CA - Black Diamond Group Limited (BDIMF) Q2 2023 Earnings Call Transcript

2023-08-04 15:49:05 ET

Black Diamond Group Limited (BDIMF)

Q2 2023 Results Conference Call

August 04, 2023 11:00 AM ET

Company Participants

Jason Zhang - VP, Capital Markets

Trevor Haynes - CEO

Toby Labrie - CFO

Ted Redmond - Chief Operating Officer, Modular Space Solutions

Mike Ridley - COO, Workforce Solutions

Kevin Lo - COO, LodgeLink

Patrick Melanson - Chief Information Officer

Conference Call Participants

Frederic Bastien - Raymond James

Matthew Lee - Canaccord Genuity

Presentation

Operator

Thank you for standing by. This is the conference operator. Welcome to the Black Diamond's Second Quarter 2023 Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded [Operator Instructions].

I would now like to turn the conference over to Jason Zhang, VP, Capital Markets. Please go ahead.

Jason Zhang

Good morning, everyone, and thank you for attending Black Diamond's second quarter 2023 results conference call today. Here joining me on the line is our CEO, Trevor Haynes; and our CFO, Toby Labrie. Also on the call, we are joined by Chief Operating Officer of Modular Space Solutions, Ted Redmond. Brenda, I think we're getting some feedback on the line, is everyone muted? Let's start again. Good morning, everyone, and thank you for attending Black Diamond's Second Quarter 2023 Results Conference Call today. Here joining me on the line is our CEO, Trevor Haynes; and our CFO, Toby Labrie. Also on the call, we are joined by Chief Operating Officer of Modular Space Solutions, Ted Redmond; COO of Workforce Solutions, Mike Ridley; COO of LodgeLink, Kevin Lo; and Chief Information Officer, Patrick Melanson.

Our comments today may include forward-looking statements regarding Black Diamond's future results. We would like to caution everyone that forward-looking statements are subject to a number of risks and uncertainties and that actual results in the future may differ materially from these forward-looking expectations. Management may also make reference to various non-GAAP financial measures in today's call, such as adjusted EBITDA or net debt. For more information on these terms and others, please review the sections of Black Diamond's second quarter 2023 management's discussion and analysis entitled Forward-Looking Statements Risks and Uncertainties and Non-GAAP Financial Measures. This quarter's MD&A, financial statements and press release may be found on both the company's Web site at www.blackdiamondgroup.com and also on the SEDAR Web site at www.sedar.com. Dollar amounts discussed in today's call are expressed in Canadian dollars unless noted otherwise and may be rounded.

I will now turn the call over to Trevor Haynes to review this quarter's operational heights.

Trevor Haynes

Thank you, Jason. Good morning, everybody, and thank you for joining us today to discuss our second quarter 2023 results. We were very pleased with the results for the quarter as the company continues to demonstrate the effectiveness of our core strategies. To remind listeners, the strategy is centered around growing our MSS platform, diversifying our WFS business and unlocking operating leverage by deploying idle assets and continued rapid scaling of LodgeLink. This quarter, the company's MSS business had new all-time record highs in rental revenue and EBITDA. Diversification of end market industries has pushed WFS utilization levels not seen in half a decade and LodgeLink's ongoing growth has continued to surpass the rule of 40 metrics. On a consolidated basis, second quarter 2023 rental revenue of $35.2 million and adjusted EBITDA of $22.5 million, each increased 24% over the comparative quarter. There is strong visibility for ongoing growth across the platform, supported by existing contracted future rental revenue of over $120 million and continued asset additions through organic capital investment into new long lived rental assets that are being deployed above internal hurdle rates at contract lengths varying from two to five plus years. MSS exited the quarter with contracted future rental revenue of $85.4 million, which was a 56% increase over the comparative quarter, while WFS future rental revenue for contracts in place of $34.7 million more than doubled from the comparative quarter. Our MSS business continued its multiyear robust growth and strong operating performance, setting all-time record highs with respect to rental revenue and EBITDA of $21 million and $17.1 million, up 20% and 34% from the comparative quarter respectively. Compounding growth in MSS has been driven by ongoing fleet additions coupled with a healthy rental rate environment, which is combined to drive average rental rates 13% higher as older contracts are renewed at current rates. The MSS sales pipeline remains robust and continues to track ahead of levels experienced at the same time last year with particular strength seen in the education and civil infrastructure sectors.

