Dexterra Group Inc.

Thank you for standing by. This is the conference operator. Welcome to the Dextera Group's fourth quarter 2024 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 one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then zero. I would now like to turn the conference over to Denise Achanu, Chief Financial Officer. Please go ahead.

Thank you, Betsy, and good morning. My name is Denise Achanu, Chief Financial Officer of Dextera 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 with the call ending by 9.15 Eastern time. We will be commenting on our Q4 2024 and annual 2024 results with the assumption that you have read the Q4 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'd 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 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. Thank you, Denise, and thank you to everyone joining the call. 2024 was another strong year for Dextero, with significant progress made towards achieving the vision of becoming a North American support services leader. A big thank you to Mark Becker, Denise Achanu, the entire leadership team, and all of our 8,500 strong employees for their contributions in making 2024 a very successful year. Our 2024 results included strong performance in our capital light support services business, including the purchase of CMI management that helps us and will help us expand into the U.S. In asset-based services, we continue to be a leader in the Canadian marketplace. We also reorganized the business following the closure of the modular sale and are well positioned to build on our new foundation through organic growth and acquisitions. As we move into 2025, Dextera has a very strong balance sheet, a supportive shareholder in Fairfax. These attributes provide us with great flexibility and allow the management team to focus on building the business for the long term and continue to create shareholder value. I'll now pass it over to Mark Becker for his comments.

Thanks very much, Bill, and good morning to everyone. and there might be a couple of sneeze interruptions during the call, so please bear with me on that. Very pleased to report that we ended 2024 with record revenue from continuing operations of $1 billion and adjusted EBITDA of $107 million. I'd really like to thank our dedicated employees across the organization, our clients, our business partners, and the board for their support in reaching this achievement. We have a strong management team in place with the continuity to build on our growth and evolution as a North American support services champion. As we executed our plan to deliver predictable results and grow the company, we are pleased to see this reflected in the progress of our share price, which has increased about 40% since mid last year. We delivered a return on equity in 2024 of $1,300. through dividends and share buybacks. As Bill mentioned, effective Q4 2024, we completed the repositioning of our business from an operational and reporting perspective into two segments, support services and asset-based services. Support services includes our capital light services locatable space rentals. Our results in the charts and our financial reporting is on the basis of this new segmentation. Strong results in 2024 were driven mainly by our organic growth, strong natural resource market activity levels, and the addition of our IFM services acquisition in the U.S., CMI management. Support services EBITDA rose significantly, offset by lower EBITDA from our asset-based services segments. which was expected due to the abnormal level of wildfire activity in 2023. These 2024 results are consistent with our plans to increase the scale and profitability of the support services business. You'll recall that Q4 is traditionally a slower period due to seasonality and many of our clients shut down over the holiday period. Despite this, we achieved strong consolidated revenue growth in Q4 of over 7% compared to the same period in 2023. The increase was primarily driven by annualized factors mentioned previously, partially offset by lower camp demobilization and installation product activity in asset-based services compared to Q4 of 2023. Activity levels remain strong across the breadth of the natural resources market, including energy and mining, and that's expected to continue into 2025. Adjusted EBITDA for Q4 of 2024 was $26.6 million compared to $23.6 million in Q4 of 2023. This increase in profitability was driven by stronger revenues and margins in support services, offset by lower volumes in asset-based services, as several large projects demobilized in Q4 of 2023. The IFM portion of the support services business delivered 6.3% adjusted EBITDA margin in Q4 as expected. Speaking more specifically about our business segment, starting with support services on slide six, strong year-over-year revenue growth in Q4 of over 18% in support services compared to Q4 of 2023 and 10.5% for fiscal 2024 was primarily related to the acquisition of CMI and organic growth as several new larger contracts mobilized in the second quarter of 2024. Adjusted EBITDA and adjusted EBITDA margin as a percentage of revenue also improved quarter over quarter. 8.8% in Q4 of 2024 compared to 7% in Q4 of 2023. And year over year, 9.1% compared to 7.4% in 2023. These increases are primarily the result of operational improvements, a better business mix, and the positive impact of the CMI acquisition. Key success factor for 2024 was replacing the unprecedented wildfire activity or $50 million in revenue that we saw in 2023 with new longer-term contracts. Collectively, these factors resulted in a net positive impact on adjusted EBITDA and margins, which are expected to continue to exceed 8% on a go-forward basis in support services. Our pipeline of new sales opportunities also remains strong in all areas of support services, including integrated facility management opportunities on both sides of the border. We are seeing the benefits of our investments in both our pursuit teams and leveraging our CMI platform in this regard. Moving to asset-based services on slide 7, for Q4 of 2024, asset-based services revenues on adjusted EBITDA of $41.3 million and $13.9 million, respectively, were lower compared to Q4 of 2023, due primarily to a more normalized wildfire season in 2024. Adjusted EBITDA as a percentage array in Q4 of 2023. The increase in adjusted EBITDA margin in Q4 of 2024 is related to strong camp utilization in 2024 as a result of the active need natural resource market versus higher camp demobilization activity in 2023, which is contracted at lower markets. 26.2 million respectively were lower compared to 2023, primarily as a result of the more normalized wildfire activity in 2024, as I previously mentioned. Adjusted EBITDA margin for the year was 29.3% compared to 36.7% in 2023. While the access matting and camp equipment utilization remains at high levels, over 90% The lower adjusted EBITDA and adjusted EBITDA margin in 2024 is due to the mix of business, primarily the wildfire camp mobilization or rental activity which occurred in 2023 versus new long-term contract mobilization activity in 2024. Adjusted EBITDA margins in this business in the future are expected to fluctuate between 30% to 40% depending on our mix of business. We will also continue to explore opportunities that offer high quick returns on targeted capital investment in the natural resource and infrastructure sectors. Finally, Dextera paid dividends of $0.35 in 2024 per share and declared a dividend for Q1 2025 of $0.0875 per share for shareholders of record at March 31, 2025 to be paid April 15, 2025. With that, I'll now turn it over to Denise for her comments.

