Black Diamond Group Limited

Welcome to Black Diamond's fourth quarter 2022 conference call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there'll 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 then zero. I would now like to turn the conference over to Jason Zhang, Director, Investor Relations. Please go ahead.

Thank you. Good morning, and thank you for attending Black Diamond's fourth quarter and year-end 2022 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 Redman, COO, Workforce Solutions, Mike Ridley, COO, LodgeLink, Kevin Lowe, and 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 fourth quarter 2022 management's discussion and analysis, entitled Forward-Looking Statements, Risks and Uncertainties, and non-GAAP financial measures. This quarter's MD&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 will now turn the call over to Trevor Haynes to review the report. Thank you, Jason.

Good morning, and thank you for joining us to discuss our fourth quarter and year-end 2022 results. I'd like to start by acknowledging and thanking our team across North America and Australia for another fantastic year. We have continued to set records in rental revenue within MSS and substantially improved both utilization and rental revenue in WFS by continuing to diversify our geography and client mix. The company also delivered record volumes of room nights sold and net revenues within LodgeLink. Most importantly, we managed to do so while keeping ourselves and our colleagues safe as we reported a top-tier total recordable incident frequency, or TRIF, of 0.51 in 2022. Over five years ago, we set out to grow, diversify, and pivot our rental platform. We believe that the current state of the business is as robust as it's ever been. For example, since 2016, our MSS rental revenues have tripled significantly. or grown at a compound annual growth rate of 20%. And we continue to see a strong runway of opportunities. In 2022, we generated consolidated rental revenues of $120 million and reported adjusted EBITDA of $84 million, up 23% and 31% from the prior year respectively. In MSS, we have continued to organically grow the fleet by reinvesting our cash flows, set quarterly records in rental revenue and EBITDA, and completed two strategic acquisitions consisting of more than 2,000 rental units in total, which, when coupled with organic fleet additions, resulted in the MSS fleet closing the year at roughly 11,200 rental units, up 27%. year over year. Average utilization in 2022 was 85%, which in terms of fleet management is effectively full utilization, while average monthly rental rate per unit improved 11% year over year, or 17%, excluding the impact of business acquisitions. This helped drive annual record MSS rental revenue and adjusted EBITDA of $72.1 million and $54.4 million, up 20% and 16% respectively. We continue to view our MSS business as a strong, diversified, cash-flowing business driven by a fleet of rental assets with long, useful lives and low maintenance capex. These assets are utilized by customers in multiple industries and geographies, and often have a strong level of contract coverage. Based on the continued growth of the MSS segment's pipeline and backlog of opportunities, we remain firmly optimistic about continued performance and growth characteristics in the MSS segment. Bolstered by our year-end contracted rental revenues of $94 million, which is an increase of $40.5 million, or 76%, compared to the same period last year. Average rental rate per unit has continued to increase across the fleet as older contracts are renewed at higher rates, reflective of today's inflationary environment, and utilization has remained healthy across the business. We continue to believe the MSS platform can maintain growth through disciplined organic asset additions supplemented by incremental tuck-in acquisitions and a continued focus on operational excellence to drive improved margins through scale and efficiency gains. Value-added products and services, or VAPS, is yet another driver of profitable growth as the company observed a 22% increase year-over-year in VAPS rental revenues. management continues to focus on opportunities to drive additional vast growth across the existing rental fleet. The current outlook for our WFS segment is similarly positive, driven by existing contracts in place, ongoing strength in Australia, steadily improving activity levels in Canada, and the diversification of our asset rental base among different customers, industries, and geographies. which has resulted in increasing rental revenues and a healthy pipeline of new opportunities. Consolidated utilization improved to 62% from 49% in the comparative quarter and is the highest level observed in many years. For the year, rental revenue and adjusted EBITDA of $48 million and $50.5 million increased 26% and 46% respectively compared to the prior year. We believe the strong improvement in our WFS business highlights the attractive operating leverage within this business unit derived from improved utilization of existing assets. This has been achieved primarily through successful diversification into new customer segments and geographies, ongoing repurposing of the asset base, and to a lesser extent, through strategic used fleet sales and the right sizing of our asset base. LodgeLink has continued to scale and set new records in quarterly room nights sold, gross bookings, and net revenues. All aspects of the platform are seeing healthy levels of growth as our listed capacity at the end of 2022 is just shy of 1 million rooms, with correspondingly robust growth on the customer side of the platform. As we continue to hit record-setting volumes, we remain confident in the value proposition being realized by our growing corporate customer base and supply network, and we believe the long-term value creation being driven by LodgeLink is compelling. As we move onward into 2023, management believes the company is well-positioned, given the diverse nature of our cash flow, strong contract coverage, and ample liquidity. We are continuing to see opportunities in several geographies for both organic and inorganic growth, which we expect will result in compounding returns as we prudently grow our businesses. I will now hand the call over to Toby Labrie to provide more detail on the fourth quarter and year-end 2022 results. Toby.

