Dexterra Group Inc

TSX:DXT

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Thank you for standing by. This is the conference operator. Welcome to Dexterra Group's Third Quarter 2023 Results Conference Call. [Operator Instructions] and the conference is being recorded. [Operator Instructions]

I would now like to turn the conference over to Karima Amlani Interim Chief Financial Officer. Please go ahead.

[Karima Amlani, executive]

Thank you, Karl, and good morning. My name is Karima Amlani, and I'm pleased to join you as the Interim Chief Financial Officer of Dexterra Group Inc. With me today on the call are Mark Becker, Chief Executive Officer; 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 Q3 2023 results with the assumption that you have read the Q3 earnings press 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. We 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]

Good morning. Thanks, Karima, and thank you to everyone for joining the call. The company delivered record results in Q3 and will exceed in fiscal 2023, our previously announced medium-term goal of achieving $100 million EBITDA and $1 billion in revenue. This is an important milestone and accomplishment for the company. And a big thank you goes out from the Board to all of our employees for their dedication and hard work in making this a reality. Our team is energized and has the platform and building blocks in place for strong EBITDA growth in IFM in Q4 and continued WAFES success using its superior brand to expand its diverse book of business while using a capital-light model.

The company is also very well financed providing flexibility to take advantage of future market opportunities. And all of this is underpinned by a disciplined approach, a culture of empowerment and support and a profitability focus with the goal of building a strong long-term business with all stakeholders engaged and provide -- and one that provides superior shareholder returns. I will now pass it over to Mark for his comments.

[Mark Becker, executive]

Thanks, Bill. Good morning, everyone. As Bill said, we've delivered outstanding results in Q3, our strongest and most profitable quarter ever for Dexterra. Our focus continues to be on execution and profitability, driving growth organically and through strategic and accretive acquisitions. Overall, we've continued to deliver strong results on all key fronts of our 2023 business plan. Our focus on disciplined execution and profitability is bearing fruit. In general, market activity remains strong across the target segments germane to the majority of our business. Our ability to win profitable new business and capture market share continuous to gain momentum in our two primary businesses IFM and WAFES.

Our 2022 acquisitions, Dana and [ HRL ], are our successes and are responsible for much of the IFM growth. On the operational front, we've seen recent abatement of inflation pressures in a number of key commodities and some improvement of labor availability. Two of our biggest cost elements are people and food. These and other inflationary pressures do persist. However, our relationships with customers, operational initiatives and our proactive approach to managing client contracts and pricing are helping us reduce the impact and is supporting our improved results.

Growing the business and continuing to drive improved profitability remains a key focus for us, both for new and existing business. Turning now to the IFM business unit details on Slide 6. The IFM business has grown strongly in 2023 with just over 20% increase in year-to-date revenue compared to 2022, primarily due to significant new education contract wins as well as growth in the hotel, rail and leisure sectors. Adjusted EBITDA as a percentage of revenue is up significantly from 2022 due to profitable organic growth and our focus on disciplined execution and margin improvement, including rationalization of our client and contract base for unprofitable contracts over the last 9 months.

Our adjusted EBITDA in Q3 was consistent with Q2 given the normal lower education sector summer activity. We successfully mobilized several new significant post-secondary education contracts in the latter part of Q3, and we expect to produce a significant uplift both in IFM EBITDA margin and absolute dollars in Q4 with the education year now in full swing. Our sales pipeline is strong across all target markets and business lines in IFM that will continue to support significant organic growth. With our continued focus on profitability improvement, we expect to approach and achieve our target of net 7% annualized IFM EBITDA margin in the near term.

And last but certainly not least, we remain active in exploring accretive IFM acquisition opportunities. As you will appreciate, accretive acquisitions are more challenging in today's higher interest rate environment. However, our disciplined approach and strong Dexterra brand will help us find the right partners to expand our reach and capabilities. Moving to WAFES on Slide 7. One of our biggest headlines this year has been the unprecedented wildfire activity across Canada. Beginning in the spring in Ontario and Quebec, our activity in this area continued to expand significantly in Alberta, B.C. and the Northwest Territories in Q3 and with about $30 million in revenue for wildfire support services in the quarter.

