GDI Integrated Facility Services Inc

TSX:GDI

Earnings Call Transcript 2019-Q2

[Operator]

Greetings, and welcome to the GDI Integrated Facility Services Second Quarter Ended June 30, 2019, Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Friday, August 9, 2019.I would now like to turn the conference over to Mr. Stéphane Lavigne. Please go ahead.

[Stéphane Lavigne, Senior VP & CFO]

Thank you, Bernard. Good morning, everyone, and welcome to GDI's conference call to discuss our results for the second quarter of 2019. My name is Stéphane Lavigne, I'm Senior Vice President and Chief Financial Officer at 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 of the MD&A filed on SEDAR last night.I will -- so in the second quarter, GDI recorded revenue of $312 million, an increase of $46 million or 17.2% over Q2 of last year. We also recorded strong performance in adjusted EBITDA, generating $18.6 million in the quarter, an increase of $5.1 million over Q2 of last year, which included a favorable impact of $1.9 million due to the implementation of IFRS 16. Prior to IFRS 16, GDI recorded adjusted EBITDA of $16.7 million, an increase of 24.2% over Q2 of 2018, representing a margin of 5.2% versus 5.1% in the prior year.For the 6-month period ended June 30, 2019, we reported revenue of $618.1 million, an increase of $99.7 million compared to the corresponding period of 2018. We also recorded strong performance in adjusted EBITDA, generating $36.5 million or $32.7 million, when excluding the effects of IFRS 16, an increase of 30.2% compared to the first 6 months of 2018. For the remainder of the call, in order to present an apples-to-apples comparison of our results, all adjusted EBITDA figures discussed will be prior to the effects of IFRS 16.Our Canadian Janitorial segment recorded revenue in Q2 of $132.6 million, in line with prior year. The segment reported an adjusted EBITDA of $7.6 million compared to $8.3 million in the second quarter of 2018 with the softer performance of our Modern franchise business that Claude will discuss.Our Janitorial USA business segment had a very strong quarter, recording revenue of $80.1 million, an increase of $26.8 million or 53 -- 50.3% with an organic growth of 27.8%. Adjusted EBITDA was $6.6 million or 8.2% of revenue compared to $3.7 million or 7% of revenue in Q2 of 2018. The strong growth in the Janitorial USA segment is mainly explained by a large new contract won in Q2 last year and acquisition completed in January of 2019.Our Technical Services segment also had a strong second quarter, recording revenue of $87.3 million, an increase of $17.8 million or 25.6% over Q2 of 2018. Adjusted EBITDA was $4.1 million in the quarter, an increase of 27.7% over Q2 of 2018. Our Complementary Services segment recorded revenue of $19.5 million in Q2, up by $1.4 million or 7.9% compared to Q2 of 2018. Adjusted EBITDA was $1.4 million, representing a 21.3% increase over the second quarter of 2018, generating an adjusted EBITDA margin of 7% compared to 6.3% last year.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]

Thank you, Stéphane. Good morning, and thank you for taking the time to participate to our earnings call. I am very pleased to report that each GDI business segment performed well in the second quarter of 2019.First, our Canadian Janitorial segment revenues are in line with last year. However, there was a slight decrease in our adjusted EBITDA. The decrease is partly related to our Modern franchise business as we are investing to develop our territory franchise model. And also we have some nonrecurring expenses in the quarter. And our operating margins have decreased slightly due to revenue mix change and some higher operating costs. This being said, our traditional Canadian business performed well in the quarter, and I am pleased with the overall segment's performance.Our Janitorial USA business segment had again a very strong quarter, as Stéphane mentioned. Our U.S. business continued to benefit from a large contract won last year in the third quarter and the acquisition that we have completed in the U.S. in January 2019 is continuing to perform very well in terms of both profitability and organic growth.Our Technical Services segment also had a strong quarter. Most of Central and Eastern Canada had a very long spring and a late start to summer, which delayed a lot of our HVAC startups. And services were typically performed by our Ainsworth business in Q2. I am very pleased that Ainsworth was able to deliver strong growth in the quarter while maintaining EBITDA margin despite this delay, which speaks to the growing strength of the business both in terms of revenue and profitability.Our Complementary Services segment, which is composed of our product manufacturing and distribution business, performed well in the second quarter. The business is generating steady results and continue to successfully grow with clients both within and outside the GDI family.Strategically, we are continuing to focus on becoming a fully integrated service provider in all our markets. And we are investing in the development of our Modern territory franchise model. We are also strengthening and redeploying our sales force in Canada to enhance our ability to provide all our services across the country. Finally, understanding the dynamic of the traditional janitorial market in Canada, we are considering to focus on implementing technology across our business to drive productivity and develop and implement more efficient business models.In summary, I feel that GDI generated strong results in the second quarter. We delivered another quarter with over 20% of growth in adjusted EBITDA. Our organic growth is strong. Our profitability continues to improve. We are executing on our plan to grow GDI through strategic acquisition, and our pipeline is strong. While we invested $22.1 million in acquisition in the first half of 2019, our debt has remained quite stable when excluding the impact of IFRS 16. Our total debt-to-adjusted EBITDA is well below 2.5x. And we are well positioned to continue to execute on our business plan and capitalize on strategic growth opportunities as they arise.That concludes my remarks. And I will now ask the operator to open up the lines to analysts for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Frederic Tremblay with Desjardins Capital Markets.

