Black Diamond Group Ltd

TSX:BDI

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Thank you for standing by. This is the conference operator. Welcome to Black Diamond's Second Quarter Results Conference Call.

[Operator Instructions]

The conference is being recorded. [Operator Instructions]. I would now like to turn the conference over to Mr. Sean McPherson, Investor Relations Specialist. Please go ahead.

[Sean McPherson, executive]

Good morning, and thank you for joining Black Diamond Group's Second Quarter 2024 Results Conference Call. On the line with us today is Chief Executive Officer, Trevor Haynes; and Chief Financial Officer, Toby Labrie, as well as Chief Operating Officer of Modular Space Solutions, Ted Redmond; Chief Operating Officer of Workforce Solutions, Mike Ridley; and Chief Operating Officer of LodgeLink, Kevin Lo.

Please be reminded that our discussions today may include forward-looking statements regarding Black Diamond's future results. And that such statements are subject to a number of risks and uncertainties. Actual financial and operational results may differ materially from these forward-looking expectations. Management may also make reference to various non-GAAP financial measures in today's call such as adjusted EBITDA or net debt. For more information on these terms and others, please review the sections of Black Diamond's Second Quarter 2024 Management Discussion and Analysis entitled forward-looking statements, risks and uncertainties and non-GAAP financial measures.

This quarter's MD&A, financial statements and press release may be found on the company's website at www.blackdiamondgroup.com and also on the SEDAR+ website at www.sedarplus.ca. All dollar amounts discussed in today's call are expressed in Canadian dollars, unless noted otherwise and may be rounded.

I will now turn the call over to Trevor Haynes to review this quarter's operational highlights.

[Trevor Haynes, executive]

Thank you, Sean. Good morning, and thank you all for joining. I will provide a high-level overview of operating results and recent records achieved by the company and then pass the call over to Toby Labrie to provide additional financial highlights and commentary.

Results for the quarter were strong with revenues of $95.5 million and adjusted EBITDA of $27.9 million, up 5% and 24%, respectively, from the comparative quarter. Net profit of $7.5 million and earnings per share of $0.12 are higher by 63% and 50%, respectively compared to Q2 2023. Management considers rental fleet operations and rental revenue to be Black Diamond's core business, the company generated a combined $35.3 million of rental revenue in the quarter, essentially flat from prior year.

Within the business units, MSS saw rental revenue grew by 6% from the comparative quarter to $22.2 million, which is offset by a 7% decline in WFS rental revenue to $13.1 million due to the lower utilization following the completion of rental terms with 2 large pipeline construction can projects late last year.

Nonetheless, consolidated utilization at the end of the quarter was a solid 75.5% with MSS at 80.7% and WFS at 62.4% compared to 79.3%, 83.4% and 69.8%, respectively, in the comparative quarter. Average monthly rental rates increased 9% in MSS from the comparative quarter. WFS average rates continue to rise as well.

Overall, management believes that the company's utilization and average rental rate trends on a year-over-year and multiyear basis are very healthy in the context of current and long-term industry averages.

Consolidated contracted future rental revenue, that is the total amount of firm contracted rental revenue at the end of the quarter grew by 16% to $139.6 million compared to $120.1 million at the end of Q2 '23. We believe the MSS contracted future rental revenue increase of 26% to $107.7 million from $85.4 million to be a highlight, as is the average rental duration increase to 58.7 months from 51.1 months. These are strong indicators of forward cash flow generation, stability and visibility extending through the balance of this year and well into 2025.

Year-to-date gross capital expenditures of $64.7 million, net of $6.1 million of maintenance CapEx compares to $30.8 million and $4.3 million in the first half of 2023. Fleet sales of $13.1 million increased from $8.9 million. Net CapEx, excluding maintenance CapEx is therefore $51.6 million year-to-date. This is essentially growth CapEx including the acquisition of a third-party rental fleet for $20.5 million effective June 28, adding 329 space rental units to our MSS fleet in the Western Canadian region.

