Dexterra Group Inc.

Thank you, James. Good morning.

My name is Rod Graham. I’m the president and Chief Executive Officer of Horizon North Logistics.

With me today is Scott Matson, Senior Vice President and Chief Financial Officer. We’re here to discuss our second quarter of 2019 operating and financial results, provide an update on how our business strategy is progressing and outline our outlook into the back half of 2019 in our setup for 2020.

I’ll provide some comments on the developments and market conditions that impacted our results over this past quarter and the initiatives we continue to drive forward with. Scott will walk at a very high level through some of our results for Q2 2019 and the rationale behind them and I’ll wrap up here by providing an update on what we are seeing for the remainder of this year before we turn to a Q&A session.

First, I will turn over to Scott for some comments regarding forward-looking information. Scott?

thanks, rod and good morning everyone. As rod mentioned, we’ll be commenting on our Q2 2019 results with the assumption that you’ve read the Q2 earnings release, our MD&A and our financial statements that were made public last night, all of which are available 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 during – using the information currently available that may constitute forward-looking statements or information under applicable securities laws as well as certain financial measures discussed today are not recognized measures under generally accepted accounting principles or IFRS and 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 outlined various risk factors, assumptions and cautions regarding forward-looking statements or information and also contained further information regarding any non-GAAP measures that we might talk about today.

So with that, I’ll turn things back to rod.

Thanks, Scott. I’ll begin with a frank statement.

As an organization, we are extremely disappointed and dissatisfied with the results we just shared with you for Q2 2019. What you’ll hear over the remainder of our prepared statements is an assessment of the current fundamentals of our business and the circumstances that led to these results.

However, we acknowledged that these results are no doubt coming as a surprise for the market. And with that comes a personal commitment for me as a CEO of this organization that we will do a better job in our messaging and managing your expectation of what is in front of us.

On the industrial services side of our business, we remain focused on four key areas, where we can leverage our turnkey camp, hospitality, access and maintenance solutions. We believe the fundamentals in this area remained strong.

However, confluential events including delays and deferrals in the mix of our regional service offerings that typically trends towards a higher EBITDA level greatly impacted our revenue and earnings in the quarter and we’ll likely continue to see modest headwinds through the back half of 2019. Starting with a look of the northern Ontario, Northern Canada regions, we see an area that is well aligned with our service offerings through significant projects and highline power, gold mining, diamond mining, forestry road construction, and potash.

We’ve already been capturing several of these early opportunities in these areas and feel there’s more to come along with a chance to commingle our industrial and our modular offerings given these often remote locations. This region comes with a high single-digit EBITDA, but little or no capital in a nice long tail contract profile.

I’ll turn it over to second pillar, the oil sands. And you believe in our approach of pursuing full turnkey opportunities along with lower EBITDA margin, low capital behind the gate catering and hospitality work, all underpinned by our strong partnerships with indigenous communities both north and south of Fort McMurray.

Our two open camps in the regions, one north and one south, augmented the strategy. As part of what you will see as a common theme throughout this quarter delays and deferrals of projects in the area and a lack of major turnaround and seasonal fire camp work greatly impacted the predictability of our revenues costing or creating cost inefficiencies.

Our third pillar, Montney, Duvernay West five, West six regions. We are continuing our strategy as a leading open camp provider in the region and have a significant portion of behind the gate business at customer-owned facilities.

This area is traditionally our highest EBITDA margin region given the exposed capital profile. However, this is an operating region, where we felt the most significant impact this past quarter.

We remain focused on ensuring we have the right customers and the right locations with the right asset profile to maximize our business. Our fourth pillar for industrial, West Coast, British Columbia and all things liquefied natural gas and LPG.

In this geography, we see massive infrastructure projects that have considerable momentum, the projects with evolving time tables that can be impacted by delays. We see things growing in this area as we exit Q2 and move into Q3.

We noted in our release last night that we were recently awarded a contract for significant occupancy of what I call our Center Ice Crossroads Lodge in Kitimat, occupancy that will be strong through remainder of this year and the bulk of 2020. I offer up that quality and location was a critical component of this contract win.

Along the coastal gas line, we were slow to get moving than we expected in Q2. However today, we are feeding people in the camps that we announced back in April with one facility fully functional and the second coming online.

The other piece of good news for us on the West Coast is the contract we announced yesterday to provide 80 construction office complexes, not office trailers, but office complexes over an initial 36-month term beginning in the back half of this year. on the rentals and logistics side of our business, we remain stable on and on or close to our plan with decent visibility in upcoming projects for matting, soil stabilization and our space rentals business.

This area of our business is particularly critical in the Montney, Duvernay regions specifically in that 250 kilometer radius around Grande Prairie. Looking both of the disappointments of Q2 2019 and the fundamentals on which we have built this industrial services business, I ask myself this question and encourage you to do the same.

Am I investing in Horizon North for one quarter or am I investing in horizon North for the considerable long-term prospects of this company? I’d remain certain that our fundamentals are strong and while the Q2 results are meaningful and impactful to our business, they are a temporary interruption in our plans.

Moving over to our modular solutions business, again, you’ll hear from Scott and I about delays and deferrals that impacted our business during the quarter. Revenue is growing and our backlog is increasing.

However, this is a new business growing in sophistication, which challenges our ability to respond as we would hope when delays impact our production schedules. One aspect of this business is that we are not in control of building and development permits.

Unfortunately, our Western Canadian manufacturing operations saw several projects impacted by delays and deferrals of our building and development permits. This has particularly hard in terms of indirect costs, which we incur to prepare for these projects.

