GDI Integrated Facility Services Inc
TSX:GDI

Watchlist Manager
GDI Integrated Facility Services Inc Logo
GDI Integrated Facility Services Inc
TSX:GDI
Watchlist
Price: 36.13 CAD -2.06% Market Closed
Market Cap: 847.2m CAD
Have any thoughts about
GDI Integrated Facility Services Inc?
Write Note

Earnings Call Transcript

Earnings Call Transcript
2017-Q4

from 0
Operator

Ladies and gentlemen, thank you for standing by. Welcome to the GDI Fourth Quarter and Year Ended December 31, 2017, Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, March 1, 2018. I would now like to turn the conference over to Stéphane Lavigne, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

S
Stéphane Lavigne
Senior VP & CFO

Thank you, operator. Good morning, everyone, and welcome to GDI's conference call to discuss our results for the fourth quarter and fiscal year 2017. I am with Claude Bigras, President and CEO of GDI; and David Hinchey, Senior Vice President, Strategic Development of GDI. 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 provisions that is fully described at the beginning of the management discussion and analysis file on SEDAR last night.Now moving to our financial results for the fourth quarter and full year of 2017. Revenue for the fourth quarter for 2017 was $247.6 million, an increase of $18.8 million or 8.2% over the corresponding quarter of 2016. Revenue for 2017 for the whole year was $930 million, an increase of $97 million or 11% over last year. The increase in revenue in the fourth quarter and for 2017 was generated primarily through acquisitions and organic growth. Adjusted EBITDA for the fourth quarter amounted to $14.1 million, an increase of $3.2 million or 29% over the corresponding period quarter of 2016. Adjusted EBITDA for 2017 amounted to $50.2 million, an increase of $10 million or 25% over 2016. The increase in adjusted EBITDA was mainly due to the strong performance of the Complementary Services, the Janitorial U.S. business segment, as well as our Technical Service segment, with the Janitorial Canada segment performing as our expectations.Before the $2.5 million of integration costs incurred in 2017 related to the Airtron acquisition, GDI adjusted EBITDA margin was 5.4% in 2017, compared with 4.6% in the prior year.Net income for the fourth quarter of 2017 amounted to $3.4 million or $0.17 per share, compared to net income of $8.5 million or $0.40 per share in the fourth quarter of last year, in which, a gain of $6.4 million was recognized last year on the early Airtron acquisition. Net income for the year was $10.8 million or $0.51 per share compared to a net income of $13.9 million or $0.66 per share in 2016. Without the 1x gain from the Airtron acquisition, the EPS would have been $0.30 in 2016.GDI generated strong cash flow during the fourth quarter of '17, resulting in a $29 million debt reduction in the quarter and $17.5 million for fiscal 2017, resulting in a total debt to adjusted EBITDA ratio below 2.5x at the end of 2017.Moving to our businesses. Our Canadian Janitorial business built consistent financial results during 2017, finishing the year with an adjusted EBITDA margin of 5.5% for the year, and 5.2% for the 3 -- for the third, fourth quarter on revenues of $484 million in 2017 and $124 million in the fourth quarter, up 1.5% on previous periods.Our Technical Service business recorded a revenue of $233 million in 2017, an increase of 60% over revenues of $145 million in the prior year due to the Airtron acquisition in November 2016. Adjusted EBITDA before integration costs increased on $3 million in 2016 to $9.5 million in 2017, an increase of $6.5 million or 219%. The business delivered $2.9 million in adjusted EBITDA before integration costs in Q4, representing a margin of 4.9%, which was a significant improvement as compared to an adjusted EBITDA margin of 2.6% in the prior year's quarter. Our Complementary Service segment performed very well in both the fourth quarter and the full year of 2017. 2017 adjusted EBITDA increased from -- increased 71% from $6.5 million in 2016 to $11.1 million in 2017, with adjusted EBITDA margin almost doubling to 14.7%. Q4 adjusted EBITDA grew more than 40% from $2.1 million in '16 to $3 million in 2017.Finally, in our Janitorial U.S. business recorded revenue of $197 million in 2017, representing a growth of 1.7% over the prior year, which was negatively affected by exchange rate fluctuations. However, adjusted EBITDA increased by 20% over 2016, driven by strong margin improvements. Our Janitorial USA segment delivered a net adjusted EBITDA margin of 7.4% in 2017 and 9.1% in Q4, a significant improvement over margins of 6.2% and 4.7% respectively in 2016. On this, I will turn the call to Claude.

