GDI Integrated Facility Services Inc

TSX:GDI

Earnings Call Transcript 2020-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the GDI Integrated Facility Services Inc. Third Quarter 2020 Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on November 11, 2020. I would now like to turn the conference over to Stephane Lavigne. Please go ahead.

[Stéphane Lavigne, Senior VP & CFO]

Thank you, operator, Mario. Good morning, and welcome to GDI's conference call to discuss our results for the third quarter of fiscal 2020. My name is Stephane Lavigne. I'm Senior Vice President and Chief Financial Officer of GDI. I'm with Claude Bigras, President and CEO of GDI; and David Hinchey, our 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 position that is fully described at the beginning in the MD&A filed on SEDAR on [indiscernible]. I will begin the call with an overview of GDI's financial results for the quarter, and will then invite Claude to provide his comments on the business. In the third quarter, GDI recorded revenue of $365.4 million, an increase of $42.5 million or 13.1% over Q3 of last year, including negative organic growth of 1.1% 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 $30.2 million in the quarter, an increase of $10 million over Q3 of last year. Adjusted EBITDA was positively impacted by additional products and services delivered to existing and new clients whose facilities remain open or partially open during the pandemic. On a year-to-date basis, revenue increased by $106 million or 11.3%, reaching $1.05 billion compared to $941 million last year. Organic growth was negative 2.3% due to the effects of the COVID-19, which was offset by revenue growth coming primarily from acquisitions. Adjusted EBITDA amounted to $72.8 million, an increase of $16 million, or 28.2% over the corresponding period of 2019. Moving to our business segments now. The Janitorial Business Canada recorded revenue of $136 million in Q3, an increase of $2.9 million or 2.2% compared to the third quarter of 2019. The segment reported adjusted EBITDA of $18.4 million compared to $9.3 million in the third quarter of 2019, representing a margin of 13.6% compared to 7% last year. Our Janitorial USA business recorded revenue of $83.7 million in Q3, an increase of $1.5 million or 1.9% compared to Q3 of 2019. Adjusted EBITDA increased by 20% to $7.2 million or 8.6% of revenue compared to $6 million or 7.3% of revenue in Q3 of 2019. Our Complementary service segment had another very strong quarter, reporting revenue of $21.6 million in Q3, an increase of $3.9 million or 22.4% compared to Q3 of 2019. Adjusted EBITDA was $2.4 million compared to $1 million in the third quarter of 2019, an increase of 125%. Finally, our Technical service segment recorded revenue of $129.1 million, an increase of $31.9 million or 32.9% over Q3 of 2019, with the full amount of revenue growth coming from acquisitions. Revenue declined on an organic basis by 10.1% as the business experienced a reduction in on call services and projects due to COVID-19 pandemic. Adjusted EBITDA was $5.2 million, a decrease of $500,000 compared to last year. 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]

