Q3 2019 Earnings Call
Standing by welcome to the back for Delighting Limited 2019 third quarter results Conference call. At this time all participants are in listen only mode. After the speakers presentation. There will be a question answer session West of course wondering, especially when you to press star one on your telephone. Please be advised todays conference is being recorded if you require further assistance. Please first problems here on the telephone.
I would now like turn the call over to your host Mr., Paul Vanderburgh, President and CEO you may begin.
2019 third quarter earnings release, Mdna and financial statements will put out after the market closed yesterday and are in the Investor section of our web site and also on SEDAR.
We are required to note. The some of the statements made on today's call may contain forward looking information in fact, all statements made today, which are not statements of historical fact are considered to be forward looking statements.
We make these forward looking statements based on certain assumptions that we consider to be reasonable. However forward looking statements are always subject to certain risks and uncertainties and undue reliance should not be placed upon them.
As actual results may differ materially from those expressed or implied.
For more information about material assumptions risks and uncertainties that maybe irrelevant to such forward looking statements. Please refer to Badgers Q3, 2019 management discussion and analysis and bad years 2018 annual information form.
Lastly, such statements only speak as of today, and just state and Badgers does not undertake to update any such forward looking statements.
So let's jump right into the results.
Consolidated Q3 revenue was 183.7 million up 9% from last year with adjusted EBITDA of 50.1 million, which was consistent with the prior year corridor some color on revenues.
Q3 revenue was 12% higher in the U.S. data knew us dollars with revenue in Canada down 5% compared to last year.
The overall growth was lower in Q3 relative to recent quarters. We are encouraged with results it particularly in a number of our U.S. markets similar to Q2 2019, the third quarter growth was really a regional story with a combination of regional factors driving the consolidated revenue growth.
The majority of our markets continued to achieve solid growth, particularly in the U.S.. We opened eight service locations in Q3 and 16, so far this year and expect to open several additional locations by year end the opportunity in the U.S. to expand not only at existing locations and expanding the fleet there but.
Also opening new locations to drive growth continues to be significant.
We added 55, Hydrovacs and the corridor and required 22 for a net Adam 33 units revenue per truck per month in the quarter was $36088, which was consistent with the prior year quarter, and what's particularly encouraging with solid uptake on the unique new units that we added and also encouraging.
Light as some of the regional operational challenges in the quarter I'll speak to that next.
As detailed in our Q3 release revenue growth in the quarter was impacted by the following factors.
We had a very very a nation a regional revenue growth rates with the majority of our regions continuing to deliver solid revenue growth.
Revenue growth in a number of regions, including the eastern U.S., the south Central and Ontario was solid.
The upper Midwest and parts of the U.S. East coast were impacted by the carry forward impact of wet weather, it's been an exceptionally what a year in the Midwest and we also experienced some lost workdays as hurricane Dorian worked its way along the coast and as it worked its way up the coast.
Market shutdown in preparation for hurricane that never came a short when all the way south to north.
Revenues in Western Canada declined and continue to be software as a result in lower oil and gas activity. This market and really specifically, Alberta in Saskatchewan looks like it will be soft for some time and there are some structural problems are going to take a while to work through.
As you would expect we're optimizing the branch network trimming expenses and relocating at the trucks of all the things you'd expect badger to do.
We're very pleased with the increased revenues and improved operational performance in eastern Canada. The improvements that have been made by the team in Ontario over the past year have really move the needle on growth in margins in that mature markets, we could not be more please.
Badger continue to diversify and the corridor with the U.S. now at 80% of our third quarter revenue that's up from 77% last year as noted earlier, we continue to focus on that opportunity there is to grow in the U.S.
Adjusted EBITDA in Q3 was 50.1 million consistent with the prior year quarter.
Our adjusted EBITDA margin for the third quarter was 27.3% compared to 30.2% in the prior year quarter.
Primary factors driving the change in adjusted EBIT da and an EBITDA margin. We're number one continued growth in the us as I mentioned U.S. dollar revenues up by 12%.
We continue to also make progress on our strategic pricing initiatives with hydrovacs rates consistent to modestly higher across the majority of our regions.
Also versus last year, I FRS had an impact of approximately 1.1 million to the positive.
And our EBITDA level.
Offsetting these positives were a combination of lower activities in Western Canada, and the carry forward impact of wet weather as I mentioned a minute ago.
And these both impacted revenue growth and labor efficiency as you know, we hire and train operators. They had a growth and that takes time, so managing manpower and balancing that with marketing activity is always always a real art.
However, adding operators and trucks is our business model, that's what drives our organic growth and managing of organic growth as an ongoing focus I don't see this ever changing in our Badger business model.
Also impacting third quarter in 2019 year to date margins are higher gionee costs, due primarily to our ERP implementation and I'll speak to that in detail a little bit further.
So related to our ERP implementation as you know implementation of this new system is a huge project for Badger. This year. This has been the focus of the entire organization. It has been all hands on deck.
We have committed leaders to this project from all across our business functions showing to ensure the success of this implementation and we've had to backfill the number roles as necessary that's part of the process.
I'm very pleased to report that the first phase of our ERP rollout was successfully launched on October onest with all of our corporate functions and back office and our Westinghouse Western operating center, which is about 20% of the operations going live it's not easy being first.
We went live with the Central operating center this past Monday, which was targeted for the beginning in November and that's another 40% of our operations things are going very well.
The rollout of our Eastern operating center is scheduled for December 1st in our franchisees will follow.
I could not think everyone enough within the organization, who have and continued to assist on this very important initiatives.
Special Thanks goes out to those part of the ERP implementation team led this process a tremendous amount of time and effort has gone into ensuring the success of this very important initiative and I can tell you. The month of August in particular was extremely intense the team worked I believe 23 straight days.
And just to comment here for those on the call who've gone through one of these systems as I mentioned earlier. It is all hands on Dec failure is not an option and these projects need to go off on time and be successful out of the box Theres no going back.
Then badger has been successful in carrying this off I'm very pleased.
So some related color on Gionee as our current run rate is at elevated levels due largely to this ERP implementation.
