Dexterra Group Inc

TSX:DXT

Earnings Call Transcript 2021-Q4

[Operator]

Thank you for standing by. This is the conference operator. Welcome to Dexterra Group's Fourth Quarter Results Conference Call. [Operator Instructions] And 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. Knight, executive]

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 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 Q4 2021 results with the assumption that you have read the Q4 earnings release.

The annual 2021 MD&A and 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 is also posted on our website, and we encourage participants to access the slides and follow along with our presentation.

Before we begin, I would like to make some comments about forward-looking information. In yesterday's news release and on Slide 2 of the presentation that we have posted on our website, you will find cautionary notes in that regard. While I won't read the content of the cautionary notes in their entirety, we do claim their protection for any forward-looking information that we might disclose on this conference call today.

I will now turn it over to Bill McFarland for his introductory comments.

[R. McFarland, executive]

Good morning, and thank you for taking the time to be with us today.

The management team and Board are pleased with our finish to 2021 and are looking positively to the future. We are particularly pleased with our 2 recent IFM acquisitions, more breadth of capabilities, new end markets and more scale to operations. These acquisitions make our goal of having $1 billion in revenue and $100 million in EBITDA within reach in the near term. Our mix of business is also changing. A larger facilities management footprint and a larger services business component in WAFES, which means more long-term contracts and stability of earnings.

John and the management team are successfully building the new Dexterra and brand by working collaboratively with our customers and employees to create a support services champion with values based on trust, respecting diversity of thought and ideas, understanding the importance of working with others and in holding ourselves accountable. Our actions have positively impacted shareholder value, and our goal is to continue to pay an attractive dividend, coupled with ongoing share appreciation.

Today on our website, we also released our second annual sustainability report, which highlights our environmental and social initiatives, including the support we give to the communities where we work.

John, over to you to discuss in more detail our Q4 results and progress.

[John Mac Cuish, executive]

Thanks, Bill. Good morning, everyone.

Our Q4 revenue exceeded $200 million, representing a 23% improvement when compared to the same quarter in 2020. And our 2021 revenue was $733 million, with EBITDA of $80.1 million.

So how did we make progress? We added new customers and a new modular capacity. We reduced our debt level and entered into a new credit facility that gives us financial flexibility for future growth. We increased our dividend. And as Bill mentioned, we recently closed 2 important acquisitions, all this in a COVID-restricted world. And for the second consecutive year, our EBITDA conversion to free cash flow exceeded 50%, which will allow us to pay down debt related to acquisitions quickly. These combined developments translated into higher shareholder value and gives us a strong foundation for future growth.

I'll now dive into some more details by business unit. In IFM, we recently won several contracts that launched in 2022. The contracts are smaller in size but collectively add up. The team has momentum as we entered 2022, with lots of opportunities to win new work in a very competitive marketplace. The airports activity improved early in Q4 before reductions in December. And you'll note in the CATSA data shows that passenger volumes in Q4 2021 were 50% of Q4 in 2019. Our airport clients tell me they see a steady improvement in activity levels over 2022 with pent-up travel demands.

We closed 2 acquisitions in January, welcoming Dana Hospitality and TRICOM Facility Services Group to Dexterra. The acquisition of Dana expands our existing culinary services into education, health care and leisure clients. This acquisition broadens our service offerings, strengthens existing customer relations, improves our ability to grow our hospitality market share in new verticals. Dana has a unique offering based on fresh food. In fact, this week, the Dana culinary team showcased their fresh made-from-scratch, farm-to-fork delivery by treating the Dexterra Board to a fantastic dinner. It was impressive.

TRICOM delivers contract janitorial and associated building maintenance services and supplies custodial equipment and consumables to clients in major centers across Canada. This acquisition brings several key contracts and client relationships, including a small footprint in the United States in Seattle and Houston.

We are very pleased to have both Dana and TRICOM join the Dexterra family and expect once we get past the initial integration phase that they will be strong contributors to EBITDA. Revenues combined will exceed $100 million in 2022.

