GDI Integrated Facility Services Inc

TSX:GDI

Q1-2025 Earnings Call

[Operator]

Good morning, ladies and gentlemen, and welcome to the GDI Integrated Facility Services, Inc. First Quarter 2025 Results Conference Call. [Operator Instructions] This call is being recorded on Friday, May 9, 2025. I would now like to turn the conference over to Charles-Etienne Girouard, Executive Vice President of Finance. Please go ahead.

[Charles-Etienne Girouard, executive]

Thank you, operator. [Foreign Language]. Good morning, all, and welcome to GDI's conference call to discuss our results for the first quarter of fiscal 2025. My name is Charles-Etienne Girouard. I am Executive Vice President, Finance at 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 in the MD&A filed on SEDAR last night.

I will begin the call with an overview of GDI's financial results for the first quarter of fiscal 2025, and we'll then invite Claude to provide his comments on the business. In the first quarter, GDI recorded revenue of $616 million, a decrease of $28 million or 4% over Q1 2024. This is mostly due to an organic decline of 7%, partially offset by an increase from the foreign currency translation of 3%. GDI recorded adjusted EBITDA of $34 million in the quarter, representing an adjusted EBITDA margin of 6%, an increase of $6 million and 2%, respectively, over Q1 of last year. In the first quarter, GDI reported a net operating working capital reduction of $9 million. GDI has also reduced its long-term debt net of cash by $14 million over Q4 2024.

Before moving to our business segment results, I would like to discuss some housekeeping changes that we made in the first quarter. First, we allocate certain IT costs from our Corporate and Other segments into our operating segments based on usage. The exercise move cost of about $1 million per quarter into our Business Service Canada segment and about $2 million per quarter in our Technical Service segment. We feel this is more accurately depicts profitability in our operating segments. Secondly, we have moved reporting for our IFS business unit from Corporate and Other to Technical Services as we feel that this is the more appropriate home for this business. The reclass represents about $25 million in revenue and $1 million in adjusted EBITDA annually. Now the only operating segment business that reside in Corporate and Other is our chemical manufacturing business. Q1 fiscal 2024 results have been restated to reflect these changes as well future financial reports.

Our Business Service Canada segment recorded revenue of $147 million in the first quarter, while generating $11 million in adjusted EBITDA, up $1 million compared to Q1 2024. The adjusted EBITDA margin of 7% was in line with Q1 of last year following the adjustment of the IT cost allocation. Our Business Service USA segment recorded revenue of $217 million in Q1, a decrease of 4% over Q1 2024. The segment experienced an expected organic decline in Q1 2025 due to the loss of the segment's largest client at the end of Q1 2024 and a reduction of low-margin contracts obtained in the Italian acquisition. The organic decline was partially compensated by an increase from foreign currency translation of 6% and by growth from acquisition of 5%. This segment reported adjusted EBITDA of $15 million, representing an adjusted EBITDA of 7%, an increase of $1 million and 1%, respectively, over Q1 of last year.

The Technical Services segment recorded revenue of $246 million compared to $260 million in Q1 last year, mainly due to organic decline of 5% attributable to lower service call levels and to the timing of project revenues. The segment generated adjusted EBITDA of $12 million, which is $6 million higher than the Q1 last year as last year was negatively affected by cost overrun on three projects in its U.S. operation. The adjusted EBITDA margin of 5% this quarter increased by 3% over Q1 2024.

Finally, our Corporate and Other segment reported revenues of $6 million compared to $14 million last year, mainly due to the sale of our Superior distribution and retail business at the beginning of Q2 2024.

I would like to turn the call to Claude, who will provide further comments on GDI performance during the quarter.

[Claude Bigras, executive]

Thank you, Charles-Etienne. Good morning, and thank you for participating in our conference call to discuss GDI's results for the first quarter of 2025. I was very pleased with the results of GDI's this quarter. Each business segment delivered an increase in adjusted EBITDA over the prior year. On a consolidated basis, GDI delivered a 21% increase in adjusted EBITDA and a 6% adjusted EBITDA margin during Q1, which is typically our slowest quarters due to some seasonal factors. Our Business Service Canada segment recorded its fifth quarter in a row with a 7% adjusted EBITDA margin after adjusting historic results for the IT cost reallocation. This business has been very stable.

In 2025, we have been seeing a higher amount of clients going to market, which has increased our churns to slightly. However, we have also been successful in winning new clients. That being said, we are expecting to deliver our historic GDP level, organic growth in this segment, depending on the timing of replacing losses with new wins. Our Business Service U.S. segment had a solid quarter, returning to its historic adjusted EBITDA margin range as the work to improve profitability of the Italian contracts has now been completed. As previously announced, organic growth in Q1 was impacted by the loss of GDI's largest client in Q1 2024 at the end of 2023. We have replaced most of the lost business and expect organic growth to progressively return to our historic level by Q4 of this year. Apart to the large client loss and the Italian restructuring, our core business is very healthy and has been growing quite well.