Our modular construction offering is a real business with considerable macro opportunity. We continue to move this initiative forward with a commitment to have best-in-class manufacturing capacity, best-in-class product offering and best-in-class quality.

This means continue to invest in our fixed assets and the people necessary to move this forward. in central Canada or Eastern Canada, we in April, acquired a company, NRB, 40-year-old company.

I’m pleased to report that NRB is on or slightly ahead of our expectations with respect to integration into our business and contribution to backlog, revenue and EBITDAS. This is the future of our organization.

Across modular solutions, our backlog and funnel of high-quality, high probability opportunities both continued to grow. our backlog exited the second quarter of this year with $96 million excluding our Fairfield by Marriott property in Kitimat, but also including the $25 million we acquired within NRB.

Our funnel of opportunities exited the second quarter at approximately $314 million. We continue to add project wins to our backlog throughout July.

To build this business, I always believed that we need three foundational principles, the right customers, the right product profile, and the right locations. I had the opportunity last week to sit in front of representatives from all three levels of government when I was in Ontario and I’m more bullish than ever that we have those fundamentals in place, which will make this business succeed.

In particular, provincial governments and the federal government are going to continue to spend on social housing, seniors, housing, education projects among others that will be ready to take on across the majority of this country. We need to look no further than the more than $7 billion; the government of British Columbia is investing in affordable housing to understand that this is a societal need that is not going to be resolved quickly.

We have several other initiatives ongoing on the modular solutions front that we believe will further set us up for success. Our work with the Rick Hansen Foundation and their accessibility certification is continuing and we are seeing strong momentum among our client and prospect base for this initiative as we look to maximize the accessibility criteria for each and every one of our projects.

We’ve recently broken ground on our Fairfield by Marriott Hotel in Kitimat and anticipated opening in early 2020. As many of you know, Marriott is leading the way and working with modular building its builders on a large number of its hotels and we expect that trend to continue and grow.

This Kitimat project we believe is the launch of something tremendous. We entered into a strategic alliance with Prefab Logic in April that we believe will generate significant opportunities to supply modules for select projects largely in the Northwestern United States.

This would further strengthen our plant utilization, provide better quarter-by-quarter predictability and we anticipate that we will provide initial exposure to this demand profile in the U.S. for both our wood frame and our steel frame modular construction and offerings.

like our industrial services business, I remain confident on the macro-environment and our key platforms of customer, product and geography for modular solutions. While the results this past quarter were not what we wanted, as we grow in sophistication, we will be able to better weather these consequences and events.

Again, I asked myself, am I investing in Horizon North for one quarter or am I investing in horizon North for the considerable long-term prospects of this company. Finally, for this segment of our discussion, I want to spend a bit of time talking about our balance sheet.

As we indicated earlier this year, we're working through a significant capital program for 2019, focused mainly on the development of our Crossroads Lodge facility in Kitimat and on the development of the Marriott hotel in Kitimat. Early in the year, we took a key step toward the development of a unique pan-Canadian service model with the acquisition of NRB, providing exposure to a significant potential market with Central and Eastern Canada.

As we've talked in many different forums, this acquisition has expanded our product profile and our manufacturing capabilities introducing steel frame, non-combustible expertise to our existing wood frame expertise. Work is already underway to share knowledge and experiences between our teams on both sides of this country to ensure our customers across Canada are receiving best-in-class product and services that suits their needs.

These significant investments in the future of Horizon North, combined with a downdraught we experienced in Q2 will result in an elevated leverage position through the course of this year. We took several steps last year reduce our overall debt and leverage positions in preparation for our 2019 growth plans and we anticipate that we will have significant but with sufficient borrowing capacity and financial flexibility to execute on our plans?

As I said, at the start of this call, the results for this quarter were not the results we were looking for nor anticipating. And while they were impacted by a confluence of circumstances and factors, the message here is that we need to do a better job in messaging to you and managing expectation as we move forward in 2019 and into 2020.

With that, I'll turn it over to Scott for a high level look at some of the numbers for the second quarter of 2019

Thanks, Rod. I'll walk through our results for the second quarter at a fairly high level, I'll provide some comments relative to where we hit the market and some where we fell short of our expectations.

I'll provide a few comments with respect to where we see things going for the rest of this year and how we see things shaping up as we look towards 2020. I won't cover every segments in detail knowing that you've read our press release and MR&A and statements that were distributed last night.

On a consolidated basis, second quarter revenue is at $104.5 million, up about $10.9 million or 12% compared to the same quarter of last year. Again, generally stronger revenues on our Modular Solutions business offset by the decrease we saw from a camp rental and catering activity perspective.

Although consolidated revenues were up year-over-year and relatively close to our expectations where we fell short was in EBITDA generation. Consolidated EBITDA for the quarter was negative $3.9 million, down $10.8 million from last year, significantly down from our expectations for the quarter as well.

That downdraft in EBITDA came from both sides of the business as Rod spoke to you and I'll mention a couple of points on each one of those separately. In the Industrial Services business, our revenues for the quarter decreased 9%, approximately $5.8 million from last year, due to the lower camp rental and catering activity that we saw in a couple of our key operating regions, which I'll discuss in a moment, that was partially offset by an increase in our rentals and logistics revenues.

In our camps and catering business, Rod spoke about the challenging market environment that we see in the Montney, Duvernay areas and in the oil sands. So I'll talk briefly about those two before moving onto the Northern region and our West Coast LNG activities.

