GDI Integrated Facility Services Inc

TSX:GDI

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the GDI Integrated Facility Services First Quarter 2022 Results Conference Call. [Operator Instructions] This call is being recorded on Wednesday, May 11, 2022.

I would now like to turn the conference over to Mr. Stephane Lavigne. Please go ahead.

[Stéphane Lavigne, executive]

Thank you, operator. [Foreign Language] Good morning to all, and welcome to GDI's conference call to discuss our results for the first quarter of fiscal 2022. My name is Stephane Lavigne. I'm Senior Vice President, Chief Financial Officer of GDI. I'm here with Claude Bigras, President and CEO, 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 2022, and then I will invite Claude to provide his comments on the business.

In the first quarter, GDI recorded revenue of $495 million, an increase of $111 million or 29% over Q1 of last year, made up of organic growth of 4% and growth from acquisition of 25%. We recorded an adjusted EBITDA of $36 million in the quarter, an increase of $2 million or 6% over Q1 of last year.

Our Janitorial Canada business segment recorded revenue of $142 million in Q1, an increase of $8 million or 6% compared to the first quarter of 2021, which was mainly generated organically. This segment reported adjusted EBITDA of $19 million compared to $22 million in the first quarter of 2021, a decline of $3 million compared to that quarter, which was a pandemic area high for this segment. Adjusted EBITDA in Q1 of fiscal 2022 was higher than each of the last 3 quarters.

Our Janitorial USA business segment recorded revenue of $163 million in Q1, an increase of $83 million compared to Q1 of 2021 due to the combined effect of the IH acquisition and organic growth of 14%. Adjusted EBITDA increased by 62% to $13 million compared to $8 million in Q1 of 2021, primarily due to the IH acquisition.

Our Technical Service business segment recorded revenue of $172 million or 10% over Q1 of 2021, which was generated mainly from acquisitions. The segment recorded adjusted EBITDA of $6 million, which was in line with prior year's quarter. Historically, the first quarter is the business weakest quarter as this segment is affected by seasonality.

Finally, our Complementary Service segment reported revenue of $25 million and adjusted EBITDA of $1 million. This segment has been negatively affected by low demand for daily consumables, such as tissue, towels, and soaps, generated organic growth of 18% in Q1 fiscal 2022 as building occupancy began to rebound.

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

[Claude Bigras, executive]

Thanks, Stephane. Good morning, and thank you for taking the time to participate in our earnings call. I'm very pleased to report that GDI delivered another strong quarter of growth in both revenue and adjusted EBITDA. We are continuing to see a reopening of regional economies and many regions where we operate, all government-mandated restrictive regulation lifted.

In both Canada and the U.S., we have begun to see a gradual reoccupation in office building and expect this to be -- to progressively continue to evolve in 2022. Outside the commercial office sector in markets such as manufacturing and distribution, education, health care and retail, which represent a significant majority of our global janitorial business, occupancy rates did not fall for a sustained period during the pandemic and as such facilities in these markets are operating at levels comparable to pre-pandemic norms. We are continuing to see client ask for our enhanced service offering and expect to -- that as long as the COVID-19 virus remains a risk in our society, our business will continue to perform well as our client looks to GDI for expertise and enhanced support to keep the facility safe.

Our Canadian Janitorial business delivered a strong quarter within the 5% organic growth and adjusted EBITDA that was higher in each of our last 3 quarters. The business performed extremely well at the height of COVID and it continues to perform well as Canada emerges from the pandemic.

Our Janitorial business enjoyed exceptional growth and more than doubled revenue in the quarter due to the acquisition of IH Services and an impressive organic growth rate of 48%. The acquisition of IH is going extremely well. Our operations teams have been working closely together to identify revenue synergies within the respective client base, and we have already begun sharing best practices in both operations and support services. IH was GDI largest acquisition to-date. And right now, it's also looking like it will turn out to be one of our best.

