Thank you for standing by. This is the conference operator. Welcome to the Black Diamond Second Quarter 2022 Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there'll be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then zero. I would now like to turn the conference over to Jason Zhang, Director, Investor Relations. Please go ahead.
Thank you. Good morning, and thank you for attending Black Diamond second quarter 2022 results conference call. With us on the call today is our CEO, Trevor Haynes, and CFO, Toby LaBrie. We are also joined today by COO, Modular Space Solutions, Ted Redmond, COO, Workforce Solutions, Mike Ridley, and CIO, Patrick Melanson. Our comments today may include forward-looking statements regarding Black Diamond's future results. We caution that these forward-looking statements are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations. Management may also make reference to non-GAAP financial measures in today's call, such as Adjusted EBITDA or Net Debt. For more information on these terms, please review the sections of Black Diamond second quarter 2022 management's discussion and analysis entitled Forward-Looking Statements, Risks and Uncertainties, and Non-GAAP Financial Measures.
This quarter's MD&A news release and financial statements can be found on the company's website at www.blackdiamondgroup.com, as well as on the SEDAR website. Dollar amounts discussed in today's call are expressed in Canadian dollars unless noted otherwise and are generally rounded. I will now turn the call over to Trevor Haynes to review the quarter.
Good morning, and thank you for joining us. Thank you, Jason. We will discuss the results of the quarter, myself and then Toby LaBrie. Let me begin by saying that I'm very pleased to be reporting another strong quarter. I'm also very pleased with how the business is currently operating. We believe this quarter to be an important data set for stakeholders as these results reflect the strong benefits of our successful pivot over the last several years. Of the many benefits, the primary has been the growth of our high margin, recurring rental revenue across our specialty rental platforms. Compared to the same quarter last year, we have grown rental revenue by 22% to CAD 28.4 million and Adjusted EBITDA of CAD 18.2 million is an increase of 34% year-over-year.
We also increased our MSS rental fleet by 424 net units or buildings through a combination of organic and inorganic means, and have also deployed cash towards dividends, share buybacks, and have redeemed an additional portion of the preferred shares that were issued in connection with the Vanguard acquisition in late 2020. We have done all of the above while keeping our long-term debt essentially flat year-over-year. We believe this speaks to the strong cash flow generation of our modular building rental platform and anticipate continued momentum in operating and financial performance throughout the second half of 2022 and into 2023. During the quarter, we closed the tuck-in acquisition of Cambrian Trailer Rentals, which has a long-standing history of exceptional service in the Southern Alberta market that has been built up over the past 40 years.
The outlook for our broader MSS business continues to be positive. Utilization in the quarter was robust at 84%, while average rental rates increased 11% on a constant currency basis, which represents a string of years of increasing average rental rates. We expect continued growth in our core high-margin rental revenue, with utilization likely to strengthen further throughout the summer months over a stable base of existing contracts in place. We also expect that as units turn over from maturing contracts, our new assets are deployed, that rising spot rental rates will continue to have a positive effect on our average monthly rental rates through the next several quarters and certainly through 2023 based on our current outlook.
These tailwinds have a powerful effect on returns on assets that have been acquired five, 10, or 15 years ago, as they're able to generate rental revenues that are pegged to returns based on capital costs for today's new build units. We take great pride in our systems and processes and our focus on operational excellence. Asset quality typically results in customers being unable to differentiate between a building that might be new or over 15 years old. In my personal view, modular buildings are one of the best alternative asset classes that most investors have never heard of, and I believe the prospects for our MSS business remain very bright. The outlook into 2023 is similarly strong in our WFS business, which continues to benefit from existing contracts in place.
Recent relative strength in commodity prices have also resulted in improved field-level activity in the upstream energy sector. We exited the quarter with utilization of 50% in our WFS business and continue to believe there is powerful operating leverage throughout our large inventory of North American rental assets to drive returns. To illustrate, our Adjusted EBITDA in WFS of CAD 10 million was a 61% improvement compared to year-ago quarter and drove return on assets of 28%, up from 17% in the same quarter last year. Australia also remains a bright spot with our portfolio, within our portfolio as utilization of 96% in the quarter is reflective of a market that is seeing some of the strongest returns within the company.
