Dexterra Group Inc.

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00:40 Thank you, Ariel, 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. 00:55 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 9:15 Eastern Time. We will be commenting on our Q3 twenty twenty one 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 on 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. 01:32 Before we begin, I would like to make some comments about forward-looking information.

In yesterday's news release and on slide two of today's 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.

01:55 I will now turn it over to Bill McFarland for his introductory comments. Bill?

01:59 Thank you, Drew, and welcome to everyone, and thank you for taking the time to be with us today. The management team and board are pleased with the strong results for Q3 that Drew and John will discuss in detail.

As we step back and review our progress, we take pride in the number of accomplishments and are looking forward to fewer COVID restrictions and the opportunity to continue to execute on our vision and plan. 02:24 We believe our plan to create accompanying with one billion dollars in revenue and one hundred million dollars in EBITDA is becoming a near term reality.

We had nineteen percent revenue growth in Q3 twenty twenty one compared to Q3 twenty twenty. And have a strong national workforce accommodations footprint with several expansion opportunities.

02:48 We have our modular capacity with the manufacturing capability to support higher revenues with a growing and diverse backlog of projects, and there are many opportunities in the facilities management space. Our disciplined asset light strategy and our current business mix, which now is about fifty percent support services will also allow us to convert a high percentage of EBITDA to free cash flow in the future.

These factors along with our strength of the management team give us confidence that we will continue to provide shareholders with attractive returns by paying dividends and through share appreciation over time. 03:32 I will now pass it over to John to provide details around our progress and what the future holds.

03:38 Thank you, Bill. Good morning, everyone.

Let me start with some good news, Dexterra Group was recognized by the Canadian Occupational Safety Magazine as Canada's safest employer in the services sector. I'm very proud of all of our team across Canada who contributed to this significant awards.

Safety is an important key performance indicator for Dexterra Group. 04:04 As Bill noted in his opening remarks, we had good results for Q3.

The revenue performance of our WAFES business was strong in Q3 due to higher occupancy, mobilization of new services contracts, including a significant oil sands customer. And a strong Q3 peak season for our forestry and fire camps businesses.

04:30 Pipeline camps in BC rebound strongly in Q3 with a good occupancy as COVID-nineteen restrictions were eased. Though our Kitimat open camp will likely continue to be closed until late Q2 twenty twenty two due to delays in scheduling of the LNG Canada project.

04:52 The WAFES increase included a six point two million dollars increase in energy services revenue related to the robust activity in the energy sector. We are also seeing new and expanding opportunities in the natural resource sector across the country that bode well for our future growth.

05:13 The Modular Solutions segment revenues for Q3 twenty twenty one decreased by three point two million dollars from Q2 twenty twenty one. This was a disappointment caused by administrative delays in the rapid affordable housing projects with the city of Toronto and site access delays on projects in BC.

Revenue from these deferred projects will be recovered in Q4 twenty twenty one in Q1 twenty twenty two. 05:44 With the opening of the NRB Modular Solutions plant in Cambridge in June of this year, production capacity for modular solutions has increased to well over three hundred million dollars annually.

Integrated facility management revenues were flat with Q2 twenty twenty one, an increased by three point four million dollars when compared to the same quarter last year. We expect this upward trend to continue as further COVID restrictions are lifted, especially in the airport retail sectors which continue to face business challenges.

06:21 Moving to slide seven. Adjusted EBITDA excluding CEWS as a percentage of revenue for integrated facility management was eight percent in Q3 twenty twenty one, improving from six percent in the same period in twenty twenty and roughly consistent with our Q2 twenty twenty one.

This was the result of a focus on utilization of resources, use of technology to provide the quality solutions customers want. 06:52 The growth prospects for IFM remain significant with first bidding for new work and an active M&A program, which will add scale, expand our geographic footprint and capabilities with the expectation of delivering a seven point five percent to eight percent overall margin level.

Forty eight percent of our WAFES business is non-capital intensive support services and aligns closely with our IFM business. The services business in WAFES is growing and will have a consistent margin with little investment required.