We look forward to completing the implementation and what you'll see US do then is leveraging the integrated in operation system to drive efficiencies and drive our costs down this is a for sure.
The visibility that the operations. This system provides its all already very evident to our managers that around the system along with the efficiencies are on our admin processes.
We're very confident that will be grinding rgs gionee cost down and we have the objective exiting 2020 added gionee run rate significantly below where we've been over the last several quarters, our long term target for DNA at 4% of revenue remains unchanged and we're confident that to invest.
Since we're making providing badger with the scale required to support our long term growth.
We'll be a big pay off for us.
Some comments on net earnings for the quarter net earnings and third third quarter were 25.8 million compared to 25.7 million in the prior year earnings were impacted by the same drivers as discussed a minute ago on adjusted EBITDA with the further impact related to slightly higher depreciation expense, which was offset by.
Reduced share based compensation expense.
Depreciation expense was up based on growth and the fleet and decreased and share based comp was down based on the lower share price during Q3.
Regarding the balance sheet badges balance sheet continues to be strong providing the fans financial flexibility to support growth and manage our capital allocation.
As of September Thirtyth total debt less cash was 179.3 million or 1.1 times trailing 12 months compliance EBIT da.
During Q3, we repurchased and canceled 589000 shares under the current NC IB program and since we began repurchasing shares under our original NC IB program in late 2018, we repurchased approximately 2 million shares and cancel down or about 5.4% of pre NC IB.
Hello.
On balance sheet item I want to comment on as our current receivables aging due to the combination of growth in the business. The internal focus on the ERP project the aging of our receivables in our portfolio is not a historic levels and not where we foresee it to be in the future Darren and John's teams are very focused.
Getting back to Badgers historical aging standards, and improving and there'll be a our and our aging beyond those levels.
I'd like to touch next on our 2019 in 2020 financial outlook.
As outlined in our third quarter press release Badger adjusted as 2019 financial outlook for adjusted EBITDA to a range of 155 to 170 million from the previous range of $170 million to $190 million.
Our 2019 Hydrovacs build in retirement ranges remain unchanged.
The primary driver of the reduction in guidance was due to weaker than anticipated Q3 results due largely to the temporary increasing cost I discussed a minute ago.
The primary driver in the reduction the guidance.
Was Q3 results and these costs that were running higher are expected to be approximately $10 million by year end. These have been incurred through two three and are expected to be incurred through the ended the year.
The temporary and contract staff required for the implementation.
As well as backfill for our Badger managers committed to the project are one component of the 10 million estimated cost.
We took our time with system and user acceptance in July August and September which resulted in those managers committed to the project and the backups being required LNG in a cost.
Continuing an expense as opposed to going back in the operations and what I mean by that as we had originally scheduled to go live on July 1st and we spent more time in July August and September doing testing to make sure. We get this right and we got it right because it's going Liberia successfully so we've had these expansions continually.
Longer than we planned.
We've also incurred expenses to upgrade Badger's network, our communications network and all the switches and and components that go with that we did not include this in the original project budget.
It's required by Oracle and we didn't include it in the budget because we knew that badger would needed eventually, but the oracle input implementation accelerated so it's I guess, where a little conservative there.
A third component is the project cost run rate in how the project costs are capitalized versus being Expensed based on accounting rules cost are capitalized until the system goes live and these are the burn rate costs on the project with the whole team.
We went live with corporate in the West on October Onest. So project cost began going to expense starting October onest and we'll continue their through year end.
So those are the major components that make up the $10 million.
So some color on project timing, we did make the decision as I mentioned a minute ago to perform more system and user acceptance testing in July through September . This has made a huge difference and how smooth our go lives have been.
The original plan called for three go live waves beginning in July than October and then December with a bunch and but with a month in between each.
To tune things up.
Because of the time, we spent on testing we're now going live in October November and December without the months in between as I mentioned, we use that time to make sure. The system was ready to go.
We're still meeting our year end timing, which is excellent. We'd originally scheduled to have everyone up and running by year end, but I have to say I could not be more pleased with this decision.
The proof is in how smoothly. The go lives are gone but of course it did have implications for our temporary GM junaid costs than I have to say I do it all the same way again.
So despite the reduction in the 2019 outlook, we continue to see solid growth opportunities in the business for the remainder of 2019 and into 2020.
We introduced our 2020 financial outlook with adjusted EBITDA of 175 to 195 million and hydro Qubec build a 200 to 230 units with retirements at 50 to 70 units.
As highlighted in the Q3 release. The 2020 outlook includes continued revenue growth, yes, we anticipate increased activity and also increased customer adoption of hydrovacs across the majority of our markets.
Along with benefits from ongoing pricing and cost reduction initiatives.
Badger's outlook on market opportunity continues to be very positive, we're very pleased to be able to cubic communicate today that well during the fourth quarter, but actually in October we will achieve bad your strategic objective of doubling the U.S. business in three to five years from a base year in 2016, we had.
Established this strategic objective in 2017, and we've achieved this doubling in just under three years.
It reflects the opportunity for hydro Qubec that we see in the us as well as the strength of Badgers business model our scale, our organizational experience in the mail it management talent that it takes to operate successfully in the hydro qubec business overtime.
The key to Badgers business model is consistency an approach and that Badger has historically and continues to manage for the long term.
The investments that Badgers made in this business over the last few years from health and safety environmental Human resources sales and Mick marketing manufacturing fleet, our finance organization and now with our ERP system, our investments to create the operating platform that can profitably capture.
The significant market opportunity that we see.
We will be providing an update on badgers strategic initiatives next week at our November 14th Investor Day, which will be held inch and Toronto, but I will say that it's safe to say that the update for next week on our us revenue growth target, our new strategic target for the next three to five year period will be again to double.
Our us business this will be the third time Badgers done that.
So with that summary, we'd like to now turn the conference call back over to Kevin and open it up for questions.
Ladies and gentlemen, if you have a question or comment at this time. Please press Star then the one key on your touched on telephone. If your question has been answered your stomach yourself from the Q. Please press the pound.
Our first question comes from Yuri Lynk with Canaccord Genuity.
Hi, good morning.