We remain focused on diversification within our WFS platform and are continuing to see opportunities in mining, disaster recovery, government, and remote infrastructure. Switching to LodgeLink, this company is continuing to benefit from our investment in driving scale and efficiency. Room nights booked were up 58% year-over-year. However, they dipped sequentially from Q1 2022 as is consistent with prior years as significantly lower room nights booked by Canadian energy services customers due to breakup, was mostly offset by our growing customer volumes in the U.S. Net revenue for the quarter was CAD 1.2 million, up 50% year-over-year and flat on a sequential basis despite the decline in room nights booked as our U.S . Bookings provided an offset with higher margins.
We anticipate a similar cadence of growth in LodgeLink as we've experienced year to date, driven not just by the ongoing onboarding of new companies or customers, but also by gaining a larger share of crew travel spend from existing customers as we demonstrate LodgeLink's value proposition to new users within the organizations that are already customers. We continue to invest in growth, G&A, as well as product and customer experience enhancements, which we believe is the path for continued long-term value creation. To summarize my remarks, we are highly pleased with the results this quarter and believe it is yet another strong data set within a string of quarters where we have been able to demonstrate steady growth in recurring rental revenues, improving utilization and returns on our legacy assets, and the ongoing growth and scale of our digital travel tech platform.
We expect these positive trends to continue through the end of the year and well into 2023. With that, I will hand the call over to Toby to provide more detail on our quarterly results. Toby?
Thanks, Trevor. Total Adjusted EBITDA for the quarter was CAD 18.2 million, an increase of 34% from Q2 2021. This was driven primarily by improving consolidated rental revenues of CAD 28.4 million, which were up 22% year-over-year. Consolidated revenues of CAD 69.4 million were up 1% from the comparative quarter. The increase in our core recurring rental revenue streams resulted in a four percentage point improvement in return on assets to 17% for the second quarter of 2022 from the same quarter last year. As Trevor touched on, we have continued to invest in our fleet to drive recurring compounding returns with CAD 11 million of net CapEx invested at strong rates of return.
While growing our rental base through reinvestment of cash flows into fleet assets, we have also returned capital of CAD 4 million to shareholders in the quarter by redeeming CAD 2.2 million of preferred shares of a subsidiary, paying our common share dividend of CAD 0.015 per share, or approximately CAD 900,000, and buying back approximately CAD 900,000 of common shares. All of this was achieved while holding our Net Debt at CAD 158 million, which has remained fairly static over the last year. Net Debt to trailing twelve-month Adjusted Leverage EBITDA of 2.1x decreased from approximately 3.0x compared to Q2 2021 and remains near the low end of our target range of 2-3x.
Our liquidity position also remains strong with roughly CAD 111 million of available liquidity from our asset-based lending facility, with an average interest rate on outstanding debt during the quarter of 2.85%. Nearly one-third of our outstanding long-term debt remains hedged at attractively low rates seen in 2021 and early 2022. Free cash flow in the quarter before growth CapEx was CAD 14.5 million, up 79% versus the comparative quarter, and diluted earnings per share of CAD 0.06 was up 200% from CAD 0.02 in Q2 2021. The company's total administrative costs for the quarter of CAD 12.6 million increased from CAD 10.3 million in the comparative quarter, primarily due to higher incentives driven by robust business performance, also increased headcount and higher software licensing costs.
While we see inflation impacting administrative costs, we do continue to realize efficiencies as we scale, and we are on track with internal benchmarks in improving our administrative costs as a percentage of gross profit. MSS in the second quarter reported Adjusted EBITDA of CAD 12.8 million, up 20% from the same quarter last year, with rental revenue of CAD 17.5 million also up 20%. Total MSS revenue of CAD 37.1 million was flat year-over-year as lower sales revenue offset the increase in rental revenue. Sales revenue can be variable quarter- to- quarter, but our key focus remains on driving the predictable growth of our recurring high margin rental revenue against our long-lived rental asset base.
As a result, MSS Adjusted EBITDA margins in the quarter of 35% were higher than the comparative quarter of 29% due to a higher proportion of consolidated revenue being driven by this high margin recurring rental revenue. Return on assets in MSS also continued to improve based on the strong secular tailwinds we've seen across this business. ROA for the second quarter in MSS was 19%, up 2 percentage points from the comparative quarter. In WFS, Q2 2022 Adjusted EBITDA was CAD 10.0 million, up 61% from the same quarter last year. WFS rental revenue of CAD 10.9 million was up 27% from the comparative quarter, while total revenue of CAD 32.3 million was up 2% from the comparative quarter last year.