C
Claude Bigras
President, CEO & Non

Thank you, Stéphane. Now I am pleased to report that GDI performed well in 2017. We continued to execute on our business plan and doing so, we have accomplished a number of strategic initiatives. First, we began the year with a significant task in front of us, the merger of 2 large mechanical and electrical service businesses into the largest and best-in-class multi-trade technical service business in Canada. I am pleased that the integration of Ainsworth and Airtron is almost complete, and it has been a success. In a year focused on integration activities has delivered an adjusted EBITDA margin of 4.1% before integration costs, as Stéphane said earlier. We are extremely pleased with the performance of this business and expect Ainsworth to continue to add incremental value to both our clients and shareholders in the next year. We will continue to focus on building Ainsworth into an innovative technical service solution for our customers. Still a lot of work ahead of us, but it's a very encouraging result for the first year of integration.Our Canadian Janitorial business performed well and delivered consistent financial results during 2017 despite the general pressure in larger urban markets across Canada, finishing the year with an adjusted EBITDA margin of 5.5% and 5.3% in the fourth quarter. We managed a minimum wage increase in the Alberta market well during the year, and our team in central Canada is working closely with their clients to complete and minimize the impact of this essential minimum wage increase in Ontario that came in effect on January 1, 2018.Our Janitorial -- U.S. Janitorial business margins, as you may recall, during 2016, were affected by a number of one-time issues as well as wage pressures in certain markets, and our U.S. team had a mandate to focus on business optimization and margin improvements. I am pleased that this business delivered solid results in both the full year and in the fourth quarter with EBITDA margins of 7.4%. The U.S. market remains a significant growth opportunity for GDI, and we are well positioned to take advantage of it.Our Complementary business performed very well last year. Our Modern Cleaning Concept franchise business continued to win new clients and grow its business across Canada, and our Janitorial Product Manufacturing and Distribution business delivered results in line with our expectations. We expect this segment to continue to perform well next year -- this year, in 2018. Globally, GDI delivered a consolidated adjusted EBITDA margin of 5.4% as compared to 4.6% in 2016, including the Technical Service business integration costs. We will continue to focus on margin optimization going forward, as GDI is also on the verge of surpassing the $1 billion revenue mark. We are now firmly positioned among the largest integrated service providers in North America, and continue to be a predominant provider in Canada. Our balance sheet is strong and our total debt to EBITDA is less than 2.5x. We are always remain to be the best in our trade.In conclusion, a solid year in 2017, and we have accomplished a number of strong strategic initiatives. Our business continued to generate a healthy level of cash flow, our balance sheet is strong, the momentum in our business remains positive and we are well positioned to continue to execute our business plan and deliver long-term value to our shareholders. That concludes my remarks, and I will now ask the operator to open up the line to analysts for questions.

Operator

[Operator Instructions] Our first question coming from the line of Martin Landry with GMP Securities.

M
Martin Landry
MD Equity Research & Equity Research Analyst

My first question, Claude, is on Technical Services. You have shown a pretty nice organic growth of 6% during the quarter, and I'm wondering if that's due in part to some cross-selling initiatives that you've started to implement to boost these revenues in that segment.

C
Claude Bigras
President, CEO & Non

Well, Martin, it's a mix of everything, yes. We're starting to collect on our initiatives there. Still a lot of work ahead of us. And [ Francis' ] job is to make sure that we optimize this. But it's a mix of everything including our initiatives in that sense, yes.

M
Martin Landry
MD Equity Research & Equity Research Analyst

Okay, okay. And I noticed you made a small acquisition in Seattle. Wondering if you can talk a little bit about it and also talk about your acquisition pipeline that you have in front of you currently.

C
Claude Bigras
President, CEO & Non

Okay. Well, first of all, yes, Seattle, we are very happy to have complete -- you know what? It's not a large acquisition, but it's -- we opened another front with our western team that is managing this business in coordination with our U.S. team. And Seattle is a very, very, very active business lately and growth is very, very important in this city. So we're looking forward to develop that. On the M&A front, we have many -- we have a good, I would say, not backlog, but we have a good -- I'm sorry?

S
Stéphane Lavigne
Senior VP & CFO

Pipeline.

C
Claude Bigras
President, CEO & Non

Yes, we have a good pipeline. Thank you very much, Stéphane. We have a good pipeline in front of us. But again, the idea is to find the right business which is the right fit. But we're working very actively into it. And if I can say like this is, '17 was a year of heavy task in front of us, 2018, we will focus on our M&A strategy for sure.

M
Martin Landry
MD Equity Research & Equity Research Analyst

Okay. And then, Stéphane, wondering if you can give us some color on the impact of the proposed corporate tax rate reduction in U.S. Wondering what's the impact that this is going to have on your consolidated tax rate this year.

