FirstService Corporation

Welcome to the Second 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 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 July 27, 2022. I would like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir.

Thank you, Chris. Good morning, everyone. Thank you for joining our second quarter conference call. As usual, Jeremy Racoosin, our CFO, is on the line with me today. I will start us off with a high-level review of our performance and growth drivers, and Jeremy will follow with a more detailed look at the financial results. Let me open by saying that we are pleased with the way the second quarter played out for us, particularly the strong organic growth we generated. Our teams continue to battle through a very tough labor environment to drive solid gains. Total revenues for the quarter were up 12% over the prior year, with organic revenue growth at 6%. If we exclude restoration, which was down organically against a tough comparative quarter, In 2021, organic growth was over 10%. EBITDA for the quarter was 91.3 million, slightly up versus Q2 of 21, reflecting a margin of 9.8% compared to 10.8% in the prior year. Jeremy will walk you through the year-over-year margin dilution in his prepared comments and provide a look forward. Looking at divisional revenue. First service residential was up 13% year-over-year, with organic growth at 7%. Organic growth was driven by new contract wins, net of losses, leading to higher management fee and labor-related revenue. We achieved gains in all our markets, with particularly strong growth in the southeast and Texas. We estimate that price accounted for between 2% and 3% of the quarterly gain. Looking to the back half of the year, we expect to show high single-digit revenue growth, almost all organic, as we lap the acquisition date of our Atlantic Pacific tuck-under in the third quarter. Moving on to first service brands, revenues for the quarter were up 11%, 4% organically. Our home improvement brands led the way with growth of 25%, almost all organic. Sequentially, relative to Q1, we were up by over 10%, which is reflective of two things. Our continued success in adding capacity despite a tough labor market, particularly installation crews and painters. And secondly, less COVID-related downtime during the second quarter relative to the first when we were hit by Omicron in January. The home improvement market continues to be relatively strong. Average home prices again rose during Q2, and home equity values remain high, which should continue to support renovation spending. Our leads are down year over year and sequentially, but still remain at a healthy level, and we continue to focus on adding capacity to meet the demand and reduce backlogs. We expect to show strong 20% plus growth in home improvement for the balance of the year. Turning to our restoration brands, first on site in Paul Davis, we generated revenues that were down slightly from the prior year and adjusting for acquisitions were down 10% organically. You will remember that we generated $50 million in revenue from the Texas deep freeze in Q2 last year. In the current year quarter, our revenue was broad-based geographically and driven more by day-to-day activity out of our branches, rather than by area-wide events where we deploy significant resources and personnel. We did not generate any revenue from named storms or significant regional events this past quarter. If we adjust for the Texas event last year, organic growth was 10%, which we are very pleased with. Q2 restoration revenues were reflective of our backlog at the end of Q1. Our current backlog is solid but down modestly from Q1 and from Q2 last year. Last year, we entered Q3 with some storm-related backlog, and later in the quarter, we generated revenue from Hurricane Ida, which hit in late August, early September. In total, we booked approximately 30 million from named storms in Q3 last year. Looking forward, we expect Q3 revenues to be modestly down from prior year, unless, of course, we experience significant storm activity over the next couple of months. Moving now to Century Fire, where we had a very strong second quarter growing by over 20% organically versus a year ago and up 10% sequentially compared to Q1. The robust growth was driven by sprinkler and alarm installation. The commercial construction market continues to be very strong. The growth in installation revenue was supported by continued momentum in service, inspection, and repair activity. We are having great success in converting our new installs into ongoing service work. Venturi exceeded expectation during the quarter, and we expect continued 20% plus growth for the balance of the year. The backlog is at a record level. Let me now hand over to Jeremy for a more detailed dive into the results.

