FirstService Corporation

Good day, and thank you for standing by. Welcome to the second quarter investors conference call. Today's call is being recorded. Legal counsel requires that discussion scheduled to take place today may contain forward-looking statements that involve known and unknown risk and uncertainty. Actual results may be materially different from those in the other future results. Performance or achievement. contemplating the forward-looking statements. Additional information concerning factors that could cause actual results to be materially different 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 July 27, 2023. I would now like to turn the call over to Chief Executive Officer, Mr. Patterson. Your line is open.

Thank you, Lisa. Good morning, everyone. We appreciate you joining our 2023 second quarter conference call. I'm on the line today with Jeremy Racoosin, our CFO. I'll kick us off with some high level comments and Jeremy will follow with more detail. As you saw this morning, we reported very strong results that reflect continuing trends and momentum that drove our Q4 of last year and the first quarter of this year. Total revenues for the quarter were up 20% over the prior year, with organic growth at 15%. EBITDA was up 30%, reflecting a margin of 10.6%. which is an 80 basis point improvement over the prior year. Similar to our previous two quarters, outsized organic growth in our brands division boosted our top line and led to enhanced margins from operating leverage. Earnings per share for the quarter were also up 30% in line with the increase in EBITDA. Let me move to highlights for each division, starting with first service residential where revenues were up 13% in total, with organic growth again hitting double digits at 10%. As I stated in my Q1 comments, we entered this year with momentum from strong sales in the fourth quarter of 22, combined with solid client retention. This favorable momentum continued through our Q2. The other trend that is helping us in terms of a year over year comparison is an increase in labor and services with many of our larger cost plus contracts. We have reduced the number of contracted but unfilled positions compared to a year ago, which increases revenue in a cost plus environment. Looking forward to the last half of the year, we expect to show similar low double-digit top-line growth for first-service residential with organic growth at a high single-digit level. Moving on to first-service brands, revenues for the quarter were up 27% with organic growth at 20%, driven by very strong results at our restoration brands and supported by solid double-digit growth at Century Fire and our home improvement brands. Our restoration brands, Paul Davis and First Onsite, together recorded revenues that were up over 40% versus the prior year, with about two-thirds of the growth generated organically. We booked approximately $35 million from named storms during the quarter, split between Hurricane Ian and Winter Storm Elliot. This is down from $75 million plus in Q1 but significantly higher than storm-related revenues in Q2 of last year. We're pleased with the performance from our restoration brands in Q2. Sequentially relative to Q1, we generated less than half the storm-related revenue, but booked approximately the same total revenue for the quarter, which reflects positively on our day-to-day activity levels across our branch network. Excluding storm-related revenue, we generated solid double-digit organic growth and restoration for the quarter. Looking forward in restoration, we expect to show continued year-over-year growth for Q3, but at a more modest level than we have seen the past three quarters. Our backlog is solid and above prior year's level. A portion of the backlog is reconstruction work related to Hurricane Anne. Much of this work is slow moving while we wait on permits or engineering studies or insurance confirmation or materials. The work will be completed over the next year as hurdles are cleared and issues resolved. The backlog excluding this portion is approximately a prior year's level. At this juncture, we expect to show year-over-year growth of 10% or more for Q3, somewhat dependent on the amount of EIN-related reconstruction that gets completed between now and September 30th. As I mentioned earlier, we're pleased with the level of day-to-day work we've been securing through our branch network and expect a solid finish to our year in restoration. Moving to Century Fire, we had a strong quarter right in line with our expectations. Low double-digit organic growth against a tough comparative quarter in the prior year. All our branches and service lines continue to perform, and we expect similar results for the balance of the year. The year-over-year growth rates will moderate in Q3 and again in Q4 due to the strong sequential growth we were generating from quarter to quarter throughout 2022. And I'll finish with our home improvement brands, which as a group were up over 10% versus the prior year with high single-digit organic growth. This is an impressive result and a real credit to our operating teams. The home remodeling sector in general is facing headwinds from higher interest rates and very sluggish home resales. Our leads continue to lag year-ago levels, but a heightened focus on lead conversion and close ratio is enabling us to continue to drive growth. Looking forward, we expect the environment to remain difficult, but our teams believe they will continue to generate at least mid to high single-digit growth through the back half of the year. Let me now ask Jeremy to review our results in more detail. Jeremy?

