Dexterra Group Inc.

Rod Graham - President and CEO Scott Matson - SVP, Finance and CFO

Scott Treadwell - TD Securities Greg Colman - National Bank Financial

Thank you, Tiffany. Good morning.

My name is Rod Graham. I'm the President and Chief Executive Officer of Horizon North.

With me today is Scott Matson, our Senior Vice President of Finance and Chief Financial Officer. We're here to discuss our Q2 2016 operating results, our business strategy, and our outlook for the rest of 2016.

I'll provide some comments on the market conditions that predetermined our business development strategy, plans and objectives, and then Scott will walk through our results for the quarter, and finally, I'll provide an update on what we are seeing for the rest of 2016, before turning to the question-and-answer portion of our call. Before we get into that, I'll turn over to Scott Matson to cover some housekeeping items.

Scott?

Thanks, Rod, and good morning everyone. As indicated, we'll be commenting on our 2016 second quarter results, with the assumption that you've read through the Q2 earnings release, our MD&A and our financial statements that we made public last night, all of which are available both on our Web-site and on SEDAR.

During this call, certain statements will be made relating to Horizon North that are based on the expectations of management as well as assumptions made by Horizon North using information currently available that may constitute forward-looking statements or information under applicable securities laws. As well, certain financial measures discussed today are not recognized measures under Generally Accepted Accounting Principles or IFRS.

More information regarding these measures can be found in our public documents. The cautionary statements contained in yesterday's news release and in our annual filings, again both available on our Web-site and on SEDAR, outline various risk factors, assumptions and cautions regarding any forward-looking statements or information, and also contain further information regarding any non-GAAP measures that we may talk about today.

So with that, I'll turn things back over to Rod.

Thanks Scott. I'd like to begin our discussion by talking a little bit about the events of the Fort McMurray wildfires, as they really played a prominent role in the operational and financial results for this quarter.

Fort McMurray; events of the Fort McMurray wildfires were well-documented and reported and I am proud of the role Horizon North played in supporting the people and the community of Fort McMurray through those tragic events. In opening the doors to our camps north of Fort McMurray, we were able to provide safe refuge into hundreds of evacuees and emergency personnel.

The actions of our people through this extraordinary event are a testament to our four core Horizon North values that are non-negotiable; safety, integrity, community and customer focus. In the days following the wildfire's devastating impact on the city of Fort McMurray, Horizon North operations in the affected areas were evacuated and restarted multiple times due to shifting winds and changing fire conditions.

Eventually, a mandatory evacuation was issued for all operations along the AOSTRA road, north of Fort McMurray, due to high temperatures and strong winds which were driving the wildfire directly towards our Blacksand Executive Lodge. I'm extremely pleased to report that all guests and personnel were safely evacuated and accounted for.

However, on May 16, the Horizon North's premier 665 bed Blacksand Executive Lodge was completely destroyed by the wildfires, while our Birch Mountain Lodge, a few kilometers away, sustained extensive smoke damage. In the days following the impact of the wildfires and into the first half of June, our focus was on ensuring all areas affected by the fire were ready for safe return.

Our efforts were also concentrated on restarting operations in order to meet our existing contract commitments, and I'm proud to report that Horizon North was able to restore the operational capability, approximately 1,000 beds, to that affected area by the middle of June. With respect to our operations, we continue to focus on ensuring our contract commitments are serviced and we are in the early stages of the cleanup efforts at the Blacksand Executive Lodge site.

With respect to our assets in the area, Horizon North carries appropriate insurance coverage and we are working closely with our insurers to expedite this claims process. Scott will provide some additional details on the financial effects in a few moments.

With respect to the rebuild of Fort McMurray, it is still early days. We look at Horizon North's participation in assisting with providing solutions to the tragic events in the region in the form of a time continuum measured over four phases.

Activities have moved from the initial safety evacuation phase to the assessment phase, and now we are currently in the midst of the remediation/reclamation/relocation phase. The final rebuilding phase has yet to begin in earnest but Horizon North will be actively engaged in these efforts.

Strategic direction; over the past 18 months I believe we've clearly articulated our commitment to a journey of transformational change in response to the changing commodity prices, political and market environment. I believe this conference call is a forum to provide a quarterly update on where we are at on that journey.