We provide a range of fire services, including mobile camps, support labor, equipment and maintenance as well as evacuee accounts. We are proud to support the provincial agencies and affected communities during these times of crisis. We're also engaged and give back to these and other communities, including our employment training program for indigenous unit that provides training and development opportunities for nearly 200 youth in 2023. Excluding the impact of the wildfires, we had about a 10% growth in WAFES over the same time frame, 10% in year-to-date growth in WAFES over this -- in 2023 over the same time frame in 2022, with many new wins across our portfolio of services. The overall natural resources market is strong and active in energy as well as gold and metals mining across Canada.

Our open count and clients count occupancies and equipment utilization as well as activity levels in access matting and space rentals are strong across the board. Our Crossroads Lodge and Kitimat is running at capacity, which we expect to continue for the balance of the year. Sales momentum and market share capture continues to be strong with significant contract wins in 2023. New major project contracts are mobilizing in Q4 and early 2024 and that will serve to offset our current significant projects that are reaching completion such as the Coastal GasLink pipeline project.

We continue to diversify and expand the WAFES footprint, Northwest and now in Atlantic Canada, leveraging our strong brand across all business lines focused on low capital, long-cycle operational contracts is maximizing our fleet asset utilization. In modular on Slide 8, we are making progress on our business turnaround plan, improving systems, processes, execution and commercial practices. We are moving through the backlog of BC-based fixed price affordable housing contracts with $16 million in associated project revenue in Q3 at an expected [indiscernible] margin. We expect to substantially complete this group of BC contracts by year-end.

Normalizing Q3 for these projects, the remaining portfolio of business delivered about 5% EBITDA. Our profitable school business -- portable business is expanding and is delivering strong results in 2023. Our project backlog has been impacted primarily by delays in affordable housing projects approvals by various levels of government and other agencies, although municipalities have recently been advised of awards, we have a number of projects under active discussion. Rebuilding backlog is a primary focus, and there are a range of broader opportunities under active pursuit, including industrial and other commercial projects. With that, I will turn it back to Karima for comments on our financial position.

[Karima Amlani, executive]

Thank you, Mark. I'll speak about our financial position and capital markets on Slide 10. In the quarter, nonrecurring items included $2 million for an onerous IFM contract, a $2.2 million impairment on held-for-sale camp assets and $0.5 million in CFO transition costs. Our net earnings rose despite these items in Q3 2023 to $14 million and to $29.6 million year-to-date, demonstrating strong improvement over 2022. Our financial position and liquidity are very strong. Our new debt facility closed as planned in August, including an expanded available limit of $260 million plus an uncommitted accordion of $150 million that provides flexibility to pursue accretive acquisitions.

Adjusted free cash flow year-to-date was $26.3 million compared to $17.1 million in Q3 2022, an improvement primarily from better results, but offset somewhat due to related investments in working capital associated with the high business activity. We expect strong free cash flow conversion in Q4 with working capital -- adjusted free cash flow conversion of EBITDA is expected to be approximately 50% on an annual basis.

The strength of our balance sheet and free cash flow conversion stands out among our peers in IFM and WAFES. Our leverage ratio is among the lowest and provides flexibility for growth as opportunities arise. In connection to the ongoing NCIB, Dextera repurchased 323,700 common shares in Q3 2023 at a weighted average price per share of $5.82 for a total cash cost of $1.9 million.

In light of our current significantly discounted share value, we plan to remain opportunistic on share buybacks within the capacity of the current NCIB vehicle which allows for 1.3 million shares to be repurchased up to May 2024. Lastly, Dexterra declared a dividend for Q4, 2023 of $8.75 per share for shareholders of record at December 31, 2023. This dividend will be paid on January 15, 2024, and equates to about a 6% return at our current market price I will now turn it over to Mark for closing comments.

