FirstService Corporation

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.

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.

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.