Thanks, Trevor, and good morning. For the quarter, our consolidated revenue of $89 million was down 7% year-over-year, while our adjusted EBITDA of $22 million increased 26% from Q4 2021 levels. For the year, revenue of $325 million was down 4% from $340 million, while adjusted EBITDA of $84 million was up 31% from the prior year. Annual diluted EPS of 44 cents was also 29% above 2021 levels. The improvement in our bottom line, despite lower consolidated revenue, was driven by the company's continued focus on growing our core recurring high margin rental revenue, which was $33.3 million for the quarter and $120.1 million for the year, up 22% and 23% respectively. Other revenues, particularly those driven by custom sales, while complementary to the rental business, can be more variable in nature while also contributing lower margins. Overall, the growth in rental revenue, which has driven bottom-line growth, demonstrates the health and stability of the business. The increase in our core recurring rental revenue stream resulted in an ROA for the fourth quarter of 2022 of 18.5% and for the full year 2022 of 19%. up significantly from 16.5% and 15.2% in comparative prior year periods. Our balance sheet remains in good shape following our recently closed acquisition in Ontario and the amendment of our asset-based credit facility in the fourth quarter. Available liquidity of $105 million positions us well for continued organic growth and incremental tuck-in acquisitions. At the end of the year, net debt to adjusted leverage EBITDA was 2.4 times and is well within our stated long-term range of 2 to 3 times. For the 3 and 12 months ended December 31, 2022, the average interest rate on outstanding debt was 5%, compared to 2.23% in 2021. The company continues to prudently manage interest rate risk with $80 million of notional interest rate swaps in place at fixed rates ranging from 0.97% to 3.57%. Total administrative costs for the quarter of $15.7 million grew 21% from the comparative quarter, primarily due to increased headcount, travel costs, occupancy and insurance, and bad debt expense. As a percentage of gross profit, admin costs decreased from 42.8% to 41.8%. On a gross basis, we invested approximately $109 million of capital into the business in 2022, which is comprised of $54.4 million for business acquisitions and $43.4 million of organic CapEx related primarily to rental fleet growth as we continue to compound and reinvest cash flows. A further $7.7 million was allocated towards maintenance CapEx and $3.2 million towards LodgeLink software development. After proceeds from used sales of $17.2 million, net capital investment was approximately $91 million for the year. During the year, we also allocated $15 million to shareholders through a combination of $2.2 million of common share repurchases, $3.9 million of dividends declared, and the redemption of $8.9 million to fully buy in the remaining preferred shares of a subsidiary. Within our portfolio, MSS reported fourth quarter adjusted EBITDA of $14.3 million, up 8% from the same quarter last year, and rental revenue of $20.0 million, which was up 24% from the comparative quarter. These both represent new quarterly records. Adjusted MSS EBITDA margins in the quarter of 30% were higher than the comparative quarter of 26%, due to a higher proportion of consolidated revenue being driven by rental revenue, which realizes higher margins than ancillary revenue streams. MSS utilization remains strong in the quarter at 86% compared to 85% in the comparative quarter. In WFS, Q4 2022 adjusted EBITDA was $13.9 million, up 43% from the same quarter last year. WFS rental revenue of $13.3 million was up 19% from the comparative quarter. This is attributable to activity levels continuing to improve in North America while the Australia fleet continues to be essentially fully utilized at 90%. Canadian and U.S. WFS utilization in the quarter of 51% and 76% also improved year over year from 42% and 52% respectively. The LodgeLink platform set records in room nights sold, gross bookings, and net revenues in the quarter. There were over 117,000 room nights sold in the quarter, up 67% year-over-year. Net revenues of $2.4 million and $6.6 million in the quarter and for the full year of 2022 increased by 118% and 74%, respectively, driven by U.S. expansion, increased oil field activity, and higher emergency response crew bookings in eastern Canada. On a full year basis, after combining our net revenue growth of 74% with our net loss margins related to LodgeLink, we are comfortably above a 40% threshold, which within the tech industry is often referred to as the rule of 40 and is a general indicator of sustainable long-term growth and value creation. Overall, we are highly pleased with the quarter and annual results and believe they are reflective of management's continued focus and success in driving growth of our core recurring rental revenues in diversified geographies and customer segments across our fleet of long-lived rental assets. While we remain attuned to macroeconomic risk factors, we continue to see opportunities to compound the company's cash flows at attractive returns on new equipment while also mitigating risk through prudent long-term contracting and balance sheet management. With that, I 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 1 on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. We will pause a moment as the callers join the queue. The first question comes from Matthew Lee from Canaccord Genuity. Please go ahead.

