GDI Integrated Facility Services Inc.

Good morning, ladies and gentlemen, and welcome to the GDI Integrated Facility Services, Inc. Second Quarter 2024 Result 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 Thursday, August 8, 2024. I would now like to turn the conference over to Stefan Leving. Please go ahead.

Thank you, operator. Good morning, everyone. Good morning, everyone, and welcome to GDI's conference call to discuss our results for the second quarter of fiscal 2024. My name is Stéphane Levigne. I'm Senior Vice President and Chief Financial Officer of GDI. I'm here with Claude Bigrat, President and CEO of GDI, and David Inchi, 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 Four Looking Safe Harbor provision that is fully described at the beginning in the MD&E file on CEDR at the end of last night. I will begin the call with an overview of GDI's financial results for the second quarter fiscal 24, and then we'll invite Claude to provide his comments on the business. In the second quarter, GDI recorded revenue of $639 million, an increase of $30 million, or 5% over Q2 of last year, comprised of 6% growth from acquisitions, and partially offset by 1% organic decline coming from the technical service segment. We recorded an adjusted EBITDA of $34 million in the quarter, in line with Q2 of last year, and up $6 million compared to our Q1 of 2024. On a year-to-date basis, revenue increased by $83 million, or 7%, to reach $1.3 billion compared to $1.2 billion last year. The overall revenue growth from acquisition was 6%, and organic growth was 1%. Adjusted EBITDA in the first half amounted to $61 million, and a decrease of 6% or 9% over the corresponding period of 2023, mainly due to the cost overrun incurred on the three projects in the U.S. technical service business that negatively impacted the results in Q1 and Q4 last year, and that we were successfully closed last quarter. Moving to our business segment, Business Service Canada recorded revenue $145 million in the second quarter, while generating $12 million in adjusted EBITDA, representing an adjusted EBITDA margin of 8% up by $1 million compared to Q1 of 2024. Our Business Service USA segment recorded revenue of $221 million in Q2, representing an increase of $41 million when compared to Q2 of last year, mainly due to the Italian and Paramount acquisitions. and 1% organic growth, which was generated despite the loss of a major customer that started affecting the segment toward the end of Q1. The segment reported adjusted EBITDA of $14 million in line with Q2-1 of 2024 and $1 million higher than Q2 of last year. Our technical service segment recorded revenue of $259 million compared to $264 million in Q2 last year, mainly due to the organic decline attributable to the strong project revenue generated last year. The segment generated an adjusted EBITDA of $14 million at 5% of adjusted EBITDA margin, which is $2 million higher than Q2 of last year. Finally, our corporate and other segments reported revenue of $14 million compared to $21 million last year, mainly due to the sale of our super distribution and retail business at the beginning of the quarter, partially offset by the 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.

