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. Actual results may be materially different from any future results, performance, or achievements contemplated in the forward-looking statement. 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 40F as filed with the U.S. Securities and Exchange Commission. As a reminder, today's call is being recorded. Today is Tuesday, October 26, 2021. I would now like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir.

Thank you, Phyllis. Good morning, everyone, and thank you for joining our third quarter conference call. Jeremy Racoosin, CFO, is on the line with me today. I will start us off with a summary of our performance, growth drivers, and highlights for the quarter, and Jeremy will follow with a more detailed look at the financial results. Let me start by saying we are very pleased with the results for the quarter, which reflect continued strong organic growth despite a very tough labor environment, lingering COVID challenges, and supply chain obstacles. Jeremy and I together will touch on these challenges in more detail. Total revenues for the quarter were up 14% over the prior year, with organic revenue growth at 8%. We again generated year-over-year organic growth across every platform, with particular strength at First Service Residential, Century Fire, and our home improvement brand. EBITDA for the quarter was $94 million, up 6% versus 2020, reflecting a margin of 11.1% compared to 12% in the prior year. Earnings per share were $1.50 compared to $1.19 last year. Jeremy will walk you through the year-over-year movement in the profitability metrics in his prepared comments. At first service residential, revenues were up 13%, with organic growth at 8%. Again this quarter, a strong contributor to year-over-year organic growth was the reopening of seasonal pools and fitness centers in the Northeast U.S. and Canada. The reopening began in the second quarter, and by the end of the third quarter, about 90% of our managed facilities were open and staffed. Outside of amenity reopening, we generated mid-single digit organic growth in line with our long-term expectations for this division. A highlight at First Service Residential during the quarter was the acquisition of the condo management division of Atlantic Pacific, a leading high-rise management company in South Florida. Atlantic Pacific has a strong and experienced team that manages a marquee portfolio of about 100 communities. The acquisition extends our significant leadership position in Florida, and importantly, strengthens our operating team and deepens our talent pool with the addition of 900 associates. This is a great add for us. We've long admired the team and the portfolio at Atlantic Pacific. Looking to the fourth quarter at First Service Residential, we expect to show high single-digit revenue growth, benefiting from the recent acquisition and amenity reopenings relative to the prior year. Moving on to First Service Brands, revenues for the quarter were up by 16%, 9% organically. Our home improvement segment was up by 15%, all organic. Sequentially, relative to Q2, we were down slightly. The home improvement market continues to be strong, and we continue to generate record levels of leads and booking. Our challenge in these brands has been our capacity and ability to produce the work. The resurgence of COVID during the quarter impacted many of our branches, compounding the capacity issue we've been dealing with all year due to the tight labor market. In addition, we were confronted with numerous supply chain issues during the quarter, which impacted our ability to complete work. All of the home improvement brands were faced with scheduling issues due to shipping delays and material shortages. So we were up 15% versus the prior year and 14% versus 2009. which reflects impressive growth, but we had the opportunity to do much better. The good news is that most of the deferred work remains in our pipeline. We're communicating extensively with our customers and rescheduling where we can for this quarter or for early 2022. Through alternative sourcing and other measures, we believe the supply chain issues are largely behind us. and we expect to show improved growth in the fourth quarter for our home improvement brands north of 20 percent, which is where we expected to be this past quarter. Our restoration brands, First Onsite and Paul Davis, together were up over 10 percent relative to Q3 of last year with mid-single-digit organic growth. This is a strong result, and we are thrilled to have generated organic growth in restoration. against a tough comparative quarter for us last year that included about $45 million in revenues from the Iowa windstorms and Hurricane Laura. We benefited this past quarter again from the Texas deep freeze, where we closed out our final jobs, and then Hurricane Ida, which impacted Louisiana, New Jersey, and New York in late August, early September. We generated about $30 million during the quarter from these events. Excluding the storms, organic growth was low double-digit, which is a positive reflection on our momentum in growing day-to-day business by signing new customers and gaining incremental share of existing accounts. We were excited during the quarter to expand our footprint at First Onsite with the acquisitions of Complete DKI in the Florida Panhandle region, Moore Restoration in central Indiana, and insurance restoration specialists serving New Jersey and metro Philadelphia. These acquisitions are in areas that are regularly impacted by weather events. Each is an important strategic addition that enhances our ability to respond to our national commercial accounts and each brings on strong leadership and talent that we are excited and proud to have on our team. We continue to carry a solid backlog at our restoration brands and expect that to drive a strong fourth quarter that will get close to our fourth quarter from 2020, which was outsized with $60 million of work from the two 2020 weather events. Century fire again grew by double digits this quarter, buoyed by a solid commercial construction market and strong momentum with our national account service and repair program. Backlogs and bid activity remain strong, and we expect to see near double-digit year-over-year growth in Q4. Before I hand off to Jeremy, I want to emphasize how pleased we are with the continued momentum in organic growth. 8% on a consolidated basis with strong organic growth at each service line. It's a great reflection on our teams and their ability to win in the market day to day. Over to you, Jeremy.

