Badger Infrastructure Solutions Ltd. (BDGI) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Badger Daylighting 2020 Annual Meeting of Shareholders Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference to your speaker today, Glen Roane. Please go ahead, sir.

Thank you, moderator. Good afternoon, ladies and gentlemen. On behalf of the company, I welcome you to this Annual Meeting of Shareholders. My name is Glen Roane. I'm the Chairman of the Board of Directors of the company. And with the concern of the meeting, I will act as Chairman of this meeting. I'm pleased that we're able to connect with many of the company's shareholders today despite the extraordinary situation we are facing with COVID-19. The decision to encourage shareholders to vote by proxy and view the meeting via our live webcast rather than attend the meeting in person was made to help ensure the health and well-being of our shareholders, employees and colleagues. After the formal business of today's meeting, Paul Vanderberg will provide an update regarding the company's operations, following which we will take questions from shareholders. It is now slightly past 1:30, and I ask that the meeting come to order. Before we proceed with the formal business of today's meeting, I would like to introduce the other directors and members of management who have joined us in person or online today. First, our directors: Catherine Best, Grant Billing, William Derwin, Mary Jordan, William Lingard, Gary Mihaichuk, Paul Vanderberg and David Bronicheski, who is a new director nominee standing for election today. Mr. Bronicheski is the current CFO of Algonquin Power & Utilities Corp. and will bring a wealth of financial and audit expertise as well as risk management and valuable industry experience to Badger's Board. We also have certain members of management with us today: Darren Yaworsky, Vice President, Finance and CFO; Jay Bachman, Vice President, Financial Operations and Relations -- and Investor Relations; and Tracey Wallace, Vice President of Human Resources. I hereby appoint Justin Ferrara of Norton Rose Fulbright Canada LLP to act as the Secretary for the meeting. I hereby appoint Elissa Rojo of Computershare to act as scrutineer for the meeting. On April 8, 2020, the notice calling this meeting and related management information circular and form of proxy were mailed to all shareholders of record as of March 30, 2020. The declaration of mailing is available for inspection by any shareholder, and I would ask that the secretary file a copy of such declaration with the meeting of today's -- with the minutes of today's meeting. A quorum of shareholders is present for the transaction of business at this meeting if at least 2 persons are present in person and holding or representing by proxy not less than 25% of the shares entitled to vote at the meeting. I've been advised by the scrutineer that there are 233 shareholders present today, either in-person or by proxy, representing 28,287,704 shares, which is 81.16% of the company's issued and outstanding shares. Accordingly, we have a quorum present. The scrutineer's report is available for inspection by any shareholder, and I would ask that the Secretary file a copy of such report with the minutes of today's meeting. With that said, I declare that this meeting has been regularly called and properly constituted for the transaction of business. In order to facilitate the timely completion of the formal business of today's meeting, arrangements have been made with certain shareholders and proxy holders to move and second the resolutions to be considered. This is not in any way intended to curtail discussion. Each item of business to be considered today requires that the resolution be passed by a majority of the votes cast. Unless a vote by ballot is requested, all votes will be conducted by a show of hands except for voting on the resolution to elect directors, which will be conducted by way of ballot. Ballots were distributed to registered shareholders who had not previously voted by proxy and to duly appointed nominees as they arrived at the meeting. If you did not receive any ballots, but think you should have, please raise your hand and a representative of Computershare will attend to you. If you're a shareholder who holds shares through a broker and you submitted a form of proxy or voting instruction form prior to the deadline, your vote has already been counted. We have no ballot holders in the room, so we will proceed. The first item of business is the presentation of the audited financial statements of the company for the year ended December 31, 2019, together with the report of the auditors thereon. These financial statements were previously mailed to shareholders. Are there any questions on the financial statements or the auditor's report? Hearing none, I declare that the audited financial statements of the company for the year ended December 31, together with the report of the auditors thereon, have been received. The next item of business is the election of directors. Information about each of the 9 nominees is included in the management information circular. Pursuant to the company's advance notice bylaw, advance notice is required to be given to the company regarding any proposed director nominees not included in the management information circular. No such notice was received by the company. It is now in order to proceed with the nomination of directors. We will be nominating and approving individual directors and not a slate of directors. I will now ask for a motion on this matter.

Mr. Chairman, I nominate each of those persons specified in the management information circular to be elected as directors of the company to hold office until the close of the next Annual Meeting of Shareholders or until their successors are duly elected or appointed, namely Glen Roane, Catherine Best, Grant Billing, David Bronicheski, William Derwin, Mary Jordan, William Lingard, Garry Mihaichuk, Paul Vanderberg.

