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Edited Transcript of GDI.TO earnings conference call or presentation 8-Nov-18 2:00pm GMT

Q3 2018 GDI Integrated Facility Services Inc Earnings Call

EDMONTON Dec 5, 2018 (Thomson StreetEvents) -- Edited Transcript of GDI Integrated Facility Services Inc earnings conference call or presentation Thursday, November 8, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Claude Bigras

GDI Integrated Facility Services Inc. - President, CEO & Non-Independent Director

* David Hinchey

GDI Integrated Facility Services Inc. - SVP of Strategic Development

* Stéphane Lavigne

GDI Integrated Facility Services Inc. - Senior VP & CFO

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Conference Call Participants

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* Frederic Tremblay

Desjardins Securities Inc., Research Division - Analyst

* Leon Aghazarian

National Bank Financial, Inc., Research Division - Special Situation Analyst

* Martin Landry

GMP Securities L.P., Research Division - MD Equity Research & Equity Research Analyst

* Neil Linsdell

Industrial Alliance Securities Inc., Research Division - Head of Research and Equity Research Analyst of Consumer Products & Special Situations

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the GDI Integrated Facility Services Third Quarter Ended September 30, 2018, Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded on Thursday, November 8, 2018. I would now like to turn the conference over to Mr. Stéphane Lavigne. Let's -- please go ahead.

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Stéphane Lavigne, GDI Integrated Facility Services Inc. - Senior VP & CFO [2]

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Thank you, operator. Good morning, everyone, and welcome to GDI's conference call to discuss our results for the third quarter ended September 30, 2018. My name is Stéphane Lavigne. I'm the Senior Vice President and Chief Financial Officer of GDI. I'm here with Claude Bigras, our President and CEO; and David Hinchey, Senior Vice President Strategic Development.

Before we begin, I'd 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 of the MD&A filed on SEDAR on November 8 -- 7, 2018.

I'd like to turn the call to Claude, who will provide further remarks for the third quarter.

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Claude Bigras, GDI Integrated Facility Services Inc. - President, CEO & Non-Independent Director [3]

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Thank you, Stéphane. Good morning, and thank you for taking the time to participate in our earnings call. I am pleased to report that GDI continued to deliver strong financial results in the third quarter of 2018. Each of our business segments reported an increase in adjusted EBITDA on a year-over-year basis. We recorded revenues of $282 million, up by $40.6 million, over the third quarter of last year and an adjusted EBITDA of $16.5 million, up by $2.9 million or 21%, representing an adjusted EBITDA margin of 5.8% versus 5.6% last year.

Our Canadian Janitorial business recorded revenue of $132 million compared with $126 million in the third quarter of '17 and an adjusted EBITDA of $9.8 million, in line with last year. Our adjusted EBITDA margin was 7.5% or -- in Q3, slightly down from last year. This business is performing well considering the prevailing market conditions, and our management and operation teams have shown their ability to maintain profitability despite labor cost pressure in certain markets.

Additionally, during the quarter, the Ontario government announced that it has rescinded Bill 148 in its entirety, which has canceled the $1 increase of minimum wage planned for January 1, 2019. Our Janitorial USA business segment delivered a very strong quarter of -- with $65 million in revenue, up by $18 million over -- or 38% over last year. The increase in revenue came from an organic growth of 18% due to significant contract wins in the third quarter and acquisition growth of 13%. Adjusted EBITDA in the quarter amounted to $5.1 million, an increase of $1.4 million or 38% over last year. Margin remains very strong at 7.8% for the quarter, in line with the prior year. Our Technical Services segment also had a very strong quarter with revenues of $73 million, an increase of $14 million or 24% over the third quarter of 2017.

The business delivered a very healthy level of organic growth of 13% in the quarter, which was generated through all of the segments' business line: service call, preventative maintenance and projects. Adjusted EBITDA was $3.6 million compared to $1.5 million in the corresponding quarter, and adjusted EBITDA margin increased to 5% compared to 2.5% last year.

