Dexterra Group Inc.

Thank you, Ariel. And good morning.

My name is 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 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 9:15 Eastern Time.

We will be commenting on our Q4 2021 results with the assumption that you have read the Q4 earnings release. The annual 2021 MD&A and 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, is also posted on our website and we encourage participants to access the slides and follow along with our presentation. 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 on our website, you will find cautionary notes in that regard. While I won't read the content 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.

Good morning and thank you for taking the time to be with us today. The management team and board are pleased with our finish to 2021 and are looking positively to the future.

We are particularly pleased with our two recent IFM acquisitions, more prep to capabilities, new end markets, and more scale to operations. These acquisitions make our goal of having $1 billion in revenue and $100 million in EBITDA within reach in the near term.

Our Mexico business is also changing. A larger facilities management footprint and our larger services business component in loss, which means more long term contracts and stability of earnings.

John and the management team are successfully building the new Dexterra and brand by working collaboratively with our customers and employees to breed support services champion with values based on trust, respecting diversity of thought and ideas, understanding the importance of working with others, and in holding ourselves accountable. Our actions have positively impacted shareholder value, and our goal is to continue to pay an attractive dividend coupled with ongoing share appreciation.

Today, on our website, we also released our second annual sustainability report, which highlights our environmental and social initiatives, including the support we give to the communities where we work. John, over to you to discuss in more detail our Q4 results and progress.

Thanks, Bill. Good morning, everyone.

Our Q4 revenue exceeded 200 million, representing a 23% improvement when compared to the same quarter in 2020. And our 2021 revenue was $733 million with EBITDA of $80.1 million.

So how did we make progress? We added new customers in the new modular capacity.

We reduced our debt level and entered into a new credit facility that gives us financial flexibility for future growth. We increased our dividend.

And as Bill mentioned, we recently closed two important acquisitions. All this in a COVID restricted world.

And for the second consecutive year, our EBITDA conversion to free cash flow exceeded 50%, which will allow us to pay down debt related to acquisitions quickly. These combined developments translated into higher shareholder value and gives us a strong foundation for future growth.

I will now dive into some more details by business unit. In IFM, we recently won several contracts that launch in 2022.

The contracts are smaller in size, but collectively add up. The team has momentum as we enter 2022 with lots of opportunities to win new work and a very competitive marketplace.

The airports activity improved early in Q4 before reductions in December, and you'll note in the CATSA data shows the passenger volumes in Q4 2021 were 50% of Q4 and 2019, our airport clients tell me they see a steady improvement in activity levels over 2022, with pent-up travel demand. We closed two acquisitions in January welcoming Dana Hospitality and Tricom Facility Services Group to Dexterra.

The acquisition of Dana expands our existing culinary services into education, healthcare, and leisure clients. This acquisition broadens our service offerings, strengthens existing customer relations, improves our ability to grow our hospitality market share in new verticals.

Dana has a unique offerings based on fresh foods. In fact, this week, the Dana culinary team showcase their fresh made from scratch farm to fork delivery, by creating the Dexterra board to a fantastic dinner.

It was impressive. Tricom delivers contract janitorial, and associated building maintenance services, and supplies, custodial equipment and consumables to clients, and major centers across Canada.

This acquisition brings several key contracts and client relationships, including a small footprint in the United States, in Seattle, and Houston. We were very pleased to have both data and Tricom joining the Dexterra family and expect once we get past the initial integration phase, that they will be strong contributors to EBITDA.

Revenues combined will exceed a 100 Million in 2022. Increase in scale of operations with Dana and Tricom acquisitions improves our mix of client and markets as you will see on Slide 7.

Among the benefits will be further diversification of our client and end-markets, more scale, improve resiliency and cross-selling opportunities with the expanded client base as we move into a post-pandemic environment. The growth in education and leisure sector reduces the IFM concentration in retail and airports.

From an operating cost and margin perspective, the IFM team is actively managing the current labor shortages, the inflation impact on supplies and equipment, as well as supply chain throughout disruption as we move at a COVID. The growth prospects for IFM remain significant with ongoing brisk bidding for new work.

Our WAFES team had an excellent year in 2021 as they grew our market share and are a leader in this space. A significant growing portion of our WAFES business is support services, which is not capital-intensive and has similar characteristics to our integrated facility management business.

