Black Diamond Group Limited

Thank you for standing by. This is the conference operator. Welcome to the Black Diamond's fourth quarter 2020 results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Jason Zhang, Director of Investor Relations, for opening remarks. Please go ahead.

Thank you and good morning. Thank you for attending Black Diamond's fourth quarter 2020 results conference call. With us on the call today is our CEO, Trevor Haynes, and CFO, Toby Labrie. We are also joined today by COO of Modular Space Solutions, Ted Redmond. and COO of Workforce Solutions, Mike Ridley. After formal remarks, there will be a question and answer session. Our comments today may include forward-looking statements regarding Black Diamond's future results. We caution that these forward-looking statements are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations. Management may also make reference to non-GAAP measures in today's call, such as adjusted EBITDA or net debt. For more information on these terms, please review the sections of Black Diamond's fourth quarter 2020 MD&A and analysis entitled forward-looking statements, risks and uncertainties, and non-GAAP measures. This quarter's MD&A, news release, and financial statements can be found on the company's website as well as on CDAR. Dollar amounts discussed in today's call are expressed in Canadian dollars unless otherwise noted and are generally rounded. I will now turn the call over to Trevor Haynes to review the quarter.

Thank you, Jason. Good morning, and thank you for joining us to discuss our fourth quarter and 2020 year-end results. I'd like to start by saying that I'm extremely proud of our team at Black Diamond for the accomplishments achieved this past year against the unique and challenging backdrop brought on by the COVID-19 pandemic. We have continued to execute on our plan to grow and diversify our business and believe the fourth quarter results are yet another data set that shows that our plan is working. We expect to carry on this momentum into 2021 and are seeing supportive tailwinds across essentially all of our segments. Highlights in the quarter include the acquisition of Vanguard Modular, record rental revenue generation in our MSS division, a $3 million funding grant from the Opportunity Calgary Investment Fund to support growth of LodgeLink, and another quarterly record of room booking volumes within LodgeLink. Since the start of the 2021 year, We've also secured new project awards that increase our WFS contracted revenue by over $36 million. In the MSS segment, rental revenue grew to $11.3 million, or by 31% from Q4 2019, which is a fourth consecutive quarterly record. Included in our fourth quarter results is one month of contribution from our acquisition of Vanguard Modular. As mentioned, during the quarter, the company closed the acquisition of Vanguard Modular Building Systems for $61.7 million U.S., including U.S. $3 million of deferred receivables. The transaction added approximately 2,200 modular space rental assets to our U.S. MSS fleet and strengthened our position in the attractive, high-return education markets in the Southeastern and Gulf Coast states. To date, integration of Vanguard is progressing with annual synergies of approximately US$500,000 targeted for exit Q4 run rate. More importantly, we are experiencing increased opportunities through our combined platform in all segments within Black Diamond, allowing us to leverage our larger market presence. The MSS segment remained resilient throughout 2020, And the outlook remains positive as we are seeing ongoing opportunities to put organic growth capital to work at attractive rates of return across North America. We expect steady and continued growth in rental revenues as a result of strong utilization, increasing rental rates, ongoing fleet additions, and increased returns through value-added products and services, or VAPs. Despite COVID-19 related challenges throughout the year and into the fourth quarter, our WFS business unit is also seeing positive momentum. Since the start of 2021, as I mentioned, the large format camp rental business has added more than $36 million of new contracted revenue, which includes our previously announced Australian contract, additional assets and services in support of the Coastal GasLink project, and further contracts with mining customers in eastern Canada. It appears that our U.S. well site and lodging businesses have troughed in terms of utilization and are seeing a gradual recovery which depending on the pace with which COVID-19 restrictions ease should continue throughout the year. Australia continues to experience strong utilization rates and we expect this business unit will continue to put organic growth capital to work. We also remain very well positioned with respect to the Goldboro LNG project. As we had announced in October of 2020, Black Diamond and our Mi'kmaq Indigenous partners in Nova Scotia received a letter of award to provide the Goldboro LNG project with a turnkey accommodation solution for up to 5,000 workers. We remain highly engaged with the customer and key stakeholders However, we understand that the project must still clear funding hurdles before a final investment decision can be made. Finally, we remain very positive regarding our LodgeLink platform, a digital marketplace offering that is bringing innovation to the crew travel industry. LodgeLink set another quarterly record in room nights booked in the fourth quarter, with approximately 36,000 room nights of bookings, despite pandemic-related headwinds for the travel industry. At the end of 2020, the platform had approximately 2,500 listed properties, representing roughly 242,000 rooms of capacity, and services 582 distinct corporate customers. Key growth indicators, including room-night bookings, customer and supplier growth, continue to scale higher in the first quarter of 2021. We believe the platform is positioned for strong growth this year, assuming pandemic-related travel restrictions continue to ease in the US and Canada. During the quarter, we also announced that LodgeLink had received up to $3 million of funding from the Opportunity Calgary Investment Fund. The funding is conditional on various hiring metrics being achieved over the next five years. This ground will allow the platform to efficiently recruit tech talent to our Calgary technology hub. As we look forward, we expect to show increased diversification by region and industry segment as the full effect of Vanguard is included and our WFS segment continues to grow in the mining sector of Eastern Canada. Overall, we are optimistic that 2021 will show improving results as we continue to progress our strategic objectives of growing and diversifying our MSS business, unlocking operating leverage from our existing fleet of remote accommodation assets in WFS, and scaling our LodgeLink travel tech ecosystem. We are off to a good start. I will now turn the call over to Toby for some further details on the fourth quarter financial results. Toby?

