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

Hello. Welcome to today's Badger Daylighting's 2020 Investor Day Presentation. My name is Cree, and I will be your event specialist today. Please note that today's presentation is being recorded. [Operator Instructions] A copy of this presentation is also posted to Badger's website. [Operator Instructions] It is now my pleasure to turn the floor over to Paul Vanderberg, President and CEO. Sir, the floor is yours.

Thank you, Cree, and good morning. Welcome to Badger's Fourth Annual Investor Day. In the past, as you know, we've held this event in Toronto, but due to COVID and overall concern from safety, we're holding the event virtually this year. With me this morning is Darren Yaworsky, our Vice President, Finance and CFO. Believe me, we would all prefer to be doing this in person and with the broader Badger team. We've always benefited from interactions with our shareholders. We're pleased to have the opportunity to talk today with you about a very successful Badger, a 30-year-old company that has many more years of success yet ahead of it. Before we begin, we need to remind everyone that statements made during today's presentation regarding management's expectations or predictions for the future are considered forward-looking statements. In fact, all statements made today, which are not statements of historical facts are also considered to be forward-looking statements. We make these forward-looking statements based on 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 we believe may be relevant to forward-looking statements, please refer to Badger's management discussion and analysis for the period ended September 30, 2020, which is available on the website and on SEDAR. So before we get into the meat of the presentation, we really want to have a safety share and talk about our -- everything we do that's focused on safety. Safety is a core value at Badger. Safety, we consider to be our DNA. Badger is an essential service provider. We service a broad range of essential end-use infrastructure segments across our North American markets. We've all heard an awful lot about essential services in 2020. And for Badger, the ultimate and essential services is our emergency response or, as we call it, ER work that we do in the wake of natural disasters. The photos here were from a recent emergency response work related to Hurricanes Laura and Zeta, which hit in the Southeast U.S. recently. Badger is the only hydrovac service provider that can mobilize a large enough fleet to service this very intense ER work. Our operating scale sets us apart here. We provided from several units to well over 100 units in the past, depending on customer needs for ER. In the past, we provided ER relief for mudslides, fires and floods. Just like our day-to-day operations, we continue to fine-tune our emergency response procedures to be better responsive, more efficient and obviously, more safe. So before we get into the growth opportunities and strategy review, let's take a moment to outline Badger's journey that we've been on over the last several years. We first established 3- to 5-year strategic milestones at our Investor Day back in November 2017, those starting from a 2016 base. Since then, we have experienced significant growth, strong margins and solid return on capital. We are proud of these results and the numbers speak for themselves. Our operating model has been strengthened over the past 3 years and has demonstrated strong financial performance across a variety of market conditions. We will discuss today how we view the market and our strategy. That will be our focus over the remainder of the presentation. The important overall theme though is that Badger has and continues to manage for the long term. Our strategy targets long-term market opportunity that we see, and it also targets improved operating performance and returns. Badger is the largest provider of nondestructive excavation services in North America. It's all about digging safely. We managed very well through the oil and gas downturn in 2015 and '16, and we continue to manage very well through the current COVID downturn. We've grown the fleet and our footprint by almost 4x in the past 10 years and achieved a 10-year revenue CAGR or compound growth rate of 17% over that period. We've expanded our end-use market exposure to include a broad range of utility, construction and industrial segments. This expanded exposure has supported a 24% annual growth rate in the U.S. business over that same 10-year period. We estimate that Badger has approximately 20% to 25% share of the truck-mounted hydrovac fleet in Canada and an approximate 30% to 35% share in the U.S. Our scale of operations provides value to our customers in day-to-day service. Scale also supports expense management, operating leverage, margins and asset utilization, and we'll talk more about this as we proceed with late more slides. In the past 5 years, our strategy is focused on expanding our markets and transitioning Badger from a successful operating business to one that's a sustainable company; this by implementing a business platform. The platform is important in order to capture the market opportunity and to deliver sustainable, profitable growth. In past Investor Days, we've described these initiatives, and then we subsequently went on and executed on them. We have some more initiatives to talk about today. We've built out a human resource function, we've established the sales and marketing function, we spent a large part of 2018 and 2019 designing and implementing a new ERP system, which is really an all-hands on deck project. It required everyone at Badger and a lot of input from the operations team to design and implement successfully. We strengthened the financial organization this last year and are in the process of finalizing shared service groups to support our operations. And we've also recently strengthened the IT organization. There is a good business case for Badger for these initiatives. They're focused on supporting growth, improving operating leverage. And the key though is that operating leverage goes hand in hand with growth. They feed on each other. The review today is about how we think about Badger's markets and also the avenues to growth, while we continue to build out the business platform and our overall business strategy, and the review includes a discussion of our proven and resilient business model, how we view growth and the market size, next steps we're taking to build the operating platform and further strengthen it. We'll talk about Badger's financial strategy and discipline. And then we'll finalize with concluding how we look at the Badger investment proposition, how this all comes together to provide value for shareholders. As our historic profitability and returns have shown, Badgers had a unique and proven business model that has performed well over a long period. Over the last 30 years, we've built the largest company in nondestructive excavation. We focus on safety in our own operations; you keep hearing the word safety, it's key to Badger. And also in helping our customers build and maintain their critical infrastructure safely. Badger's branch network has significant operating scale, and this not only supports customer service, but it also supports our expense management, our fleet utilization and shareholder return. We've expanded both our geographic and end-use market segment in addition to expanding our customer diversification. And lastly, we're unique in the hydrovac industry and that we design and manufacture our own trucks. The design and build process targets safety, efficiency and operating day-to-day, and very importantly, efficiency in the life cycle cost, the total cost of ownership of running Badgers. Our integrated model contributes significantly and vertical integration contributes significantly to overall return on capital. The operating footprint that we've built provides flexibility in how we adapt to changing seasonal, regional and general economic market conditions. Operating scale makes a big difference for our customers, I've mentioned that already, because we're always able to have a hydrovac available when a customer calls. We bring in hydrovacs in the rest of the network and from neighboring branches. As we mentioned earlier, with hurricane relief, we're able to marshal significant number of trucks across the branch network when required. The network also generates profitability and returns. Over the last 5 years, we've experienced strong adjusted EBITDA margins, even though the oil and gas market downturn and the recent COVID downturn have been challenges. We performed well through both. Our shareholders benefit from the model strength in good times and in bad. Our model, which has proven to be successful in the past, continues to be strengthened, and this, in turn, allows us to pursue the market growth opportunity that Darren will now talk about. Over to you, Darren.