Hey, Larry I apologize.
You've talked about western Canada being weak for.
Over a year now.
Typically we would expect badger too.
Move units out of a weak market like that is there anything unique to the units that are there.
Would prohibit them from from being moved and utilized in other geographies and end markets.
Well, we have moved a number of units and I would expect will move additional units Yuri.
Part of it part of it so always project timing and the individual branch circumstances, but as you know we we take a look at our daily sales and and our daily utilization and John and the team make those changes accordingly so.
Things continue you'll see us make the most.
Okay.
I want to switch to the.
The ERP.
The reduction to guidance and just get some more color on that Paul.
Can you clarify I mean, what took you guys by surprise and.
Maybe.
More color on the.
10 minute million dollar increase in run rate SGN am I am not.
Sure how to interpret that I think most people had.
2019, SGN, a about 10 million higher than than 18. So.
Frankly, I don't know what the surprise was and maybe you can just put some more more color on that for us.
Yes, and I don't I don't necessarily view it as a surprise we really started.
Incurring these costs about mid year and as I mentioned earlier there were the three the three major drivers for it.
The one is the timing of the testing we spent more time testing rather than going live July 1st.
And a number of our managers that were initially scheduled to go back into the operations.
On July Onest continued and actually they still continue.
Project and then you have the backfill for them.
Part of that is temporary employees and part of those are contractors. So that's continued and it is what it is I mean, we made that decision to do the user and system testing and take more time on that and like I say I'd I do it again.
The.
You know that decision is there so that really kicked in we had to make that decision in the back half a June .
So that's number one.
We also talked about the network upgrade that was required and I guess, you could consume maybe accuse us of being conservative from an accounting perspective, but we did not include that in the original project budget and the thought process for better for worse I guess, you could say, it's worse today, but those costs which were.
Which were a couple of million Bucks in total.
We don't basically are we figured they'd be incurred at some point anyway. So they're not really project related it's just a matter of timing might have been a year or two down the road versus now that's that's probably pretty accurate.
And then the third piece is that when the expensing when the project burn rate begins to be expense versus capitalized and under the accounting rules. The cost there are capitalized until the system go lives and that basically kicked in October onest still we have a corridor.
<unk>.
<unk> expense.
Versus capital and that expense was at a higher rate because of the factors I mentioned earlier, which is folks being sick under the project longer.
And all the backup and consultants.
Required for that so those are the major buckets that that make up the 10 million.
I mean it.
I don't think of the word surprise.
These things happened over a period of months and the decisions were taken over a period a months and I guess the perspective I have is this is a onetime event and Badgers history.
The ERP project is a huge commitment.
To Badgers business model and I'm sure as you know there other enterprises that do this and don't get it right. I mean, there is no choice failure is not an option.
Badger Vikings have the boats on the beach and we burn them.
And we're going live and we're going very successfully life. So.
Moving on and we don't expect us to keep the run rate to continue but I can tell you on GM. A we are very committed to grinding the DNA run rate down and we have we have a sight line to getting it down significantly by the time, we exar exit 2020, and we are totally committed to the four.
Percent long term run rate, it's not that often that companies do these projects and I hope I don't do another one in my career at better.
But.
Could not be more pleased with how successfully it's gone.
No I appreciate that Paul I'm, just again, just trying to get a handle for I mean, what's implied by the Q4 guidance.
The full year guidance, which we can plug to get Q4 so.
Do we expect to do you expect.
SGN a relative to the 10 million.
Take a significant step up in the fourth quarter.
As you go into the heart of implementation.
Because I.
I don't know how to.
Take the $10 million comment because I guess it depends on your starting point.
Yes, so we would see it a meaningful step up in SGN in Q4.
For all the reasons that.
That Paul described and from from Paul's perspective.
We've also put in.
Pretty clear action plans starting in Q1 in Q2 of next year too to remove those costs, but I think it's also important to appreciate that would win when you go live with an ERP system that doesn't mean that your costs and that actually means your costs from a support perspective, and if people perspective.
Sometimes goes up so we did estimate to have.
More in increased support.
For the field, if something did go wrong.
We're locked into those costs. Unfortunately, we're not using that support because the implementation has gone so smoothly, but we are locked into those costs, which are going to create a meaningful increase in or SG in Q4.
Okay. So it's kind of like almost doubling sequentially in the fourth quarter.
It.
I don't want to give this specific numbers, because that's getting into into too much disclosure, but it's a meaningful increase.
Quarter over quarter, yes.
And then last question and I'm going to turn it over to the others, but so so how do we think about just the I mean, obviously once you. Once you go live I know the costs don't go away, but I think you're running a number of parallel legacy systems.
Those will those should go away so.
Can you help us think about the what that SGN a run rate should be at the end of 2020, I mean, obviously won't be 4% hopefully it will be.
Lower than.
What it is in 19, just is that's a big gap that I need to put a number in my model and any help would be appreciated.
Yes.
If you and I are having a beer I can probably give you the specific number but that wouldn't be right either.
The reality is that we're going to probably finished the year.
We're going to finished the year.
Likely north of 5%, Gs, sorry, south of 5% Gs DNA.
Trending to a rate closer to our 4% target.
In 2021, that's probably but as much clarity that I can give you.
Without stepping over any kind of lines.
Very helpful I'll turn it over thanks.
Our next question comes from Maggie Mcdougall with Cormark core Mark.
Good morning.
Maybe.
So I just.
On to understand.
The commentary on SGT related to the comm business platform and hopefully final question on this but.
To clarify the total cost the project is estimated to be 20 to 25 million and then a portion of which capitalized portion of rich.
Is that still the cost.
Yes, we are at the top end of the 20 to 25 million on the project.
And the cost we're talking about in the $10 million would be in addition to that that have been incurred.
Have been and we'll continue to be incurred in the operations.
Okay and so.
Your.
At the end of Q3, you're at the top end of the 20 to 25 million or for your your budget continues to be that range, but at the top ended the range.
For the duration of the project our estimate is will be at the top end of the 20 to 25 range. Okay are you able to tell us how much is left to spend.
Not much were right at 25 million.
