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spk00: Thank you for standing by. This is the conference operator. Welcome to Black Diamond's first quarter 2023 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. And 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, VP Capital Markets. Please go ahead.
spk05: Good morning, and thank you for attending Black Diamond's first quarter results 2023 conference call. With us on the call today is our CEO, Trevor Haynes, and CFO, Toby Labrie. We are also joined by COO of Modular Space Solutions, Ted Redman. 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 first quarter 2023 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 CNR 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 quarter.
spk06: Thank you, Jason. Good morning and thank you for joining us to discuss our first quarter results which further demonstrates the growth, diversification and momentum our specialty rental platform has seen over the last several years. This has resulted in yet another record in rental revenue generation in our MSS segment and continued improvement in our WFS utilization, which is at the highest level seen in numerous years. The significant year-over-year scaling of our travel tech platform LodgeLink continues to prove out its unique value proposition. Specific to the first quarter of 2023, We generated consolidated rental revenue of $34.4 million and reported adjusted EBITDA of $21.4 million. These were improvements of 28% and 20% from the comparative quarter, respectively. Despite macroeconomic concerns that we all have at the moment, we are seeing healthy sales pipelines in each of our business units, with strong conversion rates to contracted revenue resulting in over $130 million of contracted rental revenue at the end of the quarter versus $76 million a year ago. At the end of the quarter, we had committed capital of $35.5 million, the majority of which is under contract with rental contracts approaching an average term of roughly 36 months. This is reflective of our disciplined approach to capital investment, where the majority of our committed CapEx is supported by long-term contracts and attractive economics. Looked at another way, our visibility on forward growth or core recurring rental revenue remains strong. MSS reported a record-setting first quarter adjusted EBITDA of $16.1 million, up 55%, driven by rental revenue of $20.4 million, up 27% from the same quarter last year, and total revenue of $46.1 million, which was an increase of 34% from the comparative quarter. In line with earlier comments, our MSS business unit continues to see healthy demand, and we anticipate continued growth into the second quarter and beyond with respect to our base of high-margin recurring rental revenue. We expect continued expansion of the rental fleet and increased uptake in VAPs. Should increases in spot rates begin to moderate with inflation, we expect to continue the ongoing growth in average rental rates as existing contracts either renew or are replaced with new customers at current rates. During Q1-23, average rental rates in MSS were up 11% year-over-year on a constant currency basis, excluding the effect of acquisitions. In WFS, first quarter rental revenue of $14 million was up 30% from the comparative quarter, while consolidated revenue and adjusted EBITDA were down 1% and 8%, to $35.4 million and $11 million, respectively. The modest EBITDA decline year-over-year was primarily related to lower revenue and margins on lodge service and non-rental revenue streams, slightly offset by higher rental revenues. We are continuing to see positive momentum across WFS driven by our efforts to diversify the business, streamline operations, while also continuing to monetize underutilized assets. This has resulted in consolidated WFS utilization rising to 65.4% from 47.8% last year, the highest utilization level seen in many years in this business unit. We continue to see strength in Australia but are also experiencing improving utilization in Canada and U.S. markets. The outlook into the balance of the year is positive. based on an active pipeline of opportunities in numerous end markets and geographies. Therefore, we expect our rental revenue base in WFS to build throughout 23 into next year, followed by a subsequent moderation as certain assets come off rent later this year, with the net effect being a relatively flat rental revenue run rate for this business in early 24 on a year-over-year basis before building again. We think it is important to note that the complexion of our WFS segment has also changed considerably over the years, as we have worked hard to expand into additional end markets and geographies. The cash flows in this segment are significantly more diversified by industry, customer, and geography than ever, which we believe will continue to drive lower variability over time. LodgeLink, our digital marketplace offering that is bringing innovation to the crew travel industry, continues to scale, with approximately 106,000 room nights sold in the first quarter, up 39% from the comparative quarter. Gross bookings of $18.5 million grew 59%, while net revenue for the quarter of $2.2 million was up 69% from the comparative quarter. We are now seeing a stronger pace of growth in our U.S. LodgeLink market, which more than doubled its gross revenues year over year. At the end of the first quarter, LodgeLink had over 11,300 properties listed, representing over 1.1 million rooms of capacity, servicing 793 cumulative corporate customers and their thousands of crew members. LodgeLink is off to a strong start in 23, and we expect ongoing growth in year-over-year volumes as we continue to demonstrate a unique value proposition by leveraging increased sophistication of our tech platform to this addressable market of approximately 70 billion US. We continue to believe that the strategies implemented years ago have resulted in a notable evolution in terms of the quality and stability of our revenue streams and cash flows across Black Diamond. Our strong balance sheet and liquidity position, which Toby will touch on shortly, as well as our strong levels of contracted revenue and diverse customer base provides what we believe our attractive defensive characteristics should uncertain macroeconomic events persist or worsen. We will remain disciplined with our capital allocation approach, but as we sit here today, we reiterate that we continue to see ample opportunities to reinvest, grow, and compound cash flows throughout our system. I will now turn the call over to Toby for some further details on the first quarter results and the company's financial position. Toby.