Thanks, Paul. I share the same opinion as Paul. It's a little awkward looking at a camera as opposed to faces in a room. So I look forward to the day that we can get back together again, but until that day, we really do appreciate you spending the time meeting with us virtually today. Today is probably an exciting day for me as well. It's my 1.5-year anniversary at Badger. I do remember, and I was reflecting a lot of conversations that I had when I first started with the company and a lot of those questions and those introductions were relating questions and saying, why Badger? And the answer at that point in time was Badger is a unicorn. Fast forward 1.5 years, and we are almost a year deep into a global pandemic, working through one of the deepest recessions on recent history. And I tell you my opinion of Badger has only strengthened; it's a unicorn. Over this 1.5 years, I've had the privilege of being able to work on building out some of the market development ideas and the strategies to go after that. So I'm pretty excited to share some of the work that we've done today, and we're showing a little bit more insight into our market opportunities. But probably more importantly, we're giving a glimpse into how we're going to go after that market from a market penetration perspective and the customer -- and from a customer penetration perspective. So let's get into it. Before -- I think the 3 key points that I want to leave everyone on this slide is: number one, we believe that there's a meaningful growth opportunity across North America and, in particular, the U.S. market. Number two, we believe that we're really early in the adoption phase of nondestructive excavation services. And therefore, we believe we have a long runway of growth ahead of us. And then finally, our branch network and the scale that Paul talked about previously, really positions us in a strong position to go after that growth. Paul wanted to be a little bit, not to get too much into the details. I love the research side of things, and I can't help myself but to share a little bit of how we came up with the 7 to 9x multiple. The premise or the hypothesis that we built upon is that the Canadian market, in particular, 3 markets in Canada are a great predictor of how the overall North American market is going to evolve. And why we believe that is that we believe the adoption, use and understanding of nondestructive excavation services in the Edmonton, Calgary and Toronto markets are probably 10 years more advanced than certain markets across North America. So what we did over the last 1.5 years is really dig into each of those markets to understand what the growth drivers are, the customer characteristics are, the economic and market characteristics to be able to drive growth. Then we applied that logic -- growth logic against the top 40 markets in North America. The characteristics of the Toronto growth markets with the characteristics of the Chicago market. The Edmonton market would be connected to the Houston market and the Calgary growth market would be connected to, let's say, a market like Indianapolis. Based upon that analysis, we came up with what we thought our growth estimate was, and it was 7 to 9x that you're seeing on the slide here today. We back-checked all of that work by doing a deep analysis, similar to what we did in Edmonton, Calgary and Toronto with 10 markets across North America. Not good 10 markets those are, but what I can say is the back validation proved that our logic was correct. Over the coming months, I know we will provide more insight into the regional numbers and I suspect a lot of you are asking, well, how does that break down to region to region. You can appreciate this is very commercially sensitive information. And we don't want to give our competitors the benefit of all of the work that we went through. But I would leave you with 2 large themes. The theme in Canada is that we believe that we're probably in the middle range of the growth, and we see the opportunity to continue to grow in certain geographies, but more specifically, we believe that we can grow the end-use customer segments that Paul talked about previously. In the U.S. market, we believe we're in the very early stages of growth, and we've got the opportunity to grow, both in new and existing geographies as well as new and existing customers. With that, perhaps flip through over to the next slide. There's a lot of new concepts on this slide. And I think before I start to unpack each of them, it's important to give 3 -- or 2 broad overarching statements that we use to -- as design principles in coming out with our market penetration strategies. The first is that all markets aren't equal and that we need to tailor our market penetration to the characteristics of each of those markets. The second is that we want to establish a first-mover advantage into each of these markets. Said differently, we want Badger to be equivalent to nondisruptive excavation as Kleenex is to facial tissues. So perhaps I'll start to unpack the slide. And unfortunately, we couldn't build this sequentially, but let's just focus your eyes for the time being at the extension market. And the extension market really is the way that we've grown historically. What we do and probably a good example of what an extension market would be with Shreveport, Louisiana. So Shreveport is a market that we would serve either at Dallas, Houston or Baton Rouge until such point in time that we have critical size in that market, in which we make an investment and place trucks in that market. We have done that time and time again to grow the business. And quite frankly, we've been wildly successful at it. The skill sets of our area, district and regional managers are really well suited to continue to grow that market. In that market, you can tell that there's a lot of white space in it. We're in 54 out of roughly 340 MSAs, so there's a lot of geography that we can grow into. The one qualifier to that is the truck count growth isn't nearly as large as the other markets that I'll talk to a little bit later. Nevertheless, the growth opportunity that we estimate is around 3x growth from where we are today to full maturity of the market or at least maturity that's equivalent to the Canadian markets that we looked at. Stepping down into the core markets, you could really think of the core markets as a combination of a number of the extension markets put together. And these are markets, like I said previously Indianapolis. It's bigger than Shreveport, so it can support more trucks, and therefore, have a larger truck count potential. We estimate that around 32 markets across North America fall into this category. We're fortunately in 29 of these locations already so that we can leverage our existing infrastructure to grow the business. But we do think there'll be about an additional opportunity, not only to fill in the remaining 3 markets that we have, but also to fill in the opportunity in the end-use customer markets. And as a result of that, we believe there's about 5x growth potential in that market. Probably the final point that I'll say is that the core markets require a tailored approach to our market penetration strategy. Moving on to the strategic markets. These are the markets that we think there is substantial opportunity to grow the truck count in each of those markets. Fortunately, we're in all 8 of these markets, again, having the ability to leverage our existing infrastructure. Given -- and you can think of a strategic market like a combination of a number of core markets put together. So there's the opportunity not only to grow branches within that market, but also to grow your customer diversification within that market. And as a result of that, we believe there's about a 15x growth multiple in that market segmentation. The final thing that I'll probably lead or help to mention where we are in that work is, probably about 20% to 25% of our trucks in our fleet currently service the extension markets that we have in this part and the balance of our fleet services, the core and strategic markets. Perhaps with that, we'll take a little bit of time and talk about our customer penetration strategy. Similar to how we grew the business through our marketing strategy, that being the extension of our existing markets, we've grown the business the same way from a customer perspective. We've really leveraged the strength of our area managers. So for example, an area manager that joins us from the equipment rental space, he or she might have very deep relationships in the general construction space, and therefore, provide the foundation or a basis in which we can grow relationships in that market across the end-use market segment. And because of the uniqueness of all of our area managers, we have core strengths in different customer categories across our network. But none of the network -- none of our branches have a complete coverage of all the customer markets that we think we have available to us. Is this new to us? Or is the diversification of our customer new to us? I think the simple answer is no. As many of you have followed the growth of Badger over the number of years, you know that we grew out of the energy patch in Alberta. And to put a little bit of perspective to that, the oil and gas exploration and production part of our consolidated revenue is about 4 -- or about 5%. The pipelines space is 10% and the facilities space is around 6%. Previously, that was much, much larger part of our business, but our area managers have been able to leverage those existing relationships to build out the diversification that we see in our customer base today. The one thing that I will probably end this slide on is that -- the one thing I will end this slide on is that I think it's important that the evolution of our area managers need to be supported. There's a tremendous amount of opportunity, both in the market segmentation and the customer segmentation, and we can't expect that the customer -- sorry, the area managers are going to do all of that work. To that end, I'll hand the presentation back to Paul, so he can spend a little bit of time talking about our business model and how we're going to be able to help support those area managers. Back to you, Paul.