S
Stéphane Lavigne
Senior VP & CFO

The proposed impact had a little impact in 2017, because it's going forward in '18 in the U.S. So it was more just on deferred taxes in '17. And in '18, it's going to reduce definitely as you know the current tax, which we estimate the tax reduction in the U.S. between $0.5 million and $1 million in 2018.

M
Martin Landry
MD Equity Research & Equity Research Analyst

So you expect the changes to reduce your tax bill between $0.5 million to $1 million.

S
Stéphane Lavigne
Senior VP & CFO

In '18, yes.

C
Claude Bigras
President, CEO & Non

There are still some rules that are not well established in the U.S. So we are still prudent before we really align our budgets.

Operator

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

F
Frederic Tremblay
Analyst

First question on the U.S. business. Margins were really strong in Q4 while organic growth was essentially flat. I understand that it's probably related to the focus on optimizing the business. Just wondering in terms of 2018, what you foresee in terms of balancing the margin optimization with organic growth. Do you -- are you confident that organic growth in the U.S. can come back closer to historical levels of mid- to high-single digits?

C
Claude Bigras
President, CEO & Non

Well, listen, Frederic, we have a balanced approach in 2018. You understand that organic growth as we grow, it's always becoming more and more a very large number. But this being said, you have a point that in the U.S., one of the exercises of margin optimization was also to diverse -- divest from some existing client business that they were not delivering our expected margins. So it has negatively affected our organic growth. But this being said, in 2018, we have a balanced approach there. We don't give guidance there, but we have a balanced approach that probably will be reflected in our traditional numbers.

F
Frederic Tremblay
Analyst

Okay. Switching to Canada. Just wondering if you've seen changes to the churn rate because of discussions that you and your competitors are having with property managers on the minimum wage hike. Is there and increased churn, either positively or negatively for you guys that -- originating from those discussions?

C
Claude Bigras
President, CEO & Non

Okay. Well, let me share with you some -- not information, but my comments. Okay, first of all, as you know, we are tracking very closely all our projects, our clients. So it was positioned to give you a fairly strong comment on that front. Loss of business, technically, is extremely minimal at this time, meaning that we have not seen any major thing. We're talking frictional percentage. On the client adjustments for minimum wage increase, I would say that we have -- I don't want to give an exact percentage here, but I can tell you that we have a significant portion of clients that we have worked with them and we have completed our work with them. There are still some clients that remains in our target and we're still working with them through January. So again, I think that in the next couple of weeks, we should have totally completed our turnaround on that front. So yes, I'm happy of what we have seen and we have not lost significant business because of the minimum wage. It's only that some customers are slower, or less -- they are slower to complete their turnaround with us.

F
Frederic Tremblay
Analyst

Okay. And that's good color. And just on the new COO joining Janitorial Canada. Can you just talk about maybe in your opinion, what made him the right person for the job? And also, what his main priorities for the segment will be in 2018 and beyond?

C
Claude Bigras
President, CEO & Non

Okay. Thank you very much. Michael Masse is a seasoned executive and B2B service line, servicing primarily facilities and institutional clients, education, hospitals and other institutional clients. So that's a very positive for us, because we have an important value in that our business is proximity in customer service, and Michael has a career long within servicing corporate clients. Secondly, he has an extensive experience in markets where we were not as active, like institutional, educational. So for us, it would be a good potential to grow our business with his support. His main focus, I would say, will be to really optimize our central business. I -- we certainly feel like central Canada is a very strong potential of organic growth for the reason I just told you, and his focus will be central Canada as we are expecting strong developments there.

Operator

[Operator Instructions] Our next question coming from the line of Neil Linsdell with Industrial Alliance Securities.

N
Neil Linsdell
Head of Research & Equity Research Analyst

You just answered one of my questions as far as the focus going forward, I think, organically with Mike coming on board. Is there anything additional with specific industries that you feel you're underrepresented now that Mike specifically is going to make a difference?

C
Claude Bigras
President, CEO & Non

Okay. Well listen, I would say that all the education market, higher education, institutional markets, corporates, I think these are all market segments in which Mike would certainly provide expertise, [indiscernible]. So we're looking forward to developing those segments.

N
Neil Linsdell
Head of Research & Equity Research Analyst

Okay. And then I guess, either with or without the impact from Mike, in the Canadian environment, are there any specific geographies -- you mentioned a focus on central Canada, where acquisitions are going to give you perhaps -- fill in more holes?