Thanks, Trevor. Total adjusted EBITDA for the quarter was $11.1 million, an increase of 4% from Q4 2020. There was no contribution from the Canadian emergency wage subsidy during the quarter. Adjusted EBITDA for MSS was $10 million, up 49% from the same quarter last year, and total revenue of $31.4 million was up 47% from the comparative quarter. This is attributable to continued growth in rental revenue, one month of contribution from Vanguard, and an increase in sales revenue in the quarter. Adjusted EBITDA for workforce solutions was $4.3 million, down 39% from the same quarter last year. WFS revenue of $24.9 million was down 4% from the comparative quarter. The U.S. well sites and lodging assets continued to see soft conditions brought on by COVID-19 during the quarter. We believe utilization and occupancy has generally bottomed in these assets. This, combined with the recently awarded and expanded contracts in Australia, Eastern Canada, and for energy infrastructure customers in Western Canada, is expected to drive improvement for WFS in 2021. Total administrative costs for the quarter of $9.1 million were up 15% from the comparative quarter primarily due to an increase in personnel costs, including the addition of Vanguard and Spectrum personnel. There has also been a steady increase in staffing levels within LodgeLink as we remain focused on growing this platform. Total administrative costs as a percentage of revenue of 16% was down one percentage point compared to 17% in the comparative quarter. At the end of the quarter, net debt of $172 million was up from $111 million in Q3 2020, primarily due to the acquisition of Vanguard. Excess borrowing capacity under the company's asset-based credit facility was approximately $84 million, and the value of eligible rental inventory used to calculate the company's borrowing base was approximately $292 million at the end of the quarter. The company exited the quarter with a net debt to adjusted EBITDA ratio of 4.2, which is up due to the acquisition of Vanguard. Net debt to adjusted EBITDA with Vanguard's trailing 12-month results included was 3.4, and we expect this leverage ratio to be back within our target range of two to three times by early 2022. We continue to employ strategies that aim to enhance the current position and long-term prospects of the company. We are experiencing strong growth in several key markets and the business is realizing the benefits of its diversification efforts. Black Diamond remains committed to its strategy of investing in growing markets, selling or redeploying underutilized assets, managing costs, and improving financial flexibility. With that, we would like to turn the call back over to the operator for questions.