Our Technical Services segment had an outstanding quarter with $246 million in revenue and a 5% EBITDA margin. Q1 is traditionally Ainsworth's seasonally weakest quarter. To put this in perspective, adjusted EBITDA in Q1 has ranged between 2% to 4% adjusted for the IT recharge since we acquired Ainsworth at the end of 2015. Much of the strong performance has resulted in our initiative to increase margin in Ainsworth's project that work began in Q3 2023. The outlook for Ainsworth for the remainder of 2025 remains positive.

I'm also pleased to report that GDI has continued to successfully execute on its balance sheet improvement initiative during Q1. We reduced net operating working capital by $9 million, which brings the total reduction to $53 million since we launched our initiative in Q3 of 2023. Additionally, the working capital reduction along solid cash flow from operations enabled us to reduce GDI long-term debt by $14 million over Q4 of 2024. This debt reduction, coupled with the strong growth in adjusted EBITDA during Q1 has brought GDI's leverage ratio in the mid-2s, which is well below our comfort zone of 3% to 3.5% time.

In summary, all of GDI business segments performed well during the quarter, and our outlook for each is positive for the remainder of 2025. We have been actively evaluating a number of M&A opportunities and the pipeline is healthy. Our balance sheet is strong. Our leverage ratio is low, and we are in a good position to continue to execute on our growth strategy.

I would also like to share that effective today, Charles-Etienne is now officially our new SVP and Chief Financial Officer. I would like to congratulate him, and I'm very, very, very excited to see him working going forward.

[Charles-Etienne Girouard, executive]

Thank you, Claude.

[Claude Bigras, executive]

I would like to thank you for participating in our conference call for Q1 2025, and I would now ask the operator to open the lines for questions.

[Operator]

[Operator Instructions] Your first question comes from Derek Lessard with TD Cowen.

[Derek Lessard, analyst]

Congrats, Charles-Etienne on the promotion. I guess, I just maybe only a few questions for me. I just wanted to hit on the organic growth in Technical Services. I guess, is it fair to say that the guardrails that you put in place to protect profitability are holding back a little bit on the revenue growth temporarily? And if so, when can we, I guess, expect those -- that organic growth to return?

[Claude Bigras, executive]

Well, listen, Derek, I would maybe take it the other side. You know what the organic growth compared, if you remember, we had a lot of growth the year before in revenue that some of it has caused us to have some road bumps last year. So I'm seeing it as a very positive. Now we are very -- as you know, I don't want to repeat myself from other calls, but we have reorganized our structure. We have reorganized our validating team. We have also refocused on margin improvements of the backlog. So all of the above. But coupled with -- also, the organic growth that we had the year before was not the healthier, if you allow me to say this.

[Derek Lessard, analyst]

Yes, that's fair. And I guess maybe just -- as a follow-up to that, could you just maybe comment on the -- on your backlog?

[Claude Bigras, executive]

Okay. Well, listen, it's Claude, by the way. I don't get it -- no, no, I'm joking.

[Derek Lessard, analyst]

I'm sorry, Claude, it's been -- you are seventh in 2 days of reporting.

[Claude Bigras, executive]

I understand. I see you guys published. It's very nice. So on the backlog, you know what, it's very healthy. Margin has improved in the area of 10%, not 10% on the revenue, 10% increment in the percentage. So I'm telling you that -- well, we cannot deliver results if the backlog and margins haven't been improved in the sense that it's -- I'm very, very happy. In the U.S., we are still working a little bit on some areas where we have a little bit of weakness. It should be behind us very soon. So I'm very, very comfortable with our backlog.

[Derek Lessard, analyst]

Awesome. And maybe one final one. Charles-Etienne, I'm getting your name right, I think, but good progress on the working cap initiatives. Is there any more -- do you see any more work to be done in this area? And I guess, you did say leverage did come down below your 3 to 3.5x comfort level. Just curious where you actually fell in the quarter.

[Charles-Etienne Girouard, executive]

The quarter, we did -- a big portion of the working cap decrease came from a change in our other financial assets, where we changed the investment strategy that we have in some place with another -- with an intercompany loan that we put in place. We feel that there is maybe more room. Now we are prudent with the current economics. We know that Q2, we have like the bonus that we're going to pay out, but -- we'll do our best to still maximize our balance sheet.

[Derek Lessard, analyst]

Okay. And on leverage?

[Charles-Etienne Girouard, executive]

Yes, it's still at -- it's below our comfort level. We're still actively looking for potential M&As. We are looking at various strategies on that front.

[Operator]

Your next question comes from Frederic Tremblay with Desjardins.

