FirstService Corporation

Good day and thank you for standing by. Welcome to the First Service Corporation third quarter investor 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 this session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 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 materially differ from those in the forward-looking statements is contained in the company's annual information form as filed with the Canadian Securities Administration and in the company's annual report on Form 40-F as filed with the U.S. Securities and Exchange Commission. As a reminder, today's call is being recorded. Today is October 22, 2026. I would now like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir.

Thank you, Michelle. Good morning, everyone. Thank you for joining our Q3 conference call. As usual, I'm on today with Jeremy Rakusin, our CFO. I'll kick us off with some high-level comments, and Jeremy will follow with more detail. We posted solid results this morning. that in aggregate met our expectations and highlight the diversification of our business model. Total revenues for the quarter grew by 6% over the prior year with organic growth at 4%. We continue to face headwinds across a number of our businesses and are very pleased to show this level of growth in a tough economic environment. We believe it bodes well for our fourth quarter and into 2027. EBITDA for the quarter was up 3%, reflecting a consolidated margin of 11.1 compared to 11.4% last year, and earnings per share were up 7%. Moving to our divisional results, first service residential revenues grew by 5% over the prior year, reflecting the net of contract wins less losses. Condo HOA management is a price competitive business, always has been. Our teams at First Service Residential continue to do a great job balancing organic growth with margin. Q3 represents the eighth consecutive margin with some level of margin improvement while averaging mid single digit organic growth. Jeremy will speak more on margins in his comments. Looking to the fourth quarter, we expect a similar result at First Service Residential. Moving to First Service Brands, revenues for the quarter were up 7% with strength at our Restoration Brands and Century Fire, supported by solid mid-single-digit growth at our Home Service Brands, partially offset by revenue declines within our roofing platform. Revenues for our two restoration brands, Paul Davis and First Onsite, were up 10% from the prior year, better than expectation. We mentioned during our Q2 call that we had made progress late in Q2, signing work and building our pipeline back to a healthy level. During Q3, we continued to see solid activity levels that were generally broad-based across North America. We're geographically diversified across our two brands. Both Paul Davis and First Onsite have strong market positions in Canada, two of the top three companies by our estimate. Also, First Onsite has a very strong position and is the market leader in Hawaii, which has been hit by a series of storms over the last several months. Activity across Canada and Hawaii helped drive our growth in Q3. Conversely, claim activity in the continental U.S. across the industry has been down year-to-date at the end of Q3. Notwithstanding, we've been successful in signing a number of large-loss projects on the mainland that will be converted to revenue over the next many months. In terms of named storms, Hurricane Isaias hit the Florida panhandle on October 10 as a Cat 2 storm. It was primarily a wind event with some flooding and in general caused less damage than originally feared. Industry insurance claims have been much lower than expected. Our restoration brands have secured some work from the event, primarily mitigation and board up, but not a material amount. Similarly, we've secured roofing repair contracts through our operations at RCA but again, it won't be material to our Q4 results. We have a solid backlog at our restoration branch heading into Q4 and expect to show mid to high single digit growth for the quarter. Moving to our roofing segment, revenues for the quarter were down 4% on a reported basis and high single digit organically. As expected, the roofing market continued to be a challenge during the quarter particularly in a few of our larger markets. I will say that we did start to see some green shoots across a number of our branches and finished the quarter with a backlog that was up sequentially and at the highest level we've seen over the last year. Looking forward to the fourth quarter, we expect to show mid-single digit reported growth and organic growth that is flat to slightly down from the prior year. As I mentioned, we will see some roof repair work in the Florida panhandle from Hurricane Isaias, but otherwise the Florida market remains very difficult and is holding us back from showing more improvement in Q4. Now on to our home service brands, which is a group generated revenues that were up mid single digit from the prior year, primarily due to the tuck under acquisition of the Indianapolis California Closet's operation in Q1 of this year. Organic growth was positive but modest. Our teams continue to battle headwinds and produce results in this segment. During the quarter, we again improved conversion and close ratios and drove a higher average job size to overcome a year-over-year reduction in leads and activity. Both the housing market and consumer sentiment worsened during the quarter and are at historic lows. Home improvement indices and forecasts are pointing to lower levels of activity in the coming months, and we expect to see that in our near-term results. Looking to Q4, we expect revenues to be flat and aggregate and down low single-digit organically. And I'll close with Century Fire. where we had another strong quarter in line with expectation. Revenues were up over 10% versus the prior year, including high single-digit organic growth. Late in the quarter, we closed on the acquisition of ANA Fire Protection based in Greenville, South Carolina. ANA is a leading provider of fire sprinkler design, installation, inspection and repair services to commercial customers across South Carolina and into North Carolina and North Georgia. Jake Gilstrap, president of ANA, will continue to lead day-to-day operations. ANA represents another in a long line of exciting partnership transactions at Century Fire that have expanded our geographic footprint and enhanced our service capability. Looking forward for Century, Our quarter end backlog ticked up sequentially again, and we expect to finish the year with a similarly strong 10% plus revenue growth. Let me now hand off to Jeremy.

