GDI Integrated Facility Services Inc

TSX:GDI

Earnings Call Transcript 2019-Q4

[Operator]

Greetings, and welcome to the GDI Integrated Facility Services Fourth Quarter Ended December 31, 2019, Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Friday, February 28, 2020. I would now like to turn the conference over to Stéphane Lavigne. Please go ahead.

[Stéphane Lavigne, Senior VP & CFO]

Thank you, Bernard. Good morning, and welcome to GDI's conference call to discuss our results for the fourth quarter and full year of fiscal 2019. My name is Stéphane 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, 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 provision that is fully described at the beginning in the MD&A filed on SEDAR yesterday. I will begin the call with an overview of GDI's financial results for the quarter, and then we'll invite Claude to provide his comments on the business.In the fourth quarter, GDI recorded revenue of $344.2 million, an increase of $40.9 million or 13.5% over Q4 of last year, including organic growth of 8.7%. We also recorded strong performance in adjusted EBITDA, generating $20.8 million in the quarter, an increase of $2.4 million over Q4 of last year, which included a favorable impact of $2.2 million due to the implementation of IFRS 16.For the full year in fiscal 2019, we reported revenue of $1.285 billion, an increase of $181.6 million or 16.4% compared to the corresponding period of 2018, including organic growth of 7.1%. We also recorded strong performance in adjusted EBITDA, generating $77.5 million, an increase of 29.2% over the prior year.Excluding the effect of IFRS 16, we recorded adjusted EBITDA of $69.3 million, an increase of 15.5% compared to 2018. For the remainder of the call, in order to present an apples-to-apples comparison of our results, all adjusted EBITDA figures discussed will be prior to the effect of IFRS 16.Our Janitorial -- Canadian Janitorial segment recorded revenue of $141.3 million in Q4, up by $5.7 million or 4.2% compared to the fourth quarter of 2018. The segment reported adjusted EBITDA of $8 million, compared to $8.6 million in the fourth quarter of 2018, representing a margin of 5.7%, compared to 6.3% last year. For the full year, we recorded revenue of $540 million, up by 1.6% and adjusted EBITDA of $33.5 million, down by 5.3% due to investments we made in the business during the year.Our Janitorial USA business segment had a very good quarter, recording revenue of $83.2 million, an increase of $14.3 million or 20.8%, including an organic growth rate of 11.3%. Adjusted EBITDA was $5.4 million in both Q4 2019 and Q4 of 2018, with a margin of 6.5% in Q4 2019, compared to 7.9% in Q4 of 2018. Adjusted EBITDA was flat as the business executed on certain higher margins project in Q4 2018 and timing of certain specialty work. For the year, that business performed extremely well recording revenue and adjusted EBITDA of $324.5 million and $23.2 million, respectively, increases of 36.1% and 35%.Our Technical Services segment had a strong fourth quarter, recording revenue of $109.6 million, an increase of $23.2 million or 26.9% over Q4 of 2018. Adjusted EBITDA was $7.4 million, compared to $5.7 million last year, for an increase of $1.7 million or 29.8% compared to Q4 of 2018. For the full year, the business delivered revenue and adjusted EBITDA of $374.7 million and $18.8 million, respectively, increases of 30.3% and 55.7%.Our Complementary Services segment reported revenue of $16.5 million in Q4, down by $3.9 million compared to Q4 of 2018. Adjusted EBITDA was $700,000, compared to $900,000 in the fourth quarter of 2018. The decrease was driven by the sale of our Disaster Restoration business unit, which occurred in the first half of 2019. For the full year, revenue were up by 3.1% at $73.5 million, and adjusted EBITDA was relatively stable at $3.9 million.I would like now to turn the call over to Claude, who will provide further comments on GDI's performance during the quarter.

[Claude Bigras, President, CEO & Non]

