Q4 2021 Badger Infrastructure Solutions Ltd Earnings Call

To the speaker's presentation. They'll be your question and answer session. To ask a question during the session, need to press orar one on your telephone. If you require anyfurther resistance, please press Star. zeroi will turn the call over to your host, trubor Carson. Morning everyone, and thank you for joining our fourth quarter earnings call. On the call this morning our badgers' present and CEO , Paul vanderberg and Darren war, badgers CFO . madgers 2021 fourth quarter earnings release. M D a and financial statements were released after market close yesterday and are available on the Investors section of baders 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 conssidered to be forward looking statements. We make these forward looking statements based on certain assumptions that we consideider 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 expressed or implied.

For more information about material assumptions risks, uncertainties that may be relevant to such forward looking statementsplease refer to bad' 2020 onemd along with the 2021 IAF. Further, such statements speak only as a today's date and adgger does not undertake toupdate any such forward looking statements. On that time of call over to Paul. Thanks Trevor, there's always we would like to start to call. Talking about health and safety, we've been pleased with the team's health and safety response during this two year old co pandemic and all the related operating challenges that have come with it. The safety of our employees and customers is Badger's job number one.

Q4 saw another spike in monthly employee COVID-19 cases, with 5% of our operators in quarantine during the month of December due to the omniron variant. This was slightly below the 6% level of a quarantines we saw in August and September with the Delta variant. The omniron surge continued into January but February cases were down by 80% from January and in March. We have just seen a handful. This is good news.

It is also good news that the center for disease control in most jurisdictions of loosened operating restrictions and return to work testing procedures, which have contributed to shorter quarantine times.

Since omi crome hit us in Q4 and Q1 and not during the peak construction season, like Delta did last year. Combined with the way that cases have fallen off, Badger and our customers are in a good position for the 2022 construction season.

If we think back through the past two years, badgger's COVID-19 playbook of consistently following the center Ford disease control guidelines has kept our people safe and met our customers' needs.

We will continue with that approach, which has been led by leonwalsh, our VP of health and safety, and his strong team, who have very successfully partnered with our operations team.

We've managed through some extraordinary operating conditions over the past several years, but under all conditions, our operating practices remain the same, focused on badgger's objective of putting employee and customer safety first.

So on to the quarter. First some comments on revenue.

We were pleased with the continuing year-over-year market improvement during the quarter, despite improvement being uneven due to omnicurrent.

Revenue of 150 threeill three million in the quarter was up 17 point 7% from last year, continuing to reflect the market recovery that began in the second half of 2021.

We also continue to see indications of improved energy market demand, as companies reset their capital budgets early in 2021 and started getting back to work. This is a welcome change after several years of energy segment headwinds.

Our revenue growth has also continued to outperform the year-over-year U's nonresidential construction trends. This outperformance has been the case since April 2021.

Q4 was a turning point for the U's nonres market after 16 months of a negative year-over-year trend versus prior year.

Activity bottomed in October in U's nonres and has been growing versus prior year ever since.

Regarding operating costs, with the uneven 2021 recovery, we experienced higher levels of direct labor costs than our historical. Trend has been driven by the fact that it's more difficult to send employees home when activity levels are uneven in our strong labor market, and also by a challenges due to coing.

The team continues to work hard to recruit and retain operators, which is a challenge but achievable in the current labor market.

We have seen some labor cost inflation and, as we discussed last quarter, have been implementing price increases to offset.

Direct labor will be less of a challenge as our activity levels continue to improve and demand becomes more steady.

Our Q4 revenue per truck per month, or rptt of $30 thousand, was up 23 point 7% last year, growing more than our 17 point 7% revenue increase.

Based on Badger history. We will see improved labor efficiencies as fleet utilization improves.

The recent oil spike is a short-term operating charallge that Rob black odir on the operations team are focused on.

Both procurement and pricing actions have been implemented.

The reality with this challenge though, is that every business faces it.

And that fuel recovery fees will be with us for the foreseeable future.

It's manageable.

We continued to manage our cost in all areas during the quarter. With market shifting to a recovery mode, we reviewed all aspects of badgger' operations for efficiencies.

This review resulted in a series of cost cutting moves and a four point $2 million charge in the quarter. These moves had good paybacks and will reduce our costs going forward.

On the manufacturing side, given the continued year-over-year revenue and utilization improvements in Q4 and, as we mentioned last quarter, we had been evaluating the need for a ramp-up of the manufacturing build rate.

For 2022, we are currently planning to add between 15 thousand units and retire between 40 and 60 units.