Thank you, Scott, and good morning, everyone. As you just heard, Our financial results for the second quarter performed in line with the expectations we laid out at the end of our prior first quarter. On a consolidated basis, our Q2 results included revenues of $931 million and adjusted EBITDA of $91.3 million, up 12% and 2% respectively, and adjusted EPS of $1.12, down from $1.21 the prior year quarter. Combined with our Q1 results, which were largely similar to the current second quarter, our six months year-to-date consolidated financial performance is as follows. Revenues of $1.77 billion, an increase of 14% over the $1.54 billion last year, including 8% driven by organic growth. Adjusted EBITDA of $153.7 million, representing 3% growth over the $149.6 million last year, with a margin of 8.7% down from the 9.7% in the prior year period. And adjusted EPS at $1.85, relatively flat to the $1.87 per share reported during that same six-month period last year. Our adjustments to operating earnings and GAAP EPS to calculate our adjusted EBITDA and adjusted EPS respectively have been summarized in this morning's release and remain consistent with disclosure in prior periods. I'll now walk through our segmented financial highlights for the second quarter. Starting with the First Service Residential Division, we reported revenues of $457 million, a 13% increase over the prior year period. EBITDA for the quarter was $50.5 million, a 9% year-over-year increase with an 11% margin down 40 basis points from the 11.4% margin in Q2 of last year. This performance reflects incremental margin improvements sequentially from the previous first quarter when we were down 70 basis points year over year. As we have previously indicated, we expect to continue closing the margin gap in the remaining half of the year and realize annual margins for the First Service Residential Division in line or relatively similar to our 2021 full-year performance. Shifting over to our First Service Brands Division, second quarter revenues came in at $473 million, an 11% increase over the prior year period. We reported EBITDA for the quarter of $43.9 million, a decrease of 9% compared to the prior year period. Our margin during the quarter was 9.3%, down from 11.3% in last year's Q2. We have talked in prior quarters about the ongoing inflationary pressures impacting our margin, and in this quarter, we saw a particularly strong surge in fuel costs within our service delivery van fleets that were not covered off given the pricing lag with our jobs. However, the primary driver behind the margin decline was in our restoration operations, where we previously called out the headwinds against last year's Texas freeze. That event generated both high margin mitigation jobs and an incremental $50 million in revenue, which drove operating leverage. Since that time, we've continued to invest in building out our operating platform, national sales organization, and response teams to better serve our clients, while also completing 10 restoration tuck under acquisitions over the past year. This quarter, as Scott mentioned, we were down 10% organically on the top line compared to last year without a similar event to the freeze, which together with our ongoing investments resulted in lower restoration margins. Notwithstanding the near-term drag on margins, during periods of mild weather patterns, the investments we have made in our restoration operating platform are critical to capitalize on the market opportunity and drive towards becoming a $2 billion revenue service line. We expect to reap the benefits of our ongoing investments and platform integration initiatives over time on both the revenue and earnings lines. Near term, during the current third quarter, we would typically expect more heightened weather-related activity to occur, which would drive improved sequential financial performance compared to Q2. However, if weather remains as mild as in the second quarter, we expect a similar contribution in Q3 from our restoration businesses. Moving on to components of our cash flow. Operating cash flow was roughly in line with prior year before the impact of working capital and resulted in $62 million available after working capital requirements. We invested $20 million during the quarter in support of our existing operations and our year-to-date CapEx of $36 million keeps us on track with our full year targeted spending of approximately $85 million. With no closed tuck under acquisitions during the quarter, we directed almost $40 million of our free cash flow towards debt pay down and increasing our controlling ownership stakes through selected minority interest buyouts. We have continued to make progress in replenishing our acquisition deal pipeline, including dialogue with several potential targets at varying stages of advancement. We would expect to see further transaction activity before closing out the year. Finally, a look at our balance sheet where our net debt position is $512 million and our leverage as measured by net debt to EBITDA sits at 1.5 times. Our liquidity reflecting total undrawn availability under our revolver and cash on hand is sizable at approximately $550 million. We are very well positioned with our conservative capital structure and ample funding sources to use our balance sheet strength and capitalize on opportunities that may present themselves in any type of market environment. In closing, the market demand fundamentals across our businesses remain healthy, and you've heard Scott walk through the continued strong organic top line growth indicators for each service line. to support the consolidated double-digit revenue growth for the balance of the year. Our operations have collectively worked hard and demonstrated resiliency to drive profitability in the face of widespread inflationary pressures. Our first service residential division is right on track with our projection to close its margin gap by year end. Within our first service brands portfolio businesses, our home improvement brands and sensory fire protection have and will continue to drive robust growth on both the top and bottom lines. Our restoration operations, as mentioned earlier, are dependent on weather-driven activity, which is unpredictable but typically elevated in the back half of the year. Any meaningful uptick in regional or area-wide events during the remainder of 2022 will provide us with greater profitability growth. than our year-to-date performance. That concludes our prepared comments. I would now ask the operator to please open up the call to questions. Thank you.