Badger Daylighting Ltd (TSX: BAD) Q4 2021 Earnings Call Mar. 18, 2022
Corporate Participants:
Trevor Carson — Vice President of Investor Relations and Corporate Development
Paul Vanderberg — President and Chief Executive Officer
Darren Yaworsky — Chief Financial Officer
Analysts:
Yuri Lynk — Canaccord Genuity — Analyst
Michael Doumet — Deutsche Bank — Analyst
Maggie MacDougall — Stifel — Analyst
Jonathan Lamers — BMO Capital Markets — Analyst
Krista Friesen — CIBC — Analyst
Trevor Reynolds — Acumen Capital — Analyst
Presentation:
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Badger Infrastructure Limited 2021 Fourth Quarter Results. At this time, all participants are in a listen-only mode. For the speakers’ presentation, there’ll be a question-and-answer session. [Operator Instructions]
I would like to turn the call over to your host, Trevor Carson.
Trevor Carson — Vice President of Investor Relations and Corporate Development
Good morning, everyone, and thank you for joining our fourth quarter earnings call. On the call this morning are Badgers, President and CEO, Paul Vanderberg and Darren Yaworsky, Badger’s CFO.
Badgers 2021 fourth quarter earnings release, MD&A and financial statements were released after market close yesterday and are available on the Investors section of Badgers 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, uncertainties that may be relevant to such forward-looking statements, please refer to Badger’s 2021 MD&A along with the 2021 AIF. Further such statements speak only as of today’s date and Badger does not undertake to update any such forward-looking statements.
I’ll now turn the call over to Paul.
Paul Vanderberg — President and Chief Executive Officer
Thanks, Trevor. As always, we would like to start the call talking about health and safety. We’ve been pleased with the team’s health and safety response during this two-year old COVID pandemic and all the related operating challenges that have come with it. The safety of our employees and customers is Badgers job number one.
Q4 saw another spike in monthly employee COVID cases with 5% of our operators in quarantine during the month of December, due to the Omicron variant. This was slightly below the 6% level of quarantines we saw in August and September with the Delta variant. The Omicron surge continued into January, but February cases were down by 80% from January, and in March, we’ve just seen a handful. This is good news. It is also good news that the Center for Disease Control in most jurisdictions has loosened operating restrictions and a return to work testing procedures, which have contributed to shorter quarantine times.
Since Omicron hit us in Q4 and Q1 and not during the peak construction season like Delta did last year, combined with the way the cases have fallen off Badger and our customers are in a good position for the 2022 construction season. If we think back through the past two years Badgers COVID playbook of consistently following the Center for Disease Control guidelines has kept our people safe and met our customers’ needs. We will continue with that approach, which has been led by Leon Walsh, our VP of Health and Safety, and his strong team, who are very successfully partnered with our operations team. We’ve managed through some extraordinary operating conditions over the past several years, but under all conditions, our operating practices remain the same focused on Badger’s objective of putting employee and customer safety first.
So onto the quarter. First some comments on revenue, we were pleased with the continuing year-over-year market improvement during the quarter, despite improvement being uneven due to Omicron. Revenue of $153 million in the quarter was, up 17.7% from last year, continuing to reflect the market recovery that began in the second half of 2021. We also continue to see indications of improved energy market demand, as company’s reset their capital budgets early in 2021 and started getting back to work. This is a welcome change after several years of energy segment headwinds.
Our revenue growth has also continued to outperform the year-over-year US non-residential construction trends. This outperformance has been the case since April 2021. Q4 was a turning point for the US non-resi market after 16-months of a negative year-over-year trend versus the prior year. Activity bottomed in October in US non-res and it’s been growing versus prior year ever since.
Regarding operating costs with the uneven 2021 recovery, we experienced higher levels of direct labor cost than our historical trend has been, driven by the fact that it’s more difficult to send employees home when activity levels are uneven in our strong labor market, and also by challenges due to COVID. The team continues to work hard to recruit and retain operators, which is a challenge, but achievable in the current labor market. We have seen some labor cost inflation and as we discussed last quarter have been implementing price increases to offset.
Direct labor will be less of a challenge as our activity levels continue to improve and demand becomes more steady. Our Q4 revenue per truck per month or RPT of $29,600 was, up 23.7% last year, growing more than our 17.7% revenue increase. Based on Badger’s history, we will see improved labor efficiencies as fleet utilization improves. The recent oil spike is a short-term operating challenge that Rob Blackadar in the operations team is focused on. Both procurement and pricing actions have been implemented.
The reality with this challenge though is that every business faces it and the fuel recovery fees will be with us for the foreseeable future. It’s manageable. We continued to manage our costs in all areas during the quarter, with the market shifting to a recovery mode, we reviewed all aspects of Badger’s operations for efficiencies. This review resulted in a series of cost-cutting moves in a $4.2 million charge in the quarter. These moves have good paybacks and will reduce our costs going forward.
On the manufacturing side, given the continued year-over-year revenue and utilization improvements in Q4 and as we mentioned last quarter, we had been evaluating the need for a ramp-up of the manufacturing build rate. For 2022, we are currently planning to add between 150 and 180 units and retire between 40 and 60 units, this compares to the 2021 addition of 32 units in the retirement of 53. Our manufacturing team is presented — positioned to plant well for higher production levels and more volume efficiencies. We are also very well positioned for our supply chain components. This positioning is a plus for Badgers’ ability to place new equipment into service versus competitive manufacturers, who are experiencing tight supply and truck chassis.
