Q2 2023 Badger Infrastructure Solutions Ltd Earnings Call

This was achieved while also adding a net 117 units to our fleet over the last 12 months.

This increase is largely driven by improved utilization, resulting from the investment in our sales and marketing resources in the beginning of our focus on pricing realization.

Our red Deer plant manufactured 55, non destructive excavation units in the quarter versus 21 units in Q2 of 2022 with a total of 112 year to date.

We retired 12 units in the quarter and 38 year to date.

We ended the quarter with 1470, non destructive excavation units compared to 1387 at the end of 2022.

We are reiterating our 2023 fleet guidance to manufacture between 200 230 units.

And retire between 80 to 100 units.

As we have previously discussed we have begun refurbishing select units by replacing key components to extend the useful life of these units by five years and increase the company's return on invested capital.

We anticipate two refurbished between 40% to 50 units in 2023 at an average cost of $150000 per unit.

We have started work already on 114 units during the second quarter.

And are very pleased with the initial results.

We've received so far.

I'll now turn the call over to Rob Dawson to discuss our financial results.

Thanks, Rob.

As Rob mentioned, we had another strong revenue quarter up 19% from last year, perhaps more importantly, our gross profit and adjusted EBITDA for the second quarter were up 40% and 50% respectively compared to last year more than double the increase in revenue, reflecting the continued returns of our focus on the commercial.

<unk> improved truck utilization and the early results of our focus on pricing initiatives.

We are encouraged by the trend in our adjusted EBITDA margins rising to 23% for the quarter compared to 18% last year as we have discussed our investments in sales and marketing coupled with our earlier investments in corporate shared service functions are starting to show the scalability of our business model.

On a trailing four quarter basis, we see record revenue and gross profits and steadily improving adjusted EBITDA margins with each sequential trailing four quarters.

We generated 32 per share and earnings per share in the second quarter, which is more than double the same period last year.

Now onto the balance sheet, our capital allocation priorities are unchanged. We continue to maintain a strong flexible balance sheet to support our organic growth and commercial strategy. Our compliance leverage was stable at one six times consistent with year end and down from two two times a year ago.

This reflects the strong cash flow generation from our base business funding steady growth all while maintaining stable relative leverage.

Our credit facility remains just over half drawn providing us with in excess of $134 million in liquidity and financial flexibility to fund, both near and long term growth and complementary capital allocation decisions.

Our receivables portfolio remains strong with over 90% below 90 days outstanding and again over 90% of customers having investment grade characteristics. We continue to focus on customer credit discipline admits the inflationary interest and credit environment in both Canada and the United States.

I will now turn things back over to Rob <unk> for some final comments.

Rob Thanks.

Thanks, Rob So before we open it up for questions. A few last thoughts we are excited for our first full year of operating under our renewed.

Commercial strategy, we've seen positive results in the first half of the year and expect to continue to see strong year over year revenue growth.

We expect to continue improving our margins by focusing on pricing utilization and operating discipline.

We believe <unk> unique uniquely positioned to capitalize on the significant U S and Canadian opportunities.

Non destructive excavation services in key end markets.

<unk> long term growth prospects remain unchanged.

We continue to see strong and growing demand for our services, our focus on growing and diversifying our customer base and National accounts program is expected to contribute to continued growth in the back half of 2023.

So with those comments, let's turn it back over to the operator to open it up for Q&A operator.

Ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your telephone. If your question has been answered or wishing was yourself from the queue. Please press star one again, we will pause for a moment, while we compile the Q&A roster.

Our first question comes from Yuri Lynk with Canaccord Genuity. Your line is open.

Okay.

Hey, good morning, guys.

Hey, good morning, Gary.

Good morning nice quarter.

Just talk about.

Your gross margin.

And ultimately where do you think you can.

You can take these on.

On a run rate for full year basis I mean.

Storage the company was in that 31, 30% 31% range.

That kind of the angle to get back to that on a on an annualized level or do you think you can take it higher.

Okay.

Yes, I'll start and I'll, let Rob.

Clean up where we are.

Whatever I Miss.

So.

Yes, we are happy with the progress made in the gross margin.

And how we're performing we do believe that there is some continued upside.

As you know we've been.

Really making improvements and strides in.

Really the our operating discipline and some of our cost control as well as.

Investing kind of in the future.

Overall, we are comfortable with where we are but we do believe we have continued upside we don't really give guidance for the back half of the year.

Hey, Here's exactly where we think the gross margin is going to be at the end of the year here.

But we're comfortable that the trend is not a one time or just a one.

A onetime performance, but rather.

How we how we've worked on the improvements we've really done foundational improvements.

Reducing some cost out of the business, but really just trying to grow as efficiently as we can.

And we're going to continue doing that in the back half Rob if you want to add anything to that.

Yes, yes.

<unk>.

Rob said, we don't provide specific guidance, particularly not on a quarterly basis, but when we do look.

In the 2018 and 19 period before Covid.

Business was earning roughly 24%, 25% EBITDA margins.