The remainder of the WAFES business relates to asset-based services. For 2021, the support services piece comprised more than 45% of the WAFES revenue.

Our WAFES business segment revenue performance was strong in Q4 2021, with an increase of $34 million compared to 2020 due to new sales and on-boarding of large new contract, stronger camp occupancy, and improved mat and relocatable structures utilization, with the increased activity in the resource sector. We expect this activity level to continue in 2022, including the reopening of the Crossroads Lodge facility with 736 beds in Kitimat, BC supporting the LNG Canada project.

Moving over to modular, a key goal for our modular solutions business unit is to scale the business, diversify our product market verticals, and fill our plant capacity. The team is also working to capture efficiency improvements in processes to drive profitability and our competitiveness, which will aid in meeting the diversification goal.

In Q4 2021, the segment faced site and administrative delays in the rapid affordable housing projects in Ontario and site access delays on projects in British Columbia caused by flooding. This resulted in revenue below expectations.

Management is working with the municipalities to improve project scheduling and is dealing with inflationary pressures across the skilled labor force in supply chain. These challenges negatively impact the profitability in Q4 and into Q1 2022.

We are managing these pressures and with higher volumes our profitability is expected to improve in Q2 2022. We have a strong backlog of work which is growing increasingly in Q4 to about $170 million compared to $153 million at September 30th.

I will now turn it over to Drew for comments on our financial position.

Thank you, John. Looking at Slide 11, we had solid performance in Q4 2021 compared to the same quarter in 2020.

Revenue was $201.6 million for Q4 2021, which increased $37.2 million or 23% compared to Q4 2020. The increase in revenue is mainly attributable to growth in the WAFES business.

The IFM business had Q4 2021 revenue of $39.3 million, which increased marginally by 2% from Q4 2020 as it continued to be impacted by COVID restrictions. The modular solutions business had Q4 2021 revenue of $46.5 million, slightly below Q4 2020 and slightly above Q3 2021, and a significant increase over 2020 for the full year in 2021.

Adjusted EBITDA was $18.1 million, which increased $4.8 million or 36% compared to Q4 2020 after adjusting for no CEWS in 2021 compared to 2020, which had $4.2 million of CEWS. This increase is driven primarily by higher business activity levels and a focus on managing project margins.

Q4 2021 adjusted EBITDA excluded one-time $1.9 million net loss recorded in our corporate segment to settle a legal dispute related to a contract in place at the time of the reverse takeover and legal costs associated with acquisitions. On Slide 12 in IFM adjusted EBITDA was $2.5 million in Q4 2021 and was an increase of $0.9 million compared to Q4 2020 excluding the $1 million of Qs received last year.

The improved margins in 2021 compared to 2020 were the result of management's focused on resource usage and project management. These margins decreased from 8% in Q3, 2021 due to the impact of labor shortages increasing the cost of overtime and outsourcing, as well as supply chain disruptions and inflationary pressures on supplies which in the short-term could not be passed on to certain clients.

In IFM, IFM margins were also impacted in Q4, 2021 by reduced project work due to the Omicron variant. We are actively managing these issues and expect margins to return to normal levels as pandemic restrictions ease in Q4 -- Q1 2022.

The WAFES business adjusted EBITDA for Q4 was $18.5 million, an increase of $6.8 million from Q4 2020, excluding Qs of $2.8 million that was recorded in Q4, 2020. Higher volumes drove strong profitability.

We also successfully negotiated improved commercial terms in Q4 for services provided to a large client, which increased quarterly EBITDA with a one-time pickup of $1.8 million. After adjusting for this item margins were fairly consistent with Q4, 2020.

Q4 business levels are traditionally lower in WAFES due to camp shutdowns over the holidays and the seasonal nature of the business. The WAFES business unit also benefited in 2021from reduced carrying costs related to underutilized staff and equipment in a less COVID restricted world compared to 2020.

Modular Solutions had adjusted EBITDA of $2.9 million a decrease of $1.5 million and lower margins compared to Q4 2020. Our margin of 6% for Q4 2021 was consistent with Q3 as our overhead costs for the business unit are higher in 2021 with the addition of new plant capacity this year.

