Badger Infrastructure Solutions Ltd.

Jerry Schiefelbein - CFO Paul Vanderberg - CEO

Yuri Lynk - Canaccord Brian Pow - Acumen Capital Gavin Fairweather - Cormark Dimitry Khmelnitsky - Veritas Elias Foscolos - Industrial Alliance Securities

Before we begin, I will just remind everyone that statements we make during today's call regarding management's expectations or predictions for the future are forward-looking statements. In fact, all statements made today, which are not statements of historical fact, 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 we believe may be relevant to such forward-looking statements, please refer to Badger's Management Discussion and Analysis for the period ended June 30, 2017, which is available on the Internet at both our website and on the SEDAR website. Further, such statements speak only as of today's date, and Badger does not undertake to update any such forward-looking statements.

Paul, over to you.

Okay. Thanks, Jerry, and good morning, everyone.

Thanks for joining us on our second quarter call. As you know, we released our second quarter results prior to the market opening today, and we would like to start by saying we are very pleased with our second quarter financial and operating performance.

We will comment first on consolidated highlights, then on regional business activity, followed by 2017 focus areas and the outlook and then we'll go to questions. Q2 2017 revenue was $123.4 million, up 34.1% from last year.

Q2 revenue was up 39.8% in the U.S. and that is in U.S.

dollar terms, with Canadian revenue up by 12.7%. A little bit of color on revenue growth.

We continued to see growth across our broad range of infrastructure end use markets in the quarter. The ops team has done a lot of heavy-lifting, as you know, in the past several years to reallocate the fleets to those markets with growth opportunities and to push our business development efforts, and we're really seeing the benefits; Q2 really was a good example of that.

Oil and gas activity and related revenue in both Canada and the U.S. was higher than the prior-year quarter and this is very encouraging also.

The quarter also benefited from a good start to the spring construction season across our northern U.S. regions.

For the quarter, the U.S. provided 71.5% of revenue versus 28.5% from Canada.

Q2 adjusted EBITDA was $32.1 million, up 38% from last year. Q2 adjusted EBITDA margin was 26.0%, up from Q2 last year margin of 25.2%.

We came out of Q1 focused on op costs and it was reflected in the results, with adjusted EBITDA growth matching our revenue growth in the quarter. Year-to-date revenue was $225.2 million, up 25% from prior year.

Year-to-date adjusted EBITDA was $52 million, up 21.4% from prior year. On a year-to-date basis, the margin strength we experienced in Q2 almost made up for the adjusted EBITDA margin softness we had in Q1.

At June 30, total debt less cash was $53.1 million, resulting in a net leverage ratio of 0.47x trailing 12 months adjusted EBITDA. Based on Badger's financial performance, our strong cash flow generation and balance sheet and our outlook on the second half of 2017, Badger's Board has approved a 15% increase in the dividend or $0.005 per month effective with the August dividend and payable in September.

The 15% increase in the dividend results in $2.2 million in incremental dividends paid on an annualized basis and therefore, will not have a material impact on our flexibility -- our financial flexibility or our ability to support continued organic growth. Badger continues to assess its financial position in allocation of cash flow as it relates to growth in fleet investment, debt repayment, dividends and other uses.

The annualized dividend will be $0.456 per share after the effect of this increase. Q2 2017 revenue per truck per month was $29,141 versus $23,038 last year.

John Kelly and the operations team continue to drive higher utilization, while at the same time successfully putting our new builds to work. We added 41 units to the fleet in Q2 and retired 16.

We expect to retire between 50 and 60 trucks this year, up slightly from the previously-communicated level of 40 to 50 retirements. And as of June 30, we have removed 33 from the fleet so far this year.

With continued growth, higher utilization and higher revenue per truck, we expect our 2017 annual build rate to be at the high end of the previously-announced range of 100 to 160 units. Now before we go to some regional comments, let's take a minute to discuss our Q2 direct cost trends.

As you know, Badger had a challenging start in early Q1 2017 related to our direct costs. In our Q1 reporting, we indicated that higher direct costs in the first part of Q1 drove the entire amount of our lower EBITDA margin for the Q1 quarter.

We also reported that we had finished Q1 at a much better run rate on these expenses, approximately on par with prior year as a percentage of revenue. The direct cost run rates as we exited Q1 that were on par with last year continued during Q2, with good cost focus by our operations team and this was reflected in our Q2 adjusted EBITDA margin.

We will continue to be focused on managing costs, and our targeted EBITDA margin remains at the 28% to 29% of revenue range. Now while we are discussing expenses, we did recognize several expenses in Q2 that had no counterpart in Q2 last year.

These amounted to $1.7 million. None were material in nature.

These expenses related to reorganization activities in our Canadian operations, accrual for a legal matter and the installation of safety cameras across our fleet. As reported in our Q1 MD&A, we are focusing on improving operational effectiveness and the efficiencies of our Canadian operations.

One area of these expenses during Q2 related to reorganized -- reorganizing several Canadian branches during the quarter, and I'll talk a little bit more in the regional summaries on where this was done. The second area of expense was for legal activities in the U.S., where we booked a provision for a potential legal settlement during the quarter.

A third expense was to install the safety cameras in our Badger's and across our entire light-duty fleet. The majority of these cameras were installed during the second quarter with installation of the remaining cameras planned to occur over the remainder of the year.

It should be noted that the cost of safety cameras, just like all repair and maintenance to our Badgers once they leave the plant, is expensed rather than capitalized. This $1.7 million in expenses reduced our adjusted EBITDA margin by approximately 1.4 points during Q2.

Next, we'd like to talk about some regional comments. The Eastern U.S.

continues to grow. In addition to solid top line growth we're seeing there, we also made progress on direct expenses during Q2, the combination of which contributed to solid improvement in adjusted EBITDA.