Is there a seconder?

Mr. Chairman, I second the motion.

Thank you. Any questions? That motion was made by -- the original motion was made by [ Lisa Olarte ] and Jay Bachman was the seconder. If there are no further questions, no questions, we will proceed with the voting on this matter. [Voting]

We had no ballot holders. So we will continue with the remainder of the business of the meeting, while the scrutineer tabulates the results of the ballot voting and advises us of the final results prior to the termination of the meeting. The next item of business is the appointment of auditors. I'm sorry, I did skip. I've asked Ms. [ Lisa Olarte ] to nominate the 9 directors, and she has nominated.

We have to move the nomination to elect them.

I’m sorry. I declare the nominations closed. I will now ask for someone to move that each of the 9 persons nominated be elected to serve as directors until the close of the next annual meeting of shareholders or until their successors are duly elected or appointed.

Mr. Chairman, I move that each of the 9 persons nominated be elected as directors of the company to hold office until the close of the next annual meeting of shareholders of the company or until their successors are duly elected or appointed.

Is there a seconder?

Mr. Chairman, I second the motion.

Any questions? I apologize for the misstep earlier. If there are no further questions, we will proceed with the voting on this matter. If you were provided with a ballot and have not already done so, please complete the ballot by marking X in the columns titled For and Withhold, and raise your hand so that the scrutineer can collect your ballot. [Voting]

Although we have no ballot holders here, we will continue with the remainder of the business of the meeting while the scrutineer tabulates the results of the ballot voting and advise us as to the final results prior to the termination of the meeting. The next item of business is the appointment of auditors. Unless there are any questions, I will now ask for a motion to approve the resolution appointing Deloitte LLP chartered accountants as auditors of the company for the ensuing year.

Mr. Chairman, I move that Deloitte LLP chartered accountants be appointed auditors of the company to hold office until the next annual meeting of shareholders of the company or until their successor is appointed at such remuneration as maybe determined by the Board of Directors and that the Board of Directors be authorized to fix such remuneration.

Is there a seconder?

Mr. Chairman, I second the motion.

Thank you, Mr. Bachman. Any questions? We will then proceed with voting on this matter. All those in favor, please signify by raising your right hand. [Voting]

Contrary, if any? [Voting]

I declare that the resolution approving the appointment of auditors has been passed. The next item of business is described in the management information circular under the heading Voting on our Approach to Executive Compensation. Shareholders are being asked on a nonbinding basis to accept the company's approach to executive compensation as more particularly described in the management information circular.

Mr. Chairman, I move that the form of resolution set forth in the management information circular respecting the nonbinding advisory vote regarding the company's approach to executive compensation be approved.

Is there a seconder?

Mr. Chairman, I second the motion.

Thank you. Any questions? Hearing none. All those in favor, please signify by raising your right hand. [Voting]

Contrary, if any? [Voting]

None. I declare that the resolution approving the company's approach to executive compensation has been passed. Ladies and gentlemen, I've received the scrutineer's report on the ballots. On the resolution concerning the election of directors, I'm advised by the scrutineer that a substantial majority of the votes cast at the meeting were voted in favor of the 9 nominees named in the management information circular, with each nominee receiving in excess of 96% of the votes in favor. Therefore, I declare those nominated to be duly elected directors of the company to hold office until the next annual meeting or until their successors are duly elected or appointed. I direct that the scrutineer's report related to the election of directors be annexed as a schedule to the minutes of this meeting. That now concludes the formal business of this meeting of shareholders. As indicated, following the conclusion of this meeting, the company will provide a short presentation relating to its business. So at this time, I would ask for a motion to conclude the meeting.

Mr. Chairman, I move that the meeting be concluded.

Is there a seconder?

I second the motion.

Thank you. Any discussion? Hearing none. All those in favor of this resolution, please signify by raising their hand. [Voting]

Contrary? [Voting]

There are none. I declare the resolution carried and the meeting concluded. I now have the pleasure of turning the meeting over to Paul Vanderberg, Badger's CEO. Paul will provide an update regarding the company's operations. I'd like to note that we will have time for questions from shareholders at the end of the formal -- at the end of Paul’s presentation.

