Dexterra Group Inc. (DXT) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the Dexterra Group Annual General Meeting. [Operator Instructions] The conference is being recorded. I would now like to turn the conference over to Bill McFarland, Chair of the Board. Please go ahead.

Good morning. My name is Bill McFarland, and I am Chair of the Board of Dexterra Group, Inc. I would like to welcome all of you to the Annual General Meeting of the shareholders of Dexterra Group. To proactively deal with the public health impact and restrictions in place due to COVID-19 pandemic and to mitigate risks to the health and safety of our communities, shareholders, employees, and other stakeholders, this annual meeting is being held in a virtual format. During the meeting, registered shareholders and duly appointed proxy holders may vote online by clicking the voting icon. If you cannot see the full text of the resolution, please scroll down on your device in order to see the resolution as well as the voting options. If you have already voted by proxy, there is no need to vote again during the meeting since your vote has been recorded in accordance with your proxy instructions. Given the virtual format of the meeting, we have appointed certain individuals to motion and second items of business in advance. In order for us to efficiently address any questions on the matter to be voted upon, we encourage shareholders who have specific questions on an item of business to submit their questions now. [Operator Instructions] Please note that questions submitted during the meeting via the online platform will be moderated before being sent to me. Your questions will be addressed before voting closes. Before we proceed with the formal business of today's meeting, I would like to acknowledge that John MacCuish, Director, CEO, and President of Facilities Management of Dexterra Group, along with Drew Knight, Chief Financial Officer; Mark Becker, Chief Operating Officer and President of Loss; and Dawn Nigro, President of NRB Modular Solutions are also present at the meeting. I now request that the meeting come to order. With the consent of the meeting, I, Bill McFarland will act as Chair of the meeting; and Jan Campbell shall act as Secretary of the meeting. I appoint [ Nazim Nathoo ] of AST Trust Company to act as Scrutineer to report on the number of shareholders and common shares represented at this meeting. The Scrutineer will compute the votes on each matter and report the results to me as Chair. The Secretary has advised that she has received a declaration from the Scrutineer stating that the shareholders have been given notice of this meeting and that that notice information circular and form of the proxy were mailed to shareholders of record as at March 30, 2021, in advance of the time required for such notice. The Scrutineer has also advised that a quorum is present. I further direct that the formal report of the Scrutineer be annexed to the minutes of this meeting as a schedule. I now declare that this meeting has been regularly called and is properly constituted for the transaction of business. Voting at today's meeting for those that are entitled to vote and have not already submitted a proxy will be conducted by online ballot for each matter. The voting panel on your screen should now display the voting options for registered shareholders and duly appointed proxy holders. The voting panel will remain open until discussion, if any, has concluded on all items of business. I will then declare voting on all items of business closed. I now declare the polls open on all items of business. A copy of the minutes of the last annual meeting of the shareholders of the corporation held on July 10, 2020, have been signed and filed in the corporate records of the corporation and is available from the secretary. The first item of business is the presentation of the audited consolidated financial statements of the corporation for the year ended December 31, 2020 and reported thereon by PricewaterhouseCoopers LLP. A copy of such financial statements and the report of the auditors thereon has been mailed to each registered shareholder of record at the close of business on March 30, 2021, and to those other shareholders who elected to receive the financial statements and report of the auditors. No vote by the shareholders is required or proposed be taken with respect to the financial statements. The next item of business is the election of directors of Dexterra Group. In accordance with Dexterra Group's advanced notice bylaw, the only individuals entitled to be nominated as directors at this meeting are the persons named as nominees in the management information circular and proxy statement prepared for this meeting as there were no other individuals nominated prior to this meeting. Those 7 nominees are: Mary Garden; David Johnston; Simon Landy; John MacCuish; R. William McFarland; Kevin D. Nabholz; and Russell Newmark. Each nominee currently sits on the Board of Directors. May I have a motion regarding the election of directors.

