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BDIMF Black Diamond

Participants
Jason Zhang Director, Investor Relations
Trevor Haynes Chief Executive Officer
Toby Labrie Chief Financial Officer
Ted Redmond Chief Operating Officer, Modular Space Solutions
Mike Ridley Chief Operating Officer, Workforce Solutions
Patrick Melanson Chief Investment Officer
John Gibson BMO Capital Markets
Ryan Bass Raymond James
Call transcript
Operator

Thank you for standing by. This is the conference operator. Welcome to Black Diamond’s Second Quarter 2021 Conference Call.

As a reminder, all participants are in listen-only mode and the conference call is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Jason Zhang, Director, Investor Relations. Please go ahead, sir.

Jason Zhang

Thank you. Good morning and thank you for attending Black Diamond’s second quarter 2021 results conference call. With us on the call today is our CEO, Trevor Haynes and CFO, Toby Labrie.

We are also joined today by COO, Modular Space Solutions, Ted Redmond and COO, Workforce Solutions, Mike Ridley as well as CIO, Patrick Melanson.

Our comments today may include forward-looking statements regarding Black Diamond’s future results. We caution that these forward-looking statements are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations. Management may also make reference to non-GAAP financial measures in today’s call such as adjusted EBITDA or net debt.

For more information on these terms, please review the sections of Black Diamond’s second quarter 2021 management’s discussion and analysis entitled forward-looking statements, risks and uncertainties and non-GAAP measures.

This quarter’s MD&A, news release and financial statements can be found on the company’s website at www.blackdiamondgroup.com as well as on the SEDAR website. Dollar amounts discussed in today’s call are expressed in Canadian dollars, unless noted otherwise and are generally rounded. I will now turn the call over to Trevor Haynes to review the quarter.

Trevor Haynes

Thank you, Jason. Good morning, everyone and thank you for joining us to discuss our second quarter 2021 results. We believe that throughout the second quarter, the company has continued to build on the momentum we have seen so far in 2021 and we feel well positioned heading into the second half of the year and beyond as we continue to grow and diversify our modular building rental businesses and scale our B2B travel technology ecosystem. A key highlight in the quarter is consolidated rental revenue of $23.3 million, which is a 61% increase over the comparative quarter. This is our core and most profitable revenue stream. Contributing to this robust growth was another record quarter for rental revenue in our MSS division and a strong recovery in WFS stemming from a number of larger cap rental projects coming on stream. The company also showed continued progress in scaling the LodgeLink platform, with significant progress in penetration of the U.S. market, where LodgeLink grew gross revenue 650% versus a comparative quarter. In the MSS segment, rental revenue grew to $14.6 million or by 60% from the comparative quarter, a sixth consecutive quarterly record.

Our outlook for MSS is positive as utilization remains very high, rental rates are increasing and organic fleet additions are expanding rental capacity. Bidding activity and backlog for MSS sales, which we view as a recurring revenue stream, remains strong throughout our diversified end markets, with particular strength in British Columbia, Ontario and the Eastern U.S. regions.

As most of those listening are likely aware, we closed on the acquisition of Vanguard in – Vanguard Modular in November of 2020. Since then, Vanguard’s operating performance has been strong and is trending ahead of our initial expectations as we are seeing a very active education market in Eastern and Southeastern U.S. Integration has continued and synergies announced at the time of the deal approximately $500,000 per year are on track to be realized as we exit 2021.

Our WFS business unit is showing further signs of recovery and benefiting from our efforts to diversify by end-market and geography. WFS rental revenue of $8.6 million grew 62% from the comparative quarter as utilization has recovered to pre-pandemic levels on the back of previously announced contracts in Australia and Canada, which are in support of infrastructure and mining-related projects.

As a result of these contracts, we expect continued improvement into the second half for WFS utilization and rental revenue.

As announced in October of 2020, the Mi’kmaq of Nova Scotia, Black Diamond Limited partnership received a letter of award to provide the Goldboro LNG project, with a turnkey accommodation solution for up to 5,000 workers.

We are aware that the Goldboro LNG project is being re evaluated, but remain well-positioned to meet any accommodation needs pertaining to the project as it undergoes further review. Larger pipeline camps for each TMX and Coastal GasLink are now fully on rental stream and showing increased occupancy, which we expect will continue. We remain optimistic on the continued growth of the LodgeLink platform, a digital marketplace offering that is bringing innovation to the crew travel industry. LodgeLink’s total room bookings grew 400% to 43,300 from Q2 2020.

While gross revenue grew 500% from the comparative quarter, U.S. gross revenue as mentioned was up 650% year-over-year and helped offset expected lower booking volumes from certain Canadian resource sectors or our sector customers within the quarter. At the end of the second quarter, LodgeLink had approximately 5,300 listed properties, representing roughly 500,000 rooms, servicing 580 distinct corporate customers.

