Earnings call: GDI IFS reports steady growth with focus on efficiency

 

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GDI Integrated Facility Services (GDI IFS) has announced its financial results for the fourth quarter of fiscal 2023, showcasing a revenue increase of 6% to $622 million compared to the previous year.

The growth is attributed to a combination of 2% organic growth and 4% from acquisitions. The company’s adjusted EBITDA stood at $37 million, reflecting a 6% margin. For the year, GDI IFS’s revenue rose by 12% to $2.4 billion, with the Business Service USA segment experiencing a notable 10% organic growth and a 14% increase in adjusted EBITDA.

However, the Technical Service segment saw a decline in organic growth due to lower project revenues. CEO Claude Bigras expressed confidence in the company’s performance and growth prospects for 2024, despite the challenges faced.

Key Takeaways

• GDI IFS’s Q4 revenue reached $622 million, a 6% increase year-over-year.
• The company’s year-to-date revenue rose to $2.4 billion, a 12% increase.
• Adjusted EBITDA for Q4 was reported at $37 million, a 6% margin.
• Business Service USA segment grew by 10% organically, with a 14% increase in adjusted EBITDA.
• Technical Service segment experienced a decline in organic growth.
• CEO Claude Bigras highlighted the company’s focus on margin over top-line growth and efficiency consolidation.

Company Outlook

• GDI IFS’s outlook for 2024 includes a focus on capturing major clients in the US and being cautious with organic growth to prioritize margins.
• The company is working on reducing working capital by $50-60 million by the end of 2024.
• There are no plans for dividends or share buybacks as the focus is on organic growth and acquisitions.
• GDI IFS aims to be opportunistic in acquiring technical businesses with heavier maintenance recurring revenue packages.
• The impact of US layoffs and actions to mitigate contract losses may lead to a slight decline in organic growth but should not significantly affect margins.

Bearish Highlights

• Technical Service segment’s decline in organic growth due to lower project revenues.
• US layoffs and actions to mitigate contract losses may result in a slight decline in organic growth.

Bullish Highlights

• Significant growth in the Business Service USA segment with a 10% increase in organic growth.
• Healthy backlog and increased margins expected to yield positive results for the rest of the year.
• Integration of Atalian and the HRIS system is anticipated to bring efficiency improvements.

Misses

• No specific numbers provided regarding the HRIS spend.
• The company did not perform dramatically bad during the transition months of November and December.

Q&A Highlights

• The sale of Superior Sany is expected to generate around $40 million in revenue with a target EBITDA delivery.
• 2024 is envisioned as a year of efficiency consolidation and acquisitions.
• Bigras expressed satisfaction with the company’s Q1 performance so far.

In summary, GDI IFS’s earnings call highlighted a strategic focus on efficiency and margin improvement, despite some setbacks in organic growth. The company’s cautious approach to growth and emphasis on acquisitions positions it to navigate the expected market volatility and pressure in 2024. CEO Claude Bigras’s confidence in the company’s direction, coupled with the positive performance of the Business Service USA segment, underscores GDI IFS’s resilience and potential for continued progress.

Full transcript – None (GDIFF) Q4 2023:

Operator: Good morning, ladies and gentlemen, and welcome to the GDI Integrated Facility Services Fourth Quarter 2023 Results Conference Call. [Operator Instructions] Also note that the call is being recorded today, Thursday, February 29, 2024. And I would like to turn the conference over to Stephane Lavigne, Senior VP and Chief Financial Officer. Please go ahead.

