GDI Integrated Facility Services Inc.

Good morning, ladies and gentlemen, and welcome to the GDI Integrated Facility Services, Inc. First quarter 2024 results conference call. At this time, all lines are in 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 10, 2024. I would now like to turn the conference over to Mr. Stéphane Neving, Senior VP and Chief Financial Officer. Please go ahead.

Stéphane Neving, Senior VP and Chief Financial Officer. Thank you, Provider. Bon matin à tous. Good morning, all, and welcome to GDI's conference call to discuss our results for the first quarter of fiscal 2024. My name is Stéphane Neving. I'm Senior Vice President and Chief Financial Officer of GDI. I'm with Bill Bigelow, 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 forelooking information, and we ask listeners to refer to the full description of the forelooking safe harbor provision that is fully described at the beginning of our MD&E file on seller last night. We'll begin the call with an overview of GAI's financial results for the first quarter of fiscal 2024, and then we'll let Mike go to provide his comments on the business. In the first quarter, GDI recorded revenue of $644 million, an increase of 53 million or 9% over Q1 of last year, which is due to organic growth of 3% and growth from acquisitions of 6%. We've recorded adjusted EBITDA of $28 million in the quarter, representing an adjusted EBITDA margin of 4%. Moving to our business segment, our business service Canada segment recorded revenue of $145 million in Q1, an increase of 4 million or 3% compared to the first quarter of 2023. This segment reported adjusted EBITDA of 11 million compared to 14 million in the first quarter of 2023, representing a decrease of 3 million. Our Business Service USA segment recorded revenue of 225 million in Q1, representing an increase of 48 million when compared to Q1 of 2023. This increase is mainly due to the revenues from new customers and to the Adelan acquisitions in November 2023. The segment reported adjusted EBITDA of $14 million compared to $12 million in the first quarter of 2023, representing an increase of $2 million. Our technical service segment recorded revenue of $252 million, an adjusted EBITDA of $8 million, representing an adjusted EBITDA margin of 3% due to the past overruns experienced on a few projects in its pre-US operations. Without the cost overrun, the adjusted income margin would have been 5% in the quarter. Finally, our segment profit and order recorded revenue of $22 million compared to $21 million in the first quarter of 2023, attributable to organic growth generated in our U.S. manufacturing operations. I would like now to turn the call to Claude, who will provide further comments on GDI's performance during the quarter.