Assuming pandemic-related travel restrictions continue to ease in the U.S. and Canada, we believe the platform is poised for ongoing growth as we continue to scale. We believe the positive quarterly and year-to-date financial performance of the company is a result of our strategies over the last several years to diversify our rental stream by customer, by industry and by geography. The company generated over $14 million of operating cash flow in the quarter. And based on our customer makeup and contracts in place, we believe the stability of this cash flow is as strong as ever, which should inform long-term value creation as we compound our returns and expand our fleets.

We expect the balance of the year will show strengthening results as we progress on our strategic objectives, growing and diversifying our businesses. I will now turn the call over to Toby for some further details on the first quarter financial results. Toby?

Toby Labrie

Thanks, Trevor. Total adjusted EBITDA for the quarter was $13.5 million, an increase of 36% from Q2 2020. There was no contribution from the Canadian Emergency Wage Subsidy in the quarter whereas contribution from the CEWS in the comparative quarter was $1.3 million. Adjusted EBITDA for MSS was $10.7 million, up 53% from the same quarter last year and total revenue of $37.1 million was up 69% from the comparative quarter. This is attributable to continued growth in rental revenue and the inclusion of Vanguard. Average rental rates in MSS were up 2% from the comparative quarter, but on a constant currency basis were up 8%, which has been driven by a healthy market activity across our platform. Adjusted EBITDA for Workforce Solutions was $6.2 million, up 13% from the same quarter last year. WFS revenue of $31.8 million was up 108% from the comparative quarter. This is attributable to a sharp rebound in lodging revenue, which was adversely affected by COVID-19 and the resulting pressure on resource markets in Q2 2020 as well as continued growth in rental and non-rental revenue. Total administrative costs for the quarter were $10.3 million, up 39% from the comparative quarter, primarily due to contribution from CEWS in the comparable quarter as well as an increase in personnel costs, including the addition of Vanguard personnel. Total administrative cost as a percentage of revenue of 15% was down from 20% in the comparative quarter. At the end of the quarter, net debt of $161 million was down from $172 million in Q4 2020. Excess borrowing capacity under the company’s asset-based credit facility increased to $99 million and the value of eligible rental inventory used to calculate the company’s borrowing base was approximately $290 million at the end of the quarter. The company exited the quarter with a net debt to adjusted EBITDA ratio of 3x, down from approximately 3.5x in December, 6 months following the Vanguard acquisition. Pace of de-leveraging is ahead of initial expectations owing to continued strength in a number of our markets. We believe this also highlights the strong free cash flow generation of our diversified rental platform and expect healthy market dynamics to continue into the second half of the year. With that, we would like to turn the call back over to the operator for questions.

Operator

Thank you. [Operator Instructions] The first question comes from John Gibson of BMO Capital Markets. Please go ahead.

John Gibson

Good morning, guys. Thanks for taking my call.

Just starting with utilization and MSS, I mean, I feel like I asked this every quarter, but just wondering how high it can go or do you see sort of mid-80s as being peak?

Trevor Haynes

Thanks, John and good morning.

We are concerned with how high utilization is running when we look at the average utilization in the low-80s.

If you look at specific markets, we are seeing utilizations up towards 90% and over 90%.

And so we have a mixed fleet facing local market. The risk is that we don’t have the building that the customer is looking for.

And so we become increasingly concerned about market share leakage. That being said, we have got a fairly healthy CapEx program underway and absorption is really strong.

So, we are continuing to expand capacity, but demand remains very strong. And perhaps Ted, you could add some color.

Ted Redmond

Thanks, Trevor. Yes, I agree with everything Trevor just said.

We also have a pretty active reefer program to get all of our units ready for rental and so this is – the high utilization is encouraging us to get every unit in rental-ready shape.

And so between that and the capital in the pipeline and the units on order in the pipeline, we are doing our best to meet customer demand. And I think for the most part, we are moving units around between branches and geographies the customer needs to.

So, I think it’s – we are increasing our like discipline and execution on the business to try to meet as many customer needs as we can and we think we are doing a pretty good job of that.

John Gibson

Great.

Second one for me sort of leading on the first one, is the high utilization really what’s driving some pricing increases in U.S. or is this a BD-specific thing or your competitors seeing it more broadly as well?

Trevor Haynes

We are seeing it in our peer comps specifically or especially in the U.S.

So, we think that our 8% year-over-year is perhaps marginally stronger than what we are seeing across the board, but thematically, it’s in line.

John Gibson

Thanks.

Turning to workforce, when you look at the – more than $15 million in contracts you have signed year-to-date, should most of them really start to hit results in Q3 and could you maybe give an average duration of these contracts?

Trevor Haynes

Yes.

We are quite pleased with the pace of contracting this year and the mobilization of cap equipment, specifically dorms and kitchens that haven’t worked for some time. And in the quarter, we did see some of the revenue related to positioning assets, which have rental rates following and still have some assets yet to come on rent, so all very good dynamics. With regard to contract coverage, etcetera, Mike Ridley, why don’t you provide some color there?

Mike Ridley

Sure.

