FirstService Corporation

Welcome to the first quarter investor conference call. Today's call is being recorded. All participants 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 11 on your telephone. You will then hear an automated message advising your hand is raised. The 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 complicated in the forward-looking statements, additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements 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 April 24, 2025. I would now like to turn the call over to the Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir.

Thank you, Olivia. Good morning, everyone. Thank you for joining our Q1 conference call. We reported solid results this morning that we're very pleased with in the current environment. I'll provide a high-level review and touch on some of the highlights, and then pass to Jeremy Racoosin for a more in-depth discussion of the results. Total revenues were up 8% over the prior year, driven primarily by tuck-under acquisitions over the last 12 months. Organic growth was slightly positive, with gains at first service residential largely offset by a modest decline across the first service brands division. EBITDA for the quarter was up 24%, reflecting a strong 110 basis point improvement in our consolidated margin. A number of our brands showed margin improvement. Jeremy will walk through the detail in a few minutes. Finally, our earnings per share for the quarter were up an impressive 37%. Looking at our divisional results, first service residential revenues were up 6%, half organic and half from a few small tuck-unders over the last 12 months. The results were in line with expectation. We had a solid quarter of contract wins and retention as we continue to work our way back to our historical mid-single-digit organic growth rate. Looking forward at first service residential, we expect similar or slightly better organic growth in Q2 and sequential improvement for Q3 and Q4. Moving on to first service brands, revenues for the quarter were up 10%, driven entirely by tuck under acquisitions. Organic growth for the division was slightly down with gains at Century Fire offset by organic declines in home services. and our roofing platform. I'll give a high-level review of each segment and start with restoration. Revenues were generally in line with expectation for the quarter, up mid-single digit, flat organically. We had solid growth in the U.S. with support from Hurricanes Helene and Milton, from which we generated a little over $10 million for the quarter. This was tempered by modest year-over-year declines in our Canadian operations. The Canadian operations of First Onsite and Paul Davis account for about 30% of our North American restoration business. Our overall restoration backlogs at quarter end are solid and at similar levels to year end and prior year. Looking forward to Q2, we expect revenues to continue at approximately the same level sequentially, which would result in similar year over year results to Q1, flat to modestly up. I'll now touch on our roofing segment, which delivered Q1 revenues that were up almost 50% year-over-year, driven by the acquisitions of Crowther Roofing and Hamilton Roofing in Florida. Organically, the revenues were lower than expected and down about 10% from the prior year quarter. There are two principal reasons for the reduction. One was weather in January and February, which reduced our production hours relative to the prior year. And secondly, we're seeing the expected awarding of some large commercial re-roof and new-build contracts deferred. Bid activity has been solid, but the awarding of contracts has slowed. We see it as a timing issue only and directly related to the current economic uncertainty with tariffs. Looking to Q2 and roofing, we will again benefit from the year-over-year impact of the Florida acquisitions and expect our revenues to be up between 25% and 30% versus prior year. Organically, we expect to be down modestly due to the continued impact of contract deferral. The underlying demand dynamics remain strong, and we're optimistic that contract awards will accelerate as we move into the back half of this year. Moving to Century Fire, we had a strong quarter, generally in line with expectation, with revenues up over 10% and organic growth mid-single digit. The Century results were bolstered by particularly strong growth in repair, service, and inspection revenues. Similar to my comments relating to roofing, we did see some deferral of expected larger commercial installation contracts from Q1 into Q2 or later in the year. Again, we see this as timing only. Our backlog continues to build at century, and we expect continued strong results for the balance of the year with organic growth in the high single-digit range. Now on to our home service brands, which as a group generated revenues that were down about 3% year-over-year, just below expectation. It's been well documented over the last few months that consumer confidence has deteriorated due to the persistence of high interest rates and the economic uncertainty. Our lead flow reflected this in Q1 and was down year over year. As I indicated on our last call, our tried and true economic indicators, home equity values and home prices, point to increases in home improvement spending. We remain optimistic that pent-up demand is building and we will start to see it in increased bookings in the second half of this year. Our lead flow is stabilized and our teams continue to drive increased lead conversion. Looking to Q2, we expect revenues to be slightly down relative to the prior year. Before I pass to Jeremy, let me add a few comments. The direct impact of tariffs to first service are immaterial. However, as I have indicated in my comments, we are seeing a moderate indirect impact. The economic uncertainty in the market today that has resulted from the trade war is causing many commercial and residential consumers to pause. It's undeniable. I opened this call by saying that we were very pleased with the results in the current environment, and I want to reiterate that point. We grew organically in Q1, albeit modestly, while driving enhanced margins. It's a testament to the diversification of our business model and the resilience of our brands. The demand drivers across our markets remain compelling, and we are optimistic we will see accelerated activity levels with market stability. On that note, over to you, Jeremy.