The playbook is relatively simple. Three key elements; people, cash, assets.

People; we have added talented individuals from other sectors of the economy that have experienced extended periods of duress and challenge. These individuals are coming up nicely with our senior key experienced personnel.

Cash; we have delevered our balance sheet to provide us the runway to prosecute our long-term plan. And assets; we are focused on fine tuning our business offering to manage the risk return axiom.

Our overriding goal is to actively develop clear vertical offerings where we can be a market leader and have a true competitive advantage. Simply put, best-in-class quality, best-in-class cost structure.

We believe this combination will provide us the greatest flexibility in driving our pricing and revenue model. Phrases like 'hunker down', 'tread water', 'wait for improved energy prices', are not in our vocabulary.

A wise man once told me, 'hope is not a strategy'. This strategic objective is about velocity of money.

For the balance of 2016, you will hear us talk about our business in two main verticals. The first is what I would refer to an industrial business line.

This would be our legacy business of lodges, camps, catering, matting and other equipment rental businesses. We are currently in the process of aggressively evaluating each individual asset in this industrial business portfolio.

These assets need to fit our high-level profile checklist that includes geography, customer relationship and First Nations relationship. If not, we will look to rationalize this asset class as part of this journey of transformational change.

Assets we add to this profile in addition to the criteria we have just discussed have to fit into our profile diversity, end market segmentation, geographical profile in Western Canada, and customer type. Final comments here, it is our belief that consolidation of this industrial segment, not unlike many segments of the energy services business, needs to occur.

On July 21, we announced the strategic acquisition of Empire Camp Equipment Ltd., which we expect to finalize by the end of August. Adding Empire will help to solidify our industrial service offering, help us to diversify our geographical footprint by gaining exposure to non-energy-based projects while adding additional traction in our more traditional markets.

In addition, the addition of Empire's high-quality recently manufactured assets are a great fit with our existing fleet and will allow us to gain further operational efficiencies. The second vertical is our Buildings business, permanent modular residential, permanent modular commercial.

We committed to this vertical 18 months ago and have made significant adjustments to our business plan to drive its success. Tremendous upgrades to our quality program, significant adjustments to manufacturing techniques to eliminate waste, sophisticated world-leading software solutions, innovative engineering and creative design, have all been part of this year-long journey.

Admittedly, one of the impediments to success of our Buildings group was creative design. In late May, we acquired Karoleena Inc.

This niche high-end residential designer prefab organization was the final ingredient necessary to the delivery of world-class product for retail, residential and commercial customer base. Within the Buildings business, we'll continue to evaluate unique niche tuck-in opportunities.

Our management here again; best-in-class quality, best-in-class cost structure. Dividends; as we announced last night, Horizon North's Board of Directors declared a dividend for the third quarter of 2016 of $0.02 per share.

We continue to be committed to the dividend based on the solidity of our expected cash flow from operations, the strength of our balance sheet and the ability to manage our ongoing capital commitments. Our ongoing commitment is to always take into account the interests of our shareholders with a view to providing a total return on their investment.

Scott, over to you to provide us [an opportunity to] [ph] the operating and financial results for the quarter.

Thanks, Rod. I'll walk through our results for the second quarter in aggregate and then briefly comment on each of our major business lines.

I will also provide some color with respect to how the effects of the loss of Blacksand Executive Lodge flow through our financial statements and comment briefly on our ongoing insurance claim process. On a consolidated basis, second quarter revenues were $52.5 million, while consolidated EBITDA for the quarter were $3.7 million or 7% of revenues, down versus Q2 of 2015 across virtually all measures.

At a high-level, as you all know, commodity prices and oil in particular continued to remain under pressure which has resulted in our customers drastically reducing their spending profiles and in turn has resulted in significant demand pressure. The overall macro environment overlaid with the effects of the Fort McMurray wildfires resulted in a very challenging operational environment for the quarter.

Turning to the various operating segments of our business, our large camp revenues for the second quarter were $31.1 million, down just over $12 million or 28% compared to the same period of last year. This was a combination of both the impact of the Fort McMurray wildfires, but more so the continued challenging economic environment.

