Black Diamond Group Limited

Thank you for standing by. This is the conference operator. Welcome to the Black Diamond third quarter 2021 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 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and 0. I would now like to turn the conference over to Jason Zhang, Director of Investor Relations. Please go ahead.

Thank you. Good morning, and thank you for attending Black Diamond's third quarter 2021 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, Modular Space Solutions, Ted Redmond, and COO, Workforce Solutions, Mike Ridley, as well as CIO, Patrick Melanson. 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 financial 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 third quarter 2021 management's discussion and analysis entitled Forward-Looking Statements. risks and uncertainties, and non-GAAP measures. This quarter's ND&A news release and financial statements can be found on the company's website at www.blackdiamondgroup.com as well as on the CDAR website. Dollar amounts discussed in today's call are expressed in Canadian dollars unless noted otherwise and are generally rounded. I'll 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 third quarter 2021 results. We are very pleased with how our platform performed in Q3. MSS set a seventh consecutive record for rental revenue and is showing steady growth with strong utilization and good rate traction. LodgeLink posted record booking volumes with triple-digit year-over-year growth rates and double-digit quarter-over-quarter growth. And WFS generated the strongest revenue quarter in several years with strengthening utilization and rental revenue. These results show that our three core strategies undertaken several years ago to grow and diversify the MSS business, unlock the operating leverage in the WFS asset base, and scale LodgeLink are working. The result is a much more stable and diverse base of recurring revenue and, we believe, enticing upside growth and value creation potential. As a result, management and the board has the confidence to reinstate a quarterly dividend. We expect that the strength in our core recurring rental revenue will continue into 2022 based on the demand we are seeing in several end markets and continue to believe there is ample opportunity for organic growth in our diversified rental platforms. We also continue to generate exponential growth and scale of our B2B travel technology ecosystem and are increasingly optimistic around the value being created within this business. In addition to the highlights already mentioned for the quarter, we also generated free cash flow of over $17 million and exited with excess borrowing capacity of $116 million. In the MSS segment, rental revenue grew to $15.3 million, up 55% from the comparative quarter. The outlook for MSS remains positive, And we continue to see opportunities to put organic growth capital to work at attractive rates, rates of return across North America within a number of industry verticals. We expect continued growth in rental revenues driven by robust utilization, increasing rental rates, which were up 9% year over year, ongoing fleet additions, and increased uptake of our value-added products and services, or VAPs. Bidding activity within MSS is strong throughout every market in which we operate. A little under a year ago, we acquired Vanguard Modular Building Systems, which doubled the scale of our US MSS platform and gave us a strong presence in the education market. The acquisition has performed better than initial expectations, owing to very strong execution from the Vanguard team, strong demand from new and existing customers, and continued tailwinds from government-related stimulus. Third quarter sales and non-rental revenue was higher than normal, but management continues to view these variable revenue streams as a derivative of our core rental revenue. Rental revenue continues to see healthy levels of growth going to strong utilization, rates, growth in VAPs, and fleet growth. Our WFS business unit is showing further signs of improvement and continues to benefit from our efforts to diversify by end market and geography. Management is seeing increasing strength in areas including mining and energy markets, as well as ongoing activity in government-related sectors. Within Australia, we are also experiencing robust market conditions and strong utilization particularly in the education market for space rental assets. EBITDA in WFS during the quarter improved 180% year over year, driven by ongoing increases in utilization, as well as a number of project-related revenue items that contributed to the quarter. The WFS segment realized a large increase in non-rental revenue in the quarter, from installation activity and non-recurring project operations work for projects in both Australia and North America. Several previously announced contracts also began to contribute rental revenue during the third quarter, and we expect steady utilization for workforce accommodation assets to continue throughout the fourth quarter and into 2022, owing to the contracted rental revenues associated with these projects. LodgeLink, a digital marketplace offering that is bringing innovation to the crew travel industry, continues to scale and delivered its highest ever quarter for room nights sold. There were over 60,000 room bookings in the quarter, which was up 87% from the comparative quarter and up 39% sequentially from the second quarter of this year. At the end of the third quarter, LodgeLink had approximately 6,200 listed properties representing roughly 600,000 rooms, servicing 605 distinct active corporate customers. We expect a moderate seasonal slowdown during the fourth quarter holiday season, but we continue to see a healthy ramp up in key performance indicators across this business. We are adding customers, properties, and believe we will observe increasing crew travel activity with existing customers as we demonstrate the value proposition of LodgeLink amidst normalizing post-pandemic travel volumes. As mentioned, given the continued free cash flow generation of our platform, we have also reinstated our quarterly dividend at a rate of one and a quarter cents per share per quarter, or five cents per share on an annualized basis. Over the last several years, the strategic transformation of the company to scale and diversify our specialty rentals businesses has resulted in what we believe to be a stable underlying base of recurring revenue. This stable and growing base of free cash flow is expected to provide increasing returns to shareholders through continued compounding organic growth as well as through a dividend that grows with the platform. Management believes this to be achievable while also maintaining our targets around long-term debt ratios. At this point, I'll turn the call over to Toby Libre for some further details on the third quarter financial results. Toby.

