Black Diamond Group Q2 2024 Earnings Call Transcript

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August 2, 2024

There are 6 speakers on the call.

Operator

Thank you for standing by. This is the conference operator. Welcome to Black Diamond's Second Quarter Results Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions.

Operator

I would now like to turn the conference over to Mr. Sean MacPherson, Investor Relations Specialist. Please go ahead.

Speaker 1

Good morning and thank you

Speaker 2

for joining Black Diamond Group's Q2 2024 results conference call. On the line with us today is Chief Executive Officer, Trevor Haynes and Chief Financial Officer, Toby LeBree as well as Chief Operating Officer of Modular Space Solutions, Ted Redmond Chief Operating Officer of Workforce Solutions, Mike Ridley and Chief Operating Officer of Logelin, Kevin Loke. Please be reminded that our discussions today may include forward looking statements regarding Black Diamond's future results and that such statements are subject to a number of risks and uncertainties. Actual financial and operational results may differ materially from these forward looking expectations. Management may also make reference to various non GAAP financial measures in today's call such as adjusted EBITDA or net debt.

Speaker 2

For more information on these terms and others, please review the sections of Black Diamond's Q2 2024 management discussion and analysis entitled Forward Looking Statements, Risks and Uncertainties and Non GAAP Financial Measures. This quarter's MD and A, financial statements and press release may be found on the company's website at www.blackdiamondgroup.com and also on the SEDAR Plus website at www.sedarplus. Ca. All dollar amounts discussed in today's call are expressed in Canadian dollars, unless noted otherwise, and may be rounded. I will now turn the call over to Trevor Haynes to review this quarter's operational highlights.

Speaker 2

Thank you, Sean. Good morning and thank you all for joining. I will provide a high level overview of operating results and recent records achieved by the company and then pass the call over to Sylvia Debris to provide additional financial highlights and commentary. Results for the quarter were strong with revenues of $95,500,000 and adjusted EBITDA of $27,900,000 up 5% and 24% respectively from the comparative quarter. Net profit of $7,500,000 and earnings per share of $0.12 are higher by 63% 50% respectively compared to Q2 2023.

Speaker 2

Management considers rental fleet operations and rental revenue to be Black Diamond's core business. The company generated a combined $35,300,000 of rental revenue in the quarter, essentially flat from prior year. Within the business units, MSS saw rental revenue grow by 6% from the comparative quarter to $22,200,000 which is offset by a 7% decline in the WFS rental revenue to 13,100,000 dollars due to the lower utilization following the completion of rental terms with 2 large pipeline construction camp projects late last year. Nonetheless, consolidated utilization at the end of the quarter was a solid 75.5% with MSS at 80.7% and WFS at 62.4% compared to 79.3%, 83.4% and 69.8% respectively in the comparative quarter. Average monthly rental rates increased 9% in MSS from the comparative quarter.

Speaker 2

WFS average rates continue to rise as well. Overall management believes that the company's utilization and average rental rate trends on a year over year and multi year basis are very healthy in the context of current and long term industry averages. Consolidated contracted future rental revenue that is the total amount of firm contracted rental revenue at the end of the quarter grew by 16% to $139,600,000 compared to $120,100,000 at the end of Q2 2023. We believe the MSS contracted future rental revenue increase of 26 percent to $107,700,000 from $85,400,000 to be a highlight as is the average rental duration increase to 58.7 months from 51.1 months. These are strong indicators of forward cash flow generation, stability and visibility extending through the balance of this year and well into 2025.

Speaker 2

Year to date, gross capital expenditures of $64,700,000 net of $6,100,000 of maintenance CapEx compares to $30,800,000 $4,300,000

Speaker 3

in the

Speaker 2

first half of twenty twenty three. Fleet sales of $13,100,000 increased from $8,900,000 Net CapEx excluding maintenance CapEx is therefore 51,600,000 dollars year to date. This is essentially growth CapEx including the acquisition of a third party rental fleet for $20,500,000 effective June 28, adding 329 space rental units to our MSS fleet in the Western Canadian region. The MSS fleet has increased by 759 rental units in the first half of twenty twenty four to 12,098 total units. The WFS fleet count has reduced 1.3% or 81 units in the first half to 6,067 units.

