GDI Integrated Facility Services Inc

TSX:GDI

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the GDI Integrated Facility Services, Inc. Third Quarter 2024 Results Conference Call. [Operator Instructions] This call is being recorded on Wednesday, November 13, 2024.

I would now like to turn the conference over to Mr. Charles-Etienne Girouard, Senior Vice President and Head of Finance. Please go ahead.

[Charles-Etienne Girouard, executive]

Thank you, operator. Good morning all, and welcome to GDI's conference call to discuss our results for the third quarter of fiscal 2024. My name is Charles-Etienne Girouard. I am Senior Vice President of Finance Operations and Digital Transformation of GDI. I am 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 the MD&A filed on SEDAR last night.

I will begin the call with an overview of GDI financial results for the third quarter of fiscal 2024 and will then invite Claude to provide his comments on the business.

In the third quarter, GDI recorded revenue of $640 million, an increase of $25 million or 4% over Q3 of last year, comprised of 5% growth from acquisitions, 1% growth from the appreciation of the U.S. dollar relative to the Canadian dollar, partially offset by a 2% organic decline. We recorded adjusted EBITDA of $39 million in the quarter, in line with Q3 of last year and up $5 million compared to Q2 2024.

On a year-to-date basis, revenue increased by $108 million or 6%, all coming from acquisition to reach $1.9 billion compared to $1.8 billion last year. Adjusted EBITDA year-to-date amounted to $100 million, a decrease of $6 million or 6% over the corresponding period of 2023, mainly due to the cost overruns incurred in the three projects in our U.S. Technical Service business at the beginning of the year and higher adjusted EBITDA in our Business Service Canada segment in 2023 due to efficiencies coming from COVID-related lower office occupancy rates.

Moving to our business segments. Business Service Canada recorded revenue of $145 million in the third quarter, while generating $12 million of adjusted EBITDA for an adjusted EBITDA margin of 8%, which was in line with Q2 2024 and was about 2% lower than Q3 last year. Our Business Service USA segment recorded revenue of $222 million in Q3, representing an increase of 37% compared to Q3, mainly to the Atalian and Paramount acquisition and 1% organic decline despite the loss of a major customer in Q1 2024. This segment reported adjusted EBITDA of $14 million, in line with Q2 2024 and Q3 last year.

Our Technical Service segment recorded revenue of $264 million compared to $269 million in Q3 last year. The organic decline is explained by a decrease in lower-margin project revenue versus this quarter versus the same quarter of last year. This segment generated an adjusted EBITDA of $20 million, representing an adjusted EBITDA margin of 8%, which is $4 million higher than Q3 last year. The third quarter is typically the Technical Service segment's seasonally strongest quarter.

Finally, our Corporate and Other segment reported revenue of $9 million compared to $15 million last year, mainly due to the sale of our Superior distribution and retail business at the beginning of Q2, which was partially offset by the growth generated by our U.S. chemical manufacturing business.

I would like to turn the call to Claude, who will provide further comments on GDI performance during the quarter.

[Claude Bigras, executive]

Well, thank you, Charles-Etienne, and thanks to all of you who are participating in GDI's third quarter's conference call. I'd like to start by publicly welcoming Charles-Etienne as lead of the finance teams, GDI's finance team. He officially took over from Stephane Lavigne on October 1 and is now in charge of finance for GDI. Stephane is still with GDI in a consulting capacity to support Charles-Etienne in his transition, and he's among us this morning. Thank you, Stephane. I'm quite pleased with GDI's results in the third quarter.

I'm quite pleased with GDI's results in the third quarter. Our Canadian business segments delivered an adjusted EBITDA margin of 8%, which was in line with both Q1 and Q2 of this year. Our Canadian business is seeing a relatively stable level of occupancy in the Class A markets, which is evidenced by a very strong -- a very consistent margin profile for the business in 2024.

Organic growth in the business was down slightly in Q3. However, this is the result of timing differences between contract wins and losses, and we had the numbers of new contract wins that will start up in Q4 and Q1 of next year. So that should help to support our organic growth numbers and targets.

Our U.S. Business Service segment delivered slightly negative organic growth as well, which was driven by the repositioning of the business largest clients, the bulk of which incurred at the end of Q1 this year. We'll still be experiencing headwinds in quarter-over-quarter organic growth comparisons from this event for the next 2 quarters. But however, I'm very encouraged that our team was able to replace almost all the revenue with new business wins in a relatively short period of time.

Also during the quarter, we continued to work on margin improvement initiatives at our Italian acquisitions. While it's taking a bit longer than we initially planned, we expect to complete the process by Q1 of next year.

When comparing Q3 of 2024, to the Q3 of last year, our U.S. and Canada Business Service segment were burdened with an additional $3 million of costs on a combined basis because there was an extra work day in this year's quarter. I'm very encouraged that both businesses were able to deliver strong results when compared to the prior year's quarter despite this hurdle.

