© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Thank you for standing by. This is the conference operator. Welcome to the Dexterra Group inc. first quarter conference call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like the conference call over to Drew Knight of Dexterra. Please go ahead.
Thank you, Sean, 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 9:10 Eastern Time. We will be commenting on our Q1 results with the assumption that you have read the Q1 earnings release. The MD&A and first quarter 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 are 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.
Thank you, Drew, and good morning, everyone. Thanks for taking the time to be with us today. The management team and board are pleased to deliver another good quarter despite the ongoing COVID-19 pandemic, and we're really excited about Dexterra's future, which is looking very promising on a number of fronts. John and Drew will speak to those developments. Yes, there were challenges in Q1 in our business. We met each of those challenges head on showed resiliency and were able to deliver positive results, which is a testament to the strength of the management team. Mark Becker and the WAFES team also recently signed an important large and strategic contract, which John will speak to in his remarks. So overall, a good quarter with an even brighter future right upon us. Our current conservative debt level provides us with flexibility for future growth, both organic and inorganic. Our goal of $1 billion in revenue and $100 million in EBITDA is now well within our sites. And we look forward to continuing to build a diversified support services platform with a capital light, disciplined approach. I'm pleased to also report that your Board approved yesterday a Q2 dividend of $0.075 payable July 15 to shareholders of record on June 30, 2021, a dividend, we expect to grow over time. I'll now pass it over to John to provide some details around our results and what the future holds.
Thank you, Bill. Good morning, everyone. As Bill noted in his opening remarks, our results for Q1 were good. In the face of continued difficult environment. Our sales were lower than Q4, a short term blip. And with improved margins and facility management, strong loss performance in Eastern Canada and continued profitability from Modular Solutions, we are able to meet the challenges. In IFM, lower airport and retail activity in BC where COVID greatly impacted our WAFES operation as project shutdowns forced temporary camp closures and overall reduced occupancy levels. And in Modular, social housing business in Ontario, which had a temporary 1 quarter volume reduction as government approvals for projects were delayed. Our frontline employees and operations teams have done a tremendous job over the past year plus to adapt our way of working to keep essential business operational and ensure our clients and their customers are safe on the projects and the facilities we manage. My thanks go out to every one of our 6,000-plus employees for their hard work and dedication. With vaccine programs advancing across the country, we believe there is a bright light at the end of the tunnel, and we are preparing for an exciting future for the Dexterra Group. The new talent, the systems, processes we have in place have laid an important foundation and are improving our results, and we expect strong high teens revenue growth in Q2 and beyond. Moving to Slide 6. In Q1 2021, we saw $38 million of revenue in integrated facility management with an adjusted EBITDA of $3.5 million. Improving our margins for this business unit has been a significant focus. And we have made strides this quarter due to stronger project management and our team's delivery on operational improvements. We believe margins of 7.5% to 8% are sustainable in a very competitive IFM market. Building scale is also a priority for integrated facility management. The organic growth prospects for this business are significant, with estimates showing that compound annual growth rates for the overall market should be double-digit over the next several years. We are seeing many businesses looking to outsource their activities for the first time. The pandemic has delayed some of those awards, but the potential is not diminished. We have robust quoting activity with our expected 2021 bids worth $200 million annually, and many have annual contract revenue of over $8 million. M&A activities have also been initiated, and we are looking for the right opportunities to strengthen our service capabilities, provides sector diversification and geographic presence. While remaining disciplined in ensuring that any deals provide strong shareholder returns in the future. We have retained key staff and hired new resources in order to help us execute on these new growth opportunities. We're also actively engaged with all of our clients on their evolving plans for 2021 and identifying opportunities where our teams can add more value. Moving to our WAFES Support Services business unit. In Q1 2021, we saw revenue of $75.7 million with adjusted EBITDA of $15.1 million. This business unit's performance is a strong source of revenue and profitability. Although our BC operations were challenged with lower camp occupancy in Q1 as Coastal GasLink and LNG Canada operations were reduced due to government restrictions, we were able to fill that void by selling new work and the strong performance in Eastern Canada as we continue to gain market share and build