Badger Daylighting Ltd. (BADFF) CEO Paul Vanderberg on Q1 2019 Results - Earnings Call Transcript

|
About: Badger Daylighting Ltd. (BADFF)
by: SA Transcripts
Subscribers Only
Earning Call Audio

Badger Daylighting Ltd. (OTCPK:BADFF) Q1 2019 Results Conference Call May 14, 2019 11:00 AM ET

Company Participants

Paul Vanderberg - President and CEO

Conference Call Participants

Yuri Lynk - Canaccord

Maggie MacDougall - Cormark

Stephen Harris - GMP Securities

Jonathan Lamers - BMO Capital

Elias Foscolos - Industrial Alliance

Jeff Fetterly - Peters & Co.

Saurabh Suryavanshi - Dixon Mitchell

Operator

Good day, ladies and gentlemen, and welcome to the Badger Daylighting 2019 First Quarter Results Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] And as a reminder, today’s conference call is being recorded.

I'd now like to turn the conference over to Paul Vanderberg, President and Chief Executive Officer. Please go ahead.

Paul Vanderberg

Thank you, Candice. Good morning, everyone, and thanks for joining our first quarter investor call. With us this morning on our call is Jerry Schiefelbein, our CFO; and Jay Bachman, our VP of Financial Operations.

Our Q1 earnings release along with the Q1 MD&A and financial statements were released last night and are in the investors section of our website and also on SEDAR.

We are required to note that some of the statements made on this call may contain forward looking information. In fact, all statements made today which are not statements of historical fact are considered to be forward-looking statements. We make these statements based on certain assumptions that we consider to be reasonable. However, forward-looking statements are always subject to certain risks and uncertainties, and undue reliance should not be placed upon them as actual results may differ materially from those expressed.

For more information about material assumptions and risks and uncertainties that may be relevant to such forward-looking statements, please refer to Badger’s Q1 MD&A and Badger’s 2018 annual information form. Further, such statements speak only as today's date and Badger does not undertake to update forward-looking statements.

So, let's jump right into the results.

We are very pleased with results in the quarter with revenue and adjusted EBITDA at record first quarter levels. For the quarter, we realized strong year-over-year revenue growth combined with continued improvements in margins. The improvement in margins is particularly encouraging.

Consolidated Q1 revenue was $146.6 million, up 22% from the prior quarter. Q1 revenue was 24% higher in our U.S. operations that in U.S. dollars with revenue in Canada consistent with the prior year quarter. This growth was achieved in spite of difficult weather conditions in the quarter that impacted construction projects across a number of our regional markets.

Badger continues to increase exposure to U.S. infrastructure markets. For Q1, our U.S. operations contributed 76% of consolidated revenue versus 71% last year. As we previously discussed, we are optimistic that there is significant runway to aggressively grow our business in the U.S. Q1 adjusted EBITDA was $33.3 million, up 36% from the prior year quarter on net revenue growth of 22%.

We are very pleased also with the operational improvements reflected in gross profit and adjusted EBITDA margins. For the first quarter, gross margin was 29%, up 350 basis points from Q1 last year. We would like to note though that adoption of IFRS 16 regarding accounting for leases resulted in a $1.1 million increase in gross margin in the quarter versus last year. If one adjusts for the IFRS 16 impact, gross margin would have increased by 270 basis points versus Q1 last year. Adjusted EBITDA margin was 22.6%, 240 basis points higher than the prior year quarter. Improvements in the EBITDA margin were driven by direct cost management and strategic pricing initiatives. The continued focus on margin is a real testament to the discipline of John Kelly and our great operations team.

General and administrative expenses rose versus the prior year quarter due to operating expenses, mostly related to our Common Business Platform initiative, which offset a portion of the operational improvements to adjusted EBITDA margin. G&A expense as a percentage of revenue was 6.3% in Q1 compared to 5.3% in the prior year.

We continue to make investments in our internal infrastructure to ensure we have the capability to support continued growth within the business and also with the significant focus on information technology and human resources initiatives related to preparing for the new ERP system. We expect to see higher levels of G&A throughout this year as we operate dual systems that do anticipate with these expenses will begin to decline as a percentage of revenue as the implementation is completed. Our long-term objective remains at 4% of revenue for G&A expense.

