GDI Integrated Facility Services Inc
TSX:GDI

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GDI Integrated Facility Services Inc
TSX:GDI
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Price: 36.13 CAD -2.06% Market Closed
Market Cap: 847.2m CAD
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Earnings Call Transcript

Earnings Call Transcript
2021-Q3

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Operator

Good morning, ladies and gentlemen, and welcome to the GDI Integrated Facility Services Inc. Third Quarter 2021 Results Conference Call. [Operator Instructions] This call is being recorded on November 11, 2021. I would now like to turn the conference over to Stephane Lavigne. Please go ahead.

S
Stéphane Lavigne
Senior VP & CFO

Thank you, operator, [Foreign Language] Good morning to all. 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, Executive Vice President of Corporate Development.Before we begin, I wish to remind you that during the course of this call, we may make forward-looking statements or projections regarding future events or the financial performance of GDI. There are risks that actual events or results may differ materially from these statements. For additional information on forward-looking statements and underlying assumptions, please refer to our MD&A that was filed on SEDAR last night.I will begin with the call with an overview of GDI's financial results for the quarter, and then I will invite Claude to provide his comments on the business. In the third quarter, GDI recorded revenue of $408.4 million, an increase of $43 million or 11.8% over Q3 of last year, including 2.9% of organic growth. We recorded an adjusted EBITDA of $32.7 million in the quarter, an increase of $2.5 million or 8.4% over Q3 of last year. Excluding the one-time inventory reserve of $1.4 million that we booked in our Super Solutions business in the quarter, GDI's adjusted EBITDA would have stood at $34.1 million.On a year-to-date basis now, revenue increased by $117.2 million or 11.2% to reach $1.16 billion compared to $1.05 billion for the same period of last year. Organic growth was 3.2% year-over-year and revenue growth from equity was 10%. Adjusted EBITDA in the 9-month period amounted to $99.2 million, an increase of $26.5 million or 0.4% over the corresponding period of [Technical Difficulty]Moving to our business segments. The Janitorial Canada business recorded revenue of $132.5 million in Q3, a decrease of $3.4 million or 2.5% compared to the third quarter of 2020. This segment also reported adjusted EBITDA of $18.4 million in line with the third quarter of 2020, representing margins of 13.9% and 13.6%, respectively. Our Janitorial business continues to benefit from providing clients with COVID-related and end services. Our Janitorial USA business recorded revenue of $85.9 million in Q3, an increase of $2.2 million compared to Q3 of 2020.The revenue increase is mainly due to organic growth amounting to $6.7 million or 7.9%, partly offset by the depreciation of the U.S. dollar in Canadian to -- in relation to the Canadian dollar by $4.5 million or 5.3%. Adjusted EBITDA increased by 13.6% to reach $8.1 million or a 9.5% of revenue compared to $7.2 million or 8.6% of revenue in Q3 of 2020 despite the year-over-year FX impact.Our Technical Service segment recorded revenue of $179.1 million, an increase of $50.1 million or 38.8% over Q3 of 2020, with strong revenue growth coming from acquisitions of 28% as well as from organic growth of 11%. Adjusted EBITDA was $10.4 million and adjusted EBITDA margin was 5.8% compared to $5.2 million and 4% in Q3 of 2020. Our Technical Service segment is operating close to pre-COVID capacity levels now.Finally, our Complementary Services reported revenue of $14.8 million in Q3, a decrease of 31.4% compared to Q3 of 2020, and an adjusted EBITDA loss of $1.1 million compared to adjusted EBITDA of $2.4 million generated in the third quarter of 2020. The loss incurred is driven by an inventory provision of $1.4 million booked in the quarter for the ageing of some PPE inventory items facing lower demand. This business continue to expect lower than normal demand for day-to-day cleaning supplies and due to low occupancy rates in many markets services.I will now turn the call to Claude, who will provide further comments on GDI performance during the quarter.

