GDI Integrated Facility Services Q3 2024 Earnings Report

GDI Integrated Facility Services EPS Results

• Actual EPS: C$0.28
• Consensus EPS: C$0.26
• Beat/Miss: Beat by +C$0.02
• One Year Ago EPS: N/A

GDI Integrated Facility Services Revenue Results

• Actual Revenue: N/A
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

GDI Integrated Facility Services Announcement Details

• Quarter: Q3 2024
• Date: 11/12/2024
• Time: After Market Closes
• Conference Call Date: Wednesday, November 13, 2024
• Conference Call Time: 9:00AM ET

GDI is a leading integrated commercial facility services provider which offers a range of services in Canada and the United States to owners and managers of a variety of facility types including office buildings, educational facilities, distribution centers, industrial facilities, healthcare establishments, stadiums and event venues, hotels, shopping centres, airports and other transportation facilities. GDI's commercial facility services capabilities include commercial janitorial and building maintenance, energy advisory and system optimization, the installation, maintenance and repair of HVAC-R, mechanical, electrical and building automation systems, as well as other complementary services such as janitorial products manufacturing. GDI's subordinate voting shares are listed on the Toronto Stock Exchange (TSX: GDI). Additional information on GDI can be found on its website at www.gdi.com.

GDI Integrated Facility Services Q3 2024 Earnings Call Transcript

Key Takeaways

• GDI reported Q3 revenue of $640 million, up 4% year-over-year, with adjusted EBITDA of $39 million flat compared to Q3 last year and up $5 million sequentially.
• Year-to-date adjusted EBITDA fell 6% to $100 million, driven by cost overruns in three U.S. technical service projects and the absence of 2023’s COVID-related office-occupancy efficiencies.
• The Technical Services segment achieved a record 8% adjusted EBITDA margin—up ~200 bps—with backlog at near-record levels and management targeting a sustainable 7% margin going forward.
• GDI reduced operating working capital by €25 million and net debt by $41 million in Q3, and expects to generate $25–30 million from the planned sale of two former facility sites in early 2025.
• Organic revenue declined 2% overall, reflecting contract timing in Canada and a large U.S. client repositioning, but new contract wins slated for Q4 and early 2025 should bolster growth.

Presentation

[Operator]

Good morning, ladies and gentlemen, and welcome to the GDI Integrated Facility Services Inc. Third 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 Wednesday, November 13, 2024. I would now like to turn the conference over to Mr. Charles-Étienne Girouard, Senior Vice President and Head of Finance. Please go ahead.

[Charles-Étienne Girouard, SVP and Head of Finance at GDI Integrated Facility Services Inc]

Thank you, Operator. [Foreign language]. Good morning, all, and welcome to GDI's conference call to discuss our results for the third quarter of fiscal 2024. My name is Charles-Étienne Girouard. I am Senior Vice President of Finance Operation and Digital Transformation of GDI. I am 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 the MD&A filed on SEDAR+ last night. I will begin the call with an overview of GDI's financial results for the third quarter of fiscal 2024 and will then invite Claude to provide his comment on the business.

[Charles-Étienne Girouard, SVP and Head of Finance at GDI Integrated Facility Services Inc]

In the third quarter, GDI recorded revenue of CAD 640 million, an increase of CAD 25 million, or 4% over Q3 of last year, comprised of 5% growth from acquisition, 1% growth from the appreciation of the USD relative to the Canadian dollar, partially offset by a 2% organic decline. We recorded adjusted EBITDA of CAD 39 million in the quarter, in line with Q3 of last year, and up CAD 5 million compared to Q2 2024. On a year-to-date basis, revenue increased by CAD 108 million, or 6%, all coming from acquisition, to reach CAD 1.9 billion compared to CAD 1.8 billion last year.

[Charles-Étienne Girouard, SVP and Head of Finance at GDI Integrated Facility Services Inc]

Adjusted EBITDA year-to-date amounted to CAD 100 million, a decrease of CAD 6 million, or 6%, over the corresponding period of 2023, mainly due to the cost overruns incurred in the three projects in our U.S. Technical Services business at the beginning of the year and higher Adjusted EBITDA in our Business Services Canada segment in 2023 due to efficiencies coming from COVID-related lower office occupancy rates. Moving to our business segment, Business Services Canada recorded revenue of CAD 145 million in the third quarter while generating CAD 12 million of Adjusted EBITDA for an Adjusted EBITDA margin of 8%, which was in line with Q2 2024 and was about 2% lower than Q3 last year.

