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

Hello, and welcome to today's Badger Daylighting's 2021 Investor Day Presentation. My name is Shelby, and I'll be your event specialist today. Please note that today's presentation is being recorded. If you have joined only by the online webcast, please note a Chrome browser is best to use for this webcast. If you are unable to hear my voice loud and clear through your computer, please adjust the volume on your speakers now. You will be able to view the live video feed from the presenter's location in the panel on the left, and a slide presentation will be in the panel to your right. You can use your mouse to adjust the size and location of these panels to your preference. If you have any technical issues during the webcast, first try refreshing your browser by pressing F5 on your keyboard. If that does not resolve the issue, refer to your reminder e-mail you received earlier for additional troubleshooting tips. A copy of the 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.

Good morning, and welcome, everyone, to Badger's investor update. We know the timing this spring is a little bit different than we've done in the past, but we wanted to provide investors with an update on our legal structure, our company branding and the updates that we're making, aligned with our very exciting strategic initiatives that we continue to work on. As you may have seen in our management information circular that posted now on SEDAR, we're aligning the company name, ticker and the legal structure with our strategy. We believe the name Badger Infrastructure Solutions Ltd. better describes the work we do in the company that Badger has become, as North America's leader in nondestructive excavation and related services for an increasingly wide range of our customers' critical infrastructure construction, expansion and maintenance. Before we begin, we'll remind everyone that the statements made during today's presentation regarding our expectations or predictions for the future are forward-looking statements. In fact, all statements made today, which are not statements of historical facts, are 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 risks and uncertainties, and undue reliance should not be placed on them as the actual results may differ materially from those expressed or implied. For more information about material assumptions, risks and uncertainties we believe may be relevant to forward-looking statements, please refer to our annual management discussion and analysis for the period ended December 31, 2020, which is available on our website and also on SEDAR. So first, let's have a bit of a safety share. As everyone knows, safety is at the heart of everything Badger does. We're the largest provider of nondestructive excavation services in North America, as I said, to a broad range of essential end use infrastructure segment. Nondestructive excavation is still in the early stages of adoption, especially in the U.S. There are many advantages of nondisruptive excavation, and many people are still not aware of the risk of damage to infrastructure, while it's being worked on and exposed for construction repair and maintenance. The biggest advantage of nondestructive excavation is the safety benefits that it provides. Nondestructive excavation virtually eliminates the risk of a line strike when working on or around critical underground infrastructure. Line strikes can create safety hazards for the workers on job site and damage the infrastructure underground; can result in serious interruptions to critical services and safety habits also to the general public. Recent industry studies indicate that less than half of excavation contractors utilize some form of locating, which we call daylighting, to identify potential hazards prior the digging. The Badger nondestructive excavation system, as I said, virtually eliminates the opportunity for damage to these utilities, therefore, avoiding these certain interruptions and any costly repairs. We'd like to begin today's business discussion with Badger's historical growth and activities in the recent years that we've made and continue to make to position the company for future long-term growth. As North America's largest provider of nondisruptive excavation, we've had significant network expansion and revenue growth over the past decade. We've grown the fleet and branch footprint by almost 4x in the last 10 years and achieved 10-year revenue of compound annual growth of 15%. The company's business model is strong, both in good times and in bad. We managed well through the oil and gas downturn in 2015 and 2016 and have managed very well through the recent COVID recession. We've expanded our end use market exposure to include a broad range of utility, construction and industrial segments. This expanded end-use market exposure has supported 23% compound annual growth in the U.S. business since 2010. We estimate that Badger has approximately a 20% to 25% share of the truck-mounted hydrovac fleet in Canada and approximately a 30% to 35% share in the U.S. Our scale of operations provide value to our customers in the day-to-day service. Our objective is to always have a truck when a customer needs one. Badger's operating scale also supports expense management, continuation of good margins and asset utilization. It's always important to note that Badger has historically and continues to manage for the long term. Our strategy targets the long-term market opportunity that we see and also targets internal improvements for operating and [ footprint ] performance and returns on capital. Badger has repositioned the business with a wide range of infrastructure end use segments over the last 10 years. In 2010, about 45% of the business is weighted to the oil and gas segment. Through the energy downturn in 2015 and '16, Badger repositioned its fleet from a largely focused oil and gas operation to a wide range of critical infrastructure construction, expansion and maintenance needs. Today, we have a diverse and strong customer relationships across these segments, and we continue to leverage these relationships and supported growth. Today, oil and gas exploration and production represents about 4% of our consolidated revenue. The pipeline transportation segment represents 9%, and related facilities represent 6%. These segments continue to be important to us, and we have a very strong operations presence in those geographic markets that are energy-focused. However, the value of nondisruptive excavation has allowed us to build relationships far beyond our background in our history in oil and gas to a wide range of other very attractive customer segments. Badger has historically invested in the business to support long-term growth. In 2019, we implemented a new ERP system with what we call our Common Business Platform. This system has worked very well with a lot of improved visibility into the operations. This visibility has been especially valuable in managing through the 2020 COVID-related volume downtrend. In 2020, we established a shared services group for both finance and human resources that you've heard us talk about in previous calls. This group provides the base for G&A, which we believe can support up to $1 billion in revenue with very limited cost increases. In 2020, we also stood up a strong IT organization, and we continue to advance information and the flow of information and related technology to our operations that we gained in putting the base in place through our ERP implementation. In 2020, we also strengthened the manufacturing organization, and the team took great advantage of the downturn and the slowdown of the plant to streamline processes and has been able to increase capacity to in excess of 350 units a year. We're very pleased with that progress. In 2021, we're strengthening Badger's sales and marketing organization to leverage our existing strong operations model and to execute on continued market penetration. We're optimizing our legal and tax structure for efficiencies. We're also establishing an internal transportation company, which allows for more flexibility in moving our fleet between our operating jurisdictions. So in summary, we continue to position Badger to safely capture the significant growth opportunity in nondestructive excavation and related services for a wide range of our customers' critical infrastructure. These are other strategic milestones that we've set for the next 3 to 5 years. Badger is focused on growth in revenue, margin and return on investment. We've had excellent historical progress against the strategic milestones, which we first established in late 2017. Our milestones for the next 3 to 5 years are: number one, to double the U.S. business yet again within 3 to 5 years, tracking from 2020 as the base; to achieve an average adjusted EBITDA growth of 15% over the 3 to 5 years; continuing to target adjusted EBITDA margin in the 28% to 29% range, and I have to say, we were very pleased with the margin results that we achieved in the 2020 recession year even with the volume decline; and finally, our fourth milestone is to continue to achieve revenue per truck per month above the $30,000 level, which, as you know, provides excellent returns of capital over the life of our Badgers. So with that, I'll hand it over to Darren to talk more about where we're going in achieving these milestones.