Market indications are that equipment will be difficult to source over the next several years, which makes Badger’s manufacturing and vertical integration more valuable. We also implemented a new manufacturing requirement planning or MRP system during the second half of last year, it went live at year-end. So our Badger manufacturing operation is now up and running on a modern MRP system integrated into our overall Oracle ERP platform.
In January, we entered into a long-term lease for seven acres adjacent to the Red Deer plant. We are in the process of working through the facility and integration plans, but we expect that this addition will enable Badger to expand capacity beyond our previously stated level of 350 units per year on a single shift basis. More to come over the next several quarters, as we firm up our plans, but we were very pleased to be able to take advantage of this opportunity, which really positions Badger for longer-term and future growth.
So some additional comments on the 2022 outlook. We are well-positioned for a busier year in 2022. We see pent-up demand across many markets and the year-over-year trends are favorable. Labor and truck availability will make existing fleets and especially fleets that are staffed with trained employees in demand and more valuable. We incurred the cost of recruiting and training operators during the uneven recovery year of 2021 and we expect that this effort will pay off as demand continues to expand and activity is steadier.
Fleet utilization and labor utilization go hand-in-hand and both drive operating leverage. Another change that we’ve made in the second half of 2021, that will impact 2022 and beyond was the strengthening of our operations team in addition of sales and marketing leadership. This is part of executing on a focused commercial strategy that targets the significant market opportunity that we see for non-destructive excavation and related services.
Rob has strengthened the team with experienced Badger operations and sales leaders stepping up to broader responsibilities and new leaders with extensive industry experience joining the team. We are establishing a focused sales and marketing organization, including a national accounts function, this is exciting. The objective here is to aggressively leverage Badger’s broad operating footprint, business scale, and extensive customer relationships, more than we’ve ever been able to do historically. This is an advantage Badger has that none of our smaller competitors have. We expect that these initiatives will benefit growth and add operating leverage as they gain momentum during the rest of the year.
So unless there are geopolitical or major macroeconomic disruptions we see 2022 conditions to support continued progress in expanding revenue, increasing our operating leverage, and driving margin. As we said in past quarters, we expect that margins will return toward historical levels as the recovery continues.
And now I’d like to turn things over to Darren for our Q4 results.
Darren Yaworsky — Chief Financial Officer
Thanks, Paul, and good morning everybody. Our revenue in the quarter, as Paul mentioned was approximately $153 million and for the year was $569 million, up over 17% and approximately 2% respectively. The gross margin was 19% and approximately 21%, respectively for the fourth quarter and full-year 2021. As Paul mentioned, we continue to invest in operators and key sales in operations personnel in anticipation of a market recovery.
G&A expenses were approximately $47 million for the full year, these costs were modestly elevated over last year’s level to support the completion of the legal entity reorganization and the MRP system implementation that Paul mentioned earlier. Both the legal entity and the MRP system went live on January 3rd of this year and we continue to anticipate our normalized G&A run rate to be approximately $40 million annually.
Adjusted EBITDA was approximately $17 million and $72 million, respectively for the quarter and full-year. As Paul mentioned, adjusted EBITDA reflects the approximate $4 million in cost-cutting actions completed in the fourth quarter. Adjusted EBITDA margins were 11% and approximately 13% for the fourth quarter and full-year respectively, again these margin levels reflected the challenging conditions in 2021, the uneven business recovery, our continued investment in operators and strengthening our operations and sales teams.
Now on to the balance sheet. Badger maintains a focus on ensuring the strength of its balance sheet and its financial flexibility. We’ve continued to make meaningful progress in accounts receivable management, particularly in the collection of long-aged receivables. And as of 14th, 2022[Phonetic] approximately 70% of our receivable portfolio was aged less than 30-days, resulting in a DSO of less than 70-days. We’re very proud of what we’ve done.
In January, we repaid the final installment in our senior secured notes with Prudential resulting in our debt being consolidated within our five-year committed credit facilities with our syndicated banks. We continue to maintain over $40 million in committed credit facilities, which provides us ample liquidity and financial flexibility to fund both near-term and long-term growth and complementary capital allocation decisions.
On the capital allocation fund, we will be focusing our capital resources to support our planned new truck build program for 2022 and additionally, the Board has approved an approximate 5% increase in our quarterly dividend to $0.165 per share or about $0.66 annually. The dividend increase will be included in the March 2022 dividend, which is payable on April 15th.
I’d like to remind everybody, about a couple of changes coming in 2022, which we mentioned previously. First, effective with Q1 2022 reporting, we’ll begin to report our results in US dollars to improve the comparability of our year-over-year results and to minimize the foreign exchange fluctuations, given approximately 80% of our revenues are generated in the U.S. dollars. And second, we’ll also be changing the frequency of our dividend payments from monthly to quarterly effective with the March dividend that I just mentioned previously.
I’d like to turn the call back to — over to you, Paul.