We expect profitability to improve with higher revenue after Q1 2022 as we manage both the rapid affordable housing projects, which created under-utilization in our plants and also supply chain disruptions. Looking at Slide 13, debt was $65.3 million at December 31st, 2021, down from $85.4 million at December 31st, 2020.

The leverage ratio at December 31st, 2021 was 0.9 times EBITDA. Debt levels will increase by $50.5 million in Q1 2022 with the acquisitions of Dana Hospitality and Tricom, and leverage will approximate 1.5 times adjusted EBITDA post acquisitions.

The corporation generated free cash flow of $45.4 million for the year ended December 31st, 2021 and converted 56% of adjusted EBITDA to free cash flow, which puts us in a great position to pay down acquisition debt quickly and complete new M&A transactions if they meet our investment criteria. Dexterra Group declared a dividend for the first quarter of 2022 of $8.75 per share, which is payable to shareholders of record at the close of business on March 31st, 2022 and will be paid on April 15th, 2022.

I will now turn -- return it back to John for closing comments.

Thank you, Drew. Dexterra is poised for continued profitable growth in 2022 as the economy is expected to move into a post-pandemic environment.

We expect strong organic growth in all business units and we'll look for IFM M&A activities that are accretive to take advantage of our strong balance sheet and expand our footprint geographically or bolster service offerings. In the IFM business, we expect a gradual improvement in the aviation and retail sectors to have a positive impact as federal restrictions on travel lessen.

The focus of the IFM business is on winning new bids in a very competitive environment, maintaining profit margins, providing excellent service to clients and on-boarding our acquisitions with speed and care. The WAFES business expects to also grow significantly in 2022 with expanded natural resource activity nationwide and the reopening of Crossroads Lodge in Kitimat, British Columbia.

And our Modular Solutions business, the demand for social affordable housing in urban centers is strong and we expect to increase our volume starting in Q2 with growth in other product categories. In conclusion, we are on track to deliver our plan for $1 billion in revenue and $100 million in EBITDA in 2023, the acquisitions have exhilarated our IFM growth and changed our anticipated revenue mix to 35% IFM, 25% Modular, and 40% WAFES, which is a positive as more long-term contracts bring certainty in earnings.

This concludes our prepared remarks 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'll circle back for additional questions.

Thank you for joining us today. And please go ahead, operator.

Hey, good morning, guys. I'll start of facing John in 2021, the results have been quite consistent despite the obvious challenges, and obviously mostly done on the acquisitions.

The first question I've got is on loss business. Can you remind us again what the economics of the 736 beds in Kitimat?

Or just in terms of revenue and EBITDA contributions, as well as how to think about the ramp into 2023. And I guess generally I'm just trying to get a sense for the loss business, and how to think about the organic profile, is one of utilization rates and demand for the commodity sector looks like it's picking up here in 2022.

Great, thanks Michael. Your first question.

The Crossroads Lodge has 736 beds in that large, and can generate $30 million to $40 million in revenue per year and it is definitely I can't give specific margin numbers, but it is a higher-margin business given our upfront investment in the facility. So we do expect that to come on fairly strongly in mid-2022.

And then sorry, go ahead, John.

I'll take the utilization question so currently, just remind folks we have about 15,000 beds under management and occupancy has been been up from last year. We're running about at the end of the year, the beginning of the year about 60% occupancy.

We expect that's going to grow as -- or at least be consistent and probably grow significantly as we move through this year because there's lot's of activity in the space. Our equipment fleet in our relocatable structures are running at above 99% utilization.

So we're feeling pretty positive about that.

That's great. Thanks, guys.

And I guess the second question, there have been some issues that you've been dealing with Modular Solutions, especially as it relates to project delays. I guess the question is, do you still think you can get to that -- you said it publicly, but something around $250 million of revenue run rate.

Do you think that's achievable at some point in 2022? And as a follow-up maybe how we're thinking about it, is the desire for you guys to diversify that business, is that a preference to provide more consistent results or is it a requirement to reach a higher level of utilization?

Michael, I think it's -- let me first talk about the headwinds that you touched on at the beginning. One of the issues we've got as we added a fair bit of capacity to that business midyear in 2021 and then the volumes didn't actually happen because of the delays.

We got hit with flood delays and site delays in in both BC and Ontario. We do have volume increases planned for Q2, but as when you mentioned the $250 million, that's something that's more of a 2023 number.