Thanks, Paul. Good morning, everyone, and I look forward to the day that we can see you in person as opposed to looking at a camera. When Paul went through the time line, I'm reminded of, first, of how much work we've done, but more importantly, how well the company is positioned for growth and really, really executed on Paul's vision. We've done a tremendous amount of work of laying the foundation for us, upon which we want to build our growth platform. At the December Investor Day session, we talked a little bit about the market opportunity. [ I'm going to try to reiterate ] some of that conversation that we had back in December this morning as well. But we've been talking quite a bit about operating leverage. And I want to spend a little bit of time in the next few slides talking about how we see that operating leverage [ timely ] to our strategic plan to affect the growth plan and the strategic milestones [indiscernible]. So as I mentioned, maybe to spend a little bit of time to refresh what we talked about in December, we think the market opportunity that's available to us [ is business ]. Just to unpack a little bit of the numbers that you're seeing on this slide, we went through the effort of comparing what we believe to be mature markets in Canada, that be in Toronto, Calgary and Edmonton, determine where it is at this point in time and market conditions that are appropriate for it to apply that to the broader market to give us an indication for the market opportunity that's available to us. One caveat to that, I will say, is that we don't think the growth opportunity in Canada has [ soften. ] There's still ability for us to find additional uses for nondestructive excavation. But to a point in time for us [ to mention ] the size of the market, that's what we chose. And we chose those markets for 3 different reasons: number one, they are mature markets, markets where the adoption is reduced with hydrovac is still accepted; number two, we operated in this market for a fair period of time; and number three, we also think there's a fair competition. So it's representative of where the markets look for the future. The other reason why we chose those markets is they have human characteristics. If you look at how Calgary, for example, it's an [ emerging ] market. You would have characteristics that are similar to communities play in Minneapolis, Kansas City, Indianapolis in the United States. We chose Toronto because it's an urban-dense market, similar to characteristics of a marketplace L.A. or New York or Chicago in the United States. And Edmonton was chosen because they have an industrial sense to it. Similar to markets like Houston, which is probably a very big comparative, but also markets like San Jose and Portland that have industrial events as well, although not necessarily all [indiscernible]. And to do all of that work, we estimate that the market potential growth at 7 to 9x over the next period of time. It is the next step of actually putting [ 2 ] new market penetration strategies, which will deeper dive into those 10 markets. And what we found is the growth opportunity is different. And perhaps I should spend a little bit of time talking about that market penetration strategy that relates to the market penetration book that we did. What we found, broadly speaking, is that there's 3 opportunities of growth in the market segmentation. Number one is what we call the extension markets. Those are markets where it's more akin to how we created the business in the past. The second market is the core markets, and the third market is the strategic markets. And I'll step through each of those in turn. So the extension market is how we've grown the business previously. So what we would typically do is build a branch around a customer relationship and grow, broaden, deepen that relationship and grow the business. And typically, that would operate within an economic column business of between [ forward kick-outs ]. What we found is that outside of that economic column business, we've been picking up business. And as we picked up business, we created a critical mass in which we set and established the next branch. [ And on this and on this and on ]. If the market penetration analysis that we did suggest that the growth opportunity in that segment is about 3x, although it provides the biggest geography growth, it doesn't necessarily translate into the biggest financial growth. It also comes with the highest cost of having established a branch network. That being said, there is still a need for growth opportunity. And quite frankly, we're very, very excellent [indiscernible] still a core component of doing business. The second market is the core market. And like I said, that's a market that is probably more into Calgary, Minneapolis, Indianapolis, Kansas City. It's a very, very good market in which we already have presence in most of those markets. So what we found is the presence in these markets is fairly narrow in our [indiscernible]. We did talk about this a little bit in our session back in December, so I won't get into great detail. But we feel that this is an opportunity that will really deepen and broaden the customer relationships in this market. And the growth opportunity that we see in those markets is 5x. The strategic market really is the more challenging market. The growth opportunity is immense. I almost think of it as the strategic market is an aggregation of a bunch of core markets put together, which comes with its own opportunities and challenges. The opportunity is that it's a small geographic space. There's a lot of opportunity for business. The challenge is that there's a logistics problem. There's transportation problems. There's disposition challenges. And there's also potentially regulatory environmental challenges, all of which we believe that we're capturing through our operating model. So the summary really on this slide is that we've got a tremendous amount of growth opportunity available to us, but the growth is different. And you've heard us talk in the last couple of months about operating leverage. And I suspect that many of you hear that from management teams from companies all over the place. But what does operating leverage mean for Badger? And what we tried to represent on this slide is how we have run the business in the past very successfully and the changes in which we