GDI Integrated Facility Services Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2024

There are 8 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the GDi Integrated Facility Services Inc. First Quarter 2024 Results Conference Call. This call is being recorded on Friday, May 10, 2024. I would now like to turn the conference over to Mr. Stephane Na Ving, Senior VP and Chief Financial Officer.

Operator

Please go ahead.

Speaker 1

Thank you, operator.

Speaker 2

And welcome to GDI's conference call to discuss our results for the Q1 of fiscal 2024. My name is Stephane Naveing. I'm Senior Vice President and Chief Financial Officer of GDI. I'm with Claude Digra, President and CEO of GDI and David Enchi, 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 and A filed on seller last night.

Speaker 2

We'll begin the call with an overview of GII's financial results for the Q1 of fiscal 2024 and then we'll then like Tho to provide his comments on the business. In the Q1, GDI recorded revenue of $644,000,000 an increase of $53,000,000 or 9% over Q1 of last year, which is due to organic growth of 3% and growth from acquisitions of 6%. We recorded adjusted EBITDA of CAD28 1,000,000 in the quarter, representing an adjusted EBITDA margin of 4%. Moving to our business segment. Our Business Service Canada segment recorded revenue of $145,000,000 in Q1, an increase of $4,000,000 or 3% compared to the Q1 of 2023.

Speaker 2

The segment reported adjusted EBITDA of $11,000,000 compared to $14,000,000 in the Q1 2023, representing a decrease of CAD3 1,000,000 Our Business Service USA segment recorded revenue of CAD225 1,000,000 in Q1, representing an increase of $48,000,000 when compared to Q1 of 2023. This increase is mainly due to the revenues from new customers and to the Atellon acquisitions in November 2023. The segment reported adjusted EBITDA of 14,000,000 compared to $12,000,000 in the Q1 of 2023, representing an increase of $2,000,000 Our Technical Service segment recorded revenue of $252,000,000 and adjusted EBITDA of $8,000,000 representing an adjusted EBITDA margin of 3% due to the cost overruns experiment on a few projects in its U. S. Operations.

Speaker 2

Without the cost overrun, the adjusted EBITDA margin would have been 5% in the quarter. Finally, our segment corporate and other recorded revenue of CAD22,000,000 compared to CAD21,000,000 in Q1 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.

Speaker 3

Thank you, Stephan. Welcome, everyone, and welcome 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 one time events. Our Business Service Canada segments generated modest organic growth and delivered an EBITDA margin in the high single digit despite Q1 being the business' seasonally weakest quarter. We typically have higher costs in January February in this segment due to the higher service level needed in winter months, which were difficult to see in our results for the past 3 years because of the disruption caused by COVID.

Speaker 3

Keep in mind, seasonal effect in our janitorial business are small, but when in our world, a single world digit world, EBITDA margin shift of 50 basis points 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 USA segment had a good quarter.

Speaker 3

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 result 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 advancing our initial integration plan and expect Italian's margins to increase to our target level by mid to end 2024.

Speaker 3

Finally, the portfolio repositioning of 1 of our larger clients that we announced in the last quarter took effect in the tail of the end of Q1. Our team in the U. S. Has worked hard to modify their cost structure, win new business to replace low loss margin, and we feel it will help mitigate the effect of the business as well as transition. We are also engaged with this client to evaluate opportunities to work together in other regions.

Speaker 3

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

Speaker 3

Operation that impacted profitability in Q4 2023 and Q1 of this year. The impact of these projects overrun was $5,000,000 in Q1 alone. The last of these projects is the result of this past quarter. Henceward 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.

Speaker 3

Subsequent to Q1, we were active on the M and A front. We successfully closed the sales of our superior Solutions janitorial distribution business on April 1. We structured a transaction that include a mutually beneficial long term business partnership with the buyer and one that will enable us to monetize certain owned real estate asset that we are dedicated to this business. With our consideration included, the sales was an excellent financial success for GDI and also a strategic win and that we have a strong distribution partner for our Canadian penetorial business going forward. Additionally, subsequent to quarter end, we closed 2 acquisitions.

