Badger Infrastructure Solutions Ltd.

Thank you Twanda. Good morning, and thanks for joining our 2019 Q2 investor call.

On with me this morning is our CFO, Darren Yaworsky, John Kelly, our Chief Operating Officer, and Jay Bachman, our VP of Financial Operations. Our Q2 earnings release along with the second quarter MD&A and financial statements were released after the market closed yesterday and are on the Investor section on our website, and also on SEDAR.

We're required to note that some of the statements made on today's call may contain forward-looking information. In fact, all statements made today which aren't statements of historical fact are considered to be forward looking statements.

We make 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 upon 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 forward-looking statements please refer the Badger’s Q2 2019 Management Discussion and Analysis and our 2018 AIF. Further, such statements speak only as today's date and Badger does not undertake to update such forward-looking statements.

So with that [Technical Difficulty] up 9% from the prior year, with adjusted EBITDA of CAD39.2 million, up 2% from the prior year. Some comments on revenues.

Q2 revenue was 11% higher in our US operations, that being in US dollars, with revenue and Canada down 7% compared to the prior year quarter. Although growth in the US was lower relative to recent quarters, we were very pleased and encouraged with the results, particularly growth in a number of our US markets.

The second quarter was very much a regional story with a combination of factors impacting consolidated revenue and adjusted EBITDA growth. A number of our markets continued to achieve solid revenue growth, particularly in the US.

During the quarter, we opened four new service locations, and eight we've opened so far in 2019. Very pleased with that.

In the quarter, we added 58 hydrovacs and retired nine for a net add of 49 and generated revenue per truck of 32,265. As detailed in the earnings release, record or near record precipitation levels throughout a number of geographies, particularly in the Midwest, Great Lake Ohio Valley regions, slowed excavation activity, a typically outdoor construction that we work in, in the spring ramp up of the season.

These areas represent some of our larger regional markets as Badger is operated in the Midwest, Great Lakes Ohio Valley areas for over 15 years. We have some great businesses there.

Adverse weather limited Q2 revenue growth and also resulted in modest headwinds related to margins. It's very difficult to manage labor efficiency with project delays.

As I'll talk about in a few minutes, we continue to plan for a solid second half of the year, given an uptick and seasonal construction that we see in the summer months, and also work from projects that were delayed based on weather. Our revenue run rate as we exited Q2 was improved from the run rate back early in the quarter.

In addition to the impact of weather, we've also seen a slowdown in demand in Western Canada, resulting from lower oil and gas activity. The slowdown in Western Canada has been anticipated and we've been watching activity coming out of spring break up.

As previously discussed and as part of our 2019 financial outlook we provided along with our year end results and also our 2019 Q1 results, we expect that these continue conditions will continue for some time. As everyone on this call would expect, we've been reviewing all aspects of our Western Canadian operations.

No surprise to our longer term shareholders here, as you know, address business model has a lot of flexibility to respond to ups and downs in regional markets and john and the operation team, I can assure you, are managing expenses and looking to relocate trucks that optimize our utilization and profits just like the team has done in the past. Badger’s geographic diversification has, in the past and will in the future, help to offset regional changes such as weather, and items like our slowdown in Western Canada oil and gas.

We continue to increase our exposure to the US market during Q2 with our US operations now contributing 79% of consolidated revenue, up from 76% last year. As discussed in the past, we are optimistic that there is significant runway to aggressively grow our business in the US.

As I noted earlier, adjusted EBITDA for Q2 was 39.2 million or up 2% from the prior year, with adjusted EBITDA margins at 24.3% compared to 26.1% last year. Adjusted EBITDA and EBITDA margin were impacted by the following.

One, growth in the US, including addition, as I mentioned, of 49 net hydrovacs in the quarter, and the opening of eight new locations since January. Two, continued progress in our strategic pricing initiatives with overall rates consistent to modestly higher across the regions in the quarter.

Number three, a recovery of previously written off bad debt from a large utility receivable that was provided in Q4 and Q1. And then finally, adoption of IFRS 16, which since Q1 with implementation of IFRS 16 got an impact of approximately CAD1 million in the corridor, consistent with what we saw in Q1.