[Mark Becker, executive]

Thanks, Karima. The points on Slide 11 serve to summarize what we've covered today and our key focus areas for the balance of the year and into 2024. My focus and the focus of the Dextera team is to continue to drive strong execution improving margins and profitability through the effective management of our business. We will continue to leverage our strong sales momentum to deliver organic growth, top and bottom line in our target markets. Our financial position and liquidity may remain strong, and we have the financial capacity to pursue a disciplined approach to strategic acquisitions to build our IFM platform and enhance the services we offer to our clients. We believe that this approach will translate into improved shareholder returns as the market recognizes the value we are creating. This concludes our prepared remarks, and I'll turn things back over to Karl for our Q&A.

[Operator]

[Operator Instructions] The first question comes from Aaron MacNeil of TD Cowen.

[Aaron MacNeil, analyst]

Mark, you referenced it in the prepared remarks that TC Energy announced the mechanical completion of Coastal Gaslink today and commissionings wrapping up by year-end. So I'm just wondering if you can give us a sense of the impact of the wind down of that project, both in terms of the Crossroads camp as well as the upstream camps associated with the pipeline and then what sort of order of magnitude? Is that from a revenue and EBITDA perspective? And what have you backfilled so far?

[Mark Becker, executive]

Yes. Thanks for the questions, Aaron. I guess talking about Coastal GasLink, we've had 2 large camps on Coastal GasLink. One is in the demobilization process. The other is in pretty high occupancy. So our assets and our camps are typically needed even into the commissioning phase on those projects. So that is continuing through to year-end, and we may -- well, we know we'll see some spillover into the new year in terms of occupancy on 1 of those 2 camps. Crossroads Lodge is really connected to the LNGC our LNG Canada project as well as other clients that we have out in Kitimat. And obviously, the big LNG project is still completing construction and then they're going to be moving into commissioning as well.

So we're supporting them with capacity in there. And I guess in terms of those projects completing, and I think you'll see it in our materials we have secured some new projects in WAFES. Some of them are mobilizing currently, actually, large projects, similar size to Coastal GasLink in the oil sands space as well as in mining and conventional natural gas space. Those are ramping up, and those will continue to ramp up in 2024 so we are going to see a really good backfill there related to those larger projects coming on stream.

And part of the positivity around those projects is they're not so much fixed project, but more long-term style operations. So we're happy to see those, and we're going to largely see kind of the Coastal GasLink become backfilled with what we're bringing on early in 2024.

[Operator]

The next question comes from Chris Murray of ATB Capital Markets.

[Kyle Brock, analyst]

This is Kyle Brock on for Chris. Hoping you can provide a bit of color on the $2 million charge recognized for the challenged contract in your facilities business as well as margin expectations for the business over the next few quarters.

[Mark Becker, executive]

Kyle, regarding that charge that we took in Q3 here, it's sort of a large federal defense style contract that we've had. And it's running through to mid next year, where it will be rebid, and we'll be rebidding on it. As we've talked about more broadly, we've been working on kind of rationalizing some of our contracts and the offsetting inflationary issues. That's one of the area -- that's one project where we've had some difficulty doing that and some of it is just sort of the parameters and the nature of the client that's in play there. So that's the nature of that.

We expect that to be contained to the number that we've identified and that gets us through to the end of the contract. And we are optimistic that we are going to win that contract back but at a substantially better economics around the project. As it relates to the IFM margins, as we've said in our materials and the MD&A, we are seeing uplifts and improvement in our margins in IFM. Some of that is related to some of the new contracts that we brought on, some of them post secondary education contracts that mobilized here in the latter part of Q3 and then are now with school year on in Q4.