Okay.
Great.
And.
So moving on and I, just wanted to talk a little bit.
Revenue situation I mean, it sounds as though there are some different regional dynamics depending on.
What.
You're looking at.
You talked about lower general activity levels, the carryover effect of weather.
Impacts from Hurricane Dorian. So this lower general activity levels is that in reference to.
Wetter facts or is that a separate.
Pocket.
Dynamic.
Yes, there is when you think about badger and our geographic diversification.
You look at 2019, I mean, it really has been a each quarter, it's been a story or regional activity and as I mentioned, we continue to have really good growth in the eastern us.
Our cell central market, you look at Texas right up through.
The the bread basket has been very very solid great growth year over year.
And in Ontario, which a few years back people were talking about is a market that was over saturated and no opportunity.
Has had a very very good.
Performance this year.
Western Canada, which is no badgers traditional market and it's still a significant market for us was off.
But Canada in total was only down 5% amount, Ontario, basically made up almost all the decline in Western Canada, which is pretty pretty delightful. So those are the major.
Pluses and minuses.
Hesitate to give.
Give too much granularity on the regional trends, but we always try each quarter to provide some directionality.
And.
The fact of the matter Badger is.
Diversified and we continue to diversify more as we expand geographically and as we expand our end use market exposure.
The wet weather in the Midwest continues to impact us and as you know.
Our our upper Midwest, our I O Valley regions are two of our oldest and largest us regions. So you have a little bit a weighted to averaging.
Growth. So if you have a big big more mature region that have slower growth.
Versus smaller newer regions that have faster growth those bigger more mature regions carry a lot of weight in the weighted average and so.
That that factors, there too, but we see continued opportunity and the markets out there.
And.
We're we're seeing actually are run rates in those older more mature us markets improving as we get through the ended the year versus Q2 in Q3.
Okay.
Moving on than just on gross margin.
Discussion around the impact of higher labor related costs.
Including costs associated with recruitment training and.
Labor efficiencies due to the weather impact in a few other impacts on revenue growth. So.
Are you able to give us an idea of the.
The magnitude of sort of each of those different pockets being I guess in one situation a tight labor market.
Costs related to hiring and training and then the second bucket being the labor inefficiencies experiences to carry over.
Okay.
Yes, if you look at margin you just look at a couple of points and gross margin there.
Oh labor in total is no. The vast majority of that that's really what drove most of the Delta and you know the good news is managing labor is something Badger knows how to do and it's part of our DNA.
What we've done this year as we've really made a concerted effort to continue to drive retention higher we've had good success with continued modest improvement in retention and as you know that you don't waiver mate.
We have a magic wand over that and move the needle significantly. So we're in our third year of improving retention for operators.
And we've also had cost pressures and and all the with the US unemployment, where it is with the demand for commercial driver's where it is it's a very competitive market and we've had to do some job leveling in different regions and have had to react a little bit we're very focused.
On the.
Basically driving offsetting price increases in those markets, but.
Im not as happy about being able to time those two together as we might be able to be but we're very focused on picking that up as we go forward I can tell you there specific plans.
For pricing moves based on the cost push side, so we'll get our arms around that and.
Roger always does.
Managing labor in the Hydrovacs business I got to tell you. It's probably the biggest challenge there is and it's something bad years done very successfully over decades.
The I've seen a number of smaller competitors and when you get it look under the 10 at competitors that might be going out of business or for sale.
The major delta between their performance on margin then Badgers isn't the direct labor categories. So.
And generally their costs are much higher so that's that's really where we are we will get our arms around this and.
It's a pretty extraordinary conditions in the U.S. and that but the good news the growth is there and with our organic business model, we have to have the operators in place.
And the trucks available to access that opportunity so it's a bit of pay forward.
When it comes to direct labor costs.
Okay. Thank you.
Our next question comes from Daryl Young TD Securities.
Good morning, gentlemen.
Morning.
Just a question for me around the bad debts.
The aging of 120, plus day receivable are you anticipating a write off of any of these receivables or how should we think about that.
Yes so.
We're not anticipating any write offs that we havent already looked into and as part of the ERP go live we've actually done a complete scrap of our credit granting and collection philosophy and implementing a new process for both.
As part of that we've also scrubbed through all of our aging and our collection practices as it stands right now we don't see any meaningful write offs in those h. buckets.
However, we're gonna have to change our collection process to be a little bit more aggressive to get our aging down to a level that's.
It's a little bit more acceptable for our business. So at this point in time, we're not seeing any kind of.
Curio weakness in in the aging.
But we do not like the fact that are aging is stretched out as far as it has.
And then some of that just a reflection of growth across the U.S. and having a larger platform.
Hi, transparently, it's it's a combination of two things one is the growth in the business the wine is.
Not necessarily having a disciplined approach to our collection and credit granting philosophy and the lotteries, which.
Is it is what.
John and I are working on hard to get that discipline re instilled back into the company again.
Got it.
Okay, and then in terms of.
Revenue growth in the us.
In the last couple of years, you've benefited from from ramp up in revenue per truck as well as the addition of more trucks, but it seems like we're operating now at probably peak revenue per truck. So would it be fair to say that the growth in the U.S. going forward will be will be more around how fast you can get the trucks down there.
Yes, so thats a great great question, Darryl, we see continued opportunity and revenue per truck and always you know that's always a balancing act I mean part of success and Hydrovacs because servicing the customers in first call. So when they call you always want to have a truck available and that's that balancing out weve.
Talked about earlier with having the the labor in the truck ready to go.
Our growth model is organic growth, adding one operator in one truck at a time and Thats why you see our guidance for the build rate for 2020 up.
From our build rate for 2019 and and to achieve exactly what you're talking about which is continuing to.
Access that growth and that opportunity that's there and have the trucks in the men ready to go so.
As we get RPT higher and higher of course growth relies more on adding trucks than men and Thats why our number one strategic initiative as is.
Having the each our strategies and the platform in place.
To drive that recruit train and retain and we rolled that out at our 2017 Investor day, and HR remains our our key strategic initiative among our four major strategic initiatives.