Our Technical Service segment delivered a very strong quarter with an adjusted EBITDA margin of 8%, the highest recorded in the business since the acquisition of Ainsworth in 2015. These results clearly demonstrate that the weakness the business experienced in Q4 of last year and Q1 of this year was driven by onetime factors that -- and now the business began rebouncing in the second quarter. The margin improvement initiative that we began implementing in Q3 last year have begun to take hold.

The backlog remained near record level, and we have increased the average margin within the backlog by roughly 100 to 200 basis point targets. Additionally, we successfully grew service revenue at Ainsworth during the quarter, which are both higher margins and recurring in nature.

Recall that this segment is seasonal and Q3 is traditionally the strongest quarter. All business units have been performing well, and we expect this segment to continue to deliver robust results going forward. We are happy to report that we also had success with our initiative and -- to more efficiently manage GDI balance sheets during towards the third quarter.

We delivered a reduction of $25 million in operating working capital compared to Q2 of 2024. Together with strong free cash flow generation, we were able to reduce GDI's net debt by $41 million. Our debt level is also benefit from the intended sales of the two facilities that were used by our Superior Solutions business, which we expect will generate gross proceeds in the $25 million to $30 million range.

To conclude, I think that GDI performed very well this quarter.

Our Business Service segment is delivering solid and consistent results. Business Service U.S.A. was able to maintain revenue level in the face of this very large client repositioning, and it is focusing on improving margin in the Italian business. Technical Service has its strongest quarter in history, and the outlook for the business is robust.

Our balance sheet improvement initiatives are gaining traction. We are reducing our debt and expect this to continue in Q4 and Q1 of next year. Our leverage ratios remains well within our comfort zone, and we are well positioned to continue to execute on our growth strategies.

Well, that concludes our prepared remarks. Please, operator, feel free to open the call to analysts for questions.

[Operator]

[Operator Instructions] Your first question comes from Derek Lessard with TD Cowen.

[Derek Lessard, analyst]

Congrats on a solid quarter, Claude. Yes. My first question is on the Technical Services. And I think you alluded to it in your prepared remarks on the record margin there. I was just curious, again, if you can just maybe give some comfort or some color around how sustainable you think that margin is? And maybe just a little bit more color on the initiatives that you've put in place to improve that margin profile of that business.

[Claude Bigras, executive]

Well, thank you, Derek. That's a very good question. Our objectives as a technical business is we are aiming at a sustainable 7% overall. This is what we are focusing on. Yes, for sure, we had a very good quarter. Like I said, it's usually our strongest quarter, but the business is really aiming towards achieving the 7% constant margin over time. This is what we expect to deliver, and we're working hard on it.

Now this being said, yes, like I said, we are measuring the improvement margins by the improvement of the margin in the billable work, but also with our backlog estimated margins. So we have seen -- now what we have seen is our margin have expanded from about 200 bps on the -- and I'm sorry, I have a lack of word in English, but on the last 12 months, if we say so, on the continuum basis, now we are over 200 bps over. So that's a very, very good news.

So we continue to improve on that, working very hard on AR, getting our working cap at the best possible situation. So I'm very proud of what the team is achieving for the last 2, 3 quarters there. And again, we were able to complete and go through our bad projects of last year.

[Derek Lessard, analyst]

Okay. And just maybe switching gears to Business Services Canada. You did note that you have a number of contracts that are coming or contract wins in Q4 and Q1. Just maybe could you provide some color on sort of what type of clients maybe or contracts those are and maybe quantify the size if you're able to?

[Claude Bigras, executive]

Well, I won't get into every detail, but we mainly have acquired clients in the commercial, commercial sector, so shopping centers, light industrials. So very regular clients that we are used to serve, that we serve well. We have a little bit of mid-manufacturing clients that joined -- that came to us. So there's not -- there's not a huge client in Business Service Canada that show up. It's a sum of midsized clients that the sales team is working with.

[Operator]

Your next question comes from Frederic Tremblay with Desjardins.

[Frederic Tremblay, analyst]

Congrats on the great quarter. How would you characterize the bidding environment for projects in Technical Services? And I guess when you look at Ainsworth's backlog and the projects that you're bidding on, do you anticipate that, that will be enough to get back to positive organic growth in Technical Services relatively soon? Or are we mostly working on the margins in Technical Services and less so on the top line growth front?

[Claude Bigras, executive]

Frederic, yes, the bidding environment is still strong. We still have -- if we look at the size of the backlog, so I would say it, please, I don't know if I should say that, but I'm very happy to realize that even though we are increasing our margins, we are able to acquire very good and strong clients. Where is the -- where is my challenge is to make sure that we work within an account receivable parameter, which is satisfactory to us. So we're pushing hard on generating the cash in the bank. So while we do both those initiatives, we still capture very good clients. So that's the good news for me.

[Frederic Tremblay, analyst]

Okay. Great. And you did touch on accounts receivables there. I was wondering, we saw a good progression on the working cap front in Q3. Do you feel like there's more to do there in Q4 and into 2025? Maybe if you can get into some of your expectations on that?

[Claude Bigras, executive]

Well, Frederic, listen, we're working very hard on it. We're very focused on it. Now we don't have full controls of all the buttons, but we're working hard on it, and we expect still some improvements in Q4. To what level, we still target and focus on what we said for the year. So we're pushing hard on it.

