FirstService - Q2 2024
July 25, 2024
Transcript
Operator (participant)
Today, and thank you for standing by. Welcome to the FirstService Corporation Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. Legal counsel requires us to advise that the discussion 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.
Additional information concerning factors that could cause actual results to differ materially from those of 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 U.S. Securities and Exchange Commission. As a reminder, today's call is being recorded today, July 25th, 2024. I would now like to hand the conference over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir.
Scott Patterson (CEO)
Thank you, Liz. Good morning, everyone. Thank you for joining our Q2 conference call. I'm on today with Jeremy Rakusin. I'll kick us off with some high-level comments, and Jeremy will follow with more detail. We were pleased with the results we posted this morning. Solid performance that in aggregate was better than expectation. Total revenues were up 16% over the prior year, again, this quarter, driven entirely by acquisitions, primarily the addition of Roofing Corp. of America in Q4 last year. Organic growth was again flat this quarter, with solid gains at FirstService Residential, offset by declines in restoration within our Brands division. EBITDA for the quarter was up 12% to $132 million, reflecting a consolidated margin of 10.2%, which we're very pleased with. Jeremy will spend time on the margin detail in a few minutes.
Looking at our divisional results, FirstService Residential revenues were up 8%, with organic growth close to 7%, which is trending in line with expectation. During the quarter, we announced the acquisition of CitiScape, one of the leading property management players in San Francisco. CitiScape has a healthy high-rise portfolio and strengthens our leadership position across the Bay Area. We've been developing a relationship with the team at CitiScape over the last number of years and are excited that we were able to complete a partnership agreement. We see a continuing significant opportunity in Northern California, and the CitiScape leadership team will help us capitalize. Looking forward at FirstService Residential for the back half of the year, we're confirming our expectation for organic growth to continue to trend to the mid-single digit range. Moving on to FirstService Brands.
Revenues for the quarter were up 23%, driven primarily by the acquisition of Roofing Corp. of America, but also several tuck-unders across our restoration and roofing segments. Organically, revenues were down 6% versus the prior year, driven by declines at our restoration brands, very similar to our last two quarters. Revenues for our two restoration brands, Paul Davis and First Onsite, were down in aggregate by about 5% and off organically by over 10%. For the third consecutive quarter, we continued to experience mild weather patterns across North America. Industry data points to claim activity off 20%-30% year over year, depending on geographic region. For our Brands, we were up against a reasonably tough comparative quarter in 2023 that saw us execute on over $30 million of Hurricane Ian backlog.
In this year's quarter, we generated only a nominal amount of revenue from named storms, really the remaining tail from Hurricane Ian. Looking forward to Q3 in restoration, we expect a similar quarter sequentially to Q2, which would put us up modestly compared to the prior year. If we experience a weather event, it will go up from there. Turning to roofing, we had a strong quarter that, as expected, was sequentially stronger than Q1, primarily due to seasonality. We generated solid results across almost all our branches and are pleased that the first six months has played out in line with our due diligence expectation. We were also pleased to have made real progress in adding to our roofing platform during the quarter with the acquisitions of Crowther Roofing and Hamilton Roofing, two Florida-based contractors.
Florida is one of the largest roofing markets in North America and was our highest priority white space geography. Crowther, primarily in the Southwest, and Hamilton on the Space Coast, provide us with an immediate, significant presence in Florida, and it's a region that we expect to further add to. Looking forward in roofing, our backlogs are stable, and we expect another solid quarter in line with Q2, plus the boost we will get from the Crowther and Hamilton additions. On to our home improvement brands, which as a group, were down modestly for the quarter by a low single-digit %. The weak housing market, higher interest rates, and general economic uncertainty have negatively impacted the home improvement market since early last year. We're flat year over year for the first six months and are generally pleased with our performance, given the current market conditions.
We believe we continue to take share. That said, we definitely continue to face headwinds and don't expect activity levels to improve through the third quarter. Looking forward to Q3, we expect our home improvement revenues to be down modestly compared to prior year, similar to what we experienced this past quarter. We're hopeful that interest rate reductions may spur increased activity later in the year. And I'll finish my comments with a look at Century Fire, which had a very strong quarter, up sequentially over Q1 and up organically over the prior year by a high single-digit percentage. The results were right in line with our expectation that we communicated on last quarter's call. Looking forward to the back half of the year, we expect more of the same continued strength with high single-digit year-over-year growth at Century. With that, I'll now hand over to Jeremy.
