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spk00: 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.
spk07: 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.
spk02: 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.
spk00: Thank you. At this time, we will conduct the question and answer session. To ask a question, please press Star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press Star 1-1 again. Please stand by while we compile the Q&A roster. The first question comes from Faiza Albi with Deutsche Bank. Your line is open.
spk08: Yes. Hi. Thank you so much. Good morning. I wanted to follow up on the comments you made around the home improvement brands where you saw growth slow. I mean, it sounds like it was still pretty reasonable at mid-single-digit year-over-year growth, and you're indicating that it would be low single-digit next quarter. How much of a lag is there as it relates to consumer demand? And you mentioned leads are off 10% versus a year ago. How should we think about this business in in 2024, assuming, you know, current conditions persist. And I'm curious if you think of this business as a leading indicator to any other part of your business, whether it's, you know, on first service residential or, you know, I feel that there isn't that much of a macro component elsewhere in your portfolio, but curious how you think about it.
spk07: Right. Okay, Faiza, there's a lot there. So let me start to work through it. You know, definitely consumer demand for home improvement is down. We see it. There are a number of industry research groups and indicators that point to it being down, and we don't expect the environment to improve over the next several quarters. But you've heard me say before that our teams are very resilient and focused on growth. And these markets are very large. And our teams, you know, the belief system is that we can scratch out growth even in the down market. We've proven that over the last few quarters with a focus on close ratio and lead conversion. And we've also been more aggressive, I think, in terms of marketing with some utilization of discounting and promotions. There is not much of a lag in this business. Our backlog is measured in weeks, and so changes in consumer demand will impact us pretty quickly one way or the other. In terms of it being a leading indicator, it's not a significant leading indicator for any of our other businesses. Most of our two largest businesses, First Service Residential and Restoration, are both really agnostic to consumer demand and more driven by weather in the case of restoration and in the case of First Service Residential, the communities need to be managed in good markets and bad markets. We don't see it as a significant indicator for us. I'll leave it at that. I'm not sure I answered all your questions.
spk08: No, that's very helpful. Thank you. And I just have a separate question, if that's okay. And that's just around some of the acquisitions that you've made, particularly on the restoration side or the fire side. I'm curious how you think about synergies or the benefits of scale? It seems like there's still a lot of white space opportunity. So maybe talk a little bit qualitatively, or if you can add some numbers to it, that would be helpful in terms of what you're seeing. Is there a synergistic benefit, and should we expect higher margins as you grow and scale, and when does that happen?
spk07: Yeah, both of the businesses you mentioned, we're filling out our footprints. And the biggest benefit is that we are better positioned and better able to respond to our national accounts. In restoration, we have, between both brands, over 400 branches, and we're very well positioned to respond to our insurance carriers and our national commercial accounts. And in Century, we continue to build out primarily the southeast and mid-Atlantic regions. Again, that national account program, the more that we can self-perform, the more we keep for ourselves because we do use a vendor network elsewhere. It's not a significant level of efficiency that's created from scale. It's more of a positioning in the market and with our clients because both businesses are local service delivery. And so we're adding labor when we add branches.
spk08: Great. Thank you very much.
spk00: Please stand by for the next question. The next question comes from Steven McLeod with BMO Capital Markets. Your line is now open.
spk05: Thank you. Good morning, guys. Just a couple of questions that I wanted to follow up on. Just on the residential side, I mean, Scott, I think you sort of covered it off in your prepared remarks in the Q&A, but just curious, can you just confirm, are you seeing any macro impact to the residential business as it relates to residents' ability to pay fees or cost pressures you're seeing, pricing pressures you're seeing on contracts, things like that?
spk07: There's two different things there. We're not seeing any pressure on monthly management fees and delinquencies as it relates to the residents, but certainly budgets are increasing at communities in terms of primarily through increased in insurance premiums, and I would say particularly in the risk areas, Texas and Florida, but generally the high-rise environment. And so the increasing inflation across their cost structure has certainly put pressure on budgets. and put pressure on us around pricing, which is, you know, Stephen, you've followed us for a long time. I mean, that's nothing new in this business for us.