Net earnings for the first quarter were $6 million compared to $8 million in the prior year quarter. Net earnings were positively impacted by the same margin drivers I noted a minute ago, but were offset by approximately $8 million in share-based compensation expense from increases in Badger share price and also a smaller amount of impact from higher depreciation expense due to an increase in the fleet. The operations team continues to successfully manage growth and balance growth and fleet utilization. Our Q1 consolidated revenue per truck per month was approximately $30,800, up 8% from RPT of $28,600 last year. We added 20 net hydrovacs to the fleet in the quarter, building 37 units and retiring 17.

I would like to highlight that the build rate of 37 units was slowed early in the quarter as we introduced and worked through the transition to a new chassis in the plant. Despite the slower build rate early in the quarter, we do not anticipate a change to our previously provided annual build rate, which I’ll discuss with our guidance in a few minutes.

Now, let me touch on the financial summary, we’d like to add some color around general activity and our outlook. Throughout the first quarter, we continue to see revenue growth across our broad range of geographies and our broad range of end use market segments.

As detailed in our 2019 financial outlook, we expect that these trends will continue throughout this year. We anticipate solid activity levels across the majority of our markets with continued volume growth as well as anticipating modestly higher average rates due to pricing initiatives and higher utilization. The Canadian oil and gas market has slowed and we expect this to continue to be the case. We continue to see operations -- our opportunities still on the infrastructure side of Canadian oil and gas but expect to see the production side of the market to be slow for the foreseeable future. However, the significant U.S. market opportunity has enabled Badger to realize growth in the U.S. and reposition our geographic and end-use market mix. Because of this growth, the Western Canada oil and gas market is a much smaller part of our business mix than it was just a few years ago.

With the significant growth opportunities Badger sees across the majority of our operations, we have continued to be very focused on recruiting and training operators. The strong opportunity in the U.S. is great for business and great for growth, but it also creates challenges related to labor. Although labor presents to these challenges, we still have the opportunity that’s there, based on the market growth. So, as usual, it's all about execution for Badger for the rest of 2019.

We continue to see positive momentum in the business for the rest of this year. And we're encouraged by our revenue run rate in Q1, despite weather during the quarter in a number of our markets. February was a real challenge across some of our geographies. We anticipate solid activity for the full-year 2019 in the U.S., although we’ve seen in early Q2 quite wet weather conditions across the number of our markets, which has delayed work. As all of us know, delays in the spring construction season will often result in work being squeezed into the remainder of the year, and we've all seen this in the past. But for 2019, we see it, the opportunity is there that work will ultimately get done and Badger will be there to provide the level of service that our customers expect to get their projects done.

Now, a quick update on our Common Business Platform project. As previously discussed, Badger's executing on standardizing business processes and modernizing our legacy IP systems into a single ERP platform. We refer to this collectively as Badger's Common Business Platform project.

The Common Business Platform project remains on schedule and on budget with rollout scheduled for the second half of 2019. We're in a very intense roll-up phase right now where we're going to go live and starting in early July. And I can tell you that team is working very hard and dealing with a lot of intensity and pressure. It's a very exciting time for this project at Badger.

Next on our 2019 guidance, in our first quarter earnings release, we had previously provided our 2019 financial outlook for adjusted EBITDA of $170 million to $190 million, a truck build of 190 to 220 new units and expected retirements of 40 to 60 units. And we continue with that view.

Couple of comments on capital allocation. The business trends and the growth we continue to see has provided Badger with the confidence to seek opportunities to drive long-term shareholder return. Last quarter, the Board approved a 6% increase to the dividend, effective with payment of the March 2009 (sic) [2019] dividend. In addition to the dividend increase, Badger repurchased and cancelled 633,000 shares during Q1 under our NCIB program. Cumulatively, the Company repurchased and cancelled just under 1.3 million shares or approximately 3.4% of the pre-NCIB share count.

Badger's existing NCIB program expires today, and as a result, the Board yesterday approved an updated programs for purchase and cancellation of up to 2 million additional shares. Implementation of the updated program is subject to normal course regulatory approvals by the TSX, which we anticipate will happen in the normal course.

