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Black Diamond Group Ltd
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Good day, ladies and gentlemen, and welcome to the Black Diamond Fourth Quarter 2017 Results Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Keenan Killackey, Investor Relations analyst.
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 Fourth Quarter 2017 Results Conference Call with Chief Executive Officer, Trevor Haynes; and Chief Financial Officer, Toby Labrie. We're also joined today by Chief Operating Officer, Modular Space Solutions, Troy Cleland; Chief Operating Officer, 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 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, net debt and funds from operations.For more information about these topics, please review the sections of Black Diamond's fourth quarter 2017 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 in today's call are expressed in Canadian dollars and are generally rounded.I will now turn the call over to Trevor Haynes to review the quarter.
Thank you, Keen. Good morning, and thank you all for joining. During the fourth quarter and throughout the year, the company exhibited strong growth in British Columbia, Eastern Canada and the United States, driving improved performance in the BOXX Modular segment. The BOXX Modular platform has now reached a scale of nearly 6,000 units, serving 13 major markets across North America. BOXX Modular's high-margin recurring rental revenue grew by 36% from Q4 of 2016 and is expected to remain stable through the first half of the year, with fleet additions in the U.S. and strong activity in Ontario and British Columbia mostly offsetting further weakness in the Alberta market.In the Alberta marketplace, we've experienced falling utilization over the last 3 years as large resource-oriented capital projects have been completed. We believe this trend is at or near its bottom, and we are gaining visibility into increased utilization levels in Alberta in the second half of the year.As BOXX's fleet has come off rent in Alberta, we've been able to redeploy a certain number of those assets into the much more active British Columbia market, where our Britco platform has strong demand for additional units. The overall business is also focused on growing its complementary revenue streams through value-added products and services, including custom sales. Major projects and custom sales activity worked through a healthy backlog in the second half of 2017 and expected to have lighter volumes in the first half of 2018. But the bid log is stronger than we have seen in the recent quarters, which leads to our expectation that we will generate higher revenues in this category in the second half of the year.Scaling up the BOXX business brings additional profitability and remains a primary objective. Management allocated over $6 million in gross CapEx to this business unit during the fourth quarter, which is expected to begin contributing to rental revenue in late Q1, with full impact in Q2. The company's Energy Services segment has benefited greatly from increased levels of drilling and completions activity in the U.S. and Canada. This business now has just over 1/3 of its U.S. wellsite fleet in the Permian Basin, which contributed to the significantly higher utilization levels. This level of activity has continued into 2018 and is expected to remain strong throughout the year.In Australia, improving economic conditions are supporting some modest increases in resource development spending, and we are seeing this reflected in demand for our workforce accommodation units in that market. Demand for space rentals and education assets in the Australian market is also quite strong as infrastructure development and general construction spending supports the increasing levels of activity. In the Montney and Duvernay liquids-rich shale plays in Canada, where we now have over 2,500 rooms in operation, we are seeing modestly improving fundamentals resulting in incremental demand for our smaller open lodges in the area. We anticipate typical seasonality in our camps business through spring break up towards the end of this quarter and into Q2, but there is improving visibility into the balance of the year due to activity levels around these open camps, specifically. The reopened Sunday Creek Lodge is expected to contribute meaningfully in 2018, with added demand from turnaround work, phased oil sands development and pipeline activity occurring in the area. Finally, management is pleased with the ramp-up in bookings on our LodgeLink marketplace, a differentiated product offering that is bringing much-needed innovation to the workforce accommodation industry. This multifaceted platform recently started contributing profitably and is showing potential for substantial scalability. LodgeLink has proven to be a useful utility for both customers and suppliers as the platform now has over 100 properties representing roughly 17,000 rooms while serving over 130 distinct corporate customers. Management is optimistic that 2018 will continue to show improving results as the business is delivering substantial opportunities to deploy assets to markets and projects that provide increasing returns to the company. I will now turn the call over to Toby for some further details on the fourth quarter financial results. Toby?
