Polishing Up Your Portfolio with GDI

GDI Integrated Facility Services (TSX:GDI) operates in the janitorial services and building systems maintenance and repair industries. Admittedly, not the most exciting of industries. However, sometimes the best opportunities come from the most unexciting businesses and often get overlooked due to their mundane nature. GDI is a big player in the janitorial space and continues to grow its market share. In such a fragmented market this is the kind of company you want to own. In this post we discuss the economics that make janitorial services interesting, and what they need to do stay competitive and their growth strategy going forward.

Economics Of Janitorial Services

The cost structure of a company operating in the janitorial services is quite attractive due to the low capital expenditures required for operations. Apart from the replenishment of cleaning supplies and occasional purchase of cleaning equipment (vacuums, electric floor scrubbers, mops), the main cost companies like GDI need to worry about is labor. About 58% of the GDI’s employees are unionized and although this may limit the company’s ability to negotiate bargaining agreements down, it also provides a sense of stability in its cost structure. This allows for labor costs to be well known in the industry which not only helps with GDI’s creditability and transparency but also makes it easier for GDI to pass on increases in labor costs (wages) onto its customers to support its margins. However, this puts GDI at odds against companies that can bid lower on contracts because employ non-unionized workers that accept lower wages. Arguably as important as cost-structure stability is revenue stability. GDI’s revenues make up the other important component to its attractive underlying economics. As mentioned in our report, the company’s revenue is mostly recurring from janitorial contracts that generally range from 3-5 years. The predictability of these revenues give the company lots of breathing room as it is able to build revenue backlog and commit more of sales resources to new customer acquisitions rather than focusing efforts on retention. The company’s size and reputation also help it ensure contracts as the company is regularly invited to participate in the bidding of contracts.

How To Stay Competitive 

To compete against lower-cost ‘mom & pop shop’ competitors, GDI needs to maintain an image of high standards, professionalism and quality to justify its higher bids on contracts. To grow or at least maintain healthy margins Employing unionized workers also gives off an image of caring for worker rights since the company is willing to abide stringent union requirements. Where GDI can outshine competitors is by leveraging its large network, acquiring smaller competitors and invest in technologies that increase the quality of its service. For example, GDI has invested in technologies that it uses to enhance customer experience such as devices that access cleanliness of an area to ensure job efficiency, a database of current and historic operational costs to reassure customers of competitive pricing, asset management software for property owners and a budgeting and maintenance platform it provides to customers. These technologies are a means for GDI to maintain transparency and enhance client relationships while giving it an edge over smaller competitors that do not have the luxury to pursue such devices.

GDI’s Growth Strategy 

GDI’s is currently implementing a 3-year growth strategy (as 2018) from which the company aspires to double its 2018 revenues. Management has indicated that they will achieve this by revamping their 1) franchise model, 2) expanding their building systems repair and maintenance segment and 3) expanding GDI’s footprint in the U.S. through acquisitions.

The company has set out 5 building blocks for growth:

  1. Improved competitiveness
  2. Cross-selling
  3. Sales effectiveness; more aggressive on sales
  4. Technical services
  5. Acquisitions: technical services and US - since 2008, 34 acquisitions, 6 acquisitions in 2018

GDI currently has a network of over 671 independent franchisees who provide cleaning services for small-to-large clients. These franchisees benefit from GDI’s subsidiary Modern Cleaning Inc through sales, administrative and customer service support as well as access to GDI’s large network of resources and competitive volume pricing for bigger clients. The company is making large investments into this franchise network for an enhancement in marketing, sales, administration, integration of resources etc.

Building blocks 1-3 are all related to their objective of revamping their franchise model:

1. Improved competitiveness

An integration of GDI’s resources and administrative process and investments in technology such as implementing a communications platform and other technologies to improve productivity and quality of service are all ways to improve the company’s competitive position. The company is also quite strict on walking away from business that does not bring sustainable profitability which ensures quality of service to all clients.

2. Cross-selling

Further integration within the company and the flexibility of its sales representatives will allow easier cross selling of other services GDI services such as HVAC servicing.

3. Sales effectiveness 

Management has emphasized the importance of investing more in marketing and sales first and foremost. The company already has quite a strong position in the Canadian market but it has not grown much in recent years, so we think an investment in more aggressive sales will help GDI grow long-term sales in Canada. However, management has not made it clear how much of those resources will be allocated towards U.S. sales. We think this should be an area that company focuses on in the largely undiscovered janitorial US market so we think a US sales strategy will follow up in future plans. Management seems to have a good understanding of how they needs to tackle the US market in terms of new customer acquisitions. GDI plans to focus on mid-sized clients in the US who can afford to pay more than smaller clients. While the company has a strong market share in Canada and is able to secure many large clients, it is still being discovered in the US so we think this approach makes sense for the company at this stage.

Building blocks 4 & 5 correspond to the company’s goal in expanding its Technical Services segment and growth through acquisitions in the U.S.

4. Technical Services 

This segment of the company is the building systems and maintenance side of the company (i.e. HVAC, plumbing, mechanical etc.). This currently generates only ~26% of GDI’s revenues and is starting to become more of a focus for the company. Management has expressed in recent earnings calls that the company can no longer simply view itself as a janitorial services company and that there needs to be a shift. The market opportunity for this segment is also very attractive for GDI considering that every building has these needs just as they have janitorial needs. This allows GDI to easily cross-sell its services to existing and new clients. GDI’s ability to focus on services that both complement each other and are considered a basic need for buildings to operate gives revenue predictability and an easy avenue for growth given the company’s expertise in customer relations in this industry and reputation for quality. The company is also being smart about growing in the segment by gaining expertise through company acquisitions. The company currently operates in building systems and automation space through its subsidiary companies Ainsworth Inc. and Airtron which the company acquired in 2015 and 2016 respectively. Over the last few years Ainsworth has made several acquisitions in the US and Canada and GDI plans to continue expanding this business through other acquisitions.

5. Acquisitions

Due to the company’s large size relative to competitors, GDI is able to acquire companies at attractive valuations, then very quickly leverage its capabilities and resources to make the acquired companies that much more valuable and profitable. Smaller companies that were not able to serve larger and more sophisticated clients are now able to using GDI’s muscle and economies of scale. GDI completed 6 regional acquisitions in 2018 – two in Western Canada, two in Quebec and two in the Northeastern United States – across the Technical Services, Janitorial USA and the Complementary Services business segments. While the company will likely to continue acquiring companies Canada, its position grows more saturated over time and will likely turn to the US more in the coming years for acquisitions as it is a bigger and fragmented market. We expect it to focus more on janitorial acquisitions given it is more of a dominant player in the janitorial space compared to the Technical Services space (more competition in the US).

In the 2018 GDI surpassed $1 billion in revenue and believes it can double its current revenues to $2 billion in 3-5 years. We always like when we see company’s giving revenue targets, as it not only sets expectations for investors and assists in valuing a company, but it also gives a sense of confidence and solid understanding from management on the company’s abilities and the dynamics of the industry. Given the company’s strong market position, ability to consolidate the industry in North America, and tight grip on costs, we think the GDI stands a good chance at achieving this relative aggressive target.

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The author does not hold a position in securities mentioned. Employees of 5i Research cannot trade in Canadian stocks.

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