FirstService Corporation

Good day and thank you for standing by. Welcome to the First Service Corporation second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. please be advised that today's conference 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 differ materially from those of 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, July 25th, 2024. I would now like to hand the conference over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir.

Thank you, Liz. Good morning, everyone. Thank you for joining our Q2 conference call. I'm on today with Jeremy McKusen. I'll kick us off with some high level comments and Jeremy will follow with more detail. We were pleased with the results we posted this morning. Solid performance that in aggregate was better than expectation. Total revenues were up 16% over the prior year. again this quarter driven entirely by acquisitions, primarily the addition of Roofing Corp of America in Q4 last year. Organic growth was again flat this quarter with solid gains at first service residential offset by declines in restoration within our brands division. EBITDA for the quarter was up 12% to $132 million, reflecting a consolidated margin of 10.2% which we're very pleased with. Jeremy will spend time on the margin detail in a few minutes. Looking at our divisional results, first service residential revenues were up 8% with organic growth close to 7%, which is trending in line with expectation. During the quarter, we announced the acquisition of Cityscape, one of the leading property management players in San Francisco. Cityscape has a healthy high-rise portfolio and strengthens our leadership position across the Bay Area. We've been developing a relationship with the team at Cityscape over the last number of years and are excited that we were able to complete a partnership agreement. We see a continuing significant opportunity in Northern California, and the Cityscape leadership team will help us capitalize. Looking forward at first service residential for the back half of the year, we're confirming our expectation for organic growth to continue to trend to the mid-single-digit range. Moving on to first service brands. Revenues for the quarter were up 23 percent, driven primarily by the acquisition of Roofing Corp of America, but also several tuck-unders across our restoration and roofing segments. Organically, revenues were down 6% versus the prior year, driven by declines at our restoration brands, very similar to our last two quarters. Revenues for our two restoration brands, Paul Davis and First Onsite, were down in aggregate by about 5%, and off organically by over 10%. For the third consecutive quarter, we continued to experience mild weather patterns across North America. Industry data points to claim activity of 20% to 30% year-over-year, depending on geographic region. For our brands, we were up against a reasonably tough comparative quarter in 2023 that saw us execute on over 30 million of Hurricane Ian backlogs. In this year's quarter, we generated only a nominal amount of revenue from named storms, really the remaining tail from Hurricane Ian. Looking forward to Q3 and restoration, we expect a similar quarter sequentially to Q2, which would put us up modestly compared to the prior year. If we experience a weather event, it will go up from there. Turning to roofing, we had a strong quarter that as expected was sequentially stronger than Q1, primarily due to seasonality. We generated solid results across almost all our branches and are pleased that the first six months has played out in line with our due diligence expectation. We were also pleased to have made real progress in adding to our roofing platform during the quarter with the acquisitions of Crowther Roofing and Hamilton Roofing, two Florida-based contractors. Florida is one of the largest roofing markets in North America and was our highest priority white space geography. Crowther, primarily in the southwest, and Hamilton on the space coast provide us with an immediate significant presence in Florida, and it's a region that we expect to further add to. Looking forward in roofing, our backlogs are stable and we expect another solid quarter in line with Q2, plus the boost we will get from the Crowther and Hamilton additions. Onto our home improvement brands, which as a group were down modestly for the quarter by a low single-digit percentage. The weak housing market, higher interest rates, and general economic uncertainty have negatively impacted the home improvement market since early last year. We're flat year over year for the first six months and are generally pleased with our performance given current market conditions. We believe we continue to take share. That said, we definitely continue to face headwinds and don't expect activity levels to improve through the third quarter. Looking forward to Q3, we expect our home improvement revenues to be down modestly compared to prior year, similar to what we experienced this past quarter. We're hopeful that interest rate reductions may spur increased activity later in the year. And I'll finish my comments with a look at Century Fire, which had a very strong quarter, up sequentially over Q1 and up organically over the prior year, by a high single-digit percentage. The results were right in line with our expectation that we communicated on last quarter's call. Looking forward to the back half of the year, we expect more of the same continued strength with high single-digit year-over-year growth at Century. With that, I will now hand over to Jeremy.