Thanks, Trevor. Total adjusted EBITDA for the quarter was $9.5 million, a decrease of 19% from Q4 2016 and up 6% from Q3 2017, which led to a $6.7 million decrease in net debt from Q3 to Q4 2017. Adjusted EBITDA for BOXX Modular was $5.7 million, up 54% from the same quarter last year. This was due to a 49% increase in fleet size to nearly 6,000 units combined with higher utilization levels of 69% compared to 64% in the fourth quarter of 2016. Energy Services adjusted EBITDA was $1.6 million compared with a -- to a loss of $0.1 million in Q4 2016. This was due to an increase in accommodation revenue from substantially higher wellsite utilization of 69% in Q4 compared to 21% in the prior year.Adjusted EBITDA for our International division was $0.3 million, up 200% from the same quarter last year. This increase was primarily due to a larger proportion of rental revenue with higher margins during the quarter.Camps & Lodging adjusted EBITDA was $5.3 million, down 55% from the comparative quarter. This reduction in adjusted EBITDA was mainly due to contract termination payments realized in Q4 2016 and the decrease in rental revenue in 2017 due to lower utilization compared to the same quarter last year. Management expects that the first part of 2018 will show a net 0 CapEx as the disposal of underutilized fleet and redundant real estate assets will fund further growth of our modular space solutions platform. With the exception of finance costs, this leaves largely all positive operating cash flows available for the purpose of reducing debt levels.Substantial debt reduction in 2018 is also expected to be achieved by the collection of a tax refund of roughly $7 million. Management believes that reducing leverage on the business will provide immediate relative value to equity holders and create financial flexibility to position us for future growth.Black Diamond is encouraged by the growth we've seen in most of our BOXX Modular markets, while resource development activity in Canada, the U.S. and Australia is also improving and providing us with visibility that we haven't had the benefit of experiencing over the past few years.We continue to employ strategies that aim to enhance the current position and long-term prospects of the company. We are experiencing strong growth in our key markets outside of Alberta, and the business is realizing the benefits of its diversification efforts. Black Diamond remains committed to its strategy of investing in growing markets, selling and redeploying underutilized assets, managing costs and improving financial flexibility.Operator, we're ready for questions.
[Operator Instructions] Our first question comes from the line of Greg Colman from National Bank Financial.
I just got a couple things I wanted to touch base on. First, starting off with the BOXX units coming off contract in Q1 in Alberta. I think in your Q3 remarks, you were -- you mentioned the weakness or the utilization hit there could be about 5% of the BOXX units. Is that still consistent with what you're thinking today? And is that what you mean when you say significant BOXX units coming off contract in Q1 in Alberta?
Yes, it's Troy here. That is fairly consistent. We've now got a stronger indication, and I think in that 5% to 6% range, from that statement we made back in Q3, is still accurate. And we can say that with a little bit more comfort because those major projects have now come off right here in Q1. We have better visibility on that.
Okay, great. All right. So it's very consistent with what we were thinking in Q3 in terms of the Q3 discussion. Secondly, on the reopening of Sunday Creek, what was the catalyst for it? What specific turnaround or was it, just broadly speaking, is the entire 1,200-bed camp reopened? And what are the expectations with its impact in Q1? Should it offset entirely or more than entirely the BOXX weakness?
It's Mike Ridley here. Yes, the reopening was burned by a few things, development in that region and also a significant turnaround with a customer. In terms of visibility, looking forward, we see additional turnaround work and some pipeline work later in the year.
And about offsetting the BOXX weakness, is this roughly the same order of magnitude that we're talking about there or substantially smaller or larger?
Well, the contribution from Sunday Creek, at current activity levels, will be greater than the incremental offering from BOXX in Alberta. Typical for what we see in our Canadian operations, activity reasonably strong through the first quarter, and then we anticipate some softness based on seasonality. And what is encouraging in the current marketplace is we're starting to get visibility further out, where we have customers making -- or giving us indications and commitments into the latter part of the year. So currently, we have visibility that Sunday Creek should remain open for the entire year and will contribute not at a 100% utilization to the full 1,200 beds but with reasonable occupancy that makes it generate a positive contribution to the business.
That's great. Okay. And then just shifting gears for a second here. LodgeLink, pretty interesting how that rollout is coming there. You were anticipating about 10,000 booking nights in Q4 when we talked about it on the Q3 results. How did the actuals compare to expectations? And what would be your explanation on any deviation?
