Badger Infrastructure Solutions Ltd. (OTCPK:BADFF) Q1 2023 Results Conference Call May 4, 2023 9:00 AM ET
Company Participants
Trevor Carson – IR
Rob Blackadar – President and CEO
Rob Dawson – CFO
Pramod Bhatia – VP, Finance
Conference Call Participants
Yuri Lynk – Canaccord Genuity
Michael Doumet – Scotiabank
Krista Friesen – CIBC
Ian Gillies – Stifel
Daryl Young – TD Cowen
Operator
Good day, and thank you for standing by. Welcome to the Badger Infrastructure Solutions conference call. [Operator Instructions] Please be advised that today’s conference is being recorded.
I would now like to hand the conference over to your speaker today, Trevor Carson. Please go ahead.
Trevor Carson
Good morning, everybody, and welcome to our first quarter 2023 earnings call. On the call this morning are Badger’s President and CEO, Rob Blackadar; Rob Dawson, Badger’s Chief Financial Officer; and Pramod Bhatia, Vice President, Finance. Badger’s 2023 first quarter earnings release, MD&A and financial statements were released after market closed yesterday and are available on the Investor section of our website as well as SEDAR.
We are required to note that some of the statements made today may contain forward-looking information. In fact, all statements made today which are not statements of historical facts are considered to be forward-looking statements. We make these forward-looking statements based on certain assumptions that we consider to be reasonable. However, forward looking statements are always subject to certain risks and uncertainties and undue reliance should not be placed on them as actual results may differ materially from those expressed or implied. For more information about material assumptions, risks and uncertainties that may be relevant to such forward-looking statements, please refer to Badger’s 2022 MD&A along with the 2022 AIF.
I will now turn the call over to Rob Blackadar.
Rob Blackadar
Thanks, Trevor. Good morning, everyone, and thank you for joining our first quarter earnings call. As always, we would like to start the call with a health and safety update. We have built a strong safety culture here at Badger and are pleased with the progress we make each year. Safety is about building a culture of shared responsibility that pushes our people to proactively identify and mitigate daily safety risk. As mentioned in our ESG report, which was published in March, we track our behavior-based observations as a key metric in monitoring our company’s performance and is a component for our short-term incentive program.
The emphasis we place on safety and integrity every day means that we challenge ourselves to meet and exceed employee, customer and stakeholder expectations. Now on to the results. We are pleased with our first quarter performance. We achieved record first quarter revenue, 25% higher than Q1 of 2022. We started the year with strong utilization and operational performance across the business. We saw some regions exhibit utilization in line with our typically busier spring and summer months, while other regions experienced headwinds due to wet weather. Overall, we are building positive momentum leading into the upcoming construction season.
We also made meaningful improvements in our year-over-year EBITDA margins, which increased 80% compared to Q1 of 2022. This can be attributed to the execution of our commercial strategy of focusing on pricing and asset utilization, which helped to raise the shoulders in our historically softest quarter. We are also encouraged by the trends in our asset utilization. Revenue per truck per month, or RPT, was just over $38,000, up 21% from Q1 of 2022. This was achieved while also adding net 60 units to our fleet over the last year. This increase is largely driven by improved utilization resulting from our investment in our sales and marketing resources.
The team’s goal remains to deliver more consistent volumes over the course of the full year. We manufactured 58 nondestructive excavation units, including one prototype Airvac in the quarter versus 16 units in Q1 of 2022. We are confident in our 2023 guidance to build between 200 to 230 units and retire between 80 to 100 units. As we mentioned on our Q4 earnings call, we are implementing a proactive refurbishment program that we expect will enable — that will enable us to extend the useful life of some of our assets. We may choose to selectively replace critical components, namely the engine, transmission, transfer case or blower to extend the life of a well-maintained chassis. We have begun identifying select units to begin this refurbishing program, and we’ll continue to review the fleet for opportunities over the balance of the year. These costs will be capitalized. We believe these incremental investments will yield positive contributions to our return on invested capital as we continue to optimize our capital investments.
Before turning the call over, I would like to welcome Rob Dawson, our new CFO, to the team.
We are excited to have Rob on board and Badger is already benefiting from his knowledge and experience. He’s only been with us for a month, but the first few weeks have reinforced our view that he is the right person to help Badger achieve our stated financial objectives.