Thank you. We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. The first question comes from Frederick Bastien with Raymond James. Please go ahead.

Good morning, guys. Nice to see you hosting a conference call again. Thank you, Frederick. Maybe if we can talk about your position right now with respect to balance sheet. I appreciate that pro forma it's now 3.4 times and that you're planning to bring it down to below 3 by year end. But if you were presented with another opportunity do another Vanguard out there. Are you in any way limited to act on that acquisition?

Thanks for the question, Frederick. It's Toby here. The answer to that is no, and we do have, as I mentioned, plenty of liquidity available under our ABL facility. We do have our target leverage range on debt to EBITDA of two to three times, which we think we can fairly quickly get back to after the acquisition of Vanguard. So we think we can absorb that relatively quickly and the added results of Vanguard to our operating cash flow also continue to give us added confidence as well as with our growing MSS rental revenue on the platform pre-Vanguard. is all giving us enhanced confidence in our cash flows and our ability to bring our leverage back down to our target ratio. And that's why at this point we're quite comfortable and continue to maintain that we're comfortable with the strength of our balance sheet today.

Okay. You did talk about... Some of the recent contract awards that you had were additions, expanding scope with respect to workforce solution, which is great. I think you had some on the east, west, and even Australia. But obviously your focus in the last several years has been to really grow the MSS business. But you're obviously seeing WTI going to rise significantly in the last several weeks, and just wondering what the capacity, can you explain better the capacity that resides within the workforce solutions business to potentially take up some of that increased demand that might come out of the increased prices?

Sure, thanks. It's important to note that we've worked really hard over the last several years while the oil and gas sector has been notably slow. worked really hard to service other customers in other regions with our assets and skill set. And MSS has been a big part of that strategy of increasing by fleet size but also growing in key markets that give us greater stability and a broader base, if you will. However, we have not turned away from our oil and gas customers. We are well positioned to service them as their demands increase. We certainly have been carrying spare capacity in our small format accommodation assets, which would be well sites, drill camps, and the like, as well as our liquid and solid containment, our tankage assets, and various other types of power, lighting, heating, et cetera. We've been successful also using those assets to service other industrial customers, but certainly we have the capacity and we're well positioned with location of key terminals in West Texas, Colorado, North Dakota, up into the Canadian Shales in Grand Prairie, Fort St. John, and even down in southern Saskatchewan in our Estevan terminal. So a perfect situation for us is we continue to see the growth outside of oil and gas and continue to expand our capacity with the education markets, general commercial, industrial, and in our camp business, also servicing disaster relief, mining, infrastructure, and then a recovery in oil and gas. And that's where we get maximum operating leverage of some of those assets that haven't been producing coming back on stream. So we're well positioned and we're excited to get to work for our oil and gas customers again.

Thanks, Trevor. Last question for me on LodgeLink. What would be sort of the milestones that you'd look for this business in the next year or two?

We're certainly focused on volume growth. We have done a lot of work on improving or adding features and tools to the product itself to improve the customer experience. We think we've come a long ways and have a very compelling offering for managing logistics related to crew travel, all forms of travel, accommodation as well as air and ground. much more enhanced billing and reporting features, etc. So a full suite to offer to our corporate customers for managing their crew-based travel. And now it's an expansion on the commercial side. We've been adding business development resources in various parts of the U.S. and looking to push into eastern Canada, for example. And so very focused on the growth of of booking volumes. That's why we're excited about setting another quarterly record in Q4 and Q1 is off to a really strong start. So near term, we're looking for fairly simple benchmarks like consistently being over 1,000 rooms per day sold and then moving upwards through the year to 1,500 as a rough target. Seeing the margin expansion, which comes with scale, and seeing that compounding growth. We think we've got all the ingredients. We've been held back a little bit by COVID restrictions. Global business travel, according to the GBTA, is down about 90% in 2020. So we think setting a volume record in Q4 is a meaningful achievement, and those numbers would have been higher without COVID travel restrictions.

