Black Diamond Group Ltd

TSX:BDI

Earnings Call Transcript 2022-Q1

[Operator]

Thank you for standing by. This is the conference operator. Welcome to Black Diamond Group's First Quarter 2022 Conference Call. [Operator Instructions].

I would now like to turn the conference over to Jason Zhang, Investor Relations. Please go ahead.

[Jason Zhang, executive]

Good morning, and thank you for attending Black Diamond's first quarter results for 2022 conference call. With us on the call today is our CEO, Trevor Haynes; and CFO, Toby Labrie. We are also joined today by COO, Modular Space Solutions, Ted Redmond; COO, Workforce Solutions, Mike Ridley; and CIO, Patrick Melanson.

Our comments today may include forward-looking statements regarding Black Diamond's future results. We caution that these forward-looking statements are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations. Management may also make reference to non-GAAP financial measures on today's call, such as adjusted EBITDA, free cash flow, ROA or net debt. For more information on these terms, please review the sections of Black Diamond's first quarter 2022 Management's Discussion and Analysis entitled Forward-Looking Statements, Risks and Uncertainties and non-GAAP measures.

This quarter's MD&A, news release and financial statements can be found on the company's website at www.blackdiamondgroup.com as well as on the SEDAR website. Dollar amounts discussed in today's call are expressed in Canadian dollars unless or otherwise and are generally rounded.

I will now turn the call over to Trevor Haynes to review the quarter.

[Trevor Haynes, executive]

Thank you, Jason, and good morning. Thank you for joining us to discuss our first quarter results. The company has had a strong start to the year as we continue to execute on our plan to grow and diversify the business. This is reflected by strong key performance indicators throughout the platform. We are seeing the intended results of these multiyear strategies while also benefiting from certain macroeconomic tailwinds. One of the results of the strength and stability of the company was the reinstitution of our quarterly dividend last year, which we have since increased for 2022.

Specific to the first quarter of the year, we generated consolidated revenue of $70.2 million and reported adjusted EBITDA of $17.9 million. These were improvements of 7% and 35% from the comparative quarter, respectively. We also generated $13.5 million of free cash flow in the quarter and our consolidated return on assets or ROA improved 5 percentage points to 17%, driven by increasing rental rates in MSS and the unlocking of operating leverage in WFS through increasing utilization of existing assets.

Consolidated rental revenue of $26.9 million increased 26% from the comparative quarter as MSS rental revenue of $16.1 million and WFS rental revenue of $10.8 million grew 16% and 44%, respectively. MSS reported first quarter adjusted EBITDA of $10.4 million, up 1% from the same quarter last year and total revenue of $34.4 million, which was down 3% from the comparative quarter. Our MSS business unit continues to see healthy demand in all regions, and we anticipate continued growth in the second quarter and beyond with respect to our base of high-margin recurring rental revenue.

We expect continued expansion of the rental fleet, increased uptake in VAPS and ongoing escalation in average rental rates across the fleet, which, for the most recent quarter was up 9% year-over-year on a constant currency basis. Custom sales revenue was down year-over-year, but can vary from quarter-to-quarter due to project timing. That said, the sales pipeline remains robust, and we expect stronger sales revenues in the second half of the year.

In WFS, Q1 revenue of $35.8 million was up 17% from the comparative quarter, while adjusted EBITDA was $12 million, up 97% from the same quarter last year. We are seeing positive momentum across the platform driven by our efforts to diversify this business, streamline operations, while also continuing to monetize underutilized assets. Average utilization in WFS has risen to 48% from 36% last year. We are seeing particular strength in Australia, where we are now essentially fully utilized but have also seen continued improvement throughout our Canadian and U.S. markets. The outlook into the balance of the year is positive as the segment's increasingly diversified customer base remains active, along with our expectations for existing larger projects to extend.

LodgeLink, our digital marketplace offering that is bringing innovation to the crew travel industry continues to scale. This business had another all-time record in the quarter with over 76,000 room nights sold in the first quarter, up 56% from the comparative quarter. Net revenue for the quarter was $1.3 million, up 86% from the comparative quarter. At the end of the first quarter, LodgeLink had 7,337 listed properties servicing 642 distinct corporate customers and their thousands of crew members. LodgeLink has had a strong start to the year, and we expect ongoing growth in volumes as we continue to demonstrate a unique value proposition by leveraging increased sophistication of our tech platform with this addressable market of approximately USD 60 billion.

