GDI Integrated Facility Services Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 12, 2023

There are 9 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the GDI Integrated Facility Service First Quarter 2023 Results Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Friday, May 12, 2023. I would now like to turn the conference over to Mr.

Operator

Stephane Lavin, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Speaker 1

Thank you, further. Good morning, all, and welcome to GDI's conference call to discuss our results for the Q1 of fiscal 2023. My name is Stefan Henning. I'm Senior Vice President and Chief Financial Officer of GDI. I'm with Paul Vigo, President and CEO of GDI and David Enci, Executive Vice President of Corporate Development.

Speaker 1

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 in the MD and A I'll answer at the end of last night. I will begin the call with an overview of GDI's financial results for the Q1 of 2023, And we will then like to provide his comments on the business. In the Q1, TDI recorded revenue of $591,000,000 an increase of $6,000,000 or 19 percent over Q1 of last year, made up mainly of organic growth of 14% and growth from acquisitions of 2%. We recorded an adjusted EBITDA of $33,000,000 in the quarter, a decrease of $3,000,000 or 8% over Q1 of last year. In Q1, we modified our adjusted EBITDA definition to exclude configuration and customization costs for our strategic information technology projects, which presently is the HRIS project that we began implementation planning in 2022 and launched on January 1 this year.

Speaker 1

So far, we have spent $7,000,000 on this project, which includes a $2,000,000 of CapEx on a total of just $10,000,000 And there were $1,000,000 of costs in Q1 of 2023 that were excluded from adjusted EBITDA. Presently, Approximately 5,500 people have been onboarded into our HRS platform and the remainder of our employees are expected to be onboarding during Also in Q1, we made the decision to rename our business segments to more adequately describe their services offering. Results Canada is now Business Service Canada and Gentlemen's U. S. Is Business Services USA.

Speaker 1

In addition, Complementary Service and Corporate and Illumination segments are in our group under Corporate and Other segments. Then to our business segment. Our Business Service Canada segment recorded revenue of $141,000,000 in Q1, a decrease of $1,000,000 or 1% compared to the Q1 of 2022 and reported adjusted EBITDA of $14,000,000 compared to $19,000,000 in the Q1 of 2022, representing a decrease of 5,000,000 Our Business Service USA segment recorded revenue of $177,000,000 in Q1, representing an increase of $14,000,000 when compared Q1 of 2022 increased partially attributable to the 2022 acquisitions and the appreciation of the U. S. Dollar relative to the Canadian dollar.

Speaker 1

The segment reported adjusted EBITDA of $12,000,000 compared to $13,000,000 in the Q1 of 2022, representing a decrease of 1,000,000 The organic revenue decline in Business Service Canada and Business Service USA segment is attributable to a decrease in COVID related extra as compared to Q1 of last year, which also led to lower adjusted EBITDA margin in both business service segments. Base service revenue is up both in Canada and in the U. S. Our Technical Service segment recorded revenue of $252,000,000 Our growth of 47% over Q1 of 2022, including organic revenue growth of 42%. The segment generated an adjusted EBITDA of $11,000,000 representing an adjusted EBITDA margin of 4%.

Speaker 1

Revenue growth for the business is attributable to a strong increase in project revenue and higher service revenues compared to previous year. Finally, our Corporate and Other segment reported revenue of $21,000,000 and a negative adjusted EBITDA of 4,000,000 compared to revenue of $18,000,000 and negative adjusted EBITDA of $2,000,000 in the Q1 of 2022. This segment also recorded organic growth of 17% in Q1 of 2023, mainly due to GDI's integrated SLP service business unit, which was launched at the beginning of 2022. The Corporate and Other segment is composed of our Integrated Facilities Business Service, I would like now to turn the call to Claude, who will provide further comments on GDI's performance during the quarter.

Speaker 2

Merci, Stephane. Thank you. Bonjour. Good morning. And thank you all for taking the time to participate in our earnings call this morning.