Okay, and then in terms of facility capacity for manufacturing I think you've said in the past that.
There's still more.
Room to expand the Alberta facilities, but would there be.
Plans to open a U.S. manufacturing at some point.
Yes. These are these are.
Great questions at end user issues that we're looking at as part of our strategic planning, but the short term answer is we have sufficient capacity for our needs over the next couple of years and we're very confident on that in red deer.
But we are looking at our our network in our overall footprint a long term.
And it's all driven the good news is that strategies, all driven by the extreme.
Opportunity that we see in the U.S. and that's why we're looking at that so more more to come.
Okay, Great and just one last one if I may.
Have you seen any change in sourcing dynamics in the U.S. now that.
Yes, any any change in sourcing dynamics.
I'm, sorry, during what kind of dynamics I'm, sorry, a insourcing of Hydrovacs services by construction companies has that been have you seen any changes on that front down down so.
Well I mean in the industry. There's always companies that you know may look to Insource typically we'll see that were a contractor has a long term big project and.
So that comes and goes Weve and in 2019, we've seen contractors go both directions on insourcing and historically, what we've seen as we have a big to your project and we want to capture the Hydrovacs revenue in house and in some of those customers that operate there.
Owned fleets, our biggest customers because they never have sufficient capacity or they never have their hydrovacs and the right place at the right time.
But we've we've also seen that customers that do that.
Can't get I direct work from other contractors they compete with so they have a very limited market opportunity. So that that teeter totter goes back and forth and I don't think that'll ever change.
And.
But again some of our biggest customers have their own fleets and we do millions of dollars or work with them.
Okay, great. Thank you very much that's it.
Our next question comes from Stephen Harris with GMP Securities.
Just a couple of follow ups gentlemen, just wanted to touch on.
When you look at the revenue growth, maybe being a little behind what you've seen in previous years I know you've highlighted a number of reasons, but but how much of this is also for the do the fact that you're you're.
Comparable base in 2018 was an extremely strong here I think EBITDA was up 29% that here and so that you just struggling with with the with tougher comps is that is that a big part of what we're seeing as well.
Yes, Stephen I'm glad you brought that up because.
Q4.
Year over year is going to be are really challenging comps as you know we had over $22 million of emergency relief work in Q4 last year.
Between the Florida Panhandle Hurricane and then the fires out west and it's been a quiet year. This year. So that's going to be a tough comp forward to Q4.
And we don't we don't see that recurring.
In fact hurricane Dorian went the other way it basically just hung off the coast and caused everyone to shutdown construction and get ready for their hurricane that never came ashore. So thats just the way it is.
And but we see continued really good growth opportunity and the other piece.
Now that we're talking about it is when you have a project like this ERP project.
We had our and continue to have our best and brightest participate we've had over 80 people from the operations in the staff functions actually involved to drive this project and it hasn't been consultants are the key group driving although we've had excellent help my t. and consultants, but it's been bad.
As operators that have driven the design of the project and design of the system. So it fits our Hydrovacs Sun and that's a big time commitment I mean, we have no general managers that have branches of over 20 trucks that have had eight weeks of 2019 on this project.
It's the right thing to do for the project, but you used the word distraction and.
This business I mean, John Kelley C or what he likes to say is the the CGS. So.
Revenue wise.
Come to fruition six months down the road and Theres definitely a distraction factor there I can't give you a dollar amount on that but there is that factor there, but you know if I look back at it.
Given how successfully this projects rolling off and I knock on wood as I say that but.
But it was time well spent.
Okay.
Just a follow up may be on on the revenue side I think when we.
Talked on the last call there was a.
An expectation that some of the last Q2 revenue due to weather was.
With some that you wouldn't get back and some other what those project related you might have a chance to pick up and in subsequent quarters.
It looks like you that didnt happen, Okay, great extent in Q3, what's your sense of being able to make up any of this lost revenues going forward.
Well, we're going to we're going to find out in Q4.
Typically in Q4, you have to push to get projects done before the cold season.
Our northern markets and.
Our run rate in early Q4.
Is a stronger than our exit rate from Q3 and Thats typical typically early Q4 is the strongest seasonal pattern and that pattern is intact. This year, but again, we don't see the emergency response opportunity that was there in a very significant last year in Q4. So.
So that's all reflected in our and our updated guidance too.
Okay, and if I could come back to this question of capitalization versus expensing.
European costs.
I mean, I think it's pretty clear that with your elevated costs that some things have been expensed over the course of the last several quarters.
And then that's going to be a change I guess coming into Q4 can you just maybe.
Remind us about what cost you have been expensing to date and what's been capitalize the nature those costs and and.
Essentially what are we talking about.
Okay.
There's a there's a few things from a capitalization perspective, it's a little bit easier to answer that question first so all of a configuration of the systems that third party consultants.
Our resources to to stand up does that have been capitalized.
The the IRS guidelines are pretty.
Prescriptive on this our expenses.
It or even in that configuration piece that falls out that needs to be expense.
I think we're probably a couple million dollars in expenses that weve that fall outside of that.
Bucket of capitalization that it's actually been expense.
Outside of that there is to pause point, there's been the network stand up costs, which has been.
More than we anticipated.
Not necessarily in absolute dollar amount, but from a timing perspective.
Just to get the full effectiveness of Oracle having.
Properly rated system into all of our branches made a lot of sense. So we accelerated that.
That was probably another roughly couple of million dollars.
On top of that there is an elevated staff level.
And to support functions in HR finance and the actual IP group.
They were there not only to to stand up the time and attendance as part of our workforce module.
From an HR perspective from a finance perspective, just as the support on the configuration in the testing and from an I.T. perspective going from an ITC staffs that was.
Modestly understaffed to a staff that is more representative to be able to maintain and ongoing infrastructure such as Oracle. Those all are all the cost that had been included in GMI and not all of those to the full extent would have been captured in our fore sight in October of last November .
Last year, when we gave out our guidance.
Okay. Thank you that's helpful.
Ill turn it back over.
Our next question comes from Jonathan Lamm with BMO capital markets.
Good morning.
Hey, John .
Following up on.
Response, Paul to one of the other analysts questions.
