FirstService Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2023

There are 9 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Third Quarter Investors Conference Call. Today's call is being recorded. Legal counsel requires us to advise that the decision scheduled to take place today may contain forward looking statements that involve known and unknown risks and uncertainties. Actual results may be materially different from any future results, performance or achievements contemplated in the forward looking statements.

Operator

Additional information concerning factors that could cause actual results to materially differ from those in the forward looking statements is contained in the company's annual information form as filed with the Canadian Securities Administrators and in the company's annual report on Form 40F as filed with the U. S. Securities and Exchange Commission. As a reminder, today's call is being recorded. Today is Thursday, October 26, 2023.

Operator

I would like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir.

Speaker 1

Thank you, Michelle. Good morning, everyone, and thank you for joining our Q3 conference call. Jeremy Rokusin is with me, and we're pleased to be on the line with you today to report on the strong Q3 results we released this morning. Results that reflect solid performance across each of our brands. We're very pleased with how the quarter played out.

Speaker 1

Trends and momentum that drove the last several quarters for us continued into Q3 Despite increasing headwinds relating to a challenging macroeconomic environment and softening consumer demand. Organic growth during the quarter was 10% on a consolidated basis. We're taking market share, and that is a tribute to our operating teams and their relentless focus on customer experience. We're growing organically while many of our markets and competitors are flat to down over the last quarter. Total revenues for the quarter were up 16% over the prior year with organic revenue growth, as I just said, at 10%, balanced about evenly between our 2 divisions.

Speaker 1

EBITDA for the quarter was $112,000,000 up 17 percent from 2022, reflecting a margin of 10%, approximately the same level as prior year and earnings per share were $1.25 up 7%. Jeremy will dive into the profitability metrics in more detail in a few minutes. Looking now at high level results for our divisions, Starting with FirstService Residential, where revenues were up 12% with organic growth over 9%. Results in this division were right on expectation. Top line growth was broad based with solid contribution from Each of our 6 regions in North America.

Speaker 1

Organic growth was driven by continued strong net new contract wins, leading to higher management fee and labor related revenue. Looking to the 4th quarter at First Service residential, we expect to again show low double digit revenue growth with organic growth at a mid to high single digit level. Moving on to FirstService brands. Revenues for the quarter were up by 20% with organic growth at 11%, driven by strength at our Restoration Brands and Century Fire. Our Restoration Brands, Paul Davis and First On-site, together recorded revenues that were up by about 25% versus the prior year with 1 third of the growth generated organically.

Speaker 1

We booked approximately $25,000,000 from named storms during the quarter, including continuing work from Hurricane Fiona, Hurricane Ian and Winter Storm Elliot. This compares to a negligible amount from named storms in the prior year quarter. Excluding storm work, we had a solid quarter and are pleased with the day to day activity levels across our branch network at both brands. During the quarter, we added to our footprint in restoration with 3 announced tuck unders. 1st On-site acquired Case Restoration based in Nashville.

Speaker 1

Case is a full service commercial restoration company We have specific expertise in large loss claims. This acquisition significantly enhances our capability End client coverage in Nashville, which is an important market for us long term. At Paul Davis, we added to our company owned platform with the acquisitions of our franchised operations serving Richmond, Virginia and Reno, Nevada. The Richmond branch complements our previously acquired Raleigh, North Carolina operation, Expanding our footprint in the Mid Atlantic region. Similarly, the Reno location augments the Scale and service capabilities of our existing Nevada and Utah company owned operations and the branches will operate collectively as one region.

Speaker 1

Looking forward, we expect our for restoration in Q4 to be down from year ago, up to 10% based on current backlog and trends. We generated $85,000,000 in Q4 last year from hurricanes Ian and Fiona, which led to an outsized result for us and a tough comparison. We continue to work through the remaining backlog from Ian, Fiona and Winter Storm Elliot and expect to generate revenue from named storms at a similar level to this past quarter in the $25,000,000 range. As I mentioned earlier, we're very pleased with current activity levels. And outside of named storms, our backlog from day to day activity is strong.

Speaker 1

We expect to have a solid Q4 in restoration. Moving now to Century Fire, where we had a very strong Q3 with record revenues. It was similar to Q2 with almost all our 30 plus branches growing sequentially and versus the prior year. We expect another strong quarter upcoming with growth in the 10% range against a very On Q4 last year that was up 20% organically versus 2021. And I'll finish with our home improvement brands where we saw our growth slow during Q3, up mid single digit year over year in total with organic growth at a low single digit level.

