Dexterra Group Inc. (DXT), a leading provider of integrated facilities management (IFM) and workforce accommodation solutions, reported a robust beginning to the fiscal year 2024, with a 7% increase in consolidated revenue to $231 million in the first quarter. The company's IFM and Workforce and Forestry Equipment Services (WAFES) units demonstrated significant growth, with IFM EBITDA expected to double compared to 2022 and WAFES maintaining strong profitability.
Dexterra also announced the pending sale of its Modular business, which is anticipated to close early in the third quarter, allowing the company to concentrate on its profitable support services and fortify its balance sheet. The company declared a Q2 dividend and extended its normal course issuer bid program, reflecting confidence in its financial health.
Key Takeaways
- Dexterra Group reports a 7% increase in Q1 revenue to $231 million.
- IFM EBITDA is projected to double in 2024 compared to 2022.
- The sale of the Modular business is expected to close in early Q3.
- The company aims for $1 billion in revenue and near $100 million in EBITDA for fiscal 2024.
- Dexterra declared a dividend for Q2 2024 and extended its normal course issuer bid program.
Company Outlook
- Focus on capital-light support services model, particularly in the IFM space.
- Target of $1 billion in revenue and close to $100 million in EBITDA in fiscal 2024.
- Plans to invest in personnel, technology, and M&A opportunities.
- Expectations of a strong balance sheet post-Modular sale.
- Continued pursuit of strategic acquisitions and debt reduction.
Bearish Highlights
- Seasonal fluctuations in the WAFES segment.
- Impact of inflation and potential wildfire activity on operations.
Bullish Highlights
- IFM segment saw organic revenue growth of 11%.
- Strong pipeline of IFM opportunities.
- High demand for rental matting inventory, particularly in Montney and Duvernay areas.
Misses
- No specific misses were mentioned in the provided context.
Q&A Highlights
- The company is reallocating resources to execute on a strong pipeline of IFM contracts.
- Dexterra is reassessing capital deployment post the Modular business sale.
- The sale of the Modular business is expected to bring in a net book value of around $40 million in cash.
- Plans to use the proceeds from the Modular sale to pay down debt.
Dexterra Group's strategic focus on its IFM and WAFES units, coupled with the anticipated sale of its Modular business, positions the company for a robust fiscal year 2024. With a strong start in the first quarter and a clear plan for growth and profitability, Dexterra is poised to meet its ambitious financial targets while maintaining a solid balance sheet and exploring strategic opportunities for expansion.
Full transcript - None (HZNOF) Q1 2024:
Operator: Good morning, ladies and gentlemen. Welcome to the Dexterra Group’s First Quarter Results Conference Call. I would now like to turn the meeting over to Denise Achonu, Chief Financial Officer. Please go ahead.
Denise Achonu: Thank you, Gazelle and good morning. My name is Denise Achonu and I am pleased to join you as the Chief Financial Officer of Dexterra Group Inc. With me today on the call are Mark Becker, our CEO; and our Board Chair, Bill McFarland, who will provide some brief introductory comments. After a brief presentation, we will take questions. We will be commenting on our Q1 2024 results with the assumption that you have read the Q1 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 cover the content of cautionary notes in any details. 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.
Bill McFarland: Thank you, Denise and good morning to everyone joining the call. We are off to a good start in 2024 in our continuing operations and are pleased with the progress and foundation we are building in both IFM and WAFES. In 2024, we expect IFM EBITDA to be about double our EBITDA in 2022 and WAFES should continue to deliver a very strong profitability. As previously announced, we are also in the process of selling our Modular business. And as a result, in Q1, the earnings from this business are classified as discontinued operations. The sale of the Modular business allows the company to focus on our two profitable support services businesses, repay debt and deploy capital in areas of the business with stronger returns. As noted before, we believe this decision will be positive for our shareholders, Modular customers and employees. Our goal in 2024 is to continue to build on our successes in IFM and WAFES and build a business for the long-term that is competitive, delivers reliable results and strong shareholder returns while maintaining a strong balance sheet. We look forward to presenting the updated path forward and plan at our June Annual General Meeting. I will now pass it over to Mark Becker for his comments.