Our Technical Service segment has a respectable quarter with 10% growth in earnings and that were in line with Q1 last year. As you know, Q1 is seasonally the weakest quarter in the business, and as work on certain type of buildings such as HVAC unit is done during the winter season.

This year, the business was also affected by the slowdown that many businesses are experiencing in the global supply chain, which is affecting the time it takes for us to receive equipment to install on certain projects. The good news is that delay does not equate to margin risk as we typically order equipment when we win the job and secure pricing at the time. And because of this, the backlog at our Ainsworth business continued to grow to near historic levels.

Our Manufacturing and Distribution business delivered positive results in the first quarter and is showing early signs of recovery as office buildings progressively reoccupy and demand for daily consumables grow.

The Fuller Industries acquisition that we closed in September last year is progressing well. We took the step that we needed to take to rationalize manufacturing operations and the cost structure, and we have retooled the sales teams to focus on targeted growth. I think it is fair to say that our manufacturing and distribution business has turned the corner, and I expect a successive improvement in results moving forward in 2022.

I am also pleased to announce that the new GDI Integrated Facility Service business unit that we launched at the end of last year, began executing on this first contract in 2022. GDI IFS offers clients a single source supplier for all their facility operation service needs, a single point of contact, comprehensive billing and direct accountability for its operation and maintenance of the facilities. It has yet another service offering and tool in the drawer to help GDI to differentiate itself in the market and satisfy all our client needs.

I'm very encouraged about the outlook of the business for the remainder of 2022 and the end of the year that will follow. We are excited because the -- pandemics and all of the GDI business unit performing well.

Even after completed 7 acquisitions in the past 18 months, we continue to have a healthy balance sheet that we are cash strong and our debt level at right level is -- makes us very comfortable and it can support our additional growth that we're seeking.

We have a strong operating platform and are one of the leading companies in our industry in North America, and I have never seen GDI in a stronger competitive position. I am very much looking forward to see how the year will evolve.

That concludes my remarks, and I will now ask the operator to open the line to analysts for questions.

[Operator]

[Operator Instructions] Your first question comes from John Zamparo with CIBC.

[John Zamparo, analyst]

I wanted to start on the labor side. And I was wondering if you could share what level of labor cost inflation you're seeing year-over-year compared to the prior quarters. And just generally, how are you finding your ability to pass on with these cost increases?

[Claude Bigras, executive]

Yes. Thank you very much. Okay. At this time, we are dealing with our labor situation normally but quite effectively. We have to understand that half of our business is covered with union agreements that are not issued that will be issued over time. So many markets are relatively stable on the price and the cost side.

For where we need to work with our labor costs, we're dealing with it according to market conditions. And like you know, we are -- we have a very strong capacity of pass-through our increases to customers. So for us, it's not exactly a bad news. It's work, but it's not a bad news. And as time will evolve, with our collective marketing agreements, we will address our labor costs according to the market economy requirements and we will work with our customers throughout it. We always have to find solutions to work with our customers in cost increases.

[John Zamparo, analyst]

Okay. That's helpful. And how would you describe the level of behavior or the pricing from your competitors? Is it generally pretty rational across the industry? Or are there competitors that are trying to price more aggressively in this environment?

[Claude Bigras, executive]

We always have to work with a very aggressive competition my friend. This is why we are always aiming to be the best in our line because that's the first condition of supply growth. But this being said, it's hard for me to describe exactly how is -- because each market evolves differently. But yes, we are dealing with tough competition, but we find our way, my friend.

[John Zamparo, analyst]

Okay. Fair enough. On your latest acquisition, MTI, are there any metrics you can share on this? Anything about deal size or recent growth rates or margins?

[Claude Bigras, executive]

Well, it's -- this business is actually -- I can tell you this is, it's a very fine contractor in the GTA area servicing mostly Downtown customers that is exactly in our area of expertise. But I think whatever we could disclose, we put it in our press release. But Stephane, would you like to add up something on that front?

[Stéphane Lavigne, executive]

No, we've not disclosed really that acquisition separately, but it's not -- it's a tuck-in in Ontario for us. So it's not significant.

