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Good day, and thank you for standing by, and welcome to the Badger Infrastructure Solutions Limited 2021 Second Quarter Results. [Operator Instructions] Please be advised that today's conference is being recorded. I will now hand today's conference over to your speaker, Trevor Carson. Please go ahead.
Thank you, and good morning. This is Trevor Carson, VP of Investor Relations and Corporate Development for Badger. Welcome to our second quarter 2021 earnings call. On the call this morning are Badger's Chief Executive Officer, Paul Vanderberg and Darren Yaworsky, Badger's Chief Financial Officer. Badger's 2021 second quarter earnings release, MD&A and financial statements were released after market close yesterday and are available on the Investors section of Badger's website and on 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 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 results -- 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 2021 and -- 2020 management discussion of analysis, along with the 2020 annual information form. Further, such statements speak only as of today's date, and Badger does not undertake to update any such forward-looking statements. I will now turn the call over to Paul Vanderberg.
Thanks, Trevor. Good morning. As always, we'd like to start the call with a discussion of health and safety. COVID have obviously been with us for 1.5 years now, and we've been very proud of the companies and our employees' response to keep our customers safe and our employees safe. Our current focus is very strongly focusing on vaccinations. Our vaccination rates have been picking up in many of our areas. We continue to promote the health and safety of employees and customers by encouraging our employees to get vaccinated, especially with what we're seeing with the spread of the Delta variant. We're beginning now to see various forms of government develop more comprehensive guidelines around vaccinations, which we support and that we believe these actions are going to be a required part of the solution to containing COVID.Onto the Q2 business trends. As we discussed on our first quarter call, we were encouraged with the improvement in market activity levels when we exited March and got into Q2. Our April U.S. revenues in U.S. dollars were higher than April 2020 levels and in line with pre-pandemic April 2019 levels. However, many of our U.S. regions experienced uncharacteristically lower activity levels in May. Activity picked up again in June, with June revenues higher than June 2020 and in line with June 2019.This variability in activity that we saw during the quarter across our regions from week-to-week and from month-to-month has been a significant challenge for managing direct expenses in our business model, where we always want to have a truck and an operator available when a customer calls. This model is valued by our customers, but has been a real challenge to manage during the uncertainty of activity levels in the COVID shutdown and in these early months of business recovery.Based on these factors, our Q2 expenses ran at a higher percentage of revenue with margins lower than planned. For July, revenue was trended modestly better than 2020 levels. With the recovery that continues underway, we're very actively managing the operations, and we're looking forward in planning our service delivery levels. We've rehired, hired and trained a large number of operators since late fall last year. We've also reactivated a significant portion of the fleet that was idled during the shutdown. These activities have occurred over a relatively short period of time, and the associated expenses have negatively impacted margins, especially in the areas of direct labor and maintenance repair.Badger is focusing closely on activity levels with our customers and reviewing all aspects of operating expenses to balance revenue and expenses in the short-term while ensuring that service capacity is in place when needed. We're also building the company's capabilities and continue to position the business to target the market opportunity we see longer-term for nondestructive excavation.As part of targeting long-term growth that we see, the previously announced executive search for a commercial leader was successfully concluded last month with the addition of Rob Blackadar, our COO. Addition of a COO with extensive commercial management experience enables Badger to strengthen our operating focus on sales and marketing and our focus on driving volume growth across our broad customer segments.As we look to Q3 and for the remainder of the year, we're seeing increases in customer activity in a number of our regions. Our utilization is continuing to increase, and we continue to work on recruiting and training operators to respond to this increased activity. With continued revenue growth and focus on matching our operating expenses to anticipated revenue as the recovery continues, we anticipate margins returning to historic