Speaker 3

Hensburg acquired the Atlantic Canada Service Business of Asman Canada, a leading O and M in the global retail display refrigeration market. This acquisition add on a very strong refrigeration service team to Handsworth's industry leading platform in Atlantic Canada. Additionally, on MiFIRS, our Business Service segment, the U. S. Segment acquired Paramount Building Solutions with over 500 employees operating through offices in Phoenix, Minneapolis and Philadelphia.

Speaker 3

This acquisition represents geographic expansion for our U. S. Business and add a seasonal management team led by a well respected industry veteran. To conclude, while we understand Gilead overall result in Q1, I'm confident that we can do better. The projects that waited on Ennsworth results are now closed out, and our outlook for the business for the rest of the year is positive.

Speaker 3

Our Business Service Canada segment is performing well, and we expect it to deliver EBITDA margin that are 100 to 200 basis points over pre COVID level for the foreseeable future. Our Business Service U. S. Segment is very advanced on the onboarding and optimization of Italia, and we expect to realize margin improvements in the coming quarters. Finally, the working capital reduction initiative that we are implementing since mid-twenty 23 continue to bear fruits.

Speaker 3

We are able to maintain constant non working sorry, constant non cash working capital despite a $30,000,000 plus reduction in Q4. We are committed to delivering an additional working cap reduction of $30,000,000 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

Thank you. Your first question comes from Jonathan Goldman with Scotiabank. Your line is now open.

Speaker 2

Hi, good morning and thanks for taking my questions. Maybe if we could start off with Business Services USA. 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?

Speaker 3

Jonathan, we are still working on the business. Atamian, 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 result. On the gross margin side, I would say that there may be 300 bps, 350 bps below the rest of the business.

Speaker 3

But the synergy that we're generating through the integrations are compensate on the EBITDA line. I would say that by the end of the year, we should be quite normalized with the business.

Speaker 2

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

Speaker 3

Yes, yes. The whole business is actually although we know what at the end of Q1, we as you know, we part with some partially with the 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.

Speaker 2

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

Speaker 3

Yes. And the Q1 is always the weakest. I'm sorry, go ahead. I'm sorry. I thought your question was finished.

Speaker 3

Can you go ahead, Jonathan again?

Speaker 4

Yes. I was just saying,

Speaker 2

yes, Q1 is a seasonally weak quarter, you know, with 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?

Speaker 3

Yes, absolutely. Dollars 5,000,000 was costly for us. Those projects are done. 1 has a little punch list to complete. So hopefully it's behind us.

Operator

Your next question comes from Sheryl Zang with TD Cowen. Your line is open.

Speaker 5

Hey, good morning, Claude. This is Sheryl calling for Derek, who's on another call.

Speaker 3

Hi, good morning.

Speaker 5

Good morning. So our first thanks for taking our question. Our first question is on the Business Services USA, Obviously, very strong organic growth there. I think last quarter you did call out contract realignment with a major customer, but it appears that you won that back and like won back the lost revenue and gain more on top of that. Is that accurate?

Speaker 5

And if so, could you provide more color around the new contract wins and how you manage to offset the revenue loss?

Speaker 3

Okay. Well, first of all is, we have not won back the loss business. 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.

Speaker 3

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 repaid the business. What I'm saying is we are still engaging to develop business with this customer. And example, next week, I'm with this customer. So we are not we did not exit this customer, but the customer realigned some of his business, And we are still working with this customer.

Speaker 3

And I'm very positive that we're going to increase our business again with that, but we have not replaced the business yet.

Speaker 5

Okay, that's clear. And just wondering if you could provide some color around the new contract wins in Business Services USA?

Speaker 3

But it's not there is a significant customer that is into, I would say, the clean room and 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 Pitt, 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.

Speaker 5

Okay. That's awesome to hear. And then maybe just one more before I re queue. In Business Services, I think in the prior quarter, you didn't know that you saw the EBITDA margin settling around 9% to 10% in Canada and around 7% to 8% in the U. S.

Speaker 5

It seems that the margins are going a bit below those levels. Has your view on the margins changed now?