[Charles-Étienne Girouard, SVP and Head of Finance at GDI Integrated Facility Services Inc]

Our Business Services USA segment recorded revenue of CAD 222 million in Q3, representing an increase of 37% compared to Q3, mainly due to the Atalian and Paramount acquisitions, and 1% organic decline despite the loss of a major customer in Q1 2024. This segment reported Adjusted EBITDA of CAD 14 million, in line with Q2 2024 and Q3 last year. Our Technical Services segment recorded revenue of CAD 264 million compared to CAD 269 million in Q3 last year. The organic decline is explained by a decrease in lower margin project revenues this quarter versus the same quarter of last year. This segment generated an Adjusted EBITDA of CAD 20 million, representing an Adjusted EBITDA margin of 8%, which is CAD 4 million higher than Q3 last year. The third quarter is typically the Technical Services segment's seasonally strongest quarter.

[Charles-Étienne Girouard, SVP and Head of Finance at GDI Integrated Facility Services Inc]

Finally, our Corporate and Other segment reported revenue of CAD 9 million compared to CAD 15 million last year, mainly due to the sale of our Superior Solutions at the beginning of Q2, which was partially offset by the growth generated by our U.S. chemical manufacturing business. I would like to turn the call to Claude, who will provide further comments on GDI performance during the quarter.

[Claude Bigras, President and CEO at GDI Integrated Facility Services Inc]

Well, thank you, Charles-Étienne. And thanks to all of you who are participating in GDI's third quarter's conference call. I'd like to start by publicly welcoming Charles-Étienne as lead of the finance teams, GDI's finance team. He officially took over from Stéphane Lavigne on October 1st and is now in charge of finance for GDI. Stéphane is still with GDI in a consulting capacity to support Charles-Étienne in his transition, and he's among us this morning. Thank you, Stéphane. I'm quite pleased with GDI's result in the third quarter. Our Canadian business segments delivered an adjusted EBITDA margin of 8%, which was in line with both Q1 and Q2 of this year. Our Canadian business is seeing a relatively stable level of occupancy in the Class A markets, which is evidenced by a very strong, a very consistent margin profile for the business in 2024.

[Claude Bigras, President and CEO at GDI Integrated Facility Services Inc]

Organic growth in the business was down slightly in Q3. However, this is the result of timing differences between contract wins and losses, and we had the numbers of new contract wins that will start up in Q4 and Q1 of next year. So that should help to support our organic growth numbers and targets. Our U.S. Business Services segment delivered slightly negative organic growth as well, which was driven by the repositioning of the business' largest clients, the bulk of which occurred at the end of Q1 this year. We'll still be experiencing headwinds in quarter-over-quarter organic growth comparisons from this event for the next two quarters. But however, I'm very encouraged that our teams were able to replace almost all the revenue with new business wins in a relatively short period of time.

[Claude Bigras, President and CEO at GDI Integrated Facility Services Inc]

Also, during the quarter, we continued to work on margin improvements initiatives at our Atalian acquisitions. While it's taking a bit longer than we initially planned, we expect to complete the process by Q1 of next year. When comparing Q3 of 2024 to the Q3 of last year, our U.S. and Canada business service segment were burdened with an additional CAD 3 million of costs on a combined basis because there was an extra workday in this year's quarter. I'm very encouraged that both businesses were able to deliver strong results when compared to the prior year's quarter despite this hurdle. Our technical service segment delivered a very strong quarter with an Adjusted EBITDA margin of 8%, the highest recorded in the business since the acquisition of Ainsworth in 2015.