We're roughly in line -- we haven't published the exact numbers, but we're in line with the expectation on LodgeLink in Q4, and we've seen higher room night bookings into Q1 here. So it continues to scale. It's early days. It's a new product. We're very pleased that early in its development, it's generating a positive contribution into the business. In terms of our being able to give you a clear line of sight on how this will scale and what the contributions will look like into further quarters, a bit early as we're continuing to develop this product. But we're pleased with the proof of concept and the fact that it is a positive contributor. And in subsequent quarters, I believe, we'll lay down some basic KPIs that we can include in our financial results to understand how this product is working.
Great. And lastly for me. In previous quarters, you've given some forward-looking guidance, quantified your outlook for this fiscal quarter or year. I didn't see any in this disclosure. Is that something that I missed and it's [ probably ] there, and you do have an outlook for 2018 EBITDA?
No, you didn't miss anything there, Greg. We didn't provide forward guidance. Rather, what we thought was appropriate was to provide more indicative guidance on where we think the business is going and the visibility that we have into our markets.
Given your earlier comments about improving visibility regarding customer commitments and contracts, especially later in the year, that seems to run a little counter to releasing a disclosure or guidance for 2018 versus what you provided in 2017. How should we think about those 2 sort of conflicting indicators?
Well, I think it's simply a matter of -- the visibility is improving, but visibility overall is -- still remains somewhat murky. And so we feel that by providing some guidance on how we see the markets currently acting and reacting, we can provide good color into how we expect the year to develop without providing specific EBITDA guidance.
Our next question comes from the line of Ian Gillies from GMP.
Would it be fair to assume that while utilization, the visibility there is getting much better, that given the work contracted revenue is trying to do, that rental rates are still somewhat uncertain in the back half of the year at this point in time?
Well, we would answer that by bifurcating between the 2 business units. Based on the nature of BOXX Modular, we do have much more confidence in the recurring revenue stream there or the base revenue stream, which is the rental revenue, in the markets that we've got good activity, Ontario, British Columbia and the U.S. We're seeing modest upward trend in rates and strong utilization. So we do get some forward visibility. That business has always been an average contract, of perhaps, 10 months, but the assets tend to stay significantly longer than the contracted term. Where we had problems in the BOXX business is our visibility around what's happening in Alberta. To what Troy had mentioned earlier, we do have some visibility of improving utilization into our Alberta branches, albeit modest, into Q2, but we have seen significant rate compression in the marketplace. When we switch over to the other part of the business, what we're seeing in the energy resources side, the customer is still gauging the market with contracts around fixed rates but not any meaningful or, in many cases, not at all, any guarantee of volume or term, which makes the business very difficult to project very far into the future with regard to like base guaranteed contracted revenue. And so what we're looking at is activity levels, other indicators such as drilling projects, midsize capital projects that are approved for plants and pipeline, et cetera, to draw back our internal forecast of how activity is going to look in that business line. Anything you'd add, Toby?
No, I think that's a good breakdown.
With respect to non-rental revenue, which is obviously tough to put a peg on it in any given quarter, but are you able to provide even maybe some goal posts of where you think that may shake out in Q1, Q2 just to provide -- just so we can maybe get the numbers a little tighter there?
Sure. It's Troy here. From the BOXX Modular perspective, it is hard to give an exact line of sight, but when it comes to non-rental revenues, we're really focused on many different product lines that contributed to that. Used fleet sales is becoming more and more common, especially in certain categories of our business. We're seeing improved traction on new manufactured product sales in all parts of our business. And then, of course, with all that comes the major operations, installation and transportation that comes with those products. So the pipeline looks strong. Q1, Q2, I think, so far, is a little bit lighter than what we saw in the second half of 2017. And of course, with all that, we're also promoting other value-added products and services to the rental components of our business.
Okay, that's helpful. And maybe with respect to Camps & Lodging, I mean, what percent of the fleet there do you think could still be put up for sale or is salable in the context of rightsizing that asset base?
Yes. We have a fairly aggressive program to get rid of excess assets -- get rid of idle assets, and we're marketing in different parts of the business. We're also looking at ways to repurpose assets, whether it be used for social housing or stand-alone units that can be used for farmers in British Columbia, for example, as well as homeless initiatives across the country. So there's a number of different ways in which we can redeploy these assets.
Okay. And then with respect to the tax refund, would it be fair to assume that, that should come through in Q2?
Yes. I think that's probably a reasonable assumption. It's largely out of our hands, but I think Q2 or possibly Q3 is probably a reasonable assumption on that.
