GDI Integrated Facility Services Inc

TSX:GDI

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the GDI Integrated Facility Services, Inc. First Quarter 2024 Results Conference Call. [Operator Instructions] This call is being recorded on Friday, May 10, 2024. I would now like to turn the conference over to Mr. Stephane Lavigne, Senior VP and Chief Financial Officer. Please go ahead.

[Stéphane Lavigne, executive]

Thank you, Preleur. Bon matin à tous. Good morning all, and welcome to GDI's conference call to discuss our results for the first quarter of fiscal 2024. My name is Stephane Lavigne. I'm Senior Vice President and Chief Financial Officer of GDI. I'm with Claude Bigras, President and CEO of GDI; and David Hinchey, Executive Vice President of Corporate Development.

Before we begin, I would like to make you aware that this call contains forward-looking information, and we ask listeners to refer to the full description of the forward-looking safe harbor provision that is fully described at the beginning of our MD&A filed on seller last night. I will begin the call with an overview of GAA financial results for the first quarter of fiscal 2014, and then we'll invite Claude provide his comments on the business.

In the first quarter, GDI recorded revenue of $644 million, an increase of $53 million or 9% over Q1 of last year, which is due to organic growth of 2% and gross from acquisitions of 6%. We recorded adjusted EBITDA of $28 million in the quarter, representing an adjusted EBITDA margin of 4%. Turning to our business segments, our Business Service Canada segment recorded revenue of $145 million in Q1, an increase of $4 million or 3% compared to the first quarter of 2023.

The segment reported adjusted EBITDA of $11 million compared to $14 million in the first quarter of 2023, representing a decrease of $3 million. Our business service USA segment recorded revenue of $225 million in Q1, representing an increase of $48 million when compared to Q1 of 2023. This increase is mainly due to the revenue of new customers and to the talent acquisition in November 2023. The segment reported adjusted EBITDA of $14 million compared to $12 million in the first quarter of 2023, representing an increase of $2 million.

Our Technical Service segment recorded revenue of $252 million and adjusted EBITDA of $8 million, representing an adjusted EBITDA margin of 3% due to the cost of overruns experiment on fee projects in its U.S. operations. Without the cost overrun, the adjusted EBITDA margin would have been 5% in the quarter. Finally, our segment Corporate and auto recorded revenue of $22 million compared to $21 million in the first quarter of 2023, attributable to organic growth generated in our U.S. manufacturing operations. I would like now to turn the call to Claude, who will provide further comments on GDI's performance during the quarter.

[Claude Bigras, executive]

Thank you, Stephan. Welcome, everyone. Bienvenue à tous and we'll come again to our Q1 call and thank you for your interest in GDI. While I'm relatively satisfied with GDI overall performance in Q1, each of our business segments were weighted down by either seasonal factor or onetime events. Our Business Service Canada segment generated modest organic growth and delivered an EBITDA margin in the high single digits despite Q1 being the business's seasonally weakest quarter.

We typically have higher costs in January and February in this segment due to the higher survival needed in winter months, which were difficult to see in our results for the past 3 years because of the disruption caused by it. Keep in mind, seasonal effect in our Janitorial business are small, but in our world, a single world digit world, EBITDA margin shift of 50 basis point movement is noticeable. We also have been actively working to improve the performance of our business service Canada segment. Mid last year, we implemented the leadership change in Central and Atlantic business units, and we have been working on improving our operation and go-to-market strategy.

This is a multi-quarter initiative that we expect will strengthen our business in Canada and position the segment for long-term success. Our Business Service U.S.A. segment had a good quarter. We delivered 27% of revenue growth, 10% of which was organic. And the remainder mostly coming from the Italian acquisition that closed on November 1. While Italian was somehow a drag on margins during the quarter, we are quite pleased with the results the business has been generating in 2024. Our operations and finance team has been working very closely with their new teammates from Italian to streamline the business, improve margin and strengthen client relationships.

