Badger Infrastructure Solutions Ltd.

Gerald Schiefelbein - VP & CFO Paul Vanderberg - President & CEO

Bert Powell - BMO Capital Gavin Fairweather - Cormark Securities Elias Foscolos - Industrial Alliance Securities Roman Trusz - Canaccord Genuity

So folks this is Gerry and I'm going to spend the first few seconds here reminding us all about forward looking statements. I would like to remind us all that statements made during today's call with reference to management expectations or predictions for the future are forward looking statements.

All statements made today which are not statements of historical fact are considered to be forward looking statements. Looking statements involve risks and uncertainties and undue reliance should be placed on such statements.

Certain material factors or assumptions are applied in making forward looking statements and actual results may differ materially from those expressed or implied in such statements. For more information about these risks uncertainties and assumptions please refer to Badger management discussion and analysis which is available on CEDAR [ph].

Badger has not undertaken to update any forward looking statements but statements speak only as of today's date. With that I'll turn it over to Paul.

Okay. Thanks Gerry.

Good morning to some on the West and good afternoon to some in the East. As you know we released our Q3 results prior to the markets opening today.

The scheduling of our board meeting last week and the Friday holiday necessitated the timing of our call. We'll first comment on some consolidated highlights then go on to some regional business comments and then the outlook and then of course to questions.

So on the consolidated side revenues, consolidated Q3 2016 revenue was 113 million versus 111 million for Q3 last year. The general trend for recent quarters continue during this last quarter with growth in non-oil and gas driven markets offsetting lower opportunity in oil and gas driven markets.

Adjusted EBITDA of $33.5 million in the quarter was consistent with the 33.7 million that we saw in the third quarter last year. Adjusted EBITDA margin of 29.6% of revenue compared to 30.3% in the same quarter last year.

Year-over-year changes in margin were a combination of U.S. margin going up over prior year quarter, in Canada margin being down a little bit over the prior year quarter.

Cash flow from operations in Q3 2016 was 15 million compared to 20.7 million in Q3 three last year. Excluding changes in non-cash working capital cash flow from operations was 20.5 million in 2016 Q3 versus 20.9 million in Q3 last year.

Now this change in non-cash working capital during Q3 is the net of increases in current taxes payable and the seasonal increase in accounts receivable both of those offset by increases in accounts payable, accrued liabilities and share based comp expense which was up year-over-year given the change in the stock price. Total debt less cash and cash equivalents the buzz point five one times adjusted EBITDA at the end of the quarter which improved slightly from last year and as of September 30, 2016 the company had total debt less cash on hand at 52.3 million.

For the quarter and year to date our U.S. business drove approximately 2/3rds of overall revenue.

Non-oil and gas markets which include infrastructure, transportation, utility, construction, communications and industrial and end markets continue to grow as a percentage of our revenue. The mix of end use markets vary by region.

We will as in the past measure annual end use market mix for our upcoming year end reporting and we expect that the non-energy mix for the full year 2016 will continue to grow. Oil and gas related markets continue to be weak in both Canada and the U.S.

It was a wet summer in the Western Canada Sedimentary Basin and Alberta had the wettest July since 1927. Well completion activity has been delayed throughout Q3.

Now however a lot of this moisture is in the ground and if we get a good hard freeze that could benefit winter work more moisture and the more freeze translates into harder and slower digging for us. So we'll see what happens as the winter kicks in.

Q3 2016 revenue per truck was 28,000 consistent with Q3, last year and showing sequential improvement from Q2 2016 revenue per truck or 23,000. Sequential quarterly improvement has continued since a very challenging Q1 2016 revenue per truck of 21,000.

In September 30, last year the company has repositioned 211 units within our operations to number one, support organic growth and markets that have growth opportunity and number two, to improve fleet utilization in some of our challenged markets. This successful repositioning of this many units reflects the aggressiveness of John Kelly and our operations management team as well as the flexibility of our Badger business model, hats off to the regional managers and fleet management team, lots of good work here.

This paper repositioning is just an example of the advantages that Edger has with our operating scale and also advantages of both end use markets and geographic diversification. Q3 revenue per truck [ph] improved in three of our four regions, Western Canada, Eastern Canada and in the Western U.S.