Thank you, Mark. I'll now provide a little bit more color on our resegmentation and financial position on slide nine. In the past 12 months, our business has gone through a significant transformation. We sold our modular business, added new long-term support services and asset-based services contracts, and expanded our IFM capabilities through the acquisition of CMI. These changes gave us the opportunity to reorganize our business from an operational and reporting perspective. As Mark mentioned earlier, we repositioned our business in Q4, resulting in two new business segments. Our Capital Light Support Services business delivers operations, maintenance, and hospitality services in both urban and remote locations, with long-term contracts serving a diverse client base, including natural resources, aviation and education sectors, among others. The nature of this business and contractual relationships support our ability to deliver sustainable, predictable revenue and EBITDA with larger contracts across a diverse client base. From an operational point of view, the repositioning of the business will help in the scalability and operational efficiency in delivering these services. Our asset-based services include the rental and installation of workforce accommodation facilities for owned and client camps, access matting rentals and sales, and rental of modular space units in remote locations. We are a leader in the Canadian market in this space. The margins from this business can fluctuate depending on the mix of business. with project work like camp installations and demobilizations having lower margins compared to the longer-term rental of camp equipment that supports natural resource and infrastructure operations, which are at higher margins. This reorganization streamlines our businesses with similar economic characteristics and provides clear strategic direction and focus for our teams. It will also help investors better understand the key drivers of our business, profile and opportunities. On our website, we have posted the comparative information under both our new and legacy reporting segments for 2024 and 2023. Going forward, we will only be reporting under our new segmentation. Turning now to our financial position, adjusted EBITDA conversion to free cash flow was 70% for the 2024 year, and above original expectations, compared to 54% in 2023. Our free cash flow reflected strong operating results and working capital management and nominal cash taxes payable as the company utilized tax loss carry forwards in 2024. We will continue to have the benefit of paying nominal income taxes in 2025 as our 2025 tax installments will not be payable until early 2026. On a normalized basis, cash taxes would be approximately $15 million. Adjusted EBITDA conversion to free cash flow is expected to continue to be above 50% over the medium term, with Q3 and Q4 experiencing the highest conversions to free cash flow as a result of the seasonality of the support services business. Net debt at December 31, 2024, was 0.6 times adjusted EBITDA, or $68 million compared to $102 million at Q3, 2023. The decrease in debt from Q3 2024 was expected as our accounts receivable from the strong summer activity levels were converted into cash as the business moved out of its normal seasonal peak activity period in Q3 2024. We are managing our balance sheet prudently and have significant unused debt capacity and flexibility under our debt facility for share buybacks and acquisition opportunities. We are also in the process of renegotiating our debt facility. Finally, we bought back and canceled just under 1.2 million common shares in 2024 as part of our ongoing normal course issuer bid for a total consideration of $8 million. We will remain opportunistic with share buybacks in 2025 as we still believe our shares are undervalued. I will now turn it back to Mark for closing comments.

