FirstService Corporation

Welcome to the second quarter 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 these 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 July 23rd, 2020. I would now like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir.

Thank you, Jesse, and welcome everyone to our Q2 earnings call. Thank you for dialing in. Jeremy Rakusin is on the line with me today. We last spoke on April 23rd. At that time, we were all right in the middle of lockdown. About 85% of North America was under some sort of lockdown or stay at home measure. And really, there was no clarity around when these measures would be relaxed. We went through a vigorous reforecasting exercise based on what we were experiencing in mid-April to provide some direction and forward guidance with our Q1 report. Well, much has changed over the last three months. As you saw in our release this morning, we significantly outperformed our expectations and the guidance we provided. There are a number of factors involved and Jeremy and I will walk you through them. In terms of agenda this morning, I will start with a summary overview of the results and variances from our forecast. I will then touch on two important highlights from the quarter and then Jeremy will follow with a closer review of the financial results. Total revenues for the quarter were up 8% over the prior year. Organic revenue declined by 9% year over year, but this was more than offset by acquisition growth, primarily relating to global restoration and several tuck-unders over the last 12 months. EBITDA for the quarter increased by 10%, reflecting a 20 basis point increase in margins. At First Service Residential, revenues were down 9%, versus our forecast of down 10% to 15%. At first service brands, revenues were up 39% versus our forecast of flat to up 15%. Margins at both divisions were materially higher than forecast. The principal reason for the outperformance was that markets in general opened up more quickly than anticipated which drove revenue opportunities across both divisions. At First Service Residential, ancillary revenues proved to be more resilient during the quarter, particularly transfer and disclosure income, which was down less than forecast in April and May and then spiked in June and was up year over year. Home sales across the U.S. were up significantly in June and our results reflected the same trend. At First Service Brands, our residential property service companies, including California Closets, CertiPro Painters, Paul Davis, Floor Coverings International, and Pillar to Post, were welcomed into homes more readily than expected. These brands came out early with clear communication around our in-home safety protocol, which opened many doors for us. Our lead conversion and close rates increased across all these businesses. On the bottom line, the aggressive tact we took in mid-March around cost control set us up to reap the benefits of operating leverage on the stronger than expected revenues. Performance during the quarter improved sequentially every month, with June results across many of our businesses and regions that were near a year ago in terms of revenue. We are seeing a continuation of these strong levels of activity into July and have not yet seen any pullback relating to the surge in new coronavirus cases across many states. We are extremely pleased with how the quarter played out relative to early expectations. Our teams were aggressive around cost containment and incredibly tenacious about seizing every revenue opportunity that was presented. And we continue to deliver on our service excellence promise across every brand. Our frontline teams are performing heroically in differentiating us from our competition. We feel very confident that we will emerge from this pandemic environment in an improved competitive position. Looking forward, we are cautiously optimistic about the back half of the year. Jeremy will provide some general direction in his comments, but we will refrain from providing any specific guidance for Q3 or the balance of the year. The economic outlook in North America remains very uncertain, and we have some concern that the strength we saw in June across many of our businesses was driven partially by pent-up demands. Before I hand off to Jeremy, I want to talk about two important highlights from the quarter. The first is the $150 million private placement that we completed with Durable Capital Partners on May 22nd. We ended Q1 with debt to EBITDA leverage of 2.4 times, which is right in our target comfort range. The equity raise took us down to 1.8 times on a pro forma basis. and gave us confidence that we could withstand anything the pandemic threw at us will also be aggressive in terms of add-on acquisitions and strategic investment. We have since green-lighted many initiatives that we paused in the early days of the pandemic and are driving ahead full steam. An example was the acquisition of Roland Companies at the end of the quarter by Global Restoration. The second highlight I want to talk about. Roland is a leading commercial and large loss restoration company in the mid-Atlantic region of the U.S. The acquisition is strategically significant for us in that it expands our geographic reach, enhances our competitive position across a number of important verticals, and brings in some of the top and most experienced restoration professionals in the industry. Roland has nine operation centers in the Mid-Atlantic, Northeast, and Southeast of the U.S., which complement our footprint and improve our ability to serve national accounts. They bring a diverse client base across healthcare, hospitality, multifamily, education, and assisted living verticals. We've added many new national relationships that we believe we can grow and further penetrate. In particular, Roland has built an exceptionally strong healthcare practice. And the company has been an industry leader supporting healthcare companies and other clients throughout the COVID-19 pandemic. This is an important move for us. And we are very excited about welcoming Sam Bergman, Mark Petroski, and the entire Roland team into the global and first service families. On that note, I will pass the floor over to Jeremy.

