GDI Integrated Facility Services Inc

TSX:GDI

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the GDI Integrated Facility Services Inc. Third Quarter 2022 Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, November 10, 2022.

And I would like to turn the conference over to Stephane Lavigne, Senior VP and Chief Financial Officer. Please go ahead, sir.

[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 third quarter of fiscal 2022. My name is Stephane Lavigne, Senior Vice President, 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 file at the end of last night.

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

In the third quarter, GDI recorded revenue of $563 million, an increase of $155 million or 38% over Q2 -- Q3 of last year, made up mainly of growth on acquisition of 30% and organic growth of 7%. We recorded an adjusted EBITDA of $40 million in the quarter, an increase of $7 million or 21% over Q3 of last year.

Additionally, during the quarter, we recorded $2 million of onetime costs related to the human resources information system project, which we expect to launch on January 1, 2023. On a year-to-date basis, revenue increased by $420 million or 36% to reach close to $1.6 billion. Organic growth was 7% year-over-year and revenue growth from acquisitions was 28%. Adjusted EBITDA for the first 9 months amounted to $112 million, an increase of $13 million or 13% over the corresponding period of 2021.

Moving to our business segments now. Our general business -- our general Canada business segment recorded revenue of $142 million in Q3, an increase of $10 million or 8% compared to the third quarter of 2021, which was mainly generated organically. This segment reported adjusted EBITDA of $17 million compared to $18 million in the third quarter of 2021, a slight decrease of $1 million.

Our Janitorial USA business segment recorded revenue of $174 million in Q3, and the adjusted EBITDA of $12 million, representing increases of $88 million and $4 million, respectively, when compared to Q3 of 2021. These increases are mainly due to the acquisition of IH Services on December 31, 2021. Organic growth in the U.S. segment was slightly negative as IH services expected a reduction in COVID extra services as compared to the prior year, which was identified during acquisition due diligence and was expected.

Our Technical Services business segment recorded revenue of $230 million or growth of 28% over Q3 2021, with 15% generated from acquisitions and 12% from organic revenue growth. The segment generated a record adjusted EBITDA of $15 million, representing an adjusted EBITDA margin of 7%. The Technical Services segment is now operating at normal seasonal capacity levels after being weighted down by supply chain challenges at the beginning of the year.

Finally, our Complementary Services segment reported revenue of $24 million and adjusted EBITDA of $1 million. This segment, which has been negatively affected by low demand for daily consumables generated organic growth of 32% in Q3 2022. The majority of which was due to GDI IFS business unit, which was launched at the beginning of 2022.

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

[Claude Bigras, executive]

[Foreign Language] Good morning, and thank you for taking the time to participate in our earnings call. First, I'm very pleased to report that GDI delivered another quarter of solid growth, generating record levels of quarterly revenues and adjusted EBITDA. Our Janitorial business in both Canada and the U.S. continues to perform well. In Canada, we are seeing relative stability in commercial office occupancy rates relative to Q2 of this year, as most tenants have rolled out bespoke return to work policies for the staff, and we are working accordingly.

Our Canadian business to continue -- continuing to perform well as we work with our Class A and corporate clients to support their needs in a dynamic office environment. Our clients and markets as such education, industrial, health care and hospitality have generally returned to pre-pandemic occupancy levels. Integration of IH service is continuing to go very well. Our teams are working well together, and we are sharing client relationships and best practices.

I remain very encouraged on the partnership with the IH team. I'm also pleased to welcome the team of Canadian Building Maintenance who joined the GDI family on September 1st. Canadian is one of the most reputable and trusted building service providers in the greater Seattle market. And together with our existing operations, we are now what I believe is the second largest building service contractor by size in the Seattle market. Of course, I always believe that we are the best provider and a best-in-class in our industry.

Ainsworth, our technical service segment also had a very good quarter. The supply chain issue that impacted their ability to close our jobs earlier in the year have subside and the business is now firing on all cylinders. Ainsworth continues to benefit from a record backlog as they are booking new business as fast as they are billing. The outlook for Ainsworth remains positive as the business enters into the fourth quarter, which is traditionally a very strong quarter.

Our manufacturing and distribution business and our new integrated facility service segment had a respectable quarter. Our manufacturing and distribution business is continuing to be affected by low office occupancy rates relative to its historic level, but the business has been showing a progressive sequential improvement as commercial occupancy rate rises. Our IFS business is performing well. It successfully started operations, which is second inaugural contract and is actively looking for more.

During Q3, we added a new senior sales resource in the U.S. market dedicated to grow our IFS business. This week, we also released our second ESG report, and I can say that I am extremely pleased with our progress on the ESG front. We are still at the beginning stage of this journey, but we have already seen progression in our analysis, understanding, management and enhancement of our corporate effort in all aspects of ESG. The second annual report illustrates our goals are taking root and growing with ESG quickly becoming an everyday topic of discussion and an important aspect of our GDI culture.

