Badger Infrastructure Solutions Ltd.

Good day and thank you for standing by. Welcome to the Badger Infrastructure Solutions 2023 Second Quarter Results Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised today's conference is being recorded. I would now like to turn the conference over to your speaker today, Robert Dawson, Chief Financial Officer. Please proceed.

Thank you, Operator. Good morning, everyone, and welcome to our second quarter 2023 earnings call. My name is Rob Dawson, Badger's CFO. Joining me on the call this morning is Badger's President and CEO, Rob Blackadar. Badger's 2023 second quarter earnings release, MD&A, and financial statements were released after market close yesterday and are available on the investor section of Badger's website and on CDAR. We are required to note that some of the statements made today may contain forward-looking information. In fact, all statements made today which are not statements of historical fact are considered to be forward-looking statements. We make these forward-looking statements based on certain assumptions that we consider to be reasonable. However, forward-looking statements are always subject to certain risks and uncertainties, and undue reliance should not be placed on them, as actual results may differ materially from those 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 MD&A along with the 2022 AIF. I will now turn you over to Rob Blackadar.

Thanks, Rob, and good morning, everyone, and thank you for joining our second quarter cruise call. As always, we would like to start the call with a health and safety update. Our number one focus continues to be on improving our leading safety culture with a focus on making sure our team and clients make it home safely each and every day. For the last 30 days, most of North America has been under some type of heat advisory. Badger is successfully mitigating this heat stress by having our operators focus on hydration, cooling periods, breaks, and aligning our work hours with the coolest parts of the day. By doing so, we've been able to avoid heat injuries across our employee base, and we appreciate our team's efforts to keep everyone safe. Now on to the results. We are pleased with the company's second quarter performance. We continued the momentum coming out of the first quarter with another record revenue quarter of $171.9 million, which was 19.2% higher than last year. We experienced strong utilization and operational performance across the business. We also made meaningful improvements in our year-over-year adjusted EBITDA, which increased 51% compared to last year. Most operating regions experienced strong revenue and EBITDA growth due to improved utilization, coupled with our new pricing strategy we rolled out near the end of the quarter. Our results show that our investments in the Commercial Strategy National Accounts Program and operational excellence rolled out last year are working. We continue to be encouraged by the trends in our strong end markets, which is helping to drive our asset utilization. Revenue per truck per month, or RPT, was just over $44,000, up 10% from last year. 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 and 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 1,470 non-destructive excavation units compared to 1,387 at the end of 2022. We are reiterating our 2023 fleet guidance to manufacture between 200 to 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 to refurbish between 40 to 50 units in 2023 at an average cost of $150,000 per unit. We've started work already on 14 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 strategy, improved truck utilization, and the early results of a 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 cents per share in 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 1.6 times, consistent with year end and down from 2.2 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 amidst the inflationary interest and credit environment in both Canada and the United States. I will now turn things back over to Rob Lacadar for some final comments. Rob?

Thanks, Rob. So before we open 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 Badger is uniquely positioned to capitalize on the significant US and Canadian opportunities for non-destructive excavation services in key end markets. Badger's 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?

Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your telephone. If your question has been answered or wish to remove yourself from the queue, please press star 1-1 again.

We'll pause for a moment while we compile our Q&A roster. Our first question comes from Yuri Link with Candid Core Genuity.

Your line is open.

Hey, good morning, guys.

Hey, good morning, Yuri.

Good morning. Nice quarter. Just talk about your gross margin. And, you know, ultimately, where do you think you can take these on a run rate full year basis? I mean, historically, the company was in that 30-31% range. Is that kind of the end goal, to get back to that on an annualized level, or do you think you can take it higher?

Yes, I'll start, and then I'll let Rob clean up whatever I missed. So yes, we're happy with the progress made in the gross margin and how we're performing. We do believe that there's some continued upside As you know, we've been really making improvements and strides in really 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 and, you know, like, hey, here's exactly where we think the gross margin is going to be at the end of the year, Yuri. But we're comfortable that the trend is not a one-time or just a one-time performance, but rather 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.

Yeah, Yuri, I think Rob said it. 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, the business was earning roughly 24%, 25% EBITDA margins. And we do believe that we are heading back towards that, and we will be getting there certainly over the next, you know, one to two years. And we do believe that 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 expectations.

Yeah. Okay, that makes sense. Last one for me, just on everything. So... It sounds like our EP benefited only a little bit from price.

Hey, your phone garbled up on our end, but I think you were saying... I think if I picked up what you were saying is something about the RPT looks like you benefit more from, I'm assuming you were saying more from utilization than price. Is that what you were saying?

His line actually disconnected.

Okay. But, yeah, anyway, I'll address I think that's what he was saying or what was really the driver of the RPT improvement. And, you know, Yuri, if you can hear us, if the call is being recorded, we actually started seeing some pricing lift throughout the quarter. But that month of June started to accelerate with a new pricing engine we rolled out and the team really adopting it and good adoption rate in the field. But you're right, the majority of that improvement was tied to utilization for this quarter, and we see pricing becoming more and more part of our performance for the back half of the year and beyond with the new pricing engine. Operator, I'll let you go to the next question. If Uri dials back in, we can certainly put him back in the queue. Sure thing.

One moment for our next question. Our next question comes from Ian Gillies with Stiefel. Your line is open.

Good morning, everyone.

Good morning, Ian. With respect, I guess, to the refurb, formally rolling out a refurb plan, can you maybe walk us through what you're doing with the trucks to the point that you're 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 to give us a bit of a sense of what's happening with those units.

