This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Welcome to the First 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 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 40F as filed with the U.S. Securities and Exchange Commission. As a reminder, today's call is being recorded, and today is April 27, 2022. I would like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir.
spk05: Scott Patterson Thank you, Chris. Good morning and welcome, everyone. Thank you for joining our Q1 conference call. I'm on the line today with Jeremy Racoosin, and together we will walk you through the results we released this morning, results that reflected very strong top-line growth across both divisions. Total revenues for the quarter were up 17% over the prior year, with organic revenue growth at an impressive 10%. EBITDA was up 4%, reflecting a margin of 7.5% compared to 8.4% in the prior year, and earnings per share were up 11%. We're very pleased with the way the quarter played out. We continue to be challenged by a tight labor market supply chain issues, and inflationary pressures. Our strong top line for the quarter enabled us to overcome the operating challenges and deliver a solid bottom line that was modestly ahead of our expectations. I'll summarize our results for each division and then pass it over to Jeremy to provide more financial detail. At first service, residential revenues were up 12%, with organic growth at a strong 7 percent and the balance from tuck-unders made during 2021. The organic growth primarily reflects net new contract wins. We experienced a modest boost from the reopening of amenity facilities during the non-seasonal first quarter. This was largely offset by a decline in certain ancillary revenues versus a year ago, particularly transfer, and disclosure income relating to resales within our managed communities. Net-net, at 7%, we're pleased with the organic growth for the quarter. Looking forward to Q2 and the balance of the year, we expect to show similar top-line growth for first-service residential. Moving on to first-service brands, revenues for the quarter were up 22% with organic growth at 12%. and the balance from acquisitions over the last year, including the six tuck-unders we reported towards the end of 2021, five in restoration and one in fire protection. Our restoration brands, First Onsite and Paul Davis, generated revenue that was up 15% over the prior year with 3% organic growth. Last year, we had a surge in claims from the Texas deep freeze, which added over $35 million in revenues to our Q1 numbers. Posting revenues above this level organically without a similar event is impressive and a reflection on the progress we're making at both brands in terms of adding customers and increasing our day-to-day business. Our backlog remains solid, and we are expecting a strong second quarter, but without weather, it will be a challenge to match the revenues we achieved in Q2 of 2021. We booked approximately $50 million in Q2 last year from the Texas deep freeze. Our best estimate at this point is that we will be slightly down in Q2. Activity levels are generally strong for our restoration brands. And as I mentioned, we feel very good about our market penetration, which should translate into strong results for the balance of the year, but it is somewhat weather dependent. Moving now to our home service brands, which as a reminder includes California Closets, CertiPro Painters, Floor Coverings International, and Pillar to Post Home Inspection. As a group, Home services were up over 25% organically for the quarter, flat sequentially. We entered 2022 with very strong backlogs in these brands, and we continued to build on them through the first quarter. The combination of Omicron in January and supply chain issues throughout the quarter challenged us, and it is a credit to our teams that we were able to produce as much revenue as we did. Activity levels remain strong in our home service brands. Home prices are up 15% year over year, which should sustain strong home improvement spending. We continue to incrementally add capacity, and although we are facing ongoing supply chain challenges, we expect to show sequential growth in Q2 and another quarter of 20% plus year over year growth. Moving on to Century Fire, we had another very strong quarter driven by 20 percent plus revenue growth, which was half organic. The commercial construction market, including multifamily and distribution, remains very active, and Century has a strong position in these verticals. In addition, the service repair and inspection division continues to build momentum. We expect a similar level of growth that century in Q2 and for the balance of the year. Let me now call on Jeremy to review our results in detail and to provide a more fulsome look forward.