Paul Vanderberg — President and Chief Executive Officer
Okay, thanks, Darren. So just before we open it up for questions, our view of the significant U.S. and Canadian long-term opportunity for non-destructive excavation and related services and Badgers growth prospects is strong. The required focus on infrastructure that we all are well aware of in North America supports the demand for our services. We stand ready to help strengthen and maintain that critical infrastructure and adapt it to the new sustainable technologies that are rapidly coming on.
Badger’s recovery from COVID continued in Q4. Activity levels picked up and the year-over-year growth we saw in Q4 has continued into early Q1. We made the investments to hire and train operators to strengthen our operations organization to build our sales and marketing team and to position our manufacturing for higher levels of demand, so Badger is ready.
So, Kevin, back to you for questions.
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from Yuri Lynk with Canaccord Genuity.
Yuri Lynk — Canaccord Genuity — Analyst
Hi guys, it’s Yuri.
Paul Vanderberg — President and Chief Executive Officer
Hi, Yuri.
Yuri Lynk — Canaccord Genuity — Analyst
Hi, Paul. So I mean, not the quarter, I was expecting anyway, I thought you guys would do a little bit better given the revenue. Paul, can you just talk about the sense of urgency that, that’s at Badger to improve the margin situation. I understand there is a lot of difficulty with gross margin. But just your overhead, I mean, it continues to increase year after year? And I’m just wondering if you [Indecipherable] reevaluate some of the investments you’re making and maybe put them off to a better time when the revenues there to better absorb it. Just how do you think about that? And what do you expect in terms of cost savings given the moves you did make in the fourth quarter?
Paul Vanderberg — President and Chief Executive Officer
Yes. Well, I’ll answer the last question first. We expect very good paybacks on those less than two-year paybacks, a lot of them less than one-year payback. So those are good moves for us. And regarding the overall cost management focus and the focus that we have in the prioritization we have, we have put some things in place for the longer-term, this was the program we’ve been working on for several years and things like the MRP system building up the operations team and the sales and marketing organization, our actions that are going to benefit us seeing a lot of benefit we think as we get into the second half and beyond of 2022. And these are actions that we really need to take — to position Badger for the long-term to match up with the long-term market opportunity.
Timing had we normally — we’ll had two Delta variants during the year. One, during our two busiest months in Q3, when we also had a major emergency response, perfect hindsight is something we didn’t have and your question on timing is a good one. But I can tell everyone on the call that it is all hands on deck on driving margin and it’s not only cost management, but it’s also revenue realization and pricing and that is an aspect of the strengthening of our sales and marketing team with the type of professionals that have come in under Rob’s leadership that our skills and experience that Badger has not had historically. So I view, this is a pretty significant reset of our operations team and the leadership skills and the marrying up of some strong historical experience Badger operators with some new talent that comes in with a different way of thinking.
And quite frankly a very serious modernization both our go-to-market strategy and things like pricing, national accounts, the whole suite of sales and marketing that can really drive the opportunity that Badger has. So the timing is not the greatest, Yuri, we’ve had that discussion in the last several quarters with the Board, but the moves are the right moves for the company longer-term, and the only thing I can say is, we’re just going to have to prove it each quarter, not only to ourselves, but to all the analyst and investor community and that’s something we talk about — talked about yesterday with the Board actually, so —
Yuri Lynk — Canaccord Genuity — Analyst
Okay. My second one is on the build, I mean, why do you want to build 155-odd trucks in 2022. I mean, your — the RPT annualized is still well below an optimal level, do you still have a lot of slack in the fleet. It looks like you’re struggling to staff, the suite that you have, and your stock price is at or near assisted two week, might be better to buy back stock here. So just your thoughts on that and if you could tie in the current truck economics given the substantial increase in manufacturing costs you experienced last year?
Paul Vanderberg — President and Chief Executive Officer
Yes, well, we want to make sure we have the trucks there and the demand there as some of our sales and marketing programs kick in and I can’t comment too much on the current trends we’re seeing. But it’s been a very solid start to the year. As I said, our year-over-year trends in early Q1 have been very positive and we’re seeing a very positive year-over-year growth going forward for 2022. So the RPT and the utilization dynamics we expect are going to change as we get into the summer season and beyond. So we want to make sure the trucks are available, and that’s the purpose behind the increased build.
20:40 And I think you’ve seen badger for a number of years, this is a similar scenario that we had in Q1 of ’17 coming out of the oil and gas downturn, where we announced in higher truck build, where the RPTs were still climbing their way back up, so a very, very similar type of recovery scenario from that perspective. But regarding [Speech Overlap]
Yuri Lynk — Canaccord Genuity — Analyst
The cost 400,000 to build the truck and other[Phonetic] costs 550,000 to build the truck?
Paul Vanderberg — President and Chief Executive Officer
Yes, well, if you take a look at the cost — the cost last year were at a very low volume rate, so there was about a 10% swing just in volume impact from the rate we had last year to a more normalized build rate. Inflation is there on truck components that is a fact, and that’s one of the reasons we’ve brought in a new ops leader with Rob and are building up the ops organization that the value of these units need to be realized. And that’s a big, big focus from the team. So revenue realization is a real focus, along with pricing and I think the good part of what we see coming in the next couple of years is that trucks are going to be in quite short supply in the industry and that is going to be hard to get. So we think there’s going to be a lot of value for having more iron on the road, staffed up with operators in the next year or two than a lot of people realize. So that’s the thought behind the increased build.
