GDI Integrated Facility Services Inc

TSX:GDI

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the GDI Integrated Facility Services, Inc. First Quarter 2020 Results Conference Call. [Operator Instructions] Also note that the call is being recorded on Friday, May 8, 2020.At this time, I would like to turn the conference over to Mr. Stéphane Lavigne. Please go ahead.

[Stéphane Lavigne, Senior VP & CFO]

Thank you, operator. Good morning, everyone, and welcome to GDI's conference call to discuss our results for the first quarter of fiscal 2020. My name is Stéphane Lavigne, I'm Senior Vice President and Chief Financial Officer of GDI. I'm here with Claude Bigras, President and CEO of GDI; and David 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 provision that is fully described at the beginning in 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 we'll invite Claude to provide his comments on the business. In the first quarter, GDI recorded revenue of $354.9 million, an increase of $49.5 million or 16.3% over Q1 of last year. We also recorded strong performance in adjusted EBITDA, generating $20 million in the quarter, an increase of $2.1 million over Q1 of last year. Adjusted EBITDA was positively impacted by the acquisition of ESC Automation which closed on January 15, 2020, but was negatively affected by $1.8 million compared to the prior years, and there was 1 extra working day in the quarter due to the leap year.Our Canadian Janitorial segment recorded revenue of $139.2 million in Q1, up by $6.3 million or 4.8% compared to the first quarter of 2019. The segment reported adjusted EBITDA of $9.4 million compared to $9.6 million in the first quarter of 2019, representing a margin of 6.7% compared to 7.2% last year. The extra day in Q1 of 2020 impacted adjusted EBITDA margin by 0.8% compared to the same quarter last year. Our Janitorial U.S. business segment had a good quarter, recording revenue of $83.1 million, an increase of $4.1 million over Q1 of 2019. Adjusted EBITDA was $6.1 million or 7.4% of revenue, the same number as last year or 7.8% of revenue of margin in Q1 of 2019. The extra day in the first quarter also impacted adjusted EBITDA margin by 0.8% compared to the same quarter last year. Our Technical Service segment had a very strong first quarter, recording revenue of $121.7 million, an increase of $41 million or 50.8% over Q1 of last year. Adjusted EBITDA was $4.7 million compared to $3.1 million last year for an increase of $1.6 million or 49.4% compared to Q1 of 2019. Our Complementary Service segment reported revenue of $16.6 million in Q1, down by $3.2 million or 16.3% compared to the Q1 of 2019, primarily because the segment is no longer reporting revenue from the Steamatic restoration business, which was divested following Q1 last year. Adjusted EBITDA was $1.4 million compared to $1.1 million in the first quarter of 2019, an increase of 47%.I would like to turn the call now to Claude, who will provide further comments on GDI's performance during the quarter.

[Claude Bigras, President, CEO & Non]

