Ladies and gentlemen, thank you for standing by. Welcome to Badger Infrastructure Solutions Ltd. 2023 Q3 results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would like now to turn the conference over to Lisa Olarte, Director of Investor Relations. Please go ahead.
Good morning, everyone, and welcome to our Q3 2023 earnings call. My name is Lisa Olarte, Badger's Director of Investor Relations. Joining me on the call this morning is Badger's President and CEO, Rob Blackadar, and our CFO, Rob Dawson. Badger's 2023 Q3 earnings release, MD&A, and financial statements were released after markets closed yesterday and are available on the investor section of Badger's website and on SEDAR. We are required to note that some of the statements made today may contain forward-looking information. In fact, all statements made today, which are not statements of historical fact, are considered to be forward-looking statements. We make these forward-looking statements based on certain assumptions that we consider to be reasonable.
However, forward-looking statements are always subject to certain risks and uncertainties, and undue reliance should not be placed on them, as actual results may differ materially from those expressed or implied. For more information about material assumptions, risks, and uncertainties that may be relevant to such forward-looking statements, please refer to Badger's 2022 MD&A, along with the 2022 AIF. I will now turn the call over to Rob Blackadar. Rob?
Thanks, Lisa. Good morning, everyone, and thank you for joining our Q3 earnings call. Before we get into the results, at Badger, we like to start all of our meetings with a safety share. Our company's Making Safety Personal campaign means using all the tools in our safety management system to not only identify and control risk, but whenever possible, remove and mitigate those risks. We use tools like our Lytx system, our stop work authority, and our mentorship programs every day to help us manage risk, both on the job and in the business. At Badger, we invest in the right tools to help our people be successful every day. Now, on to the results. As you saw in our Q3 release yesterday, the team continues to raise the bar as evidenced by our record revenues, record gross profit, and record Adjusted EBITDA.
We are very pleased with our top-line growth of CAD 195.6 million, which was 20% higher than last year, driven by our commercial strategy rolled out last year and the impact of our recent focus on our pricing strategies. Importantly, we continue to see our Adjusted EBITDA growing up 49% in the Q3 year-over-year, which is two and a half times the 20% growth in revenue. Our Adjusted EBITDA margin was 26.9%, the highest we have achieved in three years. We continue to be encouraged by the trends in our end markets that are supporting solid customer demand. Revenue per truck per month, or RPT, was just over 49,000, up 5% from last year, due to Badger's continued commitment to optimize fleet utilization and pricing.
Our Red Deer plant manufactured 57 non-destructive excavation units in the quarter versus 29 units in Q3 of 2022, with a total of 169 year- to- date. We retired 18 units in the quarter and 56 year- to- date. We ended the quarter with 1,514 non-destructive excavation units, compared to 1,387 at the end of 2022. As we are closing in on the end of the year, we are planning to produce close to the midpoint of our range of between 200-230 units. We are planning to retire between 75-85 units at the lower end of our previously provided range of 80-100 units.
As we have previously discussed, we've begun refurbishing select units by replacing key components to extend the useful life of these units by five years and increase the company's return on invested capital. We are very pleased with the finished results of the initial completed units that we have rolled back into our operations so far. Since the start of the program, we've experienced some vendor delays, and as a result, we are now expecting to fully complete between 15 and 20 units by the end of the year. Going forward, we have a plan in place to mitigate these delays after the turn of the year. We continue to believe this program contributes to improving our return on invested capital and will help to level out our retirements over the next few years.
I will now turn the call over to Rob Dawson to discuss our financial results in more detail. Rob?
Thanks, Rob. As you saw in our results, our team again delivered strong results, which were consistent with our expectations and keep us on track to have a solid finish to the year.
