FirstService Corporation

Welcome to the fourth quarter and year-end investors conference call. Today's call has been recorded. Legal counsel requires us to advise the discussion scheduled to take place today may contain forward-looking statements. They may involve known and unknown risks and uncertainties. Actual results may materially differ 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 40-F as filed with the U.S. Securities and Exchange Commission. As a reminder, today's call is being recorded. Today is February 15, 2022. I would like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir.

Thank you, Misty. Good morning, everyone. Thank you for joining us today, and welcome to our fourth quarter and year-end conference call. Let me open by saying that we are very pleased with how the year finished. We generated strong top-line and EBITDA growth despite a very challenging operating environment with continuing pandemic challenges, labor shortages, and supply chain interruptions. The results are a direct reflection on our amazing teams who throughout the pandemic, almost two years now, have been unwavering in their commitment to deliver on our service promise. So I want to kick off the call with a big year-end shout-out to the operating teams across First Service. Thank you for all you do. Now let me jump into the results with a high-level review, and Jeremy Racoosin, who's on the line with me, will follow with more details. Total revenues for the quarter were up 11 percent over the prior year, with organic revenue growth at 3 percent relative to a very strong Q4 in 2020. EBITDA was up 5 percent, reflecting a margin of 9.7 percent versus 10.3 percent in the prior year. Earnings per share were $1.21, up 19 percent. Jeremy will bridge the year-over-year movement in profitability in his comments. At first service residential, revenues were up 12%, with organic growth at 5% and the balance primarily from the Q3 acquisition of the condo management division of Atlantic Pacific. Your organic growth was solid at 5%, particularly considering the very strong comparative quarter from last year that included a surge in ancillary revenue, primarily transfer and disclosure income, and project management-related services. We did not match the same level in our most recent quarter, and the reduction also impacted our margins. Jeremy will speak to this in a minute. Otherwise, we are very pleased with the growth that primarily reflected new contract wins. Looking forward to 2022, we expect to show growth of 10 percent or above at first-service residential, split about 50-50 between acquisitions and organic growth. Given the consistency and recurring nature of the revenues, we should see these metrics approximately play out across each of the quarters. There will be some give and take as ancillary revenues fluctuate, but it is a good proxy for how we expect the year to play out. Moving on to first service brands, Revenues for the quarter were up 9% with organic growth at 2%, and the balance from tuck under acquisitions over the last year, primarily within restoration and fire protection. Your organic growth number reflects the weighted average growth from our restoration brands, our home service brands, and Century Fire. Let me break down each. And I will start with restoration, which includes our results from First Onsite and Paul Davis. Revenues for the quarter were very strong and matched our results from Q4 of 2020. You will remember we benefited from Hurricane Laura and the Iowa windstorms in the last half of 2020 and generated $60 million of related revenue in the fourth quarter. We knew it was a looming hill to climb to match the fourth quarter results, and it is a credit to our teams at First Onsite and Paul Davis that we were able to do it. We benefited from almost $40 million of revenue from Hurricane Ida during the quarter, and outside of this event, grew our business through national accounts and increased share of existing customers. Organic growth excluding named weather events was mid-single digit. Including the weather events, organic growth was modestly down due to the tough comparisons. During the quarter, we expanded our geographic coverage and enhanced our service capabilities with the completion of five restoration acquisitions, four within First Onsite, our commercial platform, and one within Paul Davis, our residential platform. At First Onsite, we added A1 Flood Tech, serving the Washington, D.C., and Maryland markets, Bales Restoration, serving metropolitan Seattle, Emergency Fire and Water Restoration, serving southern Wisconsin. And Kauai Restoration, the leading service provider on the island of Kauai, which solidifies our market-leading presence in Hawaii. At Paul Davis, we added Stat Services, a residential restoration company in Williamsburg, Virginia, adding a new market territory to the Paul Davis network of 330 locations across North America. With each tuck under acquisition, we add talent, capability, and new relationships. And importantly, we enhance our ability to respond to our national commercial accounts and insurance carriers. Looking forward in restoration, we are expecting another strong year in 2022. Although we are largely through our work related to Hurricane Ida, We enter the year with a robust backlog of jobs across North America, including many commercial and industrial large loss claims from floods and fires. Last year, we had a surge in claims and revenue from the Texas deep freeze, which drove record Q1 revenues for our restoration brands. Our goal this quarter is to meet or surpass the prior year quarter, and our backlog would support this. Moving now to our home service brands, including California Closets, Serta Pro Painters, Floor Coverings International, and Pillar to Post. As a group, the home service brands were up 30% for the quarter, all organic. We were particularly pleased with the sequential