GDI Integrated Facility Services Inc. (GDI) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the GDI Integrated Facility Services Fourth Quarter 2021 Results Conference Call. [Operator Instructions] This call is being recorded on Wednesday, March 2, 2022. I would now like to turn the conference over to Mr. Stéphane Lavigne. Please go ahead.

Thank you, operator. [Foreign Language]. Good morning, all, and welcome to GDI's conference call to discuss our results for the fourth quarter and the full year of fiscal 2021. 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, Execute VP of Corporate 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 in the MD&A filed on SEDAR last night. I will begin the call with an overview of GDI's financial results for the quarter, and then will invite Claude to provide his comments on the business. In the fourth quarter, GDI recorded revenue of $433 million, an increase of $68.4 million or 18.7% over Q4 of last year, including an organic growth of 5.1%. We recorded an adjusted EBITDA of $33.5 million in the quarter, an increase of $1.4 million or 4.3% over Q4 of last year. Adjusted EBITDA in our Janitorial business continued to be positively influenced by enhanced services delivered to clients whose facilities remained open or partially open during the pandemic, and our Technical Services business had another strong quarter, especially when compared to the prior period, as the business rebounded from the COVID pandemic and benefited from the acquisitions completed this year. On a full year basis, revenue increased by $185.6 million or 13.1% to reach $1.6 billion compared to $1.4 billion last year. Organic growth was 3.7% year-over-year and revenue growth from acquisition was 11.2%. Adjusted EBITDA in the year amounted to $132.8 million, an increase of $27.8 million or 26.5% over 2020. Now moving to our business segments. The Janitorial Canada segment recorded revenue of $140.5 million in Q4, an increase of $2.5 million or 1.8% compared to Q4 of 2020. Janitorial Canada organic growth amounted to 1.4% in the quarter due to COVID-19-related revenue fluctuations in certain market segments. This segment also reported adjusted EBITDA of $18.4 million, slightly higher than Q4 of last year, representing margins of 13.1% in Q4 of both years. Our Janitorial USA segment recorded revenue of $89.2 million in Q4, an increase of $4.8 million compared to Q4 of 2020, despite a negative FX impact of $2.8 million. The organic growth rate was 8.9% or $7.5 million, resulting from increased volume at the existing clients as well as new client wins. Adjusted EBITDA margins decreased from 10.8% in Q4 2020 to 8.6% in Q4 2021, mainly due to a higher amount of onetime COVID-related service in Q4 of 2020. On December 31, 2021, the Janitorial USA segment completed the acquisition of IH Services, Inc. and its subsidiaries, adding approximately 8,000 employees and approximately $260 million in annual revenue, generated across 29 states, significantly expanding GDI's Janitorial business in the U.S. Our Technical Services segment recorded revenue of $189.6 million, an increase of $64 million or 50.9% over Q4 of 2020, with strong revenue growth of 37.8% coming from acquisitions and a healthy organic growth rate of 13.9% as the business rebounded from the negative COVID effects. Adjusted EBITDA was $11.8 million, and adjusted EBITDA margin was 6.2% compared to $7 million and 5.6% in Q4 of 2020. Finally, our Complementary Service segment reported revenue of $18.2 million in Q4, a decrease of 15.2% compared to Q4 of 2020 and a negative adjusted EBITDA of $1.2 million, which included a $1.3 million change related mainly to a revision of inventory valuation. Now I would like to turn the call to Claude, who will provide further comments on GDI's performance during the quarter.