Toby Libre Thanks, Trevor. Total adjusted EBITDA for the quarter was $19.7 million, an increase of 101% from Q3 2020. Adjusted EBITDA for MSS was $12.5 million, up 60% from the same quarter last year, and total revenue of $50.2 million was up 110% from the comparative quarter, with 59% of revenue generated outside of Canada. This is attributable to continued growth in rental revenue and somewhat higher than usual sales and non-rental revenue in the quarter. Adjusted MSS EBITDA margins of 25% were lower than the comparative quarter of 33% due to a higher proportion of consolidated revenue being driven by sales and non-rental revenue, which is lower margin than rental revenue, as well as due to an increase in G&A costs related to an increase in a provision for a customer dispute related to one specific project of approximately $1.2 million. Adjusted EBITDA for workforce solutions was $12.6 million, up 180% from the same quarter last year. WFS revenue of $58.6 million was up 239% from the comparative quarter. This is attributable to high non-rental revenues from several projects across North America and Australia during the quarter, as well as increases in rental and lodging revenue from previously announced contracts starting up in the quarter. Total administrative costs as a percentage of revenue of 13% was down 4 percentage points from 17% in the comparative quarter. Total administrative costs for the quarter of $14.3 million were up 99% from the comparative quarter, primarily due to an increase in staffing levels following the Vanguard acquisition and continued growth across the company, as well as higher profit incentives due to strong performance of the business, and the previously mentioned increase in provision for a customer dispute related to a specific project. At the end of the quarter, net debt of $159.5 million was down from $172 million at the end of Q4 2020. Excess borrowing capacity under the company's asset-based credit facility was approximately $116 million, and the appraised net liquidation value of eligible rental inventory used to calculate the company's borrowing base was approximately $295 million. The company exited the quarter with a net debt to adjusted EBITDA ratio of 2.7 times, including trailing 12-month EBITDA from acquisitions. The strong free cash flow generation of the platform has resulted in a full-turn decline in our leverage ratio since the acquisition of Vanguard less than a year ago. The current leverage ratio falls within the company's long-term range, target range of two to three times net debt to EBITDA. Our asset rental model has continued to provide a strong base of free cash flow generation, and in the current inflationary environment, we view our asset base to be an attractive hedge. We continue to see a very healthy market for used fleet equipment sales, and in instances where we are selling used MSS assets, we are realizing sales prices at or in excess of original capital costs. Year to date, our overall return on assets in the MSS division was 19%, up from 15% in the comparative quarter, as both rates and utilization levels have continued to move higher. For new assets, we have seen an increase in manufacturing costs in the 10% to 15% range, but are continuing to attract rental rates and utilization that exceed our internal hurdle rates of return on these assets. To our existing assets, we believe the rising rental rate environment as assets turn over from contract to contract should yield improving rental margins and ongoing strength in our return on assets. As Trevor mentioned, we also announced the reinstatement of our quarterly dividend, which amounts to $0.05 per share on an annualized basis. While we remain focused on reinvestment in business growth, We believe the cash flow profile of our diversified rental platform can provide additional returns to shareholders in the form of a dividend that grows with the business, but also remain within our stated leverage ratios over time. With that, we would like to turn the call back to the operator for questions.

We will now begin the question and answer session. To join the question queue, you may press star, then 1 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 2. We will pause for a moment as callers join the queue. The first question comes from Matthew Lee with Canaccord. Please go ahead.

Hey, great quarter, guys. I'd like to start on the modular side. Sales on that front continue to be elevated. Can you maybe walk through what's driving that, the demand you're seeing in the market, and what kind of run rate you're expecting for 2022? Thanks, Matt.

Good to have you on the call. Perhaps, Ted, you can give some color around the sales volumes.

Sure. We're on the rental revenue side, which I think was the what your question was, but we could talk about sales later if you want to. We're seeing strength across the platform. All of our operating regions are seeing growth in rental revenue, and that's being driven by growth in all the fundamentals, which is our rental run rates are increasing, as Trevor said. 9% on a constant currency basis. We're seeing our utilizations either holding steady or increasing in some regions. And our number of units, again, are growing as we put CapEx in, and we're also putting CapEx into refurbishing older units and getting those units out on rent at good rates. So strength across the platform there. 2022, at this point, you know, we'll have a capital program in 2022 and continue to grow the fleet. We don't see any change in the fundamentals for 2022. Right.