Well, Monsieur Stéphane, bonjour, good morning, and thank you to everyone for taking the time to participate in our Q2 earning call. I'm pleased with GDI's performance during the second quarter. We successfully worked through the insulation issues that impacted our prior year quarters and delivered solid results across all of our business segments. Our Business Service Canada segment had a good quarter with sequential growth in both EBITDA and EBITDA margin over the first quarter of the year. Notably, EBITDA margin is holding in line with our previous guidance of 100 to 200 basics points above the pre-COVID level. And we expect to sustain this over the near mid-term. Occupancy in the Class A office market has been relatively stable, and we believe this will continue for the foreseeable future. Our business service USA segment had a very good quarter. Our team was able to mitigate most of the loss of business from one of our largest clients that we had previously announced. In addition to replacing lost revenue, we also increased EBITDA over Q2 of last year, through a combination of cost reduction, new business win, and acquisition activity. Our work on improving margin in the Italian business that we acquired at the end of 2023 is progressing well. While margins continue to be slightly impacted by Italian in Q2, we expect margin improvement efforts to be completed in the second half of the year. Additionally, the Paramount Building solution acquisition was closed on May 1st, that has substantially onboarded and has been substantially onboarded, and the business is performing in line with expectations. Both our business service segments in Canada and the U.S. remain relatively well insulated from the credit-related challenge we have been seeing in other parts of the real estate industry. We typically work with large to mid-sized buildings with large, well-established clients. While higher costs of capital can cause some clients to try push on payment terms, they do not materially affect the credit profile of most of our client base. That being said, we are cautious by nature and we regularly monitor credit quality and receivable days as a matter of course. Finally, both Q3 and Q4 of this year will have one extra working date than the comparable quarters in the prior year. As a result, this will have an effect on quarter-over-quarter comparisons, as one working day represents approximately $3.5 million in labor costs and benefits in our business service segment on a combined basis. Extra and fewer working days are irregular periodic events that has positive or negative effect when looking at quarter-over-quarter results. Our technical service segment had also a very good quarter. As expected, the three projects in our U.S. business that impacted Q4 of 2023 and Q1 of 2024 results were closed out in Q1. Results in the business rebound in Q2 with an adjusted EBITDA margin back at 5%, which was in line with the prior year's quarter. I will remind you that Nsworth is a seasonality as a business, with Q1 and Q2 traditionally been weaker due to the ramp-up of HVAC season. The margin improvement strategy that we began implementing in 2023 has been progressing well, and we are continuing to operate with a backlog near record level, and we are still seeing good demands for new bookings. On June 1st, Ensworth closed the acquisition of RICOM Corporations. Based in Toronto, RICOM is considered as a leader in smart building technology in Canada. Essentially, they focus on connecting all of the business building system into a single platform so that the data can be analyzed and used to optimize building operations. This will lead to energy optimization, greenhouse gas reduction, and a vast array of new and innovative service to enhance the experience in building occupants. RICOM further solidifies Ainsworth and GDI leadership in technology for the real estate industry sector. Also shortly after quarter, we announced a partnership with the Canadian Infrastructure Bank, CIB, where the CIB has committed up to $100 million over a five-year period to provide our clients with low-cost funding for energy and carbon reduction projects. Enzworth and its Energia subsidiary will provide complete end-to-end Turkey analysis, design-built retrofit service for projects where each building is expected to reduce greenhouse gas emissions by a minimum of 30% annually. GDI has formed a special purpose vehicle to enable our clients to finance the capital cost of the retrofit, which will include the CIB's investment with the remainder funded through an equity investment by GDI and third parties. The CIB funding of the SPV is non-recourse to GDI, subject to certain standard guarantees, and will have no bearing on our debt level or leverage ratio. This initiative with the CIB helps to demonstrate Hemsworth and GDI's leadership in the energy advisory sector in Canada, and will help our business development activity in the space. Finally, following the sales of our Superior Solution distribution business on April 1st, we have successfully moved the majority of our Canadian manufacturing operation to our plant in Kansas. Our manufacturing business is performing quite well in 2024 and has won a number of important contracts. We plan to sell the two remaining facilities through where Superior operated over the next few quarters and expect A combined growth proceeds in the $25 to $30 million range. I am happy with GDI performance in Q2 this year. Our business service team in Canada has been working hard and delivered well in a dynamically challenging office environment and preserved margin and keep our clients satisfied. Our business service team in the USA successfully managed through the loss of a major client by driving revenue growth, implementing cost reduction initiative to mitigate any negative impact and improve EBITDA margin. And our technical service business has been focusing on improving overall profitability while maintaining revenue level despite exceptionally strong growth last year. With recent challenges behind us, I'm very optimistic for the remainder of 2024. Our balance sheets remain healthy with leverage sitting within our comfort zone. We remain focused on reducing our operating working capital in the second half of 2024, which would be used to further reduce debt. And we continue to execute on our growth through acquisition strategy, having completed three acquisitions in the first half of the year. I look forward to GDI's performance for the remainder of the year. I'd like to thank all of you again for participating in this call, and at this time, I will ask the operator to open the line to research analysts 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 polling 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 Gabriel Morrow with Scotiabank. Your line is now open.

