FirstService Corporation

Welcome to the First Service Corporation 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 40-F as filed with the U.S. Securities and Exchange Commission. As a reminder, today's call has been recorded. Today is Wednesday, April 26, 2023. I would like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir.

Thank you, Shannon. Good morning and welcome everyone to our Q1 conference call. Thank you for joining. As usual, Jeremy Racoosin is on the line with me today and together we will walk you through the results we released this morning, results that reflect continued very strong growth in both divisions. Total revenues for the quarter were up 22% over the prior year, with organic revenue growth at 17%. Again, this quarter boosted by particularly strong growth in our brands division. EBITDA was up 32%, reflecting a margin of 8.1%, a 60 basis point increase over last year's Q1, primarily resulting from operating leverage in brands. Earns per share were up 16%. We're very pleased with our performance to start the year and confident that it sets us up for a strong 2023. I'll summarize the results for each division and then pass it over to Jeremy to provide more financial detail. At first service residential, revenues were up 13% with organic growth at a very strong 11%. Your organic growth reflects net new contract wins and increases in labor and services provided to existing accounts. We entered this year with momentum off the back of a strong sales in the fourth quarter and solid client retention. Our growth was broad-based across North America, with particularly strong results in the southeast and Texas, driven by wins in our high-rise and lifestyle verticals. And speaking of high rise, at the end of March, we were very pleased to close on the acquisition of Crossbridge Condominium Services, the largest condo management company in the greater Toronto market. Together, we are now the clear leader in the fastest growing high rise condo market in North America. Sandro Zuliani and Tracy Gregory have led Crossbridge for many years, and we are delighted that they are partnering with us and will continue to lead day-to-day operations. Looking forward to Q2 and the balance of the year, we expect to show similar low double-digit top-line growth for First Service Residential, with organic growth likely settling in at a high single-digit level. Moving on to First Service Brands, revenues for the quarter were up 30%, with organic growth at 23% driven by very strong results at our restoration brands and Century Fire. Our restoration brands, Paul Davis and First Onsite, together recorded revenues that were up about 40% over the prior year, with almost three quarters of the growth coming organically. We generated 75 to 85 million from named storms during the quarter, including hurricanes Fiona and Ian and winter storm Elliot. Sequentially, it's a similar level to the revenues generated in Q4 and significantly higher than storm-related revenues in Q1 of last year. Winter storm Elliot impacted a very wide geography. It's difficult to nail down revenues directly relating to the event, which is why we have the rains this quarter. of storm-related revenue. During the quarter, we were excited to expand our Paul Davis company-owned platform with the acquisition of one of our largest franchises with operations in Houston, Raleigh, North Carolina, and Nashville, Tennessee. We're partnering with Bob Hillier across these three major markets, and together we have ambitious growth plans. The Paul Davis brand has significant opportunity in these markets. Looking forward in restoration, we expect another strong quarter upcoming. Our backlog remains solid. It's up significantly over prior year levels, which will lead to strong year-over-year growth in Q2. Including the impact of recent acquisitions, we expect to show growth in Q2 of about 40% relative to a weak quarter for us in 2022 that was light on storm-related revenue. The back half of this year is difficult to forecast at this point. We expect to have some Hurricane Ian-related backlog that carries into Q3, but it is too early to quantify. In general, activity levels are strong for our restoration brands, and we feel very good about our market penetration and positioning relative to our competition. Moving now to Century Fire. We had another very strong quarter with organic revenue growth in and around 20%. I said in my prepared comments at year end that Century has momentum across all its service lines, and that's what we saw during the quarter. Alarm and sprinkler installation, inspections and repairs, and national accounts all up organically by double-digit percentages. The backlog at Century is stable, and bid activity remains solid, and we expect continued strong results over the balance of the year, albeit against tougher comps. We expect double-digit organic growth, but not at the same elevated level as the last two quarters. And now on to our home service brands, which as a group were up close to 10% over the prior year, with organic growth accounting for about two-thirds of the lift. We're pleased with this performance in an increasingly uncertain environment. Leads are down at our home service brands as homeowners pare back or delay projects due to higher interest rates and the threat of a recession. Our teams remain confident that we will continue to drive growth this year. I've said it before, the markets are huge and the work is there even in a flat to down home improvement environment. Let me now call on Jeremy to review our results in detail.

