FirstService Corporation

welcome to the third quarter investors conference call today's call is being recorded legal counsel requires us to add 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. Today is October 26, 2022, and 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 third quarter conference call. I'm on the line today with our CFO, Jeremy Racoosin. Let me open by saying that we're pleased with the results for the quarter that show continued strong organic growth, a tribute to our teams and the quality of our service delivery. Our service excellence culture drives customer retention, repeat business, and word-of-mouth referral, and our high single-digit organic growth for the quarter and year to date is a reflection of that. Total revenues for the quarter were up 13% over the prior year with organic revenue growth at 8%, balanced about evenly between our two divisions. EBITDA for the quarter was $95.5 million, up modestly from 2021, reflecting a margin of 9.9% compared to 11.1% in the prior year. Jeremy will walk you through the year-over-year margin variance. At first service residential, revenues were up 13% with organic growth over 8%. Organic growth was driven by solid year-over-year increases in amenity management, and again this quarter, by strong net new contract wins, leading to higher management fee and labor-related revenue. We achieved particularly robust growth in Florida and the Southeast, where we have a very strong presence. Again this quarter, we estimate the price accounted for between 2 and 3 percent of the quarterly gain. Looking to the fourth quarter at first service residential, we expect to show mid to high single-digit revenue growth, all organic. Moving on to first service brands, revenues for the quarter were also up by 13%, approximately half of which was organic. Our home improvement brands, led by California Closets, were again very strong this quarter with year-over-year growth of near 30%. The growth figure reflects higher capacity and production relative to the third quarter of 2021 that was weakened by supply chain and COVID-related disruption. Sequentially, revenues were up modestly relative to Q2 as we continue to have some success in adding production capacity despite a tough labor market. We're very pleased with the results from our home improvement brands that exceeded expectations for the quarter. The teams have done a great job of capitalizing on strong demand in a tough operating environment. Looking forward to the fourth quarter, we expect to again show some sequential growth from Q3 and year-over-year increases of about 15% against a strong fourth quarter in 2021. Let me now turn to Century Fire before we talk restoration. Century had another strong quarter, growing by over 20%, half organic. Growth was again buoyed by a solid commercial construction market and strong momentum with our national account service and repair program. Backlogs and bid activity remained very strong, and we expect similar year-over-year growth and Q4. Our restoration brands, Paul Davis and First Onsite, generated revenues that were approximately flat with the prior year and down mid-single digit organically. We did not book any revenues during the quarter from named storms or area-wide events and are pleased that we were able to match prior year revenues that included $30 million, primarily from Hurricane Ida. Organic growth for the quarter, excluding storm revenues, was about 10%. On September 24, Hurricane Fiona swept through Atlantic Canada, causing damage primarily in Nova Scotia, New Brunswick, and Prince Edward Island. Both Paul Davis and First Onsite responded to the event and are working in the area, but we did not book any revenue in September. Revenue generated from Fiona will fall into our fourth quarter and perhaps in the next year. A few days later on the 28th of September, Hurricane Ian made landfall in southwest Florida and caused significant damage in the Fort Myers area and continued up through Orlando and the northeast coast of Florida. went offshore, and then made landfall again in South Carolina. This was a big category four event that caused catastrophic damage, primarily from flooding related to an unprecedented storm surge. We have thousands of associates that live and work in the area of the storm, and thankfully, they are all safe, although a number of them unfortunately lost their homes or suffered significant damage. We are helping these employees that have been impacted through the First Service Relief Fund that was set up five years ago to provide aid in a situation just like this. Both First Service corporately and our associates contribute to the fund, and I'm proud to report that in the last four weeks, we have provided over 250 grants to team members that experienced financial hardship related to the storm. The storm not only impacted our associates, but also many of the communities that we manage in the area through First Service Residential. Our teams are working closely with our boards and residents to document damage for insurance purposes and to facilitate the