The MSS fleet has increased by 759 rental units in the first half of 2024 to 12,098 total units. The WFS fleet count has reduced 1.3% or 81 units in the first half to 6,067 units. Capital commitments at the end of the quarter were $32.3 million, which is 36% higher than at the end of the comparative quarter. Substantially all of this incremental CapEx is for fleet growth with customer contracts already in place.

The key takeaway here is that rental fleet growth is elevated on a year-over-year basis, given it is substantially backed by rental contracts in place, management expects not only fleet growth, but also continued rental revenue growth in the second half of '24 and beyond. With strong performance and growth of our modular rental platforms has contributed to a 300 basis point increase in our most important KPI as asset managers, which is the return on assets ROA metric. They came in at 19.9% in the quarter.

Turning now to our nonrental business lines. LodgeLink, our workforce travel platform delivered record Gross Bookings of $24.4 million and record net revenue of $2.9 million, up 25% and 26%, respectively, from the comparative quarter. Total room nights sold in the quarter rose 28% from Q2 '23 to a record 129,737 and net revenue margins rose 10 basis points to 11.9% from the comparative quarter. The platform has over 17,000 active properties and 1.6 million rooms of capacity. Management believes LodgeLink is well positioned to generate strong year-over-year growth rates as it continues to develop and expand the user base in North America and Australia.

MSS new and used sales volumes of $13.2 million increased 103% or $6.7 million from a soft Q1 '24, as idiosyncratic project permit timing issues have been resolved for the most part. However, this compares to $14.3 million in the comparative quarter or 8% lower. This decline is primarily due to the lower existing fleet sales in the comparative quarter -- in this quarter to the comparative.

Sales volumes for the second half of the year are expected to remain strong on a sequential basis. Non-rental revenue for MSS increased 31% for the comparative quarter to $16.1 million which reflects the volume of field level activity for transportation and installation of new buildings and mobilization of existing buildings.

MSS WFS revenue grew 8% from the comparative quarter to $1.3 million. WFS sales revenue was elevated at $7.8 million or 212% higher than the comparative quarter due to opportunistic sales of unutilized large format camp assets in Canada. Non-rental revenue was $14 million, down 24% from the $18.4 million in Q2 '23. Lodge Services revenue was up 7% to $9.1 million when compared to the prior quarter. Sales and nonrental revenues contributed to a 49% increase from the comparative quarter in EBITDA for WFS to $17.3 million.

The core rental platform is performing well in terms of utilization, average rental rates, contracted rental revenue outstanding, average rental duration and ancillary revenue drivers. All of which are contributing to stable recurring and growing cash flows and strong return on assets. Elevated CapEx and the corresponding growth of rental units on the platform, the majority of which are in a nonspeculative manner will deliver continued growth into '25 and beyond.

LodgeLink continues to scale nicely, achieving new record volumes and revenues, and the company is well capitalized to support continued growth. For more color on current liquidity and other financial data points, I will now pass the call to Toby.

[Toby Labrie, executive]

Thanks, Trevor, and good morning. As you mentioned, the company had a strong second quarter with adjusted EBITDA of $27.9 million and earnings per share of $0.12 in Q2 2024. Resulting in free cash flow to the business of $18.3 million in the quarter, up 8% from the comparative quarter. While we continue to pay a modest dividend and opportunistically purchased and canceled $1.2 million worth of shares under the normal course issuer bid in the quarter, we have prioritized the reinvestment of this cash flow into the business, where we are seeing continued demand for a growing asset base at high rates of return.

As a result, we deployed $53.5 million in capital expenditures in the quarter, mainly on new fleet assets associated with contract-backed customer projects. These capital expenditures included the acquisition Trevor referenced, a fleet of 329 space rental units, which provide a combination of contracted revenue and high-quality units that are less than 5 years old to meet incremental demand in our existing business rather than having built brand-new units.

The acquisition also provides inroads to a new operating area in the Kitimat region of Northwestern British Columbia and an exciting new indigenous partnership with the Gitxaala Nation.

