GDI Integrated Facility Services Inc

TSX:GDI

Earnings Call Transcript 2019-Q1

[Operator]

Greetings, and welcome to the GDI Integrated Facility Services First Quarter ended March 31, 2019, Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Friday, May 10, 2019.I would now like to turn the conference over to Stéphane Lavigne, Senior Vice President and Chief Financial Officer. Please go ahead.

[Stéphane Lavigne, Senior VP & CFO]

Thank you, operator. Good morning, everyone, and welcome to GDI's conference call to discuss the results for the first quarter of 2019. I'm with Claude Bigras, President and CEO of GDI; and Dave Hinchey, Senior Vice President, Strategic 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 provisions that is fully described at the beginning of the MD&A filed on SEDAR yesterday night.I will begin the call with an overview of GDI's financial results for the quarter, and then I will invite Claude to provide his comments on the business.In the first quarter, GDI recorded a revenue of $305 million, an increase of $53.7 million or 21.4% over Q1 of last year. We also recorded strong performance in adjusted EBITDA generating $17.9 million in the quarter, an increase of $6.3 million over Q1 of last year.At the start of fiscal 2019, we implemented IFRS 16, which changes the accounting for operating leases by effectively moving the expense below the EBITDA line, which resulted in a favorable impact to adjusted EBITDA of $1.9 million in the first quarter.Prior to this effect, GDI recorded an adjusted EBITDA of $60 million, an increase of 37.2% over Q1 2018, representing a margin of 5.2% versus 4.6% in the prior year.For the remaining -- remainder of the call, in order to present an apples-to-apples comparison on our results, all adjusted EBITDA figures disclosed will be prior to the effect of IFRS 16. Our Janitorial -- Canadian Janitorial segment recorded revenue in Q1 of $132.3 million, in line with prior year, while delivering a 5.9% increase in adjusted EBITDA from $8.7 million in Q1 2018 to $9.25 million in the current year.Adjusted EBITDA margin increased by 40 basis points to 7% driven primarily by operating and cost efficiencies realized in the business in the quarter.Our Janitorial USA business segment had a very strong quarter, recording revenue of $79 million, an increase of $27.4 million or 53.2%, with an organic growth rate of 27.4%. Adjusted EBITDA was $5.8 million or 7.3% of revenue versus $3 million in Q1 of 2018.Our Technical Services segment also had a very strong quarter, recording revenue of $80.7 million, an increase of $22 million or 37.7% over Q1 2018. Adjusted EBITDA was $2.4 million in the quarter, an increase of 70.8% over Q1 2018, representing an adjusted EBITDA margin of 3% compared to a margin of 2.4% in the prior year.Our Complementary Services segment reported revenue of $19.7 million in Q1, up by $5.4 million or 37.7% versus Q1 2018, with an organic growth rate of 20.4%. Adjusted EBITDA was $894,000, a 21.3% increase over first quarter of 2018.I would like to turn the call right now to Claude who will provide further comments on GDI's performance.

[Claude Bigras, President, CEO & Non]

