Mr. Paul Vanderberg reports
BADGER DAYLIGHTING LTD. ANNOUNCES RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2017
Badger Daylighting Ltd. has provided its results for the three months ended March 31, 2017.
FINANCIAL HIGHLIGHTS
($ thousands, except per share information)
Three months ended March 31,
2017 2016
Revenue
Hydrovac service revenue $92,490 $79,457
Other service revenue 9,201 8,700
Truck placement revenue 120 -
Total revenue 101,811 88,157
Adjusted EBITDA 19,856 19,592
Profit before tax 5,531 5,127
Net profit 3,698 3,668
Profit per share -- diluted ($) 0.10 0.10
Cash flow from operating activities before changes in working capital 19,697 19,474
Cash flow from operating activities before changes in working capital per share -- diluted ($) 0.53 0.52
Dividends declared 3,673 3,339
Overview
Key highlights for the three months ended March 31, 2017:
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Q1 2017 revenue of $101.8-million, up 15.5 per cent from 2016;
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Q1 2017 revenue growth in the United States was 23.4 per cent before conversion to Canadian dollars and Canada was 9.5 per cent;
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Continued growth in non-oil-and-gas regions. Revenue improvement in oil and gas regions for both Canada and the U.S.;
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Q1 2017 adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $19.9-million versus $19.6-million in the prior year. Adjusted EBITDA margin declined to 19.5 per cent from 22.2 per cent in the prior year due to higher direct operating costs;
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Cash flow from operations increased to $17.8-million from $16.2-million. Net profit was comparable between periods while reduced working capital requirements provided increased cash flow from operations;
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Badger had 1,031 daylighting units at the end of the first quarter of 2017, reflecting an addition of 23 units and the retirement of 16 units in that period. Of this total, 688 were included in the U.S. fleet and 343 were included in Canada. The new units were financed from cash generated from operations.
Management comments
In our 2017 outlook we stated that Badger would pursue continued growth in our non-oil-and-gas markets and that we were well positioned for any recovery in oil and gas markets. In the first quarter we continued to demonstrate strong revenue growth from our strategy to diversify away from oil and gas markets, as well as realized an increase in revenue from oil and gas markets.
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Hydrovac service revenue has increased 16.4 per cent to $92.5-million in the first quarter of 2017 from $79.5-million in the same period of 2016. Total revenue in Canada has increased 9.5 per cent while total revenue in the U.S. (in U.S. dollars) has increased 23.4 per cent.
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While year-over-year revenue growth continued to be strong, direct costs increased as a per cent of revenue leading to a decline in gross margins in the quarter.
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In particular, higher hourly wages and benefits, repair and maintenance, and fuel expenses mostly offset the benefit of higher revenues in the quarter. The run rate of these costs was higher in the early part of the quarter, improving as the quarter progressed. Badger exited the quarter with these expenses in a similar run rate to last year's rates as a per cent of revenue.
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We saw welcome year-on-year improvement in our oil-and-gas-driven geographies during the first quarter of 2017. While market opportunity is growing, we continue to see rate pressure in these regions driven by lower hydrovac industry utilization.
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The U.S. non-oil-and-gas market continued with strong revenue growth in the quarter. Direct cost increases offset a portion of the benefit of revenue growth, with the cost of training new Badger operators, repair and maintenance, and higher fuel costs being the leading factors. Badger has continued to grow regionally, and as a result has recruited and trained many new operators within a competitive U.S. market for commercial (CDL) licensed drivers. The company has also recruited and trained a number of managers that are new to the hydrovac business. Badger estimates that there is approximately an 18-month experience curve for new managers, during which they progress in mastering all aspects of local operations including human resources, sales, scheduling, fleet, operating expense management and collections. Expense management improves with management tenure and Badger expects that this pattern of improving expense management with tenure will continue into the future.
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Eastern Canada Q1 2017 revenues were lower than the previous year. The Eastern Canada market continues to be very competitive and rate pressures have resulted in Badger passing on some business at low profitability. Q1 margins improved from prior year, driven by lower direct operating costs and lower direct wage costs in particular. We are also initiating operations management changes to reduce the expense structure. Specific initiatives are targeted at optimizing the operating location network, dispatch/scheduling and administration costs. We expect the Eastern Canada market will continue to be competitive and we are positioning the region to be as efficient as possible.