Yuri Lynk — Canaccord Genuity — Analyst
Okay. I’ll turn it over. Thanks, Paul.
Paul Vanderberg — President and Chief Executive Officer
Okay. Thanks, Yuri.
Operator
Our next question comes from Michael Doumet with Deutsche Bank.
Michael Doumet — Deutsche Bank — Analyst
Hey, good morning, gentlemen.
Paul Vanderberg — President and Chief Executive Officer
Good morning.
Michael Doumet — Deutsche Bank — Analyst
I wanted to dig into the gross margin here as you discussed for margins to normalize, it seems like there is an element of operating leverage of pricing and of cost control. So anyway you can break that down for us, so we can better understand, you know, which of the three are expected to be the biggest driver for the margin recovery? And I guess what I’m trying to get at here is really, you know, as we think about 2022, how much of the margin recovery will be higher RPT versus lower cost?
Paul Vanderberg — President and Chief Executive Officer
Yes, you know, that’s — thanks for the question, Michael. You’re right, it is a combination of all three of those things and the aspect of the truck utilization and labor utilization is one that is not well understood broadly about Badger’s business. Those two do go hand-in-hand and when you take a look at RPT and gross margin, there is a very high correlation between those two historically. And the other part of our business model is that we are a very heavily labor-intense business model and when you’re not leveraging your labor effectively, you lose operating leverage, and that’s been the case for the last several years with the uneven levels of activity.
We see very significant potential as our volumes recovery recovers. But more importantly, as our volumes become more stable and we don’t have the variability to not only see improved truck utilization but significantly improved labor utilization. So that is a major factor in our focus from the operation side and especially given how tight the labor markets are, you know, in the last year and I talked about it a little bit in my comments, but when you have the labor market is tight as it is, if you don’t provide your operators with steady hours, they have alternatives. So that’s been a real challenge and that’s part of why our labor cost, which is — the direct labor cost on the trucks, which is our highest operating cost has been higher than it has been historically.
Our folks in the field tend to keep folks on the payroll rather than sending them home, just because they know folks have alternatives. And as we get busier that factor will fall away. So there is a significant amount of direct labor cost operating leverage that’s very closely tied to our fleet utilization rates. And then the other one [Speech Overlap] Sorry, go ahead, [Indecipherable].
Darren Yaworsky — Chief Financial Officer
No, no, you can [Technical Issues]
Paul Vanderberg — President and Chief Executive Officer
No, that’s okay. So I started with that one because direct labor is by far our biggest operating cost 35% to 40% of our total revenues, so a huge focus area for us. And then the other one is revenue realization and pricing and Badger historically, you know, Yuri asked a question why have you put the cost in to build up operations in the sales and marketing organization? But badger historically was run as a very decentralized business, and each individual branch basically drove their sales and marketing strategy and also their pricing strategy and that was a very successful model for many years, but because we’ve gotten so big, we have significant opportunities to drive our operating scale with — deals with national accounts that we overlap within many, many states and provinces and that have significant opportunity to help us on smoothing out the volumes, that is an initiative I’m very excited about.
And I just talked about the linkage with operating leverage on direct labor there. But pricing is another area that we’re really digging into in earnest and there is not only the opportunity to plug revenue leakage, which is 100% price realization but also to be much more strategic about how we price and think about the strategies in each of our regional markets. And this is something that was devolved to each individual branch manager historically in Badger and we’re now taking an approach to be driving that much more strategically. We think there is a significant opportunity for revenue and profit improvement in that side of Badger too.
So those are the two real major levers and both of them are our targets of the strengthening of our ops team and especially bringing in very highly experienced proven sales and marketing leaders.
Michael Doumet — Deutsche Bank — Analyst
Got it. I mean, they seem like solvable issues again, if the macro continues to move in your favor. Maybe to ask a follow-up, I mean, what are some of the obstacles to getting higher pricing and just in terms of thinking about the competitive dynamics?
Paul Vanderberg — President and Chief Executive Officer
Yes. Well, I mean, in Hydrovac business are always competitors. I mean, we’ve always had competitors and the dynamics that are local in each and every local market and that’s part of why we’re looking to raise the bar and take a more of a national account approach with our top 100 customers. There is a huge value in this top 100 customer base of having the ability to make one call and have service provided. No one else can even come close to Badger on this. So it’s really the value that we provide. And as I talked earlier that can really help us on the utilization side. And then the other —
Michael Doumet — Deutsche Bank — Analyst
No, go ahead. I was just acknowledging your response, sorry.
Paul Vanderberg — President and Chief Executive Officer
Okay, now the other part of it is just making sure we are plugging any revenue leaks and administratively making sure we are billing everything that the customer is already agreed to pay. So Rob Blackadar and Darren have taken a real focused approach together with our field back office and focus that under a very talented head of our IT to make sure that we’re driving all the IT system capabilities and making sure our admin is very efficient, making sure that all those revenue leaks are plugged in, that’s low-hanging fruit. But there was a theme here in everything we’re talking about in your questions, which is improving our operational implementation in our operational execution and that is a major focus for us.