Regarding the balance sheet. Badger's balance sheet continues to be strong, providing necessary financial flexibility to support our growth opportunities and strategically manage capital allocation. As of March 31, 2019, total debt less cash was $85 million or 0.6 times trailing 12 months compliance EBITDA.

Before we move on to the Q&A, I’d like to spend a minute to review the continuing progress we’re making toward our strategic milestones that we set in late 2016. To review, our strategic milestones are as follows. Number one, to double the U.S. business from fiscal 2016 levels over the succeeding three to five years. Our 2019 Q1 revenue growth puts us off to solid start for this year with our revenues up 22% compared to last year and U.S. revenues up 24% compared to last year. In addition, our 2018 year-to-date growth in U.S. revenues was 30%, that being on top of a 32% increase in our U.S. revenues for 2017. So, we have had excellent progress in achieving our first milestone being over 75% of the weight to doubling our U.S. business from the starting point and we’re nine quarters into this three to five-year milestone.

The second milestone is to grow adjusted EBITDA by a minimum of 15% a year. Our growth in adjusted EBITDA for Q1 was 36%, following 29% growth for full-year 2018 and 20% growth for full-year 2017. We’re very pleased and continue to make excellent progress in achieving this milestone.

Our third milestone is to target adjusted EBITDA margins of 28% to 29%. We are very pleased with our start to this objective in Q1 2019. Our year-to-date margins reflect the positive impact of U.S. growth, operating cost leverage and management, and our business improvement initiatives. Our Q1 2019 adjusted EBITDA margin was 270 basis points higher in Q1 last year, that after adjusting for the current quarter impact of the adoption of IFRS 16.

And our fourth key milestone is to drive and maintain fleet utilization and revenue per truck above $30,000 per month. And we were also very pleased with the progress on this milestone with Q1 2019 RPT of approximately $30,800, up 8% from our Q1 RPT last year. Utilization is very important in a number of other operating aspects of the business including driving our operating cost management, opportunities for pricing and supporting overall revenue growth. And we continue to see positive trends in all three of these operational focus areas.

As a final note, before we turn the call over to Q&A, we’d like to recognize Jerry Schiefelbein, who has previously announced he’s set to retire during the second quarter. So, this will be Jerry’s last call at Badger. We wish Jerry all the best. And he’s been with Badger five years. What a remarkable timeframe at Badger. Certainly with events and activities that happened, you couldn’t have written in a book, we couldn’t have predicted. And the other part of Jerry’s tenure at Badger, he’s a Wisconsin guy, grew up, born and raised in Wisconsin. And who would have thought a guy from Wisconsin would end up as CFO of a company called Badger. So, Jerry, thank you very much for all your contributions.

Now, with that summary, we’d like to now turn the call over to Candice for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from Yuri Lynk of Canaccord. Your line is now open.

Yuri Lynk

Good morning, guys. Jerry, I want to congratulate you on your hard work, enjoy your time off. Paul, regarding the U.S. growth, I mean, certainly continues to roll along. Have you noticed any change in the cadence of hydrovac adoption south of the border?

Paul Vanderberg

We continue, Yuri, to see very good opportunities there. And as we broaden out our marketing programs and our more comprehensive and approaching customers, we continue to see good take up. So, we see that growth in that runway there for the foreseeable future. I don't know how long it can go, but it looks like it’s going to have a really good long-term run.

Yuri Lynk

And is the game plan still the same in terms of going after regions that are within reach of existing branches and starting with a couple of trucks and doing demonstrations? And is that still part of the plan or are you getting pulled more by your customers into different regions?

Paul Vanderberg

Yes. That's a great question. You were at our strategic planning session last month actually. But, we have a very disciplined and organized approach. And the real important part of Badger service is to always have a truck available when a customer calls. So, it's really a challenge to start a new branch, which is very far away from our existing network, which is very strong, and the scale allows us to always have equipment and operators when a customer needs a truck. So, I think you will see us continue to take that approach. And even with that approach, we have an extraordinary amount of growth opportunity and plenty for John and the ops team to chew on. So, you will see us continue to do what we’ve been doing.

