Badger Infrastructure : Earnings Document

Badger Infrastructure Solutions Ltd. (2024 Q1 Results)

May 2, 2024

Corporate Speakers

• Lisa Olarte; Badger Infrastructure Solutions Ltd.; Director of Investor Relations and Financial Planning
• Robert Blackadar; Badger Infrastructure Solutions Ltd.; President and CEO
• Robert Dawson; Badger Infrastructure Solutions Ltd.; CFO

Participants

• Yuri Lynk; Canaccord Genuity Inc.; Analyst
• Krista Friesen; CIBC; Analyst
• Unidentified Participant; Scotia Bank; Analyst
• Ian Gillies; Stifel; Analyst
• Sean Jack; Raymond James Ltd; Analyst

PRESENTATION

Operator^ Good day. And thank you for standing by. Welcome to the Badger Infrastructure Solutions Ltd 2024 First Quarter Results Conference Call. (Operator Instructions)

Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your host today, Lisa Olarte, Director of Investor Relations and Financial Planning.

Please go ahead.

Lisa Olarte^ Good morning, everyone. And welcome to our first quarter 2024 earnings call.

My name is Lisa Olarte, Badger's Director of Investor Relations and Financial Planning.

Joining me on the call this morning are Badger's President and CEO, Rob Blackadar; and our CFO, Rob Dawson. Badger's 2024 first quarter earnings release, MD&A and financial statements were released after market closed yesterday and are available on the Investors section of Badger's website and on SEDAR +.

We are required to note that some of the statements made today may contain forward- looking information.

In fact, all statements made today, which are not statements of historical facts are considered to be forward-looking statements.

We make these forward-looking statements based on certain assumptions that we consider to be reasonable.

However, forward-looking statements are always subject to certain risks and uncertainties, and undue reliance should not be placed on them as actual results may differ materially from those expressed or implied.

For more information about material assumptions, risks and uncertainties that may be relevant to such forward-looking statements, please refer to Badger's 2023 MD&A, along with the 2023 AIF.

I will now turn the call over to Robert Blackadar.

Robert Blackadar^ Thanks, Lisa. And good morning, everyone. And thank you for joining our 2024 first quarter earnings call.

Before we get into the results, I'd like to take a moment to talk about safety.

Safety is at the center of everything we do here at Badger. April was distracted driving awareness month. Every day, we have thousands of operators and vehicles on the road and each vehicle is equipped with machine learning AI technology to encourage safe driving habits.

Maintaining a just drive mindset is crucial for all of our team members when they are behind the wheel. Just Drive is just as it states, eliminating all distractions while in the vehicle, so our operators can just drive.

Now on to the first quarter results. The team had another strong quarter with record revenues, gross profit and adjusted EBITDA.

Our top line revenue of $161.6 million grew by 13%, driven by the strength of our U.S.

operations, which saw a revenue increase of 19% year-over-year.

We continue to experience softness in our Canadian markets due to a decrease in overall construction activity, the completion of several large projects on the West Coast and delayed starts of some significant projects in Central Canada. This overall slowdown in the market led to an increased supply of idle hydrovacs across Canada.

We continue to monitor closely the end market activity in our Canadian region and will align our sales resources as well as our fleet to pivot with the overall demand.

We achieved RPT, or revenue per truck per month of $36,904 in Q1, down slightly from the previous year due to the slowdown in the Canadian market.

RPT in the U.S. for the quarter was up 3% compared with last year.

We continue to see growth in adjusted EBITDA track higher than our revenue growth, up 22% year-over-year, driven by improved operating leverage and cost management strategies.

Our adjusted EBITDA margin was 18.1%, up from 16.7% in 2023. And as a reminder, the first quarter is our slowest most seasonal quarter of the year.

The Red Deer plant manufactured 52 hydrovacs this quarter versus 57 units in Q1 of 2023. The fleet team used a seasonally slower quarter to retire 66 units and refurbish eight units.

We also took the opportunity to accelerate some Q2 and Q3 retirements from our Canadian region due to the project start delays discussed earlier.

We ended the quarter with 1,529 units, growing our fleet by 10% since Q1 of 2023.

Our full year fleet plan remains unchanged from previous guidance, manufacturing between 190 to 220 hydrovacs, retiring between 70 to 90 units and refurbishing between 35 to 45 hydrovacs.

I'll now turn the call over to Rob Dawson to discuss our Q1 financial results in more detail.

