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Edited Transcript of BAD.TO earnings conference call or presentation 6-Nov-19 4:00pm GMT

Q3 2019 Badger Daylighting Ltd Earnings Call

CALGARY Nov 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Badger Daylighting Ltd earnings conference call or presentation Wednesday, November 6, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Darren Julian Yaworsky

Badger Daylighting Ltd. - VP of Finance & CFO

* Paul J. Vanderberg

Badger Daylighting Ltd. - President, CEO & Director

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Conference Call Participants

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* Daryl Young

TD Securities Equity Research - Mining Research Associate

* Elias A. Foscolos

Industrial Alliance Securities Inc., Research Division - Equity Research Analyst

* Jeffrey Eric Fetterly

Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst

* Jonathan Lamers

BMO Capital Markets Equity Research - Analyst

* Maggie Anne MacDougall

Cormark Securities Inc., Research Division - Director of of Institutional Equity Research

* Stephen C.A. Harris

GMP Securities L.P., Research Division - Head of Research

* Yuri Lynk

Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the Badger Daylighting Limited 2019 Third Quarter Results Conference Call. (Operator Instructions). I would now like to turn the call over to your host, Mr. Paul Vanderberg, President and CEO. You may begin.

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [2]

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Thank you, Kevin. Good morning, everyone, and thanks for joining our 2019 Third Quarter Investor Call. With me today is our CFO, Darren Yaworsky; our COO, John Kelly; and Jay Bachman, our VP of Financial Operations.

Our 2019 third quarter earnings release, MD&A, and financial statements were put out after the market closed yesterday and are in the Investors section of our website and also on SEDAR. We're required to note that some of the statements made on today's 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 forward-looking 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 or implied. For more information about material assumptions, risks and uncertainties that may be relevant to forward-looking statements please refer the Badger's Q2 2019 Management Discussion and Analysis and Badger's 2018 Annual Information Form. Lastly, such statements only speak of as of today and this date and Badger does not undertake to update any such forward-looking statements.

So, let's jump right into the results. consolidated Q3 revenue was $183.7 million, up 9% from last year with adjusted EBITDA of $50.1 million, which was consistent with the prior-year quarter. Some color on revenues, Q3 revenue was 12% higher in the U.S. that in U.S. dollars with revenue in Canada, down 5% compared to last year.

Although overall growth was lower in Q3 relative to recent quarters, we are encouraged with results in particularly in a number of our U.S. markets. Similar to Q2 2019, the third quarter growth was really a regional story with a combination of regional factors driving the consolidated revenue growth. The majority of our markets continued to achieve solid growth, particularly in the U.S.; we opened 8 service locations in Q3 and 16 so far this year and expect to open several additional locations by year-end.

The opportunity in the U.S. to expand not only at existing locations and expanding the fleet there, but also opening new locations to drive growth continues to be significant. We added 55 hydrovacs in the quarter and retired 22 for a net add of 33 units. Revenue per truck per month in the quarter was $36,088 which was consistent with the prior year quarter and was particularly encouraging with solid uptake on the new units that we added and also encouraging in light of some of the regional operational challenges in the quarter and I'll speak to that next.

As detailed in our Q3 release, revenue growth in the quarter was impacted by the following factors. We had a very addition of regional revenue growth rates with the majority of our regions continuing to deliver solid revenue growth. Revenue growth in a number of regions, including the eastern U.S., the South Central and Ontario was solid. The upper Midwest and parts of the U.S. East Coast were impacted by the carry-forward impact of wet weather. It's been an exceptionally wet year in the Midwest. And we also experienced some lost workdays as Hurricane Dorian worked its way along the coast and as it worked this way up the coast, our market shut down in preparation for a hurricane that never came ashore when all the way south to north. Revenues in Western Canada declined and continue to be soft, as a result of lower oil and gas activity. This market and really specifically Alberta and Saskatchewan, it looks like it will be soft for some time, and there are some structural problems going to take a while to work through. As you would expect, we're optimizing the branch network, trimming expenses and relocating the trucks, all the things you'd expect Badger to do.

We are very pleased with the increased revenues and improved operational performance in Eastern Canada, the improvements that have been made by the team in Ontario over the past year have really move the needle on growth and margins in that mature market, we could not be more pleased

Badger continue to diversify in the quarter with the U.S. now at 80% of our third quarter revenue. That's up from 77% last year. As noted earlier, we continue to focus on that opportunity there is to grow in the U.S. Adjusted EBITDA in Q3 was $50.1 million consistent with the prior year quarter. Our adjusted EBITDA margin for the third quarter was 27.3% compared to 30.2% in the prior year quarter, primary factors driving the change in adjusted EBITDA and a EBITDA margin. We're number #1, continued growth in the U.S. As I mentioned, U.S. dollar revenues up by 12%. We continue to also make progress on our strategic pricing initiatives with hydrovac rates consistent to modestly higher across the majority of our regions.

Also versus last year. IFRS had an impact of approximately $1.1 million to the positive and an EBITDA level. Offsetting these positives were a combination of lower activities in Western Canada and the carry-forward impact of wet weather as I mentioned a minute ago. And these both impacted revenue growth and labor efficiency, as you know we hire and train operators ahead of growth and that takes time. So managing manpower and balancing that with marketing activity is always, always a real art.

However, adding operators and trucks is our business model. That's what drives our organic growth and managing of organic growth is an ongoing focus. I don't see this ever changing in our Badger business model. Also impacting third quarter in 2019. Year-to-date, margins are higher G&A costs, due primarily to our ERP implementation and I'll speak to that in detail a little bit further. So related to our ERP implementation. As you know, implementation of this new system is a huge project for Badger this year. This has been the focus of the entire organization. It has been all hands on that. We have committed leaders to this project from all across our business functions showing to ensure the success of this implementation. And we've had to back fill the number of roles as necessary. That's part of the process. I am very pleased to report that the first phase of our ERP rollout was successfully launched on October 1 with all of our corporate functions and back office in our --Western operating center, which is about 20% of the operations going live. It's not easy being first. We went live with the central operating center this past Monday, which was targeted for the beginning in November, and that's another 40% of our operations, things are going very well.