spk05: Yes, yeah. Sorry. Yeah, no, that's great, Scott. Yeah, I mean, pricing pressure is always there. That's helpful. And then just as you think about the brands business in Q4 with the restoration business, you know, we did see a couple of storm, we did see some storm activity in, you know, earlier this fall. And I'm just curious, are you seeing any backlogs building from those storms? And then secondary to that, just when you think about Q4 and the comp, again, a growth sort of slowing against the tough comp. Can you just talk a little bit about what kind of margin impact that might have on Q4?
spk07: Right. Okay. I'll deal with the first part of the question. We didn't see a significant pickup in our backlog related to some of the regional events you spoke about in Florida. That storm really hit an area that wasn't heavily populated or did not have much of a footprint as it relates to our national accounts. And then in the Northeast, again, similarly, it didn't lead to a lot of mitigation and restoration work. Jeremy, over to you on margin.
spk02: Thanks, Scott. Steve, yeah, the lack of comparable weather-related activity means that margins will be down at restoration. And that obviously impacts the overall first service brands division. Again, we see that being down year over year. Probably relatively similar coming in, relatively similar sequentially to the current third quarter for that division.
spk05: Okay, I see. So you would expect Q4 margins to be similar to what they were in Q3? In the ballpark.
spk02: I mean, obviously moving parts, but directionally, yes.
spk05: Yeah. Yeah. Okay. That's great. I'll pass it back to the line. Thank you.
spk00: Please stand by for the next question. The next question comes from Stephen Sheldon with William Blair. Your line is open.
spk01: Hey, thanks. And really nice job in the quarter. First, on the organic revenue growth in residential, I mean, it continues to be outstanding. I think you've historically said that sourcing labor for contracts is usually the biggest impediment or limiter to growth. So curious what you're seeing on the labor side right now. Is it getting any easier to source labor? And have you changed anything materially on the execution side to allow you to better recruit and retain labor?
spk07: You know, the labor market, continues to improve for us and we're really seeing it across all the brands. First Service Residential may be the best example because you've heard from us over the last few quarters that we've been filling our open positions and we're sort of back to historical levels. I think the market has certainly eased. We're seeing more applications, we're filling jobs more quickly. our turnovers improved. But at the same time, the second part of your question, Steven, we have certainly invested in resources and technology around recruiting and also onboarding. And so it's hard to discern or put a pin in the improvement, whether we've you know, been the architect of that or whether the market's come back to us, but it's, yeah, I think it's a little of both.
spk01: Got it. And has that, I guess, has that, you know, you typically talked about 3% to 5% organic growth in that business. Given your, you know, some of the changes that you've been able to kind of push through, the improvement on the execution side and maybe some, you know, has your thought process there changed on what the organic, the right organic growth profile to think about that we should be thinking about for that?
spk07: I mean, it's, it's, it's been much stronger this year. Definitely. We're getting a little more price. We, we continue to carry some momentum from a strong sales late last year and early this year, that's starting to normalize. So it's, It's easing its way back down. I, you know, mid to high, I would say, I'm comfortable with right now. Got it.
spk01: So, you know, a kick higher. Yep. Got it. That's helpful. And then just on Century Fire, given that half of that business seems tied to new construction activity for installations, just curious about the subsector exposure there. Is Century Fire more exposed to certain subsectors for construction, thinking about office versus industrial versus multifamily, more exposed to certain of those versus others? And how are you thinking about the growth outlook there, given any visibility you have into new construction over the next few years?
spk07: Right. I mean, certainly in terms of our backlog, we feel very good about Q4, and I think it will carry into Q1. But you know as you suggest the commercial real estate market is less than robust right now so we're keeping a very close eye on on backlog you know we do have a strong presence in multifamily and distribution warehouses office retail across the board but I think generally if commercial real estate, new construction slows dramatically, we would, you know, at some point we're going to see that. But 50% of that business would be a new install and 50% is recurring service inspection repair.
spk01: Got it. Thank you.
spk00: Please stand by for the next question. The next question comes from Michael Domet with Scotiabank. Your line is open.
spk06: Hey, good morning, guys. Scott, you started off with, I think, some comments on market share. So I just want to kind of get a little bit more detail on this. But for the home improvement and the century fire business, is it possible at all to break down what you think is market share growth versus industry growth? And then in your view, do you still think you have the levers to continue to push maybe a similar market share gain for those two segments into 2024?
