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spk00: 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.
spk02: 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.
spk07: 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.
spk00: At this time, if you would like to ask a question, press star one on your telephone keypad. If you would like to withdraw your question, press the pound key. Your first question is from the line of George Domet with Scotiabank.
spk01: Yeah, good morning, guys. Just to answer your question, Jeremy, on the 2022 guide of load chains for top line, just wondering, does that include future acquisitions or just the recently announced ones? And second question, just generally speaking, how much of that is pricing?
spk07: On the first question, it only includes acquisitions that we have already closed and that roll incrementally into 22, no unidentified acquisitions. And on the second question, if pricing is more minimal than volume in all of our businesses, We've talked about the role of demand for our services. It's largely volume-driven on both sides of our business, and pricing is incremental really to cover off cost inflation.
spk01: Okay, thanks. That's helpful. And just looking at the residential segment, their pricing usually takes some time. I guess it's based on a contract renewal. So any commentary there in terms of maybe how far behind we are in terms of catch-up when it comes to those contracts in today's labor cost picture? Sure.
spk02: Well, George, a third of our revenue is cost plus contracts. So that's clean and direct. And then the balance relates to fixed price contracts. And I think that's what you're talking about. And as those contracts come up, so our first opportunity really would have been this earlier in January. And as those contracts come up, we engage with our customers around the need to match wage increases, and this always leads to a healthy discussion. We certainly made some headway. Not all our contracts come up in January, but a number of them do. We made great strides, and we're confident that really by the end of the year, we'll have recouped much of the cost increases that we've been faced with. And as you heard in our prepared comments, we expect to show strong growth this year while holding our margins. So, uh, we, we, we certainly believe that that's the case.
spk01: Yeah. Thanks, Scott. And just a quick follow-up, maybe on the resi segment, uh, any general comments on competition? Um, you know, kind of the smaller, maybe lower price point competitors out there, maybe what's going on and can you give a little bit of color on, on retention rates, how those are trending?
spk02: Sure. You know, I've said many times before on this call, our competition is smaller, private companies, and they compete on price. So there's always price tension in this environment, and there certainly will be this year. And that really is one of the principal reasons why it will take us the year to work our cost increases through. But it's no different than it's always been. Our competition competes with us on price, and we have to continually prove our value. And so we've been successful at that for years and will be successful this year. Our retention rates, you know, we expect this year to be right in that same sort of mid-90s range, 94, 95.
spk01: Okay, great. Thanks for your answers. Good luck.
spk00: You're next. Question is from the line of Stephen McLeod with BMO Capitals.
spk04: Thank you. Good morning, guys. Good morning, Steve. I just had a couple of questions. I just wanted to circle around specifically on the wage environment, or sorry, the labor environment in the U.S. And I'm just curious if you can give just a bit of color around how labor shortages may have impacted Q4 and sort of how you're addressing that as you roll into this current fiscal year?
spk02: Well, the labor shortage impacted us, you know, it's really impacted us for the last 18 months. I don't know that there was anything in particular in Q4 except that, you know, in the home service brands, I noted that we did dial up our productivity significantly, and so we did start to have more success recruiting over the last four or five months on the front line. And also, we're seeing our turnover return to historical levels, and it certainly had popped earlier in the year in 21. So we're slowly filling open positions and adding to capacity. And we are seeing the labor market loosen modestly. It is still tough. And we still have many, many open positions across the company. But we're making incremental headway.
spk04: Okay. That's great. Thank you. And then, Scott, I'm not sure if you specifically addressed this in your prepared remarks. You may have touched on it, but I was just wondering if you could give a little bit of color around the year-over-year differences in storm activity and how that might have impacted specifically revenues in Q4 of this year versus Q4 of last year.
spk02: We were down in terms of sort of major storm events. We were down... over 20 million, and so our total revenues matched sort of the record level we achieved last Q4, but we were down modestly on an organic basis. X the storms, we grew organically mid-single digit. Does that answer your question?
spk04: Yes. Yeah, that's great. Thank you. Thanks, Scott. And then just finally, on the resi side, where are we with respect to amenity reopenings? I imagine maybe with the Omicron surge in late Q4 and early Q1, did that impact or did that delay some of the reopenings that you would have otherwise seen?
spk02: Well, Q4 and this quarter, Q1, are both non-seasonal. So many of the facilities, amenity facilities we manage are not open in any event. We did have some reopenings in the fourth quarter, and they did have a modest impact on our growth. I think we'll see it more in Q2. We expect to be fully open and operational in Q2 of this year. Now, we were, you know, last year largely open, probably 85%, 90%, but we'll see some boost in Q2
spk04: Okay. Okay. Great. Well, that's great. Thank you so much.
spk00: Again, if you would like to ask a question, press star 1 on your telephone keypad and press the pound key if you would like to withdraw your question. Your next question is from the line of Stephen Sheldon with William Blair.