The rollout of our Eastern operating center is scheduled for December 1 in our franchisees will follow I could not think everyone enough within the organization who have and continue to assist on this very important initiatives. A special thanks goes out to those part of the ERP implementation team who lead this process, a tremendous amount of time and effort has gone into ensuring the success of this very important initiative. And I can tell you the month of August in particular was extremely intense. The team worked, I believe 23 straight days.

And just a comment here for those on the call who have gone through one of these systems. As I mentioned earlier, it is all hands on deck failure is not an option and these projects need to go off on time and be successful out of the box. There is no going back and Badger has been successful in carrying this off. I am very pleased.

So some related color on G&A as our current run rate is at elevated levels due largely to this ERP implementation. We look forward to completing the implementation and what you'll see us do then is leveraging the integrated IT and operation system to drive efficiencies and drive our cost down. This is for sure. The visibility that the operations system provides it's already very evident to our managers that around the system along with the efficiencies on our admin processes, we are very confident that we'll be grinding SG&A costs down and we have the objective of exiting 2020 at a G&A run rate significantly below where we've been over the last several quarters.

Our long-term target for G&A 4% of revenue remains unchanged. And we are confident that the investments we're making providing Badger with the scale required to support our long-term growth will be a big pay off for us. Some comments on net earnings for the quarter. Net earnings in third quarter were $25.8 million compared to $25.7 million in the prior year. Earnings were impacted by the same drivers as discussed a minute ago on adjusted EBITDA with the further impact related to slightly higher depreciation expense, which was offset by reduced share-based compensation expense,

Depreciation expense was up based on growth in the fleet and decrease in share-based comp was down based on the lower share price during Q3. Regarding the balance sheet. Badger's balance sheet continues to be strong, providing financial flexibility to support growth and manage our capital allocation. As of September 30, total debt less cash was CAD 179.3 million or 1.1x trailing 12 months compliance EBITDA. During Q3, we repurchased and canceled 589,000 shares under the current NCIB program. And since we began repurchasing shares under our original NCIB program in late 2018, we repurchased approximately 2 million shares and cancel down or about 5.4% of the pre-NCIB float.

On balance sheet item, I want to comment on is our current receivables aging, due to the combination of growth in the business, the internal focus on the ERP project, the aging of our receivables in our portfolio is not at historic levels and not where we foresee it to be in the future. Darren and John's teams are very focused on getting back to Badger's historical aging standards and improving AR and are aging beyond those levels.

I'd like to touch next on our 2019 and 2020 financial outlook. As outlined in our third quarter press release Badger adjusted as 2019 financial outlook for adjusted EBITDA to a range of CAD 155 million to CAD 170 million from the previous range of CAD 170 million to CAD 190 million. Our 2019 hydrovac build in retirement ranges remain unchanged.

The primary driver of the reduction in guidance was due to weaker-than-anticipated Q3 results, due largely to the temporary increase in cost, I discussed a minute ago. The primary driver in the reduction guidance was Q3 results. And these costs that we're running higher are expected to be approximately CAD 10 million by year-end. These have been incurred through 2, 3, and are expected to be incurred through the end of the year.

The temporary and construct staff required for the implementation as well as back fill for our Badger managers committed to the project. Our one component of the CAD 10 million estimated cost. We took our time with system and user acceptance in July, August and September, which resulted in those managers committed to the project and the backups being required in G&A cost continuing an expense as opposed to going back in the operations. And what I mean by that is we had originally scheduled to go live on July 1 and we spent more time in July, August and September doing testing to make sure we get this right, and we got it right because it's going live very successfully.

So we had these expenses continue longer than we planned. We've also incurred expenses to upgrade Badger's network. Our communications network and all the switches and the components that go with that. We did not include this in the original project budget it's required by Oracle and we didn't include it in the budget, because we knew that Badger would needed eventually, but the Oracle implementation accelerated. So, I guess we're a little conservative there.

The third component is the project cost run rate and how the project costs are capitalized versus being expense. Based on accounting rules costs are capitalized until the system goes live and these are the burn rate costs on the project, the whole team. We went live with corporate in the west on October 1, so project cost began going to expense starting October 1 and we'll continue there through year-end.

So those are the major components that make up the CAD 10 million. So some color on project timing. We did make the decision as I mentioned a minute ago to perform our system and user acceptance testing in July through September. This has made a huge difference in how smooth our go lives have been. The original plan called for 3 go live waves, beginning in July than October and then December, with a month in between each to tune things up because of the time we spent on testing. We're now going live in October, November and December without the months in between. As I mentioned, we use that time to make sure the system was ready to go.

We're still meeting our year-end timing which is excellent. We'd originally scheduled to have everyone up and running by year-end. But I have to say I could not be more pleased with this decision, the proof is and how smoothly the go lives have gone. But of course it did have implications for our temporary G&A costs and I have to say I do it all the same way again.

So despite the reduction in the 2019 outlook, we continue to see solid growth opportunities in the business for the remainder of 2019 and into 2020. We introduced our 2020 financial outlook with adjusted EBITDA of CAD 175 million to CAD 195 million and the hydrovac build of 200 to 230 units, with retirements at 50 to 70 units.

As highlighted in the Q3 release, the 2020 outlook includes continued revenue growth as we anticipate increased activity and also increased customer adoption of hydrovac across the majority of our markets along with benefits from ongoing pricing and cost reduction initiatives. Badger's outlook on market opportunity continues to be very positive. We are very pleased to be able to communicate today that during the fourth quarter. But actually in October, we will achieve Badger strategic objective of doubling the U.S. business in 3 to 5 years from a base year in 2016.

We had established a strategic objective in 2017. And we have achieved this doubling in just under 3 years. It reflects the opportunity for hydrovac that we see in the U.S., as well as the strength of Badger's business model, our scale, our organizational experience and the management talent that it takes to operate successfully in the hydrovac business over time.

The key to Badger's business model is consistency in approach and that Badger has historically and continues to manage for the long-term. The investments that Badger's made in this business over the last few years from health and safety, environmental, human resources, sales and marketing, manufacturing fleet, our finance organization and now with our ERP system. our investments to create the operating platform that can profitably capture the significant market opportunity that we see,

we will be providing an update on Badger's strategic initiatives next week at our November 14 Investor Day, which will be held in Toronto. But I will say that it's safe to say that the update for next week on our U.S. revenue growth target, our new strategic target for the next 3 to 5 year period will be again to double our U.S. business. This will be the third time Badger's done that.