Our next question comes from the line of Jon Morrison from CIBC Capital Markets.
Just to follow on, on Sunday Creek, what form of base visibility do you need to see at this point to reopen a camp and ultimately go and hire employees and procure ancillary services to operate that camp? Like is it 3 months? Is it 6 months? Do you need a full year?
No, in that it's difficult to get take-or-pay for full year these days. Certainly, what we need is -- and have confidence that there's demand. So when we talk to customers, in the case of Sunday Creek right now, we have more than one large customer utilizing the facility and then augmenting with some smaller customers. So what we need is to ensure that when we open a camp, that it's going to meet its breakeven point and that it will do so for a reasonable period of time. It's various costs of opening a camp, but it's not as expensive as putting a camp in place. So it's not a huge hurdle for us to reopen a facility like Sunday Creek, which we had kept in a ready position but not fully staffed, obviously.
Is staffing a large issue when you, all of a sudden, want to ramp up in, say, a 2- to 3-month window?
It takes us about 3 weeks to get the facility up and running. And with our various service provider partners, obviously, there's quite a bit of logistics involved, but we can open within a fairly short period of time. And the staffing has -- I'm not going to say that staffing isn't an issue, but it wasn't a hindrance to opening the camp, Mike?
Yes. And just to add to what Trevor said, it's not really a one-size-fits-all answer. Each camp is a different size and has a different cost structure associated with it. So we'll look at sort of line of sight in terms of activity in the region. For example, if you look at the Duvernay and the Montney, it's a fairly active market right now and was over the course of the winter. We're currently operating approximately 2,500 beds. So yes, we like to have anchor clients that come into our camps, but we will also look at the varying activity in those regions to ensure that we're going to have some level of utilization over the course of the year.
Perfect. Can you share how much of BOXX's fleet is currently in Alberta versus other geographic markets? And are more redeployments on the horizon in the next couple of quarters?
BOXX's fleet would be probably 1/6 of the overall fleet size in Alberta. And yes, there are some limitations to redeployment of those assets into other areas, but we have been strategically looking at that and, I think, moving some of those assets into B.C. and Saskatchewan, very easy to do that. Moving it further east, then Saskatchewan becomes a little bit more problematic just because of the transportation cost. But we found great success in doing that thus far since the Britco acquisition and redeploying some assets into B.C., and we expect that, that will continue in 2018 as well.
In terms of the southern U.S. platform, are all of the Permian assets essentially 100% utilized right now? Or is there optionality for incremental contribution from that platform above and beyond probably additional asset deployments that you might be planning?
Well, the Permian is interesting. We took the difficult decision of incurring the cost to move the asset base from North Dakota. Probably 50% of our fleet from North Dakota went into West Texas. The asset -- those assets are 100% utilized currently. We anticipate that we'll be at 100% or very near to it for the foreseeable future. We've had some success with rate increases as the commitments roll over. And that is one market where we are being able to get some length of a take-or-pay contract to clear around 12 months, commitment against the asset. So it demonstrates how different that market is from some of the markets we're facing here in Western Canada, for example. As far as adding capacity, we're seeing our utilization increasing in North Dakota as we're seeing activity in North Dakota increase, which then raises the question do you incur the cost of moving the asset, which is quite considerable. It's quite a distance from North Dakota down to Texas. Or is it a better economic decision to leave the asset in place if it's going to go to work in North Dakota? So currently, the fleet's about 1/3-1/3-1/3 between North Dakota, Colorado and Texas. Colorado fleet is also operating at very high utilizations. I think we're in the 90% range currently, Troy?
That's correct.
And we don't suffer the seasonality that we see through spring breakup up here, so that's certainly a bright spot on the platform.
Toby, was the decision to write down the carrying value of the camp's assets, partially driven by what you're seeing for fair market value for the assets in the secondary market as you look to divest? Or was it solely based on your traditional practice of looking at cash-generating ability on the horizon?
