GDI Integrated Facility Services Inc.

To start the playback, press 1. For playback instructions, press 0. Recorded on the 12th of May, 2023. The length of the recording is 37 minutes, 15 seconds.

Good morning, ladies and gentlemen, and welcome to the GDI Integrated Facility Service First Quarter 2023 Results Conference Call. At this time, online is a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, May 12, 2023. I would now like to turn the conference over to Mr. Stéphane Lavigne, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you, Porter. Good morning, all, and welcome to GDI's conference call to discuss our results for the first quarter of this call, 2023. My name is Stéphane Leving. I'm Senior Vice President, Chief Financial Officer of GDI. I'm with Claude Liga, President and CEO of GDI, and David Enchi, Aggregate 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 harbour provision that is fully described at the beginning in the NDNA file on CEDAR at the end of last night. I will begin the call with an overview of GDI's financial results for the first quarter of 2023, and will then invite Claude to provide his comments on the business. In the first quarter, GDI recorded revenue of $591 million, an increase of $96 million, or 19% 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 million in the quarter, a decrease of $3 million 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 project, which presently is the HRIS project that we began implementation planning in 2022, and launched on January 1st of this year. So far, we have spent $7 million on this project, which includes a $2 million capex, on a total budget of $10 million, and there were $1 million 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 2023. Also in Q1, we made the decision to rename our business segments to more adequately describe their services offering. Gentle Sir Canada is now Business Services Canada, and Gentle US is Business Services USA. In addition, complementary service and corporate and elimination segments are now grouped under corporate and other segments. Then to our business segment. Our Business Service Canada segment recorded revenue of $141 million in Q1, a decrease of $1 million or 1% compared to the first quarter of 2022, and reported adjusted EBITDA of $14 million compared to $19 million in the first quarter of 2022, representing a decrease of $5 million. Our business service USA segment recorded revenue of $177 million in Q1, representing an increase of $14 million when compared to Q1 of 2022, increased partially attributable to the 2022 acquisitions, and the appreciation of the U.S. dollar relative to the Canadian dollar. The segment reported adjusted EBITDA of $12 million compared to $13 million in the first quarter of 2022, representing a decrease of $1 million. The organic revenue decline in Business Service Canada and Business Service USA segment is attributable to a decrease in COVID-related extra services as compared to Q1 of last year, which also led to lower adjusted income 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 million, or growth of 47% over Q1 of 2022, including organic revenue growth of 43%. The segment generated an adjusted EBITDA of $11 million, representing an adjusted EBITDA margin of 4%. Revenue growth for the business is attributable to a strong increase in project revenue and higher service revenues compared to previous years. Finally, our corporate and other segments reported revenue of $21 million and a negative adjusted EBITDA of $4 million, compared to revenue of $18 million and negative adjusted EBITDA of $2 million in the Q1 of 2022. This segment also recorded organic growth of 17% in Q1 of 2023, mainly due to GDI's integrated specialty service business unit, which was launched at the beginning of 2022. The corporate and order segment is composed of our integrated specialty business service, our general products manufacturing and distribution business, as well as our corporate costs and elimination of intercompany transactions. I would like now to turn the call to Flo, who will provide further comments on GDI's performance during the quarter.

Merci, Stéphane. Thank you. Bonjour. Good morning. And thank you all for taking the time to participate in our earnings call this morning. 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 B 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. 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 Cascadian business has been successfully on board, and our two 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 ends work as an exceptional quarter delivering organic growth of 43 and nearly doubled its EBITDA as you know due to the supply chain disturbance and covet delays ends words started the first quarter with a record project backlog we were able to execute on a significant amount of that backlog however We also booked more than we billed in Q1, meaning Ainsworth backlogs continue to run at the all-time high. Additionally, Ainsworth on-call service business had a strong quarter, generating close to one quarter of the organic growth. Typically, the first quarter is Ainsworth's weakest quarter from an EBITDA margin perspective, and its HVAC service business typically do not start to ramp up until mid Q2. In the first quarter, 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 two inaugural contracts and it's 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 of our business segments remains positive. We have a strong market position in Canada, and we are steadily growing our U.S. footprint. The three acquisitions that we concluded in 2022 have 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 three times that to EBITDA. We are a very strong and well-positioned competitor in the market. Our balance sheet is healthy. and capable of supporting our growth objective, and our M&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, to questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star, followed by one or a touch-tone phone. You will hear a three-tone brown, acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the pulling process, please press star, followed by the two. If you are using a speakerphone, please dip the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Derek Lessard with TD Securities. Please go ahead.