Do you need to bring in... additional expertise or strategic partners to help you continue to grow?

We're certainly looking at both. You would have noticed we announced a couple of new directors being added to our board. One of those directors has had 25 years of senior leadership experience with Sabre, which is one of the largest travel tech companies on the planet and a lot of knowledge and experience around scale up of tech related businesses with a good understanding of travel tech so there's an example there and then within the business certainly we're adding skill sets on the commercial side as well as marketing and product and even within the finance operation so we think as volumes rise we continue to to bring expertise onto the team to support that volume, but also to help us get to the next level of scale.

Great. Thank you.

The next question comes from Brent Watson with Cormark Securities. Please go ahead.

Hey, guys. Maybe just to follow up further on that line of questioning, maybe just sort of touch on the head count within lodge link and where you'd like to see yourself within a year and then maybe just the kind of the emphasis on sales versus development.

yeah so. You know we don't segment and disclose how many employees in each part of the business, but currently we're we're just over 50 employees dedicated to lodge link. The real driver. balancing act with LodgeLink is that as our volumes rise, we're trying to correlate the increase in staffing accordingly. By what we're seeing on the customer acquisition and booking volumes from those customers, we would anticipate headcount growth through the year in all segments of LodgeLink, customer support, customer service, commercial sales as well as the product marketing and then the support platform for finance operations.

Do you see any bottlenecks forthcoming on the infrastructure side or is it quite scalable at this point?

I think the team has done a great job in in building the core platform that we launched in 2019 to give us a really robust base. We can continue to iterate and add features and products over top, but we think the core platform gives us sort of the firepower, if you will, to handle anything we can foresee over the next few years, which includes significant volume growth. There will be some other opportunities for adjacent revenue offerings that we'll have to explore at that time in terms of the type of product and software to deliver that. But in terms of what we're focused on as the core transaction today, we've got plenty of capacity as far as the product itself, and we've got a fantastic team who are every day adding to that product. So we don't see that as a near-term constraint.

Okay, great. I'll turn it back over. Thanks, Brent.

Once again, if you have a question, please press star, then 1. The next question comes from John Gibson with BMO Capital Markets. Please go ahead.

Thanks, Memorial. Just looking at your MSS utilization increase to 70%, which is the highest I've seen, is this mostly due to Vanguard or are there other things driving it as well?

Well, there are a lot of contributing factors there. I'll ask Ted Redman to comment. You could, Ted.

Yeah, sure. It's pretty across the board. We've seen utilization increases in our MSS Pacific business. We've seen it in our MSS Eastern Canadian business and in our MSS US business. So Vanguard utilization was right in that same range. So they definitely contributed. But I would say it's a contribution pretty much across the board. I think all of our regions had significant utilization increases in 2022.

Great. Do you see further room for improvement, particularly maybe on the energy side in the US specifically?

Well, MSS does not really have much energy-related rentals. We're getting close to the point where we don't expect a lot of utilization growth, but as we start to hit the 78% utilization, there's opportunities for rental rate increases. So for 2021, we would be looking to do continued rental rate increases and grow the unit count through organic fleet growth. So both of those will contribute to increased rental revenue.

Okay, great. Just turning to Goldboro, I know you provided some comments in the release and this morning as well. I'm just wondering if there's been any update on the project. just in terms of it moving forward towards a positive FID here in mid-2021?

We're not working with the project proponent in terms of, you know, where they're at for financing, et cetera. We'd have to defer on that question to the Peer Day folks. But we can tell you that we're very engaged with Bechtel and with Peer Day and other stakeholders, engineering, design, et cetera, which indicates to us that there's substance and detail to this part of the project path in terms of working through details and putting resources to this project to be ready when FID comes. Mike Ridley, anything you would add there?

