Badger Infrastructure Solutions Ltd.

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00:44 Thank you, and good morning, everybody. Welcome to our third quarter twenty twenty one earnings call.

On the call this morning are Badger’s CEO, Paul Vanderberg; and CFO Darren Yaworsky. Badger’s twenty twenty one third quarter earnings release, MD&A and financial statements were released after market close yesterday and are available on the Investors section of our website and on SEDAR.

01:06 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 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.

01:31 For more information about material assumptions, risks, and uncertainties that may be relevant to such forward-looking statements, please refer to our twenty twenty MD&A along with twenty twenty . Further, such statements speak only as of today’s date and Badger does not undertake to update any such forward-looking statements.

01:48 I will now turn the call over to Paul.

01:48 Thanks, Trevor and good morning. As always, we’d like to start the call today with health and safety.

The Badger team continues to manage a COVID related operating challenges quite well. And we always put the safety of our employees and customers as job number one.

We've been promoting health and safety of employees very strongly encouraging vaccination. We began to see worksite vaccine mandates from a number of customers and governments in the quarter, which we support.

02:18 The U. S.

Government announced the vaccine mandate a few weeks ago and provided an update yesterday, which requires a significant amount of work before it can be administered by businesses across the country. At some point, we expect that the health and safety regulators will sort out all the details and we will implement it along with all other companies.

02:38 We worked on one very high profile project in the quarter that was directly linked to health and community safety. And that was the emergency response to hurricane Ida.

We want to publicly recognize our leadership team for a job very well done, in supporting the recovery work in Louisiana. We balanced delivering services to help restore critical power grid infrastructure while protecting our employees while the Delta variant was surging, not an easy task.

We were recognized by many other contractors on this emergency response for our efforts and in leading health and safety protocols. At one point, we had up to one hundred units on this project.

With people pitching in from all across badger. Badger is the only hydrovac operator in North America who can provide this level of service and response.

03:28 Now on to the quarter. We were pleased with the improved revenue in Q3 and the sequential improvement that's been made as the year has continued to progress.

Market activity levels improved across many of our regions over the quarter, reflecting continued progress in the overall recovery from COVID. When compared to the U.

S. Construction put in place statistics, our revenue growth continued to outperform the reported activity levels in non-residential construction put in place, year-over-year.

03:59 Q3 market activities was supported by approximately fourteen million dollars in emergency response work related to Ida that I mentioned earlier. This compares to approximately seven million dollars last year.

Severe weather events continue to highlight the need for strengthening North America's critical infrastructure. We were also pleased with the gross margin and EBITDA margin improvements that have been achieved as twenty twenty one as progressed and specifically as the quarter progressed.

04:30 As we shared in Q2, we’ve expected that margins will return toward the historical levels as revenue improves. Rob Blackadar who joined Badger in July as COO has been a great addition to the senior leadership team.

And Rob and his team are pursuing revenue cost control and efficiency initiatives across the organization to further drive results. 04:52 The team continues to work hard to recruit and retain operators which continues to be a challenge in the current labor market.

We've seen some labor cost inflation as we discussed last quarter and have been working to implement price increases to offset. We're also pleased with the improved fleet utilization.

Revenue per truck for month improved to nearly thirty four thousand dollars in the quarter, a significant improvement from the twenty six thousand six hundred in Q2 of this year and twenty eight thousand three hundred in Q3 of last year. With fleet utilization improving, we are evaluating the ramp-up of our manufacturing activities.

We are positioned for a this year fourth quarter compared with last year. With the numerous delays and the industry has experienced some projects, in non-residential construction in general over the last year and half.

We continue to see pent up demand across many markets. 05:50 This demand and especially the pent up demand could positively impact a traditional winter seasonality in some of our northern markets this year.

But, of course, what actually transpires will depend on the type of winter or whether we experience. This work will need to get done at some point.