Offsetting these positives were the weather conditions I talked about a minute ago, and also reduced revenues and labor efficiency that went along with that. And then the final negative would be the higher run rate in G&A as directly and indirectly associated with our ERP implementation.

And I'll comment more about that. On G&A, our expenses were higher than the previous year quarter due to operating expenses because of the common business platform initiative, offset in part by ongoing operational improvements.

Our G&A expense as a percentage of revenue was 7% in Q2 compared to 5.2% in the prior year. These expenses as we talked about in previous quarters are mainly in the IT and human resource area.

We expect to continue to see higher levels of G&A throughout this year as we build out the platform and operate dual systems. And as you know, we're going live in the second half across our entire business with CBP.

We do, though, anticipate in our planning for these expenses to decline as a percentage of revenue as implementation is completed and we get into 2020. Our long term objective for G&A, as a percentage of revenue, remains at 4%.

Operations focus-wise, management of the ERP implementation. I mean, we are all in.

We're going hard between now and year end to roll out to the regions there. Secondly, driving continued revenue growth, managing our fleet utilization, managing our operating costs, and driving continued strategic pricing initiatives are our key focus areas for the second half.

As in the past, you know Badger works to ensure a balanced approach between managing for short term financial improvements and executing on our long term business initiatives. Our net earnings, couple of comments.

Our earnings for the second quarter were CAD11.9 million, compared to CAD10.6 million in the prior year. Net earnings was impacted by the same drivers as I noted already, the further impact related to the increase in share-based compensation expense as a result of appreciation in Badger’s share price earlier in the year that combined with higher depreciation expense due to the additions to our fleet.

Regarding the balance sheet, Badger’s balance sheet continues to be strong, providing necessary flexibility to support growth opportunities, and strategically manage overall capital allocation. At June 30, our total debt less cash was CAD112.5 million or 0.7 times trailing 12 months compliance EBITDA.

During the second quarter, we repurchased and cancelled 136,700 shares under our updated NCIB program. Since we started our NCIB last year we have repurchased approximately 1.3 million or 3.6% of the pre NCIB share count.

Lastly, I'd like to know that we are very excited about a new operational initiative, which is centralized operator training program. And these are the operators that work on our trucks.

Very, very important position for us. We launched this training program in Q2.

We call it Badger University School of Operations. And I give John Kelly credit for this name.

Badger U as we call it, provides us with the ability to standardize the onboarding and training of operators that we're adding to the business. We are very pleased with the initial feedback from both our trainees and our area managers related to this important investment in our business.

Badger U will ensure that we offer our customers best operator, best truck for many years to come. We look forward to providing more background in future quarters as we scale this project up.

And through the end of last month we're over 50 trainees through the school just since April. Very exciting initiative.

Now that we've touched a little bit on the operations and financials, we'd like to add some color on general activity levels and the 2019 financial outlook. Despite the adverse weather conditions in the quarter, we continue to see revenue growth across our broad range of geographies, and end use segment markets.

As detailed in our 2019 financial outlook, we expect to experience revenue growth trends. We expect these to continue through the second half of the year.

We anticipate solid activity levels across the majority of our markets and we expect continued volume growth, as well as modestly higher average rates, again due to our successful strategic pricing initiatives. As previously noted, we expect Canadian oil and gas to continue to be slow for the foreseeable future.

Yet, we see opportunities in the infrastructure segment of the oil and gas segment in Canada. But we expect that Canadian production segment will be slow for some time and we're planning and positioning operations accordingly.

However this significant US market opportunity that we have capitalized and continue to capitalize on us has enabled us to reach realize growth in the US and continue to reposition our geographic and use market mix. Because of this growth and our successful capitalization on it, the Western Canada oil and gas market is a much smaller part of our business mix than it was five years ago.

Given our outlook for the second half, Badger has confirmed that previously provided 2019 financial outlook of adjusted EBITDA between CAD170 million and CAD190 million, a truck build up between 190 and 220 new units and expected retirements of 40 to 60 units. With those comments, I'm very pleased to turn the call over to our new CFO, Darren Yaworsky, we want to get introduced to you on the call.