Could you please clarify.
The run rate in Q4, I think I heard you say that.
On rate in Q4 to date and stronger than the exit rate in Q3.
That would be a typical I mean normally the activity levels in Q4 in the U.S. business or.
Oh or than Q3.
Refine your comments there.
Let me clarify our run rate early Q4 is up from our run rate as we exit exited Q3, and that's typically what we see.
Early Q4, and typically our strongest seasonality getting a good again given our current regional.
Diversification in our regional configuration and it was similar to the pattern. We saw last year, even excluding the emergency response. So we're very similar in the increase in early Q4 versus our exit run rate in Q3 to what we were last year.
Okay and.
The present situation in California.
Getting any meaningful challenges or opportunities for the business.
Well weve.
We have done a little bit of work.
On the fires, but nothing that would be immaterial like it was last year and you know with as as we look longer term out there though.
Similar to what we've seen in the southeast.
Utilities will will be forced to assess their networks and their distribution system and you could see longer term significant work that might be required.
To upgrade the systems in other words do they stay on telephone Poles are go underground.
Very little as underground out west so far and sell the utilities will will have to.
The analyze all that make those decisions for their own long term.
Network perspective, so there's some modest work coming out of it but again nothing to the extent we've seen last the last year.
Okay, Thanks, and when we look at the.
Truck build guidance for 19, and what it implies for Q4, it looks a bit optimistic relative to the trends in Q3, I think the new introductions were a bit lower than we are expecting.
Can you just comment on.
Sorry, the cadence of introductions in Q3.
I know the weather would have been at a major challenge in late August and September with the hurricane and flooding issues.
Well I mean, we reconfirmed, our 2019 guidance and and I can tell you I.
I think John pretty much knows we're all the trucks need to go between now and the ended the year.
And then just a comment on next year, we do have higher guidance, because we see the opportunity and I think is as Stephen asked earlier, we really to drive growth, it's going to be more and more new trucks with hiring and training operators as opposed to being able.
To dip into RPT. So we're very mindful of that and you have to do your planning ahead of time.
No we're doing just that to prepare for growth in 2020.
The other thing that will have.
And at the end of Q1 is we're converting production at the plant over to our next generation Badger. So we're working through all the supply chain and all the production changes at the plant to convert over so.
I think you'll see some some maybe some choppiness.
In in 2020, as we go through that process I'm, hoping it's as smooth as our ERP implementation and for those of you had been at the plant no. The quality of the of the management and the team we have up there. So I have confidence, we'll do well with it but that is the significant projects underway in and we're very excited about.
The next generation Badger, that's coming out lot of great improvements.
But thats something a major project, we're taking on in late Q2 next year.
And how is the chassis supply situation looking in advance.
Actually the chassis supply situation has.
Loosened.
I'm, where we were early in the year and and.
We're we're in really really good shape on what we need but we're almost out of year at one point and thats, well well well below six months at this point.
Great.
All you provided a good discussion of.
You asked margin and labor cost issues this quarter.
I still have a high level question on it though I'm not sure. If you can tell based on your reporting systems, but.
I mean.
Can you can you tell if.
Wage inflation generally.
The fact is outstripping the contribution from Hydrovacs rate inflation.
Well I would say I'd with our legacy systems.
I don't have that at my fingertips now if you want to have the discussion in Q3 next year.
We could probably gives pretty granular information but.
All our sense is and it's really we have a good handle on our wafer labor cost. It's it's the the rates that are legacy systems don't give us a lot of visibility on but our sense is that we've we've been.
We've been behind in rate increases and that's why I mentioned earlier, we're very very focused on on driving that and you know it's a it's a to execute on that it's something that has to be done in each and every location. So we're very very focused on that and John in the ops team are all over.
Okay I'll pass the line. Thank you.
Thanks.
Our next question comes from Jeff federally with Peterson Company.
Yes.
Yes.
Circling back to the labor inefficiencies side, so just sort of better understand for Q3.
The is it a function of you having.
The loading curve of your labor not match correctly with the project profile or changes in the scope of work has that came through just to understand what would cause.
A material decline in the gross margin side associated with labor inefficiency.
Yes, I mean, you've described it more particularly than than we've lived it but yes, that's in that and I would say that that that comment would also apply to Q2. So.
It's a tough one and it's a it's a real balancing act and you look at what it takes two.
To recruit in train and operator, it's a it's a two to three month process to get someone ready to go and the timing of that with the timing of customer activity is always a balancing act I mean, we really don't want to add up badger to the fleet unless we have the work for it but when you see your.
Work choppy.
Like we saw in Q2 and a little bit in some markets in Q3 and again those markets.
Traditional mature markets in the us Midwest, where there's where there is very large components of our fleet makes it a challenge and from the local managers perspective, you've got you've got your operators and you are a little bit slow.
If we don't provide the hours they'll wander awesome find another job because they need to paycheck. So thats, a really tough decision and we had 140 different locations that are making those decisions every day, but I think you're you're summarization, you know I think our articulate it very well on an overall basis, but.
The result of hundreds and hundreds of of local decisions.
And I understand the challenges you guys have talked to both the past around seasonality on the seasonally slow periods, but given that you had.
Peak demand or your seasonally strongest quarter in Q3 does this suggest or are you concerned that you'd these issues might become more pronounced as you go into the next seasonally slowest period.
Well I don't I don't really see it that way I mean, we're we're seeing the market opportunity thats out there I mean, barring a general us economic decline and.
I get the I think all of us have to put an asterisk on that one but you know the activity levels were seeing out there are good they are solid and I I think the comment I made it made earlier about the number of our folks that have been very focused and would lead to get this ERP conversion up and running successfully it all in.
And that distraction away from the business I mean, I can't put my finger on it with $1 and sense, but you know what has an impact and like I said those seeds planted now no.
Great results six months down the road and that's about the leg. So we've we've seen that but the opportunities there I mean, the feedback from the regions is such that you know there's good business out there and and where we're looking to really focus strong on driving the business I mean, the three things.
We're going to see us going higher down in 2020 very very simple.
Driving growth.