Well, thank you, Stéphane. Good morning, and thank you all for taking the time to participate in our earning call. I would like to start by giving an update on COVID-19 pandemic as this relates to GDI. As we mentioned before, the pandemic began having an impact on the commercial real estate industry in North America in mid-March of this year. As the pandemic spread, the various provincial and state governments began putting in place restrictions on business activity and essential service regulations that had different effect on our business. Different region and end markets were affected to different degrees. I am pleased to say that we now have a better visibility on how the pandemic is evolving. We are seeing provinces and states announcing gradual reopening plans for their business and economies. We continue to inspect (sic) [ expect ] a revenue impact during the second quarter and expect that business gradually return to a more normal activity level in Q3 and Q4 of this year. From the moment we said that COVID was going to have an impact on our business, our management team began to modify our cost structure in real time to mitigate the business volume declines and to preserve our financial health. We are also contemplating the use of government programs as they are available as, for example, the Canadian Emergency Wage subsidy in order to support our employees during the pandemic. Globally, we expect to emerge from the COVID-19 pandemic in a sound financial position. GDI has been very proactive during these times. Drawing on our extensive expertise and significant in-house resources, we have launched comprehensive marketing and communication initiatives designed to provide our clients and prospective clients with factual information on COVID-19 as it has been progressing, advice and instruction on how to implement protective measures to stay safe and preventative measures to reduce transmissions. Based on the client feedbacks that we have been receiving, these initiatives really sets us apart in the marketplace. I invite you also to visit our informational website, www.cleanforhealth.com.We are positioned as a key adviser to our clients as the essential service rules are lifted and occupancy rates gradually starts to rise. We are advising our clients to reopening procedures as well as daily operating practices to ensure that social distancing measures are respected and that we can deliver the services according to the recommended health procedures. For the foreseeable future, our clients will have a need for higher service levels in order to preserve the health and safety of their facilities as we have proactively prepared a full slate of new and incremental services to help ensure that our clients' buildings will be safe for occupants to return to. Now I would like to turn to GDI financial results. I am pleased to report that GDI recorded another strong quarter. Let me comment on our different business segments. Our Canadian Janitorial business delivered a solid first quarter. As we have mentioned in prior calls in 2019, we invested in building our sales force, and we are deploying a new sales approach to the market and it's starting to show positive results with an organic growth of 4.1% in the quarter.Our ongoing efforts to improve operating efficiencies is also delivering results with an EBITDA margin of 7.5% after normalizing for the 0.08% (sic) [ 0.8% ] impact from the extra working day in the quarter. This was achieved while we were also carrying the additional cost of the investments we have -- we made to develop the third generation of the Modern franchise business. While we expect that the COVID pandemic has delayed the initial rollout of this business by a few months, we already have identified franchisees candidate and expect to begin rolling out a new territory franchise model in the second half of this year. Overall, I'm quite happy with the performance of this segment in the first quarter. Our Janitorial U.S.A. business has another good quarter, delivering an adjusted EBITDA of 8.2% after normalizing again for the 0.8% impact of the extra working day. This business continued to perform very well in a strong -- and is in a strong position both competitively and geographically. And like our Canadian business, our U.S. business has been differentiating itself from competitors during this pandemic, and we expect to benefit from this in the future. Our Technical Service segment had a very strong quarter, delivering both revenue and EBITDA growth of approximately 50%. While some of this was a result of the ESC acquisition, the team at Ainsworth also delivered solid organic growth during a quarter which is typically the slowest of the year. I'm also pleased to say that the integration of ESC is progressing well and is being implemented according to plan and has not been negatively impacted by COVID-19. It's very encouraging to see that the team at ESC and Ainsworth are working extremely well together, and they see the business potential and opportunities available from combining forces. I'm very pleased with what we have seen so far at ESC. Our Complementary Service business, which now consists of our product manufacturing and distribution business, reported lower revenues due to the sale of Steamatic business last year and lower sales of equipment. However, it delivered a healthy 27% increase in adjusted EBITDA. This business began working at excess capacity as COVID-19 began to spread and the supply chains for cleaning and disinfecting products tightened. I believe that GDI is the only facility service company in North America with an in-house janitorial product manufacturing business. This, too, is another factor that is helping to differentiate GDI in the marketplace. In an environment where the availability of critical products became a short supply, our clients were able to rely on our in-house team and experts capable of sourcing products and providing alternatives and advice in these times of need. In summary, I feel that GDI delivered another strong quarter with solid growth in EBITDA despite our janitorial business having to account for an extra working day. I am proud also of our team across the whole organization. Our balance sheet remains healthy. Our leverage ratios are within our comfort zone, and we are making use of whatever program available to support our people. We have proactively made adjustment to mitigate the impact of COVID-19, and we are -- I'm very positive to emerge not only in a sound financial position but in a stronger competitive position. Finally, in this COVID environment that we are living in, I would like to thank each and every one of our dedicated employees and colleagues who are working in the front lines of this pandemic. All of you have risen to the occasion and helped GDI operating effectively in these challenging times, and I'm very proud of your effort. People are depending on us, and I'm extremely proud to see our entire team has been stepping up to the challenge. That concludes my remarks, and I will now ask the operator to open the lines for analysts -- to analysts for questions.

