Q3 2023 Badger Infrastructure Solutions Ltd Earnings Call
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I'd like now to turn the conference over to Lisa <unk> Director of Investor Relations. Please go ahead.
Good morning, everyone and welcome to our third quarter 2023 earnings call. My name is Lisa Badger's director of Investor Relations joining.
Joining me on the call. This morning is badger's, President and CEO, Rob block at our at our CFO, Rob Doctor Badger's 2023 third 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 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 2022 M DNA along with the 2022 area.
Now I'll turn the call over to Rob block there Rob. Thanks, Lisa Good morning, everyone and thank you for joining our third quarter earnings call.
Before we get into the results at Badger, we'd like to start all of our meetings.
With a safety share.
Our companies, making safety personal campaign.
Means using all the tools in our safety management system to not only identify control risk, but whenever possible remove and mitigate those risks.
We use tools like our <unk> system.
Our stop work authority and our Mentorship programs every day to help us manage risk.
Both on the job and in the business.
Badger, we invest in the right tools to help our people be successful every day.
Now onto the results.
As you saw in our third quarter release yesterday. The team continues to raise the bar as evidenced by our record revenues.
Record gross profit.
And record adjusted EBITDA.
We are very pleased with our topline growth of $195 6 million, which was 20% higher than last year driven by our commercial strategy.
Rolled out last year.
And the impact of our recent focus on our pricing strategies.
Importantly, we continue to see our adjusted EBITDA growing up 49% in the third quarter year over year, which is two five times the 20% growth in revenue.
Our adjusted EBITDA margin was 26, 9% the highest we've achieved in three years.
We continue to be encouraged by the trends in our end markets that are supporting solid customer demand.
Revenue per truck per month, or RPT was just over 49000 up 5% from last year due to badger's continued commitment to optimize fleet utilization and pricing.
Our red deer plant manufactured.
Manufactured 57, non destructive excavation units in the quarter versus 29 units in Q3 of 2022 with a total of 169 year to date.
We retired 18 units in the quarter and 56 year to date.
We ended the quarter with 1514, non destructive excavation units compared to 1387 at the end of 2022.
As we are closing in on the end of the year, we are planning to produce close to the midpoint of our range of between 200 to 230 units.
We are planning to retire between 75 to 85 units at the lower end of our previously provided range of 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 are very pleased with our finished results of the initial completed units that we have rolled back into our operations so far.
Since the start of the program, we've experienced some vendor delays and as a result, we are now expecting to fully complete between 15 and 20 units by the end of the year.
Going forward, we have a plan in place to mitigate these delays after the turn of the year.
We continue to believe this program contributes to improving our return on invested capital.
And it will help to level out our retirements over the next few years.
I'll now turn the call over to Rob Dawson to discuss our financial results in mortgage.
Thanks, Rob.
As you saw in our results our team again delivered strong results, which are consistent with our expectations and keep us on track to have a solid finish to the year.
As Rob mentioned, we had another record revenue quarter up 20% from last year, driven by our U S operations, which were up 25%.
We experienced a slowdown in our Canadian markets driven by a few large projects wrapping up.
The team has secured a number of large projects to replace these in the upcoming months.
We continue to see record gross profit, reflecting the operating leverage gained from our pricing strategies and our commitment to drive operational efficiency to achieve improved margins, while partially offsetting inflation.
We continue to be encouraged by the trend in our adjusted EBITDA margins, which improved close to 27% for the quarter and 22, 7% year to date.
Our trailing 12 months adjusted EBITDA margins continue to increase sequentially, demonstrating our commitment to providing sustainable growing margins and the scalability from strategic investments and our operational support functions.
Our annualized G&A expenses have held steady between $35 million to $40 million and we expect this level to be sufficient to support our growth trends.
Earnings per share was a record this quarter at 68 per share an increase of 60% over last year, notably 10 points higher than our increase in adjusted EBITDA.
Now onto the balance sheet our.
