Black Diamond Group Ltd

TSX:BDI

Earnings Call Transcript 2018-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to the Black Diamond's Second Quarter 2018 Results. [Operator Instructions] And as a reminder, today's conference is being recorded for replay purposes.It is now my pleasure to hand the conference to your host, Keenan Killackey, Investor Relations analyst. Please go ahead.

[Keenan Killackey]

Good morning. My name is Keenan Killackey, Investor Relations analyst for Black Diamond Group. At this time, I would like to welcome participants to Black Diamond's Second Quarter 2018 Results Conference call with CEO Trevor Haynes and CFO Toby Labrie. We are also joined today by COO, Modular Space, Solutions, Troy Cleland; COO, Workforce Solutions, Mike Ridley; and Executive Vice President, International, Harry Klukas.After our formal remarks, there will be a question-and-answer session. [Operator Instructions] Please note that while talking about our results in answering questions, we may make forward-looking statements. These statements are subject to known and unknown risks and future results may differ materially. The management will also be discussing non-GAAP financial measures in today's call, including adjusted EBITDA, net debt and funds from operations. For more information about these topics, please review the sections of Black Diamond's second quarter 2018 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 the SEDAR website. Dollar amounts discussed on today's call are expressed in Canadian dollars and are generally rounded.I'll now turn the call over to Trevor Haynes to review the quarter.

[Trevor Haynes, Chairman, President & CEO]

Thank you, Keenan. Good morning, and thank you all for joining. The company made significant progress on its objectives of reducing leverage and generating increased funds from operations. Long-term debt has now been reduced by 25% since the end of 2017. Additionally, the business increased funds from operations by 78% to $12.3 million compared to Q2 2017.Having made substantial headway on our target of a lower leverage position, we are pleased with the greater financial flexibility of the company now has. This enables management to gradually increase disciplined investment in certain of our fleets, which will lead to increasing recurring cash flows. This is just one element of growth that management is focused on. The second is the continued expansion of value-added products and services and major project sales through our MSS, or Modular Space Solutions, business. These ancillary revenues will increasingly bolster our recurring core rental revenues by allowing us to capture more of our customers aggregate spend per project. The third and perhaps most impactful in the short term is the improvement in utilization of our Workforce Solutions Group fleets in Western Canada. We have experienced a gradual recovery over the past year in open lodge occupancy and now have line of sight through recent contracts on improving rental run rates in our large-format camp segment. This improvement is expected to accelerate meaningfully at major infrastructure projects, such as LNG Canada and Trans Mountain were to advance.Evidence of near-term improvement and growth is apparent as the company has secured a number of meaningful foreign contract awards during and subsequent to the second quarter.The MSS business was awarded 2 contracts in the U.S. with roughly $10 million for the provision of permanent modular buildings related to U.S. government and military projects.Additionally, the Workforce Solutions business was awarded $8 million between 2 contracts related to remote accommodations in Australia and another $6 million in Canada relating to both open lodging and camp rental contracts.The revenue impact of these contracts is anticipated to begin in the fourth quarter of this year and continue into 2019, supporting management's view that the market in Western Canada and Australia is increasingly constructive.We are also pleased that during the second quarter, Black Diamond's Workforce Solutions business was conditionally awarded a $42 million contract for the provision of 908-room turnkey camp facility to service the construction of the coastal gasoline pipeline. This conditional award is an encouraging sign that LNG Canada is moving towards a final investment decision later this year.Perhaps as significant is the long-term incremental activity and substantial commercial opportunities that could arise as a result of the proposed LNG Canada development.Given the company's sizeable fleet of relocatable, private washroom format dormitories that WFS business is poised to benefit greatly from the added demand related to construction of the LNG plant, the coastal gasoline pipeline as well as the expected incremental upstream activity in the Montney Shale Formation.With the recent contract awards lining up to begin in the fourth quarter and into 2019, management expects strengthening results beyond Q3. The core recurring run rate for the company in Q3 is expected to be in line with Q2. However, the more variable sales and project-related revenues will be lighter primarily due to timing.As mentioned earlier, these revenues will strengthen in Q4 and into 2019, based on firm contract, contracts in place and increasing activity.In Workforce Solutions, the company converted a customer dedicated camp in Northeast B.C. to an operated open lodge, and as a result, received a net $11.2 million cash payment from the customer in exchange for the responsibility for future dismantle and remediation of that facility.This conversion of Sunset Prairie Lodge was one of the main drivers behind the overall year-over-year adjusted EBITDA increase as Black Diamond took on the risk of both future dismantle and operating cost for the facility that now has the upside of operating this facility as an open camp.The conversion was effective on April 1, which contributed to a full quarter of lodging revenue during Q2. This is considered a best-in-class facility, well located in a very active area at the Montney Shale. Management expects continued occupancy at reasonable levels, will be achieved for the foreseeable future.Used fleet sales in the WFS segment were modest during the quarter. However, management is seeing more opportunities in the sales pipeline. The rationalization of the high-density workforce accommodation fleet remains a priority for the business, and we have line of sight into increasing monetization of these assets in the second half of 2018, allowing the company to redeploy the capital.The company's wellsite accommodations business improved year-over-year, driven by increasing utilization and rates for wellsite assets in West Texas and Colorado.Market conditions in Western Canada are also improving, which we expect will contribute to stronger performance in the fourth quarter when seasonal drilling activity returns.Improving economic conditions in Australia are supporting some increases in resource development spending, and we are seeing this reflected in demand for our workforce accommodation assets there.Additionally, demand for space rentals and education assets in this market is quite strong as infrastructure development and general construction spending supports increasing utilization levels.Our newest business, LodgeLink, continues to display promising growth, and we believe the current market trends in the workforce accommodation sector are supportive of further improvement. The LodgeLink platform continues to expand its supply network, which now has nearly 390 properties listed, representing over 45,000 rooms of capacity across Canada, including a number of large hotel chains.Despite the seasonal effect this spring breakup impacting results in Q2 as compared to Q1, management is optimistic that this business will exhibit strong growth through the balance of the year and well into 2019.I will now turn the call over to Toby for some further details on the second quarter financial results. Toby?