Well, it's due to a number of factors. As you know, the impairment analysis is an accounting exercise that we have to go through and evaluate it every reporting period. So we looked at things like the fact that we've been able to realize asset sales over book value in the market, but we've also seen -- our share is trading at about a 50% discount to book value recently, and we realized lower utilizations in camps through 2018 -- or sorry, through 2017. Although in Q4, that market has been improving. So all those factors would combine into our decision and our evaluation. But definitely, our intent to and our strategy to more aggressively market these assets and sell down assets to fund our growth in our BOXX Modular platform and revenue-generating assets led to the decision to [ further ] write down in Q4. The other aspect is, as we look at our fleet, the demand on the higher-density dorms in the market is lower and hasn't rebounded as we might have expected, say, a year or 2 ago with our price-conscious customers due to the demand for labor in the market today. And so with that, the impairment was targeted more heavily against those higher-density dorms, where we see that lower value in the market today. And as we look to liquidate some of those assets, we will realize more current market pricing than potentially the longer-term cash flow projections that we may have looked at previously.
Okay. Can you clarify the total secondary fleet sales that came through in the quarter and highlight where cash proceeds were relative to book value?
We were over book value on our used fleet sales. We had fleet sales in just about all segments of the platform. And so we don't discuss the exact margins on those sales. But I think the indication that it's above -- it's been above book value provides an indication of what we're seeing there.
It's important, Jon, to note that we have sold about 1,000 rooms of capacity in Canada over the last couple of years and just under 400 rooms in Australia and have garnered over book value on those disposals. And also, Toby talked about the different classifications of assets. Where we see demand is very much in the private washroom category, and even for the pipeline work coming up, the preference is for private washroom, based on the way that labor is interacting with the developers. And Black Diamond has the largest fleet, to our knowledge, of mobile single private washroom dorms in the marketplace. Those assets, based on market dynamics, less overcapacity, more demand, were not written down to any meaningful extent. What we looked at is the older higher-density category.
And Trevor, would you say that your ability to get a premium to book value is just underpinned by your decision to be very selective about the asset sales that you're taking on in this market as ultimately, some things are being sold for fairly low valuations out there?
They are. What's interesting and makes it difficult for the fair value analysis is how wide a range you find on similar assets in fairly similar timelines between very low transaction values and some significantly high, which just reinforces that this is not the most liquid asset class, and so it makes fair value a difficult exercise. We are selective to higher-quality assets where we see our visibility as markets recover and as pipeline projects go ahead. We hope and we think they will. And we have a recovery in some larger capital projects. The private washroom dorms are where the demand is, so we're reluctant to sell that type of asset, but we're seeing a surplus of assets in the market. I think we want to see the marketplace adjust supply to demand. And we're seeing the aggregate of sales of assets out of the rental platform in Western Canada has been quite meaningful. I would suggest it's in the neighborhood of 3,000 to 5,000 rooms over the last 3 years. What do you think, Mike?
Yes. [ That sounds like the right number ]
So the market is gradually correcting.
Last one just for me. In terms of the resegmented disclosures that are going to be rolled out in 2018, can you help us understand the decision process for wanting to report financial performance of the business in line with how you're managing it internally versus having consistency in disclosure practices to the investment community and helping the average investor understand your business and be able to analyze how it's performing over a longer-term horizon?
That's a good question -- I think we ultimately are trying to achieve both. Part of our change in disclosure, as you mentioned, is predicated on the fact that we have reorganized our business to achieve efficiency and also improve the way we're going to market. We've seen the benefits of that already. But as a result, we're just -- we're managing our business differently, and we're tracking things differently. And so part of that efficiency is being able to report those on a more aggregated basis in some cases. So that's a big factor, but the other factor is we are looking at our disclosure going forward and trying to provide meaningful disclosure that doesn't take away from what we have provided in the past. So although change is difficult, I think ultimately, we hope to improve the quality of disclosure going forward.
Our next question comes from the line of Brian Pow from Acumen.
I just wanted to dwell in on LodgeLink a bit. I know it's still early days, but maybe you can just sort of give us a sense where you think your sort of penetration is today. And then really, has there been any competitive response at all to what you're trying to accomplish there?
