Black Diamond Group Limited

Thank you for standing by. This is the conference operator. Welcome to the Black Diamonds second quarter 2023 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, then zero. I would now like to turn the conference over to Jason Zhang, VP, Capital Markets. Please, go ahead.

Good morning, everyone, and thank you for attending Black Diamond's second quarter 2023 results conference call today. You're joining me on the line is our CEO, Trevor Haynes, and our CFO, Toby Labrie. Also on the call, we are joined by Chief Operating Officer of Modular Space Solutions, Ted Redmond. COO of Workforce Solutions, Mike Ridley, COO of LodgeLink, Kevin Lowe, and Chief Information Officer, Patrick Melanson. Our comments today may include forward-looking statements regarding Black Diamond's future results. We'd like to caution everyone that forward-looking statements are subject to a number of risks and uncertainties, and that actual results in the future may differ materially from these forward-looking expectations. Management may also make reference to various non-GAAP financial measures in today's call, such as adjusted EBITDA or net debt. For more information on these terms and others, please review the sections of Black Diamond's second quarter 2023 management's discussion and analysis entitled Forward-Looking Statements, Risks and Uncertainties, and Non-Gap Financial Measures. This quarter's ND&A financial statements and press release may be found on both the company's website at www.blackdiamondgroup.com and also on the CDR website at www.cdr.com. Far enough discussed in today's call are expressed in Canadian dollars unless noted otherwise and may be grounded. I will now turn the call over to Trevor Haynes to review this quarter's operational highlights.