Great. Thanks very much, Denise. Closing off, we made meaningful progress divestment of our modular Sue Solutions business. In addition, we expanded our IFM footprint into the U.S. via our semi-acquisition. Our strategic focus remains the delivery of strong profitability, consistent and predictable results, and a return on equity for shareholders in the near term of 15%. The key to achieving this return on equity will be through continuing to deliver profitable organic growth and in identifying accretive acquisitions that had critical integrated facility management capability, technology and scale. The recent transition of the U.S. government and the possibility of increased protectionist trade and other policies pose risks to both the Canadian and U.S. economies. We think of tariffs from a direct and indirect perspective. On the direct side, A large majority of our costs are labor and materials that are sourced domestically with some cross-border supply commodities, so we are to a large degree insulated from the potential impact of tariffs. We are also working proactively to mitigate the potential impacts of trade and inflationary pressures through supply chain initiatives, leveraging our contract inflation terms and pricing adjustments as necessary, and by implementing cost management and other operational initiatives across the business. From an indirect perspective, the impact on the general Canadian economy remains uncertain. However, to the extent there may be broader impacts, our mitigation measures are similar from a supply chain and contract price management perspective. We will continue to proactively monitor any economic developments and adjust our mitigation plans as needed, and currently do not expect a significant impact on our 2025 results. Enhanced shareholder value remains a priority for us. capital allocation priorities, each of which is an important pillar in our long-term strategy, including maintaining the current dividend level, supporting and sustaining selective high-return capital investments, opportunistic share buybacks under the NCIB, and accretive acquisitions that are consistent with our strategy of building a larger capital light by a found business. I am very pleased with our 2024 results. proud of the progress we've made. We are confident in our new streamlined business is the right direction for Nextera. I fully believe that we will continue to provide even greater opportunities for our people, more value for our clients and will further enhance Total Shore Herald's returns. I would like to thank again thank our employees and our clients for their support. I'll now turn our call back to Betsy who will facilitate our Q&A portion of the call.

We will now begin the question and answer session. In the interest of fairness, you are asked to limit yourself to two questions. Then rejoin the queue if you have additional questions. To join the question queue, you may press star then 1 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 question, please press star then 2. We will pause for a moment as callers join the queue. The first question today comes from Chris Murray with ATB Capital Markets. Please go ahead.

Yeah, good morning, folks. So maybe you're starting, I guess, with the support services and thinking about next year. So historically, you know, part of the discussion around IFN was organic growth was going to be something in kind of a high Keynes number. And if you think about, you know, kind of what we saw in 2024, it was sort of there, but that included the CMI acquisition. So, now that we're resegmenting and maybe kind of rebasing, how do we think about, you know, your intentions or expectations for growth in 2025 on an organic basis?

Yeah, I appreciate that question, Chris, and good morning. You know, I would say if we think about each business unit, you know, our pipeline is strong in both areas and both segments of the business across all of our business. We're very happy about that. You know, I would say looking at support services specifically, you know, we would target 5% to 7% range for organic growth. I think on the ABS side, we would target maybe 2% to 5%. And I think, you know, we certainly haven't seen any pullback from the market and from our clients on any plans around new contracts and new contract opportunities either side of the border or across any of our segments, which is a real positive. And I think, you know, just given the uncertainties and given what's going on this year, I think on balance, if we were to see 5%, That would be pretty positive how we'd view that.

All right. That's helpful. Thank you. And then my other question, just looking very quickly at asset-based services, is you talk about what the business is going to look like on a go-forward basis. There's a pretty wide range of margins. I think you talked about 30% to 40%. Can you talk a little bit about how we should be thinking about, you know, what takes you to the bottom end of that range? What takes you to the top? and how we should be thinking about kind of call it a normal fire season, normal operations, and where you think you end up?

