Black Diamond Group Ltd

TSX:BDI

Earnings Call Transcript 2022-Q2

[Operator]

Thank you for standing by. This is the conference operator. Welcome to Black Diamond’s Second Quarter 2022 Conference Call. As a reminder, all participants are in a listen-only mode, and the conference is being recorded. After the presentation, there’ll be an opportunity to ask questions. [Operator Instructions]

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

[Jason Zhang, Director, Investor Relations]

Thank you. Good morning and thank you for attending Black Diamond’s second quarter results for 2022 results 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 in today’s call, such as adjusted EBITDA or net debt. For more information on these terms, please review the sections of Black Diamond’s second quarter 2022 Management’s Discussion and Analysis entitled Forward-Looking Statements, Risks and Uncertainties and non-GAAP financial 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 noted otherwise and are generally rounded.

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

[Trevor Haynes, Chief Executive Officer]

Good morning, and thank you for joining us. Thank you, Jason. We will discuss the results of the quarter, myself and then Toby Labrie. Let me begin by saying that I'm very pleased to be reporting another strong quarter. I'm also very pleased with how the business is currently operating.

We believe this quarter to be an important data set for stakeholders as these results reflect the strong benefits of our successful pivot over the last several years. Of the many benefits, the primary has been the growth of our high margin recurring rental revenue across our specialty rental platforms. Compared to the same quarter last year, we have grown rental revenue by 22% to $28.4 million and adjusted EBITDA of $18.2 million is an increase of 34% year-over-year.

We also increased our MSS rental fleet by 424 net units or buildings through a combination of organic and inorganic means, and have also deployed cash towards dividends, share buybacks and have redeemed an additional portion of the preferred shares that were issued in connection with the Vanguard acquisition in late 2020.

We have done all of the above, while keeping our long-term debt essentially flat year-over-year. We believe this speaks to the strong cash flow generation of our modular building rental platform, and anticipate continued momentum in operating and financial performance throughout the second half of 2022 and into 2023.

During the quarter, we closed the tuck-in acquisition of Cambrian Trailer Rentals, which has a long-standing history of exceptional service in the Southern Alberta market that has been built up over the past 40 years. The outlook for our broader MSS business continues to be positive. Utilization in the quarter was robust at 84%, while average rental rates increased 11% on a constant currency basis, which represents a string of years of increasing average rental rates. We expect continued growth in our core high-margin rental revenue, with utilization likely to strengthen further throughout the summer months over a stable base of existing contracts in place.

We also expect that as units turn over from maturing contracts, our new assets are deployed, that rising spot rental rates will continue to have a positive effect on our average monthly rental rates through the next several quarters and certainly through 2023 based on our current outlook. These tailwinds have a powerful effect on returns on asset on assets that have been acquired 5, 10 or 15 years ago, as they're able to generate rental revenues that are pegged to returns to returns based on capital costs for today's new build units.

We take great pride in our systems and processes and our focus on operational excellence, asset quality typically results in customers being unable to differentiate between a building that might be new or over 15 years old. In my personal view, modular buildings are one of the best alternative asset classes that most investors have never heard of. And I believe the prospects for our MSS business remain very bright.

The outlook into 2023 is similarly strong in our WFS business, which continues to benefit from existing contracts in place. Recent relative strength in commodity prices have also resulted in improved field level activity in the upstream energy sector. We exited the quarter with utilization of 50% in our WFS business, and continue to believe there is powerful operating leverage throughout our large inventory of North American rental assets to drive returns.

To illustrate, our adjusted EBITDA in WFS of $10 million was a 61% improvement compared to year ago quarter and drove return on assets of 28%, up from 17% in the same quarter last year.

Australia also remains a bright spot with our portfolio – within our portfolio, as utilization of 96% in the quarter is reflective of a market that is seeing some of the strongest returns within the company. We remain focused on diversification within our WFS platform, and are continuing to see opportunities in mining, disaster recovery government and remote infrastructure.