Speaker 1

Higher interest rates, record low home resales and a challenging macroeconomic backdrop Has significantly impacted consumer demand. Our leads are off 10% versus year ago. As I mentioned last quarter, we've continued to drive growth through improved lead conversion and close ratios. We expect a similar result in Q4. Our teams believe we will continue to drive single digit growth against a prior year comp that was relatively weak.

Speaker 1

Let me now call on Jeremy to review our results in more detail.

Speaker 2

Thank you, Scott. Good morning, everyone. As you just heard, FirstService delivered strong financial results for the 3rd quarter on both a consolidated and segmented basis. For the quarter, we recorded consolidated revenues of $1,120,000,000 up 16% And adjusted EBITDA came in at $111,900,000 a 17% increase relative to the prior year period. Below the operating line, our adjusted EPS was $1.25 up a more modest 7% quarter over quarter, reflecting the higher interest rate environment this year compared to 2022.

Speaker 2

Highlighting our consolidated performance for the 9 months year to date, We have delivered revenues of $3,260,000,000 up from $2,730,000,000 in the prior year period, An increase of 19%, which includes 14% organic growth. Adjusted EBITDA sits at 312 $400,000 a 25 percent increase year over year with our overall EBITDA margin at 9.6%, Up 50 basis points versus a 9.1% margin for the prior year period. And lastly, our adjusted EPS year to date is $3.56 an increase of 18% over the $3.02 Reported for the same period last year, even in the face of a more than doubling of our interest expenses. Our adjustments to operating earnings and GAAP EPS and providing adjusted EBITDA and adjusted EPS respectively are disclosed in this morning's earnings release and are consistent with our approach in prior periods. I'll now walk through the Q3 segment results for our 2 divisions.

Speaker 2

At FirstService Residential, we generated revenues of $537,800,000 a 12% increase over Q3 2022. The strong top line performance drove EBITDA of 56 $600,000 representing 14% year over year growth. Our current quarter EBITDA margin yielded 10.5% relatively in line with the 10.4% in last year's Q3. The broadly distributed growth across our markets and service offering Has also driven balanced profitability for the year with our year to date EBITDA margin sitting at 9.6%, again relatively comparable to 9.8% in the prior year. Within our FirstService Brands division, we generated revenues of $579,300,000 during the current Q3, up 20% versus the prior year period.

Speaker 2

Our brands' EBITDA increased by 24% to $60,700,000 With a 10.5% margin, up 40 basis points from a 10.1% margin in last year's Q3. Our brand's margin improvement reflected operating leverage benefits derived from the strong division top line performance, particularly at our Century Fire Protection and Restoration Service Lines. With the quarter over quarter margin improvement at Both of our operating divisions, our consolidated margin ticked up slightly to 10% flat, notwithstanding higher corporate costs in the current quarter due to foreign exchange fluctuations. The strength in our operating and financial performance across our businesses also We delivered $84,000,000 in cash flow from operations Without any additional working capital as accounts receivable collections offset other operating requirements. Our 9 months year to date operating cash flow of $170,000,000 is up more than threefold versus the prior year period.

Speaker 2

Capital expenditures during the quarter totaled $23,000,000 with the year to date tally sitting now at $68,000,000 For the full year, we expect to be at or slightly lower than our previous targets of $80,000,000 in maintenance spending and $100,000,000 of all in CapEx. Acquisition investment during the quarter was modest, Reflecting the completion of a few restoration tuck under transactions that Scott referenced. Year to date, we have deployed over $110,000,000 acquisition capital and we are pleased with our tuck under program activity in contributing over and above our strong organic growth. We also continue to advance our deal pipeline to surface additional attractive investment prospects across our service lines. Our balance sheet at quarter end included net debt of just over $640,000,000 computing to leverage at 1.5 times net debt trailing 12 months EBITDA, down slightly from the 1.6 times level for growth for both the previous second quarter and 2022 year end and relatively consistent with longer term historical trends.

Speaker 2

We also have approximately $450,000,000 of total cash on hand and undrawn availability under our credit facility. We are well positioned with our conservative and flexible capital structure and ample liquidity to aggressively deploy capital towards future In terms of our outlook for closing out 2023, Our consolidated revenues for the Q4 will likely see more tempered mid single digit growth. As Scott noted, Q4 2022 included $85,000,000 in revenues from hurricanes Ian and Fiona late last year. Without any similar pending storm related events as we sit today in the current Q4, we expect that revenues Our restoration operations will be down year over year with all of our other brands growing at high single digit to low double digit percentage ranges. In terms of profitability, we expect that Q4 Consolidated EBITDA will be roughly in line with last year's Q4 due to a year over year decline in restoration profitability, Driven by both lower revenues and a margin decline without the benefits of storm related work.

