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

Thank you for standing by. My name is Jordan, and I'll be your conference operator today. At this time I'd like to welcome everyone to the Dexterra Group Inc. Second Quarter 2026 Earnings Call. [Operator Instructions] I would now like to turn the call over to Denise Achonu, Chief Financial Officer. Please go ahead.

Thank you, Jordan. Good morning, and thank you to everyone for joining the call. My name is Denise Achonu, Chief Financial Officer of Dexterra Group Inc. With me on the call today are Mark Becker, our Chief Executive Officer; and our Board Chair, Bill McFarland, who will provide some brief introductory comments. After a brief presentation, we will take questions on the call, with the call ending by 9:15 Eastern Time. We will be commenting on our Q2 2026 results with the assumption that you have read the Q2 2026 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. I will not cover the content of the cautionary notes in any detail. However, 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.

Good morning, and thank you for joining our call today. Dexterra had another strong quarter in Q2, reflecting continued progress in meeting our business plan goals as outlined at our recent AGM by delivering profitable growth and strong free cash flow while maintaining a strong balance sheet, which provides flexibility as we pursue new opportunities. We have a very resilient business model with limited direct impacts from tariffs and other geopolitical events, a key differentiator from many other businesses. And this has allowed us to continue to make strong progress in achieving our business plan goals and is supported by disciplined execution by our management team. The Board is optimistic about the company's outlook, including a growing pipeline of opportunities across North America and is encouraged to see the market recognizing strong financial performance and future prospects, which when taken together have delivered excellent shareholder returns and a positive backdrop for all stakeholders. We are also very pleased with the performance and progress made by the management team as they build a strong company for the future. I'll now pass it over to Mark for his business overview.

Thanks very much, Bill, and good morning to everyone. Starting off on Slide 5. As Bill talked about, we continued the positive momentum from Q1 with another quarter of strong operational and financial performance. We generated revenue of $269 million, an increase of 8%, while adjusted EBITDA increased by 9% to $33 million over Q2 of last year. This demonstrates we're adding scale to the business while improving our bottom line profitability, including strong free cash flow generation, which allows us to reinvest in the business, pay dividends and create long-term value for shareholders. Our performance in the quarter was driven primarily by strong workforce accommodations occupancy, organic growth from new contract wins coming on stream as well as positive impact from the Right Choice acquisition. These results were delivered despite lower-than-normal activity in wildfire support. Adjusted margins were strong at 12% in the quarter, reflecting the greater contribution from our high-margin workforce accommodation rental revenue stream, operational efficiency gains while maintaining strong customer retention, loyalty and satisfactory -- satisfaction ratings, and 3, managing inflation pressures through supply chain initiatives, contract inflation terms and price adjustments. We also generated $22 million in free cash flow in the quarter and exited the quarter with a net debt at 1.5x adjusted EBITDA. This financial flexibility will allow us to continue investing in the business and pursue high-return investments and acquisitions where they make sense and are accretive to shareholders. One of our key near-term priorities is to realize the full value of our acquisitions, and I'm pleased to report that we're making good progress. The Right Choice acquisition has enhanced our competitive position in the Montney and Duvernay region and contributed to our available workforce accommodations equipment capacity of approximately 2,000 beds, which is important to support new growth, including Canadian nation-building and other opportunities. Our fleet is over 85% utilized today, which is a market-leading rate, and we expect to utilize -- expect our utilization to increase as we secure new growth contracts, also with a focus on building some excess capacity as needed for new business. Our partnership with PVC is also progressing very well. We are focused on growing our joint business by leveraging the combined platform and expanding relationships with both new and existing customers, and we have been very impressed by the PVC team's talent and engagement. PVC has secured a number of new logo facility management contract wins in the quarter, supporting our ambitious growth objectives in the U.S. These new contracts will come on stream over the coming quarters and demonstrates the power of our combined brands. Our trailing 12-month return on equity as of the end of Q2 was 15.4%, achieving our target of 15% and demonstrating our continued commitment to delivering strong shareholder value. With that overview, I'll turn things over to Denise to provide more detail on our segmented results and financial position.

