FirstService Corporation

Welcome to the fourth quarter and year-end 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 40F as filed with the U.S. Securities and Exchange Commission. As a reminder, today's call is being recorded. Today is February 9, 2021. I would like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir.

Thank you, Jason. Good morning, everyone. Welcome to our fourth quarter and year-end conference call. Thank you for joining. Jeremy Racoosin, our CFO, is on the line with me today, and together we will walk you through the very strong quarterly results we released this morning, which again reflect the the resiliency of our business model, the strength of our market-leading brands, and the dedication of our teams. I will start with a high-level review of the numbers and some highlights for the quarter, and then Jeremy will go through the quarterly financials and summarize the full year results. Total revenues for the quarter were up 15% over the prior year with organic revenue growth at an impressive 11%. We consider ourselves an organic growth company first, and are very proud to finish a crazy year like 2020 with organic growth in the double digits. The balance of our growth for the quarter came from tuck under acquisitions, primarily in our commercial restoration platform, but also under Century Fire. EBITDA was up 25% year-over-year and reflects 80 basis points of margin improvement, driven primarily by higher margins at first-service residential, but supported by a positive uptick at first-service brands also. Jeremy will break it down for you in a few minutes. And finally, earnings per share were up 55% to $1.02. At first-service residential, revenues were up a solid 4% versus the prior year, all organic, reflecting continued positive sequential momentum over the last three quarters. We were down 9% in the second quarter, flat in the third quarter, and now up 4%. The year-over-year increase was enhanced this quarter by very strong ancillary revenues, including transfer and disclosure income, and project management-related services. Home sales in our managed communities and the related services we provide were up in excess of 20 percent compared to the prior year. In addition, we saw increases in the services we provide relating to maintenance, project management, and construction, particularly in the Midwest, where many of our communities suffered wind and hail damage during the year. The relative sequential improvement from a flat year-over-year comparison in the third quarter to up 4% in the fourth quarter is in part due to seasonality, as many of our amenities, which have been impacted by COVID-related lockdowns, are seasonal and normally shut down in the fourth quarter, reducing the negative year-over-year impact relative to the third quarter. Looking forward, we believe Q1 will be flat to up modestly relative to prior year. We continue to be impacted by amenity closures across many regions, including California, the Northeast, and Canada. We did see some openings of year-round facilities in the fourth quarter, but most have since been shut down again. Longer term in this division, As we exit the pandemic, we expect to settle back into that low to mid single-digit organic growth rate on average. A highlight at First Service Residential during the quarter was our acquisition in New York City of Midboro Management. Midboro is one of the leading management companies in New York City with a complementary footprint and a particular focus on co-ops. We now manage more than 600 properties comprising almost 100,000 units in the important New York City market. We welcome the Midboro team to the First Service family and look forward to leveraging our respective strengths in the coming months. Moving on to First Service brands, revenues for the quarter were up 26% with organic growth at 18% and the balance from tuck under acquisitions over the last year. Global restoration, our commercial and large loss platform led the way in terms of growth with revenues up over 60%, 45% organically. Global benefited during the quarter from the significant backlog of work relating to Hurricane Laura and the Iowa windstorms that impacted our customers in August. Organic growth for global adjusted for these specific weather events was low double-digit for the quarter, with strong momentum in national account work and our healthcare vertical more than offsetting weakness in our hospitality and retail verticals. Although we have worked through substantially all of the storm-related work, we did finish the year with a solid backlog relative to a year ago. and expect our Q1 to be up modestly from 2020. Our home service brands, including California Closet, CertiPro Painters, Paul Davis, Floor Coverings International, and Pillar to Post generated top line revenue approximately flat with a year ago and right in line with our expectation. Leads and sales activity were solid through the quarter while we continue to build back service capacity after significantly scaling back in Q2. We obviously continue to deal with COVID, and understandably, there remains a reluctance in many areas to open the home to installation and service crews. Until this changes, we expect our results with this group to remain relatively consistent with current levels. For Q1 on a year-over-year basis, that means flat to up modestly. As we get into Q2, we will start lapping the beginning of COVID in 2020, and we will see year-over-year increases with this group. Century Fire was up low single digit versus the prior year. The service and inspection side of the business is almost back to pre-COVID service levels and reflected year-over-year growth driven by new national account wins. This growth was tempered by flat year-over-year results in sprinkler and alarm installation, as increases in warehouse and multifamily construction were offset by declines in commercial construction in the office, retail, and education verticals. Similar to the home improvement brands, we expect Century to remain approximately at current levels until we emerge from the pandemic. We were excited during the quarter to announce two tuck-under acquisitions per century, Aegis Fire Protection, which is a market-leading player in the Kansas City area, and Cornet, a full-service fire protection company serving the Washington, D.C. market. These deals expand our footprint into two key markets that we had prioritized. We are excited to partner with the teams at Aegis and Coronet and believe we have an opportunity to significantly grow in these new markets. Before I pass the baton to Jeremy, I want to take this opportunity to again recognize our operating teams and frontline staff. Most of our employees are essential workers on site at a community or construction job or in homes or businesses delivering an important service. The collective commitment and work ethic across the company is amazing. We grew organically on a full year basis versus 2019. That is impressive given where we were after Q2. And it's a reflection on the culture and level of talent we have working at this company. Jeremy, over to you.