Thank you, Jason. Good morning, everybody, and thank you for joining us today to discuss our second quarter 2023 results. We are very pleased with the results for the quarter as the company continues to demonstrate the effectiveness of our core strategies. To remind listeners, the strategy centered around growing our MSS platform, diversifying our WFS business, and unlocking operating leverage by deploying idle assets and continued rapid scaling of WatchLink. This quarter, the company's MSS business set new all-time record highs in rental revenue and EBITDA. Diversification of end-market industries has pushed WFS utilization levels not seen in half a decade. and Loxland's ongoing growth has continued to surpass the rule of 40 metrics. On a consolidated basis, second quarter of 2023, rental revenue of $35.2 million and adjusted EBITDA of $22.5 million each increased 24% over the comparative quarter. There is strong visibility for ongoing growth across the platform, supported by existing contracted future rental revenue of over $120 million and continued asset additions through organic capital investment into new long life rental assets that are being deployed above internal hurdle rates at contract lengths varying from two to five plus years. MSS exited the quarter with contracted future rental revenue of $85.4 million which was a 56% increase over the comparative quarter, while WFS future rental revenue for contracts in place of 34.7 million more than doubled from the comparative quarter. Our MSS business continued its multi-year robust growth and strong operating performance, setting all-time record highs with respect to rental revenue and EBITDA of 21 million and 17.1 million. up 20% and 34% from the comparative quarter, respectively. Compounding growth in MSS has been driven by ongoing fleet additions, coupled with a healthy rental rate environment, which has combined to drive average rental rates 13% higher as older contracts are renewed at current rates. The MSS sales pipeline remains robust and continues to track ahead of levels experienced at the same time last year with particular strength seen in the education and civil infrastructure sectors. Moving to WFS, second quarter rental revenue of $14.1 million increased 29% from the comparative quarter as consolidated utilization remains at levels unseen in many years. We continue to see positive momentum across WFS, driven by successful efforts to diversify the business streamline operations, and rationalize the fleet through sale of underutilized assets. This has driven consolidated WFS utilization to 65% up from 50% last year. While utilization has moderated in Australia from 96% in the comparative quarter to 83% in Q2, we continue to see a strong Australian market and would point out that current Australian utilization levels are more optimal as we can meet ongoing transactional demand. We continue to add new rental units to the fleet in Australia to meet contracted sales. We continue to expect rental revenue and overall WFS performance to build throughout 2023 into next year, followed by a tempering of utilization growth in early 2024 as certain projects related to Canadian pipeline construction conclude. The current WFF sales pipeline is robust, with multiple opportunities across customer segments and geographies, providing us with confidence that the business will continue to grow on a year-over-year basis. The complexion of our WFF segment has continued to evolve over the years as we have worked relentlessly to expand and diversify our client base by industry and geography, which has resulted in a more predictable cash flow profile as volatility and concentration risk are reduced. WashLink, our disruptive digital marketplace offering for crew travel, continues to scale, with 102,000 room nights sold in the second quarter, up 49% in the comparative quarter. Gross bookings of $19.5 million grew 74%, while net revenue for the quarter of $2.3 million approximately doubled from the comparative quarter as higher average room rates and increasing margins bolstered revenue growth. At the end of the quarter, LodgeLink had over 12,000 properties listed, representing over 1.2 million rooms having serviced over LodgeLink's recent trends around growth in booking volumes and revenues are expected to continue as the company is seeing strong opportunities in the U.S. market among the transportation and resource services sectors. The long-term potential of LodgeLink continues to be a very exciting focus area for our team as we look to build on our success and service the North American free travel sector, which is estimated at approximately $70 billion per year. To close my prepared remarks, the company is continuing to benefit from strategies that were implemented many years ago and our team's disciplined execution. We believe Black Diamond is representative of the type of specialty rental platform our team set out to build, a platform with high-quality, diverse, and predictable revenue streams compounding growth through prudent reinvestment in long-lived assets and a deep-rooted commitment to operational excellence. I will now turn the call over to our CFO, Toby LaBrie, for some further details on Black Diamond's second quarter results and the company's current financial position. Toby. Thank you, Trevor. As you mentioned, this quarter's results have highlighted the effectiveness of our strategy to diversify our revenues. The strength in our balance sheet has allowed us to execute on our strategies by capitalizing on acquisition opportunities and driving organic growth to further grow and diversify our rental platform. At the end of the quarter, net debt of $204.1 million had decreased nearly $15 million from December 31st, 2022. The company's current net debt to TTM adjusted leverage EBITDA ratio as of June 30th, 2023, of 2.2 times, remains at the lower end of our internally targeted long-term range of two to three times. Following the significant MSS acquisition completed in late 2022, the subsequent decrease in net debt is a testament to our ability to generate significant free cash flow while we continue to invest in organic growth with $17.3 million of capital expenditures in the quarter. The average cost of debt for the quarter was 5.56%, up from 2.85% in Q2 2022, as central banks continue to increase interest rates in response to inflationary pressures. Higher interest rates drove higher finance costs that are up 118% from the comparative quarter to $3.7 million. Proactively, Black Diamond previously entered into interest rate swaps on approximately one-third of our debt, which were put into in place during a lowered interest rate environment our strong balance sheet gives us access to 122.7 million dollars of available liquidity on our asset-based lending facility allowing for ample dry powder to continue growing our business both organically and through selective tuck-in acquisitions switching focus from the strength of our balance sheet to operating results Consolidated revenue for the quarter of $91.1 million increased 31% from the comparative quarter. Consolidated adjusted EBITDA and consolidated rental revenue of $22.5 million and $35.2 million, respectively, each increased 24% when compared to Q2 2022. The company's administrative costs increased 28% from the comparative quarter due in part to broad-based inflation, increased salaries and wages linked to higher headcounts and profit incentives, partly driven by the MSS acquisition in late 2022 and ongoing investment in LodgeLink. As a percentage of gross profit, admin costs remained stable, while stock-based compensation, which was about $1.5 million during Q2 2023, increased 39% over the comparative quarter. driven in large part by increased share prices. Increases to our depreciation and finance expenses were in line with expectations given investment in revenue-producing assets while considering the interest rate increases that I've previously described. This resulted in second quarter net profit of $4.6 million, up 15% from the comparative quarter, while from a per share standpoint, diluted earnings per share of 8 cents is up two cents or 33% over the comparative quarter. At June 30th, Black Diamond had capital commitments of $23.7 million, representing a 27% increase over the comparative quarter, largely due to a planned increase in investments relating to contract-backed asset deployments of organic fleet growth. This is reflective of our disciplined approach to capital allocation as the vast majority of our committed CapEx is supported by multi-year contracts offering attractive economics. Furthermore, we believe it is important to note that our capital plan remains highly flexible and largely discretionary. We are pleased with the continued growth and returns through the second quarter. Our outlook for the business remains positive as we continue to grow MSS further unlock operational leverage in WFS and drive value creation and optionality through our rapidly growing large length platform. With that, I would like to turn the call back to the operator so we may open the lines for questions.