We are advanced in our initial integration plan and expect Italians margin to increase to our target level by mid to end 2024. Finally, the portfolio repositioning of 1 of our larger clients that we announced in the last quarter took effect in the -- of the end of Q1. Our team in the U.S. has worked hard to modify their cost structure, win new business to replace lost margin, and we feel it will help mitigate the effect of the business that was transition. We are also engaged with this client to evaluate opportunities to work together in other regions.

Our Technical Service segment delivered results that were impacted by seasonal factors and onetime events, which were in line with our expectations during the quarter. Q1 is traditionally the weakest quarter for Ainsworth as HVAC business volume is very low during the winter months. And instead of laying off our technicians, we keep on payroll and invest in their development through training programs. Margins in the business typically increase in Q2 and grow progressively through the year. Additionally, as we announced in Q4, there were 3 projects in our U.S. operation that impacted profitability in Q4 2023 and Q1 of this year.

The impact of these projects overrun was $5 million in Q1 alone. The last of these projects has -- this past quarter. Ainsworth business remains strong, and our outlook is quite positive for the remainder of the year. We are still targeting a 6% plus margin in our Technical Service segment. Subsequent to Q1, we were active on the M&A front. We successfully closed the sales of our superior solution general distribution business on April 1.

We structured a transaction that includes a mutually beneficial long-term business partnership with the buyer and one that will enable us to monetize certain owned real estate assets that we are dedicated to this business. Without consideration included, this sales was an excellent financial success for GDI and also a strategic win and that we have a strong distribution partner for our Canadian editorial business going forward. Additionally, subsequent to quarter end, we closed 2 acquisitions. Ainsworth acquired the Atlantic Canada service business of Ashman, Canada, a leading OEM in the global retail display refrigeration market.

This acquisition add on a very strong refrigeration service team to Ainsworth industry-leading platform in Atlantic Canada. Additionally, on -- our Business Services segment, the U.S. segment acquired Paramount building solutions with over 500 employees operating through offices in Phoenix, Minneapolis and Philadelphia. This acquisition represents geographic expansion for our U.S. business and had a seasonal management team led by a well-respected industry veteran.

To conclude, while we understand -- overall results in Q1, I'm confident that we can do better. The project that weighted on Ainsworth results are now closed up and our outlook for the business for the rest of the year is positive. Our business service as segment is performing well, and we expect it to deliver EBITDA margin that our 100 to 200 basis point over pre-COVID level for the foreseeable future. Our business service U.S. segment is very advanced on the onboarding and optimization of Italian, and we expect to realize margin improvements in the coming quarters.

Finally, the working capital reduction initiative that we are implementing since mid-2023 continue to bear fruits. We are able to maintain constant nonworking -- sorry, constant noncash working capital despite the 30 million plus reduction in Q4. We are committed to delivering an additional working cap reduction of $30 million through the remainder of 2024. I would like to thank you all again for participating in our conference call this quarter, and we'll now ask the operator to open the call for questions.

[Operator]

[Operator Instructions] your first question comes from Jonathan Goldman with Scotiabank.

[Jonathan Goldman, analyst]

Maybe if we can start off with Business Services U.S.A. Claude, could you give us a sense how the legacy business performed if you were to exclude Italian. And I guess, maybe near longer term, can Italian eventually generate margins in line with your legacy Janitorial business? And if so, what would be the time line to getting there?

[Claude Bigras, executive]

Well, Jonathan, we are still working on the business. At Taman, as you know, was a very attractive financial acquisitions, but it's a restructuring -- more or less a restructuring acquisitions. We are in the middle of it. So far, we're very pleased with the results. On the gross margin side, I would say that there may be 300 bps -- 350 bps below the rest of the business, but the synergy that we're generating through the integrations are compensated on the EBITDA line.

I would say that by the end of the year, we should be quite normalized with the business.

[Jonathan Goldman, analyst]

That would be the Italian business be normalized or the whole business?

