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spk00: 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 the forward-looking statement 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 27, 2021. I would now like to turn the call over to Chief Executive Officer Mr. Scott Patterson, please go ahead, sir.
spk04: Thank you, Buena, and good morning, everyone. Welcome to our second quarter conference call. Thank you for joining us today. I'm on the line with Jeremy Racoosin, and together we will walk you through the quarterly results we released this morning that reflected very strong growth over the second quarter of 2020, which of course was the first quarter materially impacted by the pandemic. Total revenue for the quarter were up 34 percent over the prior year, with organic revenue growth at 25 percent. Organic growth was strong at both divisions and at every material business line really across the board, and it reflects three main drivers. The reopening of seasonal amenities, very strong home improvement spending, and continued work from the Texas Deep Freeze event in February of this year. Organic growth was 25% versus a depressed 2020 due to the COVID lockdowns, versus 2019, organic growth was 10%. And that figure does not include first onsite, which we did not own at the time. The organic growth exceeded our expectation, and in particular, was impressive given the current labor market. The number of open positions we have across the company is unprecedented, and it definitely limited our capacity and tempered our growth. The balance of the top line growth for the quarter, 9%, was from tuck under acquisitions over the last year in restoration, fire protection, and property management. EBITDA was up 26% year-over-year, and earnings per share were $1.21, up 41% over the prior year. Jeremy will provide more detail on these metrics in his prepared comments. At first service residential, revenues were up 20%, with organic growth at 16%. The principal driver of organic growth was the reopening of seasonal pools. fitness centers, and other amenities in the Northeast US and Canada. The reopening accelerated quickly through the quarter, and by quarter end, approximately 90% of our managed facilities were open and staffed. We will see some additional reopening in the third quarter and expect to be back close to 100% by year end. There are a small number of seasonal pools that will not open this year, but the impact is not material to our results. Outside of amenity reopening, we generated solid organic growth driven by contract wins and gains in ancillary services. Relative to the second quarter of 2019, the first service residential division was up 9% organically. Looking forward to the balance of the year, we will see some incremental year over year benefit in the third quarter from seasonal amenity reopening. And then in the fourth quarter and into 2022, we expect to settle back into a low to mid single digit average organic growth rate in this division. Moving on to first service brands, revenues for the quarter were up by 50% versus 2020. driven by strong growth in our home improvement segment and continued strong results from our restoration brands. Our home improvement brands, California Closets, CertiPro Painters, Floor Coverings International, and Pillar to Post, were up as a group by over 50% versus the prior year quarter, a period during which much of North America was in lockdown. A more relevant and impressive metric is the 25% growth for this group relative to the second quarter of 2019. Very strong existing home sales in combination with continuing increases in prices and home equity have further buoyed an already strong home improvement market. Vaccine rollouts and the release of pent-up demand in certain regions has added to the activity levels. Our brands have benefited from the strong market, and leads, bookings, and completed jobs are at all-time highs. We reported last quarter that our challenge was production capacity to meet the demand. It remains a significant limiter for us, but we did make headway during the quarter as evidenced by the sequential revenue increase of 16% relative to our Q1. Some of this increase relates to seasonality but much of it is tied to an increase in production capacity. We continue to recruit aggressively and believe this will be reflected in a further sequential increase in Q3 for our home improvement brands. And on a year-over-year basis, for Q3 and Q4, we expect to see growth in excess of 20%. Our restoration brands, First Onsite and Paul Davis, Together, we're up over 50% relative to Q2 of last year. First on site is the big driver corporately for us because it is all company owned, while Paul Davis is primarily a franchise system. The organic growth this quarter was again driven largely by the deep freeze weather event in February of this year that impacted Texas and Oklahoma. We carried a significant backlog into the quarter and completed and booked approximately $50 million of revenue related to the event. Organic growth outside of this event was low double digit, reflecting continued progress at both First Onsite and Paul Davis in terms of adding national customers and building the brands. Our backlog and restoration remains strong heading into the back half of the year, but we are up against very strong comparative results in 2020. You will remember that we secured significant work last year from the Iowa windstorms and Hurricane Laura, and across the third and fourth quarter we generated over $100 million of revenue from these events. Certainly our goal is to at least match the 2020 results. which would mean a very strong growth year for us in restoration. For that to occur, we would again need to generate work from extraordinary weather events. Century Fire was up low double digits versus Q2 of 2020 and generally in line with our expectation. Both the service and installation sides of the business contributed to the quarterly growth. Backlogs and bid activity remain strong heading into Q3, and we expect a solid back half of the year for Century Fire with similar year-over-year growth to Q2. Before I hand off to Jeremy, I want to reiterate how pleased we are with the overall results for Q2, and particularly the organic growth we generated at each of our service lines. We continue to focus on building our brands over the long term and have confidence that our business model and long-term growth prospects remain intact. Over to you, Jeremy.
