Thank you for standing by. This is the conference operator. Welcome to Dexterra Group's second quarter 2023 results conference call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star, then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and 0. I would now like to turn the conference over to Drew Knight, Chief Financial Officer. Please go ahead.
Thank you, Ishia, 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 Mark Becker, CEO, and our Board Chair, Bill McFarland, who will provide some brief introductory comments. After a brief presentation, we will take questions, with the call ending by 9:15 A.M. Eastern Time. We will be commenting on our Q2 results with the assumption that you've read the Q2 earnings press release and 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. For the Q&A portion of the call, we will limit each person to 2 questions at a time. Before we begin, I would like to make some comments about forward-looking information.
In yesterday's news release and on slide two of the presentation that we have posted to our website, you will find cautionary notes in that regard. 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.
Good morning, thank you for joining the call this morning. I'm pleased to report that the organization achieved record results in Q2 2023. This included stronger results from all of our business units. Management's focus in 2023 of profitability and execution is making a difference and has set Dexterra up for future success. On an annualized basis, we're very close to our announced goal at the time of the merger 3 years ago of over CAD 1 billion in revenue and CAD 100 million in EBITDA. Our financial position is strong, we have experienced leaders in place. The team has demonstrated flexibility and the ability to pivot effectively in the post-COVID world. We also believe our stock is significantly undervalued and intend to continue to buy back shares opportunistically.
I will now pass it over to Mark Becker for his comments on the business and outlook for the rest of 2023.
Great. Thank you. Thank you, Bill. Good morning, everyone. As Bill said, we're very pleased with our results in Q2, continuing the positive momentum we've established this year. Our focus continues to be on execution and profitability, driving growth and margin expansion. I'll cover the by business unit details in a moment, but first, I want to reinforce our key focus areas listed on slide 5 that make up our framework of our 2023 business plan. These focus areas are unchanged from our last update and remain our key leverage points to improve and grow the business. Our consistency in this plan is helping us to continue to make a positive impact in the business broadly, both top line and bottom line. Inflation and labor market conditions generally remain a factor for us across the businesses.
While we've seen price abatement in a number of key supply commodities and some improvement in labor availability, generally speaking, market conditions continue to challenge us in critical areas such as food and labor costs. We remain very focused on managing those pressures, working proactively and collaboratively with our clients on contract pricing adjustments, strategic supply chain arrangements, and other operational initiatives to drive better margins. Overall, we're very happy with our ongoing progress and efforts in this area, and it's demonstrated in our results. Moving to IFM on slide six. Our focus in IFM is on new sales growth and continuing to improve EBITDA margins through operational improvements, inflation management, and contract rationalization. IFM revenues are up 17% compared to Q2 last year, primarily due to new business wins in the post-secondary education, hotel, and rail segments.
Relative to Q1, revenues are lower relative to the seasonal dip in education and leisure. Additionally, we are exiting or have exited approximately CAD 10 million-CAD 15 million in contracts with unsustainable commercial terms, where we are unable to achieve adequate profitability in a post-COVID environment. Netting out the impact of these rationalized contracts for IFM, our EBITDA margin is 6.6% for the quarter. This ongoing repositioning and rationalizing of the IFM business portfolio will help us move faster in the near term, towards our target of 7% or greater EBITDA margin. New sales have been particularly strong this year in IFM, with significant new profitable contracts related to post-secondary education and other segments, circa of about CAD 50 million coming on stream primarily in Q4. Mobilization of these new contracts will support a strong back end of the year from September on.
Lastly, we remain active in exploring acquisition targets in the IFM space for potential execution later in 2023 or 2024. Moving on to WAFES on slide 7. Revenue from the WAFES business was up significantly compared to Q2 last year and higher than Q1. primarily due to unprecedented wildfire support and overall robust market activity across the natural resources market segment. We've been doing all we can to support firefighting efforts across Canada, from Quebec to British Columbia, and activity continues into Q3, albeit now is primarily focused in BC. We're seeing high occupancy levels in workforce accommodations across our portfolio, as well as high utilization and activity levels in energy services in the Montney/Duvernay natural gas development regions of Northwest Alberta and Northeast BC.
