Q3 2021 Badger Infrastructure Solutions Ltd Earnings Call
Yes.
And thank you first standing by and welcome to the Badger infrastructure Solutions Ltd, 2000, <unk> third quarter results conference call. 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 this session you will need to press star one on your telephone keypad. Please be advised that today's conference is being recorded.
Any further assistance. Please press star Zero I would now like to hand, the conference over to your speaker today, Mr. Sharper Carson VP of Investor Relations. Please go ahead.
Thank you and good morning, everybody welcome to our third quarter 2021 earnings call on the call. This morning are badger's, CEO, Paul Vanderberg and CFO Darren <unk>.
It's not just 2021 third quarter earnings release, MD&A and financial statements were released after market closed yesterday and are available on the investors section of our website and on SEDAR.
We are 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 actual results may differ materially from those experienced expressed or implied.
For more information about material assumptions risks and uncertainties that may be relevant to such forward looking statements. Please refer to our 2020 MD&A along with the 2020 annex further such statements speak only as of today's date and better does not undertake to update any such forward looking statements I will now turn the call over to Paul.
Thanks, Trevor and good morning, as always we'd like to start the call today with health and safety. The Badger team continues to manage the COVID-19 related operating challenges quite well and we always put the safety of our employees and customers is job number one.
We've been promoting health and safety of employees very strongly encouraging vaccination.
We began to see Worksite vaccine mandates from a number of customers and governments in the quarter, which we support.
The U S government announced the vaccine mandate a few weeks ago and provided an update yesterday, which requires a significant amount of work before it can be administered by businesses across the country.
At some point, we expect that the health and safety regulators will sort out all the details and we will implement it along with all other companies.
We worked on one very high profile project in the quarter that was directly linked to health and community safety and that was the emergency response to hurricane either we.
We want to publicly recognize our leadership team for a job very well done and supporting the recovery work in Louisiana.
We balanced delivering services to help restore critical power grid infrastructure, while protecting our employees, while the Delta variant was surging not an easy task.
We were recognized by many other contractors on this emergency response for our efforts and in leading health and safety protocols.
At one point, we had up to 100 units on this project with people pitching in from all across Badger.
Badger's, the only hydro vac operator in North America, who can provide this level of service and response.
Now onto the quarter.
We were pleased with the improved revenue in Q3 and the sequential improvement that's been made as the Euro has continued to progress market activity levels improved across many of our regions over the quarter, reflecting continued progress and the overall recovery from Covid.
When compared to the U S. Construction put in place statistics are revenue growth continued to outperform the reported activity levels of nonresidential construction put in place year over year.
Q3 market activities was supported by approximately $14 million in emergency response work related to Idaho that I mentioned earlier.
This compares to approximately $7 million last year.
Severe weather events continue to highlight the need for strengthening North America as critical infrastructure.
We were also pleased with the gross margin and EBITDA margin improvements that have been achieved as 2021 has progressed and specifically as the quarter progressed.
As we shared in Q2, we've expected that margins will return towards historical levels as revenue improves.
Rob <unk>, who joined Badger in July of <unk> has been a great addition to the senior leadership team.
And Robin and his team are pursuing revenue cost control and efficiency initiatives across the organization to further drive results.
The team continues to work hard to recruit and retain operators, which continues to be a challenge in the current labor market.
We've seen some labor cost inflation as we discussed last quarter and have been working to implement price increases to offset.
We're also pleased with the improved fleet utilization.
Revenue per truck per months improved to nearly $34000 in the quarter a significant improvement from the 26600 in Q2 of this year and 28300 in Q3 of last year.
With fleet utilization, improving we are evaluating the ramp up of our manufacturing activities.
We are positioned for a busy year fourth quarter compared with last year.
With the numerous delays and the industry has experienced in projects in nonresidential construction in general over the last year and a half we continue to see pent up demand across many markets.
This demand and especially the pent up demand could positively impact the traditional winter seasonality and some of our northern markets. This year, but of course, what actually transpires will depend on the type of winter weather. We experience. This work will need to get done at some point.