This compares to 2021 edition of 32 units in retirement of fifty-three.

Our manufacturing team has presented position to plant well for higher production levels and more volume efficiency.

We are also very well positioned for our supply chain components.

This positioning is a plus for Badger's ability to place new equipment into service versus competitive manufacturers.

Who are experiencing tight supplying structureanities.

Market indications are that equipment will be difficult to source over the next several years, which makes badgers' manufacturing and vertical integration more valuable.

We also implemented a new manufacturing requirements planning or MP system during the second half of last year. That went live at year-end.

So our Badger manufacturing operation is now up and running on a modern MP system integrated into our overall Oracle ERP platform.

In January , we entered into a long-term lease for seven acres adjacent to the red Deer plant. We're in the process of working through the facility and integration plans, but we expect that this addition will enable the Azure to expand capacity beyond our previously stated level of 350 units per year on a single shift basis.

More to come over the next several quarters as we firm up our plans, but we were very pleased to be able to take advantage of this opportunity, which really positions Badger for longer-term and future growth.

So some additional comments on the 2022 outlook.

We are well positioned for a busier year in 2020 -two.

We see pent-up demand across many markets and the year-over-year trends are favorable.

Labor and truck availability will make existing fleets, and especially fleets that are staffed with trained employees, in demand and more valuable.

We incurred the cost of recruiting and training operators during the uneven recovery year of 2021 and we expect that this effort will pay off as demand continues to expand and activity is steadier.

Fleet utilization and labor utilization go hand in hand and both drive operating leverage.

Another change that we made in the second half of 2021 that will impact 2022 and beyond was the strengthening of our operations team, in addition of sales and marketing leadership.

This is part of executing on a focused commercial strategy that targets a significant market opportunity that we see for nondestructive excavation and related services.

Rob strengthened the team with experienced Badger operations and sales leaders stepping up to broader responsibilities, and new leaders with extensive industry experience joining the team.

We are establishing a focused sales and marketing organization including a national accounts function. This is excitingthe objective here is to aggressively leverage badgger's broad operating footprint, business scale and extensive customer relationships more than we've ever been able to do historically.

This is an advantage Badger has that none of our smaller competitors have.

We expect that these initiatives will benefit growth and add operating leverage as they gain momentum during the rest of the year.

So unless there are geopolitical or major macroeconomic disruptions, we see 2022 conditions to support continued progress in expanding revenue.

Increasing our operating leverage and driving margin.

As we sit in past quarters, we expect that margins will return toward historical levels as the recovery continues. And now I'd like to turn things over to Darren for our Q4 results.

Thanks Paul, and good morning everybody. Our revenue in the quarter, as Paul mentioned, was approximately $153 million and for the year was 569 million, up over seventeteen percent and approximately 2, 2% respectively. Gross margin was 19% and approximately 21%.

21% respectively for the fourth quarter and full year 2021. As Paul mentioned, we continue to invest in operators, in key sales and operations personnel, in anticipation of a market recovery.

gna expenses were approximately $47 million for the full year. These costs were modestly elevated over last year's level to support the completion of the legal entity reorganization and the mrp system implementation that Paul mentioned earlier.

Both the legal entity and the mrp system went live on January third of this year and we continue to anticipate our normalized gna run rate to be approximately 40 $40 million annually.

Adjusted EBITDA was approximately seventyen million dollars and $72 million respectively for the quarter and full year. As Paul mentioned, adjusted EBITDA reflects the approximate $4 million in cost cutting actions completed in the fourth quarter.

Adjusted EBITDA margins were 11% in approximately 13% for the fourth quarter and full year respectively. Again, these margin levels reflected the challenging conditions in 2021: the uneven business recovery, our continued investment in operators and strengthening our operations and sales teams. Now to the balance sheet.

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

We have continued to make meaningful progress in accounts receivable management, particularly in the collection of long age receivables and, as of March fourteenth 2022, approximately 70% of our receivable portfolios aged less than 30 days, resulting in a DSO of less than 70 days. We're very proud of what we've done.

In January , we repaid the final installment in our senior secured notes with credential, resulting in our debt being consolidated within our five -year committed credit facilities with our syndicated banks.

We continue to maintain over $40 million in committed credit facilities, which provides us ample liquidity and financial flexibility to fund both near-term and long-term growth and the complementary capital allocation decisions on the capital allocation fund.

We will be focusing our capital resources to support our planned new truck build program for 2022 and additionally, the Board has approved an approximate 5% increase in our quarterly dividend to 16 point half cents per share, or about 66 cents annually. The dividend increase will be included in the March 2022 dividend, which is payable on April to fifteenth, and.