Speaker 3

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. What we are at the end of the tail of COVID, It has been a great disturbance in our business, very positive for a while. Now we are dealing with beginning back to a new normal. And this new normal will be probably, like I said, slightly more attractive long term, which is a good news.

Speaker 3

But COVID is beyond us. So yes, 100 bps 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. Your line is now open.

Speaker 4

Thank you. Good morning.

Speaker 3

Good morning, sir.

Speaker 2

I wonder if we could start on

Speaker 4

a couple of housekeeping questions and then get to some broader ones. The Ainsworth $5,000,000 impact you mentioned, just want to be clear on that. That's purely an EBITDA impact for Q1 alone. Is that right?

Speaker 3

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

Speaker 4

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

Speaker 3

Listen, if there is a Q2 impact, it will be a very nominal. I mean, we're doing a punch list of 1 of the customers. We're still negotiating a few little things with another one. So there would be no significant impact. As far as I'm concerned, these projects are beyond us.

Speaker 3

Okay, understood.

Speaker 4

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

Speaker 3

Listen, you know what, we do not disclose more than what you saw in the 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 type culture, very happy because we just got into a great city, Minneapolis, acquired a great couple of great customers, a good team. So very, very positive for us. And the other acquisition is, we have a strong segment and we have a strong relationship with Asman already in our Refrigeration division.

Speaker 3

And this is a very good add on and we're developing closer and tighter relationship with this great manufacturer. So for us, it's a good news. So it's too they're not dramatically large. They're relatively small, but they're very well target to implement and increase our customer relationships.

Speaker 4

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.

Speaker 4

Your MD and 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 of it's just ongoing negotiations with customers on existing services?

Speaker 3

Yes, sometimes we want to be true we want to be too short in our statements. 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 according, 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 over our traditional margin.

Speaker 3

So it's not negative, but for sure. There's a lot of volatility and disturbance and so we have to be very flexible. So it's a 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.

Speaker 4

Right, understood. Okay. And then last one on the U. S. Business Services segment.

Speaker 4

The acquisition you made there, specifically the geographic expansion, I know that's a relevant part of your strategy and 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 a 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?

Speaker 3

Well, first of all is one benefit to start with. It enables us to talk with large customers that have multi geographical footprints, because we are able to serve them in roughly 18 to 20 markets, where we have a team, we have a stronghold, we have a pen 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.

Speaker 3

We are now one 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.

Speaker 3

So it creates it generates usual, but not as large synergies as if you say you would add on a business right in one of the markets you are, but there are synergy. And on this later acquisition, we have a little bit of both. We have we acquired new markets. We acquired new customers, but we also having business in one of our very strong segments, which is in Philadelphia that we will integrate in our Philly business. So we have a little bit of positive on both sides.

Speaker 3

And this is how we build 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 Bos Wash and going to the Midwest now we have a very significant footprint. This is a very good accomplishment so far.

Speaker 4

All right. I appreciate the color. I'll leave it there. Thank you.

Operator

Your next question comes from Frederic Tremblay with Desjardins. Your line is now

Speaker 3

open. Good morning, Frederic.

Speaker 6

Good morning, Claude. Yes, 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 Italian or are these businesses already sort of largely optimized and maybe you can talk about sort of the integration process related to that?

Speaker 3

Well, 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 as a 3rd element, we integrate the brands.

Speaker 3

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.

Speaker 6

Perfect.

Speaker 3

And then maybe Hello?

Operator

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

Speaker 3

Good morning, Mr. Zach. Good morning.

Speaker 7

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

Speaker 3

There is no tail in Q2 for those projects. I'll add that, you know what, our U. S. Business segment, we were investing time and energy into it. You know what, we are focused on this business segment.

Speaker 3

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.

Speaker 7

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

Speaker 3

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 not our bid margins, our bid 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?

Speaker 7

I was hoping for technical, but I'd let me call it business services as well.

Speaker 3

Yes, it's an extra one with no charge. So, okay, so go back with technical. Technical, no, technical, the strategy is very simple is we're working very, very focused on cash management. Secondly is, as the backlog is still very strong, we are making a more we have more prudent pricing approach, meaning that we put more margin reserve into our pricing. So as and as we go, as we continue to sell jobs, we increase this margin reserve.