Stephane Lavigne: Thank you, Preleur. Bon matin à tous. Good morning to, all, and welcome to GDI’s conference call to discuss our results for the fourth quarter of fiscal 2023. My name is Stephane Lavigne. I’m the Senior Vice President and Chief Financial Officer of GDI. I’m with Claude Bigras, President and CEO of GDI; and David Hinchey, 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&A filed on SEDAR last night. I will begin the call with an overview of GDI’s financial results for the fourth quarter of fiscal 2023, and then I will invite Claude to provide his comments on the business. In the fourth quarter, GDI recorded revenue of $622 million an increase of $34 million or 6% over Q4 of last year, which is due to organic growth of 2% and 4% growth from acquisition. We recorded adjusted EBITDA of $37 million in the quarter, representing an adjusted EBITDA margin of 6%. In the fourth quarter, GDI delivered a net working capital reduction of $36 million, resulting in long-term debt repayment of $33 million before business acquisition payment. On a year-to-date basis, revenue increased by $265 million or 12%, to reach $2.4 billion compared to $2.2 billion last year. Organic growth was 8% year over year and revenue growth from acquisition was 2%. Adjusted EBITDA in 2023 amounted to $142 million representing an adjusted EBITDA margin of 6%. Moving to our business segment, our Business Service Canada segment recorded revenue of $146 million in Q4, an increase of $2 million or 1% compared to the fourth quarter of 2022. The segment reported adjusted EBITDA of $13 million compared to $16 million in the fourth quarter of 2022, representing an expected decrease of $3 million. Our business Service USA segment recorded revenue of $215 million in Q4, representing an increase of $39 million when compared to Q4 of 2022, which is attributable to increases in revenue with new customers and the Atalian acquisition in November 2023. This segment reported adjusted EBITDA of $16 million compared to $14 million in the fourth quarter of 2022, representing an increase of $2 million. Our technical service segment recorded revenue of $239 million and adjusted EBITDA of $14 million, representing an adjusted EBITDA margin of 6%. The segment experienced an organic growth revenue decline of 5%, which is attributable to lower project revenues. Finally, our segment Corporate and Other reported revenue of $22 million, compared to $18 million in Q4 of 2022 with the difference attributable to organic growth generated by GDI’s Integrated Facility Services Business, GDI IFS, launched at the beginning of 2022. I would like now to turn the call to Claude, who will provide further comments on GDI’s performance during the quarter.

Claude Bigras: Well, thank you Stephane, and welcome everyone to our fourth quarter conference call. [Foreign Language] Overall, I’m pleased with our result. In the fourth quarter. Our Business Service Canada segment was able to deliver modest organic growth while maintaining a 9% adjusted EBITDA margin despite the challenges we are reading about in the commercial real estate sector. As you know, the segment’s principal exposure in commercial real estate is in Class A office towers, which makes up approximately one-third of our Canadian portfolio. Despite all of the negative headlines about commercial real estate, we believe that Class A buildings will not disappear, that facility services will still be required, and that vacancies caused by tenants moving or reducing space requirements will be filled with new tenant demands. Our Business Service USA segment also had a good quarter with 10% organic growth and an adjusted EBITDA growth of 14% over the prior year. During Q4, we completed the acquisition of the U.S. Facility Service Business of Atalian Global Services, which added approximately 2,000 employees to our teams, and considerably strengthened our footprint in the Northeast U.S. The acquisition is a turnaround opportunity where we paid a reduced price for a business of this size and have been implementing a business reorganization plan since the closing date to bring margin to our target levels. We have been making good progress in this regard and are on track with our plans. Finally, at the beginning of Q1, we were informed that — by one of our large customers that they would be undergoing a supplier realignment in Q1, which will negatively affect our segment organic growth rate during 2024. Due to our flexible cost structure, we have right-sized our costs and when paired with our new business wins, we will be able to mitigate almost completely the net impact of this loss. Our Ainsworth Technical Service Segment faced some challenges in Q4, with underperformance on a few large projects in the U.S., that caused the business to deliver results that were below expectations, which we feel may also carry over a bit in Q1, 2024 to complete those projects. Ainsworth’s EBITDA underperformance was explained by these few large projects. Our Canadian Business and the remainder of the U.S. Business performed well during the quarter. In 2024, Ainsworth Project Business grew rapidly, causing a working capital surge and a degradation in some project margins which we supported with free cash flow. At the end of Q2, we started implementing certain strategies to both reduce working cap requirement and increase overall margins in projects. I am happy to report that these efforts are starting to bear fruits as we were able to reduce working capital by $36 million since the end of Q3 2023, which helped to increase free cash flow. We’re not there yet, but the work is actively — we are working actively towards it. We also have begun to move away from very large projects in some markets and focus on projects globally with a higher margin profile, which while resulting in short-term revenue pressure, this will ultimately result in a more stable business with a more consistent margin profile. All that being said, despite the challenging quarter, Ainsworth was still able to deliver $14 million of EBITDA and an adjusted margin of 6%, even considering somehow those non-recurring project issues. Also during the first quarter, we announced the sales of our Superior Solutions janitorial product distribution segment, which is expected to close at the end of Q1. We entered this business in 2013 and we’re able to grow it into one of the larger janitorial products distribution businesses in Central and Eastern Canada. Ultimately, we decided to focus on our two main business segments, and partnering with a large well-established business in this sphere would be more beneficial to GDI’s stakeholders and enable us to redeploy the capital in our core businesses where we are achieving attractive returns. Financially, We were able to transact at a very favorable multiple as in addition to the purchase price, we expect to monetize certain owned real estate assets that directly support this business. Additionally, we are retaining our chemical manufacturing business that has recently been realizing positive momentum in its white-label manufacturing segment. I’d like to conclude on this by saying how proud I am on the team at Superior who essentially rebuilt this business from scratch in 2014, turning Superior into a strong business, servicing clients both side and outside — inside and outside of the GDI family and they were a dependable go-to supplier for all of their clients at the height of the COVID-19 pandemic, when many of their competitors were short in supply. I would like to thank all of the team at Superior and feel that they will be transitioning into a good home at Imperial Dade Canada who will become a strong partner for GDI going forward. Overall, I am happy with how GDI’s business segments performed in Q4 last year. We faced some challenges, but as always when that happen, our team shows resilience, develop plans and implement strategies to mitigate harm, overcome obstacle, and ultimately deliver growth and profitability. Our flexible cost structure enables our business to be resilient. Looking forward to 2024, I feel we are well-positioned to deliver growth. Competitively we are the largest facility service provider in Canada and amongst the largest in North America. Our reputation is excellent and our culture is entrepreneurial and dynamic. Financially, our free cash flow profile is improving due to the working capital management strategy we are implementing. Our leverage ratio are well within our comfort range, our balance sheet has plenty of room to support our growth through acquisition strategy and our pipeline is healthy. I look forward to the opportunity to deliver growth and profitability in 2024. Now operator, please open the call for questions.