The increase in scale of operations with Dana and TRICOM acquisitions improves our mix of client end markets, as you will see on Slide 7. Among the benefits will be further diversification of our client end markets, more scale, improved resiliency and cross-selling opportunities with the expanded client base as we move into a post-pandemic environment. The growth in education and leisure sector reduces the IFM concentration in retail and airports.

From an operating cost and margin perspective, the IFM team is actively managing the current labor shortages, the inflation impact on supplies and equipment as well as supply chain disruptions as we move out of COVID. The growth prospects for IFM remains significant with ongoing brisk bidding for new work.

Our WAFES team had an excellent year in 2021 as they grew our market share and are a leader in this space. A significant growing portion of our WAFES business is support services, which is not capital intensive and has similar characteristics to our Integrated Facility Management business. The remainder of the WAFES business relates to asset-based services. For 2021, the support services piece comprised more than 45% of the WAFES revenue.

Our WAFES business segment revenue performance was strong in Q4 2021, with an increase of $34 million compared to 2020 due to new sales and onboarding of large new contract, stronger camp occupancy and improved mat and relocatable structures utilization, with the increased activity in the resource sector. We expect this activity level to continue in 2022, including the reopening of the Crossroads Lodge, a facility with 736 beds in Kitimat, BC, supporting the LNG Canada project.

Moving over to Modular. A key goal for our Modular Solutions business unit is to scale the business, diversify our product market verticals and fill our plant capacity. The team is also working to capture efficiency improvements in processes to drive profitability and our competitiveness, which will aid in meeting the diversification goal. In Q4 2021, the segment faced site and administrative delays in the rapid affordable housing projects in Ontario and site access delays on projects in British Columbia caused by flooding. This resulted in revenue below expectations. Management is working with the municipalities to improve project scheduling and is dealing with inflationary pressures across the skilled labor force and supply chain.

These challenges negatively impacted profitability in Q4 and into Q1 2022. We are managing these pressures. And with higher volumes, our profitability is expected to improve in Q2 2022. We have a strong backlog of work, which is growing increasingly in Q4 to about $170 million compared to $153 million at September 30.

I'll now turn it over to Drew for comments on our financial position.

[R. Knight, executive]

Thank you, John.

Looking at Slide 11. We had solid performance in Q4 2021 compared to the same quarter in 2020. Revenue was $201.6 million for Q4 2021, which increased $37.2 million or 23% compared to Q4 2020. The increase in revenue is mainly attributable to growth in the WAFES business. The IFM business had Q4 2021 revenue of $39.3 million, which increased marginally from 2% in Q4 -- increased marginally by 2% from Q4 2020 as it continued to be impacted by COVID restrictions. The Modular Solutions business had Q4 2021 revenue of $46.5 million, slightly below Q4 2020 and slightly above Q3 2021, and a significant increase over 2020 for the full year in 2021.

Adjusted EBITDA was $18.1 million, which increased $4.8 million or 36% compared to Q4 2020 after adjusting for no CEWS in 2021 compared to 2020, which had $4.2 million of CEWS. This increase is driven primarily by higher business activity levels and a focus on managing project margins. Q4 2021 adjusted EBITDA excluded onetime $1.9 million net loss recorded in our Corporate segment to settle a legal dispute related to a contract in place at the time of the reverse takeover and legal costs associated with acquisitions.

On Slide 12, in IFM, adjusted EBITDA was $2.5 million in Q4 2021 and was an increase of $0.9 million compared to Q4 2020, excluding the $1 million of CEWS received last year. The improved margins in 2021 compared to 2020 were the result of management's focus on resource usage and project management. These margins decreased from 8% in Q3 2021 due to the impact of labor shortages, increasing the cost of overtime and outsourcing as well as supply chain disruptions and inflationary pressures on supplies, which in the short term, could not be passed on to certain clients.

