Dexterra Group Inc

TSX:DXT

Earnings Call Transcript 2020-Q4

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Dexterra Group inc. Year-end 2020 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Drew Knight, CFO. 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, 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 in the past. After a brief presentation, we will take questions with the call ending at 9:10 Eastern Time. We will be commenting on our Q4 2020 results with the assumption that you have read the Q4 earnings release. The MD&A and annual 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. [Operator Instructions] 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. 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.

[William McFarland]

Thank you, Drew, and good morning. As we look back, 2020 was a transformational year for your company, a new, stronger, well capitalized company emerged from the acquisition. You have a combined company that demonstrated resilience in a COVID environment, a company poised for growth in the back half of 2021 and beyond and a company that delivers and is building trust with stakeholders. Q4 results met our expectations despite a changing COVID environment. It was also impacted, as expected, by business seasonality related to holiday shutdowns in the WAFES camps and in our modular manufacturing plants. We continue to execute in Q4 on our priorities by building a stronger people and business platform for the future; key talent hires included Modular President, Dawn Nigro; and Internal Legal Counsel, Christos Gazeas; by expanding modular sales using our expertise in social housing products and executing on our plans to increase modular capacity in Ontario and improve modular profitability across the country; by expanding our Facilities Management and WAFES customer basis; by driving free cash flow and debt reduction, so we're well capitalized and ready for the future growth; and by maintaining discipline and staying focused on our capital light strategy. Our stated goal of $1 billion in revenue and $100 million in EBITDA in the medium-term is well within our sights. A strong foundation has been built. And we're confident that 2021's results will exceed 2020's as access to vaccines help improve business confidence. So everything considered, we made lots of progress in 2020, and we've demonstrated a capability to integrate and deliver synergies successfully from an acquisition, a capability that will be important to our future. The Board also approved yesterday a Q1 dividend of $0.075 payable, April 15, '21, to shareholders of record on March 31, 2021. And with that, I'd like to thank you for your support in year 1 of the new Dexterra. And I'll now pass it over to John MacCuish to provide some more details around our progress and what the future holds.

[John Mac Cuish]