Thank you, Scott. Good morning, everyone. As you just heard from Scott, we reported financial results that significantly exceeded the expectations we laid out for Q2 during our first quarter call. I will get into more of the specifics around this in a minute, but first, a summary of the consolidated headlines for the quarter. Revenues were $622 million and adjusted EBITDA was $71.2 million, up 8% and 10% respectively. Adjusted EPS came in at 86 cents, down 23% from last year's second quarter. Together with our first quarter results, our six-month year-to-date consolidated financial performance is as follows. Revenues of $1.26 billion, an increase of 18% over the $1.06 billion last year. Adjusted EBITDA of $115.1 million, representing 22% growth over the $94.2 million last year, with a margin of 9.2% up from the 8.9% in the prior year period. And adjusted EPS at $1.23 down 15% versus $1.45 per share reported during our same six-month period last year. Our adjustments to operating earnings and a GAAP EPS to calculate our adjusted EBITDA and adjusted EPS respectively have been summarized in this morning's press release and remain consistent with our approach and disclosure in prior periods. I'll now summarize our segmented Financial highlights for Q2. Starting with our first service residential division, second quarter revenues came in at $338 million, a 9% decrease over the prior year period. This decline came in slightly better than the 10% to 15% range we provided at Q1. Core management revenues were up modestly but were more than offset by ancillary revenue declines in areas we previously called out. Specifically, amenity management, that is our management of pool, aquatic, restaurant, spa, and fitness facilities, was down in line with forecasts. Other ancillary services, several of which carry a higher margin, such as transfers and disclosures arising from unit resales within our communities, Maintenance, Construction, and Project Management moderated less than expected. EBITDA for the quarter was $37.2 million, a 5% year-over-year decline, with an 11% margin up 40 basis points from the 10.6% margin in Q2 of last year. This margin expansion was unexpected as we anticipated a more significant pandemic-driven fall-off in the quarter in those higher margin ancillary services I just referenced. With the proactive and meaningful headcount and cost reductions we took in areas with reduced activity levels, it more than offset the negative impact to our top line, resulting in the improved margins. When you look at the quarter-over-quarter results for First Service Residential in the face of the unprecedented pandemic, It further reinforces the essential services nature and resiliency of this business. Now into our First Service Brands Division. In the second quarter, we recorded revenues of $283.4 million, a 39% increase over the prior year period, driven by contribution from the large global restoration acquisition and partially offset by a 10% revenue decline in the division on an organic basis, excluding acquisitions. This overall division top line performance well surpassed our expectations of zero to 15% revenue growth as communicated to you at Q1. While our restoration and fire protection platforms performed as expected, our home improvement service line significantly exceeded their Q2 forecasts. At the time of our Q1 results announcement in late April, with 85% of North America under some form of lockdown, our assumptions were that these measures would remain in place for all or most of Q2. The easing of government mandated restrictions and social distancing measures across many U.S. states occurred much earlier than expected. which allowed our franchise and company-owned operations to get into homes, complete jobs, and drive increased sales activity. EBITDA for the brand segment during the quarter came in at $35.8 million, up 26% year-over-year, and yielding a 12.6% margin lower than the 14% margin in last year's second quarter. The year-over-year margin decline is due to acquisition mix reflecting the addition of Global's lower margin this quarter to the higher Q2 margin profile for the balance of the division. The current quarter margin, as with the top-line performance, significantly exceeded the expectations we provided on our Q1 conference call. The early reopening of many markets blunted our forecasted decline in system-wide sales and revenues within our home improvement brands, and our operators were nimble in re-accelerating their activity levels in markets where governments and homeowners permitted access. This more modest impact to the top line, together with preemptive and aggressive cost reduction initiatives, drove the Brands Division to solid profitability in a challenging environment. Free cash flow was also exceptionally strong during the quarter. Operating cash flow before working capital changes more than doubled to $53 million over the prior year quarter. With increased focus on cash management and working capital, we saw a very strong surge in cash flow after working capital changes to $113 million. For the six months year to date, we have delivered $153 million of operating cash flow, up significantly over the prior year period. We previously also communicated on our Q1 call the intention to trim our CapEx for the balance of the year. This was reflected in our results with $7 million invested during the second quarter and $22 million year-to-date, thus tracking to our reduced full-year CapEx estimate of approximately $45 million. The strong internal cash flow performance helped keep our balance sheet in very good shape throughout the quarter. And then, as Scott highlighted, we further fortified our financial position with $150 million equity private placement, allowing us to pivot from defense to offense as we gained greater confidence from our own financial performance and better visibility around tuck-under target prospects. We exited the second quarter with our net debt at $400 million, down significantly from over $630 million at Q1. As a result, our leverage as measured by net debt to EBITDA is now at 1.5 times, a decline from the 2.4 times level in the first quarter. Our liquidity, reflecting total undrawn availability under our revolver and cash on hand, with $625 million at quarter end and remains at a record level even after the capital deployed for the Roland acquisition post Q2, which Scott earlier described. Maintaining financial flexibility to further pursue our growth objectives is a cornerstone of our business model, and we are as well positioned as ever to drive forward on these opportunities. We are very pleased with our overall results to date in the face of COVID-19 and we maintain a positive yet cautious stance on the outlook for the back half of the year. There are obviously many uncertainties around the path of the pandemic with numerous possible outcomes. However, if the current macro environment remains largely intact, we believe that for the current full year, We will be down modestly year over year on an organic basis on the top line. But with the full year contribution of global restoration versus half year in 2019, our revenues are expected to marginally exceed the 2019 reported level. We also anticipate that our consolidated EBITDA margin will be largely in line with prior year. That now concludes our prepared comments. I would ask the operator to please open the call to questions. Thank you.