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 at one four times debt to EBITDA down from two times, a year ago and the one six times, we posted at the end of June 2023.
During the quarter, we extended our credit facility to restore a five year term, providing us with an excess of $150 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% aged below 90 days.
And with over 90% of our customers having investment grade characteristics.
We are continuing to monitor our receivables portfolio amidst the inflationary higher interest and credit environment in both Canada and the United States.
I'll now turn things back over to Rob Black or dark for some final comments Ralph Thanks, Rob.
So before we open it up for questions I want to add a few last thoughts.
We've seen positive results in our first full year operating on our renewed commercial strategy.
We are very pleased with the initial results from the first full quarter with the adoption of our pricing and quoting engine.
And its effect on our topline growth and our margins.
Badger's long term growth prospects remain unchanged.
We continue to believe Badger is uniquely positioned to capitalize on the significant opportunity for non destructive excavation services in key end markets, particularly in the United States.
Finally, I want to take the opportunity to thank Glen Roane for his partnership and support.
During my tenure with Badger and my transition to President and CEO, We announced last evening in a separate press release that as part of our normal course board succession process.
Then we will not stand for reelection to the Badger Board of directors at our next AGM.
We further announced that Steve Jones, a board member since 2021 will become the chair of our board of directors.
Steve has transitioned to this role will take place over the coming months.
Steve brings a significant amount of relevant experience to badger.
Having served as the president and CEO of Covanta, holding corporation and prior to that having a long and successful tenure with air products, including several years as general counsel.
I am personally looking forward to working alongside Steve to continue to drive badger's strategic initiatives, while adding value for our shareholders. We also wish Glenn all the best in his upcoming retirement.
So with those comments, let's turn the call back to the operator, so we can open it up for Q&A.
Michelle.
And so a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.
Your question. Please press Star one again, please stand by while we compile the Q&A roster.
The first question comes from Yuri Lynk with Canaccord. Your line is open.
Hey, good morning, guys.
Good morning, Gary.
Good morning nice quarter.
Just wondering how we think about the the price increases.
But you started to implement late in Q2.
Did we see the full impact of those in the quarter or.
Have you only been able to push it through to a certain proportion of your customer.
Yes so.
We are today.
If you remember we I think it was in the previous.
Announcement, where we talked about.
We started our new pricing engine at the beginning of June.
So.
And we started to see good progress on our pricing.
And a lot of that pricing opportunity that we've been able to capture so far has been with some of our.
Spot or local type pricing.
And we.
We're seeing good progress on that.
We're very happy with.
Early indications.
Originally if you remember Yuri back at the Investor day at the end of.
Q3 last year.
We ended up talking about.
The National accounts program and how those.
Contracts are two to three years in nature, and getting pricing increases as they renew and.
And we've actually had good success with that but again that's over the course of two to three years.
So we've already started to see some benefit of that throughout the year of this year and certainly in Q3.
The last tranche of customers or.
Customers that are.
Local large local to regional in nature.
That have.
Some local type pricing agreements that typically are 12 months to 18 months in nature and as those cycle similar to the.
National accounts programs, we're reviewing the pricing on those as well so it's all starting to click and work, but it's obviously a journey.
Very very few businesses are able to get all their pricing all at once immediately where the new pricing engine.
Takes a little time, but we're very pleased with what we're seeing so far but.
Okay, and the 5% year on year increase in RPT.
That would be mostly attributable to pricing correct. Because I think there was a comment in there that utilization was stable.
I would say pricing definitely contributed.
Two the improvement on the RPT.
But.
Be mindful we are.
Obviously, you have been adding a lot of trucks into the fleet.
And utilization ordering very solid because of the demand out in the markets.
And then the.
The upside of that so holding.
That much.
Pricing with the RPT.
The number of RPT alongside of all of the additional trucks.
Really speaks to the demand out in the market because our utilization holding steady while we're able to increase price with several additional trucks.