Besides the acquisition, the remainder of the strong capital expenditures in the quarter were primarily invested in growing our rental fees. We continue adding units to meet high levels of demand and utilization for education-related assets in Canada, the U.S. and Australia.

We are also adding space rental units in MSS throughout North America related to contracted opportunities where we didn't previously have sufficient fleet to meet our customers' needs. There's also a small amount of speculative fleet growth in MSS, particularly in U.S. branches where high utilization warrants the investment to ensure we can adequately service customer needs.

And finally, in our WFS business, we are investing opportunistically in new assets backed by long-term contract opportunities, particularly related to small format accommodations in Canada and the United States where we've experienced high utilization. Beyond growth CapEx and part of capital expenditures, this quarter was $3.4 million of maintenance CapEx which includes all major refurbishments and betterments to existing assets. We've had a strong focus for many years on operational excellence, which in our business is all about protection and maintenance of our rental fleets.

Specifically, we design and procure assets that are well built to maintain -- to meet our high-quality standards and customer needs. And for existing fleet, we have defined and maintained minimum quality standards for all fleet units so that we deliver like new value even when assets might be several years old. This gives us confidence in the quality and value of our rental fleets, which is the foundation of our balance sheet. It also reassures us that the level of maintenance CapEx incurred is appropriate and sustainable to maintain the long-term value of our rental assets, ultimately benefiting Black Diamond, our clients and our shareholders.

Overall, the net investment in the business through continued maintenance and strong growth capital expenditures was funded by internally generated cash flow and by draws against our ABL credit facility. We exited Q2 '24 with long-term debt of $239.7 million and net debt of $225.9 million, which results in a net debt to trailing 12-month adjusted leverage EBITDA ratio of 2.1x. While there are no debt-to-EBITDA covenants related to our lending facility, we target a leverage ratio between 2x to 3x, so we remain at the low end of that target range. You know over $100 million of available liquidity and an outlook for continued strong free cash flow from the business, we are well positioned to continue to fuel ongoing growth.

The average cost of debt in the quarter was 6.27% up from 5.56% in Q2 2023. While this increase -- while this has increased with reference rates over that period, we continue to view our borrowing costs as highly competitive and flexible. These are borrowing -- after these borrowing rates, we are leveraging approximately 40% of the book value of our asset base, which is generating an ROA of 19.9% in the quarter, yielding a generous economic premium. We remain focused on maintaining and improving capital efficiency as measured by ROA and growing our producing asset base, which compounds into growing earnings per share.

As a result, as we continue to grow the business, we have seen an increase in administrative costs of $3.1 million or 18% from the comparative quarter to $19.9 million. Administrative costs, excluding ERP costs of $1.8 million increased by only 8% compared to Q2 2023, while growth of the overall business measured by gross profit increased by 17% indicating continued improvement in cost efficiency. We expect those cost efficiency improvements to accelerate following the implementation of the new ERP systems, which we are approaching in phases.

During Q2, we successfully went live with the new ERP for LodgeLink and are leveraging that experience and finalizing plans to move ahead with the next phase for the MSS and corporate business units.

In summary, we remain poised to continue compounding returns into growing cash flows based on the receptive market conditions that we see in our businesses. We are well contracted with $139.3 million of rental revenue in place and ample available liquidity, positioning us well not only for growth opportunities, but also should the company need to adjust our investment strategies to local or broader market slowdowns, which makes Black Diamond very resilient in any market conditions.

With that, I'd like to hand the call back to the operator for any questions.

[Operator]

[Operator Instructions]

Today's first question comes from Matthew Lee of Canaccord Genuity.

[Matthew Lee, analyst]

Just in terms of MSS utilization, should we be thinking about the 80% to 81% range is where you're comfortable balancing profitability and the ability to serve customers? Or is there potential to increase that further, just put out the assets a little bit more?