With that, I will turn the call over to Rob Dawson to discuss our financial results.
Rob Dawson
Thanks, Rob, and good morning, everyone. I’m excited to be here for my first earnings call following a strong financial quarter. Although it’s still early days, I’m excited about joining Badger and have been very impressed with the entire team and their commitment to growing the business while enhancing margins. As I get deeper into operations, I look forward to sharing my observations and plans with you over the coming quarters. As Rob mentioned, our revenue for the quarter was $143 million, up 25% from the same quarter last year, reflecting the early returns of our focus on the commercial strategy and improving truck utilization. Importantly, profitability has increased at a greater rate than revenues, showing the strength of our operating leverage. Gross margins were 23% in the first quarter compared with 18% in the same period last year.
Adjusted EBITDA was $24 million in the first quarter, the highest we have seen in the first quarter since 2019 and well over double the first quarter from 2022. Adjusted EBITDA margins also improved, sitting at almost 17% for the quarter compared with just over 9% last year. This reflects better operating leverage from the field as well as lower G&A. As a reminder, G&A in the prior year included some onetime costs to support the legal entity reorganization and the MRP system implementation at the Red Deer facility. Now on to the balance sheet. Core to the commercial strategy is a solid balance sheet to support it.
In that regard, our balance sheet remains strong with our compliance leverage stable at 1.6x, steady from the year-end and down from almost 2.4x a year ago. A key component of the improved leverage is a focus on our working capital. Our receivables, for example, remain at below 80 days of sales outstanding, significantly lower than they were a year ago. As expected, we did see an increase in inventory during the quarter, in line with our ramp-up in truck production to support the annual build program. Our CAD 400 million credit facility remains approximately half drawn, providing us ample liquidity and financial flexibility to fund both near- and long-term growth and complementary capital allocation decisions.
I will now turn things back over to Rob Blackadar for some final comments.
Rob Blackadar
Thanks, Rob. So before we open it up for questions, a few last thoughts. We are excited for our first full year of operating under our renewed commercial strategy. We have seen positive results in Q1 and expect this momentum to continue through the busy summer construction months. We expect to continue improving our margins by focusing on operating discipline and managing expense levels to anticipated revenues. We believe Badger is uniquely positioned to capitalize on the significant U.S. and Canadian opportunity for nondestructive excavation services. Badger’s long-term growth prospects remain unchanged. The current focus on infrastructure investment in North America supports the demand for nondestructive excavation. Badger stands ready to help strengthen and maintain the infrastructure in the communities in which we serve.
So with those comments, I’ll turn the call back over to the operator to take questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Yuri Lynk of Canaccord Genuity.
Yuri Lynk
Rob, you mentioned you felt you were successful in raising the shoulders in Q1, and it was a very good revenue quarter. I guess that means when we look ahead, is the business a little bit less cyclical and seasonal, I mean? And would that imply that the normal significant uptick we get sequentially in the second quarter is going to be a little more muted? Just trying to align expectations here given the bit of change in your seasonality.
Rob Blackadar
Yes. So we actually are still experiencing seasonality in the term that we use. And we purposefully use this term as raising the shoulders rather than removing the shoulders, is because we actually are shifting everything up, Yuri. And we still operate in seasonal markets. Obviously, Canada, a lot of the northern markets in the United States, we do a tremendous amount of business across those markets and they will always have seasonality just tied to the weather and other similar attributes. But we believe by shifting and raising those shoulders — not removing them, but raising them, we can actually raise the profile of the company’s profitability and returns.
And that’s really the strategy. We’re not getting — we’re not able to get away from seasonality. And I don’t want to — I definitely don’t want to insinuate that there’s not going to be any seasonality in the business. We actually believe — and you can see we certainly have strong demand really tied to our sales strategy. That will — we believe will still — we will still continue to grow throughout the summer months.
So we’re not — we haven’t hit our peak in Q1 and going to be flat for the balance of the year. Rather, we’re going to continue to grow. So that’s why we’re adding all the trucks with the increased demand.
Yuri Lynk
Yes. I apologize. Perhaps that was a poorly worded question. Is the sequential increase between Q1 and Q2 going to be any different now than in the past?
