Dexterra Group Inc.

Thank you, Shar. And good morning.

My name is Drew Knight and I am 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 Q1 2022 results with the assumption that you have read the Q1 earnings release and related documents. 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 two 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.

Thank you, Drew, and welcome. As we look at the Q1 2022 results, we were very pleased with the financial performance and outlook for both the WAFES and Facilities Management businesses, including the performance of our two recent acquisitions, which give us more scale and FM capabilities.

We are also hiring senior resources in the Facilities Management business to add bench strength for future growth and have room for further expansion for accretive Facilities Management acquisitions, given our expected EBITDA to free cash flow conversion rate of over 50% in the room under our credit facility. However, the Q1 results also highlighted some challenges in our modular business.

Modular's results were disappointing. And John and Drew will speak to our action plan during the presentation.

Our goal is to improve Modular's profitability gradually over the next few quarters, to be more consistent with our 2021 experience, as we proactively manage inflationary pressures. We remain fully committed to the modular business and the synergies it can bring to the rest of our business and to our overall growth agenda, especially, in Facilities Management, which we believe will ultimately result in long-term shareholder value.

Now, let me pass it over to John for some more detailed comments.

Thank you, Bill. Our Q1 revenue was $224 million, representing a 44% improvement when compared to the same quarter in 2021.

And adjusted EBITDA for Q1 2022 was $17 million. This increase of revenue is primarily attributed to the additional revenue generated through the acquisitions of Dana Hospitality and Tricom and an increase in WAFES revenue due to the reducing impact of COVID restrictions and new work won in 2021.

The WAFES business is expected to continue to be strong throughout 2022 due to strong natural resources activity nationwide. And the IFM business will grow and is experiencing contract wins across the country.

The Modular Solutions business experienced challenges in Q1 2022, with lower revenue and EBITDA. These challenges are attributed primarily to ongoing delays in the rapid affordable housing projects in Ontario and BC and inflationary pressures, which resulted in higher raw material and subcontractor costs of $1.5 million under existing fixed price contracts with governments.

We are currently discussing how to revise our contracting terms, given the rapid inflationary pressures caused by delays. Inflationary pressures exist in all three businesses and are expected to have a reducing impact in future periods, as management proactively manages inflation and its client contracts.

Debt increased in Q1 2022 to $130.7 million on March 31, 2022, approximately $50 million of the increase is due to the acquisition of Dana and Tricom. Our leverage approximates 1.5 times EBITDA, which gives us flexibility for future M&A, if accretive opportunities present themselves.

We expect our free cash flow conversion to EBITDA to remain healthy, exceeding 50% for fiscal 2022. With the growth achieved to date in 2022, our near-term goal of $1 billion in revenue and $100 million in EBITDA is well within sight.

I will now dive into some more details by business unit. The IFM business, revenue in Q1 2022 is up 69% from Q1 in 2021.

Excluding the acquisitions, revenue was basically flat with Q4 2021, which included higher special projects revenue. Revenue will increase starting in Q2 2022 as the aviation and the retail sectors recover from the easing of public health measures and other recent new business wins.

The aviation sector volumes were approximately 60% of COVID-19 levels in Q1, which is consistent with Q4 2021. And we've seen increased passenger volumes in March and April.

Our airport revenue levels do not increase in a linear passenger traffic, we expect airport revenues, including new work won [ph] to increase by $3 million per quarter in 2022 versus 2021. Assuming that the COVID restrictions are muted for the rest of the year, we also expect the increased scale of operations with the acquisition of Dana and Tricom for result in cross-selling opportunities over time.

The Dana business had $21 million in Q1 revenue, slightly over $50 million for all of 2021 in a COVID-restricted world. It will have a stronger back half of 2022 as the education sector moves back to in-class operations and this will provide improved profitability.

Tricom generated revenue of $4.3 million in Q1, two months results only. It was also impacted by COVID restrictions, especially in the hotel space.

We expect Tricom to also generate higher revenues in future quarters as COVID restriction ease with strong profitability and our new footprint in the US provides us with interest in growth opportunities. We remain focused on executing on our expansion strategy through both organic growth and M&A.

The WAFES business had very strong Q1 2022 results with revenue growth of $39 million, compared to Q1 2021 and $3 million higher compared to a strong Q4 in 2021. These results reflect robust activity in natural resource sector, new client wins in 2021.

