FirstService Q1 2023 Earnings Call Transcript

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April 26, 2023

There are 6 speakers on the call.

Operator

May be materially different from any future results, performance or achievements contemplated in the forward looking statements. 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 is 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.

Operator

Today is Wednesday, April 26, 2023. I would like I turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir.

Speaker 1

Thank you, Shannon. Good morning and welcome everyone to our Q1 conference call. Thank you for joining. As usual, Jeremy Racoosin is on the line with me today and together we will walk you through the results we released this morning, results that reflect continued very strong growth in both divisions. Total revenues for the quarter were up 22% over the prior year with organic revenue growth at 17%.

Speaker 1

Again, this quarter boosted by particularly strong growth in our brands division. EBITDA was up 32%, Reflecting a margin of 8.1%, a 60 basis point increase over last year's Q1, primarily resulting from operating leverage in brands. Earnings per share were up 16%. We're very pleased with our performance to start the year and confident that it sets us up for a strong 2023. I'll summarize the results for each division and then pass it over to Jeremy to provide more financial detail.

Speaker 1

At FirstService Residential, revenues were up 13% with organic growth at a very strong 11%. Organic growth reflects net new contract wins and increases in labor and services provided to existing accounts, we entered this year with momentum off the back of a strong sales in the 4th quarter and solid client retention. Our growth was broad based across North America with particularly strong results in the Southeast and Texas, driven by wins in our high rise and lifestyle verticals. And speaking of high rise, At the end of March, we were very pleased to close on the acquisition of Crossbridge Condominium Services, The largest condo management company in the Greater Toronto market. Together, we are now the clear leader in the fastest growing high rise condo market Sandra Zuliani and Tracy Gregory have led Crossbridge for many years and we are delighted that they are partnering with us and will continue to lead day to day operations.

Speaker 1

Looking forward to Q2 and the balance of the year, we expect to show similar low double digit top line growth for FirstService Residential, With organic growth likely settling in at a high single digit level. Moving on to FirstService Brands, revenues for the quarter were up 30% with organic growth at 23%, Driven by very strong results at our Restoration Brands and Century Fire. Our restoration brands, Paul Davis and First On-site, together recorded revenues that were up about 40% Over the prior year with almost 3 quarters of the growth coming organically. We generated $75,000,000 to $85,000,000 from named storms during the quarter, including hurricanes Fiona and Ian and winter storm Elliot. Sequentially at the similar level to the revenues generated in Q4 and significantly higher than storm related revenues in Q1 of last year.

Speaker 1

Winter Storm Elliot impacted a very wide geography. It's difficult to nail down revenues directly relating to the event, expand our Paul Davis Company owned platform with the acquisition of 1 of our largest franchises with operations in Houston, Raleigh, North Carolina and Nashville, Tennessee. We're partnering with Bob Hillier across these 3 major markets And together we have ambitious growth plans. The Paul Davis brand has significant opportunity in these markets. Looking forward in restoration, we expect another strong quarter upcoming.

Speaker 1

Our backlog remains solid. It's up significantly over prior year levels, which will lead to strong year over year growth in Q2. Including the impact of recent acquisitions, we expect to show growth in Q2 of about 40% relative to a weak quarter for us in 2020 2, there was light on storm related revenue. The back half of this year is difficult to forecast at this point. We expect to have some Hurricane Ian related backlog that carries into Q3, but it is too early to quantify.

Speaker 1

In general, activity levels are strong for our restoration brands and we feel very good about our market penetration and positioning relative to our competition. Moving now to Century Fire. We had another very strong quarter with organic revenue growth in and around 20%. I said in my prepared comments at year end that Century has momentum across all its service lines and that's what we saw during the quarter. Alarm and sprinkler installation, inspections and repairs and national accounts all up organically by double digit percentages.