spk08: Thanks, Trevor. For the quarter, consolidated revenue of $81.5 million increased 16% from the comparative quarter, and adjusted EBITDA of $21.4 million increased 20% from Q1 2022. Included in adjusted EBITDA is a 25% increase in administrative costs from the comparative quarter, due primarily to headcount increases, in part driven by our Q4 2022 acquisition in MSS and ongoing investment in LodgeLink. Excluding this impact in LodgeLink, administrative expenses as a percentage of gross profit decreased from the comparative quarter, representing efficiency as we scale the growing asset businesses. The resulting 20% increase in adjusted EBITDA translated to a 10% increase in profit to $4.4 million, up from $4 million in the comparative quarter. This more moderate increase in profit as compared to adjusted EBITDA is due to outsized increases in both finance costs and stock-based compensation. Finance costs were up 90% or $1.4 million from the comparative quarter due to higher debt levels and significantly higher interest rates. The effective average interest rate on the company's debt increased from 2.38% in Q1 2022 to 5.38% in the current quarter, but remain at relatively attractive levels in the current environment due to the company's ABL credit facility and fixed rate hedging strategy. The company also experienced an increase in stock-based compensation of $0.9 million, or 81% year-over-year, primarily driven by the impact of positive share price performance on equity-based awards that were issued in prior years. The consequent impact of a 10% increase to profit is consistent with the impact to diluted earnings per share, but after rounding to the penny results in a flat EPS print of $0.07 per share. From a return standpoint, the business continues to perform well as the growth in our core recurring rental revenues across the company drove an ROA of 16.3%, which represents an attractive premium to our cost of capital. Cash flow generation remains healthy as the company continues to grow its asset base while maintaining disciplined debt levels. At the end of the quarter, net debt of $208.6 million decreased $10.3 million from the fourth quarter of 2022. Net debt to trailing 12 month adjusted leverage EBITDA ratio as of March 31st, 2023 of 2.3 times remains at the lower end of our internal targeted long-term range of two to three times following the significant business acquisition completed in late 2022. We believe our balance sheet is conservatively levered and provides $115.9 million of available liquidity at March 31st. Our core asset rental model has continued to provide a strong base of free cash flow generation and continues to present an attractive growth investment opportunity. As Trevor mentioned, we're seeing increasing opportunities across our geographic operating regions to deploy and compound our cash flows while meeting or exceeding internal investment hurdle rates with multi-year term. While we remain alert to the risks of macroeconomic uncertainty and of a potential recession, we believe we are well positioned to outperform in a challenging market due to our strong balance sheet, substantial revenue contract coverage, and the diversified nature of our rental business, including a strong position in relatively defensive end markets such as education and infrastructure. In closing, our outlook for the business remains strong as we continue to grow our MSS business, seize ongoing opportunities to unlock operational leverage to deliver improving long-term utilization and diversification in WFS, and drive value creation through our rapidly growing LodgeLink platform. With that, I'd like to turn the call back over to the operator for questions.
spk00: Thank you. We'll now begin the question and answer session. To join the question queue, you may press star, then 1 on your telephone keypad. We'll 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, press star, then 2. Our first question is from Matthew Lee with Canaccord Genuity. Please go ahead. Pardon me one moment, please.
spk03: Can you hear me?
spk00: Yes, I've joined you now.