We implemented a strategy several years ago to scale and diversify our specialty rental platforms and scale our crew travel platform. And as a result, are seeing a notable evolution in terms of the quality and stability of our revenue streams and cash flows across the Black Diamond portfolio. We plan to continue building on this momentum by expanding our MSS business, both organically and through acquisitions and by improving utilization in our WFS business, while aggressively growing our B2B travel tech ecosystem in LodgeLink.

I will now turn the call over to Toby for some further details on the first quarter financial results. Toby?

[Toby Labrie, executive]

Thanks, Trevor. As Trevor mentioned, total adjusted EBITDA for the quarter was $17.9 million, an increase of 35% from Q1 2021. This drove diluted earnings per share of $0.07, an increase of 40% from the comparative quarter. It is also worth repeating that total rental revenue for the quarter was $26.9 million, which represented a 26% increase from the comparative quarter. The increase in our core recurring rental revenue as well as stronger lodging revenue resulted in an ROA for the first quarter of 17%.

At the end of the quarter, net debt of $156.6 million was down from $169.2 million at the end of Q1 2021. Our current net debt to adjusted EBITDA ratio as of March 31, 2022, of 2.3x is within our target long-term range of 2 to 3x. Our average cost of debt for the quarter was 2.3%. And over the last several quarters, we have entered into interest rate swaps to lock in fixed rates on approximately 1/3 of our debt during a lower rate environment. We believe our balance sheet is conservatively levered with almost $110 million of available liquidity. We have ample dry powder to continue growing our business both organically and through acquisitions, such as the tuck-in MSS acquisition in our Alberta market that we announced earlier in the week.

On a consolidated basis, total administrative costs as a percentage of gross profit of 40.7% was down 2.4 percentage points from 43.1% in the comparative quarter. Total administrative costs in the quarter of $12.3 million grew 22% from the comparative quarter primarily due to an increase in staffing levels, more travel-related business activity as restrictions ease and a slight increase in insurance and properties. Our asset rental model has continued to provide a strong base of growing free cash flow generation, and we continue to view our rental assets as an attractive investment in the current inflationary environment.

While the value of acquiring new assets has been rising with inflation, we continue to meet and exceed our investment hurdle rates on assets deployed on contracts with term. This inflation is also driving ongoing escalation in rental rates across the existing MSS fleet of nearly 9,000 units which was acquired at lower costs and therefore, further increases our overall return on assets.

Our WFS business is also seeing opportunities amidst strengthening commodity prices, which is improving utilization and rates with minimal capital investment in this business. In addition to reinvesting free cash flow from the business into growth capital and fleet expansion, we continue to repurchase preference shares of a subsidiary that were issued as part of the Vanguard acquisition. We have repurchased $4.6 million of these shares over the past 6 months and intend to repurchase the remaining $6.5 million in 2022. Once these are extinguished, we will have additional free cash flow available to reinvest in the business or return to common shareholders.

In closing, our outlook for the business is robust. LodgeLink is poised for continued exponential growth and our low cost of debt on the balance sheet and liquidity position gives us meaningful optionality. We are pleased with the start of the year and remain optimistic about our business as we continue to execute on our strategies.

With that, I would like to turn the call back over to the operator for questions.

[Operator]

[Operator Instructions] Our first question comes from Matthew Lee of Canaccord Genuity.

[Matthew Lee, analyst]

Another good quarter from all you. Just a question on the MSS fleet. I know you're selling some units every quarter, but can you maybe give us an idea of the net growth in the fleet you're expecting for F '22? And then maybe how M&A fits into that picture?

[Trevor Haynes, executive]

So net growth on MSS fleet for '22 and a rough split on organic and inorganic. Do you want to start there, Ted?