[Operator]

[Operator Instructions] And your first question, gentlemen, will be from Jeff Fenwick at Cormark.

[Jeffrey Michael Fenwick, MD & Co]

I was wondering if maybe you could give us a little more color around how April unfolded, even just sort of order of magnitude in terms of the drop in demand you might have seen across Janitorial and Technical. Obviously, a good number of your customers were still operating. You're still providing services. So are we talking about a 30% drop or an 80% drop? Or any sort of color you can offer us along those lines?

[Claude Bigras, President, CEO & Non]

Okay. Jeff, as you know, we do not give specific guidances, and -- but I'll try to answer it the best as I can without going to jail. So the impact has been different depending on the market or the business segment. Overall, I can tell you that we're not in a panic mode, let's put it this way. And business -- like you said, we are servicing -- we are running the business in every market to do at least minimum essential services everywhere. Our product manufacturing business is very active. Our retail division is very active. So overall, I think that we are able to consistently deliver services everywhere. And no, I'm very positive about Q2, understanding that it's a pandemic. And yes, we're not operating on 8 cylinders, but the car is well on the road.

[Jeffrey Michael Fenwick, MD & Co]

Okay. That's fair. And then, I guess, my other question is just around characterizing the timing of that line of sight on the recovery. And I would imagine you have some discussions with customers a week or 2 in advance of them reopening. So do you feel like you're having a number of those good conversations where the pipeline for May activity, you can sort of -- you can already see that begin to build?

[Claude Bigras, President, CEO & Non]

Absolutely. Now we moved from -- Jeff, if I can picture it, there's -- the first 6 weeks, we move from how we manage closing and how we manage emergency services and how we manage our workforce to now we are right in the midst of managing with our business partners the reopening sequences, the reopening process. We have been working very strongly to advise our client and support them. So I tell you that now the main focus is the scale-up of the reopening and the businesses. You're absolutely right. This is what's happening now.

[Jeffrey Michael Fenwick, MD & Co]

Okay. And I guess alongside of that, you're rolling out -- you mentioned some enhanced sanitization services that you have. So there's a whole lot of pricing scheme there. And what's the sort of profit profile on that type of business versus the typical cleaning services you offer? Is there any -- is there much difference there for you?

[Claude Bigras, President, CEO & Non]

Well, listen, you know what, Jeff? Mind you that we work with extremely strong business partners there. So we're not in the business model of taking in sanitizers and turning them into $45 an ounce. So my point is we are accompanying our clients in the reopening. There is far -- there is more products. There are more costly materials to handle cleaning in this environment. So yes, we have adjusted our pricing accordingly. But we don't see it as a hit-and-run process.

[Jeffrey Michael Fenwick, MD & Co]

Okay. That's fair. And then just looking at Technical Services specifically. You mentioned the integration of ESC is going well. How does the activity level there compare to Janitorial? I know you have a lot of -- obviously a lot of ongoing break-fix services and contracts there, a lot of project work, though, also. So how do we think about that in terms of it rebounding compared to how Janitorial might play out? Is it a little slower to come back on? Or maybe it never got hit quite as much?

[Claude Bigras, President, CEO & Non]

Well, listen, Jeff. The -- okay. First of all, if we talk about ESC, fortunately, as you all know, is Western Canada has been so far not as affected as the Eastern part of Canada. And yes, ESC has a strong operating business in the West, so it was not as impacted as us on this side of the country. So we're very happy to see that they resume work in mainly everywhere. As far as Ainsworth in Ontario and Québec, for sure, there is a different mix approach. As the construction got shut down in Québec and Ontario, for sure it had impact our project part of the business. But overall, what -- between servicing and emergencies and everything there, we're not doing too bad. And now, as you know, Ontario has start back to reopen the educations and government buildings. So we are resuming our activities. Construction is -- has reopened for residential site last week, and now it's reopening for commercial. So we expect that the scale back up will be relatively quick in this part of the country for the Ainsworth business. Now going forward for the tail of it, next -- Q3 and Q4, our backlog seems what is -- strong. So we don't anticipate major issues, but we are still working on modeling to make sure that we capture the business essence properly on the mechanical side.