Hi. I'm calling for Jonathan Goldman. My question is on technical services. How do you see the segment margins evolving in the second half? Do you expect margins to follow the typical seasonal pattern?

Well, actually, as you know, we had to resolve an issue in late 2023 and 2024. Now the business is back to its, I would say, historical recent year margins. But the focus is to continue to improve margins. And we have established initiatives where we enhance our margins at our contract negotiating levels. So, you know, I'm positive that we should see, you know, further EBITDA margin enhancement over the next quarters.

Thank you. And on the working cap for this year, are you still expecting to reduce working cap by 30 million through the balance of the year?

Yes, sir. We're still focused on achieving it, working hard on it. But we are confident and we aim to deliver on that. Our target.

That's right. Thank you very much.

Your next question comes from Derek Lessard with TD Cowan. Your line is now open.

Yeah, good morning, everybody. I hope you're doing well. Good morning. Stéphane, I just want to extend congratulations, I believe, on the retirement. But as a follow-up, I just wanted to ask if you could maybe talk about where you guys are in the search for a new CFO.

Okay. Well, Derek, listen, good news. We have our candidate in the house. So we have... We have circulated some news on that front. So the idea is Charles-Étienne Giroir, which our VP of reporting, will succeed Stéphane in September. And Stéphane will remain with the organization on a full-time basis until the end of the year and on an extended advisory basis for 2024 to help and support Charles-Étienne into his new functions. And so, you know, the good news is, you know, our talents were in sight and we're looking forward to see Charles Etienne in action. And so, and Stéphane, like I said, is not going too far. He's staying around us for the next little while.

Yeah, so it's always good to see strong bench strength. So the plan is for Charles eventually to be appointed CFO.

Yeah, and I can tell you this. I've been working with him for the last 30 days. He's very involved in visiting all our locations, meeting people. I think he's getting his grabs around it. That's good news.

Very good. Good to hear, too. On the Italia acquisition, maybe could you just, I know you touched on it in your prepared remarks, but maybe share some of the updates on the integration and the turnaround there and When are you expecting for the margins to normalize with the rest of the BSU segment? Okay.

Well, listen, we acquired it in November last year, but before January, we were not in full control of the organization. I can say that it's evolving well. You know, on the positive notes, our security segment, we negotiate several increases with customers. So our security segment over the next two remaining quarters will deliver, you know, a more sustainable margin. On the regular business cleanings, you know, the janitorial services, you know, we're still working with each of our clients to either improve margins or actually to divest from some clients if we are not able to improve margins. so our aim we are aiming again at the end of the year to work within you know what i would call the normal margin we still focus on that um i don't see any significant impairment in doing so so uh and now the business has been integrated you know all the the name the brand the people the supervision the organization organizational structure has been all incorporated in gdi our, you know, the outcome thing and finance. So I think we put everything together to be successful this year.

Awesome. And maybe one follow-up for me on technical services. I think you had guided earlier, maybe it was last quarter, to about 6% EBITDA margins by the end of the year. Is that still the target and are you on track to hit that?

Yeah, well, listen, yeah, exactly. So now I think that to be very precise, I think it was 5.4, you know, at this quarter. You know, maybe my colleagues will look at me with big eyes, but I do believe that our target would be to bring it to 7% at some point. Now, but, you know, one step at a time, we are increasing, we're working on a working cap, increasing margins, and all this should bring us to the 7% mark at some point.

Merci, Claude.

Your next question comes from Zachary Evershed with National Bank Financial. Your line is now open. Good morning, everyone.

Good morning, Zachary.

With the record backlog in technical services, it'll obviously take some time for contract negotiation initiatives to cycle through to sales. Could you maybe help us pinpoint when you expect that to flow through?

