Black Diamond Group Limited

Thank you for standing by. This is the conference operator. Welcome to Black Diamond's fourth quarter and year-end results 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 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then 0. I would now like to turn the conference over to Jason Zeng, VP of Capital Markets. Please go ahead.

Thank you. Good morning and thank you for joining us today for Black Dining Group's fourth quarter 2023 results conference call. On the line with us today are our CEO, Trevor Haynes, and CFO, Toby Labrie. as well as additional members of our executive, including COO of Modular Space Solutions, Ted Redman, COO of Workforce Solutions, Mike Ridley, COO of LodgeLink, Kevin Lowe, and CTO of LodgeLink, Patrick Melanson. Please be reminded that our discussions today may include forward-looking statements regarding Black Diamond's future results and that such statements are subject to a number of risks and uncertainties. Actual financial and operational 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 these sections of Black Diamond's fourth quarter 2023 management's discussion and analysis entitled Forward-Looking Statements, Risks and Uncertainties, and Non-GAAP Financial Measures. This quarter's MD&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.cdrplus.ca. Dollar amounts discussed in today's call are expressed in Canadian dollars unless noted otherwise and may be rounded. I will now turn the call over to Trevor Haynes to review this quarter's operational highlights.

Thank you, Jason. Good morning and thank you all for joining. We have been focused on building a diverse specialty rental and services platform that can generate predictable compounding growth. The very strong 2023 results highlight the effectiveness of this strategy. Full year consolidated rental revenue was up 21% over the prior year to $145 million, and EBITDA rose 27% to $106.6 million. 2023 is yet another in a series of strong years, culminating in Black Diamonds having a five-year compounding annual growth rate of 22% and 29% for rental revenue and EBITDA, respectively. We are confident that the business will continue to compound these and other key performance indicators in 2024 and beyond. This confidence stems in part from the company having over $136 million of rental revenue behind contract at year end 2023. We therefore step into 24 on solid footing given the correlation between rental revenue and cash flows. Our strong free cash flow generation and conservatively levered balance sheet provide considerable flexibility to fund any or all of organic and inorganic growth debt repayment, dividend, and or share buybacks. We continue to experience tailwinds in several end market verticals, such as education and infrastructure construction. These, along with steady levels of activity across our customer segments, are driving strong sales pipelines, which in turn will lead to attractive organic investment opportunities. We believe that our primary contributor to growth will continue to be from new rental units being added to our regional fleets. This primary growth will be augmented by our continued broadening of our increasingly diverse WFS segment, the ongoing scale-up of LodgeLink, and the possibility of further tuck-in acquisitions. We have achieved these strong results in current positioning due to the quality of our team and their relentless focus on achieving excellence, as exemplified by our safety culture. The company ended the year with an enviable 0.22 total recordable incident frequency rate, or TRIV, and zero lost time claims. We are truly appreciative of our fantastic team. Moving to the quarterly results. Fourth quarter consolidated rental revenue of $36 million and adjusted EBITDA of $26.1 million, increased 8% and 19%, respectively, year over year. MSS results for the quarter were healthy, with rental revenue of $22 million and EBITDA of $17.3 million, up 10% and 21%, respectively, year over year. Utilization has remained stable, and at the high end of what we consider to be optimal for this type of business. While we have been seeing lower activity levels in certain commercial construction segments in central Canada, these are being offset by continued strength in the education sector on both sides of the border and infrastructure construction activity in key US markets. Average rental rates remain robust and continue to move higher as legacy contracts renew or the assets are redeployed at prevailing market rates. Our MSS segment exited the quarter with contracted future rental revenue of approximately $102 million, an 8% increase over a comparative quarter, and with average rental duration of 52 months. Our workforce solutions business continues to benefit from multi-year diversification initiatives that has significantly broadened our customer base by sector as well as by geography. In the quarter, WFS rental revenue of $14 million increased 5% from the comparative quarter, while adjusted EBITDA improved 6% from the comparative quarter to $14.7 million. This rental revenue and EBITDA performance was achieved despite a decline of 9 percentage points in rental utilization to 60%. This decline was expected due to the previously noted completion of several large-scale oil and gas pipeline camp projects, all of which are now off rent and only nominally contributed to the fourth quarter results. We have been redeploying WFS rental assets at comparatively higher rates, which explains the modest year-over-year growth in Q4 rental revenue despite lower utilization. We expect relatively stable sequential rental revenue performance in the short term as we mobilize assets in a generally higher rate environment and anticipate a return to growth in the latter part of 2024 as utilization rises with further rental asset deployments. Our forward contracted rental revenue in WFS increased 56% year over year to $34.6 million. highlighting the attractive sales and rental pipeline in place. Our enticing opportunity set is being driven by a broad and diverse set of customers across North America, as we are seeing activity in several verticals, including mining and energy production and infrastructure development, but also disaster relief, transitional and social housing, and other temporary accommodation requirements for government and industry applications. Our operations in Australia remain a focus as we have been intentional in adding new rental units to meet strong demand and in an effort to manage utilization within an optimal range. We expect healthy rental revenue growth to continue in this region given ongoing demand tailwinds. Over the last several years, we have worked intently to successfully diversify our WFS business in order to evolve from a mostly oil and gas oriented CAF provider into a more diverse temporary housing and accommodations business, servicing many end uses and geographies. The result is evident in a more stable and predictable cash flow now being generated from numerous projects of varying sizes. We believe this stability and diversity is driving a higher quality WFS cash flow stream, which we believe is increasingly comparable to the predictability observed in our MSS business units. LodgeLink, our disruptive digital marketplace, continues to scale with over 101,000 room nights sold in the fourth quarter, bringing the trailing 12-month total to just over 419,000 room nights sold, an 18% increase compared to the same period in 22. Q4 23 booking volumes in LodgeLink were down year over year, given a particularly strong comparative year driven by disaster recovery volumes. We are seeing first half 24 booking volumes strengthening based on current activity and new customers trading on the platform. Annual net revenue of 9.8 million was up 47% year over year and net revenue margins improved by 120 basis points as we leveraged higher volumes through the platform and additional revenue streams were introduced. We expect continued growth for LodgeLink both from a volume standpoint and from improving economics as net and gross margins expand on the back of additional revenue streams, ongoing scale-up, and improved efficiencies. In summary, the fourth quarter and year-end results capped off another very strong year for the company. Our outlook is constructive as we are well-positioned across the business with stability and tailwinds being indicated across our end-market verticals. which points to opportunities for further organic growth with particular strength in education and infrastructure construction in both North America and Australia. We have the financial flexibility and the best-in-class team to capitalize. I'll now turn the call over to Toby, our CFO, for a more in-depth look at our financial position. Toby.