Rob Blackadar
We’re just in the early stages of this whole exercise. Remember, this is the first time in Q4 and Q1 that we’ve actually done this raising the shoulder strategy with our commercial strategy. I can’t tell you — I wish I could tell you, “Oh, it’s going to grow at the exact same clip or greater or a little lesser than it has previously.” But we’re actually — we’ve increased and created such new demand with new customers and growing the business into end markets. I can’t tell you — I just can’t give you that clarity of exactly what that’s going to be, Yuri. And I think it’s one of these — we’re actually — it’s happening real time.
Yuri Lynk
Yes. No, it will be interesting to see if there was any pull forward out of Q2 or if it’s incremental and…
Rob Blackadar
Yes.
Yuri Lynk
We’ll see.
Rob Blackadar
Yes, we — yes, the demand that we’ve seen, we haven’t pulled business forward or anything. In fact, our business — and I think some of this — but our business doesn’t really operate where you have the ability to pull projects forward. They use Badger typically when they have the demand on the spot. It’s not — we’re not able to like do the work in advance of a customer necessarily needing it or pull business forward. We don’t have that kind of a front-loaded log of business. So…
Yuri Lynk
Okay. Understood. Last one for me. Can you just talk a little bit about pricing and what you’re seeing there? I think that’s one of the levers that you’ve been a bit hesitant to engage for whatever reason. But can you talk about pricing in the market and if it’s keeping pace with inflation?
Rob Blackadar
Sure. So I’ve shared with different groups we’ve met with that last year was really about launching and starting our commercial sales strategy and building the demand in the business. And we needed to improve and increase utilization, which we did last year within the business, which helped to drive our RPT. And as we were getting started with that, we — from my perspective, while we had pricing improvement last year, it wasn’t to the standard that we would have liked to have seen. So this year, we continue to have solid demand tied to the sales efforts that our teams are doing, but we’re incorporating a lot more focus on pricing for 2023. We’ve already started to see it a little bit in Q1.
And again, that’s our most seasonal quarter of the year. We feel that as the summer months continue on, we’ll have opportunity to get pricing throughout the year. And we want to do it in a very smart way with our customers, while we’re giving them additional value. We have 0 interest in just taking pricing and take it or leave it approach type with our customers, but rather working alongside with our customers. All of our customers are experiencing inflation just as Badger is. Up to now, I would say we’ve probably been lagging a little bit versus inflation. And now we expect, at a minimum, be keeping up with inflation, if not being a little bit ahead of inflation on our pricing. So hopefully, that gives you a little bit more light, Yuri.
Operator
Our next question comes from Michael Doumet of Scotiabank.
Michael Doumet
Rob Dawson welcome. First question, I guess, on the margins. I think in Q3 of last year, you spoke specifically about 200 basis points of gross margin compression. That was related to the expanded sales initiative. Now I’m assuming by Q2, Q3, the program would have been matured, I think, kind of going back to the ramp-up in productivity of the sales rep. So would it be fair to assume that we get that 200 basis points back in the next few quarters.
Rob Blackadar
Yes, I’ll take that one, Michael. It’s Rob Blackadar. We are just now in the month of April on our 12-month mark of having our national accounts team fully on board and getting underway with their sales efforts. So we’re just last month at the 12-month mark with our national accounts team. The field sales team really started recruiting and ramping that up last March. So we’re a little over a year.
I think we’ll continue to make up those 200 basis points, and you’re starting to see the results from the investment we made in the sales and the sales strategy and how we’re executing to it. I can’t — I don’t want to definitively tell you it’s going to be this quarter or this exact date, but I feel very comfortable that, that investment will more than pay off for the balance of the year. And we just see a lot of solid demand. And it’s actually what I was sharing with Yuri a moment ago, a lot of new in-market customers and new areas that historically Badger has not been into with some of our customers. And it’s pretty exciting because it’s starting to make us realize that there’s a lot of room for growth, as we’ve been talking about for several years. Now we’re starting to realize it. But again, I don’t want to tell you, “Oh, it’s going to be” — we will have made it all up by the end of Q2 or the end Q3. But I think for the balance of the year, I feel comfortable with that.