Jeremy Rakusin (CFO)
Thank you, Scott, and good morning, everyone. I'll lead off with a summary of our consolidated second quarter financial results, which delivered year-over-year growth higher than the indications provided on our Q1 call in April. Revenues for the quarter were $1.3 billion, up 16% year over year, and we reported Adjusted EBITDA of $132.5 million, up 12% versus the prior year. Adjusted EPS came in at $1.36 versus $1.46 in Q2 2023. Our six months year-to-date consolidated financial performance included revenues of $2.5 billion, an increase of 15% over the $2.1 billion last year.
Adjusted EBITDA of $216 million, representing 8% growth over the $200 million last year, with a margin of 8.8%, down 60 basis points year-over-year, and a more modest decline of 40 basis points when normalized for the significantly higher FX-related corporate costs in the current year-to-date period. Adjusted EPS for the first half of the year sits at $2.03, compared to $2.31 per share reported during our same six-month period last year. Our adjustments to operating earnings and GAAP EPS to calculate our Adjusted EBITDA and Adjusted EPS respectively have been summarized in this morning's release and remain consistent with our disclosure in prior periods.
Regarding our earnings per share performance, as similarly noted during our previous Q1 call, the year-over-year decline compared to 2023 is attributable to almost a doubling in our interest expense, reflecting both higher interest rates and a larger debt balance on the heels of our large Roofing Corp. of America acquisition at the end of last year. Focusing now on our operating financial performance for the second quarter, I'll start with our FirstService Residential division. Quarterly revenues came in at $558 million, up 8% over the prior year. EBITDA for the quarter was $59 million, a 6% year-over-year increase, with a 10.6% margin, down 20 basis points from the 10.8% margin in Q2 of last year.
For the six months year to date, our division EBITDA margin sits at 9% even, comparable to the 9.1% level for the equivalent prior year period. We continue to expect margins through the balance of the year in line with 2023 and consistent with our 9%-10% annual EBITDA margin performance band over the past several years. Within our FirstService Brands division, we reported second quarter revenues of $740 million, a 23% increase over the prior year period. EBITDA for the quarter came in at $78 million, up 18% year-over-year. Our margin during the quarter was 10.5%, down 40 basis points versus the 10.9% during last year's Q2. The quarterly margin decline was confined to our restoration businesses, which were operating against higher prior storm-related activity levels.
These headwinds moderated compared to the first quarter, however, and were a key reason behind the improved year-over-year margin comparisons sequentially compared to Q1. The second contributing factor to the sequential margin improvement was the tempering of promotional initiatives within our home improvement brands. Scott noted earlier the mild top-line decline in home improvement during Q2, tipping down from the modest top-line growth in the prior first quarter. Nevertheless, during the current quarter, we achieved superior profitability and an improved year-over-year margin profile from this segment compared to our Q1 metrics. We have spoken about being assertive in balancing our growth and margin objectives in the face of the challenging macro remodeling environment, and we are pleased with what our home improvement businesses have delivered to the bottom line year-to-date.
In the back half of the year, with the continued easing of storm-driven year-over-year comparisons in restoration and the added mix of our roofing operations, we expect Brands division margin improvement in the third and fourth quarters compared to their respective prior year periods. In terms of our cash flow profile, we delivered over $130 million in operating cash flow during the second quarter, up 52% over the prior year quarter, and almost matching our consolidated EBITDA during the period, with the benefit of favorable working capital utilization. Our capital expenditures during the quarter were just under $30 million, and our year-to-date total of $54 million is pacing with our previously targeted full year CapEx of approximately $150 million.
Acquisition spending during the quarter was significant at more than $120 million, and the year-to-date investments in our tuck under acquisition program exceed $150 million. As a result, we ended the quarter with $1.1 billion of debt on our balance sheet, net of more than $200 million in cash on hand. Together with undrawn availability under our bank revolving credit facility, our liquidity for any potential immediate capital requirements exceeds $300 million. Leverage, as measured by net debt to EBITDA, sits at 2.3 times, remaining in line with the prior first quarter, as we were able to fund the higher than typical acquisition spending with our strong quarterly cash flow.
In terms of our outlook, taking into account our reported year-to-date results and the second quarter tuck under additions in our roofing operations, we are modestly increasing our indicated financial targets that we laid out at the beginning of the year. For 2024, we are now forecasting that consolidated annual revenue and EBITDA will both achieve mid-teens % growth over our 2023 annual results. That now concludes our prepared comments. Operator, please open the call to questions. Thank you.
Operator (participant)
As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Stephen MacLeod with BMO Capital Markets.