But I mean, just specifically on the sales side, I mean, MSS sales, you know, I'm just thinking that you're selling more units than run rate traditionally has, and at the same time, you're trying to grow the fleet. So, I mean, is there kind of a conflict between those two desires?

Well, not really. We did clean up some older units, so we made a conscious effort. Some of the older units, you have to make a decision on whether to refurbish them or sell them. So, I think a lot of our sales were just older units that we didn't want to refurbish, so kind of a rejuvenation of the fleet, so to speak. We did have strong demand for sales, and as Toby said, the margins on the used sales were very strong, so probably running slightly higher than the rate we'd expect to going forward for used sales, but good opportunities that we took advantage of.

Okay, that's great, Colin. And then maybe... On the dividend, I completely understand starting small, but do you kind of see some potential here to grow that dividend going forward? Or maybe are your capital allocation priorities more geared towards M&A and debt repayment?

Yeah, as you can expect, reinstating the dividend took some careful consideration. We certainly want to make sure that it is sustainable for the long term. We are confident in the underlying fundamentals of the business, and we believe that the cash flow, because of how diversified we are by end market, by geography, and even the ratio of the scale of the businesses compared to four years plus ago when we were a dividend payer. And so the first decision is whether or not the business is healthy and sustainable, and we can put a dividend in place with confidence. And so we did decide to start with a lower dividend to ensure we have room to increase over time, which is what we would like to be able to do. Of course, it's based on the performance of the business on a go-forward basis. And then the other consideration, Matt, is the return we're able to generate on our shareholders free cash flow investing back into the business. And as Toby touched on, what we're seeing for rates of return and with the contracted nature of our business, it's really attractive to compound cash flow back into the business. And so we're looking at that combination of good high return organic growth coupled with a growing dividend. And so that's really what we focused on in this case. And then the third consideration is wanting to get very comfortably within the debt ratio. And as a reminder, our debt facilities are asset-based lending, and so we borrow against the liquidation value of the assets. And so we're comfortable carrying a slightly higher debt to EBITDA ratio, and we don't have any covenants around debt to EBITDA, but we've said before that we would like to be comfortably between two and three times. And so as we've come into that range, we think the dividend comes into play, and we want to ensure that the business can compound its growth, stay within our debt ratios, and then be able to pay our shareholders over time. It's a bit of a longer explanation, but that's the three perspectives that that we spent some time looking at before deciding to reinstitute the dividend.

All right, thanks. Appreciate the insight. That's it for me.

Once again, if you have a question, please press star, then 1. The next question comes from Frederick Bastion from Raymond James. Please go ahead.

Good morning, guys. Good morning. Just a question with respect to the dividend and what's left with respect to free cash flow. How active are you planning to be on capital deployment in the short term, given that the inflationary pressures that you are benefiting from right now are also increasing the cost of your assets you'd be looking at purchasing?

Yeah, that's a great question. And we are seeing escalation in the cost of new assets from our manufacturers. And we're also seeing constraints where our manufacturers in their supply chain for certain components and even the basic commodities of lumber and steel. So it's an interesting dynamic. It certainly, as Toby mentioned in his comments, it is allowing for rental rate growth if you benchmark against the cost of a new asset, which has very powerful compounding effects on the 9,000 units we already own in the MSS business. And as Ted mentioned on our sales program, with high utilizations, we're able to invest in the refurbishment of older assets to bring them into market and to generate market rates, and that's a very efficient use of capital. And then with this strong pricing on used assets, those that don't make sense on how much investment to get them to market condition, we can sell them at a good rate. So we have very good, very tight controls around the sale of assets. We need to be able to recover essentially enough to buy a new asset to replace the asset we're selling. which we we're seeing those opportunities in the market and then we recycle and replace but we do expect that we'll continue to add to our fleets at a reasonable pace through next year and using various mechanisms with our supply chain to try and and mitigate the increasing costs involved

Just one other point. A lot of our asset purchases for rentals are done for specific projects that we bid on, and a lot of those projects would have 12 to 60-month terms. So we're contracting out that revenue for a significant period of time, so we know we're going to make a good return on that investment over the initial rental period.

And we use the cost of the new asset to set that rental rate, so... I guess we're passing through our system the escalation and cost of the asset.

Yeah, gotcha. Okay, cool. Thanks for the explanation. What was the big increase in non-rental revenue at WFS, and what was it attributed to, and how significant of an impact did it have on, say, EBITDA?