Yeah, good morning, everybody, and hope you're all well.

Good morning.

Good morning. I just wanted to maybe start on the commercial office occupancy. And, you know, you alluded to that in your prepared remarks as well as in EMDNA 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 said? I guess, reported in the media. You know, there's been some high-profile mortgage defaults in class B and C buildings in the U.S., and they're starting to see elevated vacancies. I'm just curious on what you're seeing there.

Well, that's a $2 question. Okay, first of all, I'm going to try to segregate. One thing is, You know, building default, I don't think, are exclusively related to COVID, lower occupancy. I think there's a mix of higher interest rates, you know, not occupancy, but higher vacancy levels. Anyway, I won't take the analyst jobs into evaluating the office market, but on our side, What we have seen over the years, remember a year ago, the world was still almost closed. So during the last two, three 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 in 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. 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 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, you know, our COVID extra level has decreased tremendously over the last quarters. We expect that it will continue to be reduced slowly. 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. So it gives us a better working model for the future. And we will evolve as it evolves, sir.

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

Yes. U.S. has reverted back. Mind you that, you know, I don't know if my team will look at me funny, but I will tell you that our business mix in the U.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.S., through our sanitation, industrial, and food business segments, they have more or less reverted back to normal operation some time ago. So we are working in probably, I would say, a normal cruising speed in the U.S. generally. And unlike Canada, the business office segment is still evolving. Hopefully I was clear enough.

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

Well, yeah, we know what we have about – in Canada, we are talking about 35%, you know, approximately 35% of our office portfolio. And in the U.S., probably we are in the area of 15%.

Okay.

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

Okay. And one last one for me before I recuse. 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?

Well, as you know, I'm very transparent, so... You know, 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 startups delays because of the general environment. And you know 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, Ainsworth 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, you know, 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... They're very busy, but you know what? In all, we're very happy, and I don't see any major disruption that could revert the trend.

Thank you very much, guys.

Thank you.

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

Hi, good morning. Good morning, sir. I wanted to ask another one. Good morning. Another one on the technical services, mainly the margins. So sales were close to flat quarter over quarter, but margins were down 240 basis points. So I know there's obviously seasonality in the business, but can you remind us how that seasonality impacts margins in the segments? Also, maybe there's some mixed elements in there. If there was anything else unusual in the quarter that would keep margins at the lower level in the first quarter?

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?

For both 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.

Well, you know, there are two big factors. First of all is first quarter, there's a holiday season. There's people reintegrating the office. So we always lose three, four, five, usually, you know, five billing days, which the business is more or less working on two cylinders to start with. Secondly is all the HVAC, you know, startup season and, you know, what all the breakfasts. break-fix of air conditioning units, startup of chillers and everything. It doesn't happen in February. It happens at the end of April, mid-May. So we are working on projects, discontinue, but the higher margin service call systems and the holiday payouts and the business day loss, if you allow me to say it this way, are all contributing to make it a low, usually a less the less profitable segment.

No, that's crystal clear. I appreciate that. And then the second one, again, margins, but this time the business services USA margins. So kind of below recent trends and pre-pandemic levels. In the script, you called out some sort of pricing lags, I believe. But I want to know if there's anything else there. Yeah, go ahead.

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

Oh, no, I'm just waiting for the color. I'm just trying to figure out margins for the balance of the year. I just don't want to make one quarter into a whole year and extrapolate that.

Absolutely, absolutely. Well, you know what? There are some factors that affected the margin. First of all, we have a significant decline. You know what? That still has pass-through expenses. We will terminate this first phase contract soon. you know, 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 in force in July. So we have a little bit of a lag for those. You know, it's a sum of smaller things that makes it a little bit lower. But I expect margins to resume normally, you know, what, in Q2 and Q3. Again, the surge of the margin is not critical, but I expect it to go back to its normality in the next months.

Perfect. Appreciate the color. Thanks.

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

Thanks. Good morning. Good morning. 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 points. So can you help us understand the movement in EBITDA margin quarter-over-quarter?

You know what? On each segment... Well, 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'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 to work on the original COVID margin, it would not be sustainable over a long period of time unless the world changes again. On the technical side, I think I kind of explained, you know, the margins overall, how it works. So, you know, that's about what I can say.

Yep, 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?