WFS Adjusted EBITDA margins of 31% improved 12 percentage points from the comparative quarter. Similar to MSS, the improvement in high margin recurring rental revenue as a proportion of total revenue contributed to strengthening margins. As a result, return on assets in WFS of 28% was also a marked improvement and was up 11 percentage points versus Q2 2021 levels. Finally, LodgeLink is continuing to scale, and we remain confident in the significant value creation of this unique platform. Gross bookings of CAD 11.2 million in the quarter and total room nights booked of 68,000 rooms were up 44% and 58% respectively from the comparative quarter. Net revenue of CAD 1.2 million was also up 50% year-over-year.
We continue to see growth on both sides of the platform and exited the quarter with 665 unique corporate customers and nearly 760,000 rooms of listed capacity across over 8,300 properties. In summary, we are seeing strong and growing free cash flow generation across the asset rental platform, stability of diversification by geography and end market, and balance sheet strength and flexibility, which together provide the company with a high degree of optionality for continued organic and inorganic growth, as well as the potential for accelerated returns to shareholders. With that, we'd like to turn the call back to the operator for questions.
Thank you. We'll now begin the question and answer session. To join the question queue, you may press Star, then one on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, press Star then two. Our first question is from Matthew Lee with Canaccord Genuity. Please go ahead.
Morning, gents. Thanks again for taking my question. I just wanted to start with rental rates on the MSS side. Seems like another acceleration of rates in the quarter up to 13% year-over-year. Can you maybe talk about what we should be expecting for the H2 of the year in terms of rental rate growth?
Yeah. Thanks, Matt. Thanks for the question. I'll pass it over to Ted Redmond to comment on what we're seeing for rates across MSS.
Yeah, you're correct. We've been successfully able to raise rates have much more than offset our cost increases. We expect continued rate increases going forward for the year. It takes a while for the rate, like rate increases that we did say in Q2 later in the quarter, show up in Q3 and Q4, and we continue to sign contracts at increased rates as units come off rent, and we put them back on rent at higher rates.
I'll just add to that, Matt-
There's no reason why. Yeah, go ahead.
I was just gonna add that, the average rental rate increase year-over-year is reflective of the turnover that Ted is referencing. Our actual spot rates are up considerably higher than that. It just takes time to work through, you know, the size of platform we have and the contracted nature of the revenue stream.
Right. There's no reason why, you know, rental rates going forward should be anything lower than the CAD 740 you reported in Q2.
We don't expect it, but we don't see any reasons. You can never predict the future, but a lot of the increases we've done earlier in the year are just gonna keep showing up later in the year. We expect an increase, a steady increase in rental rates.
Yeah. We think the increasing rates over the last few years haven't worked their way through our platform. Even if rates were to flatten out in terms of current spot, we would still see increases to our average rental rate over the next couple of years, I would think.
Great. Maybe just one follow-up. You know, when a new customer re-signs with you or a new customer signs on, are the rates locked in for the full 44 months that units are traditionally done for?
Yeah, typically the rates are for the term of the contract. When the contract comes up, we would then sign a new contract, and we've been successfully increasing the rates when we've been doing that. It's pretty rare that we would have an escalation cost because our cost of that asset was sort of fixed at the beginning of the contract. There might be the odd one that would have an escalation clause. Typically it's for the duration of the contract.
Matt, Toby here, I would just add to that the 44 months is our average contract length. That would also include carryover from the original committed contract. That average 44 months isn't necessarily the full first contract. So there would be some renewal periods or month to month where we would see opportunities to increase the rates over that period.
Got it. Very helpful. Congrats again on the good quarter.
Thanks.
Thanks.
The next question is from Frederic Bastien with Raymond James. Please go ahead.
Hi. Good morning, guys. I just wanted to maybe dig a little further into the last few comments you made. I think, Trevor, you mentioned a couple of years of visibility. I mean, how long do you estimate it will take before those rate hikes are fully kinda implemented and fully reflected across the system?
If we were to stabilize at current spot rates, which are up year-over-year, I think we would require the 44 months of average contract before the fleet was entirely repriced at current rates, just using simple math. You have to remember the other variable is utilization.
Yeah.