[Claude Bigras, executive]

The whole business actually. Although you know what, at the end of Q1, we -- as you know, we part with some -- partially with a large customer, which we are working again into future endeavors. I would say that we are replacing the business relatively well. And the margin impact will not be that significant at the end of the year. So I don't -- I expect the business to deliver well this year, although we had this customer impact.

[Jonathan Goldman, analyst]

No, I would agree with the strong organic growth in businesses Services U.S.A. Maybe just moving on to Technical Services. Your release noted that excluding the 3 large projects, EBITDA margins would have been 5%. Those projects are largely complete? Q1 is a seasonally weaker quarter.

[Claude Bigras, executive]

Yes. The first quarter was always the weakest -- I'm sorry, go ahead. I'm sorry, I thought your question was finished. Can you go ahead, Jonathan again?

[Jonathan Goldman, analyst]

Yes. I was just saying Q1 is a seasonally weak quarter been 5%, excluding those projects. Is it reasonable both to assume that 5% would be the starting point going into Q2 and then seeing increases through the year?

[Claude Bigras, executive]

Yes, absolutely. $5 million was costly for us. Those projects are done. One has a little punch list to complete. So hopefully is behind us.

[Operator]

Your next question comes from Sheryl Zang with TD Cowen.

[Unknown Analyst]

This is Sheryl calling for Derek, who's on another call. Our first question is on the Business Services U.S.A. Obviously, very strong organic growth there. I think last quarter, you did call out contract -- major customer, but it appears that you won that back. And like what went loss revenue and gain more on top of that. Is that accurate? And if so, could you provide more color around the new contract wins and how you manage to offset the revenue loss?

[Claude Bigras, executive]

Okay. Well, first of all, is we have not won back the lost business. we partially lost a significant part of this large client, about 75%. And we are replacing the lost revenue with strong sales over the quarter and with acquiring new clients. We have reorganized our cost structure around this client. So the impact on margin at the end of the year will not be as significant if you look at the revenue loss.

So we have not ceased the business. What I'm saying is we are still engaging to develop business with this customer. And an example, next week, I'm with this customer. So we are not -- we did not exit this customer, but the customer realigned some of this business. And we are still working with this customer, and I'm very positive that we're going to increase our business again with them, but we have not replaced the business yet.

[Unknown Analyst]

Okay. That's clear. And just wondering if you could provide some color around the new contract wins in the business services at U.S.A.

[Claude Bigras, executive]

Right. It's the -- it's not -- there is a significant customer that is into, I would say, the clean room and the data room business that we developed with it, which is a very good new client for us. But the rest is it's projects scattered over the business unit, so strong sales quarter. And the backlog, I would say the pipeline is very attractive in the business service U.S. lately.

[Unknown Analyst]

That's awesome to hear. And then just 1 more before I requeue. In business services, I think in the prior quarter, you didn't know that you saw the EBITDA margin settling around 9%, 10% in Canada, around 7% to 8% in the U.S. Is this that the margins are going a bit below those levels? Have your view on the margins changed now?

[Claude Bigras, executive]

Well, you know what? I've been saying that our long-term objective is to keep margin maybe 100 to 200 bps over the traditional margins. The market is settling down. You know what we are at the end of the tail of avid. It has been a great disturbance in our business, very positive for a while. Now we are dealing with getting back to a new normal. And this new normal would be probably, like I said, slightly more attractive long term, which is a good news.

But there's -- but COVID is behind us. So yes, 100 to 100 bps over the next foreseeable future would be the good target in Canada.

[Operator]

Your next question comes from John Zamparo with CIBC.

[John Zamparo, analyst]

Why do we could start in a couple of housekeeping questions and then get to some broader ones. The AMS worth $5 million impact you mentioned. Just want to be clear on that. That's purely an EBITDA impact for Q1 alone. Is that right?

[Claude Bigras, executive]

Yes, absolutely. Gross margin directly going to the bottom line.

