FirstService Corporation

Good day, and thank you for standing by. Welcome to the First Service Corporation third quarter 2024 earnings conference call. At this time, all participants are on 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 will 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 the discussion scheduled to take place today may contain forward-looking statements that may 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 the forward-looking statement is contained in the company's annual information form as filed with the Canadian Securities Administrators and in the company's annual and Exchange Commission. As a reminder, today's call is being recorded today, October the 24th, 2024. I would now like to hand the conference over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir.

Thank you, Tawanda. Good morning, everyone. Welcome to our third quarter conference call. I'm here with Jeremy Rakusen and we are pleased to be on the line with you today to report on the strong results we posted this morning. Results that in aggregate exceeded our expectations coming into the quarter. Consolidated revenues were up 25% over the prior year with organic revenue growth at 6%. The growth was driven by our acquisition of Roofing Corp of America in December. and supported by very strong year-over-year growth for our restoration brands. EBITDA for the quarter was up 43% from 2023, reflecting a margin of 11.5%, 150 basis points better than prior year, all driven by increases at our brands division. And finally, earnings per share were up 30%. Jeremy will spend time discussing the profitability metrics in a few minutes. Looking now at high level results for our divisions, I'll start with first service residential, where revenues were up 4% with organic growth at 3%. We've been guiding to mid single digit organic growth, so we finished a bit below expectation. The principal driving factor is something we've been discussing for several quarters, and relates to budgetary pressures at our communities from rising costs, including escalating insurance premiums. The pressure is elevated in Florida due to recent legislation requiring boards to fund cash reserves for maintenance and repairs. This is legislation arising from the Champlain Towers collapse in June of 2021. In the past, boards could choose to defer maintenance or reduce cash reserve requirements. Beginning in 2025, that is no longer possible. And in preparation over the last year, boards have been looking closely at all expense items. It's putting pressure on management fees and on the levels of cited labor. Looking forward, we see organic growth continuing in the low single-digit range for the next few quarters and then starting to pick back up. The disruption in Florida is temporary. It will normalize. We're starting to see that. And we expect to get back to our mid single digit long-term average for this business. Moving on to first service brands. Revenues for the quarter were up 44%, driven primarily by the acquisition of Roofing Corp of America, but also several tuck-unders within our restoration fire safety, and roofing segments. Organic growth was 10%, led by very strong gains at our restoration brands, supported by solid growth at Century Fire. Our restoration brands, Paul Davis and First Onsite, together recorded revenues that were up 25% versus the prior year, with organic growth north of 15%. And this is against a reasonably tough comparative quarter in the prior year, which had 25 million of revenue from Hurricane Ian. The growth was broad based across our North American branch system with particularly strong growth in Canada. During July and August, we had separate rainstorms and flooding that impacted Toronto twice and Montreal. We had hail storms in Calgary that drove a spike in claims and wildfires in Alberta that caused significant damage in Jasper. Paul Davis and First Onsite benefited from all these events. We own the top two restoration brands in Canada and will always benefit from regional weather events that impact the major urban centers in Canada. We also benefited during the quarter from a number of large loss claims in both the U.S. and Canada that exceeded our experience from the previous year quarter. First Onsite specializes in commercial large loss and generally has several large loss claims and process, but the number and size of claims can certainly cause fluctuation from quarter to quarter, and we saw that in Q3. During the quarter, we generated less than $10 million of revenue from named storms, primarily relating to some final Hurricane Ian reconstruction work. We generated only a small contribution from Hurricane Helene. Helene hit late September, and Hurricane Milton hit October 10. Our restoration brands mobilized around both storms, and have secured a number of claims and mitigation contracts in the Carolinas, North Georgia, and Florida. We're currently generating revenues primarily from demolition, cleanup, and water mitigation. Often the mitigation work leads to reconstruction, but it is too early to assess or quantify future revenues from these events. Jobs need to be scoped and insurance must be approved before reconstruction contracts can be awarded. We'll have a much better sense by our year-end call, and we'll provide an update on our backlog and the timing of future revenues. In the meantime, we're benefiting from the extensive mitigation work, which will help drive growth for our restoration segment that we expect will be 30 percent or more in Q4. we've estimated $40 million of storm-related revenue for Q4. Looking now at our roofing segment, we generated solid results at Roofing Corp of America, which were generally in line with our expectation. Looking to Q4, we expect revenues that are down modestly from Q3 due to seasonality, but again in line with our due diligence forecast which is how the first nine months have played out. Crowther roofing, which we acquired in Q2 of this year, has branches in Sarasota and Fort Myers, and we'll see a modest uptick from Hurricane Milton. We're performing some temporary repair work currently. Re-roof opportunities or more significant repairs are more likely to benefit us in the first half of next year. We'll provide more detail on any storm-related backlog in our year-end call. At this point, we expect the storms to be a boost for our Florida branches, but not material to our roofing segment in aggregate. Moving to Century Fire, we had a solid quarter that was right in line with expectation. Revenues were up low double-digit, half of the growth organic and half from tuck-under acquisitions. This is against a very strong Q3 last year. We're pleased with the continued growth we're seeing from Century against tough comparative quarters. We expect a similarly strong quarter sequentially in Q4 for Century, which would imply modest single-digit year-over-year growth against a very strong result last year. And I'll finish with our home improvement brands. where we saw revenues decline by a low single-digit percentage, which is where we guided on our Q2 call. During the quarter, we continued to see reduced year-over-year lead activity, but with some improvement relative to the first six months of the year. In recent weeks, we've experienced further improvement, which provides some optimism that we've seen the bottom in home improvement. We expect Q4 to again be down by a low single-digit percentage, and modest year-over-year declines will likely carry into early 2025. We expect top-line improvement as we move through 2025, and we'll provide more clarity at our year-end call. Let me now call in Jeremy to review our results in more detail.