Volumes and pricing were both affected as customers focused on managing utilization where they could and continued to put pressure on rates. You will note that the 665 beds lost at Blacksand have been removed from our ending bed count figures for the quarter and beds that were effectively out of service during the quarter due to the impact of the wildfires have been adjusted for through our numbers as well.

Our drill camp operations for the quarter were relatively flat compared to the same period in 2015, generating approximately $1 million in revenues, still reflecting though a significantly low drilling activity measure resulting from the challenging macro environment. Our catering only revenues increased significantly, up to $5.5 million, compared to $2.2 million in the same period of last year.

The increase was mainly due to a new contract that we added in Q4 of 2015, and combined that with the catering and other services that we provided during the Fort McMurray wildfires gets you the delta. On the service side of this business, which includes the transportation, installation and demobilization of facilities for customers, revenues for the second quarter were $4.8 million, down slightly from the same period in last year.

The decrease was a result of generally lower activity levels in the large and drill camp operations that resulted in generally less setup and decommissioning activities during the quarter. So overall, total camp rental and catering operations revenues, $42.4 million for the quarter, a decrease of about $9.3 million or 18% compared to last year.

Turning to the manufacturing side of our business, Q2 revenues were down considerably compared to the same period of last year as demand for newly constructed gear, especially camp gear, was considerably lower. In Q2 of 2015, we were completing a large oil sands camp installation project, while this year customers have sharply turned down their capital spending programs resulting in significantly less new builds.

Revenues for the quarter were just under $2 million, down from just under $18 million last year on commensurately lower total hours worked in our plants during the quarter, reflecting our reduced manufacturing headcount. So overall, segment revenues, $44.2 million for the second quarter, down about $25 million or 37% compared to the same period of last year.

EBITDA from this segment, $4.8 million as compared to the roughly $8.2 million last year, again following lower overall activity and revenues. On a percentage of revenue basis, EBITDA came in at 11% as compared to the 12% from this segment compared to last year, reflecting the effects of the various moving parts that I just described.

Revenues from our newly renamed Rentals & Logistics segment, formerly our Matting segment, in Q2 were $8.3 million, a decrease of $7.2 million or 46% in comparison to the same period of last year. The decrease in revenue and EBITDA again followed generally lower demand curve for our rental offerings as a result of the persistent tough economic environment.

You will note that this segment now includes our relocatable structures business, which was formerly reported as part of our Camps & Catering segment. Reporting these results here provides a better picture of how we manage and view our existing operations, with all of our more pure rental products, our access mats, light towers, labs, office units, et cetera, now reported in this segment.

For the second quarter, relocatable structures generated revenues of $1.3 million, a decrease of approximately $1.1 million or 46% compared to the same period of last year. Again, that decrease in revenue mainly is the result of lower utilization as market conditions continue to be very challenging.

Access mat rental revenues for Q2 were also down coming in at $1.5 million as compared to $4.5 million or so last year, a decrease of about 60%. This was again driven by a combination of lower volumes and reduced pricing as customers worked to reduce their requirements where possible and continued to push hard on pricing for the work that did continue.

Mat sales were relatively minimal for the quarter, and the sales that did occur were more weighted towards used mats which were slightly more affordable than newer, higher-priced new mats. Service revenues from this business, the transportation, installation and asset management services we perform on behalf of customers, decreased by 31% compared to last year, again driven by general lower activity levels.

So overall, revenue and EBITDA for the Rentals & Logistics segment for the quarter, $8.3 million and $2 million respectively, with each down compared to the same period last year. The overall macro environment has pushed customers to delay or cancel capital projects and reduce their costs through lower utilization of these specific products and services.

Corporate costs for the quarter were just over $3 million, compared to $3.5 million in Q2 of last year. If we normalize for the severance and restructuring costs that were incurred in Q2 of 2015, roughly $500,000 worth, our costs were essentially flat year-over-year.

From a capital spending perspective, taking into account the proceeds received from normal course asset disposals, our net capital spending during the quarter was approximately $4.1 million compared to the $9.8 million we spent last year. This reflects our condensed capital program for the year and a disciplined approach to spending across the board.

Our capital program for 2016 remains in the $15 million to $20 million range that we talked about on our last call, as we continue to focus on key strategic initiatives and supporting contracted revenue generating projects. We continue to be focused on our balance sheet.

Our total loans and borrowings at the end of the quarter were $46.8 million, down from $70.1 million at Q1, as we worked through our normal seasonal collection cycle. That translated into a total debt to trailing 12 month EBITDA ratio of 1.17-to-1, well within our existing covenant package and providing us with significant financial flexibility and capacity as we move through the rest of this year.

Finally, I'd like to provide a little color with respect to the loss of our Blacksand Executive Lodge assets and our related and ongoing insurance claim process. As we disclosed in Note 5 of our financial statements, we disposed off the net book value of our Blacksand assets amounting to $19.3 million during the quarter.

To-date, we have recognized insurance proceeds equal to the net book value that was written off, which is why you do not see a large loss on disposal of property, plant and equipment on the P&L during the quarter. During the quarter, we received a portion of the amounts recognized in the form of an advance from our ultimate claim which flows through the 'Proceeds on sale of PP&E' line of our cash flow statements.

The remaining amounts are included in accounts receivable, as highlighted in our note, as we are virtually certain of collecting at least those amounts. I won't be providing specifics or commenting directly on the overall magnitude of what we expect our final claim amounts to look like.

It's an active process and we are still working through the details with our insurance provider. Again, Horizon North and our insurance providers are working very closely together and we will continue to keep you apprised of the process as we go through that.

Our insurance companies have been very supportive throughout this process and are working closely with us to finalize things and move things forward as expediently as possible. We will provide a further update once the process is completed and we expect that to happen over the next few months.

So with that, I'll turn things back over to Rod.

Thanks Scott. I spoke about our two key verticals, industrial and buildings, permanent modular.

I provided our game-plan, the alchemy of people, assets and cash. I laid out our clear vision of best-in-class quality, best-in-class cost structure.

Now it's about putting points on the board. From a financial performance, Q2 was an extreme challenge.

You take away one-third of any company's operating revenue, add extraordinary operating charges during that timeframe, and layer in a backdrop of challenged energy pricing, and it will take a bite out of anyone's results. However, we have a clear plan to drive the results for the back half of 2016 and 2017.

We aren't providing formal guidance but agree with the range set by public analysts for EBITDA in 2016 of roughly $35 million to $40 million, and that grows into 2017 for a range of $40 million to $50 million of EBITDA. We will do that with one of the strongest balance sheets in the industry and a relatively modest sustaining capital profile that affords us free operating cash flow.

That is the end of our prepared remarks. I'll turn the call back over to Tiffany for the Q&A section of our call.

Wanted to just maybe get your views on the move into the sort of construction segment, can you just give us some color on bidding activity either by geography or sort of final end-user, and any sort of improved – maybe not improved, but better visibility on how you see Horizon North moving into engaging these end-users, is it specifically with Karoleena in a sort of retail model, or are you looking broadly at partnerships and engaging with developers or larger owners of real estate and buildings?

The answer is probably yes to everything you just said, Scott. So again, not to be [indiscernible], we needed to spend the time getting the right quality, cost structure, software, front-end software design, and now with Karoleena, the flair and creativity that comes along with that profile.

We have had some modest wins, we have not press released those for a variety of reasons, but we are quite pleased with some recent activity. We will start to kind of formulate a backlog as we proceed forward.

We have a very robust quote log, which again we aren't going to release what that kind of numerical amount looks like. But I do know that there is acceptance for this type of business.

One of the key areas of our focus is the activities of the BC housing authority. They have overtly communicated to the marketplace their desire to help out with affordable housing and the problems of British Columbia.

They certainly are looking to high-quality BC manufacturers to facilitate and accommodate that. Our plant in Kamloops I believe has become a world-class, and I've kind of termed it an auto plant, in terms of the ability for us to drive best-in-class quality and best-in-class cost structure.

So, certainly the government is part of that equation, Scott. One of the kind of early mistakes that we did make in terms of going down this process admittedly was taking individuals that have kind of come out of the energy services business and apply them to a different end customer market.

We have rectified that situation and have truly bifurcated our business into this industrial and into this buildings end market. So the individuals that populate that vertical have the skill-set and background to meet and to work with the customers in that vertical.

In addition, there is a different sales cycle, there is a different financing piece that comes along with that. We are working through a couple of adjustments in how we proceed and we look forward over the course of this quarter to start to articulate more clearly to the market what some of these wins look like.

We believe this business has tremendous growth. If we take a look at where our peers south of the border have gone, I believe we're probably 5 to 10 years behind where the U.S.

is in acceptance of modular. This isn't something brand-new for North America, but it's something that is relatively new to the pieces and parts of the permanent modular building community in certainly Western Canada.

So we look forward to having the right people, the right quality, to push forward on this. And in terms of working with, we have had a couple of groups that we have looked to partner up and believe that we will have some news to report here on our Q3 call in early November, Scott.

Okay, great. Maybe just to get some detail, I don't want to push it too hard, you said you're obviously sensitive about releasing too many numbers in the early days, is there a point either in time or in scale where you would expect that you would be releasing either quotes or backlogs, and potentially what size of contract would you win where you'd feel you'd want to release that either for materiality or just for full disclosure?

Certainly for materiality there are certain kinds of securities commission triggers that obviously we would abide by. In terms of where we start to go with this, I would like to be in a position by Q3 to start talking about backlog, Scott.

We've got some early wins, I'd characterize them as sub-$10 million, but there will be an opportunity for us to proceed forward. And some of these early wins are quite high profile and look forward to them coming out naturally in the media as part of this communication process.

Okay, great. I appreciate the color, guys.

Now looking forward to the Q3 call more than ever.

Still struggling with phone technology on my end. Just a couple of quick ones here.

I appreciate you're still dealing with the insurance claims and they are working well with you, so I don't want to push you hard on specifics, but I'm wondering if we can kind of back into a range by talking about just some general facts surrounding the facility at Blacksand, so Scott, do you mind if I ask, was it insured for market value or for net book value?

So we outlined that in our MD&A, Greg. It was a market value number.

And do you have any estimate as to what that market value would be?

I'm going to stay away from quoting numbers, Greg. As you can imagine, we are working through that process with our insurers.

I don't want to set an expectation for markets and disappoint, and I don't want to try to put my insurers in a box. So I'll stay fairly silent on what that range looks like.

But we've kind of disclosed what the book value is, what we've accrued, what we are comfortable that we are going to get, and there will be something in excess of that, I just don't want to quantify it.

Greg, I'll just chime in here. Now I've heard lots of noise from market participants which I find amazing that they would have a window in terms of what the number is.

There's only two groups that know what that number is and what we're driving towards, and one is the insurer and one is Scott and his finance accounting team. And so I'd appreciate kind of where this is coming from, but we'd like to kind of continue down this process and be in a position to give all the numbers once we have come to a final settlement.

Understood. Maybe just a few factual things on the history of Blacksand then, could you remind us when it was built and what the total invested capital was?

So when we completed that, we completed the facility in 2008, and the original cost of the assets that we decommissioned was about $45 million.

Okay, thanks very much. And then just shifting gears a little bit, Rod, you had some great commentary about the outlook for Fort Mc and the different phases, but in your initial press release comments about kind of the surged demand, you did mention that it was relatively brief just sort of at the end of the month while you had insurance adjusters coming through and the initial true there, is it reasonable to expect that we do see additional demand for mobile accommodations as you enter into that restructuring process, you did mention you participated in it, and do you have any idea as to when that would begin, is that the kind of thing we could see in 2016 or are we talking 2017 or potentially even later?

The obvious is, the winter coming at you, so accommodations are going to become even more imperative for individuals. And so I think one of the offerings that we have will resolve that on a temporary basis.

But to be pragmatic about the rebuild for certainly kind of single-family homes out, certainly looks like a 2017 type of scenario. I know you've got demolition activities underway right now, but that will take some time.

So if I'm looking at it, there is kind of the temporary relocation concept that I've talked about that will be necessary here for the back half of this year, but I think the rebuild will happen in earnest in 2017.

Okay, great. That's actually it for me.

Thanks very much.

Thank you to all for your time and your interest in Horizon North this morning. We look forward to updating you with our third quarter results in early November.

Thank you, Tiffany.