Black Diamond Group's (BDIMF) CEO Trevor Haynes on Q2 2017 Results - Earnings Call Transcript

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About: Black Diamond Group Ltd (BDIMF)
by: SA Transcripts

Black Diamond Group Ltd (OTCPK:BDIMF) Q2 2017 Results Earnings Conference Call August 4, 2017 10:30 AM ET

Executives

Trevor Haynes - Chairman & CEO

Toby Labrie - CFO

Troy Cleland - COO

Paul Wright - CRO

Analysts

Ben Owens - RBC Capital Markets

Jon Morrison - CIBC World Markets

Jeff Fetterly - Peters & Co. Ltd

Brian Pow - Acumen

Operator

Good morning. At this time, I'd like to welcome participants to the Black Diamond Second Quarter 2017 Results Conference Call with Chairman and Chief Executive Officer, Trevor Haynes; Chief Financial Officer, Toby Labrie. We are also joined today by Chief Operating Officer, Troy Cleland; and Chief Risk Officer, Paul Wright.

After our formal remarks, there will be a question-and-answer session. And at this time, all lines have been placed on mute to prevent any background noise. Please note, that while talking about our results and answering questions, we may make forward-looking statements. These statements are subject to known and unknown risks, and future results may differ materially.

Management will also be discussing non-GAAP financial measures in today's call including adjusted EBITDA, net debt, funds from operations and payout ratio. For more information about these topics, please review the sections of Black Diamond's second quarter 2017 Management's Discussion & Analysis, entitled Forward-Looking Statements, Risks and Uncertainties and Non-GAAP Measures.

This quarter's MD&A, news release and unaudited interim condensed consolidated financial statements can be found on the company's website at www.blackdiamondgroup.com, as well as the SEDAR website. Dollar amounts discussed in today's call are expressed in Canadian dollars and are generally rounded.

I will now turn the call over to Mr. Trevor Haynes.

Trevor Haynes

Thank you, and good morning. Thank you all for joining.

This quarter shows the benefit of management strategy of repositioning the business to more of a diversified industrials platform. Through a series of acquisitions along with organic fleet expansion, the company's base rental segment has grown revenue by 82% and EBITDA by 68% as compared to Q2 2016 driven primarily by a 57% increase in fleet size and an 11% increase in utilization.

Management expects continued growth and strong organic capital employment opportunities in this business unit for the second half of 2017 and into 2018. These opportunities are substantially backed by customer contracts.

The greatest demand will come from our U.S. operations in the Southeast and Gulf States. Growth will also occur in the Pacific and Eastern regions within Canada where markets continue to be quite strong. Only the prairies region is expected to see a further decline in activity almost entirely due to weak economic conditions in Alberta.

This increase in capital employment is a positive result of our expanded footprint and will lead to further diversification and cash flow stability. At the end of Q2, the space rentals business unit accounted for 57% of consolidated adjusted EBITDA.

Another positive in the quarter was the tripling of utilization for the company's small format camp fleet in our energy services business. This reflects increased drilling and completions activity in Canada, as well as the United States. It is also the results of the company's decision to relocate fleet from the North Dakota region to West Texas resulting in new market share and cash flow from the Permian basin where we previously have not operated. Increased utilization has been coupled with modest increases in day rates further increases our forecast in the second half.

Management expects that increased activities surrounding drilling and completion is a leading indicator of increased resource infrastructure projects which would benefit the large for Camps & Lodging platform.

The Camps & Lodging platform revenue generation was soft in the quarter. This is indicative of a continued - of large capital projects in the Canadian oil and gas, mining and infrastructure sectors. However with a number of large diameter pipeline in projects set to begin construction in 2018 and modest increases in development surrounding the Montney, Duvernay infrastructure complex, management expects that activity levels will remain stable in the second half of 2017 and we believe will strengthen in 2018.

The company has elected to affect the restructuring of its workforce accommodations business to ensure that the company is as cost-efficient as possible and best positioned to secure work in the current environment. This involves the integration of our camps and lodging and energy services businesses into one operating unit.