Yuri Lynk

Good. Last one for me. Just any detail on how you plan to catch up on the fleet additions? Because as you mentioned, Q1 was quite a below what I was expecting due to the -- I guess the chassis changeover.

Paul Vanderberg

Yes. Well, we did have some challenges with chassis changeover. And with the new chassis everything is computerized. So, we needed to have three different computers talking to each other, which we very successfully had running by the end of January, but we were slow rolling units out to the fleet in January. But, we're way pass that. The new units are working great, excellent feedback from the field, and we're ramping up for the summer. And we're very confident that we're going to hit our guidance on our build rates for this year.

Yuri Lynk

So, you have the operators trained up and ready to go, it was just that the trucks weren’t ready yet, is that it?

Paul Vanderberg

Yes. It was about a month’s delay in getting all the programming done, the guys that were there did a wonderful job working with the technical folks and the chassis manufacturer. And it was a temporary slowdown but we're hard at it now and we are anticipating very busy activity and rolling trucks out as planned for the rest of the year.

Operator

Thank you. And the next question comes from Maggie MacDougall from Cormark. Your line is now open.

Maggie MacDougall

I wanted to follow up a bit on one of your Yuri’s questions and just talk a little more about the growth in the U.S. Very curious, if a lot of what you're seeing in the quarter and recently is digging deeper in terms of penetration in your existing markets, or existing markets or if it's largely coming from growth into new areas via that bootstrapping technique that he was discussing?

Paul Vanderberg

Yes. Great question, Maggie. And I'll go back and make some comments on 2018 and then roll it into 2019. We've had really good success in both penetration and existing areas where we’re established and also expanding in the new geographic areas. We had really good success last year in that. It was very gratifying to see. And we continue to anticipate additional penetration in our existing areas. And a lot of it is, you can expand your radius from existing branches before you set up new branches, but a lot of it also is customers that are not using hydrovac. And we continue to see conversion of customers that were using alternative methods of nondestructive excavation, who are more and more adopting hydrovac. And our sales and marketing efforts with the big municipalities and utilities and other operators of critical infrastructure, continue to give us feedback that there's opportunity for penetration. So, we see both legs as growth opportunities continuing into the future.

Maggie MacDougall

And then, on that note, I noticed that you made some comments in your prepared remarks just on labor and tightness of labor in the U.S., which is I’m sure not surprising to anybody. But wondering if you could comment on whether you foresee access to labor being an issue at any point in your future for you guys?

Paul Vanderberg

Yes. Well, we have seen it as issues in certain regions where it has limited our ability to expand as fast as the market opportunity is there. So, it's one of our critical strategic initiatives. It's our number one strategic initiative for the management team to focus on. So, it's all about execution. We continue to add to our recruiting resources. And we're also just in the process of starting up a very exciting program for operator training. We're establishing a North American Training Center, adjacent to our Brownsburg, Indiana, U.S. corporate office. And actually, as this call is underway, we have our first group of trainees in that. So, we're looking to actually improve our onboarding, improve the initial experience of operators by bringing them in, training them in the Badger way and putting the Badger stamp on them. And we're hoping that'll accelerate our rollout of new operators into the business and also make a better connection to improve our retention rates with operators.

So, this is a very exciting initiative. It's a new one. And it's one that I think is going to be bearing fruit in the coming months and years. So, stay tuned on that. But, we're pulling out all the stops on not only recruiting but also training and retention.

Maggie MacDougall

Okay. And then, one final question for me. I'm wondering if you could just speak to trade, a lot of headlines recently around what's going on between the U.S. and China. And I'm curious if there are any potential issues you've identified either from a supply, procurement or cost standpoint or from customer sentiment?

Paul Vanderberg

Yes. From the supply side, with our chassis and other components, we have not seen a whole lot. Things have been quiet since the tariffs were introduced, the cross border tariffs last year. And even that is settled down and our cost from that has settled down. There could be broad economic impact. We saw the way that the financial markets have reacted. But unless it’s a very broad-based economic decline that is somehow triggered by trade issues, we would not see a direct impact to our customers and to our customers’ projects.

