Dexterra Group Inc.

Thank you, Anastasia and good morning. My name Drew Knight and I’m the Chief Financial Officer of Dexterra Group Inc.

With me today on the call are John Mac Cuish, CEO and President of Facilities Management; and our Board Chair, Bill McFarland, who will provide some brief introductory comments. The format of this conference call will be the same as our past calls.

After a brief presentation, we will take questions with the call ending by 9:20 Eastern Time. We will be commenting on our Q2 results with the assumption that you have read the Q2 earnings release.

The MD&A and second quarter financial statements were also made public last night and are available on our website and SEDAR. The slide presentation which supports today's comments was also posted on our website last night.

And we encourage participants to access the slides and follow along with our presentation after which we will have a Q&A period. Before we begin, I would like to make some comments about forward-looking information.

In yesterday's news release and on slide 2 of the presentation that we have posted to our website, you will find cautionary notes in that regard. While I won't read the contents of the cautionary notes in their entirety, we do claim their protection for any forward-looking information that we might disclose on this conference call today.

I will now turn it over to Bill McFarland for his introductory comments.

Thank you Drew, and good morning. Thanks for taking the time to be with us today.

The management team and board are pleased to announce strong results for Q2. We've seen good growth in revenue and EBITDA this quarter and during the pandemic have continued to strengthen our business with excellent opportunities in our sight lines.

We expect as strong back half of 2021 without any CEWS support and an even stronger 2022. We're pleased with the progress that has been made across all lines of business, especially with the growth of the Modular Solutions pipeline and in loss successes in winning new business, in support services and in rebids.

We believe our results show that our asset light strategy, customer service focus and vision have put us on the right path to build a strong Pan-Canadian company that shareholders will be proud of. Our confidence in the future was demonstrated by the board yesterday by increasing the dividend.

We will review the dividend annually and our goal is to provide shareholders with an attractive combination of dividend growth and share price appreciation over time. I will now pass it over to John to provide some more details around our progress and what the future holds.

Thank you, Bill. Good morning, everyone.

As Bill noted in his opening remarks, we had strong results for Q2 driven by progress across all business lines, aided by the easing restrictions related to COVID-19 pandemic. We're excited about the new modular solutions plant in Cambridge, Ontario, which is now fully operational with two affordable housing projects in production.

This facility opened on schedule with capital costs under budget and has added new production capacity for future growth. Modular's revenue and EBITDA increased at double-digit rates compared to Q1 with the pipeline of new projects, surging to record levels.

With the government support for social and affordable housing is evidence from round two of the rapid housing initiative, providing an additional investment of $1.5 billion plus the recent BMO announcement of a $12 billion affordable housing fund, we're confident that this growth trend will continue. The WAFES business increased revenues and EBITDA with improved camp utilization late in the quarter.

We also saw solid seasonal forestry results that will continue to drive growth into Q3. DIFM margins were consistently strong and will gradually increase as volumes return to pre-pandemic levels for airports and retail.

Consolidated Q2 2021 revenue and EBITDA increased 12% and 26% respectively when compared to Q1 of 2021. That's a strong progress that we're proud of despite operating in a pandemic.

Turning to Slide six, you've heard us discuss our near term objective of $1 billion in revenue and a $100 million in EBITDA. How do we get there and what will we look like?

These two graphs give you an idea of our plan. All of our businesses will grow and facility management and modular are expected to grow faster.

We also have more of our WAFES business in support services. More than $200 million in this business will be similar to our FM business, stable longer term contracts like our recent oil sands win and supporting our asset light strategy.

The mix of our business will change. Today our FM footprint is smaller given the impact of the pandemic and the FM goal of 30% will likely include some strategic acquisitions.

Our goals will be reached with a combination of organic growth, a return to normal activity levels, new contract wins and targeted M&A activities. Moving to Slide seven, in Q2 2021, we saw $38.8 million in revenue in integrated facilities with EBITDA of $4.2 million.

The gradual increase is mainly attributable to better business conditions as certain COVID-19 restrictions were eased As more of the population gets vaccinated and provincial COVID-19 restrictions are lifted, we will experience a positive impact on our airport and retail businesses, which have suffered during the pandemic and I've mentioned before, we had quarterly revenue declines of approximately $9 million in that sector. Canada's airport screen data shows daily passenger counts are increasing by more than 50% compared to the same day in 2020, but are 30% of the 2019 same day passionate account.