growth of 18% relative to Q3. We struggled with capacity during Q2, and particularly during Q3, of 2021 due to the resurgence of COVID, tight labor market, and supply chain issues. We had the backlog, and it is a credit to our teams and home services that we were able to effectively increase our productivity by almost 20% Q4 over Q3. Activity levels remain strong in home services. and we expect it to continue at least through Q2 and likely through the year. Like the rest of North America, our capacity was hit hard in January by Omicron, which will have some impact on Q1, but we are largely through it today and expect to finish the quarter strong and show 20% plus growth for Q1. At Century Fire, we continue to show strong top-line growth, up low double-digit versus the prior year with high single-digit organic growth. The commercial construction market remains very strong and Century enters 2022 with a record backlog and very strong bid activity. In addition, the National Account Service and Repair Program continues to build momentum. We expect to see double-digit organic growth this year at Century beginning in Q1. In late December, we were very excited to close on the acquisition of Chesapeake Sprinkler Company based in Maryland and serving the Baltimore and Washington, D.C. metropolitan markets. Chesapeake is a full-service fire protection company and fulfills a key strategic goal for Century of expanding within the Mid-Atlantic regions. We welcome Tim Anderson, CEO, and his entire team to the Century family. Before I call on Jeremy, I want to reiterate how pleased we are with our finish to the year and our performance during 2021. Organic growth for the full year was 10%, which well exceeds our average annual target and is a great reflection on the health of our brands and evidence of our ability to take market share. I want to again thank our operating teams for their continuing commitment and tenacity in a tough environment. Our culture and business model have enabled us to thrive the last two years and gives us confidence for 2022. Our markets across the board remain very active, and we expect another excellent year of growth. Over to you, Jeremy.

Great. Thank you, Scott. And good morning, everyone. As you've just heard, 2021 was another year of strong financial performance at first service. We closed out the year with a fourth quarter that included consolidated quarterly revenues of $857 million, adjusted EBITDA at $83.5 million, and adjusted EPS of $1.21, up 11%, 5%, and 19%, respectively, versus last year's fourth quarter. For the full year, our businesses collectively delivered very robust growth, which was particularly impressive in the face of macroeconomic challenges in the labor markets and the continuing effects of the pandemic. Our consolidated annual results included revenues of $3.25 billion, up 17%, including 10% overall organic growth. Adjusted EBITDA coming in at $327.4 million, a 15% increase with a 10.1% margin in line with the 10.2% level in 2020. An adjusted EPS of $4.57, up 32%. Our adjustments to operating earnings and GAAP EPS to arrive at our adjusted EBITDA and adjusted EPS results respectively are disclosed in this morning's press release and are consistent with our approach in prior periods. I'll now walk through our segmented results for both the fourth quarter and full year within our two reporting divisions, First Service Residential and First Service Brands. At First Service Residential for the full year, revenues increased by 12% over 2020, including 8% organic growth, yielding a 13% increase in annual EBITDA. Our 9.9% EBITDA margin was in line with the 9.8 percent in the prior year. Consistent with our messaging over the past couple of years, that top-line growth would be the primary driver of financial performance. Specifically in relation to the fourth quarter, revenues were $406 million, up 12 percent versus the prior year period, and the division reported EBITDA of $35.7 million, up 1 percent quarter over quarter. We saw our margin for the quarter come in at 8.8 percent, 100 basis points lower, with two factors contributing to the decline. First, as you heard from Scott, our margin declined with reduced higher margin ancillary services revenue versus Q4 2020, when we called out a significant surge in home resale driven transfers and disclosures, as well as project management job activity. By way of further relevant comparison, our 8.8 percent margin in the current fourth quarter lines up favorably to the 8.6 percent margin we delivered in Q4 2019 when we had a more normalized contribution from ancillary revenue. Second, as we initially commented on in the third quarter, we are seeing wage inflation in several areas of our business which negatively impacted our Q4 margin. We expect wage pressures to also influence our margin in the upcoming first quarter, but are confident we will work through these headwinds during the balance of the year as we go through contract renewals. In addition to the strong expected top line growth Scott referred to, we anticipate that our 2022 full year EBITDA margin at first service residential will end up coming in roughly flat versus prior year. Now onto first service brands. For the full year, performance was very strong with 23% total revenue growth, including 13% organic growth, which drove a 21% increase in EBITDA. Our segment EBITDA margin of 11.3% remained relatively flat with the prior year of 11.4%. Once again, as expected, the division performance was top line growth driven with balanced strength from our home improvement, restoration, and fire protection businesses, and a healthy contribution from recent tuck under acquisitions. In the fourth quarter specifically, first service brands recorded revenues of $451 million, a 9% increase, and EBITDA was up 10% to $53.3 million, with our margin at 11.8% level with the prior year. In the upcoming first quarter, we