GDI Integrated Facility Services Inc

TSX:GDI

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the GDI Integrated Facility Services, Inc. First Quarter 2021 Results Conference Call. [Operator Instructions] Also be advised that this call is being recorded on Friday, May 7, 2021. And I would like to turn the conference over to Mr. Stéphane Lavigne. Please go ahead.

[Stéphane Lavigne, Senior VP & CFO]

[Foreign Language] Thank you, Per. Good morning, all. Welcome to GDI's conference call to discuss our results for the first quarter of fiscal 2021. My name is Stéphane Lavigne. I'm Senior Vice President and Chief Financial Officer of GDI. I am with Claude Bigras, President and CEO of GDI; and David Hinchey, Executive Vice President of Corporate Development.Before we begin, I would like to make you aware that this call contains forward-looking information, and we ask listeners to refer to the full description of the forward-looking safe harbor provisions that is fully described at the beginning in the management and discussion and analysis filed on SEDAR last night.I will begin the call with an overview of GDI's financial results for the first quarter of 2021, and I will then invite Claude to provide his comments on the business.In the first quarter, GDI recorded revenue of $383.6 million, an increase of $28.7 million or 8.1% over Q1 of last year, including a negative organic growth of 0.7% due to the full or partial closure of certain client facilities as a result of the COVID-19 pandemic shutdown. We recorded an adjusted EBITDA of $33.5 million in the quarter, an increase of $13.5 million or 67.2% over Q1 of last year. Adjusted EBITDA was positively impacted by additional services delivered to existing and new clients whose facilities remain open or partially open during the pandemic.Moving to our business segment. The Janitorial Canada business recorded revenue of $133.9 million in Q1, a decrease of $5.3 million or 3.8% compared to the first quarter of 2020. This decrease is due to the negative effects of the COVID-19. However, this segment reported adjusted EBITDA of $22 million compared to $9.4 million in the first quarter of 2020, representing a margin of 16.4% compared to 6.7% last year.Our Janitorial U.S. business recorded revenue of $79.9 million in Q1, a decrease of $3.3 million compared to Q1 2020 due to the depreciation of the U.S. dollar in relation to the Canadian dollar, but the segment delivered 1.9% of organic growth in Q1. Adjusted EBITDA increased by 25.9% to $7.7 million or 9.7% of revenue compared to $6.1 million or 7.4% of revenue in the first quarter of 2020.Our Technical Services segment recorded revenue of $156.2 million, an increase of $34.6 million or $28.4 million over Q1 of 2020, with the full amount of revenue growth coming from acquisitions, while organic decline was limited to 1.4%, which was COVID related. Adjusted EBITDA was $6.3 million and adjusted EBITDA margin of 4%, which is in line with [indiscernible] first quarter performance, which is seasonally the business' weakest quarter.Finally, our Complementary Services segment reported revenue of $17.1 million in Q1, an increase of 3.1% compared to Q1 of 2020, but adjusted EBITDA was $0.8 million compared to $1.4 million in the first quarter of 2020, a decrease of $600,000 as a result of the low occupancy and different product mix. I would like now to turn the call to Claude who will provide further comments on GDI's performance during the quarter.

[Claude Bigras, President, CEO & Non]

