FirstService Corporation

Good day, and thank you for standing by. Welcome to the First Rivers Corporation's second quarter 2025 investor conference call. At this time, all participants are on 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 automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Today's call is being recorded. Legal counsel requires us to advise that the discussion schedule 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 forward-looking statements containing 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 July 24th, 2025. I would like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir.

Thank you, Marvin. Good morning, everyone. Thank you for joining our Q2 conference call. As usual, I'm on today with Jeremy Racoosin, I'll kick us off with some high level comments and Jeremy will follow with more detail. I'll start by saying we're very pleased with the results we posted this morning. Solid performance in an environment with continuing uncertainty and weak consumer sentiment. The results were similar sequentially to our Q1. Total revenues were up 9% over the prior year, driven primarily by tuck under acquisitions over the last 12 months. Organic growth was 2% this quarter, with gains at First Service Residential, Century Fire, and our restoration brands tempered by flat year-over-year results in our home service segment and declines in our roofing operations. EBITDA for the quarter was up 19% to $157 million, reflecting a consolidated margin of 11.1%, up 90 basis points over the prior year. Across the board, our operating teams continue to grind out margin gains. Jeremy will spend time on the margin detail in a few minutes. Finally, our earnings per share were up an impressive 26% over the prior year. Looking at our divisional results for service residential revenues, we're up 6% with the organic growth at 3%, similar to Q1 and generally right on expectation. Our net contract wins versus losses continues to improve, and we're comfortable that organic growth will sequentially improve towards our historical mid-single-digit average. Moving to first service brands, revenues for the quarter were up 11%, driven primarily by tuck-unders. Organic growth was low single-digit for the division. Revenues for our two restoration brands, Paul Davis and First Onsite, were up by about 6%, 2% organically, modestly better than our expectation. We're pleased with the momentum we have in our day-to-day branch level activity with both our US and Canadian operations. The number of claims are up and the number of jobs are up, which is a reflection on our efforts over the last few years. in signing new national accounts and especially increasing our share of existing accounts, both with national insurance carriers and commercial owners and managers. Storm-related revenues during the quarter were modest and at approximately the same level as the prior year. Looking forward to Q3 and restoration, we expect the momentum and day-to-day activity to continue which together with a solid quarter end backlog should lead to revenue that is up mid single digit sequentially from Q2. Relative to prior year, we're up against a strong comparative quarter, particularly in Canada that included revenues from two flood events impacting Toronto and Montreal, significant activity related to the Jasper, Alberta wildfires, and a few unusually large claims. At this stage, we expect Q3 revenues to be down 5% to 10% versus prior year. Of course, as we've seen over the last few years, a weather event between now and September 30th can drive the result up materially. Moving to our roofing segment, revenues for the quarter were up 25%, driven by acquisitions, principally the acquisition of Crowther in South Florida, that closed May 1st of last year. Organically, revenues declined by about 10% and were modestly lower than expectation. We continue to see some deferral of large commercial re-roof and new construction projects. Two of our larger branches in particular were at capacity at this time last year, with several large industrial re-roof projects underway. Activity at those operations slowed in the first half of this year. Our market position and relationships remain strong in those markets and the demand drivers remain compelling. We see the slowdown as timing related only and in recent weeks have seen a pickup. Our backlog at our larger operations and across our roofing platform is solid and building. We expect a stronger Q3 with revenues up over 10% versus the prior year, and organic revenues approximately flat with prior year. Moving on to Century Fire, we had a strong quarter with revenues up over 15% versus the prior year, including better than expected organic growth that hit double digits. Virtually all of the 30 plus branches performed well during the quarter, and again, The results were enhanced by particularly strong growth in repair, service, and inspection revenues. During the quarter, we announced the acquisitions of TST Fire Protection and Alliance Fire and Safety, two related fire protection companies based in Utah. Operationally and culturally, the businesses are very similar to Century and provide us with an attractive growth platform in the western U.S., The TST and Alliance teams will continue to operate the businesses, and we're excited to add them as partners as we focus on driving growth in adjacent markets. Our backlog continues to build at century, and we expect strong results for the balance of the year, with the organic growth tempering back into the high single-digit range. Now on to our home service brands, which as a group generated revenues that were flat with a year ago, better than our expectation. Consumer sentiment is down significantly since the beginning of the year, which resulted in our lead flow for the quarter being off almost 10 percent versus prior year. Our teams across the home service brands have successfully increased our close ratio, and we've experienced an increase in average job size, which together drove solid revenues that were flat with a year ago. We believe we continue to take share in our markets. Looking forward, we expect a similar result in Q3 with revenues flat, perhaps slightly down, versus the prior year. As I indicated on our last call, we remain optimistic that pent-up demand is building, and we'll see an increase in activity with interest rate reductions if they occur later this year or early next. Let me now hand it over to Jeremy.