Robert Dawson^ Thank you, Rob.

As you saw in our first quarter release, our team delivered another strong quarter of results.

We had record first quarter revenue up 13% from last year, driven by our U.S. operations, which was up almost 19%. Partially offsetting this, our Canadian operations were down 18% from last year due to the reasons Rob mentioned earlier.

The team is prepared to execute on our pipeline of projects coming up later this year and into next.

Our margins have continued to rise, reflecting the operating leverage gain from our pricing strategies and the scalability of our branch network and support functions.

Our gross profit margins were strong for the first quarter at 24.8% compared with 22.9% last year, also driven by our U.S. operations. The trend in our adjusted EBITDA margins continued to improve at 18.1% compared with 16.7% in the prior year.

Our four quarter trailing EBITDA margins also continued to grow in line with our long- term objectives. G&A expenses were $10.8 million or 6.7% of revenue compared with $8.8 million or 6.2% of revenue in the prior year. Total G&A expenses were slightly elevated from our run rate over the second half of 2023 due primarily to the timing of IT spend in the first quarter.

We continue to expect relatively stable full year G&A spend. Q1 adjusted earnings per share was $0.14 per share, up 27% compared to the prior year due to the higher adjusted EBITDA margins, offset in part by higher depreciation expense associated with the 10% increase in our fleet and higher right-of-use assets.

With revenues up 13%, adjusted EBITDA up 22% and adjusted EPS up 27%, we are encouraged by the continued scalability and growth in margins.

Now on to the balance sheet.

Our capital allocation priorities are unchanged.

We continue to maintain a strong flexible balance sheet to support our organic growth and commercial strategy.

Our compliance leverage ended the year at 1.5x debt to EBITDA -- ended the quarter my apologies -- down from 1.6x a year ago.

This is up from 1.3x at the end of 2023. The increase from year-end primarily reflects the impact of the payments made under our share-based compensation plans in the first quarter.

I will now turn things back over to Rob Blackadar for some final comments. Rob?

Robert Blackadar^ Thanks, Rob.

So before we open it up for questions, a few last comments.

We are pleased with our continued strategy to further diversify the company's business across key markets in both the U.S. and Canada. Badger's overall performance continues to scale and grow with broad exposure in our resilient end markets.

Badger's long-term growth prospects remain unchanged, and we continue to believe Badger is uniquely positioned to capitalize on the significant opportunity for nondestructive excavation services across North America.

Finally, I want to remind everyone that we have our virtual Annual Meeting of Shareholders today at noon Eastern Time, 10 a.m. Mountain time. To get more information, please visit our Investor Relations page at ir.badgerinc.com.

So with those comments, I'll turn it back over to the operator to open it up for Q&A.

Operator?

QUESTIONS AND ANSWERS

Operator^ (Operator Instructions) our first question comes from the line of Yuri Lynk with Canaccord Genuity Inc.

Yuri Lynk^ Nice quarter. I think it could have been even better if Canada had performed like it did even last year.

Can you talk a little bit more about the delays that you saw? And it doesn't sound like those projects are going to ramp up until the back half of the year. So just wondering why you weren't able to put those trucks to work in other markets or maybe even move them into the U.S. and put them to work there?

Robert Blackadar^ We had a few other large projects as well but they all were sunsetting at the end of last year. We have bid and successfully bid on several large projects that we were anticipating being started by now for Q1.

So we really weren't expecting much of a hiccup at all and just continuation of keeping the trucks working and on projects. Those larger projects, and we don't give out future projects or current projects we're on.

We will -- we are, from time to time, we'll talk about past projects, but for competitive reasons, and especially in Canada, we're not going to discuss the ones that we're bidding on, but most anyone can Google or figure out what the large projects are coming up. They continue to be delayed.

One of them was going to start at the end of Q4.

It got delayed to the beginning of Q2 and now it's being delayed to end of Q3, beginning of Q4.

For us, our core business, our regular construction business and a lot of our utility business is unchanged, remains unchanged and our trucks are busy.

The large projects, though absorbed on a relatively smaller number of these projects, a lot of our fleet. When these got delayed, we looked at it and said, we can either -- we had a few options.

We can sit on the current trucks we have and just kind of wait for those large projects to start if they start at the end of Q3, beginning of Q4, we can identify trucks that we were

going to retire in Q2, Q3, maybe the beginning of Q4, and maybe we could accelerate that.

So we made the decision in Q1 to accelerate those retirements and not carry them if we're not going to keep them busy.