cleanup, mitigation, and restoration process. Both Paul Davis and First Onsite have been on standby and are working closely with First Service Residential throughout Florida and South Carolina to help our managed communities during this difficult time. The collaboration has been very strong. Separate and apart from First Service Managed Communities, both Paul Davis and First Onsite are engaged and working on hundreds of projects in the affected area. It is still too early to quantify what this will mean to our restoration businesses in terms of revenue in the coming quarters. Many of the jobs we are tentatively engaged on may become teardown and rebuilds rather than mitigation and restoration jobs. In addition, we're working with many clients to confirm insurance coverage before a restoration commences, and the outcome could affect the amount and type of work performed. The situation continues to evolve. At this point, our best estimate is that restoration will show about 20% revenue growth in Q4 relative to the prior year. This is assuming we generate 70 million from Hurricanes Ian and Fiona with the bulk from South Florida work relating to Hurricane Ian. In the fourth quarter of last year, we generated 40 million. from Hurricane Ida. Work related to Ian and Fiona will definitely roll into 2023, but we are not in a position to quantify the level of backlog that we'll carry forward at this point. We'll obviously provide an update on our year-end call. Staying on restoration, Earlier this week, we were excited to announce the addition of three companies to our restoration platforms. The acquisitions enhance their geographic footprint and service capability. First Onsite acquired Watermark Restoration, bolstering our presence in the U.S. Southeast, particularly in Alabama and North Carolina, and adding several significant customer relationships. In Canada, First Onsite acquired the assets of Contra Global Solutions, a reconstruction company that enhances our full-service restoration offering to commercial clients in the Toronto metro market. And finally, we acquired a majority stake in our Paul Davis franchise serving Nebraska and southern Missouri. It's one of the largest and most successful Paul Davis franchises in the network, And we're excited to partner with Roger Fredstrom and Jeff Theobald to drive further growth in the Midwest U.S. On that, let me now hand off to Jeremy to walk through the results in more detail.

Thank you, Scott. Good morning, everyone. Our third quarter financial results came in largely matching our internal expectations and mirrored the quarterly performances delivered during the first half of this year. The overriding themes also remain similar to prior quarters, with strong across-the-board top-line organic growth driving our performance, partially offset by the same factors contributing to margin dilution. I will elaborate on these drivers momentarily, but let me first summarize our consolidated results. For the current third quarter, first service recorded total revenues of $960 million, up 13%. and adjusted EBITDA came in at $95.5 million, up 1% relative to the prior year period. Our adjusted EPS was $1.17, down from a reported $1.50 from Q3 last year, which included a $0.21 per share gain on sale from a non-core business. So earnings per share are down modestly year over year against a normalized $1.29 after adjusting for this prior year gain. Highlighting our consolidated performance for the nine months year to date, we have delivered revenues of $2.73 billion, up from $2.39 billion in the prior year period, an increase of 14%, which includes 8% organic growth. Adjusted EBITDA sets at $249.2 million, with our overall EBITDA margin at 9.1%, compared to $243.8 million and a 10.2% margin for the prior year period. And lastly, our adjusted EPS year-to-date is $3.02, down from $3.36 reported for the same period last year. Our adjustments to operating earnings and GAAP EPS in providing adjusted EBITDA and adjusted EPS respectively are disclosed in this morning's earnings release and are consistent with our approach in prior periods. I'll now dive further into our third quarter segmented results for our two divisions. At First Service Residential, we generated revenues of $478.6 million, a 13% increase over Q3 2021. This strong top line performance drove EBITDA of $49.6 million, a 10% increase year-over-year. We incrementally continue to close our year-over-year margin comparison with the current quarter EBITDA margin yielding 10.4%, 30 basis points lower than the 10.7% in last year's Q3. The margin was influenced by a higher mix of the labor-based services that Scott referenced earlier as driving our growth compared to higher margin ancillaries. Higher margin transfers and disclosures revenue in particular saw a greater than expected year-over-year decline due to reduced home resale activity compared to the robust levels we have called out in previous quarters. We are pleased with our progress in clawing back from a 100 basis point margin gap with improving comparisons sequentially over the past four quarters. Now to first