Maggie MacDougall

Okay. Thank you very much, Paul.

Paul Vanderberg

Yes. Thanks, Maggie.

Operator

Thank you. And our next question comes from Stephen Harris of GMP Securities. Your line is now open.

Stephen Harris

Good morning, guys. Just a couple of ones for me. I’m wondering if we can dig a little deeper into some of the areas of strength you’re seeing in the markets, particularly in the U.S., either on a regional basis or an industry basis. What’s stands out as being particularly strong, and are there -- and what are obviously very good results or are there any pockets of weakness in there as well?

Paul Vanderberg

Yes. Great question, Stephen. We have hesitated to disclose a lot of our regional results for competitive reasons historically and I really hesitate to provide too much detail. But, it’s safe to say that we do have a range of markets in a range of attractiveness of different markets. Some of our newer markets are the ones where the best growth opportunities are and some of our older, more mature markets in Western Canada would be a very challenging one now, especially with the downturn in oil and gas, would be less attractive from that perspective, if you look internally. But, we have identified and are executing on growth in markets, which we think are going to be very attractive longer term setting, and they are also very attractive from a margin perspective. So, that’s why we’re driving so hard in the U.S. because the opportunity to grab the high ground is there.

Stephen Harris

Okay. And I wonder if I could also dig a little deeper into something you talked about in your MD&A where you talked about how your labor, particularly your variable labor costs as a percentage of revenue had declined. And that sort of stands in contrast with what we’re seeing generally out there as being a relatively tight labor markets in the U.S. What are you doing specifically to achieve that? And how much of that is initiatives that would be say apart from hourly labor costs?

Paul Vanderberg

Yes. Good question. The labor efficiencies we’ve seen and we’ve been able to capture over the last several years have been very closely linked to our utilization improvements in RPT. And those two are pretty closely linked. And when the fleet is very busy, it’s very efficient; when the fleet is not busy, you have to manage labor cost by sending guys home when you don’t have work for them; calling them in, when you do have work. It’s a lot better if the machine is working and working consistently and working busy. So, that’s a hand-in-hand type of the leverage, and that’s why we’ve also worked very hard to develop our sales and marketing organization. It not only helps us on the growth side, but good sales and marketing programs help us even out and stabilize our demand, so we don’t have the big ups and the big downs. We have a real focus on growing our customer -- number of customers to broaden out the customer base. So you don’t have the ups and downs, and it’s really part of our sales and marketing program.

So, that would be the main one, sales and marketing that we continue to drive as an internal improvement initiative to level out our volume. And that really helps managing labor expense. And it also helps on retaining operators. When the operators get steady hours, they get that 50-55 hours a week, life is pretty good. When the hours are inconsistent, that’s when we have challenges retaining operators. So, all these things work hand-in-hand, and not only the attention but also the evening out the customer demand are two very key business improvement initiatives we’re very focused on. Great question.

Stephen Harris

So, have you seen labor turnover go up or down this year versus last?

Paul Vanderberg

Yes. We’ve had some modest improvement in retention, which we’re very pleased about. And we're -- like I was talking about earlier with the new training center and the additional recruiting resources that we put in place in Q3 last year that are just getting up and operating, we're optimistic, we're going to continue to push retention higher over the next year or two. There is no magic wand you wave over this. We all see the U.S. unemployment statistics. But, there are things we're very confident we can do to continue to push retention rates higher over time. It's a game of nickels and dimes. It’s not a magic one.

Operator

Thank you. And the next question comes from Jonathan Lamers from BMO Capital. Your line is now open.

Jonathan Lamers

The revenue per trend -- per truck trends in Q1 were very strong. Paul, can you comment how the trends for U.S and Canada were as Badger exited Q1 and how the -- your outlook for the spring and summer construction season may have changed since we last spoke in March.