Thank you, Mark. I'll begin with a detailed look at our business segments, starting with Support Services on Slide 7. Revenue in Support Services for the second quarter was $226 million, up 10% compared to Q2 2025. This increase was driven by strong workforce accommodation occupancy, including the contribution from the Right Choice acquisition, which was completed in Q3 2025, partially offset by lower-than-normal wildfire support activity in the quarter. Wildfire support activity is part of both Support Services and Asset Based Services. And subsequent to Q2, our wildfire support for the affected communities is trending towards more normalized levels. Excluding the contribution from the Right Choice acquisition, Support Services revenue increased by 5% year-over-year, which is in line with our expectations, including positive growth momentum in the U.S. Adjusted EBITDA in Support Services was $23 million, an increase of 12% compared to the same period last year, while adjusted EBITDA margins were 10%, consistent with the prior year period. PVC contributed $1.4 million to adjusted EBITDA in the quarter. Excluding PVC, adjusted EBITDA margins were 9.5%, reflecting continued investments in sales and business development resources in our U.S. facilities management platform to support growth. These costs are being closely managed to align with our projected growth profile. As a reminder, PVC is accounted for using the equity method as we currently own 40% of the business with an option to acquire the remaining 60% in 2027. As a result, PVC's revenue is not included in Dexterra's reported revenue. We continue to expect PVC to be cash flow neutral in the near term as it invests in modernizing its proprietary software, PVC Connect, and expands its team to support the long-term growth of its distributed model across North America. Looking ahead, we remain focused on delivering profitable organic growth with a focus on North American facilities management services, driving operational efficiencies and managing inflationary pressures, including higher energy costs through disciplined contract management and supply chain initiatives. We continue to expect Support Services adjusted EBITDA margins to exceed 9% over the long-term, particularly as we expand our facilities management services business through both self-perform and distributed models, a key competitive advantage for Dexterra. Moving on to Asset Based Services on Slide 8. Revenue was $43 million in the second quarter. Higher-margin rental revenue increased by 13%, supported by higher equipment utilization and the contribution from Right Choice, partially offset by lower wildfire activity. Excluding Right Choice, revenue increased 2% compared to the prior year. Installation and demobilization revenue was lower by $5 million year-over-year, reflecting less activity in the quarter. This revenue stream is lower margin and varies based on project timing. However, it is a critical enabler to our market-leading competitive position as a turnkey provider of workforce accommodations, securing key market opportunities and incenting long-term client relationships. Beginning in Q1 2026, we expanded our disclosure on the composition of Asset Based Services revenue to provide investors with greater visibility into the key drivers of this business. Supplemental 2025 quarterly comparative information by revenue component is available on our website, on the Investors page under Documents and Filings. Adjusted EBITDA was $17 million, up 4% compared to Q2 2025. Adjusted EBITDA margin improved to 40% compared to 38% in the prior year period, primarily reflecting a higher mix of workforce accommodation rental activity, which carries stronger margins than installation and demobilization activity. Looking ahead, current market indicators continue to support higher workforce accommodation rental activity through the second half of 2026, while access matting utilization is expected to remain similar to 2025 levels. For 2026, we continue to expect a greater proportion of revenue to come from higher-margin rental activity versus installation and demobilization activity. And adjusted EBITDA margins should continue to be at the upper end of our 30% to 40% target range. Moving to Slide 9. Free cash flow was $22 million in the second quarter, supported by strong profitability and collections from certain U.S. government accounts impacted by the shutdown and the collection of certain accounts receivable balances related to operations funded by the Canadian government. We expect the majority of our free cash flow conversion to occur in the back half of 2026, similar to the prior year. On a full year basis, we continue to expect adjusted EBITDA conversion to free cash flow to exceed 50%. In the second quarter, corporate expenses represented 2.7% of revenue compared to 2.8% in Q2 2025. Revenue growth more than offset the increase in corporate costs, which includes -- included investments in our technology platform related to labor management and artificial intelligence applications, which over time are expected to drive further operational efficiencies. Looking ahead, in 2026, we continue to expect corporate costs to approximate 2.5% of revenue, inclusive of planned investments in technology and our U.S. business platform as the business continues to scale. Capital expenditures were $3.6 million, including $2 million incurred as a result of the fire in Q1, which we expect to recover through insurance. We continue to expect sustaining capital expenditures to approximate 1% to 1.5% of revenue on an annualized basis. We remain committed to a capital-light approach, including assessing potential high-return projects using the lens of increased shareholder value. Net debt declined to $206 million at quarter end compared to $225 million at March 31, 2026, reflecting strong free cash flow generated in the quarter. Net debt to adjusted EBITDA was 1.5x, which remains well within our comfort level and our balance sheet provides flexibility as we pursue our capital allocation priorities. As we continue to focus on operational efficiency and free cash flow conversion, we expect net debt to decline over the balance of 2026, absent significant investments or acquisition activity. Our $425 million term loan matures in 2029 and has significant available capacity to support growth. We also remain committed to delivering strong returns to shareholders. In May, the Board approved the renewal of Dexterra's Normal Course Issuer Bid through May 24, 2027, allowing for the repurchase of up to 3 million shares and providing flexibility for opportunistic share repurchases. In Q2, we had limited share buybacks. We declared a dividend yesterday of $0.10 per share payable in October 2026. I will now pass it back to Mark for concluding remarks.

