Q2 2021 Badger Infrastructure Solutions Ltd Earnings Call

Please stay on the line for the next.

Yes.

Thank you for calling line that has a conference I deem other please.

Yes, it's.

1581088.

Yeah.

Thank you might have the spelling of your first and last name.

Sure, It's David D. A b I D Brown B R. W. <unk>.

No other company name.

AIE our AE.

Okay.

[noise].

Good day, and thank you for standing by and welcome to the Badger infrastructure Solutions Ltd, 2021 second quarter results. At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star 1 on your telephone.

Please be advised today's conference is being recorded.

If you require any further assistance. Please press star Zero I Wonder I entities conference over to your speaker for ever Carsten. Please go ahead.

Thank you and good morning. This is Trevor Carson VP of Investor Relations and corporate development for Badger welcome to our second quarter 2021 earnings call on the call. This morning are Badger's, Chief Executive Officer, Paul Vanderberg, and Darren you wore scheme Badger Chief Financial Officer.

Badger's 2021 second quarter earnings release, MD&A and financial statements were released after market closed yesterday and are available on the investors section of Badger's website and on SEDAR.

We're required to note that some of the statements made today 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 on them.

As a result as actual results may differ materially from those expressed or implied for more information about material assumptions risks and uncertainties that may be relevant to such forward looking statements. Please refer to badger's when day 21, and 2020 management discussion analysis, along with a day Twenty-twenty annual information form.

Further such statements speak only as of today's date and Badger does not undertake to update any such forward looking statements I will now turn the call over to Paul Vanderberg.

Thanks, Trevor good morning.

As always we'd like to start the call with a discussion of health and safety.

Covid I've, obviously been with us for a year and a half now and we've been very proud of the companies in our employees response to keep our customers safe and our employees safe.

Our current focus is very strongly focusing on vaccinations are vaccination rates have been picking up and many of our areas. We continue can continue to promote the health and safety of employees and customers by encouraging our employees to get vaccinated, especially with what we're seeing with the spread of the Delta variant.

We're beginning now to see various forms of government develop more comprehensive guidelines around vaccinations, which we support and that we believe these actions are going to be required part of the solution to containing COVID-19.

Under the Q2 business trends.

As we discussed on our first quarter call. We were encouraged with the improvement in market activity levels. When we exited March and got into Q2.

Our April U S revenues in U S dollars were higher than April 2020 levels and in line with pre pandemic April 2019 levels.

However, many of our U S regions experienced uncharacteristically lower activity levels in may.

Activity picked up again in June with June revenues higher than June 2020, and in line with June 2019.

This variability in activity that we saw during the quarter across our regions from week to week and for month to month has been a significant challenge for managing direct expenses in our business model, where we always want to have a truck in an operator available when a customer calls.

This model is valued by our customers, but it has been a real challenge to manage during the uncertainty of activity levels.

The COVID-19 shutdown and in these early months of business recovery.

Based on these factors our Q2 expenses ran at a higher percentage of revenue with margins lower than planned.

For July revenue is trended modestly better than 2020 levels.

With the recovery that continues underway, we're very actively managing the operations and we're looking forward and planning our service delivery levels.

We've rehired hired and trained a large number of operators since the late late fall last year. We've also reactivated a significant portion of the fleet that was idle during the shutdown. These.

These activities have occurred over a relatively short period of time and the associated expenses have negatively impacted margins, especially in the areas of direct labor and maintenance repair.

Badger is focusing closely on activity levels with our customers and reviewing all aspects of operating expenses to balance revenue and expenses in the short term, while ensuring that service capacity is in place when needed.

We're also building the company's capabilities and continue to position the business to target the market opportunity, we see longer term for non destructive excavation.

As part of targeting long term growth that we see the previously announced executive search for a commercial leader was successfully concluded last month with the addition of Rob Black a dire as our COO.

Addition of a CEO with extensive commercial management experience enables badger to strengthen our operating focus on sales and marketing and our focus on driving volume growth across our broad customer segments.

As we look to Q3 and for the remainder of the year, we're seeing increases in customer activity in a number of our regions.

Our utilization is continuing to increase and we continue to work on recruiting and training operators to respond to this increased activity.

With continued revenue growth and focus on matching our operating expenses to anticipated revenue as the recovery continues we anticipate margins returning to historic levels.

