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Good day, ladies and gentlemen, and welcome to the Badger Daylighting 2018 First Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Paul Vanderberg, President and CEO. Sir, you may begin.
Good morning, everyone, and thank you for joining Badger's 2018 First Quarter Investor Call. With me on this morning's call is our CFO, Jerry Schiefelbein; and Jay Bachman, our VP of Financial Operations and Investor Relations. Our Q1 earnings and disclosure documents were released yesterday and can be found in the investor section of our website or 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 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 upon them as actual results may differ materially from those expressed or implied. For more information about material assumptions, risks and uncertainties that we believe may be relevant to such forward-looking statements, please refer to Badger's 2018 first quarter management discussion and analysis. Further, such statements speak only as of today's date and the company does not undertake to update any such forward-looking statements. So with that out of the way, let's jump right into the quarter. We're very pleased with the strong start to 2018 from both an operational and a financial results perspective. Our Q1 2018 revenue was $120.6 million, up 20% from the prior year. Q1 revenue was up 29% in the U.S. and that's in U.S. dollar terms, and Canadian revenue was up 14%. We continue to see revenue growth across our broad range of end-use markets segments in the quarter. We're seeing increased year-on-year activity levels across the majority of markets with pricing generally consistent to modestly higher than we had in the prior year quarter. U.S. revenue growth was particularly impressive, given the fact we did experience modest headwinds in the quarter due to the weather conditions that everyone's been talking about the last several months. Although, weather did not materially impact the quarter as a whole due to our geographic diversification, it did result in regional operation challenges, ultimately reducing total revenue for the quarter and increasing our op cost. Again, the impact was not material on a whole, but worth noting in light of the strong performance in the U.S. with this impact included in our overall 2018 Q1 results. Even with weather, our revenue run rate as we exited the quarter was strong. Improved overall activity levels can be attributed to the ongoing adoption of hydrovac in the market, general market demand driven by economic activity, and continued improvement in our oil and gas markets. In addition, we continue to see revenue growth due to our business development efforts, which is a key differentiator of our Badger business model. For the quarter, the U.S. provided 71% of revenue and Canada provided 29%. Q1 adjusted EBITDA was $24.4 million, an increase of 23% from last year. Q1 adjusted EBITDA margin was 20.3%, 0.05% of a point higher than Q1 last year. The improvement in margin was driven by lower direct cost, the result of strong cost management through the winter season. We really need to recognize John Kelly and our entire operations team for the great work on managing direct costs in both Q4 last year and into Q1 2018. The entire operations team had diligently focused on managing this very important aspect of our business, and our results in Q1 reflect their hard work. Lower direct costs were partially offset by higher G&A expense. The increase in G&A is primarily due to staff additions made through the back half of 2017, higher incentive plan costs than what we had in Q1 last year, and general costs associated with our strategic initiatives. We anticipate that G&A as a percentage of revenue will moderate over the next several quarters due to the seasonality of Badger's business as our revenues are typically stronger in the middle quarters. And we -- but we do expect that the full year 2018 G&A as a percentage of revenue will be higher than our long-term target of 4%. I would also like to highlight that our Q1 results reflect the benefit of the updated U.S. tax legislation, which we discussed in our 2017 Q4 release. Our Q1 current tax expense was $1.5 million lower compared to the prior year, due largely to the benefit of the U.S. federal rate reduction to 21% and a full quarter's benefit of the updated bonus depreciation provisions. We will continue to benefit from these changes throughout the rest of the year. The operations team continues to successfully manage growth in our fleet utilization. Q1 revenue per truck per month was $27,300, up 10% from the RPT of $24,896 in Q1 last year. In the quarter, we added 45 net hydrovacs to the fleet, building 55 units and retiring 10, and we're operating 1,154 units at quarter-end. For full year 2018, we now anticipate building between 160 and 200 units. Those numbers both up 20 units from our view at Q4, but we continue to expect to retire between 60 and 80 units during the rest of the year or during the full year. March saw the Red Deer plant build our 1,500th Badger. We're all pretty excited and proud of this milestone and very proud of our talented team that we have at the Red Deer plant. Our balance sheet continues to provide us with the necessary financial flexibility to support our tremendous organic growth opportunities, while also strategically managing overall capital allocation. At March 31, 2018, total debt less cash was approximately $46 million or 0.4x trailing 12 months compliance EBITDA. You may have also noticed that there were a number of changes to the presentation of revenue in the quarter as a result of the adoption of IFRS 15 for the year 2018. As disclosed in our MD&A and financials, adoption of IFRS 15 did not impact Badger's adjusted EBITDA or net earnings or cash flows. The net impact of IFRS 15 on Badger's revenues and margins, as detailed