Great. Thanks very much, Denise. And before we open things up for questions, I'll provide a few comments on our outlook and priorities, which is highlighted on Slide 10. As we look to the remainder of 2026, our focus continues on strong execution of our business plan and delivering profitable, predictable results, pursuing profitable organic growth opportunities and realizing the full value of our acquisitions. Our sales pipeline remains strong across both Canada and the United States in support of our growth objectives. We expect strong organic growth across the Dexterra FM North American portfolio, including government services and integrated facilities management. In our U.S. facilities management business, we continue to focus on scaling our FM platform and expanding our facilities management opportunities through our investment in PVC and our expanded U.S. organization and sales force. As mentioned previously, we're seeing positive new sales and contract wins with PVC under the distributed FM model, supporting our growth expectations set out at the time of the PVC acquisition investment. The development of large-scale data centers is providing significant opportunity for workforce accommodations, particularly in the U.S. Dexterra is partnering with an established U.S.-based turnkey provider of workforce housing and support services to jointly pursue opportunities for data center development and other projects. Our objective is to grow our exposure to the data center space under our capital-light model, and we will continue to provide further updates as these opportunities unfold. In Canada, our established FM/IFM platform, together with our market leadership position in workforce accommodations, positions us very well to pursue opportunities related to nation-building projects. We are tracking a number of opportunities identified under the nation-building umbrella, including a mix of near-term and longer-dated projects. With Dexterra's market-leading coast-to-coast presence across the energy, mining, infrastructure, government and defense segments as well as our over 80 indigenous partnerships across Canada, we are well positioned to take advantage of these opportunities, which we expect will provide a meaningful upside opportunity for both FM and the Workforce Accommodations business. Given the strong pipeline of opportunities in the Workforce Accommodations business, including nation building, we expect to deploy our 2,000-bed capacity -- available capacity in the medium term. Accordingly, we are and we will continue to actively look at high-return accretive opportunities to augment our asset fleet while staying true to our capital-light business model. For example, our asset refurbishment expertise and facility at our Grande Prairie operations provides us with a competitively unique capability to acquire and deploy quality market assets in a very cost-effective manner. We also continue to closely monitor the macroeconomic environment and inflationary trends. Our business remains well insulated from the direct impact of tariffs as we employ our workforce locally and source the majority of our materials and supplies domestically in both Canada and the U.S. While ongoing geopolitical tensions and the conflict in the Middle East may create broad inflationary pressures, we have a number of levers to manage these impacts. These include contractual inflation pass-through mechanisms, disciplined pricing and contract management, supply chain initiatives and our ongoing operational efficiency projects, all of which have been very effective in supporting our margins. Based on what we see today, we don't expect inflation to have a material impact on our business, although we continue to monitor the situation closely. Finally, we remain committed to our disciplined approach to capital allocation. Our current priorities continue to be, supporting the dividend. #2, making sustaining and high-return capital investments. Three, maintaining a strong balance sheet, paying down the debt. And four, accretive acquisitions. We are also making strategic investments in technology, both client-facing and enterprise technology that support innovation, operational efficiency and differentiation across our platform. In closing, we are very confident in our strategy and our ability to grow and win in the developing marketplace and are well positioned to continue delivering profitable growth and long-term shareholder value. This concludes our prepared remarks. I'll turn things back over to Jordan to chair our Q&A portion of the call.