Now on to operations during the quarter, we built 5 hydro vacs, while retiring 18, ending the quarter with <unk> hundred 67 units.

We continue to expect to build between 20 and 30 Hydro Vacs. This year and continued to expect to retire approximately 60 to 70 units.

We've maintained a base level of production yet the red deer plant in order to retain key staff. This has been a very successful strategy throughout COVID-19.

Our ability to scale up production is there and we're going to be able to respond to growth in demand for trucks as market activity recovers, we are confident in our ability to ramp up production when it's needed.

We've also continued to add specialty equipment to the business to provide related services that our customers request that complement hydro vac services, we provide.

And in the quarter due to equipment equipment delivery timing. This accounted for about 2 thirds of our total capex. This.

This equipment include sewer cleaning and inspection locating services backfill and disposition related equipment.

While this has been a small part of our business.

This has been a very successful growing part of our business and the thing that's really nice about it is these are additional services being requested by our existing customer base.

This leverages, our broad branch network in Badger's operating scale.

And the net in the near term we remain focused on driving our fleet utilization to increase return on invested capital and of course, we will add new units as required.

The Q2 improvements in revenue per truck from last year and sequentially from Q1 are encouraging which is another indication of ongoing business recovery.

Fleet utilization goes hand in hand, with labor utilization and operating leverage so continued improvement and RPT is a positive trend.

We've taken full advantage of the slowdown to reconfigure process flows and upgrade parts storage and warehousing in red deer, which has increased our manufacturing capacity to at least 350 units per year.

This compares to our historical peak production of 221 units back in 2014, So we have enough capacity at red deer to replace retired units and to provide any needed growth units.

So with that I'd like to turn things over to Darren.

Lead us through the financial highlights.

Thanks, Paul and good morning, everybody or.

Our revenue in the quarter was $135.6 million or approximately 111% in the second quarter 2020 revenue when normalized for changes in foreign currency rates.

RPT in the quarter was approximately 26600 compared with 2000.20300 in Q1.2021 and 23500 in Q2.2020.

We're continuing to reposition our fleet into strategic markets to improve utilization and have moved 20 units per month on average this year.

Gross margin was 19, 2%.

With compared with 34, 5% in the prior year as Paul mentioned gross profit margin was impacted by our address direct costs wrap up to support the anticipated recovery from COVID-19.

You had also mentioned that our financial results in the current year do not include the benefits of Covid related government assistance direct costs in the prior year included $4.6 million and Canadian emergency wage subsidies.

G&A expenses were approximately $11.6 million, which includes roughly $1.9 million in 1 time costs related to our strategic initiatives to enhance our organizational design and management structure.

We continue to anticipate our 2021 G&A run rate expense to be approximately $40 million, excluding onetime costs related to these initiatives.

Of course, we always review our cost for additional efficiency opportunities.

Adjusted EBITDA for the quarter was $14.4 million compared to $35.6 million in the prior year <unk>.

Adjusted EBITDA margin was 10, 6% compared to 26, 4%.

Again expenses and EBITDA margins in the current year reflect our investment in direct cost to position for expected market recovery in strategic initiatives to support long term growth and shareholder value creation.

For reference adjusted EBITDA in the prior year.

<unk> $5.2 million.

Canadian emergency wage subsidies that subsidizing, both the direct cost and G&A, which we did not participate in the program, which we did not participate again this year.

Onto our balance sheet.

Badger maintains a focus on ensuring the strength of its balance sheet and financial flexibility.

We have continued to make meaningful progress in accounts receivable management, particularly collection of long dated receivables, which.

Continued to support our improvements in liquidity.

We restarted repurchasing common shares for cancellation and CIP program. After the board approval in March and during the quarter, we purchased roughly 156000 shares for cancellation.

We also renewed our $100 million supplemental credit facility for an additional year, providing us with $400 million in committed credit facilities with.

With our flexible covenant package, ensuring that we have financial resources and capacity to fund both near term and long term growth and thoughtful capital allocation.

Like to turn the call back to Paul for some final comments Paul.

Okay. Thanks Darren.

Put it up for questions in a minute, but a couple of comments summary comments here Q2 was 1 of those quarters that was quite a transitional time for us we experienced quite a range of operating conditions managing the ramp up for the summer season, and the ramp up from Covid recovery.