Well, actually, Zachary, now where we stand at this point, our backlog, you know, is showing an improvement of about 150 bps, you know, and we expected to show 250 bps, you know, probably by the end of Q3. So, you understand that higher margin at the backlog will, you know, will deliver higher EBITDA margin at the end. So we are seeing it already because we started this initiative a couple of quarters ago. But like you said, it takes time because all of the previous work needs to be executed. But now our backlog is, like I said, 150 BIPs over last year. I call it contractual margin. So I'm very positive that it will continue on this route. I would say that if we are able to Again, I don't want to do guidance, but if we can increase by another 150 BIPs by the end of the year, I think it will really support our objectives.

That's great, Collier. Thanks. And then for business services, the U.S., sorry, the adjusted EBITDA margins have been a little lower than pre-pandemic levels this year. Obviously, some turmoil with a major customer loss that you guys are backfilling quite well on organic growth. What's your outlook on the likelihood of bouncing back to the 7% to 8% range in that segment?

Well, that's an interesting question. As you know, Zachary, the U.S. has been full of, not challenges, but full of events. We acquired Italian that we started with a lower margin. We have this large customer lust. Now we aggressively pick up large customers with aggressive margins to compensate. And there is, I would say, the office normalization. So we have a lot to cope with in the U.S. So as we are growing and now we are rationalizing, and also the good news is we have a very significant one that is starting in Q3. I think we should go back to our traditional 7%, you know, 7% probably, I would say, by the end of Q3, maybe Q4, but this is what we're aiming at. Hello?

Your next question comes from Jeff Fenwick with Cormac Securities. Your line is now open.

Hi, good morning, everyone.

Good morning, sir.

Claude, I wanted to ask about organic growth in business services, and maybe we'll split it between the U.S. and Canada. And as you said, you've done a lot of work to replace a lost customer in the U.S. But as that sort of goes into the rearview mirror, what are the prospects here for organic growth? If we were to normalize now going forward, given that momentum you built there, I imagine that's a pretty... good pace of business expansion you've had there. So I'd imagine going forward, organic growth should be a bit stronger when you report it.

Well, listen, I would, you know, I'm always looking at, you know, my target number for organic growth is always 6%. But mind you that we cope with probably a 3% loss year over year. So now we have a little bit of inflation, revenue, you know, increase. but markets are very challenging, so you know what, we negotiate. You know, the idea is to always keep the margin alive. This is, you know, keep the margin is the first priority. So into, you know, an inflationary period where customers are challenged, because we have some customers which are challenges, we don't focus only on increasing revenue, we focus on managing our business partners to keep our margin to a sustainable level. So that's the first priority. This being said, we're investing in the sales force and we are seeing good results. My wish is that we have, you know, a net organic growth between 4% to 6% every year. So this is usually what we are aiming for.

Okay, that's good. Good call. Thank you. And then I wanted to ask about the CIB program that you've announced here and just I'm trying to understand that a little bit when you put yourself or putting some money into that program. Obviously, this is an opportunity to drive some business your way, some business development, but does the return profile from those projects look incrementally better, or is the thinking that it would just maybe drive some business beyond the initial work that you're doing with these customers? Can you just give us a little bit of color about the benefits of that program?

Yes. Okay, so let's break it into a couple of parts. The first part is clients. As you know, everybody is aware of climate changes. Everybody is aware of the government's objectives in this matter. So as a main leader in building technologies, it's a must that we offer our clients technology and advisory services and expertise into delivering on their objectives. So, you know, on the client side, it's not even a second thought. This is one of tomorrow's drivers, and we have to be up to par to service our clientele. I hope you agree with that. Secondly is this, you know, this initiative will generate a substantial amount of work over the next 10 years, you know, and beyond. And for sure, we want to capture this work to make sure that our businesses, you know, are staying healthy and that we keep strong backlogs. So that's the second part of it. The third part of it is, you see, now we will generate, I would say, we will generate profitability through two parts. One, the ends worth execution of contract and projects. And secondly, on the return on the investment we do as equity investment into the SPV, like I said. So now, like I said, we will work on the SPV, us as an investor and with external partners. So our participation would be probably in the 20% to 25% range over the whole investment required. This being said, this 20%, you know, will be probably also take the form of, you know, a fee managed and turned into equity. So it would not probably be a whole cash induction. Probably it would be to convert some of our fees into equity in the projects. Hopefully I was able to give you a good portray of it, but don't hesitate to ask me more questions if you wanted.