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 highest single digit, despite Q1 being the business's seasonally weakest quarter. We typically have higher costs in January and February in this segment due to the higher service level needed in winter months, which were difficult to see in our results for the past three years because of the disruption caused by COVID. Keep in mind, seasonal effects in our janitorial business are small, but in our world, a single digit world, if the margin shift of 50 base 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 strategies. 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 As a good quarter, we delivered 27% of revenue growth, 10% of which was organic. And the remainder mostly coming from the Italian acquisition that closed on November 1st. While Italian was somehow a drag on margins during the quarter, we are quite pleased with the result the business has been generating in 2020. Our operations and finance team have been working very closely with their new team mates from Italian to streamline the business. improve margin, and strengthen client relationships. We are advancing our initial integration plan and expect a balanced margin to increase to our target level by mid to end 2024. Finally, the portfolio repositioning of one of our larger clients that we announced in the last quarter took effect in the period at the end of Q1. Our team in the U.S. has worked hard to modify their cost structure, win new business to replace less margin, and we feel it will help mitigate the effect of the business at West Transition. We are also engaged with this client to evaluate opportunities to work together in other regions. Our technical service segment delivered results that were impacted by seasonal factor and one-time events, which were in line with our expectations during the quarter. Q1 is traditionally the weakest quarter for NSWERC 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 grow progressively through the year. Additionally, as we announced in Q4, There were three projects in our U.S. operation that impacted profitability in Q4 2023 and Q1 of this year. The impact of these projects overall was $5 million in Q1 alone. The last of these projects is the purpose of this past quarter. As work 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 segments. Subsequent to Q1, we were active in the M&A firm. We successfully closed the sales of our superior solutions and internal distribution business, Aletra First. We structured a transaction that included a mutually beneficial long-term business partnership with the buyer, and one that would enable us to monetize certain own real estate assets that were dedicated to this business. Without consideration included, this sales was an excellent financial success for GDI, and also a strategic win in that we have a strong distribution partner for our Canadian territorial business going forward. Additionally, subsequent to quarter-end, we closed two acquisitions. Hensworth acquired the Atlantic Canada Service Business of Osman Canada, a leading OEM in the global retail display refrigeration market. This acquisition add on a very strong refrigeration service team to Ainsworth's industry-leading platform in Atlantic Canada. Additionally, on May 1st, our business service segment, U.S., segment acquired Paramount Building Solutions with over 500 employees operating through offices in Phoenix, Minneapolis, and Philadelphia. This acquisition represents geographic expansion for our U.S. business and add a seasonal management team led by a well-respected industry veteran. To conclude, while we understand GDR's overall result in Q1, I'm confident that we can do better. The project that waited on end-work results are now closed up, and our outlook for the business for the rest of the year is positive. Our Business Service Canada segment is performing well, and we expect it to deliver a bit of margin at our 100 to 200 basic support over pre-credit level, for the foreseeable future. Our business service U.S. segment is very advanced on the onboarding and optimization of Italian, and we expect to realize margin improvements in the coming quarters. Finally, the working capital reduction initiative that we are implementing since mid-2023 continues to bear fruit. We are able to maintain constant non-working, sorry, constant non-cash working capital despite the 30 million plus reduction in Q4. We are committed to delivering an additional working cut reduction of 30 million through the remainder of 2024. I would like to thank you all again for participating in our conference call this morning and we'll now ask the operator to attend the call for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a three-tone prompt 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 lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Jonathan Goldman with Scotiabank. Your line is now open. Hi, good morning. Thanks for taking my questions.

Maybe we could start off with Business Services USA. Claude, could you give us a sense how the legacy business performs if you were to exclude Italian and I guess maybe near longer term, can Italian eventually generate margin in line with your legacy janitorial business? And if so, what would be the timeline to getting there?

But Jonathan, we are still working out of the business. At that end, as you know, was a very attractive financial acquisition, but it's a restructuring, more or less a restructuring acquisition. 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 are maybe 300 pips, 350 pips below the rest of the business. but the synergy that we're generating through the integrations are compensated on the EBITDA line. I would say that by the end of the year, we should be quite normalized with the business. That would be the Italian business being normalized or the whole business? Yeah, yeah. Although, you know what, at the end of Q1, as you know, we part with... some, you know, partially with a large customer, which we are working against, you know, into future endeavors. I would say that we are replacing the business relatively well, and the margin impact would not be that significant at the end of the year. So I don't think – I expect the business to deliver well this year, although we have this customer impact.

No, I would agree with you on organic growth and business impact. services you have said. Maybe just moving on to technical services, you at least noted that excluding the three large projects, even the margins would have been 5%. Those projects are largely complete. Do you want the seasonally weaker quarter?

Yeah, you know, the first quarter is always the weakest. I'm sorry, go ahead. I'm sorry, I thought your question was finished. Can you go ahead, Jonathan, again? Yeah, I was just saying...

You know, Q1 is a seasonal quarter, you know, with 5% excluding those projects. Is it reasonable to assume that 5% will be the starting point going into Q2 and then seeing increases through the year? Yes, absolutely.

You know, $5 million, which is costly for us, those projects are done. Well, that's a little punch list to complete, so, you know, hopefully it's behind us.

Oh, that's good to hear. Thanks for taking my question, Pat. Thank you.

Your next question comes from Cheryl Zang with .

Good morning, Claude. This is Cheryl calling for Derek, who's on another call. Hi, good morning. 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 want that back and – like, want back your lost revenue and gain more on top of that. Is that accurate, and if so, could you provide more color around the new contract list and how you managed to offset the revenue loss?