Thank you, Scott. Good morning, everyone. We are pleased with today's first quarter financial performance, which delivered strong year-over-year growth in our key profitability metrics. To summarize the consolidated results for the quarter, we reported revenues of $1.25 billion, an 8% increase over the $1.16 billion for Q1 24. Adjusted EBITDA was $103.3 million, up 24% year-over-year, with an 8.3% margin, and resulting in 110 basis points of improvement over the 7.2 percent margin in the prior year quarter. And our adjusted EPS was 92 cents, reflecting 37 percent growth over the prior year. Our adjustments to operating earnings and GAAP EPS in arriving at adjusted EBITDA and adjusted EPS, respectively, are consistent with our approach in prior periods. To now walk through the segment results for our two divisions, I'll start with First Service Residential. The division generated revenues of $525 million, up 6% over last year's first quarter, while EBITDA was $41.6 million, a 17% growth rate over the prior year. This resulted in EBITDA margin of 7.9%, a 70 basis points increase over the 7.2% level in Q1 24. This margin expansion was driven by cost efficiencies that we realized in our property management operations that are dedicated to servicing our community clients, including in areas around client accounting and contact centers. Our operating leaders and teams have been working on these initiatives for some time, and these efforts became more evident in Q1 as we emerged from the past 18 months of industry headwinds, which we have spoken about at length. I would note that the magnitude of the margin improvement was also amplified in our seasonally weakest first quarter. In future quarters, and particularly the second half of 2025, the year-over-year margin expansion will taper to more modest amounts as our top line ticks higher with the resumption of normalized service levels at our managed communities, thus driving a greater mix of cited labor revenue. Now to our First Service Brands Division, where we reported revenues of $726 million for the current quarter, up 10% over last year's Q1. Our EBITDA for the division was $67.8 million, a 22% increase versus the prior year quarter. The resulting margin was 9.3%, up 90 basis points versus last year's 8.4% level, and primarily driven by our home services and restoration businesses. Within home services, our California Closets brand continued to realize the benefits from operating efficiencies and the reduction in promotional activity. Both of these initiatives kicked into higher gear in the second quarter of 2024. So as we lap that period, we expect home services margin performance to be roughly flat year over year for upcoming Q2 and going forward. Restoration margins were also up over Q1 24 as we continue our multi-year journey to streamline our operating processes and optimize our cost structure. As we reiterated before, Profitability metrics within restoration are dependent on weather, job activity levels, and type of work mix, and therefore we don't expect the margin improvement to play out each and every quarter, but rather over time. Our teams across all the service lines in our brand division have been highly focused and successful in grinding out sales and driving market share during a challenging macro environment while ensuring they get a healthy return on bottom line profitability. With respect to our consolidated operating cash flow, we generated more than $75 million before working capital changes and over $40 million, including the impact of working capital. This cash flow conversion was both meaningfully higher than prior year and at a solid level, particularly given the Q1 seasonal trough for some of our businesses. Capital expenditures during the quarter were just shy of $30 million, up modestly over the prior year, and pacing within our full year CapEx guidance of roughly $125 million. We deployed minimal upfront cash towards tuck under acquisition spending during the quarter as we remain disciplined and selective in a competitive transaction valuation environment. Finally, looking at our balance sheet, our debt and cash balances were relatively unchanged at the end of the first quarter compared to 2024 year end. and therefore our net debt remained at $1.1 billion. Our leverage is conservative, sitting at two times net debt to trailing 12 months EBITDA and in line with year end. During the quarter, we also bolstered our debt capacity and flexibility by increasing and extending our five-year revolving bank credit facility to $1.75 billion plus an additional $250 million accordion feature. Our liquidity reflecting cash and undrawn credit facility balances is sizable at more than $800 million, putting us in a very strong financial position to deploy capital as opportunities arise in our acquisition pipeline. Looking forward, in the upcoming second quarter, we are forecasting consolidated revenue growth similar to the 8% growth rate in Q1. EBITDA is expected to increase at a low double-digit growth rate with the residential division margin up and brands division margin in line to slightly up compared to last year's second quarter. Scott commented on the macro uncertainty that is somewhat clouding our visibility on the top line in some of our brands division service lines. But we believe that any headwind impact is timing related and will be offset by pent-up demand. At the same time, we are driving margins and profitability as evident with the strong Q1 performance under our belt, providing us with confidence in delivering on full-year expectations for 2025. That concludes the prepared comment segment. Operator, you can now open up the call to questions. Thank you very much.