Yeah, I think on that front, Chris, like if I was to kind of characterize it for you, and you kind of look at the recent past, like years like 2023, where, you know, we've got a really, well, unprecedentedly strong fire Similarly, if you look at this year, where we've mobilized a lot of contracts, you'll see that in our commentary about mobilizing new contracts, demobilizing at the end of 2024. Mobilization, remobilization of workforce accommodations tends to be contracted at a lower margin, but ongoing rental of equipment tends to be at quite a bit higher margin. This year, 2025, we would have a lot of new camps on stream, on rental that are going to run through the year. So again, we're going to be pushing that 40% sort of number. So I think it does depend on mix of business. And I guess in this new resegmented world, what I would offer up probably through Denise is we'll kind of be very transparent about what we see in terms of mix of business. you kind of calibrate where the model should be going.

The next question comes from Zachary Evershed with National Bank Financial. Please go ahead.

Thank you. Good morning, everyone. Congrats on the quarter. Thanks very much, Zach. No, you mentioned... Sorry, go ahead.

Sorry about that.

No, no. Sorry about that.

I was going to say, you won the competition to get the earliest report out last night.

We try. You mentioned some cross-border supply commodities exposure. Can we dig a bit deeper into what that specifically is and a little bit more on your mitigation strategy at the moment would be helpful.

If you think about direct impacts and direct tariff impacts, Um, you know, the biggest cost within our business is really labor. And obviously we, um, you know, we employ labor on both sides of the border. So that's not really exposed to that. And that's our highest cost component, uh, you know, of our business. Um, you know, food, uh, a lot of our food is sourced, uh, domestically, either in the U S or in Canada. you know, where you get food sourced from. And those are the things that we've been looking at. And we've been working on that over the last two months, just because of all the, you know, the tariff discussions that have been happening since November. The other area would be, you know, supplies and commodities like paper products. Paper products actually we do source domestically. So we look at all that, you know, we're pretty active on going through our supply chain and looking at on the other front. The other thing we do as well in the food business is just looking at our menus that we offer to our clients and what is on those menus, exactly where does it come from. So we're actually actively making adjustments and planning adjustments such that that helps us sort of on the supply chain front. And really, I think You know, labor, I think if we see something that's going to be a little more related to indirect impacts, more the overall Canadian economy and how that might look. And I think that's a longer cycle view of it. So I think the short term is really our supply chain that we're really attacking. And we're feeling good about what we're seeing there and what we're doing there. And then really just beyond that, just really monitoring how the economic conditions sort of play in Canada? You know, for example, is there going to be stimulus offered? You know, how does that impact things like interest rates could be interesting depending on how that plays out, you know, if we do see economic impacts in Canada. And then really the last thing is, you know, just our contracts do allow, we have a majority of our contracts really have inflation factors still can access or in some cycle of pricing renewal. We're in better shape than we've ever been on that. And just our experience through the pandemic and the post-pandemic hyperinflation, our contracts are in better shape in that regard. And to be honest, we've kind of gone through a cycle where we've done a lot of pricing adjustments, working collaboratively with our clients in partnership to work those pricing adjustments. So if we do have impact You know, we want to rely on our contracts and our contract relationships and our client relationships to kind of work those numbers back out and really protect the margins towards what we've been targeting.

That's really helpful. Thank you. And then for question number two, you mentioned that the pipeline is strong across all areas and you're happy with how the year is shaping up. Can you give us a better idea of the areas that you're targeting in ABS?