Certainly. 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 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'll pause for a moment as callers join the queue. The first question comes from Frederick Bastien from Raymond James. Please go ahead.

Hi, good morning and good Friday. In your written remarks, you highlighted the transportation as a factor contributing to growth at Logelink.

Can you expand on this, please, and provide a bit more color? Yeah, the meaningful part of transportation for us at the moment is railroads, where we're handling the

accommodation aspect of travel for maintenance and project crews related to the large railroads in the U.S. and Canada. And it's proving to be a very sizable part of the marketplace and one where our team is proving that the value of the LogSolid platform in terms of logistics So we're seeing significant growth in that vertical. And as you could imagine, it is a very sizable market when you think about the amount of infrastructure and the maintenance required and thousands of service-level tradespeople that work within those systems.

I feel like you're only scratching the surface in the US, and so that's encouraging to see. Are there any other adjacent factors that you believe would be appropriate for Lodgling to penetrate over time?

Well, I wouldn't say we're surprised, but we certainly are pleasantly surprised by how diverse the who travel sector is in terms of types of companies. So we are seeing activity in and around disaster, disaster recovery in terms of those companies who bring services into an area that has suffered a disaster of some form. Everything from Highline Power to arborists who remove fallen trees, et cetera, to various aspects of the insurance market, et cetera, et cetera. So it's proving to be a sizable vertical. Transportation, as we touched upon. Resource services, which is essentially where we began offering the service. Not just oil and gas, but when you think about mining, et cetera. And then just broadly, infrastructure and maintenance, whether it's high-line power, related to power supply, generation resources and infrastructure, albeit outside of main population areas. So those are those that we've been focused on and have been handling volumes. I'll just pause there and ask Kevin Lowe if there's anything you would add. No, I think you had a very comprehensive list, Trevor. Maybe one other industry that we're actually targeting as well is construction, whether it's roads or large buildings, et cetera. So our commercial team has done a great job in helping us diversify beyond our core customer base.

So there's lots of opportunity here. That's great. I've got another question. This one is on workforce solutions. I think you're at 65% utilization and heading a little north. I recall hearing you say in previous calls that the 65% to 75% range was sort of the sweet spot for this particular market. How do you get to sort of that mid-range? Will it come from continued use of assets, putting more assets out there in the market, or do you also expect that you will benefit from attrition in the fleet through sales? Just curious how you could get to 70%.

Yeah, good question. We have reduced the capacity in our workforce business unit over the last number of years in terms of moving towards where we think there is a balance in the marketplace between supply and demand where we see the ability to have a stable the more stable utilization and the predictable cash flow. But at the same time, well, just to finish that, we're getting close to where we think the balance point is. So then we go into a phase where we may continue refurbishing older assets and or adding some new assets while at the same time in the normal course of trade continuing to sell some older assets. So we think we're getting into a range in what we're seeing, and I'll get Mike Ridley to comment on this part in a second, but we're seeing a much broader set of opportunities as we've built our sales network into other verticals, such as mining, but also at-risk population housing, as well as... So we think we've got a really good engine on the front to inform steady demand across a much broader set of industry verticals, and that we're getting close to where we see a healthy balance between the capacity that we have facing the market and where demand we think will exist over the foreseeable future. But just to go a little bit more, Mike, into some of the color around what we're seeing on the demand side that gives us confidence that we can – we can ride in this optimal range somewhere between 65% to 75% utilization going forward.