service brands. The division generated revenues of $481.9 million during the current third quarter, up 13% versus the prior year period. Our brand's EBITDA was $48.8 million with a 10.1% margin, down versus $53 million and a 12.4% margin in last year's third quarter. Our brand's margin decline during Q3 was due to the combination of continued growth-related investments in our restoration operations, together with the absence of revenue from any notable weather-driven activity. versus last year, which benefited from the Hurricane Ida and Texas freeze events during the comparable period. We explained the same margin dilution dynamic in our most recent second quarter call as well, and on a sequential basis compared to Q2, our brand's margin improved by 80 basis points, up from 9.3%. Now on to our consolidated cash flow, where before working capital we generated $72 million of operating cash flow in line with the prior year. Working capital requirements during the quarter absorbed all of this cash flow for a couple of reasons. We had timing-related tax and payroll payments that were both adverse to our cash flow in the current quarter and compared unfavorably versus the prior year period. In addition, with Hurricanes Fiona and Ian landing in the latter half of September, our restoration operations incurred meaningful upfront mobilization and preparation costs in advance of those events without realizing any corresponding revenue during the quarter. As Scott mentioned earlier, our teams are still in the early stages of the damage assessment and remediation planning with our clients, And preliminary indications are that we will have a lengthy backlog tail into 2023. Although timing is unclear at this juncture, we will ultimately see cash conversion of the working capital investments relating to these weather events over future quarters. Beyond working capital, the other leg of investment supporting organic growth is our capital expenditures. CapEx during the quarter came in at $19 million, resulting in $55 million of spending year-to-date. We are pacing within our previously set annual target of $85 million and may come in a little lower than that level for the full year. In terms of our tuck-under acquisition program, we have remained steadfastly disciplined with what we are willing to pay for potential targets in the face of aggressive competitive bidders and this has tempered our activity during 2022. We strive to be prudent and opportunistic with all of our investment dollars, whether deployed for organic growth purposes or towards acquisitions, to meet our return on investment expectations. We did see some modest acquisition activity during the quarter, and as Scott touched on, we also closed a couple of additional restoration transactions post-third quarter. These tuck-unders will augment our growth heading into 2023. Our deal pipeline remains active, and we expect to convert on additional opportunities in the coming months. Our balance sheet at quarter end included net debt of $556 million, resulting in our leverage coming in at 1.6 times net debt to trailing 12 months EBITDA, up slightly from 1.5 times in the previous second quarter. This leverage threshold is very much in line of where our capital structure has settled over the past several years and remains conservative and well within our comfort level. Our liquidity and debt capacity also remains strong with approximately $550 million of total cash on hand and undrawn availability under our credit facility. At the end of the third quarter, we also announced new three-year senior note facility arrangements with our two longstanding lenders, Prudential, and New York Life, simultaneously with the issuance of an additional $60 million of 10-year notes with a 4.53% coupon from New York Life. The financing improved the current balance of our debt mix to a healthy level of one-third fixed and two-thirds floating. The facilities also enhanced our financial flexibility to incrementally tap into multiple tranches of long-term notes in varying amounts over the next three years. With the uncertain and volatile interest rate environment, flexibility in managing our financing costs and diversifying our debt maturities is a key element in maintaining our strong balance sheet. In terms of our outlook for closing out 2022, our consolidated revenues for the fourth quarter will see low double-digit to mid-teens percentage growth over Q4 2021, including the assumption of realizing roughly $70 million of hurricane work, as Scott mentioned. We expect that Q4 consolidated EBITDA growth should roughly match the top line performance with consolidated margins in line or possibly a little better than the prior year quarter and somewhat dependent on the type of restoration work performed during the period. After going through budget and strategic planning review processes with each of our operations in the coming weeks, we will provide a 2023 outlook during our 2022 year-end earnings call scheduled for early February. That concludes our prepared comments. Operator, can you now open up the call to questions? Thank you.