In IFM, IFM margins were also impacted in Q4 2021 by reduced project work due to the Omicron variant. We are actively managing these issues and expect margins to return to more normal levels as pandemic restrictions ease in Q1 2022.

The WAFES business adjusted EBITDA for Q4 was $18.5 million, an increase of $6.8 million from Q4 2020, excluding CEWS of $2.8 million that was recorded in Q4 2020. Higher volumes drove strong profitability. We also successfully negotiated improved commercial terms in Q4 for services provided to a large client, which increased quarterly EBITDA with a onetime pickup of $1.8 million. After adjusting for this item, margins were fairly consistent with Q4 2020.

Q4 business levels are traditionally lower in WAFES due to camp shutdowns over the holidays and the seasonal nature of the business. The WAFES business unit also benefited in 2021 from reduced carrying costs related to underutilized staff and equipment in a less COVID-restricted world compared to 2020.

Modular Solutions had adjusted EBITDA of $2.9 million, a decrease of $1.5 million, and lower margins compared to Q4 2020. Our margin of 6% for Q4 2021 was consistent with Q3 as our overhead costs for the business unit are higher in 2021 with the addition of new plant capacity this year. We expect profitability to improve with higher revenue after Q1 2022 as we manage both the rapid affordable housing projects, which created the underutilization in our plants and also supply chain disruptions.

Looking at Slide 13. Debt was $65.3 million at December 31, 2021, down from $85.4 million at December 31, 2020. The leverage ratio at December 31, 2021, was 0.9x EBITDA. Debt levels will increase by $50.5 million in Q1 2022 with the acquisitions of Dana Hospitality and TRICOM, and leverage will approximate 1.5x adjusted EBITDA post acquisitions. The corporation generated free cash flow of $45.4 million for the year ended December 31, 2021, and converted 56% of adjusted EBITDA to free cash flow, which puts us in a great position to pay down acquisition debt quickly and complete new M&A transactions if they meet our investment criteria.

Dexterra Group declared a dividend for the first quarter of 2022 of $0.0875 per share, which is payable to shareholders of record at the close of business on March 31, 2022, and will be paid on April 15, 2022.

I'll now return it back to John for closing comments.

[John Mac Cuish, executive]

Thank you, Drew.

Dexterra is poised for continued profitable growth in 2022 as the economy is expected to move into a post-pandemic environment. We expect strong organic growth in all business units, and we'll look for IFM M&A activities that are accretive to take advantage of our strong balance sheet and to expand our footprint geographically or bolster service offerings.

In the IFM business, we expect a gradual improvement in the aviation and retail sectors to have a positive impact as federal restrictions on travel lessen. The focus of the IFM business is on winning new bids in a very competitive environment, maintaining profit margins, providing excellent service to clients and onboarding our acquisitions with speed and care.

The WAFES business expects to also grow significantly in 2022 with expanded natural resource activity nationwide and the reopening of Crossroads Lodge in Kitimat, British Columbia.

In our Modular Solutions business, the demand for social affordable housing and urban centers is strong, and we expect to increase our volume starting in Q2 with growth in other product categories.

In conclusion, we are on track to deliver our plan for $1 billion in revenue and $100 million in EBITDA in 2023. The acquisitions have accelerated our IFM growth and changed our anticipated revenue mix to 35% IFM, 25% Modular and 40% WAFES, which is a positive as more long-term contracts bring certainty in earnings.

This concludes our prepared remarks today. At this time, I'll 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'll circle back for additional questions.

Thank you for joining us today, and please go ahead, operator.

[Operator]

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

[Michael Doumet, analyst]

I'll start off by saying well done in 2021. The results have been quite consistent despite the obvious challenges, and obviously, nicely done on the acquisitions.