Things are heading in the right direction. EBITDA margin increased to 11% for Q2 in comparison to 9% in Q1.

This is mainly due to our focus on margin improvements and successful integration of a prior acquisition. The growth in the IFM segment has been less than planned, mainly due to the ongoing reduction in operations at certain facilities due to COVID-19 shutdowns and delay proposal activity.

Increasing sales is a top priority as we move out of the pandemic. We expect the growth rate to increase as pandemic restrictions are lifted and as new business wins are fueled by the current brisk fitting activity, Moving to our WAFES support services business unit, in Q2 2021 we saw revenue of $87.5 million with adjusted EBITDA of $17.8.

WAFES revenue performance was strong despite Q2 2021 being negatively impacted by pandemic restrictions in some of our major projects. The seasonal forestry business had approximately $10 million of Q2 revenue and Q3 activities is expected to be at a similar amount.

We were also successful on approximately $40 million of contract renewals during the first half of the year, which is a Testament to our strong service capability and customer relations. We're also finalizing a new contract to build a modular camp for a major oil sands producer.

This strategic contract is worth roughly $16 million and may be the first phase of a larger multi-year camp rebuild. It highlights opportunities for our various business lines to work together, to add value for our customers and is a confirmation that our asset light model is the right strategy as the oil sands producer will own the asset.

Several BC pipeline camps rebounded strongly in June with the occupancy levels further increasing in July. Higher occupancy levels acquired in that open camps are expected for the rest of the year and into 2022.

Our Kitimat open camp will likely continue to be closed for the remainder of 2021 due to ramp up scheduling of the LNG Canada project but is expected to reopen in 2022 with high occupancy. The previous [indiscernible] support services contract in the oil sands worth $30 million plus annually also starts in Q3 2021.

The Eastern Canada services that support mining and infrastructure projects also continue to have song performance in Q2, which will continue in the second half of 2021. Q2 2021 revenues for energy services business were up from the $5.6 million for Q1 2021 and are similar to the $6.5 million in revenue that we had in Q4 2020.

The Matting [ph] and space rental businesses are also expected to increase utilization throughout the remainder of 2021 and into 2022 as the energy business rebounds. On Slide nine for Modular in Q2 2021, the Modular business had revenue of $48.2 million and EBITDA $4.7 million.

These revenues are primarily focused on rapid affordable housing and portable classrooms. The increased revenue relates to our increased capacity with the completion of the Cambridge plant and growth of our project pipeline as planned.

The focus for this business unit is to secure and increase the backlog and pipeline for rapid and affordable housing. As of June 30, that pipeline was 140 -- backlog was $140 million an increase from $109 million on March 31.

These numbers exclude recurring Modular business worth approximately $40 million per annum consisting of the portable school classrooms, retail stores and kiosks. A key goal over time is to further diversify our Modular product line.

These factors all point to a strong double-digit growth in Modular solutions revenues in the back half of 2021 and beyond. I'll turn it back to Drew for comments on the consolidated financials for Q2.

Thank you, John. I want to take a look first at our consolidated revenue and EBITDA numbers for Q2 2021, which we compare sequentially to Q1 2021.

The quarter in 2021 doesn't compare to prior year Q2 2020 due to the merger. So we were focused on continuous improvement growth on a quarterly basis after taking seasonality into account.

Turning to slide 11 on a consolidated basis, our revenue for the second quarter was $173.6 million, which was $18.2 million or 12% higher than Q1 2021. Revenue and facilities management was stable for Q2 as compared with Q1 with an increase expected as COVID-19 restrictions are lifted for retail and aviation clients starting in the latter half of 2021.

The increase in WAFES revenue is mainly driven by better camp utilization in BC projects, solid forestry performance and natural resource projects in the Eastern operations. The increase in revenue for the Modular Solutions business is driven by production capacity expansion at the new Cambridge plant and stronger execution on an increasing pipeline of projects as John discussed.

We expect very strong double-digit revenue growth in Q3, Q4 compared to our year to date 2021 results and expect to exceed $725 million in revenue in fiscal '21, given the new business in our pipeline. Moving to Slide 12, EBITDA for Q2 2021 increased by $4.7 million or 26% from Q1 and hit a record level for the combined company.