Thank you, Stéphane. Good morning, and thank you for taking the time to participate in our earnings call.I am very pleased to report that each of the GDI business segments performed well in the first quarter of 2019. On a consolidated basis, GDI reported revenue of $305 million, an increase of 21.4% over the first quarter of last year. Organic growth was at 7.8% showing that our business continued to be healthy and it's growing comfortably in excess of the general economy and gaining market share in the regions we operate.Before the impact of IFRS 16, GDI delivered $16 million in adjusted EBITDA in the quarter, and we have improved our EBITDA margin by 60 basis point from 4.6% to 5.2%. With the growth in EBITDA exceeding growth in revenue, it shows that our strategy to optimize operating efficiencies while managing costs continue to bear fruits. We are growing GDI robustly while improving our profitability.Our Canadian Janitorial segment delivered a solid quarter. Despite the ongoing market pressure we have faced in this segment, the business is showing resiliency and delivered growth at almost 6% in adjusted EBITDA in the quarter.Our strategy of managing the EBITDA line over the top line has been successful so far. Our Janitorial USA business segment had a very strong quarter with an organic investment growth. Our business continued to benefit from the large contract win in Q3 last year, and the acquisitions that we completed in the USA in 2018 and '19 are performing well in terms of both profitability and organic growth.Our Technical Service segment also had a good quarter. Despite Q1 being a traditionally slower quarter, the business was able to deliver good growth in revenue and an improvement in profitability. Following the close of the quarter, we completed 2 small acquisitions in the segment, one in Southern Ontario and one in Atlantic Canada, which -- while individually not material to GDI financial profiles, they are strategic additions that strengthened our Technical Service capabilities in the region.I've said this before and I will say it again, our Ainsworth business is highly strategic alongside our traditional Janitorial business and positions GDI as the only company in Canada capable of providing all of the core services needed to operate and maintain a facility in all markets across the country with our own employees.Our Complementary Services segment, which is composed primarily of our product manufacturing and distribution business, performed also well in Q1. The business is generating steady results and continued to successfully grow with clients both within and outside the GDI family. And it's an important part of our growth strategy in Canada alongside our modern business segment, developing regional franchises.We continued to focus on business improvements through delivering cost efficiencies and innovation to enhance our business model, and we continue to build out our Technical Services business across Canada. Finally, we have started to roll out our third generation of our franchise business model.In summary, GDI delivered a strong result in the first quarter. Our growth is strong. Our profitability is improving, and we are continuing to execute on our plan to grow GDI organically, increase our cross-selling capabilities in our business units, expand the depth of our Technical Services business across Canada and continue to execute on our long-term plans...

[Operator]

Ladies and gentlemen, please continue to stand by. The conference will resume momentarily.[Technical Difficulty]Please go ahead

[Claude Bigras, President, CEO & Non]

Hello. We apologize for this inconvenience. There was probably a technical difficulty on the provider side. So the opportunity for our Technical business segment. So I'm going to make sure that they reach out. So I presume, gentlemen and ladies, that we were in summary. So I will start from that part again. So I was saying that in summary, GDI delivered solid result in the first quarter. Our growth is strong, our profitability is improving, and we are continuing to execute on our plan to grow GDI organically, increase our cross-selling results across the business units, expand the depth of our Technical Services business across Canada and continue to execute on our long-term plan to grow through strategic acquisition. Our outlook for the remainder of the year is positive. Our balance sheet remains strong with leverage ratios well within our comfort zone, and we are positioned to continue to execute on our business plan. That concludes my remarks, and we will now ask the operator to open up the lines to analysts for questions. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Alain Hazzi of GMP Securities.

[Alain Hazzi, Equity Research Associate]

So I just had 1 quick question about the IFRS 16 implementation. How can we see this going forward in terms of the impact for the EBITDA margin? Should we expect similar impact as of for Q1? Or maybe a bit more upside or more stable?

[Stéphane Lavigne, Senior VP & CFO]

It should be -- it's Stéphane. It should be pretty stable over the next quarters, like throughout 2019.

[Alain Hazzi, Equity Research Associate]

Perfect. And one more question maybe in terms of the 2 acquisitions you guys announced. I know you said it was not financially material, but maybe what attracted you to complete these acquisitions? Maybe a bit more color on that.

[Claude Bigras, President, CEO & Non]

Yes. No problem. It's Claude. Listen, both are in the Technical Services segment; one added to our capabilities in mechanical services in Southern Ontario, and the other one added in Atlantic, Canada. Like I said, combined, they are not materially -- material financially, but they generate approximately $10 million of revenues together.

[Operator]

[Operator Instructions] Our next question comes from Neil Linsdell of Industrial Alliance.

[Neil Linsdell]

All right. So just -- can you just talk about any changes in seasonality that we're seeing on any sides of the business as you add some of these acquisitions? Or should we be expecting anything different in each one of the segments going forward?

