GDI Integrated Facility Services Inc
TSX:GDI
Earnings Call Analysis
Q4-2023 Analysis
GDI Integrated Facility Services Inc
In the final chapter of 2023, GDI made a notable stride with a revenue boost to $622 million, marking a growth of 6% compared to the same quarter from the previous year. This advancement can be credited to a blend of organic growth at 2% and a 4% surge from acquisitions. The company witnessed an adjusted EBITDA of $37 million, showcasing consistency with a margin of 6%. Importantly, GDI's strategic moves allowed for a substantial net working capital reduction amounting to $36 million, which in turn facilitated $33 million in long-term debt repayment, exclusive of any payments tied to business acquisitions.
Reflecting on the annual scenario, GDI's revenue rose by $265 million — a 12% year-on-year uptick leading to a $2.4 billion annual figure. The company manifested a robust 8% organic growth, complemented by a 2% revenue increase derived from acquisitions. The annual adjusted EBITDA presented a solid figure of $142 million, which equated to a maintained EBITDA margin of 6%.
Diving into segment-specific achievements, we see GDI's Business Service Canada with a modest 1% rise to $146 million in Q4 revenue, albeit facing a slight adjusted EBITDA setback of $3 million. Conversely, the U.S.A. counterpart boasted a more impressive leap, raking in $215 million, a $39 million or 18% hike, thanks to new patronage and the strategic Atalian acquisition. The U.S. segment's adjusted EBITDA blossomed by $2 million. On an underwhelming note, the Technical Services segment grappled with a 5% organic revenue downturn, closing at $239 million, although it upheld a 6% adjusted EBITDA margin. Lastly, the newly launched GDI Integrated Facility Services empowered the Corporate and Other segment to amplify revenue from $18 million to $22 million.
The Canada segment demonstrated resilience by delivering organic growth with an enduring 9% adjusted EBITDA margin, navigating through a turbulent commercial real estate landscape.
The U.S. segment portrayed a commendable quarter, achieving a 10% organic growth coupled with a 14% rise in adjusted EBITDA year-over-year. The Atalian acquisition supplemented their workforce substantially, reinforcing the company's presence in the Northeast U.S. and presenting an opportunity for operational refinement aimed at target margin levels.
Anticipated adjustments are on the horizon with a key customer realignment affecting the organic growth rate in 2024. However, this is tempered by the Q1 sale completion of the Superior Solutions segment, a testament to GDI's strategic focus and successful transaction at an attractive multiple.
Technical Services encountered setbacks with underperforming U.S. projects in Q4, trailing below expectations. Nonetheless, strategic realignments promise to refine capital and workforce towards high-margin projects, setting a course for a more stable and consistent business model.
As 2024 unfolds, GDI is confidently positioned to cultivate growth, backed by a robust reputation and an adaptable free cash flow framework. The company will remain vigilant in managing working capital, maintaining a comfortable leverage ratio, and further nurturing its dynamic entrepreneurial spirit.
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Good morning, ladies and gentlemen, and welcome to the GDI Integrated Facility Services Fourth Quarter 2023 Results Conference Call. [Operator Instructions] But following the presentation, we will have a question-and-answer session. [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.
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 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 segments. 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 U.S.A. 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 Services 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.
Well, thank you, Stephane, and welcome, everyone, to our fourth quarter conference call. Bienvenue à tous. Merci d'être présents. Overall, I'm pleased with our results 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 1/3 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 vacancy caused by tenant moving or reducing space requirements will be filled with new tenant demands. Our business service U.S.A 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. Acquisition is a turnaround opportunity where we paid the reduced price for a business of this size and have been implementing a business reorganization plan since the closing date to bring margins 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 rightsized our cost 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 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 projects 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 requirements 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 a very large project 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 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 business in Central and Eastern Canada. Ultimately, we decided to focus on our 2 main business segments, and partnering with a large well-established business in this sphere would be more beneficial to GDI stakeholder 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 pandemics when many of their competitors were short on supply. I would like to thank all of the team at Superior and I 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 business segments performed in Q4 last year. We faced some challenge but as always, when that happened, 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, 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 Instructions] And your first question will be from Derek Lessard at TD Cowen.
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.
Okay. Well, listen, okay, first, I would say that the growth comes from probably 3 areas. First of all is pricing adjustments and prices increases among the portfolio. Secondly, we had a good project win 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 help us also to implement revenue growth on the top line. And again we're very happy with the end results.
Yes. Great result there. And I just -- how should we think about the organic growth opportunity going forward?
That's a $10 question is what -- we have a business where contract wins are not always organized in a sequence So, 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 margin.
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?