Mark Becker: Thanks, Bill, and good morning, everyone. As Bill said, it’s been a good start to the year for our continuing operations in IFM and WAFES. The business units generated a strong performance in Q1 with consolidated revenue of $231 million, an increase of over 7% from the same quarter last year. The year-over-year increase in revenue was driven by new long-term contract wins in both business units as well as strong overall market activity in WAFES. Adjusted EBITDA, which excludes the impact of discontinued operations, was $19.6 million in Q1 compared to $19.8 million and $23.6 million for Q1 and Q4 of 2023 respectively. The delta from the last quarter reflects the normal seasonality in the WAFES business unit in Q1, partially offset by robust activity in access matting, IFM defense contracts and a 1 month contribution of CMI, our previously announced acquisition, which closed on February 29. As we mentioned in our last call, CMI is an IFM capital-light business based in the Greater Washington, D.C. area, serving primarily federal government agencies across the United States, with annual revenue of approximately $50 million. CMI is an excellent strategic fit for Dexterra that expands our U.S. IFM presence and we are very glad to have Shason Yavari and the whole CMI team on Board with us. In Modular, we are finalizing the legal agreements for the sale of the business at approximately net book value and we expect to be able to formally announce something soon. The sale is expected to close in early Q3, subject to normal closing conditions. Finally, yesterday, the Dexterra Board approved the extension of our normal course issuer bid program. We plan to carry on with our NCIB as we continue to believe our shares are undervalued in the market. Speaking in more detail about IFM on Slide 6. IFM revenues were $101.6 million in Q1, an increase of more than 17% from Q1 of 2023. Organic revenue growth made up approximately 11% of the increase and was derived across all IFM service areas, but particularly new contract wins, including several in the postsecondary education space. Adjusted EBITDA as a percentage of revenue was 5.2%, which was in line with our Q4 2023 margin. Our margin in Q1 was influenced by startup and labor cost associated with onboarding of certain new post-secondary foodservice contracts in their first season of operation. The balance of the IFM business is doing well with adjusted EBITDA margins of over 6%. Positive news is we are seeing inflation impacts beginning to abate. However, it’s still with us in certain key cost areas, including food and labor. We are continuing to recover these costs through contractual inflation terms and price adjustments with some time delay. As these price increases become effective and as we streamline operations in our new food service contracts, the adjusted EBITDA margin for the entire IFM segment is expected to increase to over 6% in the back half of 2024 with fiscal 2024 revenues exceeding $420 million. Our sales pipeline is strong, including single service contracts as well as higher margin, broad service, fully integrated IFM opportunities. We anticipate the pace of organic growth in this business to continue with new integrated IFM opportunities helping to build capability and scale as well as positively contributing to our margins. Lastly, we remain active in sourcing IFM acquisitions with several targets under review. We will remain disciplined and pursue acquisitions where there is a good strategic fit and is accretive to shareholders. Moving to WAFES on Slide 7. Revenue from the WAFES business unit for Q1 was $130.3 million consistent with Q1 of 2023 and a decrease compared to Q4 of 2023 due to the normal seasonality of the business. As we see activity on large key projects such as LNG Canada and Coastal GasLink winding down, several large long-term new contracts started mobilizing in Q1 and will be fully operational by the end of Q2. Adjusted EBITDA for Q1 2024 was higher at $20 million compared to $18.5 million in Q1 of 2023, primarily due to high margin camp occupancy as well as strong access matting utilization and sales. Overall all indicators point to continued strong activity levels in all segments of WAFES in 2024. Our current year sales and sales pipeline remained strong with expected margins staying above 15%, driven by our business mix and our strong delivery model. We expect growth of the business unit at similar rates into recent years based on organic growth opportunities across our market segments nationwide. The tree planting season is underway with expected volumes similar to 2023 at about 31 million trees. We also remain well positioned and prepared to support the wildfire season and any impacts to communities this year. We continue our key contracts with the fire-based support camps in Western Canada and continue to be contracted as a first responder in many areas. So far this month, we have mobilized fire support camps to the Fort McMurray region as wildfires are already active in this area. Moving to Modular on Slide 8, the Modular business net loss for Q1 was $8 million, driven by increased cost associated with remediation and rework on certain lump-sum turnkey social affordable housing projects in Ontario. While we are obviously disappointed by these results and extra costs, these projects are now 75% to 90% complete. This reduces the risk of further cost overruns with the scope and cost to complete narrowing. Most of these projects are expected to be substantially complete in Q2 with one or two potentially carrying over into early Q3. Additionally, lower overhead cost absorption contributed to the Q1 results due to the temporary softness in manufacturing activity levels in the plants. However, our sales pipeline is active with new opportunities that we expect to bridge the temporary softness in the backlog, improving business to a more normal manufacturing activity level. The recurring education portables and commercial industrial modular business continues to grow and deliver strong profitability. With that, I’ll now turn it back over to Denise.