C
Claude Bigras
President, CEO & Non

Well, thank you, Stephane. [Foreign Language] and welcome to our call of the third-semester reports. Good morning to everyone, and thank you for taking the time to participate in our earning call. I am pleased with GDI performance in the third quarter of 2021. We are encouraged to see COVID cases level stabilizing in almost all of the markets in which we operate, and we are expecting a gradual recombining of the commercial assets market to continue through the end of 2021 with a return to a more normal occupancy levels in mid-2022, assuming that we do not experience a resurgence of the virus.Turning to our business units. Our Canadian Janitorial segment performed very well again this quarter, delivering a level of adjusted EBITDA that was in line with Q3 of last year, during the hours of the pandemic. As it was the case last year, while many cleaning services clients were operating facility at much lower than normal occupancy level, mainly in commercial office towers, many of our clients still require additional enhanced service systems and specialty services. Our Janitorial U.S. segment also performed well during the quarter, delivering an organic revenue growth of 7.9% and an adjusted EBITDA of $8.1 million despite a negative impact effect during the quarter. As with our Canadian business, margins in our Janitorial U.S. segment continued to benefit from providing clients with COVID-related services. Until the COVID-19 virus is no longer considered to be a threat within the society, we expect to continue to support our clients with these type of additional services.Our Technical service segment has recovered gradually from the COVID-induced slowdown and is now operating at close to normal capacity level. And on our cost service and preventative maintenance business is now back to pre-COVID level. While our project business is still lagging a bit as bottlenecks in the supply chain for certain pieces of equipment are causing some project delays, we do not expect this to have a material impact on the segment business or financial performance. Our Complementary Service segment was quite soft in the quarter as we are still experiencing lower demand for consumable and the low occupancy of buildings. And additionally, we felt it was conservative to book a one-time inventory provision for some of the PPEs that we had on our books for a while.We remain committed to the business and are confident that our occupancy levels begin to rise, we will see a rebound in demand and a return to its recorded profitability profile. During Q3, we continued to execute on our growth through acquisition strategy with 2 acquisitions in the U.S. market. On September 1, we completed the second acquisition in the U.S. in our Technical Service segment with the acquisition of Enginuity, which has operation in Pennsylvania and Maryland. Enginuity is also proving to be a great addition to the BPAC Group, the platform acquisition we completed in the U.S. in January of this year, and it is well-positioned to work closely with our janitorial operations in Pittsburgh and Philadelphia.Additionally, on September 15, we completed the platform acquisition in the U.S.A. on our product manufacturing division with the addition of Fuller Industries, which operate a large manufacturing plant in Kansas, producing janitorial, chemicals, brushes and a range of plastic products, which will allow us to offer U.S. clients domestically manufactured -- Made in America product line. Both of these companies are very strong fit with our culture and values, and we are excited to have their team join our family.I continue to be very positive in GDI future as building will be occupied and things normalize, we will gain the missing revenues we had so far. And our financial position is very strong. Our leverage ratios remained extremely close, and we are well-positioned to continue to execute on our business plan with the internal goal to get to our $3 billion in revenue with 6% to 7% EBITDA margin by 2025.That concludes my remarks, and I will now ask the operator to open the line for analysts for questions.

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Claude Bigras
President, CEO & Non

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

J
John Zamparo
Associate

Maybe to start on the Janitorial U.S. business. And I wonder, when you think about the mix of services in that business, whether it's standard or specialty or enhanced sanitation, did this change much over the course of the quarter or subsequent to it? And I'm trying to get a sense of what the mix of each cleaning service is at this point versus, say, a quarter or 2 ago in the state of the pandemic.

C
Claude Bigras
President, CEO & Non

Actually, if I can say, is most of the services remain stable over the last 2, 3 quarters on extra -- enhanced services. We have not seen a major re-occupancy yet. It's starting now. I think that within the last quarter and the next quarter, the first quarter of 2021, we're going to still regain revenue on re-occupancy. But so far, we have not seen a dramatic shift. Now you know what, the fact is not, I would say, is not the guarantor of the future, but so far, it's very stable.

J
John Zamparo
Associate

Okay. Understood. On the labor side, and I suppose this is Canada and U.S. You commented last call that you've seen some pretty meaningful labor inflation across both countries. Have you seen any changes to that since the last quarter? And is there any shortage of labor that's impacting sales in any way?

C
Claude Bigras
President, CEO & Non

Well, we are dealing with the labor shortage, but now we are reinforcing our recruitment strategies. At one point, for sure, we will do some triage between the customer we need to serve and the customers that are not providing much value for the business if we come to that in our labor choices. But so far, we have no significant impact on sales as we are starting business. But yes, it's a challenge, and we're working actively into it. And mind you that labor increases would happen and if it happens, it will happen. We are so adjusting our revenues accordingly.

J
John Zamparo
Associate

Okay. That's helpful. And one more from me. When you think about the 2025 guide and particularly on the margin side of 6% to 7%, you're still at an 8% margin in this quarter, it's come down from a couple others. But is the reason to think that there's upside over the long-term or at the very least that you'd be at the high end of that range. I know there's a world of time between now and then but just what you've seen during the pandemic, does it make you feel more encouraged that you might be on the higher side of margin or that we could take an optimistic perspective on long-term margins in the business?