[Operator Instructions] Your first question comes from the line of Kyle McPhee from ATB Cormark.

So your comments point to the workforce accommodation opportunities linked to U.S. data centers. And it was described as a near-term opportunity in your filings, suggesting maybe it's already derisked and we'll see the benefit soon. Can you tell us anything more about timing and size of this demand linked to U.S. data centers and whether or not anything has actually been contracted at this point?

Yes, we were already contracted and active on 1 project in the U.S., actually 2 projects in the U.S. Lots of activity around those projects, and these are large-scale projects. And that continues to develop. I think what we see is a fairly aggressive approach to projects, but they are large complex projects and will kind of develop over time. Probably the best thing I could say, Kyle, is it's continuing to develop for us. And I think we'll kind of keep you posted. But again, these are large projects that will take time, but we do expect to continue to develop our contracting on that front.

Got it. Okay. And then is this mainly services you'll be providing to third-party-owned workforce camps? Or is this rental contracts linked to your own fleet or both?

A little bit of both, but I would say broadly, our initial contract was some of our workforce accommodations that we have active down in one of the projects. But more broadly on these opportunities that we're pursuing, it is client-owned or third-party owned assets. But along with our business partner down there, we are doing workforce accommodation setup, turnkey provision of the accommodations, maintenance of the assets and then as well the full servicing of the assets as part of the contracts.

Your next question comes from the line of Frederic Bastien from Raymond James.

I think Kyle got cut off. But I'll just build on that comment around the U.S. partnership. Is it fair to assume, though, that the bulk of your contribution to this partnership would be coming from the Support Services side?

Yes, yes. That will be the most significant part of it.

Question on the wildfire season. Obviously, started quieter than normal in Q2, but it sure seems to have picked up since. Does that change your outlook for that part of the business into the back half?

I think our outlook would be a more normal level of what we would -- if there's such a thing as a normal year. But if you averaged out the last 10 years, I would say kind of a more normal year for wildfires. One thing I can say is wildfires aren't all created equally. So the fires in Northern Ontario, we're actually supporting and supporting the communities there. It's been raining like crazy in Alberta, but there's activity in BC. So it just kind of depends where they are in the nature of the fires in terms of what we can support. But generally, I would say kind of smaller impact is what we're seeing this year, but kind of an average amount.

Returning back to Kyle McPhee for a second question.

So it was nice to see the 5% organic growth from your Support Services segment in Q2. That would be net of some of the year-over-year drag from wildfire services that didn't repeat. Can you quantify that year-over-year drag from wildfire services so we can get a better idea of the true organic growth from the rest of the segment?

Yes, sure. Kyle, it's Denise. Typically, in a normal year, wildfire activity has contributed around, let's say, $20 million to $25 million, equally split between Q2 and Q3. So in Q2, we did see, I would say, less than half of what we've seen in the past. Does that help?

Your next question comes from the line of Mark Neville from Canaccord Genuity.

Maybe just to follow-up on the data center conversation. I mean it seems like it's quite a large opportunity. I'm just curious how you plan to manage the growth, the markets that you might target and sort of any comments around staffing and such?

Yes. Good question, Mark. They are shaping up. There are larger projects. As I said, they're large, complex projects. We've actually got folks from our Workforce Accommodations business. We've got a leader down there that's virtually working full time on this. A few more people that we've seconded into the opportunity, and we're also hiring on folks in the U.S. So I think we're well positioned to support the work that we're gaining and we're bidding into on those projects. And it's kind of all part of being part of the ecosystem down there on the various regions and various projects that are ongoing. But we're certainly well positioned for it, and I think we're well positioned also to provide resources, as I mentioned, on a capital-light basis.

Got it. And maybe just a second question. It sort of -- I mean, at least to me, it sort of sounds like -- it feels like you're talking up M&A a bit more or the opportunity or the potential to do M&A or sort of high-margin or accretive opportunities. Can you just maybe expand on that sort of topic and whether I'm sort -- where we're reading into it properly?