Speaker 1

The backlog at Century is stable and bid activity remains solid, and we expect continued strong results over the balance of the year, albeit against tougher comps. We expect double digit organic growth, but not at the same elevated level as the last two quarters. And now onto our home service brands, which as a group, we're up close to 10% over the prior year with organic growth accounting for about 2 thirds of the lift. We're pleased with this performance in increasingly uncertain environment. Leads are down at our home service brands as homeowners pare back or delay projects due to higher interest rates and the threat of a recession.

Speaker 1

Our teams remain confident that we will continue to drive growth this year. I said it before, the markets are huge and the work is there even in a flat to down home improvement environment. Let me now call on Jeremy to review our results in detail.

Speaker 2

Thank you, Scott. Good morning, everyone. I'll start by summarizing our Q1 results on a consolidated basis, which in broad based terms largely resembled our prior Q4 reporting period. The common theme being very strong organic growth across the board with the incremental revenue performance is driving margin improvement and superior operating earnings growth. For the quarter, we reported revenues of $1,020,000,000 a 20 2% increase over the $835,000,000 for Q1 'twenty two.

Speaker 2

Adjusted EBITDA was $82,100,000 up 32% versus the prior year's $62,300,000 and this yielded an 8.1% margin for the quarter compared to a margin of 7.5% in the prior year quarter. And our adjusted EPS was $0.85 up over the $0.73 is a strong 16% year over year earnings per share growth even in the face of higher interest costs, which will more than double versus Q1 'twenty two. Our adjustments to operating earnings and GAAP EPS and driving at adjusted EBITDA and adjusted EPS respectively are consistent with our approach in prior periods. I'll now summarize the segment results for our 2 divisions. FirstService Residential generated revenues of $446,000,000 up 13% over last year's Q1, While EBITDA was $32,000,000 a 5% increase over the prior year.

Speaker 2

The EBITDA margin For the division came in at 7.2%, down 50 basis points versus the 7.7% margin last year. The margin was impacted by a higher mix of low margin, labor driven services, which grew significantly as we both won new contracts and increased the penetration of existing accounts. During the seasonal trough Q1 period for a portion of our amenity management offering, this ramp up of labor without associated revenue accentuated the margin impact. For the coming Q2, we expect our residential margin to be roughly in line or mildly lower is in the prior year period. Shifting to our FirstService Brands division, we reported revenues of $573,000,000 during the Q1, up 30% over last year's Q1.

Speaker 2

EBITDA came in at $54,800,000 a 50 2% increase versus the prior year quarter. The division margin increased to 9.6%, is up 140 basis points versus last year's 8.2% level. On our last earnings call, we had forecasted the margin improvement is driven primarily by our restoration operations, which capitalized on weather related storm activity during the current quarter compares against the mild weather patterns last year. For upcoming Q2, we are anticipating brands margin improvement on the back was similar sequential contribution from our restoration operations as the current quarter. Turning to our consolidated cash flow, we generated $63,000,000 of cash flow from operations before working capital changes up 24% over last year's Q1.

Speaker 2

Working capital investments absorbed this operating cash flow as is relatively is typical during our seasonal trough Q1 when some of our businesses ramp up operations for their balance of year peak cash flow periods. These working capital requirements also included a significant increase in accounts receivable at our restoration operations due to the storm driven activity over the past couple of quarters. And this AR increase in fact reflected a more than $70,000,000 swing versus Q1 'twenty two, which lacked any meaningful weather activity. Capital expenditures during the quarter were just over $20,000,000 up modestly year over year. We maintain our CapEx guidance for the year of roughly $100,000,000 $80,000,000 on a normalized basis, excluding one time office moves is described in our prior Q4 call.

Speaker 2

Finally, during the quarter, we deployed approximately $80,000,000 of capital towards 3 tuck under acquisitions, which were a little larger than our typical size tuck ins. We continue to be active in cultivating our deal pipeline as we look to be assertive in the current environment. Finally, our balance sheet. With the cash flow commentary I just provided, we closed quarter with net debt of just over $700,000,000 resulting in leverage as measured by net debt to trailing 12 months EBITDA at 1.8 times. Liquidity, including our cash and undrawn bank revolver balance is approximately $380,000,000 leverage is conservative and liquidity is ample to achieve our growth targets.