I'd like to remind everybody about a couple of changes coming in 2022 which we mentioned previously. First, effective with Q1 2022 reporting, we will begin to report our results in the? U's dollars to improve the comparability of our year-over-year results and to minimize the foreign exchange fluctuations, given approximately 80% of our revenues are generated in U's dollars. And second, we'll also be changing the frequency of our dividend payments from monthly to quarterly effective with the March dividend that I just mentioned previously. I'd like to turn the call back to over to you, Paul.

Okay thanks, Darren. So just before we open it up for questions, our view of the significant U's and Canadian long-term opportunity for nondestructive excavation and related services and bradgger's growth prospects is strong.

We required the required focus on infrastructure that we all are well aware of. The North America supports demand for our services.

We stand ready to help strengthen and maintain that K critical infrastructure and adapt it to the new sustainable technologies that are rapidly coming on.

badaddress's recovery from colvid continued in Q4.

Activity levels picked up in the year-over year. Growth we saw in Q4 has continued into early Q1 and.

We made the investments to hire and train operators, to strengthen our operations organization, to build our sales and marketing team and to position our manufacturing for higher levels of demand. So badgger' ready. So Kevin, back to you for questions.

Ladies and gentlemen, if you have a question you are comment at this time, please press the Star than the one key on your touchone telephone. If your question has been answered, you ish to move yourself from the queue, please press the pound key. Our first question has comes from your link with candac ordardanuity.

Hey guys, it you are y Hi Paul.

So I mean not the quarter I was expecting. Anyway you guys would do a little bit better. Are ven revenue risft?

Paul can just talk about the sense of urgency that at bad to improve the margin situation I understand there is a lot of difficulty in our gross margin but just year overhead. I mean it continues to increase year after year and.

I'm just wondering if you can reevaluate some of the investments you're making and maybe put them off to a better time when the revenueesis there to better absorbbitit. Just how do you think about that and what do you expect in terms of cost savings, given the moves you did make in the fourth quarter?

Yes well, I'll answer the last question first. We expect very good paybacks on those less than two -year paybacks, a lot of less than one -year payback. So those, those are good, those are good moves for us. And regarding the.

The overall cost management focus and the focus that we have in the prioritization we have. We have put some things in place for the longer term. This is a program we've been working on for several years and things like the mrp system, building up the operations team and the sales and marketing organization- our actions that are going to benefit us see a lot of benit, we think, as we did, into the second half and beyond of 2022, and these are actions that we really need to take. The position Badger for the long term to match up with the long term market opportunity timing had. We normonly were had two Delta variants during the year. one during our two busiest months in Q3, when we also had a major emergency response. Perfect hindsight is something we didn't have and your question on timing is a good one

But I can. I can tell leeveryan on the call that it is all hands on deck on driving margin and it's not only cost management but it's also revenue realization and pricing and that is an aspect of the strengthening of our sales and marketing team with the type of professionals that have come in under Rob's leadership, that our skills in experience that Badger has not had historically. So I view this is a pretty significant reset of our operations team and the leadership skills and the marrying up up some strong historical experience Badger operators with some new talent that comes in with different way of thinking and, quite frankly, a very serious modernization, both our go-to market strategy and things like pricing, national accounts, the whole suite of sales and marketing that can really drive the opportunity that Badger has.

So the timing is not the greatest jury. We've had that discussion in the last several quarters with the Board. But the moves are the right moves for the company longer term and and the only thing I can say is we're just going to have to prove it each quarter not only to ourselves but to all the analyst and Investor community and that's something we talk about talked about yesterday with the Board. Actually So.

Okay my second one is on the bill. I mean, why do you want to build 165 OD trucks in 2022? I mean, you're the RPT annualized is still well below an optimal level. You still have a lot of slack in the fleet. It looks like you're struggling to staff.

The sleep that you have and your stock pricees at or neuro ist two week low, might be better to buy back stock here. So just your thoughts on on that and if you could tie in the current truck economics, given the substantial increase in the manufactction costs you experienceced last year.

Yes well, we want to make sure we have the trucks there and the demand there as some of our sales and marketing programs kick in and I CAn't comment too much on the current trends we're seeing. But it's been a very solid start to the year as, as I said, our year-over-year trends in early Q1 have been very positive and we're seeing a very positive year-over-year growth going forward for 2022. So the RP T and the utilization dynamics we expect are going to change as we get into summer season and beyond. So we want to to make sure the trucks are available and that's the purpose behind the, the increased bbuild, and I think you've seen Badger for a number of years. This is a similar scenario that we had in Q1 and' 17 coming out of the oil and gas downturn, where the announced in a higher truck build, where the RPT we're still climbing their way back up. So a very, very similar type of recovery scenario from that perspectivebut not regarding coough cost 400 thousand build truck and meracost 550 to build truck.