Stephen MacLeod (Managing Director)
Thank you. Good, good morning, guys.
Jeremy Rakusin (CFO)
Morning.
Stephen MacLeod (Managing Director)
Good morning. Just a couple of questions. Specifically around the restoration business, I know you gave some guidance around sort of Q3 and expectations on that. Can you talk a little bit about what your pipeline potentially may look like with Hurricane Beryl having come through and hit ground? Just curious if you have any indication on what that might mean in terms of large loss restoration activity.
Scott Patterson (CEO)
Yeah, Steven. Beryl will not be a significant event for us or, or the market for that matter. Quite localized to Houston. We've definitely seen an increase in claims in that market, but they're more related to residential water mitigation. So, certainly our Paul Davis business in that market has seen increased activity, but not as much commercial or large loss commercial claims have come through, in general.
Stephen MacLeod (Managing Director)
Okay. That's helpful. Thanks, Scott. And then just turning to the outlook for the Brands business. You're guiding to some margin improvement in the back half of the year, which is great. Wondering if you can talk a little bit about the organic or maybe total growth on the revenue line. Just thinking about the comps that you had from last year, Q3 seems like a tougher comp on the organic side, Q4, a bit of an easier comp. Just wondering if you can sort of frame how that will impact the back half of the year.
Scott Patterson (CEO)
Let me start, Jeremy, and you can jump in. I mean, we do expect organic growth within our restoration business. Century Fire, as I said, will be down modestly at Home Improvement, but it's not a significant part of the division. And then Roofing is a new business for us. So, in aggregate, Jeremy, can you jump in and,
Jeremy Rakusin (CFO)
Yeah, I’ll give some indications just, you know, Brands division, I’ll speak to Q3, you know, including the fact that we’ve still got, albeit moderating headwinds, in restoration from last year. You know, $25 million in Q3 and a bit more in Q4, $40 million in the back half of the year. Expect Brands division, at least in Q3, to be, to be flat, including that, and excluding those, restoration headwinds, you know, closer to mid-single digit organic growth as a portfolio. So hopefully that gives you a bit of indication metric wise, Stephen.
Stephen Sheldon (Research Analyst)
But then plus roofing?
Jeremy Rakusin (CFO)
Yeah. But yeah, yeah, sorry. I was speaking to the organic.
Stephen Sheldon (Research Analyst)
Right. So organic, kind of flattish, in Q3, including the $25 million headwinds from last year?
Jeremy Rakusin (CFO)
Yeah. Correct.
Stephen Sheldon (Research Analyst)
Okay. No, that's, that's, that's super helpful. Thanks, guys. Appreciate it. I'll get back in queue.
Operator (participant)
Our next question comes from the line of Frederic Bastien with Raymond James. Frederic, your line is now open.
Frederic Bastien (Managing Director and Head of Industrial Research Infrastructure and Construction)
Good morning, guys.
Scott Patterson (CEO)
Morning.
Jeremy Rakusin (CFO)
Morning.
Frederic Bastien (Managing Director and Head of Industrial Research Infrastructure and Construction)
You highlighted in your prepared comments that Florida was a priority area for the roofing business. I was wondering if you care to share if there are other areas of focus that you can turn to next?
Scott Patterson (CEO)
Well, Florida remains a priority area for us, Frederic. We covered a couple of regions within Florida with these recent tuck unders, but it is a huge roofing market. So we expect to add to it in time. But to answer your specific question, Texas, Mid-Atlantic, California would be priority regions for us. But we do have a fair bit of white space, so we're looking at opportunities sort of across the U.S., I would say right now.
Frederic Bastien (Managing Director and Head of Industrial Research Infrastructure and Construction)
Would you say, given what you're seeing out there in the market, that roofing will be your primary engine for, you know, organic growth on a go-forward basis? Or are there other platforms that could come in and weigh in and balance?
Scott Patterson (CEO)
Did you say organic growth?
Frederic Bastien (Managing Director and Head of Industrial Research Infrastructure and Construction)
Inorganic, M&A.
Scott Patterson (CEO)
Oh, inorganic. Sorry. Certainly roofing is consolidating quickly. So it's very active right now. But we have opportunities really across all our platforms, I would say. I would expect that we'll continue to add in restoration and fire, and FirstService Residential.
Frederic Bastien (Managing Director and Head of Industrial Research Infrastructure and Construction)
And that's great to hear. Awesome. Thanks. That's all I have. Good results, guys. Thank you.
Operator (participant)
Our next question comes from the line of Tom Callahan with RBC Capital Markets.