Moving to WFS. Second quarter rental revenue of $14.1 million increased 29% from the comparative quarter as consolidated utilization remains at levels unseen in many years. We continue to see positive momentum across WFS driven by successful efforts to diversify the business, streamline operations and rationalize the fleet through sale of underutilized assets. This has driven consolidated WFS utilization to 65%, up from 50% last year. While utilization has moderated in Australia from 96% in the comparative quarter to 83% in Q2, we continue to see a strong Australian market and would point out that current Australian utilization levels are more optimal as we can meet ongoing transactional demand. We continue to add new rental units to the fleet in Australia to meet contracted sales. We continue to expect rental revenue and overall WFS performance to build throughout 2023 into next year followed by a tempering of utilization growth in early 2024 as certain projects related to Canadian pipeline construction conclude. The current WFS sales pipeline is robust with multiple opportunities across customer segments and geographies, providing us with confidence that the business will continue to grow on a year-over-year basis. The complexion of our WFS segment has continued to evolve over the years as we have worked relentlessly to expand and diversify our client base by industry and geography, which has resulted in a more predictable cash flow profile as volatility and concentration risk are reduced.

LodgeLink, our disruptive digital marketplace offering for crew travel, continues to scale with 102,000 room nights sold in the second quarter, up 49% in the comparative quarter. Gross bookings of $19.5 million grew 74% while net revenue for the quarter of $2.3 million approximately doubled from the comparative quarter as higher average room rates and increasing margins bolstered revenue growth. At the end of the quarter, LodgeLink had over 12,000 properties listed, representing over 1.2 million rooms having serviced over 800 cumulative corporate customers and their thousands of crew members. LodgeLink's recent trends around growth in booking volumes and revenues are expected to continue as the company is seeing strong opportunities in the US market among the transportation and resource services sectors. The long term potential of LodgeLink continues to be a very exciting focus area for our team as we look to build on our success and service the North American crew travel sector, which is estimated at approximately $70 billion per year. To close my prepared remarks, the company is continuing to benefit from strategies that were implemented many years ago and our team's disciplined execution. We believe Black Diamond is representative of the type of specialty rental platform our team set out to build, a platform with high quality, diverse and predictable revenue streams, compounding growth through prudent reinvestment and long lived assets and a deep rooted commitment to operational excellence.

I will now turn the call over to our CFO, Toby Labrie, for some further details on Black Diamond's second quarter results and the company's current financial position. Toby?

Toby Labrie

Thank you, Trevor. As we mentioned, this quarter's results have highlighted the effectiveness of our strategy to diversify our revenues. The strength in our balance sheet has allowed us to execute on our strategies by capitalizing on acquisition opportunities and driving organic growth to further grow and diversify our rental platform. At the end of the quarter, net debt of $204.1 million had decreased nearly $15 million from December 31, 2022. The company's current net debt to TTM adjusted leverage EBITDA ratio as of June 30, 2023 of 2.2 times remains at the lower end of our internally targeted long term range of 2 to 3 times. Following the significant MSS acquisition completed in late 2022, the subsequent decrease in net debt is a testament to our ability to generate significant free cash flow while we continue to invest in organic growth with $17.3 million of capital expenditures in the quarter. The average cost of debt for the quarter was 5.56%, up from 2.85% in Q2 2022 as central banks continue to increase interest rates in response to inflationary pressures. Higher interest rates drove higher finance costs that are up 118% from the comparative quarter to $3.7 million. Proactively, Black Diamond previously entered into interest rate swaps on approximately one third of our debt, which were put in place during a lower interest rate environment. Our strong balance sheet gives us access to $122.7 million of available liquidity on our asset based lending facility, allowing for ample dry powder to continue growing our business, both organically and through selective tuck-in acquisitions.

