GDI Integrated Facility Services Inc

TSX:GDI

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the GDI Integrated Facility Services Inc. Second Quarter 2022 Results Conference Call. [Operator Instructions] Also note that the call is being recorded on Monday, August 8, 2022.

And I would like to turn the conference over to Stéphane Lavigne.

[Stéphane Lavigne, executive]

Thank you, operator. [Foreign Language] Good morning all, and welcome to GDI's conference call to discuss our results for the second quarter of fiscal 2022. 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 provision that is fully described at the beginning in the MD&A filed on SEDAR at the end of last week.

I will begin the call with an overview of GDI's financial results for the second quarter, and we'll then invite Claude to provide his comments on the business.

In the second quarter, GDI recorded revenue of $526 million, an increase of $154 million or 41% over Q2 of last year, including organic growth of 11% and growth from acquisition of 29%. We recorded an adjusted EBITDA of $37 million in the quarter, an increase of $4 million or 12% over Q2 of last year.

On a year-to-date basis, revenue increased by $265 million or 35%, to reach over $1 billion compared to $756 million last year. Organic growth was 7% year-over-year, and revenue growth from acquisitions was 27%. Adjusted EBITDA in the first half amounted to $73 million, an increase of $6 million or 9% over the corresponding period of 2021.

Moving now to our business segments. Our Janitorial Canada business segment recorded revenue of $145 million in Q2, an increase of $19 million or 15% compared to the second quarter of 2021, which was mainly generated organically. The segment reported an adjusted EBITDA of $19 million compared to $18 million in the second quarter of 2021, an increase of $1 million.

Our Janitorial USA business segment recorded revenue of $164 million in Q2, an increase of $89 million compared to Q2 of 2021 due to the combined effect of the IH acquisition and organic growth of 12%. Adjusted EBITDA increased by 86% to $13 million compared to $7 million in the second quarter of 2021, primarily due to the IH acquisition.

Our Technical Service business segment recorded revenue of $199 million, organic growth of -- or growth of 24% over Q2 of 2021, with 15% generated from acquisition and 8% from organic revenue growth. This segment recorded an adjusted EBITDA of $8 million, which was lower when compared to Q2 of 2021, which was unusually high due to the positive COVID-19 impact. Historically, the first half of the year in the Technical Service segment is seasonally a little slower and the business ramps up as the year progresses.

Finally, our Complementary Service segment reported revenue of $25 million and adjusted EBITDA of $1 million. This segment, which was negatively affected by low demand for daily consumables, such as tissues, towels and soaps, generated organic growth of 27% in Q2 of fiscal 2021, the majority of which was due to the GDI IFS business unit, which was launched at the beginning of 2022.

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

[Claude Bigras, executive]

Well, thank you very much, Stéphane. [Foreign Language] Good day. So I'd like to thank everyone on the line for participating in our earnings call for our second quarter of 2022 on a Monday morning.

I'm pleased to report that GDI delivered another quarter of solid results, with strong growth in both revenues and EBITDA. Overall, organic growth came in at 11% versus the corresponding quarter last year, that was at the height of the pandemic as we have -- we had a higher occupancy rate in the Canadian office portfolio in the current quarter, and we generated also a healthy level of organic growth in our Janitorial U.S. business, Ainsworth and our IFS businesses.

Our Janitorial Canada business continued to perform well in the quarter, with occupancy rates beginning to rise in the office sector as employers roll out a variety of hybrid return-to-work policies. We have been working closely with our clients to modify our service offering, to adapt to the gradual increase in occupancy rate. At the same time, we have been able to maintain a consistent level of cleanliness in the workplace health in the different hybrid work environments we have been seeing.

We expect to see a continuing increase in office occupancy rate in Canada as the year progresses. However, we do not expect occupancy rates to return to where they were prior to the pandemic as hybrid work policies should have the effect of reducing population density in an office building.

We do not expect the lower office occupancy rate to have a negative impact on our business due to the higher service tenders requirements. Outside of the commercial office sector, in markets such as manufacturing and distribution, education, health care and retail, which represent the significant majority of our global Janitorial business, occupancy rate did not fall to a sustained period during the pandemic and as such, facilities in these markets are operating at levels comparable to pre-pandemic norms.

Our Janitorial USA business had a very strong quarter, more than doubling its size with the acquisition of IH Services and posting 12% of organic growth. Our partnership with IH is proving very positive. Both our teams are working well together, and we're actively collaborating on identifying revenue synergies with both new and existing clients. We received positive feedback from a number of IH clients on our new capabilities and enhanced geographic coverage that IH can now offer as part of the GDI family.