And as always, we continue to focus closely on activity levels with our customers and reviewing all aspects of our business and operating expenses to manage expenses in the short-term, while ensuring our service capacity is always in place when needed. 06:25 Now on to operate.

In addition to Rob and his team continuing to pursue business improvement initiatives, Rob is working to strengthen our sales and marketing function at Badger to address the meaningful growth opportunity – growth opportunity in the North America non-disruptive excavation industry. There'll be more to come on this in future quarters.

06:47 On fleet during the quarter, we built four new hydrovacs and retired eleven ending the quarter with thirteen sixty units. We've been pleased also with the improvements in utilization as I mentioned with RPT a minute ago and we are evaluating the ramp up of production looking into next year.

07:06 For twenty twenty one, we anticipate building thirty three hydrovacs slightly above the previously shared build range of twenty to thirty units for the year. We continue to plan to retire sixty to seventy units this year.

As in the past, we plan to provide more details on anticipated twenty twenty two production and retirement ranges along with our Q4 disclosures. And now, I'll turn things over to Darren to take us through our financial results.

07:35 Thanks, Paul, and good morning, everybody. Our revenue in the quarter was one hundred and seventy one point eight million dollars or about fifteen percent higher than prior year when normalizing for changes in FX.

Gross margin was twenty seven point four percent marked improvement from gross margins of nineteen point two percent in Q2. As Paul mentioned, Rob and his team are continuing to pursue other cost control and efficiency initiatives across the organization to return gross margin levels to levels achieved last year.

Should also mention that our direct costs in the current year included the benefits of two point eight million dollars in COVID related government assistance in Canada compared with one point nine million dollars last year. G&A expenses were eleven point two million dollars, which includes approximately two point one million dollars in one-time costs related to our strategic initiatives to enhance our organization design and management structure.

We continue to anticipate our twenty twenty one G&A run rate expenses to be approximately forty million dollars excluding one-time costs related to these initiatives. Of course, we will review costs for additional efficiency opportunities.

08:46 Adjusted EBITDA for the quarter was thirty five point eight million dollars. Again, a marked improvement from adjusted EBITDA of fourteen point four million dollars in Q2.

As a percentage of revenue, adjusted EBITDA margins improved to twenty point eight percent in Q3 from ten point six percent in Q2. We're also reviewing all G&A costs across the organization to support more efficient operations and return to prior year adjusted EBITDA and adjusted EBITDA margin levels.

09:16 Now to the balance sheet. Badger maintains a focus on ensuring the strength of its balance sheet and its financial flexibility.

We have continued to make meaningful progress in accounts receivable management particularly in the collection of long age receivables. As at the end of the quarter, approximately seventy five percent of our receivable portfolio was aged less than thirty days.

We also renewed our syndicated credit facility for our five year term, providing us with a total of four hundred million dollars in committed credit facilities with a flexible financial covenant, ensuring that we have the financial resources and the capacity to fund both near term and long-term growth and thoughtful capital allocation. 09:57 I'd also like to highlight a couple of changes coming in twenty twenty two, which you may have seen in our earnings release last night.

Effective Q1 twenty twenty two, reporting will begin – we’ll begin to report our results in U. S.

Dollars to improve the comparability of year-over-year results and to minimize the foreign exchange fluctuations given that approximately eighty percent of our revenues are generated in the U. S.

Dollars. 10:21 We will also be changing the frequency of our dividend payments from monthly to quarterly effective with the March twenty twenty two dividend.

This will simply – simplify the administration and the dividend associated cost. 10:34 And I'd like to turn the call back to Paul for some final comments.

Paul?

10:38 Thanks, Darren. So just before we open it up for questions, a couple of quick comments.

Q3 continued our recovery from COVID with activity levels picking up and we were able to put our people to work effectively and generate better results. We're very pleased with that.

We remain focused on our markets and customers, managing expense levels while ensuring that we have trucks available for our customers. 11:03 Our view of the significant long term U.