Thanks, Trevor. And good morning, everyone. As mentioned, our fourth quarter results underscore the strength and diversity of our recurring revenue streams and the value of Black Diamond's rental platform. Our capital structure combined with the strength of our balance sheet has played a key role in financing our organic growth across multiple operating regions over several years and has allowed the company to capitalize on accretive business acquisition opportunities as they arise. The recurring cash flow from our platform has allowed us to continue to compound those same cash flows by reinvesting in growth assets to pay shareholders with a dividend that has increased three times since reinstatement in 2021, all while maintaining a conservative balance sheet. In 2023, we invested $69 million into organic gross capex while repaying $36.5 million of long-term debt. which stood at just $190.4 million a year end. Net debt also continues to decrease and was $184.2 million at quarter's end, which translates to a net debt to trailing 12-month adjusted leverage EBITDA ratio of 1.7 times. We continue to believe that the pace of our debt repayments showcases the platform's ability to generate substantial free cash flow, and has also generated significant dry powder to invest in future growth. Our weighted average cost of debt in 2023 was 5.7%, steady on a sequential basis, but up from 3.6% from Q4 2022, as interest rates rose quickly in early 2023. Given the current interest rate environment, we feel that our cost of debt is highly competitive. At year end, the company had $142.6 million of available liquidity, giving us plenty of financial flexibility to continue growing organically or through selective acquisitions. With the growth of the business, we have seen an increase in administrative costs of $2.8 million, or 17% from the comparative quarter, to $19.1 million. In addition to the increasing scale of the business and certain inflationary pressures, the admin cost increase increases were also driven by incremental professional fees. The increases in these fees primarily relate to non-recurring corporate structure reorganization costs of approximately $1.5 million and will improve business efficiencies as we prepare for an upgraded ERP system implementation. An upgraded ERP system is necessary given the rapid growth of the platform of the company, but will also allow us to improve business processes while realizing the longer-term benefits of increased scale. We will be moving WatchLink onto a new ERP system in the second quarter of 2024, and we'll look to move our remaining business units thereafter with expected implementation in 2025. We note that while administrative costs have increased, these same costs as the percentage of gross profit which we view as a key measure of administrative cost efficiency when taking into account the growth and scale of the business, remained relatively consistent with the comparative quarter and also on a full-year basis. For the year, diluted earnings per share of 49 cents was up 11% from the prior year. The prior year included a one-time non-cash impairment reversal related to Australian assets, which amounted to a gain of $4.4 million, or 7 cents per share after tax. Excluding the impact of that reversal, 2023 diluted earnings per share was up 32% from the prior year. This demonstrates that the strong growth rate in operating cash flows in 2023 was preserved to the bottom line, despite inflationary pressures and a tightening interest rate environment. In summary, and echoing Trevor's comments, our outlook remains constructive across the business. We see ongoing opportunities for capital deployment and have the financial capacity and flexibility to meet those opportunities. That gives us confidence in our ability to continue compounding cash flows and shareholder returns. And so we're looking forward to another productive year. With that, I'd like to turn it back to the operator for questions.