Loss revenue in Q1, 2021 was somewhat depressed due to significant COVID restrictions, especially the shutdown of BC projects in Q1 2021. I'm pleased to announce that the Crossroads Lodge in Kitimat, BC reopened in Q2 2022, while it will have limited occupancy in Q2, it will ramp up in Q3 and is expected to be at near full capacity in Q4 and will provide significant revenue and EBITDA for Q4 onwards based on our discussions with LNG Canada.

A growing portion of the WAFES business is service related and not capital intensive, and this aligns closely with our IFM business. This continues to be a growth area for WAFES.

We see lots of future opportunities, longer term contracts, less volatility and lower risk business. Revenue for our Modular Solutions business was lower than expected due to client-driven delays in affordable housing projects in Ontario, site access issues in the West due to the floods in BC.

We are actively discussing how to move these projects forward with government officials and expect to improve plant utilization. In Q1, 2022 production for manufacturer-only US based multifamily projects ramped up.

This is an important part of our business diversification strategy. This new product had revenues of $5.1 million in the quarter and a strong and growing future order book.

Margins for our Modular Solutions business were impacted in Q1 by fixed price client contracts, given material and subcontractor cost inflation pressures. We also experienced some supply chain delivery challenges; a benefit of the modular business is the contracts are of a shorter duration.

So more recent contract signing reflects current market conditions. A key metric for Modular segment is our backlog of projects.

The backlog was $70.9 million for rapid affordable housing at the end of Q1 2022, down from year-end, which was $78.6 million. This excludes approximately $19 million of projects being finalized with existing customers in a backlog of $26.5 million for industrial and US manufacturing supply projects signed recently, which add both product and client diversification.

Additionally, the Modular Solutions business has reoccurring modular business beyond these projects worth about $40 million per year. These include education modules, retail kiosks and other specialty kiosks.

The 2022 federal budget announcement to invest $1.5 billion to create at least 6,000 new affordable housing units in 2022 to 2023, is expected to directionally support future social and affordable housing business. I will now turn it over to Drew for comments on our financial position.

Thank you, John. Looking at Slide 10.

In Q1 2022, we had strong overall revenue growth compared to both Q4 2021 and prior year Q1 2021. Adjusted EBITDA was $17 million, which increased 31%, compared to $12.9 million in Q1 2021, excluding CEWS.

Compared to Q4 2021, adjusted EBITDA in WAFES and IFM was stronger and was offset due to challenges in Modular. The Q4 2021 loss results also included the $1.8 million unusual item booked for the price negotiation of a major contract.

The corporate expenses include $0.8 million for acquisition costs, including the Tricom earn-out accrual and also the $2.2 million provision for onerous contracts related to the pre Horizon North period. These contracts included significant remediation work, which has been impacted by inflationary pressures and have been excluded in the adjusted EBITDA numbers.

Looking at Slide 11. Modular Solutions had an adjusted EBITDA for Q1 2022 of $400,000, compared to $2.6 million in Q1 2021 and $2.9 million in Q4 2021.

Margins in Q1 2022 were primarily impacted by supply chain challenges, materials and subcontractor inflation on fixed price contracts for about $1.5 million, as John mentioned. The new U.S.

product had lower margin and start-up costs of approximately $1 million, which reduced EBITDA as processes for handling this new line of business were developed and have been expensed. The delays in affordable housing projects also impacted the optimization of plant utilization, resulting in lower overhead absorption.

Our action plan for modular includes: one, discussions with various government officials to get the delayed projects through the plants to improve plant utilization in the short-term. Number two, putting specific escalation clauses in future contracts given rampant inflation and negotiate increases on current work in progress.

Number three, create manufacturing cost certainty through revised purchasing arrangements for key raw materials and subcontractors. And number four, diversifying the product line where there are profitable business opportunities within our expertise.

The impact of these initiatives will not be evident overnight, but we believe stronger profitability will gradually occur over the next couple of quarters. In IFM, adjusted EBITDA percent -- the adjusted EBITDA percentage of revenue is 6.2% for Q1 2022, which is lower than the 6.9% recorded in Q1 2021, excluding CEWS and is consistent with Q4 2021.

The IFM business, excluding the 2022 acquisitions had improved margins in Q1 2022, as Dana included some one-time onboarding costs and is recorded nominal income. IFM is actively managing the labor and supply chain constraints, which have resulted in overtime and outsourcing to subcontractors.

IFM has roughly 70% of its client contracts with cost escalation clauses. However, there are timing issues, which result in downward pressure on margins temporarily until the client contract is adjusted.