We also closed a significant contract change order related to the recovery of inflationary costs on one of our major projects in Q2. The influence of the fires and contract change order are the primary drivers of the unusually high profitability in Q2, which resulted in EBITDA, 18% EBITDA yield compared to what would be a more normal 15%. Looking forward, strong camp occupancies, including Coastal GasLink projects, project, and our Kitimat camp at LNG Canada, are expected to continue into the back half of the year. Similar to IFM, new sales momentum has been strong this year in WAFES, with several new major camp projects and contracts coming on stream in 2024, that will support the WAFES business going forward as the current major projects like Coastal GasLink and LNG Canada move into their completion phases.
Lastly, on modular, slide 8, revenues were as expected in Q2, driven primarily by our ongoing social affordable construction projects, educational portables, and industrial segment activities. Profitability continues to be positive as a result of good progress on our four-point business improvement plan. We continue to progress through the group of fixed price BC Social Affordable Housing projects, which accounted for CAD 11 million in revenue in the quarter. The remaining CAD 24 million backlog associated with these projects is still expected to be substantially complete by year-end. Normalizing Q2 for the BC Housing contract, the remaining work delivered is approximately 5% EBITDA, as the business continues to focus on building towards a target of sustainable EBITDA margins of 6% or greater in 2024.
Our project backlog has been drawn down so far in 2023, primarily due to the timing of awards for new social affordable housing projects in the approval processes under the latest tranche of federal government funding. U.S. supply-only activity also remains muted due to the high interest rate environment impacting real estate development there. The timing of securing new contracts is impacting the current utilization at our manufacturing plants, which we are managing through adjustments to trade staffing levels and other production management measures. However, the longer-term demand for social and affordable housing remains strong, and with the number of bids and proposals in play, we expect the backlog to reach an inflection point soon and begin to rebuild. Sales and rebuilding the backlog remains a primary priority for us.
We're also pursuing other areas of opportunity in industrial and Indigenous housing projects, as well as a strong and active educational portables market. Overall, we expect modular to continue at similar quarterly revenue levels and remain profitable through the second half of 2023. With that, I will turn it over to Drew for some comments on our financial position.
Thank you, Mark. I'll speak about our financial position in capital markets on slide 10. Our financial position and liquidity remain strong. The board of directors approved a new credit facility yesterday, which is expected to close this month with a maturity date of September 7, 2026. This will include an expanded available limit of CAD 260 million, plus an uncommitted accordion of CAD 150 million, and provide expanded flexibility to pursue accretive acquisitions. We expect our leverage to be a little over 1x EBITDA by the end of this year in the absence of acquisitions. Dexterra commenced an NCIB on May 15, 2023, under which we can repurchase up to 1.3 million shares for cancellation or about 2% of our common shares outstanding.
For Q2, we have repurchased 189,100 common shares at a weighted average price of CAD 5.60 per share, for total consideration of CAD 1.1 million. We continue to believe that the company is significantly undervalued and will continue to be opportunistic in repurchasing shares in the coming quarters. For the full year, we expect adjusted free cash flow conversion to EBITDA or adjusted free cash flow conversion from EBITDA will continue to track to approximately 40%-50%. As in prior years, free cash flow is affected by the timing of capital expenditures and by investments in working capital, primarily associated with business growth. We expect strong free cash flow conversion in the back half of the year, similar to 2022.
We declared a dividend for Q3 2023 of CAD 0.0875 per share for shareholders of record at September 30, 2023, to be paid October 13, 2023, which is unchanged and is a 6% return on our current share price. I will now turn it back over to Mark for closing comments.
Thanks, Drew. The points on slide 11 in our deck serve to summarize what we've covered today and our key focus areas going forward for the balance of the year. My focus and the focus of the Dexterra team in upcoming quarters, is to continue to drive strong execution, improve margins and profitability through the effective management of our business and any inflation effects. We will continue to our growth story through strong sales and organic expansion, as well as potential strategic acquisitions to build our IFM platform and to enhance the services we offer to our clients. Our financial position and liquidity are strong, and we continue to focus on free cash flow and reducing debt, excluding merger acquisition activities.
As we continue to execute, improve, and sustain our profitability and grow, we believe that the market will recognize our true value over time. We've made good progress in the first half of 2023. I'm confident, and our employees are energized about our plans and the future ahead for the company. A future that will deliver strong stakeholder value to shareholders, employees, customer, suppliers, and our communities as we continue our growth growth and success story. This concludes our prepared remarks, I will turn the call back to Ishia. Sorry, Ishia, for the Q&A portion of the call.