07:34 WAFES EBITDA excluding CEWS for Q3 twenty twenty one increased by six point one million dollars or forty one percent compared to Q2 twenty twenty one and three point three million dollars or nineteen percent compared to Q3 twenty twenty. This increase in EBITDA was despite the closure of the Kitimat Crossroads camp in Q4 of twenty twenty.

07:59 Q3 twenty twenty one revenues for energy services increased six point two million dollars in Q3 which included two point five million dollars increase in MAT sales. Both the re-locatable structures and the [matting] (ph) business are expected to continue to experience increased utilization throughout the remainder of twenty twenty one and into twenty twenty two as the energy business rebounds.

08:27 Our Forestry and Fire camp service business had a good season, contributing significant revenue of twenty million dollars for quarter three. The team planted thirty five million trees this season, which is significant.

08:43 On slide nine, EBITDA from the modular segment for Q3 twenty twenty one saw dip from Q2 twenty twenty one of one point six million dollars due to lower volumes, lower plant utilization and the resolution of some old contract issues. Adjusted EBITDA excluding CEWS as a percentage of revenue for Q3 was six percent and year to date Q3 twenty twenty one was seven percent.

09:16 Cost improvement project is -- projects are ongoing, we believe market margins will likely approximate seven percent to eight percent as we reach scale in the business and we diversify into different product lines. A key metrics for the modular solutions is the backlog of projects and the sequencing projects to utilize our plant capacity effectively.

Management is working with our customers, suppliers and teams to align projects and improve manufacturing efficiency. This backlog increased to one hundred and fifty three million dollars at September thirty and includes twenty five point three million for industrial and U.S.

manufacturing supply projects signed in Q3 twenty twenty one. As we -- this is just a sign as we begin to diversify the business.

10:10 Our modular solutions business also has recurring modular business beyond these projects, worth approximately forty million dollars per year. These mainly consist of education modules and specialty kiosks.

The overall outlook remains very positive for modular with significant opportunities to increase revenue and EBITDA in the near term as our backlog grows and the business is further diversified. 10:38 I'll now turn it back over Drew for comments on our financial position and outlook.

Over to you Drew.

Thank you, John. Our financial position and liquidity are strong, and we’ve -- talking to slide eleven, pardon me, our financial position and liquidity are strong and we finalized a larger credit facility in September to support our growth aspirations and provide over one hundred and twenty million dollars of available credit without using the new larger acquisition facility.

11:07 Debt was seventy nine point six million dollars at September thirty, down from eighty five point four million dollars at December thirty one. Debt increased seven point seven million dollars during Q3 twenty twenty one due to the working capital investments required for revenue growth and seasonal volumes in the WAFES business.

We are also very focused on converting EBITDA to free cash flow by our disciplined asset light strategy with a goal of converting close to fifty percent of EBITDA to free cash flow in fiscal twenty twenty one. 11:39 Looking at annual -- looking at an annual calculation is important as this effectively eliminates quarterly seasonality impacts.

This conversion rate should extend into twenty twenty two as we continue to use our tax loss carry forwards to preserve cash. 11:55 Dexterra Group also declared a dividend the fourth quarter of twenty twenty one of eight point zero seven five dollars per share for our shareholders of record at December thirty, twenty twenty one, to be paid January at seventeenth twenty twenty two, which is in line with our goal of giving our shareholders a mix of dividends along with share appreciation.

12:16 Looking forward to -- looking at our path forward on slide twelve, the integrated facilities management business has many large bidding opportunities, but found in Q3 that a couple of large national contracts split their awards among several suppliers. This was a new trend in the marketplace.

We won parts of these contracts. IFM has also been significantly impacted in both the airport and retail sectors and expects the improvement in the aviation sector to have a positive impact on its results as the population receives vaccinations and federal restrictions on travel lessen.

12:53 Airport traffic is up, but it is still only -- it is still under fifty percent of twenty nineteen levels. We expect that this return to historic levels will be very gradual through twenty twenty two.

Our focus is winning new bids and maintaining current profit margins while providing excellent service to our existing clients. 13:13 Our M&A program is active and will help us add scale, expand geographic footprint and build our capability.