And as always we continue to focus closely on activity levels with our customers and reviewing all aspects of our business and operating expenses to manage expenses in the short term, while ensuring our service capacity is always in place when needed.
Yes.
Now on to operate.
In addition to Rob and his team continuing to pursue business improvement initiatives, Rob is working to strengthen our sales and marketing function at badger to address the meaningful growth opportunity growth opportunity in the north American non destruction, the destructive excavation industry there'll be more to come on this in future quarters.
On fleet during the quarter, we built for new Hydro Vacs and retired 11, ending the quarter with 360 units.
We've been pleased also with the improvements in utilization as I mentioned with RPT a minute ago and we are evaluating the ramp up of production looking into next year.
For 2021, we anticipate building 33 hydro vacs slightly above the previously shared build range of 20 to 30 units for the year.
We continue to plan to retire $60 to 70 units this year.
As in the past we plan to provide more details on anticipated 2022 production and retirement ranges along with our Q4 disclosures and now I'll turn things over to Darren.
To take us through our financial results.
Thanks, Paul and good morning, everybody.
Our revenue in the quarter was $171 8 million or about 15% higher than prior year when normalizing for changes in FX gross margin was excuse me 27, 4%.
Improvement from gross margins of 19, 2% in Q2.
As Paul mentioned, Rob and his team are continuing to pursue other cost control and efficiency initiatives across the organization to return gross margin levels to levels achieved last year.
I should also mention that our direct costs in the current year included the benefits of $2 $8 million in Covid related government assistance in Canada, compared with $1 $9 million last year.
G&A expenses were <unk>.
<unk> expenses were $11 $2 million, which includes approximately $2 1 million in onetime costs related to our strategic initiatives to enhance our organizational design and management structure.
We continue to anticipate our 2021 G&A run rate expenses to be approximately $40 million, excluding onetime costs related to these initiatives.
Of course, we always review cost for additional efficiency opportunities.
Adjusted EBITDA for the quarter was $35 8 million again, a marked improvement from adjusted EBITDA of $14 4 million in Q2.
As a percentage of revenue adjusted EBITDA margins improved to 28% in Q3 from 10, 6% in Q2.
We're also reviewing all G&A costs.
Across the organization to support more efficient operations and returned to prior year, adjusted EBITDA and adjusted EBITDA margin levels.
Now to the balance sheet.
<unk> maintains a focus on ensuring the strength of its balance sheet and its financial flexibility.
We've continued to make meaningful progress in accounts receivable management, particularly in the collection of lung age receivables.
As at the end of the quarter, approximately 75% of our receivable portfolio was aged less than 30 days.
We also renewed our syndicated credit facility for a five year term, providing us with a total of $400 million in committed credit facilities with a flexible financial covenant and ensuring that we have the financial resources and the capacity to fund those near term and long term growth and thoughtful capital allocation.
I would also like to highlight a couple of changes coming in 2022, which you may have seen in our earnings release last night.
<unk> Q1, 2022 reporting will begin we will begin to report our results in U S dollars to improve the comparability of year over year results and to minimize the foreign exchange fluctuations.
Given that approximately 80% of our revenues are generated in U S dollars.
We will also be changing the frequency of our dividend.
Payments from monthly to quarterly effective with the March 2022 dividend. This will simply simplify the administration and the dividend associated cost.
I would like to turn the call back to Paul for some final comments Paul.
Thanks, Darren So just before we open it up for questions. A couple of quick comments Q3 continued our recovery from Covid with activity levels picking up and we were able to put our people to work effectively and generate better results. We're very pleased with that.
We remain focused on our markets and customers managing expense levels, while ensuring that we have trucks available for our customers.
Our view of the significant long term U S and Canadian opportunity for non destructive excavation services and badger's growth prospects is unchanged.
We believe that increased focus on infrastructure in the U S supports demand for.
For non destructive excavation over a long period of time.
We stand ready to help maintain and strengthen that infrastructure and also support the need to adapt infrastructure to newer and sustainable technologies.
Badger's business model.