Ainsworth, our Technical Service segment, also had a good quarter with 8% organic growth in 2000 -- in our quarter. The business was still negatively affected by supply chain challenges, which caused delays in closing out some projects. However, we have been seeing improvements in the supply chain at the end of the second quarter and entering into the third quarter, and we expect project execution to improve as the year progresses. The business continued to have a record backlog, and the outlook remained quite positive for the remainder of the year.

Finally, our Complementary segment delivered strong organic growth of 24% in the quarter. This was driven by the ramp-up of our first contract in our new IFS business unit which was won at the beginning of 2022. I am pleased to announce that the IFS business won a second contract during Q2, which -- with a new client in the aerospace sector.

I remain very positive on GDI's business for the remainder of the year. All our business segments are focused on delivering strong results as OpEx occupancy rates gradually rise in Canada, as we capture growth opportunities in all our markets and from leveraging our partnership with IH Services.

As work is typically seasonally strongest in the back half of the year, as Stéphane was mentioning, and it is entering its prime period with a commending backlog, our new IFS business has momentum and is growing its sales pipeline, and our manufacturing and distribution business is beginning to rebound as occupancy rates rise and it's having success with its new Fuller Industries manufacturing operation in Kansas.

Finally, our balance sheet continues to be strong with a bank covenant leverage ratio of below 2.5x, providing us with sufficient flexibility to execute on our strategic growth objectives.

Thank you once again for participating in our earnings call. Operator, please feel free to open the lines to questions.

[Operator]

[Operator Instructions] And your first question will be from Michael Doumet at Scotiabank.

[Michael Doumet, analyst]

Can you speak to the extent of the change in the revenue mix within Janitorial Canada, I mean, as far as regular cleaning versus specialty cleaning and how that compares to the mix in the U.S. and if you're seeing any sort of gradual rebalancing?

[Claude Bigras, executive]

Great. Well, if we look at the difference, the fundamental difference between Janitorial U.S. and Canada, is in Janitorial Canada, the occupancy is lower than in the U.S. and it generates a lot more significant amount of on-demand services, which we have -- which is not as high as in the U.S. So in Canada, you have a lower base revenue, a higher on-demand service level. And in the U.S., it's the other way, you have a higher base revenue and a tighter demand for supplementary services.

Now what we're saying is, for sure, now the curve is changing. The curve is going back to a higher base as we go and a lower demand on normalized service. But mind you, that the lower base growing is also inclusive of what we can call -- what we call that high-touch services that we know that somehow affects the lower occupancy. So as we see, is base services will continue to grow, and overall, our overall margins should be improved over the traditional margins for the business mix and the occupancy and the demand.

[Michael Doumet, analyst]

That's really helpful. On the labor inflation, can you give us any sense for how that's trending, whether it's ramping or flattening out? And I wonder if your CBA, it means that labor inflation might be a little bit of a lag here in terms of when we see it. And just lastly, if I can tack that on, inflation pass-throughs, how much of an impact has that been so far to your organic growth?

[Claude Bigras, executive]

Okay. Well, I will answer your question in 3 parts. So let's talk about labor. You know what, I think we're not giving you a news. Labor has -- labor, depending on the market though, the labor challenge, I think a lot of businesses are facing it. I think the best approach that we have towards it is threefold, is we are really focusing on recruitment strategies to attract people in our business segment.

So you know what, it's enhanced, we're putting a lot of energy, efforts into that front. Secondly is we're monitoring wages closely as we need to be, I would say, somehow market-driven on what's happening in each of our markets. And thirdly, the strategy is we're adjusting our clients' contracts according to our inflationary costs that we are facing through labor and other materials. So it's threefold, and we're very focused on it. We monitor it very closely. So that's the new reality.

Now on the recruiting side, like I said, we have strategies. We work with sponsored immigration wherever we can. It's not all the markets that are affected in the same way, but it's a global strategy that we put forward. So that is regarding the labor. And your second part was regarding inflation, if I recall. So I think I kind of answered it, that, yes, the CBAs that we have, example in Quebec, where we had a CBA and the Government Parity Committee, these numbers were set for many years to come.

I cannot foresee exactly what's going to come or what's going to be ahead for ourselves if there would be some negotiating that could happen in the future. But yes, where the CBAs are signed and then with longer terms, we are continuing to work with those rates. And wherever we see that it comes due, for sure, there is wage increases to pace with the inflation. But again, the strategy here is to really align customer revenues with our inflationary cost structure.

[Operator]

Next question will be from John Zamparo at CIBC.

[John Zamparo, analyst]

I want to start with the IFS business and I just would like to better understand your goals and time lines here. Is this business completely incremental to the existing operations? And can you talk about the margin profile of this work?

[Claude Bigras, executive]

The IFS business is actually -- okay, let me just try to find the right approach, that is customers, what we are seeing, is customers have the tendency or have the will to regroup our operating -- or real estate operating services into one single contract. So our IFS group is there to manage and to operate an environment where there are several suppliers' contracts.

