FirstService Corporation

Welcome to the third 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. The actual results may be materially different from any future results, performances, or achievements contemplated in the forward-looking statements. Additionally, information concerning factors that could cause actual results to materially differ may from those in 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 40F as filed with the U.S. Securities and Exchange Commission. As a reminder, today's call is being recorded. Today is October 28, 2020. I would like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir.

Scott Patterson Thank you, Tiffany. Good morning and welcome, ladies and gentlemen, to our third quarter conference call. Thank you for joining today. I'm pleased to be here with our CFO, Jeremy Racoosin, to walk you through the strong quarterly results we posted this morning, which exceeded our expectations in both divisions. We obviously continue to be impacted by the pandemic across every business, but the remarkable efforts of our teams in combination with the resiliency and diversification of our business model, are enabling us to drive growth through this period. I will start us off and provide a high-level review of the numbers and some color around our performance, and then Jeremy will dive in with a more detailed look at our financial results. Total revenues for the quarter were up 10% over the prior year, comprising organic growth of 7%, and the balance from acquisitions, primarily tuck-unders to our commercial restoration platform, including Roland, which closed at the beginning of the third quarter and contributed healthy results. EBITDA was up 15% year-over-year and reflects 50 basis points of margin improvement, driven by higher margins at first-service residential and lower corporate costs. Jeremy will provide more margin detail in his prepared comments. And finally, earnings per share were $1.19, up 29% over the prior year quarter. At First Service Residential, revenues were flat versus a year ago. Last quarter, we reported revenues down 9% year over year, so we are very pleased with the bounce back in quarterly revenues. The sequential increase primarily reflects reopening of amenities and facilities and an increase in the property and ancillary services we provide to our communities as we move closer to our pre-pandemic staffing and service levels. Over the last 60 days, we have worked closely with our clients to successfully open up club facilities and amenities. while following CDC guidelines to ensure the health and safety of our residents and associates. However, we still have many facilities in the Northeast, California, Florida, and our Canadian markets that are only partially open or still remain closed. These facilities, which include community pools, fitness areas, spas, and restaurants represent about 20% of our amenity management revenues and offset the organic growth that we would otherwise have shown. Looking forward, we believe Q4 will closely resemble Q3 in terms of year-over-year performance. While we don't believe many of our open amenity facilities will shut down, it is unclear when our closed amenity facilities will reopen. Moving on to first service brands, revenues for the quarter were up 24% with organic growth at 15% and the balance from several restoration tuck under acquisitions over the last year. Our home service brands including California Closets, Serta Pro Painters, Floor Coverings International, Pillar to Post, and Paul Davis generated top line revenue down slightly from the prior year. This group was off about 20% in Q2 versus a year ago, so a sequential improvement in Q3 is significant. Leads and sales activity were growing through the quarter, but our ability to install and service inside the home still faces COVID-related headwinds. At this point for this group, we expect the fourth quarter to be flat to slightly down versus a year ago. with a building pipeline providing some tailwinds for us as we head into Q1 of 2021. Century Fire was up low single digit versus the prior year. The service and inspection side of the business has come back strongly relative to Q2, but was still down modestly year over year, which tempered the growth in sprinkler and alarm installations. And finally, our commercial and large loss restoration platform, Global, was up significantly versus the prior year, over 70%, including acquisitions, over 40% organically. Global benefited from two significant weather events, Hurricane Laura and the Iowa windstorms, which together generated work that accounted for about 25% of Global's revenues in the quarter. In addition, Global secured a number of large loss claims during the quarter across North America, which together with the storm work, more than offset the steep declines experienced in claims from its hospitality vertical. The success this quarter reflects well on the strategic priorities we have been executing against. These include expanding our geographic footprint, adding new national accounts, and increasing our share of existing national accounts. In particular, we benefited from the expansion of our footprint during the quarter. Our acquisitions of CatCo in Missouri, Perfection in Illinois, and Roland, primarily in the Mid-Atlantic, led to significant incremental work during the quarter. The expanded footprint in storm affected areas gave us an on the ground presence and ability to sell the larger capability and resources of global, which resulted in work that far exceeded the previous capacity of each tuck under. We have also made tangible progress in landing new national accounts, several of which contributed during the period. A number of the new accounts are in Canada, which led to strong year-over-year organic growth in our Canadian operations. This is particularly impressive in a market that is estimated to be down by over 20 percent due to moderate weather and COVID. Our backlog heading into Q4 is quite robust. Our work in Louisiana and Iowa continues, plus we have a number of large lost jobs in process. We expect a strong Q4 with revenues well above prior year and approaching those achieved in Q3. We are very pleased with our momentum in commercial restoration. The operating leadership at Global has done a fantastic job in terms of strategic execution. We have a lot of work ahead of us in this business, but our path is clear and we remain very excited about our opportunity. Before I hand off to Jeremy, I want to recognize our operating teams and frontline staff across First Service. The perseverance and positive energy that I see and hear about every day is awesome. We have a strong culture built around customer experience. It permeates every brand and motivates our teams. And it is the principal reason behind our ability to deliver 7% organic growth in a very tough pandemic environment. Jeremy, let me hand off to you.