Speaker 2

Capital commitments at the end of the quarter were 32,300,000 which is 36% higher than at the end of the comparative quarter. Substantially all of this incremental CapEx is for fleet growth with customer contracts already in place. The key takeaway here is that rental fleet growth is elevated on a year over year basis given it is substantially backed by rental contracts in place, management expects not only fleet growth but also continued rental revenue growth in the second half of twenty twenty four and beyond. The strong performance and growth of our modular rental platforms has contributed to a 300 basis point increase in our most important KPI as asset managers, which is the return on assets ROA metric. They came in at 19.9% in the quarter.

Speaker 2

Turning now to our non rental business lines. LodgeLink, our workforce travel platform delivered record gross bookings of $24,400,000 and record net revenue of $2,900,000 up 25% and 26% respectively from the comparative quarter. Total room nights sold in the quarter rose 28% from Q2 2023 to a record 129,737 and net revenue margins rose 10 basis points to 11.9% from the comparative quarter. The platform has over 17,000 active properties and 1,600,000 rooms of capacity. Management believes Lodge Link is well positioned to generate strong year over year growth rates as it continues to develop an expanded user base in North America and Australia.

Speaker 2

MSS new and used sales volumes of $13,200,000 increased 103% or $6,700,000 from a soft Q1 2024 as idiosyncratic project permit timing issues have been resolved for the most part. However, this compares to $14,300,000 in the comparative quarter or 8% lower. This decline is primarily due to the lower existing fleet sales in the comparative quarter in this quarter to the comparative. Sales volumes for the second half of the year are expected to remain strong on a sequential basis. Non rental revenue for MSS increased 31% for the comparative quarter to $16,100,000 which reflects the volume of field level activity for transportation and installation of new buildings and mobilization of existing buildings.

Speaker 2

MSS VAPS revenue grew 8% from the comparative quarter to $1,300,000 WFS sales revenue was elevated at $7,800,000 or 212 percent higher than the comparative quarter due to opportunistic sales of unutilized large format camp assets in Canada. Non rental revenue was $14,000,000 down 24% from the $18,400,000 in Q2 2023. Lodge services revenue was up 7% to $9,100,000 when compared to the prior quarter. Sales and non rental revenues contributed to a 49% increase from the comparative quarter in EBITDA for WFS to $17,300,000 The core rental platform is performing well in terms of utilization, average rental rates, contracted rental revenue outstanding, average rental duration and ancillary revenue drivers, all of which are contributing to stable recurring and growing cash flows and strong return on assets. Elevated CapEx and the corresponding growth of rental units on the platform, the majority of which in a non speculative manner will deliver continued growth into 2025 beyond.

Speaker 2

Wasson continues to scale nicely achieving new record volumes and revenues and the company is well capitalized to support continued growth. For more color on current liquidity and other financial data points, I will now pass the call to Toby.

Speaker 1

Thanks, Trevor, and good morning. As you mentioned, the company had a strong second quarter with adjusted EBITDA of $27,900,000 and earnings per share of $0.12 in Q2 2024, resulting in free cash flow to the business of $18,300,000 in the quarter, up 8% from the comparative quarter. While we continue to pay a modest dividend and opportunistically purchased and canceled $1,200,000 worth of shares under the normal course issuer bid in the quarter, we have prioritized the reinvestment of this cash flow into the business where we are seeing continued demand for a growing asset base at high rates of return. As a result, we deployed $53,500,000 in capital expenditures in the quarter, mainly on new fleet assets associated with contract backed customer projects. These capital expenditures included the acquisition Trevor referenced of a fleet of 3.29 space rental units, which provide a combination of contracted revenue and high quality units that are less than 5 years old to meet incremental demand in our existing business rather than having built brand new units.