I guess to the first question, we have to ask how big is the market and how do we define the market before we can determine what our penetration rate is. What we're finding interesting is that when we talk about 130 distinct customers and our customer sign-up is at a fair pace right now, we're finding that it goes beyond the energy-specific customers. Certainly, we've got a lot of service companies signing in as customers, and typical of those customers are companies that operate in smaller crews for shorter duration and move frequently into different areas. So if you think in that category, fracking, various types of frac support, water handling, pipeline inspection, [indiscernible], on and on and on, even on the production side for basic services on producing wells. So that's very interesting to us, and the breadth of the customers that are coming in is of interest. And it's very much that customer who is moving across broad geography, and so one relationship with a particular lodge is insufficient. And so this product helps match up capacity with the user. But we're also seeing construction type of customers that are engaged in various type of projects beyond oil and gas, services around some of the resource mining activity in British Columbia, power infrastructure, et cetera. So we think the addressable market is quite large, and so the category is workforce accommodation, not energy workforce accommodation. Currently, we have a good energy flavor in the customer base, but it seems to be rapidly expanding. And if you look at the site, you would see that the facility owners who are signing up are bringing facilities all the way through to Ontario and certainly, into British Columbia. You will likely see us pushing the geographic envelope to cover a greater territory in the near future. So currently, we think our penetration is actually quite low in terms of what the overall addressable market is. We are doing incremental development on the product; improving the usability of the site almost on a daily and, certainly, on a weekly basis; and determining how best to refine the value proposition through the marketplace. So it's interesting as far as we can tell. I mean, there's lots of people who have websites for booking onto their facilities, but the core concept at this point is in terms of how we've geared it and how we bring it to market, and we're not aware of anybody doing anything exactly similar to it.
Right. That's helpful. And then just in terms of looking at your visibility into your various markets, how critical has LodgeLink been to helping you become more comfortable with sort of what's happening with your own assets?
Yes. I think that's a good question. I think it does make decisions easier as it relates to our own assets. And as Trevor alluded to, we're seeing customers that are booking into our lodges and, actually, hotels and motels. It's really about moving crews in remote applications that we would not have otherwise seen through our conventional business. So there's -- without question, there's some incremental business and growth that we're receiving as a result of LodgeLink, and it does make some of those decisions around whether we're going to open up a camp or not in those remote regions a little bit easier.
That's all helping to augment where we have a lodge that is suitable logistically for the customer. It's helping add incremental rooms to our lodges as it is to other suppliers on the site. Of the 17,000 rooms, our facilities listed represent, perhaps, 2,000 rooms of capacity, somewhere in there. And so this is far beyond a listing of Black Diamond's facilities. And interestingly, a reasonable percentage of the supply being listed on the marketplace is by the producers who own the asset themselves and are looking for incremental rooms to offset their cost of, in many cases, underutilized facilities. So it's also a service to our traditional customer, if you will.
Okay. And then just changing direction, Toby, with sort of the strategy of a [ neutral ] CapEx program, how comfortable are you -- what sort of drives the asset investment versus the asset sales? How comfortable are you that you can sort of achieve the sales you need to fund the CapEx you want?
Yes, it's a good question. We think it's important to both reduce debt and leverage currently but also to continue investing in our diversified businesses. And so in order to do that, I think the best way to achieve it is to harvest a substantial amount the cash flow from operations to paying down debt and redeploying currently trapped capital in idle assets into other markets where we can buy revenue-generating assets. And so you're correct that, to a certain extent, our gross capital program will depend on the success and speed of our asset sales. But as we've discussed this quarter and in previous quarters, we've been pretty successful at that over the last couple of years. And as Mike Ridley mentioned earlier, we are employing further efforts to increase the pace of those sales of underutilized assets.
Okay. And then just final for me. Just on sort of the lack of guidance, I'm just, again, curious. Will there be a point in time in the future where you're more comfortable putting out some guidance? And then just in terms of what you're sort of internally thinking, I mean, are you expecting to be at least better than 2017 in terms of EBITDA performance?
Well, 2017 is the first time that we provided guidance, and it was when the business was operating different than expectations, and the guidance helped in that environment. Prior to that, for many years, we did not provide significant forward guidance, and those are periods where we had more confidence on how the business was operating. We feel more comfortable with our traditional approach of talking about the market, talking about what we're seeing, talking about near-term visibility and then trying to provide full year guidance. I think I can speak generally for management that we do feel more confident about how the business is operating. And currently, the last couple of quarters, the business has been operating to plan, and part of that is a more stable end market, if you will, in Western Canada, where what we're expecting from the market is, in fact, occurring. And then the diversification part of it, pieces like Britco are much more predictable in terms of the scale and volume of that business. And we're seeing the same in our other markets, whether it's U.S. Energy Services, as we touched on, or our core revenue streams out of BOXX in the Southern U.S. and Eastern Canada.