Certainly, ladies and gentlemen. To ask a question at this time, you will need to press star 11 on your telephone and wait for your name to be announced. to enjoy your questions, simply press star 11 again. Please stand by while we compile the Q&A roster. Now, first question coming from the line of Steven McLeod with BMO Capital Markets. Your line is now open.

Thank you. Good morning, guys. Thanks for the color. Just a couple of questions just with respect to the macro weakness. Could you just remind us sort of what you would consider to be your consolidated, you know, like exposure to macro gyrations like consumer spending and, as you mentioned, some of the commercial pushbacks you're seeing as well or delays?

Sure, I can take a first cut and then I'll let Scott layer in. I mean, in terms of the business that we've always said, whether it's related to tariffs or other macroeconomic exposure, We said the home improvement business, which is, you know, north of $500 million tied to residential homeowner and consumer sentiment. And then, you know, half of century fire and a third of roofing tied to commercial new development would be about another $500 million. So, you know, a billion dollars on $5 billion plus, 20% of consolidated first service residential, first service corporation revenue. revenues would be exposed, you know, some to residential and some to commercial. So modest. Scott, anything to add? Yeah, no, I don't have anything to add to that, Jeremy.

Thank you.

Okay, that's great. Thanks, Jeremy. That's kind of the ballpark I was thinking. I just wanted to confirm that. And then maybe just sticking with the brands business, you know, you talk a lot about sort of delays in projects, but your leads are up. but people are just not converting, but you think that's going to come back through pent-up demand. Like, are you seeing any change to conversions, or is it just that the leads are building and customers are staying warm, they're just not committing? Is that sort of how to think about it?

I think that's right. I mean, it is different with the home service brands and with – The commercial delays we're seeing at Century Fire and roofing, particularly on the commercial side, we see it as timing. Work needs to be done. I think that customers, I mean, uncertainty causes hesitation, and that's really what we're seeing. They're getting bids. They're seeing what the pricing environment is. They have work to do. They're not committing. But we don't think that these deferrals can go on for a significant length of time. Residentially with home services, it's a little bit different. I mean, consumer confidence is down. We saw this morning that existing home sales were down 6% in March. It's another indicator that the consumer is pausing on capital outlays until there's more certainty in the market. If we get into a recession or a deeper recession, I think that the consumer confidence could stay at current levels. However, the homeowner on average is wealthy. The average home equity is significant relative to history, and home prices continue to tick up, creating more equity. And certainly, historically, this has pointed to healthy home improvement spending. So, we think as soon as the market stabilizes, we're going to see it, and we're optimistic that it will be later this year.