[Claude Bigras, President, CEO & Non]

Neil, listen. You know what, the Technical Services business, by itself Q1 is generally softer for some reasons. It's the holiday seasons. Unlike the Janitorial business, which is monthly revenues, this business has a little bit of revenue fluctuation because of the holiday seasons, and it's also the winter season. So air conditioning systems and ventilation systems are running on the low side. So we can figure there's a little bit of seasonality to our Technical business segment. But I would not make a financial modeling on that, but Q1 is usually softer on the Technical Services side. And generally in Q1 -- overall, Q1 is never the greatest quarter. It's winter. It costs more money to maintain properties. There are holiday payouts, everything. But with the Technical Services quarter -- with the Technical Services, it adds up just a little layer on top of it.

[Neil Linsdell]

And I think we've done this before, but if we look at the different segments, Janitorial Canada, U.S. Technical Services, I'm just thinking about your different approaches. Looking at Janitorial Canada and the organic growth rate, what we're seeing is a different approach from the sales people, retention, the expansion and the acquisitions [ than you were ] seeing in the U.S. [ How do you put it ]?

[Claude Bigras, President, CEO & Non]

Listen, our Janitorial Canadian business, as you know, has a pretty strong market penetration. So our strategy, I would say, is 3/4. Yes, you're absolutely right, we are totally invested in redeploying very, very aggressive sales teams across all our major markets in Canada in order to restimulate our organic growth on one part. The second part is we are also pretty confident that our territory franchise model that we would be unfolding in the course of the next 4 to 5 years would also bring great deal of growth in all the secondary markets in Canada. And thirdly, we are extremely focused on technology and business efficiencies in order to make sure that we still keep our clients and deliver great service and -- but in a highly competitive manner. So this is more or less in 3 segments what we're doing with Jan Canada.

[Operator]

Our next question comes from Zachary Evershed of National Bank Financial.

[Zachary Evershed, Associate]

I was hoping you could give us a little bit more color around the strong results out of Complementary Services on the organic growth side, please.

[Claude Bigras, President, CEO & Non]

Can I say blue for the color? No, I'm kidding. Our Complementary Services is more or less composed of our product manufacturing and distribution. And we have been successful into providing large customers with our products. So there is a very strong organic growth. And also what we have done is we have concentrated our production from 2 facilities to 1 facility. They're providing us with better, more efficient cost management. So I think these are the 2 reasons why we're seeing an improvement in our Complementary Services.

[Zachary Evershed, Associate]

Excellent. One more for me. On the Technical Services side, the margins typically follow a pattern of increasing throughout the year. Did you see any reason why that wouldn't repeat this year?

[Claude Bigras, President, CEO & Non]

Well, we don't see any reason. I think this is exactly what we are conveying that the Q1 -- it's even better than the last Q1, but it's also among the softest one. So as the year increase, the startup season, the springtime, summer project executions, we should see a repeat of last year.

[Operator]

Our next question comes from Damir Gunja of TD Securities.

[Damir Gunja, Director]

Just hoping if you could expand a little bit on your -- you mentioned you have a third generation of your franchise model now. Sort of what's different there? And any goal posts or goals or extra color you could give on that rollout?

[Claude Bigras, President, CEO & Non]

Well, listen, Damir, I'm -- let me put it this way. I am always -- I'm stuck between providing you the information and keeping a competitive advantage. So I'll try to be, I would say, in general terms, but please do not ask me too much on our strategy there. I would like it to keep it for ourselves. But in a nutshell is, we have a fantastic go-to-market product, which is Modern, alongside our Canadian Janitorial GDI. And we intend to leverage it further in probably more -- about [ 80 ] markets where we're not that present. So this is more or less what we do. And we are combining both our product manufacturing and our service segments together to develop those markets.

[Damir Gunja, Director]

Do you have a number of markets in mind or sort of a target that you're looking to develop?

[Claude Bigras, President, CEO & Non]

Well, you know what, I would say that [ 80 ] markets, more or less, in Canada that we're saying we will be present.

[Operator]

[Operator Instructions] Our next question comes from Frederic Tremblay of Desjardins Capital.

[Frederic Tremblay, Analyst]

Just 1 question for me, really. Just following the 2 acquisitions that you completed, I'm wondering if you could talk about the M&A pipeline, whether you see additional opportunities to do something similar in Technical Services in other regions. And if you could speak to your U.S. acquisition pipeline as well.