Our next question comes from the line of Ben Owens from RBC Capital Markets.
I was wondering if you guys could possibly quantify the costs to reopen the Sunday Creek Lodge. And then I was curious if those costs showed up in the fourth quarter or any of those are going to show up in the first quarter results.
As we mentioned, the costs are not completely insignificant but fairly minor in the context of operating the camp for, say, a month. And so we did open the camp late in the fourth quarter, in late December, but those costs were largely captured in December.
Okay. I know you guys don't want to give specific guidance, but just kind of from a high level, I was curious. Based on the visibility that you have and indications from customers, do you think that the Camps & Lodging segment EBITDA contribution in 2018 will be greater than in 2017?
I think in the Camps & Lodging segment, we're seeing some headwinds in some areas of our business and improvements in others. So from a Camps & Lodging perspective, we're looking at that fairly flat from 2017. But as we discussed through the balance of the platform, we're seeing good causes for increase overall on the year in the BOXX Modular, Energy Services and International platforms.
What we do see year-over-year is significant increase in occupancy in our open lodges. And so that part of the business unit will be stronger year-over-year. It's difficult to -- early in the year, whether some of the large projects will advance and absorb some meaningful amount of the rental asset, the mobile single-story dorms that would go out on big pipeline projects or larger capital projects not just in the energy space. We're tracking in multiple different sectors, mining, power infrastructure. We've got a good footprint in Central and Eastern Canada now for business development, and so we're looking broadly across the marketplace. So the potential is there, the visibility is not. Would you add to that, Mike?
Yes. It's -- some of these big projects that Trevor alluded to go -- they're likely going to be tail part of '18. But there is numerous mining projects and small pipeline projects that are ongoing in Western Canada, and there's continued development of hydro generation, and transmission lines are being built off of Site C. That will all help take capacity in the marketplace.
Our next question comes from the line of Jeff Fetterly from Peters & Co.
On the open lodge side, Sunday Creek and Little Prairie, the beds that encompass, I guess, Little Prairie and Sunday Creek, was there any contribution from those assets in 2017?
From Little Prairie, no. We just opened that lodge in late Q4. So we would have had minimal contribution in Q4. So definitely, in 2018, we're seeing more significant contribution from that lodge. And then for Sunday Creek, we were open for a good part of the year and closed the camp in Q3. But during the first part of the year, we did have some occupancy but fairly low bottom line contribution from Sunday Creek through the balance of 2017.
And it was essentially done in Q4.
Let me clarify. The assets that compose Little Prairie, did they contribute in 2017? I know Little Prairie wasn't there, but the assets that composed it.
Well, we pull assets from various places. I think the simple answer is they were pulled out of the unutilized portion of the fleet in 2017, and so no.
Okay. So when we look at those 2 camps and their incremental full year contributions in 2018, on a year-over-year basis, there will be a little bit of comparison for 2017 predominantly on the Sunday Creek side?
Very modest. So you would see, in Q1, a significant increase in contribution from Sunday Creek versus the comparison of last year from that asset.
And Little Prairie did not exist Q1 '17, so you'll see contribution in Q1 of '18.
And even our Smoky asset, I'm assuming that essentially had no contribution in Q1 of last year due to a lack of occupancy, and that area has been quite busy. So I think to answer how we've addressed the current market is we've repositioned unutilized assets, added some capacity to our Smoky location in the Duvernay with Little Prairie in place. We've got Sunday open again. And so that's how we're addressing where we're seeing activity in the marketplace. Certainly, in the shales, it's more upstream and midstream construction, good activity, and that's what we've -- we've been positioning the assets where we can to take advantage of what's happening in the market currently. And that's where we'll see incremental contribution for the quarter and, we believe, for the year is in that category of our Camps & Lodging business.
On the BOXX side, the contract rollovers, assets coming off of contract in Alberta in Q1, is that essentially a utilization hit? Or do you also expect a rate element to play out there?
So when they come off rent, there is no rental revenue stream. But as they're going back out to work and we have some visibility, that some amount of the asset will go out to work in Q2. But the rates, Troy, are fairly different.