levels.Now on to operations. During the quarter, we built 5 hydrovacs while retiring 18; ending the quarter with 1,367 units. We continue to expect to build between 20 and 30 hydrovacs this year and continue to expect to retire approximately 60 to 70 units. We've maintained the base level of production at the Red Deer plant in order to retain key staff. This has been a very successful strategy throughout COVID. Our ability to scale up production is there, and we're going to be able to respond to growth in demand for trucks as market activity recovers. We are confident in our ability to ramp up production when it's needed.We've also continued to add specialty equipment to the business to provide related services that our customers request that complement hydrovac services we provide. And in the quarter, due to equipment delivery timing, this accounted for about 2-thirds of our total capex. This equipment includes sewer cleaning and inspection, locating services, backfill and disposition related equipment.While this has been a small part of our business, this has been a very successful growing part of our business. And the thing that's really nice about it is these are additional services being requested by our existing customer base. This leverages our broad branch network and Badger's operating scale.In the near term, we remain focused on driving our fleet utilization to increase return on invested capital, and of course, we'll add new units as required. The Q2 improvements in revenue per truck from last year and sequentially from Q1 are encouraging, which is another indication of ongoing business recovery. Fleet utilization goes hand-in-hand with labor utilization and operating leverage. So continued improvement in RPT is a positive trend.We've taken full advantage of the slowdown to reconfigure process flows and upgrade part storage and warehousing and Red Deer, which has increased our manufacturing capacity to at least 350 units per year. This compares to our historical peak production of 221 units back in 2014. So we have enough capacity at Red Deer to replace retired units and to provide any needed growth units.So with that, I'd like to turn things over to Darren to lead us through the financial highlights.
Thanks, Paul, and good morning, everybody. Our revenue in the quarter was $135.6 million or approximately 111% of the second quarter 2020 revenue when normalized for changes in foreign currency rates. RPT in the quarter was approximately 26,600 compared with 20,300 in Q1 2021 and 23,500 in Q2 2020. We're continuing to reposition our fleet into strategic markets to improve utilization and have moved 20 units per month on average this year.Gross margin was 19.2% with -- compared with 34.5% in the prior year. As Paul mentioned, gross profit margin was impacted by our direct cost [ ramp ] up to support the anticipated recovery from COVID-19. I should also mention that our financial results in the current year do not include the benefits of COVID related government assistance. Direct costs in the prior year included $4.6 million in Canadian emergency wage subsidies. G&A expenses were approximately $11.6 million, which includes roughly $1.9 million in onetime costs related to our strategic initiatives to enhance our organizational design and management structure.We continue to anticipate our 2021 G&A run rate expense to be approximately $40 million, excluding onetime costs related to these initiatives. Of course, we always review our costs for additional efficiency opportunities. Adjusted EBITDA for the quarter was $14.4 million compared to $35.6 million in the prior year.Adjusted EBITDA margin was 10.6% compared to 26.4%. Again, expenses and EBITDA margins in the current year reflect our investment in direct costs to position for expected market recovery and strategic initiatives to support long-term growth and shareholder value creation. For reference, adjusted EBITDA in the prior year included $5.2 million in Canadian emergency weight subsidies that's subsidizing both the direct cost and G&A, which we did not participate in, in the program, which we did not participate again this year.On to our balance sheet. Badger maintains a focus on ensuring the strength of its balance sheet and financial flexibility. We have continued to make meaningful progress in accounts receivable management, particularly collection of long-dated receivables, which continue to support our improvements in liquidity.. We restarted repurchasing common shares for cancellation in our [ ANC IP ] program after the board approval in March. And during the quarter, we purchased roughly 156,000 shares for cancellation. We also renewed our $100 million supplemental credit facility for an additional year, providing us with $400 million in committed credit facilities. With a flexible covenant package, ensuring that we have financial resources and capacity to fund both near-term and long-term growth and thoughtful capital allocation.I'd like to turn the call back to Paul for some final comments. Paul?
