Badger Infrastructure Solutions Ltd.

Good day and thank you for standing by. Welcome to the Badger Infrastructure Solutions 2024 Third Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising you, your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Anne Plaster, Director of Investor Relations. Please go

ahead.

Please go

ahead. Thank you, Michelle. Good morning, everyone, and welcome to our Third Quarter 2024 Earnings Call. Joining me on the call this morning are Badger's President and CEO, Rob Lackadar, and our CFO, Rob Dawson. Badger's 2024 Third Quarter Earnings Release, MD&A, and financial statements were released after market closed 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 2023 MD&A along with the 2023 AIF. I will now turn the call over to Rob Lackadar.

Thank you, Anne. Good morning, everyone, and thank you for joining our 2024 Third Quarter Earnings Call. By the way, we're taking this call or making this call from our Indianapolis headquarters, and we're in the middle of a pretty good rainstorm, so if you hear a little background noise or whatever, that's what you may be hearing. Before we get into the results, I'd like to take a moment to talk about safety, which is how we start all of our team meetings here at Badger. As we transition into the colder months, it's important for our teams to prepare for winter weather conditions. Here at Badger, our operators take precautionary measures, including making sure our vehicles are winter-ready and driving according to conditions, our operators dress in layers, wearing insulated gloves and waterproof footwear, and finally, we keep our work areas clear of snow and ice to prevent slips and falls. We appreciate everyone's efforts to keep each other safe for this upcoming winter season. Now, on to the quarterly results. Our 2023 results showed continued growth in revenue, gross profit, and adjusted EBITDA. Our record top-line revenue of 209.4 million grew by 7% company-wide over the prior year, driven by a 10% -over-year increase in the United States. We continue to see growth and adjusted EBITDA track higher than our revenue growth, demonstrating solid flow through, up 11% -over-year, driven by customer pricing and stability in our GNA support functions. Our adjusted EBITDA margin was 27.8%, up from .9% in 2023. Operationally in the United States, our eastern and southern regions continue to experience strong growth in both local customer and project-based work. The slowdown in growth in California, the southwest market, and parts of the upper Midwest and mid-Atlantic markets continued in Q3. We believe more clarity from the U.S. elections will allow for certain project-specific investments to commence. We expect to see movement on these projects when a new administration is in place. In our Canadian markets, revenue was down 12% compared to 2023. We have seen a pickup in some regions, particularly in Ontario, with continued positive results in the Ferries. As we have discussed all year, we continue to expect certain delayed projects in central and western Canada to start in the first half of 2025. Overall, Canada's results are expected to begin to recover in 2025 as activity levels improve and the deferred projects get underway. In my closing remarks, I will cover some of the key projects and industry sectors that Badger has been having success with across North America. We achieved revenue per truck per month of $46,851 in Q3, down slightly from the previous year due primarily to the slowdown in the Canadian market. Revenue per truck in the U.S. for the quarter was relatively flat compared to last year. We added a net 111 trucks to our fleet year over year while holding RPT relatively stable, and we continue to make good progress on our commercial and pricing initiatives. The Red Deer plant manufactured 48 Hydravax this quarter and 159 year to date. As we noted last quarter, we are moderating our rate of truck build and now expect to be at the low end of our whole year guidance for fleet growth, which we previously announced to come in at 7 to 10% growth over the prior year. This will be accomplished by building the low end of our original truck build range and tracking to the high end of our retirement range. We retired seven units in the quarter and 78 units year to date within our range of 70 to 90 units for the whole year. We ended the quarter with 1,625 Hydravax in our fleet, growing our fleet by 7% since Q3 of last year. Also of note, we announced that TSX has accepted our notice of intention to increase our normal course issuer bid. I'll now turn the call over to Rob Dawson to discuss our Q3 financial results in more detail.

Thanks, Rob. As you saw in our third quarter release, the team delivered another quarter of solid results. Revenue grew 7% driven by our US operations, which was up 10%. Our Canadian operations continued in line with the first half trend, down 12% from last year, due to the reasons Rob mentioned earlier. As Rob discussed, Canadian revenue is expected to start to recover in 2025. We remain encouraged with the overall strength in our US operations. Our gross profit margins were largely unchanged from last year at .5% compared with .1% last year. With the continued execution of our commercial and pricing strategy, offsetting slightly lower fleet utilization. The trend in our adjusted EBITDA margins continued to improve at .8% compared with .9% in Q3 2023. We are starting to realize the value in the efficiency and scalability changes we are making to our GNA support functions. Consequently, our four quarter trailing adjusted EBITDA margins continue to grow in line with our long-term objectives, even during a period of slightly below trend revenue growth. General and administrative expenses were $9.8 million, or .7% of revenue, down from $10.1 million, or .2% of revenue last year. As indicated last quarter, overall 2024 GNA spending is expected to largely be in line with the prior year. Adjusted earnings per share was $0.73 per share, up 6% compared to last year. With -to-date revenue up 9%, adjusted EBITDA up 14%, and adjusted earnings per share up 11%, we are encouraged by the continued scalability and growth in margins across our business. Now onto the balance sheet. Our capital allocation priorities are unchanged. To utilize our cash flows from operations to fund growth in our fleet and our Hydrovac services operations. We continue to maintain a strong, flexible balance sheet to support this organic growth and commercial strategy. In that regard, our compliance leverage ended the quarter at a strong 1.5 times debt to EBITDA. With ample balance sheet capacity and over four years of remaining term, we have plenty of flexibility to execute our plans. As well, during the quarter, we purchased and canceled 44,400 common shares under the newly instituted NCIB at a weighted average price per share of $36.95 Canadian. As Rob mentioned, we intend to expand our NCIB going forward. I will now turn things back over to Rob Lackadar for some final comments. Rob?