Denise Achonu: Thank you, Mark. I’ll speak about our financial position and capital markets on Slide 10. Our financial position and liquidity remains strong. Our debt level was $132 million at March 31 compared to $89 million at Q4 2023 due primarily to the funding of the CMI acquisition as well as $5.7 million of capital expenditures, which includes the sustaining access matting additions for the year. Sustaining capital expenditures are expected in 2024 to continue to approximate 1% to 1.5% of revenue. Proceeds from the anticipated modular sale will reduce the debt level significantly and provide further financial flexibility. We expect our debt level to be below 1x adjusted EBITDA from continuing operations following the Modular sale, which will provide flexibility for growth as accretive opportunities arise. Q1 2024 adjusted EBITDA conversion to free cash flow from continuing operations was 54%. Free cash flow from continuing operations conversion of adjusted EBITDA is expected to approximate 50% for 2024, with Q3 and Q4 experiencing the highest conversion to free cash flow as a result of the seasonality of the WAFES and the IFM business units. Dexterra repurchased 279,300 common shares in Q1 2024 at a weighted average price of $5.91 per share for a total consideration of $1.7 million under the terms of the NCIB. As Mark mentioned earlier, the Board has approved the extension of our NCIB program. Under the renewed NCIB, there are 165,600 shares remaining to be purchased. We are also reassessing our broader capital deployment plans in a post-modular world as we balance share buybacks, acquisitions, target leverage ratios and dividends with the goal of maintaining our strong financial position and delivering value to our shareholders. Finally, Dexterra declared a dividend for Q2 2024 of $0.0875 per share for shareholders on record at June 28, 2024 to be paid July 15, 2024. I will now turn it back to Mark for closing comments.
Mark Becker: Thanks, Denise. The points on Slide 11 summarizes our key priorities and focus areas for the balance of 2024. My focus and the focus of the Dexterra team is to complete the sale of the Modular business and continue to drive strong execution of our business plan, improving margins and profitability through the effective management of our two continuing business units. Our strategic focus on our capital-light support is on our capital-light support services model with continued emphasis on growth in the IFM space. In the medium-term, we’ll continue to leverage our strong sales momentum to deliver profitable organic growth in our target markets. We’ll also continue to invest smartly in a disciplined manner in people, technology and accretive M&A opportunities while maintaining a strong balance sheet. We believe that the company’s continuing operations are well positioned to deliver $1 billion in revenue and close to $100 million in EBITDA in fiscal 2024 with some potential upside depending on fire support activity this year. The Dexterra team is energized and has the platform and building blocks in place for strong growth and improved profitability in IFM and continued WAFES success. This concludes our prepared remarks. I’ll turn the call back to our operator, Gazelle, for the Q&A portion.
Operator: Thank you. [Operator Instructions] The first question is from Aaron MacNeil, TD Cowen. Please go ahead.
Aaron MacNeil: Hey, morning. Thanks for taking questions. Mark, on the last quarter’s conference call, you highlighted the IFM revenue mix, 30% was full integrated IFM. That’s an 8% to 10% margin. And you also mentioned you’re pursuing organic growth to bring that number higher. And I know that gets you to the 6% to 6.5% target you said last quarter, now 6%. But as we think about the reduction from that to the lower end of that range, like is that a 2024 phenomenon? Or do you still think you can get that margin up to the 6.5% or potentially higher over time?
