FirstService Q2 2023 Earnings Call Transcript

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July 27, 2023

There are 6 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Second Quarter Investors Conference Call. Today's call is being recorded. Legal counsel requires that discussions 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 those from those from any other future results.

Operator

Performance or achievements contemplating 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 as filed with the Canadian Securities Administrators and in the company's Annual Report on Form 40 F as filed with the As a reminder, today's call is being recorded. Today is July 27, 2023. I would now like to turn the call over to Chief Executive Officer, Mr. Pat Pattison.

Operator

Your line is open.

Speaker 1

Thank you, Lisa. Good morning, everyone. We appreciate you joining our 2023 Q2 conference call. I'm on the line today with Jeremy Racoosin, our CFO. I'll kick us off with some high level comments and Jeremy will follow with more detail.

Speaker 1

As you saw this morning, we reported very strong results that reflect continuing trends and momentum That drove our Q4 of last year and the Q1 of this year. Total revenues for the quarter were up 20% over the prior year With organic growth at 15%. EBITDA was up 30%, reflecting a margin of 10.6%, which is an 80 basis point improvement over the prior year. Similar to our previous two quarters, outsized organic growth in our brands division boosted our top line and led to enhanced margins from operating leverage. Earnings per share for the quarter were also up 30% in line with the increase in EBITDA.

Speaker 1

Let me move to highlights for each division, starting with FirstService Residential, where revenues were up 13% in total With organic growth again hitting double digits at 10%. As I stated in my Q1 comments, we entered this year with momentum from strong sales in the Q4 of 2022 combined with solid client retention. This favorable momentum continued through our Q2. The other trend that is helping us in terms of a year over year comparison is an Increase in labor and services with many of our larger cost plus contracts. We have reduced the number of contracted But unfilled positions compared to a year ago, which increases revenue in a cost plus environment.

Speaker 1

Looking forward to the last half of the year, we expect to show similar low double digit top line growth for FirstService Residential with organic growth at 20%, driven by very strong results at our restoration brands and supported by Solid double digit growth at Century Fire and our Home Improvement brands. Our restoration brands, Paul Davis and First On-site, together recorded revenues that were up over 40% versus the prior year, With about 2 thirds of the growth generated organically, we booked approximately $35,000,000 from named storms during the quarter, Split between Hurricane Ian and Winter Storm Elliot. This is down from $75,000,000 plus In Q1, but significantly higher than storm related revenues in Q2 of last year. We're pleased with the performance from our restoration brands in Q2. Sequentially relative to Q1, we generated less than half the but booked approximately the same total revenue for the quarter, which reflects Positively on our day to day activity levels across our branch network.

Speaker 1

Excluding storm related revenue, we generated Solid double digit organic growth in restoration for the quarter. Looking forward in restoration, we expect to show Our backlog is solid and above prior year's level. A portion of the backlog is reconstruction work related to Hurricane Ian. Much of this work is slow moving, while we wait on permits or engineering studies or insurance confirmation or materials. The work will be completed over the next year as hurdles are cleared and issues resolved.

Speaker 1

The backlog excluding this portion is approximately at prior year's level. At this juncture, we expect to show year over year growth of 10% or more for Q3, somewhat dependent on the amount of Ian related As I mentioned earlier, we're pleased with the level of day to day work We've been securing through our branch network and expect a solid finish to our year in restoration. Moving to Century Fire, we had a strong quarter right in line with our expectations. Low double digit organic growth Against a tough comparative quarter in the prior year. All our branches and service lines continue to perform And we expect similar results for the balance of the year.

Speaker 1

The year over year growth rates will moderate in Q3 And again in Q4, due to the strong sequential growth we were generating from quarter to quarter throughout 2022. And now finished with our home improvement brands, which as a group were up over 10% versus the prior year With high single digit organic growth, this is an impressive result and a real credit to our operating teams. The home remodeling sector in general is facing headwinds from higher interest rates and very sluggish home resales. Our leads continue to lag year ago levels, but a heightened focus on lead conversion and close ratio Is enabling us to continue to drive growth. Looking forward, we expect the environment to remain difficult, But our teams believe they will continue to generate at least mid to high single digit growth through the back half of the year.

Speaker 1

Let me now ask Jeremy to review our results in more detail. Jeremy?