Yes. Those projects that they came off rent on were signed back in -- when the markets were a lot stronger still. So those assets, when they go back out to work, will be at lower rates than the last time they generated revenue. And yes, the utilization -- it was a utilization effect here in Q1 that will drop off before starting to go back up.
But that has been dropping steadily through 2017 as well, Jeff, so it isn't an entirely Q1 of 2018 event. I think Q1 of '18 is where we're seeing the last of assets that have been on these very large projects coming back, and that's where we think -- we essentially have seen the bottom in our Evanston branch, the Calgary branch which handles some of the big projects for our customers based out in Calgary. It's where we're seeing the last of the projects come off, and so we expect that branch to see recovering utilization moving out of Q1.
And to add to that overall, through 2017, as Trevor mentioned, we have been seeing the utilization decrease in Alberta and where those assets have been redeployed. You're correct, Jeff, that they're going out at lower rates. The impact of all that has been offset through the year by the growth in our other markets. And what we're trying to highlight here is just that with these last large contracts coming off, it's more significant and, for a short period of time, won't be offset by the growth we're seeing elsewhere.
And just to clarify, earlier, you made reference to 5 or 6 percentage points of impact. Is that the utilization of the overall BOXX fleet compared to Q4?
Not compared to Q4, compared to Q3, when I think we reported 72%. And yes, the entire BOXX fleet out in North America.
5% of -- but part of that is already seen in Q4 is what you're saying?
Yes.
Okay. And last question on the CapEx, Toby, just to clarify. So you have a $7 million tax refund. You're guiding to $5 million of real estate sales. Should we assume that gross capital spending in 2018 will be about $12 million? Or do you expect to sell additional assets to increase gross capital spending?
Our net capital spending targeting close to 0 would be net of our fleet sales and the real estate sales. You should think of the tax refund basically being applied to debt. And so no, we think that our gross capital program, although it will be dependent, to a certain extent, as I mentioned, on the success of our fleet sales. We had about $10 million of cash fleet sales in 2017. And so depending on the size of that, we're looking to increase that going forward. And so I think you would think of the gross capital program as being larger.
So larger than what number?
Well, then what you were quoting. This year, our gross -- in 2017, we had $23 million gross capital, which was offset by -- with our fleet sales, brought it down to a net capital of $13 million. So the important number for us is to get to a net capital close to 0, but we would expect to likely be in the range, on a gross capital basis, depending on fleet sales, somewhere in the neighborhood of where we were in 2017.
Our next question comes from the line of Jason Zhang from Cormark.
So with respect to your book value in PP&E, how much of that today is made up of the higher-density dorms?
Well, after the write-down, it would be significantly less, and the fleet count would still be more on the higher-density dorms. And so of our overall book value in camps, probably think about that somewhere in -- about 1/4 of our book value would be higher-density dorms after the write-down.
Okay, good. And then with respect to the CapEx again, given the unpredictable nature of fleet sales, if that actually comes in higher than expected, is the growth in your BOXX business such that you would sort of put that capital to work? Or would your priorities more so be towards paying down debt?
Well, I think as we realize, fleet sales and pay down debt, it gives us the flexibility to toggle that CapEx to gross CapEx as we see the demand coming in. So if demand for our BOXX assets remains strong like it has been, we see the potential for increasing that gross capital program.
[indiscernible] in the system in markets like British Columbia, Ontario and the Southern U.S., all those markets could absorb additional assets on our platform. And obviously, we're going to be very disciplined in terms of investing where we get the highest return and certainly over our hurdle rate. The quantum is going to be somewhat dependent on the volume of cash that we free up out of the unutilized assets across the platform.
Okay, understood. And then finally, on camps again. Toby, when you talked to sort of 2018 being flattish on 2017 on a year-to-year basis but then pairing sort of other remarks around sort of the core of the business being stronger, so lodging and rental revenue being better, is your sort of uncertainty around where that's going related to the one-time asset sales that are -- may or may not happen in that business?
Jason, you're talking about my comments on relatively flat EBITDA contribution from camps, 2017 to '18?
Yes.
No. Where we're seeing more activity is from lodging opportunities in camps. And so we see the -- less significant opportunities on the rental side. So we would expect, in 2018, to see the proportion of lodging to rental to increase.
This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Trevor Haynes, President and CEO, for any further remarks.
Thank you, and thanks to everybody for joining today. We will end the call now. Thank you.
Thank you. And thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.