Yes well if you take a look at the.

The the cost, the cost last year. We're at a very low valueme rate. So there's about a 10% swing just in value impact from the rate we had last year to a more more normalized build rate. The inflation is there on truck components. That that is a fact and that's one of the reasons we brought in a new ops leader with Rob in building up the o organization that the value of these units need to be realized and that's a big, big focus from the team. So revenue realization is a real focus, along with pricing, and I think the good part, what we see coming the next couple of years is that trucks are going to be in quite short supply in the industry and that are going to be hired to get. So we think there's going to be a lot of value for having more iron on the road staffed up with operators in the next year or two then, than a lot of people realized. So that's that's thought behind the increased build. Ok ok ok, Thank you. Our next question comes from Michael tortank, new ning gentleon. Good morning.

I wanted to dig into the gross margins here. You know, as you discussed, for margins to normalize, it seems like there's a an element of operating leverage, of pricing and of cost control. So any way can pretty got down for us. We can better understand. You know which of the three you know are expected to be the biggest driver for the marg recoveryand, and I guess what I'm trying to get at hereis really, you know, as we think about 2022, you how much of the gin recovery will be higher RP T versus lower cost.

Yes no, that's thanks. Thanks for the question, Michael. You're right, it is a combination of all three of those things and the aspect of truck utilization and labor utilization is one that is not well understood broadly about the address' business. Those two do go hand in hand and when you take a look at our PT T and gross margin, there's a very high correlation between those two historically. The other part of our business model is that we are a very heavily labor intense business model and when you're not leveraging your labor effectively you lose operating leverage, and that's been in the case for the last several years. With the uneven levels of activity, we see very significant potential as our volumes recovery recovery, but more importantly, as our volumes become more stable and we don't have the variability.

To not only see improve truck utilization but significantly improve labor utilization. So that is a major factor in our focus from the operation side and is especially given how tight the labor markets are in the last year and I talked about it a little bit in my comments. But when you have the labor market as tight as it is, if you don't provide your operators which steady hours, they have alternatives. So that's been a real challenge and that's part of why our labor cost, which is to direct labor cost on the trucks, which is our highest operating cost, has been higher than it has been historically. Our folks in the field tend to keep folks on the payroll rather than sending them home just because they know folks have alternatives and as we get busier that factor will fall away.

So there's a significant amount of direct labor cost operating leverage that's very closely tied to our fleet utilization rates. And then 1- sorry, no even.

No it's okay. So I started with that. one because direct labor is by far our biggest operating cost, 35% to 40% of ourtotal revenues, So huge focus area for us. And then the other one is re revenue realization and pricing and Badger historically. You know- youurre asked a question, you why- if you put the cost in to build up operations in the sales and marketing organization. But Badger historically was run as a very decentralized business.

And each individual branch basically drove their sales and marketing strategy and also their pricing strategy, and that was a very successful model for many years. But because we've gotten So big, we have significant opportunities to drive our operating scale with deals with national accounts that we overlap with in many, many states and provinces and that has significant opportunity to help us on smoothing out the volumes. That is an initiative I'm very excited about and I just talked about the linkage with operating leverage on direct labor there. But pricing is another area that we're really digging into an earnest and there's not only the opportunity to plug revenue leakage.

Which is 100% price realization, but also to be much more strategic about how we price and think about the strategies in each of our regional markets, and this is something that was deolved to each individual branch manager historically in Badger in. We're now taking an approach to be driving that much more strategically. We think there is significant opportunity for revenue and profit improvement in that site of bad or two So those are, those are the two real major levels, levers in both of them, our targets of the strengthening of our ops team and especially bring in very highly experienced, proven sales and marketing leaders.

Got it. I mean, it've seen like solvable issues again if the macro continues to move in your favor. Maybe the ask a follow-up? I mean, what of are some of the obstacles? Get higher pricing, just in terms of thinking about the competitive dynamics.

yeswell, I mean, in the hydrovback business there's always competitors and we've always had competitors. The dynamics are local in each and every local market and that's part of why we're looking to raise the buyer and take a more of a national account approach with our top 100 customers. There is huge value in this top hundred customer base of having the ability to make one call and have service provided. No one else can even come close to Badger on this. So it's really the value that we provide and, as I talked earlier, that could really help us on the utilization side.