think we need to make to the operating model to be able to design the business even more successful in the future. So on the left-hand side of the slide, you'll see that we've grown the business from a regional focus. And as a result, we've had well site [ Western and Eastern ] around a branch for the geography. And as a result, we've duplicated those resources time and time again. And I think I appreciate that the area manager is trying to execute on the business and trying to execute on the growth strategy, and that is a very challenging balancing act to have to achieve. On the right-hand side of the page is the operating model that we're working for towards. And Paul touched on it in some of his opening comments. It's really -- how do we lock in our fixed cost to be able to push more volume to our system, so that we're more scalable in a cost-effective way. And perhaps maybe what I'll do is I'll work through the bottom-up on the right-hand side of the slide. So as Paul mentioned, we established a shared services operation in 2020. And the goal of that is to be the back office of sustainability to push as much volume as we possibly can through [indiscernible]. And as Paul mentioned, we believe that roughly $40 million [ in G&A run rate ] will support revenue of up to [ $70 million ]. The middle component is the Common Business Platform, and this is -- it's really the power of the ERP system that Paul had a sense and in place over the last couple of years. The ERP system comes [indiscernible] to have standardization across the organization without necessarily having to standard or consolidate everything. Said a little bit differently, it allows us to fill [indiscernible] decentralized structure of the organization, but standardization [indiscernible] operate. And then above that, you'll see that we brought each of the purified roles of the company: operations, fleet, sales and marketing and manufacturing, and I'll touch on each of those going forward. What we have there is that each of those leaders in which Paul has staff leaders for each of those pillars has a responsibility in respect to [indiscernible], allowing us all to move forward quicker [indiscernible] collectively together. Structure model strategy. And so look, [indiscernible] that we were proposing some legal changes to the organization and has spent a little bit of time talking about here -- talking about it here, but our full intent is that we've got pretty substantial businesses within Badger's core business in how do we ensure that there is accountability and responsibility in maximizing the value of each of those core businesses. Let me continue on the theme of core businesses. So if you look at fleet management, that group manages the fleet to the book value of nearly $400 million. Manufacturing, as Paul mentioned, we can -- we have a manufacturing capability of 350 units plus a year based upon our typical cost of manufacturing. That's a $100 million to $200 million of revenue [ a year ]. And then operation itself, as we talked about the growth opportunity, that's a growth opportunity of 7 to 9x market opportunity in the near future. So each of those individually becomes pretty substantial businesses, and each of them have their own opportunities there. So from a legal structure perspective, what we're doing is we're purifying the responsibilities and the reporting, so that there is an independent view of each of those businesses to maximize not only the individual but the collective value of the organization. And that's the legal structure, but you will see that we've established -- or in the process of establishing infrastructure in each one of those pillars. We've also discovered that not only [indiscernible] on the business, but we've discovered that there's some advantages from the tax savings perspective. On the right-hand side of the slide are some of the tax management initiatives that we structured. As we're almost completing -- completed the implementation of our international tax structure, I will say that despite the legal -- or sorry, the recent announcements, both in the United States and Canada in tax restructuring, our international tax structure still holds true. We're also looking at purifying [ community ] manufacturing with a legal -- 1 legal entity in Alberta as opposed to a limited partnership across Canada, the changes at the tax regime. As Paul mentioned in his opening comments, looking at setting out an internal [indiscernible] transportation company, again, that's $400 million of book value assets that we're managing, and there's a way that we can manage that in the way that we have for velocity and [indiscernible] that fleet. And then finally, with the IT department and the Oracle ERP, as Paul mentioned, we now have the IT and, of course, power to be able to meet that work internally without having to go external. So we do anticipate there will be a onetime cost of $2 million to $3 million this year with an annual tax savings of roughly $6 million to $7 million going forward. You'll also notice in our [ MIT ] that, as Paul mentioned, we're looking at changing the legal name of the organization but also aligning our branding with that legally. And on this slide, what we're seeing is some of the brand names associated with some of those changes. The biggest of which, I would say, is really purifying back the Badgers as an infrastructure company, not just a daylighting company. And in our core operations, not only they have the operations, but we continue to provide the daylighting services and also manufacturing fleet management. The other piece is that we preserve the ticker BDGI. And as of -- I believe it's around May 11, assuming that everything is approved by shareholders, we'll start trading with that ticker. I'll finish my session with a couple of comments. I think the management team, the legacy management team at Badger has done a tremendous job of positioning Badger where we are today. And I think Paul's vision for us to be able to establish the platforms for those really positions us to stoutly go after the market opportunity to scale this, but equally important, to unlock and achieve those strategic milestones that Paul commented at the beginning. I'll finish my comments by saying I'm really proud to be a part of Badger, and really looking forward to the future of the business. Thanks, Paul. Over to you.