Thanks, Glen. Good afternoon, and thanks for everyone for participating in Badger's 2020 Annual General Meeting. Before we begin, we're required to note that some of the statements made during today's presentation 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 upon 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 Q1 press release and management discussion and analysis, along with Badger's 2019 annual MD&A and the 2019 Annual Information Form. Further, such statements speak only as of today's date, and Badger does not undertake to update any such forward-looking statements. So let's proceed with the review. Badger finished 2019 on a strong note. Annual revenues were up 6% from 2018 on a consolidated basis and up 8% in our U.S. operations, that being in U.S. dollars. It's also worth noting that 2018 revenue included $22.5 million in emergency response work related to hurricanes in the U.S. Southeast and the California wildfires, which made 2019 a challenging comparative, but Badger still managed to grow. 2019 adjusted EBITDA finished within guidance at $158 million, slightly lower than the prior year comparative due to costs relating to our ERP implementation, which we'll touch on a little later. We could not be more pleased with the success of this company-wide ERP rollout, which was finally completed with our go-lives ending in late January. We reported to you on our 2020 first quarter results last night. Regarding revenue, the first part of Q1 was that period up until approximately March 10 and prior to the onset of the COVID-19 virus and the knock-on impact it's had on our economy and broadly across financial and energy markets. Early March revenue was trending up nicely from February with the typical spring construction season starting to get underway. Our revenue per truck per month was also trending along with revenues. This changed very significantly on or about March 10, with the COVID-19-related shutdowns and the government-related shutdowns, resulting in second half March revenue that ran approximately 70% of the prior year period. With that, Q1 revenue was down 7% versus Q1 last year. Our Q1 gross margin increased by 680 basis points, and our adjusted EBITDA margin decreased by 940 points versus last year. Revenue per truck per month for the quarter was $24,966, which was also down 19% from last year from the same factors I talked about with revenues. So what have we been up to in the last 8 weeks since these economic shutdowns began? We focused on actions to: number one, manage our costs; number two, preserve capital; and thirdly, enhancing Badger's already strong financial position. Some comments on managing costs. Given the unprecedented uncertainty that we were and still are faced with and there were many difficult people decisions that were required, we started by cutting senior management and board compensation. On April 1, I took a 40% salary cut and the board took a 40% cash compensation cut, along with all of our VPs who took a 20% salary cut. That was April 1. On May 1, our senior operations managers and staff took a 15% salary cut, and all other salaried staff took a 10% cut. These reductions have been put in place for an initial 90 days, and we'll review them in light of conditions that are in place at the end of the period. Unprecedented times require significant changes, and everyone working at Badger has skin in the game and is committed to the company's success. In addition to salary changes, we have laid off or terminated approximately 30% of the nonoperator workforce. This is a mix of layoff and termination. The 30% figure is an overall percentage, and this include a staff i.e. that would be accounted for in direct costs and in the G&A categories. Because of that, we broke out the estimated financial impact of our cost-cutting in the press release in order to provide direction for investors on the mix between direct cost and G&A. The cost reductions were implemented across all geographies and all staff functions. A number of the announced job cuts were driven by implementation of the shared services center approach and administrative consolidation that flows from the successful implementation of the new ERP system. The ERP go-lives, as I mentioned a minute ago, were completed in late January, and we subsequently pushed to complete the shared service consolidation, and we've also accelerated other ERP-related follow-on initiatives during the downturn. This current period of slower activity levels really do help us mitigate the implementation risk associated with shared services center and admin back office consolidation, and we're taking advantage of the slow times. As a result of all of the operational changes in restructuring, we will recognize a onetime provision of approximately $4 million, and this will be in the second quarter. The actions we took all took place in April. Of that $4 million provision, $2.4 million will impact G&A, with the remaining $1.6 million recognized in direct costs. We anticipate that the restructuring activities will result in annualized run rate savings of approximately $25 million in total, with $10 million related to G&A and $15 million of that related to direct costs. As a result of the cost reductions, we anticipate that 2021 annualized run rate for G&A of approximately $40 million. The second major action area we've been working on is preservation of capital and management of our capital spending. With lower anticipated volumes, there is no need in the short-term to continue to build and add new Badgers to the fleet. Accordingly, we curtailed production at the plant in Red Deer on April 14. We timed the curtailment with the plant completion of the production run for our generation 4-designed Badgers. As we had indicated in last November's Investor Day, we had a planned transition from our gen 4-designed Badgers to our generation 5-designed Badgers for approximately the end of Q1, and we've been able to time that accordingly. So when we start up again at the plant with higher volumes, we'll be able to start up with an entirely new set of parts and supply chain and achieve a clean cutoff. So financial position. The third major focus area we've been working on since the onset