Thank you, Scott. Good morning, everyone. I'll start by summarizing our first quarter results on a consolidated basis, which in broad-based terms largely resembled our prior Q4 reporting period, the common theme being very strong organic growth across the board with the incremental revenue performance driving margin improvement and superior operating earnings growth. For the quarter, we reported revenues of $1.02 billion, a 22% increase over the $835 million for Q1-22. Adjusted EBITDA was $82.1 million, up 32% versus the prior year's $62.3 million, and this yielded an 8.1% margin for the quarter compared to a margin of 7.5% in the prior year quarter. And our adjusted EPS was $0.85 up over the $0.73 per share in the prior year. We delivered this strong 16% year-over-year earnings per share growth, even in the face of higher interest costs, which are more than double versus Q1-22. Our adjustments to operating earnings and GAAP EPS and arriving at adjusted EBITDA and adjusted EPS, respectively, are consistent with our approach in prior periods. I'll now summarize the segment results for our two divisions. First Service Residential generated revenues of $446 million, up 13% over last year's first quarter, while EBITDA was $32 million, a 5% increase over the prior year. The EBITDA margin for the division came in at 7.2%, down 50 basis points versus the 7.7% margin last year. The margin was impacted by a higher mix of low-margin, labor-driven services, which grew significantly as we both won new contracts and increased the penetration of existing accounts. During the seasonal trough Q1 period for a portion of our amenity management offering, this ramp-up of labor without associated revenue accentuated the margin impact. For the coming second quarter, we expect our residential margin to be roughly in line or mildly lower than the prior year period. Shifting to our first service brands division, we reported revenues of $573 million during the first quarter, up 30% over last year's first quarter. EBITDA came in at $54.8 million, a 52% increase versus the prior year quarter. The division margin increased to 9.6%, up 140 basis points versus last year's 8.2% level. On our last earnings call, we had forecasted the margin improvement, driven primarily by our restoration operations, which capitalized on weather-related storm activity during the current quarter, compared against the mild weather patterns last year. For upcoming Q2, we are anticipating brands margin improvement on the back of a similar sequential contribution from our restoration operations at the current quarter. Turning to our consolidated cash flow, we generated $63 million of cash flow from operations before working capital changes, up 24% over last year's first quarter. Working capital investments absorb this operating cash flow as is relatively typical during our seasonal Trump Q1 when some of our businesses ramp up operations for their balance of your peak cash flow periods. These working capital requirements also included a significant increase in accounts receivable at our restoration operations due to the storm driven activity over the past couple of quarters. And this AR increase, in fact, reflected a more than $70 million swing versus Q1-22, which lacked any meaningful weather activity. Capital expenditures during the quarter were just over $20 million, up modestly year over year. We maintain our CapEx guidance for the year of roughly $100 million and $80 million on a normalized basis, excluding one-time office moves described in our prior Q4 call. Finally, during the quarter, we deployed approximately $80 million of capital towards three tuck-under acquisitions, which were a little larger than our typical size tuck-ins. We continue to be active in cultivating our deal pipeline as we look to be assertive in the current environment. Finally, our balance sheet. With the cash flow commentary I just provided, we closed the quarter with net debt of just over $700 million, resulting in leverage as measured by net debt to trailing 12 months EBITDA at 1.8 times. Liquidity, including our cash and undrawn bank revolver balance, is approximately $380 million. Our leverage is conservative and liquidity is ample to achieve our growth targets. Looking forward, our outlook for the full year is relatively consistent with the high level indicators I provided with our 2022 year end results in February. We see the previous 10% annual revenue growth target picking up to the low teens percentage range for three reasons. One, strong Q1 performance. Two, restoration backlog conversion driving incremental revenue in Q2. and three, recent tuck under acquisition contribution. We are maintaining our view that consolidated margins will be relatively in line or possibly slightly higher versus prior year. That concludes our prepared comments. Shannon, you can now open up the call to questions. Thank you.