Montney, Duvernay region where we were the hardest hit in our outlook at the end of Q1 of 2019, we did anticipate some market headwinds for this region and we did see infrastructure related activity down more sharply than we'd expected over the course of the quarter. We'd had some expectations for drilling and completions work based on customer indications, but we fell short in that area as well.

Based on what we're seeing so far as we move through the third quarter, we do expect at least some of those headwinds through the quarter, but have some optimism for Q4 and beyond into 2020 based on the long-term demand fundamentals that we see. In the oil sands region, we saw a significant reduction in our year-over-year revenues related to seasonal turnaround and maintenance work, that activity level did not materialize over the course of the second quarter as strongly as we've anticipated or as strongly as we've seen in each of the last couple of years.

We also saw in the quarter, we were supporting several emergency wildfire response programs, but activity in this area was slightly muted year-over-year as well. I would say as Rod outlined, we believe our strategy in this area is solid, but there is an element of unpredictability here as we move through the second quarter, that was more prevalent than in past years.

Moving to the other two key areas for our industrial services business in the Northern Ontario and Northern Canada regions and we essentially hit our expectations. Projects in these regions are generating consistent revenues and contributions to the EBITDA lines and we see this area continuing to be a solid source of activity over the coming quarters, as we've captured several early opportunities within the region for mining and power infrastructure and see more of those coming.

Finally on the West Coast and LNG-related activities remains our largest opportunity for growth on the industrial services side of our business. As Rob mentioned, our Crossroads Lodge is our most significant focus in the region and while it maybe a little slower to get underway than we had planned, it's now open with 260 beds commissioned and available and the balance of the facility scheduled to come on during the back half of this year.

We are seeing a strong and growing demand profile for this facility backstopped by several significant client commitments, including the contract that we announced yesterday. Turning to the rentals and logistics side of our business, we tracked relatively close to our expectations with respect to revenue and EBITDA.

Our services there largely concentrated in Montney and Duvernay regions and as Rod noted, we have a decent level of visibility for continued work in these services in these areas and we expect them to perform as expected for the remainder of the year. Moving into the Modular Solutions business, revenue for the quarter were up $15.6 million or 50% roughly over last year and while revenues were on track, what we saw happen in the – was the delay and deferral of multiple projects on the affordable and social housing space that was scheduled to hit our plant floors early in the quarter.

These delays caused short-term gaps in our production schedules and had negative impacts on our margins for the quarter. Those projects are largely now back on track with some additional projects in this space recently secured, so we feel reasonably comfortable with where our backlog is going forward.

That said, I'd anticipate some hangover effect as we move through the beginning of Q3 that was an improvement through Q4 and into 2020. This side of our business as Rod mentioned continues to be evolved with a number of positive steps forward over the last 12 months, the completion of our NRB acquisition in Ontario on April 1st was very positive and we've now largely completed the integration of this business and saw contributions that we're on track with our expectations for the quarter.

As Rob noted, we left Q2 2019 $95.7 million in backlog compared to $88.8 million at the end of 2018 and they expected similar for the back half of year, our capacity on the manufacturing side will be allocated to the manufacturing of our Kitimat Marriott hotel project and for the space rental complexes that we talked about last night, supporting the LNG development activities out there. And then finally I’d eco Rod's comments regarding our balance sheet.

We do have a significant capital program going on this year, largely weighted to Crossroads and to the Marriott Hotel. So we do expect that leverage position to be more elevated for the back half of 2019.

We'd previously telegraphed this in our year end and Q1 disclosures and I do expect that we'll work that down to more historical levels as we go through the back half of 2020. So with that, I'll turn things back over to Rod to conclude and then talk about our outlook for the remainder of the year.

Thank you, Scott. As I said already critical to our outlook for the remainder of this year is that despite the disappointing results for Q2 2019 which we see as a temporary albeit meaningful and impactful interruption in our plan, we anticipate that this is a short-term situation and not indicative of the long-term value for Horizon North.

We believe in the fundamentals of our business, the need to navigate through the headwinds that we anticipate will continue in certain funds. As Scott and I have laid out, we expect that the market conditions and project delay scenarios that impacted our Q2 results, persist as we enter the back half of the year, but we do respect a recovery and normalization as we acted this year moving to 2020.

We have a significant amount of optimism for 2020 and beyond based upon the fundamentals of our business, which we outlined for you this morning. Area-by-area for industrial services and the objective has been over the course of our transformational change, diversity of geography and diversity of end markets.

We will walk our way through our four pillars. Can you drive forward on our West Coast LNG initiative?

260 beds are now open at Crossroads Lodge with remainder of the facility expected to be available in early 2020. We project growing and strong utilization of this facility based on a recently awarded contract for significant occupancy of the Lodge throughout demand of the year and a significant portion of 2020.

We also have continued activity to look forward to, in our camp serving the Coastal GasLink order, where we are feeding customers in our first camp in June and we'll continue to have our second camp in order in pretty short time, as well as our liquefied petroleum gas supported camp in Prince Rupert. A continuation of the headwinds we saw over the course of Q2 in the Montney, Duvernay region, we expect those headwinds will moderate during the course of the back half of 2019, while delays and deferrals impacted us during second quarter, I'm pleased to say that we had no outright cancellations that we are aware of.

We continue to leverage our existing assets, our strategic locations and our customer relationships to be well positioned for expected future growth and infrastructure in these prolific regions. Like the Montney, Duvernay, we anticipate further unpredictability in the oil sands region for the timing of turnaround work over the remainder of this year.