Switching to LodgeLink. This company is continuing to benefit from our investment in driving scale and efficiency. Room nights booked were up 58% year-over-year. However, they dipped sequentially from Q1 2022 as is consistent with prior years, a significantly lower room nights booked by Canadian Energy Services customers due to breakup was mostly offset by our growing customer volumes in the U.S. Net revenue for the quarter was $1.2 million up 50% year-over-year and flat on a sequential basis despite the decline in room nights booked as our US bookings provided an offset with higher margins.

We anticipate a similar cadence of growth in LodgeLink, as we've experienced year-to-date, driven not just by the ongoing – or the on boarding of new companies or customers but also by gaining a larger share of crew travel spend from existing customers as we demonstrate LodgeLink value proposition to new users within the organizations that are already customers.

We continue to invest growth G&A as well as product and customer experience enhancements, which we believe is the path for continued long-term value creation.

To summarize my remarks, we are highly pleased with the results this quarter and believe it is yet another strong data set within a string of quarters where we have been able to demonstrate steady growth in recurring rental revenues, improving utilization and returns on our legacy assets and the ongoing growth and scale of our digital travel tech platform. We expect these positive trends to continue through the end of the year and well into 2023.

With that, I will hand the call over to Toby to provide more detail on our quarterly results. Toby?

[Toby Labrie, Chief Financial Officer]

Thanks, Trevor. Total adjusted EBITDA for the quarter was CAD18.2 million, an increase of 34% from Q2 2021. This was driven primarily by improving consolidated rental revenues of $28.4 million, which were up 22% year-over-year. Consolidated revenues of $69.4 million were up 1% from the comparative quarter.

The increase in our core recurring rental revenue streams resulted in a four percentage point improvement in return on assets to 17% for the second quarter of 2022 from the same quarter last year.

As Trevor touched on, we have continued to invest in our fleet to drive recurring compounding returns with CAD11 million of net CapEx invested at strong rates of return. While growing our rental base through reinvestment of cash flows into fleet assets, we have also returned capital of CAD4 million to shareholders in the quarter by redeeming CAD2.2 million of preferred shares of a subsidiary, paying our common share dividend of CAD0.015 per share or approximately CAD900,000 and buying back approximately CAD900,000 of common shares. All of this was achieved while holding our net debt at CAD158 million, which has remained fairly static over the last year.

Net debt to trailing 12-month adjusted leverage EBITDA of 2.1 times decreased from approximately three times compared to Q2 2021, and remains near the lower end of our target range of two times to three times. Our liquidity position also remains strong with roughly CAD111 million of available liquidity from our asset-based lending facility with an average interest rate on outstanding debt during the quarter of 2.85%. Nearly one-third of our outstanding long-term debt remains hedged at attractively low rates seen in 2021 and early 2022.

The Free cash flow in the quarter before growth CapEx was CAD14.5 million, up 79% versus the comparative quarter and diluted earnings per share of CAD0.06 was up 200% from CAD0.02 in Q2 2021. The company's total administrative cost for the quarter of CAD12.6 million increased from $10.3 million in the comparative quarter primarily due to higher incentives driven by robust business performance, also increased headcount and higher software licensing costs.

While we see inflation impacting administrative costs, we do continue to realize efficiencies as we scale, and we are on track with internal benchmarks in improving our administrative costs as a percentage of gross profit.

MSS in the second quarter reported adjusted EBITDA of $12.8 million, up 20% from the same quarter last year, with rental revenue of $17.5 million, also up 20%. Total MSS revenue of $37.1 million was flat year-over-year, as lower sales revenue offset the increase in rental revenue. Sales revenue can be very low quarter-to-quarter, but our key focus remains on driving the predictable growth of our recurring high-margin rental revenue against our long-lived rental asset base.

As a result, MSS adjusted EBITDA margins in the quarter of 35% were higher than the comparative quarter of 29% due to a higher proportion of consolidated revenue being driven by this high-margin recurring rental revenue. Return on assets in MSS also continued to improve based on the strong secular tailwinds we've seen across this business. ROA for the second quarter in MSS was 19%, up two percentage points from the comparative quarter.