That's a pretty good accomplishment.
Agreed, Okay second second and last one for me.
You have been generally targeting retirements above of 100 to 150 a year.
Why why are you taking down the.
Planned retirement.
It's down to about 80 trucks this year, what's what's the logic behind that.
Well.
Handful of things.
The first is we just have demand out in the marketplace.
And as we have the demand instead of.
Getting rid of trucks that we could actually make revenue with and the trucks are functioning and they're fine.
Trying to reevaluate and say do we need to.
Cycle out trucks at the exact tenure.
So when they hit 10 years in one day the truck leaves the fleet and we're actually realizing that.
We might actually have more life into the trucks and we definitely don't want to be getting rid of assets that otherwise are functioning fine.
And we have demand and we can make revenue off of them and so thats. The main reason why we've lowered down the.
Retirement.
Number because of the demand out in the marketplace.
Secondarily is.
As I was suggesting.
The trucks themselves, we're starting to realize and I shared this about a year ago, but we started looking at the number of hours on the trucks and they were actually down versus the previous 10 year cycle because.
Covid for about 18 months, the company's business was much slower and we didn't put as many hours on the trucks. So we actually think we have a little more life in the assets and then lastly.
We're using some of the trucks for that refurbishment.
And.
You saw the numbers on the refurbishment, but we have several that are in the cycle in the system to be refurbished and that also helps to draw down on the retirement number anything you add on that Robert I think the final thing I would add is.
As our geographic mix moves to less harsh climates.
And soil conditions, depending on the region can be less harsh than they typically would have been historically, so I think the entire sort of.
Useful life of attracting and the retirement program is in the middle I think of being modestly reevaluate it.
Got it makes sense, okay guys. Thanks.
Thanks, Jarrod please standby for the next question.
The next question comes from Michael <unk> with Scotiabank. Your line is open.
Hey, good morning, guys.
Michael Okay. So maybe to follow up on just general Capex expectation, but looking more into 2024 and 2025.
Based on my math it looks like they are about 100 trucks that are over 10 years old today.
And I think if I do the math on similar.
Level of retirement, our FERC cadence into next year, you'll have approximately 200 trucks about the age of 10 years. So just thinking about your ability.
Just smooth out retirements without necessarily overextending, and maybe how we should think about.
<unk> next year.
Yes so.
We obviously don't give truck build guidance for retirement guidance or really even guidance on trials, we just give basically our forecast that build rate in retirement right.
But.
And we have been in the middle of our budget and business plan cycle.
And working with the board of directors on that.
We're not quite complete and having.
<unk> all of that up.
So we're not ready to start.
Having any broad discussion Michael the normal time that we share that.
Is that the Q4 release and.
And as soon as we have and obviously, we'll share it a general rule of thumb, though and I can just tell you directionally and I feel comfortable sharing that with you Michael as our end markets are strong and we.
We feel like we definitely have the demand for the trucks.
And.
Comfortable that.
We do not.
Foresee that those markets slowing down in 2024 at this point so.
I don't know if you want to add something Robert Yes, I think.
Given given the number you had there Michael 200 units I think it is fair to say that for all the reasons Rob pointed out.
For retirements generally.
Being a review of our fleet wide wire retirements number is a little lower this year.
We're spending a fair bit of time evaluating that over the next several years in connection with both our required bells and then the refurbishment program I think it's fair to say that generally and we will have more to say about this once or once our analysis is complete and we've got a little more data to go on.
Generally the level of the retirements are going to be relatively stable.
Right.
And thats the level of build as much as possible.
To sustain our growth that Rob just mentioned with our end market demand remains quite robust again will be relatively stable with the aim of keeping our manufacturing operations in red deer.
Stable and efficient as possible less lift and as you know on a manufacturing operation. When you when you have volatility in yet to replace a lot of volatility in your cost to manage and so going forward I think that that that sort of wave of retirements is something that we think.
This is going to be far more stable.
And repeatable going forward more to come on that.