Well, thank you, Stéphane. Good morning, and thank you all for taking the time to participate in our earnings call. I'm pleased to report that GDI performed extremely well during 2019, with revenue growth across all of our business segments and record results in both our Janitorial USA and Technical Services segment.I would like to take a few moments to comment on the performance of each of the GDI business unit in 2019. 2019 was a year of investment in the future within our Canadian Janitorial segment. We made investment to redesign the sales force in our traditional service business, transforming teams from farmers to hunters, and we began deploying this new sales approach in the market. I'm very excited about the team that we have now in place and feel that we're well positioned to proactively approach the market, while also supporting our clients on a coordinated basis across Canada.Additionally, during 2019, we invested in developing the third generation of our Modern franchise business with a strategy to expand into the market in Canada that represent new territories for GDI. We laid the foundation of this new business in 2019, and we are very optimistic to expand this business in 2020.During 2019, our Janitorial business segment continued to perform well. We grew revenue and maintained our industry-leading market share, while our EBITDA margin was slightly down due to the investments that I spoke about we made to position the business for the future.Our Janitorial business segment delivered very strong results again in 2019. Since we entered the U.S. market at the end of 2012, this business has delivered compound annual growth rate in both revenue and EBITDA of more than 30%, not only through acquisitions, but on the back of solid organic growth as well. During 2019, we extended our business platform regionally with the acquisition in New England in Maine, and won additional market share with organic growth of 18.2% throughout the year. Our U.S. business continued to perform very well and is in a strong position, both competitively and geographically, to continue to do so in the coming years.GDI Technical Service segment operate through our -- operated through our Ainsworth brand has an exceptional year. After having completed 4 acquisitions in 2018, Ainsworth concluded another 4 acquisitions in 2019, which have served to build out our multi-trade capabilities geographically, while adding to the scalability of the business model. Since we formed the backbone of Ainsworth through the combination of Ainsworth and Airtron in 2017, the business has progressively delivered improvements in EBITDA margin, ending 2019 with an adjusted EBITDA margin of 5% and is on track to reach GDI's global EBITDA margin goal of 6%.In early 2020, Ainsworth completed what we feel is a highly strategic acquisition to date, adding the team at ESC Automation to the GDI family. ESC is the largest non-OEM building automation and master system integrator in Canada and is one of the most advanced provider of smart building technologies in North America. The addition of ESC has positioned GDI for the future. Together, ESC and Ainsworth are now the premier building system and multi-trade facility service provider in Canada, and they have helped GDI become a true one-stop shop for both today's and tomorrow's building and clients.Our Complementary Service segment, which, following the sales of our residential disaster restoration business in early 2019, is now composed solely of our product, manufacturing and distribution business, Superior Solution. Normalizing for the sale of the disaster business, Superior delivered double-digit growth in revenue and adjusted EBITDA in 2019 compared to 2018. As one of the larger janitorial product and equipment distribution business in Canada, Superior enables GDI to ultimately -- and ultimately, our clients, to stay ahead of the curve on new innovation and technologies in the industry.Superior leads the charge for GDI in evaluating emerging technologies, such as sensors and robotics, with its in-house R&D in developing new, more economical and environmentally friendly chemical products, offered both under Superior brand and into our private label channels.In 2019, Superior began selling a new highly innovative products within its chemical manufacturing business, which we have high expectations for during 2020. And going forward, we continue to see Superior as another key differentiator for GDI overall business.So in summary, I feel that GDI delivered yet another solid year in which we grew both revenue and profitability and we made many meaningful investments in each of our business segments to position GDI for the future and keeping in line with our usual financial prudent approach.I'm very proud of our team across the whole organization. Our balance sheet is strong. Our total debt-to-EBITDA ratio is still within our comfort zone, following the acquisition of ESC, and we are well positioned to continue to execute our business plan and capitalize on strategic growth opportunity as they arise. That concludes my remarks. And I will ask the operator to open the lines for analysts for questions now. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Paul Bilenki with TD Securities.

[Paul Bilenki, Associate]

I'd just like to start out on the ESC acquisition. So it obviously added some capabilities in automation and controls, which was an area where you're looking to strengthen your presence. What is the plan for -- given that it's a West Coast, sort of, focused business, what's the plan for rolling out those capabilities across the rest of your Canadian Technical Services platform?

[Claude Bigras, President, CEO & Non]

Okay. Well, thank you. First of all, I would like to maybe depict a little better picture of the geography with ESC and Ainsworth. So yes, ESC is operating in the west in a fairly sizable part of the business. And for us, it's an opportunity to integrate ESC within our western business, thus creating not only a strong management approach, but also a synergic approach to how we manage the business. So that's a plus on this side.And I would also say that ESC also had a significant segment in Central Canada, Ontario, and which we have -- we actually operate -- where Ainsworth operates a major part of its business as well. So by integrating those 2 segments together, it enables us to really, I would say, implement the services of ESC and the technology of ESC within our large market in Ontario.For Eastern Canada, we still remain with our existing platform. So we see it as a very, very strong opportunity to develop and grow the business with the clients. And as I just said, we have -- by integrating the platforms together, we will strongly address this opportunity.

[Paul Bilenki, Associate]

Okay. That's great color. And following on this acquisition. Now that you have those capabilities, are there any other areas or capabilities in Technical Services where you feel like you still need to add and bolster your presence? Or are you sort of looking at mostly tuck-in acquisitions at this point in that business?