of the virus has been maintaining Badger's financial flexibility and strong financial position. And I'll touch on that a little bit later. So with all of that short term focus, how do we look past that? We have really not seen anything over the last 8 weeks that would change our view of the long-term opportunity that Badger has. Badger's business model is proven and has performed well over the long-term and over all stages of the economic cycle. The advantages of Badger's scale have grown, and there is the opportunity to realize further scale advantages, especially following on our successful ERP implementation. Over the past 10 years, revenue has grown at a compound annual growth rate of 17%. The opportunity for future growth is there. Benefits of scale really show up when looking at return on invested capital with Badger's 10-year average return on invested capital of 16%. Scale supports fleet utilization and operating cost management, both of which drive margin and returns. The numbers tell the story. It's clear that Badger has been successful in building and putting Badger hydrovacs to service very profitably over a long period of time. The significant investments that we made in 2019 are the underpinning and the foundation that will support continued growth well into the future. Badger is the largest provider of hydro-excavation services. The size of Badger's fleet and the number of operating locations result in this unparalleled operating scale relative to hydrovac competitors. Scale facilitates customer service, our ability to grow organically by leveraging our existing fleet network in adjacent market areas, maximizes our fleet utilization rates and also allows us to manage operating costs. The efficiencies of scale are significant, and we'll continue to grow as the scale and the scope of our operations expand. As I mentioned, we're very pleased about the potential and excited about the potential of the new ERP system, and we're seeing visibility with the system into the operations that Badger has never had before. How did Badger create this scale? It's been created very successfully over time. First, I talked a minute ago about our extensive and growing branch network, big differentiator with servicing customers. We're always able to find a customer a truck. People who look at this industry through the lens of a small local competitor really do miss the service benefits of this branch network. The second major area is the broad range of geographies and end-use markets we service. This is all about diversification of demand. We continue to expand both geographically and in end-use market exposure, and we even see continued geographic and end-use market growth opportunities even within the current downturn. Badger has opportunity than whitespace there. Third, we have a very comprehensive sales and marketing function. Our focused sales and marketing that targets large customers and small customers across our geographies is something we have that no other competitor has. We invest the time and resources into developing this function and is also key in driving growth and profitability. A fourth component of the business model is Badger design and manufacturing. We have over 25 years of experience, a highly skilled and knowledgeable staff that lead these efforts. Manufacturing our own Badgers allows us to focus on the long term with respect to our fleet. We build and design them to constantly improve the safety, the operational and efficiency aspects of the truck. But we also make design decisions with a view toward total life cycle costs and return on invested capital over the economic life of the assets in mind. Our Red Deer team and fleet management team are best-in-class and are really at the heart of Badger's customer-focused structure. Badger's end-use market diversification and geographic footprint is also a key differentiator and source of growth. I can tell you that for our customers, scale makes a real difference and our diversification makes a real difference. The broad range of applications for Badger hydrovacs enables us to be a key partner in a wide range of client infrastructure projects. The American Society of Civil Engineers has estimated that there's $4 trillion in infrastructure needs over the next decade in the U.S. Lots of talk in stimulus and governmental programs to further stimulate spending in the infrastructure base. Badger now is comprised of 80% U.S. revenue, and that's in the U.S. where the large opportunity is. We still though have penetration and market share opportunity in Canada. Hydrovac usage is growing as a safe alternative and a productive partner to traditional mechanical excavation, and more and more utilities are engineering to be -- engineered to be underground. As you can see by the chart, Badger continues to diversify our customer base and our key end-use market segments, and we're working with our sales and marketing team to maximize efficiencies in both of these geographically and vertically to drive expansion. Coming out of the downturn and coming out of the virus, we expect to see focus on safety even grow within society. All of us have seen in the last 8 weeks and we learned a lot about what safety is all about, what health is all about, and we think this is going to be a trend that accelerates coming out of this economic crisis and health crisis worldwide. And that bodes very, very well for use of nondestructive excavation that Badger supplies. Our geographic expansion has continued and will continue in 2020. Last year, we added 16 new locations. We have historically opened 10 to 12 locations per year, and we expect to be on that pace in 2020. Our customers tell us that the value in Badger is service availability doing our -- due to our branch network and scale. So we're going to continue to do that and continue to expand the fleet at existing locations with market penetration and also open in new locations. The second area for growth in Badger, as I mentioned, is entering new markets, particularly in the U.S., as customers are introduced to nondestructive excavation and understand the value of hydrovac. Combined with the fact that our technology is really early stage in many markets, the runway