Thank you, Stéphane. Good morning, everybody, and thank you for taking the time to participate in our earning call. I'm very pleased with GDI's performance in the first quarter of 2021. The COVID pandemic continued to affect the company positively during the quarter, and all our business units continued to work on the front lines throughout fighting the virus, doing everything that they could to provide our clients with the essential services they need to keep their facilities safe and virus-free.We expect that as long as the COVID-19 virus remains a risk to our society, our cleaning business will continue to perform as our client looks to GDI for expertise and enhanced support to keep their facilities safe. As GDI has demonstrated since the beginning of the pandemic, we have the ability to implement many actions to manage costs, mitigate business disruption, protect our employees and ensure that we are able to provide our clients with the essential services they need to keep their facilities safe.Turning to our business units. Our Canadian Janitorial business performed very well during the quarter, increasing its adjusted EBITDA by 125% over Q1 of last year. While several cleaning service clients were operating their facility at lower-than-normal capacity levels, many clients required additional services and specialty services due to the pandemic, including, for example, higher frequency cleaning and disinfection services. Our Canadian business has been holding in despite the resurgence of the pandemic and most large markets that began at the end of the quarter. We also benefited from 1 less day of service in this quarter.Our Janitorial business also performed well during Q1, delivering a 25.9% increase in adjusted EBITDA and an organic revenue growth of 1.9%. As our Canadian business, many of our Janitorial USA clients also required additional COVID-related services, however to a lesser degree due to different end mixed markets. Given the widespread availability of the different COVID vaccines in the U.S. market, we expect the pace of regional economic reopening and facility reoccupying to be faster than that of Canada. In fact, in a number of regions we already have begun to see a reduction in government restrictions and a gradual reopening of facilities.I am very proud of the performance of our cleaning business during the COVID pandemics. As one of the largest and the leading commercial cleaning service provider in North America, our Janitorial segment took a leadership position in the industry in advising clients and the various processes and procedure to implement and the products to use to keep their facility clean and mitigate the risk of virus spread. I feel that our efforts during the pandemic have helped to better differentiate GDI in the marketplace and serve to solidify our value proposition to clients and strengthen our competitive position.Ainsworth, our Technical Service segment has been GDI business that was the most impacted by COVID-19. However, the business has been progressively improving since the pandemic, low -- since the pandemic low experience during the second quarter of 2020. Ainsworth has a good start to the year with an EBITDA margin of 4%, which is seasonally the weakest quarter and despite the resurgence of COVID in most of Canada. EBITDA margin was in line with historic norms. We are seeing an improvement in service call volumes. Project work is beginning to come back on stream. Our sales team is very active, and our win rate ratio is strong. While an onset of COVID proved to be a headwind for Ainsworth business, we are optimistic that as COVID receded, a tailwind will follow as building owners and managers begin to focus on air quality in their facility as the building gets reoccupied.Ainsworth in both the largest commercial HVAC service business in Canada and the largest system agnostic building automation service in Canada, and these are the 2 traits that should benefit most from a shift in focus to air quality. We continue to be very excited by our acquisition of BPAC Group on January 1 of this year. Together [indiscernible] major building system and multi-trade facility service provider in the Northeast of the USA. And we have begun consolidating Ainsworth U.S. operation under the BP management team, and we are now focusing on growing this platform alongside our janitorial service platform in the U.S. market with a goal of making GDI a true one-stop shop for both today's and tomorrow buildings in the Midwestern and Northeastern United States.Superior Solutions, our product manufacturing and distribution business, recorded a decrease in adjusted EBITDA during the quarter. While this segment continued to experience demand on personal protective equipment, it is operating in a more balanced supply-demand environment that was experienced on the onset of the pandemic. And because of the significantly reduced occupancy rate we saw in Canada in Q1, the business experienced a decrease in demand for day-to-day cleaning supply like tissues and toilet paper.Due to the exceptional performance, GDI has delivered since the beginning of pandemic. Our balance sheet is stronger than ever. And our leverage ratios are at all-time low. And we are in a solid financial position. We continue to focus on our growth through acquisition strategy. Deal flow has returned to pre-COVID levels. And our financial strength should enable us to capitalize on strategic opportunity as they arise. I would like to finish by taking each one of our dedicated employees and staff who worked tirelessly on the front line in this pandemic.Our clients were depending on us to keep them safe, and all of you have risen to the occasion. I am extremely proud to see how our entire team has been stepping up to the challenge. That concludes my remarks, and I will ask now the operator to open the lines to analysts for questions.

[Operator]

[Operator Instructions] And your first question will be from John Zamparo at CIBC.

[John Zamparo, Associate]

I wonder if you could start by characterizing the quarter from the perspective of U.S. versus Canada. And what I mean by that is, when you look at more reopening parts of the continent, are you seeing any shift from customers to more -- towards more normal levels of recurring services rather than the enhanced recurring or onetime disinfecting services?