[Operator]

Next question will be from Maggie MacDougall of Stifel GMP.

[Maggie Anne MacDougall, Head of Research]

I wanted to follow up a bit just on the extra sanitization question that Jeff had asked. When you talk about the extra things that you're doing as people are preparing to go back to work and protecting the people that are going to be occupying the businesses, I'm wondering how you think about protecting your employees from contracting any illness. And if there's anything we should be thinking about in terms of operational change to how people are working for you or perhaps additional precautions that you've been taking?

[Claude Bigras, President, CEO & Non]

Yes. Yes, no, no problem, Maggie. That's nice questions because it's important. They are our frontline people. So if they're sick, we have a problem. This being said, we have put together a full, comprehensive protocol of operations in each of our buildings. So we have a standard process that we are rolling down as it reopens. Mainly, we're talking staggered shifts so that we have minimal number of employees being together in a central room. So just for example, instead of starting at 5:00, everybody -- some coming at 4:45, 5:00, 5:15, 5:30. We are providing a lot of training on how to operate. And so that's -- a lot of it is due to training and awareness of our people how to behave in the buildings. Secondly for sure is we manufactured -- we manufacture the goods. So we're supplying protective equipments to all our employees, mask, gloves, disinfecting products and sanitizers. But again, protocols -- management protocols and employees' behavior is very important in controlling the spread of that.

[Maggie Anne MacDougall, Head of Research]

And then a follow-on question. When you look at your Complementary Services business and how busy it seems to -- or it sounds as though it's gotten as a result of increased demand for your products, should we be thinking about a shift change in the profitability of that business, seeing as how it is a bit of a manufacturing operation and increased throughput could have some positive lift to profitability?

[Claude Bigras, President, CEO & Non]

Well, for sure, the -- I can tell you that the impact -- I calculate the impact threefold. The first fold is, yes, there is an increased demand on products, and I think that we're going to have a stable increased demand at least for the next 3, 4 years because people, I think, realize that cleaning for appearance is not sufficient anymore. We have to clean for also the quality of products and protocols will increase. Secondly is it enabled us to develop a whole new area of new clients as we were able to provide the products where others could not. So we have really strongly extend our market share, and that's very important.And thirdly, it has enabled clients to realize that by being vertically integrated, we were able to provide solutions quicker than others. So you know what? For me, it's a big win. We're far from the year I was fighting because we were spending money on opening this business.

[Maggie Anne MacDougall, Head of Research]

Yes. Sure. So does this change your approach in any way going forward as you look at your growth opportunities? I know that the U.S. is a major focus for M&A over the long term. Would you look to add similar-type operations to complement what you currently have in the United States?

[Claude Bigras, President, CEO & Non]

Maggie, you know what? Can I ask you to -- just to clarify it? I'm not sure I fully captured the question. My apologies. Can you do that again?

[Maggie Anne MacDougall, Head of Research]

Yes. No problem. I'm wondering if the experience of COVID and how you've been reacting and things changing alter your strategy in any way in terms of M&A as you go into the U.S. market.

[Claude Bigras, President, CEO & Non]

Okay. It's the word M&A I did not catch. My apologies.

[Maggie Anne MacDougall, Head of Research]

No problem.

[Claude Bigras, President, CEO & Non]

Okay. You know what? Allow me to just get out of the question for a second. As you know what, a lot of companies were not that strong in emergency programs. This was a very good test, our emergency programs that we have, and I can tell you that I'm very happy. And whatever we were missing in the book is now add-on in the book. So we can -- that was one thing, talking about emergency. But now on the M&A side, listen, as of now, we're still carrying our M&A activities. David and the team are really active into identifying and working with prospects. Again, we do not release information very much on that front, but I can say that we are business as usual on that front. This being said, we expect that there might be an increase in activities maybe towards the end of the year as this thing unfolds. And we'll see -- how can I say this? There is an old say that when the sea gets out, we see who has no bathing suits. So maybe there's opportunity there.

