Black Diamond Group Ltd

TSX:BDI

Earnings Call Transcript 2018-Q3

[Operator]

Good day, ladies and gentlemen, welcome to the Black Diamond Group Third Quarter 2018 Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's call, Jason Zhang, GM, Corporate Development and Capital Markets. Sir, you may begin.

[Jason Zhang]

Thank you. Good morning. My name is Jason Zhang, GM of Corporate Development and Capital Markets for Black Diamond Group. At this time, we'd like to welcome participants to Black Diamond's Third Quarter 2018 Results Conference Call with CEO, Trevor Haynes; and CFO, Toby Labrie. We're also joined today by COO, Modular Space Solutions, Troy Cleland; and COO, Workforce Solutions, Mike Ridley. After our formal remarks, there will be a question-and-answer session. [Operator Instructions]Please note that while talking about our results and answering questions, we may make forward-looking statements. These statements are subject to known and unknown risks and future results may differ materially.Management will also be discussing non-GAAP financial measures in today's call, including adjusted EBITDA and net debt. For more information about these topics, please review the section of Black Diamond's Third 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 on SEDAR. Dollar amounts today -- discussed today's -- in today's call are expressed in Canadian dollars and are generally rounded.I will now turn the call over to Toby Labrie to review the quarter.

[Toby Labrie, Executive VP & CFO]

Thank you. And good morning and thank you all for joining. I'll review the company's performance in the third quarter and then Trevor will provide an update on our strategic objectives.Total adjusted EBITDA for the quarter was $4.6 million, a 49% decrease from Q3 2017. This translates to $10 million in funds from operations, which represents roughly $0.18 per share. The company significantly reduced its leverage position over the last 12 months.Net debt at September 30, 2018, was $82 million compared to $119.3 million at the same time last year, which translates to a 31% reduction. Adjusted EBITDA for Modular Space Solutions was $4.2 million, down 28% from the same quarter last year. Although total MSS revenue was flat from the comparative quarter, the revenue mix as well as higher transitory rental costs led to lower adjusted EBITDA.Utilization was 71% in the third quarter, up from 69% in Q2 2018 and down slightly from 72% in the comparative quarter. Workforce Solutions adjusted EBITDA was $2.9 million, down 53% from the comparative quarter, despite revenues being slightly higher. This was primarily due to the revenue mix comprising a higher proportion of lower margin sales revenue.Occupancy at the company's open lodges experienced lower-than-expected activity due to seasonal impacts on customer spending and field level activity.LodgeLink, the company's digital marketplace for workforce accommodation, is experiencing rapid growth and now has over 350 properties listed, representing over 45,000 rooms of capacity within lodges and hotels across Canada. During the third quarter, LodgeLink booked nearly 23,000 customer transactions, which generated roughly $3.9 million of gross room bookings. Through the first 9 months of the year, management prioritized a disciplined approach to capital spending and net CapEx was close to 0.Gross capital expenditures for the third quarter were $4.1 million, including maintenance capital of $0.2 million. With increasing demand for fleet assets from our MSS branches and customers, we are beginning to expand our CapEx program through the balance of the year and into 2019.I'll now turn it over to Trevor to review our strategy.

[Trevor Haynes, Chairman, President & CEO]

Thank you, Toby. Results from the third quarter were weaker than expected, primarily due to the performance of our Workforce Solutions business, which was negatively impacted by lower occupancy in open lodges, project timing and revenue composition. The weakness in our open lodges throughout the third quarter was driven by sluggish oil and gas sector activity in Western Canada but also by project timing as certain contracts led into Q4 and into early 2019.Accordingly, the outlook for 2019 remains positive as economic conditions in the company's end markets improved and the stronger balance sheet provides management with greater capital allocation flexibility. We anticipate the demand for space rentals in urban areas of Canada and the United States will remain strong over the next several years due to strengthening economies and ongoing public and private infrastructure development. Utilization is expected to remain strong throughout this segment, with increasing opportunities to drive ongoing improvement in permanent modular sales.End market growth should allow the MSS business to further increase economies of scale in existing markets and to greenfield new branch locations. Increasing scale in addition to rental rate increases and the growth of our capital-light value-added products and services offering is expected to enhance profitability in the MSS business unit. Growth will primarily be accomplished through broad investment across our MSS platform using free cash flow generated by the business. The company is targeting a minimum of 10% net fleet growth and 15% EBITDA growth annually over the next several years.Within the WFS business, the long-term outlook continues to improve. With our U.S. Energy Services and Australian operations contributing to a strengthening Canadian business, we remain focused on maintaining and marketing our sizable fleet of private washroom dormitories, which are currently among the most preferred product type in the market. LNG Canada is expected to absorb much of the overcapacity in the workforce accommodation market, while continued rationalization of fleets will further enhance pricing for these assets in Western Canada. Should other major infrastructure projects of size move forward, we believe the market could rapidly tighten, supporting management's view that this segment has significant upside over the next several years. Based off of current contracted work and expected activity, we foresee WFS strengthening in 2019, unlocking a degree of operating leverage for the company. This, combined with our substantial debt repayment over the past few years, uniquely positions us to return to improving per share earnings as we reinvest capital and free cash flow throughout the business.Our team continues to be excited about the ramp up in LodgeLink, our digital marketplace for workforce accommodations. As Toby mentioned, the business continues to scale quickly as we now have over 350 properties listed and nearly 250 unique customers that have booked over 62,000 room nights through the first 9 months of the year. We'll be rolling out a significant upgrade of the platform in the coming months, which we expect will further amplify the value proposition to customers and suppliers in 2019.Overall, management continues to assess both organic and inorganic growth opportunities in new and existing markets, which will be the primary driver for the expansion of our asset base in 2019 and beyond. Capital will continue to be deployed in a disciplined manner and directed towards opportunities that provide attractive risk-adjusted returns.To summarize, despite the softness of the current quarter's results, management believes that there's much to be optimistic about as the company heads into 2019. We're excited with the direction Black Diamond is heading, are encouraged by the ongoing improvement in our end markets and given our improved balance sheet, looking forward to returning to growth in the coming years.Operator, we're ready for questions.