Okay. Thanks, Darren. So Darren talked about how we're thinking about the opportunity, and now the question is how we go after. So we're pursuing initiatives in 5 major areas in Badger. On the branch operations side, our initiatives are very logical follow-ups from our ERP implementation, which went very successfully. And also its evolution from Badger's historical decentralized model. We're moving to a model of more shared accountability, and I'll touch on that in just a second. We're working to develop standardized roles for all positions within the company. And the idea is to free up our local area management team so they can focus more and focus better on our customers. So on shared accountability. On the sales and marketing side, Darren just reviewed the market size and segmentation. This strategy targets geographic growth and penetration in new segments and markets where we already have existing infrastructure. This translates into operating leverage. The shared accountability piece of adding to the sales and marketing and adding to our capabilities there with the hiring of a new VP of Sales and Marketing, which we just recently got underway, is that we're looking to build up the sales and marketing function to partner with our geographic operations to more successfully go after expanding our customer segments. We think there's a real, real opportunity here. On the fleet side of the business, the visibility we gained from the new ERP system has proven that we have really good tools now, much better tools to help us standardize fleet management and to manage our second largest operating cost, which, as investors know, is repair and maintenance on the trucks. Fleet utilization also goes hand-in-hand with labor efficiency, which you know is our largest operating cost. We're in the very early days of working with these better tools and providing KPIs for our operations decision-makers. I'm personally very, very excited about this because this is about internal business improvement, doing things better. We're also implementing structure to optimize our fleet management and truck movement across different jurisdictions, state and provincial borders and to be more tax-efficient in doing that. And Darren will talk about that a little bit later. In the manufacturing segment, the one critical thing we need to always ensure is to have a truck when a customer calls. We always want to have enough trucks to meet demand. So to help with this, we recently added a Vice President of Manufacturing, who's working with the manufacturing team to identify efficiencies in our current build processes, to optimize our current red beer production facility and to develop a longer-term truck production capacity strategy. COVID has given us a chance to really focus on this process. Unfortunately, the plant has been slow since we curtailed production, but the team has taken great advantage of the slow times to work on these strategies. We're making good progress there. And finally, we continue to make great progress in establishing shared services in the Indianapolis office. We're in the initial stages of optimizing other parts of our legal and tax structure also. And those align with Badger's growth strategy and also support our fleet initiatives. The key though with our initiatives is that they all target achieving market growth, they all target achieving more operating efficiency, and they all target achieving improved capital utilization. Now a couple of comments on fleet. Over the past 3 years, we have achieved an annualized RPT that's above the $30,000 mixed currency strategic milestone target that we have for the life of the truck. As you know, RPT at this level provides excellent long-term return on invested capital. Our 2020 year-to-date RPT is lower than recent years due to COVID. And as you know, we curtailed manufacturing at the onset of the pandemic to preserve capital and to ensure we focus on utilization of our assets. This 2020 focus on utilization is no different than what we successfully did during the energy market downturn of 2015 and '16. We now have greater visibility coming out of the ERP system to manage the fleet compared to the visibility we had back in 2015 and '16. And you might recall that we've been disclosing RPT in recent quarters specifically for units that had work on the books. We've done that along with the overall fleet RPT, which uses all trucks as the denominator in that calculation. There was no way we were able to do this with our legacy systems. With the current fleet size of 1,400 units, we can support revenue of well over $700 million. We've shown on this slide, recent Canadian dollar converted RPT and this is shown to provide background that there is the revenue growth opportunity in the current fleet. It's easier to do the calculations if we convert. We are confident, very confident that in the near term, we have enough trucks to service growth and in our ability to ramp up production when required. We did it back in '17 and '18 and '19, and we're going to be able to do it again. So some comments on manufacturing. While we're managing utilization in the short term, we're also, as I mentioned a minute ago, looking long term to ensure that we can meet future demand. When we look at required manufacturing capacity, we consider both replacement units to be retired and growth units. Based on the significant market opportunity we see, we want the capacity in place to supply whatever level of growth units may be required. Our planning starts with expected retirements on a year-by-year basis. On this slide, we have shown the recent years retirements, replacement and growth units. We built 81 units so far in 2020. This was 58 units in Q1, 12 units in Q2 and 11 units in Q3. As we previously discussed, we curtailed production when COVID hit, but we went ahead and completed production and built out the previous generation 4 Badger design units that were in the pipeline because when COVID hit, we were very close to the changeover to our new Badger generation 5 design. We wanted to empty out the generation 4 supply chain pipeline so we can ramp back up clean, so to speak, when the generation 5 supply chain pipeline when demand recovers. This has worked out real well. As we look forward, retirements are expected to increase between now and 2024. This is generally based on fleet replacements. And for each year, with those -- for each year with these replacements based on additions that were generally made 10 years ago. And this all is assuming an average life of a truck at 10 years. So there's about a 10-year lag between a truck edition and a retirement. While each retirement of a truck is a truck by truck and individual decision, for long-term planning purposes, the 10-year estimate is a reasonable starting point. We estimate that the current plant capacity in Red Deer is approximately 250 units a year. That's higher than the peak of 221 units we produced back in 2014, because an addition to the plant was put in place in 2015. The focus on our manufacturing strategy for the longer term is to identify what optimization can be achieved in Red Deer, and to evaluate a second facility and whether one might be required over the planning horizon. We're in the early stages of this process, as I mentioned a minute ago. Again, the objective is to have sufficient trucks available for replacement and retirements at any time. We think there's going to be good opportunities for optimizing our current Red Deer facility. The manufacturing team is also focused on procurement and supply chain efficiencies. Our new VP is really helping us focus on that. He joins us with a lot of years of experience in manufacturing, engineering and supply chain management, and he came to us most recently from the school bus business. As you may recall, we did not include a manufacturing system as part of our ERP implementation. The manufacturing and IT teams are looking at options right now, for what's called the material requirements planning or MRP system to add on to our Oracle ERP system. There's some good options they're looking at, and we don't expect the MRP system to be a material cost. More on that to come. And as always, the build rate continues to be closely monitored to ensure we're optimizing utilization and being efficient with shareholder capital. So with that, I'll pass it back to Darren to talk about shareholder capital.