Michael Doumet — Deutsche Bank — Analyst
That’s understood, and I don’t want to go on here for too long, but I did have another question, you know, based on some of your disclosure, I think the — that you had about 130 trucks that we’re becoming of age, I think that’s 10-years in 2022. Instead, you’re retiring 40 to 60 this year, can you comment at a high level as to whether what you’re looking to do here is flatten out the retirement schedule for the next couple of years? And how much flexibility do you have? And then what are the implications for margins as you’re thinking about running an older fleet?
Paul Vanderberg — President and Chief Executive Officer
Yes, no that’s a great question. A couple of comments on that, we continue to look at their retirement profile and we’ve also strengthened our fleet operations, but we’re really looking to sweat the assets a little harder and get more economic life out of them. As you say maintenance and repair expenditures in the life of the truck is a trade-off, so we’re looking at that much closer than we ever have in the past. And if you recall, we started talking about a more focus on utilization and squeezing more utilization out of the trucks that goes hand-in-hand with incremental expenses and repair expense decisions. So we’re looking to sweat the assets harder because that’s our biggest chunk of invested capital at Badger.
And then the other side and I think we’re going to — all of us on the call are going to be hearing more and more about this in the coming months. But there is a real pinch in the availability of trucks in North America. And a fleet it’s going to be worth a lot. And so we want to make sure we have enough fleet to meet demand with markets recovering and the fact that we have trucks available are going to make Badger’s first call versus other companies that are going to have trouble putting trucks on the road. So that’s why we’re so pleased about our supply chain position with chassis, that’s why we’re increasing the build, they have the trucks available and we see this as a several-year opportunity. And you know with a lack of ability to get as many trucks on the road that many industries are going to see, trucks are going to be more valuable and that should translate into the price.
Michael Doumet — Deutsche Bank — Analyst
Thank you for the comprehensive answers, Paul.
Paul Vanderberg — President and Chief Executive Officer
Okay. Thanks, Michael.
Operator
Our next question comes from Maggie MacDougall with Stifel.
Maggie MacDougall — Stifel — Analyst
Good morning. How are you doing?
Paul Vanderberg — President and Chief Executive Officer
Hey, Maggie.
Maggie MacDougall — Stifel — Analyst
I wanted to just touch on the restructuring activities of Q4 and talk a bit about any car[Phonetic] savings or efficiencies that are going to come from those in the upcoming year that we would not have seen in the past?
Paul Vanderberg — President and Chief Executive Officer
Yes. Darren, do you want to jump in on this one, getting my voice a rest for a minute.
Darren Yaworsky — Chief Financial Officer
Yes, certainly. Good morning, Maggie. So the restructuring costs were around $4.2 million and it was broken down into three broad buckets. One, was branch operations where we look to consolidate branches to cover geographic area more efficiently, and those costs will be sustaining. We also were developing some technology on the soil management side of things that — we’re looking at different alternatives, so that was another piece of the business that we had decided to focus our efforts other where. And then the final piece was looking at our real estate portfolio and just understanding the best way to be able to save those costs and those costs are sustaining as well. So of the roughly $4.2 million in expenses, we anticipate an annual savings of about 70% — 60% to 75% of that going forward.
Maggie MacDougall — Stifel — Analyst
Okay, and you’re — you’ve always sort of guided to a long-term goal of getting to a 20% to 29% EBITDA margin. I think the goalpost, kind of, keeps moving just because COVID hung around for longer and there has been things internally that you’ve been doing to better improve the operating profile of the business. Is that margin target still intact for the long term?
Paul Vanderberg — President and Chief Executive Officer
Yes, we don’t see any change in that, Maggie and especially when we take a look at the sales and marketing opportunities that we talked about a few minutes ago that really were not part of Badgers business model before. I am confident that those opportunities are very reachable.
Maggie MacDougall — Stifel — Analyst
Okay and then with regards to 2022 were mostly finished Q1 at this point and I imagine you have some indication on Q2 and how things are going to shape up for the spring. Has there been a significant year-over-year change in activity levels in your key markets? And can you speak to the impact of more activity in the energy patch versus what we’ve seen in the past several years?
Paul Vanderberg — President and Chief Executive Officer
Well, I mean, it’s nice to see energy turning around. It took a long time, it was four, five year headwind and the bottom really guide in Q2 last year when the company’s really reset their capital budgets after having them mostly in abeyance during COVID. So it takes a while for that work to get going. But we’re seeing a very robust portfolio in the pipeline segment and in field work and facility work that we haven’t seen in the last several years. So it’s about 20% of our revenue, these days. Not as much as historically, but very welcome, so that one is very good.
And — but the year-over-year monthly revenue trends as I talked about in our — in the prepared comments are very favorable and that’s continued from Q1 — Q4 into Q1 and that’s part of why we’re looking at the truck build the way we are, that’s part of why we’ve continued to hire and train operators and we paid the price for that in Q4, and we paid the price for hiring and training operators in Q3 quite frankly too. But we are in a better position operator wise by far this year and then we were last year and we’re ready and I mean, I don’t want to exclude too much optimism, but unless we have some major dislocation that’s broad geopolitical or macroeconomic, we’re looking forward to a much better opportunity to drive the revenue and also drive operating leverage as the year progresses. And we think it’s going to be better in the second half than the first half, but the opportunity is coming.
Maggie MacDougall — Stifel — Analyst
Okay. Thanks, Paul.
Paul Vanderberg — President and Chief Executive Officer
Yes. Thank you.