Mr. Chairman, my name is Drew Knight, and I am a duly appointed proxy holder. I move that each of the following nominees Mary Garden, David Johnston, Simon Landy, John MacCuish, R. William McFarland, Kevin D. Nabholz, and Russell Newmark be hereby separately elected as Directors of Dexterra Group Inc. for the period commencing as of the date hereof and ending at the close of the next annual meeting of shareholders of the corporation or until their successor is elected or appointed.

Thank you, Mr. Knight. Will someone second the motion?

Mr. Chairman, my name is Christos Gazeas, and I'm a duly appointed proxy holder. I second the motion.

Thank you, Mr. Gazeas. You have now heard the motion. Ms. Campbell, are there any questions on this motion?

Mr. Chairman, there are no questions on this motion.

Thank you, Ms. Campbell. The next item of business is the appointment of auditor of Dexterra Group. It is proposed that PricewaterhouseCoopers LLP, chartered accountants, be appointed the auditor of Dexterra Group until the next annual meeting of shareholders of Dexterra Group or until a successor is appointed. Will someone so move?

Mr. Chairman, my name is Drew Knight. I move that PricewaterhouseCoopers LLP, Chartered Professional Accountants, be appointed auditor of Dexterra Group until the next annual meeting of shareholders or until a successor is appointed. At such remuneration as may be fixed by the Board of Directors and the Board of Directors are hereby authorized to fix such remuneration.

Thank you, Mr. Knight. Will someone second the motion?

Mr. Chairman, my name is John MacCuish, and I'm a duly appointed proxy holder. I second the motion.

Ms. Campbell, are there any questions?

Mr. Chairman, there are no questions on this motion.

Thank you. If you are a registered shareholder or duly appointed proxy holder and have not submitted your votes, please do so now by selecting the applicable voting option on the voting panel. As a reminder, if you have previously submitted a completed proxy you have already voted, and it is not necessary to vote again on the ballots. We will pause briefly before closing the polls on each item of business. [Voting]

The polls are now closed, and I will ask the secretary to provide the report from the Scrutineer.

Mr. Chairman, I have received the report from the Scrutineer, the shareholders have voted in favor of each of the items of business to be voted on at this meeting.

Thank you. Accordingly, I declare the election of each of the nominees to the Board of Directors and the appointment of PricewaterhouseCoopers LLP as auditor of the corporation, the full text of which are set forth in the information circular of Dexterra Group dated March 30, 2021, to be passed. A report disclosing the voting results of this meeting will be filed on SEDAR and disclosed in a press release following the meeting. This now concludes the formal portion of the meeting. Accordingly, I declare this meeting terminated. On behalf of the Board of Directors of Dexterra Group, Inc., I would like to thank our shareholders, employees, communities where we work, and other stakeholders for their continued support. As the formal portion of the annual meeting has been completed, I will ask John MacCuish in a couple of minutes to provide an update on the business. Mark Becker, Drew Knight, and Dawn Nigro, will also be available to answer your questions. Following the conclusion of this meeting, we will post a copy of the slide presentation on Dexterra Group's website. [Operator Instructions] Please note that questions submitted during the presentation via the online platform will be moderated before being sent to me. These questions will be addressed following the conclusion of John's presentation. During the corporate update, certain statements containing forward-looking information or non-GAAP financial measures may be made. Please refer to the cautionary statement regarding forward-looking information on the slide contained in the presentation. I'd also like to make a couple of introductory remarks and start by congratulating John and the management team on its progress over the past year. Successfully integrating the operations of 2 companies, managing effectively through a pandemic, building trust with stakeholders, bringing talented new people into the organization, and building a foundation for future growth. This progress is attributed to the quality of our people and their dedication to our customers. It is a management team, your Board is very proud of. I will now pass it over to John who will speak to our vision and provide a business update.