Thanks, Paul. Badger's financial strategy has served us well over the years. And I'm really proud of what we did last year in advance of some of the troubles that we had to overcome this year from a market perspective, not from a financial strategy perspective. Last year, we upsized the size of the credit facility, and we rightsized the size of our covenants. And earlier this year, we upsized the credit facility by another $100 million just to make sure that we had funding certainty across the COVID situation. And I have to say that we weathered the storm fantastically. We are really well positioned to continue to fund growth, and I think to fund growth in any kind of market opportunity or market situation that we encounter in the future. Another piece of work that we've done, and it's associated with our long-range planning, we've really modeled up the business that's giving us a really good sense that we can fund all of the organic growth that we just talked about, all of the capital investments that Paul just talked about through our internally generated funds and our existing liquidity. Said differently, we really don't see the need to raise equity capital over our planning horizon. So I would like to spend a few minutes talking about 3 things: Number one, is reconfirming our commitment to our financial strategy; number two, confirming our commitment to making sure that we deploy capital in the most accretive manner for shareholders; and then finally, introduce a new financial metric that we think will be increasingly more important for us in running the business going forward. I think many of you may recall this slide from last year's Investor Day presentation, but let me just quickly walk through these elements. These are the 5 problems that I think are the cornerstones of our financial strategy. The first is liquidity. And I touched upon that in my opening comments. We're really comfortable with our liquidity position. We're also very comfortable with our covenant package within the liquidity position. We're currently at Q3 about 1.2x debt to EBITDA. Our capital structure, again, I think we provide a lot of flexibility to not only weather the net -- the troughs in the market, but also take advantage of the peaks in the market. We're confirming our leverage target at 1 to 1.5x debt-to-EBITDA. That gets us into an investment-grade type rating with most of the rating agencies. And until we get to scale, I think, that we'll continue to maintain that leverage. From a capital allocation perspective, we'll continue to deploy capital in the most accretive manner for shareholders. Like I said in my opening comments, we think we can self-fund our growth plan and require no equity capital. Paul mentioned on this a little bit in the fleet side of things is we are introducing some work on the legal and tax side of things. We are realigning our legal structure to align to the operating structure that Paul talked about a little bit before. And what we found through that legal realignment is there's a fair amount of tax opportunities, one of which is in the fleet operations. Happy to dig into that probably in the Q&A section. And then finally, and you've heard me talk about this over the last number of quarters, we are laser-focused on managing our working capital better, in particular AR. We've made tremendous strides on building in a credit granting process that is, I think, world class. And we have significantly enhanced our collection philosophies. All in which we're making sure that we use shareholder capital in the most efficient way possible. And speaking of shareholder capital, perhaps we can go to the next slide and talk about our capital allocation waterfall -- or at least what I call our capital allocation waterfall. I think in the conversations that we had before about the market opportunity, we completely understand why it's important for us to focus primarily on funding organic growth. But based upon all the strategic initiatives and the platforms that Paul has talked about before, and I think we worked tirelessly the team to put in place. I think we are -- the company is reaching a point where we can actually start looking at and evaluate -- evaluating acquisition is the potential way to supercharge our organic growth strategy. At this point in time, there isn't anything that's on the drawing board but we are getting ready to be able to start evaluating things in a more thoughtful manner. And the final bucket in this waterfall is, again, our commitment to return capital -- surplus capital to shareholders in the most accretive manner. We currently pay dividend, and we'll review that dividend in normal course like we always do. And we also have been engaged in buying back shares in recent years. We have suspended our share buyback program, primarily because we've been participating in the wage subsidy and now the rent subsidy program from the Canadian Government. We don't think that it's appropriate for us to take government money and buy back shares. Well, we will continue to evaluate our share repurchase program once those benefits of both use and the rental programs start to tailor off. Perhaps we can shift gears a little bit to talk about the -- one of the financial metrics that I think both Paul and I believe will be an increasingly important focus of the company. And that's return on -- adjusted EBITDA return on invested capital. That's a multiple. The whole premise behind this metric is to evaluate our cash-on-cash returns. So rather than being clouded by any kind of accounting adjustments, a dollar of capital that we get from a shareholder, we need to measure the cash returns that we generate on that dollar. The adjusted EBITDA to ROIC calculation also works well with evaluating from a post investment view perspective, a number of the strategic initiatives that Paul has us pursuing. And those initiatives are focused at not only improving the numerator of that calculation, but also the denominator. I do have to warn you. We're early stages in the development of this metric. We've just recently introduced it internally to the company. But we do believe in the coming years that it will become to embody our standard financial reporting, our KPIs and our incentive programs within the organization, all with the intent to align the behaviors of management and the behaviors of the company with maximizing shareholder -- value creation for shareholders. With that, Paul, that might be a good segue to hand the presentation back over to you.