spk08: Jeremy Leffler Thank you, Scott, and good morning, everyone. As you just heard, we reported strong financial results for the second quarter with both significant growth over last year and outperformance relative to our internal expectations. I will provide a segmented breakdown momentarily, but let me first reiterate our Q2 consolidated results. Revenues were $832 million, adjusted EBITDA was $89.8 million, and adjusted EPS came in at $1.21, up 34%, 26%, and 41%, respectively. Combined with our first quarter results, our six-month year-to-date consolidated financial performance is as follows. Revenues of $1.54 billion, an increase of 23% over the $1.26 billion last year. Adjusted EBITDA of $149.6 million, representing 30% growth over the $115.1 million last year. with a margin of 9.7% up from the 9.2% in the prior year period, and adjusted EPS at $1.87 up 52% versus $1.23 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 disclosure in prior periods. Turning to our segmented financial highlights for Q2, I'll lead off with our first service residential division. Second quarter revenues came in at $406 million a 20% increase over the prior year period. We were pleased with this year-over-year growth given the comparison to last year's quarter, which itself was only down less than 10% in the eye of the pandemic. EBITDA for the quarter was $46.5 million, a 25% year-over-year increase with an 11.4% margin, up 40 basis points, from the 11 percent margin in Q2 of last year. The margin improvement benefited once again from higher margin transfers and disclosures revenue driven by very strong unit resales within our communities compared to last year's second quarter. This heightened level of home resale activity reflects a continuing theme that started in the second half of 2020. And so we would not expect any further meaningful margin pickup at first service residential from this ancillary revenue in the back half of this year. Now onto our first service brands division. In the second quarter, we recorded revenues of $425 million, a 50% increase over the prior year period. EBITDA for the brand segment during the quarter came in at $48.2 million, up 34% year-over-year and yielding an 11.3% margin down from the 12.6% margin in last year's Q2. There were two principal reasons for this margin compression during the quarter. First, as we indicated with our outlook for this quarter during our prior Q1 call, The increased contribution from our restoration operations in the second quarter relative to our home improvement brands diluted the division margin. And second, the margin level reflects reinvestment including headcount additions for growth by most of our brands relative to last year's Q2 when aggressive COVID-related cost-cutting initiatives were incurred. On a consolidated basis, our EBITDA margin for the second quarter came in at 10.8%, down 70 basis points from the 11.5% last year. This margin dilution resulted from higher corporate costs, which totaled $4.8 million this quarter, up $3 million from last year's Q2, when significant pandemic-driven head office compensation and other expense reductions were implemented. Excluding the impact of these higher corporate costs, our combined EBITDA margin from our two operating divisions was approximately flat to the prior year quarter. We also expect to see our full year 2021 consolidated EBITDA margin end up relatively in line to last year's 10 percent level. Shifting to our operating cash flow, before the impact of working capital changes, we were up 35 percent for the quarter, mirroring our strong revenue and EBITDA growth. Cash flow from operations after working capital, however, was down versus Q2 2020 due to a significant working capital swing related to higher accounts receivable balances at first onsite restoration. reflective of their strong activity levels and Texas freeze work. This quarter's growth investment also contrasts with last year when our efforts were focused around cash preservation and collections in the face of the initial pandemic uncertainty. With respect to our capital spending, just over $15 million was earmarked towards internal growth in support of our operations. This keeps us on track with our $60 million full-year CapEx target. And finally, under our Tuck Under Acquisition program, we deployed almost $40 million during the quarter towards further growth of our first on-site platform. Closing with a review of our balance sheet, we exited the second quarter with net debt at $396 million, almost identical to the levels at Q1 and prior year end. Paired with our EBITDA growth, our leverage, as measured by net debt to EBITDA, came in at 1.2 times, continuing to tick down from recent quarterly levels. Clearly, our strong free cash flow model continues to reinforce our balance sheet strength, even as we emerge from the pandemic and reinvest by adding capacity to meet robust market demand. Our liquidity, reflecting total undrawn availability under our revolver and cash on hand, is also sizable at approximately $575 million, providing us with ample headroom to deploy capital in support of further growth. That now concludes our prepared comments. I would ask the operator to please open up the call to questions, and thank you.