The first question I've got is on the WAFES business. Can you remind us again what the economics of the 736 beds in Kitimat are, just in terms of revenue and EBITDA contributions as well as how to think about the ramp into 2023? And I guess, generally, I'm just trying to get a sense of the WAFES business and how to think about the organic profile as well as the utilization rates and demand for the commodity sector. Looks like it's picking up here in 2022.

[R. Knight, executive]

Great. Thanks, Michael. Yes, your first question, the Crossroads Lodge has 736 beds in that lodge and can generate $30 million to $40 million in revenue per year. And it is definitely one of the -- I can't give specific margin numbers, but it is a higher-margin business given our upfront investment in the facility. So we do expect that to come on fairly strongly in mid-2022.

And then -- sorry, go ahead, John.

[John Mac Cuish, executive]

Yes. I'll just -- I'll take the utilization question. So currently, I'll just remind folks, we have about 15,000 beds under management, and occupancy has been up from last year. We're running about, at the end of the year, at the beginning of the year, about 60% occupancy. We expect that that's going to grow as -- or at least be consistent and probably grow significantly as we move through this year because there's lots of activity in the space. Our equipment fleet in our relocatable structures are running at about 90% utilization. So we're feeling pretty positive about that.

[Michael Doumet, analyst]

That's great. And I guess the second question, there have been some issues that you've been dealing with, with the Modular Solutions, especially as it relates to project delays. I guess the question is, do you still think you can get to that -- I don't know it's -- you said it publicly, but something around $250 million of revenue run rate? Do you think that's achievable at some point in 2022? And I guess as a follow-up, maybe how we're thinking about it, is the desire for you guys to diversify that business, is that a preference to provide more consistent results? Or is it a requirement to reach a higher level of utilization?

[R. Knight, executive]

Yes. Michael, I think it's -- let me first talk about the headwinds that you touched on in the beginning. One of the issues we've got is we added a fair bit of capacity to that business midyear in 2021, and then the volumes didn't actually happen because of the delays. We got hit with flood delays and site delays in both BC and Ontario. We do have volume increases planned for Q2, but as -- when you mentioned the $250 million, that's something that's more of a 2023 number. And the diversification is really to derisk the business, so yes, we don't want to be so beholden or dependent upon one sector. So we want to have more even, reliable numbers as we go forward. And certainly, it will potentially help us with growth. But we are still very confident in the social affordable housing. There's -- we do have a strong backlog, and the back half of 2022 here and 2023 will be strong.

[Operator]

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

[Kyle Brock, analyst]

This is Kyle Brock on behalf of Chris. In terms of the acquisitions of Dana and TRICOM, is the margin profile for each business consistent with your other FM businesses? And is there any opportunity for synergies?

[John Mac Cuish, executive]

Yes. I'll take that. I think, as I mentioned, the Dana brings a very unique offering on the food side of IFM, on the culinary side. They drive a farm-to-fork fresh food. We are in the midst of onboarding both right now. It brings us into new markets with new clients. So we see the opportunity for additional cross-selling which is positive.

I think the addition of Dana helps us perhaps attack our senior living sector, a growing sector that we're interested in. So I would think the synergies are more positive opportunity synergies, not cost-cutting synergies. So I just want to be clear with that. And the other thing I'd point out with the TRICOM is it gets our toe into the U.S. with a bit of business in Seattle and Houston, which we're very interested in.

[Kyle Brock, analyst]

Okay. In your outlook, you've talked a little bit about the expected impact from the pandemic on Dana's business in 2022. Hoping you can provide a bit of color around what needs to improve to get the business back to the $100 million revenue run rate.

[R. Knight, executive]

Well, I think certainly, Kyle, when Omicron hit in December and January there, that was a hit to Dana and the foodservice offering. They do have a lot of education business with universities and colleges, and a lot of those in-person residences and cafeterias were shut down. So that was certainly a hit to Dana. But it is coming back gradually now as the pandemic has eased in the back half of February and March here. We do expect Q1 has a bit of challenge, but we do expect that they're going to hit that run rate going forward. And the $100 million is certainly within the sights as we move forward here after Q1.