Okay. That's great, Darren. Thank you. So there's our message. We're excited about Badger's business, continue to be. And we're very excited about the opportunity to provide you, our shareholders, with more Badger, it's bigger and more profitable. We continue to see significant growth opportunities, and we reviewed those with you today. The market opportunity is there. With Badger, you own a company that's executing on a focused strategy. And you own one that manages for the long term. We wouldn't be taking on the initiatives we've taken on over the last 5 years, if we didn't believe in the long-term opportunity. We're committed to growth in revenue, margin and returns. And we've had great progress against our strategic milestones that we started back in 2017. We're proud of the track record. This has been a frustrating COVID year but the team has improved margins the last few quarters versus last year. And this achievement in the face of 15% lower revenues. This is a testament to the strength of Badger's business model. So with 2020 and COVID creating a year that you could maybe describe as a pause year, we want to reset our strategic initiatives using 2020 as a base, and we talked about this in our Q3 press release. Even though we're resetting the measurement base to 2020, the milestones themselves are not changing. So to summarize our strategic milestones for the next 3 to 5 years, to double the business again within 3 to 5 years, and this, again, tracking from a 2020 base, to achieve average adjusted EBITDA growth of 15% over that same period, to continue to target adjusted EBITDA margin in the 28% to 29% range, and as I mentioned a second ago, we're pleased with our performance and results in this 2020 recession year. And finally, the fourth milestone is to achieve revenue per truck above that $30,000 mix currency level, which we described and discussed earlier, is providing excellent returns over the life of an asset. So how do we view Badger as an investment? The Badger business fundamentals are strong. Business fundamentals are really key. And the market opportunity for nondestructive excavations there. As Darren just talked about, we have the financial flexibility to execute on the plan, and we're disciplined about capital. We have solid strategic initiatives, and we're executing on them. The initiatives we talked about today, target penetrating the market, target strengthening the Badger team to support growth, target improvement in fleet utilization and returns, and also ensuring that we have the manufacturing capabilities to support any growth that comes our way. These initiatives all focus on further improving Badger's business fundamentals. And we continue to work hard on execution. That's to me what summarizes the Badger business opportunity. So with that, we'll now move on to the Q&A session. So before we get into that and talk about questions. Can you hold on just a minute, Cree?

Yes.

Okay. All right. Thank you. I'd just like to take a minute and announce the transition of our Investor Relations responsibilities from Jay Bachman, who many of you know, has been working with us and led this the last several years, to Pramod Bhatia. And Pramod is going to be leading our Strategic Planning and Investor Relations functions as part of Darren's group. We'd like to thank Jay for his support during the transition, his contributions over the past several years, and we wish him well as he pursues other business opportunities. So back to you now, Cree. We can open it up for calls and questions.

[Operator Instructions] And your first question comes from the line of Maggie MacDougall with Stifel.

I was wondering if you could elaborate a bit on the fleet leasing initiatives that you've outlined in the presentation as an area of potential optimization of fleet utilization. In particular, interested in what you -- how you build that out, what customers you're seeking, and how you would see that help optimize your fleet.

Okay. Maybe we'll answer this in 2 different ways, Maggie. I'll comment on the actual day-to-day management of utilization. And then Darren can maybe comment on some of the tax structuring we're looking at because those 2 do go hand in hand. On the day-to-day management, as you know, we've been just delighted with the visibility, and I keep using the word visibility from the new ERP system. And that's really helped us. We're able to see daily utilization and -- right down to the individual truck level. The previous RPT, we couldn't get to the individual truck level. So we have granularity that we just haven't had before. And so rather than waiting for the individual decentralized area managers, to initiate moves in the fleet, we're able to do that in a more cohesive way now. So that's been very significant for us. And we've moved well over, I think, 130 trucks since the downturn in April, and it's been very helpful for us. I guess the second part is maybe how we view our trucks. And then maybe that's the part Darren can talk about.

Sure. Maggie, great question. It's a difficult question because there's 3 components to it. I mean, the first component is to Paul's comment, the utilization of the fleet and more specifically, how you could appropriately use that fleet. The second, which gets a little bit more technical is the registration of your fleet and how you manage that from a regulatory perspective. And then the third component is the tax advantages of it. But I want to start off by the overarching comment is, we're looking to set up an internal leasing company. And it's an internal leasing company that is driven primarily to create the efficiencies in our internal operations. I don't want to leave the misnomer that we're actually getting into the external leasing business. So to the first point, the internal leasing business is something that is introduced quite regularly in the trucking company. And it is -- and ironically, us being based in Indianapolis is advantageous to us. And why is that advantageous to us, is that if you set up an internal leasing company, you could register all of your fleet across North America with one plating system, and Indiana, ironically, is the best place to do that. What it also does is it allows us to optimize the movement of the fleet. So without having to worry about where the trucks are garaged and how that would change your plating or your registration or even sales tax, you can move the fleet in any way that you want and have a lot more fluidity and velocity in the fleet. And the second component is it also becomes more tax efficient. So rather than -- if we moved a truck from, let's say, Indiana to California, and we permanently changed the registration and the garaging of that truck, we have to pay sales tax on that truck again, on the entire amount. Whereas if we lease the truck into different geographies, we have the ability to move the trucks around and only pay sales tax on the time in which that truck is in that geography. There are certain geographies that also create a tax-exempt environment for our trucks. So it's those 3 prongs that we're really trying to capture to make sure that we've got more cash flow falling to the bottom line, and we've got better utilization and movement in our fleet.