Good morning. Thank you once again for joining us for our Annual General Meeting. It has been an exciting year for Dexterra Group. One that has laid the foundation for your company to become a made in Canada infrastructure support service champion, a company that delivers superior returns to shareholders. We made a lot of progress in 2020. We completed the integration, we assisted clients in a difficult working environment, and we executed on our vision. Today's AGM marks an opportunity for me to speak about our vision and the philosophies that Dexterra has adopted to succeed over the next several years, including our purpose, values and guiding principles that will inform our actions and help us deliver our near-term objective of $1 billion in revenue and $100 million in EBITDA. I've been asked, where did the name Dexterra originate? First, we engaged with 2,500 employees and clients to determine what our brand essence should be. And it became clear that service was the answer. Our desire to be a trusted partner, a helping hand to clients, led us to the Latin word Manis Dextera, which we used to create the name Dexterra. The X in our brand name is made up of 2 colors to represent partnership where company and client objectives intersect. Dexterra Group is a client-driven business. Simply put, our purpose is to enable the higher performance and productivity for our clients and to play a vital role in our communities in the Canadian economy. We do that by being powered by passionate people and by delivering quality solutions for the creation, management, and operation of infrastructure. Our businesses are profitable and support the broader Canadian economy and are delivered with a sustainability lens in mind. We create custom solutions for space and infrastructure from our modular buildings that create new environmentally friendly and cost competitive spaces to the operation and maintenance of built assets in IFM. We create custom solutions that work for people and organizations from our provision of workforce accommodation and catering services to customer care and some of Canada's largest and most complex facilities. The housekeeping and environmental services that help our clients shine, a wide range of services that make our client businesses more successful. Across every solution we provide and every relationship we build, our focus is on creating value for stakeholders. For clients, we create value by maintaining and enhancing the integrity of their environments, optimizing the utility of their assets, and by delivering infrastructure, which supports their organizational goals. We let them focus on the things that they do best, and we provide certainty of cost and innovation in our area of expertise. For employees, people are our most important assets. People create competitive advantage and by building an environment where we attract, retain, and develop high-quality employees will enable us to reach even greater heights. A healthy, safe, inclusive work culture, supporting career objectives with opportunities for growth and development. Empowering our teams to embrace innovation and make decisions are keys to our employee fulfillment and loyalty. For our business partners, we create value through the collaborative pursuit of economic opportunity and by respecting the needs and goals of partners as we work with them to provide our clients with the best solutions. And for our shareholders, we create value by holding ourselves accountable and by doing what we say we will do: by delivering sustainable profitable growth, by investing in high-value opportunities and by exercising excellent financial and social stewardship. We create a stronger businesses, a stronger environment and stronger communities through our work. And we are committed to the activities and initiatives that will achieve those goals. We're extremely proud to have recently published our first ESG report. And look forward to playing our part in building an even stronger Canada in the future. That report is available on our website at dexterra.com. The culture we foster and the values we live by at Dexterra are important building blocks for our success. This year, we spent significant amount of time developing and communicating our new set of corporate values across the company. Those values are: Accountability, our teams don't just walk by. We own our successes and our failures. If we see something wrong, we act to resolve it. And if we see something right, we celebrate it. Diversity, everyone has a voice, sharing and listening to different points of view is how we learn. It's also how we make progress and move forward as a team. Trust, building trust is critical, and our actions speak louder than our words. Trust is earned through clarity of communication, respect of people, compassion and competence. This is our commitment to our clients, our colleagues and our communities. Partnership, service is what we sell. We are a client-focused organization and work closely with our customers by asking for, listening to, and acting on client feedback. This is the secret sauce that develops successful long-term relationships. You have heard us talk about our objective of $1 billion in revenue and $100 million in EBITDA. Today, I want to speak to how we'll get there. The 2 graphs give the road map for our near-term plans. You may ask, how will we reach our objectives -- that objective. The answer is clear by growing all 3 lines of business, the market and the opportunities are in front of us. The Canadian market is strong, and we expect to have 3 similar-sized profitable businesses, which will help us be resilient to changes in the market or the economy. Not all of our eggs in one basket, so to speak. The modular and FM business will have more supercharged growth, lots of opportunities with social housing. Large and numerous FM proposals as we expand into new sectors to diversify our platform in both of these segments. In WAFES, where our strong reputation for service was recently demonstrated with a new 5-year oil sand contract worth $30 million plus in annual revenue. Let me describe what WAFES will look like. Our business has already started to transition to a low CapEx and more like a traditional service business, less focus on Dexterra-owned open camps. We'll build camps for others and operate them. And we'll operate our current open camps to generate significant future earnings and cash flow. As you can see in the graph, the pure services portion of the WAFES business will continue to grow and expand and that is a business with stable earnings. We're also looking at M&A opportunities, especially in FM, but that is the gravy or the extra will take us over our $1 billion milestone. We will have 3 businesses with more scale, good profitability and a strong balance sheet to support more growth. So our $1 billion target is achievable in the near term. And will be reached primarily as the result of organic growth, a return to normal business activity levels and new wins. The way we achieve our ambitious goals and vision is by steadfastly adhering to the foundation that we've built this past year. A foundation that has placed the right tools, systems and resources in place to drive future performance. Make no mistake, we are a growth company. Our national workforce accommodation business has a strong brand and growing market share across the country. The crossroads open camp in Kitimat reopening in quarter 4 and likely as the LNG Canada project ramps up will be a real shot in the arm for us in 2022. Our Modular Solutions business has industry-leading capability and will capitalize on a surge of social housing demand, an area where we are a leader. And we'll diversify into other areas as the adoption of modular as a building alternative grows. Today, it's less than 5% of the total construction wallet. Our high-quality integrated facility management business has tremendous short and long-term prospects post pandemic, both through organic growth in our existing footprint and in new areas, along with the aviation retail sectors rebounding as the economy returns to normal activity levels and with M&A activity providing upside potential. We are in a strong financial position to capitalize on these future opportunities. We have the flexibility to invest in high-value opportunities, expand our capabilities in service offerings where it makes sense to drive growth and provide strong shareholder returns, combining capital appreciation and dividends. The guiding principles, which we have outlined previously are still true today. We live by a philosophy of being client-centric, driving sustainable, profitable growth, having a capital-light support service approach, using a decentralized model with a small head office and empowering people to move our decision-making closer to our clients, having disciplined financial management, making investments in high-value opportunities, and delivering strong shareholder returns. Yes, I'm very confident that the future is bright for Dexterra. I want to thank you for the commitment and support and for being with us today. At this time, I'm pleased to invite your questions. In addition to myself, available for your questions today are several of our other senior leaders. Drew Knight, Chief Financial Officer; Mark Becker, Chief Operating Officer and President of the WAFES Business Unit; Dawn Nigro, President of NRB Modular Solutions. So I'll now pass it back to Bill, who will moderate the Q&A section.