So with that summary, we'd like to now turn the call back over to Kevin and open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Yuri Lynk with Canaccord Genuity.

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Yuri Lynk, Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst [2]

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Paul, you've talked about Western Canada being weak for over a year now. Typically, we would expect Badger to move units out of a weak market like that. Is there anything unique to the units that are there that would prohibit them from being moved and utilized in other geographies and end markets?

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [3]

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(technical difficulty) accordingly so, as things continue you'll see us make the moves.

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Yuri Lynk, Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst [4]

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Okay. Yeah. I want to switch to the ERP the reduction in guidance. And just get some more color on that Paul. Can you clarify, I mean what took you guys by surprise and maybe more color on --the CAD 10 million increase in run rate SG&A. I'm not sure how to interpret that. I think most people had 2019 SG&A about CAD 10 million higher than '18, so I'd frankly I don't know what the surprise was and maybe you can just put some more color on that for us?

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [5]

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Yeah. I don't necessarily view it as a surprise. We really started incurring these costs about mid-year. And as I mentioned earlier, there were the 3 major drivers for it. The one is the timing of the testing. We spent more time testing rather than going live July 1st and a number of our managers that were initially scheduled to go back into the operations on July 1st continued and actually, they still continue on the project.

And then you have the backfill for them. Part of that is temporary employees and part of those are contractors. So that's continued and it is what it is. I mean we made that decision to do the user and system testing and take more time on that. And like I say, I do it again. That decision is there. So that really kicked in. We had to make that decision in the back half of June. So that's number one. We also talked about the network upgrade that was required. And I guess you accuse us of being conservative from an accounting perspective, but we did not include that in the original project budget and the thought process for better or for worse, I guess you could say it's worse today, but those costs, which were a couple of million bucks in total, we basically we figured they'd be incurred at some point anyway.

So they're not really project related. It's just a matter of timing, might have been a year or 2 down the road versus now, that's probably pretty accurate. And then the third piece is that when the expensing, when the project burn rate began to be expense versus capitalized. And under the accounting rules, the costs are capitalized until the systems go live and that basically kicked in October 1. So we have a quarter of expense versus capital and that expense was at a higher rate, because of the factors I mentioned earlier, which is folks being that kind of the project longer and all the backup and consultants required for that.

So those are the major buckets that make up the CAD 10 million. I mean I don't think of the word surprise, these things happened over a period of months and the decisions were taken over a period of months and I guess the perspective I have is, you know, this is a one-time event in Badger's history. The ERP project is a huge commitment to Badger's business model and I'm sure, as you know other enterprises that do this and don't get it right.

I mean there is no choice, failure is not an option and the Badger Viking's have the boots on the beach and we burn them and we're going live and we're going very successfully live. So we're moving on and we don't expect this to that the run rate to continue, but I can tell you on G&A, we are very committed to grinding the G&A run rate down and we have, we have a sightline to getting it down significantly by the time we exit 2020 and we are totally committed to the 4% long-term run rate. It's not that often that companies do these projects. And I hope I don't do another one in my career. But I could not be more pleased with how successfully it's gone

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Yuri Lynk, Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst [6]

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No, I appreciate that Paul. I'm just again just trying to get a handle for, I mean what's implied by the Q4 guidance. Well, the full year guidance, which we can plug to get Q4. So do we expect, do you expect SG&A relative to the CAD 10 million to take a significant step up in the fourth quarter. As you go into the heart of implementation. Because we don't know how to take the CAD 10 million comment because I guess it depends on your starting point?

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [7]

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Yeah. So we would see it a meaningful step up in SG&A in Q4 and for all the reasons that Paul described and from Paul's perspective, we've also put in pretty clear action plan starting in Q1 and Q2 of next year to remove those costs. But I think it's also important to appreciate that when you go live with the new ERP system. That doesn't mean that your cost ends that actually means your costs from a support perspective and a people perspective sometimes goes up, so we did estimate to have more and increased support for the field if something did go wrong. We're locked into those costs. Unfortunately, we're not using that support because the implementation has gone so smoothly, but we are locked into those costs, which are going to create a meaningful increase in our SG&A in Q4.

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Yuri Lynk, Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst [8]

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Okay. So it's kind of like almost doubling sequentially in the fourth quarter?

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Darren Julian Yaworsky, Badger Daylighting Ltd. - VP of Finance & CFO [9]

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It, I don't want to give the specific number because that's getting --into too much disclosure, but it's a meaningful increase over quarter-over-quarter.

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Yuri Lynk, Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst [10]

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Yeah. And then last question, and then I'm going to turn it over to the others, but so how do we think about just the, I mean obviously once you, once you go live. I know the costs don't go away, but I think you're running a number of parallel legacy systems. Those will -- those should go away. So can you help us think about the what that SG&A run rate should be at the end of 2020? I mean obviously won't be 4%. Hopefully, it will be lower than what it is in '19 just that's a big gap that I need to put a number in my model and any help would be appreciated?

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Darren Julian Yaworsky, Badger Daylighting Ltd. - VP of Finance & CFO [11]

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Yeah. If you and I were having a beer I could probably give you the specific number, but that wouldn't be right either. The reality is that we're going to probably finish the year. We're going to finish the year likely north of 5% GS -- sorry south of 5% G&A trending to a rate closer to our 4% target in 2021. That's probably, but it's much clarity that I can give you without stepping over any kind of lines.

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Operator [12]

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Our next question comes from Maggie MacDougall with Cormark.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [13]

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So I just want to understand the commentary on SG&A related to the Common Business Platform and hopefully final question on this. But to clarify, the total cost of the project was estimated to be CAD 20 million to CAD 25 million. And then a portion of which capitalize a portion of which expense. Is that still the cost?

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [14]

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Yeah, we are at the top end of the CAD 20 million to CAD 25 million on the project and the cost we're talking about in the CAD $10 million would be in addition to that have been incurred, have been and will continue to be incurred in the operations.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [15]

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Okay. And so your -- as of the end of Q3, you're at the top end of the CAD 20 million to CAD 25 million or your budget continues to be that range, but at the top end of the range?

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [16]

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No, for the duration of the project our estimate is will be at the top end of the CAD 20 million to CAD 25 million range.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [17]

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Okay. Are you able to tell us how much is left to spend?