No, I think you mostly covered it. Just to add to what Trevor's saying, though, we're working with their team on a daily basis through designs and technical aspects of the project. We're working with our First Nation Partnership, AMIGMA, on the project on a daily basis as well in terms of what it means to them. The project itself, as you all know, these big projects sometimes have a life of their own, and they're working through the details of getting it to a positive FID. But beyond that, on a day-to-day, we keep working very closely with their team.

Okay, great. That's all for me. I'll turn it back. Thanks, Joe.

The next question comes from Greg Bennett, a private investor. Please go ahead.

Good morning. Thank you for the call. I appreciate it. With the WFS, is there a utilization rate for that that, you know, as far as for us to trend, you know, a trending of or how much capital you have tied up right now that's not earning any revenue?

Yeah, in the MD&A, we do provide utilization. And you'll see the utilization has been improving over, the last year or two. One of the setbacks for our WFS business this past year was our U.S. well site business, which operates primarily in Colorado and West Texas, had been very stable for the three years prior. But with the collapse in oil prices following the onset of the pandemic, We saw a fairly sharp decline in activity with our customers, and so that caused about an 80% drop in utilization there. We're starting to see activity recover, but it's been fairly slow to this point. So the opportunity is for that fleet, which is well-positioned, good quality, to continue to get reabsorbed and generate cash flow again. Large format camp business in Canada has had, for us, well, for the whole industry, has had excess capacity due to the slowdown in large oil and gas projects in Western Canada. We're seeing a pretty good activity level in mining that has been absorbing not just ours, but more broadly speaking, capacity for remote accommodation, etc., And we've positioned ourselves really well. So positive and negative. There is some non-producing capital on our platform in that we're still not quite at 50% utilized around that WFS asset base. I think we're in the 35 range. And so that gives us the opportunity as we get those assets to work, we don't have to expend additional capital and we can bring on cash flow against those assets. That's the trend we're seeing currently. The downside, of course, is we continue to have some idle capacity. So generally speaking, we see things as constructive around our workforce business, but there's certainly assets still needing to get to work and add cash flow to the consolidated business performance.

If a final investment decision is reached for Goldboro, is there a need for capital that you need to invest capital or do you have idle assets that can be utilized?

The concept and the concept worked through with the project owner was to substantially use existing assets and to be able to relocate them. That's one of the value propositions we were able to bring to the project. And so it would be an exercise of taking existing assets, some amount of reconfiguration, you know, for codes, et cetera, and then to assemble them and bring them on. So a little bit of capital for the for the renovation and a few buildings that we may not have in our system, but fairly efficient from a capital perspective. Mike, do you want to add anything to that? I should have deferred to you to begin with.

No, that's fine, Trevor. I think you covered it. It's our full intention to utilize our existing and idle assets and make them ready for the project. And that's the best part about this for us, that it will require minimal capital in relation to the scale and the magnitude of what this project is. And we have the assets available.

Would you expect that to be a cash flow generator for 2021 this year if in June they were to decide to go ahead?

Mike, do you want to give some color?

Yeah. If they were to see a positive FID at the end of June or early July, we would expect to see some revenue for sure in the back half of the year.

Okay. That's great. In LodgeLink, are you seeing any competitive threat, any other – companies coming into that market? It seems to me like you have a first mover advantage, but is there a competitive threat there?

Well, quick to point out that crew-based travel has existed for quite some time. I mean, our approach to this market was our understanding from the camp business that there were some inefficiencies and we felt we could add value if we could solve some of the complexities of crew-based logistics. But the movement of crews, the Business Travel Association, the Global Business Travel Association pre-pandemic identified crew-based travel on a global basis of about $320 billion market. And so there were various traditional travel agencies, business travel services that were and continue to be in the space working for companies or customers, booking and providing services in that regard. We're focused on bringing the digital element and using a platform approach. So there are other travel platform companies out there that are focused on individual leisure travel, some that are working on the more traditional business traveler. We see some of the traditional service providers bringing some elements of software to the crew travel, but we think from a holistic perspective and being entirely dedicated to solving problems around crew travel, that we have a unique approach to the market, if you will, and that And that is where the opportunity is in our view.