Thank you, John. We would now be pleased to entertain any questions. [Operator Instructions] Ms. Campbell, are there any questions?

Mr. Chairman, we have received the following question: explain the financial impact in 2021 of Crossroads being closed and the opportunity when it reopens.

Thank you, and I will pass that question over to Mark Becker.

Thanks, Bill. Good morning everyone. And regarding Crossroads Lodge, as John mentioned, that is our lodge located in Kitimat BC primarily servicing the -- currently servicing the LNG Canada project, large-scale mega project located there. 736 beds in total, at capacity, that lodge will generate, for us, $30 million to $40 million in revenue annually and is really part of our higher-margin elements of our business, given our upfront investment in the facility. After a pretty strong run of occupancy in 2019 and 2020 supporting LNG Canada, the lodge has been temporary closed -- temporarily closed since Q1 of this year. Due to the BC government COVID-related health order restricting site workforce levels at LNG Canada and other major projects in BC. That is -- those workforce levels are ramping up currently, again, re-ramping up. We expect to reopen Crossroads as early as Q4, as John mentioned. Timing is really driven by the ramp-up of the LNG Canada project, which were the -- which is our current primary user of Crossroads and the site workforce level exceeding the on-site accommodations at LNG Canada, which FLIR has indicated to us, will occur this winter. So hence, our projection for Q4. We do see a drag of about $800,000 in 2021 results associated with the ongoing operating costs related to the temporary closure, but again, that will reverse as we reopen the lodge with LNG Canada. We do have a strong relationship and ongoing dialogue, both with FLIR and LNG Canada. Regarding Crossroads reopening, timing and guest loading, we are well positioned as a supplier of choice for that project, given our camp location and the amenities we offer at Crossroads. Going forward, FLIR has indicated to us they expect to fully utilize the Crossroads Lodge for several years as they work through the peak completion of the LNG project 2022 and beyond and potentially longer with the LNG Canada Phase 2 approval. So like other key assets and contracts across Canada, Crossroads is a long-term asset for us. It's well positioned, not only for LNG Canada, as I mentioned, but also future plan projects in the Kitimat region and the North Coast region in BC. Back to you, John and Bill.