spk04: Jeremy Leffler Thank you, Scott. Good morning to everyone. Let me first start by summarizing our Q1 results on a consolidated basis, which overall were better than expected, particularly in the face of operational challenges. For the quarter, we reported revenues of $835 million, a 17% increase over the $711 million for Q1-21. Adjusted EBITDA was $62.3 million, up 4% versus the prior year's $59.8 million. And this yielded a 7.5% margin for the quarter compared to a margin of 8.4% in the prior year quarter. And finally, our adjusted EPS was 73 cents, representing 11 percent growth over the 66 cents per share in Q1-21. Our adjustments to operating earnings and GAAP EPS in arriving at adjusted EBITDA and adjusted EPS, respectively, are consistent with our approach and disclosures in prior periods. I'll now summarize the segmented results for our two divisions. First service residential generated revenues of $394 million, up 12% over last year's first quarter, while EBITDA was $30.4 million, a 3% increase over the prior year. The EBITDA margin for the division came in at 7.7%, and as expected, was down 70 basis points over the 8.4% margin last year. The margin was impacted by the same two factors we called out in the prior fourth quarter, wage inflation and the increased mix of labor-driven services relative to higher margin ancillaries. When comparing the division's margin to Q1 2020, the last pre-pandemic quarter encompassing more normalized labor market and revenue mix dynamics, our 7.7 percent margin this quarter with 70 basis points better. So in summary, we are pleased with how our teams are managing through existing inflationary pressures. For the remainder of 2022, we are expecting to close the year-over-year margin gap within the first service residential division with the margin improvement weighted towards the second half of the year. Shifting to our first service brands division, We reported revenues of $440 million during the first quarter, up 22% over last year's first quarter. EBITDA came in at $36.1 million, an 8% increase over the prior year quarter. The division margin declined to 8.2% versus last year's 9.3% level. We had forecasted the margin decline, particularly given the current quarter headwind in restoration against the prior year Texas freeze surge work. We also faced operational disruptions during the quarter, both with our labor due to Omicron in January and with ongoing globally impacted supply chains. While these challenges resulted in higher costs and inefficiencies in completing jobs at several of our brands, we still delivered an overall division margin this quarter that well exceeded the pre-pandemic Q1 2020 margin of 7.5%. Our businesses have remained nimble and resilient, covering off inflationary pressures either in relative lockstep or with a modest lag. We are thus confident we will show incremental improvement in our Brands Division year-over-year margin performance in the coming quarters. Turning to our consolidated cash flow, We generated more than $50 million before working capital changes, a modest increase over last year's first quarter. With the seasonal trough Q1, we had working capital investments in those businesses that ramp up operations for their balance of year peak cash flow periods. Our operating cash flow will be stronger in all remaining quarters of 2022. Capital expenditures during the quarter were $16.5 million, up modestly year over year. We expect total CapEx for the year to come in at $85 to $90 million, lower than the $100 million target we provided at the outset of the year, with the normalized portion in the $65 to $70 million range and tracking within our typical 20% of EBITDA level. We did not close any acquisitions during the quarter, but as you heard from Scott, the flurry of tuck-unders at the close of 2021 contributed to our strong revenue growth in the current quarter and will continue to add to our top-line performance for the balance of the year. Acquisition activity can vary from period to period, and we made progress during the quarter in replenishing our deal pipeline to a healthy level that should convert in coming quarters. Our balance sheet also remains strong in every respect. We ended the first quarter with net debt of $515 million, resulting in leverage as measured by net debt to trailing 12 months EBITDA at a conservative 1.5 times and relatively in line with year end. During the first quarter, we bolstered our debt capacity by increasing the size of our revolving bank credit facility to $1 billion with an unsecured credit structure and more flexible terms. The current undrawn balance on this revolver plus cash on hand provides us with ample liquidity of approximately $550 million to drive further growth. Looking forward, our outlook for the full year remains intact and consistent with the indicators I provided with our 2021 year-end results in February. Strong contribution from all of our businesses will drive aggregate low-teens year-over-year top-line growth. With incremental improvement in our margin performance expected, particularly in the back half of the year, we expect to finish 2022 with our consolidated margins relatively in line with 2021, resulting in double-digit annual EBITDA growth. That concludes our prepared comments section. I would now ask the operator to open the call to questions. Thank you.
spk01: Thank you. To ask a question, you will need to press star 1 on your telephone. To withdraw your question, please press the pound key. Stand by as we compile the Q&A roster. Our first question comes from George Dume of Scotiabank. Your line is open.
spk02: Good morning, guys. Scott, when you characterize the labor environment as generally better, same, or more challenging since the start of the year, and maybe just your general outlook over the coming months, are we seeing any green shoots there?