For the WAFES business, the Q1 2022 adjusted EBITDA as a percentage of revenue was 14%, compared to 15% in Q1 2021, excluding Qs. This is – this slightly lower margin is due primarily to revenue mix and the move to a greater percentage of support services work.

The Q4 2021 result of 16.5% included the $1.8 million contract renegotiation mentioned earlier. On slide 12, the corporation's financial position and liquidity remains strong with $59.2 million of unused capacity on its credit lines at March 31, 2022.

For Q1, cash used by operating activities was $7.7 million. The decrease in Q1 2022 resulted from an increase in accounts receivable of $28 million, excluding the Dana acquisition.

This was due to higher Q1 revenue and the timing of client payments. The increase – this increase in trade receivables was temporary.

Actions are in progress and day sales outstanding were significantly reduced in the month of April already. The conversion of EBITDA to free cash flow for full year 2022 is expected to exceed 50% as usual.

Dexterra Group also declared a dividend for Q2 2022 of $0.0875 per share for shareholders of record at June 30, 2022, to be paid on July 15, 2022. I will now return it back to John for closing comments.

Thank you, Drew. Dexterra Group is poised for continued growth in 2022 as the economy moves into a post-pandemic environment.

Our key focuses for the upcoming quarters are. Number one, to improve the profitability of the modular business by managing inflationary and supply chain pressures, government scheduling delays and by improving plant utilization.

Secondly, we want to expand the WAFES IFM through organic growth, using a capital-light service model, along with our strong balance sheet. Three, we want to capitalize on cross-selling opportunities with the acquisition of Dana and Tricom, we have a new base of clients and hospitality, education and other verticals and new skills to execute on this expansion.

In Q2 and Q3, we'll also see the impact of our seasonal Forestry business, which has a strong book of business in place for 2022 with contracts to plan over 35 million trees and assist in firefighting efforts in various provinces. Our Crossroads Lodge in Kitimat, British Columbia is also reopened in Q2 and will improve the WAFES profitability in the latter part of the year.

In conclusion, we expect to deliver on our plan to exceed $1 billion in revenue and $100 million in EBITDA in 2023. Our revenue mix continues to evolve.

Today, it is 60% IFM and WAFES support services, 20% modular and 20% WAFES asset services, which is a small but important concentration in the energy patch of around 30%. 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'll circle back for additional questions. Thank you for joining us today.

Please go ahead, operator.

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

Can you talk a little bit about how inflation is factored into contracts in the Facilities business, specifically, are there any mechanisms in place to pass along higher labor costs?

Yes, I'll take that. Thanks for the question.

Absolutely, about 70% of our contracts have a cost of living clause. And in addition, there are other change in law triggers that would capture any minimum wage type changes or as we recently saw in British Columbia, change in the employee health cost.

So, -- and we are in the midst of triggering any of those clauses as appropriate as we move through this quarter and feel comfortable that we'll be able to fight these inflationary pressures through those provisions in the contracts and good client relations.

Okay. Thank you.

And in terms of Modular, how should we think about revenue growth, the revenue growth profile for the remainder of 2022 and into 2023? And is there anything out there that could accelerate the rate at which installations are done?

Well, I think at the moment, focus for Modular is return to profitability. We're not as focused on growth.

But nevertheless, the plant utilization requires a certain amount of throughput. So, the delays are starting to abate finally, and we are on site in the city of Toronto and in BC, which we were not able to be on site in Q1.

So, we're looking to get that revenue cross the $50 million threshold per quarter, and that will start to give us better plant optimization.

And if I could just add to Drew's comment, we have a nice number of inbounds coming from US supply only and we see that as one of the opportunities to get a higher utilization in the plants, and there's a good level of interest there and we're pursuing those opportunities as well.

Good morning and thanks for detailing your action plan for the Modular Solutions business. How long do you expect it will take for you guys to pass on these inflationary cost pressures?

In Modular, specifically, Frederic, we're in discussions with clients now on some of the contracts that were signed a year ago and were delayed. We were expected to produce them and delivered a site in 2021 and the client delayed them.

So those discussions are happening now. And then, the one benefit of modular is that the contracts are short duration.

So, we're working off that – the legacy issues, the fixed price contracts that were done a while ago. So, the new contracts that have been signed in 2022 will reflect current economics.

And what's the average duration of those contracts, Drew?

Once they go into production, they're probably eight months, nine months.

Okay. There's been – my second question regards a number of strikes in Ontario that are kind of gathering – picking momentum, lots of workers just basically walking up the job and trying to get better terms, is the pressure or the sort of the -- this development does it potentially impact your modular business on a go-forward basis?