Grinding down or up cost both at the direct and indirect and Gionee side and making sure. This ERP system is up and running and we get the benefits out of it and that goes hand in hand with driving efficiencies.
In the branches and with Gionee. So those are the three things were focused on but the good news is we see the market opportunity there and that's why you see us with a higher build rate guidance for 2020.
In terms of guidance can you connect helpless connect the dots. So when I look at the midpoint of the previous guidance for 2019 compared to the midpoint of guidance revise guidance for night team can you help us breakdown the pieces in terms of what would be attributed to the Q3 element.
Is attributed to higher rest gionee or ERP project costs, what would be attributed to the operational side of the business.
Thats, a very very difficult question.
I would say that the the Genie would dad would definitely have a bit of that drag.
Through to the first half of next year.
Operationally.
I don't think we're seeing necessarily it.
Drag from.
A topline revenue this kind of evidenced from our truck build into confidence on that front.
We do need to see how the business performs and how John manages the direct costs labor. So we definitely have some some plans around that.
From a.
From a.
Regional perspective.
It's still going to see weakness in in the energy markets, specifically in Western Canada.
Like you seeing positive.
Growth in Eastern Canada.
Positive trends in the east hearing us.
In central Us I really is going to be more.
Weather dependent if we do you run into other wet weather.
Next year that might be a bit of a headwind if not I think we've got a really strong base and continuing to grow that base in central.
Central us.
And in the West.
Thank you that market is an opportunity for us that's not completely tapped so with that is definitely a green light.
And I suspect, it's not the level of granularity that you're looking for.
I'm not sure if you want to add any comments, though I mean, I think thats probably inappropriate.
Corporate level of granularity there.
We've looked at all of our budgets and forecast and everything just to connect those dots but.
The trends we talked about.
The direct cost side on margin the DNA side.
No below the gross margin line or is that the major drivers and those are the ones. We've articulated in our Q3 disclosure.
So the range the range of guidance that you are implying for Q4 is the delta between the low in the high the potential west DNA costs or an unknown element around its unit costs or is there more uncertainty.
To the business is Q4 as you wrap up the year.
Hi, good you've narrowed the guidance range by $15 million, both our story to $15 million over three quarters away through the year now and arguably.
Not given you've seen the month of Q4.
Why not tighten the Q4 guidance range more.
Jeff I'm, not I'm, not really sure how to answer that.
I don't I don't know if I would read a whole lot into that.
No and.
2019 was Badgers first year guidance. So I know, we don't get me slack cut for that because were three quarters into it but.
I think that.
It reflects our best thinking and you always have to have a range on it you could criticize us when you could have a bigger or smaller range, but that's our best judgment and we're hanging our hat on that.
Okay.
Oh, sorry, not to beat the dead cat on on ERP, but just a clarification questions. So your your budget is 25 million and you have about $10 million of.
SGN, a or other costs that go beyond the scope of the budget. So is it reasonable to think about the total cost of the ERP project being about $35 million.
Yes, that's that's the way I look at it and I could not be more delighted I really have a hard time apologizing for that given how well we're coming out of the blocks. So you know you could you could say we should have had 35 to start with but I got to tell you I am not apologizing for it I am delighted.
And then Darren I know you touched on a couple of these points earlier, but relative to where the budget would have been a year ago. How much different is that 35 million like I understand you stayed within the 20 to 25, but what would you have assumed for no on budgeted costs a year ago.
First is what you're incurring now.
I guess, it's the delta in the guidance that we are giving so it is not enough.
I spoke about 10 million so you know.
Okay and total the break the bigger picture scope for the project.
It's about $10 million bigger than what you would have previously contemplated.
That's right way of characterizing it.
And it and it reflects the fact that the way we did this project Jeff is badger engage the organization and the operations and staff teams led it is this wasn't a bunch of consultants that just showed up in camped out and gets reflected in the success of this project.
So.
So that's that speaks for itself.
Badger's always conservative on finance on our accounting we could have included the network costs in that we elected not to because we thought and talk to the board were going to have to incurred anyway. It's just a matter of timing and it was a major project went off very successfully.
Well, we had significant upgrades there so there's a number of things in that bucket and it's part of the process, but again, what we're doing here in 2019 as you know.
Committing the organization to set up a a platform that supports our growth for the next number of years and the good news is we've got a lot of lot of growth to go. After so this is something that I personally not going to worry about.
The next five to 789 years like I've been worried about our old legacy systems and keeping the wheels on those over the last three years and to me. That's huge so if you look at their risk mitigation.
On Badgers growth strategy.
This project is just a huge risk mitigator and to me it totally de risks badger's growth opportunities going forward.
Last question on the Ensco Besides what you've reached the threshold of your current approval what are your plans going forward there.
Our current approval continues till next may so we havent reached any thresholds.
But correct me if I'm wrong you.
Approved for 2 million shares and you know repurchased just to touch over 2 million shares.
No I think thats two separate entity IB program. So the Antic Tecogen was we didnt in May of 18, which runs through to me is 90. So we still have we stop authorization.
Both in the actual approved a limit by.
By the fee, but also through the regulatory requirements of the maximum NCB allowable. So we've got we've got a loss a lot upside.
Okay. That's what the plan is to continue repurchasing.
Our next question comes from realized most call us with ice securities.
Good morning, I've got a couple of questions.
Our first one it could actually doesn't relate to truck build the truck retirement when I look at 2019 retirements, you're looking to retire between 90 and 130 trucks and.
Looking back about 10 years ago, you built about half that amount, which was 50, so what I'm trying to reconcile is.
Or the old trucks, lasting has long or new trucks more efficient or what would cause of the in my mind the accelerated debt retirement.
Yes.
China last let me, let me check those numbers I don't 50 to 70.
Yeah are you talking 19 or 20.
I'm going to require 19, and 20, Oh, Okay, We 19 and 20, you're going to retire between 90 and 130 trucks and in 2008 in 2009, you built about half that level of truck. So are the trucks lasting us as long as you're seeing or do you see more efficiency in new trucks historically, if we look at where.
Retirements, there's about a 10 year lag and we're seeing something a bit different.
Yeah.
