Dexterra Group Inc

TSX:DXT

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to Dexterra's Second Quarter 2024 Results Conference Call. [Operator Instructions]

I would now like to turn the conference over to Denise Achonu, CFO. Please go ahead.

[Denise Achonu, executive]

Thank you, Ayesha, and good morning. My name is Denise Achonu, Chief Financial Officer of Dexterra Group Inc. With me today on the call are Mark Becker, our CEO; and our Board Chair, Bill McFarland who will provide some brief introductory comments. After a brief presentation, we will take questions with the call ending by 9:15 Eastern Time.

We will be commenting on our Q2 2024 results with the assumption that you have read the Q2 earnings release, MD&A and financial statements. The slide presentation, which supports today's comments is 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 to our website, you will find cautionary notes in that regard. I will not cover the content of the cautionary notes, in any detail, however, 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.

[R. McFarland, executive]

Thank you, Denise. I'd like to start by thanking our management team and employees across Dexterra. Q2 2024 was a strong quarter as the company continues to deliver on its 2024 business plan. including strong execution and improved profitability. We now have a more simplified business and an opportunity to grow our earnings and capital-light support services platform. Dexterra has a very strong balance sheet and is well financed. This gives the company flexibility as we move forward to continue to pay the dividends to be opportunistic on share buybacks once the modular sale closes given our undervalued share price and to be opportunistic regarding niche accretive acquisitions. In conclusion, the Board is confident regarding many opportunities that lie ahead, which will deliver strong shareholder returns. I will now pass it over to Mark Becker for his comments.

[Mark Becker, executive]

Great. Thanks very much, Bill, and good morning, everyone. As Bill mentioned, we delivered strong results in Q2 across both IFM and WAFES. Consolidated revenue was just over $253 million, an increase of 18% compared to Q2 of 2023 and an increase of 9.5% compared to Q1 of 2024. Our performance was primarily driven by taking advantage of strong natural resource market activity in WAFES and onboarding of new large contracts to replace completed projects as well as growth in IFM and including the full quarter inclusion of CMI Management acquisition, which is delivering value and meeting our expectations.

This was partly offset by lower and more normalized wildfire support in Q2. Our adjusted EBITDA, which excludes the impact of discontinued operations, was just over $29 million in Q2, which also significantly -- it was also significantly up compared to $25.2 million and $19.6 million in Q2 of 2023, and Q1 of 2024, respectively. Due to the top line revenue growth factors that I mentioned, a strong execution and improved IFM margins. Strong camp occupancy and asset utilization in WAFES are also making a positive impact. Our focus on execution and strong profitability are now paying off.

We have also simplified our business and strengthened our balance sheet with the early June agreement to sell the Modular Solutions business for $40 million. We cleared competition year review in late July, and now we're just working through the final details and requirements to close the transaction this month. Also this quarter, in conjunction with the Gitxaala Horizon North Services Limited Partnership, which is owned 49% by Dexterra.

The corporation sold 329 relocatable space rental units for $20.5 million. This transaction provided an opportunity for Dexterra to proactively manage our mix of assets in the Energy Services business consistent with our strategic focus on capital-light support services with the proceeds further contributing to paying down our debt. Speaking to more detail on the business units, starting with IFM on Slide 6.

For Q2, IFM revenues were slightly over $100 million, an increase of 31% from Q2 of 2023. This increase is primarily related to the acquisition of CMI but also the addition of new contracts across the IFM business as well as some increased IFM defense contract project work in the quarter. The CMI acquisition contributed about $17.4 million (sic) [ $23.3 million ] revenue in Q2.

IFM revenue was also impacted by seasonality, especially in the education sector, which traditionally has lower and Q2 and Q3 revenue and this year was also impacted by the protest that we saw on our campuses. IFM adjusted EBITDA for Q2 was $5.8 million as expected and improved margin to 5.8% from 5.2% in Q1 and as we continue to work through our client -- work with our clients on pricing to offset inflationary impacts, implement operational improvements as well as bring on new higher-margin business including the acquisition of CMI. We expect margins in IFM to continue to improve and surpassed 6% in the back half of the year.