Speaker 2

Thank you, Scott, and good morning, everyone. We are very pleased with our 2nd quarter financial results, Which yielded strong year over year growth metrics that closely matched our prior Q1 performance in every respect. On a consolidated basis, revenues for the quarter were $1,120,000,000 up 20% year over year And driving to adjusted EBITDA of $118,400,000 and adjusted EPS of $1.46 both up 30% versus the prior year. Our 6 months year to date consolidated financial performance included revenues $2,140,000,000 an increase of 21% over the $1,770,000,000 last year With the contribution from organic growth at 16%, adjusted EBITDA of $200,400,000 Representing 30% growth over the $153,700,000 last year with a margin of 9.4%, up 70 basis points from the 8.7 percent in the prior year period and adjusted EPS of $2.31 Up 25% over the $1.85 per share reported during our same 6 month period last year. Our adjustments to operating earnings and GAAP EPS are to calculate our adjusted EBITDA and EPS respectively have been summarized in this morning's release and remain consistent with disclosure in prior periods.

Speaker 2

I'll now break down our division financials for the Q2. Beginning with FirstService Residential, Quarterly revenues came in at $517,000,000 up 13% over the prior year. EBITDA for the quarter was $55,700,000 a 10% year over year increase with a 10.8% margin, down a modest 20 basis points from the 11% margin in Q2 of last year. We expect the division margin to be relatively flat to prior year in the remaining half of twenty twenty three, which would result in our full year margin being closely in line with our 2022 annual performance. At our FirstService Brands division, we reported 2nd quarter revenues of $603,000,000 A 27% increase over the prior year period.

Speaker 2

EBITDA for the quarter came in at $65,800,000 up 50% year over year. Our margin during the quarter was 10.9%, up 160 basis points

Speaker 1

over the

Speaker 2

9.3% during last year's Q2. As Scott previously outlined, Our restoration operations benefited during the current period from elevated weather related storm activity compared against the dormant level In the prior year Q2, this contribution from our restoration platform was the primary driver behind both the higher division top line growth and margin improvement versus prior year, just as we saw in Q1. For the upcoming Q3, we expect the brands division margin to be more in line with prior year with anticipated tapering In contribution from storm backlog conversion within restoration compared to the 1st 2 quarters of this year. With the brands margin improvement we have booked year to date, we expect to finish the year with annual division margins up versus 2022. Moving below the operating earnings line, our earnings per share of 1.4 $6 during the quarter benefited from a non recurring $0.07 per share related to a gain on sale of an owned building.

Speaker 2

This gain helped offset higher year over year interest expense to drive to our 30% adjusted EPS growth, Matching our EBITDA growth for the quarter. Looking at our cash flow from operations, we delivered $86,000,000 Up 40% over the prior year quarter. More than half of the increase came from earnings growth across both divisions. And then we also benefited from working capital movements, which in the current quarter delivered a slight cash inflow versus a more typical cash requirement as seen in last year's Q2. With respect to capital expenditures, we invested $23,000,000 during the quarter in support of our existing operations and our year to date total of $44,000,000 is pacing With our targeted full year maintenance CapEx of $80,000,000 and overall spending of approximately $100,000,000 Tuck under acquisition activity during the quarter was tempered with minimal capital deployment, but with year to date investments Approaching $100,000,000 recent acquisitions will contribute to our growth during the upcoming quarters.

Speaker 2

In closing our financial review, our balance sheet remains very strong. Leverage as measured by net debt to EBITDA moderated to 1.6 times, down from 1.8 times in the prior Q1. Liquidity, reflecting total undrawn availability under our revolver Looking forward, the strong year to date performance we have booked thus far reinforces our conviction that our businesses will collectively deliver Low teens consolidated revenue growth with our consolidated EBITDA margin being roughly in line to potentially a little higher That concludes our prepared comments. Lisa, You may now open the call to questions. Thank you.

Operator

Thank The first question that we have today is coming from Stephen MacLeod BMO Capital Markets, your line is open.

Speaker 3

Great. Thank you. Good morning, guys. Just a couple of questions. Just wanted to start with the residential business.

Speaker 3

Just curious if you can give an outlook or an update on Sort of what you're seeing in terms of pricing and I guess as you have some of these Fixed price contracts coming up for renewal. What's the ability or what's the outlook for passing through some of those prices?