Darren joined badger several months ago, and he's in Badger deep. We're delighted that Darren has joined the team and Darren, over to you.

Thanks, Paul. I want to start by saying it's been a very busy and enjoyable first couple of months at Badger.

Culture and people have made my transition an easy one, allowing me to really hit the ground running. While I'm still getting up to speed on many aspects of the business, I have quickly jumped into a number of areas and I'm happy to provide some initial general thoughts and observations in those areas.

Regarding a common business practice, as Paul mentioned, system integration is going well. We completed the system testing in the second quarter.

The user acceptance testing is scheduled for third quarter and go live is scheduled for early fourth quarter. We plan to do a rolling implementation from west to east and have vast majority of the business on the ERP system by the end of the year.

Overall, the progress is going well and we're tracking to budget. Also, want to add my comments that I believe the investment in CBP and other infrastructures are key to support the long term sustainable growth of the company.

As Paul mentioned, our G&A costs have been accelerated or expanded a little bit from historical level levels based upon CBP. We anticipate those levels will continue through to the end of the year, as we work on some of the human capital alignment with the new normal post CBP implementation, with our goals squarely to get back to historical levels as quickly as we possibly can.

A final observation is around the financial strategy and we've completed a comprehensive review of the company's financial strategy and working on a number of enhancements. Now we're evaluating alternatives to enhance our liquidity, specifically increasing our credit facility capacity, and providing more flexibility in our financial covenants.

That being said, we continue to target our leverage from range of 1.1 to 1.5 times debt to EBITDA. And as Paul mentioned, we finished the quarter modestly below our leverage target.

We also did a complete refresh of our intrinsic value model to guide our capital allocation and shareholder return priorities. In short, we will continue to focus on capital resources to first support organic growth initiatives and second, share repurchases.

To that end, in the quarter, we repurchased approximately 137,000 shares at a weighted average price of CAD47.72. We will continue to evaluate M&A opportunities to advance our long term strategy and M&A will not come at the expense of investing our organic growth, Now to close, I'm really enjoying my time at Badger.

The culture, the people are fantastic. And I very much look forward to my continued work with the company.

Paul, over to you.

Okay, thanks, Darren. As Darren can attest, time goes by pretty fast at Badger; things move.

So, Twanda, why don't we turn it back to you? And we can open it up for questions.

Hey, Paul, Darren, how you doing?

Fine, Yuri

Good morning, guys. So obviously a bit of a noisy quarter.

So excuse me if I dig in a little bit, but just on the gross margin, if we strip out the bad debt recovery, your gross margin was down about 190 bps, 29% and change. Is that decline all labor inefficiency, or anything else that would have caused that erosion?

Yeah, that would have been mostly what it would have been, Yuri. And I really define labor efficiency, both at the direct with the folks on the trucks and then indirect.

We were planning for a busy spring. We're planning for a busy year.

And we were ready to go, if you remember in 2018, spring hit really hard early in Q2, and it went right through the year. And we were teed up and ready to go with operators.

So as you can well imagine, that's always the challenge of retaining operators, and providing them hours, they need their paychecks, and managing those expenses. So, we're pretty confident that's behind us as we get into our seasonal busy months.

But as you say, it was pretty noisy. And John and the team did a lot of scrambling to manage that.

It's always a tricky balance.

So, were you guys like putting two operators on a truck, or sometimes you'd put one just to just to keep them busy? Is that kind of an example of what would have led to less efficiency on the labor side?

We would have seen that trend in certain markets, but really, the story of Q2 was almost a story of two different Badgers. We had other markets where we had continued very strong growth.

And we don't get into the details on where the real strong opportunities are for competitive reasons. But we did call out specifically the areas which are some of our bigger, historically more mature regions in the US where we had significant operations, where we did have the project delays, the weather-related delays and associated labor management challenges.

Okay. And now I just want switched to SG&A.

The actual ERP spend is quite small. So, I mean, this is all mostly CBP related.