And then the other. The other sll govern would go ahead.

Just the other acknowledging your response sorry okay no, the the other part of it is is just making sure we're plugging any revenue leaks and administratively making sure we are billing everything that the customers already agreed to pay. So, Rob lacadir, and there we have taken a real focused approach, together with our field back office and focus that under a very talented that of our it to Ma sure that we're driving all the it system capabilities and making sure our ad min is very efficient, making sure that all those revenue leaks are plugged in. That's low hanging fruit, but there's a theme here, in everything we're talking about in your questions, which is improving our operational of implementation, in our operational execution, and that is a major focus force.

That's understood and I don't want to go on here for too long, but I did have another question. You, based on some of your disclosure, I think the yet about 130 trucks that were' becoming know of age- I think that's 10 years- in 2022. instead, you're retiring 40 to 60 this year. Can you comment- you know at the high levels- to whether you what you're looking to do here is flatten out the retirement schedule for the next couple of years, and you know how much flexibility you have.

And then one are the implications for margins, the comments on that. We continue to look at their retirement profile and we've also strengthened our fleet operations. But we're really looking to sweat the assets a little harder and get more economic life out of them. As you say, maintenance and repair expense in the life of the truck is a trade off. So we're looking at that much closer than we ever have in the past and, if you recall, we started talking about a more focus on utilization and squeezing aring more utilization out of the trucks. That goes hand in hand with incremental expenses in repair expense decisions. So we're looking to sweat the assets harder because that's our biggest chunk of invested capital at Badger. And then the other side- and I think we're going to- all of us on the call are going to be hear more anding more about this in the coming months- but there is our real pinch in availability of trucks in North America and a fleet.

It's going to be worth a lot and so we want to make sure we have enough fleet to meet demand. With markets recovering, and the fact that we have trucks available are going to make badge your first call versus other companies that are going to have trouble putting trucks on the road. So that's why we're So pleased about our supply chain position with chassiss. That's why we're increasing the build. They have the trucks available and we see this as a several year opportunity and with a lack of ability to get as many trucks on the road that many industries are going to going to see, trucks are going to be more valuable and that should translate into price. Thank you for the comprehensive that our smallmichael. Our next question comes from maggative goits people. Good morning you doing.

And maybe uh, I wanted to just touch on the restructuring activities of Q4 and talk a bit about any car savings or efficiencies that are going to come from those in the uh upcoming year that we would not have seen in the past. You, I want to jump in, I'm just going to get my voice arrest and I guess, goodmorning eightgy.

So the restructuring costs were around four point $2 million and it was broken down into three broad. Buckets one was branch operations where we look to consolidate consolidate branches to cover a geographic area more efficiently and those costs will be sustaining. We also were developing some technology on the soil management side of things that.

We're looking at different alternatives. So that was another piece of the business that we had decided to focus our efforts: otherware otherware, and then the final piece was looking at our real estate portfolio and just understanding the best way to be able to save those costs, and those costs are sustaining as well. So of the roughly four point $2 million in expenses, we anticipate an annual savings of about 70, 60 to 75% of that going forward.

Okay and you're you know you've always sort of guarded to a long term goal of getting to a 20 to 29%, even to margin. I think the goal post kind of keeps moving just because COVID-19 hung around for longer and there's been all things internally that you've been doing.

To better improve the operating profile of the business. Is that margin target still intact for the long term?

Yes we don't see any change in that Maggie, and especially when we take a look at the sales and marketing opportunities that we talked about a few minutes ago, that really we're not part of badaddress business model before I, I am confident that those opportunities are very reachableokay, and then with regards to 2020 -two.

We're mostly finished Q1 at this point and I imagine you have some indication on Q2 and how things are going to shape up from the spring. Has there been a significant year-over-year change in activity levels in your key markets and can you speak to the impact of more activity in the energy patch versus what we've seen in the past several years?

Well I mean it's nice to see energy turning around. It took a long time there was four five -year headwind and the bottom really got in in Q2 last year when the companies really reset their capital budgets after having them mostly in a bance during COVID-19. So it takes a while for that work to get going but we're seeing a very robust portfolio in the pipeline segment and field work facility work that we haven't seen in the last several years. So it's about 20% of our revenue. These days not as much as historically but very welcome. So that ones very good and.