Speaker 2

I am overall pleased with GDI's performance in Q1 this year. In our business Service Canada segment, we're seeing a stabilization of occupancy levels in the Class A and the office market As most occupants are well into the deployment of their individual hybrid work policies. We are actively working on a sustainable service model that would respond to most of the occupancy policies We are seeing evolving in the market. As expected, we have seen a progressive decrease in COVID Extra services in Canada, and we expect this to continue through the coming few quarters. We continue to expect margins in Canada to remain at a premium to pre pandemic levels for the foreseeable future.

Speaker 2

Our Business Service USA segment had a good quarter despite a lower margin in the quarter, which is primarily driven by a reduction of extra services, pass through expenses and timing in price increases to customers. Our Canadian Cascadion business has been successfully on board and our 2 Seattle offices were combined at the start of the year. Finally, our IH service business is continuing to perform extremely well. Moving to our technical service business. Ennsworth has an exceptional quarter delivering organic growth of 43% and nearly doubled its EBITDA.

Speaker 2

As you know, due to the supply chain disturbance and COVID delays, Hencewards started the Q1 with a record project backlog. We were able to execute on a significant amount of that backlog. However, we also booked more than we build in Q1, meaning, Ensworth backlogs continue to run at the all time high. Additionally, Ensworth On Call Service business had a strong quarter, generating close to 1 quarter of the organic growth. Typically, the Q1 is Ensworth's weakest quarter from an EBITDA margin perspective NSHVAC Service business typically do not start to ramp up until mid Q2.

Speaker 2

In the Q1, we made a decision to move our GDI, IFS and Manufacturing Distribution Business into our new Corporate and other segments due to the size relative to the other business segments. The IFS business is continuing to perform well On its 2 inaugural contracts and its building on its sales pipeline across North America. IFS typically focus on large and complex contract opportunities with sales cycles that can be long, But I'm encouraged by the opportunity they are pursuing. Our manufacturing and distribution business is gradually adapting to The lower office occupancy environment. In conclusion, I would like to say that the outlook for all our business segments remains positive.

Speaker 2

We have a strong market position in Canada and we are steadily growing our U. S. Footprint. The 3 acquisitions that we conclude in 2022 has been successfully on board and are all performing well. Our balance sheet, which has been supporting our strong organic growth, has a leverage ratio of more than 3 times debt to EBITDA.

Speaker 2

We are a very strong and well positioned competitor in the market. Our balance sheet is healthy and capable of supporting our growth objectives, And our M and E team is actively working on new opportunities. I'm pretty much looking forward to our team to continue adapting in this evolving environment in 2023. So please now, operator, if you could open the lines, please, Two questions.

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. You will hear a 3 tone product line in your request and your questions will be pulled in the order they are received. Your first question comes from Derek Lessard with TD Securities. Please go ahead.

Speaker 3

Yes. Good morning, everybody, and hope you're all well.

Speaker 2

Good morning.

Speaker 4

Good morning.

Speaker 3

I just wanted to maybe start On the commercial office occupancy and you alluded to that in your prepared remarks as well as in the MD and A as it being Stable. Can you just maybe help me square away those comments and your views on the ground with what's sort of being, I guess reported in the media, there's been some high profile mortgage defaults In class B and C buildings in the U. S, they're starting to see elevated vacancies. I'm just curious on what you're seeing there.

Speaker 2

Well, that's a $2 question. Okay. First of all is, I'm going to try to segregate one thing is, Building default, I don't think are exclusively related to COVID lower occupancy. I think there is a mix of Higher interest rates, not occupancy, but higher vacancy levels. Anyway, I won't play I won't take the analyst jobs into evaluating the office market.

Speaker 2

But on our side, What we have seen over the year is remember a year ago, the world was still almost closed. So during the last 2, 3 quarters, We have seen a kind of a stabilization of what, I would say, the next foreseeable future would look like. We're starting to have a better understanding of the occupant strategy and occupying their office. So it provided us Enough knowledge and information to work into structuring a service model that can respond to more or less all those services. We cannot work every day differently with different staff level and different office occupancy level.