Mark Becker: Yes. Good morning, Aaron, good questions. Yes, still confident in what we’re projecting and saying around our margins. We’ve seen, as I mentioned in the comments around some of the new contracts in post-secondary education that we brought on for the first season. But we’re seeing the back half broadly around IFM, the back half of the year at over 6% margins and bringing us up to that level. So I would say on the inflation factors that we’ve seen around food cost and labor that we’re covering off through pricing adjustments and contractual increases kind of brings us back to those numbers, and we’re still positive on that front, and those ranges that you discussed that back half of this year will be over 6% for IFM broadly. We’re still very confident in that.
Aaron MacNeil: Got it. And just a point of clarification on the Modular side. Is the rework largely done? Or will you still sort of incur losses in the segment until the sale? And is there any risk that the sale could fall through? Or is it as good as done at this point?
Mark Becker: Yes. As I talked about, those projects that we’ve had issues on, they’re 75% to 90% on all of them. Completion targeted by the end of Q2, we may see a couple of carryovers into Q3, get to those points in execution on the projects, your scope, your spend and the scope of the costs, you starting to close down towards the end of the project. So really lowers the risk that we would say largely those cost impacts are behind us on those projects into Q4. We might see maybe a small loss in Q4 – Q2, sorry. But some of that is just related to some of the manufacturing activity and overhead absorptions. But we expect it to be quite a bit less, if anything, in terms of those losses. In terms of the Modular deal, I think I’ve shared about as much as we can on it. We are into the final phases of finalizing the agreement with our proponent buyers. So I probably can’t share a lot more related to that.
Operator: The next question is from Chris Murray, ATB Capital Markets. Please go ahead.
Kyle Brock: Good morning. This is Kyle on for Chris. Hope you can touch on the wildfire activity currently underway. Do you expect any of your operations in Western Canada be impacted in any way? And does the situation change your outlook for fire support in 2024?
Bill McFarland: Yes. I would say it’s always a risk for us related to impacting operations both our clients as well as our operations haven’t seen really anything yet on that front. But – and whether or not it’s been an early fire season. We’ve been involved now already with the Fort McMurray fire with a couple of response camps that we’ve mobilized up to Fort McMurray. It just depends on how it plays out because when you get wet weather in June or July, suddenly, the whole thing shifts. But all we can really say is kind of an early start already to the season. We’ll have to see how that plays out in terms of the activity level and really nothing significant yet in terms of risk to our operations or what we would expect for the balance of the year within WAFES related to fire activity in terms of negative impact, so we’d be still looking at the current levels we’ve been talking about.
Kyle Brock: Okay. Then shifting to Modular. You previously mentioned the potential sale price around net asset value or in that $40 million range. Is that still the way we should be thinking about this color I would appreciate?
Bill McFarland: Yes. That I would continue to think that way and it’s kind of why we flagged it. We’re confident in the sale agreement and closing the agreement. So I would continue to think of it that way.
Operator: Thank you. Next question is from Zachary Evershed, National Bank Financial. Please go ahead.
Zachary Evershed: Good morning, thanks for taking my questions.
Mark Becker: Good morning, Zach.
Zachary Evershed: On a new IFM contract, how long is the ramp-up between starting margin and mature margin typically? And what is ramping up over that duration?
Bill McFarland: Yes. Good question, and I’ll answer it, I guess, by saying it depends. Some contracts, depending on the nature of it, it could ramp up very quickly in terms of our returns. Others not. We found with some of these post-secondary contracts that we’ve brought onboard. We brought about four of them onboard, and it’s really boiling down to just a couple that we’re seeing kind of the ramp-up related to those contracts. I would say probably the thing that we’re flagging related to Q4, Q1, just kind of first season with a couple of the contracts they’re quite large that we’ve seen some less than target margins, but we do expect to get those back. And of course, Zach. You go through the summer season now, which is a lower activity level, but still profitable, but then it picks back up again in the fall with the next season. Our expectations are all these contracts are going to be on plan for margin return next season. The other thing I’ll mention to you about this is it really depends on the food service business around fee contracts versus P&L contracts or profit and loss contracts. A lot of our contracts, the ones we target are kind of fixed fee-based contracts. We like those, it tend to be higher margin. Although we do see P&L contracts that are larger in scale is also attractive, but they can be challenging in that initial ramp-up.