Operator: [Operator Instructions] And your first question will be from Derek Lessard at TD Cowen. Please go ahead.

Derek Lessard: Yes, thanks, and good morning everybody. Hope you’re well.

Claude Bigras: Hi, good morning.

Derek Lessard: Good morning guys. I want to start out on a positive note. Super strong results in your U.S. Business Services Segment. Could you maybe just help us with how much of that organic growth was price versus volume, and then maybe talk about what’s driving the incremental revenue from the new clients?

Claude Bigras: Okay, well listen, first, I would say that the growth comes from probably three areas. First of all is pricing adjustments and price increases among the portfolio. Secondly, we had good project wins and good organic growth in last year. And thirdly, for sure, the acquisition of Atalian in the last couple of months in the quarter really helped us also to implement revenue growth on the top line. And again we’re very happy with the end results.

Derek Lessard: Yes, great result there. And how should we think about the organic growth opportunity going forward?

Claude Bigras: That’s a $10 question. We have a business where contract wins are not always organized in the sequence. So far, we are experiencing good wins this year. And I can only tell you that we’re focusing a lot. We have grown our sales teams. We’re really focused on organic because we feel that it’s the most rewarding value creation in the business. So we are implementing our sales strategy, we’re growing our sales teams. So far it does deliver good results. Now this being said, again, this company was able to deliver results by focusing more on the bottom line than the top line. Easy to get clients if you lose money. So, we are always very cautious. So, I’d rather be a little bit more prudent on organic growth, but deliver margins.

Derek Lessard: Okay, thanks for that, Claude. And just maybe on the Technical Services side, you guys — you said again that you’re focusing sort of on the smaller, higher margin projects. Just curious on how much of the revenue drop in that segment, was tied to that versus the timing, as you pointed to in the MD&A. And then maybe finally, any comment on your backlog and whether you feel the drop was more of a one-time issue and transitory.