Speaker 2

So we needed to Structure a service model that respond to most of the strategies and we're working actively into that. So the good news is So we're starting to see a little bit more clearly what would be required for us to deliver the service. So this will provide us a better stability. On the other hand, our COVID extra level has decreased tremendously over the last quarters. We expect that it will continue to be reduced slowly.

Speaker 2

I think we have seen the most surge of it. But now it's all depending. If there is a resurgence of the virus and everything, we can be in a totally different space. But for our perspective, We are seeing a better stabilization in the office building. Now we are about 50% occupancy overall.

Speaker 2

So it gives us a better working model for the future. I mean and we will evolve as it evolves, sir.

Speaker 3

No, that's very helpful. Are you seeing Claude, are you seeing a difference In the U. S. Versus Canada?

Speaker 2

Yes. U. S. Has revert back. Mind you that I don't know if my team will look at me funny, but I will tell you that our business mix In the U.

Speaker 2

S. Is not the same as in Canada. So our exposure or our market penetration to Office and Commercial Properties is higher in Canada than in the U. S. So in the U.

Speaker 2

S. Through our Sanitation, Industrial and Food Business segments, they have more or less revert back to normal operations some time ago. So we are working in a probably I would say a normal cruising speed in the U. S. Generally.

Speaker 2

Yes. And unlike Canada that the business office segment is still evolving. Hopefully, I was clear enough.

Speaker 3

Yes, that was clear. I was wondering if you had The sort of the office space mix of your overall portfolio?

Speaker 2

Well, yes, we know what we have about In Canada, we are talking about 35%, approximately 35% of our office portfolio. And in the U. S. Probably we are in the area of 15%.

Speaker 3

Okay. Very, very

Speaker 2

And you actually put a good point. You know what, for sure, our clients are into a turmoil. So our job is to adapt And it to be and to work with our clients and also be prudent on our credit with our clients. And we're very focused on it.

Speaker 3

Okay. And one last one for me before I recue. Just maybe could you help us with the Or your expectations around the technical services business, obviously a very strong quarter for you there. Specifically, just looking to get some confidence on the growth and maybe level of revenue and how much of the backlog Should we expect you guys to realistically convert to sales?

Speaker 5

Well,

Speaker 2

As you know, I'm very transparent. So to compare to Q1 of last year is a little bit biased because A year ago, we had supply chain issues, we had customer delays issues, we have project start up delays Because of the general environment and what and so the backlog was built over time and we had a good combination of Backlog due to some delays and also very, very efficient contract acquisition. So, Ellsworth is working full steam ahead For the last while, you know what, it's very, very I'm very pleased with the way they convert their backlog. We are not seeing any clouds in the horizon that would impede us to deliver. For sure, it Takes up a little bit of our working cap because they're working very busy.

Speaker 2

But you know what, in all, we're very happy and I don't see any major disruption that could revert the trends.

Speaker 4

Thank you very much guys.

Speaker 2

Thank you.

Operator

Thank you. Your next question comes from Jonathan Goldman with Scotiabank. Please go ahead.

Speaker 5

Hi, good morning. I wanted to

Speaker 2

Good morning, sir.

Speaker 5

Another one on the technical services, mainly the margins. So sales were close to flat quarter over quarter, but margins were down 2 40 basis points. So I know there's obviously seasonality in the business, but could you remind us how that seasonality impacts margins in the segments? Also maybe there's some mix elements in there. If there's anything else unusual in the quarter that would keep margins at the lower level in the Q1?

Speaker 2

Okay. You know what, I'm sorry because you know what, it doesn't come in very well here. Okay. You want to know You want me to explain to you to give you an overview of the seasonality. Are you talking about the business service segment or the technical segment?

Speaker 5

The technical services, because I'm looking at like the sales, they're flat quarter over quarter, but margins are down. I know the seasonality, but if there's anything else?

Speaker 2

Well, Bart, there are 2 big factors. First of all is, Q1, there is a holiday season, there is People reintegrating the office. So we always lose 3, 4, 5, usually 5 billing days, which is the business is more or less working on 2 cylinders to start with. Secondly is On the HVAC startup season and what all the break fix of air conditioning units, startup Chillers and everything, it doesn't happen in February. It happens in end of April, mid May.