Well, I think our modular business is -- we're lucky, it's not done at sites. So.

we're not reliant on-site workers that are on strike. So it's in the plant and so we've got some control there.

And sub-trade is something we're focused on with both the cost of the sub trades and contracting out. So it's less of an impact for us than maybe some of the traditional stick builders...

Good morning. Everyone thanks for taking my questions.

Can you give us some color on capacity utilization in energy services and occupancy and workforce accommodation, please?

Sure. Capacity utilization and energy services so our assets, relocatable structures and matting, we do have high percentage utilization currently.

So, we're pretty happy with that business. We're running around 80% utilization.

So that's -- we're pretty happy with that business right now. What – the second question, you were talking about the occupancy rate in WAFES and maybe I'll pass it over to John for that one.

Hi Zach, good morning. We're running about a 55% occupancy on all our managed beds.

So these are client owned beds, these are company-owned beds. This is our whole managed portfolio of beds across the country.

We're – and we're quite pleased with that number. And it was 40% last year.

So, it's an uptick and we're pleased with that at Zach.

That's helpful. Thanks.

And then looking at modular, there were onetime start-up costs of about $1 million for the US market products, can you drill down on what that consists of?

Yes. A lot of it was materials for the US market that are very specific for code in the jurisdictions where we're working.

But more importantly, it's the size of the modules are considerably larger than our typical modules. So handling in the plant was something that had to be developed overtime, as the boxes move around the plant, it was very inefficient in the first go round.

So, we had to do a bit of a plant relay out to better handle these big boxes.

Hi. Good morning, guys.

Good morning, Michael

I missed the prepared remarks, so I apologize, if these questions are done. But I wanted to ask whether or not you are seeing an acceleration in the bidding activity for IFM and WAFES -- or WAFES, you guys would say, aside from the Kitimat lodge?

I mean what should we expect in terms of organic growth there? I mean, given obviously the favorable exposure to airports and energy, respectively?

So I’ll -- Michael, I'll take that one. The -- as the restrictions reduce, we're seeing a lot more activity in IFM bid.

We are seeing a lot more activity with government procurement that sort of has been installed. They're now coming to market.

I think in the WAFES world, there are more opportunities for us to chase than maybe in normal cases, but that's just a result of the natural resource area being on fire. I don't really mean on fire, but it's going well, and we're taking advantage of that.

We won some very significant rebids in workforce accommodation recently of significant value. We've also won a few rebids of a decent size in IFM.

So we're feeling very comfortable about our prospects with IFM and WAFES. And my -- the beginning of my remarks kind of led us there that we're really encouraged by what we can do in 2022 in WAFES and IFM.

That's great color, John. And I guess, the second question on M&A, just how you're thinking about that going forward?

And maybe just as a quick follow-up. Have you been able so far to capitalize on early cross-selling opportunities on the deals that have been closed to-date?

Okay. Look, I mean, we're consistent with our M&A strategy.

We're focused on IFM opportunities that are accretive. And we'll -- we have a program and nothing more to say on that at this point in time.

With regard to the two we've onboarded -- the onboarding, we've just completed the 90 days onboarding. And I want to draw attention that I say onboarding.

I don't say integration, because we want to learn from these new organizations, because they may have a better way to do things. So we're well into that onboarding.

And we bid some things jointly with IFM and Dana already after 90 days. So we feel good that we're making progress.

Thanks for the follow-up. Just one, the new guidance for the segment split on $1 billion in revenue is 50% WAFES, 30% IFM and 20% Modular.

Back in March, WAFES is only 40%. So if the wins were to come out of your sales in the resource and energy sectors, which are on fire right now, do you have a path to your growth target, or is it dependent on the elevated activity in those segments?

So, I would say the FM business has grown nicely, both with the acquisitions and a bunch of organic wins in the last couple of months. That's finally broken free.

So that $1 billion target, just some of the WAFES stuff has naturally grown. It's kind of exceeded expectations, as you've seen some growth in Q1 here and in Q4.

So it's just a math -- function of math, and we're backing off a little bit on the Modular growth plan, because we've got to stabilize it and make it profitable.

Zach, I'd direct you to our five-year plan table, that's in the AGM slides, and it will give you a very good look at how we see things going forward in the future. We do not see WAFES not growing.

It's just that as a percentage of the overall might change.

That’s great. Thank you very much.

Thank you.