[Claude Bigras, President, CEO & Non]

I'm sorry. Yes. But I think we have to do a little bit of both. For sure, we are always opportunistic to acquire some businesses in markets where we need to develop our presence or increase our service offering. But this being said, we are also always looking for a technology and a business that can make a difference in growing our offering to our customers. It can be small or medium or large companies. And also, as you know we have now, I would say, a significant mechanical business in the U.S. and we're also looking on how to continue to develop our business in that direction.

[Operator]

Our next question comes from Frederic Tremblay with Desjardins Capital Markets.

[Frederic Tremblay, Analyst]

On Janitorial Canada, organic growth of 4% was the strongest we've seen there this year in the quarter. Can you go into a bit more detail on what drove that strength? Was it early benefits of your efforts at Modern or cross-selling? Maybe just a bit more details on what were the main drivers of the solid organic growth in Canada.

[Claude Bigras, President, CEO & Non]

Well, listen, I think it's a sum of a lot of effort from the teams. As you know that we are redeploying our sales strategy. As we go, we are very focused on growing the business. Canadian market is maturing, so we need to -- we are becoming more and more aggressive in the way we do business, but always keeping in mind that the bottom line profitability is the objective. So we have to be cautious on how we grow the business. But I would say that it's more or less our engagement into growing the business in Canada, the main driver.

[Frederic Tremblay, Analyst]

Okay. And there was a mention in the MD&A about the revenue mix change and higher operating cost in the Modern business. Are those higher cost temporary in nature? Or is it a nature of your efforts? And will that continue going forward?

[Claude Bigras, President, CEO & Non]

Well, as you know, we are investing in our Modern business, so for sure it has an impact on our costs. But I think we're investing for the future on that front. And also, as -- without divulging any, I would say, market strategic secret, is -- we are spending a lot of energy into the future of Modern and we are also coping with the evolution of the market. As we grow and we develop more multi-geographical segment, for sure, we expand a little bit our cost base. But I think it's all good for the future as we would be able to engage with some other major clients across Canada.

[Frederic Tremblay, Analyst]

Okay. And switching maybe to M&A. ESC was obviously a large transaction, very strategic. How does the recent acquisition of ESC, given its size, how does that impact your appetite for other mid- to large acquisitions in the near term?

[Claude Bigras, President, CEO & Non]

Well, listen, for sure, ESC has a high profile in the organization, and we will spend a lot of energy to do the best approach to integrate the business and develop our service offering. So I would say that we have a primary focus on that.But as you know, acquisitions and M&A activities are sometimes opportunistic. So we're not closing the door to future acquisitions in the segments, but we will be focused on integrating ESC as a first objective. And the good news is, even with these acquisitions, we are well within our comfort zone, so we have some flexibility here to continue our growth strategy if we have opportunities to do something significant to support the business.

[Operator]

Our next question comes from Scott Fromson with CIBC.

[Scott Douglas Fromson]

So I have a couple of questions on accounting. So the expense line that was higher than our expectations was the transaction and reorganization expenses. Can you break this down a little bit, and was there anything unusual in that?

[Claude Bigras, President, CEO & Non]

Well, listen, you know what? I think Stéphane can give you more clarity on that. Stéphane?

[Stéphane Lavigne, Senior VP & CFO]

Yes. As we made acquisitions 7 in the year, plus the ESC. So we booked all of our costs of transaction in this line. So that's why -- and the ESC being a larger transaction, that's why we see larger transaction costs this year in this line. And especially, we didn't have the benefit of ESC in 2019 because we just closed it in 2020, but we still booked the transaction cost in '19 as they were incurred. That's why it's higher this year.

[Scott Douglas Fromson]

Okay. Understood. So what component of that -- I think it's about $2.5 million in Q4. What component of that was reorganization and what component was the ESC transaction?

[Stéphane Lavigne, Senior VP & CFO]

We -- the ESC was about 1/3 of the total transaction cost, the transaction and reorg. And the reorg cost was about 20% of that total amount.

[Scott Douglas Fromson]

Okay. And the remaining 45-or-so percent?

[Stéphane Lavigne, Senior VP & CFO]

Was the other acquisitions, right? We did 7 other acquisitions.

[Scott Douglas Fromson]

Okay. But in Q4, did you pick a deferred transaction cost from previous acquisition?

[Stéphane Lavigne, Senior VP & CFO]

The bulk was ESC as we booked pretty much $1 million there of transaction costs.

