Badger Infrastructure Solutions Ltd. (BDGI) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. Welcome to the Badger Infrastructure Solutions' Third Quarter 2026 Results Call. [Operator Instructions] As a reminder, this event is being recorded today, November 6, 2026, and will be made available on the Investors section of Badger's website. I would now like to turn the call over to Anne Plasterer, Director of Investor Relations. Welcome.

Thank you, Monica. Good morning, everyone, and welcome to our third quarter 2026 earnings call. Joining me on the call this morning are Badger's President and CEO, Rob Blackadar; and our CFO, Rob Dawson. Badger's 2026 third quarter earnings release, MD&A, and financial statements were released after market close Thursday and are available on the Investors section of Badger's website and on SEDAR+. We are required to note that some of the statements made today 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 on 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 such forward-looking statements, please refer to Badger's 2025 MD&A along with the 2025 AIF. I will now turn the call over to Rob Blackadar.

Thank you, Anne. Good morning, everyone, and thank you for joining our 2026 third quarter earnings call. Before we get into the results, I'd like to take a moment to talk about safety, which is how we start all of our meetings here at Badger. As winter approaches, conditions can change quickly, both on the road and at our job sites. Being ready for those changes, whether it's severe weather, an equipment issue, or an unexpected situation, is important. Safety is a shared responsibility, and preparedness is a key part of our culture here at Badger. Here at the company, that means knowing what to do in an emergency, making sure our vehicles and safety gear are winter-ready, connected, and keeping -- I'm sorry, winter-ready, keeping an eye on local conditions and staying connected with our teams. We all have a role to play in keeping each other safe and being prepared. That role is an important part of how we make safety personal. I want to personally thank all of our Badger team members and customers for their continued commitment to working safely together. Now on to the quarter's results. The Badger team delivered another record quarter of double-digit organic growth in revenue and adjusted EBITDA. Building on our positive momentum from Q2, third quarter revenue came in at $287 million, representing 21% growth over the prior year. Adjusted EBITDA grew at a faster pace than revenue, up 25% year-over-year to $83.4 million. Accordingly, our adjusted EBITDA margin increased 90 basis points to 29.1%. This represents the second quarter in a row of margin expansion. These results reflect our focus on hiring and training quality operators, effective management and deployment of our growing fleet, and our ongoing focus on pricing discipline. Last quarter, I shared all of the various project types we are involved in. Many of these projects are multiyear, nondiscretionary, fully funded with regulatory approval, and are either underway or starting in the near term. Our project subscription services highlight that there continues to be record amounts of upcoming work through the year 2030. All of our end market segments are contributing equally to our organic growth rate of over 20%. Of note, data center revenue was a consistent flat 15% of our total revenue throughout the entire third quarter, and that trend is continuing on into the fourth quarter. Our growth was also supported by continued investments in our fleet and our successful pricing initiatives. The Badger team's focused pursuit of delivering top-tier customer service and operational performance positions the company for long-term success as the industry leader across North America. We achieved RPT, or revenue per truck per month, of $51,895 in Q3, up 8% compared to last year. Badger ended the quarter with 1,822 hydrovacs, which represents an 11% increase in our average fleet from the prior year. Given the strength in our end market demand, we anticipate that 2026 fleet growth will remain slightly above the 7% to 10% growth target previously provided in our outlook. Our Red Deer plant delivered 83 hydrovacs this quarter compared to 57 units in the same quarter last year. We also retired 23 units and refurbished 9 units in the quarter. Our full year fleet strategy remains on track. We continue to expect refurbishments of between 30 to 50 hydrovacs and to retire between 130 to 150 units. We continue to advance our efforts around launching a second manufacturing facility to be located in the United States. We look forward to providing more information regarding our progress on this front in the near future. Before I pass the call over to Rob Dawson, I'd like to share one last thought. As we look to the remainder of the year and into 2027, we remain positive about our end market demand. Many of our projects are well-funded, multiyear duration, and are already underway, which gives us confidence -- sorry, what gives us confidence is not only the strength of the demand environment, but our ability to capitalize on it. Over the past several years, we have demonstrated that Badger has the scale, the capabilities, and the team to deliver results as opportunities present themselves. We believe that Badger's commercial and operational strategies will continue to create long-term value for our shareholders. With that, I'll turn it over to Rob to give our financial update, and then we'll go straight into Q&A. Rob?