Okay. Thank you, Mark. Ms. Campbell. Are there any other further questions?

Yes. Mr. Chairman, we've received the following question: What is the diversification strategy for modular as you have a lot of eggs in the social housing programs basket? And how long a tail does social housing have?

Okay. Thank you, Ms. Campbell, and I will pass that one over to our President of Modular, Dawn?

Thanks, Bill, and thanks for the question. We are looking at expanding more into markets other than Canadian social housing. But let me be clear, we love the Canadian social housing market, and it is our #1 priority, today it is. New markets may include lower cost rental units, which is apartments geared to more moderate-income tenants, social housing in the U.S. The U.S. hospitality market and assisted living and long-term care in Canada. Our first U.S. social housing project was successfully executed earlier this year, and we have projects that serve other markets in our pipeline today. Recently, we conducted a benchmarking study of pricing in these target markets and to substantially penetrate some of these markets, we will need to price more competitively than we have historically. Through a cross-functional initiatives launched in Q1 of this year, we've identified several opportunity areas for improving our processes and driving efficiencies and have established project teams to go after these opportunities. By delivering on their mandates, these project teams will position Modular Solutions to be more competitive in other markets, enabling greater diversification. Also, Modular Solutions in the East continues to grow its legacy NRB sales, which are outside of the social housing market and represent more than $40 million of sales annually. With respect to the length of the tail from social housing, we anticipated it to extend at high demand for the next 2 to 3 years. CMHC has recently released a second wave of Rapid Housing Initiative, or RHI funding, which seeks to provide vulnerable Canadians with affordable homes. Last year, the first round of funding was $1 billion, and CMHC received $6 billion of applications. So it was well oversubscribed, and it is reflective of pent-up demand. We are currently fulfilling the project's funding through that first round, and we'll be doing so for the balance of this year. The second round of funding is $1.5 billion, so 50% larger than the first. The funding -- this funding is part of the overall 10-year $70 billion federal housing strategy.

Thank you, Dawn, and Ms. Campbell, are there any other questions?

Yes, Mr. Chairman, we've received the following question. Why are you not looking at M&A in WAFES as it is your highest margin business?

Thank you, and I'll pass that one over to John.

Thank you, Bill. I'll make 2 points in answering this question. We're being disciplined in our approach to M&A. We've established clear principles and selectivity for what we're looking for in a prospective deal. We don't have an unlimited wallet here, so we must be selective. We're looking to invest in high-quality opportunities that will accelerate the growth of the business in markets with lots of headroom and long-term potential. FM is the priority right now as we want scale in that business to go after a larger -- a large addressable market. Second point is, we have a very competitive and large workforce accommodation business with a national footprint. The quality of the service they provide is excellent, and we're well positioned to increase our market share organically.

Thank you, John. Ms. Campbell, are there any further questions?

Yes, Mr. Chairman, we've received the following question: How will we replace the big projects in WAFES today down the road? Is this a shrinking market?

Over to you, Mark?