Thanks, Stéphane. Thank you. Good morning, all. [Foreign Language]. And thank you very much for taking the time to participate in our earnings call. So overall, I'm very pleased with GDI's performance in the fourth quarter and the full year of 2021. During the quarter, both our Canadian and U.S. Janitorial segments delivered strong results. At the beginning of Q4, we were seeing a reduction in restrictive COVID measures across most regions. We were working with our clients to provide enhanced services as their facility began to reopen. Midway through the fourth quarter, the Omicron variant landed in North America and a number of regional governments reintroduced restrictive measures designed to reduce the spread of the virus. The restrictive measures differed greatly by geography and were more pronounced in Canada than in many of the regions where we operate in the United States. While many of our clients in Canada and the U.S. continued to require enhanced COVID-19 services, we saw a lower amount of onetime services in our U.S. segment than we experienced in the previous year. Moving into the first quarter of 2022, as the threat of Omicron is subsiding, we have been experiencing a relatively rapid easing of restrictive COVID measures. And many clients are implementing reoccupation plans as we speak. We expect that as the pace of reoccupation intensifies and the population of buildings densifies, our clients will continue to require enhanced services to keep occupants safe. Our Technical Services segment has fully recovered from the negative headwinds it faced during the pandemic of 2020 and in early 2021. Our Service business is performing well. Our clients are increasingly seeking our advice and support on optimizing the air quality in their buildings, and our project business continues to enjoy backlogs at an all-time high from ongoing success we are having in winning new business. Additionally, we conclude our highly strategic acquisition in early Q1 of this year with the acquisition -- with the addition of Energere to our family. Energere is the leading energy advisory and energy service business in the province of Quebec, providing turnkey energy efficiency solutions that reduce client's energy consumptions, greenhouse gas emissions, thus reducing their carbon footprints and enhance their overall ESG profile. Energere will be a key part of Ainsworth and GDI's value proposition to the market well into the future as the ESG movements gain momentum and our fight for global climate warming as -- will undergo a more serious or more intensive attention. Our Complementary Services segment, which consists of our product manufacturing and distribution business, recorded a decrease in revenue and adjusted EBITDA during the quarter. This business continues to be affected by low demand for daily consumables, like soap, towel and tissues, as a result of the low occupancy rate we are experiencing in facilities. However, this slowdown is transitory, and we expect the business to recover as occupancy rate rises. As I look back at 2021, I can't be more proud of the team at GDI and what was accomplished. First and foremost, we acted as an expert adviser and trusted partner to our clients and played a critical role in keeping the occupants of their buildings safe from the virus. We also concluded a number of significant strategic acquisitions. Since January 1, 2021, we have concluded 6 acquisitions: The BP Group in New York City; Enginuity Mechanical in Pennsylvania; Fuller Industries in Kansas; IH Services in South Carolina; and [indiscernible] and Energere, both in Quebec; adding over $550 million in annual revenues. Operationally and [ graphically ] and strategically, we considerably have strengthened 3 of our business segments and provided us with the tools and talents to continue to be extremely relevant to our customers. On a pro forma basis, GDI has reached $2 billion of revenue milestone. We have doubled our revenue over the last 4 years, and we have almost tripled our EBITDA. Hindsights, we have completed some 46 acquisitions over the last 10 years, which has been a tremendous amount of work, and I congratulate the team for that. As we begin 2022, I am very optimistic for GDI business. After 2 years of uncertainty, the outlook for the pandemic is more clear and our clients can focus on implementing reopening and reoccupying plans with confidence. We expect that as facility reoccupies, our clients will continue to require enhanced service from our Janitorial business, volume in our manufacturing and distribution will increase and our Technical Service business will continue to perform well. Even after 6 acquisitions since the beginning of last year, our balance sheet is strong, our leverage ratio is around 2x, and we are well positioned to execute on our strategic growth plan. And lastly, I would like to take a moment to thank Mr. David Galloway, one of our Board member that has been with us since 2015 and that has notified us of his resignation at the end of 2021 for personal reasons. David is a true gentleman and brought to GDI his business experience and wisdom, and we sincerely thank him. At the same time, I would like to welcome Madame Anna Ristic -- Anne Ristic, I'm sorry, to the GDI Board of Directors. Anne brings a wealth of experience, having spent more than 20 years in a large national law firm as Co-Managing Director. So welcome to GDI, and we are sure that your contribution will be tremendous. So that concludes my remarks, and I will ask the operator to open the lines to analysts for questions. Thank you.

[Operator Instructions] The first question comes from Michael Doumet with Scotiabank.