In WFS, Q2 2022 adjusted EBITDA was $10.0 million, up 61% from the same quarter last year. WFS rental revenue of $10.9 million was up 27% from the comparative quarter, while total revenue of $32.3 million was up 2% from the comparative year compared to quarter last year. WFS adjusted EBITDA margins of 31% improved 12 percentage points from the comparative quarter. Similar to MSS, the improvement in high-margin recurring rental revenue as a proportion of total revenue contributed to strengthening margins. As a result, return on assets in WFS of 28% was also a marked improvement and was up 11 percentage points versus Q2 2021 levels.

Finally, LodgeLink is continuing to scale, and we remain confident in the significant value creation of this unique platform. Gross bookings of $11.2 million in the quarter and total room nights booked of 68,000 rooms were up 44% and 58%, respectively, from the comparative quarter. Net revenue of $1.2 million was also up 50% year-over-year. We continue to see growth on both sides of the platform and exited the quarter with 665 unique corporate customers and nearly 760,000 rooms of listed capacity across over 8,300 properties.

In summary, we are seeing strong and growing free cash flow generation across the asset rental platform, stability of diversification by geography and end market and balance sheet strength and flexibility, which together provide the company with a high degree of optionality for continued organic and inorganic growth as well as the potential for accelerated returns to shareholders.

With that, we'd like to turn the call back to the operator for questions.

[Operator]

Thank you. [Operator Instructions] Our first question is from Matthew Lee with Canaccord Genuity. Please go ahead.

[Matthew Lee, Canaccord Genuity]

Good morning, gents. Thanks again for taking my question. So I just wanted to start with rental rates on the MSS side, seems like another acceleration of rates in the quarter to 13% year-over-year. Can you maybe talk about what we should be expecting for the second half of the year in terms of rental rate growth?

[Trevor Haynes, Chief Executive Officer]

Yeah. Thanks, Matt. Thanks for the question. I'll pass it over to Ted Redmond to comment on what we're seeing for rates across MSS.

[Ted Redmond, Chief Operating Officer, Modular Space Solutions]

Yes, you're correct. We've been successfully able to raise rates that more than -- much more than offset our cost increases. We expect continued rate increases going forward for the year. Rate, it takes a while for the -- like rate increases that we did say in Q2 later in the quarter show up in Q3 and Q4, and we continue to sign contracts, increase rates as units come off rent and we put them back on rent at higher rates.

[Matthew Lee, Canaccord Genuity]

So just to add to that -- yes, go ahead.

[Trevor Haynes, Chief Executive Officer]

I was just going to add that the average rental rate increase year-over-year is reflective of the turnover that Ted is referencing, our actual spot rates are up considerably higher than that. It just takes time to work through the size of the platform we have and the contracted nature of the revenue stream.

[Matthew Lee, Canaccord Genuity]

Right. So there's no reason why rental rates going forward should be anything lower than the 740 you reported in Q2?

[Toby Labrie, Chief Financial Officer]

We don't expect that, but we don't see any reasons. I can never predict the future, but we definitely -- we've already -- a lot of the increases we've done earlier in the year are just going to keep showing up later in the year. And so, we expect an increase -- a steady increase in rental rates.

[Trevor Haynes, Chief Executive Officer]

Yes. We think the increasing rates over the last few years haven't worked their way through our platform. So even if rates were to flat note in terms of current spot, we would still see increases to our average rental rate over the next couple of years, I would think.

[Matthew Lee, Canaccord Genuity]

Great. And then maybe just one follow-up. On a new customer resigned with you or a new customer signs on; are the rates locked in for the full 44 months that you traditionally term for?

[Trevor Haynes, Chief Executive Officer]

Yes, typically, the rates are for the term of the contract. And then when the contract comes up, we would then sign a new contract and we've been successfully increasing the rates when we've been doing that. It's various pretty rare that we would have an escalation cost because our cost of that asset sort of fixed at the beginning of the contract. There might be the odd one that would have an escalation clause. But typically, it's for the duration of the contract.