Okay, well, that's interesting. So far, okay, first of all, let me say that we do not foresee any significant disturbance in the market, so that's good news. As you know, we have over 150 collective bargaining agreements, 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 you know, negotiations end up around, you know, a four, four and a half percent increases. And after that, resuming at the normal, I would say, traditional two percent, two and a half percent increases. So we see a jump, which is not abnormal. You know, you all know, you all see the inflation. So yes, Collective bargaining agreements tend to work on a 4% to 5% increase, a jump, and resuming to a certain normality. This is the simplest, but I think the closest to reality answer I can give you.

That's great, Collier. 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?

Well, yes. You see, we tried to be ahead of the parade. Like I was saying, people start to have visibility on how they will operate. Now they want to design their requirements according to their new occupancy model. So the good news is over the next three, four, five months, at least we're going to be able to develop a more stable platform. Now, you know, every day is a new day, you know, 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. So, you know, 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 will probably generate less revenue, but I think an overall better margin, like I was saying.

Okay, okay, that's helpful. Two more. One's on the M&A pipeline, and I'm wondering what you're seeing there, and are you seeing any change in either the number of opportunities or the quality of opportunities, particularly within technical services?

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 see what 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. I wonder if there's been any change in in payment terms or are 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. So is that still the expectation for this year?

Well, yes, that's a very good point because this is one of the focus that we're working on. Two, three pieces. First of all is as interest rate surges, we have seen a little bit of a drag in our AR. in our receivables because customers, they face a higher interest rate. So we have to be, we are working more actively with them. Secondly, the growth in Hemsworth 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 in Q1 affected our working cap. 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 on better cash flow management or more restrictive cash flow management and support the business unit and the working capital need, that's key.

Got it. Okay. That's helpful. I'll leave it there. Thank you very much.

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

Good morning, everyone. Thanks for taking my questions.

Good morning, Zachary.

With the bulk of CapEx leaning to technical services, how fast does capacity ramp up off that spend, and have you been able to increase capacity since last quarter?

Capacity side, yes, we have increased it because, you see, the revenue is there. So we are increasing capacity. Our labor pool is in the I-90s, so that remains also a work in progress to continue to hire and train people. On our technical side, it's not easy as recruiting just anybody and sending them in a car or in the truck, I mean. So yes, we're working, we are hiring, we are training people. We're working with our subcontractors and our business partners to be able to 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.

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

Well, actually, Fuller is not hurting very bad. We are, you know what, we are in the mix of, you know, working on a business plan with Fuller. And, you know, the building reoccupancy is actually now permitting us to generate more revenue. So I'm not in a critical mode on that front, Zachary. It's just that, you know what, the second part of COVID was difficult for our business unit. There was an oversupply in the market. Our office customers were not consuming. So, you know what, it's like a double dipper, but things are starting to resume to a better normality now.

Great, thanks. And moving on to M&A, can you give us a sense of your appetite and what size targets you're considering given your current balance sheet?

Well, you know, as I always say, you know, the M&A, uh activities are opportunistic we are for sure uh we still are looking to mid-size businesses that we can acquire and integrate with our family usually those are quite you know accretive and we have been successful in that this being said well you know at the last couple of acquisitions as you said they were more significant we have a better capacity 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.

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

Actually, us, we are applying the change, but it doesn't mean that everybody is at the same place. But, you know, it's still new. It's still new, but we have to work with our potential targets, and we work them out with them, and I think people understand that there's a new reality shaping up. Saying that the investment banking market has adjusted, they are still working on higher expectations, but we work with them.

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

But we do not disclose this information, Zachary. But you know what? If I were blunt, I'd say for the next year, I think we have enough work in the projects.

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. Any signs of that decline slowing?

You know what, and you see that, you know, let me share a comment that shouldn't, you know, it's interesting is in 2019, we were at the level of, And, you know, all things being equals, we're delivering, although that most of the COVID, you know, COVID extras and higher margins projects is vanishing, we're still sustained a very high margin 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 three-quarters of it is behind us now.

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

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

Hi, good morning, guys. I just had a question on the strong 1Q order in the services, including the on-call services that are starting than usual. Well, it's in fact on Q2 activity levels.

So far, we don't see anything. As you know, we are in our second quarter. So far, we have not seen that. I think that we had a mild winter. It helped a lot on the break-fix and services. But no, we don't see anything in particular. We have no signs of reductions.

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

Absolutely. You know, 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 hours, the report is still the same. So, you know what, so far so good. 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.

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

Thank you very much.

Thank you.

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

Well, thanks everyone again for taking the time for this call. I would just leave this message. I think that we are very, very well positioned to adapt to the market. There's 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 these times. 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. We have a good balance sheet. We're positioned to capture opportunities. So it's work, but I'm very positive on the outcome over time. Thank you very much again.

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.

Goodbye.