[Trevor Haynes, executive]

Matt. Thanks for the question. I think the best way to look at our utilization and I'll get Ted to provide some commentary as well. We look at a range of utilization. If you got to think about our MSS fleets as being a mix of types of units and where we have asset types that have a shorter calling cycle, more of our smaller transactional you need assets on hand to be able to meet demand as it comes in. And so we look at full utilization on that asset somewhere between 75% and 85%. So we'd be right in the middle of that. We can treat education assets a little bit differently because of how long the duration of assets on hand and a little bit more visibility coming out. So we very much look at a blended utilization and we think that around 80% is fairly often that in addition.

[Edward Redmond, executive]

Yes. I don't have much to add because I think that's exactly right. We're in a spot that we're comfortable with. We've got units in most sizes to meet customer demand. And if we get short in a certain size, then that's where we spend CapEx, we don't spend CapEx unless we or short in units or we have future contracted demand. So we think we're right kind of in the right range right now.

[Matthew Lee, analyst]

Okay. That's helpful. And then maybe just in terms of the newly acquired asset, great fleet growth, obviously. But aside from the attractive unit price and the existing contracts you touched upon, is there anything to make that market particularly attractive? And maybe how should we think about the opportunity for other plug-ins this year?

[Trevor Haynes, executive]

We approached CapEx in the first instance where we have a customer in place and a contract in place before we order the asset, and that's the bulk of our CapEx, and it's the primary reason why our CapEx is elevated this year from last year, we're directly managing demand to ordering of assets.

What we're very focused on is ensuring that our return on assets or our return on investment maintain hurdles, and we ensure that the way we're contracting rent. We're happy to grow, but we're not interested in eroding our returns on capital. So that's primarily how we approach CapEx in terms of a bit more specificity of what we're seeing in types of assets and areas of business. So I'll ask Ted to add a bit more there.

[Edward Redmond, executive]

Yes. I think strategically, we look at how can we grow while maintaining strong utilization. So growing market share is one of the easiest ways to do that. So where there's demand in a market that exceeds the units we have, we'll add units there. We're also -- with the -- some of the acquisitions we've done, we have markets where we don't have a full product line or we're not serving all the different end customer markets. So we're working to grow additional penetration into new end markets and new product types. So we think there's significant growth opportunities available in all those areas ahead of us.

[Matthew Lee, analyst]

Great. And just one clarification. So the new -- the 329 units you acquired this quarter, those already came with contracts and revenue associated with them?

[Trevor Haynes, executive]

Essentially, all of the units were in place on a project in generating revenue. To be clear, that project is in its late cycle. And so there will be a repositioning of assets, but we've got visibility in demand where we think we absorbed those assets that will come out of that project that we're seeing good demand criteria or drivers in Western Canada, right?

[Edward Redmond, executive]

Yes, that asset class, those are primarily complexes. So to the 18 unit complexes and we've got strong demand for that asset class for projects across Western Canada. So that was part of the reason that we did that acquisition was called existing contracted revenue, but also for other projects that we saw demand for.

[Trevor Haynes, executive]

One thing [Technical Difficulty] Northwestern British Columbia has a number of projects underway or coming up with regard to LNG and other export facilities being expanded or greenfield built. So we're quite excited to have a key partner in the area with the Gitxaala Nation, but also to have assets that we can match up with those projects. So strategic piece in our view.

[Operator]

[Operator Instructions]

Today's next question comes from Frederic Bastien with Raymond James.

[Frederic Bastien, analyst]

Hi, good morning, guys. Okay, sorry. Rental revenue growth at MSS is tracking at 5% to 6% so far this year. Is it reasonable to expect the rate of growth to pick up in the second half?

[Trevor Haynes, executive]

Where you would see a rate of growth pick up would be in the quantum of assets that we're bringing on to the platform. Keep in mind that our North American education business typically sees assets being placed through the summer months when kids aren't in school. And then you see the uptick in rental revenue as the assets are on rent, beginning with the school season in the fall. So Ted, based on the volume of new education assets going into the U.S. and Canada, we expect a fairly meaningful uptick in the revenue stream associated with our education revenue line.