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [18]

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Not much, we're right at CAD 25 million.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [19]

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Okay, great. And so moving on then, I just wanted to talk a little bit about the U.S. revenue situation and I mean it sounds as though there is some different regional dynamics depending on what area you're looking at? You talked about slower general activity levels plus the carryover effects of weather and impacts from Hurricane Dorian. So the slower general activity levels, is that in reference to the weather effects or is that a separate bucket of dynamic?

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [20]

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Yeah, there is, when you think about Badger in our geographic diversification you look at 2019 I mean, it really has been a each quarter. It's been a story of regional activity. And as I mentioned, we continue to have really good growth in the Eastern U.S., our south central market, you look at Texas rate up through, the breadbasket has been very, very solid, great growth year-over-year in on Ontario, which a few years back people we're talking about is a market that was over saturated in no opportunity has had a very, very good performance this year,

Western Canada, which is Badger's traditional market and is still a significant market for us was off, but Canada in total was only down 5%, Ontario basically made up almost all the decline in Western Canada, which is pretty, pretty delightful. So those are the major pluses and minuses. I hesitate to give too much granularity on the regional trends but we always try each quarter to provide some directionality. And you know the fact of the matter Badger is diversified and we continue to diversify more as we expand geographically and as we expand our end-use market exposure, the wet weather in the Midwest continues to impact us. And as you know our upper Midwest, our Ohio Valley regions are 2 of our oldest and largest U.S. regions.

So you have a little bit of a weighted averaging on growth. So if you have a big more mature region that has slower growth versus smaller newer regions that have faster growth, those bigger more mature regions carry a lot of weight in the weighted averaging, so that factors there too. But we see continued opportunity and the markets out there and we are seeing actually our run rates in those older more mature U.S. markets improving as we get through the end of the year versus Q2 and Q3.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [21]

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Okay, moving on then, just on gross margin. Discussion around the impact of higher labor and related costs, including costs associated with recruitment training and the reduced labor efficiencies you saw due to the weather impact in a few other impacts on revenue growth. So are you able to give us an idea of the magnitude of sort of each of those different buckets being I guess in one situation a tight labor market and costs related to hiring and training and then the second bucket being the labor inefficiencies you experienced a carry-over of some of those weather impacts?

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [22]

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Yeah. If you look at margin, you just look at a couple of points of gross margin there. Labor in total is the vast majority of that. That's really what drove most of the delta. And the good news is managing labor is something Badger knows how to do and it's part of our DNA. What we've done this year is we've really made a concerted effort to continue to drive retention higher. We've had good success with continued modest improvement in retention and as you know we don't wave a magic wand over that, and move the needle significantly. So we're in our third year of improving retention for operators.

And we've also had cost pressures and hold up with the U.S. unemployment where it is, with the demand for commercial drivers where it is, it's a very competitive market and we've had to do some job leveling in different regions and have had to react a little bit. We are very focused on, basically driving offsetting price increases in those markets, but I'm not as happy about being able to time those 2 together as we might be able to be, but we are very focused on picking that up as we go forward. I can tell you there's specific plans for pricing moves based on the cost push side.

So we've got our arms around that and Badger always does. Managing labor in the hydrovac business, I got to tell you it's probably the biggest challenge there is and it's something Badger has done very successfully over decades. I've seen a number of smaller competitors and when you get a look under the tent at competitors that might be going out of business or for sale, the major delta between their performance on margin in Badger's is in the direct labor category so and generally their costs are much higher. So that's really where we are. We will get our arms around this and it's a pretty extraordinary conditions in the U.S., but the good news is the growth is there and with our organic business model, we have to have the operators in place and the trucks available to access that opportunity. So it's a bit of pay forward when it comes to direct labor costs.

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Operator [23]

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Our next question comes from Daryl Young TD Securities.

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Daryl Young, TD Securities Equity Research - Mining Research Associate [24]

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Just a question from here on the bad debts. The aging of 120 plus day receivable are you anticipating a write-off of any of these receivables or how should we think about that?

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Darren Julian Yaworsky, Badger Daylighting Ltd. - VP of Finance & CFO [25]

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Yeah. So we're not anticipating any write-offs that we haven't already looked into in, as part of the ERP go live we've actually done a complete scrub of our credit granting and action philosophy and implementing a new process for both. As part of that. We've also scrub through all of our aging and our collection practices. As it stands right now, we don't see any meaningful write-offs in those age buckets. However, we're going to have to change our collection process to be a little bit more aggressive to get our aging down to a level that's -- like a little bit more acceptable for our business. So at this point in time, we're not seeing any kind of material weakness in the agent, but we do not like the fact that our aging stretched out as far as it has.

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Daryl Young, TD Securities Equity Research - Mining Research Associate [26]

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And some of that's just a reflection of growth across the U.S. and having a larger platform?

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Darren Julian Yaworsky, Badger Daylighting Ltd. - VP of Finance & CFO [27]

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Transparently, it's a combination of 2 things, one is the growth in the business, the one is not necessarily having a disciplined approach to our collection in credit granting philosophy. And the latter is, which is what John and I working on hard to get that discipline re-instilled back into the company again.

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Daryl Young, TD Securities Equity Research - Mining Research Associate [28]

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Got it, okay. And then in terms of revenue growth in the U.S. in the last couple of years, you've benefited from ramp up in revenue per truck, as well as the addition of more trucks, but it seems like we're operating now at probably peak revenue per truck. So would it be fair to say that the growth in the U.S. going forward will be more around how fast you can get the trucks down there?

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [29]

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Yeah, that's a great, great question Daryl, we see continued opportunity in revenue per truck. And as you know, it's always a balancing act. I mean part of success and hydrovac is servicing the customers in first-call. So when they call you always want to have the truck available and that's that balancing that we talked about earlier with having the labor in the truck ready to go. But our growth model is organic growth adding one operator in one truck at a time, and that's why you see our guidance for the build rate for 2020, up from our build rate for 2019 and to achieve exactly what you're talking about which is continuing to access that growth and that opportunity that's there and have the trucks in the men ready to go. So as we get RPT higher and higher of course growth relies more on adding trucks and men and that's why our number one strategic initiative is having the HR strategies in the platform in place to drive that recruit, train and retain and we roll that out at our 2017 Investor Day and HR remains are our key strategic initiatives among our 4 major strategic initiatives.