Michael Doumet
Perfect. And then maybe just changing topics to the refurbishments and the CapEx or the truck CapEx. If you spend approximately — I don’t know if it’s 25% of the truck, to get 50% more useful life, is this not the new economic model for the company? If not, is it because an older truck maybe while refurbished might need more maintenance? Just trying to get a little bit more color there why maybe this isn’t kind of a go-forward law.
Rob Blackadar
There’s a handful of nuances that got us to starting the refurbishment program. And this will probably answer your question. We started challenging the status quo that the company has had for a long, long time, which is we have a very purpose-built vocational truck that is a what’s called a heavy spec from the manufacturer. We mainly use Peterbilt today. And that purpose-built truck was, as I said, heavy spec and it was built to last a long, long time. And we have a newer fleet manager who came into the company with me and he started saying, “Well, why are we getting rid of them at year 10?” And we looked at, “Okay, we” — the depreciation schedule on those trucks is a 10-year depreciation life.
And so it just kind of naturally made sense that was the replacement cycle. And he started looking at the data, and he said, “But we don’t put a lot of miles on the trucks. We are using them for a lot of hours on the engines, but they’re not over the road a lot. We go to a project and we work for 8 hours and then we go home. And very, very basic.”And that’s where he said, “Maybe we could start to extend the life of these and put a little bit of investment in and go to 5 years.” The — once we started really doing the data — the legwork on the entire fleet, we realized 1/3 to maybe a little bit greater than a 1/3, maybe 40%, are in cold weather markets that have a lot of abrasive snow removal, like salt and sand and things that are really corrosive to the frame of the truck.
And those trucks will be really, really hard to run through this because they already have — they wouldn’t have the expected life of some of the trucks that don’t have all those same issues out in the field. The other thing that we’re very mindful of is the ability for us to get engines. The reason we’re not saying, “Hey, this is our go-forward. The refurbishment plan, it’s going to be like this for the rest of Badger going forward. This is our brand-new model,” is because we believe right now, today, we have access to engines for the next 2 to 3 years and we’re going to take advantage of that. At some point as the technology changes on the engines, and it’s always evolving, we may not have access to these replacement engines for trucks that are 10 years old. And so we’re — I don’t know a better way to say it, Michael, but we’re kind of making hay while we can here for the next couple of years.
And it also helps to smooth out our replacement cycle, because, as you know, we do these peaks and valleys a couple of years of really high truck production and then we dropped down. And now we’re actually able to smooth that out a little bit more and have more steady truck production, which can continue — keep a very lower cost of production and continue to lower the cost of production because we steady stated the manufacturing. And then our retirement schedule can be a lot more orderly as well. We’re not bringing in 150, 200 trucks a year during these peak months and then reducing out another 150. We actually can do that in a more steady state across time. So anyway, that’s a long-winded answer, but that’s kind of a deep dive on the refurbishment program.
Michael Doumet
Yes, it’s very comprehensive, Rob. Maybe I’ll squeeze in one more. CapEx was a little light for 58 trucks being built in the quarter. Just wondering if you can break down CapEx expectations for ’23, new truck builds, refurbishments and PP&E?
Rob Dawson
Michael, it’s Rob Dawson here. I think what you see in PP&E there is the number of trucks that have been released from production into the field. So it doesn’t necessarily represent the 58 trucks that were manufactured during the quarter. And we have no changes to our expectations for how many trucks are going to be manufactured in the year, which I believe is 200 to 230.
Operator
Our next question comes from Krista Friesen of CIBC.
Krista Friesen
I was just wondering, you spoke about the new end markets that you’re entering and that you’re finding more demand. And can you provide a bit more color on what those end markets are?
Rob Blackadar
Yes. So traditionally, Krista, as we’ve been pretty heavily focused on oil and gas, and as of late put a lot of emphasis on infrastructure, specifically how it relates to utility and a lot of the utility refurbishment and expansion, a pretty good amount in the U.S., some in Canada. And what we’re starting to actually chase is some new markets that a few of our locations across the company had been having success with, but we had not shared that — those end markets across the organization. We had a pretty large sales meeting, where we were actually able to put all these people together in a room and our teams were actually able to share these good ideas across the organization. Some easy examples — and again, they’re going to sound a little out there, but this opportunity exists everywhere. We’re actually starting to do a lot of work with zoos, like where the animals are, the zoo, that a lot of times they have a lot of growth and they’re very concerned about bringing in construction equipment around the animals.