It also involves a reduction of the Senior Leadership team and to refocus our sales and business development teams. Toby will provide further color in a minute.

We had lower full year EBITDA guidance to $25 million to $35 million. This is a result of a slower than expected recovery in our camps and lodging segment, which we believe is due to the retrenchment of oil prices in the quarter. However, management expects stronger quarterly performance going forward.

With the aforementioned increase space rentals demand, we're increasing CapEx guidance for the year to $23 million from $12 million and asset sales of $10 million from $5 million, bringing net CapEx to above $13 million for the year.

After careful review, the Board management have determined that the company's dividend should be suspended giving preference instead to using cash flow to invest in the business and to deleverage the balance sheet.

I will now pass the call to Toby to review the company's results and initiatives.

Toby Labrie

Thanks Trevor. Total adjusted EBITDA for the quarter was $5.4 million down 29% from Q2 2016, due to ongoing weakness in the resource sector impacting the van for large-format counts, but up 17% from Q1 2017 due to growth and improved performance of the BOXX Modular segment.

Adjusted EBITDA for BOXX Modular was $5.7 million up 68% from the same quarter last year. This is due to a 57% increase in the fleet to 5830 unit combined with a significant increase in utilization from 64% to 71%. This business unit also saw an increase in new and used fleet sales for the quarter as a result of our strategic expansion into strong markets within Canada and U.S.

Camps & Lodging adjusted EBITDA decreased $4.6 million or 57% from Q2 2016, due primarily to lower lodging revenue in the company's operated camps. The lower lodging revenue was driven primarily by fewer lodging beds utilized and lower occupancy rates.

Adjusted EBITDA from the energy services business unit increased by $0.9 million from Q2 2016 to $0.6 million in the current quarter, due primarily to a significant increase in utilization of accommodations units from 13% to 50%.

This was driven by higher drilling and completions activity in Western Canada, North Dakota and Colorado as well as increased market share realized from recent relocations and accommodation units from the North Dakota region to West Texas.

International adjusted EBITDA improved by $0.3 million over the comparative quarter to $0.2 million. Higher utilization and sales in the education sector highlighted the quarter. Public and infrastructure spending in Australia is expected to continue to support high levels of utilization and drive future project opportunities in the international business unit.

We believe, we are also seeing the start of recovery in the resource sector, which will complement the increasing demand from education and infrastructure development. Positive cash flow from operations in the quarter was largely used on investments in new space rentals fleet.

The company also declared $4.1 million of dividends in the quarter, resulting in a payout ratio of 88%. Combined withdrawn cash for CapEx and dividends led to an increase in debt from $113 million in Q1 2017 to $118 million in Q2. Net debt to trailing 12 month adjusted EBITDA for the quarter was $3.36.

With the continued EBITDA growth expected from BOXX Modular combined with the modest improvements anticipated in the rest of the business, management estimates the 27 adjusted EBITDA will be a range of $25 million to $35 million. While this increased cash operations could help in decreasing the payout ratio in the second half of the year; assuming a constant dividend rate, there is significant competition for this capital.

In carefully evaluating this demand for capital, the company has decided to spend its dividend and focus the cash generated from operations on reinvestment in new assets for which the company is seeing increasing opportunities with compelling returns and contract terms. The cash will also to be used to reduce debt to preserve capital for future growth opportunities.

Finally, we have put a normal course issuer bid in place potentially returning capital to shareholders in the form of share repurchases rather than dividends, when we believe that from time-to-time, the market price with the common shares may not fully reflect underlying value.

In addition, to a change in capital allocation and in effort to deliver and enhance commercial model for profitability and long-term success, Black Diamond has initiated internal restructuring of the organization. The restructuring will consolidate of our four operating business units into two. All operations within the space rentals business will fall under a modular solution business unit.