spk05: I would say it's approximately the same as the beginning of the year. I mentioned on our last call that we were having more success recruiting, and I think that still holds in general. but I would say it's incremental. It's still a very tough labor environment. We have many open positions and we're still capacity constrained at a number of our businesses. So it's a grind, I expect it to continue, but we're making headway and obviously still driving strong revenues.
spk02: Okay, great. Can you talk a little bit about where we are with resigning those higher fixed price contracts, renewals at FSR, and has that to date had any impact on retentions, or are we still kind of trending in the mid-90s?
spk05: You know, it's a fluid situation, George. We have contractual relationships that lock in a fixed price, and we've been working through price increases for many months now, educating our clients, being very transparent about our wage and cost increases. We're definitely having some success in passing through the increases, but it will be an ongoing process. As you heard from Jeremy, it will continue through the balance of the year. And second part of your question, we're keeping our accounts We're having very healthy discussions with our clients, and our retention should be right in line with our expectation this year.
spk02: Okay, thanks. And just one last one for Jeremy. Can you maybe talk to the reason why we dropped our CapEx by $10 to $50 million for this year? And just to confirm, for 2023, CapEx should be in the $65 to $70 million range, right?
spk04: George, the reason for the drop is more in the one-off category, so a couple of the regional office moves that are for service residential operations, there's some of it will not get incurred this year and will roll a bit into next year. Yes, $65 to $70 million as a percentage of revenues, 2%, 20% of EBITDA, that's our normalized spend. That's what we would expect for 2023. We haven't done budgets. If there's a bit of this role of the $10 to $15 million that's coming off this year into next year, that would be incremental. So it's really timing on the one-off CapEx. Got it. All right. Thanks, guys. Thank you.
spk01: Thank you. Our next question comes from Stephen McLeod of EMO Capital Markets. Your line is open.
spk06: Thank you. Good morning, guys. Morning. I just wanted to ask a little bit about the home improvement business. So you cited exceptionally strong growth in those service lines. Can you just talk a little bit about sort of why you're seeing, why you think you're seeing growth being so strong, whether there are pockets of growth within the lines and where those might be, and then how you expect that growth to kind of evolve as the year goes by? I think previously you had suggested that you would expect it to be strong at least through the first half of the year. But I'm just wondering if that expectation has changed at all.
spk05: Right. The reason that we're seeing the strength is really driven off of the home price increase year over year of 15%, which is a massive increase in home equity. And home equity historically has been a big, big driver of home improvement spending. So That certainly gives us comfort that it will continue for the balance of the year. We're booked through Q2. I've provided an outlook for Q2. There is less visibility for us, obviously, in the back half of the year, but at this point, we're comfortable that the work will be there. Remember that We've been capacity constrained at these brands for some time now, trying to catch up to the market opportunity and the leads. And we're really still doing that, continuing to add capacity, recruiting aggressively. So, you know, getting the work right now is not a problem for us based on our capacity.
spk06: Okay. Okay, that's helpful. And then maybe just on Century Fire, I missed the number that you gave. I apologize in your prepared remarks around the growth. And I think you said it was split sort of 50-50 organic versus acquisition. I was just wondering if you could repeat that number.
spk05: Yeah, it was 20% plus is what I said, half organic. And, you know, it's a level that we see for the balance of the year really.
spk06: Great. And then maybe just finally on the acquisitions, Jeremy, you suggested that you've done a good job of replenishing your pipeline. Should we think about the areas or targets of acquisitions sort of similar to what your recent activity has been sort of focused on the restoration business and complemented by some of the other segments?
spk05: Yeah, exactly. I mean, it does include activity. across both divisions, but it will likely be weighted towards restoration and fire again this year. Great. Okay, that's it for me.
spk06: Thank you, guys. Thank you.
spk01: Thank you. And next we have Paisa Alloway, Dr. Bank. Your line is open.
spk03: Yes, hi, thank you. Good morning. Good morning. I first just wanted to ask about your confidence in getting back to flat margins as we get to the back half of the year. And I'm curious if you're depending on pricing, certain weather events, just more color around that would be helpful.