Great. Thank you, Scott. Good morning, everyone. As you've just heard, we closed out 2020 with a strong kick to the finish line in the fourth quarter. Our consolidated results included quarterly revenues of $775 million, adjusted EBITDA at $79.9 million, and adjusted EPS of $1.02, up 15%, 25%, and 55%, respectively, versus last year's fourth quarter. Financial results for the full year also showed impressive growth over 2019, particularly given the COVID-19 challenges since last March. More specifically, we reported annual revenues of $2.77 billion, up 15%, including 4% overall organic growth. Our adjusted EBITDA came in at $283.7 million, a 21% increase, with a 10.2 percent margin, up 40 basis points over the 9.8 percent level in 2019. And the bottom line impact was adjusted EPS of $3.46, up 15 percent. Our adjustments to operating earnings and GAAP EPS to arrive at our adjusted EBITDA and adjusted EBS results respectively are disclosed in this morning's release. and are consistent with approach in prior periods. I'll now break down our segmented results within our two reporting divisions, First Service Residential and First Service Brands. Leading off with First Service Residential, revenues for the fourth quarter were $363 million, up 4% versus the prior year period. The division reported EBITDA of $35.5 million, a 19 percent increase, together with 120 basis points of margin improvement quarter over quarter. The strong growth in home resale activity, which benefits our transfers and disclosures services and drives higher margin revenue, had a pronounced impact on our fourth quarter margin expansion. a continuation of what we saw in the preceding third quarter. For the full year, revenues were in line with 2019, and we saw improved profitability with 6 percent EBITDA growth and a 9.8 percent margin, up 60 basis points year over year. These results reinforce, once again, the resilience of our property management business and its recurring contractual revenue base in navigating through the pandemic. Turning to our First Service Brands Division, fourth quarter revenues were $413 million, a 26% increase, and EBITDA was up 28% to $48.6 million, with margins slightly up year over year. For the full year, performance was also strong, including 36% total revenue growth along with a 31 percent increase in EBITDA. Robust organic growth at global restoration underpinned the top-line strength for both the fourth quarter and the year and reflected increased storm and large loss claims activity in the second half of 2020 versus prior year. The annual revenue growth also benefited from full-year contribution of the global acquisition and other tuck under acquisitions. Our segment EBITDA margin modestly contracted 50 basis points to 11.4% for the year, largely due to the increased weighting of our lower margin global restoration operations within the brands division for 2020. Free cash flow during 2020 was also exceptionally strong. operating cash flow after working capital for the fourth quarter was $97 million and for the full year surged to $292 million, both significant increases over 2019. We benefited from strong operating earnings growth and a positive swing in our working capital as we focused on harvesting cash in the face of COVID-19. We expect to revert back to a modest level of working capital investment as we gradually emerge from the pandemic and as our businesses resume their normalized growth path. In terms of capital expenditures, we incurred $39 million in 2020, lower than our most recent guidance and also lower than the prior year. CapEx was reduced by roughly 30% from our original budgeted level at the outset of 2020 to once again manage cash flow during the pandemic. For 2021, we are targeting maintenance capital expenditures at around $60 million, reflecting a more normalized level of annual spend. We also had a solid year on the acquisition front in 2020. We deployed almost $100 million during the year on six tuck-under acquisitions which in aggregate generate roughly $120 million in additional revenue on an annualized basis. We are pleased with our activity level for the year, particularly given that the M&A market was closed for roughly half the year during the height of the pandemic. Currently, we continue to see a solid transaction pipeline. Turning now to our 2020 year-end balance sheet, net debt was $405 million, with our leverage at 1.4 times net debt to adjusted EBITDA, one turn lower than at 2019 year-end. The strong free cash flow that I just highlighted was a significant contributor in this debt reduction. We have previously indicated our comfort of running leverage in the mid-two times range, and so we currently have ample headroom to deploy capital prudently towards future growth. Our liquidity is also at record levels, exceeding $600 million, reflecting significant cash on hand and almost full draw capacity under our revolving credit line. We have always believed that maintaining a conservative capital structure and maximum financial flexibility is a cornerstone of the first service business model. In light of this balance sheet strength, our board of directors yesterday approved an 11 percent dividend increase to 73 cents per share annually in U.S. dollars, up from the prior 66 cents. We have now hiked the annual dividend by 10 percent plus for the past six consecutive years since our 2015 spinoff into a new public company. for a total of more than 80 percent cumulative dividend growth. Looking forward, Scott has provided some commentary on the near-term top-line outlook for some of our business lines. Putting it all together on a consolidated basis for Q1 2021, we expect that our revenues will be up mid-single digits versus last year's first quarter. We also see a likely modest year over year improvement in our consolidated margins, which help drive further profitability for the upcoming first quarter. This concludes my prepared comments and I would now ask the operator to please open up the call to questions. Thank you.