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Daryl Young, TD Securities Equity Research - Mining Research Associate [30]

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Okay. And then in terms of facility capacity for manufacturing. I think you've said in the past that there is still more room to expand Alberta facilities, but would there be plans to open U.S. manufacturing at some point?

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [31]

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Yeah. These are, these are great questions and these are issues that we're looking at as part of our strategic planning. But the short-term answer is, we have sufficient capacity for our needs over the next couple of years and we're very confident on that in Red Deer, but we are looking at our network in our overall footprint to long-term and it's all driven. The good news is that strategy is all driven by the extreme opportunity that we see in the US, and that's why we're looking at that. So more to come.

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Daryl Young, TD Securities Equity Research - Mining Research Associate [32]

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Okay, great. And just one last one if I may. Have you seen any change in sourcing dynamics in the U.S. now that, yeah. Any change in sourcing dynamics?

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [33]

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I'm sorry Daryl, what kind of dynamics? I'm sorry.

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Daryl Young, TD Securities Equity Research - Mining Research Associate [34]

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In sourcing of hydrovac services by construction companies. Has that been, have you seen any changes on that front down so?

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [35]

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Well, I mean, in the industry, there is always companies that may look to in-source, typically will see that where a contractor has a long-term big project. And so that comes and goes. We've in 2019 we've seen contractors go both directions on insourcing and historically what we've seen is we have a big 2 year project, and we want to capture the hydrovac revenue in-house and in some of those customers that operate their own fleets are our biggest customers because they never have sufficient capacity or they never have their hydrovac in the right place at the right time.

But we've also seen that customers that do that can't get hydrovac work from other contractors they compete with. So they have a very limited market opportunity. So that (inaudible) goes back and forth, then I don't think that will ever change and but again some of our biggest customers have their own fleets and we do millions of dollars to work with them.

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Operator [36]

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Our next question comes from Stephen Harris with GMP Securities

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Stephen C.A. Harris, GMP Securities L.P., Research Division - Head of Research [37]

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Just a couple of follow-ups, gentlemen, just wanted to touch on, when you look at the revenue growth. Maybe being a little behind what you've seen in previous years. I know you've highlighted a number of reasons, but how much of this is also due to the fact that your comparable base in 2018 was an extremely strong year. I think EBITDA was up 29% that year. And so that you are just struggling with tougher comps is that a big part of what we're seeing as well?

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Darren Julian Yaworsky, Badger Daylighting Ltd. - VP of Finance & CFO [38]

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Yeah Stephen, I'm glad you brought that up because Q4 year-over-year is going to be a really challenging comp. As you know, we had over CAD 22 million of emergency relief work in Q4 last year, between the Florida Panhandle hurricane and then the fires out west, and it's been quiet year this year.

So that's going to be a tough comp forward to Q4 and we don't see that recurring. In fact, Hurricane Dorian went the other way. It basically just hung off the coast and caused everyone to shut down construction and to get ready for their hurricane and never came ashore. So that's just the way it is and, but we see continued really good growth opportunity. And the other piece, now that we're talking about it is, when you have a project like this ERP project, we had our and continue to have our best and brightest participate.

We've had over 80 people from the operations and the staff functions actually involved to drive this project and it hasn't been consultants or the IT group that's driving it although we've had excellent help from IT and consultants. But it's been Badger's operators that have driven the design of the project and design of the system. So it fits our hydrovac and that's a big time commitment. I mean, we have no general managers that have branches of over 20 trucks that have had 8 weeks of 2019 on this project.

It's the right thing to do for the project, but you used the word distraction and in this business I mean, John Kelly is here what he likes to say is that the seed you sow revenue wise, that come to fruition in 6 months down the road and there's definitely a distraction factor there. I can't give you a dollar amount on that but there is that factor there. But if I look back at it and given how successfully this project is rolling off and I knock on wood, as I say that. But it was time well spent.

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Stephen C.A. Harris, GMP Securities L.P., Research Division - Head of Research [39]

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Okay. Just to follow up maybe on the revenue side. I think when we talked on the last call, there was an expectation that some of the lost Q2 revenue due to weather was with some that you wouldn't get back and some other that was project related, you might have a chance to pick up in subsequent quarters. It looks like that didn't happen to a great extent in Q3. What's your sense of being able to make up any of those lost revenues going forward?

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [40]

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Well, we're going to find out in Q4, typically in Q4 you have the push to get projects done before the cold season in our Northern markets, and our run rate in early Q4 is stronger than our exit rate from Q3 and that's typical. Typically early Q4 is the strongest seasonal pattern and that pattern is intact this year. But again we don't see the emergency response opportunity that was there and very significant last year in Q4. So that's all reflected in our updated guidance too.

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Stephen C.A. Harris, GMP Securities L.P., Research Division - Head of Research [41]

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Okay. And if I could come back to this question of capitalization versus expensing of ERP costs. I mean I think it's pretty clear that with your elevated cost that some things have been expensed over the course of the last several quarters and then it's going to be a change I guess coming into Q4. Can you just maybe remind us about what costs you have been expensing to date and what's been capitalized, the nature of those costs and precisely what are we talking about here?

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Darren Julian Yaworsky, Badger Daylighting Ltd. - VP of Finance & CFO [42]

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There is a few things from a capitalization perspective. It's a little bit easier to answer that question first. So all of the configuration of the systems, the third-party consultants are resources to stand up to system have been capitalized. The IFRS guidelines are pretty prescriptive on this. There are expenses that are even in that configuration piece that falls out that needs to be expense. And I think we're probably a couple of million dollars in expenses that we've -- that fall outside of that bucket of capitalization that have actually been expensed.

Outside of that, there is to Paul's point, there has been the network stand up costs, which has been more than we anticipated, not necessarily in an absolute dollar amount but from a timing perspective for us to get the full effectiveness of Oracle having a properly rated system into all of our branches made a lot of sense. So we accelerated that. That was probably another roughly a couple of million dollars. On top of that there is an elevated staff level in the support functions in HR, finance, and the actual IT group that were there not only to stand up the time and attendance as part of our workforce module from an HR perspective, from a finance perspective, just the support on the configuration and the testing and from an IT perspective going from an IT staff that was modestly understaffed to a staff that is more representatives to be able to maintain an ongoing IT infrastructure such as Oracle, those all are all the costs that have been included in G&A and not all of those to the full extent would have been captured in our foresight in October of last year or November of last year when we gave out our guidance.