spk07: It's easier to create clarity in the home improvement business because there are a number of research groups that follow it pretty closely. And so we feel We feel very confident that we're taking share in closet organization space, painting, the significant brands we have, floor coverings. Tougher at Century Fire, but the organic growth we're seeing is quite strong. And I think that we're driving a lot of it As we've made acquisitions, we're adding services where necessary to ensure all our branches are full service and adding alarm to sprinkler businesses and vice versa, adding service to primarily installation businesses. And it's been a significant growth driver for us to add services to the existing customer base. And so we're taking wallet share in that instance. But it's definitely a higher number of organic growth than the market. But it's not crystal clear. And in terms of driving this into 24, I think we'll continue to take share. The question is the market and what kind of support we get from the market.
spk06: That's helpful. Thanks. And then maybe flipping over to restoration, I think previously, you know, you talked about making investments in that business that once completed would, you know, drive eventual margin expansion, I think over several years. So just curious on how those investments are progressing, timelines on, you know, potential margin expansion for that business. Obviously, recognizing that storm impact, you know, aside. as it relates to these investments.
spk02: Michael, yeah, it's Jeremy. Investments on track, you know, we're probably two-thirds of the way now, you know, in terms of onboarding our branch network. We said this would carry on through this year and likely into part of 24, and then after that we'll evaluate the opportunity, you know, for reaping. the benefits of that investment. So I suspect at some point in 24 and into the later years, we will see that. And we'll get greater clarity as we go through budget and strategic planning reviews in the next couple of months with both restoration, as well as all of our other businesses, clarity on 24 and beyond.
spk06: Very helpful. Thanks, guys.
spk00: Please stand by for the next question. The next question comes from Tom Callahan with RBCCM. Your line is open.
spk04: Thanks. Morning, guys. Maybe just one on my questions you asked, but maybe just some comments on the acquisition pipeline you guys alluded to in the prepared remarks there. I know you were a little more active towards the end of last year and early this year, but kind of where it stands right now, maybe relative to last year, and is there a specific focus, or is it kind of broad-based across the restoration and residential side of things?
spk07: You know, the pipeline's solid. Relative to last year, I mean, just thinking back, we did close some fourth-quarter deals last year, so we, you know, it's, I think it would be close to where we were last year at this time, but it's generally in line with where we've been. Jeremy talked about our spend this year. We're very comfortable with what we've accomplished so far. It's right in line with where we've been the last few years, and our pipeline's in decent shape. I don't know. whether we'll close in the fourth quarter or whether that will leak into next year. But we've got activity and it's balanced across both divisions.
spk04: Got it. That's very helpful. And maybe just one follow-up piece on the residential side. You've talked about the success with repricing there on the renewals. Just curious, has that impacted retention rates at all or are those holding pretty steady?
spk07: No, retention's Retention is at our long-term historical rate. It's about the same as it has been the last several years.
spk04: Awesome. Thanks. I'll turn it back.
spk00: As a reminder, to ask a question, please press star 1-1 on your touchtone telephone. Please stand by for the next question. The next question comes from Frederick Bastine with Raymond James. Your line is open.
spk03: Yes, thank you. Good morning. Scott, you've been quite active and successful at consolidating restoration and fire protection in recent years. As you look forward, how far are you from where you'd like to be? I'm just wondering if you can conceivably double, perhaps triple the size of these businesses in the next five years or so.
spk07: In the case of restoration, I would say that our activity would be slowing. Our footprint is starting to fill out. And we will become more of an organic growth engine, as we have been and are at First Service Residential. We still have white space that we're focused on. But I see the next few years won't be as active as we have been the last three. Century fire, we still got lots of white space and regions to grow into. So I see that being continuing to grow sort of at the same pace as we have been. But in both cases, Frederick, you know that our first focus is on organic growth. Are we winning day-to-day at every branch? That's our first priority, and it will continue to be that.
spk03: Awesome. Thanks. That's all I have. Great quarter. Thanks.
spk00: I show no further questions at this time. I would now like to turn the call back to Mr. Scott Patterson for closing remarks.
spk07: Thank you, Michelle. Thank you all for joining us today. We look forward to our Q4 and year-end report in early February. Take care.
spk00: Ladies and gentlemen, this concludes the third quarter investors conference call. Thank you for your participation. You may now disconnect.
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