We're also anticipating, based on what we're seeing, through our funnel and pipeline and how contracted we are. You'll note our revenue behind contract increased significantly year-over-year as you know, with the competition for assets at high utilization. That gives us the opportunity to lock in longer term with our customers. As we think about utilization, our view is also that the market is quite stable in terms of current utilization levels. You know, there's other economic factors that may impact.
Right. It sounds like 2023, I mean, you're still gonna see increases right through the end of the fourth quarter and potentially into 2024.
Yeah. If you think of an asset that has been on a fixed rate on a three-year contract that will be coming off contract and either being renewed with that customer or being repositioned on to you know a new customer requirement, you're looking at a substantial step-up from the rates that would have been locked into that contract three years ago to today's spot rates. It's fairly meaningful as we look at the upside of inflation on this type of asset class.
Then when you think of how we're structured, where we outsource most of the labor components of operating our platform through our vendors, and therefore the upside on inflation on rental rates more than offsets the pressures on wage and other operating costs on the platform. We're looking at this very closely. We're very data-driven. We've got great visibility. Going back to, in many respects, this is a great asset class. This is one of those facets of where there's some advantage.
Yeah. One of the best alternative asset classes investors have never heard of. Guys, I want you guys to kinda go over and remind us of what happened, like, in the H2 of last year. I mean, your rental revenue is fairly predictable, but on both the MSS side and on the Workforce Solutions side, you had pretty big revenue coming from sales and non-rental activities, which set up a fairly difficult comp on a year-over-year basis. If we start with MSS, I mean, you had, you know, both sales and non-rental combined for about CAD 35 million of revenues in each of Q3 and Q4 last year.
I mean, I know you commented in your prepared remarks that you had good visibility into some sales, but you know, could you expand further on that?
Yeah. I'll just make a couple of quick comments, you know, over the whole platform, and then Ted and Mike can give some additional color for MSS and WFS. You know, we point investors, et cetera, when they look at this platform to the way that we look at it, which is as an asset rental business or an asset management business. So the most important revenue stream in our view is rental revenue. Then when we look at rental revenue margins and we look at return on assets, there's a number of ancillary opportunities when we're operating as a modular building rental business. Those include renting ancillary items like furniture, etc , that we refer to as VAPS.
Gives us the opportunity to work with customers who are looking to acquire assets. We do a fairly healthy trade in new asset sales where we'll manage the manufacturer and many other components required, you know, from a project management perspective, deliver the asset and close the sale. We do in normal course sell assets out of our fleet where we like the return in terms of the cost of that asset. Those two revenue streams can be quite meaningful on the top line. Yet they're very variable, and so it's hard to predict what volumes we'll do from quarter-over-quarter, year-over-year.
They're very profitable lines for us, so that's the reason we engage in that trade. What's most important in understanding our business and how our business is operating is looking past top line. With that said, you know, we had a very strong year last year, Ted, on the sales side, and now we're, you know, putting up comps against it, maybe give some color on why that is.
Sure, yeah. The long-term trend in sales is positive. If you go back four or five years, there's sort of a steady increase, like when you average it over a year. When you look at quarter-to-quarter, it's lumpy. The last two quarters of last year were really good sales quarters. Whereas I'd say, you know, this year the sales are maybe a little bit more typical. As you saw in our outlook, we are anticipating to see sequential improvement in custom sales revenues based on our current backlog in place. You know, we have a good backlog going into the year. The other thing to keep in mind is that sales margins are significantly lower than rental margins.
While there may be a top line impact, the bottom line impact is much less, given the higher rental margins. You know, the fact that we had our 20% year-over-year growth in EBITDA, which was driven primarily by our 20% growth in rental revenue. You know, it has a much less impact on the bottom line. We're looking forward to a good second half.
There's nothing from our perspective that's a read-through that there's a weakening in our markets. It's just the variability in terms of the opportunities right now.
Yeah.
In addition to new sales and used sales of assets, we do have one-time revenue. When we think in our workforce business, when we position a large remote camp, for instance, we will provide the services of preparing the site, moving the assets, installing the assets which the customer pays us for upfront. Some of those projects can be quite meaningful and create lumpiness on the top line as well. Mike, I think that's part of the explanation for the comparison year-over-year. Why don't you give some color there?
Yeah, I think that's exactly. I mean, Frederic, core to everything that we do is revolves around the asset. And with that, sometimes there'll be a construction element to it, which involves transportation, installation, dismantle, return transport, catering services will come with it, sometimes power generation and so forth. So that can be lumpy at times, but as Ted alluded to, those are at much lower margin than what would be on our run rate, our rental run rate. So, it just is bouncy a little bit over the course of the year, but it kinda goes with the business a little bit.