Year-over-year monthly revenue trends, as I talked about in our in the prepared comments, our very favorable and that's continued from Q1, Q4 into Q1 and that's part of why we're looking at the truck build the way we are, that's part of why we've continued to her and train operators and and we paid the price for that in Q4. We paid the price for hiring and training operators in Q3, quite frankly to. But we are in a better position operator wise by far this year than we were last year and we're ready. I don't want to exude too much optimism But unless we have some major dislocation, that's broad geo political or Mac economic, we're looking forward to much better opportunity to drive revenue and also drive operating leverage as the year progresses and we think it's going to be better in the second half than the first first half. But the opportunity is coming. Okay Thank, Thank you. Our next question comes from lam P o capital markets. Thank you, P Jonathan.

Paul and therein revenue was up 10 million last year, direct costs for up 55 million. My question is: is there any way to estimate a portion of the direct costs? It could be unusual by looking at metrics like operator hours paid while the trucks for idle or operator hours spent in quarantine, or operator hour or overtime hours.

Versus normal levels over to overtime hours. Do you have any pieces you can give us there as we think about it? More fair gross margin for this business.

wellwe track a whole lot of things like that and I could say that with the uneven recovery in COVID-19 the things that really hurt with COVID-19 when you have five or 6% of your operator base. In a particular months in quarantine. You do have higher overtime to cover the work because you don't you don't have someone in the truck you're driving further to cover work for other branches. You have more overnight work and subsistence. Meals hotels things like that to cover work so months like that hurt and there's no. two ways about it and December was one of those months. So and we had two of those right during the peak of our construction season in August and September . The other thing is that when it when we have that type of the COVID-19 hit all of our customers are having one to.

So you have a lot of disruption just with job sites in customer activity too. So that's why we're So cautiously optimistic about what we see coming into the spring, given that the omicrown barariance dropped off so far.

So we track an awful lot of things, not not statistics that we would like to start publishing or are able to start publishing, but you. We track nonbillable hours. So hours that are paid but not bbuild- major focus for us in a major pricing opportunity, in an internal improvement- one of those price leakage things I talked about earlier- and when you get past that, you have overtime management, nonbillable hours. You have mobilization. So how much time are you mobilizing in driving to get to a job site? Is that billable or not? So know, those are all things that we track. And direct labor, the big bucket we focus on because, as you say, it is a biggest costokaythanks. So, as the company se's incentive plans for this year and what's required for targeted payouts, would 15% EBITDA growth from 2021 be adequate or are you also requiring some margin improvement to get targeted payouts?

Yes yes Jonathan, we have a real focus internally on operating leverage and margin for 2022 and I think that's going to continue to be our focus, just because we have a number of execution and business improvement opportunities. So we don't have 2023 internal incentives in place yet, but thousand and 22 itiss going to be a year of focus on business improvement and execution improvement, and that's why I'm So pleased with robs activities: his his first seven months and we got to keep in mind that he just got his regional organization and his new sales and marketing organization actually announced it in place at the beginning of January - So early days, but we're pretty pleased with what we're seeing so far.

And just on pricing: usually in the mdna there's a comment about average hydrovac rates. I didn't see that. How did the pricing in Q4 compared to prior year?

Pricing pricing would have been slightly higher and we've actually continued to focus very closely on that. My view is that we're going to have progress on pricing as 2022 continues and I think that.

Longer term as we get laterer ID of the year and into next year. Given how tight we're seeing the truck chassis market and the ability of companies across many industries to add equipment, there's going to be more value in fleet and there's going to be more pricing opportunities. As we sit here today, the lead times for our heavy duty chassis are out a year.

Yes was a really long. What kind of on rate of leage inflation would Badger be experiencing relative to that slight increase in pricing?

Yes well, we have seen some wage increases, we tried some retention bonuses in the third and fourth quarter last year and in continue to look at all that. But we are very focused on on pricing to offset direct labor cost increases. And then the other thing that we think going in the right direction this year, based based on what we had with our two COVID-19 flare UPS last year, is the labor utilization and that one we see is a very significant opportunity as truck utilization increases. The utilization of labor will really, will really help our margin. Last question for me, just on the new sales office that RA set up. Are there any?

Early wins that you'd like to share with us. At this stage, is it too early to say?

Yes it's pretty early to tell, but my personal view and i- you Rob can speak for himself- maybe next quarter- is that if you look at some things that are unique to Badger, national accounts is probably top of the list in my opinion, and we have the scale of the scope of operations with a lot of major companies that historically we've dealt with them on a bran by branch basis. So the focus that robs put in place there, I think particularly, is going to really make badgeror different and in differentiate us in many ways from smaller competitors. So I that that's a part of my optimism and that's also why I want to have enough trucks for Rob's teamthank commentsthanks, Jonathan. Our next question comes from christopheron with CBC.