Revenge per truck was lower in the Eastern U.S. and this lower number was really driven by the number of growth units that were added in the east.

As you know it takes time to get new units properly and safely staffed and up and operating and the East team has really done a great job in this regard over the last year. We continue to monitor revenue per truck, utilization and the anticipated retirements of our Badger units when we plan our future build rate.

Over the past few months I've gotten to know our Badger manufacturing and engineering team and the fleet management team across North America and we're very fortunate to have such a great group of people leading this part of the company for us. Badger manufacturing, design and fleet operations are another advantage of Badger scale and this scale advantage supports lower feet replete repair and maintenance expense and related downtime.

During Q3, our hydrovac build rate continued in the range of three to six units per month. In the quarter 20 hydrovac trucks were added to the fleet with 11 retired.

If you recall part of the additions during Q3 were from chassis replacement on some of the 16 units that were taken out of the fleet back in Q1 2016 due to unreliable engines. This chassis replacement is not included in the 3 to 6 unit per month build rate.

I just mentioned a minute ago. Now a couple of regional comments for the Eastern U.S., the Eastern U.S.

continues to perform well with growth continuing across a number of our local markets. In the western U.S.

we still see market pressure from slowness in our western oil and gas markets. We will continue to evaluate the fleet and reallocate additional hydrovac units until we’re happy with where our utilization is.

We continue to aggressively pursue a project work across the west and from the fleet perspective we're really in the later stages of reallocating equipment, lots of good works been done. In Eastern Canada, our Ontario operations are showing growth year over year in the quarter and we continue to expect progress in Eastern Canada overall.

The team is settling in very well. In Western Canada, we mentioned earlier the wet summer which impacted Q3, Q3 revenue was down slightly year over year but the region continues to have very good success in managing operating costs or fighting for project work and focusing on our very strong business development capabilities.

Finally for the outlook, short term we see a continuation of the trends we've seen in recent quarters with growth in those markets driven by nine of non-oil and gas while working through the bottoming process in our oil and gas regulated markets. The significant fleet repositioning the company has executed on has really changed the address market focus and this is very positive for the future, but 2017 and beyond we'll continue to expand our service position in geographic areas where we are already established and continue to expand into new geographic areas.

I would like to thank the many investors I've had the chance to meet with over the past few months. We appreciate your interest in and support for Badger.

This company is truly a unique business with a very strong business model and the team will continue to execute on our strategy to build value for the long term. I would now like to turn the call over to the moderator for questions.

Just in terms of Western Canada oil and gas. We are hearing that there is some positions heading into the winter season that there is some deferrals and pent up demand that that I guess with the wildfires and maybe a little bit of a rebound in the price of oil that activity levels could be a little elevated through this winter season, I know weather matters for you guys but aside from that are you seeing the same kinds of things?

We are seeing similar trends and a number of companies in the service business are staffing up for the winter work and interestingly so many folks have moved away from Alberta that it's harder and harder to find good staff so I think that's a very good sign. And you know when you look at the amount of wet weather that has really slowed things down.

I think that's really been a big factor especially on the well completion side for us. We're tied into probably more well completions than more of the upstream activities there.

So we're hoping as things tighten up with the winter weather that'll get underway.

And just obviously there's been a lot of talk lately with respect to infrastructure spending and whatnot in the U.S. and I guessed Canada as well though it seems a little bit delayed, can you just give us some of your thoughts I know it's like the early days but just where and how you think you might be positioned for that kind of activity?

Well I mean I think we're very well positioned for infrastructure work overall and as we continue to grow our non-oil and gas business and we continue to expand geographically. I think that our overall mix is going to be better position than it would have been a year or two years ago for sure, it's really hard to comment on the political side of things, it seems like everything takes a lot longer than folks think and even though there's lots of recent talk about infrastructure there's quite a long time before any shovels really hit the dirt but you know we are very well positioned.

It looks pretty positive from what folks are talking about in Washington on fiscal stimulus and things like that and Badger continues to be better and better positioned. You look at our end use markets and transportation, municipalities, communications those are some of the drivers of our growth and we continue to see those as drivers of our growth.

So I think we're pretty well lined up there but it's not going to be real short term. I think it could be a couple of years before the shovels really hit the dirt.