And Maggie, the way I look at this, and I just love these kind of internal improvement opportunities because it does not matter what the market does, it doesn't matter what competitors do, it doesn't matter what customers do. These are internal improvement opportunities, and it's up to us to go after. So we're scrubbing the system really good. And we're coming up with some really good opportunities. These aren't dollars, they're pennies and nickels, but these things add up. So I'm personally really excited about this type of thing.

Okay. One more question from me, and then I will turn the line over. This is really the first time that we've seen you guys fairly concisely communicate that you do -- that you are starting to consider an acquisitional strategy as part of your growth strategy. Could you elaborate on what type of things maybe interest to Badger? Will there be other hunch about companies? And would there be things that would bring additional services to the business?

I didn't hear your question, Maggie. And Paul, did you get it?

Yes. It came through -- are you asking about acquisitions, Maggie? It was really faint on our end. I just love these virtual things.

Sorry about that. I think it's my microphone. Just asking about acquisitions and what types of businesses you may be interested in acquiring.

Yes. Okay. Well, 2 points here. Darren talked about this in our capital allocation waterfall, but there's 2 points I would make. The first one is that with our legacy systems, Badger was really not in a position to do integrations with the ERP in place. And the fact we've strengthened our organization, strengthened the finance team, strengthened IT, strengthened HR, we're in a much better position to even think about integration. So that's a go-forward opportunity that wasn't part of Badger's business opportunity mix in the past. The second point is the type of opportunities that are open to us, and there are regional opportunities where we're not in a region yet. Darren talked about our MSA participation today. There may be some smaller regional players that are opportunities. And also there's complementary services. So our customers require and sometimes they ask for other services. It could be backfill or paving or coring, sewer inspection services. We're in these businesses in many of our locations. So it might be a natural for us to get into these businesses with complementary tuck-under type acquisitions. But nothing we're talking about would be on the major scale of significance. These are smaller, but they could help us accelerate our growth.

One follow-on to that, that I just thought of. When you talk about this adjusted EBITDA return on invested capital, how do you tie that back into your thoughts around accretion from acquisitions? In other words, do you need to see similar return levels on those types of opportunities as you do with your organic growth opportunity?

Yes. Professor, do you want to comment on that?

Simple answer is, yes. If it isn't accretive on our -- as accretive or more accretive to our organic growth, it's shareholder disruptive or capital disruptive. So we're pretty darn disciplined on making sure that if we do go into any acquisitions, it is enhancing our accretion and not taking the return.

Your next question comes from the line of Claire Thornhall (sic) [ Claire Thornhill ] with EdgePoint.

So I just wanted to ask, you've talked about how you went into this downturn with better visibility on cost than you've had before. And we've seen how well margins have held off even with the revenue declines you experienced. So I just wondered, does this change how you think about your future earnings power when utilization recovers? And specifically, when you think about the strategic milestone longer term, should we expect them to reflect that this improvement is sustainable?

Yes. Great question, Claire, and welcome to the Investor Day today. I would love to know the answer to that as I sit here today. It's early days with our ERP system. We went live at -- finished with going live at the end of January and went to the COVID dance right after that. But we've been really pleased with the benefits that the visibility has provided. Darren's team is rolling out a whole different set, a new set of KPIs and daily dashboards for our operations leaders, the beginning of 2021. So we'll actually enter 2021 with even better visibility and better follow-up and consistent KPIs than we've ever had before. So I'm very optimistic. And this is back to all these internal improvement focus items and focus opportunities that I'm so keen on. I think we're going to do better with this over time. You can't manage what you can't measure. And our measurement is the best it's ever been, and it's going to get a lot better for 2021. Regarding the strategic milestones, if I could ask you, please be patient, let us get there. Let us do a victory lap, and then we'll set new ones. And just like we did when we doubled the U.S. sales from our base of 2016, we hit it in about 33 months back in the -- I mean, Q3 of 2019, and we did a short victory lap. It was admittedly a short one, but then we set it again to double the U.S. business again. So we have some great targets there if we achieve them. I think -- and as we achieve them, I think everyone on this call is going to be pretty pleased.

Your next question comes from the line of Daryl Young with TD Securities.

So just a quick question on maybe a bit of a case study question about your experience in the Greater Toronto Area, and you said it would be akin to what you might see in Chicago in the future. And so I'm just trying to get an understanding of how your end market customers have evolved in the GTA over time? And what you're seeing now? And what the margin profile could look like for those end customers? So would you be more slanted towards utilities now in Toronto than you were, say, 5 years ago? Or just how that evolution has been occurring and what you would expect as you move into a place like Chicago?

Yes. Well, Toronto, as Darren talked about, is a more mature market for us. We still think there's growth to come, and we've experienced growth there. Our customer end-use segmentation there is fairly mature and fairly broad, which is very helpful. With Toronto, you always get big projects like CrossLinks and the [indiscernible] Ontario project. I mean, I think you're probably pretty familiar with all those. And those come and go. But the market -- the metro is so big that there's always something going on. And that's a metro that you could extrapolate to different metro sizes and population of the U.S. And Darren describes it as an urban dense market because it doesn't have a heavily industrial component. Toronto is very progressive in using nondestructive excavation from a safety and a regulatory perspective. Ontario is probably one of the leaders in North America. And I think there's one thing that I think we all would probably expect, as we look forward, is that we're not going to have less regulation, and we're not going to have less focus on safety. So as a case study, that's why we use Toronto as an example of an urban dense market. How long it might take to get there, remains to be seen, but we know what it looks like when we get there. So I don't know if it helps the framing of that. But we certainly see Toronto and the Province of Ontario, in particular, is the future of where nondestructive excavation can go in the rest of North America.

Okay. And then I guess, have you put any early cost estimates with respect to your potential for a new factory, new truck manufacturing facilities? Do you have any kind of ballpark estimates at this point of what that may cost? Or any further details you could provide on that? I know it's still very early days.