Speaker 2

So we are working on projects discontinued, but The higher margin service call systems and what the holiday payouts And then the business they lost, if you allow me to say it this way, are all contributing to make it a low, usually a The less profitable segment.

Speaker 5

No, that's crystal clear. I appreciate that. And And then the second one again, margins, but this time the Business Services USA margin, so kind of below recent trends in pre pandemic levels. In the script, you called out some sort of pricing lags, I believe. But I wanted to know if there's anything else there yes, go ahead.

Speaker 2

No, no, no, no. I'm sorry, I didn't want to interrupt. You finish, please, and I will answer after. Don't worry.

Speaker 5

No, I'm just waiting

Speaker 6

for the color. I'm Trying

Speaker 5

to figure out margins for the balance of the year, whether it's I just don't want to make 1 quarter into a whole year and extrapolate that.

Speaker 2

Absolutely, absolutely. Well, you know what, there are some factors that affected the margin. First of all, we have a significant client, You know what, that still has pass through expenses that are we will terminate this 1st phase contract And the past two expenses will be revised. So that affects the margin on a mathematical approach. Secondly is, we have another large client that increases are due the increases are enforced in July.

Speaker 2

So we have a little bit of a lag for those. It's a sum of smaller things that makes it a little bit lower, I expect margins to resume normally what in Q2 and Q3. And again, the surge of the margin is not critical, but I expect it to become to go back to its normality in the next months.

Speaker 5

Perfect. Appreciate the color. Thanks.

Operator

Thank you. Your next question comes from John Zampara with CIBC. Please go ahead.

Speaker 7

Thanks. Good morning. Good morning.

Speaker 4

I want to start in Business Services Canada and just would like to better understand the dynamic there. And I get the year over year comparison, but if we look at Q1 compared to Q4, Sales were roughly the same, both in dollars and the mix of recurring versus on call, but EBITDA margin was down over 100 basis So can you help us understand the movement in EBITDA margin quarter over quarter?

Speaker 5

You know

Speaker 2

what, on each segment, First of all is on the business service side, for sure on one side you've got a drop in revenues Of the COVID Extra, so that affects both revenue and margins. There There's an extra day in the quarter as well over the last quarter. So that makes also a difference. And again, like I'm saying is, we are still working into getting a better glimpse Of our new normality, I expect that we will run, like I said, at a premium over Our traditional margins, but there's a reality that what to work on the original COVID margin, It will not be sustainable over a long period of time unless the world change again. On the technical side, I think I kind of explained The margins overall, how it works.

Speaker 2

So, it's about what I can say.

Speaker 4

Yes, that's fine. It was just specific to Business Services. So that's helpful. Sticking with Canada, any recent labor negotiations In Canada for business services and if so, can you share what kind of cost increases you're agreeing to versus the past few years?

Speaker 2

Okay. Well, that's interesting. We are so far, okay, first of all, let me say that we do not Foresee any significant disturbance in the market. So that's a good news. As you know, we have over 150 collective bargaining agreements.

Speaker 2

So it's a full time job like we say. So we don't foresee any major disturbance. Secondly, what we have seen is that negotiations end up around a 4%, 4.5% increases and after that resuming at the normal, I would say, traditional 2%, 2.5% increases. So we see a jump, Which is not abnormal. You all know you all see the inflation.

Speaker 2

So yes, collective bargaining agreement tend to work on a 4% to 5% increase And resuming to a certain normality. This is the simplest, but I think the closest to reality answer I can give you.

Speaker 4

That's great color. Thank you. And then one more in Canada and back to commercial office customers. Are you seeing more requests For reduced level of services or requests for price reductions from corporate clients?

Speaker 2

Well, yes. You see, we tried to be ahead of the parade. People now have a like I was saying is, People start to have visibility on how they will operate. Now they want to design their requirements according to that The new occupancy model. So the good news is over the next 3, 4, 5 months, At least we're going to be able to develop a more stable platform.