Speaker 1

The acquisition also provides inroads to a new operating area in the Kitimat region of Northwestern British Columbia and an exciting new indigenous partnership with the Gucapar Nation. Besides the acquisition, the remainder of the strong capital expenditures in the quarter were primarily invested in growing our rental fleets. We continue adding units to meet high levels of demand and utilization for education related assets in Canada, the U. S. And Australia.

Speaker 1

We are also adding space rental units in MSS throughout North America related to contracted opportunities where we didn't previously have sufficient fleet to meet our customers' needs. There's also a small amount of speculative fleet growth in MSS, particularly in U. S. Branches where high utilization warrants the investment to ensure we can adequately service customer needs. And finally, in our WFS business, we are investing opportunistically in new assets backed by long term contract opportunities, particularly related to small format accommodations in Canada and the United States, where we've experienced high utilization.

Speaker 1

Beyond growth CapEx and part of capital expenditures this quarter was $3,400,000 of maintenance CapEx, which includes all major refurbishments and betterments to existing assets. We've had a strong focus for many years on operational excellence, which in our business is all about the protection and maintenance of our rental fleets. Specifically, we design and procure assets that are well built to maintain to meet our high quality standards and customer needs. And for existing fleet, we have defined and maintained minimum quality standards for all fleet units so that we deliver like new value even when assets might be several years old. This gives us confidence in the quality and value of our rental fleets, which is the foundation of our balance sheet.

Speaker 1

It also reassures us that the level of maintenance CapEx incurred is appropriate and sustainable to maintain the long term value of our rental assets, ultimately benefiting Black Diamonds, our clients and our shareholders. Overall, the net investment in the business through continued maintenance and strong growth capital expenditures was funded by internally generated cash flow and by draws against our ABL credit facility. We exited Q2 2024 with long term debt of $239,700,000 and net debt of $225,900,000 which results in a net debt to trailing 12 month adjusted leverage EBITDA ratio of 2.1 times. While there are no debt to EBITDA covenants related to our lending facility, we target a leverage ratio between 2 to 3 times. So we remain at the low end of that target range.

Speaker 1

With over $100,000,000 of available liquidity and an outlook for continued strong free cash flow from the business, we are well positioned to continue to fuel ongoing growth. The average cost of debt in the quarter was 6.27 percent, up from 5.56% in Q2 2023. While this has increased with reference rates over that period, we continue to view our borrowing costs as highly competitive and flexible. These are borrowing at these borrowing rates, we are leveraging approximately 40% of the book value of our asset base, which is generating an ROA of 19.9% in the quarter, yielding a generous economic premium. We remain focused on maintaining and improving capital efficiency as measured by ROA and growing our producing asset base, which compounds into growing earnings per share.

Speaker 1

As a result as we continue to grow the business, we have seen an increase in administrative costs of $3,100,000 or 18% from the comparative quarter to $19,900,000 Administrative costs excluding ERP costs of $1,800,000 increased by only 8% compared to Q2 2023, while growth of the overall business measured by gross profit increased by 17%, indicating continued improvement in cost efficiency. We expect those cost efficiency improvements to accelerate following the implementation of the new ERP systems, which we are approaching in phases. During Q2, we successfully went live with the new ERP for Lodgelink and are leveraging that experience in finalizing plans to move ahead with the next phase for the MSS and corporate business units. In summary, we remain poised to continue compounding returns into growing cash flows based on the receptive market conditions that we see in our businesses. We are well contracted with $139,300,000 of rental revenue in place and ample available liquidity, positioning us well not only for growth opportunities, but also should the company need to adjust our investment strategies to local or broader market slowdowns, which makes Black Diamond very resilient in any market conditions.

Speaker 1

With that, I'd like to hand the call back to the operator for any questions.

Operator

Thank you. We will now begin the question and answer session. Today's first question comes from Matthew Lee at Canaccord Genuity. Please go ahead.

Speaker 4

Just in terms of MSS utilization, should we be thinking about the 80% to 81% range of where you're comfortable balancing profitability and the ability to serve customers? Or is there potential to increase that further to sweat the assets a little bit more?