We don't make it a regular practice. We move our trucks all across Canada and all across the U.S., but we don't make it a regular practice to move trucks north and south of the border. Typically, we have what's called FET or federal excise tax implications by moving trucks because we actually use these as they are purpose-built trucks, vocational trucks. And because of that, we have a lot of duty and tax implications to move them north and south of the border.

So that's -- when we looked at the fleet and we said it feels like we're going to have some potential excess fleet until these large projects start.

We identified some of the oldest units and we said, let's accelerate the retirement of those instead of waiting when we would normal course do it.

That's the whole story behind that, Yuri. There's not a lot of additional color other than what I just laid out for you.

Yuri Lynk^ No. That makes sense. And the Canadian outlook, I mean I think the language in the MD&A changed a little bit. You're not talking about growth now in Canada.

So should we expect a kind of a similar quarter in Q2? And then maybe the ramp-up of those projects in Q3 and Q4, but Canada largely down in 2024?

Robert Blackadar^ Yes.

So my perspective and visiting with our Canadian leaders across the country, they are sharing that the business, the backlog of their day-to-day business is continuing robust and we're expecting a normal course season.

What's missing is some of these large projects and the volume.

So if looking at it from a year-over-year perspective, I think you're largely correct that we are going to see lift in Q2.

We're going to see a lift in Q3 relative to Q1 because we saw that it's a seasonal business.

The summer season is going to be rolling, but I would not be expecting any growth.

And as we are looking at some of the projects, if they start in Q4, and again, these have been pushed twice now.

But if they start in Q4, we believe we'll have the opportunity to get back to close to even on some opportunities, but it's not so robust that we think that we're going to have any kind of growth across Canada. And Rob, I don't know if you want to add anything on that.

Robert Dawson^ I have nothing to add to that.

Operator^ Our next question comes from the line of Krista Friesen with CIBC.

Krista Friesen^ Just on the refurbishments, it looks like you continue to do them in Q1.

Is that progressing kind of as planned in terms of sorting out all the issues with your suppliers and also just the cost to do the refurbishments as well?

Robert Blackadar^ Yes, absolutely.

So we just had an update just the other day with some of the management team and the Board and shared the same, Krista, that we're pretty pleased that the eight that we have here are kind of the cleanup.

If you remember, there's a little bit of a hangover. When we first launched, we put out a lot of our refurbishments out to multiple shops, and we realize there's a more efficient way to do it.

These eight are coming from some of these multiple shops and getting cleaned up.

We still have a few more but not many.

And then the trucks that we're seeing coming out of our one focused shop, we're actually seeing the good cost and pricing that we were expecting. And as I think we had said in Q4, it was a little bit harder whenever we have disparate shops, and they're doing a one- off or one or two trucks at a clip on the cost to be as controlled as it is when we're funneling them all through one.

We're satisfied with the one shop and their cost, but the cleanup on some of the ones that we just have received were just slightly higher.

If you remember, we had originally said 125 to 150 range, and these were in that 160-ish range.

But the shop that we have coalesced on, we're having the main focus of refurbishments on as well within the range that we've shared with investors.

Krista Friesen^ And then maybe just on Canada, the results this quarter, is that really just reflecting the delay of some of these large projects? Or are there maybe some issues in

pushing through increased pricing in Canada and executing on some of the sales strategy up here?

Robert Blackadar^ Yes.

So certainly we've had a pricing focus across the entire company. And it's our perspective that we don't believe that pricing is what's driving the volume and lack of volume there in Canada. The reason I feel pretty comfortable with that, Krista is our CPQ pricing engine actually is dynamic in nature. And so as the utilization or the business slows down in a certain branch, the pricing actually will decrease to make sure that we don't lose a deal to keep our utilization on a proper level.

As utilization increases, obviously the pricing will increase. And with that dynamic pricing model, we don't feel like pricing is what the driver is of the revenue decline.

But certainly we keep an eye on it.

We're also just in the early stages of starting to track what we call like a lost deal log, and that concept is if you lose a deal, why are we losing? Are we losing to price, are we losing to availability, to service levels or something like that, even to a customer credit issue or something like that. And we haven't.

As we're just starting that exercise, we haven't seen any kind of uptick regarding losing a bunch of deals on pricing.

We're very mindful of that, though, because very quickly, you can start to lose deals on pricing if you don't keep an eyeball on it, but our Head of Canadian operations and our Head of Sales are -- they watch it like a hawk. Rob, do you want to add anything on that?