S. and Canadian opportunity for non-destructive excavation services and Badger’s growth prospects is unchanged.

We believe that increased focus on infrastructure in the U. S.

Supports demand for non-destructive excavation over a long period of time. We stand ready to help maintain and strengthen that infrastructure and also support the need to adapt infrastructure to newer and sustainable technologies.

11:32 Badger’s business model our operating scale and flexibility, our diversification of venues and geographic markets combined with our operating track record across all stages in the economic cycle, all support achieving our long-term growth aspirations. We're making the business moves today to position Badger to take advantage of this long-term opportunity.

And in the past, Badger always managed for the long-term. 11:57 So with those comments, let's turn it back to (Francy) for questions.

12:26 Good morning, guys.

12:28 Hey, Daryl.

12:30 Just the first question around the margin outlook and the direct labor as we head into Q4 and Q1. Obviously, those are seasonally weaker periods and I'm just curious on, if you want to share what kind of magnitude and margin impact, do you think would just as we carry the higher levels and wafer through that both lower periods?

12:55 Yes, a great question, Daryl that you probably were in our board meeting yesterday, but certainly a real focus of ours and Badger has traditionally had a seasonal business where Q4 and Q1 because of the cold weather states and provinces we operate in have lower volumes. So, we're very closely focused on managing direct labor to volume in those cold weather periods just like we have in the past.

Last year, it was a bigger challenge because we were also trying to gauge recovery from where COVID was bottoming And if you recall, the market activity with COVID really did bottom about last – this time last year, October, November. So, we had multiple factors underway to manage, but from my view, this year is getting back to more of a traditional winter season.

13:48 With continued COVID recovery growth, but we have a lot better run rate right now going into this winter season and a lot better visibility about where the COVID bottom is. And that's obviously behind us now.

So, we're thinking about managing it more like we have in past years where our local and regional folks are very focused on that. And Rob and his team will certainly be very focused on that.

So much better set of circumstances with better visibility this year.

14:22 Okay, great. And then on the emergency response work, it's great to see the contribution that the Badger was able to make.

Just curious if you'd be willing to share what the EBITDA contribution of that was, it was about eight percent of revenue, but just, I think it's historically been higher margin work for emergency response?

14:43 Yes. I can comment historically it has been higher.

It continues to be, and this is a capability that Badger has that no other company in our business has. And I could not be more pleased with the performance of our operations team led by (Liz Peterson) and her group in the Eastern U.

S. To take advantage of this.

It's a unique service we provide to our customers and a huge differentiator in the electrical utility customer segment for us.

15:18 Okay. And then one last one, just with respect to working capital as you move into next year and hopefully much higher activity level.

How big of a working capital draw would you anticipate moving to the next year?

15:37 I don’t think, I would see much of a big draw. We've been, we've really cleaned up the both the credit granting and the collection procedures.

So, it's the, cleaned out all of the aging buckets. So, we turn the receivables, and we've shorten the cash collection or cash conversion cycle quite a bit.

So, at the maximum, I look at probably fifteen to thirty days’ worth of sales, which would be your wrap-up of working capital requirement, but like I said, like the way we're managing our receivables now is night and day from where we were not too long ago.

16:14 Okay, Thanks guys. I'll get back in the queue.

16:17 Yes. Thanks, Daryl.

16:28 Thank you. On the U.

S. Gross margin percentage, about twenty four percent this quarter, on revenue per truck close to thirty seven thousand.

Can you help us bridge that gross margin to historical periods? When it was eight percent to ten percent higher at times when RPT was this high?

I understand that there's been a lot of price inflation since then. So, utilization is probably still too low, compared to what the RPT would suggest, but can you help us bridge the rest of the gap there?

17:10 Yeah, Great question, Jonathan. In my mind, it's pretty simple.

We've still got work to do in our cost structure and passing through factor cost increases in our pricing. And we did make really good progress in the quarter, but there's still work to do, and we have a lots focus on that and our operations team.