...As Rob mentioned, we had another record revenue quarter, up 20% from last year, driven by our U.S. operations, which were up 25%. We experienced a slowdown in our Canadian markets, driven by a few large projects wrapping up. The team has secured a number of large projects to replace these in the upcoming months. We continue to see record gross profits, reflecting the operating leverage gained from our pricing strategies and our commitment to drive operational efficiency to achieve improved margins, while partially offsetting inflation. We continue to be encouraged by the trend in our Adjusted EBITDA margins, which improved close to 27% for the quarter and 22.7% year-to-date. Our trailing twelve-month Adjusted EBITDA margins continue to increase sequentially, demonstrating our commitment to providing sustainable, growing margins and the scalability from strategic investments in our operational support functions.
Our annualized G&A expenses have held steady between $35 million-$40 million, and we expect this level to be sufficient to support our growth trends. Earnings per share was a record this quarter at $0.68 per share, an increase of 60% over last year, notably 10 points higher than our increase in Adjusted EBITDA. Now on to the balance sheet. Our capital allocation priorities are unchanged. We continue to maintain a strong, flexible balance sheet to support our organic growth and commercial strategy. Our compliance leverage was at 1.4 x debt to EBITDA, down from 2 x a year ago and the 1.6 x we posted at the end of June 2023.
During the quarter, we extended our credit facility to restore a five-year term, providing us with in excess of $150 million in liquidity and the financial flexibility to fund both near- and long-term growth and complementary capital allocation decisions. Our receivables portfolio remains strong, with over 90% aged below 90 days and with over 90% of our customers having investment-grade characteristics. We are continuing to monitor our receivables portfolio amidst the inflationary, higher interest, and credit environment in both Canada and the United States. I will now turn things back over to Rob Blackadar for some final comments. Rob?
Thanks, Rob. Before we open it up for questions, I want to add a few last thoughts. We've seen positive results in our first full year operating under our renewed commercial strategy. We are very pleased with the initial results from the first full quarter with the adoption of our pricing and quoting engine and its effect on our top line growth and our margins. Badger's long-term growth prospects remain unchanged. We continue to believe Badger is uniquely positioned to capitalize on the significant opportunity for non-destructive excavation services in key end markets, particularly in the United States. Finally, I want to take the opportunity to thank Glen Roane for his partnership and support during my tenure with Badger and my transition to President and CEO.
We announced last evening in a separate press release that as part of our normal course board succession process, Glen will not stand for re-election to the Badger Board of Directors at our next AGM. We further announced that Steve Jones, a board member since 2021, will become the chair of our board of directors. Steve's transition to this role will take place over the coming months. Steve brings a significant amount of relevant experience to Badger, having served as the President and CEO of Covanta Holding Corporation, and prior to that, having a long and successful tenure with Air Products, including several years as General Counsel. I am personally looking forward to working alongside Steve to continue to drive Badger's strategic initiatives while adding value for our shareholders. We also wish Glen all the best in his upcoming retirement.
So with those comments, let's turn the call back to the operator so we can open it up for Q&A. Michelle?
Thank you. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. The first question comes from Yuri Lynk with Canaccord. Your line is open.
Hey, good morning, guys.
Good morning, Yuri.
Good morning, Rob. Nice quarter. Just wondering how we think about the price increases that you started to implement late in Q2. You know, did we see the full impact of those in the quarter, or have you only been able to push it through to a certain proportion of your customers?
Yeah. So, today, if you remember, we, I think it was in the previous announcement where we talked about, we started our new pricing engine at the beginning of June. So, and we started to see good progress on our pricing, and a lot of that pricing opportunity that we've been able to capture so far has been with some of our spot or local type pricing. And, we're seeing good progress in that. We're very happy with early indications. Originally, if you remember, Yuri, back at the Investor Day, at the end of Q3 last year, we ended up talking about the national accounts program and how those contracts are two to three years in nature, and getting pricing increases as they renew.
And we've actually had good success with that. But again, that's over the course of two-three years. So we've already started to see some benefit of that throughout the year of this year, and certainly in Q3. The last kind of tranche of customers are customers that are large, local to regional in nature, that have some local type pricing agreements that typically are 12-18 months in nature. And as those cycles, similar to the national accounts programs, we're reviewing the pricing on those as well. So it's all starting to click and work, but it's obviously a journey. Very few businesses are able to get all their pricing all at once immediately with a new pricing engine.