Yeah, sure. So the quick genesis of the whole refurb program, Ian, was we were looking at all 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 rate was going to be. And then what our capex burn would be. And we looked at all these assets that were at the 10-year mark. And historically, the company had a 10-year lifecycle on the trucks. And pretty 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 our trucks, Ian, and this has been for a long, long time here at the company, if not from the beginning, but they are heavy spec. They're not, but they're almost overbuilt type trucks. They're right on the cusp of just a 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, Lon, and myself, and I have a trucking background, and I was a diesel mechanic a long time ago, to really reevaluate, do we need to get rid of them at the 10-year mark? And so we did a couple of discussions with some suppliers, vendors, and realized that We only use four things on the truck in a very heavy way, and that's the engines to run the back of the hydrovac, the transmissions, the transfer cases, or we call them T-cases, and the blowers. That's it. Those things are run all day, every day. The rest of the truck is not used in a big way. Those four things are the ones that are the highest wear items on that truck at the end of the 10 years. we thought of what would it take, how long could we extend the useful life of those trucks, how long could they go if we just replace those four items when 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's 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 $150,000, you can have all four of those major components new with a warranty, with 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's a no-brainer to save for an additional $150,000 and get an additional five years off of the truck. And it's a good performing truck. A few caveats to it, though, Ian, on the strategy. We really inspect the trucks to make sure they're good candidates. That's why you're not seeing us do it with every single truck. Think of the colder weather markets that have salt, sand, a lot of caustic materials that will eat up the frame of the truck. Those don't make good candidates because by the time you reframe the truck, you put in a new engine, all that, you might as well buy a new truck. But there are several markets that we operate in that don't have rust issues, rust concerns, anything like that for the frames. And we do a thorough inspection before we flag it as a candidate for the refurb program. That's why you'll notice in my discussion that we said around 40 units this year. We're not doing it with all the units that we could be retiring. We're pretty excited about it because we think it's going to improve the return profile. So does that give you some more color, Ian?

Yeah, it does. That's actually great. I actually have two follow-on questions from that, if I may, one for you and one for Rob Dawson. The first being, if you were a customer getting one of these refurb trucks or an existing truck in the fleet, is there any discernible difference between And then the second piece for Rob Dawson is, at some point, is this going to cause you to take a look at the depreciation policy for those of us that care on earnings?

Yeah, so I'll cover the front side of that, and Rob, you can hit the back side. On the front side, baked into that $150,000, we actually do, and we learned this from the trucking industry, whenever you repower or refurb an over-the-road vehicle, is making sure that the paint job is still solid. And remember, we have some access to paint facilities as well as our own, but we can sandblast and either touch up paint or if we need to repaint something. 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 refurb process. And our operators can be proud of taking it to a job because that's our brand and our image. Then the second thing, we put in a new driver's seat with air ride. It's a very minimal cost for a very happy operator to get in. Basically, the refurb truck is like new air, all the control, everything's new to him. during this refurb policy. It costs a little bit more to do it that way, and that's why we baked it and we upped that number from 125 to 150 from our initial discussions. The customer sees no discernible difference because you have to remember we have roughly, I think this morning we said 1,470 trucks. I mean, they're all different ages that can show up on a customer's job site. The most important thing for the customer, though, Ian, is It starts, it runs, it performs, and the customers are happy. So anyway, that's a quick summary on that, and I'll let you talk about the depreciation.

On the depreciation, Ian, a new truck, 10 years, depreciated down to residual value, and then refurb a truck, $150,000 over five years. And then if you think about the refurb, it's going to be pretty de minimis in the full picture with 1,400 trucks versus 40 or 50. Yeah.

Fair enough. last clean up for me capex in the quarter was a bit higher than I was anticipating but absent the reefer program are your views on capex and full year spending relatively unchanged at this point?

Yeah that's right Ian and you'd see there's some discontinuity quarter to quarter because we do keep some trucks in inventory until they're completed. And so there are some trucks, if you follow the unit count, that were on the fence line in Red Deer 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's, you know, accounts as cap backs in the financial statements for gap purposes in the quarter that they get released operations, but the build occurred in Q1. So there's some discontinuity between the two. So you'd see a higher number in Q2 and you would have seen a lower number in Q1. Our plans for the year unchanged and our capital expectations, other than that very modest increase from the referred program, remain the same as from the beginning of the year.

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

Again, ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your telephone. And now Yuri's back on the call. Did you want me to open up his line just to see if he had anything further? Sure, sure. One moment.

Hey, Yuri, I think I may have answered when we lost you. I think I may have answered the question.

Yeah, I think maybe you did. I was just asking on pricing, when you started to raise prices and how that's being received by your customers.

Yeah, so we have been working on pricing really since the turn of the year. and doing it how Badger's done it historically, which is on a one-off basis and not very systematic. We've actually had some pricing improvement, very slight in Q1. In the first couple months of Q2, pricing was continuing to improve. Obviously, 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 weren't 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 in 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 aren't dramatically taking the pricing up. We're not getting too aggressive, but we're doing incremental pricing, really focusing and tied to utilization and certain statistics on what type of work it is. So far, we haven't gotten a lot of pushback, but I'm also very, very focused on our utilization and the pricing. We 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. The last thing, Yuri, I'd 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 and utilization is hitting so hard and very strong. So it's a good time to roll out 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.

A quick 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 a good number, or do you think you might come in closer to 40 million going forward? Thanks.

Yeah, I'm not familiar with that 30 to 35 million. I apologize, Gary. But I would say, you know, year to date, We're in line with last year, and I 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 to 35. Thanks, Grant. Thanks, Grant.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Robert Blackardoff for any closing remarks.

Okay. Thank you, Operator. And on behalf of all of us at Badger, Thanks 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 concludes today's presentation. You may now disconnect and have a wonderful day.