in our Q1 disclosure documents, was not material. One area we should highlight as it relates to the adoption of IFRS 15 is the ability for financial statement users to try to recalculate RPT based on information contained in the MD&A. As you know, RPT is an internal key performance indicator that is based on gross hydrovac revenue. With adoption of IFRS 15, our operating partner and franchise revenue is now presented on a net basis. This presentation change will result in an inability for an external user to recalculate RPT on the basis that would have been -- on the basis that users would have been able to do so in previous years. We do, however, consider RPT to be an important KPI and an important utilization measure in the managing of the business and we will continue to use it on a gross basis. Next, we'd like to provide an update on our normal course issuer bid. As announced with our Q4 results, the board approved implementation of a normal course issuer bid or NCIB under which Badger will have the option to repurchase shares for cancellation. The Toronto Stock Exchange has accepted the notice filed by the company to implement the NCIB. In connection with the NCIB, we've entered into an automatic share purchase plan with a broker to facilitate repurchases during times when the company ordinarily would not be in the market due to insider-trading rules or our own internal trading blackout periods. Purchases under the NCIB will be made by the broker based on parameters of the exchange, Canadian securities laws and the terms of the broker agreement. The automatic share purchase plan has been accepted by the exchange and will be effective as of May 15, 2018. Under the NCIB, Badger may require up to 2 million common shares during a period from May 15, 2018, to May 14, 2019, or on an earlier date if we complete purchases of shares under the NCIB, or if we elect to terminate the NCIB at our option. Our strong financial performance in 2017 continuing in the first quarter of 2018, combined with expectation of future growth consistent with our strategic milestones, the strength of our balance sheet, all underpin the belief that from time to time Badger's share price does and has not reflected the underlying value of our common shares, and the NCIB provides Badger with an additional tool to increase long-term total shareholder returns. Any shares we purchase under the NCIB will be canceled. We would also like to comment regarding the recent written confirmation that Badger received from the Alberta Securities Commission regarding conclusion of its investigation into allegations by short-sellers and the press release Badger issued back on May 2. In this confirmation, the commission said that it is closing its investigation into allegations by short-sellers of accounting and disclosure-related breaches of Alberta securities laws. As part of this process, the ASC authorized Badger to divulge that an investigation was conducted and was concluded with no enforcement action taken. It's helpful to provide some color on our ability to disclose such matters, especially involving the ASC relating to this past series of events, and it also will reply future events. We would like to highlight that the Alberta Securities Act, as detailed in Section 45 of the Act, requires that investigations by the ASC be kept confidential unless the AIC (sic) [ASC] gives specific permissions to divulge them. As a result, Badger could not and would not be able to disclose the existence of an investigation unless the ASC gave the company permission to do so. While we don't typically comment on interactions with regulators, we believe that the extraordinary circumstances regarding this matter warranted disclosure to investors. Badger has over 2,000 employees who work hard every day to build and maintain this company's reputation. Accusations that attempt to damage this reputation need to be addressed in an appropriate and responsible way. Lastly, we'd like to spend a minute on our outlook for the remainder of the year. In 2017, Badger grew revenue as a result of ongoing growth in the adoption of hydrovac, particularly in the U.S., and we anticipate this trend to continue in 2018. The operational and financial improvements we've realized throughout last year and into the first quarter of this year are a testament to the strength of Badger's business model. We're pleased that the macroeconomic environment in both the U.S. and Canada is anticipated to support ongoing infrastructure, construction, and welcome oil and gas activity levels for the remainder of the year. We continue to review all aspects of our business to facilitate long-term sustainable growth, which will ultimately support future revenue, cost and margin improvements. The market opportunity is there. The market growth is there, and Badger is very focused on executing to make sure we capture it. With execution on another strong quarter, following the significant progress we realized last year, we continue to make substantial progress in meeting our strategic milestones we established last year. In particular, the 29% increase in Q1 U.S. revenue provides us with a very strong start to the fiscal 2018. We remain focused on managing our business for the long-term. In 2018, we are again focused on our same strategic milestones, which are: number one, doubling our U.S. business from fiscal 2016 levels over the succeeding 3 to 5 years; growing adjusted EBITDA by a minimum of 15% per year; targeting adjusted EBITDA margins of 28% to 29%; and driving fleet utilization with revenue per truck per month above $30,000. In closing, we're pleased to report on our Q1 results and are looking forward to another great year. We appreciate the support from our shareholders, our customers, and the hard work and dedication of Badger's employees. We would now like to turn the call over back to Bruce and open up for questions.