Thank you, Scott, and good morning, everyone. We are very pleased with our second quarter financial results, which yielded strong year-over-year growth metrics that closely matched our prior Q1 performance in every respect. On a consolidated basis, revenues for the quarter were $1.12 billion, up 20% year-over-year, and driving to adjusted EBITDA of $118.4 million and adjusted EPS of $1.46, both up 30% versus the prior year. Our six-month year-to-date consolidated financial performance included revenues of $2.14 billion, an increase of 21% over the $1.77 billion last year. with a contribution from organic growth at 16%. Adjusted EBITDA of $200.4 million, representing 30% growth over the $153.7 million last year, with a margin of 9.4%, up 70 basis points from the 8.7% in the prior year period. And adjusted EPS at $2.31, up 25%, over the $1.85 per share reported during our 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 break down our division financials for the second quarter. Beginning with First Service Residential, Quarterly revenues came in at $517 million, up 13% over the prior year. EBITDA for the quarter was $55.7 million, a 10% year-over-year increase, with a 10.8% margin down a modest 20 basis points from the 11% margin in Q2 of last year. We expect the division margin to be relatively flat to prior year in the remaining half of 2023, which would result in our full year margin being closely in line with our 2022 annual performance. At our first service brands division, we reported second quarter revenues of $603 million, a 27% increase over the prior year period. EBITDA for the quarter came in at $65.8 million, up 50% year-over-year. Our margin during the quarter was 10.9%, up 160 basis points over the 9.3% during last year's Q2. As Scott previously outlined, our restoration operations benefited during the current period from elevated weather-related storm activity compared against the dormant level in the prior year second quarter. This contribution from our restoration platform was the primary driver behind both the higher division top line growth and margin improvement versus prior year, just as we saw in Q1. For the upcoming third quarter, we expect the brand's division margin to be more in line with prior year, with anticipated tapering in contribution from storm backlog conversion within restoration compared to the first two quarters of this year. With the brand's margin improvement we have booked year-to-date, we expect to finish the year with annual division margins up versus 2022. Moving below the operating earnings line, our earnings per share of $1.46 during the quarter benefited from a non-recurring 7 cents per share related to a gain on sale of an owned building. This gain helped offset higher year-over-year interest expense to drive to our 30% adjusted EPS growth, matching our EBITDA growth for the quarter. Looking at our cash flow from operations, we delivered $86 million, up 40% over the prior year quarter. More than half of the increase came from earnings growth across both divisions, and then we also benefited from working capital movements, which in the current quarter delivered a slight cash inflow versus a more typical cash requirement as seen in last year's Q2. With respect to capital expenditures, we invested $23 million during the quarter in support of our existing operations, and our year-to-date total of $44 million is pacing with our targeted full-year maintenance CapEx of $80 million and overall spending of approximately $100 million. Tuck-under acquisition activity during the quarter was tempered with minimal capital deployment, but with year-to-date investments approaching $100 million, recent acquisitions will contribute to our growth during the upcoming quarters. In closing our financial review, our balance sheet remains very strong. Leverage as measured by net debt to EBITDA moderated to 1.6 times, down from 1.8 times in the prior first quarter. Liquidity reflecting total undrawn availability under our revolver and cash on hand remains ample at approximately $420 million. Our conservative capital structure and financial flexibility allow us to be assertive as we keep our eyes open for opportunities to deploy capital. Looking forward, the strong year-to-date performance we have booked thus far reinforces our conviction that our businesses will collectively deliver low teams, consolidated revenue growth, with our consolidated EBITDA margin being roughly in line to potentially a little higher than our annual 2022 level. That concludes our prepared comments. Lisa, you may now open the call to questions. Thank you.