The WAFES business is seasonal, but revenue will be higher in Q4 twenty twenty one compared to Q4 twenty twenty despite having the Kitimat camp closed. The newly launched hospitality services contracts in the oil sands will add to results and the expectation for strong results in twenty twenty two.

The Kitimat camp is expected to be fully occupied in the second half of twenty twenty two. 13:47 As John said earlier, our resource based businesses are expecting to experience better camp occupancy stronger mat and re-locatable structures utilization throughout the remainder of twenty twenty one and into twenty twenty two as the energy and mining sectors rebound.

14:04 And our modular solutions business has added a significant backlog of work, it has a strong pipeline of other opportunities, so we are expecting good revenue and EBITDA growth in Q4 twenty twenty one rolling into twenty twenty two. 14:18 Dexterra Group has tax loss carry forwards of seventy point eight million dollars as at September thirty and we'll save over fifteen million dollars in cash taxes in twenty twenty two and twenty twenty three which will enhance free cash flow in those years.

14:34 As Bill alluded to in his opening remarks, Dexterra Group is poised for strong growth in twenty twenty two. We are focused on organic growth as well as selective acquisitions.

We have taken steps to prepare for growth with the recently expanded credit facility and ERP implementation and by refining processes throughout the business to promote scalability. 14:57 Hiring of new people continues to be a challenge that we are actively managing across all business segments.

But we have a strong team energized by our recent successes and we look forward to continued support from our shareholders as we build a strong national support services champion. Our shareholders may be proud of.

15:15 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 have time at the end, we will circle back for additional questions.

Thank you for joining us today. Please go ahead, operator.

16:02 Hey, good morning guys.

16:05 Good morning, Michael.

16:06 First question, maybe if you can expand on the reasons the customers diversify the supplier base for the new awards in IFM that'd be great. And I guess maybe just as a quick follow on, Drew.

I mean, do you have better visibility at this point in terms of contract wins and an acceleration of growth? Or is there an element of kind of M&A having to be part of that equation as that brings more scale and capability.

Just curious on your thoughts there?

16:36 Yes, sure, Michael. I think in the IFM world, some of the contracts did stay with incumbent suppliers as some of the national contracts they were looking to consolidate everything from coast to coast.

And I think there were some influence from COVID that’s making a change at this time, maybe wasn't in the best interest, so they did leave a lot of the work with incumbent suppliers. So it remain very fragmented.

However, they did award, we did win an award with one of those national contracts. It was just a fair bit less than we expected with winning the national contract.

17:16 And in terms of scaling up, we are actively bidding many contracts and we expect to win our fair share in the next quarter and the ramp up for these contracts is fairly quick in the services business, which is a nice thing. So if we win something, we would probably launch it within three months.

17:39 And we are diversifying the business as we go across the country and with capabilities and our M&A program is certainly focused on that as we -- as we are getting down the path on M&A and getting close on a few transactions.

17:58 That's great color, Drew. And maybe just turning to workforce combination.

Given the strong demand there, are you at a point where utilization rates are high enough that you can go ask for more price, but maybe not for a long term contract, but maybe shorter term contracts or new business? Or is there still a bunch of excess capacity in the industry?

18:21 Yeah. Good question.

I believe there's still excess capacity in the industry quite frankly. We actually have some excess ourselves.

I've said before that we weren't anxious to dump it into the market and create another competitor for ourselves. So I think there is still pressure there in that regard.

I think on the service only the opportunity to support services bid, the margins are good and the competitive side on that will be driven by the quality of our culinary and our service to the residents in the camp. So, I think there's an opportunity for us as we continue to win greater share of those opportunities that we could have some improvement as we deliver on the customer service side of things.

19:45 Good morning. Facilities management revenue grew nine percent year over year.

Does this fall in line with your expectations? Or could we see growth accelerated further with the retail sector improving?

20:00 Yes. I think nine percent is kind of a low watermark for us we're expecting much higher growth year over year, Frederick.