Matthew Lee, Canaccord Genuity Hey, morning guys. Congrats on the good quarter and really glad to hear the excitement for next year. I don't want to start with a housekeeping question on MSS rental rates. You disclosed the rate of 757, which I assume is elevated because of the Ontario acquisition closing mid-quarter. But if I do some rough pro forma math, I'd estimate the run rate would be close to 725. Is that kind of the right number to base our F23 growth off of? Or, you know, is 757 the number that we should be thinking of for Q1 and beyond?

Thanks, Matt. Good morning. Don't be one of you. Start off and Ted can add some color.

Sure. Yeah, thanks for the question, Matt. The average rates that we post for MSS are a blend across various different regions as well as asset types and sizes. And so it can vary quite a bit depending on the mix of the fleet. And so the number in itself doesn't mean a whole lot, but the relative change obviously means quite a bit to us And so when we looked at the change on a blended basis, we did go up by 11% year over year. But when we took out the effect of the acquisitions, which were actually blending that number down because of the nature of the type of assets relative to our average fleet, we actually saw a higher improvement of 17%. or 13% on a constant currency basis when you take out the effects of foreign exchange.

I was just going to say, it sounds like you've just prorated the additional units, so I think it sounds like your proration math makes sense.

Okay, thanks. And then maybe on the lodge length side, bookings were really quite a bit higher than we expected. Was that seasonality, or should we be thinking about this business as growing off that 20 million bookings going forward?

Well, there's two things happening. The baseline volumes are growing in terms of increased number of customers and their base crew change volumes that we're handling. But we also had in that quarter an elevated volume from disaster recovery. That, of course, is difficult to predict and isn't necessarily seasonal either. And then I guess in some of the industries, Kevin, there is a little bit of seasonality as well. So maybe I'll pass it to you for some additional thoughts.

Sure. Thank you, Trevor. There is a bit of seasonality within the energy industry, which we're quite strong in. That trend underlying the energy industry continues to hold for the next couple of quarters at least, or so far as we can see. But as Trevor noted, a big spike during the fourth quarter was because of emergent response. So I wouldn't go and assume that we're going to continue to have that big spike, but certainly we are pretty positive about the business. The baseline is growing. So the baseline continues to grow, yes.