Okay. Thanks, Darren. As everyone can see there and love strategy and market segmentation. So there it is, Badger has strong business fundamentals and significant market opportunity, lots of runway for nondestructive excavation in North America. We have a good portfolio of strategic initiatives. They're very solid. We continue to execute on them, and we're now aligning our legal structure to facilitate these initiatives and be even more efficient. We're focused on further improving how we penetrate our markets, strengthening the team to support market penetration and long-term growth, focusing on fleet utilization and obviously, focusing on return on capital. And we also want to make sure we also have the manufacturing capabilities to support growth in any stage of the cycle and at any stage of growth. We continue to work hard on execution. And that's it. That really summarizes the Badger investment opportunity. As Badgers -- as Darren has articulated, the team is very committed to the strategy. And our view is that Badger Infrastructure Solutions really is a better name for what Badger is all about, what the opportunity is all about and what the future is all about with Badger. So with that, why don't we move on, Shelby, to the Q&A section of today's call?

[Operator Instructions] Your first question is from Yuri Lynk of Canaccord.

Paul, does the new -- can you just talk to me a bit about the new strategy and how that changes or doesn't change the P&L responsibility at the branch level that I think worked so well for Badger in the past? Does that change at all under this new strategy?

No. We don't see that changing at all. We see continued direct linkage between the P&L and the operations team. And that's something that is legacy Badger. It's very strong. And as you know, the direct linkage of pretax earnings, which includes the charge of capital that drives the branch bonus model and the branch bonus pool, is a real strong part of our culture. So that continues, and I struggle with ever seeing changing that. It's worked great for a long time.