However, our teams will continue to focus on leveraging our long standing expertise and on our two prominent indigenous partnerships to pursue full turnkey, as well as catering and hospitality opportunities both North and south of Fort McMurray. Northern Canada in Northern Ontario, our long history and expertise gives us a unique ability to provide our services in the highly variable and remote conditions.

With that, we anticipate a continued steady contribution to our business and made additional opportunities to support a growing number of industries and projects in this area. In Modular Solutions, our project pipeline for the remainder of the year is expected to continue to gain and balance between government sponsored and commercial projects.

Again, we anticipate the challenges we encountered in Q2 2019 will slightly impact some of our Q3 performance, however, we see a gradual rebound in normalization throughout Q3 and should be back on stream full board for Q4 of this year. Our team's focus will be optimizing the execution of our projects and expanding our offerings to a variety of customers and end markets provide additional stability and predictability of this business.

The integration of NRB into Horizon North fold has been very smooth and we are pleased with its operation and financial performance to-date. Our integration activities are ongoing with respect to sharing expertise and opportunities and we are working to expand NRB’s historical product and service offering with a particular focus on the nascent, social and affordable housing space largely in the Greater Toronto area.

Finally, to iterate our expectations regarding the balance sheet, we anticipate that we will remain with a more elevated leverage position through 2019 than we are accustomed to, with sufficient borrowing capacity and financial flexibility to execute on our plans, which we continue to be focused on furthering the development of our unique pan-Canadian service model. This brings me to the end of our prepared remarks.

As I said to begin this call, there are significant disappointment at our Q2 results, and a certainly a recognition of commitment for me as a CEO to improve our messaging and managing expectation of what is the come for Horizon North into 2020. Having said that, my optimism remains and the optimism of our employee base remains, we believe that the fundamentals of our business remains strong and while meaningful and impactful to our business anticipate just maybe with Q2 two results or a temporary interruption in our plans.

I will close with the remark that I've made a couple of times through my presentation. Are you choosing to invest in Horizon North for one quarter or are you choosing to invest in Horizon North for the considerable long-term prospects of this company?

Give my significant personal investment, I'm choosing the long-term prospects of this company. With that, I'll turn the call back over to James for the Q&A session.

Thanks for taking my questions. I wanted to start by diving into the industrial division.

When we look at the $2 million loss – in the quarter the $2 million EBITDA loss, that's about a $9 million swing from last year at this time, can you help me bridge that $9 million year-over-year? In your prepared remarks, I sort of categorized them into three groups, but let me know if there is more.

The three groups I'm thinking about our costs you incurred because your resources weren't aligned with the customer schedules, but then we're aligned later in the quarter. The second would be cost incurred as you prepared for contract wins.

And then the third one was general weaknesses, even if you had your costs aligned with activity. Can you help us understand that $9 million in the context of those different buckets, some which have passed and some which are going to persist?

Greg, it’s Scott. Thanks for your question.

I won't give you the super granular detail, but I would categorize the majority of that would be general weakness from the demand profile. So a significant portion of that in terms of year-over-year demand.

I'd probably split the other two relatively equally, in terms of being able to respond to shortfalls in a relatively quick period. But then also the flip side of that is being able to be prepared for the waves of customers that you're planning to see as they come to you.

So from a – call from an oil sands or a West five, West six perspective, that would be most of the impact from, how fast can you react to your cost structure? And then more so from a Crossroads and other perspective of putting costs ahead of that revenue stream.

Okay. So it sounds like even if the costs were aligned with the activity in the quarter, that still would've been a pretty challenging period for the industrial division in Q2 because of the lower demand.

Yes, that's a good way to phrase it, Greg. I mean, certainly there is always leavers in hindsight that I would say, yes, we can pull that quicker and we can move those things faster or be a little bit more deliberate on certain places.

But the majority of the fact was what I would call the downdraft in terms of that fundamental demand profile in that short-term period.

But if you look at the nature of the customer profile and as Q2 results come up for those customers, they certainly are articulating kind of a back half of the year and into 2020 growth plan. And so we still believe that we've got the right physical locations, the right asset profile and the right quality offering for that.

So remain optimistic in terms of, what that will bear to bring. Unfortunately, we hit a confluence of events on Q2 that made it a challenging quarter.

Got it, okay. And on the Modular side of the business, you mentioned the backlog that includes the $25 million from your Grimsby purchase, but excludes the Marriott win and also the wins that you said you were executing in July.

Can you give us an idea of what the backlog would look like today with the inclusion of those?

Yes. So maybe I'll talk about it this way, Greg.

I'd say book-to-bill from the end of the quarter till today is slightly above 1, without counting those things into the backlog. So we're going to have some utilization of the manufacturing capacity for the Kitimat hotel and for the space rentals complexes.

So outside of what I’d characterize is standard backlog, we've got some additional utilization coming through there. The translation for that is that our plants are going to be relatively steady state or getting more steady state as we go through the back half of the year than we saw on Q2.

More particular in terms of the hotel, we don't want to be in a position where we're competing with customers out there. The Marriott hotel in Kitimat is a unique asset for us, it certainly proves up the model in terms of where Marriott wants to go with their build program that has skewed towards Modular.

So certainly once that is up and going, there would be an asset that perhaps someone else would look to own. We've had a series of inbound calls that are quite interested in terms of that asset, Greg, and so as we move into 2020, likely that would be off our balance sheet on someone else's.

That sounds to me as though the Marriott hotel would probably not be a part of the backlog at any point because it's one year building with the intent of selling afterwards.

That is exactly, Greg. That's correct.