Speaker 2

We anticipate Continued strong and profitable growth across our remaining operations. With this outlook, combined with our 9 months year to date results, We will deliver 2023 annual total revenue growth in the mid teens percentage range with a similar level of consolidated EBITDA growth, very impressive performance for the year. During our next earnings call in February, covering off our year end results, We will also provide a high level 2024 outlook encompassing upcoming budget and strategic planning reviews with our brands. That concludes our prepared comments. Operator, please open up the call to questions.

Speaker 2

Thank you.

Operator

Thank you. At this time, we will conduct the question and answer session. Q and A roster. The first question comes from Faiza Alwy with Deutsche Bank. Your line is open.

Speaker 3

Yes. Hi. Thank you so much. Good morning. Good morning.

Speaker 4

I wanted to follow-up on the comments you made around the home improvement brands where you saw growth slow. I mean, it sounds like it was still pretty reasonable at mid single digit year over year growth and you're indicating that it would be low single digit next How much of a lag is there as it relates to consumer demand? And you mentioned leads are off 10% versus year ago. How should we think about this business in 2024 assuming current conditions persist? And I'm curious if you think of this business as a leading indicator to any other part of your business, whether it's on 1st service residential or I feel that there isn't that much of a macro component elsewhere in your portfolio, but curious how you think about it.

Speaker 1

Right. Okay, Faiza, there's a lot there. So let me start to work through it. Definitely consumer demand for home improvement is down. We see it.

Speaker 1

There are a number of industry research Groups and indicators that point to it being down and we don't expect the environment to improve over the next several quarters. But you've heard me say before that our teams are very resilient And focused on growth and these markets are very large. And our teams, The belief system is that we can scratch out growth even in the down market. We've proven that over the last few quarters with a focus on close ratio and lead conversion. And we've also been More aggressive, I think, in terms of marketing, with some utilization of discounting and promotion.

Speaker 1

There is not much of a lag in this business. Our backlog is measured in weeks. And so changes in consumer demand will impact us pretty quickly One way or the other. In terms of it being a leading indicator, It's not a significant leading indicator for any of our other businesses. I mean, Most of our 2 largest businesses, FirstService Residential and Restoration are both Really agnostic to consumer demand and more driven by weather in the case of restoration and in the case of FirstService Residential, I mean Communities need to be managed in good markets and bad markets.

Speaker 1

So we don't see it as a significant indicator for us. I'll leave it at that. I'm not sure I answered all your questions.

Speaker 4

No, that's very helpful. Thank you. And I just have a separate question, if that's okay. And that's just around some of the acquisitions that you've made, particularly on the I'm curious how you think about synergies or the benefits of Scale, like it seems like there's still a lot of white space opportunity. So maybe talk a little bit qualitatively or if you can add some numbers to it, that would be helpful in terms of what you're Is there a synergistic benefit and should we expect higher margins as you grow in scale and when does that happen?

Speaker 1

Yes. Both of the businesses you mentioned, we're filling out our footprint. And The biggest benefit is that we are better positioned and better able to respond to our national accounts. In restoration, we have between both brands over 400 branches and we're very well positioned to respond to Our insurance carriers and our national commercial accounts. And in Century, we continue to build out Primarily the Southeast and Mid Atlantic regions.

Speaker 1

And again, that national account program, the more that we can self The more we keep for ourselves because we do use a vendor network elsewhere. So that the prime it's not a significant level of efficiency that's created from scale. It's more of a positioning in the market and with our clients because both businesses are local service delivery. And so we're adding labor when we add branches.

Speaker 4

Great. Thank you very much.

Operator

Please stand by for the next question. The next question comes from Stephen MacLeod with BMO Capital Markets. Your line is now open.

Speaker 5

Thank you. Good morning, guys.

Speaker 6

Hi, Steve.

Speaker 1

Just a couple of a couple

Speaker 5

of questions that I wanted to follow-up on. Just on the residential side, I mean, Scott, I think you sort of covered it off in your prepared remarks in the Q and A. But Just curious, can you just confirm, are you seeing any macro impact to the residential business as it relates to residents' ability to Pay fees or cost pressures you're seeing, pricing pressures you're seeing on contracts, things like that?

Speaker 1

There's 2 different things there. We're not seeing any pressure on monthly management fees and delinquencies as it relates to the residents. But certainly budgets are increasing at communities in terms of Primarily through increased insurance premiums, and I would say particularly in the Risk areas, Texas and Florida, but generally the high rise environment. And so the increasing inflation across their cost structure is certainly put pressure on budgets And put pressure on us around pricing, which is Yes. Stephen, you followed us for a long time.