That's great. Thanks, Scott. And then maybe just finally, just from the M&A environment, if we do see a period of more protracted slowdown or delays, you talked about you're obviously in a strong financial position. What are you seeing in terms of multiples and are you seeing potential targets beginning to emerge?

Well, I would say that we're actually hearing about Some sale processes that have been deferred pushed to the back half of the year until things settle down. But I would say that the market's still quite active. There's no indication that multiples have changed or no indication that they've come down. But the market's active. Our pipeline's active. We expect to transact this year over the balance of the year.

That's great. Okay. Thanks, guys. Appreciate the color. Thank you.

Thank you. Our next question, coming from the lineup, Scott Fletcher with CIBC. Your line is now open.

Hi. Good morning. I'll stick to the brand side of things. On the organic decline in the roofing piece, you sort of mentioned 10% range. Is there any way you could break out how much of that was weather related versus sort of commercial delay related? And I assume that those weather related delays would be more likely to come back sooner than the commercial delays.

I think that's right, Scott. You know, it's hard to pinpoint that accurately, but I'll spitball it sort of half and half. You know, some of the new roofing contracts are significant well over 10 million dollars up to 20 I mean it can from quarter to quarter it can it can make a difference and then certainly weather can as well because it reduces your time on a roof and we certainly saw that in particular in January and February this year during our seasonally weakest quarter because of winter weather you know this year we saw weather in the form of rain and high winds and smoke from wildfires impact our production hours in non-seasonal regions like Texas, Louisiana, and California. That will come back. It won't come back in the second quarter entirely. We see it over the balance of the year, but we do see the deferral and the commitment around these new roofs and re-roofs, we do see that continuing until we see more stability in the market.

Okay, thanks. That's helpful. And then on the restoration side, last quarter you sort of mentioned some unclear timelines on the reconstruction work related to the hurricanes. Is there anything you can update us on on sort of the pipeline on reconstruction work in the restoration business?

Generally, I can. I mean, it's very slow to convert. scoping, permitting, environmental approvals, insurance approvals, all takes considerable time. We generated a little over $10 million in Q1 from Helene and Milton. We do have remaining backlogs in these events. We expect to convert it really over the balance of the year. It won't be material to the year or to any particular quarter. I think the real relevant metric is our total backlog, which is, as I said in my prepared comments, it's similar to year end and to prior year, which points to similar revenue levels in Q2.

Okay, great. Thank you. I'll leave it there.

Thank you. Our next question, coming from the line of Daryl Young with Stiefel, Yolanda Smallman.

Hey, good morning, everyone. I think this might be the first quarter since I've covered you guys that you've missed on the top line and beat on margins. And I'm just wondering if there's a shift in how you're thinking about managing the business towards more margin-centric and maybe dialing back top line growth, or is this really just a function of some of the weather and whatnot issues you've already called out in the quarter?

Yeah, I mean, well, you know, the margin, Jeremy said in his comments, I mean, the margin efforts are every day and every year. And the teams are doing a great job, really, across all the brands. The top line, I mean, you know, also, we didn't point it out in our comments, but there's about 10 million of FX employees. impact also from our Canadian operations that hit our revenue that we didn't necessarily foresee. And otherwise, no, it's really these, you know, home improvement, again, a little lower than expected. And the contract commitment commercially, again, at Century and roofing. Much of it is tied to the trade war and the current environment, and we think it's all timing related. The underlying demand drivers remain compelling. We're very optimistic about all our brands and the demand environment once we get through this.

And then flipping over to the residential business, I think, you know, in recessionary environments in the past, you've seen more requests for pricing. We'll call it more shopping by HOAs. But you've always done well and taken share in that kind of environment. Is that sort of how you would be thinking about this time as well? Or has anything changed now that you're at a much bigger scale?