Thank you, Bill, and good morning, everyone. I wanted to start, as I did on our last call by thanking our more than 6,000 Dexterra Group employees across Canada. They have done an outstanding job supporting our customers during the pandemic and our own significant business changes. Their exceptional work in creating safe environments and working closely with our customers as they navigate their own economic uncertainties is a significant reason why we are a partner of choice. Of note yesterday, our team published Dexterra's first ESG report. It's on our company website. I encourage you to read the report and hear from our people as they tell their story. It is important for our people and all our stakeholders that we release this report. I will now move to Slide 7 and give a brief overview of the quarter and our progress before speaking to the specific business segments. As Bill noted in his opening remarks, we had solid performance in Q4, particularly when we assessed the impacts of seasonality and continued restrictions related to COVID-19. Revenue was $164.4 million, with adjusted EBITDA, excluding Canadian Emergency Wage Subsidy of $13.3 million and $17.6 million with CEWS. Our Facilities Management and WAFES business units experienced headwinds but the good news is we have immediate new business opportunities in our Modular Solutions unit for social housing. The implementation of vaccinations makes the return to normal business environment in the back half of 2021 likely with revenue and EBITDA increasing accordingly. In this current environment, we have retained our focus on the safety of our clients and their customers, supporting them in a reasonable way and remaining prepared for a resumption of normal business. I believe this client-centric approach will serve us well in the future. We continue our work to drive discipline across the company with an emphasis on accountability, both internally and with our clients, maintaining cost effectiveness and working with low capital expenses. 2020 was about building the right platform for the future, small head office, high-performance culture. Post transaction, we have stabilized and are building the workforce, while bringing on new talent to drive continuous improvement and innovation. We are ready for the growth post COVID-19. On Slide 8, I'll speak to the Facility Management more directly. So in Q4 2020, we saw $38.5 million of revenue in the Facility Management business, with adjusted EBITDA, excluding CEWS of $1.6 million. Improving our margins and managing cost has been a significant focus for this business unit. The impact of temporary closures or reductions in operations, especially airports and increased cost of operation in the COVID environment has put pressure on the margins. However, we continue to maintain the critical resources required for future growth. The Q4 results reflect some restructuring to enable future margin improvements as we enter 2021. And these costs were the main reason for the reduced FM margin in Q4 compared to Q3. Our pursuit of new business remains heavily focused on emerging opportunities in the public and institutional sectors. Quoting activity has finally reopened with a number of opportunities that have been in our pipeline for some time, have now come to market. We have an overall line of sight of over $700 million of annual revenue that will be competitively bid over the next 3 years. In particular, we are expecting bids in 2021 to approximate $200 million of annual revenue. The overhang of the pandemic impact on airports and retail has also reduced FM revenue by more than $8 million per quarter. Though we expect a rebound in these sectors post COVID, the FM team is also focused on diversification in our client base and potential niche acquisitions in 2021. Moving over to Workforce Accommodations, Forestry and Energy Services. In Q4 2020, we saw a decrease in WAFES revenue and EBITDA when compared to Q3 2020 due to the normal seasonality of forestry, and the lower camp occupancy during the holiday season. Revenue for Q4 was $78.2 million, while adjusted EBITDA, excluding CEWS was $11.7 million and 14.5 million, including CEWS. Lower camp occupancy will persist through the first half of 2021, driven primarily by COVID-19. The BC government restrictions on LNG Canada and Coastal GasLink pipeline projects, which were amended and introduced at the end of 2020 mandated a workforce reduction of circa 75% on major infrastructure projects in the province. We are expecting a strong rebound in the back half of 2021 and into 2022 as these restrictions ease and our customers' fast track work to catch up on project time lines. These early 2021 headwinds will be offset by new project wins and business in Eastern and Northern Canada and COVID-19 government subsidies. In addition, we note that the current winter drilling season is at a historic low and 40% below prior year. However, we see signs of recovery based on higher energy prices, market consolidation and increased project activity. This bodes well for our recovery next year's winter drilling season. Our energy services business continues to see utilizations lower than historic averages. This is a cyclical business and one that's -- is greatly impacted by low drilling activity and the delayed timing of client projects as a result of ongoing -- of the ongoing pandemic.However, despite these historic lows, the business remains profitable. And with a disciplined management, it is contributing positive cash flow. On the whole, we remain pleased with the performance of this business unit, leveraging more than 50 partners -- partnerships with indigenous communities across Canada and with a footprint in every major resource development region in the country, we are in a good position to be the industry leader in the provision of Workforce Accommodation solutions. And of note, we've already won or should be granted contract extensions in the next month of over 21 million contract renewals, a real testament to the quality customer service from the WAFES team. On slide -- I'll move now to Slide 10. Our revenue from the Modular Solutions improved in quarter 4 2020 to $48.2 million, with adjusted EBITDA, excluding CEWS of $4 million compared to the $39.5 million in revenue in quarter 3 and adjusted EBITDA of $2.5 million. These results represent further progress in our efforts to improve performance and profitability. Our new President, Dawn Nigro, provides a fresh perspective on the operations with a view to diversification opportunities in the future. We have an emphasis on streamlining our operations and finding opportunities to maximize the utilization of our 3 existing plants with a specific focus on cost improvements. The efforts we are making should continue to have a positive impact on our margins for the business and cost competitiveness will enable more diversified growth. There continues to be a significant amount of momentum and enthusiasm from various levels of government for modular built rapid social housing programs. The $1 billion rapid housing initiative from the Canadian government and the CMHC is a significant driver of activities in these areas. Half of those funds are going directly to 15 municipalities across the country to help create 3,000 new permanent, affordable housing units across the country. We have strong and deep relationships with BC housing and the city of Toronto, and these governments will be the largest builders of social housing in Canada, and we expect that our expertise in social housing projects will allow us to be a significant player with other municipalities across the country. The emergence of these significant opportunities led to investments in expanding our manufacturing capacity by adding a plant in Cambridge, Ontario, which will open at the end of the second quarter of 2021 and ramp up production through the remainder of the year. The production capacity of this plant exceeds $100 million annually and will require capital investment estimated $7 million. Our current social housing backlog in Modular sits at approximately $61 million. Importantly to note, we have an additional NRB Module reoccurring business beyond social housing, that's worth about $40 million per annum. The modular business is tracking a pipeline of high potential projects worth approximately $300 million to be awarded over the next 12 to 18 months. This is a segment we're really excited about, with great short and long-term opportunities. I'll now turn it back to Drew for comments on the consolidated financials.