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Operator [43]

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Our next question comes from Jonathan Lamers of BMO Capital Markets.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [44]

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Following up on your response, Paul, it's one of the other analyst questions, could you please clarify about the run rate in Q4. I think I heard you say that the run rate in Q4 to date has been stronger than the exit rate in Q3. That would be a typical. I mean normally the activity levels in Q4 in the U.S. business are fair bit slower than Q3. Can you just clarify your comments there?

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [45]

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Yeah, let me clarify our run rate early Q4 is up from our run rate as we exited Q3 and that's typically what we see early Q4. And typically our strongest seasonality getting again given our current regional diversification in our regional configuration and it was similar to the pattern we saw last year even excluding the emergency response. So we're very similar in the increase in early Q4 versus our exit run rate in Q3 to what we were last year.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [46]

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Okay. And is the present situation in California creating any meaningful challenges or opportunities for the business?

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [47]

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Well, we believe, we've done a little bit of work on the fires, but nothing that would be material like it was last year. And as we look longer term out there though. Similar to what we've seen in the Southeast, the utilities will be forced to assess their networks and their distribution system and you could see longer-term significant work that might be required to upgrade the systems. In other words, do they stay on telephone poles or go underground, very little is underground west so far. And so the utilities will have to analyze all of that and make those decisions for their own long-term network perspective. So there is some modest work coming out of it, but again nothing to the extent, we've seen last year.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [48]

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Okay, thanks. And when we look at the truck build guidance for '19 and what it implies for Q4. It looks a bit optimistic relative to the trend in Q3. I think the new introductions were a bit lower than we were expecting, can you just comment on sort of the cadence of introductions in Q3. I know the weather would have been a major challenge in late August and September with the hurricane and flooding issues?

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [49]

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Well, I mean we've reconfirmed our 2019 guidance and I can tell you I think John pretty much knows where all the trucks need to go between now in the end of the year. And then just a comment on next year. We do have higher guidance because we see the opportunity and I think as Steven asked earlier, are we ready to drive growth. It's going to be more and more new trucks with hiring and training operators as opposed to being able to dip in the RPT. So we're very mindful of that and you have to do your planning ahead of time and we're doing just that to prepare for growth in 2020

And the other thing that will have and at the end of Q1 is we're converting production at the plant over to our next generation Badger. So we're working through all the supply chain in all of the production changes at the plant to convert over. So I think you'll see some, maybe some choppiness in 2020 as we go through that process. I'm hoping it's a smooth as our ERP implementation and for those of you who have been at the plant know the quality of the management and the team we have up there. So I have confidence will do well with it, but that is a significant project that's underway and we are very excited about the next generation Badger that's coming out a lot of great improvements and, but that's something a major project we're taking on in late Q2 next year.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [50]

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And how is the chassis supply situation looking in advance of that?

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [51]

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Actually, the chassis supply situation has loosened from where we were early in the year and we're in really good shape on what we need, but we are almost out a year at one point and that's well below 6 months at this point.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [52]

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Great. Paul, you provided a good discussion of the U.S. margin and labor cost issues this quarter. I still have a high-level question on it though. I'm not sure if you can tell based on your reporting systems. But I mean can you tell us wage inflation generally the fact is outstripping the contribution from hydrovac rate inflation?

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [53]

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Well, I would say with our legacy systems. I don't have that at my fingertips. Now if you want to have the discussion in Q3 next year we could probably give pretty granular information, but our sense is and it's really, we have a good handle on our labor cost. It's the rates that our legacy systems don't give us a lot of visibility on, but our sense is that we've been behind in rate increases. And that's why I mentioned earlier, we are very, very focused on driving that and it's -- to execute on that it's something that has to be done in each and every location.

So we're very, very focused on that. And John, and the ops team are all over it.

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Operator [54]

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Our next question comes from Jeff Fetterly with Peters & Company.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [55]

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Circling back to the labor inefficiencies side. So just so I better understand for Q3. Is it a function of you having the loading curve of your labor not match correctly with the project profile or changes in the scope of work as they came through. I just want to understand what would cause a material decline in the gross margin side associated with labor and efficiency?

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [56]

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Yeah, I mean you've described it more articulately than we'd lived it but yes. It's and that, and I would say that comment would also apply to Q2. So it's a tough one and it's a real balancing act and you look at what it takes to recruit and train an operator, it's a 2 to 3-month process to get someone ready to go.

And the timing of that with the timing of our customer activity is always a balancing act. I mean, we really don't want to add a Badger to the fleet unless we have the work for it. But when you see your work choppy like we saw in Q2 and a little bit in some markets in Q3. And again, those markets in traditional mature markets in the U.S. Midwest where there is a very large components of our fleet, makes it a challenge. And you know from the local managers perspective, you've got your operators and you're a little bit slow, if we don't provide the hours, they will wander off and find another job because they need a paycheck.

So that's a really tough decision, and we have 140 different locations that are making those decisions every day, but I think your summarization I think articulates it really well on an overall basis, but it's the result of hundreds and hundreds of local decisions.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [57]

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And I understand the challenges you guys have talked about in the past around seasonality and the seasonally slow periods. But given that you had peak demand of your seasonally strongest quarter in Q3. Does this suggest or are you concerned that did these issues might become more pronounced as you go into the next seasonally slowest period?

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [58]

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Well, I don't really see it that way. I mean, we're seeing the market opportunity, it's out there, I mean barring general U.S. economic decline. And I mean you have to put, I think all of us have to put an asterisk on that one, but you know the activity levels we're seeing out there are good, they're solid. And I think the comment I made earlier about the number of our folks that have been very focused inwardly to get this ERP conversion up and running successfully in that distraction away from the business, I mean I can't put my finger on it with dollars and cents, but you know it has an impact. And like I said, those seeds planted now create results 6 months down the road. And that's about the lag. So we've seen that, but the opportunities there. I mean the feedback from the regions is such that there's good business out there and we're looking to really focus strong and driving the business, I mean the 3 things going to see us going higher down in 2020 very, very simple driving growth grinding down our op cost, both at the direct and indirect and G&A side and making sure this ERP system is up and running and we get the benefits out of it, and that goes hand in hand with driving efficiencies in the branches and with G&A. So those are the 3 things we're focused on. But the good news is we see the market opportunity there and that's why you see us with a higher build rate guidance for 2020.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [59]

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In terms of guidance can you can I help us connect the dots, so when I look at the midpoint of the previous guidance for 2019 compared to the midpoint of guidance revised guidance for '19. Can you help us break down the pieces in terms of what would be attributed to the Q3 element what's attributed to higher SG&A or ERP project costs. And then what would be attributed to the operational side in the business.