Like, what's in there right now that would drive it up over CAD11 million in the quarter from CAD7.5 million last year? Can you just -- a little more color on, what's in there right now?

What's coming out? And what's the cadence to get to kind of 4% long term run rate?

Now you're reading our spreadsheets. So -- but a couple of couple of comments there.

If you look at what was in the CBP budget the CAD20 million to CAD25 million budget, that was project costs. But anytime you do an EFP implementation like this, there are other categories, I'll give you a couple examples.

One is the whole network. So in order to run a system like Oracle, it requires a lot of bandwidth.

And you need to have really strong connectivity and release fast response time. So we've gone in a parallel process, which was not part of the budget to upgrade and put a whole new upgraded network in place.

And that is a multi-seven figure dollar project, with consultants and people we brought in to do that. It's not something that we would staff up for with our ongoing IT team.

It's really a one off. It's something badger would have been faced with eventually.

But the fact that you’re plugging in a product like Oracle, basically forces the timing to get that up and running. That's one example.

Another example is just the IT group. There's a lot of work that needs to be done.

There's training, there's working on user acceptance testing scripts, there's a number of other areas that just require new processes, management of Oracle relationship versus our previous legacy systems, keeping the legacy systems running. We're now running two systems.

So you not only have the operating challenges of running two systems, but you have all the technical challenges of running duplicate systems with our legacy systems and the new system both up and running. And that'll be the case through the end of the year.

So you have you have almost double counting there. And you have the fees, the software fees that are doubled up with running two systems.

Those would all be included in there that would not be part of the CBP budget. And then another one that was a major area, and it's continuing and it will fall off as we stood up a new time and attendance system, it's going to be a huge improvement in our productivity of tracking labor hours, and our ability to make sure that those are captured properly.

So we pay folks, obviously, properly the first time but also that we capture labor hours, so we can build all of our incurred labor hours, and we call that time and attendance. So that was a functionality that we added part way during the program, very pleased about the potential and what we're seeing there.

But that was required, a number of consulting hours that were outside of the overall CBP program. So those are three major areas that are accounting for.

You're looking at a run rate CAD1.5 million, CAD2 million a month, in those areas, plus or minus. So those are things that are required to do.

There's a great business case and payback for them. But you have to do it, you have to eat it and you get some visibility into that.

Those are discrete processes. And that's why our confidence is so high that those will fall off and will grind away at our SG&A back down to our historical levels.

Hi, there.

Hi, Maggie.

I was wondering if you could give us a bit more nuance around the impact weather actually had on your organic growth in the quarter. Whether it was quite significant or perhaps even in terms of basis points of organic growth what you feel the impact really has been?

No, that's an excellent question. We hesitate to disclose more regional detail that we do, and I don't want to give you a BS answer.

But we do that for competitive reasons. But we thought it was important to call out the Midwest, Great Lakes, Ohio Valley region specifically.

I don't I don't know if -- I think Jay has it available. But there are some precipitation maps of the US that are available through government agencies that show the record levels of precipitation, and it really overlays Texas right up through the Midwest, Great Lakes, Ohio Valley, and to a certain amount up into Ontario.

But we've had record precipitation up through those areas since statistics have been started back in 1895, or near records, and it has had a significant impact. And it really continued through most of the quarter.

Worse early than late. As I talked about earlier, our revenue run rate improved exiting the quarter than what we saw earlier in the quarter, which gives us encouragement.

But those were the areas that we're hit heavily. And those are areas where badger has been established.

And we've established a really nice network, it's a mature -- more of a mature market. But these are markets where we've had really good growth the last several years, and we were planning and are planning on continued growth again this year from a broad range of end use segments that are represented in those areas there.

So those were hit pretty hard. Other areas, geographically, when you check out the weather maps would have had actually less rain days and that helped us, but these were such big areas for us.

And they are a very, I would say, bigger, more mature regions. It really did have an outsized impact regionally.

Okay, thanks. And then shifting gears to capital allocation and the balance sheet.