Mike, do you want to? Sure, I'll take it. Hi, Frederick, how are you? I'm good, thank you. WFS, we had numerous projects that commenced in the quarter that had a lot of sort of non-rental type work, transportation, installation, other sort of wraparound services in North America and in Australia. And the kind of good thing about it is we've worked really hard the last several years around our strategy of diversifying. where we've executed, we have some in the U.S. around with government. In Australia, we're tied into the mining sector. And then in Canada, in particular, in eastern Canada, we've had very good success and traction in terms of the hard work, in terms of executing on our strategy over the last few years. So that's really the bulk of it. And as it ties sort of to the rental piece of it, it's ongoing good contracts, both in the diversification through mining and government, but also some of these long-term projects that we've been tied to in Western Canada that we will see good rental through 2022 as well.

Thanks. Is there a bit of granularity you provide on the contribution and that there, but maybe Toby or Or Trevor, what can you say about, because we can't use the third quarter results and straight line that into the future. And there was obviously a bit of a, you obviously benefited from a number of things in the quarter, but that won't necessarily be repeated in the answering quarters.

Yeah, typically, Frederick, our margins on non-rental revenue are in the 15 to 25% range. And so it kind of depends on the type of revenue. In the quarter, we're on the higher side of that range, given the mix of revenue.

Sorry, go ahead. What you're touching on is the elevated non-rental as we generated operations revenue from transportation of assets, installs, related revenue for putting assets in place. What we enjoy next is the recurring rental stream against those projects once they're up and running. And so we did have a higher mix because several projects were being deployed at the same time. So you would normalize that. But where you're going to see in return is the higher contribution rental stream as more of our workforce assets are generating recurring rent, and we will normalize, we expect, on the non-rental operations revenue associated with putting camps and lodging facilities in place. That being said, we do have projects being deployed currently and into Q1. So that operating non-rental revenue stream doesn't go away, but I think you're correct. We would suggest it normalizes. But behind that, we're seeing improved utilization and rental run rates. So on a go-forward basis, you'd need to model sort of an adjustment between the two.

Yeah, Frederick, maybe to put some more goalposts around that, our typical quarter-end workforce on non-rental is anywhere from $5 to $10 million of sort of non-rental. And so we would expect that that's sort of your more normal range. But certainly on any given quarter, we can see bumps like this where we'll have a number of projects that sort of coalesce and come into the quarter.

Okay, thanks. Just wondering about there was potential for this Goldboro project to significantly add to revenues. Is this project shelf definitely permanently? Do you have an update on that or you can't count on this or do you actually have hopes that this will come back down the road?

We're still tracking it. The owner of the project is still assessing. There hasn't been any formal announcements. that have been made about the project, about whether it's carrying forward or not. We are still staying close to it and talking to the owner. In terms of will it generate revenue in the short term, I think it's pretty doubtful. Beyond that, it's hard to say.

Okay.

Thanks, guys. Appreciate it. Thanks, Frederick.

Good to have you on the call.

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

Hey, just curious on the energy services side of the business. We saw utilization drop a little bit in Q3 on a year-over-year basis. With the strength in commodity prices, are you beginning to see things bounce back there?

Yeah, we're for sure seeing improvement in the Canadian market. We're seeing sort of our accommodations piece of that improve. And we have some decent contracted revenue going forward into Q4 and beyond that. So we anticipate to have a pretty strong winter season in Canada. And even in the U.S., we're seeing some pickup with some of our activity down there that's tied to the energy sector, but also tied to the non-energy sector with government and disaster relief type projects as well. So all in all, pretty pleased with how those assets are performing for us.

And Trevor, maybe just to add, the surface, I think you're referring to the surface equipment, which, you know.

Yeah, that's correct, yeah.

The pretty small component of the overall workforce business. So I think a couple of quarters ago, we actually lumped our well site accommodation assets into the workforce utilization number. And so that's sort of what I think Mike Ridley is speaking to in terms of seeing some good improvements. On a core record basis, we did see a bit of decline here in the service rentals part of the business, but again, it's a very small component of workforce, and we probably had a bit of a stronger core than normal in the comparative quarter, owing to a few customers that were very active.

Got it. And then on the M&A side of things, what's the acquisition pipeline look like? We know we've seen a number of transactions in the space recently. Just wondering what it looks like to you guys.

Yeah, well, we continue to track a number of opportunities, but of course we don't talk openly about them and we don't plan them into our business if there's a level of uncertainty. I think from a broader perspective, we're seeing these platforms trading at higher multiples than I've seen in quite some time in our industry. And there's been quite a bit of consolidation. And so there's fewer platforms out there in terms of targets of any size. However, we believe Smaller tuck-in acquisitions that at a creative rates can be achieved You know various parts of our operating footprint, so that's that's what we're focused on But certainly a very robust Level of interest in these type of businesses and the multiples as you've seen from a few of the recent announcements are Are quite elevated from long-term average so We're watching it closely.

Got it. Thanks. That's it for me. Thanks, Trevor.

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

Thank you. Thank you, everybody, for joining today and your interest in Black Diamond. And we hope you have a great day. Thank you.

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