[R. Drew Knight, Chief Financial Officer]

Thank you, John. Let's take a look at first, our consolidated revenue numbers for Q4 2020, followed by our consolidated adjusted EBITDA and our financial leverage and liquidity position. Then finally, an overview of our path forward for Q1 2021 and beyond. Starting on Slide 12. On a consolidated basis, our revenues for the fourth quarter were $164.4 million, which represents an increase of $100.3 million when compared to Q4 2019. This increase is mainly attributable to $97.3 million of revenue from the acquisition and the strong performance in Modular Solutions, along with resilience in both Facilities Management and WAFES. Revenue of $38.5 million in Facilities Management is a decrease of $6.2 million over the comparative quarter last year, but is up $2.8 million from Q3. WAFES revenues of $78.2 million increased by $58.8 million over Q4 2019, in large part due to the acquisition of Horizon North. Dexterra Group did not have a Modular Solutions business in 2019. So that revenue is all of it as in the current year and is up almost $10 million from Q3 results. Moving to Slide 13. Adjusted EBITDA for Q4 increased by $14.2 million from Q4 2019 to $17.5 million. We saw some positive impacts again from the Canada Emergency Wage Subsidy, which helped ease the impact of WAFES business, with subsidies of $1 million for Facilities Management, $2.7 million for WAFES, $0.4 million for Modular Solutions and $0.1 million for Corporate, totaling $4.2 million in the quarter. From a net earnings perspective, we did adjust the bargain purchase gain in Q4, and this reduced net earnings by $4 million. The purchase price allocation work has now been audited and is now concluded. As we have outlined in previous calls, we assess business units, both including and excluding CEWS, as we prepare for this subsidy to cease in the near future. You will note that the subsidies I just outlined for this business are at noticeably lower levels than either of the 2 previous quarters. CEWS has enabled us, however, to maintain staffing levels and overall customer service levels while preparing for growth as the pandemic subsides. Net of CEWS, adjusted EBITDA was down compared to the prior year's quarter by $1.6 million in FM, while WAFES increased $9.9 million and Modular Solutions increased $4 million. We have articulated on previous calls that $5 million in adjusted EBITDA per month or $15 million per quarter on average was a good baseline in a COVID-19 environment. This remains the case with seasonality causing fluctuations of approximately $2 million per quarter. Q3 exceeded that $15 million baseline, and Q4 was, as expected, below the baseline by the $2 million mark. We remain confident that when business returns to more normal levels in FM and WAFES and delayed projects and RFPs resume, there's a good opportunity to exceed the $15 million EBITDA baseline per quarter in the back half of 2021 and beyond. Slide 14 shows Dexterra Group's financial position and liquidity are strong with $81.6 million in liquidity available at December 31, 2020. Free cash flow generated was $64 million in the year 2020. Since the merger at the end of May, our net debt has been reduced from $138 million to $85 million, exceeding our target of being under $100 million at year-end. We expect the overall strengthening of our balance sheet to continue in 2021, absent acquisitions. With our balance sheet rapidly improving, the quarterly dividend of $4.8 million is poised to grow post COVID. In the go-forward period, we remain focused on capital-light discipline and expect maintenance CapEx not to exceed $5 million per annum. On Slide 15 of the presentation, as I look to the path forward for Q1 2021 and beyond, Modular Solutions is in a strong position to capitalize on the surge of rapid affordable housing projects nationwide. We have invested it with the plant in Cambridge improving our capacity. To that end, the city of Toronto has awarded us the next 3 buildings to be delivered in the back half of 2021, and those wins of roughly $30 million are not included in our reported backlog as they're still in the contracting phase. BC Housing continues to award significant volume of projects and our contracted backlog with BCH is $53 million, with many more projects in advanced stages of discussion. In the WAFES business, the impact of COVID-19 and the BC government restrictions continue to challenge our clients' projects. This may cause the seasonal Q1 EBITDA to temporarily fall short of the baseline expectations. This shortfall will likely be made up from further COVID-19 funding and strengthen the eastern operations in gold and other mining. We anticipate a solid rebound in the second half of the year as the pandemic subsides and government restrictions ease with the reboot of the Coastal GasLink camps and the reopening of our Kitimat camp, which could add $3 million to $5 million of additional EBITDA to our quarterly results. We have done a good job of performing and negotiating contracts through the trough in WAFES, as John discussed. And we'll continue to make this our focus until the economy normalizes. Facilities Management has seen significant impact from COVID-19. Our strong growth prospects for the business have been delayed, but they are not diminished, and quoting activity has surged in Q1. We remain excited about the growth prospects for our FM business in a post-COVID world and expect improved margins in 2021 and new wins to impact revenue in the back half of 2021. As I noted earlier, CEWS' funding is diminishing, but helps with margin erosion from WAFES revenues and enable us to retain supervisory and management staff that will activate growth post COVID. Tax strategies have also been implemented to save cash taxes of $5 million in 2021 and maybe into 2022. Our debt reduction will pause temporarily in Q1 2021 due to the new modular plant and seasonality. The ongoing focal points for Dexterra's operating model are capital-light, decentralized business units with a small head office, disciplined management and client focused. Overall, our stated plan to grow Dexterra Group to $1 billion revenue and $100 million EBITDA remains very much achievable. As John and Bill have noted, we have a plan to grow in the medium-term organically and through selective, accretive acquisitions. This growth activity will be strengthened by continued disciplined management of our work with a laser focus on key priorities. 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. [Operator Instructions] That concludes our comments. Thank you for joining us today. I'll now turn the call back to Ariel for the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from Chris Murray of ATB Capital Markets.