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

Good morning, guys. Thanks for taking my question. I wanted to maybe start on the WFS side. In the past, when utilization was in the low 60s range, you've been pretty open to looking towards asset sales. But, you know, reading your MD&A, it feels like you're a little bit more constructive on the rental opportunities than maybe in the past. You know, is fleet rationalization on the WFS side still an objective, or have you maybe reconsidered that?

Thanks, Matt. Yeah, that's a good observation, as we have. reduced our fleet size over the last several years, we are getting to a capacity where we think we're better matched with the demands in the marketplace. And as we've shown success in moving the asset around North America to service, whether it's transition housing for homeless or a broader set of resource customers mining, for example, in Eastern Canada, our view is that we're very close to a balance point. And so I would characterize that we continue to sell assets, but we're selling assets not primarily from trying to right-size the capacity of our fleet, but more from a commercial perspective of where, you know, it's a compelling transaction for us. And increasingly, we need those sales to get closer to the cost of replacement assets if we're going to maintain, you know, a similar bed count or unit count going forward. So, yes, the strategy has been shifting And I think, Mike, we're pretty close to a balance, and certainly in certain asset categories, we're seeing really tight utilizations.

Yes. I mean, specifically on the large format business in North America, we're getting to a point where there's probably not a lot more that we'll do in terms of selling off, but we're A lot of those assets now are being replaced to smaller type assets where they can be used in a whole bunch of different applications, double end well sites and smaller density type product is becoming more and more popular, if you may, within the market. And then when you go over to Australia as well, we're still in growth mode over in Australia with a lot of our businesses over there with the space rentals and educations. But even in our workforce business over in Australia, we're able to deploy capital to really good customers and really good term contracts. So in Australia, we're kind of going the other way. And then over in North America, as Trevor alluded to, we're sort of slowing down that, but there are still opportunities to deploy new capital and then also with our existing assets across all corners of the United States and Canada.

That's super helpful. Maybe on the MSS side, some industry consolidation earlier this year. Can you maybe talk about how that's changed the competitive market in the U.S. and maybe how it changed your view on M&A?

Yeah. I mean, there is a recent very large transaction announced with a combination of, well, Scott Mobile Mini and McGrath Red Bull, which is an entirely U.S. deal in that that's where all of the grass assets are. We see this as a continuation of significant consolidation in the space over the last eight years. We continue to find that markets want choice and gives us room to grow even within consolidation. And we find that the industry is really quite disciplined when you think about asset quality, but also from a pricing perspective. So we do think it's constructive in terms of how we approach our markets and our customers. But Ted, any additional comments there?