Well, thank you very much, Stephane. Good morning, and thank you for taking the time to participate in our earnings call. I am pleased with GDI's performance in Q3. All of our businesses units experienced a gradual rebound in revenue availables during the third quarter as the various regional economies where we have operations across North America reopened. We really stepped up to our game during the quarter by working closely with our clients to design building re-openings and re-occupying plants to help ensure the health and safety of building occupants. Near the end of the quarter and into Q4, we began to experience a resurgence of the pandemic in most markets across Canada and the U.S. However, we feel that regional governments, businesses, and real estate owners are better prepared to manage through this new phase of the crisis. As GDI has demonstrated since the beginning of the pandemic, we have the ability to implement a number of 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. Our efforts have been highly effective to date as evidenced by GDI's strong performance in Q2 and Q3 of this year. There still remain a high degrees of uncertainty around the duration of the pandemic and the economic environment that may follow. However, we feel confident that GDI will navigate through the remainder of the pandemic. We worked very hard during the pandemic to differentiate GDI in the marketplace and feel that we are well positioned as a key adviser to our clients, and our management team is doing a very good job to answer that GDIs delivers on our client needs and emerge from the pandemic with a strong financial and competitive position. As you may all know, cleaning has taken a totally different meeting with the general public. And through our Clean For Health initiative, we are making sure that we respond to their expectations by providing a standardized methodical and rigorous cleaning and sanitation processes. You can learn more by going to our cleanforhealth.com website. Turning to our business units. Our Canadian Janitorial business performed very well in the third quarter. We saw a number of facilities that were closed during Q2 to reopen during the quarter. And while most of our clients were operating facility at lower than normal capacity levels, many required additional services, and specialty services, such as higher frequency cleaning and disinfecting services. Our U.S. Janitorial business also performed well in the third quarter, delivering a 20% increase in EBITDA despite a modest organic revenue decline compared to the third quarter of 2019. Several clients of the business required additional services, again due to COVID-19. However, it was to a lesser degree that was experienced in the Canadian segment as a result of different end market mix. I'm very proud of the performance of our janitorial businesses during this pandemic. As one of the largest and leading commercial janitorial service provider in North America, our janitorial business segment took a leadership position in the industry in advising clients of the various processes and procedures to implement and the products to use, to keep facilities clean and mitigate the risk of virus spread. Now, our Complementary business service business, which consists now of our product manufacturing and distribution business, had another strong quarter. This business continued to work at excess capacity to meet the high demand from GDI clients and other third party clients, for personal protective equipment, such as gloves, mask, as well as cleaning and disinfecting products and equipment.The business delivered 22% of organic growth in the third quarter and more importantly, we were able to provide our clients with critical products in their time of needs. Our technical business, I'm sorry, has been GDI business that was the most impacted by COVID-19, as certain projects were pushed into the future and service cost volumes fell as buildings were at lower occupancy. Our business began to reoccupy -- as buildings began to reoccupy during the third quarter, we began to experience a progressive recovery in activity level from the pandemic low experience in Q2. Service call activities has been progressively rebounding, and we were approaching normal level by the end of the quarter, and we have been experiencing a pickup in project work as well. The backlog at Ainsworth remains close to record level, and we have seen a good amount of new project booking at the end of Q3 and into Q4 this year. Ainsworth business remains strong, and we fully expect our technical service business to be a solid performer for GDI well into the future. I'm extremely pleased with GDI performance in the third quarter. Our management team has been incredibly proactive since the beginning of the COVID pandemic, again, to ensure that our business is positioned to mitigate any negative impact while preserving our financial end. Due to the exceptional performance GDI delivered during the pandemic, our balance sheet is strong, our leverage ratios are at multiyear low, and we are in a solid financial position. We continue to focus on our growth through acquisition strategy and our financial strength will enable us to capitalize on strategic opportunities as they arise. I would like to finish by thanking each and every one of our dedicated employees who work tirelessly on the front line of the pandemic. Our clients were depending on us to keep them safe, and all of you have risen for the occasion. I'm extremely proud to see how our entire team has been stepping up to the challenge. This concludes my remarks, and we will now ask the operator to open the lines to analysts for questions.

[Operator]

[Operator Instructions] Your first question comes from Maggie MacDougall with Stifel. Please go ahead.

[Margaret Anne MacDougall, Head of Research]

So obviously, you're seeing quite a strong increase in demand for cleaning services despite building occupancies remaining less than optimal at present. I was wondering if you could provide us with some insight into how things trended throughout Q3. Did you see an increase in occupancy or activity in office buildings, retail, et cetera? And how has heightened demand for cleaning and sanitization proceeded through the quarter as we've seen some people start to get back to work and more out and about?

[Claude Bigras, President, CEO & Non]

Well, thank you very much. What we are seeing so far is Q3, as I was saying, we are -- we live with our back to work policies from our clients. But now we are in Q4 and without doing forward-looking statements, I would say that we are probably in the continuum of what we have experienced in Q3. We don't see any major trends so far. Now, this being said, 2021 and you know what, I think there would be a lot of levers that would be into play to define what the general picture will look like, but we are fairly positive that we will continue on the, I would say, the enhanced cleaning and sanitization approach in the marketplaces.

[Margaret Anne MacDougall, Head of Research]

Your Complementary Services division appears to be operating at essentially full capacity. Wondering if there's any opportunity to grow that business over and above the current capacity that you have? And if so, if that's something you're considering over the coming months.

[Operator]

I think the speaker might be muted. This is the operator. We can't hear you. One moment, please. I think Claude will be calling back to join the call. So just one moment please here.