Okay. That's really helpful color and I appreciate it maybe just to quickly follow up just in terms of the trucks that are.
Getting older are you finding it that there is more repair and maintenance costs associated with running those trucks or.
Going back to Rob to some of your comments about running fewer hours through COVID-19 at that necessarily isn't the case.
So what's interesting Michael.
Yes.
I've heard a lot of history historical discussions about as the fleets really is the <unk>.
<unk>.
Units.
As the hydro Vac started to age out beyond 10 years, the MLR would really start to.
Go up in dramatic fashion, and we're actually not seeing any big spikes in our MLR, we certainly have normal course MLR.
But the one thing Thats happened and it happened with the New fleet leader, we brought in around two years ago as he really.
Worked with the entire fleet team and all the branches and our regions.
To really get Uber focused on preventative maintenance and so if we're doing anything we are being a lot more prescriptive and aggressive on the PM side to prevent having these major failures in catastrophic.
Engines and transmission failures.
As the trucks.
Starting to age out so because of that our <unk> is actually really smooth right now and but.
Sure.
I've shared with.
At a few conferences that Robin I've been fortunate enough to present at.
That we have a new.
Fleet data system that we're rolling out and.
At this point it looks like it's going to be fully implemented enrolling.
Middle of next year.
Obviously, it's rolling earlier than that but fully integrated and everything at the midpoint of next year.
Those data metrics, Michael we actually believe will allow us to be even more efficient with our fleet and so we're going to be able to identify here.
Here are the trends and identify where we should be being even more aggressive on pm or.
If there is any kind of catastrophic failures.
Start to figure out what the root causes and we're pretty excited about that we say all the time amongst the management team now and with the board of directors.
We like to make data driven decisions and this will allow us to do a lot more on the fleet. So very excited about that.
Very interesting thanks, a lot guys.
Thanks, Mike.
Standby for the next question.
The next question comes from Chris <unk> with CIBC. Your line is open.
Alright, Thanks, Scott Thanks for taking my question and congrats on the quarter.
I was just wondering if you could.
Diving a bit more on.
Pretty good margin that you posted this quarter and just kind of what the moving parts were there and and what Youre attributes.
But that improvement to weather.
It's more on the pricing strategy in a bit.
A bit on the cost side as well just if you can give us more detail. Thank you.
Hi, Good morning, Chris that's rubbed Hudson here.
I could say, it's predominantly due to two things as you mentioned pricing, obviously has a very positive impact on margins because its cost free other than some additional commission.
But also it's not necessarily that we're cutting costs or we have a program too.
Go through and hold back on costs, but what we do have and we've talked about this quite a bit is we've made a pretty.
Significant investment in our in our functional support groups like fleet as Robin mentioned sale.
Sales and marketing over the last several years and so we have those.
Functions, we focused on creating scalability and those functions such that there is a pretty decent fixed cost element to those so as revenue rises that operating leverage that that creates is going to increase EBITDA margins by higher than the percentage increase in revenue and you would have seen it.
A 50% increase in the EBITDA margin this last quarter over a 20% increase in revenue.
After price that's by far the second biggest impact and Thats something that degree of operating leverage we think will be a bit outsized as we get into higher EBITDA margins as we've talked about in the past.
Great. Thanks, and then maybe just on the on the refurbishment and you mentioned that the vendor delays, which I think you'd hope to have that that fixed by next year.
Do those vendor delays also impacted any of your just normal production or is that just refurbishment.
Just on the Refurbishments Christa.
Mainly tied to.
When we launched the refurbishing refurbishment program.
<unk>.
Really.
Spread out some of the refurbishment work too.
Several shops across the U S and a couple in Canada and the delays are really tied to some of the major component tree. So I think everyone's aware, but the.
The main focus of the refreshment is the engine the transmission.
Tk's or transfer case, and then the blowers the big.
Device in the back that actually does the section for the truck those four components, we have pretty good access to the blowers because.