spk04: Sure, I'll take that. Thanks, Faiza. On the residential side, it is both pricing, and Scott spoke to some of that on some of the earlier questioning, As well as us taking a closer look at our cost structure, operational efficiencies. We talk about the service delivery model and offing some of the role from our front-end property managers. But a lot of just costs around IT, telephony, payroll, headcount, together with pricing. And again, we see that picking up in terms of closing the gap in Q3 and Q4. On the brand side, the ability for us to capture any cost increases through pricing is pretty good. Some of it's relatively immediate. Some of it's on a quarter lag. So whatever the challenges that we're seeing in the current quarter around supply chain or wage inflation, we believe we'll capture in Q3 and so forth. There's a part of that, and then the weather aspect at first on site tends to be skewed towards the back end of the year, all of restoration, in fact, Paul Davis as well. And so margins should be better for that business in a typical year in the back half. This upcoming Q2, we have the headwind versus the Texas freeze work of last year, and we don't see the same level of activity in Q2 of this year. another reason why margin improvement in brands will be more skewed to the back half of the year.
spk03: Okay, that makes sense. And then just secondly, you know, there's a lot of conversation around a potential recession in the U.S., and I'm curious if you could, you know, remind us, like, how much of your business would be, you know, is more cyclical versus defensive, I know you talked about home improvement and how home prices tend to impact home improvement spending, but I'm curious if you could share more color around how a recession might impact, which parts of your business might get more impacted.
spk05: Let me start with that, and then I'll pass it over to you. I appreciate the question, Faiza, but it feels a bit odd and ironic to be talking about a recession when we're out recruiting aggressively. trying to increase capacity to tackle the work and the opportunity we have in front of us right now. But I do understand the question and the concern. We've proven over the years and during past downturns to have a very resilient business model. And keep in mind that our two largest businesses are largely immune from economic cycles. Restoration is influenced by weather. First service residential is a contractual business and our communities need to be managed so neither of them are discretionary spends. Century Fire has some exposure through new construction and the home service brands has some exposure. I think particularly California closets but I think the thing to remember in home services and all our brands really is that we have very modest market shares, and these are huge markets. And in a downturn, these markets will still be huge, and it's on us to go out and get the work. But, Jeremy, maybe you can provide a little color around the home service brands and our risks.
spk04: Sure. So home improvement applies to around 25% of our brand's division and 13% of consolidated. So it's a $400 million total revenue exposure. About $300 million of that is CalClosets, which is really the one that could be the most exposed. When we've looked back at our other home improvement brands like painting and floor coverings, they were very resilient even during the great financial crisis. So California closets at 300 million ish of revenue exposure there. And then Scott also commented on, you know, century fire half of its recurring contractual revenue, but the other half tied to new development would be exposed. That's about 50% of a $300 million plus business tied more to commercial new development. So it really depends what type of downturn, you know, home improvement, housing century, more commercial. So they, you know, You may not see both get hit at the same time if there was any exposure due to those macro factors.
spk03: Great. Thank you so much. Very helpful.
spk01: Thank you. And next we have Scott.
spk08: Do you have a sense of how much of that 12% organic growth at first service brands would be attributable to a mix and how much to price that? particular price increases in excess of inflation. Just trying to get a sense of the sensitivity to inflation.
spk05: Okay, Scott, was your question just relating to brands?
spk08: Yeah, just relating to brands.
spk05: Okay, Jeremy's been digging into this, so I'm going to pass it over to him.
spk04: Yeah, Scott, I mean, the first point to make is, you know, any pricing that we're taking is not, you know, we're not taking more price than what our costs are increasing. So we're not looking to expand our margins over and above the, you know, the labor wage inflation or the raw material supply chain costs that we're incurring. But, you know, in our home improvement brands, order magnitude 5% to 10% price increases. to account for those cost increases. At restoration, there's a couple of different segments. Commercial restoration, a little bit easier for us to pass through. We have these master service agreements with our major clients. We have price tear sheets that we're continuously updating. a relatively direct pass-through. Each project is of a different size. You know, when we're doing these jobs, they're different shapes and sizes, so it's really hard to quantify pricing, but we're kind of, as we're booking new jobs now, we're pricing it in the current cost environment. On the residential restoration side, it's a little bit, takes a little more time. We're working with carriers and adjusters around their pricing mechanisms. And then finally, at Century Fire, I think it's back to 5% to 10%, the best we can call it. You've got the install work where we're doing major jobs and pricing it. A lot of our inputs there is either labor and steel. Prices have increased, so we're passing along. On the repair service inspection side, it would be at the lower end of that 5% to 10% range because it's really just more labor.