[Toby Labrie, Chief Financial Officer]

And Matt, Toby here. I would just add to that, that the 44 months is our average contract length, that would also include carryover from the original committed contract. And so that average 44 months isn't necessarily the full first contracts. So, there would be some renewal periods or month-to-month where we would see opportunities to increase the rates over that period.

[Matthew Lee, Canaccord Genuity]

Got it. Very helpful. Congrats on the good quarter.

[Operator]

The next question is from Frederic Bastien with Raymond James. Please go ahead.

[Frederic Bastien, Raymond James]

Hi, good morning, guys. I just wanted to maybe dig a little further into the last few comments you made. I think, Trevor, you mentioned a couple of years of visibility. I mean, -- how long do you estimate it will take before those rate hikes are fully kind of implemented and fully reflected across the system?

[Trevor Haynes, Chief Executive Officer]

If we were to stabilizing current spot rates, which are up year-over-year, I think we would require the 44 months of average contract, before the fleet was entirely repriced at current rates, just using simple math. You have to remember the other variable is utilization.

[Frederic Bastien, Raymond James]

Yeah.

[Patrick Melanson, Chief Investment Officer]

So we're also anticipating, based on what we're seeing through our funnel and pipeline and how contracted we are, you'll note, our revenue behind contract increased significantly year-over-year as with the competition for assets at high-utilization that gives us the opportunity to lock in longer term with our customers. And so, as we think about utilization, our view is also that the market is quite stable in terms of current utilization levels, but there's other economic factors that may impact.

[Frederic Bastien, Raymond James]

Okay. But it sounds like 2023, I mean, you're still going to see increases right through the end of the fourth quarter and potentially into 2024.

[Patrick Melanson, Chief Investment Officer]

Yes. If you think of an asset that has been on a fixed rate on a three-year contract that will be coming off contract and either being renewed with that customer or being repositioned onto a new customer requirement.

You're looking at a substantial step-up from the rates that would have been locked into that contract three years ago to today's spot rates. So it's fairly meaningful as we look at the upside of inflation on this type of asset class.

And then when you think of how we're structured, where we outsource most of the labor components of operating our platform through our vendors. And therefore, the upside on inflation on rental rates, more than offset the pressures on wage and other operating costs on the platform.

So we're looking at this very closely. We're very data-driven. We've got great visibility. And yeah going back to in many respects, this is a great asset class. And this is one of those facets of where there's some advantage.

[Frederic Bastien, Raymond James]

Yeah. One of the best alternative asset class as investors have never heard of. Guys, I want to like you guys to kind of go over remind us of what happened like in the second half of last year. I mean, your rental revenue is fairly predictable.

But on both the MSS side and on the Workforce Solutions Side, you had pretty big revenue coming from sales and non-rental activities which set up a fairly difficult comp on a year-over-year basis.

So if we start with MSS, I mean, you had both sales and non-rental combined for about $35 million of revenues in each of Q3 and Q4 last year. I mean I know you commented in your prepared remarks that you had good visibility into some sales, but could you expand further on that?

[Patrick Melanson, Chief Investment Officer]

I'll just make a couple of quick comments over the whole platform and then Ted and Mike, can give some additional color for MSS and WFS. We point investors, et cetera. When they look at this platform, it is the way that we look at it, which is as an asset rental business or an asset management business. And so the most important revenue stream in our view is rental revenue.

And then when we look at rental revenue margins and we look at return on assets, there's a number of ancillary opportunities when we're operating as a modular building rental business. Those include renting ancillary items like furniture, et cetera, that we refer to as VAS, but also gives us the opportunity to work with customers who are looking to acquire assets and so we do a fairly healthy trade in new asset sales, where we'll manage to manufacture and many other components required from a project management perspective, deliver the asset and close the sale.

And then we do in normal core sell assets out of our fleet, where we -- where we like the return in terms of the cost of that asset. So those two revenue streams can be quite meaningful on the top line. Yes, they're very -- they're variable. And so it's hard to predict, what volumes will do from quarter-over-quarter, year-over-year.