Robert Dawson^ No. I don't think I have anything else to add on that.

I mean obviously in the winter season when utilization is generally low. And then it was a little lower than anticipated in Q1. That's not the point in time when we're going to be pressing on price either.

So I would say that would just reinforce Rob's comments that we feel that the work we're receiving and the work we're getting is still representative of the full market available, and it's not just a Badger issue.

Operator^ Our next question comes from the line of [Tolson Jona] with Scotia Bank.

Unidentified Participant^ This is (Inaudible). I'm calling in for Michael.

I just wanted to ask, at your recent Investor Relations Day, you spoke about leveraging technology and click management, HR and marketing.

I mean I would like you to provide an update on how those initiatives are progressing? And should we look at those initiatives as first time incremental cost before it's an incremental benefit? You know what I mean?

Robert Blackadar^ Yes. Thanks. And yes, we understand Michael wasn't able to join.

So thank you for asking the question. Yes. So we are progressing.

If you remember, we said we're going to start toward the end of the year to start to introduce some leveraging data a lot more for some of the business decisions made within the business. And we are progressing along with that on time and on schedule.

We've actually had a couple of key stakeholder meetings since Investor Day and structuring our kind of our data warehouse and our data technology and what some of the things are that we're going to start leveraging.

So we're pretty satisfied with that. We built that into our business plan for 2024. So we feel comfortable there's not going to be a bunch of excessive costs tied to or any kind of major expense jumps tied to this data journey that we're starting. And we feel pretty comfortable with that.

We also believe though as the business gets more ramped up leveraging data that it will actually take and drive more efficiency within the business.

We see it today as it sits. We leverage today right now a bunch of data on our driving and our drivers behaviors behind the wheel. We leveraged something called Lytics, which is an AI-based and obviously we are not an AI company.

So I'm cautious leveraging the term AI. But in this case, it's an AI-based system that identifies our drivers' behaviors, and it helps coach and help our drivers drive more safely and more efficiently. And so far, we've actually -- we were chatting about this yesterday in a meeting.

We're watching our safety and our statistics and our vehicle incidents and accidents decrease in a big way, and it's tied to leveraging that data.

That obviously translates into lower cost regarding insurance, et cetera. And anything we can do to mitigate all the insurance costs that are increasing by showing that we actually are driving safer, more miles and with less incidents. That's just an example, but we're going to be doing that on steroids.

I don't know if you want to talk anything more about the data, Rob.

Robert Dawson^ One example is just this quarter, we've implemented Fleet TO, as I think Rob has mentioned a number of times over the past while. And that's a fleet management system, and it's providing us with a significant amount of data already, and

we've already identified opportunities in our maintenance and repair spend, both in planned maintenance and in other opportunities.

We think these savings are going to be material. And it's all part of the plan that we have to increase the scalability of the business. That's just one example.

As we roll out a lot of these data platforms and aggregate going forward.

Unidentified Participant^ Maybe just a final question from my end.

I mean could you also just speak on inflationary trends, labor with I mean whatever color you can provide.

Robert Blackadar^ So inflation wise, just like every other business in North America and probably even globally, Badger is not immune to inflation and some of the cost pressures we're getting from our own suppliers and vendors, et cetera.

We've seen some inflationary pressures on our truck build program and from some of our suppliers because we've been steady state on our manufacturing, which we always felt was going to be the case, but we've become a more predictable customer and consumer for some of our suppliers.

We are getting inflationary pressures and some cost increases, but I don't believe we're getting them at the same level as we see some of our competitors who are -- they're not buying necessarily at the same volume at the same steady state as Badger is.

As far as labor inflationary pressures, just like with everyone else, our employees expect to be paid and we will pay a fair wage for our employees.

Everyone, for the most part, depending on their situation gets an annual raise and that type of thing, but there's nothing out of the ordinary that we're seeing unless you want to add anything regarding inflationary pressures.

Robert Dawson^ Yes.

I would say we've disclosed our truck build costs, and you can see that they've really moderated over the last six quarters, I would say, maybe six to eight quarters. and we're back into a low single-digit inflationary environment, which was elevated into the double digits two or three years ago.

Same thing goes for our operating costs. You see our gross margin ticking up almost 200 points year-on-year at a time when we're seasonally low on revenue, and we do have a pretty good operating leverage/fixed cost environment with our current footprint of branches.