I'm very pleased with the performance of our Ainsworth business during 2018. We expended considerable effort over the last 3 years, implementing a strategy to build a strong management team, realize operating efficiencies and drive top line growth. And these efforts are bearing fruit. Ainsworth is delivering result in line with our expectation and has a strong backlog going into the fourth quarter.

Our Complementary Service segment had another strong quarter with $19 million of revenue, up by 29% or $4.3 million and generating an adjusted EBITDA of $1.1 million versus $900,000 in '17. Year-to-date, revenues are at $800 million, an increase of $78 million or 11% over last year. All our business segments are showing strong organic growth, with a combined organic growth of 5.1% versus 2.2% in 2017.

After 9 months, our adjusted EBITDA stands at 41.6%, up by $5.5 million or 15.2% increase over 2017, with a margin of 5.2% versus 5% in 2017.

Additionally, our net income is up by $1.8 million after 9 months, and our earning per share is up by 26.5%.

So during Q3, we continued to execute on our strategy to strengthen GDI businesses and service offering through a strategic acquisition. Our Ainsworth subsidiary concluded the acquisition of a leading mechanical and electrical service business in Montreal, considerably strengthening Ainsworth platform in Québec and solidifying GDI's position as the leading fully integrated facility service provider in the province as well as across Canada. This marked GDI's fifth acquisition in 2018 and our pipeline of strategic opportunities remains strong for the coming year.

Overall, I'm very pleased with the performance of other GDI business segments during this third quarter. Our outlook for the remainder of the year remains positive. Our balance sheet is strong. Our leverage ratios are within our comfort zone. And we are well-positioned to continue to execute on our business plan to deliver our long-term goal of reaching the $2 billion mark by the end of 2022.

That concludes my remarks, and we will now ask the operator to open up the lines to analysts for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Martin Landry with GMP Securities.

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Martin Landry, GMP Securities L.P., Research Division - MD Equity Research & Equity Research Analyst [2]

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My first question is on your acquisition of Simpkin Mechanical. I think it's the one of the largest transactions you've done in the last 2, 3 years. And I was wondering if you can talk a bit more about it. What expertise does that bring to your offering? And can you talk a little bit about the revenue profile and the valuation multiples you paid?

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Claude Bigras, GDI Integrated Facility Services Inc. - President, CEO & Non-Independent Director [3]

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Okay, Martin, just to make it a little bit more concise is it's not 3 years, it's 2 years. It's a significant transaction that we did over the last 2 years. Remember that we did the Airtron acquisition 2.5 years ago. This being said, I would just like to also add that over the last couple of years, we have done several smaller acquisitions that when you add them up, there are becoming a significant revenue increase. And so I'm very happy to see -- to say that if we don't have any big targets in the bull's eye, we still are committed to really, really be opportunistic in each market with strategic acquisitions, even if they are not as large as some others we did. This being said, the business in Montreal, we have disclosed the information, but it's a significant electrical contractor in the Montreal region. Maybe, David, you would like to add something on that front?

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David Hinchey, GDI Integrated Facility Services Inc. - SVP of Strategic Development [4]

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Yes, sure. It's a -- Simpkin is one of the stronger mechanical/electrical contractors in the Montreal market. It's a very well-regarded firm, strong reputation. We've had very positive feedback from our client base after the news.

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Claude Bigras, GDI Integrated Facility Services Inc. - President, CEO & Non-Independent Director [5]

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I know you'd like to have more meat, but this is what we can give you so far.

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Martin Landry, GMP Securities L.P., Research Division - MD Equity Research & Equity Research Analyst [6]

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Okay. And can you talk a little bit about what's the revenue profile of that company? And what kind of multiple you think you paid?