[John Zamparo, analyst]

Got it. Okay. And the challenges you faced on those 3 contracts in that segment, did that end in Q1? Or is there expected to be any sort of Q2 impact?

[Claude Bigras, executive]

Listen, if there is a Q2, in fact, it would be very nominal. I mean we're doing a punch list and a lot of the customers, we're still negotiating a few little things with another one. So there will be no significant impact. As far as I'm concerned, these projects are beyond us.

[John Zamparo, analyst]

Okay. Understood. Next up, the acquisitions you completed subsequent to the quarter, can you say anything to give us a sense of how material those are either what you're paying for them or what you expect them to contribute on the top line in the next year?

[Claude Bigras, executive]

Listen, you know what, we do not disclose more than what you saw in press release. But I can tell you that those acquisitions are in line with our historical acquisition multiples. They are in line with what we pursue as far as business culture, very happy because we have just got into a great city, Minneapolis, acquired a great -- a couple of great customers, a good team. So very positive for us.

And the other acquisition is we have a strong segment, and we have a strong relationship with -- already in our Refrigeration division. And this is a very good add-on and we're developing closer and fighter relationship with this great manufacturer. So for us, it's a good news. So it's too -- they're not dramatically large. They are relatively small, but they are very well targeted to implement and increase our profitability and our customer relationships.

[John Zamparo, analyst]

Okay. Understood. And then a couple on business services, 1 in Canada and 1 in the U.S. So let's start with Canada. I guess it's a follow-up on the margin question. your MD&A, you called out the fact that the margins you're seeing in Canada are a little bit lower because you're having to incur -- it sounds like, correct me, but you're having to incur more labor costs to service a higher occupancy rate and you're not being reimbursed for that. Are we right to interpret it that way? Or is there another component to this if it's just ongoing price negotiations with customers on existing services?

[Claude Bigras, executive]

Yes. Sometimes, we want to be through -- we want to be too short in our statement. So I think what we have to capture is contracts are reverting back to normal. So we have a higher occupancy, and we are adjusting the contract accordingly. So we work with customers. So what we're saying in Q1, we were probably not totally adjusted with customers.

But what we anticipate again is that we are adjusting the contract to the standard contract base progressively and with probably a smaller reduced occupancy over the next quarters, we anticipate again to be 100 to 200 bps over our traditional margin. So it's not negative. But for sure, there's a lot of volatility in disturbance. And so we have to be very flexible. So it's -- you know what, it's an interesting time for us. But we're up to the challenge, and we're working very, very closely with our customers

[John Zamparo, analyst]

Right. Understood. Okay. And then last 1 on the U.S. Business Services segment. The acquisition you made there, specifically the geographic expansion, that's a relevant part of your strategy. It typically has some holistic benefits, you're able to generate organic growth and capture more customers than you would have if you didn't have kind of a headquarters in a new geography. Can you talk about some of the deals you've done historically and the types of benefits those provide?

[Claude Bigras, executive]

Well, first above is 1 benefit to start with, enable us to talk with large customers that are multi geographical footprints because we are able to serve them in roughly 18 to 20 markets where we have a team, we have a strong hold, we have a pin in the city, we have staff. So that's already a good win to start with.

Secondly is our size enable us to pick up, again, large industrial or large institutional customers. There is a trust, there is a confidence level. We are now 1 of the 3, 4 U.S. players. So that has a lot of value going forward in developing the business. Now if we go now in details is for sure, we add on new geographies, but back office gets integrated so -- and the leadership gets integrated so it generate usual. They're not as large synergies as if you would add on a business right in 1 of the markets you are. But our synergy -- latest acquisition, we have a little bit of both. We have -- we acquired a new markets. We acquired new customers, but we're also having business in 1 of our very strong segment, which is in Philadelphia that we will integrate in our Philip business. So we have a little bit of positive on both sides.