Tom Callahan (Analyst)
Thanks. Good morning, guys.
Scott Patterson (CEO)
Morning.
Tom Callahan (Analyst)
Maybe just to follow up on that line of questioning with respect to roofing. Obviously, the deals done this quarter were maybe a little larger than kind of your traditional tuck in. Is that a function of, you know, maybe market structure, or is it really just a function of wanting to establish a good base right off the bat in those core areas? And how should we think about kind of sizing of those roofing deals going forward?
Scott Patterson (CEO)
I think that deals will generally be smaller, Tom, going forward, and maybe more in line with the size of tuck under that we normally do when we enter a market. I mean, those were truly too attractive companies that we had really dialed in on. Crowther being the larger and you know, being the dominant player in Southwest Florida is a big move for us. On average, they will be smaller going forward.
Tom Callahan (Analyst)
Okay, thanks. Thanks for that. Maybe just, separately on, on Century Fire, you know, strong results, continue there. And I'm just curious, when you look at the opportunity set there, like you specifically talked a bit in the past about, you know, bringing all the branches towards full service providers, so, you know, sprinkler to, to alarm or vice versa. You know, just wondering from, from that angle, how much running room is, is left, in, in terms of the, that growth opportunity?
Scott Patterson (CEO)
Certainly, it's still an opportunity, but the surge we saw, I think particularly in 2023, where we grew organically over 20%, you know, we really made some strong headway through that period. So we're in a period of sort of mid- to high-single-digit organic growth that's gonna be more typical for us moving forward with Century.
Tom Callahan (Analyst)
Okay, thanks for that. I'll, I'll pass it back.
Operator (participant)
Our next question comes from Stephen Sheldon with William Blair.
Stephen Sheldon (Research Analyst)
Hey, thanks. Appreciate you taking my questions. First, just on the roofing business, great to hear that it's tracking to your expectations. But can you just remind us of the rough seasonality and whether that looked any different than you would have thought initially? It seems like the acquired roofing assets may have contributed a lot more than we at least had modeled in the quarter, but, you know, that may just reflect some normal seasonal trends that we didn't fully capture. So any detail on kind of seasonal patterns you're seeing?
Jeremy Rakusin (CFO)
Yeah, it's Jeremy, Stephen. First quarter is definitely seasonally weaker than Q2 and Q3, and then it tails off a little bit in Q4. So, Q2 and Q3 are the seasonal peaks for most of the businesses. You know, we'll see with the Florida-based businesses, that's probably more of a year round. Just given the geography that it sits in and the climate. So yeah, sequentially more contribution from roofing than in Q1, plus also the month of, as Scott said, this tuck-under was particularly the, the Crowther one was larger than typical, and we got a one of the three months in the quarter contribution from that business.
Stephen Sheldon (Research Analyst)
Got it. Okay, that's helpful. And on FirstService Residential. It sounds like you're optimistic that Scott is kind of about the growth potential in the Northern California market. Can you just talk about what those opportunities look like? Is it more master planned communities, or just generally, where do you see your opportunity to grow in that market?
Scott Patterson (CEO)
Yeah, master planned, primarily, high rise and large master planned communities are our sweet spot for us. And, the addition of this team, I think, strengthens our presence and strengthens our positioning in the market.
Stephen Sheldon (Research Analyst)
Great. Thank you.
Operator (participant)
The next question comes from the line of Tim James with TD Securities.
Tim James (Managing Director and Head of FICC Technology)
Thank you. Good morning. Just one question here. I'm wondering if you could talk about the. I know you've been indicating there are promotional investments or expenses being undertaken for the, for the home improvement business. I'm just wondering if you can give us a bit of an update on, you know, how that is going. Are you seeing evidence of, of success from those investments? And, and just remind us of the, the, the catalyst or, or the reason behind that, push.
Scott Patterson (CEO)
Well, we, we had been dialing up our marketing spend and, and our discounting sort of through the end of 2023 and, and into Q1, but we pulled back this last quarter, Tim, and sort of tweaked our, our balance between focus on market share gains and bottom line. And, and so as Jeremy indicated, the top line came off modestly, but our margins increased this past quarter, and we feel we're more in a sweet spot for us, in the right spot, and we'll, we'll, we'll likely maintain our
our current spend through Q3, and really effectively take what the market gives us in terms of revenue and make sure that we're executing and delivering on our service promise with a real focus on driving repeat business and word-of-mouth referral when the environment becomes more favorable. So strategically, we made a decision to dial down that spend, really not seeing the same results in Q1 that we were in the last part of 2023.