spk03: Okay. Morning, guys. I see my question. I wanted to start on fleet growth. On the MSS side, anyways, you know, fleet remained essentially flat quarter over quarter. I know you previously mentioned the goal of adding 500 units this year. Is that still the objective, and is that primarily going to be organic?
spk06: Good morning, Matt. Yes. We are... pretty healthy project specific opportunities for deploying CapEx and we had a reasonable amount of CapEx in Q1 but when you look at the amount of contracted capital commitments outstanding at the end of the quarter just under $36 million that points to a reasonable amount of equipment being added to Q2 and Q3 the bulk of that consistent with our our recent few years, is in MSS, and it also follows our reasonably large positioning in the school or classroom market in Canada and the U.S. So we will see growth this year on an organic basis. And just to add a little bit more color to that, Ted, if you... Yeah, we've...
spk07: As Trevor said, we've got the $35 million in CapEx. A significant amount of that would be related to MSS, and those would be assets that we've got on order that are being manufactured currently and will go to work in Q2 and Q3. There's a small offset by used asset sales, but we try to control those and only sell off units that we can't refurbish and put put on rent productively. So we expect continued asset growth as the year as the year continues.
spk03: Okay, that's helpful. And then just a clarification question. Did you mention that 2024 workforce solutions rental revenue will be flat to 2023? Or flat to 2022? Flat? Well,
spk06: Current visibility, we have some of our equipment coming back from the two large pipeline projects in Western Canada. That should occur, we expect, quite late this year and into next year. That being said, there's some significant operations revenue that comes along with that. However, the strength of opportunities in the system right now and the pace at which we're putting equipment out to work on new projects, a whole variety of geographies and for different end market customers. We see continuing to grow rental through the end of this year and then to look at relatively flat profile when we look at 23 compared to 24 as we reposition the assets that will be coming out. So we're monitoring this closely. We're confident that we won't see much of a gap until those caps come back.
spk05: Maybe to add a little bit as well, Matt, as Trevor mentioned, there will be fairly sizable operational revenue tied to some of those projects, and so the other offset would be probably a fairly healthy uptick on the non-rental revenue side, which will make its way to EBITDA as well.
spk02: All right. I appreciate the call.
spk00: Your next question is from John Gibson with BMO Capital Markets. Please go ahead.
spk02: Morning, guys. Just wondering how you're sort of viewing M&A right now. I mean, typically, we've seen a larger transaction from Black Diamond every sort of 12 to 18 months, and you've gotten leverage to the low end of your target range and the business looks stable and also your valuation has grown a bit. But I guess on the other hand, the higher interest rate environment maybe makes it trickier in terms of increasing the ABL, which you've done in the past. So just wondering what your thoughts are as you take all these things into consideration as you look at acquisitions going forward.
spk06: Yeah, good question. Thanks, John. We are active looking at opportunities. It's very difficult to predict when an acquisition opportunity will come up and whether or not we'll be successful in being the acquirer in terms and valuations that make sense to us. So it's part of our playbook, and I believe we've been quite successful at the transactions that we've done over the years. And we are, to your point, positioned that we could transact However, what we have much more visibility and control over is our organic growth capex. So we can get some near-term visibility on what that looks like, as we've mentioned in the script here and then in Ted and my comments with regard to just the magnitude and quantum of that organic capex. And I think most importantly is that the opportunities we're seeing right now, we're able to allocate capital where we're able to secure a contract with a strong counterparty before we have the asset manufactured. So, sort of two-part answer to your question. Yes, we continue to look at acquisitions, and we think over time, you know, it's a way that we can continue to scale business. As Toby mentioned, I think we're seeing that positive benefits of scaling with regard to improving EBITDA margins and a reduction in terms of our cost to operate the overall platform relative to gross margin. However, at this point, we're very focused on organic CapEx as the first driver of growth.
spk02: All right. Appreciate that. This wasn't for me then on workforce. Obviously, I can see utilization move up. Wondering how much of it is due to a pickup in WCSB activity versus some of the fleet moves you've made over the past several years to areas outside of Western Canada.