Claude Bigras: Okay, well, listen, let me be a little bit more specific because I don’t want us to start with the wrong assumptions. You know, project profiles, there is no such smaller project as a higher margin profile. And we do a lot of those. We do thousands of those projects during a year. So we’re acquainted to that. But on larger projects, what we’re focusing on is there are project profiles that offer a better margin expectation, which focusing on more, for example, like our control division. But overall, what we are implementing is higher margin at the bid process. So, this way you know what it eliminates — probably naturally eliminates lower-margin project profile. So we decided to be not competing head to head with larger margin guys. We are keeping a margin policy which is probably more rewarding for us, okay. So that’s one thing. Secondly, yes, in a couple of markets, we undertake a couple of projects that did not deliver the margins and we had to adjust our Q4 according to these project delivery. We still have a little bit of wins on one project in Q1. But again, those projects will be finished in the next weeks and I’m going to be very happy to move on.

Derek Lessard: Okay, thanks for that color, Claude. I read you.

Claude Bigras: And you know what, we have a very healthy backlog and with overall increased margins. So you know what? I’m positive for the rest of the year.

Derek Lessard: Thank you.

Operator: Thank you. Next question will be from John Zamparo at CIBC. Please go ahead.

John Zamparo: Thank you. Good morning. I wanted to follow up on that last answer, please. Claude, the cost overruns that happen at those larger projects, can you give some color into what drove those, and why you consider them one time, and what gives you confidence they won’t occur elsewhere?

Claude Bigras: Well, when we analyze, because for sure, we work extensively in analyzing and shielding ourselves for those to repeat in time. Example, one project, we were very aggressive on margin expectations. So, at the end of the day, the project — example, this very large project delivered okay margins. But since we were expecting a lot more, we had to adjust our expectations on margin. And that’s one thing that we had to do. So this adjustment, it is what it is. And another one is there was a mishap in the bidding and the execution. So you know what? And we had to live with it to deliver because we have a reputation, but it would be behind us. But out of the 3,500 projects we do a year, I don’t remember seeing this type of mishap happening very often. So, we just implemented more cautious approach on margins. We are more conservative in the way we structure our margin profile on project estimates. So, it will help us — it will give more positive surprise than negative surprise.

John Zamparo: Yes, fair enough. Okay. And does the ERP implementation, once that’s completed, is that something that helps with in analyzing project costs and projecting margins, and ultimately like what your bid is, is that related to the ERP implementation?

Claude Bigras: Well, listen, an ERP is not an AI system, so it helps to give more accurate information. Mind you, we do ERP to centralize our business systems, and centralize our information system, and streamline our operating — our system actually are pretty robust in giving us the information, I can tell you this. But now, this being said, we are finishing the implementation of our HRIS system, which is critical for us at 35,000 plus more employees, it was the time to do it. So we’re completing that. We are still evaluating how we will implement our ERP? We are in the last miles of our business case into that, and decision will be made very shortly on how we’ll proceed. And I’ll be happy to share with you when we are fully aligned on the ERP implementation.

John Zamparo: Okay. Understood. A couple more on the technical services business. Looking back historically, that had grown organically well into double digits on the top line. You mentioned a couple of reasons why it moved the way it did. Some of that timing, some of that intentional because you’re not chasing lower-margin jobs. I wonder if you can say how much of the decline was those two factors versus something related to the industry or otherwise.

Claude Bigras: You know what? We have to look at it — it’s a decline on a quarter-over-quarter. Overall, this business did 18% growth year-over-year. You know now the jump — you know what? the jump on the revenue of projects quarter-over-quarter, you have to take it with a grain of salt. But, we still have a healthy backlog. So, I expect us to continue in the same trend that we are revenue-wise. But for sure, you know what, by putting — how can I say this is, by implementing a higher-margin profile on our project bidding, for sure, it will end up being — even our win rate might diminish. But — and again, focusing on the bottom line is, I think, more healthy than the top line.

John Zamparo: Yes. Understood. Okay. And then, just one more on the working capital front. I wonder, is there a target that you can share for 2024 on what you hope the improvement is? Or at least some goalposts on that?