Speaker 2

Now every day is a new day. It's but It's getting there. So yes, it will probably come out to a reduction in service Not service level, but in service requirement because of less occupancy, but we will see a more stable environment. Our strategy is to adapt to our customer. This is our primary objective, evolve with them And be more aggressive and continue to be aggressive in business development to still generate growth, although our base customers in this segment We'll probably generate less revenue, but I think an overall better margin like I was saying.

Speaker 4

Okay. Okay. That's helpful. Two more. One's on the M and A pipeline and Wondering what you're seeing there.

Speaker 4

And are you seeing any change in either the number of opportunities or the quality of opportunities, Particularly within technical services?

Speaker 2

Well, listen, I would say, you know what, again, I don't want my team to look at me funny, but Don't worry, they're very busy. So we are both working on the business service side and the technical side in Canada and the U. S. So you know what, I'm very happy to see the level of work being done there. I cannot tell you more because we don't give guidance, but I think you I'll see what

Speaker 4

I'm saying. All right, understood. And then one last one, I feel like I ask this every quarter, but on working capital and you referenced it earlier Claude, But there was a material drag on cash flow generation that came mostly from receivables. So I wonder if there's been any change In payment terms or our customers deferring payments, just would like to better understand that dynamic. And I think you'd previously said you expect A fairly material net improvement in working capital.

Speaker 4

So is that still the expectation for this year?

Speaker 2

Well, yes, that's a very good point because this is one of the That we're working on 2, 3 pieces. First of all is, as interest rate Surgeons, we have seen a little bit of a drag in our AR, in our receivables because customer, they face a higher interest rate. So we have to be we are working more actively with them. Secondly, the growth in Ensworth also, you know what in project, This is by far one of our most demanding working capital segment. So yes, the heavy production we had Q1 affected our working cap.

Speaker 2

So our strategy is threefold, is We are really, really close to our customers on the credit side because I'd like to service our client to our best of ability, but I'd like to be paid. Secondly, is to really work with our business partners to On a better cash flow management or more restrictive cash flow management and support the business unit And the working capital needs, that's key.

Speaker 8

Got it. Okay. That's helpful.

Speaker 4

I'll leave it there. Thank you very much.

Speaker 2

Thank you.

Operator

Thank you. Your next question comes from Zachary Avershed with National Bank Financial. Please go ahead.

Speaker 6

Good morning, everyone. Thanks for taking my questions.

Speaker 2

Hey, good morning, Zachary.

Speaker 6

So with the bulk of CapEx leaning to technical services, how fast is capacity ramp up off that spend? And have you been able to increase since last quarter.

Speaker 2

Capacity side, yes, we have increased it Because you see the revenue is there. So we are increased capacity. Our labor pool is in the high 90s. So that remains also a work in progress to continue to hire and train people. On our technical side, it's not We are recruiting just anybody and send them in the car or in the truck, I mean.

Speaker 2

So yes, we're working actively working, we are hiring, We are training people. We're working with our subcontractors and our business partners to be able to I realize more so. I'm happy with what is done. I think we will continue to generate the revenues. We have a better capability, but it's a work in progress going forward to continue to build this capability for sure.

Operator

That's helpful.

Speaker 6

Thanks. And then looking at Corporate and Other, what's the path back to profitability there? How bad is Fuller hurting right now?

Speaker 2

Well, actually Fuller is not hurting very bad. We are what we are in the mix Working on a business plan with Fuller and the building re occupancy It's actually now permitting us to generate more revenue. So I'm not in a critical mode on that front, Zachary. It's just that what the second part of COVID was difficult for our business unit. There was an oversupply in the market.

Speaker 2

Our office customers were not consuming. So you know what, it's like a double dipper, But things are starting to resume to a bit of a better normality now.

Speaker 6

Great, thanks. And moving on to M

Operator

and A, can you give

Speaker 6

us a sense of your appetite and what size targets you're considering given your current balance sheet?