Operator
Our next question comes from Jonathan Lamers with BMO Capital Markets.
Jonathan Lamers — BMO Capital Markets — Analyst
Thank you.
Paul Vanderberg — President and Chief Executive Officer
Hey, Jonathan.
Jonathan Lamers — BMO Capital Markets — Analyst
Paul and Darren, revenue was up $10 million last year. Direct costs were up $55 million. My question is, is there any way to estimate the portion of the direct costs? It could be unusual by looking at metrics like operator hours paid while the trucks for idle? Or operator hours spent in quarantine? Or operator hour or over time hours versus normal levels of overtime hours? Do you have any pieces, you can give us there as we think about a more fair gross margin for this business?
Paul Vanderberg — President and Chief Executive Officer
Yes. Well, we track a whole lot of things like that and I can say that with the uneven recovery and COVID, the things that really hurt with COVID when you have 5% or 6% of your operator base in a particular month in quarantine. You do have higher overtime to cover the work, because you don’t have someone in the truck you’re driving further to cover work for other branches, you have more overnight work and subsistence, meals, hotels, things like that to cover the work. So months like that hurt and there is no two-ways about it and December was one of those months. So and we had two of those right during the peak of our construction season in August and September.
38:46 The other thing is that when we have that type of the COVID hit all of our customers are having one, two. So you have a lot of disruption just with job sites in customer activity too. So that’s why we’re so cautiously optimistic about what we see coming into the spring, given that the Omicron variants dropped off so far. So we track an awful lot of things not statistics that we would like to start publishing or able to start publishing, but we track non-billable hours. So hours that are paid, but not billed. The major focus for us and a major pricing opportunity in an internal improvement one of those price leakage things, I talked about earlier. And when you get past that you got overtime management, a non-billable hours, you have mobilization. So how much time are you mobilizing and driving to get to a job site is that billable or not. So those are all things that we track. And direct labor is the big bucket we focus on, because as you say, it is our biggest cost.
Jonathan Lamers — BMO Capital Markets — Analyst
Okay, thanks. So as the company sets incentive plans for this year. And what’s required for target payouts with 15% EBITDA growth from 2021 be adequate? Or are you also requiring some margin improvement to get targeted payout?
Paul Vanderberg — President and Chief Executive Officer
Yes, yes, Jonathan. We have a real focus internally on operating leverage and margin for 2022. And I think that’s going to continue to be our focus just because we have a number of execution and business improvement opportunities, so we don’t have 2023 internal incentives in place yet. But 2022 is going to be a year of focus on business improvement and execution improvement and that’s why I’m so pleased with Rob’s activities his first seven months and we’ve got to keep in mind that he just got his regional organization and his new sales and marketing organization actually announced in place at the beginning of January. So early days, but we’re pretty pleased with what we’re seeing so far.
Jonathan Lamers — BMO Capital Markets — Analyst
And just on pricing, usually in the MD&A, there was a comment about average Hydrovac rates, I didn’t see that. How did pricing in Q4, compared to prior year?
Paul Vanderberg — President and Chief Executive Officer
Yes, pricing would have been slightly higher, and we’ve actually continued to focus very closely on that. My view is that we’re going to have progress on pricing as 2022 continues, and I think that longer-term as we get later into the year and into next year given how tight we are seeing the truck chassis market and the ability of companies across many industries to add equipment, there’s going to be more value in fleet and there’s going to be more pricing opportunities. As we sit here to date the lead times for our heavy-duty chassis are at a year.
Jonathan Lamers — BMO Capital Markets — Analyst
Yes, those are really long. What kind of [Multiple Speakers] wage inflation would Badger be experiencing relative to that slight increase in pricing?
Paul Vanderberg — President and Chief Executive Officer
Yes. Well, we have seen some wage increases, we tried some retention bonuses in the third and fourth quarter last year and we continue to look at all that, but we are very focused on pricing to offset direct labor cost increases. And then the other thing that we think is going in the right direction this year based on what we had with our two COVID flare-ups last year is the labor utilization, and that one we expect to see is a very significant opportunity as truck utilization increases, the utilization of labor will really help our margin.
Jonathan Lamers — BMO Capital Markets — Analyst
Last question from me, just on the new sales office that Rob has set up. Were there any early wins that you’d like to share with us at this stage? Or is it too early to say?
Paul Vanderberg — President and Chief Executive Officer
Yes, it’s pretty early to tell, but my personal view and I — Rob can speak for himself may be next quarter, is that if you look at some things that are unique to Badger national accounts is probably top of the list in my opinion. And we have the scale and the scope of operations with a lot of major companies that historically we’ve dealt with them on a branch by branch basis. So you know, the focus that Rob has put in place there, I think particularly is going to really make Badger different and differentiate us in many ways from smaller competitors. So I — that’s part of my optimism and that’s also why I want to have enough trucks for Rob’s team.
Jonathan Lamers — BMO Capital Markets — Analyst
Thanks for your comments.
Paul Vanderberg — President and Chief Executive Officer
Yes. Thanks, Jonathan.
Operator
Our next question comes from Krista Friesen with CIBC.
Krista Friesen — CIBC — Analyst
Hi, thanks for taking my question. I was just wondering, like is there a level of inflation, whether it’d be in fuel or in labor cost, that could result in structurally lower margins for Badger and you are hitting that $20 million to — sorry 29% target?