But the revenue of those contracts, the margins, more or less, the margin is within our business segments. The Technical Service segment operates the contract with the margins and the Janitorial Service business would do the same. So what you have in IFS is you have the revenue, but the bulk of the, I would say, the profitability is within the business segments. So the IFS objective is to actually cover its cost for managing the infrastructure of the management layer on top and managing other trades that are delivered with services.

So for saying, we have to keep in mind that this segment will generate revenues. It will generate some EBITDA, but not at the level of the business units because they capture these revenues and they capture this margin. Do you -- am I clear enough? You understand that, you know what, that they're passing through a lot of revenues to the divisions.

[John Zamparo, analyst]

Understood. Yes. I wanted to switch to Technical Services. Can you add some color on what you're seeing here? I wonder how you think about operating conditions versus, I don't know, pre-pandemic and to what extent they are getting closer to returning to whatever the new normal is. And I wonder if conditions improved during the quarter or if they have improved subsequent to it.

[Claude Bigras, executive]

Okay. Well, listen, you know what, the start of the year, if you allow me, there was a kind of a double-whammer in the sense that, usually our lower quarters, because, you know why, the structure of it is maintenance contract and AC units are not operating. So it's always a lower-margin quarter.

But the first quarter, and early in the second quarter, we had significant delays, equipment, general contractors being delayed because they have equipment issues or delivery issues. So it was a little bit challenging. But now the good news is what we assume towards the second quarter and re-entering in the third quarter is this situation, it seems to be getting back to its normal.

So our latest analytics show that we're getting back to a more -- to a normal level of activity. So for us, it's very encouraging for the second -- the remaining part of the year, understanding also that we have a very, very, very significant -- actually a record backlog.

So provided we get machinery, equipment and the resources to execute, I think we will see -- I don't want to be doing some forward-looking. I don't know exactly where to stand on that front, but we're very positive for the rest of the year.

[John Zamparo, analyst]

Okay. That's good color. I wanted to follow up on Michael's question on Janitorial, and particularly in Canada. And really, I think, what a lot of us are trying to get a sense of is the sustainability of recent performance. And I know there's a lot of unknowns, and you don't have a crystal ball, but when you have conversations with your biggest office clients, what can you share about their plans for upcoming quarters? And do you get the sense that like they are generally satisfied with the amount of service they are purchasing now?

[Claude Bigras, executive]

I'd be very blunt with you. You said that we have no crystal ball, and unfortunately, many of our clients -- I would say that many of our clients, they don't even know how they will manage and -- midterm to long term. We were expecting a return to normal by the second quarter last year. We were expecting it early this year. At this time, the only thing I can predict is I think it will be a slow return to normal over the next 4, 5, 6 quarters, and there would be market adjustment.

But again, I don't expect the occupancy level to come -- you see -- before the pandemic, it was -- there was a race to how much people you can stack in 1,000 feet. You know what, we're no longer there. Now people understand that there is a price to pay. So I think that occupancy level overall will fall a little bit in the more sustainable level of occupancy in buildings.

Now the impact of hybrid work over time, you know what, it's also something we have to deal with. I think the main thing we have to understand is we are absolutely certain that going forward, we're going to have to show a lot of flexibility and a lot of customization with our customers. So we are geared for that. We are prepared for that. We have different strategies and different service-level offerings that we have prepared. But at the end of the day, by delivering enhanced services and heavily customized services would be more rewarding on the bottom line. This is an absolute fact.

So now to what level, what we think is going to be a slow pace over the next 3, 4 quarters, for sure, you understand that we are very present to, I would say, to make our clients aware that the removal of enhanced services can have a negative impact on their occupancy and their operations. So customers are sensible to that. Yes, I would love to give you numbers, but your guess is as good as mine to some extent.

[Operator]

And your next question will be from Zachary Evershed at National Bank.

[Zachary Evershed, analyst]

Given the lower density of people in office, are any of your customers pushing for a lower cost per square foot when they're renewing their contracts?

[Claude Bigras, executive]

Well, listen, yes, we have to understand one thing, is the lower occupancy does not remove the fact that we still have to clean. It's not like I can -- if they have a lower occupancy, we still have to do all the public space we need to cover, and we need to run through the floors and we need to service washrooms and everything. Lower occupancy, in my book, is offset by a little bit the enhanced services, or partially by enhanced services we need to deliver with the higher frequency of cleaning.

So you know what, unless Mr. Customer has significant unoccupancy, you know what, you free up some space or whatever, we don't expect the price per square foot -- wherever the offices are occupied, we don't expect the price per square foot to drop. And especially with this inflationary period, that's another fact that customers and we all have to live with.

[Zachary Evershed, analyst]

Makes sense. And then following up on the Technical Services and the supply chain disruptions directionally improving, do you think we'll get a bit of a doubled cohort effect as equipment shipments start to fall better and things start to come in at the same time?