Zachary Evershed: Thanks for that color. And then still on the same topic with inflation abating in categories outside food and labor, how long does it usually take for price adjustments to roll through and add maturity?
Mark Becker: It depends again the client, the contract, but all I can tell you is Zach because we’re getting good at it. I mean we’ve been at it now from the pandemic all the way through to where we are now, we are very active on this front across all our business lines, particularly WAFES and IFM, which have the long cycle contracts, making sure we’re getting access to CPI increases and just contract pricing increases in general. Generally good response from our clients. I mean they all get it. We all know where inflation has been and abatement is only just starting now. So we do see a bit of a lag, and it depends which contract and some of the size. But usually with the abatement, we’re going to start catching up. It’ll be our anticipation to start catching up on it. Labor, I would expect over the next couple of years to still see pressure in that. The hourly labor has largely been left behind. I would terms of inflation. So we’re going to see kind of hourly labor continuing to increase. So we’re going to be very focused on making sure we’re managing those costs and pricing.
Operator: Thank you. Next question is from Gabriel Moura, Scotiabank. Please go ahead.
Michael Doumet: Hi, calling for Michael Doumet. On the last call, you indicated that 2023 EBITDA margin in WAFES would be tough to replicate in 2024. But if the matting and the wildfire business are active this year, is there another reason why margin would be lower this year versus last?
Mark Becker: Yes. I wouldn’t expect margins to be lower this year. If anything, I would say probably similar is kind of what we’d be flagging. A lot of that is driven by product mix or business mix that we’re seeing. WAFES in general, very active in terms of asset utilization, whether that’s camp equipment, matting utilization, even relocatable rentals. Our utilization rates are very high, which tends to drive high margin. We’re also getting into higher margin contracts just because of the nature of the business. Wildfire can pull that margin up potentially depending, but I would say it’s more driven by our activity level. And our long-term target in WAFES is to maintain a 15% EBITDA margin rate at the segment level. With WAFES, I think we will be positive on that or North of that this year, similar to 2023.
Michael Doumet: Thank you. And is there any way you can provide specific on the matting business as the mix between the rental and sale shift in the recent quarter? And will there be an eventual need to ramp up CapEx if the momentum continues into 2025?
Mark Becker: Yes. Good question. Matting, I don’t think that mix necessarily changes, but we do see a range of demands from clients. We look to maintain our matting – our rental matting inventory, our capitalized inventory around 36,000 mats, which is what we currently have. We still do see demand from clients, the Montney, Duvernay area, liquid-rich gas, supplying LNG Canada, etcetera, very, very active and continuing active. So, we do see clients that are wanting, so we have high utilization on our rental fleet, but they are also wanting new mats as well. A lot of cases, we would provide new mattings to clients that don’t end up being capitalized. We are effectively either manufacturing them or buying them and then selling them to the clients, so they don’t end up being capitalized. It would be kind of – if you look back in the last year or 2 years, it would be kind of very specific situations where we would ramp up capital related to matting, and it would be very, very high return, very short cycle return on anything that we might do around capitalizing. Beyond that, we kind of spend about $4 million out of our sustaining capital, just maintaining that fleet that I mentioned to you.
Operator: Thank you. The next question is from Sean Jack, Raymond James Limited. Please go ahead.
Sean Jack: Hey. Good morning guys. So, just thinking about M&A, do you think it’s realistic that we see another purchase for the end of 2024? And on top of that, could you also talk about what your comfort leverage range is going forward?
Mark Becker: Yes. I will talk a little bit about that first and I will turn it over to Denise to talk about leverage ratio. I think we talked before, Sean, and Jack to the market. We want to stay strategic on acquisitions, focused on integrated – fully integrated FM acquisitions like CMI, both Canada and the U.S. We remain very active on that front. It is vitally important, though, we find the right fits that are strategic for us from a capability and a platform perspective and a scale perspective for us, and also that we get the right valuations as well. That’s very important to us, and we maintain our balance sheet. So, whether or not we can really predict timing on any of these, you really can’t predict timing. It’s going to be very really focused on what we can find in the nature of the deals. Denise, do you want to talk about leverage ratio?