Speaker 1

I mean, that's nothing new in this business for us.

Speaker 5

Yes. Sorry. Yes, no, that's great, Scott. Yes, I mean pricing pressure is always there. That's helpful.

Speaker 5

And then just as you think about the brands business in Q4 with the restoration business, we did see

Speaker 1

a couple of storm we did see some

Speaker 5

storm activity in The in earlier this fall. And I'm just curious, are you seeing any backlogs building from those storms? And then secondary to that, Just when you think about Q4 and the comp, again, a growth sort of slowing against the tough comp. Can you just talk a little bit about what kind of margin impact that might have on Q4?

Speaker 1

Right. Okay. I'll deal with the first Pardon the question. We didn't see a significant pickup in our backlog related to some of the regional The events you spoke about in Florida, that storm really hit an area that wasn't heavily populated or did not have Much of a footprint as it relates to our national accounts. And then in the Northeast again, similarly, It didn't lead to a lot of mitigation and restoration work.

Speaker 1

Jeremy, over to you on margin.

Speaker 2

Thanks, Scott. Steve, yes, the lack of comparable weather related activity means that margins will be down at restoration And that obviously impacts the overall FirstService Brands division. Again, we see that being down year over year. Probably relatively similar coming in relatively similar sequentially to the current Q3 for that division.

Speaker 5

Okay. I see. So you would expect Q4 margins to be similar to what they were in Q3 On the brands.

Speaker 6

In

Speaker 2

the ballpark. I mean, obviously, moving parts, but directionally, yes.

Speaker 6

Yes.

Speaker 5

Yes. Okay. That's great. I'll pass it back to the line. Thank you.

Operator

Please standby for the next question. The next question comes from Stephen Sheldon with William Blair. Your line is open.

Speaker 6

Hey, thanks and really nice job in the quarter. First, on the organic revenue growth in residential, I mean, it continues to be outstanding. I think you've historically said that sourcing labor for contracts is usually the biggest impediment or limiter to grow. So curious what you're seeing on the labor side right now. Is it getting any easier to source labor?

Speaker 6

And have you changed anything materially on the execution side to allow you to better recruit and retain labor.

Speaker 1

The labor market Continues to improve for us and we're really seeing it across all the brands. FirstService Residential may be the best example Because you've heard from us over the last few quarters that we've been filling our open positions and we're Sort of back to historical levels and I think the market has certainly eased. We're seeing more applications. We're filling more jobs more quickly. Our turnover has improved.

Speaker 1

But at the same time, The second part of your question, Stephen, we have certainly invested in resources and technology around Recruiting and also onboarding. And so it's hard to discern or put a pin in The improvement whether we've been the architect of that or whether the markets come back to us, but it's yes, I think it's a little of both.

Speaker 6

Got it. And has that I guess is that you typically talked about 3% to 5% organic growth in that business. Given your some of the changes that you've been able to kind of push through the improvement on the execution side and maybe Has your thought process there changed on what the organic the right organic growth profile to think about that we should be thinking about for that? Yes.

Speaker 1

I mean, It's been much stronger this year. Definitely, we're getting a little more price. We continue to Carry some momentum from strong sales late last year early this year. That's starting to normalize. So it's easing its way back down.

Speaker 1

Mid to high, I would say, I'm comfortable with right now. Got it. Got it. That's helpful.

Speaker 6

And then just on Century Fire, given that half of that business seems tied to new construction activity for installations, just curious about the subsector exposure there. Century Fire is more exposed to certain subsectors for construction, thinking about office versus industrial versus Multifamily, more exposed to certain of those versus others. And how are you thinking about the growth outlook there given any visibility you have into new construction over the next few years?

Speaker 1

Right. I mean, certainly in terms of our backlog, we feel Very good about Q4 and I think it will carry into Q1. But As you suggest, the commercial real estate market is less than robust right now. So we're keeping a very close eye on backlog. We do have a strong presence in multifamily and distribution warehouses, Office retail across the board, but I think generally if Commercial Real Estate, new construction slows dramatically.

Speaker 1

We would at some point, we're going to see that. 50% of that business would be a new install and 50% is recurring service inspection repair.

Speaker 6

Got it. Thank you.

Operator

Please standby for the next question. The next question comes from Michael Doumet with Scotiabank. Your line is open.

Speaker 7

Hey, good morning, guys. Scott,

Speaker 2

you started off with,

Speaker 7

I think some comments on market So

Speaker 5

I just want to kind of get a little bit

Speaker 7

more detail on this, but for the Home Improvement And the Century Fire business, is it possible at all to break down what you think is market share growth versus industry growth? And then in your view, do you still think you have the levers to continue to push maybe a similar market share gain for those two segments into 2024?