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Claude Bigras, GDI Integrated Facility Services Inc. - President, CEO & Non-Independent Director [7]

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Well listen, as you know, Martin, we do not disclose this informations. But I would say that we paid a multiple totally in line with our past practices in acquiring these businesses.

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Martin Landry, GMP Securities L.P., Research Division - MD Equity Research & Equity Research Analyst [8]

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Okay. And you won a large contract in the U.S. in July, and it contributed to significant organic growth in the U.S. segment. Just wondering if you can give us some color on what was the main selling feature that got your client to switch supplier? Was it price? Was it service? I'm just wondering how you are positioning yourself to win that contract?

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Claude Bigras, GDI Integrated Facility Services Inc. - President, CEO & Non-Independent Director [9]

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Okay, first of all, as we have not said it was one contract, it's several significant contracts. So it's not the result of only one project. But yes, there is one project more significant than others. And this is a particular project. Our selling point was our overall capacity in the sense that, as you know, we had a acquired a mechanical group in Michigan some time ago, so the combined offering of both the mechanical -- our mechanical group Ainsworth U.S. and GDI Facility enabled us to reach out to a very large client that integrated everything together, and we are the sole source supplier for about, I would say, 117 of their facilities across the greater Detroit area. So the selling point was our capacity.

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Martin Landry, GMP Securities L.P., Research Division - MD Equity Research & Equity Research Analyst [10]

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Okay...

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Claude Bigras, GDI Integrated Facility Services Inc. - President, CEO & Non-Independent Director [11]

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That we were able to provide both services together.

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Martin Landry, GMP Securities L.P., Research Division - MD Equity Research & Equity Research Analyst [12]

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Okay, and what does the profitability profile of the contract looks like?

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Claude Bigras, GDI Integrated Facility Services Inc. - President, CEO & Non-Independent Director [13]

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Well, listen, it's, you know what, I would say that the profitability is in line with our expectations for this type of project. So we're very satisfied so far. We are still in the ramp-up. So I don't foresee any major changes in our profitability profile going forward. The only thing I would say is, we have not -- we don't have a very large -- we don't have a lot of visibility towards the clients spending over and above our project, but we feel like there will be a significant amount of supplemental work going forward. So we hope that is going to be fueling our businesses a little bit further more.

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Operator [14]

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Our next question comes from the line of Leon Aghazarian with National Bank Financial.

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Leon Aghazarian, National Bank Financial, Inc., Research Division - Special Situation Analyst [15]

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Well, I'm going to follow up a little bit on that types of questions there. So on the Simpkin, I understand that you guys aren't willing to disclose much more information. But can you maybe talk about maybe the margin profile of the business? I mean, as we see Technical Services in the quarter was actually quite strong, especially on a year-over-year basis for the margin. So just trying to see if it's kind of in line with that. Is it better than what we've seen in terms of technical service side?

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Claude Bigras, GDI Integrated Facility Services Inc. - President, CEO & Non-Independent Director [16]

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Well, listen, Leon, even if you torture me, you won't get more. But let me just add up something. First of all is the margin contribution is not fueled by the acquisition. The margins, the overall margins of what we have -- the company we have acquired is within our historical margin at Ainsworth. The reason why we're increasing our margin is because our business plan that we have worked on is delivering fruit. We told you, gentlemen, that we were involved into building a very strong management team, you know what, synergize -- find synergies, applied costs restructuring and pursue cross-selling and clients. So what you see here it's not the result of an acquisition that changed the world. It's a result of the management team working every day at the business plan. The acquisition is relatively new actually. So it's not that, that has fueled the margin. It's the result of day to day's work. Do you understand what I'm saying?

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Leon Aghazarian, National Bank Financial, Inc., Research Division - Special Situation Analyst [17]

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No, absolutely. No, I realize it was closed very near the end of the quarter and that did not contribute too much in the quarter. So it was driven by the organic growth, right, it was around 12.6% for technical. So what drove that? Is it the existing clients are basically getting -- requiring more of the Technical Services and, therefore, growing that side of the business? Or is it new contract wins there?