[Claude Bigras, President and CEO at GDI Integrated Facility Services Inc]

These results clearly demonstrate that the weakness the business experienced in Q4 of last year and Q1 of this year was driven by one-time factors, and now the business began rebounding in the second quarter. The margin improvements initiative that we began implementing in Q3 last year have begun to take hold. The backlog remained near record level, and we have increased the average margin within the backlog by roughly 100-200 basis points targets. Additionally, we successfully grew service revenue at Ainsworth during the quarter, which are both higher margins and recurring in nature. Recall that this segment is seasonal, and Q3 is traditionally the strongest quarter. All business units have been performing well, and we expect this segment to continue to deliver robust results going forward.

[Claude Bigras, President and CEO at GDI Integrated Facility Services Inc]

We are happy to report that we also had success with our initiative to more efficiently manage GDI balance sheets during the third quarter. We delivered a reduction of CAD 25 million in operating working capital compared to Q2 of 2024. Together, with strong free cash flow generation, we were able to reduce GDI's net debt by CAD 41 million. Our debt level is also benefit from the intended sales of the two facilities that were used by our Superior Solutions business, which we expect will generate gross proceeds in the CAD 25 million-CAD 30 million range. To conclude, I think that GDI performed very well this quarter. Our Business Services segment is delivering solid and consistent results. Business Services USA was able to maintain revenue level in the face of this very large client repositioning, and it is focusing on improving margin in the Atalian business.

[Claude Bigras, President and CEO at GDI Integrated Facility Services Inc]

Technical Services has the strongest quarter in history, and the outlook for the business is robust. Our balance sheet's improvement initiatives are gaining traction. We are reducing our debt and expect this to continue in Q4 and Q1 of next year. Our leverage ratios remain well within our comfort zone, and we are well positioned to continue to execute on our growth strategies. That concludes our prepared remarks. Please, Operator, feel free to open the call to analysts for questions.

[Operator]

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 touch-tone phone. You will hear a prompt that your hand has been raised. 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 up before pressing any keys. Your first question comes from Derek Lessard with TD Cowen. Your line is now open.

[Derek Lessard, Director of Equity Research at TD Cowen]

Yeah, good morning, everybody, and congrats on a solid quarter, Claude.

[Claude Bigras, President and CEO at GDI Integrated Facility Services Inc]

Thank you very much, David.

[Derek Lessard, Director of Equity Research at TD Cowen]

Yeah, my first question is on the technical services, and I think you alluded to it in your prepared remarks on the record margin there. I was just curious, again, if you can just maybe give some comfort or some color around how sustainable you think that margin is, and maybe just a little bit more color on the initiatives that you've put in place to improve that margin profile of that business?

[Claude Bigras, President and CEO at GDI Integrated Facility Services Inc]

Thank you, Derek. That's a very good question. Our objectives as a technical business is we are aiming at a sustainable 7% overall. This is what we are focusing on. Yes, for sure, we had a very good quarter. Like I said, it's usually our strongest quarter, but the business is really aiming towards achieving the 7% constant margin over time. This is what we expect to deliver, and we're working hard on it. Now, this being said, yes, like I said, we are measuring the improvement margins by the improvements of the margin in the billable work, but also with our backlog estimated margins.

[Claude Bigras, President and CEO at GDI Integrated Facility Services Inc]

So we have seen now what we have seen is our margin have expanded from about 200 basis points on the, I'm sorry, I have a lack of words in English, but on the last 12 months, if we say so, on the continuum basis, now we are over 200 basis points over. So that's very, very good news. So we continue to improve on that, working very hard on AR, getting our working cap at the best possible situation. So I'm very proud of what the team is achieving for the last two, three quarters there. And again, we were able to complete and go through our bad projects of last year.

[Derek Lessard, Director of Equity Research at TD Cowen]

Okay, thanks for that. And just maybe switching gears to Business Services Canada, you did note that you have a number of contracts that are coming or contract wins in Q4 and Q1. Just maybe could you provide some color on sort of what type of clients maybe or contracts those are and maybe quantify the size if you're able to?

[Claude Bigras, President and CEO at GDI Integrated Facility Services Inc]

I won't get into every detail, but we mainly have acquired clients in the commercial sector, so shopping centers, light industrials. So very regular clients that we are used to serve, that we serve well. We have a little bit of mid-manufacturing clients that came to us. So there's not a huge client in Business Services Canada that show up. It's a sum of mid-size clients that the sales team is working with.