Our pipeline of new sales opportunities remain strong in all areas of IFM, both in Canada and the U.S., including higher margin fully integrated service IFM contracts. This pipeline will support our plan to deliver strong organic growth. We also continue to evaluate strategic niche opportunities for acquisitions in the IFM space.

Moving on to WAFES on Slide 7. Revenue from the WAFES business was -- in Q2, it was just over $153 million, which is an increase of about 18% over Q1 of 2024, driven by new sales growth and strong market activity generally across the business. Adjusted EBITDA for Q2 of 2024 was $29.2 million, providing a margin of 19% compared to 18% for the same quarter last year.

Higher WAFES revenue and EBITDA compared to the same quarter of last year was the result of strong market activity and greater than 90% asset utilization across our primary asset-based services, including turnkey camp rentals, access matting services as well as inflationary price increases being passed on to consumers, including some negotiated settlements and this too was partially offset by lower and more normalized wildfire support activity in the quarter.

In addition, several new large long-term facility management like contracts, are now on stream, replacing the large oil and gas projects at completion, including Coastal Gas Link and the LNG Canada projects. We expect adjusted EBITDA margins to continue to exceed to be robust and continue to exceed 15% on an annualized basis.

While so far in 2024, wild productivity has been more akin to normal levels, we are seeing some increased fire support activity in Q3. Currently, we expect this activity to have a positive impact on Q3 results, but is expected to be significantly less than the extraordinary activity in Q3 of last year, continue to be very proud of our natural disaster and fire support activities supporting communities across Canada, including the recent activity in the Fort McMurray and Jasper regions of Alberta where our teams are working to support the first responders.

With that, I will now turn it over to Denise.

[Denise Achonu, executive]

Thank you, Mark. I'll speak about our financial position and capital markets on Slide 9. Overall, our Q2 free cash flow generation has improved over the prior year and reflects normal seasonal fluctuations. Over the year, we expect to deliver 50% conversion of adjusted EBITDA to free cash flow with Q4 being our strongest quarter for free cash flow generation, given the seasonality of the business. We also will have, over time, lower working capital needs with the sale of the Modular business, which was more capital intensive.

In Q2, we completed the share buybacks under our current NCIB program up just over 165,000 shares. Under this program, over the past 15 months, we have invested a total of $7.5 million, repurchasing 1.3 million shares. We will continue to remain opportunistic about further share buybacks post closure of the modular sales as we believe our shares are still significantly undervalued in the market and an excellent use of our capital.

In light of our continued strong free cash flow generation and strength of our balance sheet, our capital allocation priorities in the near term remain unchanged and include maintaining the current dividend level, making sustaining capital investments of up to 1.5% of revenue, along with high return, short payback opportunistic growth capital investments when they arrive. And lastly, identify niche IFM acquisitions while continuing to maintain a strong balance sheet.

Debt was $139.8 million at June 30, 2024, compared to $132.7 million at Q1 2024 and will be reduced by $40 million following the Modular sale. The increase from Q1 2024 was due to normal seasonality in the business. In the context of our capital allocation priorities that I previously described, we intend to keep our adjusted EBITDA to bank debt ratio below 2x in the future. This provides us ample opportunity to buy back shares and acquire niche businesses that expand our geography or capabilities as our ratio will be closer to 1x post the Modular close.

Finally, we declared a dividend for Q3 2024 $0.0875 per share for shareholders of record at September 30, 2024, to be paid on October 15, 2024.

I will now turn it back to Mark for closing comments.

[Chris Murray, analyst]

Thank you, Denise. The points on Slide 11 really serve to summarize our key focus areas and our priorities for the second half of 2024. In the near term, job #1 for me and the Dexterra team is to continue to improve the predictability and profitability of our business results through driving strong execution and operational excellence. Continued improvement in IFM margins as well as pursuing profitable organic growth on both sides of the border at target margins is a key step in that plan. In parallel, we continue to support and build upon our leading market position in Workforce Accommodations, Forestry and Energy Services.

The closing of the sale of the modular business allows us to simplify our business model and focus on our 2 core continuing support services businesses, IFM and WAFES. The repositioning of these support services businesses from an operational and reporting perspective is in process. This reorganization will help streamline our business with similar economic characteristics and provide clear strategic and operational direction and focus.