You know, it takes a little time, but we're very pleased with what we're seeing so far, but.
Okay. And the 5% year-on-year increase in RPT that would be mostly attributable to pricing, correct? Because I think there was a comment in there that utilization was stable.
I would say pricing definitely contributed to the improvement on the RPT. But be mindful, we obviously have been adding a lot of trucks into the fleet, and utilization holding very solid because of the demand out in the markets, and then the upside of that. So holding that much pricing with the RPT, and the number of RPT alongside of all the additional trucks really speaks to the demand out in the markets because our utilization holding steady while we're able to increase price with several additional trucks. That's a pretty good accomplishment.
Yeah, agreed. Okay, second and last one from me. You've been generally targeting retirements above of 100 to 150 a year. Why are you taking down the planned retirements down to about 80 trucks this year? What's the logic behind that?
Well, a handful of things. The first is we just have demand in the marketplace, and as we have the demand, instead of, you know, getting rid of trucks that we could actually make revenue with, and the trucks are functioning and they're fine, we're starting to reevaluate and say: Do we need to cycle out trucks at the exact 10-year point? So when they hit 10 years in one day, the truck leaves the fleet, and we're actually realizing that we might actually have more life into the trucks, and we definitely don't want to be getting rid of assets that otherwise are functioning fine, and we have demand, and we can make revenue off of them.
So that's the main reason why we've lowered down the retirement number because of the demand out in the marketplace. Secondarily is as I was suggesting, the trucks themselves, we're starting to realize, and I shared this about a year ago, but we started looking at the number of hours on the trucks, and they were actually down versus the previous 10-year cycle because COVID, for about 18 months, the company's business was much slower, and we didn't put as many hours on the trucks. So we actually think we have a little bit more life in the assets. And then lastly, we're using some of the trucks for that refurbishment.
And, you saw the numbers on the refurbishment, but we have several that are in cycle, in the system to be refurbished, and that also helps to draw down on the retirement number. Anything you want to add on that, Rob, or?
No, I think that's the final thing I would add is, you know, as our geographic mix moves to, you know, less harsh climates and soil conditions, depending on the region, can be less harsh than they typically would have been historically. So I think the entire sort of useful life of a truck and the retirement program is in the middle, I think, of being modestly reevaluated.
Got it. Makes sense. Okay, guys. Thanks.
Thanks, Yuri.
Please stand by for the next question. The next question comes from Michael Doumet with Scotiabank. Your line is open.
Hi. Hey, good morning, guys.
Good morning, Michael.
Hey. So maybe to follow up on just general CapEx expectations, but looking more into 2024 and 2025, you know, based on my math, it looks like, you know, there are about 100 trucks that are over 10 years old today. And I think if I do the math on, you know, a similar, you know, level of retirement or refurb cadence into next year, you'll have approximately 200 trucks above the age of 10 years. So just thinking about, you know, your ability, you know, to smooth out retirements without necessarily overextending and maybe how we should think about retirements next year.
Yeah. So, we obviously don't give truck build guidance, retirement guidance, or really even guidance on trucks. We just give basically our forecasted build rate and retirement rate. But, and we have been in the middle of our budget and business plan cycle, and working with the board of directors on that. We're not quite complete in having wrapped all that up, so we're not ready to start having any broad discussion. Michael, the normal time that we share that is at the Q4 release, and as soon as we have it, obviously, we'll share it.
A general rule of thumb, though, and I can just tell you directionally, and I feel comfortable sharing that with you, Michael, is our end markets are strong, and we feel like we definitely have the demand for the trucks. And comfortable that, you know, we do not foresee those markets slowing down in 2024 at this point. So I don't know if you want to add something, Rob?
Yeah, I think, you know, given the number you had there, Michael, 200 units, you know, I think it is fair to say that for all the reasons Rob pointed out, for retirements generally, being a review of our fleet, why our retirements number is a little lower this year. We're spending a fair bit of time evaluating that over the next several years in connection with both our required builds and then the refurbishment program. I think it's fair to say that generally, and we will have more to say about this once our analysis is complete and we've got a little more data to go on.