Speaker 1

It's easier to create clarity In the Home Improvement business because there are a number of research groups that follow it pretty closely. And So we feel very confident that we're taking share in closet organization space, painting, The significant brands we have, floor coverings, tougher at Century Fire, But the organic growth we're seeing is quite strong. And I think that we're driving a lot of it. As we've made acquisitions, we're adding services We are necessary to ensure all our branches are full service and adding alarm to sprinkler businesses and vice versa, adding service to Primarily installation businesses and it's been a significant growth driver for us to add services to the existing And so we're taking wallet share in that instance, but It's definitely a higher number, our organic growth than the market. But it's not crystal clear.

Speaker 1

And in terms of driving this into 2024, I think we'll continue to take share. The question is The market and what kind of support we get from the market.

Speaker 7

That's helpful. Thanks. And then maybe flipping over to restoration. I think previously you talked about making investments in that business that once completed would drive Progressing timelines on potential margin expansion for that business, obviously, recognizing that storm impact I mean aside, as it relates to

Speaker 2

these investments. Michael, yes, it's Jeremy. Investments on track. We're probably 2 thirds of the way now in terms of onboarding our branch network. We said this would carry on through this year and likely into part of 2024.

Speaker 2

And then after that, we'll evaluate the opportunity For reaping the benefits of that investment. So I suspect at some point in 2024 and into the later years we will see that And we'll get greater clarity as we go through budget and strategic planning reviews in the next couple of months with both restoration as well as all of our other businesses, Clarity on 24 and beyond.

Speaker 1

Very helpful. Thanks, guys. Okay. Thanks.

Operator

Please standby for the next Question? The next question comes from Tom Callahan with RBCCM, your line is open.

Speaker 3

Thanks. Good morning, guys. Maybe just one on my But maybe just some comments on the acquisition pipeline you guys alluded to in the prepared remarks there. I know you're a little more active towards the end Of last year early this year, but kind of where it stands right now maybe relative to last year? And is there a specific focus?

Speaker 3

Or is it kind of broad based across the restoration and residential side of things.

Speaker 1

The pipeline is solid Relative to last year, I mean, I'm just thinking back, we did close some 4th quarter deals last year. So I think it would be close to where we were last year at this time, but It's generally in line with where we've been. And Jeremy talked about Our spend this year, we're very comfortable with what we've accomplished so far. It's right in line with where we've been the last few years. And our pipeline is in decent shape.

Speaker 1

I don't Whether we'll close in the Q4 or whether that will leak into next year, but we've got activity and it's balanced across both divisions.

Speaker 3

Got it. That's very helpful. And maybe just one follow-up piece on the residential side. You've talked about the success With the repricing there on the renewals, just curious has that impacted retention rates at all or are those Holding pretty steady?

Speaker 1

No. Retention is at our long term historical rate. It's about the same as it has been the last several years.

Speaker 3

Awesome. Thanks. I'll turn it back.

Operator

The next question comes from Frederic Bastien with Raymond James. Your line is open.

Speaker 8

Yes. Thank you. Good morning. Scott, you've been just follow-up really on the M and A Questions here. You've been quite active and successful at consolidating restoration and fire protection in recent years.

Speaker 8

As you look forward, How far are you from where you'd like to be? I mean, just wondering if you can conceivably double, perhaps triple the size of these businesses in the next 5 years or so.

Speaker 1

In the case of restoration, I would say that Our activity would be slowing. Our footprint is starting to fill out, and We will become more of an organic growth engine as we have been in our FirstService Residential. We still have white space that we're focused on, but I'd see the next few years won't be As active as we have been the last three. Century Fire, we still got Lots of white space and regions to grow into. So I see that being continuing to grow sort of at the same pace As we have been.

Speaker 1

But in both cases, Frederick, you know that our first focus is on organic growth. Are we winning day to day at every branch? That's our first priority and it will continue to be that.

Speaker 6

Awesome.

Speaker 8

Thanks. That's all I have. Great quarter.

Speaker 2

Thanks.

Operator

I show no further questions at this time. I would now like to turn the call back to Mr. Scott Patterson for closing remarks.

Speaker 1

Thank you, Michelle, and thank you all for joining us today. We look forward to

Operator

Ladies and gentlemen, this concludes the 3rd quarter investors conference call. Thank you for your participation. You may now disconnect.

Remove Ads
Powered by Quartr
Earnings Conference Call
FirstService Q3 2023
00:00 / 00:00
Remove Ads