So typically, in that post secondary market and client set, you'll see some flatness during Q3, during the summer and then things really pick up when the school year comes on in Q4 and then Q1. So we're expecting some uplift in Q4, both, I guess, in terms of margin EBITDA yield in percentage, but also absolute EBITDA in IFM in Q4 and carrying through into Q1 and really taking us through to that annualized 7% margin in IFM, which is what we're going to be seeing broadly across the business in the near term.

[Kyle Brock, analyst]

Okay. Also hoping you can confirm for us what the $14 million working capital add back to your free cash flow figure pertains to and sort of what the rationale for the add back at?

[Mark Becker, executive]

Yes, really primarily, Chris, sorry, Kyle, primarily connected to the growth of the business and the amount of business activity we had this year is primarily what that's related to.

[Operator]

The next question comes from Zachary Evershed of National Bank Financial.

[Zachary Evershed, analyst]

Congrats on the quarter. So on the impairment of $2.2 million related to excess camp equipment, can you give us a little bit more color around that? And I mean it doesn't sound like it based on your previous comments, but are you seeing the base WAFES was business turning down related to the asset rationalization?

[Mark Becker, executive]

Yes. I think more of a onetime type thing that we've seen there, and it was really related to a specific installation that we had went in, in a location, and we relocated it to a different spot. And really just kind of the valuation in terms of how the installed cost was versus sort of the valuation of the assets. Generally speaking, we're seeing a lot of activity around camp asset, demand for camp assets. We're seeing positive pressure upward pressure around the value of assets, both rental as well as sales assets.

So really, we're not seeing any kind of downturn in loss related to both activity related to occupancies or the demand for assets, the demand for projects. In fact, everything is fairly strong. And that's pretty much right across the board, whether it's energy, the mining space, infrastructure and really across all geographies across Canada, we're still seeing very strong activity levels and everything we're seeing in terms of intel kind of points to continued strength in that space.

[Zachary Evershed, analyst]

Great info. And for my second one, you're not disclosing the $40 million in recurring contracts in the backlog anymore. Is that shrinking Or is it a different type of business that you're bringing on, maybe not as recurring in the new wins?

[Mark Becker, executive]

In the modular space, the recurring business that we do have in the modular space is still there. And if anything, it's growing, really related to our school portable business, for example, in Ontario, some of the commercial stuff. We're seeing that maintaining or even growing. So I think it might be Zach and we can certainly take this off-line just might be a little bit around the partitioning of how the backlogs are quoted. But no real change there. In fact, if anything, probably growth in that space.

[Operator]

The next question comes from Frederic Bastien of Raymond James.

[Frederic Bastien, analyst]

My question maybe for Mark. Can you discuss the opportunities and challenges you're seeing in social, affordable housing cities and municipalities needed more than ever, but it seems to be really getting slow to get going. So just wondering if you could just give us an update here?

[Mark Becker, executive]

Yes. Appreciate that, Frederic, and good pointed question. And as you pointed out, we are seeing the demand for social affordable housing and affordable housing. We're still seeing a lot of federal grants, a lot of federal government funding, provincial government funding being announced related to that. And those funding awards are happening, as I mentioned in my remarks, and they are being awarded to municipalities, not for profits, kind of the usual channels that do those projects. In fact, for example, in Western Canada, there's been 22 municipalities that we're actively talking to that have RHI or other funding source awards. And really, it's just transitioning from that, yes, you're successful on a funding grant and then transitioning into an active project where you're going through the kind of the contracting process with clients and in some cases, RFP process.

And that's really the state that we're in. We do see projects happening. And to your point, there is a lot of demand. It's a matter of working things through that system and how that comes through. But we are seeing -- we will see those kinds of projects coming into our space. We're also seeing projects in modular we're still active in the U.S. We're active in Eastern Canada or probably, Western Canada and Central Canada across commercial and other sectors. So it's really just the affordable housing thing and working through that system of getting projects on the ground and awarded.