We will combine all of the company's current operations that are focused on workforce accommodations under one integrated workforce solutions team. We expect this to produce a more competitive business through a solution based sales approach.

The company incurred a restructuring charge of $2.9 million in the quarter-to-quarter and expect to realize $3 million in an annualized cost savings. With cost savings from the restructuring and the suspension of the dividend, the company expect to attain nearly $20 million in the business compared to current run rates which will allow for accelerated growth on the space rental business and diversification of the overall platform.

I will now hand the call back over to Trevor.

Trevor Haynes

Thanks Toby.

I will briefly summarize, the space rental segment outside of Alberta is performing very well. Our broader footprint in the segment is generating meaningful organic growth capital our growth opportunity. CapEx guidance has been increased to 23 million gross and 13 million net.

Substantially all of this net spend is space rentals related in the U.S. as well as Pacific and East regions of Canada with significant contract coverage. Energy services is showing considerably strength in utilization year-over-year in both Canada and United States with modest rate increases which we believe are sustainable.

Camps & Lodging remains soft but with an improvement dead log is expected to remain steady. Australia activity is expected to strengthen in the second half due to sales and moderately improving market resources and infrastructure.

We are streamlining our workforce businesses to reduce costs and improve competitiveness. We are suspending the dividend and redirecting cash to CapEx and deleveraging. Dividend and cost reductions will free up approximately $20 million for reinvestment in the business.

Management is pleased with the significant growth of its space rentals platform resulting in a more stable diversified industrials business.

Operator we are ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Ben Owens of RBC Capital Markets. Your line is open.

Ben Owens

Looking for some additional color on the new guidance range, was there any specific projects that you called out that led to reduction in guidance in the Camps & Lodging segment?

Trevor Haynes

I wouldn't point to specific projects, would rather point to a less than anticipated occupancy in our open lodges. We had anticipated greater utilization of our Sunday Creek Lodge for example which when you take the full turnkey day-rate aspect of how that lodge engages its customers would have meaningful impact and our anticipation there was that we would have multiple users in that facility in reality we only had one or two.

So we did have occupancy the camp was open, but significantly lower than anticipated. This one area we would point to and we can say that broadly about our three open lodges that the occupancy based on activity in those areas that those camps are located was just lower than what we had anticipated when we looked earlier in a year at and what demand would going in for us.

We think the part of that is more to do with the delay in capital projects etcetera in those areas and that the activity will increase in the second half and into 2018 as various types of infrastructure and capital maintenance projects take place.

Ben Owens

Another one on guidance, of the new range $25 million to $35 million in adjusted EBITDA, how much of that is being contributed by BOXX Modular for the year?

Trevor Haynes

A fairly significant portion of the increase from the first half of the year is represented by BOXX. We only see modest increases at the midpoint of the range from Camps & Lodging and we do expect to see continue increases from energy services as well as international in the back half of the year but those are more modest than the BOXX improvement.

Ben Owens

And then last one for me, on the cost savings initiative, what's the timing of the $3 million in annual cost savings? When you expect to hit full annual run rate on that?

Toby Labrie

We expect to realize most of the benefits starting in the third quarter. However as you'll see with the second quarter we do have small setting G&A increases as a result of recent acquisitions, but we do expect to see most of the $3 million in savings starting in the third quarter and by the first quarter of 2018 we will expect to have realized all of the remainder.

Operator

[Operator instructions] Our next question is from the line of Jon Morrison of CIBC World Markets. Your line is open.

Jon Morrison

Can you talk about the line of sight for incremental utilization in the large cast business in the back half the year, like would you expect to be over 50% utilization in Q3 or Q4 at this stage?

Trevor Haynes

No. We anticipate the utilization will be more in line with the quarterly that just came out of -- we don't anticipate any meaningful reduction in the core rental piece of our Camps business and at this point in time, we have some upside potential on our largest increasing utilization from what we saw in Q2 but we've included very little of that in our current forecast range as Toby had mentioned?