Thank you, Scott. Good morning, everyone. We are pleased with our strong Q2 performance, reflecting year-over-year growth in profitability on the back of the same margin expansion drivers we saw in this year's first quarter. I will provide more details in a moment. First, a walkthrough of our consolidated financial results. Revenues for the second quarter were $1.4 billion, up 9% year-over-year, and we reported adjusted EBITDA of $157.1 million, up 19% versus the prior year. Adjusted EPS came in at $1.71, a 26% increase over Q2 2024. Our six-month year-to-date consolidated financial performance tracks closely to the strong growth metrics in the second quarter, aggregating to revenues of $2.7 billion, an increase of 9% over the $2.5 billion last year. Adjusted EBITDA of $260 million representing 21% growth over the $216 million last year with a margin of 9.8% year-to-date, up 100 basis points year-over-year. And adjusted EPS for the first half of the year sits at $2.63, a 30% increase over the prior year period. 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. Shifting to our operating financial performance for the second quarter, I'll start with our first service residential division. Quarterly revenues came in at $593 million, up 6% over the prior year. EBITDA for the quarter was $65 million, an 11% year-over-year increase with an 11% margin up 40 basis points over the 10.6% margin in Q2 of last year. The margin improvement during the second quarter was driven by the same operating efficiencies noted in our first quarter, principally in areas around client accounting and community resident communications. For the six months year-to-date, Our division EBITDA margin sits at 9.6 percent, up 60 basis points compared to the equivalent prior year period. Consistent with what we said on our Q1 call, we expect the margin improvement from these efficiencies to moderate in the remainder of the year. Within our first service brands division, we reported second quarter revenues of $823 million and 11 percent increase over the prior year period. EBITDA for the quarter came in at $95 million, up 23% year-over-year. Our margin during the quarter was 11.6%, up 110 basis points, versus the 10.5% during last year's Q2. The margin expansion within the vision saw a contribution from the same themes as the first quarter. Our restoration businesses continue to benefit from the optimization of their resources and operating processes, driving superior year-over-year profitability in the face of modest organic growth. And in our home improvement segment, California closets captured additional margin improvement carry-through from labor cost efficiencies and reduced promotional activities. Turning to our cash flow profile, we generated $163 million in operating cash flow during the second quarter, exceeding our consolidated EBITDA for the period with a contribution of positive working capital trends. Our cash flow was up 25% over the prior year quarter and currently sits at over $200 million year-to-date, an increase of 67% over the same period in 2024. Our capital expenditures during the quarter were a little over $30 million, and our year-to-date total of $63 million is right on pace with the annual CapEx target of $125 million we provided at the beginning of the year. Acquisition spending during the quarter was approximately $40 million, largely tied to the fire protection tuck-unders which Scott summarized in his commentary. With the free cash flow surge in the second quarter, we were able to pay down almost $70 million of debt during the period. As a result, our leverage, as measured by net debt to EBITDA, declined to 1.8 times from the two times level at the end of Q1. With our cash on hand and undrawn bank credit facility balances, our liquidity exceeds $860 million. We are well positioned with this balance sheet strength to deploy capital when we see the right opportunities. Concluding with our outlook for the year, we remain firmly on track to hit our annual consolidated growth targets we set out at the beginning of the year, which included high single digit revenue growth and margin expansion driving to double digit EBITDA growth. For the remainder of 2025, our current line of sight is that the year-over-year growth profiles for Q3 and Q4 will be relatively similar to each other. As Scott noted, our First Service Residential Division will revert back towards its mid-single-digit organic revenue growth rate and high single-digit overall growth when accounting for recent tuck under acquisitions. Our First Service Brands Division revenues are expected to be slightly up versus prior year with restoration facing the headwinds of a strong back half of 2024 without assuming any significant weather activity that could materialize in the remainder of 2025. Consolidated revenue growth will settle in at mid single digits absent the closing of any meaningful tuck under acquisitions during the balance of the year. From an operating profitability perspective, I mentioned the tapering of first service residential margin expansion for the remaining quarters down to levels modestly higher than prior year. Margins within the first service brands division will also aggregate to be roughly in line with prior year. As a result, our consolidated EBITDA should increase slightly more than our revenue growth during the balance of the year. That concludes our prepared comments. Marvin, you may now open up the call to questions. Thank you.