[Ted Redmond, executive]

Sure. Yes. So we've got significant CapEx planned for the year, so the fleet will continue to grow. It's a bit difficult to predict because net fleet growth is offset from used sales, but we have been deemphasizing used sales this year compared to last year. So we definitely think we'll have significantly higher net fleet growth this year versus the prior year due to increased CapEx and lower used sales. What was the second half of the question?

[Trevor Haynes, executive]

Organic versus inorganic.

[Ted Redmond, executive]

Yes. So that's the organic piece. The inorganic piece, we had a nice pickup from the acquisition of Cambrian in our Calgary branch. It's hard to predict inorganic M&A sales or sales done until it's done. So maybe I'll pass it back to Trevor if he wants to talk about the pipeline of M&A.

[Trevor Haynes, executive]

Yes. Well, we won't comment upon any specifics, Matt, but certainly, we're actively looking at opportunities and we have a pipeline and the timing of that and our success in buying within our framework for valuation and quality of asset. We would like to do another tuck-in before the end of the year, if not more, but very difficult to predict. So we're very focused on what we have control over, which is what Ted mentioned with regard to the organic.

[Toby Labrie, executive]

And I think with the current CapEx profile that we see, you'll note that we have a significant amount of capital commitments in place. We also have secured manufacturing slots with our manufacturers so that we can guarantee some of that capacity because we do see tightness in the manufacturing market today. So with that, it makes it some -- poses some challenges to growing our fleet organically, but I do think that we'd like to target in that 5% to 10% growth range between the organic and inorganic fleet growth for the year.

[Matthew Lee, analyst]

That's great color. And then maybe on the CapEx, if I think about gross CapEx, how does that split between your 2 segments?

[Trevor Haynes, executive]

The bulk of the growth CapEx is going towards MSS, which is consistent with the strategy we've shared over the last several years of scaling up MSS. We do, however, have a very robust market in Australia, the Australia business fits under our WFS business unit. And we are, on an organic basis, adding net fleet, and so we have CapEx in Australia, albeit on a smaller percentage than a significantly smaller percentage than MSS here in North America.

So those are the 2 key areas that we have capital allocation, a little bit around the maintenance and repurposing side of WFS as we see opportunity to get some assets out to work, some of which haven't worked for a few years, and sometimes it takes a small amount of capital to get those buildings operational again. And then, of course, we continue our books took in cadence with LodgeLink as last year in terms of capitalizing the technology development or the software build for that business, but the boat is going into MSS.

[Operator]

Our next question comes from Frederic Bastien of Raymond James.

[Frederic Bastien, analyst]

Yes. I was surprised to see you make this tuck-in acquisition in your own backyard, so to speak. Can you just go through the rationale and perhaps expand on whether they were potentially other opportunities to expand the fleet in other regions, but why did you decide to act on that specific one?

[Trevor Haynes, executive]

Good question. Thanks. Cambrian has operated in the Calgary market for 40 to 50 years. Well-known brand. They occupy a very distinct part of the market here. So the rationale works a couple of ways. We've talked to the owners for about 16 years and the opportunity in terms of timing happened to be now. Also, as we look to shift our operations in the Prairies, as we've built the fleet, it sort of mirrored what was happening in Western Canada with regard to resources.

And so the fleet on the MSS side was more sized towards the larger 12/60s and complexes that would work on big projects up north. As we've become increasingly focused in the urban areas, we found that we didn't have the complete fleet mix where it's Cambrian brought to us. The other menu items, if you will, so smaller wheeled units, a small amount of mobile storage.

And so really makes us much more competitive or more clearly matched to the different types of demand within the city of Calgary. And we're also quite bullish the city is growing again. And so we think it fits in really well from a synergies perspective. We have a full operating branch here. And so we've brought over the assets and contracts but don't require any people or infrastructure. So it's a really nice accretive transaction from a well-respected seller who has a really good business. We're quite pleased to be the owner. Ted?

[Ted Redmond, executive]

Well, just to add on to what Trevor said, it helps diversify our Calgary and Southern Alberta business to cover more industrial, commercial, construction type customers. So we think that, that's a positive.

