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 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.

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.

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.