[Frederic Tremblay, analyst]

Okay. Great. And maybe if I can squeeze in one more. You did mention the gross proceeds of $25 million to $30 million potentially for the two facilities that you're looking to sell. Any update sort of on discussions on that or your expectations on timing of getting those proceeds in the bank?

[Claude Bigras, executive]

Well, are you interested to buy? I can send you the book it on it. Okay. No. Well, listen, we are at the last step of putting the building to market. Mind you that we sold the Superior business a couple of months ago, and they still occupy the premises. Now we are shipping up the premises. We are fully engaged with the brokerage firms.

So I would say that in the next -- over the next 4 weeks, we should have both -- there is a little bit of prework done on the advertising of it. But probably in the next 4 weeks, we should be full blown on the market. We expect maybe 3 to 4 months turnaround. So if I were to make a bet, I would say Q1, Q1 for most of it, a big part of it and Q2 maybe for the remaining, the second building. So it should be expected at the 2025 cash flows.

[Operator]

[Operator Instructions] Your next question comes from Zachary Evershed with National Bank Financial.

[Zachary Evershed, analyst]

So just a follow-up on Fred's question. Maybe you could remind us what you're expecting in terms of magnitude from the building sale proceeds?

[Claude Bigras, executive]

25 to 30 net.

[Zachary Evershed, analyst]

Perfect. And with that hitting the balance sheet and some improvements on working capital, you're dipping under 3x net debt to EBITDA already. What's your appetite like for M&A at the moment?

[Frederic Tremblay, analyst]

Well, we're still focused -- we're still very focused on our growth through M&A. Mind you that 2024, we work actively in several other areas that we need to focus on, but we're still very engaged. We have done three small acquisitions during the year. I can tell you that the team is focusing on but acquiring the right businesses on the technical services, we're focusing on where we have regional presence, where we have a strong maintenance service line on the business service arena. We still are very disciplined in our pricing and our evaluation of the business. So again, the win is not to acquire at any price, it's to acquire a sustainable business at the right price.

[Zachary Evershed, analyst]

Got you. And then you made reference to the Atalian integration and evaluating the lower-margin contracts. What's left to do there? And how much do you think you can do and...

[Claude Bigras, executive]

I missed the first, [ Frederic ], I'm sorry, I missed the first part. You said $2 billion.

[Zachary Evershed, analyst]

Atalian.

[Claude Bigras, executive]

Oh, Atalian. My apologies. Okay. Okay. But it's work in progress. I can tell you that if I'm playing like this is on the Security segment side, very interesting, very strong progress. We have increased the margin substantially. We have also -- I hate to do this, but we had to depart from some clients where we could not increase the margin, thus contributing a little bit for our little organic decline. But we're working well with the clients. I expect that another 2, 3, 4 months, we should be going with the business at the EBITDA level that we are targeting. So maybe another 2, 3 months, we should be there.

[Zachary Evershed, analyst]

Great color. And then just one quick last one on the Technical Services margins, great progress there. The improvements that you're talking about, will they be -- will they continue to reflect the seasonal pattern of Q4 dipping a little bit versus Q3? Or is the power of the backlog enough to buck that seasonal trend?

[Claude Bigras, executive]

No, I think that we can expect Q4 to perform as expected. Q3 is our strongest, but Q4 is also a good quarter. So I don't see any major issues there. Backlog is there to support -- the team is very focused on delivering. Like I said, the areas where we had some hiccups last year, they're full blown. I'm looking at their monthly results, they're consistent in their results now.

So I'm expecting -- I'm very positive for Q4. But again, we don't expect to be -- we don't expect to be 8% every quarter going forward, but our objective and target is a sustainable 7% average year EBITDA. This is where we -- next step is there. After that, we'll see what's next.

[Operator]

Your next question comes from Derek Lessard with TD Cowen.

[Derek Lessard, analyst]

Yes. I just have one last one, more of a housekeeping issue. Could you just maybe talk about your CapEx expectations for Q4 and how we should look at that looking out maybe to 2025 as well?

[Claude Bigras, executive]

Yes. Well [indiscernible] Charles-Etienne.

[Charles-Etienne Girouard, executive]

We should have a CapEx in line with our trend like that we have like since the beginning of the year, like [indiscernible] we have there.

[Claude Bigras, executive]

Yes. Well, listen, you have to understand that starting new projects cost money. So there is a little bit of CapEx there. But overall, we are -- it's very rare that we get out of our 1% to 1.25% on the technical side or 0.75% to 1% on the business service side. But again, business service, they started a lot of new projects. So for sure, it does a little bit of, but nothing major.

[Operator]

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

[Claude Bigras, executive]

Well, thank you very much, operator. Thank you very much again for listening to this conference call. I'd just like to pass my thanks and my congratulations to everyone that is operating and working in the business. It's a concerted effort. And I can tell you that everybody in their position is swimming in the right directions, and they're pushing to get the business continue to develop the success that we have been. And I'm very positive for Q4, but I'm also very positive for 2025. So thank you very much again for listening.

[Operator]

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