Black Diamond Group Limited (BDI) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Black Diamond Group conference call to discuss the acquisition of Vanguard Modular. [Operator Instructions] I will now turn the conference over to Mr. Jason Zhang, Director of Corporate Development. Sir, you may begin.

Thank you. Good afternoon, everyone, and welcome to Black Diamond's conference call and webcast to review our recently announced acquisition of Vanguard Modular Building Solutions. On the call with me today are Trevor Haynes, President and CEO; Toby Labrie, Executive Vice President and CFO; and Ed Redmond, COO of Modular Space Solutions. Our comments today may include forward-looking statements regarding Black Diamond's future results. We caution that these forward-looking statements are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations. Please refer to our press release dated November 30 as well as our annual quarterly filings on SEDAR for more information on forward-looking information and these risk factors. In terms of an agenda, Trevor Haynes will give a brief introduction of Vanguard, and we'll then step through a quick summary to highlight the strategic benefit to Black Diamond. Toby Labrie will then speak to some of the pro forma financials. And finally, Trevor will close the formal comments with a brief description of our overarching strategy and themes before opening it up for questions. We have uploaded a short presentation on our website at www.blackdiamondgroup.com in the Investor Centre under Presentations & Events. Please note that we may be referencing this presentation throughout prepared comments during the call. With that, I'll turn it over to Trevor Haynes.

Thank you, Jason. I'd like to start by saying that we are truly excited to welcome Vanguard and its team to the Black Diamond family. Throughout our due diligence process, it became obvious that Vanguard and its team consists of dedicated, high-performance individuals, and we're very much looking forward to working with this top-tier team as we continue to build our company. Over the last several years, we have been focused on growing and diversifying our rental business. We've made it a priority to grow our Modular Space Solutions, or MSS rental fleet by at least 10% per year with a longer-term goal to double our rental assets by 2024 from our 2019 levels. And to do this in a profitable, disciplined manner that create share value, while growing our stable base of recurring rental revenue. We think this acquisition very much aligns with these goals and accelerates the growth of our MSS business while also adding key team members and bolstering our exposure to the attractive education end market. As noted in the press release, we closed on this acquisition yesterday for a purchase price of USD 58.7 million plus USD 3 million of deferred receivables. We think Vanguard is a highly strategic fit for Black Diamond for a few reasons. First, Vanguard brings a very complementary asset base to our rental platform with a focus on education rentals. Second, as previously mentioned, Vanguard comes with a very impressive management team that, combined with our existing team, will propel this part of our platform to a next level of growth and performance. And third, this acquisition fits within our longer-term vision to grow, scale and diversify our business by meaningfully increasing our recurring rental revenue. I'll now expand further on these points, starting with Vanguard's complementary asset base and focus on the education and classroom rentals vertical, which makes up close to 3 quarters of the existing rental revenue of their portfolio. Vanguard has built a solid reputation in the geographies it serves and is among the market leaders in modular education services for both rental and sales applications. The company also has a very strong contracted revenue stream of over USD 23 million, which implies approximately 2 years worth of rental revenue under formal contract. But perhaps even more important than this data point is the fact that the average asset within the system stays on rent for over 7 years, and the average fixed contract is roughly 40 months, which we think is a testament to the stability shown throughout the core education customers. Our second point on the strategic fit for Black Diamond centers around the strong management team in place at Vanguard. We have provided management bios in our uploaded presentation. Substantially, all of the Vanguard team will stay on post-acquisition and effective immediately, Peter Eberle, who had been CEO of Vanguard will become the Senior Vice President of our U.S. Modular Space Solutions segment. Peter will report to Ted Redmond, our Chief Operating Officer of Modular Space Solutions business unit, and will have direct responsibility for the growth of our U.S. MSS platform, which with this recent addition, has grown to 4,220 rental units and have meaningful reach throughout the eastern and southeastern U.S. through the Gulf Coast and into Texas. Finally, our last point on strategic fit centers around a theme that the team here has been focused on for some time. We continue to focus on growing and expanding our diversified MSS rental platform throughout North America and specifically within the U.S. market. Following this deal, our MSS segment grows to 8,856 rental units, which represents approximately 5.1 million square feet of rentable space. Pro forma, our MSS segment revenue is over $104 million throughout the first 9 months of this year, and pro forma EBITDA is roughly $28.4 million over the first 9 months of 2020. In terms of diversifying the overall Black Diamond platform, our revenue makeup on a post-acquisition basis now shifts considerably with education making up over 21% of our consolidated revenue, up from 7% previously. On the rental revenue side, over 2/3 of Black Diamond's consolidated rental revenue will be generated through the MSS segment. Overall, we think the addition of Vanguard accelerates our goal to profitably double our recurring rental revenue-focused MSS business and provides Black Diamond shareholders with a stable and growing cash flow stream. With that, I'll turn it over to our CFO, Toby Labrie who will give a bit more information on Vanguard's financials, how we funded the deal and the pro forma impact to Black Diamond. Toby?

