FirstService Corporation

Good day and thank you for standing by. Welcome to the third quarter investors conference call. Today's call is being recorded. Legal counsel requires us to advise that the decision 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 Thursday, October 26, 2023. I would like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir.

Thank you, Michelle. Good morning, everyone, and thank you for joining our third quarter conference call. Jeremy Racoosin is with me, and we're pleased to be on the line with you today to report on the strong Q3 results we released this morning. Results that reflect solid performance across each of our brands. We're very pleased with how the quarter played out. Trends and momentum that drove the last several quarters for us continued into Q3. despite increasing headwinds relating to a challenging macroeconomic environment and softening consumer demand. Organic growth during the quarter was 10 percent on a consolidated basis. We're taking market share, and that is a tribute to our operating teams and their relentless focus on customer experience. We're growing organically while many of our markets and competitors are flat to down over the last quarter. Total revenues for the quarter were up 16% over the prior year, with organic revenue growth, as I just said, at 10%, balanced about evenly between our two divisions. EBITDA for the quarter was $112 million, up 17% from 2022, reflecting a margin of 10%, approximately the same level as prior year. And earnings per share were $1.25, up 7%. Jeremy will dive into the profitability metrics in more detail in a few minutes. Looking now at high-level results for our divisions, starting with First Service Residential, where revenues were up 12%, with organic growth over 9%. Results in this division were right on expectation. Top-line growth was broad-based, with solid contribution from each of our six regions in North America. Organic growth was driven by continued strong net new contract wins, leading to higher management fee and labor-related revenue. Looking to the fourth quarter at First Service Residential, we expect to again show low double-digit revenue growth with organic growth at a mid to high single-digit level. Moving on to first service brands, revenues for the quarter were up by 20%, with organic growth at 11%, driven by strength at our restoration brands and Century Fire. Our restoration brands, Paul Davis and First Onsite, together recorded revenues that were up by about 25% versus the prior year, with one-third of the growth generated organically. We booked approximately 25 million from named storms during the quarter, including continuing work from Hurricane Fiona, Hurricane Ian, and Winter Storm Elliot. This compares to a negligible amount from named storms in the prior year quarter. Excluding storm work, we had a solid quarter and are pleased with the day-to-day activity levels across our branch network at both brands. During the quarter, we added to our footprint in restoration with three announced tuck-unders. First on-site acquired Case Restoration, based in Nashville. Case is a full-service commercial restoration company with specific expertise in large loss claims. This acquisition significantly enhances our capability and client coverage in Nashville, which is an important market for us long term. At Paul Davis, we added to our company-owned platform with the acquisitions of our franchised operations serving Richmond, Virginia and Reno, Nevada. The Richmond branch complements our previously acquired Raleigh, North Carolina operation, expanding our footprint in the Mid-Atlantic region. Similarly, the Reno location augments the scale and service capabilities of our existing Nevada, and Utah company-owned operations, and the branches will operate collectively as one region. Looking forward, we expect our revenues for restoration in Q4 to be down from a year ago, up to 10% based on current backlog and trends. We generated $85 million in Q4 last year from hurricanes Ian and Fiona which led to an outsized result for us and a tough comparison. We continue to work through the remaining backlog from Ian, Fiona, and Winter Storm Elliot and expect to generate revenue from named storms at a similar level to this past quarter in the $25 million range. As I mentioned earlier, we're very pleased with current activity levels. And outside of named storms, our backlog from day-to-day activity is strong. We expect to have a solid Q4 in restoration. Moving now to Century Fire where we had a very strong Q3 with record revenues. It was similar to Q2 with almost all our 30-plus branches growing sequentially and versus the prior year. We expect another strong quarter upcoming. with growth in the 10 percent range against a very strong Q4 last year that was up 20 percent organically versus 2021. And I'll finish with our home improvement brands where we saw our growth slow during Q3, up mid-single-digit year-over-year in total with organic growth at a low single-digit level. Higher interest rates, record low home resales, and a challenging macroeconomic backdrop has significantly impacted consumer demand. Our leads are off 10% versus a year ago. As I mentioned last quarter, we've continued to drive growth through improved lead conversion and close ratios. We expect a similar result in Q4. Our teams believe we will continue to drive single-digit growth against a prior year comp that was relatively weak. Let me now call on Jeremy to review our results in more detail.