All right. Thanks a lot, guys. I'll pass the line. Thanks, Matt.

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

Good morning, guys, and great results. Good year. Thanks, Frederick. I just want to continue with LodgeLink. We saw, obviously, some very good growth in the quarter. Question around your ability to continue to scale up. Was there anything during the quarter of the year that kind of inhibited you from taking all the volume you wanted? I'm trying to see how much more growth can we expect out of that business. It's a large market. You're doing well. So just wondering if you could provide an additional call here.

Yeah, we continue to believe the addressable market is very sizable, north of $50 billion in North America in terms of business, spend, or group-based travel. So I'm not concerned that we're running out of addressable market. We do have some... limits in terms of being able to scale up as quickly as we can bring customers in. You know, this is business to business, and crew travel is quite complicated when we're moving large groups, and so we do need a corresponding resource set in terms of people to handle the volume, and I think, Kevin, we did sort of touch some of those limits in Q4 where we might have been able to handle more volume, just the confluence of the amount that was coming in all at the same time. But as we roll into Q1 here, we're seeing continued growth in the baseline, recurring handling of crews for core customers.

Anything you would add there? I think you touched on most of it. In order for us to maintain a service level that we would like, we did have some growing pains. I mean, doubling the revenue year over year was challenging on a few fronts. We think we've resolved some of those issues. So, you know, as Trevor noted and we talked about before, the baseline growth continues to be steady. You know, our commercial team led by Vinny Campana has done a great job at pulling more clients in and the organization's geared toward making sure that we continue to service that growth.

I think I would just add there, Frederick, as we continue to invest in the product, we put $3.2 million of investment there. We're continuing to realize benefits and being able to scale more quickly with further automation and more efficiently. So we are seeing the benefits of that, and we look to continue to improve there as well.

Thank you for that. My next question is around the hard assets on the workforce solutions. Can you comment on the level of activity? I understand and we have noticed over the last several years your diversification into other end markets and geographies. You have a couple of fairly large projects rolling off at the end of the year. Can you give us some

level of comfort as to your ability to kind of replenish that work as these um these projects uh do roll off thank you yeah thanks roger um the two big pipeline projects where we do have uh remote camps um we do expect uh at some point late this year might get into maybe early 2024 that those projects will come to completion um we do see a really healthy opportunity set across our WFS platform right now, which gives us some confidence. And maybe, I guess, without specific projects, but... Yeah.

No, it's a good question. And, Frederick, I think as Trevor said in his opening comments, we've worked really hard to diversify our business and work, not just MSS, but workforce geographically and from an industry standpoint. And... I believe our business is as healthy as it's ever been from a diversification standpoint. Our bid pipeline is excellent. While there's some big projects coming off at the end of the year, you're going to see it back filled with probably a bunch of smaller projects that's going to be tied. Some of it will be tied to oil and gas. A lot of it will be tied to construction, migrant housing in the U.S., disaster relief. And then when you go over to Australia, a very healthy economy. We have a super strong team over there. We're benefiting from a strong infrastructure rebuild market in Australia with highways and that, and then also an education market that is extremely strong. So I'm pretty bullish on our business going forward in spite of these two big projects coming off.

Thanks, Mike. Thanks. The one you missed in Canada is the mining sector, which we're seeing quite a bit of activity, eastern and northern, and at-risk populations, which is an interesting new vertical for us. Thanks to all of you.

Sorry I cut you off, but thanks. Thank you.

This concludes the question and answer session. I would now like to turn the conference back over to Trevor Hames for any closing remarks. Please go ahead.

Thank you for listening in. And once again, we're very pleased with the performance of the company in 2022 and working hard to set up 2023 for more success. So thank you very much for your time 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.