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Claude Bigras, GDI Integrated Facility Services Inc. - President, CEO & Non-Independent Director [18]

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Well, it's a mix of everything. You know what, every, you know what, our 3 segments performed well with existing clients, new clients, GDI clients, it's a mishmash of everything. But yes, the growth is fueled by a bigger book of business. But you know what, we see it in break-fix, we see it in projects, and we see it in the maintenance contracts. So it's not the particular one item that is really is it. All the 3 segments are moving well. And maybe, I should not say that because they look at me, but in the West, we had some challenges because of the economy and everything. And by working very hard at it, we were able to stabilize and even turn some of the business segments there that are contributing. So it's all good news.

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Leon Aghazarian, National Bank Financial, Inc., Research Division - Special Situation Analyst [19]

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Okay. And if I could switch over to the -- to that U.S. -- some of the U.S. business that you had won. You mentioned one of them was -- the larger one was about 117 facilities. Could you -- obviously, I understand you're not going to able to name the contract itself, but I mean, what field was it in? What industry was it in?

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Claude Bigras, GDI Integrated Facility Services Inc. - President, CEO & Non-Independent Director [20]

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Well, I can say it's around the education sector.

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Leon Aghazarian, National Bank Financial, Inc., Research Division - Special Situation Analyst [21]

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Okay, fair enough. And you also mentioned that part of the -- one of the sales pitch was the overall capacity that you were able to have, meaning that U.S. mechanical side helped you gain some more business. Does that basically give you more of an impetus, more of a reason to be looking towards M&A, given the fact that that worked well for you, in order to maybe add more mechanical, which will help you gain more business?

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Claude Bigras, GDI Integrated Facility Services Inc. - President, CEO & Non-Independent Director [22]

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Well actually, I would say that we're not. Our business plan is not focused on that. Let me put it this way. We have made this acquisition of this mechanical group because this particular client was in our line of sight, and we geared up. You know what, it's not a fluke win. Let's put it this way. It was a long -- it was a long-term strategy that we had adopted 1.5 years ago to acquire this particular client. So we really built everything around being the winner of that particular project.

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Leon Aghazarian, National Bank Financial, Inc., Research Division - Special Situation Analyst [23]

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Okay. And one final one from me would just be on the M&A front. I mean, you did mention 5 acquisitions this year, obviously, being one of the larger ones as well in terms of Simpkin. Like what -- if you're looking forward, and you mentioned your pipeline is actually quite full as well. Is it more on the Canadian side? More on the technical? More on the U.S.? Or kind of what's the area of focus?

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Claude Bigras, GDI Integrated Facility Services Inc. - President, CEO & Non-Independent Director [24]

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Actually, as you know, I'm always, you know what, myself and the team, we all work -- always working on all front. So we have some stuff in the U.S., some stuff in Canada and some stuff in mechanical as well. So you know what, again, I don't want to be evasive, but it's the truth is we are active in those 3 sectors.

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Operator [25]

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(Operator Instructions) Our next question comes from the line of Neil Linsdell with Industrial Alliance.

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Neil Linsdell, Industrial Alliance Securities Inc., Research Division - Head of Research and Equity Research Analyst of Consumer Products & Special Situations [26]

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Just so I can get my head around completely about the -- you've obviously made a lot of improvements, a lot of efficiency, integration. Where can we expect -- if you just look at the base of the -- or the base of your operations today, how much more tweaking can you do to improve the margins? Say in -- are there any specific areas that you can focus on to do that before we talk about more scale or acquisitions?

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Claude Bigras, GDI Integrated Facility Services Inc. - President, CEO & Non-Independent Director [27]

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Well, that's an interesting question. So hopefully, you don't expect me to answer you with numbers and items and names.

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Neil Linsdell, Industrial Alliance Securities Inc., Research Division - Head of Research and Equity Research Analyst of Consumer Products & Special Situations [28]

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Just in general. No torture involved in this one.