[Toby Labrie, Executive VP & CFO]

Thanks, Trevor. Total adjusted EBITDA for the quarter was $9.5 million, a 76% increase from Q2 2017. This translates to $12.3 million in funds from operations, which represents 22% per share. Adjusted EBITDA for the Modular Space Solutions business was $5.3 million, down 4% from the same quarter last year. This was mainly due to the fact that rental revenue was down 9% from Q2 2017, due to certain large contracts in Alberta that expired in recent quarters, but rental revenue has recovered by 4% since troughing in Q1 of this year.Sales revenue was up 50% from the comparative quarter due to increased sales of used fleets, the majority of which was underutilized Alberta fleet. We were also able to transfer additional Alberta fleet to British Columbia to meet growth capital needs in that market, resulting in a cumulative $6.7 million of these fleet transfers since acquiring Britco in March 2017. Workforce Solutions adjusted EBITDA was $7.5 million, up 108% from the comparative quarter. This was primarily due to the margin earned on the future dismantle of Sunset Prairie Lodge associated with the transaction to convert this facility from a dedicated rental camp to an open lodge effective April 1, 2018. Also contributing to the adjusted EBITDA increase was improved lodging occupancy, which more than tripled year-over-year from 11% to 35%, due to higher activity at Sunday Creek Lodge as well as occupancy at Sunset Prairie Lodge in the quarter.Finally, our small format wellsite accommodations business continue to show improvement, while the strengthening markets in Australia resulted in improved results from this part of our business. These increases in adjusted EBITDA were partially offset by the loss of rental revenue from Sunset Prairie Lodge.In addition to strong operating results, the company reduced its debt -- its net debt by 25% in 2018 to $84.8 million, achieved by applying to the debt, a combination of operating cash flows, proceeds from the Sunset Prairie Lodge transaction and proceeds from sales of redundant real estate. This significant debt reduction resulted in a net debt-to-EBITDA leverage ratio of 2.3:1 for the trailing 12 months ended June 30, 2018, which is approaching management's long-term leverage target of 2:1. The company now has increased flexibility to more quickly grow the business. Management continues to prioritize the disciplined approach to capital spending. Growth capital expenditures were $3.6 million in Q2 and $5 million year-to-date, including maintenance capital of roughly $100,000 in each of the first 2 quarters of 2018.This restricted deployment of capital expenditures in the first half of the year helped significantly reduce the financial leverage on the business, which now provides management with the flexibility to accelerate the deployment of capital expenditures into healthy markets with strong demand for capital assets.As we target growth, management is encouraged by the stabilization and improvement in market conditions that we are experiencing across the company. Although we would like to see certain markets improve more rapidly in the event that one or more large catalyst projects were to proceed, this could result in the acceleration of end market improvement and a significant upturn in our business performance. We are pleased by the company's accomplishments during the quarter and with the enhanced financial flexibility that this debt reduction has achieved, which paired with increasing cash flows allows us to turn our focus towards reigniting the growth cycle on a disciplined basis.We also anticipate growth as we expand our noncapital-intensive revenue lines as well as by taking advantage for operational leverage by getting fleet to work in challenged markets that are slowly starting to recover.The board and the management team remain closely aligned on maximizing shareholder value through the adherence to these core strategies.Operator, we're now ready for questions.