on our reputation for good service. The benefits of a strong national business. Margin improvements were due to strong utilization of our support services for infrastructure and mining work. Overall, this business -- overall in this business, we expect a healthy revenue uplift, stronger revenue in Q2 and beyond as the occupancy for natural resource projects improves. Especially with the Coastal GasLink restart and our strong outland forestry business. We have also won a significant new project to provide support services i.e., housekeeping and food service for a major industrial oil sands client with 2,700 beds under management and a 5-year contract with annual revenue exceeding $30 million. This is symbolic of the evolution of our Workforce Accommodation business with no CapEx required and builds upon our support services capabilities as we grow our market share in that arena. On Slide 8, our revenue for Modular Solutions was $41.9 million in Q1, with adjusted EBITDA, $2.9 million. Our Q1 results were dampened by social housing delays in Ontario in multiple communities. Our social housing volumes in BC remained strong in Q1 and we expect that to continue over the course of the year. And our revenues are expected to exceed Q4 2020 volumes for the rest of Q2 in 2021. As mentioned on our Q4 call, we are adding additional plant capacity in Cambridge, Ontario to allow us to expand our affordable and social housing footprint in Ontario. The production capacity of this plant exceeds $100 million annually, and the plant will open this month. It is under budget with a capital cost of around $4 million. Our new President of Modular, Dawn Nigro, has been a great addition to the team and has a plan developed, which will help us capitalize on new Modular opportunities over time. Our current social housing backlog nationwide sits at $63.5 million, excluding $45 million of contracts currently being finalized with the city of Toronto. Outside of social housing, we have a solid reoccurring and growing business of over $40 million annually, which includes school, portable specialty kiosks and retail outlet applications. I'm often asked why the backlog isn't higher. And it is important to understand that Modular is a bit different than traditional construction. Project time lines are much shorter, which is a key advantage for cost certainty. So backlog numbers are also smaller as the time from design to delivery is much shorter. Our experiences, contracts are typically finalized 2 months before production begins. We have a pipeline of approximately $300 million in high potential projects to bid over the next 12 to 18 months. We will have the plant capacity to deliver these projects in a cost-effective manner. And there continues to be a significant amount of momentum and enthusiasm from various levels of government for Modular built rapid affordable housing program. I'll now turn this back to Drew.
Thanks, John. On a consolidated basis, our revenues for the first quarter were $155.4 million. Revenue of $38 million in facilities management was stable versus Q4 2020. WAFES revenues of $75.7 million were only $2.6 million lower than Q4 despite the low drilling season and the BC restrictions that temporarily closed 3 of our facilities and reduced camp occupancy levels. Occupancy levels have already increased in Q2, and we continue to win new work with Q2, Q3 typically being the strong quarters for WAFES with our forestry business activities. Modular Solutions revenue declined largely was largely the result of the temporary project delays in Ontario that John mentioned, though our work on BC projects continued unabated and Phase 2 with the city of Toronto starts in Q2. As such, we are expecting high double-digit revenue growth in Q2, and this trend is expected to continue for the rest of 2021. Adjusted EBITDA for Q1 2021 increased to $17.8 million despite the revenue decline. CEWS support was $4.9 million for the quarter, and has assisted us in maintaining employee levels. Adjusted EBITDA in facilities management increased and margins for FM were up to 9% in Q1 2021 from a comparative 7% in Q4 as we executed on our performance improvement plans. Adjusted EBITDA for WAFES was strong and in Modular Solutions adjusted EBITDA dropped by $1.5 million from Q4 to Q1, given the lower volume of manufacturing. With increased revenues in Q2 and for the rest of 2021, we also expect double-digit EBITDA growth in Q2 and beyond. Dexterra has a strong financial position. Free cash flow of $12.4 million in Q1, net debt of $79 million and a leverage to trailing 12-month EBITDA of 0.9x. We will remain focused on a capital-light discipline. Tax plans are also now in place to save cash taxes of $5 million per year. In Q1, we recognized an additional deferred tax asset benefit of $1.1 million based on the tax planning and profitability of the businesses to utilize these tax assets. Let me take a moment to discuss some key elements of our path forward for Q2 2021 and beyond. Beginning with IFM, the strong growth prospects for this business have been delayed but not diminished. We expect many project awards to be made in the second half of this year, and there will be a gradual return of aviation and retail activities. Our goal is for the CAGR for this business to be double-digit over the next several years as we grow market share organically and via M&A. In the WAFES business, we expect activity to increase in Q2 and beyond. Coastal GasLink has restarted in Q2, and the new contract John mentioned launches