[Frederic Tremblay, analyst]

I wanted to start with Technical Services as well. I noticed that one of the points you mentioned was lower service calls. Is that just a matter of timing? Or is there anything in the market structurally with economic environment that's slowing down a little bit there?

[Claude Bigras, executive]

No, it's because it's the winter. Q1 is usually our weakest and break/fix and maintenance is our weakest quarter during the winter. So now you know what, I don't expect any changes actually. If I'm looking at the last quarters, we have been seeing an increase in break/fix and service costs. So it's just -- I don't want to say seasonality because it's not that critical. But for sure, the Q1 is always our weakest in that particular area of the business.

[Frederic Tremblay, analyst]

Okay. Great. That's helpful. Maybe just switching to the M&A pipeline or your appetite for M&A? I'm just curious if you're still thinking about the same types of activities in janitorial and Technical Services or if you're also looking at options in something else that would be adjacent to what you're currently offering?

[Claude Bigras, executive]

Okay. First of all, is we're always very active in our M&A approach to things. Allow me to comment this way. What we're seeing in the market is there was a lot of activities in M&A in COVID and early after COVID. Unfortunately, for us to start with is we see those activities with other companies that were doing M&A in our sector. They're experiencing very heavy bumps as maybe the price they paid too much for it for the businesses. So we still remain very prudent, and we still remain very disciplined in our approach. So that's one thing to start with. Secondly, it's -- we have plenty of opportunity in our -- of our two main segments, which is a Business Service and Technical. At this time and with the economic, I would say not uncertainty, but with the general condition, I would be prudent in order to explore something new to learn. I think we focus on what we're strong and we will still develop our density. There is still a lot to do in the U.S. So no, I don't think we will do anything sexy going forward. I think we focus on what we do well.

[Frederic Tremblay, analyst]

Yes. Sounds good. Last question for me. Nice margin stability in Business Services Canada. Can you talk about the margin outlook or margin opportunities in the other segments, Business versus USA and Technical Services? Do you see -- is there opportunities in one more than the other to improve margins going forward in your opinion? Or are they both kind of trending in the right direction?

[Claude Bigras, executive]

Well, listen actually, Frederic, I had a discussion with my colleagues earlier on, for sure is now we have targets, but the targets are not the end by itself, those targets is alignments. For sure, my wish -- my midterm outlook for technical, I think we can still achieve -- we can achieve more -- I don't want to say that in English, but we -- I'm working to surpass our targets. On the Business Services segment, you agree with me that it has been a roller coaster since [ I think '20 ]. I think to be stable, I think it's already a good thing. But yes, again, as we grow, I don't know if I can say that, but I will say it. We have been focusing heavily on acquiring market sector segments such as data centers and life science and food processing, which are traditionally delivering stronger results. So this is where we are focusing is increasing the EBITDA through an improvement of the margin. I don't shrink my way to greatness, I'm not a big strong believer. There's always improvements to do on our overhead. But I think that pursuing activity sectors and developing our sales strength, I think, is the way to go in Business Service.

[Operator]

[Operator Instructions] Your next question comes from Zachary Evershed with National Bank Financial.

[Zachary Evershed, analyst]

Congrats on the quarter, and congrats Charles-Etienne. So looking at that Ainsworth organic decline, it did mention project timing. Do you expect any catch-up in the quarters ahead? And what do you think a good pace of organic growth to expect from Ainsworth in 2025 is?

[Claude Bigras, executive]

Listen, you know what, everything trends to -- for us to be -- to go back to our normal growth trend by the end of the year. I'm giving you the conclusion of our analysis. But towards the end of the year, we should resume to our normal growth. After the 2023, '24 bump in revenue in Technical, the loss of the client in 2024, I think with the sales now, our sales structure being there and our backlog, I think that you can expect in the next couple of quarters to resume back to our normal organic growth globally and in both our segments.

[Zachary Evershed, analyst]

That's helpful. And then looking at the reorganization, broadly speaking, what drove it in general? And do you see any specific synergies between Ainsworth and the integrated facility services?

[Claude Bigras, executive]

Okay. Actually, this is one of the reasons we made this change is, you know what, I'm happy to report that we acquired another very large North American client in IFS. So that's a very good win in Q1. We realized that -- there is two parts. The first part is we came to realize or we came to conclusion that the most appealing service in our IFS segment is the Technical Service segment. And we also have defined that engineering, energy is all services that are actually a good trend in our IFS. So we move it into our Technical segment because that's the right place for IFS to be. And secondly, and it goes along also with our IT is I want to have the most clear, clear, clear corporate overhead lined up. You know what, I don't want to use pure, but in the sense that I want to have pure corporate overhead in this part. So it's easier to trend. And I don't want -- I'm trying to avoid any noise that could mislead, and it's the same thing for IT. You know what those costs are not in the business unit. So they need to revolve into their original number, including that expense. This will also increase our profitability. So those changes are done to optimize our operations and clarify our numbers.