Okay. Well, first of all, we have not won back the lost business. We partially lost a significant part of this large client, about 75%. And we are replacing the lost revenue with strong sales over the quarter and with acquiring new clients. We have reorganized our cost structure around this client, so the impact on margin at the end of the year will not be as significant if you look at the revenue loss. So we have lucky pays of business. What I'm saying is we are still engaging to pivot business with this customer. And, you know, example, next weekend 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, and I'm very positive that we're going to increase our business again with them, but we have not replaced the business yet.

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

Well, there is a significant customer that goes into, I would say, the clean room and the data room, business that we developed with, which is a very good new client for us. But the rest is, you know, it's projects scattered over the business unit. So strong sales quarter. And the backlog, I would say that the pipeline is very attractive in the business service U.S. lately.

I think in the prior quarter you did note that you saw the EBITDA margin settling around 9-10% in Canada and around 7-8% in the US. It seems that the margins are going a bit below those levels.

Has your view on the margins changed now? Our long-term objective is to keep margin maybe 100 to 200 pips over the traditional margins. You know, the market is settling down. You know what? We are at the end of the tale of COVID. You know, there's been a great disturbance in our business. Very positive for a while. Now we are dealing with getting back to a new normal. And this new normal would be probably, like I said, slightly more attractive long-term, which is good news. But, you know, COVID is beyond us. So, yes, 100 to 100 nips, you know, over the next foreseeable future would be the good target in Canada.

Okay. That's very helpful.

Thank you. Your next question comes from John Zampero with CIBC. Your line is now open. Thank you. Good morning. Good morning, sir.

I wonder if we could start in a couple of housekeeping questions and then get to some broader ones. The Ainsworth $5 million impact you mentioned, just want to be clear on that. That's purely an EBITDA impact for Q1 alone, is that right? Yes. Gross margins are actually going to the . 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?

And listen, if there is a queue to infect, it would be very nominal. I mean, you know, we're doing a punch list of one of the customers. We're still negotiating a few little things with another one. So there would be no significant impact. You know, as far as I'm concerned, these projects are beyond us.

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

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. We are in line with what we pursue as far as business, tribe, culture. Very happy because we just got into a great city, Minneapolis. Acquired a 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. 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 good news. So it's true, you know, they're not dramatically large, you know, and they're relatively small, but they're a very well target to implement and increase our profitability and our customer relationships.

Okay, understood. And then a couple on business services, one in Canada and one in the U.S. So let's start with Canada. I guess it's a follow-up on the margin question. Your MD&A, you called out the fact that the margins you're seeing in Canada are a little bit lower because you're having to incur more labour costs to serve as a higher occupancy rate, and you're not being reimbursed for that. Are we right to interpret it that way or is there another component to this if it's just ongoing price negotiation with customers and existing services?

Sometimes we want to be too short in our statement. I think what we have to capture is contracts are reverting back to normal. 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 occupancy over the next quarters, we anticipate, again, to be 100 to 200 over our traditional margin. So it's not negative. For sure. You know, there's a lot of volatility and disturbance, and so we have to be very flexible. So it's, you know what, it's an interesting time for us. But we're up to the challenge, and we're working very, very closely with our customers.

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

Well, first of all, there's 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. You know, there is a trust, there is a confidence level. We are now one of the three, four U.S. players. So that has a lot of value going forward in developing the business. Now, if we go down, you know, in details, is for sure we add on new geographies. But, you know, back office gets integrated. So, and leadership gets integrated, so it creates, it generates usual. They're not as large synergies as if you, you know, you say you'd add on a business right in one of the markets you are, but there are synergies. I love this later acquisition, we have a little bit of both. We have, we acquire new markets, we acquire 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. And this is how we built the U.S. business, by the way. You know, one after the other, acquiring a market. Now we are, you know what, we are, I would say, in the gauze wash and going to the Midwest, now we have a very significant footprint. This is a very good accomplishment so far.

All right, I appreciate the call. I'll leave it there. Thank you. Thank you, sir.

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

Good morning, Frederic. Good morning, Claude. Yeah, most of my questions have been answered, but maybe just a couple more. On the two 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 could talk about sort of the integration process related to that?