You mentioned target debt to EBITDA levels of 1 times, maybe that higher. And you're not really anywhere near that right now, generating plenty of cash flow.

So would you expect to continue to be quite active under your NCIB, it seem you repurchased quite a lot of stock so far this year? Would just appreciate your thoughts on that strategy.

Yeah, you want to jump in and put Darren to work a little bit here this morning.

Just for clarity, our target leverage range 1 to 1.5 times. And we are obviously below that range.

The work that we've done continues to suggest from an intrinsic value perspective that buying shares makes a lot of sense. The company continues to operate on a free cash flow positive perspective, which suggests that buying back shares is something that is squarely in our wheelhouse.

Good morning, gentlemen.

Stephen, Good morning,

Just had a couple questions here. When you think about the weather related impact on Q2, a lot of construction projects got delayed.

How much of that business do you figure is going to happen anyway, and just get pushed into the second half of the year versus business that gets cancelled and just basically doesn't happen?

We would love to have the answer to that. John Kelly sitting here would love to know what that exactly is going to play out as, but I’d do it in a couple of buckets.

We have a lot of large utility customers, municipalities, where you're doing maintenance work. And so when maintenance work is delayed, the schedule is delayed and the schedule continues to just kind of bumps the schedule on, lost working days are lost working days.

So that's one bucket. And then the other bucket would be projects.

So with projects, there's always a target date. Infrastructure has to be completed, turned over and operations need to begin.

So with projects, we see more of a push to cram in work to meet the project deadlines. And that's really going to be the piece where we're going to be challenged along with a lot of other subcontractors that are out there on these projects to get the work done.

The good news, and the thing that gives us a lot of confidence is that Badger is shown we can rise to the occasion, move equipment, move operators around. And all of you saw the severe stress test we had in Q4 last year with two big emergency reliefs, and the amount of equipment we were able to bring to bear to help our important infrastructure customers get their infrastructure up and running.

So I would very much anticipate that we will have the ability to do that and to meet our customer project needs as we go through it at the back half of the year, because we do think there will be a cram. And part of it, we were talking about it in the Board meeting yesterday is going to be what happens with weather in Q4.

So if we have nice weather through Q4, that will help everybody, including our customers and our projects. If we have an early winter, that'll really increase the cramp.

But I'm very confident that whatever happens, Badger is going to be able to rise to the occasion and provide the service that our customers expect.

So just to follow up. If you think of those two buckets, what's the relative size of those two buckets for Badger?

Well, that’s a great question, Stephen. I mean, it really depends on projects and regions.

But I'd have a hard time saying it's much different than 50-50 based on our business mix and use market mix.

Okay, great. And my other question relates to the ERP project, and the roll out of that.

And just how do you see this as a risk event, and particularly thinking that Q4 is when you're going to go live? Is this something that you think has the potential for being disruptive to the business and just in the sense that changes is always difficult or is this something that you're comfortable can be rolled through in a relatively seamless manner?

Should we be worried about an impact on Q4 financials as a result of the rollout?

Okay, you've been reading their mail on that one. And anything like this, any project like this has a lot of risks that goes with it.

That's something that needs to be managed, and risk is always something to be mitigated. So the project management team Wade Wilson, our Interim CIO, and the team, very focused on risk mitigation.

We've done our system integration testing. That's completed very successfully.

As Darren mentioned, we're next into user acceptance testing. And that's where we're actually going end to end with the system.

And as part of user acceptance testing, we're actually going to run a month's worth of actual data end to end. We're going to take May data and run it end to end and match it up against our historical May data.

So we're going through a number of mitigation steps to identify any bugs that need to be taken care of, and that's an ongoing process. So we think we have it covered.

We've gotten very experienced folks. I mentioned Cheryl Moody a minute ago, we have other consultants in our systems integrator PwC, who have excellent experience in these areas and these projects.

And we think we've covered it all. But you can never say for sure, there may be something that causes bugs, but we're not aware of any.

And there's no high level errors or issues that have come out of our system integration testing, that are issues at this point. So we continue testing and we're going to do everything we can to make it on time, and continue to make it on budget.