I think generally, the level of retirements are gonna be relatively stable, with and that the level of build, as much as possible, to sustain our growth that Rob just mentioned, with our end market demand remaining quite robust. Again, we'll be relatively stable with the aim of keeping our manufacturing operations in Red Deer, as stable and efficient as possible with, you know... And as you know, in a manufacturing operation, when you have volatility in your throughput, you have a lot of volatility in your cost to manage. And so going forward, I think that sort of wave of retirements is something that we think is gonna be far more stable and repeatable going forward. More to come on that.
Okay. No, that's really helpful color, and I appreciate it. Maybe just to quickly follow up, just in terms of the trucks that are, you know, getting older, are you finding it, you know, that there is more repair and maintenance costs associated with running those trucks? Or, you know, going back, Rob, to some of your comments about, you know, running fewer hours through COVID, that necessarily isn't the case.
So what's interesting, Michael, and you know, I've heard a lot of historical discussions about as the fleets really as the Badger units as the hydrovac started to age out beyond 10 years, the M&R would really start to go up in dramatic fashion. And we're actually not seeing any big spikes in our M&R. We certainly have normal course M&R, but the one thing that's happened, and it happened with a new fleet leader we brought in around two years ago, is he really worked with the entire fleet team and all the branches in our regions to really get uber focused on preventative maintenance.
If we're doing anything, we are being a lot more prescriptive and aggressive on the PM side to prevent having these major failures and catastrophic engines and transmission failures, you know, as the trucks are starting to age out. So because of that, our M&R is actually really smooth right now. But I'll share, and I've shared with at a few conferences that Rob and I have been fortunate enough to present at, that we have a new fleet data system that we're rolling out, and at this point, it looks like it's gonna be fully kind of implemented and rolling middle of next year. You know, obviously, it's rolling earlier than that, but you know, fully integrated and everything at the midpoint of next year.
Those data metrics, Michael, we actually believe will allow us to be even more efficient with the fleet. So we're gonna be able to identify, "Here are the trends," and identify where we should be being even more aggressive on PM or, if there's any kind of catastrophic failures and, start to figure out what the root cause is. And, we're pretty excited about that. We say all the time amongst the management team now, and with the board of directors, that we like to make data-driven decisions, and this will allow us to do a lot more on the fleet. So very excited about that.
Very interesting. Thanks a lot, guys.
Thanks, bud.
Please stand by for the next question. The next question comes from Krista Friesen with CIBC. Your line is open.
Hi, thanks. Thanks for taking my question, and congrats on the quarter. I was just wondering if you could dive in a bit more on, I mean, it was a pretty good margin that you posted this quarter, and just kind of what the moving parts were there and what you attribute that improvement to, whether it's more on the pricing or it's these new strategies and a bit on the cost side as well. Just if you can give us some more details. Thank you.
Hi, good morning, Krista. It's Rob Dawson here. I could say it's predominantly due to two things. As you mentioned, pricing obviously has a very positive impact on margins because it's cost-free, other than some additional commission. But also, it's not necessarily that we're cutting costs or we have a program to go through and hold back on costs. But what we do have, and we've talked about this quite a bit, is we've made a pretty significant investment in our functional support groups, like fleet, as Rob mentioned, sales and marketing, IT, over the last several years. And so we have those functions. We focused on creating scalability in those functions such that there's a pretty decent fixed cost element to those.
So as revenue rises, you know, that operating leverage that creates is gonna increase, uh, EBITDA margins by higher than the percentage increase in revenue. And you would have seen, you know, with a 50% increase in the EBITDA margin this last quarter over a 20% increase in revenue. That's, you know, after price, that's by far the second biggest impact. And that's something that degree of operating leverage, we think, will be a bit outsized as we get into, you know, higher EBITDA margins, as we've talked about in the past.
Great, thanks. And then maybe just on the refurbishments, and you mentioned there's the vendor delays, which I think you hope to have that fixed by next year. Do those vendor delays also impact any of your just normal production, or is that just refurbishment?