We will also be aligning our external reporting with these changes and expect this to be in place for our 2024 year-end reporting. Our strong balance sheet provides us with flexibility for future share buybacks and niche IFM acquisitions when opportunities arise and where we are confident we are in a good position with good market opportunities with a strong team and a strong balance sheet to deliver robust shareholder returns, including a return on equity of 15% over the medium term.

In summary, we are well positioned for continued success and strong results in the back half of the year and beyond. I'm excited for the future of the business and the opportunities it will bring. This concludes our prepared remarks.

Back over to you, Ayesha, for the Q&A portion of our call.

[Operator]

[Operator Instructions] First question comes from Chris Murray with ATB Capital Markets.

[Kyle Brock, analyst]

This is Kyle on for Chris. So obviously, a nice step-up in IFM margins in the quarter. Can you talk a bit about what you view as the key drivers to get margins above 6% in the second half and the exit rate we should be thinking about heading into 2025 given the contribution you're getting from CMI?

[Mark Becker, executive]

Kyle, the IFM margin still, as I mentioned, expect them to be surpassing 6% in the back half of the year. Our margin profile in IFM is improving as we address inflation impacts with our clients. That effort is going well. Working with our clients to service them in the best way that we can and really generate a win-win situation from that. Additionally, this year, the summer season hasn't been particularly strong around the food service business and the post-secondary education market, as I mentioned.

So as this business ramps up significantly starting in the latter part of Q3, it will also contribute to our Q3, Q4 margins. So it's really a mix of our kind of improved margin performance, addressing inflation with our clients, and kind of our natural seasonality around IFM. And we are looking to kind of maintain that profile greater than 6% and improve on that profile into 2025.

[Kyle Brock, analyst]

Okay. Great. Then turning to your outlook, which talked about a planned reorg in the second half. Should we view this as a potential precursor to a larger strategic review or further portfolio shaping? Any thoughts on the process or expected timing would be appreciated.

[Mark Becker, executive]

Yes, good question. Really, as I mentioned, it's really about reorientating our business around support services and getting better alignment internally and not so external reporting around our support services business as well as our asset-based business, and just giving better transparency and better visibility on those 2 components of the business. Beyond that, it's not a broader strategic realignment of any way. That's what you can really expect from us is really just readjusted some internal realignment that's minor and really just realigned reporting is what you can expect.

[Operator]

Next question comes from Frederic Bastien with Raymond James.

[Frederic Bastien, analyst]

Good results, guys. So a quick question. Historically, we've seen the WAFES business performed the strongest during third quarters. Given the broad-base momentum you're enjoying, is it reasonable to expect this trend to also persist this year?

[Mark Becker, executive]

Yes. Look, we've seen growth in WAFES, we continue to gain good market share. We tend to continue to win work in the WAFES space. As I mentioned in our remarks, our asset utilization is very high, and that test drive high margins as well.

We still -- all indicators are is we still see high activity in the natural resources space and it's not just energy, it's into the mining space as well, which does support kind of a build, I would say, on WAFES. I would say, with more normalized fire activity compared to the high activity that we see last year, we would see similar kind of improved results, I would say, from a Q2 perspective, maybe a couple of million dollars in EBITDA related to some project-specific stuff.

But I would say, with our normal seasonal profile that you would normally see from us, we would see kind of a similar level of activity, again, with that adjustment that I mentioned. And then just continue to build on IFM, a slow and steady or steady build in IFM and both on revenue as well as improved margins.

[Frederic Bastien, analyst]

And how is the pipeline of M&A opportunities currently in the IFM business?

[Mark Becker, executive]

I would say good. I mean our program around acquisitions is really still focused on strong strategic fit for IFM opportunities. Geography, both Canada and the U.S., adding capabilities that we'll continue to focus on all that. Really, as I mentioned, our job 1 this year is really to focus on our delivering stable, reliable results and steady organic growth. But having said that, we still look at we still continue to assess acquisition targets in the near to midterm. And in light of our capital allocation priorities that we talked about, it probably means slightly smaller acquisitions or smaller acquisitions, but with very strong strategic fit.

[Operator]

The next question comes from Zach Evershed with National Bank Financial.

[Thomas Bolland, analyst]

It's actually Thomas calling in for Zach. Sorry if I missed this, but you're actively managing assets and mix. Is there any outstanding asset that you would like to divest? Or what kind of -- what should we expect there?