[Operator Instructions] And our first question comes from the line of Yuri Lynk from Canaccord Genuity.
Nice quarter. Paul, it was only 6 weeks ago that you provided initial build rate guidance. You've taken it up materially this morning. Can you just provide some more detail on what changed in the intervening 6 weeks? And where you're seeing the strength broadly, Canada, U.S., is it in oil and gas or infrastructure? Just some more color would be appreciated.
Yes. Sure, Yuri. Happy to do that. As we did talk about when we put Q4 results out. Early in the year, it's always a little more difficult to see how those 2 middle quarters are going to pan out, really Q2 and Q3. And if you look at the way our seasonalization has evolved, given the great growth we've had in our non-oil and gas infrastructure and new segments, those 2 middle quarters are really being our peak -- becoming our peak quarters in the company's overall end-use market mix. So Q1 is always a little bit more of a fuzzy view as to how the total year would shake out. But we were very pleased even with the weather challenges to see how Q1 ended up. And as I mentioned a minute ago, the revenue run rate as we exited the quarter was very solid. So that combined with other factors that we continue to look at, we've had pretty good overall growth across most of our business segments regionally in the quarter. And the other 1 you mentioned, which is recovery and continued growth in oil and gas is a real positive for us that really wasn't there at this time last year, and we've had good growth year-over-year in our oil and gas segments, again which was new in 2018. So overall, we're more optimistic. And obviously, it's reflected in the build rate.
That's fair. Pricing has been slowly getting better last year or 2, but it hasn't moved much. When -- what are you seeing on pricing? And are there new markets where it's starting to increase more rapidly?
Yes, as we said in our disclosure, actually the last couple of quarters we've seen modest improvements in pricing across our markets. We use the word modest because it is. And when you take a look at the acceleration, especially in our oil and gas markets, we hear a lot about labor shortages and labor being in short supply. And as labor gets in shorter supply, contractors have more value. And I think all of this -- and that service, the energy business will be taking a look at that because it is harder to get operators. And when labor is in shorter supply, by definition, your costs are going to be going up, and by definition you need to get that back in higher rate. So that's probably the biggest structural change across our annual segments. If we look at where we're this quarter in '18 versus the previous year's quarter. And as labor continues to be tight, we're going to see those cost pressures supporting rate increases in the industry.
And our next question comes from the line of Brian Pow from Acumen.
My first question relates to bringing 45 new trucks into the fleet. Just on -- on your previous conversation, just talking about labor issues and things like that, so maybe if you can just give us an understanding of the time from when a new truck arrives at its destination? And how you quick you have it up and working and sort of getting it to the normal levels of utilization?
Okay. I appreciate that one. Our ultimate objective is to have a trained operator ready when a truck arrives in a local area. And we work very hard to do that. We typically would like to -- even in the Q1 slower periods be hiring and training operators for when spring hits. And if you recall, spring really hit hard last year. We had a real acceleration of activity. And as I mentioned a minute ago, we exited the quarter at pretty good run rate. So we're working very hard to bring on and train operators. The most important thing that we do is get our operators trained so they're out there working safely, which is what our customers really, really demand, that's why they hire us as a hydrovac company. And this is a big focus for us. This is the biggest reason really as far as our ability to support growth is why we established a human resources function last year, and at the end of Q1, we were just starting to establish our human resources function, and Tracey Wallace has joined us and built out a very good team across the business. It's reflected in G&A. I'll probably got some questions on the G&A, but I could not be more pleased with how that has developed, and how our recruiting and training programs are developing. It's still early days, but when you look at our organic growth model and you look at things that are mission-critical on executing on organic growth, the human resources function and recruiting and training operators is right smack-dab in the middle of things we need to execute well on. And I'm very pleased with our progress in the last year.
So when we look at Q2, I mean, those trucks are sort of contributing to like a full extent for Q2, the ones that came in on from Q1?
Yes, would totally expect that.