Well, I mean, the pricing pressure has been very acute in that business. for the last 18 months. I mean, we've been talking about that, particularly in Florida with the pressure on the budgets, the community budgets. We don't see pricing pressure getting worse or escalating from here. These communities and their need to be managed

will continue and it's it's always price competitive so i don't i really don't see it changing got it okay um and then do you have handy uh what your organic growth rate would be um x that fx impact that you you spoke to or well i'll just jump in at 10 million scott said you know pretty close to that that's

That's about 1% on the consolidated line. You know, we did 1.25 over the 1.16 billion last year. Got it. Okay, that's it for me. I'll jump back in the queue. Thanks, everyone.

Thank you. And as a reminder, to ask a question, please press star 1-1 on your touchtone telephone. Our next question coming from the lineup, Stephen Sheldon with William Blair. Your line is now open.

Hey, thanks for taking my questions. First one here, just really great to see the margin expansion in the residential segment this quarter. So can you just give some more detail on how you're driving some efficiencies in client accounting and the contact center operations that you mentioned? And has your view changed at all in the potential long-term margin profile there relative to the 9% to 10% range you've talked about?

Yeah, Stephen. So client accounting is really around, you know, Head count reductions and streamlining our process to get those monthly financial statements out to thousands of communities and the boards that are our clients at those communities. And then the contact centers, it's relating to dealing with inbound requests from our communities and our residences. We're using digital and AI tools, technology in a broad way. to take the loads off of our frontline portfolio managers and bring it to the back office so they can be more effective in dealing with their boards and can be more productive and increase their loads. So it's a whole bunch of efficiencies. And at the end of the day, this is all about delivering service excellence and enhancing the customer experience at our communities. As to the sustainability of it, we've talked about, as you alluded to, a 9% to 10% margin ban. Last year, we were around the middle point of that. And you know, with better margins this year, we'll be in the upper half of that band. And, you know, that is our belief for our long-term goal. We'll continue to work on other margin enhancements over time, but being at the upper end of the 9% to 10% margin band is a good target for us for the end of this year. Got it. That's helpful.

And then just as a follow-up, I any updated thoughts about expanding the services portfolio, similar to what you guys did when you expanded it into a restoration and roofing, you know, are you, are you entirely focused on growing and gaining market share in the current in markets or as we're sitting here, you know, a few years down the road, do you think it could be a new business and then market in the portfolio? How are you guys thinking about it?

Always open-minded Steven, but, uh, our focus is on the brands we own today. Um, The one thing I would add is that we have talked about this broader thesis around repair and maintenance of the built environment, which includes restoration. It includes roofing. It includes painting. And there are other adjacencies that are very similar. So we are certainly interested in that broader thesis. which has many, many drivers and tailwinds. We talk frequently about the weather events, but the aging building stock, the coastal building codes that we're increasingly seeing that are driving repair and maintenance spend. So there are, I would call them adjacencies that we're interested in, but they would be part of our current segments and part of our current platforms.

Great. Thank you, Jermaine and Scott.

Thank you. Our next question coming from the line up, with Raymond James.

Good morning. Guys, I was wondering if you could comment on labor availability and also labor costs. I know this was obviously an issue when we saw inflationary pressures a couple years back, but presumably things are getting a lot better just based on the margins you deliver. I just wanted to see if you could comment on that, please. Thanks.

Yes, Frederick, much better certainly than you know, a few years ago. Our turnover is down. It's really down to levels that we saw pre-COVID and continuing to improve. And wage inflation has stabilized. And so we're able to recruit more effectively and we're able to keep our people more effectively. And it's... more stable than it's been in a few years.

And is that helping facilitate market share gains? I know this is obviously a key part of the first service story is your ability to continue winning market share. Is that helping contribute?

Well, culture, employee experience for us is critical in delivering on customer experience. So The tenure of our folks, particularly the front line, always helps us in terms of driving customer experience, which in turn drives repeat business, retention, and word of mouth referrals. So the answer is yes.

Okay, great to hear. Thanks for your thoughts.

Thank you. And I'm showing no further questions in the Q&A queue at this time. I will now turn the call back over to Mr. Scott Patterson for any closing comments.

Thank you, Olivia, and thank you all for joining our Q1 call. Enjoy the rest of the day.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.