Speaker 3

So the goal going forward is increase margins, capture cash deposit and manage our cash structure there. So this is the motto for technical going forward.

Speaker 7

Good color. Thanks. 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?

Speaker 3

Yes. Well, listen, you know what 5%, if you exclude the project, 5% is the weakest quarter. We expect to work in our 6% plus margins like we're supposed to be. The overall goal to be very, very open is 7% to 8% over time. So it's a big project, but I expect the margin to revert to go back to the 6 plus.

Speaker 7

Excellent. Thanks. Then just a last one 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 pre pandemic conditions, would you still be targeting 100 to 200 basis points higher margin?

Speaker 7

Or is it dependent on market conditions to an

Speaker 3

extent? But you know what, the business Service U. S. Is in a very particular, very interesting position as we work a lot in suburban markets. We work a lot in the industrial.

Speaker 3

We have 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 glad 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.

Speaker 3

So the 2, 3, 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 that this business already had a slightly better EBITDA margin than the Business Canada.

Speaker 7

Thank you very much. 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?

Speaker 3

No, no. You know what, but now it's an epathitic scenario. To be very honest, you read the same newspapers as I read. The expectation of occupancy to revert back to pre pandemic, a 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% margins.

Speaker 3

But I don't anticipate the scenario in any foreseeable future.

Speaker 7

That's very helpful. Thank you. I'll turn it over.

Operator

Your next question comes from Liam Belgevin with Desjardins. Your line is now open.

Speaker 3

Good morning, Mr. Liam.

Speaker 1

Hi. Good morning. So this is for Fred. Basically, thank you for taking my question. I wanted to know the organic decline of 1% in the technical service segment is attributed to timing of project revenues.

Speaker 1

Is that timing effect part of the normal course of business? Or did you experience some unexpected delays?

Speaker 3

Well, listen, no, it's just what there is timing issues here and everything. Last year, we had a very strong organic growth. So what it's execution of projects and project billing. I don't have what to be very open, I don't have a full analytics of the 1% decrease. It's project management.

Speaker 3

So you can put it on timing and that's about the best answer I can give you on this one.

Speaker 1

Great. That's all for me. Thank you very much.

Speaker 2

Thank

Operator

you, sir. Your next question comes from Sheryl Zang with TD Cowen. Your line is now open.

Speaker 5

Hi, thank you. 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 is the backlog is or what the level is compared to prior quarter?

Speaker 5

And if you see any slowdown in new orders now that you're lapping tougher comps?

Speaker 3

Okay. Backlog is very healthy. We're talking probably, I would say at least we have worked probably log for over 2 quarters, so which is very good. Cheryl, let me put it this way, Once we're working on our margin at such time, the backlog will go down a little bit. So my point is, the backlog for now is healthy.

Speaker 3

I mean, the customers are at the rendezvous. We are executing. I can tell you that the backlog, the short term back log 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.

Speaker 3

And at one point, you know what, the backlog is still very healthy, but our objective is margin improvements.

Speaker 5

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

Speaker 3

Well, Stephane, maybe you can help Sheryl.

Speaker 2

Yes, this is just For sure, Sheryl, like this was like an accelerated 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.

Speaker 5

Okay. Just to clarify, we should expect it to revert back in Q2 or next year?

Speaker 2

No, no. Q2 should be back to the normal level in Q2.

Speaker 5

Okay. That's very clear. Thanks, Stefan.

Speaker 2

Welcome. Thank you.

Operator

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

Speaker 3

Well, gentlemen, listen, I'm aware that this quarter has been a little bit challenging for all the reasons we expected and 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 are working the after COVID era, but the team 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 2024, we should be very, very well positioned to attack and continue our growth.

Speaker 3

Thank you very much for making the call.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating in Assay. Please disconnect your lines.

Powered by Quartr
Earnings Conference Call
GDI Integrated Facility Services Q1 2024
00:00 / 00:00