[Frederic Bastien, analyst]

Perfect. That good color. I guess the last conference call was only a couple of months ago, but a lot of those changed in the overall financial markets at least and seems to be often as an indicator as to what's going on that's going to happen out there in the economy. How are you feeling about -- or has your outlook on the end markets and your own specific business or strategy changed dramatically since you last reported?

[Trevor Haynes, executive]

Strategies haven't changed dramatically, I guess, tactics perhaps. We are seeing a renewed strength around our energy customers and a different type of discussion, whether it's in Canada or the U.S., which has us reacting to a certain extent, I would say, Mike, to demand in areas that we may not have predicted as being as strong. You noticed in workforce in this past quarter, our lodging revenue, volumes into -- we're not a big player in the open lodging business, but our Sunset Prairie Lodge has been very active.

We're seeing field level activity also on the pipeline construction camps, we've seen much higher loading than had been expected. And then upstream oil and gas from our small format camp business has, I think, safe to say, surprised us in terms of the strength of activity. U.S. side has been a bit slower, but we're starting to see that uptick. And you certainly have a read through from some of the energy services businesses. But then it's not just oil and gas, we're seeing our mining customers, Australia and Canada. So those are areas, and I'll let Mike give some color on.

The other part of it is spend a lot of time thinking about inflation and how it works into our business model. We certainly were convinced that we are a beneficiary of inflation the way that rate increases work across such a large asset base that has a fixed cost. But we're also adjusting like everybody is to cost inflation. We have a small footprint in terms of people relative to the size of our business. But -- so those are a couple of things that we've been focusing on and thinking about how we adjust our tactics. But the most notable, I think, is around our workforce business. And maybe Mike give a little bit more color there.

[Michael Ridley, executive]

Frederic, thanks for your question. I think the good news is we've worked really, really hard, as I think you probably know the last few years to sort of employ a much more diversified strategy. So with that, I think when you look at the macroeconomic environment being far more diverse is a much better way to go than just being focused sort of not solely on the oil and gas sector but primarily on the oil and gas sector. Geographically, Eastern Canada, we have 2,100 beds now on rent tied to mining projects and other types of projects. The U.S., we're seeing opportunities with disaster relief, with construction, with green energy, migrant housing, colleges, universities that are looking for overflow dorms.

And then in Australia, a very good, solid market, very diverse market. Education, we're becoming one of the premier classroom providers in that marketplace as well as really good workforce space with mining and infrastructure. So I think our strategy of having being very diversified geographically, industry-wise is really, really working. And I think we'll hold up even when there is a bit of a downturn. So super happy with the results that we're getting as a result of that.

[Toby Labrie, executive]

Yes. The other piece I would add, Frederic, is this is more or less the trajectory that we thought the market would be going in. And so from a financial and balance sheet perspective. That was the emphasis for locking in some of our rates in 2021 and locking in 1/3 of our debt at fixed rates that we saw at that time. So as I mentioned in my earlier comments, we feel that, that gives us good stability and surety of what our fixed costs will look like going forward.

[Operator]

[Operator Instructions] Our next question comes from John Gibson of BMO Capital Markets.

[John Gibson, analyst]

Congrats on what I thought was a pretty good quarter again. First off, margins saw a nice jump in both segments and I know a portion of this was due to higher rental revenue contribution, but wondering how much you've seen pricing increase. I guess if you could even touch on both segments.

[Trevor Haynes, executive]

For sure. To start off, Toby, margins in general?

[Toby Labrie, executive]

Yes. General margins, we are seeing good margins on -- we typically will look at it by revenue stream. And so on a rental revenue basis, we've seen good strong margins from that perspective. In our Workforce business, we did see some recovery of costs and from -- incurred in previous periods. And so that in the current period skewed things up a little bit. And so looking at that on an average over the last few quarters is really a good way to think about how those margins trend out over the longer term. In MSS, we saw a pretty sizable change in our mix of revenue.

And so typically with that, you would expect an increase of margins because we had a higher proportion of rental revenue, which attracts higher margins. We didn't quite see that full uptick when you compare year-over-year and a big part of that is due to some of our non-rental margins being a little bit lower than we would typically expect and that we do -- we will typically expect going forward. And then on some of the final integration of our Vanguard business, doing some final training and systems integration as well as some reorganization internally. We incurred approximately $600,000 of nonrecurring costs there and have completed that integration. So I don't expect any further costs there.