Speaker 2

Stephen, I'll take that. Go ahead, Scott.

Speaker 1

Yes. Okay, Jeremy. It's an ongoing exercise, Stephen, we're having contracts renew throughout the year. As you know, It has been and always will be a price competitive market. It's generally how our smaller competitors compete against us.

Speaker 1

So We remain in an inflationary environment. And while wages have stabilized, we're still Seeing increases as contracts renew, we need to cover off these increases. In some cases, we're getting that increase. In some cases, We're not we're getting part of it. We're getting over a period of time.

Speaker 1

So I've talked about in the last several quarters, it's a balance for us between margin and organic growth. And I think that will continue. We are, I think, right now probably at about 3% in terms of Price increases, 10% organic for the quarter, 3% of that would be price. And I think that's the level we'll be at for the foreseeable future.

Speaker 3

Then maybe just on the home improvement side of things, you talked a little bit about you're sort of seeing the home remodeling sector facing headwinds, but Still expecting mid to high single digit growth through the back half of the year. So just curious if you can give a little bit of color as to where That incremental or those pockets of strength

Speaker 1

are coming from in light of the weaker macro backdrop? Yes. I mean there's a number of things. We see this environment as an opportunity to grab share. So we have invested in marketing.

Speaker 1

We are Carefully using promotion and discount, all to drive leads. And then we're very focused on converting the leads and closing the sale. Our leads are down Year over year, as I think I said in my comments, but we're having greater success in Converting them and closing them and certainly marketing and promotions are helping. The other thing this year is we have a greater Capacity in these home improvement brands to complete work with a more stable labor environment. So our productivity has improved.

Speaker 1

We're able to schedule work more quickly. All of that is helping with the close ratio.

Speaker 3

Okay. That's helpful. Thanks, Scott. Appreciate it.

Operator

Thank you for your question. And one moment while we get prepared for the next question. And our next question We'll be coming from Michael Doumet of Scotiabank. Your line is open.

Speaker 1

Good morning, Scott and Jeremy. My first question is on the residential business. On labor, I wonder, are you at a point where you think you've essentially filled the vacancies, Maybe call it your kind of like normal vacancy levels, particularly as it relates to fulfilling ancillary service. Just trying to get a sense for The continued momentum of that business on a go forward basis? Yes, we have.

Speaker 1

We're back to historical levels In terms of our open positions, and so we've made real progress over the last 6 months. We're in a labor environment that is improved certainly for us and the type of Positions we're trying to fill. So we have seen A little boost to our organic growth the last few quarters. We'll probably see it again in Q3, but it's a temporary Boost. And we won't see it certainly next year.

Speaker 1

Got it. So it's a bit of a catch up. Again, for the residential business, I think you're calling for high single digit growth in the second half Versus 10% plus in the first half. If I look to the comps last year, it doesn't really look like the second half Grew much faster than the first half. I'm just trying to wonder why you're calling for an effective slowdown in the Organic comps in the first half versus the second half, particularly given some of the tailwinds here?

Speaker 1

Yes. I think It's not a significant decline, but we will see This labor boost, we'll see that start to fall off. So I think we're Certainly making an accommodation for that as we guide towards high single digit. Otherwise, this business is stable month to month, quarter to quarter. So we won't see any big moves One way or the other.

Speaker 1

Okay. That makes sense. And maybe just the third one for Jeremy. On the working capital side, I think you commented Jeremy, I thought it was neutral. Typical seasonality is usually it's a draw.

Speaker 1

But there's been nearly, call it, 175,000,000 Investment to working capital in the last 4 quarters. So just wondering how to think about that, how correlated it should be to restoration activity Just seasonality in the second half? You're right. I mean, a

Speaker 2

lot of The investment in working capital is reflected in accounts receivable and that's largely driven by our restoration operations. We expect to collect on that in the coming quarters. They are longer paying customers, good paying customers, All backed by insurance and the timing and as to which quarters it's going to come in is hard And obviously also dependent on further weather driven activity in coming quarters. So the timing is always Around working capital, as I said, it's very tough to predict quarter to quarter. It's we feel comfortable that we are going to convert it.

Speaker 2

And I think You see saw the start of that in this quarter with some of our other working capital items swing to the positive.

Speaker 1

Perfect. It's been a nice quarter guys. Thanks for the answers.