Nice quarter, and congrats on all the deals.

Thank you very much.

Claude, you talked about it. We've lived with this pandemic for 2 years now. Are your customers getting to a point where they're looking to embed some of these specialty cleaning services into their contracts? And is that giving you better visibility on the longer-term opportunity as well as pricing conditions for those services?

Mike, I think we're going to see a little bit of everything. Mind you that in the commercial building sector, most of the enhanced work is provided through the occupants of the buildings. So -- and the landlord portion is more related to public areas. I cannot predict the future with certainty, but we have seen a mix of both. Some will require it in their contract and some would like to keep a certain, I would say, grasp on the spending, so they keep it aside.

Got you. That's helpful. And with the U.S. reopening a little bit more quickly here, I think we're all looking to your Janitorial U.S. business for signs of things to come in Canada. I wonder if that's the right way to think about it because, obviously, the business mix in the 2 countries are very different with a lot more commercial office exposure in Canada. Is there an argument that can be made where some of this higher-margin work could stick around for longer and maybe in higher quantities and that can sustain higher margins in Canada? Or is the conclusion eventually that they could converge?

Yes. Well, listen, I think that both segments will benefit from enhanced services and occupancy levels going forward as building occupants are more or less now densifying the space to a healthy level because COVID is not out of our lives for the foreseeing future. But you're right, U.S. as a different business segment, they have reopened more quickly than Canada. I would -- without making a forward-looking statement, I would presume that Canada will retain strong enhanced business service level. As you said, the business mix is more on the commercial building and commercial real estate that required those services. Yes, it will come back to a more normal service level, but we are anticipating a higher enhanced service level overall.

Your next question comes from John Zamparo with CIBC.

I want to start with the IH Services acquisition. It seems like there's an opportunity for revenue synergies there. I wonder if you can provide any color on how significant that might be? And historically, on deals of this size, how long does it typically take to capture revenue synergies?

Well, we are at the beginning of the story, as you know. Yes, for sure, there will be efficiencies that we will extract out of the business. We're still working actively into it. Mind you that they operate very specific industrial segments and there is a great deal of talent. At this time, yes, for sure, there would be positive synergy, but I am not -- I'm shy to advance any size or time lines as we are working together with this team in order to identify exactly the best synergic approach without compromising any of the service level provided. But yes, there would be some. And for sure, in the next quarter, we'll come up with -- unlike others, we'd like to make sure -- we'd like to study in depth before we come up with a business plan and the synergy areas. We don't anticipate, but we try to do our own work first, if you allow me to say.

Okay. Fair enough. And then on the other acquisition, on Energere, can you give some details on this business? You've said $45 million in revenue, but can you add any commentary on growth of that business over the past few years or how margins compare to the rest of the GDI business?

Okay. Well, listen, I can say that the margins are more or less comparable to our business. The rationale behind it is they have a unique talent structure and a unique knowledge into, what I would call, the future real estate demand. You are all aware of the global warning -- warming crisis that we are all living. Over the next 10 years, it would be an extremely, I would say, focus need for our real estate clients to reduce their carbon footprints, to enhance their energy consumptions. So we wanted to make sure that we have the talent and the team that can enable us to pollinate through our other regions, like in Canada and the U.S. And our objective is, as we have released lately, as we have created the energy and -- I'm sorry, the energy segment and technology segment, we just created actually in the last couple of weeks, that will encompass Energere and other technology-driven services that we are rendering in order to really grow revenues. It's more -- you know what, it will be more -- except Energere, it would be a business development segment that would provide work into our business segment, mainly Ainsworth, but some others as well. So it would be a key driver of growth for us going forward. And we are building a whole business plan around it. Am I saying -- am I doing it -- am I saying it to you clear enough? Or you'd like me to talk more on it?

I'll always take more, but that is clear and understood.