Thanks, Rob. As Rob noted, revenue and adjusted EBITDA both rose by over 20% for the second consecutive quarter. As we have discussed for some time now, we remain focused on building scalability at every level of the organization while continuing to invest for growth. During the quarter, the rate of hiring and training of both new operators and our field operations team remained steady with the rate of fleet growth. We continue to benefit from the increased rate of hiring through the earlier part of the year. We are also starting to see the benefits of our focus on the efficient deployment and maintenance of our fleet. Combined with steady execution on pricing, we are pleased with the progress of these efforts and their impact on branch and operations efficiency, leading to flow-through to gross profit margin. We have also continued investing in our long-term initiatives to add to shareholder value. The rollout of our operational excellence program is expected to continue through the remainder of 2026 and 2027. As well, the launch of the 2 new service lines is proceeding in line with our original business case. We are pleased with the progress on these initiatives to date. In the third quarter, these initiatives reduced our ongoing adjusted EBITDA margins by about 60 to 80 basis points, in line with the impact on margins in the first 2 quarters of 2026. General and administrative expenses were $11.5 million in the quarter, or 4% of revenue, compared to the $10.6 million, unchanged at 4% of revenue in the prior year. Finally, adjusted earnings per share was $0.96 per share, up 5% compared to last year. Of note, during 2026, our effective tax rate has been elevated due to the impact of what is essentially a minimum tax in the United States. We anticipate that effective tax rates will normalize in 2027. Year-to-date, with revenue up 21%, adjusted EBITDA up 22%, and adjusted EBITDA margin up 30 basis points, and adjusted EPS up 10%, we are encouraged by the continued scalability and growth in margins, all while investing for growth. Turning to the balance sheet. Badger has, for a very long time, maintained a strong balance sheet combined with conservative financial objectives, including relative leverage, available liquidity, and debt maturity profiles. This has served us well, allowing us to fund our growth largely from cash flows while continuing to return capital to shareholders through the dividend and our NCIB. Given the growth we have seen and expect to continue to see into 2027, and as noted by Rob, we are planning to produce at the top end of our narrowed 300 to 310 hydrovac production range this year. Combined with the spending on our new service lines, 2026 capital spending is now anticipated to be about $203 million to $222 million at the upper end of our initial range. With the undrawn capacity on our 5-year credit facility and our compliance leverage at 1.5x EBITDA, the midpoint of our 1x to 2x targeted range, we have plenty of flexibility to continue investing in our organic growth strategy to support initial investments in new service lines and to fund the second manufacturing facility in the United States. Further, we successfully renewed our NCIB in the third quarter, maintaining our ability to make opportunistic share purchases in addition to returning capital to our shareholders through dividends. During the third quarter, we did not purchase any shares under the NCIB. So with those comments, let's turn it back to the operator for questions.

And we do have our first question that has come in. It is from Yuri Lynk at Canaccord Genuity.

Lots of puts and takes on the margin front, and that was good color, Rob, on the 60 to 80 bps. As we think about '27, what's -- how do we think about these puts and takes in terms of your ability to get into the midpoint of that 25% to 30% target EBITDA margin range?

Thanks for the question, Yuri. It's Rob Dawson here. As we noted in the last few quarters, our expectation or anticipation was that we'd be pretty flat on margins in the second half of 2026 and start to see a return to growing margins in 2027. You can see now that for 2 consecutive quarters, we've exceeded that anticipation by showing some bottom-line growth in margins, mainly due to the level of growth being what it's been as well as, I guess, some better execution on our team's part, particularly on that labor and our maintenance and repair expense as well as continued work on the pricing. So what does that mean for next year? We do anticipate moving towards the bottom end of that range over the next 12 to 18 months. Into the midpoint of the range, I think that would be unrealistic to expect that we get to the midpoint of the range within the next year, as you suggested in the question. But we do continue to see a steady march into that range for sure.