Thank you. At this time, we'll collect the question and answer session. As a reminder to ask a question, you will need to 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. And our first question comes from the line of Stephen McLeod of BMO Capital Markets. Your line is now open.

Thank you. Good morning, guys. Just had a couple of questions with respect to the outlook. Starting with the residential business, can you just talk about your confidence in the return to mid-single-digit organic growth in the back half of the year with respect to some of the community budgetary pressures we've seen? Are you seeing those already beginning to reverse?

I wouldn't say reverse, Stephen, but... They're starting to normalize. It was most acute last year. We started to see it normalize, I guess, towards the end of last year and through the first six months. So it's really playing out as we've described in our last few calls. We expected Q4, Q1, and Q2 to be tougher organic growth quarters. There is still some disruption. As many communities in Florida are still underfunded and work towards increasing monthly maintenance fees or implementing a special assessment, we're working closely with our boards. So there will continue to be some disruption, but we don't expect it to significantly impact our organic growth going forward, and as I said in my prepared comments, we expect uh, sequentially improve and move towards that mid single digit number. And we'll, we'll start to see that in Q3.

Okay. That's great. Thank you. Um, and then just moving to the, uh, for service brands business, um, you gave some color on, on the outlook, uh, which is very helpful. Um, you know, the margin in the quarter was quite strong, even despite organic sales growth being more modest in that business. So, you know, obviously you're getting some margin improvement based on the efficiencies that you've put in place. You know, when we see organic growth beginning to accelerate at some point in time, do the plans you've put in place lead to a higher margin profile for the business overall over the long term?

Yes, Stephen, I'll take that, Jeremy. For sure. I mean, both those businesses would benefit from traditional or natural operating leverage if we get accelerating top-line growth. Home improvement, we've been in a sort of flat to slightly down realm, and an acceleration there would help. In the case of restoration, which is the other area where we've seen significant margin improvement, that, again, is a function of top-line growth. performance, and we've spoken at many times around the weather-driven activity levels that can create a more volatile quarterly performance. So it really depends on activity levels there. That's why in the back half of this year, with the strong prior year comparable, we're not expecting margin improvement unless we get a matching or better level of weather-driven activity.

Okay. That's, that's great. And then maybe just finally on the brands business, um, with the roofing on the roofing side of things, um, you know, Scott, you mentioned your prepared remarks that the last, over the last few weeks, you've seen some improvement. Um, so just wondering like, what, what is, what's the backdrop you need to see? Is it more macro driven or is it just people getting people who are making these large investment decisions, getting more comfortable with tariff situation? Like what, what, what exactly do you need to see in order to kind of get that backlog moving? get those deferrals moving?

Uh, I think it's, I think it's all the above. I mean, there, the tariff uncertainty, uh, I think the expectation that interest rates, uh, would start moving down. Uh, and, and, and that has, that's not happened and it's, it's, you know, pushed out to later this year or next, I think all of that is, is causing hesitation, uh, prospect, um, for perhaps, uh, some inflation. So a number of large commercial customers continue to sit on contracts, but even with that slowness, we have started to book work, as I said, and it's picking up for us. The bidding activities remain strong throughout, but we're seeing more commitment. But there still is some deferral. but we expect to see some improvement Q3.

Okay, that's great. Thanks, guys. Appreciate it.

Thank you. One moment for our next question. And our next question comes from the line of Stephen Sheldon of William Blair. Your line is now open.

Hey, thanks. Congrats on the great results here. Starting in restoration, I guess you talked about – some of the progress with national accounts and gaining share with more day-to-day work. As that continues, do you think restoration will become less reliant on large storm activity, which I think you talked about potentially being a swing factor of 20% if we're taking any given year, and potentially make this a business with slightly less volatility quarter-to-quarter, year-to-year than at least you've seen historically, I guess? If that continues, could it change the profile of the business?

I'm not sure that's That's true, Steven, because as we gain ground with national accounts and as we improve our positioning and gain more wallet share, that will translate during CAT events also. We'll take on more work. I think it just improves our ability to drive more revenue in moderate weather conditions and sets us up to win more during CAT cat events also.

Okay. Got it. That makes sense. And then on brands, just following up on the margins there, I guess high level as you think about the individual segments and businesses within brands, can you just remind us where you still see the biggest room for margin improvement over the coming years? And within restoration, do you think there are multiple years of margin expansion just from the better resource optimization using the tech platform that you guys have built out there?