Switching focus from the strength of our balance sheet to operating results. Consolidated revenue for the quarter of $91.1 million increased 31% from the comparative quarter. Consolidated adjusted EBITDA and consolidated rental revenue of $22.5 million and $35.2 million, respectively, each increased 24% when compared to Q2 2022. The company's administrative costs increased 28% from the comparative quarter due in part to broad based inflation, increased salaries and wages linked to higher headcount and profit incentives, partly driven by the MSS acquisition in late 2022 and ongoing investment in LodgeLink. As a percentage of gross profit, admin costs remained stable while stock based compensation, which was about $1.5 million during Q2 2023, increased 39% over the comparative quarter driven in large part by increased share prices. Increases to our depreciation and finance expenses were in line with expectations given investment in revenue producing assets while considering the interest rate increases that I previously described. This resulted in second quarter net profit of $4.6 million, up 15% from the comparative quarter, while from a per share standpoint, diluted earnings per share of $0.08 is up $0.02 or 33% over the comparative quarter. At June 30th, Black Diamond had capital commitments of $23.7 million, representing a 27% increase over the comparative quarter largely due to a planned increase in investments relating to contract backed asset deployments of organic fleet growth. This is reflective of our disciplined approach to capital allocation as the vast majority of our committed CapEx is supported by multiyear contracts offering attractive economics. Furthermore, we believe it is important to note that our capital plan remains highly flexible and largely discretionary. We are pleased with the continued growth and returns through the second quarter. Our outlook for the business remains positive as we continue to grow MSS, further unlock operational leverage in WFS and drive value creation and optionality through our rapidly growing LodgeLink platform.

With that, I would like to turn the call back to the operator so we may open the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Frederic Bastien from Raymond James.

Frederic Bastien

In your, I guess, written remarks, you highlighted the transportation as a factor contributing to growth at LodgeLink. Can you expand on this, please and provide a bit more color?

Trevor Haynes

The meaningful part of transportation for us at the moment is railroads where we're handling the accommodation aspect of travel for maintenance and project crews related to the large railroads in the US and Canada. And it's proving to be a very sizable part of the marketplace and one where our team has proven the value of the LodgeLink platform in terms of logistics efficiency and cost efficiency. So we're seeing significant growth in that vertical. And as you could imagine, it is a very sizable market and if you think about the amount of infrastructure and the maintenance we acquired and thousands of service level tradespeople that work within those systems.

Frederic Bastien

It feels like you're only scratching the surface in the US and so that's encouraging to see. Are there any other adjacent factors that you believe would be appropriate for LodgeLink to penetrate over time?

Trevor Haynes

Well, I won't say we're surprised, but we certainly are pleasantly surprised by how diverse the crew travel sector is in terms of types of companies. So we are seeing activity in and around disaster, disaster recovery in terms of those companies who bring services into an area that has suffered a disaster of some form, everything from highline power to [indiscernible] to remove fallen trees, et cetera, to various aspects of the insurance market, et cetera, et cetera.

So it's proving to be a sizable vertical, transportation as we touched upon, resource services, which is essentially where we began offering the service, not just oil and gas but when you think about mining, et cetera, and then just broadly infrastructure maintenance, whether it's highline power related to power generation resources and infrastructure, albeit outside of main population areas. So those are verticals that we've been focused on and have been handling volumes. I’d just pause there and ask Kevin Lo if anything you would add.

Kevin Lo

No, I think you had a very comprehensive list, Trevor. Maybe one other industry that we're actually targeting as well is [indiscernible] construction, whether it's roads or large buildings, et cetera. So our commercial team has done a great job in helping us diversify beyond our core customer base. So there's a lot of opportunity here.

Frederic Bastien

I got another question. This one is on Workforce Solutions. I think you're at 65% utilization and heading a little north. I think I recall hearing you say in previous calls that the 65% to 75% range was sort of the sweet spot for this particular market. How do you get to sort of that mid range? Will it come from continued use of assets, putting more assets out there in the market or do you also expect that you will benefit from attrition in the fleet like through sales? Just curious how you could get to 70%.

Trevor Haynes

We have reduced the capacity in our Workforce business unit over the last number of years in terms of moving towards where we think there is a balance in the marketplace between supply and demand, where we see the ability to have a more stable utilization and predictable cash flow. But at the same time -- I'll just finish that, we're getting close to where we think the balance point is. So then we go into a phase where we may continue refurbishing older assets and/or adding some new assets while at the same time in the normal course of trade continuing to sell some older assets. So we think we're getting into a range of what we're seeing, and I'll get Mike Ridley to comment on this part in a second. But we are seeing a much broader set of opportunities as we've built our sales network in the other verticals, such as mining but also at-risk population housing as well as emergency housing for government, et cetera. So we think we've got a really good engine on the front to inform steady demand across a much broader set of industry verticals and that we're getting close to where we see a healthy balance between the capacity that we have facing the market and where demand, we think, will exist over the foreseeable future. But just to go a little bit more, Mike, into some of the color around what we're seeing on the demand side that gives us confidence that we can ride in this optimal range, somewhere between 65% to 75% utilization going forward.