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Claude Bigras, GDI Integrated Facility Services Inc. - President, CEO & Non-Independent Director [29]

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No, no -- but no, listen. Neil, listen, it's a days to day's work. Yes, now we are in our budgeting process. We review -- we are always constantly into how can we better -- develop better efficiencies. It's not a process that we do once every 5 years. We are constantly that. Now we are in the -- we are like I said, in budget process. Every stone are turned, and we are always looking: Is this the most efficient way to service a client? Or is it the most efficient way to do something? And we keep that insight with long-term business plans that we need to be staffed and we need to be tooled in order to reach our long-term goals. So it's the equation of both. Now this being said, I think there is still some room to be more efficient in some areas. And I tell you that attaching business profitability to growth is always a healthy way to grow -- to address efficiencies. So yes, we are strongly focused on growth because when people are busy, it's a good news. And usually, it's more profitable when people are busy than not busy.

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Neil Linsdell, Industrial Alliance Securities Inc., Research Division - Head of Research and Equity Research Analyst of Consumer Products & Special Situations [30]

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Okay. And well, as far as the segments are concerned, I'm -- my guess would be that on the technical service side, because of, I guess, the higher value-add, it is where you could potentially get more profitability out of your current operations. And then I'm also wondering: Is the potential to put acquisitions on top of that going to drive more improvement than just fine-tuning the operations that you have now?

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Claude Bigras, GDI Integrated Facility Services Inc. - President, CEO & Non-Independent Director [31]

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Well, listen, yes, like I said, fine-tuning is our day-to-day bread and butter. But you're right. By adding up acquisitions and building density, for sure, it's always a positive contribution to margins. So yes, we are. But you see, again, on the technical side, we have a trifecta role. Let's put it this way. We have to build our density, we have to build our service offering in each market in Canada, and we have to extend our geography. So you see, it's a triple mission. So we are pursuing that and keeping that in mind. But every time we have an opportunity to build density, it's always more profitable than opening a brand-new market.

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Neil Linsdell, Industrial Alliance Securities Inc., Research Division - Head of Research and Equity Research Analyst of Consumer Products & Special Situations [32]

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Okay. Well, obviously, I'm not going to get you to slip up and give me any numbers here. So just -- but can you provide any details as far as of the clients that you currently have, how much, say, cross-selling have you managed to do as far as adding in technical service to, say, Janitorial? And how does that compare to your targets or you think the potential out there is?

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Claude Bigras, GDI Integrated Facility Services Inc. - President, CEO & Non-Independent Director [33]

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Well, listen, you make me think of my better half. You're not asking, but you are asking. So okay, well listen, cross-selling is -- there is a very nice dynamic on the cross-selling side. And I tell you something. The good news is it's growing. I don't want to push it. I don't want to push a number out of the blues, but I can tell you something that I would not be surprised to say that probably -- we have probably increased our dual-client penetration by at least 20%, 25%. So that's a good -- that's a very good result so far.

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Operator [34]

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

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Frederic Tremblay, Desjardins Securities Inc., Research Division - Analyst [35]

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Speaking of customer overlap. I was just wondering as it relates to Simpkin, any significant overlap between their operations and your existing traditional intent or on business in the Montreal region?

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Claude Bigras, GDI Integrated Facility Services Inc. - President, CEO & Non-Independent Director [36]

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Yes, they are very present downtown Montreal as we are. So it's a very positive because we both have -- allow me to say this in a very humble way: We both have a great reputation. So customers are very excited. So far, what we have seen, customers are very excited. And it gives us the opportunity to really introduce our Ainsworth and electrical business within other clients where they are not that present. So example, in a couple of weeks, we're going to have a major event in Montreal, we'll send you the invites, where we're going to meet the real estate market with both our business segments. So we hope that we're going to develop strong cross-selling capability over the next 2 years, especially in the Montreal and Québec market with this acquisition.