Thank you, Scott. Good morning, everyone. Our third quarter financial performance, as you just heard, was driven by strong organic and overall revenue growth and very balanced across both of our divisions. First service residential, and first service brands. I will provide segmented commentary in just a moment, but first a consolidated recap. For the third quarter, first service total revenues came in at $849 million, adjusted EBITDA at $94.2 million, and adjusted EPS at $1.50, up 14%, 6%, and 26% respectively. On a year-to-date basis, We have delivered strong, consolidated results across the board, both in terms of top line and profitability, and with significant contributions from all of our operations within both divisions. Financial highlights for the nine months year-to-date include revenues of $2.39 billion, up from $2 billion even in the prior year period, an increase of 20%, which includes 13% organic growth. Adjusted EBITDA also increased 20%, up to $243.8 million, compared to the $203.8 million in the prior third quarter, with our overall EBITDA margin remaining in line at 10.2%. And lastly, our adjusted EPS year-to-date currently sits at $3.36, up 38% over the $2.44 margin. per share reported for the same period last year. Our 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 elaborate on our third quarter segmented results. Within our first service residential division, we reported revenues of $423.1 million. a 13% increase over Q3 2020. This strong top-line performance drove EBITDA of $45.1 million, an 8% increase year-over-year. At the same time, we did see our EBITDA margin moderate by 50 basis points to come in at 10.7% for the quarter. This margin decline resulted from two factors. we have experienced a general increase in wages across the division. We can recoup some of this through cost-plus contracts, but much of it will be subject to a lag in getting price increases through contract renewals. A second factor contributing to our margin for the quarter was the increased labor coming on stream to support our amenity facility reopenings during the quarter, which yielded a typical sub-10% fully burdened margin that averaged down the overall division margin. Now to our first service brands division. The division generated revenues of $426.4 million during the current third quarter, up 16% versus the prior year period, and supported by both the strong organic growth drivers that Scott commented on, as well as contribution from recent tuck-under acquisitions. During the current third quarter, our brand's EBITDA came in at $53 million, a 9% increase year-over-year, with a resulting 12.4% margin down compared to 13.3% in last year's Q3. The margin decline was primarily attributable to supply chain constraints affecting the pricing of our raw material input at both our home improvement brands and Century Fire Protection, and increased labor costs also related to those supply chain bottlenecks, which caused scheduling issues and inefficiencies within our frontline teams in completing jobs. Reverting now back to our consolidated results, just a couple more comments to note on our overall profitability. First, we incurred a $2 million year-over-year increase in corporate costs during the third quarter that impacted our overall EBITDA and operating earnings, reflecting a normalization of compensation expenses compared to the COVID-driven cost reductions in the prior year quarter. Our total corporate cost of $3.9 million during the quarter is consistent with my comments in Q2 regarding reversion back to an annualized corporate cost run rate in the mid-teens millions of dollars. Second, we realized a $12.5 million gain in other income related to the sale of our small non-core legacy pest control business based in Florida, which was part of our first service residential division. On an after-tax basis, this divestiture contributed 21 cents to our adjusted earnings per share of $1.50 for the third quarter. In terms of capital deployment during the third quarter, we saw strong activity with our Tuck Under Acquisition Program. We invested $46 million during the period on four transactions that will bring approximately $75 million in incremental annualized revenues. Our deal pipeline remains quite active as our teams continue to be engaged in varying stages of dialogue with prospective targets. We also incurred $13 million in capital expenditures during the third quarter, and with year-to-date CapEx sitting at $42 million, we are on track with our $60 million full-year target. Cash flow was strong during the quarter, allowing us to internally fund a good portion of these capital requirements, while at the same time incrementally strengthening our balance sheet further. Before working capital changes, cash flow from operations was $72 million, up in line with EBITDA growth over the prior year quarter. we realized almost $30 million of operating cash flow after working capital investments required to support both the across-the-board strong organic growth of our existing businesses and the recent tuck under acquisitions. Our balance sheet at quarter end included net debt of $425 million, resulting in our leverage coming in at 1.2 times net debt to trailing 12-month EBITDA down sequentially from our prior second quarter. Our liquidity and debt capacity also remains strong with approximately $535 million of total cash on hand and undrawn availability under our credit facility. To close off our prepared comments with an outlook, you have already heard Scott's top line indicators for the fourth quarter for each of our businesses. On a consolidated basis, we therefore expect our revenue growth in Q4 to be in the high single digits. Our consolidated EBITDA margin in the fourth quarter will see some year-over-year decline largely due to similar labor cost-driven margin dilution at first service residential as we saw in the third quarter. On a full year basis, we anticipate our consolidated EBITDA margin to come in at around 10%, relatively in line with 2020, and consistent with our expectations that we communicated on our second quarter earnings call. In terms of our 2022 outlook, we will provide some high-level color during our 2021 year-end earnings call scheduled for early February. That concludes our prepared comments. Phyllis, you can now open up the call to questions. Thank you.