S
Stéphane Lavigne
Senior VP & CFO

Well listen, I'm the first one to adhere to what you said. So you know what, it's a digital statement, 6% to 7% is traditionally our net margin of growth of EBITDA. So yes, as we are getting out of the pandemic and everything, we do feel that there would be an upward -- not without too pressure, but trends on EBITDA as we -- our enhanced services are always providing a little bit better margin. So yes, we -- I cannot -- like I said, I cannot do a forward-looking statement, but I certainly hope that it would be the case.

Operator

Your next question comes from Jeff Fenwick from Cormak Securities.

J
Jeffrey Michael Fenwick
MD & Head of Institutional Equity Research

So Claude, just wanted to talk about the Canadian market then. I just want to understand better the planning cycle for you. I know a number of large Canadian employers, they are looking to bring back their staff at the beginning of the year. Do you get much advanced notice around their requirements for this and that might give you a bit of line of sight on activity and occupancy picking up for you as you enter 2022?

C
Claude Bigras
President, CEO & Non

Well listen, you said Stephane. Are you addressing the question to Stephane or you want to me answer?

J
Jeffrey Michael Fenwick
MD & Head of Institutional Equity Research

The way it go.

C
Claude Bigras
President, CEO & Non

Okay. Okay. Good. No, we have -- listen, we are starting to see, yes, some advanced notice. As an example, the government in Quebec just stated, the employees will start getting -- coming back to their offices tentatively around November 15. We have those signs from several places. We also have some signs that companies are aiming for early Q1 to start integrating. So there is no major trends, I can tell you -- but I can tell you that our customers are reengaging either on the normal occupancy or hybrid occupancy or they are re-engaging as we speak progressively. So between now and probably the end of Q1, we should be -- again, it's our opinion, but it should be probably back to almost normal, maybe a little gap in occupancy, negative gap, but so much the better. So I think this is what's going to happen by Q1 2022.

J
Jeffrey Michael Fenwick
MD & Head of Institutional Equity Research

Okay. That's helpful. And then I wanted to talk about the M&A pipeline here. Nice to see a couple of tuck-ins happen for you recently. What is the pipeline looking like now? Is the cadence maybe going to pick up here a little bit just given that it's a little easier to travel? And maybe a comment on expectations around multiples being paid right now. Are they roughly where they were pre-COVID or have they gone up perhaps?

C
Claude Bigras
President, CEO & Non

Listen, yes, we are keeping a healthy pipeline and we -- and for sure, traveling enables us to be in contact with more and more. I have our Chief Legal watching me, but I can tell you that the M&A team is very busy, let's put it this way.

J
Jeffrey Michael Fenwick
MD & Head of Institutional Equity Research

Okay. Great. And sorry, yes, the expectations of vendors, do you see some inflation now in multiples in the industry in general, I think it has done pretty well through COVID. So how are those financial vendors?

C
Claude Bigras
President, CEO & Non

Can you just -- just want to make sure I understand. Can you just repeat to make sure I fully understood your question, please?

J
Jeffrey Michael Fenwick
MD & Head of Institutional Equity Research

Sure. Just -- are your targets out there expecting higher multiples now, just given that margins have been better, demand has been very good. And do you think you're going to end up having to pay a little bit more on an EBITDA multiple basis?

C
Claude Bigras
President, CEO & Non

Well, for sure, you know what, it's -- again, it's always the quality of the company we're looking at that will drive our focus. So yes, people do better margin overall but also, for sure, it gives a certain trillion to the price. Again, like I was saying, it's always a little bit the uncertainty in the future, that is also a kind of not an obstacle, but as well in that we keep in consideration when we do our business valuation. But yes, for sure, globally, there is a upward trend on margins and on multiples for sure.

Operator

[Operator Instructions] There are no further questions at this time. Please proceed.

C
Claude Bigras
President, CEO & Non

Well, thank you very much for listening to our call. Well, I don't think -- we won't be speaking before Christmas. So I would like to give you advanced wishes for Merry Christmas and family this year, hopefully, and stay safe, and I look forward to our next call to discuss together. Thank you very much.

Operator

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

C
Claude Bigras
President, CEO & Non

Thank you.

S
Stéphane Lavigne
Senior VP & CFO

Thank you.