Continue to focus on our market and customers managing expense levels to what we anticipate future revenues to be while ensuring that we have trucks available for our customers when they call.

Our view of the significant U S and Canadian long term opportunity for non destructive excavation services and Badger has long term growth prospects remains unchanged. We believe that the focus on infrastructure in the U S. With an initial bill close to passage, perhaps this weekend, we will further support longer term demand for non destructive.

Excavation its pretty clear to all observers that the need to maintain and strength in infrastructure is there and it is real.

We continue to make the moves to position Badger for this opportunity such as expanding our marketing and manufacturing marketing and management capabilities and the strength of our operations team.

Badger has proven business model operating scale and flexibility diversification of end use and geographic markets combined with our historical operating track record across all stages of the economic cycle and I can say this cycle has been unique in my business career, all support achieving our long term growth aspirations.

So with those comments, let's turn it over to Stephanie for questions.

Thank you as a reminder, in order to ask an audio question. Please press star followed by the number 1 on your telephone keypad. Once again that is star 1 for a question.

And your first question is from the line of Maggie Macdougall with Stifel.

What would your cost of capital.

Good day.

Thank you for your tactics.

Yes.

Yeah.

We didn't get all of that question could you can you repeat it.

Yeah.

Okay.

Okay.

Maggie Macdougall your line is open for questions.

Okay.

Yes.

Okay.

And that question has been withdrawn will move to the next question.

Our next question from the line of Yuri Lynk with Canaccord.

Hey, good morning, guys.

Good morning, Eric.

Paul It looks like your U S revenue was.

Only by 5.5% below Q2.19.

Which itself was a pretty tough comp so.

I'm, just wondering I mean that doesn't sound like a big deal.

The Asian and this is in the U S. Dollar so I'm just wondering.

What were you what was the company planning in terms of revenue.

And where.

You know where was it off which country, which end market because the top line actually seems pretty good for me.

A little more color on what went wrong with the planning.

Yeah, well you all.

Always try to plan ahead in our business you have to have the trucks and operators. There ahead of time.

And as you well know Yuri that we don't we don't operate under any taken take or pay contracts.

Services as customers need us so that's the that's the real debt.

Charm to get rate and planning for anticipated revenue. So thats the backdrop to what we do day in and day out but related to Q2.

It wasn't as much.

Planning for a level, but it was the variability we saw.

We saw good improvements going into April we saw than a soft may and then we saw an uptick tip again.

In June and May was a particularly tough month, which really impacted the quarter youll get operators, they're up they're trained and if you don't have the work.

Retention is a very important factor so.

You have to fill in with things like training maintenance on the trucks to make sure they get their hours. So you keep them. So that was a significant factor during the quarter and then the other factor was on the MSR side.

Direct labor and Ameren iron ore the 2 areas that particularly impacted direct costs during the quarter and during the quarter. We activated about 120 trucks that had been previously idled and that was a very significant ad.

That's a cost add and it's upfront. So those trucks now were running in Q3. So we don't we don't see that is continuing but the flip side is it was real positive because we had the demand and the anticipated demand.

Activate those trucks after they had been idle for quite a while during COVID-19 and we're seeing very solid activity levels in early Q3, and and looking through the rest of the year.

Okay.

I'll give it given all the investments over the last 3 or 4 years and in the CRM and the ERP.

And whatnot I mean are you pleased with the visibility you have into the business.

Yes, that's a great question, we we had a number of discussions in yesterday's board meeting on that very subject.

The visibility in the.

And the Kpis that are available as tools for our operators are the best they've ever been.

And we're looking at new ones all the time.

But.

As we go forward, we're going to be in a lot better position to to monitor that and.

It's going to be really good with Rob Black a day are coming on board. The next major area that I see as an opportunity is is in the sales and marketing area.

Getting into the price matrix.

Analyzing what we can do.

On the whole customer side of things, which is information that we have but we haven't really begun to leverage yet. So that's the next major area that I'm looking forward to.

Okay, I'll turn it over there thanks.

Great. Thanks for your next question is from the line of Jonathan Lamers with BMO capital.

Good morning.

Hey, Jonathan.

Uh huh.