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Darren Julian Yaworsky, Badger Daylighting Ltd. - VP of Finance & CFO [60]

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Yeah. That's a very -- that's a very difficult question. I would say that G&A would we definitely have a bit of a drag through to the first half of next year. Operationally, I don't think we're seeing necessarily a drag from a topline revenue is kind of evident from our truck build in the confidence on that front. We do need to see how the business performs and how John manages that costs and labors, but we definitely have some plans around that. From a regional perspective would likely is still going to see weakness in the energy markets, specifically in Western Canada, likely seeing positive growth in Eastern Canada, positive trends in the East during U.S. In Central U.S., it really is going to be more weather-dependent. If we do run into other wet weather next year that might be a bit of a headwind. If not, I think we've got a really strong base and continue to grow that base in central U.S. And in the West, I think we see that market is an opportunity for us. That's not completely tapped. So that is -- that's definitely a green light, and I suspect it's not the level of granularity that you're looking for.

And Paul, I'm not sure if you want to add any comments.

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [61]

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No, I mean I think that's probably an appropriate level of granularity there. We've looked at all of our budgets and forecasts and everything Jeff to connect those dots, but the trends we talked about, the direct cost side and margin, the G&A side, below the gross margin line or the major drivers and those are the ones we've articulated in our Q3 disclosure.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [62]

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So the range of guidance that you are implying for Q4, is the delta between the low and the high potential SG&A costs or an unknown element around SG&A costs or is there more uncertainty tied to the business this Q4 as you wrap up the year? Like you've narrowed the guidance range by CAD 15 million, sorry CAD 215 million over 3 quarters away through the year now and arguably more than given you've seen the month of Q4. Why not tighten the Q4 guidance range more Jeff?

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [63]

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Jeff, I'm not really sure how to answer that. I don't know if I would read a whole lot into that. 2019 was Badger's first-year of guidance. So I know we don't get any slack cut for that because we are 3 quarters into it, but I think that it reflects our best thinking, and you always have to have a range on it. You could criticize us when you could have a bigger or smaller range, but that's our best judgment and we're hanging our head on that.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [64]

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Okay. Sorry, not to beat the dead cat on ERP, but just a clarification question. So your budget is CAD 25 million and you have about CAD 10 million of SG&A your other costs that go beyond the scope of the budget. So, is it reasonable to think about the total cost of the ERP project being about CAD 35 million?

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Darren Julian Yaworsky, Badger Daylighting Ltd. - VP of Finance & CFO [65]

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Yeah, that's the way I look at it and I could not be more delighted. I really have a hard time apologizing for that given how well we're coming out of the blocks. So-- you know, we could, you could say we should have had CAD 35 million to start with, but I got to tell you, I'm not apologizing for it. I am delighted

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [66]

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And Darren, I know you touched on a couple of these points earlier, but relative to where the budget would have been a year ago. How much different is that CAD 35 million. Like I understand you've stayed within the CAD 20 million to CAD 25 million. But what would you have assumed for non-budgeted costs a year ago versus what you're incurring now?

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Darren Julian Yaworsky, Badger Daylighting Ltd. - VP of Finance & CFO [67]

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I think it's the --in the guidance that we're giving. So it's about CAD 10 million.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [68]

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Okay. So the bigger picture scope of the project is about CAD 10 million bigger than what you would have previously contemplated that's a reasonable way of characterizing it?

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [69]

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Yeah. In and that reflects the fact that the way we did this project. Jeff is Badger engage the organization and the operations and staff teams let it is this wasn't a bunch of consultants just showed up and camped out and gets reflected in the success of this project, so that speaks for itself, Badger's always conservative on finance on our accounting, we could have included the network costs in that we elected not to, because we thought and talked to the board we're going to have to incurred anyway, it's just a matter of timing and it was a major project that went off very successfully where we've had significant upgrades there.

So there's a number of things in that bucket and it's part of the process. But again, what we're doing here in 2019 is committing the organization to set up a platform that supports our growth for the next number of years and the good news is we've got a lot of growth to go after. So this is something that I'd certainly not going to worry about the next 5 to 7, 8, 9 years like I've been worried about our old legacy systems and keeping the wheels on those over the last 3 years and to me that's huge. So if you look at the risk mitigation on Badger's growth strategy, this project is just a huge risk mitigated and to me it totally derisks Badger's growth opportunities going forward.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [70]

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Last question on the NCIB side. So you've reached the threshold of your current approval, what are your plans going forward there?

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [71]

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Our current approval will continues till next May. So we haven't reached any thresholds.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [72]

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But correct me if I'm wrong, you approved for 2 million shares and you've now repurchased just a touch over 2 million shares?

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Darren Julian Yaworsky, Badger Daylighting Ltd. - VP of Finance & CFO [73]

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No, I think that's 2 separate NCIB programs. So the NCIB program was, we did in May of 2018, which runs through to May of 2019. So we still have -- we still have authorization, both in the actual approved limit by the OSC but also through the regulatory requirements of the maximum NCIB allowable. So we've got a lot of upside.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [74]

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Okay. So, the plan is to continue to repurchasing.

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Operator [75]

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Our next question comes from Elias Foscolos with IA Securities.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [76]

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I've got a couple of questions. First one, it actually doesn't relate to truck build, the truck retirement. When I look at 2019 retirements you're looking to retire between 90 and 130 trucks and looking back about 10 years ago you built about half that amount, which was 50. So what I'm trying to reconcile is, are the old trucks lasting as long or new trucks more efficient or what would cause the -- in my mind the accelerated retirement?

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [77]

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Yeah, hold on Elias. Let me check those numbers. Are you talking '19 or '20?