EBITDA growth in WAFES is mainly driven by increased activity levels and revenue. The Modular Solution segment is demonstrating strong growth and profitability from increased deficiencies in rapid affordable housing projects and a strong pipeline.

The higher consolidated group revenues expected in the second half will drive greater EBITDA and more than compensate for a lack of government subsidies. The higher volumes also enhance the overhead absorption rate.

On Slide 13 Dextera Group's financial position and liquidity are strong. We generated free cash flow of $14.9 million and $27.3 million for the three and six months ended June 30 respectively.

Debt was reduced to less than one times EBITDA. We have improved our leverage and liquidity position and are in the process of finalizing new debt facility in Q3 on more favorable terms, including adding capacity for acquisitions.

As acquisitions are completed, we expect leverage ratios may increase from current levels and could approximate two times EBITDA. For the three months ended June 30, cash generated by operating activities was $20.2 million compared to $13.5 million in the same period of 2020.

The improvement was driven primarily by stronger working capital management. This cash was used to fund the capital expenditure of the Cambridge NRB plant as well as to repay debt and pay dividends.

On Slide 14, let me take a moment to discuss some key elements of our path forward for Q3 and beyond. First a note on the COVID-19 pandemic, the pandemic's effect on our business has been -- pardon me, the pandemic's effect on our business and easing restrictions has been a theme through the past 15 months.

In the back half of 2021 and beyond we expect the restrictions of COVID-19 to lift resulting in a lessening impact on the business. However, while we are optimistic, we also continue to monitor the situation closely in the event that a Varian driven fourth wave occurs.

As Bill said, when we began, we are pleased with the progress across all our lines of business. The organic growth prospects of the IFM business are significant and compound annual growth rates for the FM market are estimated to be double-digit over the next several years.

The pandemic delayed this growth opportunity. However, as John mentioned, bidding activities are brisk and we have an active M&A program to accelerate the expansion of our IFM business.

The Facilities Management business has maintained key staff and recently hired new resources. So we are well positioned to execute on these opportunities.

Our focus is to scale up this business and maintain strong profit margins while providing excellent service to our clients. The activity in the WAFES business will continue to be strong in the back half of 2021 and into 2022, with all of our open cans operating at a higher occupancy level, including the Kitimat camp reopening in early 2022.

A strong rebound in camp occupancy levels is expected or is being experienced in the third quarter, including the positive impact of a new support services contract with a significant oil sands customer for multiple locations. The contract should provide over $10 million in revenue for the rest of 2021.

Clients have also resumed investments in energy projects and our WAFES energy business will benefit from better pricing and higher activity levels. And the number of forest fires this year -- this summer is up substantially from last year across the country.

Our teams in Alberta and Ontario have been busy supporting local communities in this time of need and we expect this work to have a positive impact on our Q3 results. The completion of the NRB Modular Solutions plant in Cambridge was on time and under budget and has us all very excited for the future of that business.

Production capacity exceeds $100 million annually though the investment plan assumes a graduated ramp up. Strong double-digit growth in Modular Solutions revenues in the back half of 2021 and beyond is expected.

Our ongoing vision and operating model remain the same. We are a growth story and are building a Pan-Canadian support services champion using a focused approach and capital light strategy.

Any capital investments will be disciplined and pass a rigorous review, and we will continue to operate with a small head office team. We will grow organically and via acquisitions with the goal to deliver on our plan to reach $1 billion in revenue and $100 million in EBITDA in the near term.

This concludes our prepared remarks for today. At this time, I will turn the call back to our operator for the Q&A portion of the call.

We ask that you begin by limiting yourself to two questions. If we then have time at the end, we will circle back for additional questions.

Thank you for joining us today. I'll now turn the call back to Anastasia for the Q&A session.

Yeah, thanks folks. Maybe we can just think about the forestry business for a second and just the growth in that and thank you for some of the color around what we're expecting.

How do we think about the seasonality of that business? Certainly lumber prices have been whipping around a lot, and I think you alluded to the fact that the forest fire season may be a lot more intensive this year than last.

But if you can sort of walk us through how to think about seasonality in that business and sort of the magnitude of the growth we could expect, that would be helpful.

Hi, Chris. Yeah, the business traditionally is about $10 million in Q2 and $10 million in Q3.