Just last question quickly, Gerry, every quarter this year the DSOs seem to have come down, they were down again this quarter. Is it possible to see that trend continue into the fourth quarter?

Well DSO is a seasonal, it's a seasonal number depending on kind of when your revenues show up and then collection of those revenues. Typically going into the fourth quarter we catch up on collections, but that's a forward looking historically based seasonality comment.

So yes we would expect to -- given history but the future will tell.

Just nice to see the verbiage on the meaningful improvement in Eastern Canada, curious if you could provide us with some color on what -- you know going on in this market and potentially how much further you feel like you have to go until you get back to kind of the high watermark that were set a few years ago.

Great question, it's a fun subject to talk about. You know George [indiscernible] and the team are really settling into the market there and we did have a lot of work to do as a company to rebuild our management team there in position and I think things everything I can see is coming together very nicely.

We did lose a fair number of customer relationships as we had our operating issues there and we're working very hard to get those back. It certainly takes time to do that and relationships are earned one job at a time and one customer at a time and George and the team are very focused on that So I would expect to see continued improvement, steady improvement and we're very, very pleased about what we see coming there and the things the teams team is looking at there.

And then just secondly on the G&A line and expenses. It's really would be nice to see you know the expense reduction is coming through, curious for how you think about the expense line here, is this a good run rate or do we expect to be adding a little bit of expenses going forward here?

You mean for SG&A?

Yes on the G&A line.

Yes, so I mean our target remains unchanged at 4% of revenue. We will be a little below that sometimes and unfortunately probably a little above it other times depending on the implementation of programs or whatever but 4% is still our target and we think that’s a good target.

I got a question on the repositioning, repositioning of the trucks, obviously costs in terms of lost revenue and also has an outright cost in terms of moving the trucks. I was wondering I'm assuming that's going to be in the segment and not corporate costs line, could we see some improvement in terms of margin as the repositioning is mostly completed you have said or also on the revenue side and I think Paul you addressed that with Eastern U.S.

it was a bit low in terms of revenue per truck?

We will see impact as you said with some lost revenue as the trucks are being repositioned and then we'll also I think there was some comments in the MD&A also about some additional R&M and typically when you take a look at moving a truck you take a fresh look at it if there's any maintenance that needs to be done there may be a little extra maintenance done that may not come at that particular time with a normal operating schedule. So it's probably a little bit of that in there too and this is also a very significant fleet repositioning 2011 of all of our units in the last 12 months.

So most of that’s behind us and I think the revenue opportunity loss and also the [indiscernible] impact which are the two I really look are pretty much behind us.

Okay. So there could be some improvement in margin as that is behind you now but excluding seasonality.

I think that’s a fair expectation and the other thing that's very important in our business and Badger is always best operator, best truck and so when those trucks get repositioned we have to make sure the an operator is recruited and trained and up and working safely and that's a very expensive process for us and one that's very important to our service and safety offering to the customers so that takes time too. So there's a bit of a factor in there but it's all good because these trucks are being put in markets where we believe there's a good opportunity for growth.

Appreciate the work you guys are doing on bringing the truck revenues back up, reposition is important part of that. What if you could give us any idea there was a negative article in Barron's [ph] two weeks ago and in it they stated that they were trying to schedule an interview to respond to questions about receivables and some accounting for vehicles and they indicated that they weren’t able to accomplish that and the end result was a somewhat negative article.

Wonder if you could comment on that and give us any ideas if you're going to perhaps reschedule that and try to correct some of the what I view as misconceptions in the Barron's article.

Yes. So they called us during our quiet period when we really aren't supposed to be talking to the market and I'm very careful about it and many of the questions not the ones written up in the article but many of the questions they sent me ahead of time had to do with revenues per truck so they were trying to get a quick inside look at Q3 before you guys got a look at it.

So I told them it's better not for us to have that conversation but invited him to call me right after today and he chose to publish ahead of calling me back. So I won't speculate on what is real incentive is but obviously didn't want to give the answers to his questions before he published so I don't think I will call him back.

We understand Barron has frequently done that to companies and it's unfortunate, that's their style it's why we don't take their magazine but anyhow we do get impacted by it as stocks get responses. So thank you for that information.