And we do believe.

That we are heading to back towards that and we will be getting there certainly over the next.

One to two years and we do believe that we can we can steadily.

Grow through that number as well, but in the near term over the next one to two years that would certainly be I think within our within our expectations.

Okay that makes sense.

Last one for me I think so.

Yeah.

Okay.

It sounds like.

Are you benefiting from.

From price.

Okay.

Okay.

Okay.

Your phone garbled up on our end.

But I think you were saying.

If I can.

If I picked up what youre, saying is something about.

The RPT looks like you benefit more from I'm, assuming you're saying more from utilization and price is that what youre, saying.

Sure.

Actually just kind of his line disconnected.

Okay, but anyway ill.

I'll address I think thats, what he was saying what was really the driver of the RPT improvement.

And.

The Euro if you can hear us if the call is being recorded.

We actually <unk>.

Started seeing some pricing lift throughout the quarter.

But the month of June started to accelerate with the new pricing engine, we rolled out.

And the team really adopting it and good adoption rate in the field.

So, but youre right. The majority of that improvement was tied to utilization for this quarter and we see.

Pricing, becoming more and more of.

Part of our performance for the back half of the year and beyond with the new pricing engine. So operator I'll. Let you go to the next question of Youri dialed back and we can certainly put them back in the queue sure thing one moment for our next question.

Our next question comes from Ian Gillies with Stifel. Your line is open.

Morning, everyone.

Good morning, Ian.

With respect I guess to the reefer formally rolling out referred plan can you maybe walk us through.

What youre doing with the trucks.

To the point that you are comfortable and maybe talk a little bit about are they trucks that are typically towards the end of their useful life or is it trucks that are in the middle of their useful life. Just if you could give us a bit of a sense of whats happening with those units.

Yes sure so.

The quick Genesis of the whole referred program Ian was.

We were looking at all of the work ahead of US for the next few years, specifically tied to a lot of the infrastructure spend in the United States and some in Canada and then we started looking at what our.

Manufacturing capabilities and run run rate was going to be and then what our capex.

Burn would be and we looked at all of these assets that were at the 10 year, Mark and historically the company had a 10 year lifecycle on the trucks.

And pretty routine routinely right at the 10 year, Mark we would start to retire out the 10 year old trucks and bring in new trucks.

And then we would have some growth trucks baked into it.

The way, we spec Archrock C and this has been for a long long time here at the company if not from the beginning but they are heavy spec.

Almost theyre not but they are almost overbuilt type trucks, they're right on the cusp of just really nice specced heavy duty truck.

And a lot of the truck manufacturers, when we sat down with them about six months ago. They kept telling us the trucks have a lot more life in them than just the 10 years.

And so it caused our fleet leader lawn and myself and I have a trucking background and has a decent mechanical long time ago to really reevaluate do we need to get rid of them at the 10 year Mark.

And so we.

<unk> did a couple of.

Discussions with some suppliers vendors and realize that we only used for things on the truck and a very heavy way and thats the engines to run the back of the hydro back the transmissions the.

The transfer cases, or we call them <unk> and the blowers.

Those things are run all day every day the rest of the truck.

As <unk>.

Not used in a big way.

<unk> four things are the ones that are highest wear items on on that truck at the end of the 10 years.

And so we thought of what would it take how long can we extend the use.

Useful life of those trucks, how long could they go if we just replace those four items.

It's time or when they need to be replaced.

We can replace those items for between depending on where we are in the country and who is doing it but 125 to 150 I think in the MD&A. We were talking earlier, we have an average of 150 is what our expectation is and we're seeing that number.

For $150000 you can have all four of those major components.

We knew with a warranty was a three year warranty on the engine.

And we believe we can get an additional five years out of the truck and that truck.

Was on a 10 year depreciation cycle. So it makes no.

It's a no brainer to say for an additional $150000 and get an additional five years off of a truck and it's a good performing truck a.

A few caveat to it though Ian on the strategy.

We really inspect the trucks to make sure. They are good candidates, that's why you're not seeing us do it with every single truck.

The colder weather markets that have salt sand a lot of cost of materials that will eat up the frame of the drug.

Those don't make good candidates because by the time you reframe. The truck you put in a new engine all of that you guys will buy a new truck.

But there are several markets that we operate in they don't have rust issues, Russ concerns or anything like that for the frames.

And we do a thorough inspection before we flagged as a candidate for the referral program.

Thats why youll notice.

In my discussion that we have set around 40 units this year.

We're not doing it with all the units that we could be retiring so we're pretty excited about it because we think it's going to earn in.

Prove the return profile. So does that give you some more color Ian.

Yeah.

It's actually great I actually have two follow on questions from that if I may one for you and one for Rob Gosh in the first being <unk>.

If youre a customer getting one of these refurb trucks or an existing truck and the fleet is there any discernible difference and then the second piece for Rob Dawson is at some point is it going to cause you to take a look at.

The depreciation policy for those of us that care on earnings.