Speaker 2

Looking forward, our outlook for the full year is relatively consistent with the high level indicators I provided with our 2022 year end results In February, we see the previous 10% annual revenue growth target picking up to the low teens percentage range for three reasons. 1, strong Q1 performance 2, restoration backlog conversion driving incremental revenue in Q2 and 3 recent tuck under acquisition contribution. We are maintaining our view that consolidated margins will be relatively in line or possibly slightly higher versus prior year. That concludes our prepared comments. Shannon, you can now open up the call to questions.

Speaker 2

Thank you.

Operator

Thank you. Our first question comes from the line of Michael Doumet with Scotiabank. Your line is now open.

Speaker 3

Hey, good morning, guys. Very impressive quarter, as you see the organic growth. First question On FSR, I appreciate raising prices in residential is always a challenge, but given the lower margins, I'm assuming in part due to the, you spoke about the mix, but also the lower retail activity. I wonder if the thinking with you and maybe some of your peers here Is that prices need to continue to trend higher to offset some of these pressures and build back towards historical margins? And maybe to expand on that, Are you seeing any increase in churn?

Speaker 3

And if not, can we assume that the 2% to 3% could continue for several quarters potentially?

Speaker 1

Yes, I think, Michael, we're probably we continue to make some progress. I think our 11% organic growth, probably 3% of it is price. And we will get our make our way back to our historical margins. In this business, we can't recoup our cost increases immediately. The competitive environment really, I think prevents that.

Speaker 1

And so we're in a we're always in a continue, but we're confident that our margins will make their way back to historical levels. And Don't forget that transfer and disclosure income, which is a high margin ancillary is still well below historical levels. And we can't increase prices on core management or other services To recoup T and D because again that will settle in at its historical average as well.

Speaker 3

That's really helpful. Thanks for the color. The second question, I think you get asked a version of this question every conference call, so in keeping with the tradition. Just on home improvement, If I look back through 2019, it looks like the cumulative growth, 2022, 2021 in particular, was about 50%. The rates are growing are slowing and obviously there are concerns.

Speaker 3

But

Speaker 4

I guess just to get

Speaker 3

a better sense for the sustainability Of the last 2 years, any way you can break down price and market share just to give us a sense for how much those contributed to that growth?

Speaker 1

Well, in that business, we have been able to pass along cost increases. The last couple of years have been very strong organic growth years, 20% plus And we were probably close to half of that, maybe high single digit in price. In terms of sustaining growth in this market, the thesis and the strategy is that we have leadership positions, but very modest share. And these markets are huge. And there is an opportunity for us to grow even in a down environment.

Speaker 1

And that's the way That's certainly the belief system within our teams and that's the situation we're in now. And as I said in my prepared comments, Our teams are very confident we'll grow this year.

Speaker 3

Got it. And maybe just as a follow-up, if I am to presume that promotional activity is picking up. Any implications for margins?

Speaker 1

Did you say promotion activity? Promotional activity either increase marketing or promotional. Yes. No, that's actually very true. Headwinds are stronger in this business than they were at year end and definitely seeing consumers defer decisions And cut back on job size.

Speaker 1

And for us, we see it as an opportunity to take share, take more share. And so we are investing in marketing and promotion and that will temper Any operating leverage that we might have otherwise seen with increased revenues. And it also, we were talking about price increases a minute ago, it also Sort of changes that dynamic too. We'll probably see stable pricing this year, if not a bit of discounting. Got it.

Speaker 1

Makes sense. Thanks a lot, Scott.

Operator

Thank you. Our next question comes from the line is Daryl Young with TD Securities. Your line is now open.

Speaker 3

Hey, good morning guys and congrats on the good results. Just following up on the residential property management side. If you strip out that 3% price growth, You're still delivering huge market share wins and volume growth. Is there anything that's changed in the market that's allowing you to forms so strongly. I'm just wondering if maybe there's an increase in HOA outsourcing or if there's something following the pandemic where Boards are more inclined to go with professional services or any color you can give there, it's just very strong.