Our operating scale and flexibility our diversification of end use and geographic markets combined with our operating track record across all stages of an economic cycle, all support achieving our long term growth aspirations.
We're making the business moves today to position Badger to take advantage of this long term opportunity and in the past Badger's always managed for the long term so with those comments, let's turn it back to <unk> for questions.
Thank you and participants that's a reminder, if you would like to ask a question you May Press Star one on your telephone keypad again Thats Star then the number one on your telephone keypad to withdraw your question press the pound key.
We have a question coming from the line of barrel Yang from UBS Securities. Your line is now open.
Good morning, guys.
Hey, Darryl.
Just the first question around the margin outlook in the direct labor as we head into Q4 and Q1.
Obviously, those are seasonally weaker periods and I'm just curious on if you want to share what kind of magnitude of margin.
Impact do you think would exist.
As we carry the higher levels of wafers through that.
<unk>.
Yes, great question Darrin that Youll, probably were in our board meeting yesterday.
But certainly a real focus of ours and.
Badger has traditionally had a seasonal business, where Q4 and Q1 because of the cold weather States and provinces. We operate in have lower volumes. So we're very closely focused on managing direct labor to volume.
In those cold weather periods, just like we have in the past.
Last year it.
Was a bigger challenge because we are also trying to gauge recovery from where Covid was bottoming and if you recall the market activity with Covid really did bottom about last this time last year October November. So we had multiple factors underway to manage but from my view this year is.
Getting back to more of a traditional winter season.
With the continued colver COVID-19 recovery growth, but we have a lot better run rate.
Right now going into this winter season, and a lot better visibility about where the COVID-19 bottom is and Thats, obviously behind US now so we're thinking about managing it more like we have in past years, where our local and regional folks are very focused on that and Rob and his team will certainly be very focused on that.
So much better set of circumstances with better visibility this year.
Okay, Great and then.
On the emergency response work it was great to see the contribution the bedroom is able to make.
Just curious if you'd be willing to share what the.
EBITDA contribution of that was it was about 8% revenue, but just I think it has historically been higher margin work for emergency response.
Yes, I can comment historically it has been higher.
<unk> to be and.
This is a.
Our capability that Badger has that no other company in our business has and.
I could not be more pleased with the performance of our of our operations team led by Liz Peterson and her group in the Eastern U S to take advantage of this it's a unique service, we provide to our customers and a huge differentiator.
In the electrical utility customer segment for us.
Okay, and then one last one just with respect to working capital as you move into next year and hopefully much higher activity level.
How big of a working capital draw would you guys anticipate they're.
Moving to the next year.
I don't think I would see much of a big drought, we've been we've really cleaned up the both the credit granting and the collection procedures. So it's the and cleaned out all of the aging buckets. So we turn the receivables and we've shortened the cash collection, our cash conversion cycle quite a bit.
So.
At the maximum look at probably 15% to 30 days' worth of sales, which would be your your your wrap up of working capital requirement.
I said.
The way we are managing our receivables now is night and day from where we were not too long ago.
Okay, great. Thanks, guys I'll get back in the queue.
Yes, thanks Neil.
Your next question comes from the line of Jonathan Lamers from BMO capital markets. Your line is now open.
Thank you.
On the U S gross margin percentage.
24% this quarter.
On revenue per truck close to 37000.
Can you help us bridge.
<unk> gross margin to historical periods.
When it was 8% to 10% higher at times when RPT was this high.
I understand that.
There's been a lot of price inflation.
Since then so utilization is probably still still.
Too low compared to what the RPT would suggest but can you help us bridge the rest of the gap there.
Yes, Great question, Jonathan in my mind, it's pretty simple.
We've still got work to do in our cost structure and passing through <unk>.
Factor cost increases in our pricing.
We did make really good progress in the quarter, but there is still work to do and we have lots of focus on that and our operations team, but we are very confident that as we continue to have the advantages of higher and steadier volumes.
More traditionally than we've experienced historically that will continue to drive those margins back towards those historical trends, but fact of the matter is we still got work to do Jonathan I'm not going to beat me beat around the Bush.