But seriously, customers -- you know what, we have an extremely strong trade business across Canada and the U.S. We are $800 million-plus. We have about 4,000 techs and specialists on the road. Now the new need for the customers -- they will still need to have upgrades and replacement and rate stakes and service costs and maintenance, but we want to move into being on the offering side, providing customers with solutions toward the needs they are facing going forward. In order to do that, we needed the talent, the expertise, the knowledge, the -- I would say, the reference. And this is what Energere is providing us. It's providing us the [indiscernible], the springboard, in which we're going to multiply our Energy & Technology segment in Toronto, in Vancouver, in Calgary, in New York, in Pennsylvania. So this is the idea behind it. This whole segment will provide a better understanding of customer needs going forward.

Okay. That's very helpful. And then if I can just sneak in one more housekeeping question. In the Janitorial segments, when you segregate recurring services versus on-call services, am I correct in assuming that the kind of the onetime disinfection services, that's considered on-call, whereas your enhanced sanitation is still considered recurring? Is that fair?

Yes, exactly. Enhanced business are treated as recurring revenues, yes. I mean whenever it's regular and it is within the day-to-day service segment, it goes out to recurrent.

Your next question comes from Maggie MacDougall with Stifel.

Claude, I wanted to switch gears here and just talk a little bit about sort of the tail risks that we're seeing in economies, markets, generally speaking. Your supply chain of chemicals, is there any impact whatsoever that we should be thinking about from the really tragic events that have unfolded over the last week? I'm thinking through sort of the commodity complex and how that may feed into cleaning chemicals. I'll let you just answer that question, and then I'll have a follow-up.

Okay. Thank you. Well, Maggie, first, let me say that our thoughts and our hearts goes with the Ukrainian people that a week ago, they were living a normal life and now hell gets loosened in their country. So we are very, very disturbed by that emotionally. And I'm sure I'm speaking for all of us at GDI. This being said, I would say, first of all, is we do not have much of transactional -- transaction with Eastern Europe as far as our supply chain, to start with. So that's one thing. And secondly, as you know, I would say this. Thank God, we own the manufacturing and distribution company. In the pandemic, we were able to deliver services and get our raw material that we needed to execute. So I think it was a good positive for us. Going forward, yes, we were overstocked in 2021 because there was an overproduction, mainly in the disinfecting and sanitizing segments. But going forward, we have acquired a large manufacturing facility in the U.S. because we are reducing our exposure to global supply. At this time, we have some bumps with our Asian partners. We are working through it. As you know -- you know what, how can I say that, transportation maybe, shipping and transportation costs has exploded. So we're coping with the increase of cost. But again, we are looking to manufacture more and more in North America to reduce our exposure to international market events or international supply chain bumps that we have in the future. Are you -- did I cover it properly for you, Maggie?

You did. And then the second question I had was the other major concern that's been out there for a lot of different companies, is wage inflation. Labor markets are tight in the United States. And people have experienced rapid escalation there. So I'm wondering, you've got really good pricing pass-through, if there's anything further to add to that? It's really more just a box-checking exercise here with the question.

Absolutely, Maggie. You know what, you put your finger in my day-to-day worrying, if you allow me, that's for sure. But the first thing is we are very fortunate, we have -- most of our large markets are unionized, and we have mid- to long-term union agreements in place. So that makes it a little bit more secure on the salaries exposure. This being said, yes, it's -- the labor market has tightened up. And we have to deploy several initiatives in order to recruit and train because recruiting is one thing, training is another. And as the market is not reopened totally, we still are good with our service level. But as the market reopens, we need to really, really focus more and more. My risk, at the end of the day, would not be to not service customers, it would be to have to assume a little bit of overtime, which is not a good thing in the business. But we're not there. We are -- you know what, I can tell you that we are working upstream to that, go towards this problem. At last, I would say that we are one of the best employer in our trade, so we attract a lot of people that work in maybe more difficult or less rewarding business environment. So we cope on that as well to support us. Lastly, if there are some markets where we really have a bigger-than-anticipated problem with labor, we will service -- we will have to define our customer pool. And if we have to divest from some customers to have our labor working in the best environment, we will do so. But we're not there yet. But we're working actively towards it because I don't want to live the problem. So we'll try to resolve it before it happens.