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [78]

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Between '19 and '20 you're going to retire between 90 and 130 trucks and in 2008 and 2009, you built about half that level of trucks. So are the trucks lasting as long as you're seeing or do you see more efficiency in new trucks. Historically, if we look at retirements there's about a 10-year lag and we're seeing something a bit different.

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [79]

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Yeah. That's a good question. The retirement decision is an individual truck by truck decision. So there are a number of circumstances trucks that are running 24 hours a day in an industrial plant, it's different than a truck that's in the municipal work, trucks that are banging around in the oil patch, get beat up faster than trucks that are on pavement. So you're always going to have those individual decisions that impact the numbers, but, and again these are all individual one truck at a time decisions that John and the ops team make, but we don't see any general trends that would change the economic life of the fleet and the newer technologies I mean, automatic transmissions, we think that one might actually help in how we recruit drivers. They don't have the experience and the skills that would have been required with the old manual transition transmission. So we think that might actually help us and repair and maintenance in the truck life side in some markets. But it's no major trends that are underlying it. It's this the particular timing. And the real good news with Badger is that we are very diligent on maintaining our average life of the fleet. So you don't see us running up our average life from where it is and below 5 years with an average tenure economic life, we're very diligent about that because we all know that if it doesn't run up then the repair and maintenance is going to run up too and that's something we don't want to have.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [80]

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okay, thank you very much. I know you're kind of trying to correlate off a pretty low point about a decade ago. I want to move to the bank debt. There has been a massive increase in the amount of debt that Badger can now take on through a bank line. And I do understand there is a bit of a retirement coming up on some of the term debt. But the question I've got is, why have such a large bank line that seemingly would be unutilized when you're sitting there incurring standby fees?

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Darren Julian Yaworsky, Badger Daylighting Ltd. - VP of Finance & CFO [81]

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So it's part of our larger financial strategy through, when we look at our leverage guidance of between 1.5x debt to EBITDA, the size of our historical credit facility wasn't even big enough to get us into the lower low range of that range. So getting the right size facility to a roughly CAD 300 million at, if we look at the 2020 guidance upper end of the EBITDA range of CAD 195 million. It's rate out that 1.5x upper ends of our guidance.

So it wouldn't be prudent for us to put out guidance and not have the financial capacity to be able to act on that. And the standby fees, quite frankly, you can look at that is liquidity insurance. So if there is any kind of lock-up in the capital markets, it's a small price to pay for having funding certainty to make sure that we can build the trucks and continue to fund our business.

The second component that's really important is getting our covenants right-sized, so our covenants previously was a debt to EBITDA of 275 or 2.75x, which was I think off market for a company of Badger's quality and our banks agreed. So we've taken that covenant up to 4 times. And then to your final point. We're also using our credit facilities as a certainty of funding to be able to refinance the Prudential notes that mature over the next 3 years. So we have a CAD 25 million US payment in January of next year and the subsequent 2 January's. We've already built that capacity into our credit facilities both in the base facility as well as our accordion features, so that we remove that refinancing risk and we will refinance it at substantially lower interest rates that we currently have on the potential notes.

The final piece I know you didn't ask about, I'll give it to you anyways, is that we were able to do a carve out in our covenant structure that essentially means that the covenants for the Prudential notes are largely relevant. So it's just now a time of letting those notes kick off and refinance the credit facilities.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [82]

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Okay. Just on the Prudential one quick follow-up, can you prepay the entire -- probably you can pay it in advance, but the penalties make it not worth that I mean that's typically what I've seen is that correct?

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [83]

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That's absolutely correct. So we've done the match and it's ask we've done the math and it's modestly NPV negative if we pay the make-whole premium and refinanced it with the credit facility and hedge that to have funding certainty, but now that we've negotiated the credit facilities, the way that it is, it's more prudent for us to let the Prudential notes run off in due course.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [84]

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Okay. I want to follow up a bit on Jeff's question because I didn't hear the answer. And maybe just cut off here. He asked about the normal course issuer bid, do you plan on getting back into that?

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [85]

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We haven't really ever gotten out of it. So we have an NCIB program that was established at roughly 5% of float in May of 2018, that runs through to May of 2019. We have bought under that program a meaningful amount, and we still have a meaningful amount that's available to us that will continue to use under our prudent oversight to make sure that we're using capital in the most efficient way. But we haven't got out of the NCIB program, we've continue to buy during that .

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [86]

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Yeah, I mean what I got out, what I meant by that was sort of re-continue purchasing, which looks like it slowed down. Now trying to tie the NCIB to your credit facility or an issuer bid is something like a substantial issuer bid something that's on the table, given that you've got the capacity and clearly share price is more attractive now than it was in Q3?

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [87]

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Yes. So we look at all of that. I probably will hold this conversation to next week when we go through our capital allocation waterfall, but very briefly we want to reinvest into the business first because that provides the best return and for our shareholders. And then secondly, or maybe thirdly return capital in the most prudent and a cost-effective way for shareholders. And based upon our intrinsic value, one of those effective mechanisms is buying back shares. Can I tell you specifically that we're looking at (inaudible) at this moment, the answer is no, but it doesn't necessarily mean that it would be off the table, but the primary focus is to make sure that we're reinvesting in the business to support the organic growth that John and his team are driving.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [88]

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Great. Yeah, I mean my job is to poke, so I had to sort of take a stab. I appreciate it. Those are all the questions from me. Thank you.

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Paul J. Vanderberg, Badger Daylighting Ltd. - President, CEO & Director [89]

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Darren loves talking the math, so he really appreciated those questions.

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Operator [90]

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Just letting you know, I wasn't showing any further questions. And I was going to turn the call back over to you guys.

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Unidentified Company Representative, [91]

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Thanks, Kevin. So before we wrap up today's call, we'd like to remind everyone that we are hosting our Annual Investor Day next on Thursday, November 14 at One King West Hotel in Toronto. The formal presentation begins at 9:00, we'll have and the management team, the broader management team will be there to meet with investors. We'll have the presentation there and we'll have a live webcast and that will be available also afterwards on our website and then we'll have continued conversation over a lunch.

So it's a great opportunity for everyone to meet the broader Badger management team and we're very much looking forward to it. And there are details to register for the Investor Day in the Q3 release. So finally, on behalf of all of us, we'd like to thank our customers, our employees and our shareholders for your ongoing support and your support is what drives Badger's success. So, Kevin, back to you. Thank you,

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Operator [92]

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Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.