Okay. How should we think about the high visibility line of sight from a timing perspective?

Is the $300 million got a lot that our near-term wind potential or is this a medium to longer-term stuff that is very dependent on execution of successful of first phases of projects before we start to get into second and third phases?

I'd characterize it as a series of kind of follow-ons for projects that we have had contracted wins and it would be in the next 12 to 18 months, Greg, a little challenging to actually nail down from a timetable perspective. But certainly a real qualified opportunities that quite frankly, we feel quite comfortable, we'll be able to convert the backlog.

All right. Switching over to the balance sheet and the spending for a minute.

For the full year you spent $53 million including the M&A, what do you anticipate, given your full year CapEx, including M&A to be?

Yes. So peel out the M&A piece of that, which is 15 and we're roughly 50% of the way through our capital spend program at June 30th.

So we've got about an equal amount to go for the back half of this year, Greg.

Okay. So looking at – let me try to do some math here.

Looking at both $70 million CapEx plus the $15 million M&A.

Correct?

Just talking about the growth in the contract wins, who are the counter parties for the $37 million Crossroads revenue and the $30 million LNG development?

By contract, we're not able to disclose who that counterparty is, Greg, so prefer to kind of abide by the nature of the contract, but given the order of magnitude I'm sure you can conclude pretty clearly in terms of who that would be.

So single counterparty is one for the two different projects with $37 million and the $39 million.

Just one was correct.

Okay. Fair enough.

Is the LNG development work then, if it is one counterparty, is the LNG development work in Kitimat is well or it’s somewhere on the pipeline or upstream?

Purely in Kitimat, Greg

Got it. And when we think – you've given us good disclosure on the timing and the revenue size there, should we assume that this works, this $67 million total tracks the margin profile of your legacy industrial services business call it low-to-mid teens EBITDA margins or would it be materially higher or lower based on the style and structure and et cetera, et cetera?

Yes. Maybe I’d talk about the two separate pieces.

So from a Crossroads perspective, certainly that is a long-term investment for us that we expect to be on the ground more than the initial series of construction of five plus years. The payback is reasonably strong on that, so decent margin profile, probably more like our West five, West six business versus what the some of the other pieces of our business contribute today, it is a full turnkey offering and it's our lodge with our assets.

So that's typically our higher margin profile pieces versus the catering only or hospitality pieces behind the gate. Then on the office complex rentals, I would suggest it will track kind of add or near with some potential upside with respect to what our historical space rentals modules and margins have been, Greg.

So to step two separate pieces, but I think they do track to the stronger pieces of our traditional business.

Okay, thanks. That's it for me.

I'll pass it back

Thanks, Greg.

Good morning everyone. With respect to the Modular Solutions business, if you look at the trailing 12 months EBITDA margins are kind of right around 8%, are you able to perhaps provide some goalposts around that business moving forward?

Just given the variability and down with you adding new assets in like what does that margin look like long-term?

So in – when we sat down and had a conversation at broad goalposts, somewhat kind of product specific provides kind of the margin variability. So this 10% to kind of 15% number is the number that we've been articulating over the short-term.

Certainly economies of scale as you get into larger projects type opportunities, so really dependent in terms of the nature of the actual product that's going through the plant. But certainly a double-digit number Ian, is the kind of lower end of the range as we go forward in time here and mature the sophistication in that offer.

And when you talk about the maturation of the business in reaching those margins, I mean, is that a 2020 event or some time thereafter?

No, 2020 certainly would be the objective as we've gone forward in here, we continue to raise the bar in terms of the quality and kind of sophistication of construction code. And so as I take a look at the nature of the product offering we have from a construction code perspective we’re pushing towards net zero for a lot of what we're doing.

And with that, there has been kind of a series of investments we've had to make, I think we get to steady state, we've got something that quite frankly should attract a bit of a premium or certainly get the job going forward. So 2020 is where it hits strides, we've been putting a bunch of this, step code 3.75 product in the Vancouver right now and I think it's going to be the standard for construction throughout the province of British Columbia going forward.

Okay. And you noted production schedules changing during the quarter due to building permits and I can only assume that that’s a normal course of business moving forward.

And so one would assume you'll continue to see these impacts in your business, so does it continue to be a drag in the future or is there some way you can plan around this?

As we – so I'll go back to first principles, the Europeans are 70 years ahead of Canada, the Americans are probably 10, 15 years ahead of Canada in terms of modular construction. So massive business, but it’s a lot of accumulative advantage more product we have on the ground, the easier the sale process becomes.

And so as I believe going forward here, we will broaden out kind of what that backlog looks like and be able to work our way around development and building permits. This is a backlog comment, Ian, I certainly think that we continue to get a series of quest interested parties, that are looking at modular versus conventional stick built construction, so as we go forward in time this becomes less of an issue as you’re able to move different items around.

Certain types of projects unfortunately have certain types of lead times and it makes it a bit challenging to move things around, and we particularly were impacted this go around with projects like hotels that have certain timetables for delivery. So we've got two hotels kind of coming through our plan right now, and so unfortunately weren't able to kind of pull them forward and effectively accommodate the delay in deferral on the building and development permits.

So go forward in time as we get to kind of more backlog and conversion of high visibility line of sight to that backlog, this becomes less of an issue Ian.

Okay. On the Camps & Catering side, is it a fair assumption that – are you able to quantify whether there is one time cost in Q2 embedded within gross margin or should we be thinking about the need to generate, call it $50 million issued revenue to start generating some amount of gross margin?