I think just the organic growth on the stuff related to COVID will help us scale up, but also we're expecting -- we have one several small contracts and are expecting to win many more going forward. So, I think we're expecting double digit growth for sure in IFM year over year.

20:32 Okay. And if you have touched on that, apologies, but how is the acquisition pipeline looking?

Do you have a lot of -- you're looking at? Just I would like to get an update here.

20:45 Yes, not in a position to announce anything at the moment, but we are down the path, we've got a pretty good pipe of opportunities we're looking at and we've advanced discussions with a couple of targets. So it's moving along well.

21:10 Yes. Thanks.

Good morning. So my first question is around, thinking about revenue into twenty twenty two and some of the moving parts.

So, if we kind of start with your expectation for at least seven twenty five million dollars this year in revenue, correct me if that is changing. When I think about, you had the Kitimat camps and you seem to have a pretty good WAFES business that’s well positioned and demand moving up there.

IFM, the recovery, I think we all understand. 21:44 I mean, how close do you think you can get to your billion dollar mark just with -- what's actually happening in the business today outside of acquisitions over the next year?

21:56 Yes. We're not going to hit the one billion dollars mark in twenty twenty two.

Chris to be clear. You mentioned at the beginning of the question, the seven twenty five million dollars number, we don't give forecast, but it's in the presentation for a reason, we're going to be in and around that range.

So it's a safe number for twenty twenty one. But next year, we've telegraphed strong growth and we're expecting double digit growth, so it will be in the teens for next year.

22:25 So that will get us over the eight hundred million mark, but it's not going to get us to one billion dollars for sure. But we are expecting in the near term twenty twenty three, twenty twenty four.

And that's for all business units, we're seeing strong growth for all three business units.

22:41 Okay. That's helpful.

And then just turning to the module business, just a couple of questions. So, John, I think you mentioned that there were some maybe unusual, call it, catch up costs or just old contract you're trying to fix up.

If we were to think about the margin profile of at least this quarter and moving forward, would that margin still be in that kind of eight percent range that you were thinking about kind of near term as opposed to any sort of color you can give us about kind of the magnitude of those charges so we can normalize, it would be helpful?

23:17 So let me just say this as we diversify the mix of our business will change. And it's important to diversify as we just saw there are delays in rapid housing with municipalities and we want to maximize the throughput in our manufacturing.

So the diversification is important. But with that, when you're doing manufacturers supply, that's at a bit of a lower margin.

So we've got the product mix, if I can say that within the sales. I think we've got supply chain headwinds to be honest with you, if you've done any work in your own home, you'll know the price pressures on building supplies and actually the lack of supply in some cases.

24:09 And now we have some good process improvement plans and the team is working on it to improve the throughput in the manufacturing facilities. But I just would say that's really the color.

It's around the product mix, but it's good business.

24:27 Right. I think maybe just add, Chris, I know the analyst community wants a number to put into the model.

So, I would say we've said in John's comments, the seven percent to eight percent is the right margin for that business. So as John said, there are several things we're working on, but seven percent to eight percent is probably a right number going forward.

25:04 Good morning, everyone. Thanks for taking my questions.

On the topic of the BC and Toronto housing project delays, are those still delayed, because you mentioned that they might go into Q4, Q1, but it's already November here and a ramp up just before Christmas doesn't sound super likely. So could you give us some color on the pace of the recovery of those delayed sales?

25:28 Yes. So, Q4 will be higher than Q3 for modular.

So we are moving forward and there is -- some of the stuff is breaking free. I would say that Toronto, a couple of projects are not going to site yet, but they're going to storage, and -- but we're continuing to manufacture the next couple of projects for the city of Toronto.

So, growth in that segment will still be significant in Q4 as that -- and BC has broken free. That's we're ramping up at BC for sure.

26:05 That's helpful. Thanks.

And then on your sustaining CapEx projections for next year, there's a bit of a step up to ten million dollars. Can you walk me through some of the items that go into that?

26:19 I'm not sure I've given that ten million dollars number publicly to anyone. So I'm not sure where you got that number, Zach, but we are continuing to focus on being asset light and as there are new projects in both FM and WAFES, there were some small investments, but it's probably more growth CapEx.