Well, I would just add that in the past when there's been acquisitions like that, it's been positive for our business and we've been able to pick up some good employees, good salespeople and other employees. So we certainly think that it's going to be fine for our business. And if anything, we'll benefit by getting some good people to join our team.

All right. That's great, guys. Thanks for the question. Thanks, Will.

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

Good morning and congrats on a great year again. Thank you. Maybe I'd just build on the discussion that you started on the Will Scott's proposed merger with Merrick Roth. Any other implications that you might see from a supply standpoint? And also, you know, have you gotten incoming calls from potential suppliers of boxes, you know, indicating that they might want to sell to you? And then separately, just with respect to mom and pop that may be looking for a way out and looking to sell their businesses, has that discussion been picking up? Anyway, any additional caller on the... potential implications would be great. Thank you.

Thanks. Starting from the access to supply part of your question, Frederick, what we're finding with the consolidation of these larger players is they tend not to be adding new capacity as opposed to rationalizing existing capacity. And on a combined basis, they continue to have excess fleet availability in comparison to us. A good part of that requires referred capital to bring it to market. And so in that respect, it reduces the competition for line time with manufacturers in the industry. And as a quick reminder, we don't manufacture our own buildings. And so we access independent manufacturers to supply to us. So we think our access to supply and our pricing characteristics for supply are improved modestly as opposed to the opposite from this combination. So we certainly have access to grow. There's no impediment in terms of our ability to have new units built for us. On the other side of the question, with regard to ongoing acquisitions or tuck-ins for us, we continue to maintain a healthy pipeline. We don't think anything about the recent transactions sort of changes our positioning as a buyer. We like to think we're a preferred buyer in many cases. And so, yes, we have active and ongoing conversations with smaller fleet owners. Even when they decide to sell, if we can reach reasonable terms is sort of another question, but certainly there's active conversation.

Since you hinted at it, I know you can't comment too much on this, but are they more open to

negotiating with you right now because there's limited choice with respect to potential takers of their business well every every potential transaction sort of has its own some personality so it's hard to broadly characterize we continue to find with private owners that were viewed as a preferred buyer and from We don't see that as having changed. As you know, it's difficult for us to, one, comment on anything specific in our acquisition pipeline, and it's very difficult for us to predict the timing of when a transaction may occur. So we tend to focus on what we have control over, which is deploying capital and organic growth. We think 2021. 4 is going to be another healthy year for us based on the demand that we're seeing through our sales funnels and bid pipeline. If we are successful on some tuck-ins, that would be a nice way to accelerate us, but we think we'll still have a very successful year even without.

That's great. Just switching gear to Logelink, would you mind just discussing a bit the You know, performance in the quarter, we saw a bit, you know, a bit of a slowdown with respect to, you know, on the growth side and things like that. So how are things shaping up going into the next year? Or, sorry, going into, you know, the rest of the year?

Yeah, we point to the full year of 23 as being another year of significant growth, especially at the net revenue line and margin expansion within the business. You know, that's being driven by success on a number of fronts, including advancement of the software platform, supporting the marketplace. Pass it over to Kevin to provide a bit more color on what's happening within the quarter and what we see going into this year.

Thanks, Trevor. We, as Trevor noted, we're very proud of the team and how well they've achieved, how much they've achieved in 2023. Q4 of 23, in comparison to 22, as you recall, 22 was helped by a lot of natural disaster and and that type of work, and we did have that in the fourth quarter of this year. What we're seeing in the first quarter is that our growth risk is resuming, and we think that the platform itself and the business itself is still very healthy, and we are very optimistic about the growth prospects going forward.

Thanks. I'll turn it over. Whatever you're doing, keep doing it. Thank you, brother.

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. Thank you, everyone, for joining. And one more point of recognition to the great teams and their great work across the Black Diamond businesses. Hope you all have a great day.

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