Jon Morrison

Is there any major plan on relocation our balance heads in the quarter that would be in the back half of the year that would benefit nonrental revenue that we should be thinking about or again it's pretty much status quo for the install base being static.

Trevor Haynes

It would be modest -- there's always options, if we were to secure projects in the quarter that we may not be anticipating rental run rate from -- in this fiscal year we may very well generate some of the operations revenue related to positioning the asset and the same occurs on assets that currently aren’t on rent.

A number of our facilities have been left at our customers project sites in anticipation of those projects becoming active again, if those assets were to be removed from the site, we would generate revenue for the dismantling and return of the asset and the current forecast range we've provided there's not a significant amount of that included.

Jon Morrison

How much of the future growth in BOXX that you guys are messaging would be underpinned by incremental asset builds or purchases versus leaning on the existing asset base data that you have?

Trevor Haynes

To answer that, the best way is to talk regionally, when we look at our Ontario market for example where the platform is operating quite, we're seeing quite high utilization into the low 80% range which indicates we may not have certain assets available for customers and we will be looking to replenish the fleets. And then we look at larger project demand for customers specifically our infrastructure construction customers in a greater Toronto area and the Ottawa region we would have to build assets to meet that demand.

We’re seeing similar on the West Coast where we acquired the vertical platform which made us the largest player in the BC marketplace for space rentals. We are seeing strong demand and percentage of that near demand we need to meet with new assets and then also in the U.S. where most of the CapEx we're seeing for the second half of the year is to build our assets for contracts that we've already secured, and those contracts are of size in terms of number of units relative to that business unit and also have enough contract turn to give us a visibility to deploy that capital.

If you look into the prairies region, we have excess fleet capacity and we can meet demand with our fleet. We’re also using the prairies sweet to augment demand in British Columbia which gives the ability to relocate and absorb that excess capacity.

So we need to get back to your question, in markets East and Gulf Coast and Southeast, in U.S. and also on West Coast for us to be able to secure the contracts that are available to us for larger projects, we are having to deploy capital and the payback is attractive and contract length gives us the confidence that is good capital allocation and that's a primary region for looking at the cash flow that is currently being used as a payout to our shareholders and whether there's a better use for our shareholders and for the long-term build of our business, and in our view that's a better use of that capital.

Jon Morrison

Can you give more color on the types of the assets that you sold them in the quarter and is that horse trading large camps for more BOXX or is that a regional issue driving that or it doesn’t make sense to relocate certain assets?

Toby Labrie

The sales that we saw in the quarter were would have been primarily space rentals sale through the normal, our normal course business. We typically will see these opportunities with customers that leads equipment for us but may need something for have a longer-term need for an asset and so those sales were just normal of course presales and I would say primarily in the BOXX segment.

Jon Morrison

Can you share with the bed count in the Permian is right now?

Trevor Haynes

Are you accounts in the Permian Colorado and North Dakota or split fairly evenly. So we have got third of our assets in each of those markets as far as bed counts, Troy…

Troy Cleland

Yes, I've never really looked at it is what the total bed count is posted distribution of the number of units that we have and as what Toby said is there, with more or less third, third, third and the three regions that we occupy down the U.S.

Jon Morrison

Last one just from me. Can you help us to understand the decision to put in the NCIB given that you cut the dividend, you had a couple equity ranges in the past year and to point earlier you're running at higher leverage ratios than you're traditionally comfortable with? So, should we think about that is being maybe in the option to go on in a better market if things continue to progress more positively or would you expect to be active in that rate off the bat.

Trevor Haynes

Our priorities for use of the cash that we will be saving through the restructuring the business and suspension of the dividend is to fund the projects that meet our investment criteria being generated within the business which will further grow the business especially a more diversified non-resource part of our business which we believe is a stability.

And then to reduce the leverage on the balance sheet to ensure that we've got as prudent a balance sheet as we can have in this environment, which will give us financial flexibility going forward and then in terms of looking at different methods of return to shareholders if the business is in a position where that makes sense, the NCIB is a tool that we have put in place arguably in current tax environment in Canada.