spk06: Thanks, and good morning. On restoration, I guess as you continue to expand more into larger national accounts, can you – kind of remind us what that could mean in terms of more visibility and, I guess, stability in that business? I know there's potential volatility in restorations due to weather events, but does that change at all as you continue to win larger accounts where you maybe become less reliant on bigger events?
spk02: I don't know that it does really change the model, Stephen. You've heard us say in the past that first on-site is historically generated 15 to 20% of its annual revenue from area-wide events or named storms. We were within that range in 21. We were within that range in 2020. We were well below it in 2019. As we add national accounts, they will have properties within the path of the storm. And so I think that the national accounts enables us to grow organically year in and year out. But our dollar value from each storm would likewise grow and see us in that 15 to 20% range still. So I think there will always be a component for us We do try to manage it within that level, which we see as a healthy level. We want to continue to drive our day-to-day business outside of these events every year as well.
spk06: Got it. That's helpful. And then just on the M&A side, curious if you've seen any changes in M&A valuation expectations from sellers out there, especially with some pullback, I guess, in public market valuations. I know you guys are really disciplined in what you pay, but have you seen any change in expectations and maybe that creating a more favorable M&A environment for you guys to deploy capital? Thanks.
spk02: I mean, as you know, most of our talk owners are small businesses, and we have been very effective at managing the valuations around those deals in our historical mid-single-digit level. As the size increases, we've seen the valuations really pop. I can't say that we've seen the markets influence those valuations yet, but it's still early. I would probably think that the interest rate environment and if the market continues at its sort of current levels that we will see a more conducive valuation scenario.
spk06: Great, thank you.
spk00: Your next question is from the line of Scott Frommson with CRBC.
spk05: Thank you, and good morning, gentlemen. Question on the home services brands. Do you see rising materials and labor costs, I guess, along with rising interest rates, putting a crimp on consumer demand? Or is the backlog and outlook strong enough to carry you into next year?
spk02: We believe the backlog and outlook will continue to be strong through this year, Skye. None of our metrics show any pause. And we'll provide updates quarter to quarter through the year if we do see any change.
spk05: Okay. And on the residential management services, are you seeing increased competition from mid-market private equity or Are your connections and relationships enough to sort of preempt bidding?
spk02: You know, we've seen private equity enter every one of our markets over the last year, and certainly we do see it in residential property management as well. It hasn't... You know, there's always some competition for the acquisitions. I don't think it's dramatically changed the environment, but certainly there's increased competition from private equity.
spk05: Okay. Thanks, Scott. That's helpful. I'll turn it over.
spk00: Again, if you would like to ask a question, press star 1 on your telephone keypad and press the pound key if you would like to draw your question. Your next question is from the line of Darrell Young with TD Securities.
spk03: Good morning, gentlemen. First question is around Century Fire and specifically the Chesapeake acquisition. Should we think of this very similar to restoration where you're going to continue to build a national footprint for the fire platform and the sell through to national accounts?
spk02: I would say that the path for restoration, we are looking today across North America to fill out our footprint. At Century Fire, it's more targeted to the southeast and Florida and Texas and the Carolinas in particular. And then we still have work to do within that footprint. And you saw with Chesapeake, the Mid-Atlantic also has been a priority for us. We still have opportunity within those four areas, and then we'll look beyond it from there. I don't expect that to happen this year.
spk03: And then in your opening remarks, I think you made reference to on the restoration platform broadening both your national account and insurance relationships. Was the reference to insurance relationships more on the resi side? And I guess following on that, has there been any, as you've consolidated the commercial platform, has there been any opportunities you've found or seen with the insurance side to maybe exploit an opportunity there?
spk02: Certainly the insurance carriers and national relationships are important for both First Onsite and Paul Davis, although they are certainly more important for Paul Davis on the residential side. And Paul Davis is adding new national accounts and have this year. Sorry, what was the back half of your question?
spk03: Just whether there was any opportunities to drive revenue growth related to maybe a unique insurance relationship for commercial customers or an angle there that?
spk02: Well, I think the angle is that Paul Davis and First Onsite have partnered and presented to, I would say, a handful of insurance carriers, a national commercial residential capability that's really unmatched in the industry. And so we're making some headway on that front. We've got a couple of customers as a result of that, and it's certainly something we'll be focused on more in the coming years.
spk03: Okay, great. And then just one last one on the resi side. With all the investment that seems to be going in with pension funds looking for single-family rental investments, Is there an opportunity there for First Service Residential to be a property manager or a partner to some of these pension fund investments that are going into developing those single-family rental communities?
spk02: You know, we've looked at it. It is a different business model, and the economics are quite different, and it's not something we're pursuing right now, and I don't really see it. in the coming years.
spk03: Okay, great. That's it for me. Thanks very much, guys.
spk00: Again, if you'd like to ask a question, press star 1 on your telephone keypad. There are no further questions at this time.
spk02: Thank you, Misty. And thank you, everyone, for joining us today. We look forward to a big upcoming year and kicking it off with our Q1 call at the end of April. Thank you.
spk00: Ladies and gentlemen, this concludes the fourth quarter and year-end investors conference call. Thank you for your participation and have a nice day.
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