No that's a good question.
All with the retirement decision is an into individual truck by truck decision. So there are a number of circumstances.
Trucks that are running 24 hours a day in and industrial plant, it's different than a truck that's in a municipal work.
Yes that are banging around in the oil patch.
I will get beat up faster than trucks that are on payment. So you're always going to have those individual decisions that impact the numbers, but.
And again these are all individual one one truck at a time decisions that John in the ops team make.
But we don't see any general trends that would that would.
That change the economic life of the fleet and.
The the newer technologies automatic transmissions, we think that when might actually help.
And how we recruit drivers that don't have the experience and the skills that were would have been required with the old manual transition transmission. So we think that might actually helped us.
And on the repair and maintenance and the and the truck life side in some markets, but its no major trends that are underlying it. It's this the particular timing and the real good news with Badger is that we are very diligent on maintaining our average life for the fleet. So you don't see us running up our average life.
Dave.
You know from from where it is in below five years with an average tenure economic life, where we're very diligent about that because we all know.
That if it Doesnt run up then the repair and maintenance is going to run up to and and that's something we don't want to have.
Okay. Thank you very much I know we were.
Of trying to correlate offer pretty low point about a decade ago.
I want to move to the.
Bank debt, there and have a massive increase in the amount of debt that badger can now take on through a bank line and and I do understand there's a bit of a retirement coming up on some of the termed out but the question I've got is why have such a large.
Bank line that seemingly would be on utilized when you're sitting there incurring standby fees.
Yes, so it's part of our larger.
Our financial strategy.
When we look at our our leverage guidance of between one and half times debt to EBITDA the size of our historical credit facility wasn't even big enough to get us into the lower low range that range. So the getting getting the right size facility to a ramp roughly $300 million.
If we look at the the.
The 2020.
Guidance upper end of the EBITDA range of $195 million. It's it's a it's it's rate out that 1.5 times upper ends of our guidance so wouldn't be prudent for us to put out guidance and not have their financial capacity to be able to act on that.
And the standby fees quite frankly, you can look at that is liquidity insurance. So if there is any kind of.
Lockup in the capital market, it's a small price to pay for having funding certainty to make sure that we can build the trucks and continue to fund our business.
The second component, that's really important getting our covenants rightsized. So our covenants previously was the debt to EBITDA to 75, our 2.75 times.
Which was I think off market for a company badger's quality and our banks agreed so we've taken that covenant up to four times.
And then to your your final point, we're also using our credit facilities as a certainty of funding to be able to refinance the potential notes that mature over the next three years. So we have at 25 million dollar us payment in January of next year and the subsequent to January's, we've already built that capacity into our credit.
Facilities, both in the base facility as well as our accordion features so that we remove that refinancing risk how will refinance to that.
Substantially lower interest rates than we currently have on the potential.
The final piece I know you Didnt ask it but I'll give it to you anyways.
Is that we were able to do a carve out in our covenant structure that essentially means that.
The the covenants for the potential notes are largely irrelevant. So it's just now at time of flooding those notes kick off and will refinance the credit facilities.
Okay.
Just on the potential one one quick follow up can you prepaid the entire you can probably you can paid in advance, but the penalties make it not worth that I mean, that's that's typically what I've seen is that correct.
That's absolutely correct. So we've done now half.
We've done the math in it.
It's.
It's modestly NPV negative if we paid the make whole premium and refinanced it with the credit facility and hedged that to Husbanding certainty, but now that we've.
We've negotiated the credit facilities the way that it is it's more prudent for us to let the potential notes runoff in due course.
Okay.
I want to follow up a bit on jeffs question, because I didn't hear the answer.
And maybe just cut off here.
He asked about the normal course issuer bid or do you plan on on getting back into that.
What we haven't really ever gotten out of it. So we have we have in NC IB program that was established at roughly 5% of slowed in may of 18.
That runs through to May have 90.
We have bought under that program.
You know a meaningful amount and we still have a meaningful amount that's available to us that we'll continue to use under our.
Our prudent oversight to make sure that we're using capital in the in the most efficient way, but we haven't got out of DNC IB program, we've continued to buy.
Yeah, I mean, what I got out what I meant by that was sort of re continue purchasing which looks like it slowed down now trying to tie the NC IBT your credit facility or an issuer bad it's something like a substantial issuer bid something thats on the table given that you got the capacity.
Clearly share prices more attractive now than it was a in Q3.
Yes, so we look at all of that I'd, probably will hold this conversation to next week when we go through our capital allocation waterfall.
But but very briefly we want to reinvest into that business first because that provides the best return for our shareholders.
And then secondly, maybe thirdly return capital in the most prudent and cost effective way for shareholders and based upon our intrinsic value one of those those effective mechanisms.
As buying back shares.
Can I tell you specifically that we're looking at it.
Thank you Mr. bid at this moment the answer is no but that doesn't necessarily mean that it wouldn't be off off the table, but the primary focus is to make sure that we're reinvesting in the business to support the organic growth that John and his team are driving.
Great. Yeah, I mean, my my job is to poke so like I had to sort of take a stab I. Appreciate it those are all the questions for me. Thank you.
They're in love talking finance, so he really appreciated those questions. So thanks.
So I am I don't think.
Go ahead, Kevin just letting our wasn't showing any further questions and I was going to turn the call back over you guys.
Okay. Thanks, Kevin So before we wrap up today's call, we'd like to remind everyone that we're hosting our annual Investor Day next on Thursday November 14th that one King West Hotel in Toronto.
Formal presentation begins at nine will have coffee.
In the management team the broader management team will be there to meet with investors.
We'll have the presentation, there and it will have a live webcast and that will be available also afterwards on our website and then we'll have continued conversation over a lunch. So it's great opportunity for everyone to meet the broader badgered management team and we're very much looking forward to it and there are details to register for the Investor day in the.
Q3 release.
So finally on behalf of all of us we'd like to thank our customers our employees and our shareholders for your ongoing support and your support is what drives bad your success. So Kevin back to you Sir Thank you.
Ladies and gentlemen, just conclude todays presentation. You may now disconnect have a wonderful there.