Yes. Thanks, Bill. In the future, we are seeing a range of projects and market activity in '22 and 2023 and beyond in WAFES, specifically in the areas of LPG terminals, in the North Coast of BC, some of which are already approved or are achieving or near approval. And as well, additional LNG projects in that same area. We're also seeing increased gas drilling and production in the Montney, Duvernay plays in Northern Alberta and BC, some of which is in support of the LPG LNG projects on the West Coast. Additionally, we're also seeing in Northern Canada and Central Canada, new gold and iron ore mining projects and expansions, both in Northwest territories, Northern Ontario, Northern Québec. And I guess lastly, we're also seeing new infrastructure projects as well. We're currently the largest camp operator on the Watay Power infrastructure project in Northern Ontario. But we're seeing subsequent projects on the horizon, such as the Kivalliq Hydro-Fibre Link in Nunavut. So we have a lot of -- on our docket. Currently taking us through 2022, 2023. Much of it already in-flight and already contracted and I guess, as you can see from what I overviewed, there's a lot more on the horizon for 2023 and beyond. Really, our national market presence in WAFES really enables us to access this geographically and market diverse business opportunity. And our objective is to really not only maintain but to organically grow WAFES business via this future market demand as well as through incremental market share capture. And the recent oil sands wins that John mentioned, I think, are good examples of that market share capture and also a good example of our focus on long-term evergreen style contracts that take us on into the future through the long haul. Back to you, Bill and John.

Thank you, Mark. Ms. Campbell, are there any other -- any further questions?

Yes. Mr. Chairman, we've received the following question. With debt having been reduced materially how do you prioritize M&A opportunities, organic growth and the possibility of higher dividends?

I'll pass that one over to Drew Knight.

Great. Thanks, Bill, and good morning, everybody. As we look at our debt position, certainly, our -- we're trending towards 1x EBITDA, which is right in our comfort zone. And there is a lot of organic growth on the horizon. So there will be investments, cash investments in our organic growth, certainly. Currently, we are focused on returns to shareholders and with dividends and capital investment. But I would say that we would gradually grow the dividend over time, but we're also focused on investing in the business. So organic growth will suck up a substantial portion of cash over the near-term as we're looking at substantial growth in modular and FM in the coming 12 months. But then certainly, we will be looking at further acquisitions, and that could increase the debt load when we do those acquisitions at that time. But as I think we've telegraphed it in a lot of our messaging, we are being very disciplined in that acquisition strategy. We won't lever up the business without substantial reviews and business case analysis and reviews with the Board. Back to you Bill.

Thank you, Drew. Maybe one point that I might add to that is we continue to be very focused on capital-light, and I'd just like to reemphasize that. That we believe, if we exclude the investment that we've made in the Cambridge modular plant that on an ongoing normalized basis, that would be around $5 million a year. So a lot of the new organic growth will have working capital investments, which I think you were referring to, Drew, in relation to receivables and payables but it's not capital outlays that we are going to have to make. So just for clarity for the group. With that, Ms. Campbell, are there any further questions?

Yes. Mr. Chairman, we've received the following question. The stock price hasn't really moved over the last several months despite a strong stock market. Why?

Well, I could probably talk a lot about that, but I'm going to pass that one on to Drew again.

Okay. Thanks, Bill. I guess, I would view that question as follows: that Dexterra is relatively new to most investors. So there are several investors that have a wait and see approach. They want to see that the acquisition with Horizon North is functioning well with positive organic cash flow and that the business plan is being executed and that growth is happening. We have a long-term point of view, build a good business, and things will work out well. Quarterly earnings are not our focus. We do expect to demonstrate substantial growth in Q2 and Q3 and into 2022. We can't predict the stock markets. However, we believe that our stock price is undervalued currently. And we believe this is evidenced by most of the analysts providing strong buy ratings on our stock. So back to you.

Thank you, Drew. Ms. Campbell, are there any further questions?

Mr. Chairman, we have received the following question. What margins can I expect go forward in each of the businesses?

I think that's a good question. And Drew, I'll pass that one over to you to maybe give a quick overview.

Yes. I'll take that one, Bill. Thank you. FM and modular should be approximately 8% EBITDA margin as operations stabilize later in 2021. The WAFES margins are currently around 15% today, and we think that is a reasonable rate. And the win here with WAFES is that there is less volatility of earnings. So performance certainty with limited CapEx going forward.

Thank you, Drew. Ms. Campbell, are there any further questions?

Mr. Chairman, there are no further questions.

Thank you, Ms. Campbell. I would like to thank everyone for attending our Annual General Meeting and thank you also for your ongoing support. We look to stay connected with you over the upcoming year and having an in-person meeting next year. I wish everyone good health. Please stay safe and get vaccinated as we move through what we hope is the final stage of the pandemic. Have a great day.

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