[Operator]

[Operator Instructions] And our first question comes from Daine Biluk of CIBC Capital Markets.

[Daine Biluk, Associate]

So can you share how much of the nonrental revenue was associated with the future dismantle of Sunset Prairie in the quarter? And whether we should expect to see any of that spill over into Q3?

[Toby Labrie, Executive VP & CFO]

Yes. Daine, it's Toby here. We -- most of the nonrental revenue increase from -- in our Workforce Solutions business from 2017 to 2018 was as a result of that transaction. There were, as we mentioned, a few other minor pieces contributing there, but that is the main part of the increase there.

[Daine Biluk, Associate]

Okay. And then maybe that will go into Q3?

[Toby Labrie, Executive VP & CFO]

I'm sorry, yes, no spill over into Q3, as there is no further obligations the customer required on that, so we've recorded that revenue in Q2 of this year.

[Daine Biluk, Associate]

Okay. Perfect. Understood. The open camp occupancy had a pretty solid showing in the quarter. Can you help us understand how we should think about this number unfolding in the second half of the year?

[Trevor Haynes, Chairman, President & CEO]

That's a good question. As you would know, there is a fair amount of variability currently in the marketplace. We've seen an increased number of people working in and around the Western Canadian oil patch, which is driving the quarter that increase in occupancy, as simply stated more people working in the remote areas, means more customers to lodges. However, until we get significant infrastructure projects that can make long-term commitments around these facilities, we're working on fairly short line of sight. What's encouraging is, as we mentioned in our narrative, we do have contracts and contract visibility for Q4, Q1 and into '19, some of that is firm commitment around our lodges, which gives us an element to visibility. Current run rate is similar to Q2 in terms of our lodges. Mike, do you want to add any color?

[Michael Lenard Ridley, Executive VP & COO of Workforce Solutions]

Yes, just we are seeing fairly active small pipeline builds in the Montney region, which leads to workforces staying in our lodges. As Trevor alluded to, there's -- we have some turnaround work in Sunday Creek Lodge, which we're expecting to carry through the year and into next year. And fairly healthy drilling and completions activity, driving into the lodges in the shales. And then taking over of Sunset Prairie, converting that rent to an open lodge for us, we expect fairly solid occupancy for the balance of the year. And over layering all of this is our LodgeLink platform with incremental growth in small crews staying in our lodges as well as hotels and motels. So I think fairly modest growth for our business.

[Daine Biluk, Associate]

Okay. That's good color. On the back of your Coastal GasLink award, are there any other bidding opportunities related to LNG Canada that remain outstanding, you've been involved in? Or are these largely in place as it stands?

[Trevor Haynes, Chairman, President & CEO]

You want to take that, Mike?

[Michael Lenard Ridley, Executive VP & COO of Workforce Solutions]

Yes, sure. The main camps has been awarded along CGL. That being said, there is a quite a demand for private format dorms. And we believe, Black Diamond is the, I guess so, the large asset holder of this type of dorm. Believe, there will be some opportunities to provide subcontract work for some of these camps. And I think there will be some spill out work that could also lead to additional assets going to work.

[Trevor Haynes, Chairman, President & CEO]

Just keep in mind that Black Diamond not being an integrated operator, we're an equipment provider. So even where we may not be securing the turnkey contract and working with partners to deliver the whole spectrum of services around the camp, we may be operating as an equipment provider into other parties who have the primary contract. So when we look at these large projects, we look at it from a couple of different perspectives in terms of how we participate. So as we continue to talk about opportunity, that's what we're implying.

[Daine Biluk, Associate]

Understood. Within the Modular Space Solutions, is the current expectation for Alberta to remain soft in the back half of the year?

[Trevor Haynes, Chairman, President & CEO]

We've seen a modest increase off of the trough that we experienced in Q1 for utilization in the province. It's going to take a bit longer. Troy, do you want to throw some color on Alberta fleet utilization for MSS?

[Troy Christopher Cleland, Executive VP & COO of Modular Space Soultions]

Yes, we've seen an improvement since Q1 and when the last of those big projects came back. We've seen a healthy volume of bidding and utilization has improved, but not unlike our Workforce Group. It's a lot of small projects that are going on rent, and it will be the major projects that would actually really turn that utilization. And of course, our focus right now is on the utilization side of things and maintaining and/or increasing market share, and we think it'll be a while before we start to see significant recovery of the actual rental rate.

[Daine Biluk, Associate]

Okay. That's good color. Just last one for me. Toby, with net Alberta today, are you guys targeting any further reductions? Or should we view the capital structure as in place with the majority of cash flow being directed towards growth initiatives?