[Zachary Evershed, analyst]

That's clear. Then the last one for me. Does the reorganization affect your plans for ERP unification in any way?

[Claude Bigras, executive]

You know what, Zachary, I missed the first couple of words. What did you say?

[Zachary Evershed, analyst]

Does the reorganization affect your plans for ERP unification?

[Claude Bigras, executive]

No. Actually, it simplifies it. No, no, absolutely not. You know what? No. The ERP program is advancing well. We're doing whatever we have to do. There is already a segment that has been put in place in corporate, and simpler is better.

[Operator]

Your next question comes from Jonathan Goldman with Scotiabank.

[Jonathan Goldman, analyst]

Just maybe a couple of housekeeping ones to start. What would segment margins have been under the old disclosures for each segment?

[Claude Bigras, executive]

What? Okay. Just repeat the last part.

[Jonathan Goldman, analyst]

So if we were to go to the old disclosures before the reclassification, what would the margins be in each segment in this quarter?

[Claude Bigras, executive]

Okay. So...

[Charles-Etienne Girouard, executive]

Yes, we have restated for your information 2024 Q1. The impact to adjusted would be about like $1 million per quarter in Business Service Canada and about $2 million in Technical Service per quarter.

[Jonathan Goldman, analyst]

Okay. And the revenue is affected, too, right, for each of those?

[Charles-Etienne Girouard, executive]

Yes. So the revenue was affected between Corporate and Other and Technical Services. So annually, the IFS business that was transferred between the two segments, it's about $25 million annually in revenue and about $1 million annually in adjusted EBITDA.

[Jonathan Goldman, analyst]

Okay. Perfect. And how much did the 1 fewer working day contribute to Canada and U.S.A. margins improvement year-on-year?

[Charles-Etienne Girouard, executive]

It's working say. It's about $3 million per working day.

[Jonathan Goldman, analyst]

Sales or EBITDA?

[Charles-Etienne Girouard, executive]

EBITDA.

[Jonathan Goldman, analyst]

Okay. And then, Claude, could you just clarify the comment you made earlier, the 10% increment improvement in backlog, was that the technical backlog and you're talking about, I guess, quarter-on-quarter margin improvement? I just wasn't clear on what you were referring to.

[Claude Bigras, executive]

Okay. What I'm saying is when we initiate the initiative, we were at what we call the set margins. And this margin has improved by 10% up to today. So let's say, example, we had a set margin of 19.5%, now we're around 22% margin. So we have increased our margin. It's the set margin by about 10%. And the good news is all our empirical analytics, excluding three mishaps is very close to our result, and end result is really in line with our set margin and the backlog. So for us, it's very encouraging. So we have improved our margin by 10% overall in our backlog. So -- and consequently, we are improving our margin of operation and the execution.

[Jonathan Goldman, analyst]

What's the base to refer to this 10%? Is it Q1? Is it 2024? Is it LTM?

[Claude Bigras, executive]

You know what, I would say Q1 2024 more or less. It took us 2, 3 quarters to really -- because don't forget, backlog and executions are maybe 2 quarters in advance. So we start improving margin. And I would say Q2, Q3, Q4, we saw the improvement as the backlog gets executed and new business comes in. So I would say it's about a year. It was a plan that we had a year ago, we said that we would improve our margin.

[Jonathan Goldman, analyst]

No, definitely. And maybe one more from me. Do you have an update on the timing of the real estate divestitures?

[Claude Bigras, executive]

Well, listen, I can tell you is that we have some two properties in the market. One is well underway. Can I put it this way? I never know exactly what to say to not be legal, but yes, one of the properties is well underway. And the other property is on the market. We have some actions. But we don't have anything firm up with the second one. But I expect that within the next couple of quarters, it's done.

[Operator]

There are no further questions at this time. I will now turn the call over to Claude Bigras, President and CEO of GDI for closing remarks.

[Claude Bigras, executive]

Well, thank you very much, operator. Well, in conclusion, and I think that we discussed heavily on the effort that the team is doing. We're talking about it, but there's a lot of work behind the scene with the teams. I would like to take this time to say, kudos, because people are all focused to deliver the strongest result to keep the business in the best possible shape as possible. Again, it's a marathon. So what I can tell you is all these efforts are done but also in conjunction with making sure the business is on top of its game, that we're efficient, that we're well staffed to execute, there's no, I would say no game shows. So we are improving. You know what, it's a work in progress, but we don't do it at the detriment of making the business not as strong or as efficient as it has been. So I would like again to congratulate the teams on being very, very focused and prudent. Thank you.

[Operator]

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