Thanks, Rob. So before we open it up for questions, a few last comments. In the context of our in-market headwinds that have developed over the past few quarters, we continue to be pleased with our performance on both the top line, scaling to the bottom line. Our commercial strategy execution continues to help address capitalized on various projects, including data center construction builds, microchip manufacturing plants, energy and power grid hardening projects, and several other infrastructure projects. We continue to bid and win light rail transit, wastewater treatment plant facilities, and stadium projects all across North America. We are also seeing good growth in ongoing infrastructure maintenance and renewal work across our footprint. Badger is the only vertically integrated hydro-backed services company that can simultaneously support all of these diverse projects while also supporting our local market customers. A great example of this was our ability to mobilize and support the recovery efforts from the most recent hurricane that hit the southeast United States. While this did not have an impact on our Q3 results due to the timing of the hurricane, Badger was able to work closely with our utility customers to get power restored in a safe, efficient manner for the communities in which we operate. I am very proud of our local sales, national accounts, and operations teams who are helping to grow Badger to new heights by supporting our local communities and key projects and customers. So with those comments, let's turn it back to the operator for questions.

Operator? Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. One moment while we compile our Q&A roster. Our first question is going to come from the line of Christoph Riesen with CIBC. Your line is open. Please go ahead. Yes, go ahead.

Hi, good morning. Thanks for taking my question.

Good

morning, Christoph. I'm just wondering if you could maybe walk through a little bit more of what you're seeing on the demand front in the areas you call the US and maybe if you can walk through what end markets they are specifically and how you might expect that to play out, whether it's a Republican or Democratic win on Tuesday.

Yeah, and by the way, I probably speak for a lot of Americans who may be listening that everyone is ready for this political season to be gone and wrapped. It's been a long, long season here. I don't give out specific, either cities, markets, really more specific than what we shared in the commentary for competitive reasons because we have several competitors who do listen to our calls. But specifically, I can share with you and, you know, and make you be more color as to some of what we're seeing is there are certain markets that are more favorable and I could use, I reference California and I guess a little bit more specificity. Christoph would be like Southern California. There are several renewable energy type projects, I think in terms of like solar and wind and some other renewable green energy type projects that right now aren't, even though they are on the books, they're ready to go. I think people are hesitant to get those underway and started where we would start to work for those on those projects because people are hesitant to see who is going to, you know, which party or which technology or in technology is going to be more in favor. When you ask and we get asked this regularly, what happens if the Democrats win, what happens if the Republicans win? Badger does work and we've done very successful work under both types of administrations. But for example, we believe that if the Democrats were to win some of those renewable energy type projects, I'm speaking of like solar and wind and other alternative green energies, we believe that would be very much in favor and the Democrats support that type of technology. We do a lot of business in solar fields and that would immediately open us up to doing more business because all of those renewable green energy type technologies have to be right into the grid and that's Badger's sweet spot of how we can do that safely for our customers. If the Republicans were to win and this concept of really accelerating oil and gas and accelerating energy independence throughout the United States, we believe we would see a lot more support for pipeline and oil and gas projects all throughout the United States. And we've seen that in the past with some Republican administrations and obviously we do a lot of business in that space as well. So either way, we're comfortable once, as we discussed, but once Tuesday is over, a new administration gets into power and depending on what happens with Congress, kind of keeping going with the projects. Some other areas to point out though, and again I pointed out some successes, but the Eastern Seaboard and the southern region that we have, some of the southern areas, continue to be very robust and not seeing a lot of slowdown at all. So really encouraged by that, Krista. So again, I apologize, I can't give you more specific cities or anything like that. We just don't feel comfortable releasing that.

Thanks. Yeah, that was helpful. And maybe just one more for me, regarding to the lower end of your truck bill this year, is there any discussions around maybe using some of that capacity to manufacture trucks to lease?

Yeah, so we have had a lot of discussions internally with some of the leaders within the business on what the overall capacity of the manufacturing plant is and we believe we have a lot of additional capacity available to us within the manufacturing plant. We have contemplated back and forth, do we do something additional with it? Do we consider using our trucks externally? Do we manufacture something additional, et cetera? We're underway with doing, Rob and I are working on some strategic initiatives along those lines of evaluating that. We're not really at a place today to announce anything or discuss anything, but we do think about that additional capacity as a big asset that the company has and how we can best leverage it and monetize it. So I don't know if you want to add anything to that, Rob? No, I have nothing to add to that. I think that's a good comment. But again, your comment, we certainly, that's one consideration, but if you think about a really well-run manufacturing plant and its ability to, like what you could do with that, either additional products, more volume, et cetera, we have a lot of opportunity in front of there.