[Toby Labrie, Executive VP & CFO]

Yes, I think we -- what we're targeting is to operate the business with the leverage ratio of about 2:1. And so with that, we do expect that EBITDA should be coming up, which helps that ratio, but in the near term, we expect some modest decreases in debt as well, but increasingly, we are able to allocate more of our operating cash flows to grow capital expenditures, which helps reinforce that cycle as well.

[Operator]

Our next question comes from Cole Pereira of GMP FirstEnergy.

[Cole Pereira, Associate]

So jumping back to the question about some of the subcontracting work for LNG Canada. Would you guys kind of strictly just be looking at renting your assets out? Or do you think there'd be an element of sales as well in there?

[Michael Lenard Ridley, Executive VP & COO of Workforce Solutions]

It could be a combination of both, but it's primarily going to be rental opportunities.

[Cole Pereira, Associate]

Okay. And the split is kind of just on, well to speak, kind of determined as things come up?

[Michael Lenard Ridley, Executive VP & COO of Workforce Solutions]

Sorry, repeat the question.

[Cole Pereira, Associate]

And -- so in terms of the split between the rental revenue and sales revenue, it's kind of just determined as things come up in the future?

[Michael Lenard Ridley, Executive VP & COO of Workforce Solutions]

Yes. I mean, it's mostly rental opportunities in terms of the sales side. Less of sales of assets whether it's Modular Space or Workforce or sort of normal course of business, and on the Workforce specifically. We're strategically looking at -- to be excess demand or demand on our certain types of assets. We're strategically trying to redeploying to the market from a sales perspective.

[Trevor Haynes, Chairman, President & CEO]

Those on specific to the -- to LNG Canada. LNG Canada, everything we're looking at, where the vast majority is on a rental basis. And keep in mind that both platforms have demand. So our Britco platform in British Columbia for all of the support buildings, offices, training, medical, et cetera, there is a significant opportunity there in and around the planned construction as well, to a certain extent, along some of the infrastructure related to the pipelines. So our view is, there continues to be opportunity that we're pursuing and it would be primarily rental.

[Cole Pereira, Associate]

Okay. That's helpful. And then on growth CapEx side, are you able to give any details kind of the monetary range might be considering? What projects you might be looking at, just any details there? And whether this would be a second half '18 event or more so 2019?

[Trevor Haynes, Chairman, President & CEO]

Well, there is 2 general categories for CapEx for us, one is project-specific where we are bidding on projects that would require new equipment on a rental basis, and we've continued a good part of our capital in the first half of the year has been project-specific. We view that as lower risk, and that we have contract visibility for that capital. And then the second is, where we are adding to our fleet, so we're monitoring utilization rates. And ultimately, utilization in the rental game is far lower than 100%. We'd be looking at optimal being in the 70% to 80% or 75% to 85% range and so that's whereas we're watching utilization as well as what the cost of assets and what the average run rate is to ensure we can get our ROI hurdle, we prospectively order fleet and add to those categories. So what you'll see from us is that increasing of the fleet additions ramping up based on the timeline in getting delivery from our manufacturing partners. You won't see a dramatic increase this year. What you'll likely see is, our committed capital at the end of the quarters is starting to look higher. And so on a cash basis, it would -- an increase in capital spend in building our fleets would show up in 2019, and the increase in the recurring run rate on our core rental stream would also show up primarily in -- also show up in '19 versus '18.

[Cole Pereira, Associate]

Okay. -- sorry, go ahead.

[Michael Lenard Ridley, Executive VP & COO of Workforce Solutions]

And what you'll see is, maybe, a bit of a jump here in 2018, so it would be more of our focus on the BOXX where that capital spending increases somewhat and then taking a closer look at some of our assets and making some minor refurb adjustments to put those assets to work as well.

[Cole Pereira, Associate]

Okay. So then should we -- for 2018 as a whole, should we still think about you guys targeting a net CapEx budget as 0? Or do we think there might be a kind of a bit of an outflow in the back half of the year?

[Trevor Haynes, Chairman, President & CEO]

Well, I would estimate, it's going to be close to 0 even with increased spending because we are continuing to rationalize some of the Workforce fleet that we believe there is an overcapacity and our visibility for some time for the high-density format of remote housing, and we're finding opportunities to sell that into more remote markets, et cetera. So as we free up that capital, that offsets our outflow on CapEx. So current visibility, Toby, you being here, 0 net CapEx.

[Toby Labrie, Executive VP & CFO]

Yes, that's right.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's question-and-answer session. I would like to turn the call back to Trevor Haynes, President and CEO for any closing remarks.

[Trevor Haynes, Chairman, President & CEO]

Thank you, and thank you all for taking the time to listen in today.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program, and you may now disconnect. Everyone, have a great day.