[Claude Bigras, President, CEO & Non]

Well, listen, I can say that we have a healthy pipeline like usual. Last year, we completed 6 acquisitions, and we have 3 done so far. Our strategy, Frederic, is we are not aiming only at the big storytelling, this paper-sized acquisition. We also focus on those less -- I would say less popular, but strategic acquisitions in smaller markets. We're building our Technical platform like this. So we have some significant movement on that front. On the U.S. side, for sure, we are extremely focused to develop that. I can only say that I don't see anything outside of our ordinary course of business. We just -- we executed a great transaction in Q1 with AMPM out of Boston, and we look forward to doing some other during the year in that range.

[Operator]

Our next question comes from Scott Fromson of CIBC.

[Scott Douglas Fromson]

Just a question on U.S. operations. Your organic growth is very strong. What do you think a reasonable long-term growth outlook is in the U.S.?

[Claude Bigras, President, CEO & Non]

U.S., it's always amazing to see what we can turn out with our U.S. business. So as a general term, I would like them to even be better, hopefully. But it's another opportunity. We're still a small player overall there. So I think we see a lot of market opportunities. We have a great brand there. People -- I think we're delivering great service. So I am expecting that we can continue to develop this type of growth. And you know what, we are focusing on the sales and business development side in the U.S. Allow me to say this, it's a great opportunity for organic growth in the U.S. So we're putting a lot of energy on that front.

[Scott Douglas Fromson]

What do you think you're doing to gain market share? What are you doing that your competitors aren't?

[Claude Bigras, President, CEO & Non]

Well, again, let me just answer you like this. There is no spectacular move, it's to do a little better on many fronts: on the sales, on the pricing, on the technology, on the approach, on the relationships. It's a multiple-item formula. There is no differentiator that is obvious. Taking a step back, we are the only one that can offer probably the slate of services that we offer self-perform. So I think customer appreciates that.

[Scott Douglas Fromson]

So do you have to pick your spots? Or is it sort of widespread?

[Claude Bigras, President, CEO & Non]

I'm not sure of the question. You mean pick your spot, can you just give me a little bit more flavor on it?

[Scott Douglas Fromson]

Well, I'm wondering if you have a more targeted strategy, like, if you have a smarter sales strategy to target potential customers. Or is it kind of low-hanging fruit?

[Claude Bigras, President, CEO & Non]

Well, listen, I don't know, but this trade doesn't have low-hanging fruits anymore, my friend.

[Scott Douglas Fromson]

Your organic growth would suggest otherwise, but, okay.

[Claude Bigras, President, CEO & Non]

Well, listen, I think it could be [ boast ] to say that it was easy for the team in the U.S. They work extremely hard to deliver on those. But this being said, friend, I think if I understand your question well, don't forget that in the U.S. we are working with a different dynamic. First of all, we have a food sanitation business that is also a more specialized business. We also -- so we have very significant customers on that front. Secondly is -- and our U.S. business, as you know, we also have a small technical business in Michigan. And yes, it enables us to do more integrated services in the Great Lakes area because of that. And also, we are developing extremely -- we're developing about 7 cities around our core, meaning Indiana, Michigan, Pennsylvania, all the northeast part we're very focused on building density.So in order to deliver EBITDA and good margin and good growth, you need to do work on those fronts. We have a specialized business we're growing, and we're developing density in those markets. And we integrate strong sales and business development effort into developing those markets. You know what, in Canada, there are 10 cities with over 1 million people, and in the U.S., there are 200 cities. So the whole market approach is totally -- in the Northeast, we can work for the next 5 years and grow this business and still have room.

[Operator]

We have no further questions in the queue at this moment. I'll turn the call back over to you, Mr. Lavigne.

[Claude Bigras, President, CEO & Non]

Well, listen, you know what, I think I kind of concluded with my summary after we reached that miscommunication. So I don't want to repeat it for the third time. But again, very, very, very happy with the team. They work extremely hard to developing and bringing the business where it is. And we continue to tap on the business and its strengths to continue to develop and acquire the best players in the market. And I look forward to talking to you in the next quarter.

[Operator]

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you, and have a good day.