anticipate our brands division margin to be down versus prior year for two reasons. First, Scott touched on the significant Texas freeze work we saw at first onsite in the first quarter of last year. And with that event came higher margin mitigation jobs. In the absence of any similar weather-driven event in the upcoming quarter, first onsite's margin will be lowered due to less favorable job mix. The second factor at play is Omicron. Scott commented on the disruptive effect in pockets across our operations during January, and we are seeing this percolate into our labor costs in terms of paid time off sick leave, overtime pay, and related inefficiencies in getting jobs completed. whether it be in home improvement, fire protection, or restoration. We would expect upcoming Q1 brands EBITDA to be relatively in line with last year, with the broad-based, strong, top-line growth across our service lines offsetting the margin impact. I also wanted to briefly call out two other items impacting our consolidated profitability. Our corporate costs came in at $17 million for the full year, a significant increase over 2020 when we took aggressive expense reduction measures across the board to address the uncertainties of COVID. Second, during the fourth quarter, we realized $7 million in other income related to a gain on sale from a building owned by First Service Residential in Florida. On an after-tax basis, this divestiture contributed 12 cents per share to our adjusted earnings per share for the fourth quarter and for the year. I'll now provide some commentary on our cash flow and capital deployment. Cash flow from operations before working capital was strong, both for the fourth quarter, up 30%, and for the year, increasing by 28% over the prior year. Operating cash flow after working capital declined over both the quarter and the year resulting from the comparison to the unusual positive working capital flows in 2020 when COVID driven cash preservation was a key priority for us. 2021 full year operating cash flow after working capital came in at a relatively normalized level after excluding more than $30 million of non-recurring payments for COVID deferred payroll taxes from the prior year and for contingent value consideration from recent tuck under acquisitions. We also had an exceptionally strong year on the acquisition front in 2021. We deployed more than $160 million of capital during the year, which included a surge of activity at year end, resulting in almost half of that spending tally coming in the fourth quarter. We closed on 18 tuck-under transactions that collectively generate more than $200 million in revenue on an annualized basis. Because of our strong sprint to the year-end finish line, roughly two-thirds of that acquired annualized revenue will be incremental for 2022. We have continued to replenish our transaction pipeline and, as always, are actively looking at several opportunities across our businesses. We also incurred capital expenditures of $58 million in 2021, slightly lower than our most recent guidance of $60 million. We have typically targeted our annual CapEx at roughly 2% of revenues and 20% of EBITDA and have consistently come in at or below these levels in recent years. However, we expect our 2022 capital expenditures to be higher than these benchmarks at closer to $100 million for three reasons. Reduced and deferred spending during the eye of the pandemic, particularly in 2020, requires some catch up. We also have a couple of planned significant headquarter office moves within our operating businesses that have build outs and leasehold improvements. And then finally, the recent surge of tuck under acquisitions I just referred to will require some additional growth capital. Excluding these items, our spending for the upcoming year would land at our normalized target level. Finally, a look now at our 2021 year-end balance sheet. We closed out the year with $487 million of net debt, resulting in our leverage at 1.4 times net debt to adjusted EBITDA level with 2020 year end. Our liquidity is ample at $470 million, reflecting significant cash on hand and capacity under our revolving credit line. The collective cash flow generation of our businesses kept our balance sheet strong, even with the normalized resumption of working capital investments and an elevated level of acquisition capital spending. Consequently, our Board of Directors yesterday approved an 11% dividend increase to $0.81 per share annually in U.S. dollars up from the prior $0.73. We have now hiked the annual dividend by 10% plus for the past seven consecutive years since our 2015 spinoff into a new public company, resulting in a doubling of our dividend over that time. Looking forward, Scott and I have provided some segment indications for the upcoming first quarter. On a consolidated basis for Q1, which is our seasonally weakest quarter, we expect strong double-digit revenue growth sufficient to offset a decline in margins so that our consolidated EBITDA should be flat to modestly up quarter over quarter. For the full 2022 year, we are highly confident in extending our lengthy track record and delivering once again on our target of 10% plus consolidated revenue growth on the back of balanced organic and acquisition growth. In fact, we believe with the strong market fundamentals driving demand for our services, together with recent acquisitions that we have cemented, We will finish the upcoming year with total top line year over year growth in the low teens range. Margins are expected to incrementally improve versus prior year as we move from Q1 through the remaining quarters. And we expect that by year end, our annual margins will be relatively in line with 2021, allowing us to deliver double digit consolidated EBITDA growth for the year. This concludes the prepared comments section. Operator, would you please open up the call to questions? Thank you.