Paul Vanderberg

Yes. I’m happy to comment on that. Q1 was a solid quarter with year-over-year improvements up 8% in RPT. I did comment a minute ago that early Q2 we’ve seen some wet weather. So, it’s been a bit of a mix bag with the volumes in associated RPT and we do see though once it dries out, we're going to see real explosion of business based on the activity levels that our folks in the region see. So, it’s just a matter of when spring really happens and when the dry weather really happens. And we're ready for it, we have the operators. We're building the trucks and we know where they are going, when they came off the line at Red Deer for the year. And it’s going to be, we anticipate, an extremely busy Q2 and -- end of Q2 and end of Q3, but it was a slow start to Q2. So, we'll see how the quarterly number goes. This is pretty normal when you're in the construction business working outside, it happens.

Jonathan Lamers

And just on the trucks that are coming out of Red Deer, with the delay in Q1, Red Deer might need to put out as many as 50 trucks a quarter over the coming quarters, which should be back to pre oil and gas downturn build rate. Is the capacity there, is this the labor ready for building that kind of a rate.

Paul Vanderberg

We see that as very achievable and there are other things that we can also do at the plant if we need to go higher. But the guys at Red Deer are staffed up and staffed appropriately, and we have all the supply chain and the components lined up to meet our build targets for the year. So, again, this was about a one-month delay in programming these computers in the transmissions and in the transfer cases and all the different components. So, the team did a great job. But, we had about a one month delay there. And the trucks were built, we just couldn't send them out. So, it wasn't like they weren't built, it was just a programming issue. So, we're very confident that we're going to be fine for their guidance for the rest of the year.

Jonathan Lamers

And just on the truck cost, the average CapEx per truck was a bit high in Q1. I assume that was because of this disruption in January. And if you could just comment on that, and also, maybe whether you're seeing an adjustment to chassis prices on your latest round of orders for next year, given that fuel costs have declined so materially?

Paul Vanderberg

Well, we've seen the changes with the steel costs, for sure, and that's been positive. But, the U.S. economy is extremely strong, and the truck chassis manufacturers are very, very strong in their demand. So, we've seen some modest increases in chassis pricing, which is to be expected. But, we're very confident we're going to get the chassis that we need from our suppliers. And, but we don't see any major cost changes on the chassis side.

Jonathan Lamers

Okay, thanks. And on the 2019 guidance, I was a bit surprised as the Company didn't raise its guidance, given that we now have the IFRS 16 benefit to EBITDA, Q1 results were strong, the Canadian dollar seems to have gone down to a lower level. Could you explain the thinking in not increasing the guidance at this stage?

Paul Vanderberg

Yes. I’m happy to provide some color, Jonathan. IFRS 16 was something that went into our initial guidance for 2019, so that was baked into our thought process, we knew that was coming. And, I did comment on the wet weather in Q2. And it's still early in the year. If you look back at our seasonality, Q2 and Q3 are the big quarters, volume wise, and then business usually tails off in Q4. So, once we see how spring kicks in, we’ll certainly be looking to update our guidance, but it's still pretty early in the year too. So, those are the two major factors behind the thought process.

Jonathan Lamers

Okay. And if I could just ask about the margin improvement that we did see in Q1, I was interested in this commentary about the operating leverage. Within the direct costs bucket, is the shoe too big for the foot there, the way that -- similar to the comments you made in the past about G&A?

Paul Vanderberg

Well, we had a pretty good experiment on how much operating leverage can fit into that shoe back in Q4 with all the emergency relief, and we saw what happened with margins there. So, when you look at the run rate we had in our fleet utilization, and any associated operating leverage with that in Q1, we're not even close to the -- how far we pushed it last Q4. So, we’d love to test it again. But we had a pretty good stress test on that, which turned out to be very positive margin wise in Q4 with that $22 million in emergency relief work that we very successfully managed across our branch network and across our fleet, with RPT over $40,000.

Now, you can't continue that forever. But, it gives us a little bit of a view and indication that Badger's network and the scale of operations provides a lot of flexibility and provides a lot of advantages to manage swings in volume. So, we'd love to test it again. And maybe, we’ll get a chance later in the year.

Jonathan Lamers

Within the Canadian business, there was quite a notable margin percentage improvement in Q1 2019 versus Q1 2018. Has there been a shift in mix of Canadian business since the prior year?