Okay, great. Second question just relates -- to some extent it relates to G&A, but it just -- your longer-term margin -- EBITDA margin target. You're a ways away from that. You did reference some of the investment you are making in the business currently, but how long would you see it will take you to reach that EBITDA margin target?
Yes, well these -- our strategic milestones are longer-term targets. And we have a lot of very good initiatives that are going underway internally. Some of the biggest ones would be related to the common business practices in the operating platform that we briefed investors on, and we plan on having more information to share with our Q4 results on that, but we continue to make good progress on that. There are a lot of efficiencies that can be driven from that. And freeing up our resources to do more things in the business which will both help our top line and the efficiencies will take out expenses. So those are things that accrue only to us, and we can execute those internally and drive bottom line. I'm personally very excited about some of those as they're coming together on the strategy side. And then the second one is ongoing market activity. Part of the decline in overall margins from the peak of oil and gas. And we've talked about it a lot the last several years, is really been the excess capacity that was there when oil and gas first crashed back in 2015 and the overhang it's had on the market. What we've seen especially in the last 12 months is a lot of that capacity has been used up, and the fleet continues to -- the industry fleet continues to age and trucks are retired. So that overhang is really more in a balanced position now. And we've -- as mentioned, we have seen modest improvements in the rates over the last 12 months. We could not have said that in 2016 because we were still looking for the bottom and oil and gas is still looking for where rate pressures may bottom. So that trend is now going in the right direction, but the big thing I'm very excited about is the potential for internal improvements as we get our systems and processes lined up and standardized across our whole network. And that will be an 18- to 24-month program for us. There will be expenses that go along with that, so we'll have intervening expenses in the meantime that we'll have to go through. And we will keep investors briefed on, what those are and what our plans are when we're ready to roll that out.
Okay. Thanks, and then my last question just relates to the balance sheet, and in particular working capital. It looks like you made some good progress on the AR side and that -- is this something we can come to expect, or maybe you can just sort of talk to the progress you made on working capital management?
Yes, Brian, it's Jerry here. We just take the chance to remind people that the business is seasonal in nature. So you're going to see working capital build and erode, as you build revenues, and then move from high revenue months or quarters into lower revenue quarters. So a lot of the improvement was coming from collecting previous quarters' revenues, while of course, you build in your current quarter. So it's really more of a seasonal activity.
Our next question comes from the line of Jonathan Lamers with BMO Capital.
On the evaluation of Badger's technology and business support applications and progress. Could you update us as to where you are in that process? Whether you've begun to implement a new system? And maybe discuss got how extensive a system is being considered? What functions will be covered?
Yes, happy to Jonathan. We are at the end of the strategy phase. And we are currently in discussions with suppliers for a software platform. And also consultants to implement that platform. So that's right where we are. We will have more details to disclose along with our Q2 results. So we expect all of this is to get over the goal line during Q2. And also we're looking at a team of internal thought leaders within Badger to drive our common practices and actually go through and blueprint all of our internal practices to get to best practices and then pick those out consistently and drive those across the whole organization. So this is really going to hit the -- the rubber is going to hit the road in Q2, and we're looking forward to a fulsome, more fulsome discussion of that along with our Q2 results.
Okay. And just to clarify. You believe this is adequately provided for in your SG&A guidance provided in the MD&A of 4% to 5.3% for 2018?
Yes, anything that would be related to the project would be discrete from our current run rate of SG&A. In Q1, we had just a small amount, about $200,000 related to strategy work, and not really a material amount that would have been in our SG&A for the quarter. It's just related to strategy and some consulting cost. So the real ramp-up will come when we actually announce what we're doing. And under accounting convention, I think investors should expect to see a mix of expense and capital items when the total cost of the platform project is rolled out. But we'll have a lot more detail along with our Q4 -- our Q2 disclosure.
Right, okay. So moving on. On the oil and gas, Paul, you made some pretty positive comments about the demand improvements there. But if we look -- and I understand it was up year-over-year, but if we look at Q1 versus Q4, can you kind of describe the improvement in the markets that you saw sequentially? And is it still refinery and pipeline pick up? Or are you starting to see any change in the fieldwork?