I think, compared to Q2 last year, Mike, we did have some larger operations revenues, as we positioned assets to go on rent. We're enjoying rent in this quarter this year, but we don't have the same amount of volume of one-time operations, correct?
Yeah, that's the case for sure. There were some fairly significant projects in the US that would have had a fairly high level of construction services tied to it.
That's awesome, guys. I appreciate the extra color. It's helpful. I'll pass it over. Thanks.
Thanks, Frederic.
The next question is from Brent Watson with Cormark Securities. Please go ahead.
Hey, guys. Maybe on LodgeLink, can you give us a rough sense of the split between Canada and U.S. bookings, maybe on a year-to-date basis, sort of normalized for Q2?
Yeah. Do you have those, Toby?
I don't have them at my fingertips.
We can follow up with you, Brent.
Anything interesting to note about air travel bookings at all at this point?
You know, from a macro, there's a couple of trends we're seeing around the travel space. One is an increase in average room rates pretty much across platform or across North America, but specifically on the U.S. side. I think room rates off the top of my head, this information is easy to find with the Global Business Travel Association, et cetera. I believe they're up about 20% on average. What does that mean for LodgeLink? Well, you know, our revenues are driven as a percentage of those room rates. As we see escalation there, we also see escalation and our net revenue corresponds with that.
As many of us read, there's been an increase in air travel as well. There's a read-through to the crew travel sector as there's a portion of air travel. However, in most cases, crews are traveling by ground. The accommodation piece is the big value proposition and offering for our LodgeLink platform.
Sorry, Brent, going back to your previous question on the U.S. split. For the year, our split for the U.S. was approximately a third of our bookings. In Q2, that was a little bit higher with breakup in Canada resulting in fewer Canadian bookings. A little bit higher, but for the year it was about a third, and that's trending up quite a bit from last year.
Yeah, I think closer to a little over 40% in Q2.
Okay. Awesome. Thanks a lot.
Thank you.
Once again, if you have a question, please press star then one. Our next question is from Trevor Reynolds with Acumen Capital. Please go ahead.
Morning, guys.
Morning.
Just following up on the U.S., Canada split in LodgeLink. Are you able to provide a breakdown of the properties or rooms listed between U.S. and Canada?
In terms of our total number of listed rooms and/or properties, how many are U.S.?
That's correct. Yeah.
We can certainly get that for you. We don't have that number right at our fingertips right now.
Yeah, no problem. Just on the rollout of the mobile app, good to see that you guys got that out there. Just wondering what the adoption's been like and if you're seeing increased usage by employees. I know that was an issue before.
Yeah. Thanks for the question. We're quite excited about mobile app ramp up. Patrick, maybe you can give a bit of color. It's a bit early stage for us. We just launched.
Yes. Thank you for the question. The first version of the mobile app, which is basically a minimum viable product, typical software development cycle, right, was piloted with five key customers that were dedicated to work with us. It's been rolled out to these customers. We are transacting with them, collecting information which will inform the next iteration of the mobile app as we progress. Since then, we've made it available far and wide to our customer base. We are collecting information, and as that comes back, we'll make sure the investments put to the mobile app will yield benefits both for the customer and of course, for LodgeLink, for the future. We are excited about this app for sure.
Great. Thanks, guys. That's it for me.
Thanks, Trevor.
This concludes the question and answer session. I'd like to turn the conference back over to Trevor Haynes for closing remarks.
Thank you. In summary, we're really pleased with how the platform is operating. We believe what we've been focusing on in terms of accelerating the growth of our MSS business, expanding by geography, but also increasing the size of the fleet and showing that we can compound our growth, but also our EBITDA even faster than the fleet growth. As well, getting at the operating leverage on our workforce business, which, as you can see, we spread this high quality asset out into other end markets like mining, disaster recovery, et cetera, as well as our strength of our Australian business, we're seeing the benefits with very modest investment of capital there.
LodgeLink, another quarter where we're showing really strong year-over-year growth as we scale up this business. We're very pleased with the way the business is running and, from what we're looking at right now, we see these trends continuing through the end of this year and into next year. Thank you for your interest in joining us today and I hope you enjoy the rest of the day. Thank you.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.