Paul Vanderberg — President and Chief Executive Officer
Yes, the way we look at it is the — it’s not really so much the level of inflation. It’s how we manage it or pass it through. And I’ll give you an example, Krista. We’ve had a recent oil price shock and we’ve had a fuel recovery fee in place now for several years. So we have a mechanism that auto adjusts. Obviously we’re looking to update that and make sure it’s really tight and lots of opportunity there. But because we’ve had that mechanism in place the price shock is not as big. You know, you get a lag, because we’ve been adjusting it historically once each month. But once you get through that month that mechanism works.
45:49 So that’s one that you get a lot of press on, but that’s one we’re very much on top of and then the key and that’s part of the Jonathan’s questions earlier on labor, it’s really incumbent on us to make sure that we’re staying ahead of cost increases, in fact our cost increases from inflation on labor, it is our biggest expense. And quite frankly that’s an execution opportunity and we just need to execute on that. And so with fleet being in shorter supply, the next couple of years, I think that’s going to be a tailwind for us in our ability to execute, but we can improve our execution there and that’s something we’re very focused on.
Krista Friesen — CIBC — Analyst
Okay, great. That makes sense. And just as we see a bit of a rebound here in the oil and gas industry, is there a different margin profile with that sort of work? Or would it be similar to what we’re seeing from the other industries that you operate in?
Paul Vanderberg — President and Chief Executive Officer
Yes. Well, that the — there is a different margin profile and different types of work and it’s part of its industry to industry, but parts of it’s also how much utilization, you can drive. So for example if you have a truck that’s out there, four trucks that’s out on a pipeline in its every day for 10-hours in the same operators, go to the same place every day and get dispatched that’s really efficient. If you have a truck that is chasing around in urban area and you’re doing two jobs in a day and we’re trying to stack jobs and keep the utilization up, that’s a whole different margin dynamic there. So it’s not only segment different, but it’s also the type of work. And that’s the other reason I’m so excited about national accounts, because those are accounts that need Hydrovac’s every day and it is also relationships grow, that’s going to help us on the fleet and labor utilization.
Krista Friesen — CIBC — Analyst
Okay, great. And then just can you comment on how you’re looking at top line growth for this year? And the growth that you’re seeing or the initiatives that you’re working on to growing your core markets and your strategic market?
Paul Vanderberg — President and Chief Executive Officer
Yes. Well, I can’t really comment specifically on the top line growth we’re forecasting for this year, but we have been pleased with the year-over-year growth we’ve seen so far in Q1 and we’re ramping up the fleet and make sure we have the operators to be able to take care of that. Regarding the initiatives and what we’re doing to drive revenue there is an awful lot on the way and underway and its — but it’s still early days as I said a few minutes ago, on our new sales and marketing initiatives. But the important thing is a lot of these initiatives are activities that Badger has not done historically with our decentralized go to market [Indecipherable].
Krista Friesen — CIBC — Analyst
Perfect, thanks. That’s it from me.
Paul Vanderberg — President and Chief Executive Officer
Okay. Thanks, Krista.
Operator
Your next question comes from Trevor Reynolds with Acumen Capital.
Trevor Reynolds — Acumen Capital — Analyst
Good morning, guys.
Paul Vanderberg — President and Chief Executive Officer
Hey, Trevor.
Trevor Reynolds — Acumen Capital — Analyst
Just curious a little bit on the MRP and what the potential savings and on that front, you mentioned 10% on volume for decrease in the cost to build trucks, just wondering what impact that MRP will have?
Darren Yaworsky — Chief Financial Officer
Yes, We’re actually really excited about how the MRP system is working and pleased with how the implementation went. But just to unpack some of the numbers that were mentioned before, so for 2021, our cost fully loaded with overhead absorption for a truck was around $550,000, that compares to 2019 levels of around $450,000. To Paul’s earlier point once you start getting volumes back up into the — manufacturing volumes back up into the numbers that we’re talking about for a build program that takes the number down about 10%, so the high 400s. We also believe that the sequencing supply chain and componentry management that will get out of the automation of the MRP system could conceivably get us another 10%. So we’re optimistic that despite some of the inflation that we’re seeing, we could potentially get manufacturing cost back down to the 2019 levels.
Trevor Reynolds — Acumen Capital — Analyst
Great, and then are there any choke points in terms of the supply chain you guys mentioned you’re well positioned in terms of chassis, but any other potential supply chain issues in terms of the manufacturing build?
Paul Vanderberg — President and Chief Executive Officer
I’ll cover chassis are really the big one and we really made our commitments early on. And as I mentioned earlier, with lead times out to a year everyone is making commitments earlier. So that is a major focus for us. We did make commitments early on and if you think back historically what was going on in Q3 with Delta and all sorts of disruptions, we made the moves we had to make and we’re very pleased with those moves. So we’re in a very good position. We’re hearing about competitive Hydrovac manufacturing plants that, you know, we have to find a chassis before they build one.
And we have our supply chain are working quite nicely there, so we are very pleased with the positioning we have, and I’m personally delighted that, that’s coming together at a time when the sales and marketing team is getting up and running and building momentum. So when Rob first joined Badger, one of his first questions to me is, as we get things cranking here are we going to have enough trucks? So we want to make sure we have enough trucks for this team.