[Operator]

Next question will be from Zachary Evershed at National Bank Financial.

[Zachary Evershed, Analyst]

Congrats on the quarter.

[Claude Bigras, President, CEO & Non]

Thank you, sir.

[Zachary Evershed, Analyst]

Given the increased uncertainties since Q4 results, will you be dialing back on your CapEx guidance for $20 million this year?

[Claude Bigras, President, CEO & Non]

Well, for now, you know what, we have not lift the freeze on CapEx unless emergency or contracts start-ups. You know what? I have not given some thoughts as of now to lift it. For sure, we'll be -- we are still -- Zachary, we are still into our restriction mode, and all of Q2 will remain the same notwithstanding that so far, I'm very positive on what's happening and what we are seeing. But I have no intention to lift the freeze on the hiring and the freeze on CapEx, at least not before the summer or maybe the fall.

[Zachary Evershed, Analyst]

That's helpful. And in difficult economic environments in the past, have you historically seen a spike in bad debt? And what kind of provisions do you take to counter that?

[Claude Bigras, President, CEO & Non]

Zachary, listen. This is -- you know what? I've been in business for 35 years. I have not seen a condition like we have. We had seen little lesser dramatic scenarios like 9/11 and H1N1 and the SARS and all this. This one, the good news is we have run credit assessments for all our clients since we're working with many major clients. I'm not saying that major clients are all shielded from problems. We just saw that yesterday. But this being said, we have a very good comfort on the recovery of our receivable. And so far, cash-wise, I can tell you that the team has been doing a great job. We have not seen yet a depletion or an increase in our DSOs.

[Zachary Evershed, Analyst]

And then one last one for me. You mentioned that as the sea goes out, you see who's not wearing a bathing suit. So obviously, as an opportunity is coming down the line, are you looking at additional sources of financing in order to capitalize on that in the coming months?

[Claude Bigras, President, CEO & Non]

Well, Zachary, you know what? As we speak now, we are in a very -- we are in our comfort zone on the debt. We are in our comfort zone on the cash on hand, on our availabilities. Are we set up for opportunities? For sure, and we'll manage that as prudently as we've been doing over the last 5 years. So if the opportunities arise, for sure, we will look at our capitalization approach to the business.I'm not saying that -- but I cannot tell you at this point what would be the best financing vehicles. It has to depend on the opportunities and the condition in the market.

[Operator]

Next question will be from Frederic Tremblay at Desjardins.

[Frederic Tremblay, Analyst]

As you're having those initial discussions on reopening, I was just wondering how receptive are your customers to your marketing and communications on those higher service levels that you're suggesting. What sort of degree of confidence that the higher level of service will be materializing as the recovery unfolds?

[Claude Bigras, President, CEO & Non]

Well, Frederic, I think there are 2 things we have to consider. The first thing is the approach. I'm telling you that we are actually extremely aggressive on our approach through our marketing tools, our marketing team. The sales team is coming back. You know what? We have -- we said that's not rehired, but we have taken back in our sales teams. So there's a whole aggressive strategy to communicate and being present in the marketplace. So that's one part. The second part, allow me to say this, people will have no choice in the sense that every building occupants, there are protocols. They need to disinfect. They need to clean. They need to ensure that the environments are safe for their people. So we're talking a solid increase in the amount of service -- the service level but also the frequency of services. Sanitation goes with the right products at the right frequency. So I see that companies that won't do that, actually they will -- they would be the artisan of their own demise because they're going to have sick people. So I think it's a must that they equip themselves with the right approach to clean, cleaning for health, like we say. So I'm very confident that GDI will be positioned to service its client and more going forward through our -- the both facts I just gave you. Does it make sense for you?