I think as Trevor touched on, previously around Trans Mountain and Coastal GasLink, they continue and they are going to carry through to next year when we have some projects that are in the middle of getting transported and installed that will be commencing sort of at the back half of this year and into next year. And when you go over into Australia, we also have numerous projects that are commencing that will carry on for the balance of the year and into next year as well.

John Gibson

Got it. Thanks. Last one for me, what are you seeing in terms of M&A, particularly for the Modular Solutions segment? Obviously, we have seen some pretty big multiples for acquisitions in the space.

Just sort of wondering if the bid prices have come down or are you seeing the move even higher from here?

Trevor Haynes

Recent data points are indicating valuations for space rentals fleets have been increasing still.

So, we are seeing very strong multiples.

Some of these platforms are quite a bit bigger than what we would be targeting.

And so the question would be multiples paid by Brookfield, for example, in acquiring Modular Europe 260,000 units fleet, does that multiple applied targets we would be looking at, I would suggest not. But even in the mid-market size, multiples are trending high.

So, our targets are to aggregate smaller fleets, and we continue to believe that we can acquire accretively in that space. But there is no question that valuations are, I guess, is a double edged sword. And arguably, our business is quite valuable based on those multiples. But in terms of the organic side of our growth, our inorganic coupled with organic, we are going to have to look at aggregating some smaller platforms to ensure that we get the valuation bump, accretion, etcetera.

John Gibson

Got it. Thanks. I appreciate your responses. I will turn it back.

Trevor Haynes

Thanks John.

Operator

[Operator Instructions] The next question comes from Ryan Bass from Raymond James. Please go ahead.

Ryan Bass

Thanks. Good morning, guys. Thanks for taking my questions. Have you been I just think maybe on large length to start off, have you been able to leverage the grants that you have received, I guess, to attract or hire individuals from the tech space?

Trevor Haynes

Toby, do you want to take that?

Toby Labrie

Yes, sure.

So, the way that the OCIF agreement works is it’s tested on certain increments.

So, we haven’t quite hit the first increment to test yet.

So no, we have not yet received any funding there. But the agreement still remains in good standing and provides an opportunity for us to attract talent to Calgary to satisfy our growing technology development needs.

Ryan Bass

Okay, fair enough. Thanks. And then just again, on LodgeLink, when do you expect that part of the business to be EBITDA breakeven?

Trevor Haynes

We track closely the margins that we generate on existing business and looking for margin expansion, as far as net revenue from gross revenue.

And so, we are satisfied that the part of the business that we have built is profitable on a gross margin basis. The challenge for these technology platforms is the opportunity for growth requires continued investment, albeit in growth G&A, so to speak.

And so as we continue to add more resources for handling greater volume of customers and suppliers, and to build out the workflow software that sort of the core of the value proposition, we expect that we will continue to run negative EBITDA modestly for the next several quarters as we lean into the growth opportunities that we are seeing here.

Ryan Bass

Okay, it makes sense. And then just on the overall business, can we just get an update on CapEx and how the funds will be allocated this year?

Trevor Haynes

We have got a fairly healthy CapEx program. At the same time, we are very focused on bringing our debt within the range that we had set out which is between 2x and 3x. And we are quite pleased that we are accomplishing both with the business at this point in time.

So, our net CapEx range remains the same as we had set out and we have a good cadence of uptake and absorption of that capital with our primary focus around our MSS business in North America. And maybe Toby in terms of the numbers, etcetera, you can – I am not sure with my answer.

Toby Labrie

Sure.

So, with – our capital plan, as Trevor mentioned, as we have been focused on both growing the fleet, while deleveraging following the Vanguard acquisition, we have been most focused on our net CapEx target of $25 million to $30 million.

And so, we do expect to be coming in within that range.

However, with – we do have seen and expect to see continued healthy sales activity of existing fleet and so with that we are seeing the growth CapEx coming in, at target and potentially slightly above, where we are targeting at $35 million.

So, we expected that to continue to be allocated to the various business units as it has been primarily on growth at MSS. But also as we have put some projects out to work in workforce, we continue to allocate some capital to get assets in rental ready shape. And then finally, in LodgeLink, we have a modest amount of capital deployed there.

Ryan Bass

Okay, that’s it for me. Thanks.

Toby Labrie

Thank you.

Operator

There are no more questions from the phone lines. This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Trevor Haynes for any closing remarks.

Trevor Haynes

Thank you. Thank you everybody for listening today.

Just to sum up, where we are pleased with how our business is performing specifically the growth in rental revenue, and the particular characteristics around our rental stream strong utilization, increasing rental rates, strong absorption of our organic capital program. And then also very strong sales pipeline and backlog and continued growth around lodging.

So, our outlook for the remaining quarters of this year is positive as we believe these trends continue.

So, thank you for your interest in Black Diamond and hope everybody has a great day. Take care.

Operator

This concludes today’s conference call.

You may disconnect your lines. Thank you for participating and have a pleasant day.