Yeah, I guess one follow-up there is just when I think about a program like this, my assumption is you're offering terms to the end customer for financing that are probably better than they would typically get. It's a bit of an encouragement to pursue these projects, obviously. So I'm just curious to get the lower return potential out of that type of loan.

I'm sorry, lower return potential?

Well, I mean, if you're effectively lending the customer money to them, the discount to prime or whatever that rate is to encourage them to utilize the program, and therefore the return on a loan is relatively less in that situation. So, you know, are you making a good return out of that equity that's going into this?

Okay. You know what? Maybe I just want to make sure. You know what? I don't mean, my thinking is, You know, as an investor, we have an expectation of return. So, you know, this is one part. The second part is lower the loan costs, higher the expectation of return at the end. You know what I'm saying? It's like a device communique. If you have a higher interest rate, the return for the investor would be lower. If you have a lower interest rate on the lending part, the capital part should receive a higher return. Am I saying it properly for you?

I think I get what you're speaking to there, yes.

So my point is, you know what? The point is, you know, we're providing the clients. And don't forget us. Our revenue is based on capturing the savings generated through the initiatives. So actually what the SPV will receive is the amounts of savings generated generated through the program over a certain period of times. So, yes, the programs, the system, the modelization is built around providing the equity investor with the fair right amount of return based on the risk level, et cetera. And Nsworth, the model is based on Nsworth making his honorable and sustainable margin by executing the project. So CIB is a tool that we use because it enables our clients to not be obliged to put extra debt on their properties, which are sometimes well financed. So I think it's a great, great initiative from the government to support the decarbonization strategies. Don't you think so?

Yeah, that's very helpful, Collier. I appreciate that. Thank you. That's all I had.

You know, it's hard to – bear with me. It's hard to explain the program of this magnitude in three minutes. So bear with me.

Absolutely. Thank you.

Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the one. Your next question comes from Liam Bergevin with Desjardins Capital Markets. Your line is now open.

Good morning. Good morning. This is Liam for Fred. Could you share your observations on the M&A environment, more especially on your pipeline in the U.S., where GDI seems to have a significant extension potential?

Well, listen, as you know, M&A is part of our day bread and butter. David and his teams are always working actively into it. we feel like the environment has normalized itself a little bit now. We live the period where everybody was selling their business and their grandmother in the COVID era. So now we're past that. Now the business is getting to a new normal. So, yes, we're very active. Again, we don't do forward-looking, but I can tell you the team is always very busy exploring opportunities and seeking. But again, that the objective is not to buy businesses, it's to buy business at the right price. That's the ticket.

Great, that makes sense. And maybe my second question would be, on the acquisition of RICOM, would you be able to quantify your expectations for RICOM's annual revenue generation?

Well... RICOM, on the revenue side, is not a big needle mover on the revenue side. RICOM is an engineering expert business in providing a layer of expertise and systems that will enable us to go further in our technology approach with our clients. So you know what? You should tag this with my prior answers. So the objective behind RICON is really to support our objective in the technology sector to start with. This being said, you know, RICON is, you know, I don't know exactly. I don't remember what we disclosed. But you know what? It's not a significantly high revenue generating business.

Understood. Well, that's all for me. Thank you for taking my questions.

Thank you.

No further questions at this time. I will now turn the call over to Mr. Bidra for closing remarks.

Well, again, thank you very much for taking the time. I would just like to share with you that, you know, I'm very happy to have a very, very focused team working on our objectives, working on making this business a better business. I'm always, you see, Business is like anything else, a living organism. Sometimes we have little things to address. We're working on it. We have worked on it. We're still working on it. And I'm looking forward to see where we are, where we'll be at the end of the year. But I'm very positive on all the efforts that are deployed. So thank you again for the time.

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