But I can't say that there won't be a surprise, that's always part of any of these things. But we've done everything we can with Project leadership that's got the experience, and it's had those -- the past experience in the bumps and bruises with other implementations to lead our efforts.

And I think we've done everything we can to mitigate.

Good afternoon.

Hey, Jonathan.

Yeah. Follow up to Darren's comments on the SG&A.

So, Darren, I believe you said that you anticipate the elevated expense to continue through the end of the year. Is that that you expect SG&A to continue to be about 7% of sales that you expect or that you expect the discrete costs that Paul flagged CAD1.5 million, CAD2 million per month to continue at about the same rate through the end of the year?

Could you just clarify that comment, please?

Sure. I think that we will see a declining SG&A as a percentage of revenue over the back end of the year.

Probably more in Q4, you'll see a relief as opposed to Q3. And then going through the first half of next year, we will be working really hard to take those costs out.

And our target drawing a line in the sand is ideally to be back around the neighborhood of our target rate by the end of 2020.

And do you continue to expect ERP will be complete by Q2 2020?

I think the ERP is going to have a number of different elements to it. The core backbone of the ERP will be in by the end of the year.

Stabilization and user comfort will likely be done by the end of Q1. Beyond that point we will be evaluating other initiatives that we could enhance our operations through automation and bolt on mechanisms that we can or bolt on modules that we could add to the ERP.

But I wouldn't necessarily say that the ERP is one and done. It’s a continuous evaluation and process improvement.

That being said, the big cost and the big push will be done by the end of this year.

Okay, thanks. And a follow-up on the new truck introductions.

Do you plan for the rate of fleet growth to step up for the second half along with the expected improvement in activity levels or should we kind of think about the year-over-year truck rollout as being similar to H1?

Yeah. Well, we did -- as everyone knows, we did have some delays in Q1 because of the rollout of the new automatic transmissions.

But we back on track in Q2 and we've maintained our guidance for the full year. So that that implies some catch up in the second half.

And the truck orders from the field that we're seeing are in line with our production targets. So all of that’s lined up at this time.

Thanks. And one last question on the margin.

There was this comment in the MD&A that Badger maintained hours for operators to mitigate operator turnover? Has there been any change in the company's policy with respect to pay for downtime?

No, and I think that's a good question. And as I mentioned a few minutes ago, in certain areas where we were impacted by whether it's always going to be a local management call and what is the market like, what's the potential risk of losing folks, if they get their hours.

And that's managed almost local branch by local branch. So we did have that challenge.

And it was an impact as was mentioned earlier and called it out earlier on our gross margin on the direct labor side and the quarter. But there's not an overall written in stone process that that's delineated to the field.

But that's the advantage of Badger’s local entrepreneurial culture is that's managed locally and area managers live and die with having best operator best truck and you have to have your operators trained ready to go when the phone rings. So that's the balancing act that we manage.

Thanks for your comments.

Good morning.

Good morning, Elias.

Just want to focus on the wage component of G&A, particularly in the US. Is that related to the Badger University specifically, because that is a wage component that seem to have a large increase?

Yeah. Well, we didn't call out specific costs at Badger University.

We have seen in our initial cost there, and are very pleased with the effectiveness of that. If you think about it, the traditional training of operators would be in the individual branches, so you just have individual direct labor expense as operators are getting up the learning curve.

And what Badger University is, is a very intensive first two weeks, that really we’ve seen really accelerates them getting up the learning curve. So they'll complete their training when they get back in the branches and go through their mentor process where they're buddied up with a mentor who actually signs them off on being able to operate a Badger.

So what we've seen so far is actually an acceleration of training, and we think long term will lower overall training costs. And then the other thing we've seen, and it's early days, but we're optimistic that because of consistent onboarding, introduction to Badger that we're getting with Badger University very consistent.

And onboarding, in particular, we think is going to really help us with longer term retention of those operators. So we're very anxiously awaiting how we see turnover statistics from Badger University trained operators versus those that went through our traditional local branch training.