[John Gibson, analyst]

Got it. I'm going to kind of touch on the organic growth you spoke about earlier. Where are these assets -- these new assets headed? Are they pretty spread out across your various MSS businesses? Are you seeing more areas of strength in one area?

[Trevor Haynes, executive]

We've got a couple of areas of strength. Ted, why don't you give a color there?

[Ted Redmond, executive]

Yes, we're investing across the platform because we're seeing good demand, high utilization and we're able to meet our hurdle rates. That said, there are regions that we're focusing on to grow. So again, on the West Coast of Canada, we're seeing strong demand in some of our BC markets. So we're investing there. Ontario and Quebec, we've been moving into the Quebec market over the last 18 months, very successfully, very high utilization in those markets. So we're investing to put units to work there. So I would say, percentage-wise, we're growing quicker in that Ontario and Quebec market than like in terms of the amount of investment versus the existing asset base, so the percentage of unit growth is higher in that market.

And then our U.S. markets, again, we're seeing strong demand. So especially on the East Coast education demand for new rental units remains strong. So we've had a significant investment program in our U.S. East business and -- but also still investing in our U.S. Southwest business. So strong across the Board and investing across the Board with those couple of areas I noted of extra emphasis.

[John Gibson, analyst]

Okay. Got it. And last one for me. Typically, we've seen a bit of a drop in room bookings for LodgeLink in Q2, just given how your customer base is probably diversified outside the oil and gas space? Over last year, do you think it's possible we could see an increase next quarter? Or we'll see seasonality play effect here?

[Trevor Haynes, executive]

Well, the trend we're seeing, and we've been pushing hard into the U.S. market and building up our commercial presence there. And I think you'll see that the percentage of U.S. revenues to Canadian is going to be shifting. And that trend was in place in Q1. We're seeing that continue in Q2. And that certainly helps us in terms of muting the effect of spring breakup, which is what you're alluding to there. So here in Western Canada as the frost comes out of the ground, very difficult to move heavy equipment. So we have a slow period, specifically around oil and gas services, but more broadly, any heavy equipment movement on big projects.

So we've seen that show up in the numbers in LodgeLink for volume in -- specifically in the April month period. But increasingly, as we expand into servicing other industrial sectors who also have crew movement logistics where we add value. And as we push in specifically to the U.S., those factors don't apply. So I'm pretty confident, John, on a year-over-year basis, you're going to see the business continuing to grow and that you'll see a less pronounced effect of breakup on the LodgeLink volumes.

[Toby Labrie, executive]

And maybe put another way, John, to give you an idea of how April is shaping up, April was pretty much right in line with January and February. So hard to know what will happen in May and June, but that at least gives you an indicator of how we are shaping.

[Operator]

Our next question comes from Keith Dalrymple of Dalrymple Finance.

[Keith Dalrymple, analyst]

You've spoken a little bit about M&A in the pipeline you have. Could you give us a little more color on what's happening with M&A in the industry in terms of multiples and what might be driving any changes in multiples, whether it's competition for deals and money chasing new assets or is inflation beginning to creep into M&A from like an asset perspective?

[Trevor Haynes, executive]

Yes. Thanks for the question, Keith. We have seen over the last several years, quite a bit of consolidation in the MSS space specifically within the U.S. market. And during that period of time, we've also seen key drivers improving for the sector as far as utilization on these fleets compared to long-term average, but we've also seen multiples rising as there's fewer targets of consequence, I guess, a consequence being sized and the desire from the strategics in the marketplace to continue to view that as positive.

But as an acquirer, ourselves, it certainly ex M&A difficult to stay within our framework for valuation, and we take a long-term view of value and this asset class and how it performs over the cycles. So a little bit of color of what we're seeing out there. However, we continue to have a good pipeline and we have strong relationships, and I think we are -- for many of those looking to sell their businesses.

[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, executive]

Thank you, operator, and thank you, everybody, for joining us this morning and listening to the conference call and joining the discussion. I hope you have a great day. Thank you.

[Operator]

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