FirstService - Q3 2023

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Q3 investors conference call. Today's call 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 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 U.S. Securities and Exchange Commission. As a reminder, today's call is being recorded. Today is Thursday, October 26th, 2023. I would like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir.

Scott Patterson (CEO)

Thank you, Michelle. Good morning, everyone, and thank you for joining our Q3 conference call. Jeremy Rakusin 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. 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 two divisions. EBITDA for the quarter was $112 million, up 17% from 2022, reflecting a margin of 10%, approximately the same level as prior year. 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 six regions in North America.

Organic growth was driven by continued strong net new contract wins, leading to higher management fee and labor-related revenue. Looking to the Q4 at FirstService 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 Onsite, together recorded revenues that were up by about 25% versus the prior year, with one-third of the growth generated organically. We booked approximately $25 million from named storms during the quarter, including continuing work from Hurricane Fiona, Hurricane Ian, and Winter Storm Elliott. 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 three announced tuck-unders. First Onsite acquired Case Restoration, based in Nashville. Case is a full-service commercial restoration company with specific expertise in large loss claims. This acquisition significantly enhances our capability and 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.

Looking forward, we expect our revenues for restoration in Q4 to be down from a year ago, up to 10% based on current backlog and trends. We generated $85 million 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 Elliott, and expect to generate revenue from named storms at a similar level to this past quarter, in the $25 million 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. 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+ branches growing sequentially and versus the prior year. We expect another strong quarter upcoming, with growth in the 10% range, against a very strong 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. Higher interest rates, record low home resales, and a challenging macroeconomic backdrop have significantly impacted consumer demand. Our leads are off 10% versus a year ago. As I mentioned last quarter, we continue 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. Let me now call on Jeremy to review our results in more detail.

Jeremy Rakusin (CFO)

Thank you, Scott. Good morning, everyone. As you just heard, FirstService delivered strong financial results for the Q3 on both a consolidated and segmented basis. For the quarter, we recorded consolidated revenues of $1.12 billion, up 16%, and adjusted EBITDA came in at $111.9 million, 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. Highlighting our consolidated performance for the nine months year-to-date, we have delivered revenues of $3.26 billion, up from $2.73 billion in the prior year period, an increase of 19%, which includes 14% organic growth.

Adjusted EBITDA sits at $312.4 million, a 25% 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 segmented results for our two divisions.

At FirstService Residential, we generated revenues of $537.8 million, a 12% increase over Q3 2022. This strong top-line performance drove EBITDA of $56.6 million, 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 $579.3 million during the current Q3, up 20% versus the prior year period.

Our brands EBITDA increased by 24% to $60.7 million, with a 10.5% margin, up 40 basis points from a 10.1% margin in last year's Q3. Our brands 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 extended to very strong cash flow conversion during the quarter. We delivered $84 million in cash flow from operations without any additional working capital as accounts receivable collections offset other operating requirements.

Our nine months year-to-date operating cash flow of $170 million is up more than threefold versus the prior year period. Capital expenditures during the quarter totaled $23 million, with the year-to-date tally sitting now at $68 million. For the full year, we expect to be at or slightly lower than our previous targets of $80 million in maintenance spending and $100 million 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 million in 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 million, computing to leverage at 1.5x net debt to trailing twelve months EBITDA, down slightly from the 1.6x level for growth for both the previous Q2 and 2022 year end, and relatively consistent with longer term historical trends. We also have approximately $450 million 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 opportunities as they may arise. 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 million 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 from our restoration operations will be down year over year, with all of our other brands growing at high single digits 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. We anticipate continued strong and profitable growth across our remaining operations.

With this outlook, combined with our nine months year-to-date results, we will deliver 2023 annual total revenue growth in the mid-teens % 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, strategic planning reviews with our brands. That concludes our prepared comments. Operator, please open up the call to questions. Thank you.

Operator (participant)

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

Faiza Alwy (Managing Director, Equity Research)

Yes. Hi, thank you so much. Good morning. 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, you know, pretty reasonable at mid-single digit year-over-year growth, and you're indicating that it would be low single digit next quarter. How much of a lag is there as it relates to, you know, consumer demand? And you mentioned leads are off 10% versus year ago. How should we think about this business in 2024, assuming, you know, 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, you know, on FirstService Residential or, you know...

I feel that there isn't that much of a macro component elsewhere in your portfolio, but curious how you think about it.