[Operator]

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

[Zachary Evershed, analyst]

How do the labor issues we saw in Q4 translate into the rest of 2022? And are you taking any initiatives to retain and attract talent?

[John Mac Cuish, executive]

So Zach, I think these labor issues are temporary. We already see a little bit of more availability. I think the -- that in the COVID world, people were a little reserved in coming back into the marketplace. So I think it's temporary -- actually, I know it's temporary. And we're doing a fair amount of work around recruitment. We -- as I mentioned on our last call, we have an employee referral program. So with 8,000 employees, we've got a lot of recruiters out there. We have a strong union, a lot of collective agreements, and that's not a problem with labor in -- with union situations.

And just to add a little color to this, we're getting a lot of traffic to our job boards on our website, significantly more in the last 30 days and like in the thousands. So we're feeling good that this is just a temporary thing to manage through.

[R. Knight, executive]

Yes. And I think, Zach, just adding to John's point on the union contracts, they're also a recruiter for us. So often you call the union house and say we need x number of people and they help go get bodies for us, point one. And then point two, when CERB and all the federal government wage subsidies that helps with our lower-skilled work, those people have become more available suddenly now that that's ended.

[Zachary Evershed, analyst]

That's clear. For my second question, can you tell us more about the material cost inflation you're seeing at Modular and what that does to your long-term margin expectations for the segment?

[R. Knight, executive]

Well, I think the material cost inflation, certainly lumber was a big concern early in 2021, but that leveled off. And a lot of our contracts get finalized very close to the start of production. So we build those costs in. They're pretty current costs into the contracts as they get signed before they go into production. So it's not like they're long-term fixed-price contracts from a couple of years ago. So it does reduce the risk there. And I think as some of our contracts do have cost escalation clauses in them, certainly, on a commercial basis, we try to get those cost escalation clauses in there if it's a longer-term contract and the market changes.

And some of the delays that's often a change order that we go after with the customer. So if the customer drives a delay on the contract, we're going to say, well, the cost profile of that contract has changed and we require a change order, and that's part of commercial negotiations.

[Operator]

Our next question comes from Trevor Reynolds of Acumen Capital.

[Trevor Reynolds, analyst]

I guess just maybe a little bit more on some of these inflationary pressures on the IFM side of things and maybe what sort of impact that's having on some of these contracts. And also, I guess just on the -- with COVID restrictions ending -- this got to be the second question, but with COVID restrictions ending, what sort of impact have you seen to date on those 2 struggling sectors in terms of retail and aviation?

[John Mac Cuish, executive]

So I'll start with the second -- your second question and then go to your first. So the aviation, the airports, as I mentioned, talking to clients, they believe things are going to be an uptick. There's a lot of pent-up demand for travel, so there's a lot of optimism as we go through this year. We're unsure at this time about how much of our old levels of business in retail actually come back because I think the last 2 years have changed buying habits with the consumers, and bricks-and-mortar stores are not where they were. So a little uncertain when or if they'll ever come back to the levels they were in 2019.

And as it relates to your first question about IFM impact of some of these labor shortages and other cost escalations, I do believe these are temporary. We have -- in the fourth quarter, this was a lot of extra overtime that we didn't count on. A lot of -- maybe a little bit more outsourcing than we really wanted to do. But we're just seeing -- we're getting our staffing levels back. Things are on the uptick, and we don't see this as anything going into the future.

[R. Knight, executive]

Yes. And I guess I would just add, Trevor, that in IFM with long-term contracts, those long-term contracts, almost all have a cost escalation or market testing feature to them so that we level set where things are in the marketplace. And as John noted, a lot of the issue was very short term in nature and sudden as Omicron hit and people decided not to show up to work and the guys were scrambling to fill spots, either with overtime or outsourcing.

[Operator]

[Operator Instructions] Our next question comes from Bryan Fast of Raymond James.