Mike Ridley

It's all sort of been part of our plan here for the last several years around sort of geographic and industry diversity sort of build up our utilization and focusing on, quite frankly, markets that we weren't in five years ago with homelessness and migrant housing and mining. In Eastern Canada, we now have 2,700 beds on rent, absorbing many, many of the Western Canadian assets, infrastructure. And disaster relief is another area, again, that we weren't that focused on several years ago. And another market that is proving to be quite interesting with a lot of opportunity is the US market absorbing Canadian assets and working sort of through that and getting projects online that also help increase the utilization. And then as Trevor alluded to, we will still add capital that's underpinned by really nice projects to our workforce fleet. We are, I think, getting pretty close to sort of an optimal fleet size and bed count size, but we'll continue to downsize where we can. And then sort of if you just move over to Australia, it's a very active, robust market that we will continue to grow that business as well and increase fleet and sort of keep it at really healthy utilization rates.

Operator

The next question comes from Matthew Lee from Canaccord Genuity.

Matthew Lee

I was a little late, so if this is a repeat. But I want to start on the Workforce Solutions side. You had a nice big pickup on the nonrental revenue front, which I take with installation. You've talked a little bit about the couple of projects that are online right now. But what sort of utilization are you expecting on the back half of the year? And then maybe how should we think about those two mountain pipeline projects in terms of how many basis points of utilization that they can potentially cause it to decrease in 2024?

Trevor Haynes

Yes, it's a very good question and it's something we've been looking at for a number of years is where the large pipeline projects come to conclusion. Fortunately, for us, we've seen a really nice strengthening in project deployments on the WFS side, which is driving utilization growth through the end of the year here. And so we think that will offset sort of for new -- reasonably stable utilization level when we look on a year-over-year basis as we move into '24. So a lot of the good work that Mike and his team have been doing in terms of finding and developing other markets for us. The timing looks like it's lining up. It doesn't always line up. But in our system, it appears that we'll be able to on a year-over-year basis. So our WFS business is able to take those assets back, and whether it's those assets or others that gone out to replace the majority or absolutely control their growth through the end of next year in terms of our rental run rate for WFS in Canada. Mike, again, anything else you would add there?

Mike Ridley

No, I think you covered most of it, Trevor. Just a couple of sort of quick comments. A few years ago, these projects would have been far more of a factor than they are today. But as I sort of touched on earlier with Frederic's question, the business is far more diverse industry wise and geographically. And I'm confident that over the course of '24, we'll get back to a very, very healthy utilization rate. And then further to that, we will have some operations margin as well that would come out of the camps that are coming out as well. And our contracted rental revenue, as Trevor talked to during his part is up to $34 million, which is double from what it was previous quarter, and our sales pipeline is healthy as it's ever been. So I'm very confident we'll get our utilization back once these projects come off.

Trevor Haynes

Matt, just we're going to add from a financial perspective what the impact is here, just on a percentage basis.

Toby Labrie

As we move through the year, and Mike mentioned, we have contracted revenue in place that we continue to see new asset deployments and we expect that to continue through the back half of 2023. And as we move into 2024 with those projects coming off that we see essentially a flat growth year-over-year on utilization from the start of the year and then continuing to grow from there. And so we expect our robust pipeline of opportunities to continue to translate into new projects.

Matthew Lee

So on an average basis then utilization rate in 2024 will actually be up against 2023?

Trevor Haynes

What we're suggesting is that -- what we're seeing at this moment is that we would be in a similar range year-over-year, but with a potential offside bias that we can update as we move through quarters here. What we're looking at opportunity set is as you guys also mentioned is really encouraging. So as we move along through subsequent quarters, we can update you or you'll see it in our numbers as our win rates could inform some sort of strength to what we're seeing right now.

Operator

This concludes the question-and-answer session. I would like to turn the conference back over to Trevor Haynes for any closing remarks.

Trevor Haynes

Thank you, operator. We appreciate everybody's attendance here today on a Friday going into a long weekend here in Canada. And as always, we are available through Jason Zhang for any additional. So enjoy the balance of the summer and the long weekend. And thank you once again for joining us.

Operator

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.

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