Jeremy Rakusin (CFO)

Right. Okay, Faiza, there's a lot there, so let me, let me start to work through it. You know, definitely consumer demand for home improvement is down. We see it. You know, 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, you know, the belief system is that we can scratch out growth even in a 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.

... There is not much of a lag in this business. Our backlog is measured in weeks. So changes in consumer demand will impact us pretty quickly, one way or the other. You know, 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, you know, our two 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, the communities need to be managed in good markets and bad markets. 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.

Faiza Alwy (Managing Director, Equity Research)

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 restoration side or the, you know, fire side. And I'm curious how you think about, you know, 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 seeing. Is there a synergistic benefit, and should we expect, you know, higher margins as you grow and scale, and when does that happen?

Jeremy Rakusin (CFO)

Yeah, 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. You know, 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, you know, primarily the Southeast and Mid-Atlantic regions. And, again, that national account program, the more that we can self-perform, the more, we keep for ourselves, because we do use a vendor network, elsewhere. 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.

Faiza Alwy (Managing Director, Equity Research)

Great. Thank you very much.

Operator (participant)

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

Stephen MacLeod (Managing Director, Equity Research)

Thank you. Good, good morning, guys.

Scott Patterson (CEO)

Hey, Steve.

Stephen MacLeod (Managing Director, Equity Research)

Just a couple of... Morning. Just a couple 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&A. But just curious, can you just confirm, like, are you seeing any macro impact to the residential business as it relates to, you know, residents' ability to pay fees or cost pressures you're seeing, pricing pressures you're seeing on contracts, things like that?

Scott Patterson (CEO)

You know, there's two 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 you know, primarily through increased insurance premiums. And I would say particularly in the risk areas, you know, Texas and Florida, but generally, the high-rise environment. And so the increasing you know, inflation across their cost structure has certainly put pressure on budgets and put pressure on us around pricing, which is, you know, you, Steven, you've followed us for a long time. I mean, that's nothing new in this business for us.

Stephen MacLeod (Managing Director, Equity Research)

Yes. Yeah. Sorry. Yeah, no, that's, that's great, Scott. Yeah, and I mean, pricing pressure is always there. That's, well, that's helpful. And then just as you think about the brands business in Q4 with the, with the restoration business, you know, we did see some storm activity in, you know, 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, the comp, organic 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?

Scott Patterson (CEO)

Right. Okay, I'll deal with the first part of the question. We didn't see a significant pickup in our backlog related to some of the regional 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. Jeremy, over to you on margin.

Jeremy Rakusin (CFO)

Yeah, thanks, Scott. Steve, yeah, 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.

Stephen MacLeod (Managing Director, Equity Research)

Okay, I see. So, so you would expect Q4 margins to be similar to what they were in Q3 on the, on the Brands-

Jeremy Rakusin (CFO)

In the bulk. I mean, obviously, moving parts, but directionally, yes.

Stephen MacLeod (Managing Director, Equity Research)

Yeah. Yeah. Okay, that's, that's great. I'll pass it back to the line. Thank you.

Operator (participant)

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

Stephen Sheldon (Partner, Equity Research Analyst)

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

Scott Patterson (CEO)

You know, 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, you know, I think the market has certainly eased. You know, we're seeing more applications, we're filling more jobs more quickly. Our turnover has improved. But at the same time, the second part of your question, Steven, we have certainly invested in resources and technology around recruiting and also onboarding. And so it's, you know, it's hard to discern or put a pin in the improvement, whether we've, you know, been the architect of that or whether the market's come back to us.

But it's, yeah, I think it's a little of both.

Stephen Sheldon (Partner, Equity Research Analyst)

Got it. And has that—I guess, you know, you've typically talked about 3%-5% organic growth in that business. Given your, you know, some of the way the changes that you've been able to kind of push through the improvement on the execution side and maybe some... 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?

Scott Patterson (CEO)

Yeah, 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 and early this year. That's starting to normalize. So it's easing its way back down. You know, mid to high, I would say, I'm comfortable with right now. So-

Stephen Sheldon (Partner, Equity Research Analyst)

Got it.

Scott Patterson (CEO)

Tick higher. Yep.

Stephen Sheldon (Partner, Equity Research Analyst)

Got it. That's helpful. 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. Is Century Fire more exposed to certain subsectors for construction? You know, thinking about office versus industrial versus multifamily, you know, is it 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?