Thank you. We will now begin the question and answer session. To join the question queue, you may press Star, then One on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your questions, please press Star, then Two. The first question comes from Chris Murray with ATB Capital Markets. Please go ahead.
Thanks, and good morning. This is Kyle on behalf of Chris. In the MD&A, you called out a CAD 5 million non-recurring add-back in WAFES, hoping you can provide a bit some color on what's in that number and if we should be expecting similar add-backs in the second half.
Thanks, Kyle. Yeah, the CAD 5 million add-back in WAFES is related to a couple of things. It's, it's partly related to a change order on a large project, camp project that we have, and it's also related to the fire support activities during the quarter. Much of that will, will continue on into Q3 this year, and that comment was more related to next year when some of that stuff may not be there. Anything else?
No, that's it for me for now. Thanks.
Okay, great. Thanks.
The next question comes from Aaron MacNeil with TD Cowen. Please go ahead.
Hey, morning. Thanks for taking my questions. As it relates to the CAD 50 million in incremental IFM revenues, can you just give us a sense of what your margin expectations are for that work? If it's... You know, I assume it's incremental to your, your current margins, but maybe you could just give us, us a flavor for that.
Yeah. Good morning, Aaron. Yeah, good, good, good question. That work, we had a really good season this year, related to post-secondary education, services. That season is typically, changeovers in those contracts, happens in the spring, and we did very, very well on that front. It's a fair chunk of that CAD 50 million, in the, that's gonna come on stream in the fall. As well, we're getting good traction in our hotel and, and rail sectors as well, services sectors as well, which has also got similar, similar timing. All of that, you know, we are targeting, you know, IFM broadly, we are targeting kind of that 7% or higher, EBITDA margin for that business, and anything that we bring on, is kinda measured against that benchmark and, and higher.
Obviously, there's a mix, you know, of, of business. You know, some integrated IFM business is higher, call it 10% EBITDA margin, some of it's lower. Generally, we wanna have everything kind of, 7% and more as, as we work towards that target overall for that business.
Understood. switching gears to the, the modular business, can you walk us through Canada's different affordable housing initiatives, the status of government funding tranches, and what we'd need to see happen to see an uptick in, in bookings related to that end market?
Yeah. You know, pretty much everything is under the Rapid Housing Initiative now, which has had several tranches of funding. The latest tranche of funding is active this year. Proposals went in against, and, you know, it's $2.5 billion is, is the latest tranche of funding for affordable housing. Proposals went in from, you know, municipalities, agencies, areas that are proposing even, you know, First Nation communities, we're seeing proposals going in for affordable housing. All those proposals went in in the spring, and awards are just kind of underway right now. Through the summer, those proponents who are putting in affordable housing are receiving kinda funding decisions from, from RHI and through CMHC, is, is how it's done this summer.
We're seeing that real time happening, happening right now, as that funding comes across. You know, I would say, Aaron, generally speaking, and, and we hear this, kind of at all levels, we, we hear this at the federal level, we hear this at the provincial level, even the municipal level, that, you know, none of those groups are, are happy with the amount of, you know, affordable housing that's getting done, and I'm, I'm sure you can see that in the media. There's a lot of energy to get that fund, get those projects live, get those projects awarded, get those beds built. Of course, you know, there's always steps to that. You know, the funding thing that we're in now, you know, the funding processes that we're in now.
Then once things get awarded, you know, there's the design phase as well as the permitting phase, you know, and, and public consultation in some situations with some of these municipalities. We are expecting in the back half of the year to see quite a few awards, in that, social affordable housing space.
The next question comes from Zachary Evershed with National Bank Financial. Please go ahead.
Morning, everyone. Thanks for taking my questions, and congrats on the quarter.
Thanks, Zach.
Just following up on Aaron's question on the timing of some RHI funding. Previously, I think you guys had discussed a bit of a dip in Q3 as there was an air pocket in the backlog. Some of the commentary in the prepared remarks indicated that we should actually see a bit more of a steady pace in modular. Could you confirm that that is the case, that we'll see roughly equivalent quarter-over-quarter revenues and margin in the segment?