[Claude Bigras, executive]

Yes, exactly. It's not significant financially, but it's significant in servicing our customers in our core.

[John Zamparo, analyst]

Understood. Okay. Just a couple more. On the technical side, the global supply chain shortages you referenced in the press release, can you add some color on what parts of the Technical Services business that impact in particular? And have you seen any alleviation of those problems?

[Claude Bigras, executive]

Well, again, by operating in 20 different markets at the same time, we don't deal with the same issue everywhere. But I can say globally that our backlog is very strong, is to convert the backlog into revenues. We have project delays, contractors are having issues with other subcontractors on the contract. So it's top projects, equipment reception takes a little longer. We have delays. We have some delays in example, we order AC units, we have some delays.

So all those things together add up to have a conversion that's maybe 10 plus percent less than usual. I don't want to -- you know what, we're working very hard. We preorder our stuff. We work with our GCs and we work with our customers. But I think it's a reality in 2022 that we deal a little bit with this problem. But this being said, like I said, it's not critical, but it's just -- let me put it this way, it's annoying. So this is where we are.

[John Zamparo, analyst]

That's helpful. Okay. Last one for me. On the buyback program, I just want to get a sense of your intent to use this. Is the goal to use the full amount of that? Or is it really just an option that you view at your disposal if M&A opportunities aren't what you like to see this year?

[Claude Bigras, executive]

Our intent is to be opportunistic with our purchase or the purchase program. And we have no -- we do not have any set objective outside that we would repurchase up to 500,000 shares. And as you see, it's a very, very balanced approach in the sense that this program does not impede our objectives of growth, but we want to be opportunistic in the market at the life of the stock positioning. So I think it's an investment. Actually, it becomes -- it becomes within our range of capital allocations. So we want to participate a little bit there, but we continue to work on our main objectives. It does not impede us to continue to work on M&A and corporate development.

[Operator]

Your next question comes from Zachary Evershed with National Bank Financial.

[Zachary Evershed, analyst]

Can you give us a refresher on your relative exposure to your various end markets? And are there different considerations for passing through pricing in each one?

[Claude Bigras, executive]

No, no, no. It's not -- you see, gentlemen, let me put it this way because you know what, I'd like to quantify risk. Supply chain is a risk and you know what, market consideration. Inflation is not -- and my book is not considered a critical issue because as I've been saying, is we work with our customers to work with those increases. And again, it's not -- now we're not into a critical phase because we have collective agreements in all main markets. But this market where we have to work on our cost increases, we work swiftly with our customers. The objective here is to be as harmonized with our customer, with our increases. This is where it's very important. But I don't see it as a critical risk actually.

I'm not saying that this has not happened. I'm not saying that the increases are not happening. I'm just saying that the way we handle this risk, I think, mitigates the negative results.

[Zachary Evershed, analyst]

Absolutely. And then a very interesting new business unit in Complementary Services, who is the ideal customer for this segment? And how can you better service them through GDI IFS than through your traditional offerings?

[Claude Bigras, executive]

Okay. You're talking about the IFS segment, not the product manufacturing segment, just to make sure, because actually...

[Zachary Evershed, analyst]

That's right.

[Claude Bigras, executive]

With these 2 businesses, can have an answer. But on the IFS side, the beauty of IFS is that the customer does not have to work with all the business units to receive a service. We have a team. We have a structure that handles the totality of Mr. Customer needs on the forefront. And in the back office, it also works and organize the work with the existing business unit in each market and each business, like the Technical Services, the Janitorial Services or even Complementary Services. So this is how it works. And we see it with a very, very significant customer we started to work with in 2022. It's very promising. And this business will continue to grow and service customers that want to concentrate their operating and operation in maintenance with one professional service contractor.

[Zachary Evershed, analyst]

And with the current structure, are there any capacity limitations to grow? And how fast do you hope to scale up that customer base?