And this is how we built the U.S. business, by the way. One after the other, acquiring a market, now we are what we are, I would say, in the buzz wash and going to the Midwest now, we have a very significant footprint. This is a very good accomplishment so far.

[Operator]

Your next question comes from Frederic Tremblay with Desjardins.

[Frederic Tremblay, analyst]

Most of my questions have been answered, but maybe just a couple more. On the 2 latest acquisitions, I'm just curious to know if you would consider them turnarounds a bit like a tall -- or are these businesses already sort of largely optimized and maybe you can talk about sort of the integration process related to that.

[Claude Bigras, executive]

No, it's not a turnaround like Italian. We're paying a fair multiple. It's accretive on the multiple side. It's a mature business, but there's a lot of potential to develop in the market. We will integrate this business over the next 3, 4 months, but also we start by integrating finance after that IT and the brand has a third element. We integrate the brands. So it's a 3-, 4-month thing to integrate. So I would say that at the end of Q3, we should be -- we should have integrated this business nicely.

[Frederic Tremblay, analyst]

Okay. Perfect. And then maybe...

[Operator]

The line has been disconnected. Your next question comes from Zachary Evershed from National Bank Financial.

[Zachary Evershed, analyst]

Based on the wording, it sounded like the troublesome projects with cost overruns and technical services were all but wrapped up, can you confirm that those are completely behind us now? Or is there a lingering impact in Q2?

[Claude Bigras, executive]

There is no tail in Q2 for those projects. Our U.S. business segment, we are investing time and energy into it. You know what, we are focused on this business segment. We are positive for it, but there's work ahead, but those projects are no longer in the horizon for us to invest more money into it. We're done.

[Zachary Evershed, analyst]

Good color. And then if you look at the backlog in terms of volumes, pricing and margin, how is it looking these days?

[Claude Bigras, executive]

I'm seeing what I've been saying for a long time is the margins are reverting back to a new normal. Our bid margins are -- pricings are more or less in line with what we have seen. Customers are still demanding rebates for occupancy and which we're dealing with. Okay, I'm sorry, are we talking about business service or technical?

[Zachary Evershed, analyst]

I was hoping for technical, but I -- the business services as well.

[Claude Bigras, executive]

Yes, I'd say next to with no charge. So -- okay. So go back with technical. Technical -- no, technical, the strategy is very simple, is where we're working very, very focused on cash management. Secondly is, as the backlog is still very strong, we are making a more -- we're a more prudent pricing approach, meaning that we put more margin reserve into our pricing.

So and as we go, as we continue to sell jobs, we increased this margin reserve. So the goal going forward is increased margins, capture cash deposit and manage our cash structure there. So this is the motto for technical going forward.

[Zachary Evershed, analyst]

Good color. And then building on that, I'd say for the last 3 years, technical margins have moved up 100 to 200 basis points from Q1 into Q2. Now excluding those cost overruns, it sounded like TS delivered a 5% level in Q1. Do you expect that typical 100 to 200 basis point step up into Q2 from that 5% level?

[Claude Bigras, executive]

Yes, listen, you know what 5% if you exclude the project I presented is the weakest quarter. We expect to work 6% plus margins like were supposed to be. The overall goal to be very, very open is 7% to 8% over time. So it's based on project. But I expect the margin to revert to go back to the 6 plus.

[Zachary Evershed, analyst]

Excellent. And then just last 1 for me. Talking specifically about business services Canada. Can you help us draw a line between what's keeping margins higher than pre-pandemic between market factors versus structural internal changes? Like if we had a complete reversion of the market to pre-pandemic endemic conditions, would you still be targeting 100 to 200 basis points higher margin? Or is it dependent on market conditions to an extent?

[Claude Bigras, executive]

You know what, the business service U.S. is in a very particular -- very interesting position is we work a lot in suburban markets. We work a lot in the industrial. We have a relatively strong business units in some markets. So the business mix is attractive. And so that helps us with the margins.