It's just on the refurbishments, Krista. It's mainly tied to when we launched the refurbishing, refurbishment program, we really spread out some of the refurbishment work to several shops across the U.S. and a couple in Canada, and the delays are really tied to some of the major componentry. So I think everyone's aware, but the main focus of the refurbishment is the engine, the transmission, the T- case or transfer case, and then the blowers, the big device in the back that actually does the suction for the truck. Those four components, we have pretty good access to the blowers because we, you know, obviously put together the trucks today. But the transfer cases, transmissions, and the engines are where we've seen some of the delays.
And what we're doing to kind of mitigate that going forward, Krista, is pre-positioning some of those assets tied to what we're building into our plan for next year on the number of refurbishments. That way, there just won't be a delay next year because all the componentry will be waiting on the trucks to come in. It's a lot more efficient. It's the same concept as we do in our manufacturing plant, and we're now bringing that same level of logic to this refurbishment program at some outside shops. It's pretty cool to see all the successes we're having in our manufacturing plant being able to translate into other areas of the business. So it's pretty cool.
Great, thanks. I'll jump back in the queue.
Thanks, Krista.
As a reminder to ask a question, please press star one one on your telephone. Please stand by for the next question. The next question comes from Ian Gillies with Stifel. Your line is open.
Morning, everyone.
Good morning, Ian.
Given the discrepancy in performance between the U.S. and Canada at current, do you have any intention, or have you put much thought towards shifting some of the Canadian asset base into the U.S. to help propel growth on?
Yeah, I mean, we are all the time evaluating the, you know, the best place to have the trucks. And the, the wonderful thing about Badger and our business as a whole, every asset has wheels and can move very rapidly. So we can, we can move assets, any way we want to move them, including across the border, and we do from time to time. You know, maybe, Ian, a little bit more color, though, to make sure you have the perspective. And we have moved some assets, started to move some assets, a few assets, from the western part of Canada into the States earlier in the year.
But a little bit of color on, you know, some of the Canadian revenue is, we had several large projects wrap up in Q2 and early into Q3, and there were some other additional large projects that were supposed to be starting in the back half of this year, and those projects have actually been pushed to later in Q2 of 2024. And so because of that, that's where you're starting to see some of the decline. But the markets in Canada, you know, we're not ready to, you know, throw in the towel and move all of our assets at all, period.
We're very, very comfortable, and obviously, this is our home market, where the executive office is, and over here in Calgary, and we're very, very happy with our business in Canada. Obviously, this transition between some of these large projects, you know, has the decline in the revenue for a short period here. Some of those projects that are gonna be coming up that we're seeing are really some of these larger transit projects. And some of the projects that were slowing down were a little bit of pipeline project and some telecom projects, and we expect those to, again, pick back up here in mid to late Q2 of 2024. Rob, you want to add anything on that?
Yeah, and, you know, I think, if you just look to the back of our MD&A, we also show units split between Canada and the U.S. and you'd see since the end of 2021, in Canada, we have the exact same number of units today as we had back then. So, you know, that's been steadily in effect. I think, you know, there's still growth in Canada. Utilization's improving, obviously, but we are focused on the return on capital on those assets in Canada.
Having them on wheels, of course, if there's excess units anywhere, and there's lots of work somewhere else, then that's what a centralized fleet function is aiming to do, is really to optimize the utilization of the assets we currently have, rather than adding too many assets in one region when it's not necessarily needed.
Okay, that's helpful. Second question from me, with respect to truck builds and costs. If memory serves me correctly, you guys have been relatively well inventoried on the chassis side, and you've been purchasing on a pretty regular basis. And I'm just curious on when you're looking to your suppliers on that cost front, if there's any material change, and whether you're expecting any material change in the truck build costs moving forward, because it's been pretty good year- to- date.
