Dexterra Group Inc

TSX:DXT

Earnings Call Transcript 2021-Q3

[Operator]

Welcome to Dexterra Group's Third Quarter Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions]I would now like to turn the conference over to Drew Knight, Chief Financial Officer. Please go ahead.

[R. Drew Knight, Chief Financial Officer]

Thank you, Ariel, 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 MacCuish, CEO and President of Facilities Management; and our Board Chair, Bill McFarland, who will provide some brief introductory comments.The format of this conference call will be the same as our past calls. After a brief presentation we will take questions, with the call ending by 9:15 Eastern Time. We will be commenting on our Q3 2021 results with the assumption that you have read the Q3 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.Before we begin, I would like to make some comments about forward-looking information. In yesterday's news release and on Slide 2 of today's 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. Bill?

[Bill McFarland]

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 a number of accomplishments and are looking forward to fewer COVID restrictions and the opportunity to continue to execute on our vision and plan.We believe our plan to create a company with CAD 1 billion in revenue and CAD 100 million in EBITDA is becoming a near-term reality. We had 19% revenue growth in Q3 2021 compared to Q3 2020 and have a strong national workforce accommodations footprint with several expansion opportunities.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 50% 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.I will now pass it over to John to provide details around our progress and what the future holds.

[John MacCuish]

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 award. Safety is an important key performance indicator for Dexterra Group.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 camp occupancy, mobilization of new services contracts, including a significant oil sands customer, and a strong Q3 peak season for our Forestry & Fire Camps businesses. Pipeline camps in BC rebound strongly in Q3, with a good occupancy as COVID-19 restrictions were eased, though our Kitimat Open Camp will likely continue to be closed until late Q2 2022 due to delays in scheduling of the LNG Canada project.The WAFES increase included a CAD 6.2 million increase in Energy Services revenue related to the robust activity in the energy sector. We are also seeing new and expanding camp opportunities in the natural resource sector across the country that bode well for our future growth.The Modular Solutions segment revenues for Q3 2021 decreased by CAD 3.2 million from Q2 2021. 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 2021 and Q1 2022.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 CAD 300 million annually.Integrated Facility Management revenues were flat with Q2 2021 and increased by CAD 3.4 million 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 and retail sectors, which continue to face business challenges.Moving to Slide 7. Adjusted EBITDA, excluding CEWS, as a percentage of revenue for Integrated Facility Management was 8% in Q3 2021, improving from 6% in the same period in 2020 and roughly consistent with our Q2 2021. This was the result of a focus on utilization of resources, use of technology to provide the quality solutions customers want.The growth prospects for IFM remain significant, with brisk 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 7.5% to 8% overall margin level.48% of our WAFES business is noncapital-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.WAFES EBITDA, excluding CEWS, for Q3 2021 increased by CAD 6.1 million, or 41%, compared to Q2 2021 and CAD 3.3 million, or 19%, compared to Q3 2020. This increase in EBITDA was despite the closure of the Kitimat Crossroads Camp in Q4 of 2020.Q3 2021 revenues for Energy Services increased CAD 6.2 million in Q3, which included CAD 2.5 million increase in mat sales. Both the relocatable structures and the matting business are expected to continue to experience increased utilization throughout the remainder of 2021 and into 2022 as the energy business rebounds.Our Forestry & Fire Camps service business had a good season, contributing significant revenue of CAD 20 million for Quarter 3. The team planted 35 million trees this season, which is significant.On Slide 9, EBITDA from the Modular segment for Q3 2021 saw a dip from Q2 2021 of CAD 1.6 million 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 6%, and the year-to-date Q3 2021 was 7%.Cost improvement projects are ongoing. We believe market margins will likely approximate 7% to 8% 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 CAD 153 million at September 30 and includes CAD 25.3 million for industrial and U.S. manufacturing supply projects signed in Q3 2021. And this is just a sign as we begin to diversify the business.Our Modular Solutions business also has reoccurring modular business beyond these projects, worth approximately CAD 40 million 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.I'll now turn it back over to Drew for comments on our financial position and outlook. Over to you, Drew.