Hi think to taking my Co. I was just wondering like: is there a level of inflation, whether it it be in fuel or in in labor cost, that could result in instructurally lower margins for patr and not hitting that 29 to sorry, 20% to 29% target?

yesthe, the way we look at it is. It's not really so much the level of inflation, it's how we manage it or pass it through. And I'll'll give you an example, Krista. We've had a recent oil price shock and we've had a fuel.

Recovery fee and place now for several years. So we have a mechanism that auto would just. Obviously we're looking to update that and make sure it's really tight and lots of, lots of opportunity there. But because we've had that mechanism in place, the price shock is not as big. Now you get a leg because we've been adjusting it historically once each month, but one should get through that month. The mechanism works. So you know that that's one that you get a lot of press on, but that's one we're very much on top of. And then you know the key- and it's part of the Jonathan's questions earlier on labor- is it's really incumbanon us to make sure that we're staying ahead of cost increases and factor cost increases from inflation on labor. That is our biggest expense and you know, quite frankly, that's execution opportunity and we just need to execute on that. And so with fleet being in shorter supply the next couple years, I think that's going to be a tailwind for us and our ability to execute. But we can improve our execution there and that's something we're very focused on.

Okay great, that makes sense and just as as we see a bit of a rebound here in the oil and gas industry, it's very different margin profile with that sort of work, or would it be similar to what we're seeing from the other industries that you operate in?

Well the there's A. there's a different margin profile in different types of work and part of it industry to industry. But part of it's also how much utilization you can drive. So, for example, if you have a truck that's out, there are four trucks that's out on a pipeline and it's every day for 10 hours in the same operators go to the same place every day and get dispatched. That's really efficient. If you have a truck that is is chasing around an urban area and you're doing two jobs in a day and we're trying to stack jobs in know, keep the utilization up, that's a whole different margin dynamic there. So you know it's not only's segment different but it's also the type of work.

And you know that's the other reason I'm so excited about national accounts, because you know those are accounts that need hyddervs every day and is those relationships grow. That's going to help us on the fleet and labor utilization. Ok, great. And then just can you comment on how you're looking at top line growth for this year and the growth that you're you're seeing or the initiatives that you're working on to growing your core markets and your strategic markets?

Yes well, I CAn't really comment specifically on the toppe line growth we're forecasting for this year, but we have been pleased with the year-over-year growth we've seen so far in Q1 and we're ramping up the fleet and make sure we have the operators to be able to take care of that. Regarding the, the initiatives and what we're doing to drive revenue.

You know there is an awful lot on the way and underway and you know it's, but it's still early days, as I said a few minutes ago, on our new sales and marketing initiatives. But the important thing is a lot of these initiatives, our activities, that Badger has not done historically with our decentralized go to market model. Thanks, that's it for me. Thanks, chrisista.

Your next question comes from Trevor rentals withth acuum capital. Morning guys.

Just curious a little bit on the MP and what the potential savings- and on that front you mentioned 10% on volume for decrease in the cost the build trucks. I just wondering what to impact the MP will have.

yeswe're actually really excited about how the mrp system was working and pleased with how the implementation went. But just to unpack some of the numbers that were mentioned before, So for 2021 our cost, fully loaded with overhead absorption for a truck, was around $550 thousand. That compares to 2019 levels of around 4, 50 to to Paul's earlier point, once you start getting volumes back up to the manufacturing volumes, back up to the numbers that we're talking about for our bill program, that takes the number down about 10%. So the high high, four hundreds. We also believe that the sequencing supply chain and componentary management that will get out of the automation of the mrp system could conceivably get us another 10%. So or or optimistic that despite some of the inflation that we're seeing, we could potentially get manufacturing costs back down to the 2019 levels.

Great and then are there any choke points in terms of the supply chain you guys mentioned you're well positioned in terms of chassis, but any other potential supply chain issues in terms of the manufacturing both.

Well Trevor chassis are really the big one and we really made our commitments early on and, as I mentioned earlier, with lead times out to a year, everyone is making commitments earlier, So that is a major focus for us. We did make commitments early on and if you think back historically what was going on in Q3 with Delta and all sorts of disruptions, we made the moves we had to make and we're very pleased with those moves. So we're in a very good position. We're hearing about competitive hydrovac manufacturing plants that have to find a chassis before they build one

And we have our supply chain working quite nicely. There So we are. We are very pleased with the positioning we have and I'm personally delighted that that's coming together at a time when the sales and marketing team is getting up and running and building momentum. So when Rob first joint Badger, one of his first questions to me is, as we get things cranking here, are we going to have enough trucks? So we we to make sure we have enough trucks for this team.