Okay. Thanks, Darren. We'll open it up for questions in a minute. But a couple of comments, summary comments here. Q2 was one of those quarters that was quite a transitional time for us. We experienced quite a range of operating conditions, managing the ramp-up for the summer season and the ramp-up from COVID recovery. We continue to focus on our market and customers, managing expense levels to what we anticipate future revenues to be, while ensuring that we have trucks available for our customers when they call.Our view of the significant U.S. and Canadian long-term opportunity for nondestructive excavation services and Badger's long-term growth prospects remains unchanged. We believe that the focus on infrastructure in the U.S. with an initial bill close to passage, perhaps this weekend, will further support longer-term demand for nondestructive excavation. It's pretty clear to all observers that the need to maintain and strengthen infrastructure is there, and it is real.We continue to make the moves to position Badger for this opportunity, such as expanding our marketing and our manufacture -- our marketing and management capabilities and the strength of our operations team. Badger's proven business model, operating scale and flexibility, diversification of end-use in geographic markets, combined with our historical operating track record across all stages of the economic cycle, and I can say this cycle has been unique in my business career, all support achieving our long-term growth aspirations.So with those comments, let's turn it over to Stephanie for questions.
[Operator Instructions] And your first question is from the line of Maggie MacDougall with Stifel.
What was your cost of capital on the new [ addition ] need to be attractive to you?
Yes. We didn't get all of that question. Can you repeat it?
That question has been withdrawn. We'll move to the next question. Your next question is from the line of Yuri Lynk with Canaccord.
Paul, it looks like your U.S. revenue was only like 5.5% below Q2 2019, which itself was a pretty tough comp. So I'm just wondering, I mean, that doesn't sound like a big deviation, and this is in U.S. dollars. So I'm just wondering, what were you -- what was the company planning in terms of revenue? And where was it off, which country, which end market? Because the top line actually seems pretty good to me. So just a little more color on what went wrong with the planning.
Yes. Well, you always try to plan ahead in our business. You have to have the trucks and operators there ahead of time. And as you well know, Yuri, that we don't operate under any take-or-pay contracts. It's services as customers need us. So that's the real -- the charm to get right in planning for anticipated revenue. So that's the backdrop to what we do day in and day out.But related to Q2, it wasn't as much planning for a level but it was the variability we saw. We saw good improvements going into April. We saw then a soft May, and then we saw an up tip again in June. And May was a particularly tough month which really impacted the quarter. You get operators, they're up. They're trained. And if you don't have the work, retention is a very important factor. So you have to fill in with things like training, maintenance on the trucks to make sure they get their hours, so you keep them. So that was a significant factor during the quarter.And then the other factor was on the [ M&R ] side. Direct labor and M&R were the 2 areas that particularly impacted direct costs during the quarter. And during the quarter, we activated about 120 trucks that have been previously idled, and that was a very significant add. That's a cost add and it's upfront. So those trucks now are running in Q3. So we don't see that as continuing. But the flip side is it was real positive because we had the demand and the anticipated demand to activate those trucks after they've been idle for quite a while during COVID. And we're seeing very solid activity levels in early Q3 and looking through the rest of the year.
Okay. Paul, given all the investments over the last 3 or 4 years in the CRM and the ERP and whatnot, I mean are you pleased with the visibility that you have into the business?
Yes. That's a great question. We had a number of discussions in yesterday's board meeting on that very subject. And the visibility and the KPI's that are available as tools for our operators are the best they've ever been. And we're looking at new ones all the time. But as we go forward, we're going to be in a lot better position to monitor that. And it's going to be really good with Rob Blackadar coming on board. The next major area that I see as an opportunity is in the sales and marketing area and getting into the price matrix, analyzing what we can do on the whole customer side of things, which is information that we have, but we haven't really begun to leverage yet. So that's the next major area that I'm looking forward to.
Your next question is from the line of Jonathan Lamers with BMO Capital.