[R. Drew Knight, Chief Financial Officer]

Thank you, John. Our financial position and liquidity are strong, and we've -- I'm talking to Slide 11, 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 CAD 120 million of available credit without using the new larger acquisition facility.Debt was CAD 79.6 million at September 30, down from CAD 85.4 million at December 31. Debt increased CAD 7.7 million during Q3 2021 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 via our disciplined asset-light strategy, with a goal of converting close to 50% of EBITDA to free cash flow in Fiscal 2021. Looking at an annual calculation is important, as this effectively eliminates quarterly seasonality impacts. This conversion rate should extend into 2022 as we continue to use our tax loss carryforwards to preserve cash.Dexterra Group also declared a dividend for the fourth quarter of 2021 of CAD 0.0875 per share for our shareholders of record at December 30, 2021, to be paid January 17, 2022, which is in line with our goal of giving our shareholders a mix of dividends, along with share appreciation.Looking at our path forward, on Slide 12, 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 improvements in the aviation sector to have a positive impact on its results as the population receives vaccinations and federal restrictions on travel lessen. Airport traffic is up, but it is still under 50% of 2019 levels. We expect that this return to historic levels will be very gradual through 2022. Our focus is winning new bids and maintaining current profit margins, while providing excellent service to our existing clients.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 2021 compared to Q4 2020, 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 2022. The Kitimat Camp is expected to be fully occupied in the second half of 2022.As John said earlier, our resource-based businesses are expecting to experience better camp occupancy, stronger mat and relocatable structures utilization throughout the remainder of 2021 and into 2022 as the energy and mining sectors rebound.And our Modular Solutions business has added a significant backlog of work and has a strong pipeline of other opportunities. So we are expecting good revenue and EBITDA growth in Q4 2021, rolling into 2022.Dexterra Group has tax loss carryforwards of CAD 70.8 million as at September 30, and we'll save over CAD 15 million in cash taxes in 2022 and 2023, which will enhance free cash flow in those years.As Bill alluded to in his opening remarks, Dexterra Group is poised for strong growth in 2022. 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.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.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 2 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.

[Operator]

[Operator Instructions] Our first question comes from Michael Doumet, of Scotiabank.

[Michael Doumet, Analyst]

First question, maybe if you can expand on the reasons the customers diversified the supplier base for the new awards in IFM, that would be great. And I guess, maybe just as a quick follow-on, too, 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 capabilities? Just curious on your thoughts there.

[R. Drew Knight, Chief Financial Officer]

Sure, Michael. I think in the FM 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 was some influence from COVID that making a change at this time maybe wasn't in their best interest. So they did leave a lot of the work with incumbent suppliers. So it's still – it remained 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.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 3 months.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 are getting down the path on M&A and getting close on a few transactions.

[Michael Doumet, Analyst]

That's great color, Drew. And maybe just turning to workforce accommodations. Given the strong demand there, are you at a point where utilization rates are high enough that you can go ask for more price? Like, 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?

[John MacCuish]

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 opportunities, the support services bids, 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 a greater share of those opportunities that we could have some improvement as we deliver on the customer service side of things.

[Operator]

Our next question comes from Frederic Bastien, of Raymond James.

[Frederic Bastien, MD & Equity Research Analyst]

Facilities Management revenue grew 9% year-over-year. Does this fall in line with your expectations? Or could we see growth accelerate further with the retail sector improving?

[R. Drew Knight, Chief Financial Officer]

I think 9% is kind of a low watermark for us. We're expecting much higher growth year-over-year, Frederic. I think just the organic growth on the stuff related to COVID will help us scale up. But also we're expecting -- we have won several small contracts, and we're expecting to win many more, going forward. So I think we're expecting double-digit growth, for sure, in FM year-over-year.

[Frederic Bastien, MD & Equity Research Analyst]

Okay. And if you have touched on that, apologies, but how is the acquisition pipeline looking? Do you have a lot of files that you're looking at? Just would like to get an update here.

[R. Drew Knight, Chief Financial Officer]

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.

[Operator]

Our next question comes from Chris Murray, of ATB Capital Markets.

[Christopher Allan Murray]

So my first question is around thinking about revenue into 2022 and some of the moving parts. So if we kind of start with your expectation for at least CAD 725 million this year in revenue, and correct me if that is changing, when I think about you add the Kitimat camps in, you seem to have a pretty good WAFES business that's well positioned and demand moving up there, FM, the recovery, I think we all understand, I mean, how close do you think you can get to your CAD 1 billion mark just with what's actually happening in the business today, outside of acquisitions over the next year?