[Claude Bigras, executive]

Okay. You know what, I'm not sure I fully -- you said -- and I missed the word when you said, do you think that the equipment coming in with what type of effect?

[Zachary Evershed, analyst]

A double cohort, where you're getting shipments all at once as supply chains improve.

[Claude Bigras, executive]

Okay. Forgive my bad English. Cohort, I don't know what it is.

[Zachary Evershed, analyst]

No problem. Where you start to receive shipments that you ordered 3 months ago and 2 months ago at the same time. So you're able to undertake a backlog of 2 months in a single month.

[Claude Bigras, executive]

I see, I see, the pressure in that. Well, so far, so good. Yes, I would say, equipment -- but the way, first of all that projects are calculated, the equipment is on-site for us. It's a realized revenue. So on that front, it's okay. We're covered on that front.

On the install and -- no, there's no significant issues that has arisen so far, and I don't foresee one. Yes, you know what, we have the resources to execute and projects. Whatever delays we had, upstreams in the projects, they're done, it's gone. So now we're processing more as normal right now. You know what I'm saying? It's not like we had 1.5 months delay upstream, and now we have 1.5 months less to deliver. All the projects are adjusted consequently.

[Zachary Evershed, analyst]

Understood. And then just one last one on Technical Services. How should we think about the magnitude of drag-on margins in the back half of the year and maybe split up into Q3 and Q4?

[Claude Bigras, executive]

You know what, I don't have that figure. I would have to figure it out. First, for now, what I can tell you is we expect a strong next 2 quarters as far as margins, that I can tell you this.

[Operator]

[Operator Instructions] And your next question will be from Frederic Tremblay at Desjardins.

[Frederic Tremblay, analyst]

A follow-up on IFS. Just trying to better understand the targeted client base for IFS at this stage. Is it totally new customers to GDI that are interested in this offering? Or do you also have clients that maybe currently use one of your services and maybe are looking to add more to the services line.

[Claude Bigras, executive]

Okay. Well, listen, it's a mix of both. Unfortunately, what we have so far, we have been able to partner with our 2 new clients. But yes, it will be a mix. What we want to achieve is this. We want to make sure that our existing client base that is looking forward, concentrating their services, that we're there for them, and we are able to undertake.

I don't want the competitor to take the client away from us because we lacked a market presence. And secondly, yes, is we will certainly continue to develop in our new market segment. But mind you, an existing customer that works in one service with us and we are able to develop an IFS contract revenue, sometimes with triple and quadruple for that same client, so it's a gain anyway. With a new client, it's a gain, it's not a wash.

[Frederic Tremblay, analyst]

Perfect. That's helpful. Just to clarify also on the new contract with the aerospace client, did that start in Q2? Or is it something that's going to start later in the year?

[Claude Bigras, executive]

Well, it will start towards the end of Q2, and let's say, it would be a Q4 -- probably more of a Q4 revenue stream.

[Frederic Tremblay, analyst]

Okay. Perfect. Last question for me, on acquisitions. With IH Services being your largest acquisition ever and exceeding your expectations so far, does that kind of motivate you guys to look at other large transactions? And maybe just a general comment on your M&A pipeline at this point.

[Claude Bigras, executive]

Well, listen, we are still very active. We are very focused now on integrating the businesses. And between now and the end of the year, that we'll do significant actions in the marketplace in our integration and consolidation action plan. So this is one thing I think I wanted to convey to you. For sure, we are always on the lookout to find the right partnership and the right business and the right market at the right price. So we're very, very picky. But at the end of the day, there will be opportunities.

Now I cannot -- you know how it is. I cannot divulge more, but I would just say that we're active. We're very active and we're focused on -- I think one of the success of GDI has been that we have been somehow prudent and intelligent in the way we do our acquisitive strategy. And I want us to focus on those criteria going forward.

Market went a little bit berserk last year, and we were able to manage something significant, but at a reasonable -- and within the reasonability of the business. And I want to continue to do that in 2022 and 2023. So there will be opportunities, but we won't drop on anything that moved.

[Operator]

And at this time, gentlemen, we have no further questions. Please proceed with your closing remarks.

[Claude Bigras, executive]

Well, thank you very much again. it was -- I would just share with you that it has been very, very interesting times that we're living in, especially in our business segments. We have a mix dealing with a lot of things that -- we are now anything but a clockwork business. There was -- there are many, many, many aspects of the business we deal with.

I can just outline the efficiency of the teams that we are very fortunate to have. We respond well. They react quickly. We adjust quickly. We are focusing on the right thing. And this, I commend the team, and I want to take this moment to thank every one of them because at the end of the day, that was -- this is the team that delivers the result. Thank you very much again for taking -- for the call.

[Operator]

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