Paul Vanderberg

Yes. Well, a couple of things. We continue to drive all the same business improvement initiatives across the whole organization, including Canada. Our intelligent pricing initiatives have benefited our Canadian margins and we manage the fleet utilization very closely and move trucks around. But the other aspect and it’s an accounting item regarding IFRS 16, we have in Canada more bigger leases on real estate as a percentage of the business than we do in the U.S. So, the impact from IFRS 16 was a little bit bigger in Canada just based on the structural mix of our historical leases, some bigger ones and longer term ones than we have in our U.S. business. So, there is a little bit of impact there too. But we continue to have good success with pricing initiatives and other internal improvement opportunities we’re going after across all of our operations including Canada.

Jonathan Lamers

Okay. Thanks for your comments.

Operator

Thank you. [Operator Instructions] And our next question comes from Matthew Weekes from Industrial Alliance. Your line is now open.

Elias Foscolos

Hi. It’s Elias for Matthew.

Paul Vanderberg

Good morning, Elias.

Elias Foscolos

First of all, I just wanted to again congratulate you, Jerry. I know it’s been an interesting five years there. Moving on to one question, because most of my questions have been asked. It’s a bit of capital allocation question and a bit of the guidance question, but I’m going to try to pinch the issuer bid. Given that you haven’t changed your guidance, would it be safe to assume that the pricing that you stepped into the market in Q1 would be above the same pricing that you would look at going forward, or are there some other factors that might change that we can’t see other than guidance?

Paul Vanderberg

Elias, are you asking a question regarding the pricing at which we may execute under the NCIB?

Elias Foscolos

Yes. Yes, just asking in general terms, would it be similar to the first quarter amount or given that you haven’t change guidance or is there something else that we might be thinking of?

Paul Vanderberg

Yes. Well, the Board updates the strategic plan every year. And as part of that we look at what we think the intrinsic value of the Company. That’s just good discipline as part of the strategic planning and process. And all of that would be reflected into our thoughts on the potential pricing to repurchase or again cancel shares under an NCIB. So, if there’s activity out there, that will be disclosed as per the disclosure regulations, and it will be made public under those regulations.

Elias Foscolos

Okay. I’ll leave at that then. Thanks.

Paul Vanderberg

Yes. Thanks, Elias.

Operator

Thank you. And our next question comes from Jeff Fetterly from Peters & Company. Your line is now open.

Jeff Fetterly

Good morning, guys. Just a follow-up on the Canadian margin side. So, I’m just trying to understand and reconcile. So, year-over-year, Canadian revenue was flat, your margins were up meaningfully implying that you took about $2.5 million of cost out of business or the revenue mix was there. I understand your comment about the IFRS benefit and the waiting towards Canada. But, is there any items in Q1 ‘19 that were particularly profitable that wouldn’t necessarily recur, or has there been any material structural change in the cost structure for the Canadian business? Because revenue’s been stagnant no matter which quarter, we look at and the margins are obviously quite strong in Q1.

Paul Vanderberg

Yes. Good question, Jeff. I mean, we’ve been looking at the Canadian business for cost reduction opportunities for several years and that process continues. So, you always have different opportunities, and we’re very focused on that. As everyone on this call knows, the Canadian market is our most mature. And we do have a fairly high level of competitive intensity, both east and west in Canada. So we continue to focus on that. And this is something you grind away at, small items here and there, and it’s picking up pennies and nickels to drive margin higher. I did mention earlier, we’ve had some good success in our strategic pricing initiatives. We’ve had strategies that have been driven centrally there with some very good success. And these are things we’re just going to continue to grind away at. There is not a major factor. I did call out IFRS 16 because it was a one-time lump with a change in accounting to move it down -- the expense down in the depreciation line as opposed to lease expense. But, those are the factors. And you will see us continue to drive internal improvement initiatives across the business and managing labor costs all those things are just part of Badger's day-to-day operations and we’re very pleased with the process we’ve had and we’ll continue to stay focused on it.

Jeff Fetterly

Is it reasonable to assume that Q1 ‘19 compared to Q1 ‘18 net pricing would have been higher but volume would have been lower?

Paul Vanderberg

Yes, I would agree with that, for Canada specifically. Yes.