[Scott Douglas Fromson]

Okay. Also, net finance expense, can you give a bit of color on how we should model it in our forecasts?

[Stéphane Lavigne, Senior VP & CFO]

The big impact of that really is, the fluctuation here is, like -- were impact of the cash level of our LTIP program. So it depends really on the stock price increase that you would model going forward in your model.

[Scott Douglas Fromson]

Okay. Were there any onetime fees associated with the ESC transaction?

[Stéphane Lavigne, Senior VP & CFO]

Not in the financing expense, no.

[Scott Douglas Fromson]

Okay. And final question, your outlook for Technical Services, you mentioned that there was a lot of project-based work, is -- what do you see in terms of the feasibility and visibility into the current fiscal year?

[Claude Bigras, President, CEO & Non]

Well, Stéphane, on me, you know what, I would just maybe start, and, Stéphane, you can jump in at any time. You know what? We have fairly good visibility with a very strong backlog. All the business units within Ainsworth seems to be having a healthy backlog everywhere. So we don't anticipate any major changes going forward. And our monthly -- what we call our monthly project sales is steady, so it means that we always replenish our backlog. So we don't see -- we see a repeating of 2019 on that front. But Stéphane, if you wanted to give a little bit more details.

[Stéphane Lavigne, Senior VP & CFO]

No, I think your response is pretty powerful.

[Scott Douglas Fromson]

So -- I think the organic growth rate was 8.7%. Is that abnormally high? Or is that -- or would we expect something in the line of what you did over the year?

[Stéphane Lavigne, Senior VP & CFO]

If I can -- definitely, it's a very good record this year. So typically, it's been a bit lower than this. So as we had a huge U.S. contract that also rolled into 2019 in the first half, so that had a very positive impact. So I would say we've always set like around that 5% to 6%, maybe, of global organic, and that's still probably a goal to work or a target.

[Operator]

[Operator Instructions] Our next question comes from the line of Zachary Evershed with National Bank Financial.

[Zachary Evershed, Analyst]

So looking at Janitorial US, we touched on organic growth a little bit here. But would you characterize that as primarily new business in gaining market share?

[Claude Bigras, President, CEO & Non]

Yes, absolutely.

[Zachary Evershed, Analyst]

And so we talked a little bit about the sustainability in the 5% to 6% global organic growth rate. If we're looking at Complementary Services, which is hitting a bit of a down trend, and Janitorial USA and Technical Services, which is quite strong. Do you expect that, that trend will continue? Or should we see some normalization towards mid-single digits in all the segments?

[Claude Bigras, President, CEO & Non]

Yes. Yes. Well, listen, no, absolutely. We are very confident on our Superior business because I don't think we are experiencing a trend, I think it's more of a business timing, and I think this is the main driver of it. But this being said, yes, we have launched a very, very promising new products approach and we are seeing already, in early 2020, very favorable receptions on our launch. So we feel like 2020 will be a very good year for our product business as well.

[Zachary Evershed, Analyst]

Excellent. That's helpful. And speaking of the launches on the new third-generation franchise model, how would you qualify the interest from potential franchisees in various territories?

[Claude Bigras, President, CEO & Non]

Well, listen, we are actually -- you understand that I'm very cautious in what I'm saying because it's very strategic for us, so I don't want to -- anyway, I think you understand what I'm saying. But this being said, we have a good reception, but the proof of the pudding would be in the next 3, 4 months as we're making a formal launch in the market, and I'll be able to keep you posted on that, but we're very confident on that front.I think we were able to build a very, very appealing model. And I think it's going to be a success.

[Zachary Evershed, Analyst]

Perfect. And then one last one for me. How does the U.S. Technical Services M&A market compare to Canada's? Are multiples at the deal table similar?

[Claude Bigras, President, CEO & Non]

Well, to be very honest, we are -- we were not focused in developing the U.S. Technical Service segment. So we -- I cannot report much, but we don't expect to be very, very different in multiple. But I have no historical figures to sustain what I'm saying there. So we feel that it's about the same approach. But we'll see over time. But again, we were not focused on developing the Technical segment until we made the acquisition of ESC, where now we have -- just now, we have a significant business there.

[Operator]

Gentlemen, there are no further questions at this time.

[Stéphane Lavigne, Senior VP & CFO]

Thank you. So -- for all to be participating on the call, and talk to you next quarter.

[Claude Bigras, President, CEO & Non]

Thank you very much, and see you there. Thank you very much. Bye.

[Stéphane Lavigne, Senior VP & CFO]

Thank you.

[Operator]

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, everyone.