spk00: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw a question, press the pan key. Once again, to ask a question, please press star 1 on your telephone. Your first question is from Stephen MacLeod of BMO Capital Markets. Your line is now open.
spk05: Oh, great. Thank you. Good morning, guys. I just had two questions here. Scott, you mentioned in your prepared remarks that restrictions around labor kind of limited your growth in the quarter. I'm just curious if you're able to quantify or give an indication as to how much further you think growth would have been had you had the labor to meet the demand.
spk04: You know, that's hard to know. Steven, we've tried to come at that a few different ways, but I'm not prepared to quantify it or really able to accurately, but certainly in our home improvement brands, we are booked out farther than we want to be, and there are leads and estimates that we can't get to. I think there would have been incremental growth in home improvement. Really, the other businesses, it's a similar situation. We do have more open positions than we have historically. At First Service Residential, some of our communities are temporarily short-staffed, bodies that would be reimbursable. So that's, you know, also tempering the top line in that business.
spk05: Okay. Okay. But it's okay. Okay. I see. Thank you. And then maybe secondly, you know, Scott, you gave some good puts and takes around what your Q2 expectations are in the first service brands business or sorry, back half expectations. just around the home improvement restoration and century fire. And I'm just wondering, you know, how that stacks up on a segment, total segment basis, just when you think about all the moving parts around those three major business drivers.
spk04: I don't have that in front of me. Jeremy?
spk08: Yeah, Steve, stronger in Q3 versus Q4, but you know i think the aggregate pieces suffice i you know i think you you could wait wait the um scott's commentary more towards q3 versus q4 and q4 is somewhat dependent on you know what happens uh in restoration um in terms of storm activity okay okay that's helpful uh thanks guys i'll get back in queue
spk00: Your next question is from Steven Sheldon of William Blair. Your line is open.
spk02: Good morning. Thanks. I just want to ask a little bit more, I guess, about the home improvement brands. I think you would talk some about potentially turning away some businesses. You don't want a long gap between the booking and the installation for the customer, especially I think in businesses like California Closet. So I just wanted to ask, it sounds like, has that continued And as you look across your businesses, have you seen any signs that the hiring challenges could be alleviating at all?
spk04: I don't know that we're proactively turning away business, Stephen, but we have limited our marketing spend so as not to amplify our capacity issue. I would put it that way. You know, we, as I mentioned, we're not getting to some leads. We're not able to provide estimates for all prospective customers. And we're booking jobs too far out. So it's, you know, that impairs the brand experience. And that's something we're working very hard to rectify through communication with the customer and really proactively managing those relationships. We are making headway and improving our pace of recruiting, I would say, largely because we've invested in it. We've added resources. We've generally increased our efforts around recruiting consistently, really, over the last six or nine months. So we're making headway. And, you know, as I mentioned, I think we expect to see – sequential improvement, particularly in home improvement in the third quarter as a result of adding capacity. But I'm not sure that the market is getting any easier or opening up at all in terms of labor. I don't know if that answers your question.
spk02: No, that's helpful. Appreciate that. And then as a follow-up, corporate expenses, I think, picked up here just a little bit this quarter to just under $5 million on an adjusted basis. So I just wanted to ask if we should expect this to kind of be a new baseline to grow from moving forward, and I think this is the highest it had been. Are there any, I guess, unusual items in there this quarter to call out that may have driven some of that increase?