in Q3. Our Kitimat Lodge serving the LNG Canada project, an area, expects to reopen in Q4 and we expect strong occupancy throughout 2020. The Kitimat Lodge has 750 beds, and the reopening delay is due to LNG Canada, first filling its 4,000 bed lodge. However, the LNG work -- LNG Canada workforce is planned for 7,000 workers per day after the chillers arrive in Q4 2021. So we expect the Kitimat Lodge to provide significant profitability for several years starting in 2022. Modular Solutions remains in a strong position to capitalize on the surge of rapid social housing projects nationwide. The investment we are making with the plant in Cambridge will improve our capability to deliver these projects within the province of Ontario on a cost-effective basis. Further contracts and bids are upcoming in multiple municipalities across Ontario, while BC housing continues to award significant new contracts across that province. The legacy business in school portables and commercial kiosks and structures also expects to have a strong year in 2021. And the business President Dawn Nigro is focused on diversifying the portfolio. So we expect to deliver strong growth starting in Q2 in this segment. Our ongoing vision and our operating model remain the same, building a support services champion with a capital-light strategy, operating with a small head office, a client-focused approach to how we work and a disciplined approach to capital investments with the goal to deliver our plan to reach $1 billion in revenue and $100 million in EBITDA in the medium term. This concludes our prepared remarks for today. I'd like to remind everybody of our AGM scheduled for next week on Wednesday, May 19 at 10 a.m. Eastern Time, where we will have a very brief presentation followed by a Q&A session. At this time, I will turn the call back to our operator for the Q&A portion of the call. [Operator Instructions] Thank you for joining us today. I'll now turn the call back to Sean for the Q&A session.
[Operator Instructions] Our first question comes from Frederic Bastien from Raymond James.
I was wondering if you could quantify the impact of the BC temporary closures, what they had on your WAFES business, either on revenue or EBITDA possible.
Well, we don't have the specific number, but the Crossroads Lodge is a specific EBITDA contributor for us. And it is millions of dollars of EBITDA per quarter. I guess that's all I would say at this point. 750 beds a crossroads -- 750 beds at crossroads that was empty for the quarter. And we did have to continue maintaining the place. So it was a cash drain for the quarter.
Understood. Okay. You referred to a pipeline of $300 million of opportunities over the next 18 months, I guess, for your Modular business. If I recall previously, you were more pointing towards $200 million. So am I right there? And then what have you seen change? What has changed since been?
So Frederic, it's John. I think what's changed is there's -- the funding program from CMHC around rapid housing, expanded substantially I think the interest in delivering affordable housing by many municipalities to deliver it in the form of modular construction as opposed to traditional stick built there's an uptick. And also, we know that there's incoming interest from the likes of quick service restaurants, et cetera, for other modular work around our specialty kiosks and infrastructure work. So things are picking up in folks being interested in delivering projects through modular construction.
And just a clarification on the work you're trying to finalize with the city of Toronto, that $40 million was previously announced back in December? Or is that new? Or these are new contracts that you're looking to finalize?
It's a bit of both. Not all the contracts are done. Some of the contracts are done from what we announced in December, and then there are a couple of new buildings added to the list.
[Operator Instructions] Our next question comes from Zachary Evershed from National Bank Financial.
Great quarter. Regarding the delayed government approvals in Modular, are those dollars still reflected in the backlog? And do you think there's a risk that they could slide to the right again?
It's a bit of a blend of -- there's a couple of projects in the backlog that were delayed. And then there's a couple of projects in the pipeline that was delayed. An example of one was in the global mail on the weekend in Beaverton, Ontario. That project got delayed with some nimbyism in the neighborhood, and it's pushed out to November, and we expected it in Q1. The quantification of the projects that were delayed is about $50 million per quarter.
Got you. And could you tell us a little bit more about the big WAFES win? And then what kind of seasonality should we be looking for? And how early in Q3 will this kick off?
So I'll give you a little more color around that. Very exciting development for us and very good, sustainable sales and profitability, Zach. There would be a modest amount of seasonality, but not a great not a great difference. I think there could be some changes if there are shutdowns for repairs, there might be more people in the camp. I think the adjustments will be up not down because these are not -- these are operating -- this is operating projects. These are operating mines and they're not subject to the kind of ebbs and flows that maybe a construction progress might be. These are -- this is an established operating arenas. And so we're very pleased. And it would start in August and September.