[Derek Lessard, Director of Equity Research at TD Cowen]

Thanks for that, Claude. I'll reach you.

[Operator]

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

[Claude Bigras, President and CEO at GDI Integrated Facility Services Inc]

Good morning, Frederick.

[Frederick Tremblay, President and COO at Desjardins]

Good morning, Claude. Congrats on a great quarter. How would you characterize the bidding environment for projects in technical services? And I guess when you look at Ainsworth's backlog and the projects that you're bidding on, do you anticipate that that will be enough to get back to positive organic growth in technical services relatively soon, or are we mostly working on the margins in technical services and less so on the top-line growth front?

[Claude Bigras, President and CEO at GDI Integrated Facility Services Inc]

Yeah, the bidding environment is still strong. We still have, if we look at the size of the backlog. So I would say it, please. I don't know if I should say that, but I'm very happy to realize that even though we are increasing our margins, we are able to acquire very good and strong clients. Where is my challenge? Is to make sure that we work within an accounts receivable parameter, which is satisfactory to us. So we're pushing hard on generating the cash in the bank. So while we do both those initiatives, we still capture very good clients. So that's good news for me.

[Frederick Tremblay, President and COO at Desjardins]

Okay, great. And you did touch on accounts receivables there. I was wondering, we saw good progression on the working cap front in Q3. Do you feel like there's more to do there in Q4 and into 2025? Maybe if you can get into some of your expectations on that.

[Claude Bigras, President and CEO at GDI Integrated Facility Services Inc]

Frederick, listen, we're working very hard on it. We're very focused on it. Now, we don't have full control about all the buttons, but we're working hard on it, and we expect still some improvements in Q4. To what level? We still target and focus on what we said for the year, so we're pushing hard on it.

[Frederick Tremblay, President and COO at Desjardins]

Okay, great. And maybe if I can squeeze in one more, you did mention the gross proceeds of CAD 25 million-CAD 30 million potentially for the two facilities that you're looking to sell. Any updates sort of on discussions on that or your expectations on timing of getting those proceeds in the bank?

[Claude Bigras, President and CEO at GDI Integrated Facility Services Inc]

Are you interested to buy? I can send you the booklet on it now. Okay. No, well, listen, we are at the last step of putting the building to market. Mind you that we sold the Superior business a couple of months ago, and they still occupied the premises. Now we are shaping up the premises. We are fully engaged with the brokerage firms. I would say that in the next four weeks, we should have both. There is a little bit of pre-work done on the public advertising of it, but probably in the next four weeks, we should be full-blown on the market. We expect maybe three to four months turnaround.

[Claude Bigras, President and CEO at GDI Integrated Facility Services Inc]

So, if I were to make a bet, I would say Q1 for most of it, a big part of it, and Q2 maybe for the remaining, the second building. So it should be expected at the 2025 cash flows.

[Derek Lessard, Director of Equity Research at TD Cowen]

Okay, great. Thanks for that. I appreciate it.

[Operator]

Ladies and gentlemen, as a reminder, should you have a question, please press star one. Your next question comes from Zachary Evershed with National Bank Financial. Your line is now open.

[Claude Bigras, President and CEO at GDI Integrated Facility Services Inc]

Good morning, Zachary.

[Zachary Evershed, Director at National Bank Financial]

So just to follow up on Fred's question, maybe you could remind us what you're expecting in terms of magnitude from the building sale proceeds?

[Claude Bigras, President and CEO at GDI Integrated Facility Services Inc]

25-30 net.

[Zachary Evershed, Director at National Bank Financial]

Perfect. Thanks. And with that hitting the balance sheet and some improvements on working capital, you're dipping under 3x net debt to EBITDA already. What's your appetite like for M&A at the moment?

[Claude Bigras, President and CEO at GDI Integrated Facility Services Inc]

We're still very focused on our growth through M&A. Mind you, in 2024, we work actively in several other areas that we need to focus on, but we're still very engaged. We have done three small acquisitions during the year. I can tell you that the team is focusing on acquiring the right businesses in the technical services. We're focusing on where we have organic presence, where we have a strong maintenance service line in the business services arena. We still are very disciplined in our pricing and our evaluation of the business. Again, the aim is not to acquire at any price. It's to acquire sustainable business at the right price.