spk08: Steve, it's Jeremy. Yeah, I mean, compared to last year's Q2, we had significant salary cuts and other head office expense reductions. But, you know, this quarter would have reflected normalization. We accrue every quarter for bonus accruals, so there would have been a catch-up versus Q1 as we see visibility for the balance of the year. We've added a couple of additional resources at our head office as well. I'd say a mid-teens for the year, mid-teens million dollars of head office or corporate costs is a good number to go going forward. We've also had FX, the stronger Canadian dollar would have also amplified maybe versus looking back a couple of years, strong Canadian dollar converted to U.S. dollars would have an impact as well.
spk02: Got it. Thank you.
spk00: Your next question is from Matt Logan of RBC Capital Markets. Your line is now open.
spk06: Thank you and good morning. Good morning. Maybe following up on the labor market and some of the challenges you're facing there, when we think about the margin, do you find that you're able to offset some or all of the rising labor costs with higher prices? Or is this simply just the fact that you can't get the labor at all?
spk04: We are experiencing some wage inflation, and certainly to date, as evidenced by the margins you saw in the release, we have been able to offset that. But maybe I'll pass it over to Jeremy. He's been digging into the wages across the company. I'll let him amplify.
spk08: Yeah, sure. Thanks, Scott. As Scott said, ability to preserve margins thus far, again, I think is reflected in our results. But it is evolving, you know, as we speak. Some pockets seeing more wage inflation than others. You know, it does vary by service line, by role or position, and by market. And, you know, at First Service Residential, we have a lot of cost plus contracts. So our ability to pass that through directly It does give us, you know, good cover. And then at some of our other brands, particularly in home improvement, you know, in terms of wage inflation around our installer crews or painting crews, our ability to pass along in terms of pricing our jobs has been good thus far. It's on a little bit more of a lag, so it's not a direct pass-through. But again, we keep a close eye on this. We're monitoring closely, and it's continuing to evolve. But so far, so good.
spk06: And maybe turning to your capital allocation and target leverage, how should we be thinking about tuck under acquisitions or the potential for larger M&A with leverage now down in kind of the low one-turn range?
spk04: Go ahead, Scott. Okay. I was just going to say it doesn't impact us in terms of accelerating activity. You know, we have a pipeline, we have a process, we have a rhythm, and we just want to ensure that we always have the capacity to continue to drive our M&A program. Jeremy, I'll let you add to it.
spk08: Yeah, Matt, I was going to make a similar point so that our leverage doesn't drive how aggressive we get on M&A. It's sort of a result of it. But if we grow acquisitions at mid-single digits, the chances are we may have some very modest annual deleveraging. And then it's something in terms of what we do with capital deployment after Our acquisition spend, we revisited with the board, and Scott and I make our recommendations. But I don't think we're at that point now. Acquisition spend and size of acquisitions, again, can be episodic and can change from quarter to quarter. And I think we still got ample opportunities with our pipeline.
spk06: And when we take a step back and look at the M&A environment, Are you seeing elevated acquisition multiples or maybe just some color in terms of what you're seeing on the ground for residential restoration and home improvement?
spk04: It's very active in general, the market. More activity in restoration and fire protection for us due to the active consolidation and presence of many private equity buyers, frankly. Certainly multiples are increasing. You know, we historically have focused on expanding our footprint with smaller acquisitions. And so the impact at that level is not as significant as it is as you get to the larger companies. But certainly we're seeing multiples increase across the board.
spk06: And maybe one last housekeeping question here for me. In terms of the storm-related activity and the large loss revenues, would the EBITDA margins be consistent with prior quarters at around 10%? Yes. On those incremental revenues? Yes. Excellent. Appreciate the commentary, gentlemen. I will turn the call back.
spk08: Thanks, Matt.
spk00: Your next question is from Frederick Basti of Raymond James. Your line is now open.
spk09: Hi, guys. If we strip out the impact of weather-related events, do you think your commercial restoration activities can maintain a high single-digit organic growth in the foreseeable future through market share gains and just expansion of your services?