Thank you, Scott, and good morning, everyone. Our third quarter financial performance was strong and above expectations, as Scott indicated. The consolidated results included revenues at $742 million, adjusted EBITDA at $88.7 million, and adjusted EPS at $1.19, up 10%, 15%, and 29%, respectively. On a year-to-date basis, we have executed and delivered growth in similar fashion in the face of COVID-19 headwinds, a further testament to the essential services nature and enduring ability of our businesses to perform in challenging market conditions. Financial highlights for the nine months to date include revenues of $2 billion even, up from $1.73 billion in the prior year period, an increase of 15%. Adjusted EBITDA at $203.8 million, a 19% increase over the $171.3 million last year, aided by both growth on the top line and an improvement in our consolidated margin by 30 basis points, up to 10.2%. and adjusted EPS of $2.44, up modestly over the $2.38 per share reported for the same period last year. Adjustments to operating earnings and GAAP EPS in 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 our segmented highlights for the third quarter. At First Service Residential, we generated revenues of $374.8 million in line with prior year. Scott referenced the year-over-year decline in our amenity management services from COVID-related facility closures, which tempered top-line growth. Our EBITDA for the division increased 5% to $41.8 million. with our margin increasing by 60 basis points to 11.2%. The margin improvement was primarily attributable to strong growth in our higher margin transfers and disclosures revenue, driven by increased velocity of home resales in the quarter compared to prior year Shifting over to our first service brand division, we reported revenues of $367.2 million for the third quarter, an increase of 24% versus the prior year period. Scott has already provided color on the top line drivers of growth for the quarter. EVA-DA during the quarter increased to $48.7 million, up 19% over the prior year, and our margin came in at down compared to 13.7% in last year's Q3. Margins improved at our home improvement brands from prior expense reduction initiatives offset by the impact of stronger top line growth at our lower margin company owned operations in restoration and fire protection. Our consolidated EBITDA and operating earnings also benefited from a 50% reduction in corporate costs versus the prior year quarter. Compensation expenses were lower, reflecting a focus on cost containment in the current environment, together with favorable foreign exchange. Below the operating earnings line, we achieved superior earnings per share growth of 29% in Q3. Two key drivers compared to the prior year quarter were an improved 24% tax rate and lower interest expense, where we benefited from both a lower cost of debt funding and significant debt pay down. Contributing to the debt pay down was another quarter of strong cash flow. Before working capital changes, cash flow from operations was $67.5 million, up in line with the earnings increase at 28% over the prior year quarter. Operating cash flow after working capital was $42 million, a little more than double the prior year as we continue to effectively manage our working capital during the pandemic. On the capital deployment front, we outlaid $9 million in capital expenditures during the third quarter, with $31 million now incurred year to date. These are both lower than prior year levels, again reflecting cost containment discipline and tracking well within the pacing of our $45 million full-year CapEx target. We also spent $65 million on acquisitions during the quarter with the Roland restoration transaction comprising the bulk of that total. Our deal pipeline is active across our service lines with the re-acceleration of our tuck-under acquisition program after having gained greater comfort in navigating through the pandemic environment. Our balance sheet continues to be strong in support of these initiatives. At quarter end, our net debt was $446 million, resulting in leverage of 1.6 times net debt to trailing 12 months EBITDA. Our liquidity and debt capacity remains strong, with $575 million of total undrawn availability under our credit facility plus cash on hand. These metrics remained largely in line with the prior second quarter, demonstrating the ability of our operations to generate free cash flow to internally fund our acquisition spend during the quarter. In closing my prepared comments, we reiterate our outlook from the second quarter earnings call, where on the back half of the year we called for flat consolidated top-line growth and margins consistent with prior year, absent any storm-related activity. This baseline is consistent with what we see for the remaining quarter. And then adding the impact from recent storm-related and large loss claims backlog at global, our consolidated results should see modestly positive growth in Q4. During our next scheduled earnings call in early February, summarizing our 2020 year-end results, we will provide some high-level comments on our outlook for 2021. I would now ask the operator to open the call to questions. Thank you.