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Frederic Tremblay, Desjardins Securities Inc., Research Division - Analyst [37]

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Okay, and just in Montreal there. Any other major area within the country where you feel that something similar can be done? Any other major cities where this could be replicated?

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Claude Bigras, GDI Integrated Facility Services Inc. - President, CEO & Non-Independent Director [38]

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Well, again, I repeat, Frederic, is we're pursuing the -- especially on the technical segment, but it can apply also to other segments. We're pursuing both service offerings, building our density in each market and covering new geographies. So this is more -- this is the bigger objective. So the point is, Frederic, is we have a plan to grow, but there is also the opportunities that presents. So we always -- we never apply an M&A strategy by the letter. We have to be flexible, and we have to capture opportunities in the order they show up. But again, for sure, we are extremely keen to build density because this is, by far for us, the most profitable way. But it does not always showing the way we want it. So we have to be very opportunistic.

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Frederic Tremblay, Desjardins Securities Inc., Research Division - Analyst [39]

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Okay, understood, thanks for that. And just lastly, for me. In Janitorial Canada, I was wondering if you can maybe discuss the trends between the win differences between the modern business and the traditional Janitorial business? Are those performing similarly? Or are there major differences in terms of the growth profile there?

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Claude Bigras, GDI Integrated Facility Services Inc. - President, CEO & Non-Independent Director [40]

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GDI Canada. You know what, I'm not sure I fully understand the question, Frederic, can you just say it again. So is it GDI Canada? Yes?

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Frederic Tremblay, Desjardins Securities Inc., Research Division - Analyst [41]

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Yes, between modern and your, let's say, traditional Janitorial business, any differences in the growth profile of the 2 divisions there?

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Claude Bigras, GDI Integrated Facility Services Inc. - President, CEO & Non-Independent Director [42]

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Well, you know what, the Janitorial Canada, for sure, is a subject. We work a lot into Janitorial Canada. It is a very large traditional segment for us. I learned from my -- from the Americans the way to treat those calls, "You are a very bad person. I'm not answering your question." So anyway, so to make the long story short, Janitorial Canada, the profile is -- I don't see any major -- how can I say this? I don't see any major discrepancies between both business unit. They both perform well. So that's a good thing. Don't forget that in central Canada, we had to deal with all the labor increases that were enforced in January. In Q3, we had to deal with the increases in Alberta, and we have to deal with the increases in BC. So Canadian Janitorial is extremely defensive because we need to cope with all those increases that are coming to us. It's one after the other. So it's giving us a little bit of relief that the Ontario government is as we tell there's Bill 178. So it'd give us a little bit of breathing space on that front. But the modern business -- so this is the challenges I have in Canada. So we -- the management team is coping with it. But it's not the best way. In my book, it doesn't create the most value. We are more defensive. So we're looking of ways to really increase the business and create more value on that front. On the modern business front, yes, there are some very nice wins. But this platform now is pursuing very large, multi-geographic clients, and we are very confident over -- in the next 3, 4, 5 quarters, that we're going to have significant wins that will fuel this business. Did I answer it the way that you were looking at? Or...

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Frederic Tremblay, Desjardins Securities Inc., Research Division - Analyst [43]

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Yes, you did.

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Operator [44]

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Gentlemen, there are no further questions at this time. Please continue with your presentation or closing remarks.

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Claude Bigras, GDI Integrated Facility Services Inc. - President, CEO & Non-Independent Director [45]

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Well, gentlemen, thank you very much for attending this call. In closing, I would like to say I thank -- I personally thank the management team across all the business units. They did a wonderful work. We attacked this year with a lot of challenges, and the team has been able to really cope with all those challenges and deliver strong results so far. The outlook is positive. So let's hope that it continues this way. And we're going to be very, very focused on building, furthermore, the value of the business. Thank you very much.

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Operator [46]

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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, everyone.