spk04: We do. Frederick, we do. We've certainly seen that to date. This past quarter, we grew organically at over 10%. We're investing aggressively in our sales team, and we are driving new national accounts. We also believe we're increasing the wallet share of our existing accounts, and we've had some success with leveraging the expertise and relationships from our tuck under acquisitions across our footprint. A great example is the healthcare expertise at Roland. It's been a year since we completed that deal and we've had considerable success expanding our healthcare vertical in the last 12 months. And we're seeing that in a very healthy backlog heading into the back half of the year. So, you know, quarter to quarter, the storms will cause some fluctuation, but we do believe there will be steady and solid organic growth underlying that.
spk09: Great. And can you comment on sort of the rebranding efforts and how that has gone and whether it's also driven through incremental traffic?
spk04: I mean, we're very happy with the way the rebranding has gone. It honestly feels like we've been first on site for a few years now. It's totally entrenched internally, and we believe gaining considerable traction externally. The one area we've seen early gains is cross-border and extending national relationships that we have in the U.S., or Canada to becoming North American relationships. And certainly one brand and one message is helping make that happen.
spk09: Great. Good to hear. Changing gears, I was a little surprised to see tuck-in acquisitions contribute as much as they did to first service residentials' growth. My math suggests that they would have added anywhere from 13 to 14 million bucks of revenue But, you know, you don't really press release, you're talking acquisitions anymore on the first service residential side. So I was wondering if you could provide a bit more color on that.
spk04: Jeremy?
spk08: Yeah, sure. I'd say we're selective in what we press release. You know, we did press release the first service residential property management business in New York City, Midboro. But there's some insular service providers, that we acquire that are small and because they're in the ancillary category, whether that's pool or pool management, pool maintenance, fitness, if they're one-offs like that and they're small, we don't tend to press release them. So that would have probably plugged the difference between the disclosed mid-borough release and our net acquisition growth.
spk09: Gotcha. Okay, thanks. And my apologies, I missed I missed how much incremental restoration work you got relative to the deep freeze. Would you mind just reminding me?
spk08: 50 million.
spk09: Okay. Awesome. Thank you. Great results.
spk00: Your next question is from Daryl Young of TD Securities. Your line is now open.
spk03: Morning, guys. Morning. A question around the restoration side, and I guess just as we head into the back half of the year, as you alluded to, the hope would be to stay flat at a minimum. How should we think about some of the extreme weather events that are happening right now across North America in terms of fire versus named storms for your business, and which ones would be the biggest contribution, just if you were to kind of rank through fire versus wind and hurricanes?
spk04: Wind and water damage generally generate more revenue opportunities for us, particularly with our strong footprint on the East Coast and in the Midwest. As we build out, continue to build out our footprint on the West Coast, wildfires will become a bigger part of our business. But in general, the work required around wind and water far exceeds the work required around wildfire damage, I would say.
spk03: Okay, great. And then just on some of the tuck-under acquisitions, I'm thinking, Max, you seem to be targeting much more specialized restoration tuck-unders. Are there any specific verticals? I mean, you've got the healthcare with Roland. Are there any specific other verticals that you'd like to be in in restoration that are more niche maybe?
spk04: I would say we're targeting to strategically increase our footprint. And so Maxon's in New York City was very important for us because we did not have a presence in New York City. And to properly serve our national accounts, we needed a a significant presence, and Maxson's brought us that. So I would say it's more about footprint, and then the particular verticals and specialties within a company are also interesting, and we take that into account, and they can help drive growth, certainly, as Roland has for us. We're not targeting any niche services at this point.
spk03: Okay, great. And then just one last one. I think last quarter you mentioned on the residential side that some of the disruption of COVID has caused some board-level turnover. I'm just curious if you've seen any margin pressure or any competitive dynamics that are shaping up as you have more turnover of property management contracts?
spk04: Yeah, I mentioned last quarter that we were seeing an increase in board turnover, which generally leads or can lead to an RFP. And I would say that is proving out. We certainly saw an increase in the number of opportunities, sales opportunities in Q2, and that continues into Q3. But on the flip side, we have more of our communities go out to bid than we normally see. When communities go out to bid, it does attract price competition. So that would impact our margin over time. I don't think it will be material. unless it continues. And I think what we're going to see is we will see this settle down. I believe our sales will be, you know, they will be up this year, but our retention will be up a little bit. Our turnover of accounts will be up a little bit as well. Net-net, you know, we still think we're going to settle into that low to mid single-digit organic growth rate as we get into 2022.