Thank you, Scott. Good morning, everyone. As you just heard, First Service delivered strong financial results for the third quarter on both a consolidated and segmented basis. For the quarter, we recorded consolidated revenues of $1.12 billion, up 16%, and adjusted EBITDA came in at $111.9 million, a 17% increase relative to the prior year period. Below the operating line, our adjusted EPS was $1.25, up a more modest 7% quarter-over-quarter, reflecting the higher interest rate environment this year compared to 2022. Highlighting our consolidated performance for the nine months here to date, we have delivered revenues of $3.26 billion, up from $2.73 billion in the prior year period, an increase of 19%, which includes 14% organic growth. Adjusted EBITDA sits at $312.4 million, a 25% increase year over year, with our overall EBITDA margin at 9.6%, up 50 basis points, versus a 9.1% margin for the prior year period. And lastly, our adjusted EPS year-to-date is $3.56, an increase of 18% over the $3.02 reported for the same period last year, even in the face of a more than doubling of our interest expenses. Our adjustments to operating earnings and GAAP EPS and 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 walk through the third quarter segmented results for our two divisions. At First Service Residential, we generated revenues of $537.8 million, a 12% increase over Q3 2022. This strong top line performance drove EBITDA $56.6 million, representing 14% year-over-year growth. Our current quarter EBITDA margin yielded 10.5%, relatively in line with the 10.4% in last year's Q3. The broadly distributed growth across our markets and service offering has also driven balanced profitability for the year. with our year-to-date EBITDA margin sitting at 9.6%, a gain relatively comparable to 9.8% in the prior year. Within our first service brands division, we generated revenues of $579.3 million during the current third quarter, up 20% versus the prior year period. Our brands EBITDA increased by 24%, to $60.7 million with a 10.5% margin of 40 basis points from a 10.1% margin in last year's third quarter. Our brand's margin improvement reflected operating leverage benefits derived from the strong division top line performance, particularly at our century fire protection and restoration service lines. With the quarter over quarter margin improvement at both of our operating divisions, Our consolidated margin picked up slightly to 10% flat, notwithstanding higher corporate costs in the current quarter due to foreign exchange fluctuations. The strength in our operating financial performance across our businesses also extended to very strong cash flow conversion during the quarter. We delivered $84 million in cash flow from operations without any additional working capital as accounts receivable collections offset other operating requirements. Our nine months, year-to-date operating cash flow of $170 million is up more than threefold versus the prior year period. Capital expenditures during the quarter total $23 million with the year-to-date tally sitting now at $68 million. For the full year, we expect to be at or slightly lower than our previous targets of $80 million in maintenance spending and $100 million of all-in CapEx. Acquisition investment during the quarter was modest, reflecting the completion of a few restoration tuck-under transactions that Scott referenced. Year-to-date, we have deployed over $110 million in acquisition capital, and we are pleased with our tuck-under program activity in contributing over and above our strong organic growth. We also continue to advance our deal pipeline to surface additional attractive investment prospects across our service lines. Our balance sheet at quarter end included net debt of just over $640 million, computing to leverage at 1.5 times net debt to trailing 12 months EBITDA, down slightly from the 1.6 times level for both the previous second quarter and 2022 year end. and relatively consistent with longer-term historical trends. We also have approximately $450 million of total cash on hand and undrawn availability under our credit facility. We are well positioned with our conservative and flexible capital structure and ample liquidity to aggressively deploy capital towards future opportunities as they may arise. In terms of outlook for closing out 2023, our consolidated revenues for the fourth quarter will likely see more tempered mid-single-digit growth. As Scott noted, Q4 2022 included $85 million in revenues from hurricanes Ian and Fiona late last year. Without any similar pending storm-related events as we sit today in the current fourth quarter, we expect that revenues from our restoration operations will be down year-over-year with all of our other brands growing at high single-digit to low double-digit percentage ranges. In terms of profitability, we expect that Q4 consolidated EBITDA will be roughly in line with last year's fourth quarter due to a year-over-year decline in restoration profitability driven by both lower revenues and a margin decline without the benefits of storm-related work. We anticipate continued strong and profitable growth across our remaining operations. With this outlook, combined with our nine-month year-to-date results, we will deliver 2023 annual total revenue growth in the mid-teens percentage range with a similar level of consolidated EBITDA growth. Very impressive performance for the year. During our next earnings call in February, covering off our year-end results, we will also provide a high-level 2024 outlook encompassing upcoming budget and strategic planning reviews with our brands. That concludes our prepared comments. Operator, please open up the call to questions. Thank you.