[Claude Bigras, President, CEO & Non]

Yes. Well, John, you're absolutely right. As business reopened, business, building gets reoccupied, I think we are seeing a trend towards a better normality. But I would qualify it probably as a new normality. It would be very unwise for building owners just to revert to pre-pandemic approach to cleaning. I think what we will see is a more in-depth approach to cleaning and sanitation. So yes, customers will probably spend less globally on extra services, but I think they will resume into more in-depth cleaning approach to their day-to-day services. Hopefully, this is giving you a little bit of the flavor.

[John Zamparo, Associate]

Yes. That's helpful. And then one more. Claude, you spoke a bit about the potential for a tailwind from increased focus on air quality and filtration upgrades. I'd like to get a sense of how often you're having these conversations with customers, but also how material are these types of jobs and how profitable are they versus the rest of the technical services group? And is there any recurring element to that business as well?

[Claude Bigras, President, CEO & Non]

Yes. Okay. Well, what we are seeing, as everybody is learning from the pandemic, now the science is telling us that, yes, the 2-meter distance resolve the -- what we call the high molecular structures of, I don't know to say that in English, but the droplets. But we are realizing that the small particles flow in the air and can be a very, very strong carrier of the virus through ventilation systems. So customers now are -- they have to turn into how they can provide a better indoor air quality in their building. It means UV disinfection systems, air generating systems, stronger filtering systems, improving of their equipments. So like you said, it won't make a building spend gazillions of dollars, but these are, I would say, a very interesting margin projects, not being huge by themselves, but they can be rewarding project on the bottom line. So this is what we're focusing on in the sense that our base business will be strong, our trade business and projects are strong, but we are also pushing on those enhanced services that are good margin buildups in the business. You understand what I'm saying? It's not a volume play, it's a margin play with those. And also it enables us to acquire new clients in the process.

[Operator]

Next question will be from Michael Doumet at Scotiabank.

[Michael Doumet, Analyst]

I think most of us would have assumed that you hit the high watermark for margins in the Janitorial Canadian business last year, but that was up again in Q1. You did mention the benefit of the extra day. I just want to get a sense for how much that played in and what else drove the margin upside.

[Claude Bigras, President, CEO & Non]

Well, listen, to be very honest, when you put the extra day, the pandemics and the building occupancy, I cannot give you real scientific numbers, but I would presume probably 2%, 3%.

[Michael Doumet, Analyst]

Okay. And then maybe just flipping back to the technical services. Now it's been a few quarters now where site restrictions have deferred work, but at the same time it sounds like to me that COVID has increased the overall demand for services. At some point I presume you'll make a transition from growing the backlog, to executing the backlog. So I guess the question is, are you approaching that point? I mean, do you feel comfortable that, that could be a 2021 transition?

[Claude Bigras, President, CEO & Non]

You know what, I'm not sure I fully capture your question, Michael. You're talking about the backlog at Ainsworth?

[Michael Doumet, Analyst]

Yes. It seems like to me your customers have a desire for more and more work.

[Claude Bigras, President, CEO & Non]

Yes.

[Michael Doumet, Analyst]

But there are restrictions in sites that prevent your technicians from doing that work. But at some point, I would presume that we would see elevated levels of sales and execution. I just wondered if it's in 2021.

[Claude Bigras, President, CEO & Non]

I understand. I understand. Well, okay. So yes, you're right. The restrictions and -- sometimes disable us to execute on the projects. But now what we see is we more or less realize the expected number of billable hours every month. So we see that the business is resuming to a sustainable number hour per period. But as building reopens and everything for sure, lifting the restriction would enable us, you know what, to probably execute more on our project backlog, but which will generate more monthly revenues. Backlog is good, but we have to turn it into money.

[Michael Doumet, Analyst]

That's the point of backlog. Okay. Great. And then maybe if I could slip in one extra question. Since the start of the pandemic I've noticed you haven't closed on a janitorial acquisition. And given the performance of your business in the last few quarters, I wonder if it's fair to assume that maybe seller expectations have increased and given the moving parts, it may be harder to close a deal. Am I overthinking it? Or…

[Claude Bigras, President, CEO & Non]

No, no, no. This occupies my thoughts, my friend. You know what, the problem is uncertainty. Everybody deals with uncertainty. We expect positive long-term effect. Some people see huge effect. Some people expect a return to normal. So we are dealing in the janitorial and cleaning sites, and this affects for sure our acquisition strategy. We're dealing with a lot of uncertainty. So it's hard to price business when there's -- the uncertainty what can play positively or negatively into our pricing methodology. So you know what, at this time we are very cautious on how we priced our businesses. But what we expect is the deal flow is strong. So as we're getting there, we will continue to develop there. But yes, uncertainty has a certain impact on our janitorial acquisitions.