Yeah, and, you know, ABS still means, you know, it's really underpinned by that natural resource environment. So things like energy, and we're still seeing really strong activity in energy. Western Canada, you know, a lot of our working clients, you know, are in the Montney, you know, natural gas region. A lot of those clients are, you know, hard pipe through CGL to the LNG Canada project. So that's filling out. We've got workforce accommodations active there. And then similarity in the mining space, more of that in central Canada, northern Canada. And, you know, we're still seeing a lot of – gold prices have remained very high. We're still seeing a lot of investment. We're still seeing a lot of new projects. We're seeing a lot of expansion there. And last thing I'll mention as well – last couple of years, the Wate power line, where we provide virtually all the workforce accommodations for that. We're seeing our client there now putting in the next tranches and next stages of Northern Ontario power infrastructure. We're contracted into that. We're contracted into a new hospital in Northern Ontario for construction related to workforce accommodations. So, you know, it's really that natural resource underpinning, but that diversification into and and it's really spread across everything whether it's access matting workforce accommodations obviously is our biggest piece there in abs and uh in our you know our smaller space rental business as well another question there betsy from anyone Sounds like we may have lost Betsy here. Hello? Well, I think we've lost our connection here, it seems like. Apologize for that. We'll dial back in to our operator. We'll hang up and dial back in and see if we can reconnect with our operator.

I can announce the next, are you ready for the next question?

Yes. Yes, please.

Our next question will come from Zachary Evershed of National Bank Financial. Please go ahead.

Hey, guys. With Fairfax moving above 50% ownership, any implications there for the business as a whole?

And the speaker line may be muted. Your line is showing live.

Hey guys, can you hear me?

We seem to be having issues with the speaker line. Please stand by. Thank you for your patience. ¶¶ ¶¶ Our speakers are connected. I will ask them to please continue.

Betsy, can you hear me okay?

You're coming through fine.

Excellent. So, I apologize And, you know, I think really no changes related to the Fairfax engagement with Dextera. You know, we're continuing with our NCIB. Obviously, Fairfax is not tabling shares related to that NCIB anymore for reasons related to our tax pools that are now exhausted. So really continuity that we do have around Fairfax. And, Bill, if you've got any other comments you'd like to make around the Fairfax side.

No, I think the only comment I'll make is Fairfax are more than pleased to keep their shares because they believe the value of Dextera well exceeds its current market price.

Fair enough. And then with the new segmentation, are you considering any changes to compensation metrics, whether long-term incentive plans or short-term incentive plans?

Yeah, good question, Zach. I mean, our incentive plans both have short-term, meaning our annual bonus that's tied to business and operational metrics, including free cash flow generation and EBITDA generation, and then our long-term metrics tied to the equity side of things. really unchanged in terms of the design of those. Obviously, those are realigned for the business units or the new business segments. Those of our organization that are lined up with the various business segments are aligned with their business segments. For example, Jeff Litchfield, who leads the ABS side of things and part of support services, he's aligned So really not a big change there other than a similar realignment of the business segments to ensure we've got good alignment of our executive compensation and our internal compensation with the business segments.

And again, if you would like to ask a question, please press star and then 1 to join the queue. Our next question will come from Shawn Jack of Raymond James Limited. Please go ahead.

Hey, good morning, guys. Just a quick one from me. So some good commentary early speaking on the price renewal and success of improving pricing for the support side of the business. Just wondering, is there any new tools that, you know, you guys would like to highlight that are helping with that? Or is it a market-driven thing or just any additional color would be great?

Sean, I'm not sure I understood your question. Can you just repeat it for me one more time? I can hear you okay. I just didn't really catch it.

So just earlier you guys spoke about how pricing has been a focus for the contracts on the support side of the business. Wondering if there's any new kind of strategies or any sort of internal changes that you guys would highlight that have been helping with that, or is it more of a market-driven thing?

Yeah, I think, you know, pricing is always, you know, driven by the market side. And, you know, we've been very careful and certainly through our experience and our long history, we kind of know where the margins are and where the margins are going. You know, things like integrated facility management, we know is a higher margin business and part of our strategy to capture that. So I think, you know, we would always look at, you know, the market opportunities and it does change, you know, from different markets. market segments and even different geographies in terms of what, you know, the margins and the pricing that the market supports. So we're always looking at that and then, of course, marrying that up against operational improvements, operational efficiencies, operational effectiveness to try to always maximize our margin and then be quite transparent with the market around what margins we are targeting within the different business segments and then how that will change over time as we grow the business.

Okay, perfect. That's all for me. Thanks.

Ladies and gentlemen, at this time, we will conclude our question and answer session and also conclude the Dextera call. Thank you for participating in today's conference, and you may now disconnect your lines.