In conclusion, I would like to say again that I'm very pleased with the performance above the business unit. We are operating in an environment with many challenges and a good deal of uncertainty. But it's related to incredibly tight labor markets, the unprecedented reimaging of office environment and our historic move in interest rates caused economic uncertainty. With our dynamic and flexible business model, coupled with our relentless dedication to support our clients, GDI is built for times like this. Our balance sheet remains strong. Our leverage ratio is below 2.5x, which is well within our comfort zone, enabling us to continue to deliver on our strategic growth objectives.

At this time, I would ask the operator to open up the lines for questions from our research analysts. Thank you.

[Operator]

[Operator Instructions] And we will take our first question from Jonathan Goldman with Scotiabank.

[Jonathan Goldman, analyst]

So just a question. Technical Services sales are obviously very strong, and you called out resolving these supply chain issues earlier in the year. So I just -- I want to know if there's any catch-up from the earlier in the year in terms of sales that would make that number larger than the nominal CECL volume or if there's any other drivers behind the strong organic growth that you'd like to call out?

[Claude Bigras, executive]

For sure, the slow start of the year, we were waiting -- there were supply chain issues, which are leveling to a normal pace. For sure, it has an accelerating factor on our revenues as we perform the contracts, and we make up for the last time. Secondly, again, our backlog is at half-time level for the last year. So we have plenty of work ahead of ourselves. So unless there is significant changes in the supply environment, I think that we can continue to cruise at a very good pace.

[Jonathan Goldman, analyst]

No, that makes sense. It's good to hear things are firing on all cylinders. And I guess my second question then just on IH. I mean seems to continue to outperform expectations really well. Is there any driver specifically behind that? Is it revenue synergies or other things, how can the performance to be really exceptional?

[Claude Bigras, executive]

Well, I will try to phrase it properly as we did our job very well in analyzing the business revenue and valuations and EBITDA. And I think we partnered with IH at the moment where they were in an upswing line, but that is helping the revenue. We had also already discussed the COVID enhanced service reduction with some major clients that they work with. So, all this put together, it has a very good result in 2023. So I can say that the team has evaluated things properly.

[Operator]

And we take our next question from John Zamparo with CIBC.

[John Zamparo, analyst]

I wanted to start on the U.S. Janitorial business and the EBITDA margin there was meaningfully lower than a year ago and also from Q2. Is there anything in particular in the quarter that impacted EBITDA margin in the U.S?

[Claude Bigras, executive]

Well, I don't want to make things complicated, but I think that the -- what we're cruising at almost normal business in the U.S. on that front. But also, there is a significant -- a major contract with one client in which for the next probably 4 to, I think 5 quarters we have to pass through revenues and expenses as bill payments with no margin. And this is striking a little bit our percentages. This should be resuming to normal probably by mid of 2023 at the contract renewal. But the numbers are a little -- somehow a little bit tricked because of that. And we are very confident going forward with our enhanced margin in the U.S. But we have to cope with this little anomaly if you allow me to say.

[John Zamparo, analyst]

Okay. That's helpful. Sticking with the U.S. Janitorial business, I think you'd said organic sales declined modestly, and you pointed to IH, but just trying to better understand that because IH wasn't in last year's numbers. So is that just saying that IH also declined on an organic basis? And I wonder, was that decline that you reported, was that similar for the business, excluding IH as well?

[Claude Bigras, executive]

Okay. Yes. If we exclude IH, our organic growth was positive. When we have onboard IH in our financials, we used our last -- the trailing 12 months that included a significant amount of onetime COVID service revenues from some major clients. So us when we did our transaction, we knew and we had anticipated it, and we had accounted for it. So it was not a surprise. But unfortunately, when you look our trailing 12 months with these revenues and the normal situation that we knew that we were getting in, it creates a little bit of a negative impact. But I can tell you that IH is actually growing -- actually growing well because we are replacing these revenues one time with recurrent service revenues, which is great for us.

[John Zamparo, analyst]

Got it. Okay. That's helpful. And then in Canada, on the Janitorial side, I know there's lots of unknowns here, and we ask this every quarter. But to what extent do you think the Q3 margin represents a sustainable number? And what can you say about conversations you're having with office clients in Canada. Are there requests for lower services or lower prices? Just any color you could add there would be helpful.

[Claude Bigras, executive]

Well, let me put it this way. We know exactly what we're getting into as probably all of us, there's no volatility, nowhere. So it's easy. In other word, actually, we work very hard with the business, but we are all evaluating into a kind of volatile environment. But so far, what we are forecasting is that we stay within those margins for the foreseeable future with maybe adapting the business mix, coping with inflation that also increased revenues and everything. So I'm really 100% not relatively, but I'm optimistic to keep the same level of margins in the foreseeable future. Again, let's hope that things are continuing to evaluate positively, not negatively, globally.

[John Zamparo, analyst]

Got it. Okay. That's helpful. And then one last one for me, a housekeeping question. I wanted to ask about working capital. That's been a significant drain on cash flow so far this year. I wonder if you could add some color there and over what time period do you expect that to reverse?