Yes, it's Scott here. I'd kind of go back to how we answered some of the original question, is that, a large portion of that margin downdraft in the quarter was related to the activity levels.

So I think your comment of, what level of activity do you need to be profitable? I think there's an element of that, certainly there were elements of costs that impacted us both in terms of response times, in terms of turning down lodges and capacities, we went through that, that can be mitigated, maybe a little more quickly than we did this quarter.

So I wouldn't necessarily say that there is a bunch of one-time embedded costs, right from that perspective that hit us, but certainly there is an ability to manage at least part of that shift a little bit differently.

Okay. You alluded to a number of growth opportunities used earlier in the call, there's obviously a material CapEx program this year.

I mean, you're clearly a growth stock, so can you maybe explain the merits of keeping the dividend in place, give the spending profile?

Yes. So certainly something we evaluate at a fairly hard level every single quarter, fundamentally from a balance sheet perspective, elevated leverage as we go through the back half of this year large capital program, yes.

But we believe that and translates into solid and stronger cash flows as we go out of this year and into 2020. So believe we've got the capacity to continue that forward.

And that we have a strong view of our cash flows going forward into 2020 and beyond. Some of the investments we're making today such as our investment in Crossroads is a foundational step forward for us in terms of the next five to 10 years of development.

So believe that's got a very solid level of cash flow generation for us and that's what gives us the comfort or the ability to say that we can pay it.

And as we've looked through 2020, we continue to kind of get aggressive with our capital light strategy and so they’re particularly a kind of the four pillars, certainly the growth portion of it is a capital light type oriented strategy. On the modular construction side, we needed to have a platforms in place, NRB cements our Southern Ontario strategy.

And so I think we're in good shape from a incremental capital perspective necessary for those types of offerings.

Okay. And last one for me, I mean, Scott you anticipate needing to relax the debt covenants as you head into the back half of the year.

Well, certainly, I mean our – the softness in this quarter doesn't help my trailing 12 months leverage position, so we're working through that process right now. I've got some tenor left in my facility and we are communicating with our syndicate on a fairly regular basis.

So I'll defer that in a specific answer to you, Ian, until we get further into the year.

Okay. Thanks very much.

Thanks, good morning, folks. If we go back and look at the Modular business, you made the note, I'm kind of deep down about NRB contributing about $30 million in revenue in the quarter.

So if I think about Q1, you're kind of running that mid-40s number, we had $30 million in for NRB, but we basically stay flat. Is that the right way to think about the magnitude of the revenue that essentially got lost in the quarter due to some of these delays?

And then I guess the other piece of that is, is that – should we be thinking about kind of a call it a 47 plus, call it plus 10 type number kind of run rating as we go through the balance of 2019 into 2020?

Sure Chris, it’s Scott here. Yes, I think you’ve kind of done the math right in terms of A plus B minus C to get us to the overall revenue contribution for the quarter.

I think you're phrasing for three and four is probably accurate, plus or minus. So you're correct, the additional piece that we added on from an NRB perspective effectively offset the softness or the projects had got delayed and deferred in kind of the Western piece of the business.

And so with the rebound a little bit of the Western piece as we exit three and into four, I think you do have that modest step up that you referred to coming through.

Okay. And then you talk about kind of maturing up into 2020, and I know you've been not in capacity, not only NRB, but you've added the Calgary facility.

Do you have a rough idea of what you think your fair capacity number is going to be on an annualized basis with current assets that you have? Or do you feel like you're going to be capacity constraint at all?

Certainly don't feel like the word capacity constrained at this point. From a Western Canadian perspective, if we rewound the tape a year ago, we were low on capacity.

So, we made a couple of those moves in terms of acquiring our Aldergrove facility and then the Calgary facility. I think we’ve got adequate room to run and expand and add more revenue here in the western side of things as the project build out.

Eastern Canada in terms of the NRB acquisition, believe we can uptick the capacity there slightly as we move forward, but it’s – and it’s running at a relatively steady state or a fairly full clip. So, the short answer is no, I don’t believe we have capacity constraints.

but if we see the acceleration on the east that we anticipate as we go through 2020, we may need to look at capacity from an eastern perspective. Western wise here, I believe we’ve got enough capacity to handle our demand profile.

Yes. Chris, just to finish this off, we’re just turning on a second shift at NRB, night shift.

So that certainly allows for us to o continue to kind of grow that. but I echo Scott’s comments as we continue to push and probe on the social housing opportunity within GTA of a high-quality problem would be that we sell little capacity and move to kind of an additional facility at some point in time in 2020.

Okay, great. next one, just on that the office, the 80 unit office contract, I think the thought at some point was that you were going to put an office building beside the hotels in the Kitimat facility.

So, is that the contract for that or is this a different office structure that you’re going to be supplying or just so we can think about, is that still the camaraderie or is this kind of what you’re doing with that piece of the property?

Yes. these are completely discreet type of projects.

So what we announced is actually behind the gate, within the actual project area. So that, that has a very different feel to the project that we will also do for an office building between 40,000 and 50,000 square feet on our owned land in Kitimat, that would be obviously more open access type office building and have considerable third-party demands coming, asking for that type of space.

So, they’re completely different, Chris in terms of thinking about them.

Okay, great. So, very much like the hotel, we probably maybe 2020 event, 2021 is that you go on, you build up a hotel and either decide to operate it yourself or find a third part of your operator type thing.

That’s correct.

Okay, great. Scott just thinking about, balance sheet and sometimes when you do these acquisitions and you kind of reset your balance sheets on the working capital metric scale all kind of goofed up.