Claude Bigras: Well, listen, my dream is to be negative working cap, but I don’t think it will happen this year. But this being said, we have a working capital profile. Project execution, we are totally vertically integrated with our staff and it’s all self-performing, so — and the industrial clients, as you know, have payment policies. But this being said, we are streamlining our process. Our strategy is to — what to reduce the order-to-cash timing, and also increase project billing during the execution. So, we’re implementing three or four strategies to actually continue to reduce our working cap. You know what, it will move quarters over quarters in 2024, but we are still aiming at our $50 million to $60 million reduction of working cap by the end of 2024.

John Zamparo: Got it. Okay. That’s helpful. I’ll leave it there. Thank you.

Claude Bigras: No problem, sir.

Operator: Thank you. Next question will be from Frederic Tremblay at Desjardins. Please go ahead.

Frederic Tremblay: Good morning.

Claude Bigras: Good morning, sir.

Frederic Tremblay: And maybe to — going back again to Technical Services briefly, you mentioned a focus on margin and bottom line, can you remind us what sort of margin profile you’d be targeting there? In the past, you mentioned, like 7% adjusted EBITDA margin. Is that still roughly what you’d like to achieve in that segment?

Claude Bigras: Yes, Frederic, you know me, maybe I’m transparent in many aspects. Remember, we start acquiring and these businesses were delivering negative EBITDA margin. So from minus 1% to 1.5%, now we’re at 6%. I think an LTR margin would be 7, considering that it is a little heavier on CapEx, but it’s not terminal 7. By working on the maintenance mix, on project mix, we hope that we still continue to increase to 7.5. But my next target is to be at 7. And after that we’ll do another phase plan to increase it another 100 bps. But my focus is 7. Until we have a regular 7, we work very hard on it. After that, we’ll move on.

Frederic Tremblay: Okay, great. Thanks for that. And with the working capital improvements that we’re starting to see, can you maybe talk about some capital allocation priorities for 2024? Maybe your thoughts on CapEx and potential M&A?

Claude Bigras: Okay, you know what? You said capital allocation. Well, listen, we have our acquisitive strategy, and we are very opportunistic in that front. So, yes, our priority for sure is, you know what, M&A activities. On the CapEx, we’re prudent on the CapEx. We spend CapEx in implementing our HRIS. I cannot give you visibility on the ERP as a decision has not been fully done. So, I’m waiting to see exactly what’s involved on that front over the next four to six quarters. But yes, M&A is still a priority. We’re very opportunistic. We want to make sure we do the right size acquisitions, and the rest goes on the debt for sure.

Frederic Tremblay: Okay. And just on the M&A, does the current, I guess, environment or current things that you’re going through in Technical Services, does that change how you think about potential acquisitions in Technical Services, or there’s no change there, you’d still be open to making other transactions there in the near to mid-term.

Claude Bigras: It’s a very good point, Frederic. And again, you know what? Very blunt, but lesson learned, we’re focusing a lot more on heavier maintenance recurring revenue package. When we look at new technical businesses where we are also looking at the size of our acquisitions we do and how can we build densities within our acquisitions. So, yes, you know what, we’re more focused on our technical acquisitions and we’re focusing on a promising acquisition in energy, decarbonation, expertise in energy projects. So, yes, we are focused on more futuristic technical services, developing concentration, and moving with the higher recurring revenue technical businesses.

Frederic Tremblay: Very helpful. Thank you.

Operator: [Operator Instructions] And your next question will be from Zachary Evershed at National Bank. Please go ahead.

Claude Bigras: Good morning, Mr. Zachary.

Zachary Evershed: Good morning, Mr. Bigras. Starting with GDI IFS, could you give us an update on your outlook for the subsegment there?

Claude Bigras: 2024 delivered — we’re still young in the game. Am I totally happy with the growth? No. I would have expected that we would capture a couple of major clients. We have some good stuff in the books, but nothing really heavy intangible. So it’s still a work in progress. If you were to ask me if we will still continue to focus on the U.S. side to capture some good clients, but no the business is not yet where I want it to be.

Zachary Evershed: Good color. Thanks. And then if we think about the impact of U.S. layoffs and the other actions you’re taking to mitigate the large contract loss, how does that flow through organic growth and the margin profile throughout this year?