Okay. One final question, which you may or may not be aware of, but for U.S. investors, there's blue sky laws for state registration. Are you aware that there's a whole group of people that are U.S. investors now that over half your business is in the United States with your MSS business that can't purchase your stock in the U.S. markets because it's not Belus guide?

We are aware of that. Toby, if you want to give a bit of color on where we're at. Simply put, we don't file in the U.S. or we're not under the SEC rules as an issuer in the U.S. at this point in time. And we're aware. that that is restrictive to retail investors. But at this point in time, you've accurately summarized the situation. And in the very near term, we don't foresee a change to that. But it's certainly something for consideration as we continue to scale. And to your point, as we continue to become larger, in the U.S. in terms of our revenue and our asset base.

Is there any reason for not wanting to pursue that?

I think the things that have held us back to date is just from a cost and complexity point of view for us. As Trevor mentioned, we continue to look at it, but it hasn't surfaced as a top priority just yet.

Okay. Thanks. Thanks for the great job. Appreciate it.

Thank you. Thanks for the questions.

The next question comes from Trevor Reynolds with Acumen Capital. Please go ahead.

Hey, guys. Just wondering if you'd give us a little bit of color on the customer concentration in LodgeLink. Thanks, Trevor.

Well, the good news is the number of customers that are actively booking on the platform has continued to increase, which, you know, therefore decreases customer concentration. We do have a few larger customers or project-based, certainly some of the fracking companies are great customers of ours, a couple of E&P companies, but increasingly we're seeing service companies in multiple different industries, power line maintenance, wind farm services in the U.S., some transportation companies. We, by the day, are working hard on making sure we've got a really wide base of customers and we're getting increasing bookings and slowly winning, if not all of their 100% share of their spend. We're certainly working towards that goal. Toby, if you have any additional data points in regard to customer concentration.

Well, I guess the only thing I would add there, Trevor, is that we've been seeing steadily increasing diversification of our customer base. It's expanded into other geographies and have added a lot of supply in different markets. And so, as Trevor mentioned, although the good news story on certain key customers have seen a lot of value with the platform and have put all or nearly all of their volume with us. That gives us some concentration in some cases. However, we do see the growing base of corporate customers and we see that increasing. So we think that continues to level off over time.

Okay, great. Do you have a rough breakdown of U.S. versus Canada bookings?

The U.S. side has been growing, but it's still representing, I think, below 20% of total bookings, Toby, would be sort of a rough split. Of course, it changes day by day, but I would generally say About 20% U.S. bookings. It's growing quickly. Certainly the U.S. in terms of total market size for crew-based travel is significantly larger than Canada. And so we're putting more and more marketing and sales resources towards the U.S. market. So we anticipate that that will continue to grow even as the Canadian volumes grow as well.

Perfect. Assuming Goldboro goes ahead, where would that put your utilization at?

That's a great question. On the large format camp fleet in Canada, we would see a substantial jump in utilization. Keep in mind that the way these large camps are deployed, we would go in phases. as the project ramps up its manpower. So it wouldn't all happen on day one, but certainly the absorption of existing fleet from our 35% to 40% utilization we're currently at, we could certainly see that going up, to be conservative, 70% or higher once those assets are fully deployed. I think directionally that would be the way you would see it as well, Mike Riddle. Yeah, for sure.

It would about double to where we're currently at. Perfect. On the Australia side, you guys are basically fully utilized after the recent contract there. What's the plan there? Are you looking to grow that fleet or are you happy just equipping cash there?