So that's there. And we did accounting-wise account for that in G&A, but it was not a material amount in the corridor and longer term we will probably be allocating that back to the regions for the training.

Okay. So with Badger University, to a degree, which we can't quantify we're going to see some G&A increase, but we should see some direct costs decrease, there has to be a payoff someplace?

That's right. And what we've seen so far, we're very optimistic about that payoff.

And it's again, overall though the cost of Badger University is not material. I mean, in the overall operations and we think there'll be minor improvements, but a little bit of G&A for lower direct cost and training short term.

And then the other one would be reduction longer term of turnover, which is a very significant operating item for us. So the jury is going to be out for a while, but we really like what we see so far.

Okay, I'll move off that. I do want to ask a question on truck builds.

I mean, 58 is a pretty good number for the quarter. It comes close according to my records to the 62 in Q2 ‘14.

I'd like to know how you sort of account for it. Is your 58 trucks that are fully complete or is it fully complete and ready?

Are they fully complete and out in the field or is there any other play? The direct reason I'm asking is your capital costs were essentially the same in Q2 over Q1, a little higher, but not materially and yet truck build was substantially higher.

So I'm trying to reconcile the 58.

Okay, no, good question. We would have had a little bit different surge in our work in process in Q1 versus Q2, and we did have trucks that were built during Q1 that we had delays putting out in the field because of the transmission programming issue we talked about last quarter.

So a little bit of timing there. But it was not anything other than we have a truck built and it's not out in the field yet on the capital tracking side.

And I think it's also important to mention on RPT and how we calculate revenue per truck. Any truck that's completed, whether it's in the field or still in the parking lot at Red Deer goes into the denominator for the revenue calculation.

So there's an awful lot of discipline internally based on the way that accounting is done there. It makes us want to get everything out and put it to work.

Good morning, everyone.

Hey, Jeff.

I just wanted to circle back on the SG&A side, just trying to better understand. So on a Q2 versus Q1 basis, your SG&A was up about CAD2 million.

The factors that you described earlier, Paul, that touch on ERP, but are beyond the scope of it formerly, were those also in place in Q1 or if they've been ramping up through Q2?

They would have been a mix, Jeff. It's just based on the timing of those programs.

The standing up of the network would have accelerated in Q2, the time and attendance work would have been there in both quarters. And the IT group would have -- we would have accelerated contracting resources in Q2.

And were there any lumpy or timing or seasonally related things in the SG&A or from dollar standpoint is that a number to think about for the back half of the year?

As Darren mentioned earlier, we see a similar structure of those expenses through Q2 and starting to tail off -- sorry, in Q3 and starting to tail off in Q4.

Okay, great. Clarification around the Canadian side.

So you mentioned looking at the cost structure in Western Canada, given the weakness. Have you relocated any trucks out of Western Canada at this point?

Yes, we have and we expect to relocate more.

Can you give us a sense of what magnitude that is?

I hesitate to do that. But I can assure you that john and the operations team are continuing to do a really good scrub on utilization.

And we're not limiting that just to trucks, we are looking at all aspects of costs all the way up to fixed costs. So anytime you have -- and you at Peters would know as well as anybody the type of structural and production reductions, structural -- some of the concerns with structural issues in Western Canada, we have to take a look at all this.

And no surprise we're doing that. And we'll report is as we make progress on all that.

But we're looking at all aspects of our Western Canadian operation, structure and costs.

It is the strongest pull for those relocations into Eastern Canada or other regions of Canada or into the US?

It would be a mix. We've added units in Eastern Canada.

In the last several quarters very pleased to see that and -- but as most of the opportunities south of the border.

Okay. And your comment earlier about adding four new locations in Q2 and eight locations year-to-date, is that the cadence of about four per quarter give or take that you need to support 200 growth unit additions?

Well, that and same-store growth. So those are the two factors and those would be a smaller percentage than same-store growth, just because you have a ramp up in new markets.

But if you look historically, you go back a number of years, plus or minus one a month has been our run rate on new locations historically. And I can assure you, we have a very granular program, a very focused program, where we want to go next, and how we get all those resources in place, especially management and operators to support those openings.