[Christopher Allan Murray]

John, maybe just turning back to some of your commentary around Facilities Management. And certainly, it sounds like -- I think Drew mentioned that you guys have seen some increased level of activity in terms of bidding in Q1. Can you talk a little bit about what you guys are seeing in the environment around growth opportunities? And as part of that discussion, can you also maybe elaborate a little bit on what you were talking about in terms of acquisitions? Is that just to buy certain contracts? Or is there something a different area that you guys want to move into?

[John Mac Cuish]

Okay. I'll start with the -- what we're seeing in terms of bids or tenders kind of opening up in the last couple of months. And the best way to describe this to you, Chris, is that in the first 2 months, 2 weeks of this year, we have submitted 33 tenders, which is like an all-time high for us. And it was -- obviously, it's a sign of what's coming to market. And it really were things that we expected to come to market in the summer and fall of last year and they just got stalled due to the pandemic. So we're quite excited about those organic opportunities. The mention of the -- looking at M&A activities, we have our program. We've assigned resources. We have created a matrix of priority. But let me say that we're interested in perhaps tuck-unders that enhance our capabilities in Facility Management, probably may -- could help us with geography, if that's the case. And in all cases, we want any activity to deliver the right kind of return for us and build the scale that we're going to need. And our objective is clearly a return on investment of 15%. So Chris, I hope that helps.

[Christopher Allan Murray]

Pit does. Just a minor follow-up on the [ 33 bids ]. What's your historical win rate on bids?

[John Mac Cuish]

Okay. Pre-COVID in -- when we were rocking and rolling, around 40% hit rate. Statistically, we're uncertain because there's a lot of competition out there these days. So it might affect that a bit, but we have very strong bidding capability.

[Operator]

Our next question comes from Michael Doumet of Scotiabank.

[Michael Doumet, Analyst]

So first question on the Modular Solutions there. I mean nice performance in the quarter. I know you're taking a closer look at cost with an eye on making some tweaks there. I mean should we expect continued sequential margin improvement there? And just second, now how should we think about the margins when the new facility ramps? I mean should we expect margins to somewhat lag the revenue ramp in the second half of '21?

[R. Drew Knight, Chief Financial Officer]

Yes. Good questions, Michael. Dawn joined the team and is going through our cost competitiveness right now as we speak. And there is a real focus on margin improvement. It's probably not -- it's not going to happen in Q1 and Q2, maybe as we're ramping up. But in the back half of the year, we will see margin improvement in our legacy plants, but that's a fair point in Cambridge. As it ramps up, there may be a little bit of a lag with some margins there in Q3, but we fully expect that Q4 we're going to be flying and margin rates should be up to where we expect them. Does that answer your question?

[Michael Doumet, Analyst]

Perfectly. And then just the second question. Provided us with an update on the cost synergies. I think on the last call. Was there anything more there? And I guess on the other or the flip side. I was wondering if you can talk about some of the progress made on the cross-selling synergies from the transaction and if any of the $300 million of FM opportunities partially reflects that.

[R. Drew Knight, Chief Financial Officer]

Yes. I think certainly, where -- our business units are working well together in a coordinated fashion. When we've talked about the FM opportunities, they're not really cross-selling opportunities per se. But we have brought in our Fairfax colleagues to help us with some opportunities there. And certainly, FM and Modular could see some growth from the linkage to Fairfax. They're constantly building restaurants and managing facilities. So there is a bit there, but there's no guarantee. We've got to competitively bid that business and win it on our own merits for sure.