for growth continues to be very exciting. Revenues in the U.S. for 2019 were $386 million, that being in U.S. dollar, compared to approximately $50 million in 2010. The U.S. market is large and presents the most significant opportunity that Badger has to grow. Our strategic initiatives. Last year was a huge transformational year for Badger and we focused on building out systems, standardizing business processes and strengthening key business functions, all of this work allowing us to establish a platform to capture the opportunity in North America for nondestructive excavation. We made significant investments during the last 3 years, the largest of which has been the ERP implementation that we executed on in 2019 and early 2020. This is a significant piece of infrastructure that supports the business model and is there to support continued growth. We're very pleased with the way the regional rollout went with the ERP system, and the execution on this project was very successful and was possible and made possible with the dedication and commitment of the entire team across all functional areas and especially heavy participation from our operations team. As the ERP project is now in the operational phase, as I mentioned earlier, we're pushing to realize the operations and financial benefits that this system facilitates. Human resources and other key strategic initiatives. Badger is a service business and recruiting, training and retention is key to supporting growth. Our human resources organization is closely aligned with our geographic regions and driving strategies tailored to the regional operating needs. HR is a very important part of Badger's ERP. We implemented standardization and recruiting practices, training and a new time and attendance/payroll system that automated our legacy payroll process is significant efficiency opportunity that we're executing on with the ERP system. Sales and marketing, another strategic initiative. We have alignment of the sales organization, both geographically and vertically across our end-use market segments. We have a group with professional sales management practices that we're implementing across the organization with key initiative with our ERP implementation being CRM, which is called customer relationship management system. This one part of the ERP system gives us significant enhanced visibility into what's happening with the operations. And then finally, our fourth strategic initiative is the technology related to our Badger units and fleet. Maintenance and repair of the fleet is our second largest operating expense, that being second largest after the direct labor of the operators on our trucks. Badger's operating scale with our in-house design benefiting from daily operator feedback from our over 1,400 units is a significant advantage in addressing maintenance and minimizing downtime. We also design our units to operate across all geographic regulatory jurisdictions and for an efficient economic life cycle. So back to the financial discussion on the balance sheet. Badger continues to maintain a strong financial position. At May 7, 2020, we had approximately $300 million in total liquidity through the combination of cash on hand of approximately $100 million and $200 million in committed credit facilities. At the end of Q1, Badger's total debt less all the cash on hand, the ratio of that to EBITDA was 1.3x, which is well within the financial covenant of 4x under our credit agreement. As disclosed in our Q1 release, we entered into a supplemental $100 million 1 year credit facility earlier this week to provide the company with enhanced liquidity and enhanced financial flexibility should it be required. The $100 million of additional liquidity is included in the $300 million number I mentioned just a minute ago. Although we don't presently see the need to utilize additional liquidity, we believed it was prudent to put the facility in place in line of the current degree of uncertainty in the economy and the potential for knock-on impacts across financial and credit markets similar to what we did see back in 2009. So strategic milestones. Despite this near-term economic disruption, Badger remains focused on generating profitable, long term, sustainable growth to drive total shareholder returns. Last fall, at our November Investor Day, we updated and confirmed our long term strategic, financial and operational milestones and these consist of: firstly, double the U.S. business over a period of 3 to 5 years; secondly, target adjusted annual EBITDA growth of 15% on average over that same period; thirdly, targeting an annualized adjusted EBITDA margins of 28% to 29%; and fourth, targeting adjusted -- sorry, targeting revenue per truck per month to maintain it above over 30,000. So with that, we'll now move on to the question-and-answer period. Victor, please open the line to questions.

[Operator Instructions] And our first question comes from the line of [ William Aaron ] from [ Baytown Holdings ].

Paul, I wanted to ask you, do RSUs come -- are they issued every year? And do they -- what -- how do they -- how many shares are issued into the share capital of Badger? I'm talking about RSUs for staff?

Okay. Thanks for joining us. The RSUs have been historically issued annually, but there's not a guarantee issue. That is an annual decision that the Board would make, so there's not a perpetual program there in any shape or form. So the RSUs are cash settled. So there's no issuance of company shares and associated dilution that go along with the issuance of those.

So the RSUs don't form -- aren't put into the share capital, they're bought out?

Yes, that's correct. So they are cash-settled programs. So as they vest, they'd be cash settled so no additional issuance of shares.

[Operator Instructions] And I'm not showing any questions at this time.

Okay. Victor, thank you, and thanks to everyone who joined us this afternoon. We'll now wrap up the formal part of the presentation. And we very much appreciate our shareholders' support, the support of our employees, customers, suppliers and especially our shareholders, and you're what make Badger successful. So thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.