Yes. No, great question, Daryl. It is very early days, and we've included some placeholders in the 5-year plan, but they're very, very early and very rough. I personally am very optimistic that our management -- our team and our manufacturing operations will come up with some good optimization alternatives in Red Deer. The early thinking has been very encouraging. And so that decision on a second facility may need to be taken at some point, but the timing may get pushed out. So as with everything else we do at Badger, we want to make sure we have enough trucks available, but also we want to be very thoughtful about the application of shareholder capital. So the good news is we think there's opportunities for optimization. And that goes hand-in-hand with our long-term strategy on a second facility. So we'll keep everyone posted. It's early days, but what I've heard so far is very positive. And positive, meaning we have some good optionality.

Perhaps the one thing I would add to that is that we have taken a very conservative approach on estimating that number in our plants. So said differently, it's higher than we think it's going to be. And even in that scenario, we don't believe that we have to issue any kind of equity. We can self-fund any kind of expansion requirements for the second plant.

Yes. Along with growth to capital in the plan. That's -- forgot there.

Your next question comes from the line of Matthew Weekes with Industrial Alliance.

I figured I would just kind of clarify, I want to picture these different markets a little bit better. So if I were to picture the kind of extension versus core versus strategic market, can I see the core markets as being sort of major metropolitan centers, extension markets being sort of smaller markets that could be served out of those operating branches. And then the strategic markets as being sort of a broader region, for instance, say, like the mid -- like the U.S. Midwest or Eastern Canada or something like that?

Okay. No, that's -- why don't we let Darren continue on that. So he led us today.

I think you actually -- I think your logic is pretty darn sound. So the examples that I would use is or what I did use is Shreveport, which is an extension market that can be served out of Dallas or Houston, which we would consider a core market. And then the strategic market, I think, you've captured it perfectly, Matthew, is it could be one geography that is a large urban center or it can be a combination of a number of geographies that aggregate together into a region. All of which have a unique requirement in which we have to target a customized approach to penetrate that market, both from an operations perspective, a sales and marketing perspective and also a delivery perspective. So I think the way you've captured is actually pretty darn fair. And with that, Paul, I'm not sure if you want to add any comments.

Yes. The thought process we're engaging in is not only customer and market segmentation, but also how we service the market with our branch and equipment network. It all has to work together. So that's a different approach than we've done historically, where each and every local branch manager was very entrepreneurial and built up their own market. We're now looking at doing things more together. And we're probably the farthest along with this in the GTA and in Ontario. We've had great success in pulling together things like centralized dispatch and relooking at our branch network to optimize the logistics. So that's probably where we refer this along. But we'll have more on that as we come along. And -- but for competitive reasons, we're looking at staging, and we'll be executing and keeping people posted accordingly. We're excited about the opportunity.

[Operator Instructions] At this time, your next question comes from Jonathan Lamers with BMO Capital Markets.

Question for you on the Red Deer plant. Do you believe there's physical space available to expand capacity? And also, are you able to comment on any low-hanging fruit type opportunities for improvement there? I'm thinking about equipment to automate portions of the assembly or applying some best practices for how the lines are organized. Are you able to provide any commentary there?

Yes. On the space, I mean, we are limited by real estate. But the manufacturing team is really digging in on thinking about all sorts of things, on the layout of the physical buildings, on working with shifts. We've already just had one shift. There's shift opportunities there. So there's a lot of, what I call, flexibility and how we look at that facility. And like I said earlier, I'm pretty optimistic the team is going to come up with some really good alternatives to optimize. And regarding low-hanging fruit, I would say it's going to be all of the above. So we've really taken advantage of the slow time with COVID to really step back and take a look at what we're doing and how we're doing it. And we're also in between the generation 4 and generation 5 design. And our generation 5 Badger design is the first Badger we've designed to actually have a bill of materials, and to integrate that bill of materials with an MRP system. So for those on the call that are into the manufacturing business, just thinking about that opportunity in and of itself versus our history of being an in-place fabricator, gets -- puts a smile on your face as far as low-hanging fruit is concerned. So we're in the very early stages to your question there, Jonathan. But I personally am very optimistic we're going to have some really nice internal improvement opportunities in that part of the business, too.

Okay. And to circle up on that, do you have an early indication of CapEx? And whether there will be investment required above and beyond the normal non-truck CapEx that we've seen in past years?

Regarding the investment in the facility to optimize it in Red Deer, it would not be material. It would be of a relatively modest nature. And that's the other reason I'm so pleased with the opportunities we're seeing so far.

Okay. And switching gears. Paul, you made a comment that the current fleet of 1,400 trucks could service about $700 million in revenue, give or take. I believe there is an old rule of thumb for this business that once utilization was near $30,000 revenue per truck, Badger wants to be building trucks or management would be concerned about business being turned away. I know it's -- I know we're early into the recovery, but do you think that old rule of thumb is still relevant? I'm just wondering if your recent analysis has shed any light on that?

Yes. Well, we're obviously looking forward to testing that, just like we did coming out of the bottom in '15 and '16, Jonathan. And that $30,000 number -- the historical number, that's a mixed currency number. So that's -- by and large, I think, is going to hold true for generalities. The reason we wanted to put a slide in the presentation today that actually converts RPT to a Canadian dollar number is to provide investors with some insight into the existing capacity we see in our current 1,400 truck fleet, and our ability to drive near-term, short-term revenue with the current fleet we have in place. So we thought it would be easier to actually do a converted RPT that people can connect more easily to the revenue that could come out of that. And that's why we wanted to have that slide in there. But I think the patterns you've seen in the past will probably be pretty similar, although I would hope based on our more -- our better tools we have from ERP and our more tight focus on utilization that we'll be able to add less trucks than we've had in past upturns. But that remains to be seen, but that's something you'll see us continue to focus on. It's a great question.

Okay. And one more topic from me for Darren. I appreciate the slide with your market share estimate, 30% to 35% in the U.S. Are you able to provide us with a sense of how fast the overall market was growing pre-COVID, maybe over the last 10 years, whether Badger was growing faster than the overall market or in line?