[Claude Bigras, executive]

Well, it's in the working capital for sure is, as we saw the business coming back to more normality, we see there's a little drain on the accounts receivables DSOs. We're working very hard on it. We have also some onetime CapEx expense related to our IT initiatives. So yes, but I don't expect that -- we expect the working capital to resume to its normal level within the next quarter or 2.

[Operator]

And we take our next question from Zachary Evershed with National Bank Financial.

[Thomas Bolland, analyst]

It's actually Thomas, calling in for Zach. Most of my questions have been answered. Would you mind sharing some thoughts about where your balance sheet stands given the heightened risk of the recession and maybe how you would expect an economic slowdown to impact the different segments?

[Claude Bigras, executive]

Okay. Unfortunately, the line is not very good. I don't know if it's me or you, but let me just repeat the question to make sure I understood well. You're asking me how is balance sheet standing now and how much we inspect the effect going forward into of recession. Is that what you're asking me?

[Thomas Bolland, analyst]

No, I was -- well, close. I was asking how you thought about your leverage and where your balance sheet stands given the heightened risk of a recession and how…

[Claude Bigras, executive]

Okay. So well, actually, as we -- as I said earlier on, is our level ratio is below 2.5x, which is well into our comfort zone. So I think that we have the power, the means and the fuel to continue to grow our business through our acquisitive strategy. So that's a good news.

Secondly, in the recession, for sure, there is a positive and a negative. The positive is usually, if we work well within a recession with our clients our resistance or our adaptability remains very strong. So usually, we don't do that, we don't do bad in the recession, if we work well. But yes, we have to be more prudent on receivables and the way we allocate our cash. So we have a tendency to be a little bit more conservative in our way of working with the balance sheet. But so far, I don't have a significant headwinds. We don't see any significant headwinds that could change significantly our balance sheet position. But again, you know what, we have to be prudent, and we have to deal with uncertainty. So we are a little bit on the conservative side.

[Thomas Bolland, analyst]

And you touched a little bit on it earlier, but is Technical Services performing at the upper end of its potential now? Or is there still a little bit of like potential for improvements to margins and the overall performance?

[Claude Bigras, executive]

It's nice, always asking for more. So now seriously -- okay, our labor usage is close to its capacity because we work with our technical staff. We measure every week what is our utilization level. So we are almost to its potential. This being said, what, as business grow and everything, our people are recruiting and we are always aiming to continue to grow our business. But if there's no acquisitions in the next 3, 4 quarters, which I'm just saying that we have a healthy M&A portfolio ahead of us. But this being said, I think, yes, we are close to our potential, but there's always room to increase by a couple of points on our revenues.

[Operator]

[Operator Instructions] And we are taking our next question from Frederic Tremblay with Desjardins.

[Frederic Tremblay, analyst]

A question on Janitorial Canada in their 7% organic growth in the quarter. Can you help us maybe understand if that was mainly driven by volume or demand for recurring services? Or was there a bit of pricing in there as well?

[Claude Bigras, executive]

Okay. You're talking Jan, Canada. Right?

[Frederic Tremblay, analyst]

Yes.

[Claude Bigras, executive]

Okay. Sorry, I think my phone has a little issue. So it's difficult for me to totally hear. Well, you know what, in Jan Canada, we still have, I would say, significant demand on enhanced services. So that is a part -- is fueled in part by that. And also is with contract increases and what an adjustments to inflation, it's also fueled a little bit of our organic growth.

[Frederic Tremblay, analyst]

Okay. Perfect. And just on acquisitions, IH is obviously performing very well. It was a large acquisition in the new region. So I was just wondering if your -- if IH is sort of generating new leads maybe for you guys in the Southeast in terms of other acquisitions, if you're interested in enhancing the platform there either in Janitorial or technical services?

[Claude Bigras, executive]

Well, that's a very interesting question, Frederic. And it's something that we are actually working actively on is because IH has, I would say, as a dual role in the business. First role is it's -- they have a significant expertise in industrial service sectors. So they are operating in almost every state in the U.S. through their industrial segment. They're growing their health care segment very well, which is also not geographically bound, but there also are our regional Southeast business, and we are now focusing on providing support M&A strategies and growth into their own regions going from Carolinas to Florida. So they have a dual role, but now we have to build the second one.

[Operator]

[Operator Instructions] And it seems we have no further questions at this time. And with that, I would like to turn the call back over to you for any additional or closing remarks. Thank you.

[Claude Bigras, executive]

Well, thank you, operator. Well, just in closing, I would like to share with everyone how this -- the GDI team is dedicated to achieving results and make us the best-in-class again in our industry. It's impressive to see how people are aligned and focused, and I would like to thank everyone, every single one of them because everybody is contributing to the success of GDI. And we're working in the future. I think we are well equipped to work in the future. But again, we'll work with our talents. And I'm sure that we will continue to deliver very good results. Thank you.

[Operator]

Thank you. This concludes today's call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.