- Badger continues to execute on its strategies to build its organizational capabilities including reducing operator and area manager turnover, increasing operations efficiencies, driving sales growth, and improving on our business processes and practices. Senior positions filled so far in 2017 include:
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Vice-president, human resources: Tracey Wallace will join Badger in June, 2017. Ms. Wallace has 28 years in HR and has served as head of HR at large North American businesses.
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Vice-president, business development: Tim Reiber has accepted the role as vice-president, business development. Mr. Reiber was most recently vice-president of operations, Western United States, for Badger, and has five years of experience with Badger and 23 years of experience in senior sales and operations roles.
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Vice-president, Canada operations: Wade Wilson joined Badger in January, 2017, and has assumed the role of vice-president responsible for all Canadian operations. Mr. Wilson has 38 years of experience as an operator in fleet-based service businesses. Mr. Wilson will focus on improving the operational effectiveness and efficiencies of Badger's Canadian operations which is important given the level of competition across the Canadian market.
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Vice-president of U.S. central region: Mike Tunney also joined Badger in January, 2017, as vice-president of U.S. central region. Mr. Tunney has 38 years of operations experience with fleet-based service and transportation businesses.
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Vice-president of U.S. Pacific region: Kevin Carnahan joined Badger in April as vice-president Pacific. Mr. Carnahan has 25 years of senior operations and sales experience in fleet-based industrial services.
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Revenue per truck (RPT) in the first quarter of 2017 has improved compared with the first quarter of 2016 with the increase in revenue and continuing efforts by the operations team to relocate Badgers to markets with higher opportunity. During the quarter, Badger relocated 47 units. RPT was at $24,747 through the first quarter of 2017, a 17.2-per-cent increase from $21,105 in the first quarter of 2016. RPT in Canada is higher than that in the U.S. Further increases in RPT and improved utilization in general will result in the need to increase the build rate of Badger units.
- Badger is increasing the annual build rate to be between 100 and 160 units, versus the range of 70 to 100 provided with our 2016 annual report. Badger continues to expect to retire 40 to 50 trucks in 2017. To date Badger has removed 16 trucks from the fleet in 2017.
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Badger's balance sheet continues to be strong and capable of supporting the increase in investment in new Badger units. Total debt less cash and cash equivalents is $41.0-million. Nothing is drawn on its $125-million syndicated revolving credit facility and the ratio of total debt less cash and cash equivalents to adjusted EBITDA is 0.39. Badger has the capacity to build more trucks when needed.
Badger manages its business for long-term growth and success. In the first quarter of 2017 Badger continued to focus on growth, significantly strengthened its organization, increasing the focus on human resources, business development, operations management and on maintaining a strong balance sheet.
Outlook
Badger continues to drive growth across a broad range of infrastructure-related markets. Additionally, with this quarter, there is growing evidence that the oil and gas regions are stabilizing and beginning to grow.
The company has gone through a significant period of adjusting its operations across its regions, focusing on end use market segments that provide opportunity for continued growth. The operations team has focused on improving Badger utilization, relocating equipment from markets with lower opportunity to those with growing opportunity. RPT improvements reflect these efforts and growing RPT is driving an increase in the Badger build rate.
As always, the key to any strategy is in execution. The company is frustrated that higher direct operations costs in early Q1 offset the earnings benefits of revenue growth. The team is focused on efficient operations and improving margins by managing both rates and expenses. Longer term, the company is adding the management resources to drive the strategy of doubling the U.S. business in three to five years and adding 10- to 15-per-cent growth in Canada; at attractive adjusted EBITDA margins.
INTERIM CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in thousands of Canadian dollars)
For the three months ended
March 31,
2017 2016
Revenues $101,811 $88,157
Direct costs 78,171 64,635
Gross profit 23,640 23,522
Depreciation of property, plant and equipment 10,938 11,276
General and administrative 3,784 3,930
Share-based compensation 2,113 (348)
Operating profit 6,805 8,664
(Gain) loss on sale of property, plant and equipment (34) 2,236
Finance cost 1,277 1,348
Foreign exchange loss (gain) 31 (47)
Profit before tax 5,531 5,127
Current income tax expense 3,267 3,363
Deferred income tax (recovery) expense (1,434) (1,904)
Income tax expense 1,833 1,459
Net profit for the period 3,698 3,668
Other comprehensive income
Exchange differences on translation of foreign operations (1,766) (14,458)
Unrealized foreign exchange gain (loss) on net investment hedge 778 6,576
Other comprehensive income (988) (7,882)
Total comprehensive income 2,710 (4,214)
Earnings per share
Basic and diluted 70.10 0.10
We seek Safe Harbor.
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