[Stéphane Lavigne, Senior VP & CFO]

Claude is dialing back in now.

[Claude Bigras, President, CEO & Non]

Hello. Now, we see the limitations of working at home policies.

[Margaret Anne MacDougall, Head of Research]

We've all been there. No problem. I just had a question about your Complementary Services division operating at what looks like pretty full capacity. If there's any prospects to expand the capacity? And if so, if you plan on going ahead with that.

[Claude Bigras, President, CEO & Non]

I would say this is yes, we're working at full capacity. We are growing sustainably month-over-month. We are cautious, though that we don't over, I would say, overdo it, both on capital expenditures and risking also to diminish the overall quality of the customer experience in our business. So yes, we're growing, but we are growing with a certain level of quality and prudence in the market. But yes, we're growing every month. We have had our production lines. This business is working 2 shifts. So that's good news. But I do not want -- again, I don't know us to overdo it and miss on the quality of the delivery.

[Margaret Anne MacDougall, Head of Research]

Of course. Final question for me. It's been a difficult environment to accomplish M&A for a lot of companies just because of the challenges with in-person diligence during a pandemic. I'm wondering if you could provide us with an update of your M&A pipeline. Are you seeing opportunity? And have you figured out how to go about executing on it in this environment?

[Claude Bigras, President, CEO & Non]

Actually, yes, we're still active. We're still active in the M&A sector, David and his teams are, you know what, they are extremely competent. And surprisingly, they really managed to adapt to the new environment. So yes, I'm positive on that front. You understand I don't want to say too much, but we're active and we have a [indiscernible].

[Operator]

Our next question comes from Zachary Evershed from National Bank.

[Unknown Analyst]

It's actually Thomas calling in Zach. So most of my questions have been answered. Maybe one for me would be with the resurgence of COVID cases, does that change anything to the projected rollout of the Modern franchise?

[Claude Bigras, President, CEO & Non]

Well, for sure. Again, on this particular aspect, that you know what, we have evolved into the franchise development. We might have some good surprises in the next coming months. But yes, at one point, it became a little bit more challenging to promote, advertise. And as you may know, a franchise business like this, there's a lot of in-person communications and everything. So yes, it does not went as we would have expected because of the pandemic, and also that our Modern business got extremely busy servicing the client in the marketplace as they are heavy into the retail sector. So I think it's a combination of both. But this being said, we might have some good surprises.

[Operator]

[Operator Instructions] Our next question comes from Frederic Tremblay with Desjardins.

[Frederic Tremblay, Analyst]

I wanted to ask on the technical services side. In terms of the demand, are you -- I guess you touched on it a little bit, but are you seeing a larger backlog of projects that were potentially delayed during the recent months that would eventually boost the organic growth in that segment? I was wondering if you had any visibility on the timing of that and as well as the availability of labor to meet this potential surge in demand from delayed projects.

[Claude Bigras, President, CEO & Non]

Yes, during Q2 and early Q3, there were some delayed projects. I can say that probably most clients were also learning how to maneuver into the pandemics, with the restrictions and everything. But I feel like the business kind of got into a working pattern. So at the end of the day, again, without going forward-looking statements, we have seen a very, very strong project awards in the last couple of months. So we're very, very positive project execution. Now, this being said, tomorrow morning, should the situation degrades in a very significant matter, for sure, the technical business we need to have access to properties to deliver the service. But we're very confident at this time. And I think that GDI would be a CDI Technical or if you want, Ainsworth will be a strong player going forward. We don't anticipate any major issues.

[Frederic Tremblay, Analyst]

And switching to Complementary Services. Obviously, a very strong quarter there and good improvement on a year-over-year basis on the margin front. On a sequential basis versus Q2, I understand that maybe the 17% margin in Q2 was exceptionally strong, but you did 11% this quarter. So should we use that as basically the sustainable margin going forward? Was there a change in product mix as the quarter progressed, that would explain the variation in the margin versus Q2? Just maybe your thought on that?

[Claude Bigras, President, CEO & Non]

Well, listen, I think the answer is probably in between. Depending on the cutoffs and depending on the customers, the product mix. I think that as we will grow, I think the margin will be probably in between.