Were there any other issues surrounding their suggestion that for instance receivables were significantly past due, any concerns that we got to know about?

No, there's no concerns there. We need to check our DSOs, they were down pretty low.

They're going on right now because we had a lot of revenue inside the quarter. So it almost lags that's what we see [indiscernible] do.

So there's nothing outside of the ordinary there and they made some references to us versus Lonestar. We really don't think those are legitimate comparisons.

The Lonestar is regionally based I don't know what their receivables look like but my expectation or speculation would be it's more regionally based and more risk than ours. So we don't really consider those buyable comparisons.

So there's nothing to worry about on the receivable side, you'll see if you look again historically that our bad debt expense rocks along somewhere around a 0.5% or 1% of revenue that’s something just to keep in your back pocket and check on. Receivables aren't the issue, it's bad debt that’s the real issue and that’s been fairly benign for years and continues to be.

So we don't really see any issue there.

We appreciate the response and hopefully they will get that message at Barron's as well but we will send them a response if they like it or not. So thanks for your help.

This is Roman Trusz calling in for Uri Link [ph]. Just taking a look at the revenue per truck, it looks like it's been bottoming.

So just kind of wondering if you can give us maybe some color into 2017 as far as what the build rate is or what might look like given you getting closer to that 30,000 revenue per truck?

This is the build rate for 2017 is something we're looking at right now. We look annually and we also do a longer term three year look and we update it quarterly or more often and that's something that we're looking at right now for 2017 and I do agree as the RPT has improved it certainly impacts our thinking on that but right now we don't see any short term change going into Q4 for that three to six truck per month build rate, if something were to change and we were to go outside of that we would certainly let the market know.

And then in your outlook you mentioned that we might see a lessened winter seasonal effect and just given the tough comp you had with the weather last year how can we kind of think about revenue and EBITDA going into Q4?

We would like to know that answer, what we need is a nice cold snap up here in Alberta to get everyone out and moving in the patch and you know I think the comment you may be referring to in the MD&A is as we continue to expand our U.S. business we will have a bigger percentage of non-oil and gas mix in our end use markets and a bigger percentage of more warmer climate mix in our end user markets, so we expect over time to see the winter seasonality lessen and that's I think a very good thing and it makes it easier when you think about allocating your fleet around even for a short term.

And I think the markets that were more and more participating in if you think about the whole down the east coast across the Gulf and up the West Coast those are the warmer markets and they're also ones that are have the highest growth and the ones will probably benefit most significantly from any of the infrastructure push we see coming in the U.S. also.

So I think there's not only a short term mix but a long term market opportunity benefit for Badger.

And then just Paul, kind of build on that, just looking at it sequentially how can we kind of look at it in relation to the Q3 since the mix is probably more in line with what you see in this quarter than what we saw last year.

I mean we're looking at it right now traditionally Q4 is down a little bit from Q3 just because of the winter seasonality and we have indicated that you know the same trends we see in the last several quarters in the markets could pretty much be expected to continue and that would be our current view on Q4.

Just the quick detailed question, I was wondering whenever you're doing the hydrovac process is the water all on-board the truck or sometimes you have to connect to the water line and then from the city and is there ever been a case where water usage was an issue on a job?

Yes Matthew, our trucks are set up to carry the water with them when they leave for a job site and in some facilities there might be water actually on a site as specially in industrial type facilities and then another circumstance is where we want to maintain good digging productivity we will actually shovel water or a customer may shovel water out to the hydrovac unit in water trucks which are a lot lower cost to operate than the hydrovacs. So those would be the different scenarios that could play out logistically on providing water.

Okay. But you've never run into an issue where a job was compromised for water shortage or conservation arguments or any of that kind of thing?

We have seen certain markets where water and usage of water is something that's a conservation item and we do dry dig in some markets without water. It's much, much slower.

So there's a real cost and productivity issue there and that would depend on local preferences and customer or potentially infrastructure owner preferences but the hydrovac technology is a much more effective way to dig than dry digging based on the technology that's available in the market today.

Well folks if there's no more questions I think we've had a pretty good call, a reasonable quarter and we will hang up now and get after working on our fourth quarter. Thank you for your participation everyone.