Claude Bigras: Okay, margin profile. You know what, at the end of the day, what we did to cope for it, I don’t think there would be not a significant margin move, that’s the good news. Organically, depending on the rate of wins we’ll have in the U.S., it can change. But the lesson by losing, you know what, I would say by starting up with probably, I would say a net of 8% organic decline with this client, I mean, on the business service segment in the U.S. So we need to focus on sales win. So probably, maybe it would be a negative couple of points. But again, I don’t want to do forward looking, but we’re working very hard to make sure that we mitigate, first of all, margin has been working on them, and on the revenue side, we’re working very hard to compensate the revenue.

Zachary Evershed: Got you. Thanks. And so then just digging in on that, given that you’re not foreseeing a significant margin move, is that on the percentage side or frame the other way in terms of the reason for part…

Claude Bigras: Yes, in dollars, actually, you know what, by reducing revenue and keeping in dollars, so we will be in line with — yes it will bump up a little bit the percentage if you make the math, it’s a rule of three. But on the dollar side, I think we did — these large projects, they are good for growth, for healthy topline, margins are always not to the level of other smaller projects. And when these happen, we’re very happy to capture them. Not so happy when they go somewhere else for service. But we have a flexible business, so we were able to adjust the business accordingly and rapidly. That’s the key element.

Zachary Evershed: That’s a good clarification. Thank you. And then just one last one. In terms of onboarding Atalian and your outlook for HRIS spend, how much of the upside from integration relies on the new system? And what other buckets are you looking at?

Claude Bigras: No, I have not done a relation between HRIS and how we will be more efficient integrating business. For sure, we did it to do that, but I did not put time into getting a number on that front, to be very honest, Zachary. This being said, November and December were transition times, we were working with the vendor in their systems. We retained most of the people, and even in those two months, we did not do dramatically bad. And without teasing, very happy so far in Q1 of what’s happening there. Am I saying enough to give you a good sense?

Zachary Evershed: Great sense. Thank you.

Claude Bigras: Okay.

Zachary Evershed: I will turn it over.

Operator: Thank you. Next question will be from Derek Lessard at TD Cowen. Please go ahead.

Derek Lessard: Yes, thanks. Just a follow-up for me. I was just curious if you could add any, I guess, color on the sale of Superior Sany with respect to the revenues and EBITDA and free cash flow. And then maybe — just maybe, tell us how you’re thinking about as your free cash flow and your balance sheet improve, how you’re thinking about or your views on returning capital to shareholders, whether it’s by dividend or share buybacks.

Claude Bigras: Okay, first thing, let’s resolve two things. We never paid a dividend in this company so far, and there’s no intentions to start anytime soon as we focus on our capital, on growth, and creating value through this channel. Secondly, share buyback, we did some in 2024 to be very prudent — very honest. I don’t think we will continue at this time in the sense that besides organic growth and business acquisitions, the latter is, for me, as far as I’m concerned, the last value creation, understanding that the two other segments can deliver far more value. So we will continue to focus our capital on what we feel is the right way to continue to create value, okay, that’s one thing. So, the second part is Superior is basically two operating segments, manufacturing and distribution. We have actually spun-off our distributions because the market has consolidated a lot in this sphere and we felt that we could not offer the more efficient or competitive solutions to the market. So we rather work — there’s a saying, if you cannot beat them, join them. So, for us, I think it was a good solution for them and us. Now, on the revenue side, I would say that probably it will be — if I look at the year, it would be in the 40-ish millions of revenue with maybe what, I think — again, I don’t want to direct too much, but I would say our target EBITDA delivery. So hopefully it gives you a good sense.

Derek Lessard: Oh, thanks for that, Claude. Very good color. Thanks, guys.

Operator: Thank you. And at this time, we have no other questions registered. Please proceed.

Claude Bigras: Okay. Well, again, interesting quarter, a lot of moving parts, nice acquisition that we did. We’re starting the year with very interesting backlog and business ahead of us. We have to be smart, 2024 is another year where we see volatility and market pressure. So, working very hard, very focused in the business. This year is a year of efficiency consolidation, but we always keep our momentum in acquisitions. So, I look forward to continuing the year, and I want to thank you for being on the call.

Operator: Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your line.

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