And the diversification is really to de -risk the business. So we don't want to be so beholden or dependent upon one sector.

So we want to have more even reliable numbers as we go forward. And certainly, it'll potentially help us with growth, but we are still very confident in those social affordable housing.

There is -- we do have a strong backlog and the back half of 2022 here and 2023 will be strong.

Good morning. This is Kyle Brock on behalf of Chris.

In terms of the acquisitions of Dana and Tricom, is the margin profile for each business consistent with your other IFM businesses and is there any opportunity for synergies?

I'll take that. As I mentioned, the Dana brings a very unique offering on the food side of IFM on the culinary side, they drive a firm before fresh food.

We are in the midst of on-boarding both right now. It brings us into new markets with new clients, so we see the opportunity for additional cross selling and which is positive.

I think the addition at Dana helps us perhaps attack our senior living sector of growing sector that we're interested in. So I would think the synergies are more positive opportunity synergies, not cost cutting synergy.

So I just want to be clear with that. And the other thing I'd point out with the Tricom is it gets our toe into the U.S.

with a bit of business and Seattle in Houston, which we're very interested in.

Okay. Thanks for the color.

In your outlook you keep talking a little bit about the expected impact from the pandemic on Dana 's business in 2022, how can you provide the color around what needs to improve to get the business back to that $100 million revenue run rate?

Well, I think certainly Kyle, when Omicron hit in December and in January there that was a hit to Dana and the food service offering. They do have a lot of education business with universities and colleges and a lot of those in person residences and cafeterias were shutdown.

So that was certainly a hit to Dana, but it is coming back gradually now as the pandemic is eased in the back-half of February and March here. We do expect -- Q1 has a bit of challenge, but we do expect that they're going to hit that run rate going forward and a $100 million is certainly within the sites as we move forward here, after Q1.

Good morning, everyone. Thanks for taking my question.

How do the labor issues that we saw in Q4 translate into the rest of 2022? And are you taking any initiatives to retain and attract talent?

I think these labor issues are temporary. We already see a little bit of more availability.

I think that in the COVID world, people were a little reserved in coming back into the marketplace. I think it's temporary.

Actually, I know it's temporary. And we're doing a fair amount of work around recruitment.

As I mentioned on our last call, we have an employee referral programs with 8,000 employees. We've got a lot of recruiters out there.

We have a strong union. A lot of collective agreements and that's not a problem with labor union situations.

And just to add a little color to this, we are getting a lot of traffic to our job boards on our website, significantly more in the last 30 days and like in the thousands. So we're feeling good that this is just a temporary thing to manage through.

And I think Zach, just adding to John 's point on the union contracts, they also a recruiter for us, so often you call the union house and say we need x number of people and they help go get bodies for us, point 1. And then point 2, when CEB and all those federal government wage subsidies that helps with our lower skilled work, those people become more available suddenly now that that's entered.

That's clear, thanks. For my second question, can tell us more about the material cost inflation you're seeing in Modular and what that does to your long-term margin expectations for the segment?

Well, I think the material cost inflation, certainly lumber was a big concern early in 2021, but that leveled off. And a lot of our contracts get finalized very close to the start of production.

So we build those costs and their pretty current costs into the contracts as they get signed before they go into production. So it's not like they're long-term fixed-price contracts from a couple of years ago.

So it does reduce the risk there. And I think some of our contracts do have cost escalation clauses and certainly on a commercial basis, we try to get those cost escalation clauses in there if it's a longer-term contract and the market changes.

And some of the delays, that's often a change order that we go after with the customer. So if the customer drives a delay on the contract, we're going to say, well, the cost profile of that contract has changed and we require a change order.

And that's part of commercial negotiations.

Good morning guys. I guess maybe a little bit more on some of these inflationary pressures on the IFM side of things and maybe what impact that's having on some of these contracts.

And also with the COVID restrictions ending, it's the second question, what impact have you seen to-date on those two struggling sectors in terms of the retail and aviation?

I'll start with your second question and then go to your first. The aviation, the airports, as I mentioned talking to clients they believe things are going to be an uptick.

There is a lot of pent-up demand for travel so there's a lot of optimism as we go through this year. We're unsure at this time about how much of our old levels of business and retail actually come back because I think the last two years have changed buying habits for the consumers and bricks-and-mortar stores are not where they were.