Yes. We didn't get into all of the specificity of market share year-over-year, that would have just -- that would have taken us another year to do that work. I could probably give you some thumb -- edge on it. I would say that Badger was developing the market probably grew faster than everybody else. And going forward, we want to make sure that we continue to grow faster than everybody else and set the parameters in each of those new markets that we're getting into. To really set the standard for all the things that Paul said in his guess part of the presentation, the work is done safely and it's done profitably. You set those parameters and they become the benchmark of all of our competitors having to measure up against us. Sorry, I can't give you a better answer than that, Jonathan, but I hope that gives you what you need.

Yes, that's great. I'll pass the line.

Thanks, Jonathan.

Your next question is from Jeff Fetterly with Peters & Company.

A couple of random questions. I'll try to be brief. First off, on the follow-up to that market share one. Is your expectation when you talk about market potential...

Jeff, we're having a tough time hearing you. Is there a chance you can get closer to your mic?

Is that better?

Yes, it is. Thank you.

Sorry, so follow-up to the market share question a minute ago. When you talk about market potential, is your expectation that your market share, especially in the U.S. will grow beyond the current 30% to 35%?

Yes. We would expect that would be generally maintained.

Okay. And the Slide 13, the market penetration strategy. Just to clarify what I heard earlier, did you say, Darren, that 20% to 25% of trucks today service core markets?

Yes. 20% to 25% of the trucks today service the extension markets. The balance, the 75% to 80% service. Yes, service the core and the strategic markets.

Okay. And so how do we reconcile, especially on the extension side, some of the comments from last year. Previously, you talked about having a presence or exposure to about 80 MSAs in the U.S. The reference in this slide is to 54. How do we reconcile those 2 numbers? And then how do we think about the MSA context within core and strategic markets?

Yes, good question. I think that when you look at all of those numbers on that slide, they're additive. So the entire MSA market in North America is around 380 MSAs. And that we hold 54 of those in the extension market, 29 of those in the core market and 8 of those and what we are categorizing is the strategic market. So all of those need to be added together to get to all of the MSAs that we're servicing in the market to reconcile to what we said last year.

Okay. So conceptually, last year, you had exposure to 80 MSAs. This year, you would have exposure to another 10 to 15 on top of that. Is that a correct interpretation?

That's correct. Yes, that's actual.

Okay. And then on the manufacturing...

Sorry, Jeff. I do want to make the point that not all MSAs are created equal and that's the intention of our market penetration strategy is the opportunity set in 1 MSA might be 15x that or, I guess, if you look at the extension and the growth -- or the strategic market, the growth opportunity in an MSA that would follow to the strategic market is 5x more opportunity than you would have in your extension market.

Is the company still thinking about the markets and customers in the context of strategic accounts?

Yes. That's certainly part of our sales and marketing approach.

And so last year, the comment was that about 30% of revenue was being derived from strategic accounts. Has that ratio changed much?

I don't have the latest review that we did on that. That's just something we look at from time to time. But I would imagine that it has not changed materially, Jeff.

Okay. And just a couple of clarifications on the fleet retirement and manufacturing side. So in the past, you've talked about the ability to potentially smooth out the retirement cycle for the units. What is your thinking today in the context of the numbers that you put on to Slide 18?

Yes. Well, I mean, as you know, each retirement decision is an individual truck by truck decision. So that will be different than just taking a 10-year life factor. And it really depends on where the truck has been used, has it been rattling up and down mountains and off-road or has it been in a city. Those type of factors certainly come into play there. So we'll always have some variability around the 10-year economic life. As we look forward, though, part of our new gen 5 design, which was the first Badger that was built for the bill of materials, interchangeable parts. Previously significant parts were custom fitted to each chassis with previous designs. We believe that there'll be opportunities for rebuild and opportunities for renovation of existing -- rehabilitation of existing trucks with our new design going forward. So as we get into 5 and more years out into the future, we think we're going to have better optionality in managing that part of the business. So we may -- knock on wood, may have some opportunities to squeeze more useful life out of that and out of each unit and also improve the total cost of ownership. So it's early, early days, but the reason we've been so excited about the new gen 5 design is -- this is all built into the design, and it's new for Badger. And it's going to pay benefits in the future. But again, that's in the future.

Is it reasonable to assume that you're trying to find ways or focused on ways to reduce the size of that 2023 and 2024 bar?

Well, we obviously are looking at that, but we don't want to push it out too much. Just to maybe smooth the capital out, if it costs us on repair and maintenance. And as you know, M&R on the fleet is our second biggest expense, around 6% to 7% of revenue. So we wouldn't want to try to smooth out capital and age the fleet out unnecessarily where it wasn't a good business trade-off with M&R expense. Part of your capital and your fleet is pay me now, pay me later. And we want to definitely be thoughtful about how those trade-offs are made. But the key though with the higher replacements from that 2013 and '14 model years, the key is we want to have enough manufacturing capability to not only meet those retirements, but also to supply growth trucks. The last thing we want is they have an Investor Day, where we're talking to everybody about the fact that we didn't have enough growth trucks and the market opportunities there because we're convinced it is.

And that ties into the last question for me. The arrow between current manufacturing capacity and required manufacturing capacity, conceptually, how big is that gap likely to need to be? Do you need to double what your throughput capacity is to meet your initiatives?

Well, we -- there's not a number on the arrow because we're looking to see how far we can push it. And how far we can go in Red Deer and then what we might need required with another facility, if another facility is at all required. So let's stay tuned on that one. I would anticipate ongoing questions on that. And as we move our plans along, we'll continue to provide updates to investors on that. No, great questions. You're living with us in Red Deer, Jeff.

At this time, there are no further questions. Gentlemen, do you have any closing remarks?

Yes. Thank you, Cree, and I'd like to thank everyone on behalf of both Darren and I, for your participation in this virtual session. For us, this session is a challenge. We really like to see our investors in person, so the virtual format is always a challenge. And also, Darren and I had to put on both a mask and a tie today. So that's almost the trifactor of Badger challenge for this year's Investor Day. But life goes on, business goes on. And the message for investors today is we continue to keep our head down and execute on our strategic initiatives and making this business stronger and more profitable. But we appreciate everyone's participation, interest and support of Badger. And please, everyone, be safe.

Thank you for joining today's presentation. You may now disconnect. Have a great day.