Quite progressing.

Progressing, yes.

Okay. That's great. On the tax rate, just to be clear, it sounds like another quarter in the mid-30s, and then you think we go back to, what '27, something like that in next year? Because it's been a pretty big drag on the bottom line.

I'm sorry, Yuri, can you say that again? I missed the first part of your question.

Just on the tax rate for Q4 and for '27.

For 2026, and we apply an annualized methodology to determine taxes, so I think the effective tax rate you're seeing for the first 3 quarters of the year is expected to remain relatively stable Q4. We're anticipating a move back to statutory rates in 2027 by 26%.

Our next question is from Jasroop Bains, TD Cowen.

I'm speaking on behalf of Tim James. I just have one question. In the press release, you mentioned the multiyear expansion of utility and infrastructure networks as demand drivers. Could you guys expand on that a bit more? What are you guys seeing in those end markets today? And what gives you guys confidence that the strength is multiyear in nature?

Yes. No problem. So a lot of that is tied to our end market customers that we are working directly for. They're bidding and winning projects that are really large in nature, I think in terms of transmission and distribution projects that are going across the United States. So from the Midwest and South Central areas of the United States to the coast, as well as a lot of conversions of some of the existing power plants. You can look at what's happening with a lot of the electrical rates that are happening to a lot of the United States customers, that the rates are really, really high, and there needs to be more power and more grid production and more power being brought into the grid. And that's -- those are the projects we're referencing. There happens to also be in the U.S. and also in Canada, a lot of work happening on the nuclear front as well, where they're refurbishing certain nuclear plants and spending more time on some of those nuclear plants. And then lastly, if you think in terms of kind of grid hardening, a lot of the investments that have been made to the grid are greater than 35, 40 years old. And so it's now getting to a time where there has to be additional investment happening. The rates are high, and there continues to be more and more power demand. A lot of people think that's only in terms of data centers or AI, but it's actually excluding data centers and AI, there's a tremendous amount of power demand happening on the electrical front, and those are the projects we're on. But a lot -- like I started off with, a lot of transmission and distribution projects, a lot of transmission, a lot of transfer stations. We're seeing it all over the country. It's not in one single pocket. And we're definitely putting a really strong focus going forward on our utility business. We also view that as more of a recurring type business rather than one-off construction-type projects, so.

And it's not only power. If you think about water supply and water treatment, and then sewage and sewage treatment, and if you think about gas, both transmission and distribution, we're seeing that across all of our markets, long sustained spending occurring from all of our utilities and infrastructure customers in those areas. And then finally, like airport infrastructure and a lot of those other things, those are longer-term trends. And many of those projects are multiyear, multibillion-dollar projects.

Yes.

Our next call is -- a question is from Ian Gillies, Stifel.

I wanted to dive into the second manufacturing facility that you're considering in the U.S. I mean, there's the obvious benefits of new trucks, more trucks, tariff relief potentially. But the press release noted there seems to be some sort of tax benefits if you build a facility there. And is there anything else, perhaps operationally, you'd want to highlight in around that facility?

Yes. So I think you're on the right track with how you're thinking about it. A lot of people think that Badger's interest in having a second plant is either solely tariff-related or is only tax-related. But there's really a lot of benefits for having a second plant. And we've been contemplating a second plant a lot longer than the last year or 2. We start looking at saying, does it make sense to have our main manufacturing plant where there's only one single manufacturing plant? And if they were ever to have any kind of a situation or problem there, that's a lot of risk to the business. And so this actually starts to derisk the business by having a second plant online. It gives us additional capacity as the business scales and grows, Ian, we're starting to realize that the adoption of hydrovac and nondestructive excavation is only accelerating. It has not even gotten near full capacity here in the United States. And so for us to be able to feed and support that makes a lot of sense. Third, and again, the reason we're not focusing only on tariffs is because tariffs came in very quickly and they could leave very quickly. So that's not our core issue, but it would give us some tariff relief on units that we build in the United States and keep in the United States. And then probably the last part, and then Rob can add if I'm missing anything here. But the last part I would probably share is right now, in a lot of states that we're contemplating putting the manufacturing plant in, there are a lot of incentives for people to come to various states. And when coupled, all those things together, it just makes a lot of sense. And -- but the one thing for us is it gives us a lot of optionality on how we can continue to scale the business because the business is not slowing down here for the next several years. And I don't know if you want to add anything to that, Rob.