spk08: Thanks. And do you have a sense of how much of that organic growth is mixed? Or is that kind of flat? Mix in terms of terms of higher, higher growth parts of that business?
spk04: Well, I'd say all of the business, I mean, home improvement, century fire, all over 20% plus. And at first on site, more a headwind, in fact, grew modestly organically, even in the face of, you know, $35 million of Texas freeze work last year.
spk08: Okay. And just a quick comment. Follow-up question on labor tightness. Is it limited to recruiting challenges, or has turnover become a factor?
spk05: Turnover was a factor, certainly through 21, but it is starting to return to historical levels, so less of a factor, Scott.
spk08: That's great. Thanks, gentlemen. That turned it over. Thanks.
spk01: Thank you. Our next question comes from Stephen Sheldon of William Blair. Your line is open.
spk00: Hey, Scott and Jeremy. Congrats on the results here. Just a quick one for me and following up on a prior question. On the residential side, I think you've talked about growing there 3% to 5% organically, and we're nicely above that again this quarter. So I guess how much of that was driven by, you know, roughly driven by abnormal wage inflation? Would you have been closer to that range that you've talked about, excluding some of the cost increases, the labor cost increases that you've been able to pass through?
spk05: The portion of that 7% that was priced, we think, is 2% to 3%. So it's up from our historical sort of 1% to 2%. And as we continue to work it through, we'll probably see that inch up a little bit more through the balance.
spk00: Okay, great. Thank you.
spk01: Thank you. And as a reminder, to ask a question, please press star 1 on your telephone. To withdraw your question, press the pound key. Stand by as we compile the Q&A roster. And while we do that, the next question comes from Daryl Young of TD Securities. Your line is open.
spk07: Hey, good morning, guys. Just a question on Century Fire. It sounds like a lot of the growth is coming through on the new sprinkler installation side. Has that mix, historically I think it was 50-50, inspection and monitoring versus new construction, has that mix shifted significantly over the course of the pandemic?
spk05: No, in fact, Darrell, it's continued to trend towards the service side. I think it would have reversed in the last quarter a bit. But it's still sort of 45% install, 55% service, thereabouts.
spk07: And looking forward on the M&A pipeline, specifically with respect to Century Fire, is the goal to continue to keep that mix relatively stable in the future? And then, I guess, second part, what kind of valuations are you seeing? I know it's been hyper-competitive in the fire space historically, so is there any changes there?
spk05: We're very comfortable with the 50-50 mix, and so we are certainly keeping that in mind as we look at tuck-unders. But knowing that if we buy an installed business, then we can supplement it with a with the service business, and we're doing that all the time with our branches as we fill them out. We have, I mean, the valuations, we have not seen change, honestly, in the last year or so. They're still very, very high.
spk07: Okay, great. And then one last one, just on the residential side, you've already spoken quite a bit about recessionary environment there. And through the last global financial crisis, you obviously grew that business, and I think you've effectively tripled it since then. Is there any change in the dynamic or are you skewed towards more ancillary services now than previously that would change the thinking on the ability to grow through another recessionary environment?
spk05: No. There has not been a lot of change in this business in terms of mix. the level of ancillary revenue that we drive off of communities and units. So I would see it being very similar.
spk07: Okay, great. That's it for me. Thanks. Thanks.
spk01: Thank you. And I'm seeing no further questions in the queue. I will return the conference to Scott Patterson for closing remarks.
spk05: Thank you, Chris, and thank you, everyone, for joining. We look forward to reporting on a strong Q2 in July.
spk01: Ladies and gentlemen, this concludes the first quarter investors conference call. Thank you all for your participation and have a nice day.
Disclaimer