spk06: Yeah, our core strategy with our WFS business over the last five to seven years has been to get the operating leverage out of high quality large asset base that was significantly underutilized. So what we're seeing today is sort of the positive results of that work. A significant amount of our equipment is working in the mining sector and we've seen a fairly active contracting profile over the last little while with equipment going either to augment existing equipment working on certain mines across Canada or to new projects. So we're quite pleased about that. I think currently we've got somewhere close to 2,700 rooms in our system that are working in eastern Canada. By Eastern, I include Ontario and East. And that, when you think about out of the total capacity, is probably about 40%. So the diversity, we're quite pleased with because we have access to multiple end markets and then multiple customers within the end markets. We're also doing more and more work in all three countries with regard to government sector, housing of at-risk populations of different types and we see that growing in terms of a percentage of our business and we're positioning resources to expand our network in that customer area. And then to your question, the upstream, we see very active upstream levels still as a total percentage of our revenue stream It's much smaller than it used to be. But when we look at the areas that we're concentrated on in Canada, which would be, generally speaking, the Mont-du-Vernay, we're seeing really strong activity levels, really good recurring rental streams, as well as our concentration in West Texas. So, yes, all are growing, and the team is doing a fantastic job. We didn't touch very much on Australia, but we do have CapEx, growth CapEx being deployed in Australia. Utilization levels are really high. The market is fairly healthy there, and our team is doing a great job. So we see growth in Australia and maintaining those high utilizations in WFS that we've been showing there for the last while. Probably a longer answer than you were.
spk02: No, I always appreciate the color, Trevor, and I'll turn it back. Thank you. Thank you.
spk00: Your next question is from Frederick Bastien with Raymond James. Please go ahead.
spk01: Good morning, guys. Good morning. All right. So we've seen a nice sequential uptick in workforce solutions utilization in the quarter. Just wondering if you are seeing this continuing into the current quarter.
spk06: Into the current quarter, we don't give forward guidance, but our outlook remains positive. We're seeing a really healthy pipeline of opportunities They tend to be smaller deployments in terms of the size of the facilities or the number of rooms required, which we really like the complexion of, if you will. Currently, we have equipment mobilizing on multiple different opportunities. I would suggest in the near term, from here to the end of the year, that we continue to strong and or growing utilization and rental revenue streams before the first of the pipeline camps come back. But I think what we're seeing right now, Frederick, is that we'll completely or substantially replace that revenue stream in the near term, and then based on what we're seeing through our networks, the opportunity to continue to grow revenue subsequent to that grow in terms of your rental revenue stream and maintaining good utilizations.
spk01: Can you, I'm sorry, just on that, can you remind me what sort of utilization would you say is optimal for that business? Presumably, it may not be as high as what you're achieving right now on the MSS side, but just give us, you know, if you could give us a ballpark of where you think we could get to assuming everything goes according to plan and the market is receptive?
spk06: In the past, when our WFS fleet was made up mostly of large format dormitory and kitchen assets, we were able to run in the 90s in terms of utilization for a long period of time. The mix of the fleet is different today and also the fact that we're purposefully servicing many more projects and end market customers. I would suggest that us running the current fleet mix into the 70, 75% range would be fairly optimal. 80% at the high end, but I would suggest we would look to see this fleet operating between 65 and 75 would be quite optimal. And in that range, in certain asset classes, you're going to be able to get some rate traction. We're seeing rate traction in some of our asset classes, specifically the small format assets that work upstream and on upstream oil and gas or on small projects. As we see utilization rising, we should start to see, or we are starting to see some great traction in the WFS platform. Not in all asset categories, but certainly in some areas.
spk01: Thanks. Moving on to a different type of question, just came across some development in Vancouver. Just introduce a pretty comprehensive response plan for the downtown east side of Vancouver, and that includes adding more homes by the end of June, which is a pretty tight timeline. I'm wondering if this may present opportunities for a company like you.
spk06: Absolutely. As I mentioned earlier, this is an area we've been focused on and have been building our resources on our team to be able to work with agencies like BC Housing or large cities and municipalities in Canada and the U.S. to deal with a significant housing crisis for at-risk populations. And so we're well positioned. We've got a solution that solves the immediacy problem. You know, while they wait to build, you know, institute longer-term solutions. And the receptiveness of those trying to solve the problem in the public sector is really strong. So we do have, without mentioning specific customers or projects, we do have projects underway, and the feedback is great. very positive. So we think this is an area we can grow. And the problem that you identify in and around the Vancouver area is an area that we are focused in providing solutions to those trying to solve that problem.