Yeah. So, we actually, I think, you're aware of this, but we, historically, have run, in the last several years, have run, Peterbilt chassis, owned by PACCAR, and, and then, we thought it probably more to be a little bit more prudent and not have all of our eggs in one basket, we decided to actually go out to an RFP, RFQ, for our chassis providers, and we've since added, Western Star, which is owned by Daimler, out of, Portland, and we've started buying, some Western Star. We have really good support. Obviously, we have roughly about 1,450 units that are Peterbilt.
We're one of their larger customers as far as parts, service, warranty, and we're going to continue to buy their chassis, and especially as our company grows and we grow the need to grow to build more trucks. Peterbilt's a good partner and will continue to be. Western Star is just a top-shelf brand, especially for heavy spec Class 8 trucks. So we're very also very happy and proud to be partnering with them as well. We actually think it's normal course, good business practice to have two suppliers, and it also allows us to not be dependent on the build slots for only one.
And so if one is unable to fill and the other has them, obviously, we're going to shift the orders. Again, both the suppliers have really been good to work with, and we're very happy with both those suppliers today.
Okay. Thanks very much. I'll turn the call back over.
All right. Thanks, Bud.
Please stand by for the next question. The next question comes from Trevor Reynolds with Acumen. Your line is open.
Morning, guys. I was just wondering if, and maybe I missed this going through the MD&A, but just wondering if you'd comment on any disaster relief work that you got during the quarter. I know there was a couple big storms down in the U.S., so I was just wondering if that was a major contributor in the quarter.
Hi, Trevor. This is Rob Blackadar. We actually had very little ER work this year, so which is kind of interesting, for, in our world, it's actually been pretty quiet. We've for the work that we do, there have been a few storms this year, but they haven't been to the level that we've had in previous years. We have a very strong emergency response structure and group that are basically kind of on standby, and not just for hurricanes or weather-related, but also for any kind of emergency response, and it could be some kind of a major catastrophe anywhere in North America.
We have a group that's kind of always on standby, always with a bag packed, and we even have an emergency response kind of command center, which is a really best-in-class investment that the previous CEO and team built, and we leverage. This year, though, we just haven't had a lot of ER work. So, very fortunately, the end markets are good. So what you're seeing is truly from the end markets and not like a kiss from emergency response.
Yep. And on a comp basis, last year, there was a reasonable amount of that in there. We just haven't pointed it out in our materials. We're focused on the positives that are occurring today.
Great. And then maybe just, with Canada doing, like it'll be kind of flattish in the near term here. What, what's your kind of views on seasonality in Q4 and through maybe some of your usual slowdown quarters, just given the high levels of demand that you're seeing from the end markets in the U.S.?
Yeah, we were chatting about that the last few days as a team, both the leadership team and the board of directors. You know, we have been saying for the last couple of years, Trevor, that this concept of lifting the shoulders and throughout the shoulder seasons, and obviously, our Q4 is our second slowest quarter, and Q1 is our slowest. And, with the concept of lifting the shoulders, that doesn't mean we take out seasonality, but rather just lift it up. And, we're starting to see that lift occurring even, you know, in today's business today is that those end markets, especially relating to U.S., they're really robust.
Rob quoted in his opening remarks what the lift on revenue was for the U.S. markets, and we continue to see that, and so, like, really good stuff there. Regarding Canada and any even northern U.S. markets, we're always going to have seasonality. Some comments I share with other investors and analysts on there very regularly is that as long as we're in seasonal markets, we will have seasonality. No matter what the adoption rate is for a hydrovac or a non-destructive excavation, we will always have seasonality as long as we're going to be in seasonal markets, and it's our desire to be in all the major markets in North America. So obviously, Canada has probably some of the most seasonality we have in the business.
But the guys in the field and the teams in the field, they're used to that seasonality, and so they're prepared with their projects and customers, and they do everything they can to offset that seasonality.
Great. That's all my questions. Thanks, guys.
Thank you, bud.
I show no further questions at this time. I would now like to turn the call back to Robert Blackadar for closing remarks.
Thank you, Michelle. On behalf of all of us at Badger, thanks to our customers, our employees, our suppliers, and shareholders for your ongoing support that drives Badger's success. Operator, you may now end the call. Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect.