Dexterra Group Inc.

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

Greg Colman - National Bank Financial

Thank you, Christine. 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 second quarter 2017 operating results, providing an update on how our business strategy is progressing and outline our view through the remainder of 2017. I'll provide some comments with respect to recent developments, our overall view of the environment and initiatives we continue to drive forward upon.

Scott will walk through our results for the second quarter of 2017, and finally, I'll provide an update on what we are seeing for the rest of this year and into 2018 before turning it to the question and answer portion of our call. First, I’ll turn things over to Scott for some [Indiscernible] comments.

Scott?

Thanks, Rod, and good morning everyone. As Rod mentioned, we'll be commenting on our 2017 second quarter results, with the assumption that you've read the Q2 earnings release, the MD&A and financial statements that were made public last night, all of which are available both on our website and on SEDAR.

During this conference 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.

And more importantly 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 website and on SEDAR, outline various risk factors, assumptions and cautions regarding 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. As outlined following the release of our first quarter earnings we now show modular solutions as the new business segment within Horizon North.

We are now seeing the benefits of our bifurcation strategy with modular solutions gaining momentum and our industrial services businesses showing signs of improvement. Modular Solutions.

We are starting to realize some significant wins including the recent completion of our fast tracked innovative modular constructed hotel property located in Revelstoke, British Columbia. We were able to complete the turn-key hotel project in 8 months from ground breaking in late October to handover the possession to the client at the end of June.

The property is branded Ramada and is located right on the TransCanada Highway in Revelstoke. I strongly encourage you to stop in and stay the night.

We see the next 12 months of revenue coming from two main concentric circles, an inner circle which is a committed backlog and an outer circle, our high visibility line of sight. The inner circle is our $31 million backlog of executed contracts with the majority being phase 1 of multiple phased development projects.

This includes social housing projects, first phase of multiple phase condominium projects, First Nations commercial and housing infrastructure and a series of Karoleena and Kadence residential homes. The outer circle represents high visibility line of sight to future projects and is filled with signed MoUs and otherwise related to future projects and phases.

This number which is probability insignificantly risk-weighted is approximately $75 million. This represents the next phases of already contracted backlog and in many cases, these phases are an active predevelopment.

These also include social housing projects that are awaiting final government approvals and hotel projects for which we have an executed letter of intent, but are awaiting final business and development permits. Almost all the project in its outer circle are located in British Columbia, and a number of them have been slowed by the spring flooding and the forest fires.

These have been unfortunate delays, but we look at these as modest deferral in terms of timing for many of these projects, out of our Q2 and into the back half of this year. Our quote log continues to represent multiples of our backlog and high visibility line of site projects, some events that have occurred during the second quarter give us cause for optimism well into 2018.

We generally try to political party agnostic in our communication to our stakeholders. However, the outcome from the recent provincial election in the province of British Columbia, and that new leaderships strong support for social building infrastructure, which would be affordable housing, senior residence, educational facilities makes us optimistic of the new provincial government spending profiles will benefit our BC located modular business.

With regards to aboriginal housing initiatives, the federal government’s commitment to improving Aboriginal housing across this country as we move through the end of the decade remains a federal priority. The first round of contract left was somewhat tepid, but we believe the future left will be much more deliberate.

We believe that our partnerships, processes and demonstrated capabilities will allow for us to handle the manufacturing delivery and installation of modular homes for First Nations be it by community, by region or large procurement strategy. During the second quarter, we hosted well known television personality Mike Holmes in the homes approved, homes team at our world class manufacturing facility in Kamloops, British Columbia.

Shortly thereafter, [Horizon North, during] its residential modular home brand of Karoleena was named an official homes approved homebuilder. The homes approved, homes program focuses on the integration of the right building products, technology and building practice to construct a home that goes beyond residential standards from construction to final inspection.

Emphasizing quality and efficiency, Karoleena is one of the select few modular homebuilders in North America to partner as the homes approved, homebuilder. These partners build to Mike Holmes' standards, which incorporates industry-leading products to help protect the home and the homeowner.

This includes features as fire, sound protection, high end or high air quality, heat recovery systems and durable materials. We have seen a significant increase in traffic to our website and have a number of new residential prospects in hand as a result.

I would encourage listeners to visit our website to get more information and to view a short video of Mike Holmes visit to our facilities. Finally Horizon North recently made the decision to move all of its manufacturing and production from the [Okinawan] Pauls facility to our Mount Paul, which is in Kamloops manufacturing facility.

Unfortuantely the cost of this exercise, closure, severance movement equipment were born in our second quarter results. This move is part of our continued focus on lean initiatives and will be carried forward throughout the remainder of 2017 and beyond.

We continue to focus on transformational change. We are pleased to continue the development of our Center of Excellence in Kamloops, providing our customers and employees the opportunity to collaborate under one roof.

In summary, we may remain very bullish on the future of this business segment. We believe that our manufacturing platform set up in Kamloops has a requisite quality, safety, supply chain sophistication and auto industry lean cost structure to really generate margin of economies of scale.

Industrial services, industrial side of our business was generally busier year-over-year due to somewhat improved commodity pricing, Fort McMurray based turnaround work, increased drilling activity was [516] and extremely wet conditions, which in turn created an early and quick break up, surging demand for our matting services. The wet conditions also delayed some pipeline construction work, extending some projects into Q2, which increased our large camp activity in the Grande Prairie area.

As we touched on at the end of Q1, we are pleased to been awarded the contract in Canada’s Arctic regions, that was for [Indiscernible] providing the opportunity for us to demonstrate our service, abilities in complicated and tough environments. This highlights our skill set and our competitive advantage.

There are a considerable number of Northern Canadian opportunities on our radar screen driven by our unique partnerships and a long history of working in the North. An important industrial wind force in Q2 was the contract award for the provision of [cancellations in the lobby] area near Grande Prairie, supplying and installing a 390 person camp along with catering and hospitality services for an initial 20 month contract term.

This is the initial phase of a multiphase project with the option for future work. As outlined in around MD&A we recently completed the sale of 450 bed camp facility in the Alberta oilsands area to an existing customer, which has contributed to a higher Q2 revenue profile.

The sale of this fleet equipment is part of our approach to managing and optimizing the sale, the size and mix of our rental fleet and we are pleased to work with our customer to provide them with a solution they were looking. As we continue to move through current uncertain economic times we are noticing new contract trends in our camps and catering division.

These days of take-or-pay and long-term contracts are behind us and we are working to create better operating efficiencies to deal with the new reality of customers utilizing and committing to services only when needed. With the recent Petronas Specific Northwest announcements of their removal of opportunities in the Prince Rupert area, it was quite disappointing to all of us but we remain cautiously optimistic for other industrial development in the [Prince Rupert Port ridge] and Kitimat areas.

With that, I’ll let Scott comment on the Q2, 2017 financial results and I’ll come back with the outlook for the rest of 2017. Scott?

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

I’ll compare mainly to Q2 of 2016, but we'll provide a few comments relative to our views for the rest of this year and going forward as well. On a consolidated basis our second quarter revenue was $91.6 million, up significantly compared to the same period of last year and as Rod commented as a result of both higher activity levels in our industrial operations and the sale of the existing 450 person camp in the Alberta oilsands region.

Consolidated EBITDA for the quarter was $8.6 million, up compared to Q2 of last year coming in around 9% of revenue compared to the 7% we saw last year. This was mainly the result of higher activity levels and camp sale we talked about.

I’ll walk through our industrial division, starting with our camp and catering operations. Revenues from our large camp operations increased by $5 million or 16% as compared to Q2 of 2016.

The increase between the quarters was due to higher activity levels at several in the Ford McMurray area, which experienced stronger utilization due to significant turnaround work occurring in the region. We also saw higher quarter-over-quarter activity in the West five, West six area which was primarily driven by stronger drilling programs and pipeline construction programs, which extended from Q1 into Q2 as a result of weather-related delays.

Revenues from drill camp operations for Q2 of 2017 increased by about 600,000 57% compared to last year, again due to the increased drilling activity in the West five, West six area that we saw. Our catering only revenues from the provision of catering and housekeeping services without associate bed rentals were relatively consistent with the same period of last year although on a bit of a different job mix.

On the service side of this business, which includes the transportation set up, demobilization of camp facilities for our customers, revenues for the quarter were down slightly compared over the last period but this was mainly due to the mix of contracts and the timing of specific projects going on. Equipment sales revenues, include new and used fleet sales and with revenues for the quarter being up by roughly 20 million compared to the same period in 2016, again primarily due to the sale of the existing camp to our incumbent customer as compared to several smaller individual dorm sales in 2016.

So in total, our camp rental and catering operations revenues were $68.7 million in the quarter, an increase of about $24 million, $25 million or 57% compared to last year. And our EBITDA for the quarter was $13.5 million of substantial increases compared to the second quarter of last year.

From our rentals and logistics operations for Q2, revenues were $15.9 million, an increase of $7.6 million or 91% in comparison to last year. This increase was driven mainly by higher activity levels of each part of our matting operation, mat rentals, mat sales and the associated transportation and installation activity.

Access mat rental revenues for Q2 increased by about $1.3 million, roughly 85% compared to Q2 of 2016. This increase was due to stronger demand for mat in particular in an around at the Grande Prairie area as a result of the wet ground conditions and increased drilling activity.

Service revenues from this business, the transportation, installation, and matt management services we perform on behalf of customers increased by $2.7 million in the quarter or 53% compared to the same period of last year, again driven by higher activity levels both from matting rentals and from sales. From a sales perspective, the sale of new and used rental on logistics fleet includes maps and some ancillary other gear was significantly higher increased by $3.9 million compared to the same period of 2016 driven mainly by higher matt sales.

We sold just over 5400 matts in this quarter compared to just 500 matts or so in 2016. Relocatable structures, revenues for Q2 decreased slightly by $0.3 million or 19% compared to the same period of last year, again mainly due to continued downward pressure on pricing which more than offset the slightly improved activity levels.

So overall EBITDA for the second quarter was $3.3 million, up 63% compared to the same period of last year. As a percent of revenue, EBTIDA was 20% down slightly from 24% in Q2 of last year mainly due to lower matt rental rates as rates for a number of significant customers were agreed to in late 2016 and largely come up for renegotiation in the second half of 2017.

In addition, the current quarter included significantly higher matt sales which typically attract slightly lower margins. On the modular solutions side of our business, which consists of production, transportation and the installation of residential, retail and commercial modular buildings, revenues for the quarter were $7 million as compared to just $0.5 million in Q2 of 2016.

Our Q2 revenues comprised mainly of commercial products, including the 85 room hotel in Revelstoke, British Columbia that Rod mentioned earlier, and several smaller residential projects 2016 revenues were associated with a few small residential projects generated by the acquisition of Karoleena Inc. which occurred part way through Q2 of 2016.

Currently, the focus for this business unit is to secure an increased backlog as we continue to drive this new offering forward. At the end of June 2017, backlog was $30.9 million or $31 million compared to $31.9 million at the end of March 2017.

So essentially our book-to-bill ratio of one to one. With a consistent backlog and stronger utilization of production capacity expected to the second half of the year revenues, plant efficiency is anticipated to improve and generate a more stable and predictable result profile.

Corporate costs for the quarter were $2.9 million, this compared to a $3.1 million for the same period of last year, however you will note if you take a look at our overall SG&A cost they are up quarter-over-quarter just under $2 million. This was largely related to provisions taken on some challenge receivable amounts during the period.

Total loans and borrowings exiting the quarter were $69.4 million compared to $46.8 million last year. Putting that together with our trailing 12-month EBITDA profile brings our overall debt to trailing 12-month EBTIDA ratio at June 30, to 2.39 to 1 compared to 1.17 to 1 at the same period of last year , but of notes we’ve had some significant collections over the past few weeks resulting in our net current debt position dropping to roughly $53 million as of this morning significantly improving that leverage ratio.

So with that, I’ll turn things back over to Rod for some final comments.

Thanks, Scott. Industrial outlook.

Industrial outlook. With oil prices range-bound in the mid- to high $40 a barrel, energy customers certainty as we appeared, however there are certain geographic areas such as the Montney and Deep Basin that are expected to remain busy.

And Horizon North has a significant presence in this area. To our calculation, we remain the largest open camp provider in that West five, West sixth region.

We do anticipate pricing of our services to continue at current rates despite localized improvements to utilization, resulting in our second half industrial operations likely remaining similar to that of the first half of 2017. A strong First Nations partnering strategy has been the foundation of our company since the inception.

We continue to strengthen our relationships both North and South of Fort McMurray and believe that new partnerships will lead to a number of commercial successes in the second half of 2017 and into 2018. BC wildfires, this summer season has been one of tragedy and great loss for a number citizens of British Columbia and Horizon North has been providing support in communities where we are active.

We are currently providing the equipment to support a team of 180 to 200 hard working forest fighters, -- forest fire fighters and have additional gear on notice to mobilize. We also believe there will be an active role for us to play in the rebuild of commercial and residential infrastructure as we look to help the citizens of British Columbia get their lives back in order as they return to their communities.

Modular solutions, our outlook related to modular solutions business remains very positive. I appreciate the first half of 2017 has been a challenging period for stakeholders.

We are very optimistic about the next 12 months. As our plant is currently full of a diverse number of projects and we have a very high visibility line of sight project work backlog or quote log.

That is the end of our prepared comments. I’ll turn the call back over to Christine for the Q&A section.

Hi, gentlemen just a couple of quick ones here. First from a modelling perspective and congratulations on the contract win.

What is the timing of – that you are expecting for that $63 million to start to come through? I know you mentioned in Q3 I believe that just getting a little bit more granular than that and what we are expecting.

Yes, thanks Greg. It’s so that – we are on the ground now or mobilizing it on the ground now, so you’ll expect to see some contribution in, call it the back half of Q3 and then run forward over the next couple of years.

And is it relatively flatter with the three year period or is it bulky at the front, middle or back?

There will also be a bit of a ramp up as we go, so the first part of that contract will be in that ramp up phase, then it will run relatively steady state for a good chunk of it and then ramp down at the end.

Got it. And then just shifting over to your permanent modular side, taking a look at your backlog and expectations for the balance of the year, what kind of utilization does executing your bid book represents from your current facility.

We believe that we can execute that current backlog and that high visibility line of sight with roughly one and half shifts out of the potential for three. So there is certainly scope of incremental opportunity there Greg.

And just to be clear, that 1.5 shift for the expected utilization that of potential three, that’s for the backlog plus your highlighted [Indiscernible]

That’s correct, Greg.

Okay. Got it.

Yes, so we certainly can accommodate incremental work on top of that.

Got it. And then just lastly talking about some of the one time costs in the quarter, you mentioned the facility move and the cost that happened in the quarter there.

Was [that borne] entirely in Q2, should we expect any of that in Q3 or additional sort of facility moves and lean manufacturing costs associated with it or is that largely behind us?

That’s all Q2 oriented expense Greg.

Got it. That’s it from me.

Congrats on the quarter guys.

Thanks, Christine certainly appreciate stakeholders listening into today’s call. There is no more other commentary.

Thank you Christine.