Thank you, Scott. Good morning, everyone. As you just heard, we're pleased with our consolidated third quarter results, particularly given the organic top line performance, which exceeded our expectations. For the quarter, We recorded revenues of $1.53 billion, up 6%, and adjusted EBITDA of $170 million, a 3% increase relative to the prior year period. Our consolidated EBITDA margin for the quarter was 11.1%, down modestly from last year's 11.4% level. Adjusted EPS during Q3 was $1.89, resulting in growth of 7% quarter over quarter. For the nine months year-to-date, our consolidated financial performance includes revenues of $4.3 billion, up 4% over the $4.1 billion in the prior year, adjusted EBITDA at $437 million, a 3% increase year-over-year, with our overall EBITDA margin at 10.2%, relatively in line with the 10.3% margin for the prior year period. and lastly, our adjusted EPS year-to-date is $4.57, reflecting 4% growth over the $4.39 reported for the same period last year. Our adjustments to operating earnings and GAAP EPS in providing adjusted EPD and adjusted EPS respectively are disclosed in this morning's earnings release and are consistent with our approach in prior periods. Turning now to our segment performance, I'll start at First Service Residential. In the third quarter, we generated revenues of $633 million, resulting in 5% growth over the prior year period. EBITDA was $71 million, a 7% increase over the third quarter of last year. Our current quarter EBITDA margin came in at 11.3% with the 30 basis points of margin expansion versus the prior year quarter, matching our year-to-date margin improvement as our operating teams further optimize labor costs and find incremental efficiencies. In the fourth quarter, we will see a continuation of these efforts and together with the seasonal benefit from exiting non-core aquatics operations earlier this year, we expect our first service residential division to show more significant margin expansion than the year-to-date performance. Looking next at our first service brands division, we generated revenues of $898 million during the current third quarter, up 7% over Q3 25. EBITDA for the division was $102 million matching the prior year level. Our margin of 11.3% compressed 80 basis points compared to the 12.1% margin in last year's third quarter. The lower margin was primarily reflected in our roofing operations, which was impacted by both the declining revenues that Scott noted, as well as gross margin compression due to competitive market pressures at certain key branches. In addition, the division profitability included a modest decline in home improvement margins, partially offset by an uptick in margins at restoration brands on the back of their strong revenue growth in the quarter. Now I'll provide a summary of our cash flow and capital deployment. During the third quarter, we generated almost $125 million in cash flow from operations prior to working capital, up 6% year-over-year in line with earnings growth. Our cash flow after accounting for working capital requirements was $84 million, with the decline quarter-over-quarter due to higher work and process inventories and accounts receivable in conjunction with increased activity and pipeline levels in our restoration brands. Year-to-date, we have generated more than $300 million in operating cash flow at a healthy 70% of EBITDA conversion rate. Capital expenditures during the quarter total $28 million and spending year-to-date sits at $88 million below our 2025 levels. We expect full-year CapEx to now come in at approximately $125 million, in line with last year and lower than our original 2026 budgeted CapEx of $140 million. With modest tuck-under opportunities tempering our acquisition spending at $25 million for the quarter, we focused our capital deployment efforts on buybacks of first-service shares. In Q3, we repurchased 2.2 million shares at a cost of a little more than $300 million under our normal course issuer bid. Year-to-date, since the beginning of the second quarter, we have now repurchased 4.1 million, or 9%, of our outstanding shares. This has contributed to stronger EPS growth in our Q3 results, and we believe that this investment will yield attractive returns over the long term. We currently have remaining capacity to buy back an additional 2.6 million shares under our existing normal course issuer bid, which expires in late August 2027. We will continue to judiciously balance our share repurchases after taking into account other factors, including our acquisition pipeline opportunities, the market valuation of our first service shares, and balance sheet, all with the intention of driving long-term value for our shareholders. and on the topic of our balance sheet, we ended Q3 with net debt of $1.4 billion resulting in leverage of 2.4 times net debt to trailing 12 months EBITDA and up sequentially from 1.8 times at the end of the previous second quarter largely due to our share buyback activity. This capital structure remains conservative and well within our comfort level given the strong free cash flow model of our enterprise. We also have approximately $500 million of total cash and credit facility capacity providing us with ample financial flexibility and liquidity. Wrapping up with our balance of your outlook, the aggregation of the brand by brand top line indicators Scott has provided will drive to similar mid single digit consolidated revenue growth for our upcoming fourth quarter as we delivered in the third quarter. This will also culminate in mid-single-digit growth in consolidated annual revenues for the full year and at the upper end of the range we expected at mid-year. On the EBITDA line for Q4, we expect consolidated margins to be slightly higher than prior year driven by first-service residential, as noted in my earlier comments. For the full year, we are maintaining our target provided at the end of Q2. of mid-single-digit consolidated annual EBITDA growth and margins relatively in line compared to prior year. During our February year-end earnings call, we will provide more details on our outlook for 2027. And that now concludes our prepared comments. Michelle, you may now open up the call to questions. Thank you.