And as you accurately say, the idea is linked with our thinking on the build rate.

Good morning, gentlemen.

Good morning, Daryl.

Yeah. Just wondering if you can provide a bit of an update on the competitive environment in the US and in some of the more mature markets that you're operating in the northeast?

Yeah. Well, the Northeast would be one of our less mature markets.

So the ones we had all the rain in are far more mature markets. But we continue to see good uptake on adoption of hydrovac technology by a number of infrastructure owners.

That trend is there. And that's a trend that Badger has capitalized on for the last number of years.

And we continue to expect to do that into the future. So that trend is there.

There are competitors. We see competitors showing up in different markets, and Badger is always the one that plants the flag and develops the market and does the missionary marketing for hydrovac.

And people always follow. You can look at our locations on a map, that's always been the case.

We expect that to always be the case. We have had some markets where we've seen some competitive fall off.

We've talked about Ontario, in particular, and in past quarters is an area where we've seen some competitive fall off. And it's been a very competitive rate market, it's better than it was.

And we've had some structural changes with one big competitor in particular, that went out of business in the summer of ‘17, which has been very helpful along with the change in regulations on licensing hydrovacs, commercial vehicles, which changes operating costs for a number of our competitors in Ontario. So those structural changes have been positive and continue to be for us.

And you'll always see in different markets, and we've seen a smattering of smaller competitors who are here or there for sale, probably going out of business. And it’s you always try to understand that and maybe small time operators 4, 6, 10 trucks, but we've had some of those, and not necessarily in one location.

We've had a mix of those across the number of regions in the last few months. And we always try to understand why, because typically these are areas where we're doing just fine.

And so is it a succession issue, is it other operating issues, a lot of these competitors have leased hydrovacs. And we know what it costs to lease a hydrovac, which really is an additional fixed cost.

And we all know that if you don't manage your labor expenses very closely, and that gets out of line, you can turn income statement upside down pretty quickly. So those are the major factors we think contribute to operating challenges.

But we have seen in recent quarters and not necessarily in one area, smaller competitors not continue with the business. So that one is when we monitor.

But again, these are in areas where again, Badger is having very good success. So there's always the 80-20 rule out there in any industry and we expect it's no different in hydrovac.

Got it. And then in terms of the pricing improvements that you referenced, some of that’s coming from the strategic pricing initiatives you've undertaken.

But would that be the majority of it or would it be the entrance into the new markets in the US that are underrepresented?

Yeah. I mean, I talked about -- basically, I think about it in three buckets.

The one bucket is markets where we've had structural improvements. I call out Ontario, particularly with competitive structure has been very helpful.

And the second one would be new markets, where they are missionary marketing and where you're introducing hydrovac for the first time. Those markets generally have better margins than more competitive markets.

And then third is the strategic pricing initiatives buckets. And we're really just getting started on strategic pricing.

We've had some really good success because we focused on it. And John and the team has driven some strategies centrally that have been well executed in our regions and in our local branches, on specific items to focus on.

And we see that opportunity continuing. But I'm particularly excited about what we see coming out of our common business platform initiative.

And just something like time and attendance, capturing all of our labor hours. Are we capturing it all accurately?

And we can -- are we assigning it to our individual work tickets accurately? Are we building all the overtime we incur?

These are revenue leakages that we know exists out there in our legacy systems that aren't linked, that are leakages to be plugged as we get the CBP system up and running. So I see us continuing to talk about margin improvement and continuing to talk about strategic pricing and administrative improvements in pricing for a number of quarters into the future.

I see that continuing to be part of our mix going forward. It's something I'm personally extremely excited about, because it's an internal improvement that we can make.

Don't need additional volume in the market, don't need the competitors to do one thing or another. These are internal improvements that we can execute on internally, which are the best kind they accrue to us.

So very excited about the potential and that's why I can't wait to get up and running on CBP.

Okay, thanks, Yolanda. And we very much appreciate everyone's participation in the call, your support of Badger.

And that's it for Q2. We're looking forward to a strong finish in 2019.

Thanks, everybody.