And we don't expect any major drops over the foreseeable future. I would be blunt to say that we expect to do better than the 200 bps. But don't forget, the historical margin was already a little bit higher. So the 2 -- maybe I would say, maybe 2, 2.5, 3, maybe if we're good in the U.S. business segment long term. But don't forget, this business already had a slightly better EBITDA margin than the business Canada.

[Zachary Evershed, analyst]

And then just to reiterate on the Business Services Canada, if occupancy went right back into the 80s or where it was pre-pandemic, do you think you could still do 100 to 200 basis points better than the pre-pandemic level?

[Claude Bigras, executive]

No, no. You know what, but now it's an -- scenario. To be very honest, you read the same newspapers as I read, the expectation of occupancy to revert back to prepandemic, I don't think it is a scenario that is short term. No, for sure. You know what, the market comes back to a full new reality and inflation and occupancy. I think we would be in the Tier 1 at the 6% margin. But I don't anticipate the scenario in any foreseeable future.

[Operator]

Your next question comes from Liam Bergevin with Desjardins.

[Liam Bergevin, analyst]

So this is for Fred. Basically, I wanted to note the organic decline of 1% in the Technical Service segment is attributed to timing of project revenues. Is that timing effect part of the no more course of business? Or did you experience some unexpected delays?

[Claude Bigras, executive]

Well, listen, no, it's just you know what -- various timing issues here and everything. Last year, we had a very strong organic growth. So what is execution of projects and project billing, I don't have -- what to be very, I don't have a full analytics up to 1% decrease. It's project management. So you can put it on timing and that about the message answer I can give you on this one.

[Operator]

[Operator Instructions] Cheryl Zang with TD Cowen.

[Unknown Analyst]

Just a couple of follow-ups from us. First is on Technical Services. You do know that you have a very strong backlog. Just curious if you could provide more details around like how long as the backlog is or what the level is compared to prior quarter. And if you see any slowdown in new orders now that you're locking tougher comps.

[Claude Bigras, executive]

Okay. Backlog is very healthy. We're talking probably I would say, at least we have work publicly -- for over 2 quarters, so which is very good. Cheryl, let me put it this way. You know what, we're working on our margin until such time the backlog will go down a little bit. So my point is now -- the backlog for now is healthy. I mean the customers are -- we are executing.

I can tell you that the backlog, the short-term backlog fill has been done at better margins than the ones that were backlogged in 2023, so it's all encouraging. So the objective here is increase overall margins on projects. And at 1 point, you know what the backlog is still very healthy, but our objective is margin improvements.

[Unknown Analyst]

Okay. That's very helpful. And maybe 1 last 1 for me is in the MD&A, you do know that depreciation is up significantly because of the revision of amortization period for customer relationship. Just curious if this we should think about the higher depreciation as the new run rate that we should be expecting for the rest of the year and moving to future years? Or is it just temporary?

[Claude Bigras, executive]

Well, Stephane, maybe you can help, Cheryl?

[Stéphane Lavigne, executive]

Yes. This is just temporary, Cheryl. Like this was like accelerated the amortization of the customer relationship of that large account that we have to take in Q1. So it will revert back to the normal trends after that, like on depreciation and amortization.

[Unknown Analyst]

Okay. Just to clarify, was your excited to revert back in Q2 or next year?

[Stéphane Lavigne, executive]

Q2 should be back to the normal level in Q2.

[Operator]

There are no further questions at this time. I will now turn the call over to Mr. Bigras for closing remarks.

[Claude Bigras, executive]

Well, gentlemen, listen, I'm aware that this quarter has been a little bit challenging for all the reasons we expected that we outlined. Now the good news is we're marathonist. So we're working hard on the business. I'm very positive for the remainder of the year. And it's a good work in progress. And you know what, we're working the after COVID era, but did is focused. And I'm sure that business will remain at where it's supposed to be by the end of the -- by the end of '24, we should be very, very, very well positioned to attack and continue our growth. Thank you very much for making the call.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.