26:44 So, I think in the past, we were saying we would be keeping it around five million dollars and next year it might be a small uptick to seven million dollars or eight million dollars, but it's not going to ten.

27:08 Hello again. Just I wasn't able to ask a follow-up question on the M&A front.

When you are looking -- I mean, with respect to acquisition pipeline, are you looking at businesses that could grow your business to the tune of five percent ten percent or something more meaningful?

27:28 Look, you're talking about the size of the business. I think Frederick, our sweet spot would be adding businesses that have revenue from probably the low of twenty five million dollars and one hundred million dollars and one hundred twenty million dollars would probably be in the sweet spot, we could look at something bigger, but we are focused on tuck in that range, twenty five million dollars to one hundred million dollars.

Does that helps?

27:55 Yes. That helps Lastly, how should we think about working capital requirements over the course of the year.

Are they highest in the winter months and lowest in the summer months?

28:08 No, it's probably the inverse, because as we ramp up in this summer months, revenue grows in the summer months and we have that Forestry business that kicks-in in the summer. So, we're usually long on accounts receivable during that period.

And also, some of the inventory requirements for modular in the summer, but we're expecting working capital to reduce in Q4 and debt will be repaid in Q4.

28:46 Yes. Thanks folks.

Turning back to the modular business, this is more a theoretical question. But when you're talking about different end markets, one of the areas where at least the predecessor company looked a little bit was hospitality and certainly it looks like travel starting to pick up.

Any thoughts around maybe looking at hospitality or other verticals inside the module business just to expand the footprint on these types of facility.

29:16 Yes. Certainly, we're looking at multiple ways to diversify that business and talking to various customers, certainly mid-rise hotels are a nice fit for us that we're looking at potentially bidding on some of that, but there's now a lot of hotel building at the moment.

And certainly, we use our Fairfax connect for other things like as their – when they get around a building new restaurants, certainly bringing a restaurant online in six to twelve months is much better than stick build and doing it over twenty four months. So, I think we are focused on looking at some of that hospitality play.

30:01 Does that answer your question?

Yes, it does. Are there any -- is there any other areas you may be looking at outside of your traditional kind of, call it, the school and education sectors, things like that and hospitality?

30:18 So one thing I'll just add to this. I mean, this is manufacturing supply in the hospitality sector.

We're not planning to get back into the site delivery of hotels. I think we're very interested in expanding our specialty kiosk work.

We think there's lots of opportunity for that. And as Drew mentioned, I know across the U.S.

there are lots of restaurant owners that are Chick-fil-A is one who's gone to totally modular for new stores, so we think there's lots there to go after to diversify.

31:05 Great. That's helpful.

Thank you.

31:16 Hey, thanks for taking the follow-up. I mean, this has been asked on every Q3 call of all your peers.

So maybe just staying on theme here, but just talking about the lever availability. One, are you finding it, I would say, easy enough, but are you able to get the labor to kind of go after some of these new contract wins?

Or is that a little bit of constrain? And then two, in terms of inflationary pressures, are you seeing that a lot in the wage base and are there pricing mechanisms.

31:51 So, I'll take that. We're very fortunate right now that we have good people engagement across the business.

I wouldn't deny that there is some tension in the business around labor availability, but we're managing it. We have lots of tools in the toolkit that we're deploying.

We also have over thirty collective agreements and unionized employees are pretty stable. So there are some regional pockets and there are some selected like skilled trades are a little more difficult than general labor or customer care workers or etcetera.

But we're managing through that. 32:45 As it relates to cost pressure regarding that, I know that the modular projects are very, very short in their lens, so you can manage that into your pricing.

And on the services contract, you have escalation clauses, change in law clauses. So, like I can assure you most of the FM contracts, if there was a province that decided to push the minimum wage, we got mechanisms to deal with that.

So, am I losing sleep over it, no, but we're paying attention to it.

33:29 Great color. I appreciate it.

Thank you.

33:42 Great. Thanks, Ariel.

Thanks for joining us everybody. Have a good day.

Bye.