spk03: Perfect. Okay. Great, great quarter guys. Thanks.
spk00: Your next question is from George Dume of Scotiabank. Your line is now open.
spk01: Yeah. Good morning guys. Just to follow up the last, uh, last question on the higher condo and HOA turnover. Um, I'm just wondering when you, when you layer that in with kind of the ongoing shortage of labor, um, do you think we'll maybe come still be able to hold that kind of low to mid 90% retention rates that we've had in the past, or you see it, Scott, maybe slipping a little bit lower for a short period of time there?
spk04: No. No, we'll be able to hold it. I mean, we always have. It's off maybe a point this year, but still in the 93, 94 range. We don't see that as being an issue.
spk01: Okay, great. And maybe for Jeremy, just on that 25% organic growth number that you guys produced in the quarter, how much of that was pricing? How much of that was volume? And maybe just general comments on pricing. Which areas of the business are you guys pushing harder on that?
spk08: Yeah, we've got many different service lines, George, so hard to dissect. Pricing at first service residential is always modest, price competitive, spoken about that. We're getting good pricing, again, to accommodate cost increases in the home improvement business. But out of that 25%, I would say most of it's volume. Predominant amount of volume.
spk01: Okay. And would you like to give any comment on looking forward, how much you guys kind of where you see pricing going, maybe in terms of percentages in the next couple quarters?
spk08: Don't have percentages. I think it's really about trying to cover off any cost increases. And as I mentioned earlier, at First Service Residential, we have a big component that's cost plus. So that just gets matched. And then the other business lines, particularly in the brands division, will be a function of us just trying to preserve margin vis-a-vis any labor cost increases. And in some instances, very small material cost increases.
spk01: Okay. Just one last one for me, Jeremy. On the working capital, obviously a pretty pronounced drag as kind of restoration activity is high. Can you talk to me where you see that number kind of shaking out in the back half of the year and for the year?
spk08: It's hard to look at it on a quarterly basis. I've said on an annual basis, one and a half percent usage of working capital as a percent of revenues is a good rule of thumb. Now, it's going to I think you've got to look at multi-year averages. We have the weather-related business that can really move that working capital usage. We've got cutoff times around heavy labor business and payroll timing. So you've got to look at a multi-year annual basis and 1.5% usage on revenue. So you've got a $3 billion business. We're in the order of $45 million-ish, $50 million. of working capital usage, but over a longer measurement period than just quarterly.
spk01: That's great. Thanks, guys. Great question. Thank you.
spk00: Your next question is from Scott Frommsen of CIBC. Your line is now open.
spk07: Thank you, and good morning, gentlemen. Just a couple questions. First, on the home improvement businesses, are you concerned about moderating growth? following these COVID-related increases?
spk04: I think it will moderate, Scott, just as, you know, there is a certain level of pent-up demand, I think, that we're experiencing right now, and it will moderate going into 2022. But, you know, the home improvement market in general is so strong, existing home sales, higher home equity, That will continue to provide tailwinds through 2022, we believe.
spk07: Okay, thanks. And just a question on the impact of inflationary pressures on residential contracts, particularly labor. Do you see an impact there, or are there sufficient rate escalators that will cover off?
spk04: Jeremy?
spk08: Yeah, Scott, cost plus contract, roughly 30-ish percent of our division revenues. So that directly covers us off. And then we've got, you know, in our property management contracts and anything else that's, you know, recurring contractual nature that's more than a year would have CPI type price escalators built into them.
spk07: Okay, thanks. I'll turn it over. Thank you.
spk00: No more questions. Please continue, sir.
spk04: Thank you, Bryna. And thank you, everyone, for joining us this morning. We look forward to continued strong results in our next report towards the end of October. Thank you.
spk00: Ladies and gentlemen, this concludes the second quarter investors conference call. Thank you for your participation. Have a nice day.
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