Denise Achonu: Sure. Just given where interest rates are now, obviously, we are going to use the proceeds of the modular sale. The first thing we will do is pay down debt. And then again, just to Mark’s comments, it’s what are the opportunities out there for acquisitions for growth that meet our criteria. But just given more broadly than that, what we are looking at is really a larger kind of capital allocation model just in terms of how we are thinking about share buybacks, acquisitions, and even looking at our card, what’s the right target leverage ratio in that context. So, anyway, really right now directionally, we are going to be paying down debt and then we will be taking a look at where we want to end up for the future, and we will talk a little bit more about that at our AGM.
Sean Jack: Okay. Perfect. Thanks guys.
Operator: Thank you. Next question is from Trevor Reynolds from Acumen Capital. Please go ahead.
Trevor Reynolds: Hey guys. I was wondering if you guys can touch on the re-contracting of assets coming off of the pipeline, and maybe where that sits?
Mark Becker: Yes. Good morning Trevor. And I think you mentioned this a few times, but assets that are coming off Coastal GasLink as well as LNG Canada, we have been very active getting those contracted, and we have got some large projects that are actually large long-term contracts both in Western Canada and Eastern Canada, where we are reallocating those assets, which has been great for us because we all know Coastal GasLink and LNG Canada were big projects and they are ramping down. But as we are ramping up the new projects, we are able to kind of redeploy those assets and reutilize those assets. So, we are very happy about that. We are very happy about that situation.
Trevor Reynolds: Okay. Great. And then I just had a question around the write-downs that you have taken on the modular. Does that have any impact on the NAV? I know you said you are still expecting around that $40 million level? And just maybe following on that, like, what is the actual cash pay-down of that $40 million that will be available to you guys?
Denise Achonu: In terms of – let me take a write-down. We are – based on what we are saying, we are expecting to get net book value for the modular business. So, that’s right in line with what we are carrying it at. And it’s going to be a cash deal. What we have said is take the cash, we will pay down debt. And does that help?
Trevor Reynolds: Yes. I think so. Yes, I thought there was some working capital that maybe had to be paid down as well. So, I was just wondering what kind of net pay-down in actual debt will be?
Mark Becker: I think I would focus for now just on the $40 million, I think would be – would probably be a good number to use for now, I would say.
Trevor Reynolds: Okay. Thanks guys.
Operator: Thank you. Next question is from Zachary Evershed, National Bank Financial. Please go ahead.
Zachary Evershed: Hey guys. Two quick follow-ups, in IFM, has there been more of a focus on post-secondary organic growth versus fully integrated FM? Do you have the capacity on the integrated front for growth?
Mark Becker: Yes. Good question, Zach, and we do. And we do and we have actually brought on resources. We have a focused team that’s looking at integrated FM opportunities or IFM opportunities, organic IFM opportunities. We have got a really pretty strong pipeline there. We have got quite a number of opportunities that are right in front of us, and we are active on. So, we have kind of set ourselves up related to resourcing, both around pursuit of those contracts as well as a ramp-up in execution. So, when we win those contracts, and it’s not like we don’t have kind of a pretty substantial inertia around IFM already. We can leverage that inertia to ramp those contracts up as they come onboard.
Zachary Evershed: Got it. Thanks. And then just on you mentioned that you are reassessing your capital deployment plans post modular, any real changes that you are considering versus prior messaging on the M&A front?
Mark Becker: I would say really, really the same. We have mentioned the NCIB. So, we have got that in play, proceeds from the modular sale is going to go against that. And we will continue to kind of look at acquisitions as kind of our next tranche of capital allocation. Target leverage, we are still going to determine that. I think generally, we want to keep a strong balance sheet and how things are transpiring in 2024. We are going to see our leverage drop quite low. We want to make good use of that as well. I think keeping target leverage, we will communicate something like that in the future, but I think we are not going to be looking to over-leverage our balance sheet. And certainly, at this particular stage where we are nowhere near that – those kinds of tipping points. So, we want to – we will communicate more around our target leverage as kind of part of our capital allocation discussion as part of the AGM is what I would say.
Operator: Thank you. There are no further questions registered at this time. This concludes the Dexterra Group’s first quarter results conference call. Please disconnect your lines at this time and we thank you for your participation.
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