It's a more tax efficient way to return capital to shareholders then dividend. However at this point our priority is to redirect the cash into diversifying and growing our business.

Operator

Our next question comes from the line of Jeff Fetterly of Peters & Co. Ltd. Your line is open.

Jeff Fetterly

Couple of rental questions. Following on to John's question. On the leverage side, what do you target your leverage ratio to be or down to?

Trevor Haynes

Historically or currently?

Jeff Fetterly

Going forward?

Trevor Haynes

I think currently we see our leverage against cash flow climbing and we believe that is a function of near-term softness in our EBITDA and especially related to activity in the Camps and Lodging and resource sector that impact our business.

And so in the near-term we're targeting to returning to bring that down. We have been focused on debt repayment for quite a while. So we intend to continue repaying debt, but in the near-term, we aren’t concerned about our leverage position based on our forecast, but we see that coming down below three times in our near term forecast.

Jeff Fetterly

And is that something that you think you could achieve by the end of the year? Do you think that's more of a 2018 horizon?

Trevor Haynes

Well that's more of a 12-month look as we move towards on.

Jeff Fetterly

On the BOXX side, the incremental capital that you talked about being supported by contracts, what sort of terms and structures do those have?

Trevor Haynes

For the BOXX contract we typically engage our customers on a fixed monthly rate for our BOXX assets. We had average historically above 11 months contract term outstanding. The larger multiunit complexes tend to work on larger projects and they can secure anywhere from six months to 48-month contract terms where we're looking at the capital deployment right now, they're generally in the two-year or longer category.

Typically there and I guess you use the oil and gas industry terminology take-or-pay. So the customer is committed to a fixed term and if they return the asset really essentially they have the liquidated damages owed to us of all remaining rent to the contracted term.

Jeff Fetterly

And so do you expect the average term to cover -- or the average contract term to cover about half of payback or capital investment for those assets. I am just trying to think about the risk profile that you're incorporating.

Trevor Haynes

When you look at on an average basis, this asset has historically had a longer payback based on the rate divided into the cost of the asset that would average somewhere between 4, 4.5 years payback. Keep in mind these are assets that have an expected life of 25 years plus and we're currently contracting rates in that range.

Jeff Fetterly

Last thing, your revised guidance range, what factors would potentially swing you to the lower end of that range versus the upper end of that range?

Trevor Haynes

The risk in the forecast would be to some degree utilization on the fleets but given the length of sales cycle and the contracting, the way that we contract that's probably not the greatest risk it would be on sales and operations where we are engaging our customer to sell assets specifically where we are having assets built for them and we are reselling oftentimes those contracts can or those projects can slide based on a number of factors earnings conditions, execution at the site level.

So operations and sales would be where I believe if we were to come in on the low-end of the range, it would be some variance in the timing of those projects versus the base rental stream.

The other variable in today's environment is the occupancy in our open camps. We secure very little in the way of long-term commitments from our customers and so the volume of people in house from weak to weak tend vary - again that would more likely due to delays or weather some factor impacting our customers working in that particular area versus what they have indicated to us will be their usage of our lodges.

So I think those would be the factors that would most contribute to a negative variance to our range. Conversely the positive would be - sales can be generated on a fairly short-term basis so we could see an increase in asset sales in the quarter versus our current outlook and we could also see higher than expected occupancy in our lodges and perhaps a modest increase in utilization even over the remaining 60 days of the quarter.

Operator

The next question comes from the line of Brian Pow of Acumen. Your line is open.

Brian Pow

I think all my questions have been answered. Thanks.

Operator

Thank you. And at this time I’m showing no further questions. I would like to turn the conference back over to Mr. Trevor Haynes for closing remarks.

Trevor Haynes

Thank you. And thank you everybody for participating in second quarter conference call and webcast today. We look forward to speaking with you on our call next quarter. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everybody have a great day.