Scott Patterson (CEO)

Right. I mean, certainly in terms of our backlog, we feel very good about Q4, and I think it will carry into Q1. But you know, as you suggest, the commercial real estate market is less than robust right now, so we're keeping a very close eye on backlog. You know, 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, we would, you know, at some point we're gonna see that. But 50% of that business would be a new install, and 50% is recurring service, inspection, repair.

Stephen Sheldon (Partner, Equity Research Analyst)

Got it. Thank you.

Operator (participant)

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

Michael Doumet (Analyst)

Hey, good morning, guys. Scott, you started off with, I think some comments on market share. So I just want to kind of get a little bit 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, you know, 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?

Scott Patterson (CEO)

It's easier to create clarity in the home improvement business because there are a number of research groups that follow it pretty closely. 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. You know, I think that we're driving a lot of it as we've made acquisitions, we're adding services where necessary to ensure all our branches are full service and, you know, adding alarm to sprinkler businesses and vice versa, adding service to primarily installation businesses. It's been a significant growth driver for us to add services to the existing customer base.

So, we're taking wallet share in that instance, but it's definitely, you know, a higher number, our organic growth than the market. But it's not crystal clear. And in terms of driving this into 2024, I think we'll continue to take share. The question is, you know, the market and what kind of support we get from the market.

Michael Doumet (Analyst)

That's helpful. Thanks. And then maybe flipping over to Restoration. I think previously, you know, you talked about making investments in that business, that once completed, would, you know, drive eventual margin expansion, I think over several years. So just curious on how those investments are progressing, timelines on, you know, potential margin expansion, for that business. Obviously, recognizing that storm impact, you know, aside, as it relates to these investments.

Jeremy Rakusin (CFO)

Michael, yeah, it's Jeremy. Investment's on track. You know, we're probably two-thirds of the way now, you know, in terms of onboarding our branch network. We said this would carry on through this year and, and likely into part of 2024. And then after that, we'll evaluate the, the opportunity, you know, for reaping the benefits of that investment. So I, I suspect, at some point in 2024 and, 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, in the next couple of months with, with both Restoration, as well as all of our other businesses, clarity on 2024 and beyond.

Michael Doumet (Analyst)

Very helpful. Thanks, guys.

Operator (participant)

Please stand by for the next question. The next question comes from Tom Callaghan with RBCCM. Your line is open.

Tom Callaghan (Analyst)

Thanks. Morning, guys. Maybe just, just one on my, a couple of my questions are asked, but maybe just some comments on the acquisition pipeline you guys alluded to in the prepared remarks there. I know you were a little more active towards the end of last year and early this year, but kind of where it stands right now, maybe relative to last year, and is there a specific focus or is it kind of broad-based across the restoration and residential side of things?

Scott Patterson (CEO)

The, you know, the pipeline's solid. Relative to last year, year... I mean, I'm just thinking back, we did close, some Q4 deals last year, so it, we, you know, it's-- 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, you know, Jeremy talked about our spend this year. We're very comfortable with what we've accomplished so far. It's, it's right in line with where we've been the last few years, and, our pipeline's in, in decent shape. You know, I don't, I don't know, you know, whether we'll close in the Q4 or whether that will leak into next year, but we've, we've got activity, and it's balanced across both divisions.

Tom Callaghan (Analyst)

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

Scott Patterson (CEO)

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

Tom Callaghan (Analyst)

Awesome. Thanks. I'll turn it back.

Operator (participant)

As a reminder, to ask a question, please press star one one on your touch tone telephone. Please stand by for the next question. The next question comes from Frederic Bastien with Raymond James. Your line is open.

Frederic Bastien (Analyst)

Yes, thank you. Good morning. Scott, you've been just follow up really on the M&A questions here. You've been quite active and successful at consolidating restoration and fire protection in recent years. As you look forward, how far are you from where you'd like to be? I mean, you know, just wondering if, you know, you can conceivably double, perhaps triple the size of these businesses in the next, you know, five years or so.

Scott Patterson (CEO)

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, you know, more of a organic growth engine as we have been and are at 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, you know, continuing to grow sort of at the same pace as we have been. 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.

Frederic Bastien (Analyst)

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

Scott Patterson (CEO)

Thanks.

Operator (participant)

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

Scott Patterson (CEO)

Thank you, Michelle, and thank you all for joining us today. We look forward to our Q4 and year-end report in early February. Take care.

Operator (participant)

Ladies and gentlemen, this concludes the Q3 investors conference call. Thank you for your participation. You may now disconnect.