They're very profitable lines for us. So that's the reason we engage in that trade. But what's most important in understanding our business and how our business is operating is looking past top line. With that said, we had a very strong year last year, Ted, on the sales side, and now we're putting up comps against it. Maybe give some color on why that is.

[Ted Redmond, Chief Operating Officer, Modular Space Solutions]

Sure. Yes. So the long-term trend in in sales is positive. If you go back four or five years, there's sort of a steady increase like when you average it over a year. When you look at it quarter-to-quarter, it's lumpy. The last quarters of last year were really good sales quarters, whereas I'd say, this year, the sales are maybe a little bit more typical.

As you saw in our outlook, we are anticipating to see sequential improvement in custom sales revenues based on our current backlog in place. So we have a good backlog going into the year. The other thing to keep in mind is that sales margins are significantly lower than rental margins. So while there may be a top line impact, the bottom line impact is much less, given the higher rental margins. So the fact that we had our 20% year-over-year growth in EBITDA, which was driven primarily by our 20% growth in rental revenue. So it has a much less impact on the bottom line, and we're looking forward to the second half.

[Trevor Haynes, Chief Executive Officer]

There's nothing from our perspective as a read through that there's a weakening in our markets. It's just the variability in terms of the opportunities right there.

[Ted Redmond, Chief Operating Officer, Modular Space Solutions]

Yes.

[Trevor Haynes, Chief Executive Officer]

Yes. In addition to new sales and new sales of assets, we do have one times revenue. So when we think in our workforce business, when we position a large remote camp for instance. We will provide the services of preparing the site, moving the assets, installing the assets, which the customer pays for us upfront. And so some of those projects can be quite meaningful and create lumpiness on the top line as well. Mike, I think that's part of the explanation for the comparison year-over-year, but want to give some color there?

[Mike Ridley, Chief Operating Officer, Workforce Solutions]

Yeah. I think that's exactly it, Frederic. Core to everything that we do is – revolves around the asset. And with that, sometimes there'll be a construction element to it, which involves transportation, installation, dismantle, return transport. Catering services will come with it some time, power generation and so forth. So that can be lumpy at times. But as Ted alluded to those are at much lower margin than what would be on our run rate – our rental run rate. So it just – it's bouncy a little bit over the course of the year. But it kind of goes with the business a little bit.

[Trevor Haynes, Chief Executive Officer]

And I think, the comparative quarter, Mike Q2 last year, we did have some larger operations revenues as we positioned assets to go on rent. We're enjoying rent in this quarter this year, but we don't have the same amount of volume of one-time operations, correct?

[Mike Ridley, Chief Operating Officer, Workforce Solutions]

Yes. That's the case for sure. There were some fairly significant projects in the US that would have had a fairly high level of construction services tied to it.

[Frederic Bastien, Raymond James]

That's awesome, guys. I appreciate the extra color. That's helpful. I'll pass it over. Thanks.

[Operator]

The next question is from Brent Watson with Cormark Securities. Please go ahead.

[Brent Watson, Cormark Securities]

Hi, guys. Maybe on LodgeLink, can you give us a rough sense of the split between Canada and US bookings maybe on a year-to-date basis, sort of normalized for Q2?

[Trevor Haynes, Chief Executive Officer]

Yeah. Do you have those, Toby?

[Toby Labrie, Chief Financial Officer]

The – I don't have them at my fingertips.

[Trevor Haynes, Chief Executive Officer]

We can follow up with you, Brent.

[Brent Watson, Cormark Securities]

Okay. Anything interesting to note about air travel bookings at all at this point?

[Trevor Haynes, Chief Executive Officer]

From a macro, there's a couple of trends we're seeing around the travel space. One is, an increase in average room rates pretty much across platform or across North America, but specifically on the US side. So I think room rates off the top of my head. This information is easy to find with the Global Business Travel Association, et cetera. But I believe, they're up about 20% on average.