Yeah. morning, Zach. Yeah, revenues are we expect to be very similar to what we've seen so far this year. A lot of that is just through the current, like, the current projects that we have going through. Having another strong year in educational portables and, you know, industrial units in central Canada. Also the affordable social affordable housing projects that we have ongoing from a revenue perspective. Manufacturing, we've, you know, we've, we've trimmed back our, we've trimmed back our trade labor levels, which, which we normally do when we see lumpiness in this kind of in these projects in terms of manufacturing versus field construction.
As I mentioned to Aaron, you know, awards around social affordable housing are, are kind of real time. They're not gonna come all within one week or one, two-week span. We'll see it over a course of the next few months. Then, as those projects come to bear, you know, through the balance of the year, we'll start refueling, you know, start going towards rebuilding our backlog. It's not just, you know, affordable housing as well. We've got, you know, sales efforts on kind of a wide range of, of areas, including, you know, student housing as well as senior housing, you know, that we're waiting on. We're actually seeing a pretty good diversification of, of projects. It's just a matter of bringing those to bear and, and getting the awards across the line.
That's good color. Thanks. Then for my second one, how much more portfolio rationalization is left to be done at IFM?
Not a lot. I think that CAD 10 million-CAD 15 million, Zach, we're talking about, is, is kind of for the year. This year is kind of how we estimate. It's not, but, you know, there's, there's stuff that's in flight. We'll always take a look at kind of the, the low end of the, the low end of our, the low end of our profitability of our contracts, but, we're working our way through it. I think one of the big positives for us in IFM is, is the strong sales, which is kind of giving us the room, to be honest, to, to kind of rationalize some of the other contracts and, and still continue to grow the business. You know, we'll kind of work through to get there.
I mean, our target, you know, for next year is that 7% target. We got to manage inflation and price increases related to that, but that is our target, you know, for 2024, is to be at that 7% level.
Once again, if you have a question, please press Star, then 1. The next question comes from Trevor Reynolds with Acumen Capital. Please go ahead.
Hey, guys.
Trevor.
Just on, just on the contracts that were rationalized, like, was there competition that was undercutting you, or, you know, what were the negotiations like on those contracts?
Yeah, good, good question, Trevor. You know, the, the, the pandemic is kind of in our rearview mirror. Thank, thank goodness for all of us. Things have changed, you know, in, in, in some of our scopes in the field. You know, profitability that maybe was in a certain position has, has changed, and scopes of work are being changed by the clients. In those situations, obviously, we try to work with clients to, you know, adjust those scopes so they're kind of a profitable, kind of net add to us. That's possible in some situations. Some, some situations, it's not. A majority of situations, it is possible, and, and we are, you know, kind of reconfiguring contracts to more meet our targets.
You know, as well, you know, we're really not losing things to competitors. It's, it's more just kind of as we're reconfiguring contracts and as they currently exist. Again, in most cases, we're able to, we're able to get those into place. Even, you know, it's very much in tandem with inflation effects as well. You know, we have constant ongoing conversations with clients around inflation effects. You know, contracts have inflation terms, but doesn't always cover everything and everything at, at the magnitude that we've seen. It all kind of ties together.
Any of these contracts that are, I guess, you know, structurally marginal, if I could say it that way, again, we're looking to rescope those, or, or we are looking to, to exit those, with those clients, and we look to exit those, exit those professionally.
Got it. Thanks. That's helpful.
... just on the, the free cash flow conversion, obviously lagging, year to date. just, just maybe what has to change to fix that, to get that to the levels that you guys are targeting?
Yeah, good question, Trevor. I think, you know, the business, as we've said in our materials, the business naturally provides 40%-50% conversion of EBITDA. We just had a couple of one-timers in the first half here that, one, we did replenish some matting CapEx. We did some CapEx in matting related to a couple of specific contract opportunities. Also, with the growth in the business last year, we, we looked at fixing our vendor relations and, and payment terms, so we did a 2-time injection of capital to fix our working capital. There was a first tranche in June, and there'll be another tranche in July that already happened.
Those are kind of one-timers, and other than those things, the business naturally provides, greater than 40% and closer to 50%, free cash flow conversion.
The next question comes from Sean Jack with Raymond James. Please go ahead.
Hey, guys. Congrats on the quarter. Just wanted to know, do you see any opportunities to win more reoccurring work in the wildfire space stemming from this, you know, large surge in wildfire demand?