No, it's not a turnaround like Italian. You know, we're paying a fair multiple. It's a creative 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 three, four months, but And also we start by integrating finance after that, IT, and the brand as a third element. We integrate the brands. So it's a three-, four-month thing to integrate. So I would say that at the end of Q3 we should have integrated this business nicely. Perfect.

Your next question comes from Zachary Evershed. from National Bank Financial. Your line is now open.

Good morning, Mr. Zach. Good morning. Based on the wording, it sounded like the troublesome projects with cost overruns and technical services were all that wrapped up. Can you confirm that those are completely behind us now, or is there a lingering impact in Q2?

There is no ban in Q2 for those projects. I'll admit that, you know what, our U.S. business segment, we are investing time and energy into it. You know what, we are focused on this business segment. We are positive for it, but there's work ahead. But those projects are no longer on the horizon for us to invest more money into it. They're gone.

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

I'm seeing what I've been saying for a long time is, you know, 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, which we're dealing with. Okay, I'm sorry, are we talking about business service or technical?

I was hoping for technical, but I'm looking for business services as well.

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

And then building on that, I'd say for the last three 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 points step up into Q2 from that 5% level?

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

Excellent. Thanks. Then just a last one for me. I'm talking specifically about Business Services Canada. Can you help us draw a line between what's keeping margins higher than pre-pandemic between market factors versus structural internal changes? Like if we had a complete reversion of the market to pre-pandemic conditions, would you still be targeting 100 to 200 base points higher margin? Or is it dependent on market conditions to an extent?

But you know what? Business Service US is in a very particular, very interesting position. We work a lot in suburban markets. We work a lot in the industrial. 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 blunt to say that we expect to do better than the 200. But don't forget the historical margin was already a little bit higher. So the two, three, you know, maybe I would say maybe two, two and a half, three maybe if we're good. The U.S. business segment longer. But don't forget the business already had a slightly better margin than the business Canada.

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

No, no. You know what? Now it's an empathetic scenario. Just to be very honest, you read the same newspapers as I read The expectation of occupancy to revert back to pre-pandemic, I don't think it is a scenario that is short-term. No, for sure. You know what? If the market comes back to a full new reality, inflation and occupancy, I think we would be in the tier one at the 6% margins. But I don't anticipate the scenario in any foreseeable future.

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

Your next question comes from Liam Bergevin with Desjardins. Your line is now open. Good morning, Mr. Liam.

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. Is that timing effect part of the no more course of business, or did you experience some unexpected delays?

Well, listen, no, it's just, you know what, you know, there is timing issues here and everything. You know, last year we had a very strong organic growth. So, you know what, it's execution of projects and project billing. I don't have, you know what, to be very open. I don't have a full analysis except for 1% decrease. It's project management, so you can put it on timing, and that's about the best answer I can give you on this one.

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

Thank you, sir.

Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the one. Your next question comes from Cheryl Zhang with TD Cowan. Your line is now open.

Hi, thank you. Just a couple 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, and if you see any slowdown in new orders now that you are allotting tougher comps.

Okay. Backlog is very healthy. We're talking probably, you know, I would say at least we have worked probably long for over two quarters, so which is very good. Cheryl, let me put it this way. You know what? We're working on our margin at the such that the backlog will go down a little bit. So my point is, no, the backlog for now is healthy. I mean, the customers are at the rendezvous. we are executing, I can tell you that the backlog, the short-term backlog fill has been done at better margins than the ones that were backlogged in 2023, so it's all encouraging. So the objective here is increase overall margins on projects, and at one point, you know what, the backlog is still very healthy, but our objective is margin improvements.

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

Okay, well, Stefan, maybe you can help Cheryl. Yeah, this is just for Cheryl. 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.

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

No, Q2 should be back to the normal level. Thank you.

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

You're welcome. Thank you.

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

Well, gentlemen, listen, you know, 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 marathonists. So we're working hard on the business. I'm very positive for the remainder of the year. And it's a good work in progress. And you know what? We're working the after COVID era, but the team is focused. And I'm sure that business will remain at where it's supposed to be by the end of 2024. We should be very, very, very well positioned to attack and continue our growth. Thank you very much for making the call.

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

Goodbye.