On the U.S. gross margins, is the issue, the RPT, that's close to 30,000? Are there other factors at play? It sounds like from reading the MD&A that there might be 2 other things or 3 other things. Like, one would be the recruitment costs and the reactivation of the trucks that you mentioned, 2 would be that it sounds like low-margin markets might be recovering faster than higher-margin markets. And then third, based on the language around hydrovac rates, it sounds like there was a decline in same market rates in some markets. Is that having a material impact on gross margins? Any thoughts you would have on all those would be great.
Yes. In the quarter, the additional color that we can discuss in addition to direct labor and M&R would be fuel. So we did have a pretty significant upswing in fuel during the course of the quarter. It's been going on for longer than that, but we saw it particularly in the quarter. And as everyone knows, we've had a pretty effective fuel surcharge program in place for a number of years now, but there's a lag there. So I would expect that, that's going to start to even out as we go forward in future months.
I guess to my question, though, around this language on hydrovac rates being comparable across the majority of markets. There's a shift in the language there from consistent have declines in the same market rates has been a material issue for gross margins?
Well, we always have a few hotspots that are out there. And our oil and gas markets have continued to be the areas with the biggest challenges pricing wise. But that's always been there. I don't remember that ever not being a factor in some of our markets. But actually, as we went through the quarter with utilization spiking up, we've actually implemented pricing increases across a number of our markets. And to your point, on the higher utilization that supported those increases. So that's actually what occurred as we went through the quarter.
Okay. So would you have a comment on your ability to pass-through wage inflation in this environment?
Yes. Well, that continues to be a work in process. And I think that would probably be a valid comment for lots of labor-intensive companies. And -- but our success with the increases we put through during Q2, and those were in the second half of the quarter, would indicate that the market is more accepting of price increases, given the general understanding of labor costs and also the general understanding of supply across a wide range of industries. So we were pretty pleased with the way that last round of increases went. So we'll be monitoring utilization closely and continuing to monitor rates and pricing.
Rob Blackadar seems to have a very impressive resume on the sales front. Could you share with us some additional color on what you have asked him to do and the opportunities that you see on the national account side?
Yes. No, that's a great question. Rob has been with us about 3.5 weeks. He provided his initial thoughts to the board yesterday, we had a very productive discussion. And the interesting thing about recruiting an individual like Rob is he's very diligent in researching, badger, very diligent in researching our end-use markets, our long-term opportunities, and he voted with his confidence by joining Badger. So we've been very pleased with that. And he's taking a fresh look at our operations function overall. And with a specific approach to strengthening our sales and marketing operations. And the big opportunity that I see is to continue the transition with Badger sales and marketing like we've transitioned other functions at Badger and transitioning from a very decentralized, locally driven approach where each area manager pretty much has done their own thing to more of a local and then a regional and then a national or corporate approach, as you said, with corporate accounts.So I think, obviously, he has to have some time to settle in, but there are some significant opportunities there that he's very well positioned for experience wise and knowledge wise. And I can say that I've been very pleased with how quickly he's integrating into the operations. So stay tuned on that one, but I'm very, very pleased with what we've seen so far.
Okay. Last question, if I may. Just on the July outlook. Paul, you mentioned that you've seen continued improvement sequentially in sales, I believe. Like historically, we would see something like a 10% to 20% uplift in RPT in the U.S. business at this time of year. Do you have any color for us on whether what you're seeing is seasonally as consistent with the historical seasonality?
Yes. Well, I don't want to get into specific guidance, Jonathan, but your comments about U.S. RPT nudging into the low 30s is very appropriate. And I think if you apply a typical seasonal pattern, I think the expectation could be pretty reasonable.
[Operator Instructions] And at this time, there are no further questions.
Okay. Thank you, Stephanie. I would like to thank everyone for participating this morning. On behalf of our customers, employees, suppliers and our shareholders. We appreciate everyone's ongoing support that makes Badger successful. So Stephanie, you can end the call. Thanks.
Thank you. This does conclude today's conference call. You may now disconnect.