Obviously, you've put together the trucks today.
But the transfer cases transmissions and engines are where we've seen some of the delays.
And what we're doing to kind of mitigate that going forward Christa as pre positioning some of those.
<unk> tied to what we're building into our plan for next year on the number of Refurbishments in that way there just won't be delayed next year because all the.
That componentry, we'll be waiting on the trucks to come in to a lot more efficient.
<unk> concept as we do in our manufacturing plant.
And we're now bringing that same level of logic to this refurbishment program at some outside shops.
And it's kind of it's pretty cool to see all the successes, we're having in our manufacturing plant being able to translate to other areas of the business. So it's pretty cool.
Great. Thanks, I'll jump back in the queue.
Thanks, Chris.
As a reminder to ask a question. Please press star one on your telephone.
Please stand by for the next question. The next question comes from Ian Gillies with Stifel. Your line is open.
Good morning, everyone.
Hey, good morning.
Yeah.
Given the discrepancy in performance between the U S and Canada at current.
Do you have any intention or have you put much thought towards.
Shifting some of the Canadian asset base in the U S to help.
Propel growth.
Yes.
We're all the time.
Evaluating the best place to add the trucks and the wonderful thing about Badger and our business is the holes.
Free asset has wheels and can move very rapidly. So we can we can move assets.
Any way, we want to move them, including across the border and we do from time to time.
Maybe in a little bit more color, though to make sure.
Yeah the perspective.
And we have moved some assets starting to move some assets a few assets.
From the.
The western part of Canada into the states earlier in the year.
But a little bit of color on.
Some of the.
Canadian revenue as.
We had.
Several large projects wrap up in Q2 and early into Q3 and there were some.
Other additional large projects that were supposed to be starting in the back half of this year and those projects that have actually been pushed to the.
Two Q later in Q2 of 2024, and so because of that that's where you're starting to see some of the.
The.
Klein, but there the markets in Canada.
Not ready to throw in the towel and move all of our assets at all period, we're very very comfortable and obviously this is our home market.
Where the.
Executive offices and over here in Calgary, and we're very very happy with.
With our business in Canada, obviously.
This transition between some of these large projects.
The decline of the revenue.
For a short period here some of those projects that are going to be coming up.
Debt.
That we're seeing are really squeeze larger transit projects.
And.
Some of the projects that were slowing down.
A little bit of pipeline project, and some telecom projects and we expect those to again pick back up here.
In mid to late Q2 of 2020 for Rob you want to add anything on that.
I think if you just look to the back of our MD&A. We also show units.
But between Canada, and the U S you'd see since the end of 'twenty one in Canada. We have the exact same number of units today as we had back then so that's been steadily in effect I think there is still growth in Canada, utilizations, improving obviously, but we are focused on the return on capital on those assets in Canada, and having them on <unk>.
Of course, if there's excess unit to anywhere.
Theres lots of work somewhere else then that's what our centralized fleet.
Function is aimed to do is really to optimize.
Utilization of the assets, we currently have rather than adding too many assets in one region, one let us not necessarily needed.
Okay. That's helpful.
Second question for me with respect to truck builds and costs.
If memory serves me correctly, you guys have been relatively well inventory on the chassis side and you've been purchasing on a pretty regular basis and I'm just curious on when Youre looking at your suppliers on that cost front and if theres any material change in whether you're expecting any material change in the truck build costs moving forward because it's been pretty good pretty good year to date.
Yes, so we actually.
I think.
You're aware of this but we historically.
<unk> run into.
The last several years of run Peterbilt chassis.
Owned by pack car and.
Did that almost exclusively and.
Then.
We thought it probably more to be a little bit more prudent and not have all of our eggs in one basket, we decided to actually go out to an RFP RF Q4, our chassis providers and we've since added Western Star, which is owned by Daimler out of.
Portland.
And we started buying some western star.
Have really good support obviously, we have.