[R. Drew Knight, Chief Financial Officer]

We're not going to hit the CAD 1 billion mark in 2022, Chris, to be clear. You mentioned at the beginning of the question the CAD 725 million number. We don't give forecasts, but it's in the presentation for a reason. We're going to be in and around that range. So that's a safe number for 2021. 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. So that will get us over the CAD 800 million mark, but it's not going to get us to CAD 1 billion, for sure. But we are expecting it in the near term, 2023, 2024, and that's for all business units. We're seeing strong growth for all 3 business units.

[Christopher Allan Murray]

Okay. That's helpful. And then just turning to the Modular 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 contracts 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 8% 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 would be helpful.

[John MacCuish]

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 manufacturer 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 know the price pressures on building supplies and actually the lack of supply in some cases. Now 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.

[R. Drew Knight, Chief Financial Officer]

Right. I think maybe just to add, Chris, I know the analyst community wants a number to plug into the model. So I would say we've said in John's comments that 7% to 8% is the right margin for that business. So as John said, there are several things we're working on, but 7% to 8% is probably the right number, going forward.

[Operator]

[Operator Instructions] Our next question comes from Zachary Evershed, of National Bank Financial.

[Zachary Evershed, Analyst]

On the topic of the BC and Toronto housing project delays, are those still delayed? Because you mentioned that they might go into Q4 or 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?

[R. Drew Knight, Chief Financial Officer]

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. 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 in BC, for sure.

[Zachary Evershed, Analyst]

That's helpful. And then on your sustaining CapEx projections for next year, there's a bit of a step up to CAD 10 million. Can you walk me through some of the items that go into that?

[R. Drew Knight, Chief Financial Officer]

I'm not sure I've given a CAD 10 million 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. So I think in the past we were saying we would be keeping it around CAD 5 million. And next year, it might be a small uptick to CAD 7 million or CAD 8 million, but it's not going to CAD 10 million.

[Operator]

Our next question is a follow-up Frederic Bastien, of Raymond James.

[Frederic Bastien, MD & Equity Research Analyst]

I just wasn't able to ask a follow-up question on the M&A front. When you're looking at -- I mean, with respect to your acquisition pipeline, are you looking at businesses that could grow your business to the tune of 5%, 10%? Or something more meaningful?

[R. Drew Knight, Chief Financial Officer]

So you're talking about the size of the business? I think, Frederic, our sweet spot would be adding businesses that have revenue from probably the low of CAD 25 million, and CAD 100 million, CAD 120 million would probably be in the sweet spot. We could look at something bigger, but we are focused on tuck-unders in that range, CAD 25 million to CAD 100 million. Does that help?

[Frederic Bastien, MD & Equity Research Analyst]

Yes, that's helpful. 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?

[R. Drew Knight, Chief Financial Officer]

No, it's probably the inverse. Because as we ramp up in the 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 even 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.

[Operator]

Our next question is a follow-up from Chris Murray, of ATB Capital Markets.

[Christopher Allan Murray]

Turning back to the Modular business, this is more of a theoretical question, but when you're talking about different end markets one of the areas where at least the predecessor company had looked a little bit was hospitality. And certainly, with it looks like travel starting to pick up, any thoughts around maybe looking at hospitality or other verticals inside the Modular business just to expand the footprint now that you've got the facility?

[R. Drew Knight, Chief Financial Officer]

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 not a lot of hotel building at the moment. And certainly, we use our Fairfax connections for other things like as when they get around to building new restaurants. Certainly, bringing a restaurant online in 6 to 12 months is much better than stick-build and doing it over 24 months. So I think we are focused on looking at some of that hospitality play.Does that answer your question?

[Christopher Allan Murray]

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

[John MacCuish]

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 restauranteurs 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.

[Operator]

Our next question is a follow-up from Michael Doumet, of Scotiabank.

[Michael Doumet, Analyst]

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 labor availability. One, are you finding it, I wouldn't 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 a constraint? And then, too, in terms of inflationary pressures, are you seeing that a lot in the wage base? And are there pricing mechanisms?

[John MacCuish]

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 30 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 laborers or customer care workers or et cetera, but we're managing through that.As it relates to cost pressure regarding that, I know that the modular projects are very, very short in their length. So you can manage that into your pricing. And on the services contracts, 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've got mechanisms to deal with that. So am I losing sleep over it? No, but we're paying attention to it.

[Operator]

There are no further questions at this time. This concludes the question-and-answer session.

[R. Drew Knight, Chief Financial Officer]

Great. Thanks, Ariel. Thanks for joining us, everybody. Have a good day. Bye.

[Operator]

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