Got it and then with the cost restructuring that you undertook in Q4, is that, do you see any more coming down the pipe here in 2020? -three.

Don't, don't see it. We took a hard look at midyear and they said: you know what, with with Delta, another kick in the gut during 2021. So let's sweep out all the corners and uncover everything. And so we're pretty well positioned for a good couple year run here from a whole system network perspective. We dropped out 12 locations and with our sales and marketing strategy we are looking to really drive more volume for Ader customers.

And deeper with our existing customer accounts through our existing network. That's a different commercial market focus than we've done historically, which is adding dots on the map. So if you think about that change in focus that we couldn't do previously because we didn't have the sales and marketing leadership, this leverages our cost structure differently than adding dos on the map. So you think about operating leverage and you we need to be obviously successful with those sales and marketing plans, but it flows through the system of existing fixed in semi fixed cost structure very differently than starting up new branches. That has a lot of greenfield experience. So this is is a different focus in a different, different approach. And and the good news is when, when you look at our core and strategic markets, the good news is our analysis indicates that the broadening, the opportunities to broaden the customer base are real in there. There it's all about executiongot it and then, with the fleet movement that you did and closing those offices, very maybe the- is there any early changes and utilization they SPE to or is there any change in industry exposure that they can touch on?

yesa number of the branch consolidations where historical locations in some of the oil and gas markets. We're not backing out of servicing any territories, it's just the way we're doing it. So we're very well positioned and we may be driving fther to meet some jobs and some customers may not want to pay mobilization So we may lose some work to some smaller local competitors, but we have other places to move that equipment to and it benefits our overall operating leverage in our overall margin to do that. So those are decisions we took very intentionallythankvery much. A good day thanks, drior.

The next question comes from your linked with chanic orgenuity: paulk, can you just clarify your expectations for the first quarter? You mentioned we're off to a strong start to the year, but chll talked about Al Macron running into into the first quarter. So how how, how we, how Don we think about that?

Yes OMA Ron in January was about like December , where we had 5% of the the operators quarantine for a period, So very similar to December . But we've been very pleasantly surprised with how fast the cases have fallen off, like in March I think we have under 10 the entire employee base, So that that's a real positive. In the good news, I guess if you could say there's good news, is we had only criro in December and January , which is our slow season, So we're looking forward to things going pretty solid from here and, as I said in the prepared remarks yourury, our year-over-year growth in early Q1 has been very good.

Okay but we shouldn't expect any kind of meaningful inflection and gross margin, given the quarantine and stuff like that. Is that how we should read that?

Well the whole quarter is not written yet, But when you see that type of a COVID-19 impact in a month, it makes for a very challenging month. I mean, that's just just the fact we've been living that now for a couple of years and so tough start to the quarter, but that's turning around very quickly n.

Conscious a time here. But any details on the red Deer expansion like what will kind of timeline cost pro forma capacity?

Yes well, as I said in my prepared remarks well, this is something first given them more background. This was an opportunity that did not exist. It came up with an adjacent property, became available, So it was truly a needle in a haystack and we jumped on it. So the team is working through facility layout and integration as we speak andwe're we're looking at a pretty significant expansion above our current stated 350 truck per year capacity on a single shift basis, and I I can say that the capital requirements are modest.

And I would stress the word modest. So that's the other part of this. That's pretty exciting there. There are buildings there and we're also consolidating. There's actually cost savings to it. We're actually consolidating three remote shops that were scattered around red gear into this one integrated facility which gives you all kinds of operating efficiencies. We are hauling parts around town on flat beds back and forth and we're eliminating all of that. So cost savings, safety improvement, efficiency improvement, all of the above it really wasn't need in haystack and that's why we jump on it. But capital, the capitalist, is very modest, that's part of way- are so exciting.

Yes thanks you ary, and I'm not showing any further question at the time. I' turn the call back over to our hohouse for any closing remarks.

Okay thanks Kevin, and appreciate everyone's participation this morning. So, on behalf of all of us at Badger, we want to thank our customers employees, suppliers and our shareholders for everyone's ongoing support and working with us to drive Badger' success. Thank you.

Ladies and gentlemen, does conclude today's presentation. You may now disconnect and have a wonderful day.

Thank you, and your line will be on hold until the huns begin.