Yeah. Good morning, Sean. You know, wildfire, you know, in a given year can be everything from zero to, to, to very, very significant, as we saw this year, Sean. I mean, obviously depends on weather conditions regionally, and then this year we saw, you know, dry conditions and high wildfires really across the country this year. One thing I would say to you, Sean, is, is we are continuing to look at that business and, and, you know, how we can support it better. You know, some of the equipment that we do have in our inventory that we use for fire support, we also cater and operate, fixed fire base camps in, in Alberta.
We're constantly looking at that and, and adjacencies related to that, so that, again, we can make a contribution to, to, to that business segment, you know, as, as best as we can when we do have strong fire years. The big driver is really environmental conditions. You know, Jeff Litchfield, our business unit president, myself and others, you know, we're kind of just looking at, at how we can, how we can build adjacencies and how we can, better... even better serve that market, when there is activity related to, wildfires.
Perfect. Okay. Yeah. No, that all makes sense realistically. The last one, kind of more of a conceptual one. Kind of talked about in the remarks a little bit about M&A. I was wondering, just, honestly, for everyone else's understanding, could you describe kind of potential ideal candidates for the business right now of what M&A would look like, or what type of capital you guys would like to deploy?
Yeah, that's good. Good question, Sean. You know, really for us, and, you know, I think we've been consistent with this message, you know, we see the growth opportunity, market opportunity around, around the IFM space. For us, it's really a focus on finding the right opportunities that'll support that, support that, that growth strategy. Very, very active work for us, at this time. The, you know, I would say kind of our, I guess, list of criteria that, that we would, that we would, you know, say is, is, is our-- is, is what we would use on our screen for acquisition targets is, is really related to expanding our scope of scale and, in IFM, and I would say scope and scale and maybe even geography to, to, to a, to a degree.
We are looking at U.S.-based opportunities. A significant IFM business platform for growth, one that is gonna not only be a, you know, accretive acquisition, but something we can build off of as well. Some of these acquisition targets in IFM, there's technology solutions that are, that are, are interesting to us, that could expand what we currently have around IFM technology. People and talent is, is an important piece, as well as a complementary culture that would be a good fit for us. That's kind of the criteria. The other very important thing I would mention is, you know, we do view, you know, acquisitions around the investment related to that acquisition, you know, on a reasonably conservative basis.
We want to maintain our, our kind of, you know, debt ratios at 2.5 or, or less, say, and, you know, kind of declining quickly. As we look at sizes of opportunities, related to our, you know, our debt capacity and, kind of our leverage targets, that's kind of how we measure it.
The next question comes from Kirk Wilson with Beacon Securities. Please go ahead.
Morning, guys. Congratulations on a great quarter.
Kirk?
Are you there? Hello?
Yeah. Thanks, Kirk. Good morning.
Okay. Okay, good morning. Most of my questions, I guess, have been answered. I wondered if you can walk us through the outlook for the Crossroads Lodge and, and maybe the impact from the labor issues out there, with, with LNG Canada, and, and then look at the occupancy here in the back half of the year as it relates to margins from that business.
Yep, good, good, good questions, Kirk. You know, Kitimat Crossroads Lodge is, is pretty full right now. You know, the LNG Canada project is kind of getting into that completion phase this year and next year. We've got a lot of occupancy in Crossroads Lodge right now. You know, you're alluding to kind of some of the, some of the media coverage around, you know, some of the union action or union agreements, if I could say it that way, you know, related to the Cedar Valley Lodge, which is the actual lodge on site at LNG Canada, as well as our Crossroads Lodge. You know, the Cedar Valley Lodge, and I have to get my timing straight here, but I think 3 weeks ago or whatever, closed their agreement.
o closing our agreement with the UNITE HERE on Kitimat Crossroads Lodge, so we don't anticipate any disruption related to those agreements, kind of no different than we saw with Cedar Valley Lodge
Great. Thanks, guys.
The next question comes from Zachary Evershed with National Bank Financial. Please go ahead.
Thanks for the follow-up. Just one last one. If we look at the balance of share repurchases versus M&A opportunities, how are the economics shaking out? Is it still looking a lot more attractive on the NCIB versus seller expectations on multiples?
Yeah, I think, Zach, we'll continue to be opportunistic. You know, today's pricing level, it's a good buying opportunity. Certainly we're looking to deploy capital for acquisitions. We'll, we'll keep our eye on, on the ball there.
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.
Thank you.