Speaker 2

Well, as I always say, as you know, the M and A activities are opportunistic. We are for sure, we still are looking to midsize businesses That we can acquire and integrate with our family. Usually those are quite accretive and we have been successful in that. This being said, the last couple of acquisitions, as you said, they were more significant. We have a better capacity.

Speaker 2

So yes, We're looking to more significant acquisitions because we have the capacity. I have the team, I have the depth, I have the knowledge and we have the expertise to do it. It's not only a question of cash, it's a question of capacity. So I can tell you that we're ready to continue to grow and we are capable of undertaking larger opportunities. I'm very confident on that front.

Speaker 6

Great, thanks. And then on those Potential targets, any change to M and A multiples given the tighter interest rate environment?

Speaker 2

Actually us, we are applying the change, but it doesn't mean that everybody is at the same place. But it's still new. It's still new, but we have to work with our Potential targets and we work the math with them. And I think people understand that there's a new reality shaping up, Mainly saying that the investment banking market as adjusted, they are still working On the other higher expectations, but we work with them.

Speaker 6

Got you. Thanks. Would you be able to share any color on the size of the technical services backlog in terms of dollars or weeks?

Speaker 2

We do not disclose this information, Zachary. But what if I were blunt, it says for the next year, I think we have enough work In the projects.

Speaker 6

Fair enough. Thank you. And just one last one. You're now seeing more clearly what's required in business services and some stabilization in office occupancy. We've been watching margins in Canada decline by about 100 basis points every quarter since Q2 of 2022.

Speaker 6

Any signs of that decline slowing?

Speaker 2

You know what, and you see that Let me share a comment that shouldn't it's interesting is in 2019, we were at the level And all things being equal, we're delivering, although that most of the COVID extras and higher margins projects is vanishing. We're still sustained a very high margin EBITDA in dollars, I mean, so I think the team has done a great job in bridging The pre COVID to the post COVID. This being said, the margin is continuing to adjust. I cannot tell you specifically where we will be at the end of the year, but I don't think there will be significant 4, 5, 6, 7, 100 points down. I think that we are I think that at least 3 quarters of it is behind us now.

Speaker 6

That's helpful. Thanks. I'll turn it over.

Operator

Thank you. Your next question comes from Liam Bergeron with Desjardins Capital Markets. Please go ahead.

Speaker 7

Hi, good morning guys. I just have a question on the strong 1Q quarter in technical services, Including the on call services that are starting unusual, will it impact on Q2 activity levels?

Speaker 2

So far, we don't see anything. As you know, we are in our Q2. So far, we have not seen that. I think that we had a mild winter. It helped a lot At the break fix in services, but no, we don't see anything in particular.

Speaker 2

We have no signs of reductions.

Speaker 7

Okay. So you haven't seen that I'm being pulled forward to 1Q or No. Are you? Okay. And are you still expecting strong activity into Q2 as well?

Speaker 2

Absolutely. I understand your question is, did we do our Q2 business in Q1, but that's not the case. It's continued to generate the revenue so far. This is what we have on our Board. And on the usage of ours, the report is still the same.

Speaker 2

So what so far so good, Howard. I think that Our service delivery in the market is strong. I think people recognize that. And so we're servicing more and more customers every quarter.

Speaker 8

Great. That's all for me guys. Thank you.

Speaker 2

Thank you very much.

Operator

Thank you. There are no further questions at this time. Mr. Bighraw, back over to you.

Speaker 2

Well, thanks everyone again for taking the time for This call, I would just leave this message Yes, we are I think that we are very, very well positioned to adapt to the market. There has been a lot of changes, a lot of volatility. I think our grandkids will talk about this 10 years as The great disturbance. So, our capacity and our adaptability and our Focus on profitability, I think, will help us to go and continue to go through this I think it's a known secret that the economy is looking a little bit to be getting into recessions. I'm happy to say that we're strong.

Speaker 2

We have a good balance sheet. We're positioned to capture opportunities. So It's worked, but I'm very positive on the outcomes over time. Thank you very much again.

Operator

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

Powered by Quartr
Earnings Conference Call
GDI Integrated Facility Services Q1 2023
00:00 / 00:00