But we are very confident that as we continue to have the advantages of higher and steady our volumes more traditionally and we’ve experienced historically that will continue to drive those margins back toward those historical trends. But fact, the matter is, we still got work to do Jonathan and not beat around the bush.

17:55 Fair enough. On the pricing Paul, are there any indications that you have that the ability to pass through pricing is improving?

And I'm thinking about maybe MSA, you might be setting up for next year, for example compared to prior year MSAs or just normal course work in the October?

18:16 Yes. Well, there certainly opportunities when MSAs come up for renewals.

So, we'll be looking at that and are looking at that very closely. And on the other side is with Rob coming in, great background and marketing and commercial strategy.

So, we have some fresh eyes at the table which is certainly going to benefit us as we go forward. I can tell you there's lots of focus on it, especially with the cost factors that we've seen in fuel and labor.

So, lots of focus on it and it's certainly a very significant business improvement area for us and we're all over it.

18:56 Thanks. The driver shortage situation is something facing many industries in the U.

S. There's an article in the Wall street journal this week, saying the U.

S. Is short about eighty thousand drivers.

Is there anything that you can do, I know over time, was a major issue this quarter? Or you just, is it really margin will be depressed until labor situation improves?

19:25 Yes. Well, the labor in the short term going to continue to be a challenge and we're pulling all the levers that we have available to us.

You asked a very good question linked to labor a minute ago, which is what type of pricing opportunities are there and we're convinced that there are a number of opportunities in that area. And the other thing we're looking at longer term is the design of our trucks and the type of trucks in the type of drivers required early days, but this is something that we think about very closely because we design our equipment, we're vertically integrated and we design it to use it.

So, we think about things like labor cost when we design our equipment. Because that's a much bigger expense year-over-year than the capital cost in the trucks.

So, we're looking at longer term things on truck designed to help expand the driver cool. So, more to come in the future on that, but it's an advantage that Badger has that we're working on.

20:31 Thanks. One last question for Darren, if I can.

These strategic investment expenses I believe part of that's related to the legal reorganization. Could you expand on what those are and whether there's anything?

Will be relevant for the business next year?

20:51 So the legal reorg, is this broadly two components to the – three components that we're doing to the work. One is the legal reorg structure, the second is expanding our shared services model now with specifically with HR and with the in future with the back office support of the operations as well.

And then the final component is working on the implementation of Rob's target operating model for sales and marketing operations and fleet, which is a pretty exciting and as Paul mentioned, we'll share some more stuff in the coming quarters. But specifically, your question on the legal entity reorg, and we announced this earlier this year.

That's where we're satisfying our structure and clarifying the pillars of responsibilities and operations. 21:44 The primary goal in doing that is to achieve tax efficiency so that we don't have drag on sales tax when we move units around.

And then the second, which is a byproduct of that is removing any kind of ops to close and being able to have commodity and velocity in their fleet and being able to move the fleet where the demand is needed. Without having to reregister the vehicles and like I said, be attached to any kind of sales tax.

So that's the background. The cost savings and I think we shared this previously.

We anticipate on a normalized build program that we can have a cash tax savings of around six million dollars a year. That is a combination mostly of sales tax, but there is a small component of income tax that's related to the Hungarian and financing structure that we put in place.

22:43 I'm hoping I covered off your question, but if there is more details happy to give you more clarity.

22:49 And there and you did say that the SG&A would be forty million dollars excluding those expenses. So, is that a fair run rate for next year or will some of these continue?

23:00 There might be a little bit of continued – continuation of cost, but I think forty million dollars is the right number. We are looking at some cost efficiency improvements that we'd like to implement in Q4.

So, I think probably an all-in run rate of forty million dollars is a good number to work with.

23:21 Thanks for comments.

24:23 Okay. Thanks, Francy.

On behalf of all of us at Badger, we want to thank our customers, our employees, suppliers and our shareholders for your ongoing support that helps us all drive Badger success. So, Francy, you can end the call, please.