[Claude Bigras, executive]

You know, impediment to grow, we always say that impediment to grow is in our head. But there is a reality, we need to be able to acquire the labor and the equipment and everything. So I don't see it -- again, I don't see it. I would love to have growth to a point where it becomes a problem, but I don't think we're there yet.

[Zachary Evershed, analyst]

Fair enough. And one last one for me. How do you prioritize capital allocation now that the NCIB is in the mix?

[Claude Bigras, executive]

We keep the same priority as we have been for the last -- for the last how many years, except that we see -- as a capital allocation, we saw the capital allocation that we need to repurchase some of our shares, was good for the business and we just position ourselves. And as you see, what we took a pretty reasonable and balanced approach to this program. We're not -- in no way we want to signal that we want to prioritize share repurchase instead of continuing to grow the business. It's absolutely not the case. But in the light of, like I said, of what's happening over the last month, it becomes an opportunity for GDI as well.

[Operator]

Your next question comes from Frederic Tremblay with Desjardins.

[Frederic Tremblay, analyst]

My first question for me is on the U.S. Technical Services with the acquisitions that we saw last year. Just wondering if you could provide an update on how this business unit is performing? And maybe if you can contrast it with any sort of differences between your U.S. platform and Canadian platform, that'd be helpful.

[Claude Bigras, executive]

Well, first of all, we don't see many differences between the U.S. and Canada platforms. Both are working hard. They have a little -- I would say they have little differences in the service offerings. We do a little bit more design build than in Canada. We do not have significant electrical activities in Canada. It's a significant unit. So in the service offering mix, it's a little different. But as you know, we're growing our U.S. business.

One thing I can tell you is that we're very, very satisfied of our partnerships with developers since the last 2 years and our technical service in the U.S. I think that we're building a strong, well-positioned, well-respected technical service business, and we will continue to grow this platform because we have a solid team, solid base there. And we have a very, very healthy backlog. And so far, it has delivered at least as expected, within our acquisition.

So the perspective looks very good. But again, you know what, like any other businesses, the post-pandemic, we need to be prudent, and we need to make sure that we can get our materials and the projects are -- the projects are been executed swiftly. So that's the challenge in both sides, but we're working on it very hard.

[Frederic Tremblay, analyst]

Perfect. And just on the IFS business. I'm just wondering if it's -- is there a way to consolidate your existing services? Or is there also an opportunity moving forward to add additional services to that and maybe like a security or operating services, or are you really just concentrating on the services that we currently offer?

[Claude Bigras, executive]

Well, you know what Frederic, that's a very interesting question. I don't know exactly. But just to example, like you may not know, but with our acquisition of IH Services, we end up with, what I would say, a small but effective security services business. We're still looking into how we want to operate and develop this segment. But my point is IFS objective is to be able to have a coordinated approach and seamless approach with our -- with customers that need to have -- that needs to encompass all their operational needs -- facility operation needs within one single contract. So it has -- we have an FM teams and a structure to service those customers.

Gentlemen, it doesn't look like it, but when you combine 4, 5, 6, 7, 8 or 10 services for one customer, it cannot be treated within business units. You know what, it's not efficient, and it won't deliver the customer transparency or the customer interface that they desire. So this is why we created the single division that has specifically the structure and the depth and the expertise to execute on that front. And as we see now, the market is demanding more and more of those services in a centralized manner. So this is why we are focusing on it. But again, we're not delivering real estate services or leasing and all this. We are in operation and maintenance business. We stay focused on our expertise.

[Operator]

Thank you. There are no further questions at this time. Mr. Bigras, you may proceed.

[Claude Bigras, executive]

Okay. Well, thank you very much again for taking the time for this early morning call. Like I said, you know what, 2022 looks very exciting on all fronts. So it's going to be an engaging year. But again, I'm very happy to have such a dedicated and professional team alongside. I'm sure that in 2022, it will become -- it will stay -- be a very exciting year and positive year. Thank you very much again. Bye-bye. Good day.

[Operator]

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