Well, listen, let me be a little bit more specific because I don't want us to start with the wrong assumptions. Project profiles, there is no such -- smaller project has 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 profile that offer a better margin expectation, which we're focusing on more. For example, like our control division. But overall, what we are implementing is a higher margin at the bid process. So this way, you know what, it eliminates probably -- but it 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 will still have a little bit of wins on one projects in Q1. But again, those 2 projects -- those projects will be finished in the next weeks, and I'm going to be very happy to move on. And when we have a very healthy backlog and with overall increased margins. So you know what, I'm positive for the rest of the year.
Next question will be from John Zamparo at CIBC.
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 that they won't occur elsewhere?
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 expectation 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, we have to live with it, to deliver because we have a reputation, but it will 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're just -- 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 -- if we give more positive surprise than negative surprise.
And does the ERP implementation, once that's completed, is that something that that helps with in analyzing project costs and projecting margins and ultimately, like what your bid is? Is that related to the ERP implementation?
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 proceed. And I'll be happy to share with you when we are fully aligned on the ERP implementation.
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 2 factors versus something related to the industry or otherwise?
You know what, we have to look at it. It's a decline on the quarter-over-quarter. Overall, this business did 18% growth year-over-year. Now the jump on 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, what, by putting -- how can I say this is, by implementing a higher margin profiles on our project bidding, for sure, it will end up, even our win rate might diminish. But -- and again, focusing on the bottom line is, I think, more healthy than top line.
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?
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 industrial clients, as you know, have payment policies. But this being said, we are streamlining our process. Our strategy is to want to reduce the order to cash timing and also increase project billing during the execution. So we're implementing 3 or 4 strategies to actually continue to reduce our working cap. Now you know what, it will move quarter-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.
Next question will be from Frederic Tremblay at Desjardins.
And maybe to go back again to Technical Services briefly. You mentioned your focus on margin and bottom line. Can you remind us what sort of margin profile you'd be targeting there? I think in the past, you mentioned like a 7% adjusted EBITDA margin. Is that still roughly what you'd like to achieve in that segment?
Yes. Frederic, you know me, maybe I'm not transparent in many aspects. Remember, we started acquiring and these businesses were delivering negative EBITDA margin. So from minus 1% to 1.5%, now we're at 6%. I think an [ LTO ] margin would be 7% considering that that's 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'll work very hard on it. After that, we'll move on.
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?
You said capital allocation? Well, listen, we have our acquisitive strategy. And we are very opportunistic in that front. So yes, our priority is, for sure, is what, M&A activities. On the CapEx, we're prudent on the CapEx. I don't -- we spend CapEx in implementing our HRIS. I cannot give you visibility on the ERP as a decision. It has not been fully done. So I'm waiting to see exactly what's involved on that front over the next 4 to 6 quarters. But yes, M&A is still a priority. We're very opportunistic. We want to make sure we do the rightsized acquisitions, and the rest goes on the debt for sure.
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, let's say?
It's a very good point, Frederic. And again, you know what, very blunt, but lesson learned. We're focusing a lot more on a 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 are more focused on our technical acquisitions. And we're focusing on the 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.
[Operator Instructions] And your next question will be from Zachary Evershed at National Bank.
Starting with GDI IFS, could you give us an update on your outlook for the subsegment there?
2024 delivered -- it's still -- we're still young in the game. We have -- 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 and tangible. So it's still a work in progress. If you were to ask me, is we would 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.
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?
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 have in the U.S., it can change. But the lesson by losing what I would say, by starting up with probably a net, 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 -- and 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.
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 from the other way in terms of reason for part --
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 3. But on the dollar side, I think we did -- these large projects, they are good for growth, for healthy top line. 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.
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?
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 2 months, we did not do dramatically bad. And without teasing, I'm very happy so far in Q1 of what's happening there. Am I saying enough to give you a good sense?
Great sense.
Next question will be from Derek Lessard at TD Cowen.
Just a follow-up for me. I was just curious on 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 that -- 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?
First thing. Let's resolve 2 things. We never paid a dividend at this company so far, and there's no intentions to start anytime soon as we focus 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 creations, understanding that the 2 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 2 operating segments, manufacturing and distribution. We have actually spin up 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 say, 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 would be -- if I look at the year, it will be in the $40-ish million of revenue with maybe what -- I think, again, I don't want to drag too much. But what I would say, our target EBITDA delivery. So hopefully, it gives you a good sense.
And at this time, we have no other questions registered. Please proceed.
Okay. Well, again, interesting quarter. A lot of moving parts, nice acquisition that we did. We're starting the year with very, 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 and acquisitions. So I look forward to continuing the year, and I want to thank you for being on the call.
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.