We're heading on that same trajectory this year, though with the forest fire activity, there may be a small uptick in Q3. As we get into Q4 and Q1, it's pretty quiet, but there's about a $1 million of other finning activity in Quebec and Northern Ontario that's still happened in Q4 and Q1, but it is pretty quiet in those quarters.

Okay. No, that's helpful.

I'm just trying to scale with the magnitude of growth looks like. And then just, going back to your comment about double-digit growth in facilities management yeah and you're right.

I mean, it has been a bit slower than expected. Should we be thinking that, if you take that, whatever that double-digit number is, maybe we can just even kind of try to frame that because double-digit is a pretty wide range, but you know, if we think about that, do we think about this as growing from the current base kind of normalizing for activity levels in airports and in shopping malls and then kind of growing from there, or do we think about, you know, the kind of call it the last maybe year and a half, two years where that CAGR wasn't there and we see a significant almost step function type jump as we go into 2022?

Yeah, I think Chris, I'll let John add some color there, but I'm looking at it from baseline of today. Right now that business is around $150 million business and it's going to grow in the high teens or low twenties as we go forward on an organic basis.

And as we look at acquisitions, it'll scale up even quicker. But I think John will tell you, we won a few small bids and some of the bigger bids are still hanging out there.

Yeah. I just add that I think things are opening up and I gave you a few stats from CATSA on the airports with the daily average passenger screened.

So things are improving and that's going to produce opportunities for us to grow. We've got a good pipeline of activity coming to the market this fall or waiting years, some larger bids.

If I had a number $35 million would be something that would up our current, just with what we have with the pandemic coming back then plus new sales. So yeah that's sort of, what's in my in my line of sight.

I think, I think Chris as John says, $35 million is kind of the immediately in our sites, but $200 million is, is certainly in our sites in the pretty near term next year.

Just first question on the comments regarding stronger EBITDA in the second half, so that's more than $52 million, I guess, in the second half of '21, do you expect it to be a contributor at all? And should we expect a similar seasonality to next year, or is there some sort of incremental strength exiting 2021?

Yeah. Michael we're not expecting cues in the back half of the year.

In fact, we've kind of paused our claims just till we get our heads around the legislation because there's they -- as much as the legislation has been passed, there are some doors open there that we want to look at before it gets -- it goes any further. But yeah, certainly the back half of the year, we're looking at a sizable increase in our top line and bottom line and the bottom line pickup will fill the hole, but that cues leaves from the first half.

So we claimed about $9.1 million in the first half, and we think we'll fill that hole.

Okay. That's clear.

That's helpful. And then maybe just I guess previously you had talked about leverage ratio or target leverage ratio of about one time EBITDA, but I guess with the dividend increase and the desire to do M&A, does that mean that you have a higher tolerance for leverage now?

And if that's the case, what leverage ratios should be or are you guys targeting longer term?

Yeah. That's a good question, Michael.

Yeah, certainly we have a tolerance for higher leverage ratios. I would say that where we're at now, we're very comfortable with, but it's probably a little bit below our norm.

And we would expect to be closer to two times levered going forward as we do some acquisitions and the leverage ratio goes up and down. The new credit facility will enable us to accelerate that acquisition plan.

So I think we mentioned in the materials, you'll see that we're closing that credit facility in Q3 and it will be somewhat up-sized to allow for acquisitions and for us to potentially lever up. Does that answer your question, I guess you're on mute now.

Good morning, everyone. Congrats on the quarter.

The acquisition program is now active and that's great news. Could you tell us a little bit about the team you have working on the pipeline and where you're looking?

What types of acquisitions?

Yeah. So I guess the senior leadership team is all engaged in the acquisition program.

And we're certainly focused on FM as we go forward because that's the business that has a relatively small market share and the market itself is growing. So we think the opportunities there are much more significant and we could add some to our geographical presence as well as to our capability.

So we are focused on different service providers that would tuck under or merge with our FM business. Is that a fair John?

Yes. And I think we're going to grow modular and WAFES organically.

I think you can see that the WAFES group is gaining market share. I like to use the word dominating that area, but as we win more support services, camping, catering work and modular as you can see has a strong pipeline and so we believe we're going to get all our growth there organically.

That's great. Thanks.