Yes. Like I -- as we've talked about, I think, so far this year, we're really focused on making sure we can deliver full value from the recent acquisitions, which is the Right Choice acquisition and the PVC investment. So I would say when we talk about high-return kind of investments, they would be smaller capital investments, not necessarily M&A, but other capital investments like some of the things I talked about in my remarks that will kind of support the business. And that's been typical for us, but not specifically focused towards M&A at this point. Never say never, but those would be kind of our priority focuses that we're focused on this year.

Your next question comes from the line of Zachary Evershed from National Bank Financial.

Maybe building on the last question there. What kind of hurdle rate would you guys be looking for when you're investing in new or refurbished beds?

Like high, quick return is what I would say. I mean, our -- yes, like kind of 2 to 4 years max and probably closer to 2 realistically. And we're -- on a refurbishment basis, it can be done pretty cost effectively, as I mentioned. And with a lot of the projects that we're seeing in our pipeline, there's real opportunity to put those to good use. I think our focus is really going to be about well matching any of those incremental investments to the pipeline and the opportunities that we see in front of us, not get too far ahead of our skis in terms of how we do that and make sure any investments are indeed that high-return investment that we're really going to recapture that from the contracts that we're going to deploy those -- that equipment on.

And then sticking on maybe the nation-building theme, can you compare and contrast your indigenous relationships versus other peers, who you see as main contenders and whether that's been a major factor in the pipeline?

Yes. It is a big factor. And I think if you look at our last 5 years in the remote business, we've gone from kind of a Western-focused business to West to East to the Arctic, coast to coast to coast, as I like to say, and including energy, mining, infrastructure. So we've kind of got quite a breadth, and we've got quite a breadth of indigenous relationships, over 80 relationships, as I talked about. I think if you look across the competitive environment, you're not going to see anyone that really has that kind of scope and scale in terms of both geographic coverage as well as community relationships. And without exception, nation-building more broadly, broad opportunities in Canada in the remote space, indigenous relationships are really, really important. So we're very happy to have that position. We're very happy to be able to work with communities on that basis because it's a key part of how we're going to earn and land this work in front of us.

Your next question comes from the line of Trevor Reynolds from Acumen Capital.

I was just wondering if you could touch on the magnitude of the new contracts that you highlighted in the U.S.

Yes. And generally, I would say, right around that $30 million per annum, with some upside growth potential on scope expansion. So there are new logos to the distributed model, which is positive and indicative of our work with PVC. And I think also supports what we're seeing in the U.S. in terms of a larger, more fragmented market, where there is larger opportunities and ability for larger growth rates.

Great. And then you mentioned that you expect the 2,000 beds of current capacity to be deployed near term here. Maybe just which sort of projects those are going to? And then maybe just on your ability to procure more assets. It seems like the market is getting very tight. How do you think you're going to be able to do that?

Yes. Like I'd probably say we've got to watch characterization of near term. I would say probably mid-term is probably a good way to say that. And for us, and Zach was asking about our coverage in Canada, like it's not just about specific nation-building projects. It's a much broader pipeline of opportunities that even some very near-term things that will come into play. I think we're kind of seeing nation-building projects that are identified as the nation-building projects, perhaps they're all under discussion. They're all under contracting activity, but maybe coming to fruition and kind of hitting the P&L kind of the back half of next year. But there's other opportunities that are near term and other opportunities that are long term. And I guess one thing we're seeing is I think the overall opportunity set is probably a 2027 plus, 2027 to 2035, if you look at all the nation-building projects and the proposed schedule. To answer your question around equipment, I mentioned in my remarks, I mean, we do have -- we do maintain our equipment very well. I've always talked about that with our business. We have a facility that can maintain equipment, and we would use that to build incremental assets by purchasing market assets. There is assets out there. Obviously, we want to achieve our level of quality with limited investment, you can actually bring those to kind of good market shape to be able to bring those to the contracts that we're seeing. We've talked about the data centers being more client or third-party capitalized and with the capital-light model, that's another opportunity, both in Canada and the U.S., I would say. And obviously, ultimately, new equipment, but that can be a very expensive way to go and a very slow way to go where we would see kind of the refurbishment model to be something that can be brought to bear fairly quickly and very cost effectively.

Next question comes from the line of Jonathan Goldman from Scotiabank.