The western U.S. saw overall growth during the quarter, including improvement in our oil and gas markets.

As part of these improvements in oil and gas markets, we are also seeing a tick up in labor as the labor tightens up across the region, but overall a much improved situation from what we had a year ago. The Pacific Coast operations continue to improve with the new leadership in the region helping refocus our efforts on operational and financial, and we're seeing both -- improvement in both of those areas.

Also important is that the new leadership team now allows us to be more aggressive in pursuing growth opportunities there. In Eastern Canada, Q2 revenues were relatively flat to prior year.

But as the quarter ended, we saw market improvement going into the summer. Additionally, we are beginning to see upward pressure on rates from changes in the Ontario Ministry of Transportation regulations for licensing Hydrovacs.

Our Ontario team implemented a reorganization during Q2 to cut costs and we'll continue to seek operational improvements that continue to reduce our costs there, part of the reorganization expense we took in Q2. In Western Canada, we saw market opportunity grow.

Energy activity has improved. Q2 2017 revenue growth benefited on a year-over-year basis because last year in Q2, we lost working days because of the Fort McMurray fire.

So on a comparable basis, we had more working days. Our Western Canada team also made several moves to reorganize operations and improve our efficiencies and these moves had costs also included in that $1.7 million during Q2.

On our 2017 focus areas. Badger's focus strategy is about driving organic growth in the infrastructure markets we service.

To support this growth, we have continued to strengthen the organization, and we talked to you about that in past quarters. In Q2, Jay Bachman joined the finance team as Director of Finance Operations.

Jay joins us with a strong finance background in the public company area, and I think many of you may know Jay from his time at Superior Plus. Alan Richter, previously our Corporate Controller, is taking on new responsibility to head up Financial Planning and Analysis, which is a new function for us.

Alan will be working very closely with John Kelly and the operations team to drive common operating practices and operational improvement across the business, a big opportunity that we are very excited about. All of us at Badger are looking forward to Jay and Alan's contributions.

We also updated Badger's Investor Presentation in June, which details our strategy of driving organic growth in our core Hydrovac operations. The updated investor presentation highlights Badger's 3 main strengths: first, we have a proven business model and strong competitive position; second, that we offer a unique service to attractive end use markets; and third, that we are executing on our focus strategy.

It's worthwhile to comment on how these strengths make a difference because they really do differentiate Badger from other Hydrovac competitors. Our branch network, scale of operations, both give us the ability to relocate equipment to where the opportunities are.

This, together with our broad market knowledge and business development skills, make us able to consistently and profitability put our equipment to work across this branch network. These strengths were reflected in our Q2 results, and Badger is really unique in the Hydrovac business in these areas.

The updated Investor Presentation also outlines our strategic financial milestones, which are: to number one, double the U.S. business again within 3 to 5 years; two, grow adjusted EBITDA by a minimum of 15% per year; three, target adjusted EBITDA margins of a range of 28% to 29%; and four, drive fleet utilization and revenue per truck above $30,000 per month.

When we look at our strategic milestones versus 2017 results, we are encouraged by the progress toward these targets. We're pleased to be able to report on this progress to our shareholders for the quarter.

Badger is always managed for the long-term. We continue to work to improve our sales and business development efforts, improve our human resource practices and organization, drive operational efficiencies and improve the business processes overall.

The goal is simple, build the best-in-class business with a solid operating platform to drive sustainable long-term growth. Before we turn the call over for Q&A, we're also pleased to highlight today that Badger will be hosting its first Investor Day in Toronto on Thursday, November 16.

We are all looking forward to the opportunity to provide investors with an update on our business and strategy as well as very importantly providing a forum for investors to meet our senior members of the management team. Further details on this Investor Day can be found in that second quarter press release.

With that said, we'd like now to turn the call back to the operator for Q&A.

Yes. So I may not remember all of that, Dimitry.

But let's go to your first one, which I think was about why do we accrue revenue that hasn't been invoiced? And that's simply an operational issue where the signed tickets coming on our iPads and it takes a number of days to turn those into invoices.

So the work's been completed. It's been approved by the customer.

We have the right to it. It's reasonably probable that we are going to receive it.

It just hasn't been through the process of turning into an invoice. Okay.?

That was the invoicing issue. What was the next one?

That's right. So what you're going to find is that there is just more of a lag that was needed to be accrued in that -- as kind of you said, the revenue increased.

The workload increases on people, and it just took them a little bit longer to actually turn them into invoices so they accrued them. And then I think you've got...

Yes. So I think what you'll find is just the increase in revenue and an increase in working capital.

If you take a look at our increases there, you'll see that it kind of aligns with the increase in that under 30-day. So it's just things are accelerating and they're accelerating recently.

And I think you wanted to talk about the internal control statement, correct? Is that your last one?

Yes, okay. So the second quarter disclosure is correct.

You are required, Paul and I are required to certify each quarter that we have in an internal control system. We are then required once a year to test that system and to certify to you at the end of the year that the system has been tested and that it complies with what we're required to do.

So it's not required to testify to that or to certify to that in the interim quarters, just on the end of year. So we're in compliance there.

Yes, our lawyer looked at it and said you don't need to make the certification on the interim quarter. So we didn't make the certification.

And then for Fort Mac, we don't have the actual numbers. We're just -- want to make sure that market understands that there were less workdays -- less work in Fort Mac last year because of the fire.

But we have no quantification of that for you.

Okay. Thank you, everybody.

We very much appreciate the interest in Badger. And the operations team is very focused on driving our strategy and continuing to grow the business.

We have a very focused strategy and I think what you see is what you get with Badger: organic growth, focusing on Hydrovacs and doing all the things that we need to do to put sustainable growth in place for our shareholders. So with that, we'll end the call.

Thank you very much.