[Frederic Tremblay, Analyst]

And congratulations on a solid quarter.

[Claude Bigras, President, CEO & Non]

Thank you very much, sir.

[Frederic Tremblay, Analyst]

First question would be on the U.S. business. The organic growth was obviously very strong again. Now that's been a year since you've won the contract, the large contract, just wondering if you had any color on what to expect in terms of organic growth going forward now that you're basically lapping that large contract.

[Claude Bigras, President, CEO & Non]

Well, we expect that kind of the business will continue to sustain, I would say, profitable organic growth or steady organic growth as we have a very strong sales team and each markets are growing as far as new sales. So that's a good news. As far as the large contract, it's still maturing. I think we're going to have -- we're going to see revenue growth in this contract for maybe the next 2, 3 -- at least 2 to 3 quarters as the client is adding up on the business. So we are -- it is looking fairly good for the next 3 to 5 quarters as far as I'm concerned on organic growth.

[Frederic Tremblay, Analyst]

Okay. That's helpful. And on the Modern business, can you maybe share some additional details on the investments that you're making there in terms of the territory franchise model and if we should expect those investments to continue in Q3, Q4 and beyond?

[Claude Bigras, President, CEO & Non]

Yes. Well, on the Modern side is what we have, I would call it, a perfect expense mix in the sense that we have some significant onetime items due to some legal fees that we had to carry. Also we invested a good chunk of our EBITDA, the decrease was based on our investment, like you said, in this territory franchise model. That will continue to happen over the next 2 to 3 quarters. As we are implementing, probably we will be, how can I say this -- it's a substantial investment that Modern is doing into its future. So yes, we will still spend money. Probably the rhythm will remain more or less in the same areas and the same size, I would say, for the next 2 to 3 quarters. We should start seeing revenue top lines probably, I would say, in the first, second quarter of 2020.

[Frederic Tremblay, Analyst]

Okay. And just in terms of the investments there, what are we talking about specifically? Is it staff? Is it, I don't know, technology? What sort of investments are in there?

[Claude Bigras, President, CEO & Non]

Well, listen, we're talking about staff, we're talking about inventory, talking about consulting, talking about marketing material, legal because it's a whole new perspective on our franchise model, so we are designing it from scratch on some extent. So it includes every investment we need to do to carry on the business in this particular business segment.

[Operator]

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

[Neil Linsdell]

Congratulations as well. Just talking about the acquisitions as you're going to continue on the M&A front, are you seeing any kind of pressures or changes in the valuations, different players coming in, try to challenge you or compete with you at different levels or in different geographies?

[Claude Bigras, President, CEO & Non]

Actually, in the U.S. for a while, we had some players that were, I would call them, market disturbers. I think they got a lot quieter lately. So we're always taking opportunities at the right place in the U.S. And traditionally in the U.S., there's always -- the valuation is always a little challenged. In Canada, on the technical side, we have -- we don't see any particular new players coming in the market. It's the same -- we are working more or less in the same environment that we've been mitigating for the last 5 years, saying that except that in the U.S. for a couple of years, we had some strange market conditions. But I think we are back to normal competitors in the market.

[Neil Linsdell]

Okay. So you're not seeing any kind of change in attitude towards you because if they know you can pay up because you're becoming a larger company with a higher profile.

[Claude Bigras, President, CEO & Non]

Well, listen, they can think what they want. At the end of the day, it's what we prefer to pay the accountant.

[Neil Linsdell]

Okay. Understood. Can you outline -- I mean you have impressive growth already. But what are some of the restrictions that you're seeing in each one of the markets that you're trying to grow? Is it number of salespeople? Or is it just hours in a day? Is it resources? What's keeping you from growing even faster?