Operator

Thank you for your And our next question will be coming from Tom Callaghan of RBC. Your line is open.

Speaker 4

Thanks. Good morning, guys. Maybe just to start on the restoration side and going back to your prepared remarks there. Mentioned in Q2 that total revenue was really the same despite kind of that lower booked amount of storm revenue in Q2. Can you maybe just talk about some of the positive drivers of that day to day activity and is it broad based or is there something specific driving that?

Speaker 1

Well, between the two brands, we have 430 or 440 branches. So we are positioned across North America. While there weren't any named storms In the 1st 6 months, there was widespread weather really throughout North America. And So our branch network benefited from that.

Speaker 2

We are

Speaker 1

Responding well to our customers, the national commercial and insurance carriers, And I think we're building on and improving our service delivery. We feel like we're getting more wallet share. So it's just day to day organic growth across the branch network. The other thing I will say is that we did benefit from a few very large projects that were not storm related. We are in the business of large loss principally through first on-site and we always have large losses on the go, but we did get A boost in Q2 from a few particularly large jobs.

Speaker 4

Got it. That's helpful. And then maybe just one more From me on the M and A front, maybe just talk about what you're seeing on the pipeline and then any commentary on Any evolution of a pricing valuation thus far in 2023?

Speaker 1

Sure. Our pipeline is steady and I would say it reflects a normal level of activity for us. We didn't close anything in the quarter, but we do have deals in process and there really are I think I said on the last quarter, there are typical tuck under family owned business. I would say that the deal flow has slowed. The availability of companies Has decreased.

Speaker 1

I think it may be because owners believe multiples are down or competition has moderated, But we haven't seen that. Good businesses are attracting multiples As high as they've ever been and good businesses are attracting many bids. So it's a I don't think the valuations have changed. We haven't seen it. And I think the deal flows off a bit.

Speaker 1

But I would expect us to close some of our pipeline between now year end.

Speaker 4

Okay, great. That's it for me. I'll turn it back.

Operator

Thank you. One moment for the next question. And our next question is coming from Matthew Fleek of William Blair. Your line is open.

Speaker 5

Hey, Scott and Jeremy. You have Matt Fialik on for Steve and Sheldon. Thank you for taking my questions. I wanted to start with one on residential. What is the pace of new HOA construction meant to Growth in the residential segment, is that becoming a bigger component of organic revenue growth by giving you newer properties to pursue?

Speaker 1

I would say new development for us, Matt, has always been a Stable component of our growth, but it's probably off right now, compared to the last 5 years. We've always given the number that it's Average is about 20% of our growth and that's where it is right now, I would say, for their abouts. But it has been stronger, I think the last few years. But we do It's a core part of our strategy and we have strong relationships with developers across North America, Does that answer your question?

Speaker 5

Yes, that's helpful color. Thank you for that. And then I was just looking for an update on the Restoration Technology platform and how that's progressing relative to your expectations and what that Platform could mean for margins in the brand segment and if it could move the needle any?

Speaker 2

Yes. Hi, Matt. It's Jeremy. I'll take that one. Making continuous progress, I said on our last call, we were approaching the halfway mark.

Speaker 2

We're a little more So it's steady, on track. We've got many branches still to onboard and any benefits that we're going to see from that is We'll only start to incrementally realize on that at some point in 'twenty four and beyond, multiyear But hard to quantify until we have kind of completed getting everyone on one system and going to market with 1 brand in In terms of processes that are consistent and systematic across the board.

Speaker 5

Got it. That makes sense. And then just a quick clarification question here and forgive me if I missed this, but how should we think about the impact from weather In the Q3 relative to levels seen in the Q2, assuming no other name weather events come through?

Speaker 1

It will be down quite a bit. We're through most of our backlog from Ian and Winter storm, Elliot. So we'll see some, but down materially from Q1 and Q2.

Speaker 5

Okay, got it. Thank you both and great quarter.

Speaker 2

Thanks, Matt.

Operator

Thank you for your questions. At this time, I'm showing no further questions in the queue. I would like to turn the call back over to CEO for closing remarks. Please go ahead, sir.

Speaker 1

Thank you, Lisa, and thank you all for joining today. Enjoy the rest of your summer, and we'll regroup for Q3 at the end of October.

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