[Operator]

Next question will be from Maggie MacDougall at Stifel.

[Margaret Anne MacDougall, Head of Research]

So I wanted to ask a little bit about how things have been going in Canada. We -- in Toronto it feels like we've been in lockdown for like a really long time now. But all over the country there's new restrictions being put in place. And it's always a little difficult to kind of understand exactly how this might impact occupancy and buildings because, for example, our office is closed, and we're being told to work from home here. But I know that other professional services firms are open with some employees going in. And so, could you just give us a bit of general commentary around how things are shaping up in Q2 with regards to trends for occupancy in your experience? And if that's much different than what we saw last year this time when everybody went into a really strict lockdown.

[Claude Bigras, President, CEO & Non]

Yes, Maggie, you know what, each regions are acting differently to be very -- we have to keep that in mind. It's not a uniformity across the board. That's one thing. Secondly, I think that Q2 is behaving a little bit, I would say, towards what we see is we see some overstock in the markets. We see -- we don't see much reopening. We see also that retail is kind of slowing down a little bit on the demand. I think where we're going to -- what we're going to see is reopening. Again, you know what, my guess is as good as the 300 million specialists we have in Canada and in the U.S. But I would say that I believe that we will see progressive reopening at the tail of Q3 and then in Q4. I think this is where it's going to globally be reopening, universities, buildings. If I had to put a bet, I would say, end of Q3 and Q4 we should see kind of a coming back to a new normal.

[Margaret Anne MacDougall, Head of Research]

And then in your discussions with your property managers, as you talk about -- I'm sure people are making plans for that and maybe the timing is not quite known yet. But when you talk to these property managers to help them with their planning, what are they saying? Because it seems to me like we're going to be in a situation where we'll have some good amount of the population vaccinated. I don't know if it's 50% or 40% or something like that, but not quite at a level where we can really loosen up on the public health practices like the mask wearing and the sanitization and all of that stuff to keep the unvaccinated population protected. So has that line of thought played into any of your discussions? And perhaps you could just share a little bit about how those property managers are planning for the future.

[Claude Bigras, President, CEO & Non]

Okay. Well, I think it's very interesting because it's a discussion that we entertain every day with our stakeholders. I think what's important for us to convey to our clients is the worst thing that could happen is even with the vaccines that [indiscernible] what the commercial business environment become a vector of pandemics because the sanitation measures has been softened too much and too quick. I think reoccupancy is getting back to normal. I think that office internal structures would be modified. I think the -- I would say, the densification of occupation in buildings will go back to a lesser level as people will live with a certain distanciation. I think there was a great learning in this pandemic. And yes, there would be probably more work from home, but I think it will be offset with better space management. And at the end of the day, again, is we need to keep enhanced measures and place in order to make sure that we provide a safe office environment. This is the ticket. If people don't feel safe at the office, they will not engage. This is very, very important. So we are the -- I don't want us to look like, we're -- you know what, we are salesmen, but there's a reality. We need to work with our client to understand that the cleaning for appearance no longer apply, it's cleaning for health. This is the new tomorrow. So this is our engagement with our business, is to educate and provide this new level of cleaning for health. You know what, I don't want to be looking to holistic, but did I express it properly, so it's understood?

[Operator]

Next question will be from Frederic Tremblay, Desjardins.

[Frederic A. Tremblay, Analyst]

The first one for me is on air quality. I just want to confirm that are you able to offer the [ Smart AIQ ] product within the BP network? Or that's mostly a Canadian offering for now?