But I’m just thinking about working capital through the balance of the year. It looked like receivables and payables, kind of really stepped up.

I appreciate you’re probably going to be pretty careful about cash flow. How should we be thinking about, first of all on the – on your receivable side?

Any issues with payments from clients or anything like that? And just your thoughts around working capital management as you go through the back of the year and you grow the business.

Sure. So, as our – one of the things that’s – that we’ve seen in our business as the modular business has moved forward that that requires very little fixed asset capital, but it does require working capital.

So that’s part of what you’re seeing as we grow through the back half of this year, that working capital increase, we typically then – on the industrial side of the world, we typically have a Q1 to Q2 bulge from working capital that then works itself down through the back half of the year. So, I’m not forecasting any massive swings one way or the other.

I’m not seeing any particularly challenging files from a receivable perspective at this point. And I probably won’t go any more granular than that, but I’m not modeling massive working capital swings either way, Chris.

Okay, that’s fair. All right, I’ll get back in queue.

Thanks folks.

Thank you.

Good morning. On the modular side, trying to understand to get a better sense of backlog.

So, you’ve added – you added NRB and the NRB backlog, your book-to-bill was under 0.5 times in Q1 and obviously, your aggregate backlog shrank. Did you see cancellations or what was the trend and flow within the backlog specifically in Q2?

Yes. So, I’d even maybe go back from the beginning of the year till now.

you’re right, Jeff. So, book-to-bill is actually slightly positive.

That does include the NRB piece. So, I would say the chunk that we added from NRB that we talked about our Q1 has remained relatively stable as we’ve come out of Q2, so that piece kind of runs steady state.

on the kind of preexisting piece of our business or the western piece, there has been some fluctuation there. projects do move in and out of our line of sight at regular intervals and we have been reasonably successful I think at replacing and replenishing that backlog as we’ve gone forward.

So, certainly, as we chew through a number of those projects that book-to-bill ratio becomes pretty critical. So, we watch it pretty closely.

Are the high opportunity line of sight volumes converting fast enough to maintain a book-to-build ratio or is there a definite enough demand in the market support this square footage you have in place right now? If you expect that your book-to-bill will continue to be above one times in coming quarters of second half 2019.

Yes. As I peer into what the high visibility line of sight is like, I would feel pretty, pretty committed that we indeed would be able to convert that, Jeff.

I just take a look at the nature of the project of sculpts and certainly in terms of talking to proponents that are behind those projects, they certainly feel like they’re part of the proceeding forward. So, yes.

And I know you’ve spoken to this earlier, but trying to understand lumpiness, did projects always have cancellations or deferrals? There’s volatility, but I’m trying to understand as you add scale, how does that change or reduce the risk of lumpiness or volatility within the manufacturing business?

I can’t say I’m clear based on what I heard earlier.

Yes. So, I’ll give you a couple of thoughts and Rod would likely chime in here as well, Jeff.

So, to me, it becomes that you’ve touched on it in terms of the size and the complexion of your backlog. So as you – as that backlog gets larger and larger and the complexion of it gets a bit more balanced, that certainly helps us spread the manufacturing out and level load those plants a little bit more.

And maybe, what I’ll do is, in Q2 what we saw was a number of projects that were imminently going onto the plant floor that were delayed or deferred. And so it’s difficult to replace some of those shorter-term quick cycle projects except with shorter-term quick cycle projects.

And at this time, our backlog, if I looked back to the beginning of Q2, our backlog wasn’t quite mature enough that we had a huge amount of those to slot in. We had some, we did accelerate some of those in there, but as that backlog gets larger and gets more mature, you’ve got more ability to drag things into short-term production out of that backlog.

So, you can manage it a little bit better. And if we think back a year, our backlog was significantly lower and less.

So, it’s more robust and better than it was a year ago. It’s not where we wanted to be yet, but that’s effectively what needs to happen

As well, Jeff, I’m trying to stay away from the statements. And so I’ll say a bit of really high level from a confidentiality perspective, but as we take a look at the continuum of affordable housing, there’s a couple of meeting issues, where government funds have been appropriated and things that were in very good stead and good shape for doing that.

I don’t really want to offer up kind of what those verticals look like for our competitors that likely will be listening to this call. So, we feel comfortable as we go forward this breadth, we’ll solidify and take some of the lumpiness away from kind of what we’ve experienced to-date as we build out a brand-new business here, Jeff.

To support the manufacturing business at the square footage and footprint that you have today, what level of backlog in absolute terms and then within a mixed basis, do you think you need to avoid these type of a lumpy issues on a quarterly basis?

I believe that number is 150. And again, as I suggested, Jeff, as I take a look at the high visibility line of sight, we certainly see a series of projects; we think we’ll move to backlog, some of these other kind of elements in this continuum of affordable housing.

We certainly believe we’ll – we push forward here into 2020. So, we feel comfortable we can drive towards that number.

That would be a very, very comfortable, so that’s a good number for us. that would also include the fact that we have owned NRB.

NRB is going to move in through their legacy business, continues to have that good support and their legacy business. But we think there’s incremental opportunity in that Southern Ontario market that is not in any of the NRB backlog as of right now.

Maybe, this is the touch competitively sensitive, but if you’re striving towards a 150 backlog number, conceptually, what do you think the ideal mix is between what would be on social housing or affordable housing versus other commercial opportunities to avoid again, this lumpiness or these unpredictable natures?

Yes. I’ll make a comment and then I’ll give you that, what the number.