C
Claude Bigras
President, CEO & Non

Well, I would say -- let me tell you 2 things on that front. First of all is, our geography is well balanced globally. We are the largest one in each markets in Canada. We have the West, Central, Quebec and Atlantic. We are very well positioned in all those markets. All the major urban centers, we're also well covered. So this for me, it's a job done. Now again, central Canada, if I look at the economy and the population and the potential, I think we are underrepresented as far as market share, so where we would be working extensively in that. Thirdly, I would say, and I think I said it a little bit, but I don't want to be a teaser, but there is another 70 markets in Canada in which I think we will look closely into how we will develop our presence and all those other markets in Canada.

N
Neil Linsdell
Head of Research & Equity Research Analyst

Okay. All right. And then just lastly, rather than on geographies, on to your technical capabilities now that this major integration is behind you. Is there any -- can you identify any kind of technical capabilities that you'd like to further add, or will give the biggest impact to your ability to do cross-selling and such?

C
Claude Bigras
President, CEO & Non

Well, 3 items on that front. First item, you said it, is optimize. Still work to optimize our cross-selling activities. No matter how hard we worked last year, I think there is still a lot to be done. We have good successes, but there is still a lot to do. So we're focused on it. Secondly is, one of our objectives is also, what I would call, aligning all the service line in each market. We are the largest player in Canada, but we do not carry all the service trade in each market. So when we talk about gap is, I would like for us to be able to offer our customer the multi-trade segments, but everywhere in Canada for all the multi-trades. So we still have some gaps to fill there. And the third item, I would say is, we will be extremely focused on energy sensor monitoring. Today, people want to measure. They want to be able to interact with their buildings. We are developing intelligent business -- building solutions. I think it's the future. And we are invested into providing our clients these solutions. These are the 3 main, I would say, focus on the technical side.

Operator

Our next question coming from the line of Vincent Perri from Scotiabank.

V
Vincent Perri
Associate Analyst

Just to wrap up on the new COO position. That is a new position that you have created, correct?

C
Claude Bigras
President, CEO & Non

Yes.

V
Vincent Perri
Associate Analyst

Okay. So you're essentially increasing the depth of the management team. Okay.

C
Claude Bigras
President, CEO & Non

Yes. We are, for sure.

V
Vincent Perri
Associate Analyst

Okay. And just getting back to -- with regards to your Janitorial U.S. margins, in the MD&A we note that there was a reversal in some reserves. Can we get a number or -- I'd just like to get the sense of the significance of that amount.

S
Stéphane Lavigne
Senior VP & CFO

Well, listen, we do not disclose specifics, but, Vincent, I think I would look at the year as the overall number because through the year, we are working with specific provisions that are not fully aligned with quarters. And over the year, I'm happy to say that we were more prudent. And with the gateway, it enabled us to reverse some of the reserves that we had built, especially on the WSIB segment.

V
Vincent Perri
Associate Analyst

Okay, fair enough. And just lastly, in Canada, Claude, can you speak to what you're seeing with respect to the competitive environment? And also obviously, the pressure that's coming on from the cost side with respect to the minimum wages. How do you see margins in Canada in the next year? Do you think we could still have some improvements? Or given the context, you'd just be happy with having margins at current levels? I'm talking about on a percentage basis.

C
Claude Bigras
President, CEO & Non

What do I see in Canada, that's a big question. I see a nice presence at the international with colorful clothing, but that's another story. So what I see in Canada. You know what? I think, Vincent, we need to be innovative to keep our margins. The industry is maturing, especially on the Janitorial side. So I think it's important that we provide innovative solutions in order to keep our edge in the market. Long term, you know what, and I think I said it before, long term, better wages for our workforces across Canada is a healthy approach to the business. We cannot build long-term successful businesses by being extremely, extremely, I would say, what, harsh or extremely focused on paying the least possible. You know what, the cost of living has increased substantially in Canada. And I think it's very normal that our workforce have a decent wage to execute this job, which is actually nights. These are difficult jobs. So I think is going to be healthy globally. It's always the adjustment period that we need to work through. But as being said, it will be healthy for margins. We work on percentages over costs. So I think it will be positive. We just have to work around it. But again, I'm telling you is, we have to be innovative and we have to offer a good solution to customers. This is the ticket.

Operator

Mr. Bigras, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

C
Claude Bigras
President, CEO & Non

Thank you very much, operator. Well, gentlemen, I would just like to say that I am very, very -- not happy, but I'm very proud of what the team -- the management team and our staff were able to achieve in 2017. It's the sum of a lot of hard work and people are committed to continue to work in this focus. So I'm a very fortunate CEO. So thank you very much for your time and see you next quarter.

Operator

Ladies and gentlemen, 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.