[Mark Becker, executive]

Yes. I would say kind of asset optimization is what we always will be focusing on. We are a capital-light strategy, and we'll continue on that path. And for example, the LNG Canada space rental assets that we divested of this in Q2 as an example of that. And then we continue to look for opportunities for kind of quick payback investments, short-term quick payback investments and of a smaller nature.

Our focus is really around kind of optimizing and maximize the utilization of our suite of assets and really just looking to maximize our utilization because as we know and as we can see, I mean it does maximize our profitability, but it's really an optimization play versus looking for assets that are high value of high utilization and then opportunities where if there's a divestment, it would make sense from the nature of the asset or where it's deployed.

[Thomas Bolland, analyst]

Perfect. That's helpful. And would you be able to give us a little bit more color about the EBITDA drag from the campus protest and the $10 million in CapEx this quarter, please?

[Mark Becker, executive]

Yes. So I would say it's been a little bit of an interesting summer. It's always a little lower activity for us in the on-campus efforts, particularly around food service. The protest, there was actually convocations that were canceled and a number of the campuses are not canceled but moved off-site as well as some of our larger post-secondary campuses hold pretty large conferences during the summer.

And some of those conferences were actually canceled related to it. And we just adjust and kind of react to that and modify kind of our on-site labor and costs related to that. But we did see an impact. And hopefully, that doesn't continue on next year, next summer, but it did have an impact to us this year.

As related to the capital spent year-to-date, obviously, we've got our sustaining capital that we kind of plan on and spend every year kind of up to 1.5% of revenue. And also, as I mentioned in my other comments, there is opportunities here and there, particularly with strong clients and long-term clients that are looking for things like access matting from us increases to our fleet to support them on long-cycle contracts. So that $10 million really went towards those kind of high-margin, high-return payback opportunities as well as our normal sustaining capital.

[Operator]

[Operator Instructions] The next question comes from Trevor Reynolds with Acumen Capital.

[Trevor Reynolds, analyst]

Can you maybe -- there was obviously a significant outperformance in WAFES in Q2 versus last year despite the forestry business being off? I was just wondering if you can kind of quantify some of the year-over-year changes. I know you mentioned the asset utilization, but were there other parts of the business that you maybe you can highlight and just how you see that flowing through to Q3 would be helpful.

[Mark Becker, executive]

Yes. I would say, as you mentioned, obviously, fire activity was lower, but we had more than offset that related to activity in WAFES. And you mentioned the asset utilization, our assets are very highly utilized. But this is kind of a broad thing that we're seeing camp occupancies, and that wouldn't just be energy, that's energy space, that's in mining, that's in infrastructure, and a Canada-wide coast to coast to coast has been high. And just overall demand has been high. And also, I think a lot of activity around the gas-based production, like we have good, long-term, long-operational support opportunities in the oil space, oil sands space specifically, but also just the Montney-Duvernay gas activity, supporting LNG, LPG, U.S. gas shipments, power switching.

Just continues to be very, very active for us, and we kind of lead the market in that region related to -- for sure workforce accommodation. So all of that kind of -- and this includes gold mining, metals mining that we're seeing out East and up North. All that's kind of coming together for a very strong activity level for us. And all indicators that we see that continuing the balance of this year and into 2025. But obviously, we watch that pretty closely.

[Trevor Reynolds, analyst]

Okay. Great. And then just, I guess, where -- obviously, we've seen a pickup in forest fire activity over the last month or so, I'd say, at least in Western Canada. Maybe just how this -- where we're at versus last year in Q3 with maybe just some insight there.

[Mark Becker, executive]

Yes, for sure. So last year was the big spike. If you looked at what our total revenue was for the year was the big spike was in Q3. And a lot of that was -- well, a huge part of that spike was just related to some of the kind of evacuee camps that we put up on North Coast BC as well as in Alberta and interior BC. We're not seeing that level of activity. We are, as I mentioned, supporting firefighters, both in the Fort Murray region as well as in the Jasper region.

But it's really a moderate -- to be a moderate increase for Q3 compared to what we would call a normal year of fire activity and certainly significantly less than what we saw in Q3 last year.

[Operator]

This concludes the question-and-answer session and today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.