[Operator]

[Operator Instructions] Our first question comes from Daine Biluk from CIBC World Markets.

[Daine Biluk, Associate]

For the incremental work you secured related to LNG Canada, can you provide any more color on that? And whether the expected timing will be similar to your GasLink contract?

[Trevor Haynes, Chairman, President & CEO]

The work that we secured is in and around the Kitimat area. So the work would be primarily related to the initial construction that's ongoing in the Kitimat region. So we would expect that to -- the current contract would be for the initial -- the first initial phase of 1 year to 2 years in that construction period with the potential optionality to extend beyond that.

[Daine Biluk, Associate]

Okay. That's good color. In regards to the Workforce Solutions margins, outside of some of the revenue mix and higher sales, were there any other items that impacted costs in the quarter?

[Trevor Haynes, Chairman, President & CEO]

For the most part, the -- yes, the revenue mix was the primary driver. We did have on a -- certain repairs and maintenance costs were a little higher than normal due to some -- which are expensed due to some activity with certain units that we put out to rent. So it was partly the lower rental revenues as well that's driving that with a lot of our rental revenue in the Workforce group switching over to lodging revenue as those alter the conversion of Sunset Prairie Lodge to an open lodge from a rental camp earlier in the year.

[Daine Biluk, Associate]

Okay. And so would it be fair to say that you would anticipate Q4 margins moving back in line with the level witnessed over the past 12 months, excluding any of this mix or sales noise?

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

Yes, it's Mike Ridley here. Yes, we expect to see some improvement. I mean, the market is still strained. There does continue to be downward pressure on rental assets in our lodging revenue. But that being said, the outlook is better, rolling into 2019 with LNGC being announced, the work that's Toby alluded to, in Kitimat, the Coastal GasLink line, which will take on some additional asset rental revenue as well. And then further down, as you look at the northeast of British Columbia, the upstream market and the potential for additional lodging revenue where we're strategically located, we think bodes well.

[Daine Biluk, Associate]

Okay. That's good color. Given some of the open camp occupancy contracts you signed for the upcoming drilling season, do you have any desire to add additional open camps or expand existing facilities at this stage?

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

Yes, we're constantly looking in areas of activity where we can see some benefit to add additional lodging and that particular area is one that we certainly have our eye on.

[Daine Biluk, Associate]

Okay. And then just last one from me. On the MSS side, for some of the new project sales in the pipeline, can you help us understand how margins on those would compare to some of your more traditional rental activity? Just trying to get a sense on how margins should move if these type of projects make up a larger portion of revenue for the segment.

[Toby Labrie, Executive VP & CFO]

Yes, the sales margins are often a fair bit lower. The rental margins, after you take away some generic costs, the margins oftentimes are well north of 50% there, whereas, sales margins along with our operations margins are often a lot smaller. Not single digits, probably a little more than double digits but not by much.

[Operator]

Our next question comes from Robert -- excuse me, Michael Robertson from National Bank Financial.

[Michael Storry-Robertson]

You mentioned in yesterday's release that you anticipate additional opportunities related to LNG Canada and further opportunities with potential further projects out West. Would you expect them to be similar in size and scope to the $43 million camp contract related to the Coastal GasLink pipeline?

[Trevor Haynes, Chairman, President & CEO]

Project-specific wise, probably not but I think, we will see some great benefit in pickup of our additional private format dorms as well as on the MSS side of things, there is great opportunities for space and there's going to be, along the line and into Kitimat, there's going to be a big requirement for space as well.

[Michael Storry-Robertson]

So sort of a lot of a little projects versus something bigger and meatier?

[Trevor Haynes, Chairman, President & CEO]

Yes, that's probably well said.

[Michael Storry-Robertson]

Okay. And it was good to see you achieve continued delevering in the quarter despite the challenges related to the project timing for the WFS segment. Do you have a leverage range that you will target moving forward while shifting the focus back to growth?

[Toby Labrie, Executive VP & CFO]

Yes. Longer term, we're still committed to achieving our targeted leverage of about 2x debt-to-EBITDA. And so we're making our way down there. It might not be a straight line towards that but that's generally the longer-term target that we're moving towards.

[Operator]

I'm showing no further questions at this time, I would now like to turn the call back to Trevor Haynes for closing remarks.

[Trevor Haynes, Chairman, President & CEO]

Thank you and thank you, everybody, for joining this morning. We would like to announce that going forward, we will no longer be hosting quarterly conference calls. Myself, Toby and our Investor Relations team will continue to be readily accessible to investors and analysts alike. Once again, thank you for listening and have a great day.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may disconnect and have a wonderful day.