[Claude Bigras, President, CEO & Non]

No, no. We can offer it everywhere. You know what, it's MERV-13 filtration systems, it's UV frustration systems. It's a more enhanced filter rotation and change. You know what, it's not rocket science. It's just to be focused on renewing air and managing the quality of the air flow. So it's applicable everywhere.

[Frederic A. Tremblay, Analyst]

And then just moving to Janitorial. Last quarter you talked about some customers issuing RFPs with enhanced services within the RFP. Is that something that you're continuing to see in recent weeks? And if so, what's sort of the impact, I guess, on future quarters in terms of margin profile for the Janitorial segments as maybe we're gradually moving below the 13%, 16% margin we've seen in Janitorial Canada, but perhaps staying above where we were pre-COVID. Well just your thoughts on that in the…

[Claude Bigras, President, CEO & Non]

Well, listen, I think it's very prudent to, margin like we saw in Canada last quarter, to be very honest, I would not promote that this is the one going forward. I think it was very exceptional -- it was very, very rewarding Q1 of 2021. Like I said, there was the extra day. There was a certain level of service. It was the after holiday service, retailer were involved into providing a lot of -- asking a lot of demand, which is now getting softer. But this being said, what we should expect, I think, going forward is, again I'm just restating that we have to make sure that our clients understand the service dynamic going forward. And we have to make sure our clients understand that there is a process to have in place when you do disinfection. So demand for one-time disinfections, we probably see that it's going to get to -- it will be reduced or it will go to a better -- to a, I would say, a leader -- lesser, lesser, leaser in English, lesser amount, but enhanced services will kick in. So probably the revenues will get back to a more regular brand, but with, I would say, a twist of margin and a twist in -- but a sustainable twist in revenue going forward because of enhanced services. More sustainable margin a long time, but we won't see those big peaks as we saw during the pandemic. But mind you, [indiscernible] next year, the virus research, we're back in square one.

[Frederic A. Tremblay, Analyst]

Yes, for sure, for sure. Great. Last question for me, just on M&A. You spoke about the environment for Janitorial and your thoughts there. Just curious on the technical services side, especially in the U.S. You mentioned that the integration of BP is going well. I guess, does that mean you have a strong appetitive or stronger appetite for U.S. technical services acquisition?

[Claude Bigras, President, CEO & Non]

Absolutely. Absolutely. Again, Frederic, I think I said it many times, density is a key in our business. So yes, now we have a strong platform in one of the largest markets in the world. And we are investing on it. We are integrating our business, the other operating business within it. And our intention is to grow our technical multi-trade and building automation system platform, absolutely.

[Operator]

[Operator Instructions] And your next question will be from Zachary Evershed at National Bank Financial.

[Zachary Evershed, Analyst]

Just a quick one for me, building on Fred's question here. Looking across your business segments and your geographies, could you maybe rank for us your interest in the acquisition opportunities there? And also give us just a bit of color on the pipeline of targets and maybe the pace at which you expect to be able to deploy your very strong balance sheet?

[Claude Bigras, President, CEO & Non]

Well, that's the good news. At least we have the means for our ambition. That's a good start. Secondly, as I said earlier, on the Janitorial side, we remain prudent because we need to cope with the level of uncertainty. So this is one point. On the technical side, we continue to entertain discussion with many players. We have a fairly sizable pipeline, if you can allow me to say that. But again, you know what, we have to find the right business fix -- fit, I'm sorry, not fix, but fit, and we have to pay the right price. So this is our challenge. We have to make sure that we execute on our strategy. But the idea is not to do absolutely transaction, is to do the right transactions.

[Zachary Evershed, Analyst]

Congrats on the quarter.

[Operator]

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

[Claude Bigras, President, CEO & Non]

Thank you very much. Well, in closing, I want to thank you again for being on our earning calls. Just to recap is we're very happy with our results. We're still working very hard into, you know what, this pandemic period. People are dedicated towards it. We want to make sure that we develop and offer our clients a sustainable solution going forward. So at the end of the day, I think it would be all positive for our business and our business impact, and we remain very focused on the business. So hopefully, you know what, as building reopens and everything, we will be able to be at the forefront of supporting our clients. Thank you again.

[Operator]

Thank you. 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 lines. Have a good weekend.