Fair enough.
On the pricing Paul.
Are there any indications that you have that.
To pass through pricing is improving I'm thinking about maybe msas you might be setting up for next year for example, compared to prior year Msas or.
Just normal course work into October.
Yeah, well there are certainly opportunities to win MSA has come up for renewal. So we'll be looking at that and are looking at that very closely and the.
The other side is with Rob coming in great background in marketing and commercial strategy. So we have some fresh eyes at the table, which is certainly going to benefit us as we go forward I can tell you there's lots of focus on it, especially with the cost factors that we've seen in fuel.
Labor so lots of focus on it and it is certainly a very significant business improvement area for us and we're all over it.
The driver shortage situation something facing many industries in the U S. There was an article in the Wall Street Journal This week.
In the U S. A short about 80000 drivers.
Is there anything that you can you can do.
I know over time, because it was.
The major issue this quarter.
Or are you just is.
Is it really.
Margin will be depressed until.
The labor situation improves.
Yes, well in the labor in the short term going to continue to be a challenge and we're pulling all the levers that we have available to us.
You asked a very good question linked to labor.
A minute ago, which is what type of pricing opportunities are there and we are convinced that there are a number of opportunities in that area and the other thing. We're looking at longer term is the design of our trucks and the type of trucks in the type of drivers required early days, but this is something.
But we think about very closely because we design our equipment, we're vertically integrated and we design it to use it. So we think about things like labor cost when we design our equipment because that's a much bigger expense year over year than the capital cost and the trucks. So we're looking at longer term things.
On.
On truck designed to help expand the driver pool, so more to come in the future on that but it's an advantage that badger has that we're working on.
Thanks, One last question for Darren if I can.
Strategic investment expenses.
I believe part of that is related to the legal reorganization could you expand on what those are and whether there is anything.
There will be relevant for.
The business next year.
So the legal rework.
Broadly two components to the the three components that we're doing to the work one is the legal rework structure.
<unk> is expanding our shared services model.
Now with specifically with HR and with the not too distant future with the back office support of the operations as well and then the final component is working on the implementation of Rob's target operating model for sales and marketing operations and fleet, which is a pretty.
And as Paul mentioned, we'll share some more stuff in the coming coming quarters, but specifically your question on the legal entity rework and we announced this earlier this year, that's where we stratify our structure and purifying the pillars of responsibilities and operations.
The primary goal in doing that is too big.
To achieve tax efficiency, so that we don't have.
You don't have drag on sales tax when we move units around and then the second which is a byproduct of that is removing any kind of obstacles and being able to have fluidity and velocity in their fleet and being able to move the fleet, where the demand is needed without having to re register the vehicles and like I said be attack.
To any kind of sales tax.
So that's the background.
Cost savings and I think we shared this previously we anticipate.
On a normalized build program that we can have a cash tax savings of around $6 million a year.
That is a combination mostly of sales tax.
But there is a small component of income tax thats related to the the Hungarian financing structure that we've put in place.
Im hoping I covered off your question, but if there is more details happy to give you more clarity.
And Darren you did say that the SG&A would be $40 million, excluding those expenses. So.
Is that a fair run rate for next year or will some of these continue.
There might be a little bit of continue continuation of costs, but I think for $40 million is the right number we are looking at some cost and efficiency improvements over that wed like to implement in Q4, So I think probably at all.
All in run rate of $40 million is a good number to work with.
Thanks for your comments.
Again participants if you would like to ask a question you May Press Star then the number one on your telephone keypad again Thats Star then the number one on your telephone keypad. Your next question comes from the line of Maggie Macdougall from Stifel. Your line is now open.
Maggie Macdougall your line is now open.
Got it helpful.
Please hold while we are.
While we compile the Q&A roster.
And speakers, we don't have any questions silver.
I'll turn it back to you for any closing remarks.
Okay. Thanks <unk>.
On behalf of all of us at Badger, we want to thank our customers.
Our employees suppliers and our shareholders for your ongoing support that helps us all drive badger's success. So transit you can end the call. Please.
Thank you and ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.
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