Our next question comes from Jeff Fetterly from Peters & Co.
Question on the Forestry side. What is your visibility and expectation for the Forestry business this Q2, Q3 season?
Well, we think it's going to be a strong season and certainly stronger than last year. Last year was like an all-time low, given COVID, and they were behind on the tree planning activity, but then also forest fires were negligible last year. There's not a lot of people out in the bush setting fires, frankly. So a lot of that activity is expected to ramp up this year. And I think Jeff you're based in Alberta. I think the Alberta government's warrant that this was the driest winter on -- in many, many years. So it's certainly worth $20 million this coming summer.
And on the IFM side, just some clarity, John, on your comments. So how competitive are you seeing the bidding today and how do you think about that in terms of the hit rate for that $200-plus million of awards you expect this year? I know last quarter, you mentioned historical win rate of about $0.04.
So I would say it's competitive out there. I wouldn't say it overly competitive, but it's -- there's lots of interest when tenders go out. I think we -- I'm sorry, we're optimistic that we can get back to pre-COVID hit rate. It may take a little time. We've got a number of very large proposals out to bid right now, that we feel very optimistic about. And I hope that the next time we're together, I can make some announcements around that. So to wrap it up is that we're continuing to compete aggressively, and we will win our fair share of work.
And sorry, just a clarification. So the CAGR you talked about with 15% in FM in coming years. Is that entirely organic? Or do you expect M&A will be a part of that?
No M&A would be part of that. We're going to grow that business both organically and through M&A.
Yes.
But we could get pretty close to that organically. That's true. M&A would ramp that up pretty quickly.
Our next question comes from Chris Murray from ATB Capital Markets.
So maybe, John, just going back to the $200 million in bids you're talking about for facilities management this year. Just thinking about your end markets and how you're thinking about positioning? Like any thoughts on areas you want to avoid or perhaps where you want to go back to given some of the experience you've had over the last year?
I think I'll answer this with diversification. I think it's not that we want to abandon any particular segment or group of customers because we don't. But we certainly want to diversify a bit more. So we're putting some effort into what I'll call in the senior living area because it has long-term growth perspectives. We're continuing to bid into retail, and we're not really going to back away from that. I would say that there's interest in government and there's lots of opportunity for government infrastructure. So I wouldn't say we're backing away from anything, I'd say we're just focusing on a bit more diversification. And once again, in FM, we just have to build our scale up because building scale helps us in so many ways. It helps us with the margin. And I hope you'll note that our margins on the uptick.
Okay. No, that's helpful. And then the other question I have is on Modular on the business. And the margin in that business has been a little bit challenging. And of course, I mean, I hear what you're saying about a little bit of a delay in some Ontario projects. But what are your thoughts around the margin profile? And I'm thinking again about the new plant that you're building, and where you think you can identify additional margin opportunities as you go through? Is it a factor of just being able to bid that volume that's out there correctly? Or is there things you can do operationally in order to drive higher volume or higher margins?
Yes. I think the team at West has a stable platform and run rate for their margins. The team in the East is evolving with the new plant. The traditional business in the East was not these low-rise apartment buildings. It was more school portables and such. And so when we ramp the first 2 Toronto projects through Grimsby, it really didn't fit in the plant, and we had to turn the box of sideways and it was very inefficient, frankly. And that's why I think you've seen in previous quarters, the margin rates in Modular might have been 5 or 6 points. But going forward, we think the margin rates in Modulars should be 8 or 9 points.
And I'd just add to that. Dawn has been here for a month. He has a very strong plan around cost management. And improvements and diversifying the business base. So I just want to add that to the mix that we're comfortable that we can create good margins and good stable margins in that business.
[Operator Instructions] We have a follow-up question from Frederic Bastien from Raymond James.
Just like maybe a clarification here. But when you point to high double-digit growth for your business in Q2, are you referring to like low teens, high teens or a percentage that's even greater than that?
Yes. High teens, Frederic. Sorry, I meant to change that in my script this morning to make it clearer because somebody could think it's 99%. I don't want that.
[Operator Instructions] 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.