[Frederic Tremblay, Analyst]

Last question for me. Just going back to the M&A pipeline. Given the strong balance sheet that you have, are you considering larger targets? Or maybe just give us an idea of the size of the targets that you're considering in the M&A pipeline?

[Claude Bigras, President, CEO & Non]

Do you want names and sizes? No, I'm joking. No, listen, for sure. You know what, as the business is growing, our focus would be maybe a more significant acquisition. But we are very [indiscernible] type acquirer. So we are looking hard to find the right opportunities. We still work with smaller-sized businesses. But yes, we have a tendency to work also with a larger size. But we do not discard the value of working with midsized companies to add up on our talents and on our revenue strength. This being said, larger opportunities are good, but they need to be at a price point where it's sustainable for the business. We do not engage into highly speculative market valuations.

[Operator]

[Operator Instructions] Your next question comes from Jeff Fenwick with Cormark Securities.

[Jeffrey Michael Fenwick, MD & Head of Institutional Equity Research]

Claude, I wanted to talk about margins here and expectations going forward, particularly with Canadian Janitorial. Those margins are very substantially larger than what you typically would have been producing prior to COVID. Are you finding now that after being through this COVID for about 8 months, are you having customers coming back to you and asking to either get some price concessions or maybe this is part of the Clean for Health effort, where they sign up for just a package of services that are focused on sanitization that might be a little more cost-effective for them? And does that maybe drive more revenue long term, but we might start to see the margins come down a bit from Canadian Janitorial?

[Claude Bigras, President, CEO & Non]

Well, listen, customers, we're not increasing our price per se, per buildings per customers in the sense that the regular service rendered and even the enhanced cleaning protocols, what are within our [indiscernible] markings and types, where we really have higher-margin surges of the on-call services that we provide for specialty disinfection and other type of, I would say, heavy demand. I would say, highly -- not dangerous, but highly special environments. This is where we have enhanced margins. So for sure, at the end of the pandemic, should we don't -- the people don't require those services, we will come back to a more regular margin. But we do feel like the enhanced cleaning would provide an overall higher margin, but not to the levels that we're seeing now. But now, this being said, we expect to continue with the strength for the next couple of quarters, at least as there is still a lot of demand for those specialty services. But it's not per se an increase of margin per regular dollar revenues.

[Jeffrey Michael Fenwick, MD & Head of Institutional Equity Research]

Understood. I guess I was just a little surprised because even after a very strong Q2, you saw yet another step-up in that EBITDA margin in Canadian Janitorial. So you're just talking about situations where perhaps there was a case of COVID in an office, and you've got to go in and do a very deep cleaning there.

[Claude Bigras, President, CEO & Non]

Exactly. Exactly. As I would say it, please take it with a grain of salt. Our Hazmat team has to go there. Works with a lot of chemical components and perform very specialty work. These call for a higher risk margin, for sure.

[Jeffrey Michael Fenwick, MD & Head of Institutional Equity Research]

Okay. And then I just wanted to talk about U.S. growth there as well. It's not quite as far back up as Canada has been. It sounds like maybe just a little bit of a different mix in the customer base there. I thought we might have seen it pick up a bit more. Anything we should think about in terms of the differences in mix in the U.S. that can make that recovery a little bit slower?

[Claude Bigras, President, CEO & Non]

Listen. In the U.S. is we are less active in the high-rise business building sectors. We are a little bit more into education. And for sure, education, when the customer is not operating, it's hard to bill in services. That's one thing. So the business mix, yes, give us a little less. I will say this also that we are acting as a very prudent operator in the U.S. as market offers different challenges as far as liabilities and everything. So through this pandemic I wanted to make sure that we had -- that we were fully protected in the case of, I don't know, any negative outcomes that we have when we're dealing with pandemics. So the good news is we are fully covered in case of anything on that front. So it gives us results, but I think it's a mix of both.

[Operator]

There are no other questions at this time. Please proceed.

[Claude Bigras, President, CEO & Non]

Well, thank you very much again. You know what, I won't have to say much. But again, I would like to just say again that I'm very proud of what the GDI team did and how we step up to support our thousands of customers and business partners into this pandemic. It's very important that we outline it again because they're making this thing happen. Also, we're really the delivery people of the results. And I would like again to thank you for attending this call.

[Operator]

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