[Bryan Fast, analyst]

Yes. There was a loss of $1.7 million related to a legal dispute on a contract that was negotiated prior to the acquisition. Could we get some more color on which segment this relates to? And is that issue now completely settled?

[R. Knight, executive]

The issue is basically behind us. It was an old construction contract that was in place at the time of the takeover in a different geography than where we currently operate. But I can't get into too much detail more than that.

[Bryan Fast, analyst]

Okay. And now that you've closed both Dana and TRICOM, how is the acquisition pipeline looking here?

[R. Knight, executive]

The acquisition, it's still active and we're still looking at the market. I guess I would say we stacked up a couple of deals quickly there. We're not chasing deals, so that's important. The deals must be accretive, and the timing is kind of uncertain. But we are active in the marketplace looking for other opportunities that are a good fit for our business.

[Operator]

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

[Zachary Evershed, analyst]

I was wondering if you could tell us a little bit about how you see the trends in commodity prices affecting demand for your WAFES services. And how that incremental revenue may be above and beyond your expectations, how that flows through to margins?

[R. Knight, executive]

Well, there's been some inflation in food costs, I would say, but we've -- generally, a lot of that stuff gets passed through to our customers. There may be a temporary hit, so it's not perfectly timed, and we might get a timing difference. But that's a limited issue. And a lot of those natural resource contracts, the mining sector and energy sectors are on fire right now, and our camps are highly utilized or highly occupied. So we don't see much of an impact there.

[Zachary Evershed, analyst]

And then just one last one. Can you give us a bit more color on the end markets you're looking to add to Modular?

[R. Knight, executive]

Sorry. Go ahead, John.

[John Mac Cuish, executive]

Okay. Okay. I think, Zach, we would not like to reduce our social affordable housing, but we'd like to get that to about 50%. And then the other 50%, we'd like to grow our specialty kiosks, our U.S. supply, direct supply only business. We've got a good, strong track record in education, in education portables. So our desire is to kind of balance that out over time, so we're 50% specialty kiosks and U.S. supply and education classrooms and then 50% social affordable housing. We think that's a nice balance for the future.

[Operator]

Our next question comes from Trevor Reynolds of Acumen Capital.

[Trevor Reynolds, analyst]

Just one follow-up on the beds under management. I was just kind of wondering where that 60% occupancy sits relative to historical highs?

[John Mac Cuish, executive]

So remember, when we say 15,000 beds under management, that's not equipment necessarily that we own. So you all -- or you may not, but we -- recently, we've been getting behind-the-gate contracts with large mining operations and oil and gas operations, where this is the client's camp and we're a service provider. So we're managing those beds, so it's not necessarily our equipment. So I think a little difficult to look backwards and give you some kind of indication there.

Now if you're talking about our open camps, we have 1,100 beds in 4 active open camps, and we're running at about 63%.

[R. Knight, executive]

Yes, that 1,100 excludes Kitimat because it's closed right now.

[John Mac Cuish, executive]

That's right. I'm saying -- I'm just talking with 4 active camps. So we're currently running 63%, which is getting close to the norm. So perhaps back in the heyday of oil and gas, we might have been running 75%. Just the nature of the business, it's just like a hotel in the -- a remote hotel or a remote lodge. These are good occupancy numbers. They're never going to be 90% or 100%.

[R. Knight, executive]

Yes. I think 2019, 2020 were pretty bleak years, and they were below 50% during those years. So it's definitely an improvement.

[Trevor Reynolds, analyst]

Perfect. Okay. And then just one last quick one. Like are all your fuel cost pass-through?

[R. Knight, executive]

Fuel costs like transportation, generally it's built into the landed cost of our goods either when we're receiving materials or when we're shipping to customers. We do have some fuel costs to get crews out into the sites. So generally, it's passed through. But they're all -- there's always a short-term hiccup, and so a sudden thing, like now, might take a month. But it's pretty immaterial to be honest, Trevor.

[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.