Yes, even so, home improvement would really be dependent on again that re, acceleration re, remodeling spend the macro factors that drive the top line because we've been added in terms of the labor efficiencies and reduce promotion activity for a year now. So. We're always tweaking and trying to get more efficient and reducing overtime hours and return visits, optimizing our labor, all that. But I really think it'll be a function of improved top line growth when the macro conditions improve. And then restoration, it's a multi-year effort. The teams have made major strides. We've cemented a lot of the... the labor-driven efficiencies there. And, you know, there will be more opportunities. It's just not going to be in a straight line game because it is dependent on activity levels and revenue performance in that business as well. All right. Great. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Scott Fletcher of CIBC. Your line is now open.

Good morning. I wanted to ask on the fire protection business. It seems to be outperforming now a few quarters in a row. Could you just dig into why, what are some of the dynamics that lets that business outperform relative to some of the other brands, given they're taking the same macro? Just curious if it's something to do with the mix of commercial or some idiosyncratic factors in the fire.

Yeah, I think primarily the growth in repair service and inspection, part of their business. It was a big driver in Q1 and particularly in Q2. And it's been a multi-year effort around the service side of the business. We made it a priority when we partnered with the Century team to balance the business and drive out the service work to create more of a 50-50 installation versus service. So it's definitely been a strategic priority. And then the investment has followed that, so investing in sales and service techs. And there's been a particular focus on collaborating with the installation teams to convert new installs into ongoing service work. And then in the last, I'd say, 12 to 18 months, a big push on driving inspection sales and inspection work that drives service work. And so all of those factors continue to sort of drive the service side of the business, which has been pulling along the installation side the last few quarters.

Okay, great. That's an interesting color. And then I wanted to ask on the M&A front, you know, at the end of the year, given where leverage is now, you're tracking to sort of get leverage back down to the levels that it was when you did the Roofing Corp deal. Are you, given the current macro, are there opportunities for platform deals as leverage takes down or is Tuck Under maybe more of the focus given the uncertainty?

Yeah, our leverage is always at a modest level. I don't know that we've very often been in a position where we haven't been able to be opportunistic around a large deal. So we think about the leverage when we're looking at opportunities, but it doesn't influence us one way or the other. If there's a strategic fit, a larger opportunity, we'll figure out the balance sheet side of it. So I think there's certainly an opportunity for larger acquisitions. The definition of new platform, it's not something we're seeking out. We have opportunities across the platforms we have. So I would expect that our activity will be focused on the areas that we, service areas we have today.

Okay. Thank you for the call. I'll pass along.

Thank you. One moment for next question. Again, as a reminder to ask a question, you'll need to press star 1-1 on your telephone. Our next question comes from the line of Daryl Young of Stiefel. Your line is now open.

Hey, good morning, everyone. First question's on home improvement. The environment's obviously been very tepid, but there does seem to be a big divergence between the high-income and the low-income consumer, and I'm just curious if you can give us a bit of color on where your market positioning is in terms of your products, and if you're seeing any indication that that may be true and holding your business in better than maybe some of the broader economic indicators might indicate.

I think there's something there. Our largest brand within our home service group is California Closets, which caters to the broad spectrum of consumer, but it does have a big part of their growth and history. The brand has been around a more affluent customer. That has been helpful. I mentioned that we've seen our average job size increase, and I think that has been weighted towards the affluent consumer, which has influenced our group. I do believe that's true.

Got it. Okay. And then on the roofing business, wondering if the sort of quarterly volatility in results that you're seeing stacks up with what you would have seen in your due diligence on the asset. I guess I'm just trying to figure out if we're going through a unique period of time for roofing today or if weather and starts and stops on projects is something that was part of the expectation when we got into this business.

No, I think that we're in an environment that has influenced roofing. We're certainly not alone. I think we're holding our own in roofing and perhaps doing better than the market. We have operations that have historically relied on large industrial reroof work and some new construction, and that has been slower. And as I said, we're starting to see it pick up. So no, I'm not sure we identified any volatility. In fact, it's, you know, the demand drivers in roofing are very compelling with, you know, influenced by weather, but also the aging built environment. It's going to be a big driver in this market. We think we're very well positioned We've got a strong team, great partners, and a solid footprint. I think we're in an environment that's sort of macro-driven, but feel very good about where we're at and where we're going.

Okay. That's great, Collin. Thank you.

Thank you. I'm showing no further questions at this time. I'll now turn it back to Mr. Scott Patterson for the closing remarks.

Thank you, Marvin, and a Thank you, everyone, for joining us today. And end of October, we'll be on our Q3 call. Enjoy the rest of your day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.