Well, our truck can remote hose in and actually remove any kind of debris or help them with construction projects or infrastructure projects in that market. And again, we did that work in a few markets, but not all over the place. Another example is food services and food manufacturing. So we found that a few of our trucks were being used to actually suck out waste product at the end of a food manufacturing plant, that they could not get — it’s just really hard to get remote access to. But there was enough access for one of our remote hoses to get into the plant. And actually, we were able to help these plants be a lot more efficient.
And we can do it actually in off hours and not affect their production. So we’re actually starting to expand that all over. Another area that we’re just underway with starting, so we — you would not see it in our current numbers, Krista, but we see it as a future opportunity is government and military as some of our end market customers. So again, we’re really expanding our thought process, getting away from the historical oil and gas and only infrastructure and now looking at almost every single market of how can Badger help this customer. And the customers are really receiving it well. So hopefully, that makes sense what I’m saying.
Krista Friesen
Yes, that’s great. That’s very creative. I was also wondering if you can just speak to are any of the markets or the industries that you’re operating in seeing some sort of weakness, just given what the macroeconomic backdrop is right now?
Rob Blackadar
Yes. So in the U.S., we’ve seen a little bit of — again, we don’t do a lot of residential or around a lot of residential. We support a few residential builders, a very few. And we’ve seen that soften up a little bit in certain pockets. Especially, where it’s multifamily, it has softened up a little bit. Some of the commercial space is starting to — commercial construction in certain markets is starting to soften up a little bit. And in other markets — I was just in the Dallas-Fort Worth market a few weeks ago for a meeting and went and met with some customers. And there is a tremendous backlog of work in the same space. So it’s very — it’s really in pockets, Krista, but there’s nothing really consistent.
Now we’re very mindful — we actually had this discussion yesterday with some of our senior leaders and some Board members yesterday. We’re very mindful of no company, no business would ever be immune to a recession or anything that would really turn down the markets. But we actually believe that we are so underpenetrated in certain markets, especially in the U.S. that we can, again, not avoid being part of a recession, but we can help offset some of the effects by just continuing to be a little bit more creative, as I shared on the previous question, and just really opening up our minds as to, “Okay, what else can we do with our trucks? And again, it’s being well received. So — but there’s no — there’s not one market that I would say, “Well, this thing has really just turned down.” We haven’t seen it. So I’ll just leave it at that.
Operator
Our next question comes from Ian Gillies from Stifel.
Ian Gillies
I wanted to approach Krista’s question in a little bit of a different way. There’s a lot of concern around credit availability in the U.S. And is there any way for you to qualify your customer base on maybe large versus medium versus small customer or public versus private customers or anything of that nature to maybe just get us an understanding of that breakdown?
Rob Dawson
It’s Rob Dawson here. Good question. I would say when we look at our customer base, we just look at a snapshot of our receivables at the end of the quarter. Over 90% of our receivables, and as I look through, a similar percentage of all of our sales are to customers that we would consider having a very strong credit outlook. And by strong, we mean would have metrics that would map it to being in investment grade.
Many of them don’t have credit ratings. As you noted, there’s a private-public split. I don’t have that private-public split on hand here. So — but we do feel that a great proportion of our revenues and customers are of a very good credit quality. Another thing that we’ve done recently is a vast majority of our smaller, more regional customers are pay upfront, either with credit card or cash. And so they’re out of receivables. There’s no credit risk involved with them at all.
And that program has been taken up with increasing frequency over the last year or 2 as well. So credit is something that we’re following very, very closely. We’re not seeing any clear signs of deterioration in credit quality or issues with our credit so far.
Ian Gillies
That’s helpful. And it was also along the lines of available capital for future projects. But that’s been well covered all up. The second question I wanted to ask is, the truck build costs, I thought, were quite encouraging in the quarter. Can it get better from here, i.e., can they go lower? Or is this kind of a good number to be thinking of moving forward?
Rob Blackadar
I’ll cover that. And if Rob or one of the other guys want to add more. But I think we are actively continuously looking at what can we do to continue to build a better truck at same or less cost. And our truck manufacturing leader based out of Red Deer, that is his background. And we’re already seeing the benefit of his efforts.