Speaker 1

No, I don't think anything fundamental I like that, Daryl. I mean, we had a very strong sales quarter in Q4 and solid retention, which gave us some momentum coming into Q1, which certainly helped. And We will certainly focus on continuing to drive that balance between wins and losses. The other modest boost we had in the quarter was increased labor and services at existing large communities in some regions, in our South region in particular, we have cost plus contracts that specify a certain number of employees on-site. And we have been challenged through the pandemic Over the last few years to fill all of these contracted positions due to the labor shortages.

Speaker 1

In the last year, certainly relative to Q1, we have significantly reduced our open positions. And in a cost plus environment that drives revenues. That's we'll see that over the next few quarters as well, Some of that, but it's not something that we'll see ongoing.

Speaker 3

Got it. Okay. And then just with respect to the investments being made in the restoration platform and the spend that's ongoing there, Can you give us any updates on how far along you are? I know you've sort of said it's going to continue across this year. But are there any benchmarks or indications you can give us on when that drag may subside?

Speaker 1

Jeremy, you want to grab that?

Speaker 2

Sure. Thanks, Scott. Yes, Daryl, one of the major initiatives is onboarding our branches onto our operating platform that we built out, it's largely technology driven and I'd say we're approaching the halfway mark on that. We've got over 100 branches that we need to get onto the single platform. So I've said before, we're going to be into 24 before we complete with that and then there will obviously be additional small modules on the edges that we'll be continue to optimize, but it's into 24 and then we should be largely Done with the major wave of these investments.

Speaker 3

Got it. Okay. I'll jump back in the queue. Thanks guys.

Operator

Thank you. Our next question comes from the line of Stephen MacLeod with BMO Capital Markets. Your line is now open.

Speaker 5

Great. Thank you. Good morning, guys. Just wanted to follow-up on the residential business. I know

Speaker 3

you gave a little bit

Speaker 5

of color around organic growth was quite strong, but just curious if you can give a are a lot of those gains coming from market share gains and if so, is it just the natural attrition that happens in the market or is there something else Going on where you're being more competitive and driving that above average organic growth rates?

Speaker 1

We continue to have success in the high rise and large lifestyle communities Where we have scale and expertise and we're seen as experts. These are Large communities, often with 100 plus people on-site. These are staff members that need to be recruited, onboarded, trained, managed and it's complex. They also require a broad service offering, food and beverage, amenity management, event planning and so on. So our expertise in this area is well known And it's less competitive for us.

Speaker 1

And so we do have certainly a greater win rate When we have opportunities in front of us like this and it's a sweet spot for us and a focus of ours. So I think It's primarily those verticals, Stephen.

Speaker 5

I see. Okay. That's interesting. And would you characterize the runway for those incremental contract gains in that in those verticals, high rise, large livestock communities, is that a large addressable market or is that sort of more of a niche segment of the market.

Speaker 1

No, it's large. It's large and it's this is not new for us. I mean, this is many years. This has been certainly a component, a significant component of our growth. But I think the 11%, this boost I described from filling open positions and price, we're not far off our historical rate You know, when you take those into account.

Speaker 5

Okay. I see. That's helpful. Thanks, Scott. And then just on the brands business, Jeremy, you talked a little bit about The margin expectation for Q2, and just curious, would you expect or maybe too soon Would you expect to see a similar type of margin gain in Q2?

Speaker 5

And then secondly, I guess on the back of What was a strong Q1 margin and what's expected to be ongoing margin strength in Q2? Do you feel like you're well positioned to drive margin growth In the brands business on a full year basis?

Speaker 2

Well, for Q2, for sure, I don't know if it will match 140 basis point, but we'll have meaningful margin improvement in Q2, again, largely Due to what we see as a similar contribution from restoration as we got this Q1 and frankly Q1 mirrored Q4. So three pretty similar quarters of restoration, incremental revenue from the weather driven activity and day to day wins as well. That's going to drive consolidated margin improvement. For the back half, I think we got to be cautious. We need to see It's not just about restoration, it's the other businesses as well.