Tim James (Managing Director and Head of FICC Technology)
Okay. That's, that's very helpful. Thank you.
Operator (participant)
Our next question comes from the line of Himanshu Gupta with Scotiabank.
Himanshu Gupta (Director and Equity Research Analyst)
Thank you, and good morning, everyone. So on FSB margins, I think they were higher than our expectations in Q2. Was there any particular segment which led to better margins?
Jeremy Rakusin (CFO)
No, Himanshu, you know, it, it was really the sequential improvement quarterly that from Q1 that I spoke about was really around, you know, less headwinds in restoration, what Scott just touched on and what I said in my prepared comments, reduced, you know, discounting and promotion activities in, in home improvement. So sequential margin improvement, profile in Q2. And then we. You do have the added mix of, I spoke to it on an earlier question, you know, roofing coming in seasonally higher in Q2 than in Q1. So those would be the three factors that would have contributed to tighter margin, gap in, in Q2 on a year-over-year basis than in Q1.
Himanshu Gupta (Director and Equity Research Analyst)
Yeah. Got it. That's helpful. And then, you know, sticking to the roofing, probably margins, I mean, obviously, two recent further acquisitions as well. So as you build scale in the roofing business, do you think, you know, margins can improve, over a period of time?
Jeremy Rakusin (CFO)
No, I mean, at this juncture, it's a very decentralized structure with roofing. You know, individual brands operating in their local markets, getting local and regional business. There are some benefits of scale, but they're not about cost reductions and margin enhancement. You know, what I articulated when we invested in and partnered with the Roofing Corp acquisition as well as with the tuck-unders, you know, they'll be a little bit higher than 10%, but we don't see any line of sight to significant margin improvement at this juncture.
Himanshu Gupta (Director and Equity Research Analyst)
Got it. Okay. And maybe the last question is on Century Fire. I mean, obviously very strong. You mentioned high single digit for, you know, second half of the year, very similar to Q3 as well. Any thoughts into the next year? I mean, given, you know, you'll be facing tough comps. Do you see further easing as well in that business?
Scott Patterson (CEO)
I think we would expect to continue to grow at a single digit level for 2025, but we'll certainly update that as we get closer to year-end.
Himanshu Gupta (Director and Equity Research Analyst)
Sure. Absolutely. Okay. Thank you, guys. I'll jump back.
Jeremy Rakusin (CFO)
Thanks.
Operator (participant)
Our next question comes from the line of Daryl Young with Stifel.
Daryl Young (Managing Director)
Hey, good morning, everyone, and congrats on a good result. Just with respect to the residential division, I mean, the market share gains have continued to be extremely strong. I know you've added some new service lines within there, but can you just give us a bit of color on maybe which markets are particularly strong and what's been driving that? And also, is labor availability helping you with your site labor contracts?
Scott Patterson (CEO)
Certainly labor is much better than it has been over the last few years. I mean, it started to improve in late 2023, I would say, and it continues to be much better. Our turnover is certainly down and in line with our experience from pre-COVID, 2019. So in general, we're able to attract talent and keep it. Which does help us at FirstService Residential, certainly. It's a very labor-intensive business, and our contracts require, in many cases, a certain headcount.
And so keeping maintaining that headcount in line with our contractual obligations maintains our revenue, and we struggled with that in 2022. Generally, solid across North America at FirstService Residential. No markets necessarily stronger than others, other than I would, I would just reiterate the verticals that remain strong for us, high rise and then the larger lifestyle and master planned communities. I don't know if I answered your question.
Daryl Young (Managing Director)
Yeah. No, that's, that's helpful color. And then maybe just one quick, nitty-gritty one, sorry for this but, the minority interest, share of earnings as we go forward, just with some of the acquisitions you've done recently, how should we look at that, Jeremy, for the remainder of the year?
Jeremy Rakusin (CFO)
Yeah, I've indicated to most of you, you know, 9%-10% is a good number. It's tracking lower year to date, but that's often a function of mixed performance among the businesses that we're partnered with. But I would still stick with that 9%-10%, conservatively.
Daryl Young (Managing Director)
Okay, great. Bye. Thanks, guys.
Operator (participant)
That concludes today's question and answer session. I'd like to turn the call back to Scott Patterson for closing remarks.
Scott Patterson (CEO)
Thank you, Liz, and thank you everyone for joining. Enjoy the rest of your day. We will reconvene at the end of October for Q3.
Operator (participant)
Ladies and gentlemen, this concludes the second quarter earnings call. Thank you for your participation, and have a nice day.