Speaker 2

Good morning, Matt. Thanks for the question. I think the best way to look at our utilization and I'll get Ted to provide some commentary as well. We look at a range of utilization. You've got to think about our MSS fleets as being a mix of types of units and where we have asset types that have a shorter call out cycle, more of our smaller transactional.

Speaker 2

You need assets on hand to be able to meet demand as it comes in. And so we look at full utilization on that asset somewhere between 75% 85%. So we'd be right in the middle of that. We can treat education assets a little bit differently because of how long the duration of assets on hand and a little bit more visibility coming up. So we very much look at a blended utilization and we think that around 80% is fairly often that in addition.

Speaker 3

Yes, I don't have much to add because I think that's exactly right. We're in a spot that we're comfortable with. We've got units in most sizes to meet customer demand and if we get short in a certain size then that's where we spent CapEx and we don't spend CapEx unless we are short in units or we have future contracted demand. So we think we're right kind of in the right range right now.

Speaker 4

Okay, that's helpful. And then maybe just in terms of the newly acquired asset, great to see fleet growth obviously, but aside from the attractive unit price and the existing contracts you touched upon, is there anything that made that market particularly attractive? And maybe how should we think about the opportunity for other tuck ins this year?

Speaker 2

We approached CapEx in the first instance where we have a customer in place and a contract in place before we order the asset and that's the bulk of our CapEx and it's the primary reason why our CapEx is elevated this year from last year. We're directly matching demand to ordering of assets. What we're very focused on is ensuring that our return on assets or our return on investment

Speaker 1

to

Speaker 2

maintain hurdles and we ensure that the way we're contracting rent, we're happy to grow, but we're not interested in eroding our returns on capital. So that's primarily how we approach CapEx in terms of a bit more specificity of what we're seeing in types of assets and areas of business. I'll ask Ted to add a bit more there.

Speaker 3

Yes. I think strategically we look at how can we grow while making strong utilization. So growing market share is one of the easiest ways to do that. So where there's demand in a market that exceeds the units we have, we'll add units there. We're also with some of the acquisitions we've done, we have markets where we don't have a full product line or we're not serving all the different end customer markets.

Speaker 3

So we're working to grow additional penetration into new end markets and new product types. So we think there's significant growth opportunities available in all those areas ahead of us.

Speaker 4

Great. And just one clarification. So the new the 3 29 units you acquired this quarter, those already came with contracts and revenue associated with them?

Speaker 2

Essentially, all of the units were in place on a project and generating revenue. To be clear, that project is in its late cycle. And so there will be a repositioning of assets, but we've got visibility and demand where we think we absorb those assets that will come out of that project that we are seeing good demand criteria or drivers in Western Canada, right?

Speaker 3

Yes. That asset class, those are primarily complexes. So 2 to 18 unit complexes and we've got strong demand for that asset class for projects across Western Canada. So that was part of the reason that we did that acquisition was built for the existing contracted revenue, but also for other projects that we saw demand for.

Speaker 2

The only thing to note, Matt, that area in Western British Columbia has a number of projects underway or coming up with regard to LNG and other export facilities being expanded or greenfield built. So we're quite excited to have a key partner in the area with the Gugatla nation, but also to have assets that we can match up with those projects. So strategic piece in our view.

Speaker 4

Great. Thanks. I'll pass the line.

Operator

Thank you. Today's next question comes from Frederic Bastien with Raymond James. Please go

Speaker 5

ahead. Hi, good morning guys. Rental revenue growth at MSS is tracking at 5% to 6% so far this year. Is it reasonable to expect the rate of growth to pick up in the second half?

Speaker 2

Where you would see rate of growth pickup would be in the quantum of assets that we're bringing onto the platform. Keep in mind that our North American education business typically sees assets being placed through the summer months when kids aren't in school and then you see the uptick in rental revenue as the assets are on rent beginning with the school season in the fall. So Ted based on the volume of new education assets going into the U. S. And Canada, we expect a fairly meaningful uptick in the revenue stream associated with our education revenue line.