Roughly about 40 550 units that are peterbilt.
We're one of their larger customers as far as parts service warranty.
And we're going to continue to buy their chassis and especially as our company grows and we grow the need to grow to build more trucks peterbilt a good partner and we will continue to be.
And Western Star is.
As the top shelf brand, especially for heavy spec class eight trucks.
And.
And so we're very also very happy and proud to be partnering them as well, we actually think it's it's normal course, good business practice to have two suppliers.
It also allows us to.
To not.
Be dependent on the build slots for only one.
So if one is unable to fill in the other has them obviously, if we're going to we're going to shift and ship the orders.
Both both the suppliers.
<unk> really been good to work with and we're very happy with both the suppliers today.
Okay. Thanks, very much I'll turn the call back over.
Alright, Thanks, Mike.
Please standby for the next question.
The next question comes from Trevor Reynolds with acumen. Your line is open.
Good morning, guys.
I was just wondering if and maybe I missed this going through the MD&A, but I'm just wondering if you could comment on.
Any disaster relief work that you got during the quarter I know, there's a couple big storms down in the U S. So I'm just wondering if that was a major contributor in the quarter.
Hi, Trevor this is Rob <unk>.
We.
We actually had very little ER work this year.
So which is kind of interesting in our world its actually been pretty quiet.
We've.
The work that we do there have been a few storms this year, but they haven't.
<unk> been to the level that.
We've had in previous years.
We have a very strong emergency response.
Structure and group that are basically kind of on standby and not just for hurricanes or weather related.
But also for any kind of emergency response and it could be.
Some kind of a major catastrophe and anywhere in North America, we have a group that's kind of always on standby always with a backpack and we even have an emergency response kind of command center, which is.
Really best in class investment that.
The previous CEO and team built.
And we leverage this year, though we just havent had a lot of ER work.
So.
And.
Very Fortunately the end markets are good so what youre seeing is truly from the end markets are not like.
The kiss from emergency response.
And on a comp basis last year, there was a reasonable amount of that in there. We just haven't pointed it out in our materials are focused on the positives that are occurring today.
Great.
And then maybe just with Canada sounding like it will be kind of flattish in the near term here, what what's your kind of views on seasonality in Q4 and through maybe some of your usual slowdown quarters, just given the high levels of demand that youre seeing from their end markets in the U S.
Yes.
Yes, we were chatting about that the last few days as a team.
Both the leadership team and the board of directors.
We have been saying for the last couple of years Trevor that.
This concept of lifting and shoulders.
They are the shoulder seasons and obviously.
Our.
Q4 is.
Our second slowest quarter in Q1 is our slowest.
And.
We with the concept of lifting the shoulders that doesn't mean, we take out seasonality, but rather just lifted up and.
We're starting to see that lift.
Occurring even.
In today's business today.
Is that those end markets, especially related to U S.
They are really robust Rob quoted in his opening remarks.
What's the lift on revenue was for the U S markets.
And we continue to see that.
So like really good stuff there.
Regarding Canada, and even northern U S markets, we're always going to have seasonality.
Some comments I'll share with other investors and analysts on the very regularly.
<unk>.
That as long as we're in seasonal markets, we will have seasonality.
Even no matter what the adoption rate is for <unk>.
Hydro back or non destructive excavation.
We will always have seasonality as long as we're going to be in seasonal markets and it is our desire to be in all the major markets in North America. So.
So obviously, Canada has probably some of the most seasonality we have in the business.
But the guys in the field and the teams in the field. They are used to that seasonality and so they are prepared.
With their projects and customers and they do everything they can to offset that seasonality.
Great. That's all my questions. Thanks, guys.
Thank you Bob.
No further questions at this time I would now like to turn the call back to Robert <unk> for closing remarks.
Thank you Michele on behalf of all of Us at <unk>.
Roger Thanks to our customers our employees, our suppliers and shareholders for your ongoing support that drives badger's success. Operator, you may now and the call. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
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