I think Jeff, so I mean if we came through the back half of 2018 we were highly leveraged to social and affordable housing projects, to get that number to something that looks like 50/50 between those types of projects and then true other commercial residential projects. I think that gets us that effective balance.

We’re not – obviously we’re not there yet, but certainly something we see in the future balancing out specifically with exposure into the Ontario markets and then further spending here in western Canada as well. You see we certainly have the demand profile continuing to Virgin Jeff and certain of the commercial verticals that we can talk pretty openly at the Marriott Hotel and Kitimat will be our fourth modular hotel the demand profile for that continues to be quite robust in both our western and our eastern platforms.

So, as we take a look at certain of the commercial end markets, I think there’s lots more to go here as moving to 2020 third of the land markets.

Okay. That’s a good transition.

So, for the Marriott Hotel in Kitimat, once you complete and open it in early 2020, what do you expect your sunk costs will be?

Well, yes, right now, so both kind of looking each other a little bit from the overall, the specific number, Jeff, just in terms of when we decide to monetize that.

That’s the issue I’m having as well, Jeff, is to keep going through it. We’re having discussions right now with a couple of parties that are interested and not real interested in terms of profiling that.

Sorry, let me flip that around then. So, you’re targeting to spend $70 million in 2019.

How would that break down in terms of allocation?

I’ll probably give you the same answer, Jeff. The majority of our capital is going towards crossroads and to that hotel, but then a portion of it to the rest of our fleet as well.

So, of the further to answer that question for now.

Okay. Thanks guys.

Appreciate the color.

You’re welcome.

Yes. Sorry.

Just a couple of quick follow-ups to you, actually on the crossroad contracts that kicked off in July. Did that kick off sort of what I’m going to say is like at bid margins or at run rate margins or is it the sort of thing that is going to ramp up into a margin profile that will then be the average for the duration of the contract?

Yes, Greg, I would say that a margin profile that will be relatively steady stage from beginning through end, certainly for this contract, which underpins a large chunk of that facility. There is the ability for us to bring in other contracts and other occupancy in there.

And so long-term committed contracts typically give you a better pricing profile, which is a decent margin. We’re happy with the margin profile of that and spot market type sales or shorter-term duration and shorter capacity commitments typically result in higher margins.

So, I think there’s upside potential on long-term margin there.

Okay. Got it.

And then just stepping away from front of metals for a minute and it’s something a little different, but you are doing conference calls and then you worked for a bit. Is this conference call a one-off due to a complex quarter or do you anticipate resuming them on a quarterly basis?

Yes, good question Greg. So, certainly with the challenges and the headwinds we saw from Q2, we thought it was important that we spend some time and provide some more fulsome Mecca explanations.

We’re working through that process now. So, we haven’t made that determination as we go forward.

So TBD at this point…

Okay. Got it.

All right, thanks. That’s it for me again.

Yes. Thanks guys.

just a couple other questions and this is more back on the modular business again. but team needs the way you show up, but it’s been a lot of discussions and some of the construction industry about contract types and fixed price versus design build, all this kind of stuff.

Do you have any thoughts about how your go-to-market strategy is going to work in terms of who’s going to be risk-sharing on things like this where the permitting, which is probably beyond your control ends up having a financial impact for you and not necessarily for the sponsors.

Yes. Again, I’ll make a couple of comments, Chris and then fundamentally, Rod may kick in from there.

I mean I fundamentally, this is really about the maturity of your backlog and the ability to level load plants and shift production and projects around. And so as this business becomes more mature and we move forward as we talked a little bit about it what our short-term targeted backlog number looks like, that would give us the ability to move some schedule pieces around.

So, it helped mitigate these types of things. Certainly, as our business continues to mature and moves into different areas yes, contracting strategy is part of that.

but fundamentally to me, I think it becomes a basics and how do you level your plants and make sure that you’ve got a robust backlog that you can shift and Bob and weave a little bit more.

I’d actually take a step further and take a look at the nature of the verticals is going to depend vertical by vertical, Chris. If you can get kind of standardized kind of cookie cutter, a little or no tolerance in terms of kind of the next one, we’ll certainly have one type of bid strategy.

If it’s bespoke, we would have a different type of bid strategy. I’m not being cute on it.

It just really varies, as it stands right now, kind of a vertical by vertical.

Okay, good. And then last question, just the city of Toronto’s doing some work around social housing and there’s actually some expedited discussions around that happening.

just wondering if – and I understand you guys may have been having some of those discussions given your experience in Vancouver and some of the folks that work with you. I’m just wondering if you’ve got any color that you can add about the potential of the opportunity for you, should decide to go ahead with some of the pilot projects.

I think we’re well positioned, for us, having the delivery vehicle in Southern Ontario, obviously is part of this conversation. The nature of our senior management team has experience in providing exactly, where I believe the city of Toronto wants to go with it.

and then from Horizon North perspective, we’ve actually done this type of work in Vancouver. So, just kind of putting those three points together, I would argue that I believe from a module perspective we’re extremely well positioned, Chris, not to kind of put a finer point on it.

Yes. Any ideas of kind of the magnitude of the market opportunity for you and timing perhaps?

Yes. A number of sites that and this is public domain number of sites that have been disclosed 10 to 11 sites, is the number of sites that the city of Toronto was talked to.

So, certainly that gives you a bit of a profile in terms of we’re going to start potentially, it could be order of magnitude of number of doors. I don’t have a good number to offer up on this conference call.

That’s really a city of Toronto question.

All right. Fair enough.

Thanks guys.

Yes.