On the U S gross margins.

Is the issue the RPT, that's close to 30000.

Are there other factors at play it sounds like for meeting the MD&A that there might be 2 other things are 3 other things like 1 would be the recruitment costs and the reactivation of the trucks that you mentioned 2 would be that it sounds like low margin markets might be recovering faster than higher margin markets.

And then third.

Based on the language around hydro vac rates. It sounds like there was a decline in same market rates in some markets.

Is that having a material impact on gross margins.

Any thoughts you would have on all those for the great.

Yes in the in the quarter the additional color.

That we can discuss in addition to direct labor and <unk> would be fuel. So we did have a pretty significant upswing in fuel during the course of the quarter its been going on for longer than that but we saw it particularly in the quarter and as everyone knows we've had a pretty effective fuel surcharge program in place.

For a number of years now, but theres a lag there. So I would expect that that's going to start to even out as we go forward in future months.

I guess for my question now.

Around this language on hydro vac rates being comparable across the majority of markets.

There is a shift in the language there from consistent.

Have declines in same market rates been a material issue for gross margins.

Well, we always have a few hotspots that are out there.

And.

Our oil and gas markets have continued to be the areas with the.

With the biggest challenges pricing wise, but thats always been there I don't remember that ever not being a factor in some of our markets, but actually as we went through the quarter with utilization spiking up we've actually implemented pricing increases across the number of our of our markets.

And to your point on the higher utilization that supported those increases so that's actually what would've occurred as we went through the quarter.

Okay. So would you have a comment on your ability to pass through wage inflation in this environment.

Well that debt.

That continues to be a work in process.

And I think debt would probably be.

A valid comment for lots of labor intensive companies.

But our success with the increases we put through.

During Q2 and those were in the second half for the quarter would indicate that the market is more accepting.

Price increases given the general understanding of labor cost and also the general understanding of supply.

Across a wide range of industries. So.

We were we were pretty pretty pleased with the way that last round of increases win so we'll be monitoring utilization closely and continuing to monitor rates and pricing.

Thanks, Rob.

<unk> seems to have a very impressive.

Whereas EMEA on the sales front.

Could you share with us some additional color on what you have asked him to do and the opportunities that.

You see on the National account side.

Yeah.

That's a great question.

Rob has been with us about 3 and a half weeks.

He provided his initial thoughts to the board yesterday, we had a very productive discussion and the.

The interesting thing about recruiting an individual like Rob as he very.

Very diligent and researching badger very diligent and researching our end use markets, our long term opportunities and he.

He voted.

With his confidence by joining badger's. So we've been very pleased with that.

And he's taking a fresh look at our operations function overall.

With a specific approach to strengthening our sales and marketing operations.

And the big opportunity that I see is to continue the transition with Badger sales and marketing like we've transitioned to other functions at badger and transitioning from a very decentralized locally driven approach for each area manager pretty much has done their own thing.

To more of a local and then our regional and then <unk>.

National or corporate approach as you said with corporate accounts so.

I think.

Obviously, he has to have some time to settle in.

There are some significant opportunities there that he is very well positioned for experience wise and knowledge wise and I can say that I've been very pleased with how quickly. He is integrating into the operations. So stay tuned on that 1 but I'm I'm very very pleased with what we.

We have seen so far.

Okay last question, if I may just on the July outlook.

Paul You mentioned that you have seen continued improvement.

Quench land sales I believe.

Like historically, we would see something like a 10% to 20% uplift in RPT in the U S business at this time of year.

Any color for us on.

What other whether what Youre seeing is a seasonally is consistent with our historical seasonality.

Yes, well I don't want to get into specific guidance, Jonathan but your comments about U S. RPT nudging into that low thirty's is very appropriate.

And I think if you apply a typical seasonal pattern I think the expectation could be pretty pretty reasonable.

Thank you.

Thanks, Jonathan.

Once again, if you would like to ask an audio question. Please press star followed by the number 1 on your telephone keypad.

And at this time there are no further questions.

Okay. Thank you Stephanie.

I'd like to thank everyone for participating this morning on behalf of our customers employees suppliers and our shareholders. We appreciate everyone's ongoing support that makes badger successful. So Stephanie you can end the call.

This does conclude today's conference call you may now disconnect.

Okay.