And it's a -- it's us, but it's absolutely every other modular producer and modular builder in the space. We're all kind of in the same boat, if you look across the competitive environment in terms of the situation. So really, it's -- that's about all I can say with that now. I mean we will see things -- we are expecting to see things change in terms of backlog and new projects coming on. It's just really a matter of timing around that. And I guess, related to the overall profitability of the business, modular is an important part of our business, but it's also a smaller part of our profitability as well. So we kind of factor that into kind of our overall thinking around the business.

[Frederic Bastien, analyst]

Okay. And you noted some good development in education. Is that across provinces? Or is there a specific region that is showing particular strength?

[Mark Becker, executive]

Yes. Pretty much everywhere, Frederic. A lot of our new wins, though, have been Atlantic Canada as well as here in Ontario. We've got some substantial new post-secondary facilities that we won new contracts. And our Dana brand is really working well in the post-secondary environment, and we're finding a lot of success. Winning new contracts, taking over contracts from others. But we're really seeing opportunities and conversations happening really across Canada, but a lot of the actual contracts that we are winning and actual contracts that are turning over into the market or Atlantic Canada kind of through to Central Canada.

[Operator]

The next question comes from [ Terry ] Reynolds from Acumen Capital.

[Trevor Reynolds, analyst]

Just you guys mentioned the spillover of the wildfire support services into Q4. Maybe just kind of what sort of impact we can expect from that?

[R. McFarland, executive]

Terry. Some, but not a lot. I mean there's a bit of carryover. And I mean I guess, for the sake of the communities that have been impacted. I mean the fires are abated now at this point in the season. But we do have a bit of carryover activity that you'll see within Q4. I think probably more of the characterization of Q4 that I would say is, I think we will show some revenue and EBITDA growth in Q4 say, compared to last year in Q4 with that, but also our underlying business, both IFM and WAFES is pretty strong. So we will see a little bit of a stronger situation there in Q4. I think from both sides of that from the underlying business and a little bit of minimal carryover from the fires.

[Trevor Reynolds, analyst]

Okay. And then just on the acquisition pipeline, you kind of highlighted in the prepared remarks that it slowed down a bit. Maybe is it -- is it more competitive out there? Or maybe just highlight what you're seeing on that side of things?

[Mark Becker, executive]

Yes, I appreciate that question. I certainly wouldn't say slowed down. And I would say, for us, lots of activity, and we're active on kind of a number of fronts around deals and potential deals. Of course, kind of in the high interest rate environment as a little more challenge to it. But we're trying to -- we're staying disciplined on this. We're really focused on finding the right opportunity. Market sector connection that we're looking for, geographic footprint that we're looking for and then all the important things around talent and skills and capability and client access, cultural fit. But we are quite active on a few fronts.

We just want to make sure we do find the right fit and the right deal. Of course, we can't really announce anything until we kind of have a signed deal. So I guess all I can really say is stay tuned. But the only thing I would reinforce is, Terry, is just very active for us and continues active.

[Operator]

The next question comes from Zachary Evershed of National Bank Financial.

[Zachary Evershed, analyst]

Just a quick follow-up. I was wondering if you could comment on what the margin profile for WAFES, like excluding the outsized contribution from the Fire Support Services and where you see that going into next year.

[Mark Becker, executive]

Yes. Good question, as always, Zach. I mean, to your point, there was a bit of an outsized margin yield, EBITDA yield related to loss obviously in Q3 and I think as we've talked about before, our target for that business unit will continue to be kind of that 15% EBITDA yield from loss. And some of the things like our asset utilization is kind of through the roof right now. Towards your other question there, it's in the high 90s. We've never in probably in the history of the company has seen it that high, and we expect that to continue because we see a lot of demand, as I mentioned to it. Some of the new projects, some of the new major projects we've brought on kind of outside the Coastal GasLink and LNGC space are also driving that utilization for us, meaning they are -- they do engage our existing camp assets, and that helps us with that margin.

So Zach, I think we're really, really focused on that 15% margin and carrying that forward.

[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.