We have been gradually growing the fleet. But yeah, we're generating more cash than we've been putting to work in Australia. And it's the workforce fleet that would be substantially fully utilized or essentially fully utilized once we deploy the recent contract win. But generally speaking, we're very constructive on the Australian marketplace. And Mike, in terms of total utilization, if you can give some color there.

Yeah, for sure. And in Australia, we also have an MSS business that falls under workforce. And a big focus on education in Australia, and that's been extremely strong in Brisbane and in the Sydney area. So we see continued growth in that market as well as our space rentals fleet. And then, yeah, workforce will add – strategically add capital when the opportunities present itself as we win projects going forward.

Perfect. That's all for me. Thanks.

The next question comes from Jeff with Peters and Company. Please go ahead.

Good morning, guys. A couple of quick follow-ons. In terms of WFS utilization, I know you referenced sub-50% broadly, but the private washroom component of the fleet, where would that sit today?

That's a good question. Mike, do you want to take that one?

It's probably not far off of that, Jeff. Surprisingly enough, the one thing I'm really pleased with is we've done a very good job in terms of diversifying, as Trevor talked to in the pre-part of the presentation here, So we're seeing a lot of activity in the mining and disaster relief and government construction. And the Jack and Jill format wash cars or Jack and Jill format dorms, we're seeing an abundance of those taken at the same time in those sectors. So with that, where we're seeing the private format dorms being taken is we're active, as you know, on the Coastal Gas Link and the Trans Mountain Project and some of the other projects that TransCanada is currently working on. So it's fairly balanced. We're pleasantly surprised with the results that we're seeing out of our Jack and Jill format and our 49-person format dorms.

And so if Goldboro moves forward, is that going to be exclusively a private washroom configuration?

Yeah, it would be, Jeff. It would be primarily private. private format and there would be some refurb on some existing assets to get them into that format, but it's 95% private format.

Okay. The capital program, the $35 million, how much of that do you have line of sight on today?

Purposefully in Q1, our capex is fairly light as we show in the NDNA. We've been focused on bringing the Vanguard platform into the Black Diamond world and understanding cash flows and forward capital demand from that system, which is very strong. We're seeing good capital deployment opportunities from the Vanguard platform. So we will gradually accelerate as we're comfortable with how our cash is working and where our debt levels are and that we're progressing to that target of being below three to one debt debit time. So we have confidence that we'll be able to absorb the $35 million through the year and that we'll be able to do so at or above our return hurdles. We have been prioritizing project specific so often we're bidding new capital for long-term leases whether that's in the education sector or in the more general industrial rentals and we're seeing really healthy pipelines really good demand through MSS for exactly that and and then depending on you know as we get into q2 Looking at how our cash flow is working and what the project specific demand is versus that 35 million, we'll consider some fleet additions. And as Ted mentioned earlier, we've got really tight utilization or very high utilization in our British Columbia market and our Ontario market specifically, where we see good return metrics and we would like to expand our footprint. So that's generally how we're approaching it. We're also watching the dispositions of assets in the normal course. We do sell assets to customers for various reasons in our MSS business, and then we're also seeing certain types of mining as we see activity around mining in Canada increasing. It makes sense on some of those projects where they have more of a steady manpower for a longer period of time to acquire assets, and so there's some opportunity in that as well. which, as we free up that capital, we can look at where we sit on our estimate of net capex for the year if the $35 million grows. So we think we've got a positive situation in that regard. I don't know if that answers exactly your question, but that's how we're looking at our capex at this point in time.

It's safe to say there's going to be a heavy waiting for the $35 million to the second half of the year.

To the middle of the year, usually Q4 as we get into even our MSS business, if you look at the trend over the last several years, Q1 tends to be the weaker because in most of our Canadian markets, construction starts or correspond with frost coming out of the ground, whether that's in the greater Toronto area or even a similar trend in the lower mainland of BC and certainly everywhere else in Canada. So we tend not to want to put a lot of new assets on the ground at the end of the year. So you will see Jeff Mora Q2, Q3 capital expenditure profile for us this year. is what we see at this point in time. And maybe, Ted, touch on just a bit more color on how constructive the bid logs and our pipeline are looking on the MSS business as it relates to our CapEx.