[Edward Redmond, executive]

Yes, definitely. Some of those units are already in the fleet as -- because we're buying a significant number of units. So it takes a while, we've got to preorder them and then we can't. They don't all get completed on September 1. So they start getting delivered in June. So we're already seeing some of those in our fleet. And as you heard from Trevor on the contracted revenue, really strong contracted revenue. So that's a signal of those units going on rent in September. So we see that in both our Canadian and U.S. education fleets. We also have the VC acquisition units that just went to our fleet literally the last day of the quarter and to those -- we'll see some rental from those in Q3 and Q4 as well. So we definitely will see continued growth in our rental revenue.

[Trevor Haynes, executive]

And the other leading indicator that you can see in the results in Q2, we do a lot of field level activity around schools, classrooms. And so part of the elevated nonrental revenue in the quarter relates to the work of positioning assets. Canadian schools move around in July, August, but keep in mind that Southern U.S. schools typically around by the end of May. So some of that is in June, right Ted?

[Edward Redmond, executive]

Correct. And one of those will start in early August, so we want to get the units in place and on rent by them. So they have to be installed in May and June.

[Frederic Bastien, analyst]

Okay. And do they start generating revenue at the moment that you plug everything in? Or does it start when the school year starts?

[Trevor Haynes, executive]

A lot of our contracts would be -- they're all long multiyear contracts, but they're typically starting at the start of the school year.

[Frederic Bastien, analyst]

Okay. I have a similar question, I guess, for the Workforce Solutions segment. There was obviously a lull that we all expected with the completion of the pipeline contracts that you had on rent. But as you start deploying more assets do -- can we expect that pace of growth to also accelerate in the back half?

[Trevor Haynes, executive]

Those are couple of things going on in our WFS business, as you touch on there, the two big pipeline camp projects that came to completion last year caused a reduction in utilization as those assets came back. We had seen an uptick in projects, Mike, late last year. So that's sort of filled in part of that gap also the rates are higher. So that closes the EBITDA gap. And so as we continually deploy gradually, we'll be bringing up utilization. And we've also sold off a little bit of that excess capacity and then we've been investing in other asset lines. WFS that are showing really good characteristics for demand rate and utilization generally. So there's a number of things going on there, Mike, why don't you add a bit more color.

[Michael Ridley, executive]

Yes, sure. Thanks. I would also say like our small format business is very active our daily business, which is oil and gas is extremely strong. And we're actually seeing a lot of these assets going into different applications. Of course, we have to deal with what seems to be nonannual occurrence with buyers and everything that goes with that. So we position ourselves to get in touch and get to know these various government entities that are tied to this. I mean a portion of that. There is a fire, there will be opportunities for us. So we expect to see some growth in that area.

Our U.S. small format businesses is very strong as well and expect to see good utilization for the balance of the year down there and then when we go over to Australia, do expect to see a little bit of improvement with utilization in that market as well when it comes to give a large format.

Canadian business, the pipeline is fairly active. The projects aren't what they were with TMX and CGL, but there's a lot of different opportunities, be it mining and construction right across the country. So long and short of it is we do expect to see an improvement in overall rental growth for the balance of the year.

[Frederic Bastien, analyst]

Cool. That's great. And I just wanted to ask another question on Workforce Solutions. The margins were quite high during the quarter, the EBITDA margins were like close to 40%. So wondering if you could explain what helped drive this and whether we should expect this to kind of normalize into Q3 and Q4?

[Toby Labrie, executive]

Sure. This is Toby, Frederic. Yes, we had some unusual, I guess, cadence of costs with some projects where costs in Q2 were unusually low for some of the projects that we had. So we expect margins to return to normal in future quarters. So this one was a little unusually high.

[Operator]

Thank you. And this concludes our question-and-answer session. I'd like to turn the conference back over to Trevor Haynes for any closing remarks.

[Trevor Haynes, executive]

Thank you again for joining, and you're interested in Black Diamond. Hope everybody has a great weekend. Thank you.

[Operator]

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a pleasant day.