[John Mac Cuish]

I just want to add 1 point there. On the FM growth, we're just beginning to harvest the kind of collaboration. We're doing -- FM is doing work for Modular around warranty and kind of helping close out some projects quickly in Toronto. We are doing some joint discussions between FM and Modular in the long-term care space, and I'll leave it at that for today. And so look -- we look forward to harvesting a bit of that revenue synergy as we work through the year.

[Operator]

Our next question comes from Frederic Bastien of Raymond James.

[Frederic Bastien, MD & Equity Research Analyst]

I have a follow-up question on the FM tenders you submitted recently. You mentioned there was a lot of competition out there. So I was wondering if there are risks that it could lead to margin pressure for the segment on a go-forward basis.

[John Mac Cuish]

Yes. Frederic, I mean, good question. There's always risk when you're in a competitive environment. We are working very hard at adding technology and innovation in our delivery solutions so that we can keep pace with any of that pressure that may come from additional competition. And we are actually -- we're working our margins up. We're not anticipating that our margins are going down even in a competitive environment.

[R. Drew Knight, Chief Financial Officer]

And I would just add, Frederic and I think we mentioned this in our documents that the margin in FM in Q4 was unusually low. And John and his team have been working the margin front, and we anticipate it's going to be up in Q1 and beyond.

[Frederic Bastien, MD & Equity Research Analyst]

Okay. Second question, in your MDA, you suggest that you generate about $40 million of recurring Modular business outside of social housing. Can you remind me what makes up that volume and whether there are opportunities for Dexterra to also grow that part of the business?

[John Mac Cuish]

Sure. I'll take that, Frederic. So the bulk of that business is in the education sector, where we're a leader in providing portable classrooms and related solutions for schools. We have a strong, what I call, specialty kiosk business. So this is where we are building kiosks for gas bars, perhaps condo developers need a display center. So that's a significant business. And yes, there's growth. So if you think outside of -- if you think outside of affordable housing, we have the capability. We're a wood constructor. So we're 5 stories and below. So we're an ideal solution for senior living. So that could be retirement homes or nursing homes. I mentioned the kiosks and the kiosks could be in -- any sector of the economy uses kiosks. And then think about this in relation to restaurants and hotels, particularly quick service restaurants, the sooner you get them up and running the sooner you start earning revenue. So we're as excited about that as we are about the affordable housing, Frederic.

[Operator]

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

[Zachary Evershed, Analyst]

Hoping you can help us pinpoint the magnitude of the temporary closures in BC for WAFES. How many beds were out of play and for how long the camps [indiscernible]?

[R. Drew Knight, Chief Financial Officer]

Yes. So Zach, I think -- certainly, I think our documents telegraphed this fairly clearly. The Kitimat camp is closed and 2 out of 4 camps on the Coastal GasLink are closed at the moment. But the 2 camps in the Coastal GasLink are reopening this month. So that's good news. That's positive. In terms of the impact, I think we did say that there is an offset. And WAFES revenue for the quarter is probably down about $1 million for the quarter from where we'd like it to be. So it's mostly offset by strength in the gold mining sector and other mining sector in the East. So certainly, the pan-Canadian theme of the acquisition was -- is bearing fruit because we're getting an offset in the East from trouble in the West. But we do think it's temporary, and it is going to come back shortly.

[Zachary Evershed, Analyst]

That's really helpful. Second question then can you tell us a little bit more about the work that was done to modify the cost structure and the reorg that was done in FM.

[John Mac Cuish]

Sure, Zach. So I made some leadership changes. So the cost associated with that restructuring is probably, for the most part, people cost. So I established a new leader in the Dexterra on demand and I changed leadership in FM in the West. And in both cases, I'm seeing a positive impact of that change. And I'll be able to show you more about that after quarter 1.

[R. Drew Knight, Chief Financial Officer]

Does that answer your question then, Zach?

[Zachary Evershed, Analyst]

Absolutely.

[R. Drew Knight, Chief Financial Officer]

Okay. Great. Yes, if there's no other questions, Ariel, perhaps we can conclude the call.

[Operator]

There are no further questions from the phone lines.

[R. Drew Knight, Chief Financial Officer]

Okay. Great. Thank you, everybody, for the call today. Be well. Goodbye.

[Operator]

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