But are you -- with some of these changes, are you not taking some of the levers out of the hands of some of these branch managers and their ability to move fleet as they wish, respond and hire people, stuff like that? It seems like that's going to be centralized. And on the surface, would it not make you a little bit less nimble than you were before?

Yes. It's actually -- Yuri, I see it actually being the opposite of that. And let me give some background on that. The visibility we've gained with the ERP system and our access industry utilization right down to the individual truck level has increased extraordinarily with the ERP system. And prior to that, we have limited visibility, more on an overall fleet at a branch level perspective as opposed to individual units. So we can see a lot better into what's happening on each unit than we have in the past. And that really, for me, supports more nimbleness. So the organization understands where there's underutilized, they have that. And it could be underutilized where we don't have the business in a branch, or it could be underutilized where we don't have an operator. So in either of those scenarios, there's management action and follow-up that can be facilitated by that information. So we've been much more nimble. And that's the major driver behind why you heard us talking more about focusing on utilization once we came out of the ERP implementation in early 2020. But we think there's an extraordinary amount of opportunities there. The fleet-leasing company that Darren talked about is not necessarily how we manage the fleet day-to-day. It's our ability as a company to move equipment between the areas. And what it does, and Darren can spend more time on it, I would imagine, we'll probably have some more [ focus ] on this. So you might as well cover it. But what it allows us to do is to move fleet across operating jurisdictions with a minimum of tax friction and regulation friction when it comes to registration of vehicles. So it's a major improvement actually in our ability to move fleet and be nimble. So from my perspective, these are just tools that we have available to us. And they really leverage our traditional strong focus in our operations on fleet utilization.

Probably, the only thing I would add to that on the operating model side of things is that we're not looking, Yuri, to take any responsibility away from the area managers. What we're trying to do is take the administration away from the area managers, but really freeing them up to be value creative for the business with the [indiscernible] being neared in paperwork and profit.

When we started the Common Business Platform initiative back in 2018, it's hard to believe it was a 2-year process, but one of our targets was to free up time for our area managers. And we thought there might have been about a date that we could free up. And the work that we've done in 2020 where we have specific initiatives coming out of the ERP system implementation to address those very opportunities is actually well underway and being implemented. So we're pleased with the progress that's been made in that regard since we went off. Actually, we finished going live with ERP at the beginning of January last year. We're pleased with that side. So it's got seems to be working quite well.

Okay. It all makes sense. I was hoping -- if I could just sneak one quick one in, and I'll get back in the queue. Just given that you're setting up a manufacturing vertical, if you will, does that signal in any way that selling your trucks to third-parties is on the table or no?

Yes. We will take a look at all sorts of ways to service the market for nondestructive excavation. It certainly -- that structure would certainly facilitate that. Those type of opportunities would not have been possible with our previous structure. And -- but I don't ever foresee a scenario where we would actually outright sell Badgers. So it's early days. But the main driver in the manufacturing and establishing the manufacturing vertical is really tax efficiencies for the first step, and we'll continue to evaluate opportunities as we go forward. It's early days in that area.

[Operator Instructions] Your next question is from Jonathan Lamers of BMO Capital markets.

A follow-up question on tax. Do you expect the impact to the income statement to also be $6 million to $7 million? And a follow-on, do you have an estimated income tax rate for 2021 and 2022 or a range that's reasonable?

Yes. So to your first question, we -- the $6 million to $7 million was cash tax savings. Not all of that would hit the P&L. So the majority of the advantages that we get through the internal lease structure, as Paul mentioned, is the optimization of sales tax of the post-income tax. The tower structure or the international finance structure will hit the P&L, and that is a portion of that $6 million to $7 million. From a tax planning perspective or a modeling perspective, I think the effective tax rate that we've been saying to The Street is around 27%. Until there's a little bit more water under the bridge with regards to the Canadian tax proposal that came out in the budget last week and the Biden tax proposal that came out I think [ weeks ] before that, probably we want to take a little bit more time before we start giving tax guidance for 2020 -- 2022 and beyond. But for this year, we anticipate that the effective tax rate that we've had previously will sustain at that.

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

Certainly. Thank you, Shelby. We appreciate everyone's participation today. This is a little bit different having a spring update at Badger, but our strategy is really driving our change in structure. And we wanted our investors to be fully apprised and up to speed with what we have going on. The changes we're making reflect our excitement with the opportunities and the growth that we see continuing in this business. And we're now going to get back to execution. So thanks for your participation this morning.

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