Jeremy Leffler Thank you, Scott. Good morning, everyone. I'll start off by recapping highlights from the very strong financial results for the current third quarter. During the period, we recorded consolidated revenues of $1.4 billion, up 25%, driving to adjusted EBITDA of $160 million, a 43% increase relative to the prior year period. Our consolidated EBITDA margin for the quarter was 11.5%, up 150 basis points over last year's 10 percent level. Adjusted EPS during Q3 was $1.63, up 30 percent quarter over quarter, even with an almost doubling of interest expenses in the current quarter. For the nine months year-to-date, our consolidated financial performance includes revenues of $3.85 billion, up from $3.26 billion in the prior year period, an increase of 18%. Adjusted EBITDA at $376 million, a 20% increase year-over-year. With our overall EBITDA margin at 9.8%, up 20 basis points versus a 9.6% margin for the prior year period. And lastly, our adjusted EPS year-to-date is $3.66, exceeding the $3.56 reported for the same period last year, notwithstanding significantly higher interest expenses throughout the current year. Our adjustments to operating earnings and GAAP EPS in 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 provide a segmented review of the third quarter performance within our two divisions. At First Service Residential, we generated revenues of $560 million and EBITDA of $58.6 million, both representing a 4% increase over the prior year period. Our current quarter EBITDA margin yielded 10.5%, matching the level last year. Our teams are focused on operating with an efficient cost structure and achieving healthy, profitable growth in serving our community association clients even in the face of some market headwinds, which Scott touched on. This has allowed us to maintain inline margins year-to-date, and in similar fashion, we expect to finish the year with annual margins comparable to 2023 levels. Turning now to our First Service Brands Division, we generated revenues of $836 million during the current third quarter, up 44% versus the prior year period. EBITDA for the division increased by 74% to $105.8 million with a 12.6% margin up more than 200 basis points compared to the 10.5% margin in last year's third quarter. Two factors drove the significant margin expansion. First, as Scott described, our restoration operations benefited from higher activity levels and significant revenue growth over the prior year period and this strong top-line growth drove operating leverage. Second, our home improvement brands have continued to show resilience and capture market share to sustain a solid top line in a challenging macroeconomic environment, while at the same time taking action on the cot side. During Q3, we maintained our tactical shift from the previous second quarter of dialing back promotional and marketing activity. In addition, our company-owned operations with in-home improvement realized operating efficiencies primarily from improved labor productivity. Walking next through our cash flow profile, we delivered $110 million in cash flow from operations prior to working capital movement. and $77 million in operating cash flow, including changes in working capital. Year-to-date, we have generated almost $200 million in operating cash flow, up 17% year-over-year, and tracking almost in line with our EBITDA growth. Capital expenditures during the quarter total $27 million, and spending year-to-date sits at just over $80 million. We expect to be at or slightly lower than our $115 million of annual all-in CapEx for 2024, which was our target established at the beginning of the year. Acquisition investment during the quarter was negligible, but year-to-date we have deployed almost $160 million in capital, primarily relating to the Florida-based roofing acquisitions in the second quarter. Our balance sheet at quarter end included net debt of almost $1.1 billion, resulting in leverage at 2.1 times net debt to trailing 12 months EBITDA, down from the 2.3 times level for the previous second quarter, and back in line with 2023 year end. We also have more than $350 million of total cash on hand and undrawn availability under our credit facility. Our conservative balance sheet, financial flexibility, and ample sources of liquidity put us in a strong position to be assertive in seizing growth opportunities that fit with our strategy. Finally, to wrap up our prepared comments, the following are some indicators around our outlook to close out 2024. We expect that our revenue growth for the fourth quarter will exceed 20%. In terms of Q4 profitability, I mentioned earlier that at first, service residential, we anticipate relatively flat margins, while at first service brands, we reconfirm from our last Q2 call the expectation for higher year-over-year margins. For the full 2024 year, we will deliver stronger financial performance than previously anticipated at the end of the second quarter, driven largely by the outperformance during this current third quarter. annual consolidated revenue growth should approach 20% and together with an incremental improvement in our consolidated annual EBITDA margin should drive to EBITDA growth north of 20%. Our outlook beyond the next quarter into 2025 will be outlined during our February year-end earnings call. And that now concludes our prepared comments. Operator, please open up the call to questions and thank you