[Frederic Tremblay, Analyst]

Yes. No, that's helpful. And just on a geographic basis, you anticipate a difference between the pace of the recovery between the U.S. and Canada on the Janitorial side?

[Claude Bigras, President, CEO & Non]

Well, I'm tempted to say that Canada does not have the miracle injection yet, but maybe it will come. But okay. So -- but listen. You know what? The U.S. is a very different business altogether in the sense that -- so the states are bigger than Canada -- some states are bigger than Canada. So we are dealing with 50 governments that have different approach to do the business. So we're -- you know what? So we're seeing some of our markets opening up quickly. Some others are not. So it's difficult. But overall, people want to go back to work. People wants to restart the economy, and they're looking for the best possible way to do it while respecting that human life is important. And I think everybody does their best, and we are there to support them as they reinitiate or they reset their economies. But again, 50 states, so we are -- I think the big keyword here is to be -- to adapt yourself. You have to be resilient and you have to be flexible, and you have to be very promptly reactive. These are the keywords in those days.

[Operator]

[Operator Instructions] And your next question will be from Neil Linsdell at Industrial Alliance.

[Neil Linsdell]

Just to try and -- I'm trying to think about the conversations that you're having with different types of customers and imagining there's customers that are saying, well, we're just going to step up and do 50% or 200% or 400% more cleaning, some that will go for the additional services that you're looking at, some that just are happy with the frequency that they previously had and some that might need to scale back, maybe they close facilities or close floors in their offices or reduce the number of staff. Can you give any kind of color as far as the percent of your business or customers that you would kind of put into each one of those buckets?

[Claude Bigras, President, CEO & Non]

Well, listen -- okay, let's -- okay, first of all, let's create -- let's get -- take away the wrong assessments. Unless people in a facility does not exactly reduce the need for our services, and so us, the need for services needs to be a shutdown environment. So you close 2 floors, yes, for sure, you need less. But fewer people, less on a floor is the same thing for us. So this is one thing. The second thing is, for sure, as the retail sector would be reopening with shopping centers, shopping centers that there are 6 stores closed or 8 store closed in a shopping center, it doesn't change the dynamic and the need to operate the shopping center. And shopping center, unlike others, they will have to have very, very strong service protocols in order to secure their clientele. So we don't foresee any major issue. Office environment, for sure, we understand that the -- I would say that notwithstanding the fact that the buildings are opening, there would be a progressive return to work environment probably between now -- and you know what, there would be the summer season vacation. We expect that -- I would say, more or less, a regular attendance in building would be probably towards, you know what, September or something. Again, you know what? I am not a -- I don't say the -- anyway, we envisioned, take it with a grain of salt. But at the end of the day, when building reopen, they need to be serviced. Public areas needs to be serviced. Occupant, even if they're at 50% or 60%, there is still a big need for our services. We need to clean the same surfaces. And like I said, instead of looking at a desk every night, now we're going to have to wipe the desk every night, because it's going to be critical that this desk is virus free. So this is the big difference when I say cleaning for health instead of cleaning for appearances. Not only now we have to say it looks clean, it has to be clean. So it's no longer an appearance thing. The game is to make sure that this area, this place has been sanitized properly. So you see? So the impact -- unless it's closed down, I think the impact would be positive for our business overall.

[Neil Linsdell]

Would you give a percentage as far as, say, 95% of your customers will do the same or more cleaning?

[Claude Bigras, President, CEO & Non]

I'm positive that probably all of them will have to do more cleaning.

[Operator]

[Operator Instructions] And at this time, Mr. Bigras, Mr. Lavigne, we have no other questions. Please proceed.

[Claude Bigras, President, CEO & Non]

Okay. Well, thank you very much again for attending the call. And my only closing statement would be, again, thanks to our team that are dedicated in making GDI shine in those times and please stay safe. Thank you very much for the time. Good day.

[Operator]

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