Thanks for your question, Frederick. It's all been part of our plan here for the last several years around geographic and industry diversity to build up our utilization and focusing on, quite frankly, markets that we weren't in five years ago with the homelessness and now migrant housing and mining in eastern canada we now have 2700 beds on rent absorbing many many of the western canadian assets infrastructure and disaster relief is another area again that we weren't that focused on several years ago and another market that is proving to be quite interesting with a lot of opportunity is the u.s market absorbing absorbing canadian assets um and working sort of through that and getting projects online that also help increase the utilization um and then as trevor alluded to we we will still add capital that's under underpinned by really nice projects uh to our workforce fleet we uh we are i think getting pretty close to sort of an optimal fleet size and bed count size uh but we'll continue to downsize where we can and um And then sort of if you just move over to Australia, it's a very active, robust market that we will continue to grow that business as well and increase fleet and sort of keep it a really healthy utilization rates. Thanks.

Keep up the good work.

Thanks, Roger.

The next question comes from Matthew Lee from Connect Card Genuity. Please go ahead.

Morning, guys. Sorry, I was a little late, so I have to repeat. But I wanted to start on the workforce solution side. You had a nice big pickup on the non-rental revenue front, which I take with installation. You've talked a little bit about the type of projects that are coming online right now, but what type of utilization are you expecting in the back half of the year? Then maybe how should we think about those two mountain pipeline projects in terms of how many basis points of utilization that they can potentially... caused a decrease in 2024? Thanks, Matthew.

Yeah, it's a very good question. Something we've been looking at for a number of years is where the large pipeline projects come to conclusion. Unfortunately for us, we've seen a really nice strengthening in project deployments on the WFS side, which is driving utilization growth through the end of the year here. And so we think that will offset or mute on a stable, reasonably stable utilization level when we look on a year-over-year basis as we move into 2021. So a lot of the good work that Mike and his team have been doing in terms of finding and developing other markets for us, the timing looks like it's lining up. It doesn't always line up, but in our system, it appears that we'll be able to, on a year-over-year basis, show our WFS business is able to take those assets back and whether it's those assets or others that have gone out to replace the majority or perhaps will even show their growth through the end of next year in terms of our rental run rate for WFS in Canada. Mike, again, anything else you would add there?

No, I think you covered most of it, Trevor. Just a couple sort of quick comments. A few years ago, these projects would have been far more of a factor than they are today, but as I sort of touched on earlier with Frederick's question, the business is far more diverse industry-wise and geographically and confident that over the course of 24 we'll get back to a very, very healthy utilization rate. And then further to that, we will have some operations margin as well that would come out of the camps that are coming out as well. And our contracted rental revenue, as Trevor talked to during his part, is up to $34 million, which is double from what it was previous quarter. And our sales pipeline is as healthy as it's ever been. So I'm very confident we'll get our utilization back once these projects come off.

Okay.

Okay.

So, Matt, just going to add from a financial perspective what the impact is here. Yeah, as we move through the year, and like Mike mentioned, we have contracted revenue in place that we We continue to see new asset deployments, and we expect that to continue through the back half of 2022 and back half of 2023. And as we move into 2024, with those projects coming off, that we see essentially a flat year-over-year on utilization from the start of the year and then continuing to grow from there. We expect our robust pipeline of opportunities to continue to translate into new projects.

So on an average basis, then utilization rates in 2024 will actually be up against 2023?

What we're suggesting is that

but with a potential upside bias that we can update as we move through quarters here. What we're looking at in Opportunity Set, as you guys also mentioned, is really encouraging. So as we move along through subsequent quarters, we can update you, or you'll see it in our numbers, as our win rate could inform some further strength to what we're seeing right now.

Okay, that sounds great. Thanks to the caller, and see you guys at the MSA day.

Thanks, Ryan.

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

Thank you, operator.

We appreciate everybody's attendance here today on a Friday going into a long weekend here in Canada. And as always, we are available through Chase and Zhang for any additional. So enjoy the balance of summer and the long weekend.

And thank you once again for joining us.

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