Sure, yeah. We see good backlogs for this time of year, significantly better than last year. as we've continued to grow our geographic reach and grow our sales teams and of course the acquisition of Vanguard. We have lots of opportunities for deploying CapEx. Again, as Trevor said, we're focusing on where we have specific bids to customers or specific customer awards that require capital. We know exactly the term of the contract and the returns we're going to get on those assets for the first typically two to four years that they go on rent. As we get into the latter part of the year and have more capital available, we would do more limited fleet purchases, again, prioritizing the bid The actual customers that have a specific project and are ready to sign a contract would get the priority.

How much cost inflation are you seeing right now on the MFF side in terms of building units, especially with all of the input cost changes that we've seen over the last few months?

Over the last year, we've seen moderate price increases. We are also getting price increases from our vendors. You know, especially the last month or two, we've seen increases in lumber and metal pricing. So that impacted our pricing. So what we're doing is a lot of our quotes we're doing with like with short term. So 14, 30 day validity so that and we get our pricing locked in from the factory for that same, you know, 30 day period. So we're not taking any risk. We also use current pricing when we're figuring out the return on an asset. So we're kind of, you know, we know what the price is, we know what the rate we're getting from the customer. So we don't, we're not taking, we're not seeing a lot of risk from that, but we're definitely seeing price increases kind of roughly in the five to 10% range for modular units

And the rental rate increases you've referenced through the call, are you seeing net pricing improvement or is it largely offsetting the input cost inflation that you're seeing?

Certainly over the last two years, I think we've seen net pricing improvement. I would expect that we would at least stay steady and probably, again, it's only the new assets that have the higher price. So You know, the vast majority of our assets that we're organically growing our fleet, say 7% during the year, the other 93% of our assets are at historical cost. And so the price increases we get on those, you know, drives margin increases. So overall, we're definitely driving margin increases with our price increases and staying at least steady on the new assets and meeting our return hurdles on the new assets.

Last question, just on the CapEx side. Is there a scenario where you would be comfortable or see the opportunity to spend more than $35 million this year organically?

Well, there are scenarios, and one of the benefits of this type of platform is we don't have a fixed CapEx demand. Our maintenance capital is typically about 5% of our rental run rate. And so really our CapEx and the bulk of that $35 million is opportunity-driven. And when we look across the platform, I mean, you're looking at literally hundreds of different individual opportunities driven by specific customers with specific requirements. And we can look at that and determine how to price that opportunity and whether or not to fund it We do have, because of the way our contracting works, we also have flexibility where we can use third-party financing for our customers, et cetera. So we can still take the volume with our customer even if we choose not to put the asset on our books specifically, if you will. So we look at addressing the opportunity in the marketplace. our focus on market share, our focus on returns, and then looking at our capital capacity, our financial capacity. And so if the business is strong, we would be comfortable accelerating the CapEx program for sure, or it could be opportunity-driven where really good rates of return with a really strong counterparty with an attractive length of contract term. And we would then take that decision in the context of where we're at with our debt levels and our objectives for where we want to be on a debt level basis and how the cash flow is working on the platform. So I think, Jeff, the answer there is that we've got a good deal of flexibility and we're using a very robust database decision methodology here. And even there, we've got optionality to still do the business, but maybe not necessarily take the assets immediately onto our platform.

Thanks for the call. I appreciate it. Thank you, Jeff.

This concludes the question and answer session. I would like to turn the conference back over to Trevor Haynes, the CEO, for any closing remarks.

Thank you, operator. Thank you, everybody, for your time today and interest in Black Diamond. We look forward to updating you again in this format after our Q1 release in early May. And, of course, we're always available should you want to reach out directly. Thank you and have a great day.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.