And I think we will continue to see some improvements, but I don’t want us to — I don’t want anyone on the call to think it’s going to get — it’s going to be step change cost down. Because all of our suppliers, just like we are with our customers, they have pricing pressures themselves from their raw materials and they do their best to pass along. And we do our best not to take a price increase and we meet somewhere in between. But we do believe we will continue to have inflation on some of our manufacturing partners and really the suppliers. We’ve certainly seen it in some of our chassis suppliers as well as certain key suppliers. And we’re doing our best to, “What can we do to get a little bit more creative to keep one of the best quality made trucks with the longest life in the market?
What are we doing to continue that quality of a build and keep the cost, like I said, the same or lower?” But I don’t want to be unrealistic with anyone on the line. I think to think it’s going to be a step change lower is just not realistic. I think what you’re seeing is pretty real. And again, we have inflationary pressures ourselves from our suppliers. Anything you want to add, Rob?
Rob Dawson
I have nothing to add to that. Yes. So add to that. Yes.
Operator
Our next question comes from Daryl Young of TD Cowen.
Daryl Young
Just one quick one for me with respect to the Airvac trucks and just where you’re at in terms of the rollout of that new vehicle.
Rob Blackadar
Yes. So we continue to be in prototype mode with the Airvacs. And as you saw, we built one this last quarter. But it’s still in the prototype mode. We still believe that Airvac will be a part of our customer offering and solution in the future. But we really are spending the first half of 2023 really focusing on our hydrovac production because we want to make sure that the hydrovac production doesn’t have any distractions to deliver the results that we need and the volume of trucks that we need coming out of the plant. And you’ll start to see us ramp up the Airvacs the back half of 2023. But we’re going to do that in a very orderly fashion so as not to distract the hydrovac production. Anything you would add to that, either one of you guys? So pretty straightforward, we just — we don’t want to try to be all things to all people all at the same time and really confuse up our manufacturing process. We now have a nice rhythm and production, and we don’t want to screw that up. So hopefully, that makes sense.
Operator
Our next question comes from Michael Doumet of Scotiabank.
Michael Doumet
Okay. I want to go back to maybe the price versus utilization thought process, because, obviously, RPT — you really launched together the 2, so a little bit hard to break out the 2. But it sounds to me like utilization is running relatively high. Presumably, that will be higher in the seasonally stronger Q2 and Q3. And as you said, I think, in response to Yuri’s question, prices lagged cost inflation. So I’m wondering now, why not trade some utilization for price, because, obviously, prices better flow through to margins? Just trying to get your thought process for the balance of the year.
Rob Blackadar
Yes, Michael. We don’t think you have to — if we continue to push enough demand into the business, we don’t believe you have to trade utilization and price. And we actually think that you can actually do both. And we — I will tell you, though, your thought process is music to the ears of everyone in the room over here in Calgary, is we would be — we would happily give up a little bit of utilization to get a fair amount of pricing. But realistically, they can actually work together. The opportunity that we have shared and continue to share with a lot of folks, and I mean internally as well, is pricing is the company’s biggest opportunity.
We spent a lot of time with our field leaders and our sales teams and our managers in the month of February walking through pricing, training, development. The finance team and FP&A folks that work with Pramod and Rob Dawson and Trevor, they have really kind of upped our game as to our data analytics regarding pricing, and we’re actually empowering our field leaders to actually start to have pricing confidence and power tied to the strong demand.But I can assure you if the opportunity comes down to either hold utilization or take some pricing, we’ll have — we will start to lean on pricing. But again, they don’t have to be mutually exclusive. They can actually be complementary. And we believe they will be for 2023.
Operator
I would now like to turn it back to Rob for closing remarks.
Rob Blackadar
Thank you, operator. And thank you, everyone, for the very good questions. I’d like to remind everyone before I wrap up the call that this afternoon we will be having our Annual Meeting of Shareholders, our AGM, at 3:30 Eastern and 1:30 Mountain Time here in Calgary. So if anyone has an interest, feel free to dial in. And that’s on our press release. So on behalf of all of us at Badger, thanks to our customers, employees, suppliers and shareholders for your ongoing support that helps to drive Badger’s success. Thank you.
Operator
Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.
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