Yes, so I'll cover the front side of that.

Rob you can at the back side on the front side and baked into that $150000.

We actually do and we learned this from the trucking industry.

Whenever you Repower refurb over the road vehicle.

Is making sure that the paint job.

Is still solid if we need to.

Remember, we have some access to bank facilities as well as our own but weakened sandblast.

Either touch up paint or who need repaying some of them, but if we're going to put a truck out for an additional five years, we want to make sure. It looks really good coming out of the reefer process and our operators can be proud of taking it to a job because thats our brand and our image.

The second thing, we put in a new driver's seat with air ride.

It's a very minimal cost for a <unk>.

Very happy operator to get in basically the refurb truck is like new are all of the control of everything is new to him.

During this policy it costs, a little bit more to do it that way and Thats why we baked it in we up that number from 125 to $1 50 from our initial discussions.

The customer sees no discernible difference because you have to remember we have roughly I think.

This morning, we set 2570 trucks I mean, they're they're all different ages that can show up on our customers' job site. The most important thing for the customer, though Ian as it starts it runs it performs and the customers are happy so anyway.

Quick summary on that and I'll, let you talk about on the depreciation and.

New truck 10 years.

I appreciate it down to residual value and then refurbish truck 150000 over five years.

So and then if you think about the refurb, it's going to be pretty de Minimis in the full picture with 1400 trucks versus 40.

Yes.

Fair enough.

Last cleanup for me Capex in the quarter was a bit higher than I was anticipating.

But absent the refurb program.

Views on Capex in full year spending relatively unchanged at this point.

Yes, that's right and you would see there is some discontinuity quarter to quarter, because we do keep some trucks in inventory until Theyre completed.

So there is some trucks if you follow the unit count that were on the fence line in Red near waiting to be delivered to operations at the end of Q1 and those are all then put out into the field. During Q2. So there is.

Counts as Capex in our financial statements for GAAP purposes in the quarter that they get released operations, but the build occurred in Q1. So there is some discontinuity between the two so you'd see a higher number in Q2 than you would've seen a lower number in Q1.

Our plans for the year unchanged and our capital expectations other than that very modest increase from the refurb program remain the same as from the beginning of the year.

Perfect. That's what I figured I just wanted to confirm I will turn it back over.

Okay.

Again, ladies.

Ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your telephone.

And our <unk> back on the call did you want me to open up the line to the CPA and if anything further.

Sure sure one moment.

Hey area I think I may have answered when we launched I think EMEA Randy.

To answer the questions.

Yes.

And I was just asking.

On pricing when you started to raise prices.

And how that's being received by your by your customers.

Yes so.

We have been working on pricing really since the turn of the year.

And doing that doing it how badger has done it historically, which is on a one off basis.

And not very systematic way.

<unk> had.

Some pricing improvement.

Slight in Q1.

In the first couple months of Q2.

Pricing was continue to improve obviously, that's our we're getting into our higher demand part of the season.

But in June when we rolled out the pricing engine.

It was brand new.

And we Werent.

100% sure how well it was going to be received.

By the field, even though we've done a tremendous amount of training and everything and it was one of the most well received programs.

In the company's history and so.

We started seeing a little bit of acceleration on our pricing.

Specifically, the very last month of the quarter.

We are pretty excited about really having.

The full quarters of Q3, and Q4 coming up ahead of us and having that pricing engine in place during the middle of the season.

As far as how the customers are receiving it.

We arent dramatically taking the pricing up.

We're not getting too aggressive, but we're doing incremental pricing really focusing and tied to utilization.

<unk>.

Certain statistics on.

What type of work it is.

So far we haven't gotten a lot of pushback.

I'm also very very focused on our utilization and the pricing.

Don't want to sacrifice a lot of utilization for just trying to chase price, but obviously pricing is a big opportunity and lever.

For US we're also the last thing.

I would share with you to give you this context.

And sometimes it's just the way things work out but this is working out in our favor is the timing of the pricing engine rollout is happening right as the season was getting ramped up and so obviously, we are into our highest utilized months.

Utilizations hitting so hard so.

Strong so it's a good time to rollout the pricing.

But we're very cognizant of making sure that we're not upsetting a bunch of customers and also making sure we're giving them value for the pricing.

That's helpful.

Last one for Rob Dawson.

Before your time, Rob there was some SG&A guidance out there of 30% to $35 million a year.

Is that still is.

Is that still a good number or do you think you might come in closer to $40 million going forward.

Yes, I'm not familiar with that 30% to $35 million I apologize here, but I would say year to date were in line with last year than I had thought our expectations would be to remain sort of be holding the line on G&A spending. So I think your latter estimate is probably more accurate than 30%.

35.

Thanks, guys.

Thanks, sure and I'm not showing any further question at this time I'd like to turn the call back over to rubber black for any closing remarks.

Okay. Thank you operator and on behalf of all of Us at Badger.

To our customers our employees suppliers and our shareholders for your ongoing support that drives badger's success. Operator, you may end the call.

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