spk01: Thanks for this, Trevor, and great work. Keep it going. Thanks. That's right.
spk00: Once again, if you have a question, please press star then 1. Your next question is from Trevor Reynolds with Acumen Capital. Please go ahead.
spk04: Morning, guys. Morning. Maybe you can just give us an update on what you're seeing on construction costs for units these days.
spk06: Yeah, most of the units we're building right now are in our MSS business, Canada-US, so I'll ask Ted to provide some color.
spk07: Thanks, Trevor. Yeah, Trevor, over the last three years, we saw fairly significant increases, but I would say over the last nine months, it's the increases have moderated and flattened, so we're not seeing large increases in most cases. It's still, the units are still up significantly and which is why we've had to raise our rates. But I think we've managed that well. So it is moderating and we're watching the situation and obviously making sure we earn our cost of capital and above when we put our units out for rent.
spk04: Perfect, thanks. Jumping to the redeployment of the pipeline assets, where are you seeing the biggest potential for redeployment on those assets, and do you expect rates to be similar to what they're currently on rent for?
spk06: What's interesting is other areas of our workforce bleed. are in demand right now and are being mobilized. And so those larger private washroom dormitory formats will probably see a lower utilization in the industry for a little while, especially in Western Canada. Where we see the opportunity to deploy them is outside of Western Canada. We're seeing activity, mining and remote infrastructure into the northern territories of Canada, certainly mining across everything from northern British Columbia through Ontario, Quebec, and out into the Atlantic provinces. A lot of project considerations in the works, much of the public sector related to the far north in Canada, and so we think These are very desirable assets in terms of the format. It's basically a hotel room style versus a dormitory style. We think the demand is there and will gradually absorb the industry capacity. I think we're particularly well positioned because of the end market networks we've built up outside of oil and gas over the last several years, which are quite robust. And then we're also seeing opportunities in the U.S. We've sort of unlocked the the means to which we can move these assets into the U.S. and deal with the difference in codes, et cetera. And so we are mobilizing assets into certain areas of the U.S. using Canadian assets. So, Toby, you may have some additional.
spk08: Just going to add there on those U.S. mobilizations, we're seeing contract coverage against... that we are moving down there. And then once we have them in the market, we typically see opportunities to put those either onto another contract or we've been successful in finding opportunities to sell them into that market.
spk04: Great. Just touching on acquisitions again, like how are you guys feeling about the market in terms of kind of the bid-ask spread? maybe on Australia as well with full utilization there. Are you seeing opportunities for acquisition there as well, or is that not many opportunities there?
spk06: We're certainly looking at opportunities in Australia as well as the U.S. and Canada. As you know, the world is changing fairly quickly in terms of credit, et cetera. Perhaps the current market favors strategic silver financials if you've got a well-capitalized machine with good access to capital. So we think we may see increased opportunity. However, there's been a great deal of consolidation in North America, especially in the U.S., for MSS platforms. It continues to be a competitive market in the US for acquiring these platforms. However, we've shown that we can strategically position and buy well on a multiple basis. Canada certainly is an area where we're interested in acquisition on the MSS side and Australia in both business units if the opportunities presented themselves. very actively looking at opportunities. However, we'll stay disciplined. We've got a pretty good track record of how we buy and the performance of the businesses that we've bought subsequent to acquisition. Yes, we think we're well positioned to manage a bigger asset base in terms of systems and team, etc. But we're going to be
spk00: very disciplined okay that's uh that's helpful thanks for uh thanks for taking my questions thanks trev this concludes the question and answer session i'd like to turn the conference back over to trevor haynes for any closing remarks as we touched on uh
spk06: In our presentation today, the business continues to run well. Good year-over-year growth in key metrics such as rental revenue run rate, in our disciplined approach to CapEx and to securing longer-term contracts for our assets where we can do so has led to $130 million of rental revenue under contract. And with the growth CapEx that we have committed substantially all of that has contract in place, which gives us visibility on forward growth, and our log-in platform continues to scale. So from our perspective, business is running well. We look forward to updating everybody at the end of the second quarter, and thank you for your time here today. Have a great weekend.
spk00: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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