Trevor Reynolds — Acumen Capital — Analyst
Got it. And then with the cost restructuring that you undertook in Q4, is that — do you see any more coming down in the pipe here in 2023?
Paul Vanderberg — President and Chief Executive Officer
Don’t see it. We took a hard look at mid-year, and he said, you know what, with Delta another kick in the gut during 2021. So let’s sweep out all the corners and uncover everything. And so we’re pretty well positioned for a good couple of year run here from a whole system network perspective. We dropped out 12 locations and with our sales and marketing strategy, we are looking to really drive more volume broader customers and deeper with our existing customer accounts through our existing network. And that’s a different commercial market focus than we’ve done historically, which is adding dots on the map.
So if you think about that change in focus that we couldn’t do previously, because we didn’t have the sales and marketing leadership, this leverages our cost structure differently than adding dots on the map. So if you think about operating leverage and we need to be obviously successful with those sales and marketing plans, but it flows through the system of existing fixed and semi-fixed cost structure very differently than starting up new branches that he has a lot of greenfield expense. So this is a different focus and a different approach. And the good news is, when you look at our core and strategic markets, the good news is, our analysis indicates that they’re broadening — the opportunities to broaden the customer base are real and they’re there, it’s all about execution.
Trevor Reynolds — Acumen Capital — Analyst
Got it. And then with the fleet movement that you did in closing those offices — maybe just — is there any early changes in utilization that you can speak to? Or is there any change in industry exposure that, that you can touch on?
Paul Vanderberg — President and Chief Executive Officer
Yes, a number of the branch consolidations were historical locations in some of the oil and gas markets. We are not backing out of servicing any territories, it’s just the way we’re doing it. So we’re very well positioned and we may be driving farther to meet some jobs and some customers may not want to pay mobilization. So we may lose some work to some smaller local competitors, but we have other places to move that equipment to and it benefits our overall operating leverage in our overall margin to do that. So those are decisions we took very intentionally.
Trevor Reynolds — Acumen Capital — Analyst
Thanks very much. Have a good day.
Paul Vanderberg — President and Chief Executive Officer
Thanks, Trevor.
Operator
The next question comes from Yuri Lynk with Canaccord Genuity.
Yuri Lynk — Canaccord Genuity — Analyst
Paul, can you just clarify your expectations for the first quarter. I know you mentioned, we’re off to a strong start to the year, but you also talked about all Omicron running into the first quarter. So how do we think about that?
Paul Vanderberg — President and Chief Executive Officer
Yes, well, Omicron in January was about like December, where we had 5% of the operators in quarantine for a period. So very similar to December, but we’ve been very pleasantly surprised with how fast the cases have fallen off like in March, I think we have under 10. And the entire employee base so that’s a real positive. And the good news I guess if you could say there is good news, we had Omicron in December and January, which is our slow season. So we’re looking forward to the things going pretty solid from here. And as I said in the prepared remarks, Yuri, our year-over-year growth in early Q1 has been very good.
Yuri Lynk — Canaccord Genuity — Analyst
Okay, but we shouldn’t expect any kind of meaningful inflection in gross margin given the quarantine and stuff like that? Is that how we should read that?
Paul Vanderberg — President and Chief Executive Officer
Yes. Well, the whole quarter is not written yet, but when you see that type of COVID impact in a month, it makes for a very challenging month. I mean, that’s just the fact we’ve been living in that now for a couple of years and so tough start to the quarter, but that’s turning around very quickly.
Yuri Lynk — Canaccord Genuity — Analyst
Okay and just conscious of time here, but any details on the Red Deer expansion, like what, kind of, timeline cost, pro forma capacity?
Paul Vanderberg — President and Chief Executive Officer
Yes. Well, as I said in my prepared remarks, well this is something — first off to give some more background, this was an opportunity that did not exist, it came up with an adjacent property became available, so it was truly a needle in a haystack and we jumped on it. So the team is working through facility, layout and integration as we speak. And we’re looking at a pretty significant expansion above our current stated 550 truck per year capacity on a single shift basis. And I can say that the capital requirements are modest, and I stress, the word modest. So that’s the other part of this, it’s pretty exciting there. There are buildings there and we’re also consolidating there’s actually cost savings to it, we’re actually consolidating three remote shops that were scattered around Red Deer into this one integrated facility, which gives you all kinds of operating efficiencies. We were hauling parts around town on flatbeds back and forth and we’re eliminating all of that.
58:44 So cost savings, safety improvement, efficiency improvement, all of the above. It really was a needle in a haystack and that’s why we jumped on it, but the capital is very modest, that’s part away and so exciting.
Yuri Lynk — Canaccord Genuity — Analyst
Got it, sounds good. Okay. Thanks, Paul.
Paul Vanderberg — President and Chief Executive Officer
Yes. Thanks, Yuri.
Operator
And I’m not showing any further questions at this time. I’d like to turn the call back over to our host for any closing remarks.
Paul Vanderberg — President and Chief Executive Officer
Okay, thanks Kevin, and appreciate everyone’s participation this morning. So on behalf of all of us at Badger, we want to thank our customers, employees, suppliers, and our shareholders for everyone’s ongoing support and working with us to drive Badger’s success. Thank you.
Operator
[Operator Closing Remarks]