So a little uncertain when or if they'll ever come back to the levels they were in 2019. And as it relates to your first question about IFM impact of some of these labor shortages and other cost escalations, I do believe these are temporary.

We have -- In the fourth quarter; this was a lot of extra overtime that we didn't count on. A lot of maybe a little bit more outsourcing than we really wanted to do.

But we are getting our staffing levels back. Things are on the uptick, and we don't see this as anything going into the future.

I guess I would just add, Trevor, that in IFM with long-term contracts, those long-term contracts almost all have cost escalation or market testing feature to them. So that we level set to where things are in the marketplace.

And as John noted, a lot of the issue was very short-term in nature and sudden as Omicron hit and people decided not to show up to work and the guys were scrambling to fill spots either with over time or outsourcing.

Yes. Thanks.

Good morning. There was a loss of $1.7 million related to a legal dispute on a contract that was negotiated prior to the acquisition.

Could we get some more color on which segments this relates to? And is that issue now completely settled?

The issue is basically behind us. It was an old construction contract that was in place at the time of the takeover, in a different geography than where we currently operate.

But I can't get into too much detail more than that.

Thanks. And now that you've closed both Dana and Tricom, how is the acquisition pipeline looking here?

The acquisition, it's still active and we're still looking at the market. I guess I would say we stacked up a couple of deals quickly there.

But it's -- we're not chasing deals, so that's important. The deals must be a creative, and the timing is uncertain.

But we are active in the marketplace looking for other opportunities that are a good fit for our business.

Thanks for taking a follow-up. I was wondering if you could tell us a little bit about how you see the trends in commodity prices affecting demand for your WAFES services.

And how that incremental revenue, maybe above and beyond your expectations, how that flows through to margins.

Well, there's been some inflation in food costs, I would say, but we've -- generally a lot of that stuff gets passed through to our customers. There may be a temporary hit, so it's not perfectly timed, than we might get a timing difference.

But that's a limited issue. And a lot of those natural resource contracts, the mining sector and energy sectors are on fire right now and our camps are highly utilized, are highly occupied.

So we don't see much of an impact there.

And then just one last one. Can you give us a bit more color on the end markets you are looking to add to Modular?

[Indiscernible]

Sorry, go ahead, John.

I think that we would not like to reduce our social affordable housing, but we'd like to get that to about 50%. And then the other 50%, we'd like to grow our specialty kiosks, our U.S.

supply, direct supply only business. We've got a good strong track record in education and education portables.

So our desire is to balance that out overtime, so we're 50% specialty kiosks and U.S. supply and education classrooms.

And then 50% social affordable housing. We think that it's a nice balance for the future.

This one is follow-up on the [Indiscernible] management. And I'm just wondering where that 60% occupancy sit through relative to historical highs.

Remember when we say 15,000 beds under management, that -- that's not equipment necessarily that we own. So you will or may not, but we -- recently we've been getting behind the gate contracts with large mining operations in the oil and gas operations, where this is the client's camp and we're a service provider.

So we're managing those beds, so it's not necessarily our equipment. So I think a little difficult to look backwards and give you some indication there.

Now if you're talking about a open camps, we have 1,100 beds in four active open camps. And we're running at about 63 --

Yeah. That 1,100 excludes Kitimat because it's closed right now.

That's right. I'm saying it's for -- I'm just talking about the four active camps.

We're currently running 63%, which is getting close to the norm. Perhaps back in a heyday of oil and gas, we might have been running 75%.

Just the nature of the business, it's just like a hotel in the -- a remote hotel or a rural lodge. These are good occupancy numbers.

They're never going to be 90% or 100%.

Yeah. I think 2019, 2020 were pretty bleak years and they were below 50% during those years.

So it's definitely an improvement.

Perfect. Okay.

And then just one last quick one. Are all your fuel costs pass-through?

Fuel costs like transportation generally, it's built into the landed cost of our goods, either when we're receiving materials or when we're shipping to customers. We do have some fuel costs to get crews out into the sites.

So generally it's pass-through. But they're all -- there's always a short-term hiccup and so a sudden thing like now might take a month, but it's pretty immaterial, to be honest, Trevor.