Speaker 3

Yes, definitely. Some of those units are already in the fleet as because we're buying a significant number of units. So it takes a while. We've got to preorder them and then we can't they don't all get completed on September 1. So they start getting delivered in June.

Speaker 3

So we're already seeing some of those in our fleet. And as you heard from Trevor on the contract of revenue, but really strong contracted revenue. So that's a signal of those units going on rent in September. So we see that in both our Canadian and U. S.

Speaker 3

Education fleets. We also have the BC acquisition units that just went into our fleet literally the last day of the quarter. And so those we'll see some rental from those in Q3 and Q4 as well. So we definitely will see continued growth in our rental revenue.

Speaker 2

And the other leading indicator that you can see in the results in Q2, we do a lot of field level activity around schools, classrooms. And so part of the elevated non rental revenue in the quarter relates to the work of positioning assets. Canadian schools move around in July, August, but keep in mind that Southern U. S. Schools typically are out by the end of May.

Speaker 2

So some of that is in June, right, Ted? Correct.

Speaker 3

And a lot of those schools start in early August, so we hope to get the units in place and on rent by then. So they have to be installed in May June.

Speaker 5

Okay. And do they start generating revenue the moment you plug everything in? Or does it start when the school year starts?

Speaker 3

A lot of our contracts would be they're all long multiyear contracts, but they're typically starting at the start of the school year.

Speaker 5

Okay. I have a similar question, I guess, for the Workforce Solutions segment. There was obviously a lull that we all expected with the completion of the pipeline contracts you had on rent. But as you start deploying more assets, do can we expect that pace of growth to also accelerate in the back half?

Speaker 2

There's a couple of things going on in our WFS business. As you touch on there, the 2 big pipeline camp projects that came to completion last year cost reduction in utilization of those assets came back. We had seen an uptick in projects, Mike, late last year. So that's sort of filled in part of that gap. Also rental rates are higher, so that closes the EBITDA gap.

Speaker 2

And so as we continually deploy, gradually we'll be bringing up utilization. And we've also sold off a little bit of that exit capacity and then we've been investing in other asset lines with WFS that are showing really good characteristics for demand rate and utilization generally. So there's a number of things going on there. Mike, why don't you add a bit more color? Yes, sure.

Speaker 2

Thanks. I would also say like our small format business is very active. Our daily business, which is oil and gas, is extremely strong. And we're actually seeing a lot of these assets going to different applications. Of course, we have to deal with what seems to be now an annual occurrence with fires and everything that goes with that.

Speaker 2

So we position ourselves to get in touch and get to know these various government entities that are tied to this in the unfortunate that there is a fire, there will be opportunities for us. So we expect to see some growth in that area. Our U. S. Small format businesses is very strong as well and expect to see good utilization for the balance of the year down there.

Speaker 2

And then when we go over to Australia, do expect to see a little bit of improvement with utilization in that market as well when it comes to sort of a large format. Canadian business, the pipeline is fairly active. The projects aren't what they were with TMX and CGL, but there's a lot of different opportunities be it mining and construction right across the country. So the long and short of it is we do expect to see improvement in overall rental growth for the balance of the year.

Speaker 5

Cool. That's great. And then just want to ask another question on Workforce Solutions. The margins were quite high during the quarter at the EBITDA margins were like close to 40%. So wondering if you could explain what helped drive this and whether we should expect this to kind of normalize into Q3 and Q4?

Speaker 5

Thank you.

Speaker 1

Sure. This is Toby, Frederic. Yes, we had some unusual, I guess, case of costs with some projects where costs in Q2 were unusually low for some of the projects that we had. So we expect margins to return to normal in future quarters. So this

Speaker 2

one was a little unusually high.

Speaker 5

Got it. Thank you.

Operator

Thank you.

Speaker 3

And

Operator

this concludes our question and answer session. I'd like to turn the conference back over to Trevor Haynes for any closing remarks.

Speaker 2

Thank you again for joining and you're interested in Black Diamond. Hope everybody has a great weekend. Thank you.

Operator

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a pleasant day.

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Black Diamond Group Q2 2024
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