Thank you, Scott, and good morning, everyone. I'll lead off with a summary of our consolidated second quarter financial results, which delivered year-over-year growth higher than the indications provided on our Q1 call in April. Revenues for the quarter were $1.3 billion, up 16% year-over-year, and we reported adjusted EBITDA of $132.5 million, up 12% versus the prior year. Adjusted EPS came in at $1.36 versus $1.46 in Q2 2023. Our six-month year-to-date consolidated financial performance included revenues of $2.5 billion, an increase of 15% over the $2.1 billion last year. Adjusted EBITDA of $216 million, representing 8% growth over the $200 million last year, with a margin of 8.8 percent, down 60 basis points year-over-year, and a more modest decline of 40 basis points when normalized for the significantly higher FX-related corporate costs in the current year-to-date period. Adjusted EPS for the first half of the year sits at $2.03 compared to $2.31 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 our disclosure in prior periods. Regarding our earnings per share performance, as similarly noted during our previous Q1 call, the year-over-year decline compared to 2023 is attributable to almost a doubling in our interest expense. reflecting both higher interest rates and a larger debt balance on the heels of our large Roofing Corp of America acquisition at the end of last year. Focusing now on our operating financial performance for the second quarter, I'll start with our first service residential division. Quarterly revenues came in at $558 million, up 8% over the prior year. EBITDA for the quarter was $59 million, a 6% year-over-year increase with a 10.6 percent margin, down 20 basis points from the 10.8 percent margin in Q2 of last year. For the six-month year to date, our division EBITDA margin sits at 9 percent even, comparable to the 9.1 percent level for the equivalent prior year period. We continue to expect margins through the balance of the year in line with 2023 and consistent with our 9 to 10 percent annual EBITDA margin performance band over the past several years. Within our first service brands division, we reported second quarter revenues of $740 million, a 23 percent increase over the prior year period. EBITDA for the quarter came in at $78 million, up 18 percent year-over-year. Our margin during the quarter was 10.5%, down 40 basis points versus the 10.9% during last year's Q2. The quarterly margin decline was confined to our restoration businesses, which were operating against higher prior year storm-related activity levels. These headwinds moderated compared to the first quarter, however, and were a key reason behind the improved year-over-year margin comparisons SEQUENTIALLY COMPARED TO Q1. THE SECOND CONTRIBUTING FACTOR TO THE SEQUENTIAL MARGIN IMPROVEMENT WAS THE TEMPERING OF PROMOTIONAL INITIATIVES WITHIN OUR HOME IMPROVEMENT BRANDS. SCOTT NOTED EARLIER THE MILD TOP LINE DECLINE IN HOME IMPROVEMENT DURING Q2, TIPPING DOWN FROM THE MODEST TOP LINE GROWTH IN THE PRIOR FIRST QUARTER. NEVERTHELESS, DURING THE CURRENT QUARTER, WE ACHIEVE SUPERIOR PROFITABILITY AND AN IMPROVED year-over-year margin profile from this segment compared to our Q1 metrics. We have spoken about being assertive in balancing our growth and margin objectives in the face of the challenging macro remodeling environment, and we are pleased with what our home improvement businesses have delivered to the bottom line year-to-date. In the back half of the year, with the continued easing of storm-driven year-over-year comparisons and restoration, and the added mix of our roofing operations, we expect brands division margin improvement in the third and fourth quarters compared to their respective prior year periods. In terms of our cash flow profile, we delivered over $130 million in operating cash flow during the second quarter, up 52% over the prior year quarter, and almost matching our consolidated EBITDA during the period with the benefit of favorable working capital utilization. Our capital expenditures during the quarter were just under $30 million, and our year-to-date total of $54 million is pacing with our previously targeted full-year CapEx of approximately $115 million. Acquisition spending during the quarter was significant at more than $120 million, and the year-to-date investments in our tuck-under acquisition program exceed As a result, we ended the quarter with $1.1 billion of debt on our balance sheet, net of more than $200 million in cash on hand. Together, with undrawn availability under our bank revolving credit facility, our liquidity for any potential immediate capital requirements exceeds $300 million. Leverage, as measured by net debt to EBITDA, sits at 2.3 times, remaining in line with the prior first quarter, as we were able to fund the higher-than-typical acquisition spending with our strong quarterly cash flow. In terms of our outlook, taking into account our reported year-to-date results and the second quarter tuck-under additions in our roofing operations, we are modestly increasing our indicated financial targets that we laid out at the beginning of the year. For 2024, we are now forecasting that consolidated annual revenue and EBITDA will both achieve mid-teens percentage growth over our 2023 annual results. That now concludes our prepared comments. Operator, please open the call to questions. Thank you.