And what does that mean for LodgeLink, well, in order our revenues are driven as a percentage of those room rates. And so as we see escalation there, we also see escalation in our net revenue corresponds with that. As many of us read, there has been an increase in air travel as well. So there's a read-through to the crew travel sector, as there's a portion of air travel. However, in most cases, crews are traveling by ground. And so the accommodation piece is the big value proposition and offering for our LodgeLink platform.

And sorry, Brent, going back to your previous question on the US split, for the year, our split for the US is approximately a third of our bookings. But in Q2, that was a little bit higher with breakup in Canada, resulting in fewer Canadian bookings. So a little bit higher, but for the year, it was about a third, and that's trending up quite a bit from last year.

[Toby Labrie, Chief Financial Officer]

Yes, I think closer to a little over 40% in Q2.

[Brent Watson, Cormark Securities]

Okay. Awesome. Thanks a lot.

[Trevor Haynes, Chief Executive Officer]

Thank you.

[Operator]

[Operator Instructions] Our next question is from Trevor Reynolds with Acumen Capital. Please go ahead.

[Trevor Reynolds, Acumen Capital]

Good morning, guys.

[Trevor Haynes, Chief Executive Officer]

Good morning.

[Trevor Reynolds, Acumen Capital]

Just following up on the US, Canada split in LodgeLink. Are you able to provide a breakdown of the properties or rooms listed between US and Canada?

[Trevor Haynes, Chief Executive Officer]

In terms of our total number of listed rooms and/or properties, how many are US?

[Trevor Reynolds, Acumen Capital]

That's correct, yes.

[Trevor Haynes, Chief Executive Officer]

We can certainly get that for you. We don't have that number rate at our fingertips right now.

[Trevor Reynolds, Acumen Capital]

Yes, no problem. And then just on the rollout of the mobile app, good to see that you guys got that out there. Just wondering what the adoption has been like and if you're seeing increased usage by employees. I know that was an issue before.

[Trevor Haynes, Chief Executive Officer]

Yes. Thanks for the question. We're quite excited about mobile app ramp-up. Patrick, maybe you can give a bit of color. It's a bit early stage for us. We just launched.

[Patrick Melanson, Chief Investment Officer]

Yes. Thank you for the question. We're quite excited about mobile app ramp-up. Patrick, maybe you can give a bit of color. It's a bit early stage for us. We just launched.

[Patrick Melanson, Chief Investment Officer]

Yes. Thank you for the question. So the first version of the mobile app, which is basically a minimum viable product, typical software development cycle, right, was piloted with five key customers that were dedicated to work with us. It's been rolled out with these customers. We are transacting with them, collecting information, which will inform the next iteration of the mobile app as we progress.

Since then, we've made it available far and wide to our customer base, we are collecting information. And as that comes back, we'll make sure the investments put into the mobile app will yield benefits, both for the customer and, of course, for LodgeLink for the future. We are excited about this app for sure.

[Trevor Reynolds, Acumen Capital]

Great. Thanks guys. That’s it for me.

[Ted Redmond, Chief Operating Officer, Modular Space Solutions]

Thanks, Trev.

[Operator]

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

[Trevor Haynes, Chief Executive Officer]

Thank you. In summary, we're really pleased with how the platform is operating. We believe that we've been focusing on in terms of accelerating the growth of our MSS business, expanding by geography, but also increasing the size of the fleet and showing that we can compound our growth but also our EBITDA even faster than the fleet growth.

As well, getting at the operating leverage on our workforce business, which, as you can see, as we spread this high-quality asset out into other end markets like mining, disaster recovery, et cetera, as well as our strength of our Australian business. We're seeing the benefits with very modest investment of capital there. And then LodgeLink, another quarter where we're showing really strong year-over-year growth, as we scale up this business.

So we're very pleased with the way the business is running. And from what we're looking at right now, we see these trends continuing through the end of this year and into next year. So thank you for your interest in joining us today, and hope you enjoy the rest of the day. Thank you.

[Operator]

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