Yes. I mean, there was a mention of some impact on income taxes. And I'll just reiterate what Rob said is that while there are some obvious benefits on taxes and tariffs to moving -- or to adding a manufacturing facility in the United States, definitely not the core purpose. It's just an outcome of that strategy. And really, it's just if your supply chain and your capital spend is in the same market that your majority of your operations and growth is in, then everything else is just simplified, your organization structure, and the way that you raise money and fund growth. And so that's all simplified by that. It just makes a lot of sense.

And I think I'm going to add one more thing to give Ian even more color. We have found over the last 4, 5 years as the business has matured, Ian, out in the field, I think in terms of our operations and our commercial strategy, but also our manufacturing strategy has really matured. And I believe you and a few investors have been on tours of the manufacturing plant in the last few years. But it is a completely different facility than it was even as recently as 5, 6 years ago. It is extremely well run, very efficient. You've noticed the cost of our trucks, excluding tariffs, have really -- we've done a really good job of keeping those costs in line in spite of all these inflationary pressures. And so we're very proud of the manufacturing facility and how it's performed, and we believe we can continue to get that benefit by a second plant. So I thought that might give you even more color there, Ian.

No, that's all very helpful. Switching gears to RPT. It obviously was -- showed pretty good growth year-over-year. Obviously, some of that's pricing you mentioned in the prepared remarks. Are you able to share at all whether it's a few regions that are helping drag up overall pricing, or whether it's kind of broad-based across the U.S. and Canada right now?

Yes. So we're actually seeing it being more broad-based. And so -- including in Canada, we're seeing pricing. The strategy we use in the business is really leveraging that pricing engine we built back in '23. And it's super helpful that we're starting to leverage some of the technology and data that we've been capturing for the last 3 or 4 years on our customer trends and our project trends on how we should be pricing, and then capturing the price and getting the pricing closed. Our commercial sales teams are working really, really hard, and they're incentivized to capture the most amount of pricing, but still being competitive in the market. And that's how you're seeing that RPT moving, because if you think about it, we are adding trucks at the higher end of our fleet adds, our utilization is solid, and then the pricing is additive on top of that. That's where you start to see that operating leverage starting to get more and more into effect. And that's what Rob was talking about. We started noticing 2 quarters ago improvement on our margins, and it continues today. And so very pleased with that. I don't know if you want to add anything to that.

Yes. I think the heterogeneity of pricing in various markets earlier this year was a much bigger factor. I think now it's more across the board. And by that heterogeneity, I mean like growth rates in markets with higher prices being higher than growth rates in markets with lower prices. So that would impact RPT, not necessarily impact profitability. We're starting to see that be a lot more broad-based.

And what's interesting, Ian, I think our competitors, obviously, we don't talk pricing with our competitors. But we obviously know like, hey, we're winning deals or we're losing deals to competitors. Our competitors are following suit on some of their pricing as well as what we're seeing in the marketplace, because I think us leading on pricing in the industry, as we are the industry leader, I think some of our competitors were looking for us to start making some moves as well. And so it's allowed them to move on pricing as well. So it's good and healthy for the industry to get solid pricing. It's got to be fair, and we're not looking to do outsized pricing moves. But obviously, there's inflationary cost in every business in North America, and we want to make sure our pricing reflects that.

And last point is diesel costs are up quite a bit, and we do charge a fuel recovery fee, and we don't earn a lot of margin on that, if any. But it does -- it has had a very modest impact on the rise in our RPT. I only mention that because when like the inevitable decrease in diesel costs come, that will be a minor reduction in RPT or an offsetting factor.

Okay. If I could sneak one last one in, you may choose to pass on it. Can you maybe give some goalposts on how we should think about the new service offerings going into next year and capital spend, and maybe based on the success you've had this year, if you want to spend more, maybe you want to spend less? Just curious on that.