And then speaking of the Modular segment your wins with municipalities speak for themselves, and it's easy to see the list from the two rounds of rapid housing initiative funding to city budgets. The other half of the rapid housing initiative is allocated to projects.

Could you tell us a little bit about your successes in winning any of those?

Well, I think we're in constant communications with a variety of municipalities that are looking to tap into the rapid housing funding from the feds. I think the first round of that RHI program was over-subscribed.

So that's why they came out with round two and working with several municipalities on that front.

Sorry guys. Thanks.

Last question. Could you give us a little more color on the timing and cost of the ERP implementation mentioned your filings?

Bill you want to…

So the -- you should join our board. We've already finished the major chunk of that and it launched on April 1.

So the big portion of the Calgary Horizon North business launched on April 1. There's a couple of small pieces that we're just wrapping up in Q3.

And we're basically done. Then we're looking at harmonizing our modular business, but a big chunk of that work is already done.

The cost in total was around $0.5 million and that's it.

Good morning, gentlemen. I wonder if you could give a little bit more color on the Bank of Montreal affordable housing fund, whether that would be a new organization, grassroots funding, or whether the money used to support various initiatives there are underway already in Canada.

And so any color to fill that out in terms of when it might get started would be helpful.

Thank you. Yeah, I think that's not the immediate focus for us on that one, Scott.

We are focused on broadening, we've been working on social housing mostly, but we are starting to work on affordable housing in several jurisdictions. And those people that are running the projects might tap into that fund, but it's not, we don't directly tap into the fund.

It's the developers or the municipalities that tap into the fund. So we just think that provides added capital for our customers to drive more projects.

Does that answer your question?

Thanks folks. I just want to follow up with the question on margins.

So if we think about going forward and as things recover. John, I don't know if you want to take this, but in facilities management, you've always sort of talked about kind of an 8% margin profile.

And so I guess a couple of pieces of this with flips out there being bid and certainly what you may be thinking about in terms of types of M&A, is there anything we should be thinking about other than kind of as maybe some natural operating leverage just for scale where the margin profile in FM changes, and then also if you don't mind maybe commenting on how you see the margin profile changing over time in the other two major segments?

Right. I think we've messaged this clearly before.

We see at them at around an 8% margin. We see the Modular around an 8% margin and WAFES at 15%.

We don't really have any line of sight to move off of that obviously mix of business, obviously, if we're not really going to be chasing lower margin services business in the future, we might be chasing things that would be at that level, or maybe a little better. No, yeah, I guess like on a hard FM side, if it might be a little more around helping clients achieve their carbon reduction plans, then that's maybe more around the 10% reduction and so I think eight is a good, good number to think about Chris.

Okay. No, that's helpful.

I just wonder, but know, we're not going to see a big mix shift change as we go into next year.

No, I don't think so. No.

And, it might, kick a tick up a bit depending on the mix of the business, because that's just the nature of the animal, but, I would stick to the 8% as the term.

Okay. I think Chris, the WAFES business is also support services and as there's growth in that business, it's more support services and more like FM and that any growth from here in that WAFES business might be closer to the 10%, 12% rate because it is very similar to FM and the reason for that is because the former Horizon North business with the asset heavy camps, there's a significant capital investment that had to be recovered and that's why the margins are a little bit higher, but going forward we're asset light is just services and it's a little bit lower margin as we go forward for growth.

Good morning. I have one question.

I'm sorry, if it's been asked before, just joined the call a little late. On Slide six you talk about that the near term objective $1 billion support services champion.

I know this has been a target of yours since the merger. We didn't have much visibility with COVID, but do you have a better sense as to what sort of timeframe we'll be looking at before you can grow into this target?

Yeah, we are we are thinking it's more near term because if you think back, that was a year ago in a year as clicked off the clock. So at the time we were saying medium term, and so now it's near term, and I think, if you maybe missed the first part of the conversation, Fred, but we're saying that revenues for the year are going to be greater than $725 million.

So therefore the back half pretty much signaling that it's going to be north of $400 million. So that puts us at over $800 million run rate as we enter 2022 and so we're pretty comfortable with that.

There's ongoing organic growth and then when we get a tuck under, we'll be hitting that billion mark. So, I don't want to commit to date, but probably in two, three year range easily,

That's helpful. Thanks.

And good results.

Great. Thanks everyone.

Bye.