Sequentially, things have been pretty busy especially in the U.S., and that activity continues. Labor is tight and the markets are busy. You get into the Permian, that's really where it's the hottest, but even the whole Eastern slope up into the Dakotas has recovered nicely from where we were in Q1 last year, and that's a big benefit for us. And it's important to note that even in the downturn, we cut our costs significantly and got right sized in those markets, but we maintained Badger's position and our ability to service, and we're garnering the benefit of that as we speak. Our guys did a great job of screwing down our operating cost. So we have seen some really nice operating leverage as the volumes have improved. So we're pretty pleased with the results but sequentially quarter-over-quarter it's been pretty consistent. But versus where we were this time last year, there's been a big improvement.
And on those -- on the cost control, I mean now that you have more business development officers in place. Is this -- would you say this is freeing up resources for the area managers to focus more on your key initiatives like customer satisfaction and cost control. And I guess, as you add more business development officers, do you believe there's an opportunity for smoother cost management than we've seen in the past results?
Well, one of the big factors in how business development and sales work hand-in-hand with operating costs is trying to broaden the customer base and smoothing out demand. The toughest part of op cost to manage for an area manager is when demand spikes up and down and managing our operators and our labor. But if things are steady, and we can keep things at a steady pace much, much better, much easier to manage our op cost there. So those 2 really do work hand-in-hand. You know we have added a lot of BD folks. It's a real differentiator that Badger has versus smaller competitors. But we have had some great year-over-year volume growth, and as Jerry mentioned earlier, we haven't seen huge pricing growth. So Badger's top line is mostly been driven by volume growth. And we have had great success in driving top line with our BD programs. And we've added people to keep up with the volume growth that's really what you're seeing at Badger over the last 18 months.
And one question for Jerry. For the other revenue, I believe historically the vast majority of that was in Canada. Following the revenue recognition changes, are you able to tell us how much of that would be in the U.S. versus Canada now?
I can't give you any specific numbers and I haven't already disclosed publicly. The other revenues in the states would be associated equipment and services with hydrovac whereas we do have 2 separate businesses in Canada -- 3 separate actually, we have a shoring business, very tiny, and then there are Benko Sewer Service business and our Field Tech business.
But to clarify, was there any change for this category now that the -- some of the third-party revenues are being recorded on a gross rather than a net basis?
No, the third-party revenue is going to be the pass-through type revenues, disposal fees, water fees. If somebody is doing backfill and we're arranging for it, that type of activity set.
And our next question comes from the line of Dimitry Khmelnitsky from Veritas.
I wonder if you could elaborate on what areas did the ASC look at, if you don't mind?
Happy to address that question, Dimitry. Our disclosure is limited to what's in our press release and in our Q1 results. So I have no additional information to provide on that.
And our next question comes from the line of John Segrich with Luminus.
Just wondered if you could maybe help us out a little bit going forward now that you've changed the presentation like you pointed out, it's pretty impossible for us to calculate the RPT. So just wondering maybe, would you consider giving us the amount of disclosure that is required to be able to calculate that metric, just so we can use it and think about it going forward again, since you don't give price or utilization, and that's about the only thing people have to look at your business?
Yes. So John, it's Jerry here. We kind of saw this problem coming. We provide RPT as a utilization metric, but it seems many investors are using it as a financial modeling tool which we -- we would see as unfortunate. Of course, you're in-charge of your own models. But I don't think we're going to be revealing more data in the future. We will continue to provide RPT because we think it's an important utilization metric. But I don't see us providing additional supplemental and non-GAAP information.
Okay. So I mean you wouldn't consider just giving us the partner revenue that flows through hydrovac by U.S. versus Canada, so people can really understand your business?
I think people can understand our business. So -- and at this point in time, we don't intend to split that out. But yes, at this time I don't think we're going to split that out.
John, it's Paul. It's early days. We try to be very fulsome with our IFRS 15 disclosure. And I think we're probably detail-wise above what the standards would call for. But comments and questions like yours are important to us. And as we go forward, we'll certainly consider the disclosure. And if you look back at what we did throughout 2017, we took people's comments to heart and we did make changes in disclosures. So that -- we would appreciate continuing that discussion with you.
Yes, great. No, it's been helpful the disclosure changes you guys have made. And it's a little extra but it would help people really understand the metric since you don't really give price or volume.
No, it's a good point. We'll continue the discussion, thank you for that.
And at this time I'm showing no further questions. I'd like to turn the call back over for any closing remarks.
Okay, thank you, Bruce. We appreciate everyone's participation in the call today. We appreciate your continued interest in Badger, and we're looking forward to a great year. Thank you.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.