Thanks, Trevor. Vanguard has a long track record of strong financial results that we believe will enhance our goal of generating strong and long-term returns for our shareholders. On a pro forma basis, Vanguard would have contributed $41.7 million of revenue and $9 million of EBITDA to our MSS business for the first 9 months of 2020. Growing a core part of Black Diamond's overall platform, the revenue split for the company will also move to over 60% MSS compared to our previous split of roughly 50-50 between MSS and WFS or Workforce Solutions. In terms of geographic revenue split, our U.S. revenue moves to over 50% compared with approximately 30% previously. The USD 61.7 million purchase price consists of USD 58.7 million for the base business plus USD 3 million for deferred receivables. These receivables represent a longer-term stream of contracted cash flows that are not part of normal working capital to operate the business, and therefore, we have valued them separately from the recurring business operations. We have funded the acquisition of Vanguard through USD 50 million of cash, USD 8.7 million of preferred shares and USD 3 million of common shares. The USD 50 million of cash has been drawn from our asset-based credit facility that has recently been expanded from CAD 200 million to CAD 300 million. Additionally, Vanguard's high-quality fleet will be added to the borrowing base for this line, allowing us to expand the headroom we have available under this flexible, cost-effective source of liquidity. We note that as part of the facility expansion process, Vanguard's fleet underwent an independent appraisal with the resulting net orderly liquidation value of approximately USD 58 million, which supports our borrowing base of $255 million under the credit facility at close. This provides us with over $70 million of liquidity at close. As we've said in the past, we believe the ABL facility is an ideal funding mechanism to enable us to continue executing on our capital deployment strategy while also allowing us the flexibility to acquire strong businesses such as Vanguard. The common and preferred shares have been issued to the previous majority owners of Vanguard. The preferred shares are treated as equity on our balance sheet with key features being that they are fully redeemable at Black Diamond's option and are expected to pay a 7% dividend for the first 2 years, rising by 1% per year thereafter. With debt drawn to fund the acquisition, pro forma debt-to-EBITDA at September 30 increases to 3.6x. While our leverage position remains comfortably within asset coverage ratios, we expect debt-to-EBITDA will decline back to our target range of 2 to 3x within 12 to 18 months as we direct some free cash flow to debt repayment in the coming quarters. To echo Trevor's comments earlier, we're extremely excited to be partnering with the team at Vanguard, and we believe our combined MSS business is very well positioned for future growth. I'd now like to turn it back to Trevor for some closing comments.

Thank you, Toby. I'd like to close with a brief overview of what I believe shareholders are getting with an investment in our shares today. The acquisition of Vanguard greatly accelerates our longer-term goal to scale and diversify through our MSS business and therefore, is a meaningful step towards that goal. Within our Workforce Solutions segment, we continue to believe there is significant untapped operating leverage. We own one of the largest rental fleets of modular workforce accommodation assets in North America. And while this asset class remains underutilized, we have seen an improvement in parts of this business. This includes a recently awarded contract for a pipeline expansion project, which we announced in our last quarterly release, increasing activity related to mining projects in Eastern Canada, as well as our recently announced Letter of Award with Goldboro LNG of the east coast of Nova Scotia, which would potentially be one of the largest projects our company has ever worked on and would absorb substantially all of our excess fleet capacity. Our business in Australia also continues to flourish, and we believe there are enticing opportunities there, both organic and inorganic. Last, but certainly not least, we are very encouraged with the momentum that we have seen within our online digital platform, LodgeLink. Even in the midst of pandemic-related travel restrictions in the most recently reported third quarter, we continue to set daily record booking volumes, while we continue to grow our customer and supplier base also in the U.S. We think 2021 could be very well a pivotable year for LodgeLink and are excited to share more as we progress through next year. So as I characterized on our investor update while in the summer, I think that as a shareholder, you're ultimately receiving a steadily growing recurring rental revenue platform through our MSS business, an attractive option value on underutilized assets through our Workforce Solutions business and further untapped alpha on what we view to be a disrupted digital booking platform for essential crew accommodations in LodgeLink. Before concluding my prepared remarks, I'd like to just close by once again welcoming our new colleagues and team members from Vanguard. I know I speak for everyone here at Black Diamond, when I say that we're very much looking forward to seeing what the combined MSS platform can achieve going forward. And with that, operator, we'd like to open up the call for questions, please.

[Operator Instructions] We have a question from John Gibson of BMO Capital Markets.

Congrats on the acquisition, guys.

Thanks, John.

Thanks, John.

First one from me. It looks like utilization on the acquired MSS fleet is above 80%, and this compares to utilization on your broader MSS fleet in the 70% range. I'm just wondering, can you explain the delta between utilization levels? Is it more end market related? Or do you think you could maybe realize some incremental torque from your existing platform?

It's a great question. And there's a couple of aspects to that answer. We see some differences in utilization by region. Certainly, the Canadian Prairies is one area that we've had some weakness versus our Britco platform on the West Coast or our BOXX platform in Ontario, which are both very strong. And we've also seen some variance in our U.S. marketplaces. But with regard to the opportunity of blending higher, the utilization in the combined U.S. platform, we feel that, that is a likelihood, in that many of the states that we're operating in are contiguous, and the assets are tagged to be able to operate in those states. And so we can pull any excess assets from either fleet through the sales channels of the business. But I'll ask Ted Redmond to also comment.

Thanks, Trevor. Just to build on that, on the U.S. side, we're going to have an extensive combined sales force. And we think that they'll be able to cross-sell the assets from the 2 businesses. We have also, in some of the markets, where we have lower utilizations, we have refer programs going on to take some of the older assets and make them more rentable at higher rental rates through the refer program. So that's been ongoing, and we've seen increasing utilization throughout 2020 as a result of that.

And John, this is Toby here. I would just add that one of the other differences that we see on the Vanguard platform is that it is over 70% education based. And as we discussed, tends to have a quite long contracting profile. And so with that, you see less assets turning in and out. And therefore, we're able to maintain a higher utilization on average over time.

Okay. Great. Appreciate that. Second with me, just more broader -- you talked about the MSS landscape, particularly in the U.S. How fragmented in the industry is it -- or in other words, are there additional opportunities that you could look at down the road as well?