Perfect. Thank you. Congrats on the quarter and I'll jump back in the queue.

Thanks, Krista.

Thank you. And as a reminder, to ask a question, please press star 1-1 on your telephone. One moment for our next question. Our next question comes from the line of Ian Gileus. Your line is open. Please go ahead.

Morning, everyone. Good morning, Ian. I'm just curious on how you're thinking about transferring trucks, perhaps from Canada to the US, and how that may impact your business.

If you remember on the last call we were asked a similar question as why don't you just move the trucks south of the border of Canada to software right now? And that way you could soak up some of the demand that you have in the United States. And I shared in that response that we're hesitant to do that initially. We always really want to evaluate, could we use those anywhere else in Canada or could we soak up additional capacity? Or even consider accelerating some retirements in Canada specifically, still keeping within our range, but leveraging it that way. The reason we're hesitant to move them south of the border, Ian, is because in the US you have to pay a federal excise tax of about 12% of the first cost of a truck. And whenever you have used trucks to pay the 12% on the initial cost, even though it might be a -year-old truck, it's really hard to swallow because it actually makes your return profile a lot less on that particular truck, that asset. Since that time though, again, we've had another quarter to kind of contemplate that. And I think we have started to move a handful of trucks south of the border. And we probably will continue to review that. I don't think it's going to materially change our truck build schedule for next year. And I think it's some opportunity. Somewhat. But we, you know, as we look and talk to our customers, as well as a lot of data sources that we use, and I know most people on the call, Ian, you know, we look at Dodge, we look at tech reports and industrial information resources, or IIR. We deal with a lot of industry groups that advise us on what's happening within the bidding markets of excavation, as well as the projects being let. And we feel that the second half of next year is going to be pretty strong. And so because of that, again, we may move some trucks south, but we also believe, as I put in the remarks, Canada is going to be starting to hit some of the larger projects again. So I'm not sure how much. And I don't know if you want to add anything to that. Yeah,

I think the comment that Canada is a bit over fleeted, I think, is a fair comment. And if you looked at the numbers, you know, there's been a lot of de-fleeting in Canada already this year. And as Rob said, we're constantly evaluating the quality of trucks and the ability for us to move further trucks down into the busy areas in the United States, such that we can move to higher utilization areas. It's a steady drip. I know I wouldn't be expecting any sudden big change, but it's something that's being evaluated continually.

That's helpful. As we think about the next few quarters, and you've talked a little bit about some pockets of weakness in the US, are you seeing it have a detrimental impact on pricing yet, or is it really just a utilization issue at this point?

Yeah, so far, our pricing is held in there pretty well. Rob and I were actually discussing it the last couple of days. Our pricing is held in pretty well. Utilization, you know, is probably taking the biggest hit. You know, again, like we said in the comments, you know, Canada helped to drive some of that utilization softness. But in those certain pockets, Ian, that you're referencing, it's not – if the projects are just on hold or they're just not – you know, they're waiting on to see, okay, what technology is going to be more in favor from an energy perspective. It's not a pricing situation. And so, we can – we could lower prices or do anything, and it's not going to make those projects start. And so, we've actually held pretty tight with our pricing and, again, continue to see success with that.

It's very different with inflation in the states than in Canada. For sure, you know, Canada's come down for a bit, but it's still 3% in the United States or just at the start of a rate-cutting cycle. Yeah, where you guys have an advance of us. And pricing, you know, when inflation is 3%, and, you know, even if it holds in, it's still 3%. Pricing is always going to be a big component of our commercial strategy to make sure that we're not going backwards on margin.

No, that's helpful. And if I could perhaps sneak in one more, it would seem to me that we're in an air pocket just given infrastructure spending trends in the US. But do you think next year you can get back into the defined revenue growth ranges that you laid out at the Investor Day? It would seem to require some pretty healthy growth in the back half of the year.

Yeah, so, you know, we just reviewed our 2025 plan or budget with our board of directors yesterday, Ian, and certainly, you know, as I said a bit ago in the previous question, you know, all the signs are pointing to the back half of the year being, you know, solid and really starting to come back alive to the markets that we have had, you know, even as recently as, you know, Q3, Q4 of last year and into Q1 of this year, that coming back alive in the second half of next year. But that is our plan. And, you know, when we have pulled and received the budget from a lot of our field teams, you know, unsolicited by Rob and myself, that's how they actually built their plans as well. And it does, you know, again, we don't give out guidance on revenue. We don't give out guidance on EBITDA, just really our truck bills and our retirements. But it does suggest we're back into that range in the back half there.

Okay. Thank you very much. I appreciate that. I'll turn the call back over.

Thank you. And I'm showing no further questions at this time. And I would like to hand the conference back over to Rob Blacketar for any closing remarks.

Thank you, operators. On behalf of all of us at Badger, we want to thank you, say thank you to our customers, our employees, suppliers, and shareholders for your ongoing support that drives Badger's success. Operator, you may now end the call. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.