[Claude Bigras, President, CEO & Non]

Well, growing faster, how fast do you want us to go? You know what, I feel like home, never enough. But okay, so let's start one piece at a time. Okay. So in Canada, as you know, we have a substantial market share in large markets. So our restrainers are the market grow by itself. Secondly is we need to develop the best possible tool and technology to still be competitive in our traditional market but yet still generate margins. The growth -- organic growth is only valuable when you can grow it at a profitable perspective. Otherwise, it means nothing. So yes, in Canada, yes, we need to have the right client, the right client mix and have the right margin. So don't be surprised that if we feel like a business is not profitable, we will either exit it or we will turn around from it. But I am not ready to engage into developing organic growth without the sustainable profit. But this being said, we're looking to develop into secondary markets with our franchise model. I think this would be a sustainable growth going forward in this market. In the U.S., I'd be very -- I'm very excited about the U.S. And yes, we are investing in our sales force globally, also a lot in Canada because I think that we were very fortunate in Canada to be good, I would say, farmers because of our reputation, our scale, our geography -- geographical presence. And our reputation of quality has helped us tremendously over the years to grow the business. But now I think we need to go the extra step, where now we aggressively are pursuing midsized customers in all regions. And I think with a good revenue mix and a good customer mix, we'll be able to have an acceptable growth but with a margin that is sustainable over time. Did I answer properly to you?

[Neil Linsdell]

Yes. And to [ call in ], it's really going after some of the larger accounts in the U.S. now that you've developed a presence. And to get there, you need to enhance your sales force. Is that kind of the key?

[Claude Bigras, President, CEO & Non]

Yes, sir. The key is to have a good mix. You know what, larger accounts are very nice for a top organic growth. But they are also sometimes challenging on the bottom line. So if you only focus on large clients with very, very large revenues and low, low margins, you will have a problem with the business. So what I'm saying is we have to grow both ways. We have to grow with large clients, but we also have to have a strong team that develop regional, smaller and midsized clients in order to balance it out properly.

[Neil Linsdell]

Okay. Fair enough. And then just lastly, you've talked about your investments in technology. But can you just give us maybe some examples of what specifically you invested in and what improvements it's giving you? Is it with scheduling? Is it with logistics?

[Claude Bigras, President, CEO & Non]

That is interesting. That's a good question actually because we are investing a great deal into that. It goes through a couple of specific items. Let's talk about the one that people sees. We are investing in floor maintenance technologies, robotic scrubbers, robotic vacuums. I think you're starting to see them in some buildings, where the machine works by itself. It's not totally true, but this is a technological breakthrough we have for the last couple of years that may provide some customer savings and some sustainable margins for us. But now where we are investing a lot it is with portable technologies. We do believe that efficiencies will come through working directly with people in the field through modern tools like phone systems. All our training -- we're converting all our training material into video that can be accessible through mobile phones. We are converting all our process into mobile technology. So this -- you know what, it costs money, but I think it will pay out as we will grow our efficiency and diminish our global overhead.

[Neil Linsdell]

Go ahead.

[Claude Bigras, President, CEO & Non]

No, no, no. I'm sorry. What I was saying is we do a lot of those actions that doesn't show so much stand-alone. But at the end of the day, it will bring another dimension to the way we manage our business. We move from paperwork-based to totally digital and web-based and communication systems. So it's going to be something to see in the next couple of years.

[Operator]

Our next question comes from Scott Fromson with CIBC.

[Scott Douglas Fromson]

A question on the U.S. Given the competitive nature of the market and your investment in sales and systems there, are the margins sustainable?

[Claude Bigras, President, CEO & Non]

Yes. We have no indication that -- but again, since we are really chasing down -- we have -- like I said earlier on, yes, we capture very significant clients, but we're also very active in the mid-markets, midsized clients and everything. So I think the revenue mix is still very sustainable. We don't foresee any major downfalls ahead of us for now.

[Scott Douglas Fromson]

So -- and on acquisitions, are these companies that have what you would call suboptimal cost structure compared to what you can do as a larger platform?

[Claude Bigras, President, CEO & Non]

Well, for sure. You know what, an example, if I take the example of our last -- our last investment in the Boston market, you have the perfect storm of how GDI can play in those markets. So we have acquired talent and market presence very quickly. The team was able to address some larger clients' approach because of our capabilities. So we were able to capture significant clients. On the cost structure, day 1, they were able to move in on our platform, so thus having better information systems. They were able to save substantially on equipment and products. So this is, for us, a perfect storm on the good way.

[Scott Douglas Fromson]

That's the kind of storm we like.

[Claude Bigras, President, CEO & Non]

Absolutely.

[Operator]

There are no further questions at this time.

[Claude Bigras, President, CEO & Non]

Okay. So again, thank you very much for participating in today's call. I would just like, in closing, to say that I'm very satisfied with the team and how our people are engaged in the business. And we continue to work every day to make this business a better business. And we're still aiming on our business plan of reaching the $2 billion mark in a couple of years at a sustainable profit. So thank you again for your presence on the call.

[Operator]

That does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your line. Have a great day, everyone.