[Zachary Evershed, Director at National Bank Financial]

Gotcha. Thanks. And then you made reference to the Atalian integration and evaluating the lower margin contracts. What's left to do there and how much do you think you can do in short term?

[Claude Bigras, President and CEO at GDI Integrated Facility Services Inc]

I missed the first, Frederick, I'm sorry, I missed the first part. You said 2 billion?

[Derek Lessard, Director of Equity Research at TD Cowen]

Atalian.

[Claude Bigras, President and CEO at GDI Integrated Facility Services Inc]

Atalian. My apologies. Okay, okay. But it's work in progress. I can tell you that if I'm playing like this is on the security segment side, very interesting, very strong progress. We have increased the margin substantially. We have also, I hate to do this, but we had to depart from some clients where we could not increase the margin, thus contributing a little bit for our little organic decline. But we're working well with the clients. I expect that another two, three, four months, we should be going with the business at the limit level that we are targeting. So maybe another two, three months, and we should be there.

[Zachary Evershed, Director at National Bank Financial]

Great. Thanks. Then just one quick last one on the technical services margins. Great progress there. The improvements that you're talking about, will they continue to reflect the seasonal pattern of Q4 dipping a little bit versus Q3, or is the power of the backlog enough to buck that seasonal trend?

[Claude Bigras, President and CEO at GDI Integrated Facility Services Inc]

No, I think that we can expect Q4 to perform as expected. Q3 is our strongest, but Q4 is also a good quarter. So I don't see any major issues there. Backlog is there to support. The team is very focused and delivering. Like I said, the areas where we had some hiccups last year, they're full-blown. I'm looking at their monthly results. They're consistent in their result now. So I'm expecting. I'm very positive for Q4. But again, we don't expect to be 8% every quarter going forward, but our objective and target is a sustainable 7% average year's EBITDA. This is where we next step is there. After that, we'll see what's next.

[Zachary Evershed, Director at National Bank Financial]

Very clear. Thank you. I'll turn it over.

[Operator]

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

[Derek Lessard, Director of Equity Research at TD Cowen]

Yeah, guys, I just have one last one, more of a housekeeping issue. Could you just maybe talk about your CapEx expectations for Q4 and how we should look at that, looking out maybe to 2025 as well?

[Claude Bigras, President and CEO at GDI Integrated Facility Services Inc]

Yeah. One minute, Charles-Étienne?

[Charles-Étienne Girouard, SVP and Head of Finance at GDI Integrated Facility Services Inc]

We should have a CapEx in line with our trend like that we have since the beginning of the year.

[Claude Bigras, President and CEO at GDI Integrated Facility Services Inc]

Yeah, wonderful.

[Charles-Étienne Girouard, SVP and Head of Finance at GDI Integrated Facility Services Inc]

Like we have it.

[Claude Bigras, President and CEO at GDI Integrated Facility Services Inc]

Yeah. Well, listen, you have to understand that starting new projects costs money. So there is a little bit of CapEx there, but overall, we are. It's very rare what we get out of our 1-1.25% on the technical side or 0.75-1% on the business service side. But again, business service, they started a lot of new projects. So for sure, it does a little bit of swing, but nothing major.

[Derek Lessard, Director of Equity Research at TD Cowen]

Okay. Thanks, gentlemen. That's all for me.

[Operator]

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

[Claude Bigras, President and CEO at GDI Integrated Facility Services Inc]

Thank you very much, Operator. Thank you very much again for listening to this conference call. I'd just like to pass my thanks and my congratulations to everyone that is operating and working in the business. It's a concentrated effort, and I can tell you that everybody in their positions is swimming in the right directions, and they're pushing to get the business continue to develop the success that we have been, and I am very positive for Q4, but I'm also very positive for 2025. Thank you very much again for listening.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating in our Q&A. Please disconnect your line.

Participants

Executives

• Charles-Étienne Girouard, SVP and Head of Finance
• Claude Bigras, President and CEO

Analysts

• Frederick Tremblay, President and COO at Desjardins
• Derek Lessard, Director of Equity Research at TD Cowen
• Zachary Evershed, Director at National Bank Financial