Jeff Fetterly

Yes. Sorry, on the Canadian side. Okay. Just a follow-up in terms of the chassis and manufacturing side. With the implementation or change that you mentioned, did you guys change chassis providers or is it just a model update?

Paul Vanderberg

We did not change providers, it’s the new model. And we’re going to all automatic transmissions as opposed to manual transmissions. The new units have some very great technology. And the other aspect of going to automatic transmissions is it really opens up a much broader funnel of driver candidates because a lot of commercial drivers come out of training schools not trained for manual but they are on automatics and pretty much all the over the road trucks that are being built and have been built for a long time are automatics. So, it's not only a technology improvement but it's also an opportunity to dramatically open up the candidate funnel for drivers, for commercial drivers in North America. So, we're very pleased with how it's transitioned. It was a little bit of sweat in January when we were working on the programming. But, the guys have done a great job and we're off to the races for the rest of this year. So, there's a really neat labor component to the change too.

Jeff Fetterly

What's your lead time for ordering chassis or the new chassis right now?

Paul Vanderberg

Lead times are about the same. They're pretty much close to a year right now. That's a pretty good KPI on how strong the U.S. economy is.

Jeff Fetterly

And so, when you think about setting up for 2020, is at this point your ordering cycle and thought process to maintain the same cadence?

Paul Vanderberg

We're ordering for next year based on what we expect in our 2020 financial plan.

Jeff Fetterly

Would that be materially different than the build rate that you’re currently working on for 2019?

Paul Vanderberg

I can't comment on that. We only gave guidance for 2019.

Jeff Fetterly

Okay. I thought I’d try. Thanks, Paul. I appreciate it.

Paul Vanderberg

Good try, Jeff. I appreciate that, as always.

Operator

Thank you. And our next question comes from Saurabh Suryavanshi from Dixon Mitchell. Your line is now open.

Saurabh Suryavanshi

Hey, guys. Most of my questions have been answered. Paul, just on the NCIB, I just wanted to understand the thought process from the Board of intrinsic value. Because, based on your guidance and your plan for trucks, you still are in a free cash flow mode. So, is that the idea is to delever more or actually use that for either for -- I don't know if there's anything on the acquisition front or the buybacks are actually in place?

Paul Vanderberg

Yes. I appreciate that question. And good morning, Saurabh. We -- as I mentioned a minute ago, the Board does consider intrinsic value in capital allocation decisions. And that would include not only NCIB, but also dividends. And I'm pretty confident that this Board will continue to evaluate all aspects of capital allocation going forward, balanced against the needs to continue to support growth in the fleet and growth and working capital to support higher revenue levels. So, those are the factors we look at, across the piece.

And, what you'll see us do is any purchases we do make, will be certainly considering of and reflecting the board's view of intrinsic value. So, you'll see that as that comes out. I'm not really able to comment much more on that. But, we do consider having an NCIB in place as an important part of our capital allocation. And as everyone knows, this was a new tool that went into Badger's tool kit of capital allocation for 2018. We're very pleased with the progress we made in 2018 and early 2019 with canceling, buying and canceling 1.3 million shares. And we consider this to be an important part of our capital allocation and also in driving long-term shareholder returns and returning money to shareholders over time.

We do see the opportunity to return money to shareholders with an NCIB, based on Badger's very strong cash flow generation. And, we're also very focused on being able to support the capital needs for future growth for Badger. So we think all those can be done. And we'll see what happens on the leverage side. But, we do also agree that Badger could stand a little higher degree of leverage over time. And, that's something that we’ll migrate into, over time.

Saurabh Suryavanshi

Okay. Thanks, guys.

Paul Vanderberg

Thanks, Saurabh.

Operator

Thank you. And I'm showing no further questions at this time. I'd like to turn the conference back over to Paul Vanderberg for closing remarks.

Paul Vanderberg

Okay. Thank you. And thank you for everyone's participation. On behalf of us all, we really want to thank our shareholders, our customers, our employees for continuing to support Badger. This is a great business. And it's our objective to get all of you a lot more Badger. So, thank you for your participation in the call.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone, have a great day.