Speaker 2

But restoration in particular, really dependent on whether we see weather In the latter half of this year. Q3 will be, if we're comping against last year, There wasn't much to speak of. So that could be apples to apples if we don't get weather. But Q4, if we're looking at further, We had a strong Q4 in 2022 and it really will be dependent on what weather does in that business. All the other businesses are performing very well on the margin front.

Speaker 5

Okay, great. That's it for me. Thanks guys.

Operator

Thank you. Our next question comes from the line of Stephen Sheldon with William Blair. Your line is now open.

Speaker 3

Hey, good morning and congrats on the results. First question here on Century Fire. I know there are some concerns about construction activity slowing here given the macro challenges. So curious how you're thinking about the risk of slowing construction activity weighing on the growth trajectory of the fire business over The next few years, just given that new construction is at least one factor supporting growth there.

Speaker 1

Yes, certainly, Stephen, we're Keeping an eye out on our bid activity and backlog, our backlog is in a position that gives us visibility really for the balance of the year and we feel comfortable With the balance of the year, but as you suggest, the certainly, As I said, headwinds in the home improvement market and often residential is a precursor to commercial. So we're very cognizant of it. I would say in this last quarter, Service, in particular, led the way for us in terms of growth. So we feel very good about that. And we continue to focus on that balance between new construction And service repair and national accounts.

Speaker 1

So it's a fair point.

Speaker 3

Got it. And this is a question I've asked before in restoration, but how do you think about the strategic benefit of having scale on both The residential and commercial side of restoration and specifically has that benefit changed at all or become even more important, Especially in times like this where there's a lot of work and storm related work and where you can maybe Better or more dynamically allocate labor resources. Just any updated thoughts on that?

Speaker 1

Well, Scale in commercial and residential independent of each other is very important As our national commercial occupiers, owners, managers look to consolidate their vendors. So it matters having branch network matters. And certainly in residential it matters. And Paul Davis with 3 30 locations is positioned well with National Insurance Carriers. Together, we're not necessarily Collaborating in terms of workforces, but there is lots of referral work back and forth.

Speaker 1

And there are joint efforts in terms of Presenting and positioning ourselves with insurance companies to be the residential and commercial solution. And we won a couple of accounts together. And so that's really the big opportunity, referrals And working together with insurance companies.

Speaker 3

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Frederic Bastien with Raymond James. Your line is now open.

Speaker 3

Good morning, guys.

Speaker 1

Good morning. Good

Speaker 4

morning. So you made your 2 largest deals in the past 5, 6 years or so when credit tightened and private equity paused and we're certainly seeing this kind of dynamic currently. So in light of this, can you please tell us how on the levels of maybe 0 to 10 or 1 to 10, how excited you are about Your pipeline of M and A opportunities, whether that's large deals or more tuck in opportunities.

Speaker 1

Well, the pipeline is solid, Frederick. I don't want to throw water on You're excitement, but we have a number of tuck under transactions in process, but they are our typical type tuck under deal, small family owned businesses. We're very pleased with the deals we've announced this year at Paul Davis and FirstService Residential and our activity levels are balanced, But certainly nothing significant in the works. But as Jeremy said in his prepared comments, we Have a conservative balance sheet. We have a significant amount of liquidity available to us.

Speaker 1

And like you, we believe that this is an opportune environment for us. And We're ready for an opportunity if we have a shot at.

Speaker 4

Thanks, Scott. That's all I have. Thank you.

Operator

Thank you. I'm showing no further questions at time. I would now like to turn the call back over to Mr. Scott Patterson for closing remarks.

Speaker 1

Thank you, Shannon, and thank you everyone for joining

Operator

Ladies and gentlemen, this concludes the FirstService Corporation First Quarter Investors Conference Call. Thank you for your participation and have a nice day.

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