FirstService Corp

TSX:FSV

Earnings Call Transcript 2021-Q3

[Operator]

Welcome to the third quarter investors conference call. Today's call 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 Administrators 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 Tuesday, October 2021. I would now like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir.

[D. Scott Patterson, President, CEO & Non]

Thank you, Phyllis. Good morning, everyone, and thank you for joining our third quarter conference call. Jeremy Rakusin, CFO, is on the line with me today. I will start us off with a summary of our performance, growth drivers and highlights for the quarter, and Jeremy will follow with a more detailed look at the financial results. Let me start by saying we are very pleased with the results for the quarter, which reflect continued strong organic growth despite a very tough labor environment, lingering COVID challenges and supply chain obstacles. Jeremy and I together will touch on these challenges in more detail.Total revenues for the quarter were up 14% over the prior year with organic revenue growth at 8%. We again generated year-over-year organic growth across every platform with particular strength at FirstService Residential, Century Fire and our Home Improvement brand. EBITDA for the quarter was $94 million, up 6% versus 2020, reflecting a margin of 11.1% compared to 12% in the prior year. Earnings per share were $1.50 compared to $1.19 last year. Jeremy will walk you through the year-over-year movement in the profitability metrics in his prepared comments.At FirstService Residential, revenues were up 13%, with organic growth at 8%. Again, this quarter, a strong contributor to year-over-year organic growth was the reopening of seasonal pools and fitness centers in the Northeast U.S. and Canada. The reopening began in the second quarter. And by the end of the third quarter, about 90% of our managed facilities were open and staffed. Outside of amenity reopening, we generated mid-single-digit organic growth in line with our long-term expectations for this division. A highlight of FirstService Residential during the quarter was the acquisition of the Condo Management division of Atlantic Pacific, a leading high-rise management company in South Florida. Atlantic Pacific has a strong and experienced team that manages a marquee portfolio of about 100 communities. The acquisition extends our significant leadership position in Florida, and importantly, strengthens our operating team and deepens our talent pool with the addition of 900 associates. This is a great add for us. We've long admired the team and the portfolio at Atlantic Pacific. Looking to the fourth quarter at FirstService Residential, we expect to show high single-digit revenue growth, benefiting from the recent acquisition and amenity reopenings relative to the prior year. Moving on to FirstService Brands. Revenues for the quarter were up by 16%, 9% organically. Our Home Improvement segment was up by 15%, all organic. Sequentially, relative to Q2, we were down slightly. The Home Improvement market continues to be strong, and we continue to generate record levels of leads and booking. Our challenge in these brands has been our capacity and ability to produce the work. The resurgence of COVID during the quarter impacted many of our branches, compounding the capacity issue we've been dealing with all year due to the tight labor market. In addition, we were confronted with numerous supply chain issues during the quarter which impacted our ability to complete work. All of the Home Improvement brands were faced with scheduling issues due to shipping delays and material shortages. So we were up 15% versus the prior year and 14% versus 2009, which reflects impressive growth, but we had the opportunity to do much better. The good news is that most of the deferred work remains in our pipeline. We're communicating extensively with our customers, and rescheduling where we can for this quarter or for early 2022.Through alternative sourcing and other measures, we believe the supply chain issues are largely behind us, and we expect to show improved growth in the fourth quarter for our Home Improvement brands, north of 20%, which is where we expected to be this past quarter. Our restoration brands, FIRST ONSITE and Paul Davis, together, were up over 10% relative to Q3 of last year with mid-single-digit organic growth. This is a strong result, and we are thrilled to have generated organic growth in restoration against a tough comparative quarter for us last year that included about $45 million in revenues from the Iowa wind storms and Hurricane Laura.We benefited this past quarter again from the Texas deep freeze, where we closed out our final jobs, and then Hurricane Ida, which impacted Louisiana, New Jersey and New York in late August, early September. We generated about $30 million during the quarter from these events. Excluding the storms, organic growth was low double digit, which is a positive reflection on our momentum in growing day-to-day business by signing new customers and gaining incremental share of existing accounts. We were excited during the quarter to expand our footprint at FIRST ONSITE, with the acquisitions of complete DKI in the Florida Panhandle region, more restoration in Central Indiana and Insurance Restoration Specialists, serving New Jersey and Metro Philadelphia. These acquisitions are in areas that are regularly impacted by weather events. Each is an important strategic addition that enhances our ability to respond to our national commercial accounts and each brings on strong leadership and talent that we are excited and proud to have on our team. We continue to carry a solid backlog at restoration brands and expect that to drive a strong fourth quarter that will get close to our fourth quarter from 2020, which was outsized with $60 million of work from the 2020 weather event.Century Fire, again, grew by double digits this quarter, buoyed by a solid commercial construction market and strong momentum with our National Account Service and Repair program. Backlogs and bid activity remains strong, and we expect to see near double-digit year-over-year growth in Q4. Before I hand off to Jeremy, I want to emphasize how pleased we are with the continued momentum in organic growth, 8% on a consolidated basis with strong organic growth at each service line. It's a great reflection on our teams and their ability to win in the market day to day.Over to you, Jeremy.

[Jeremy Alan Rakusin, Chief Financial Officer]

Thank you, Scott. Good morning, everyone. Our third quarter financial performance, as you just heard, was driven by strong organic and overall revenue growth, and very balanced across both of our divisions, FirstService Residential and FirstService Brands. I will provide segmented commentary in just a moment, but first, a consolidated recap. For the third quarter, FirstService total revenues came in at $849 million, adjusted EBITDA at $94.2 million and adjusted EPS at $1.50, up 14%, 6% and 26%, respectively. On a year-to-date basis, we have delivered strong consolidated results across the board, both in terms of top line and profitability, and with significant contributions from all of our operations within both divisions. Financial highlights for the 9 months year-to-date include revenues of $2.39 billion, up from $2 billion even in the prior year period, an increase of 20%, which includes 13% organic growth. Adjusted EBITDA also increased 20%, up to $243.8 million compared to the $203.8 million in the prior third quarter, with our overall EBITDA margin remaining in line at 10.2%. And lastly, our adjusted EPS year-to-date currently sits at $3.36, up 38% over the $2.44 per share reported for the same period last 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 elaborate on our third quarter segmented results. Within our FirstService Residential division, we reported revenues of $423.1 million, a 13% increase over Q3 2020. This strong top line performance drove EBITDA of $45.1 million, an 8% increase year-over-year. At the same time, we did see our EBITDA margin moderate by 50 basis points to come in at 10.7% for the quarter. This margin decline resulted from 2 factors. First, we have experienced a general increase in wages across the division. We can recoup some of this through cost plus contracts, but much of it will be subject to a lag in getting price increases through contract renewals.The second factor contributing to our margin for the quarter was the increased labor coming on stream to support our amenity facility reopenings during the quarter, which yielded a typical sub-10% fully burdened margin that averaged down the overall division margin. Now to our FirstService Brands division. The division generated revenues of $426.4 million during the current third quarter, up 16% versus the prior year period, and supported by both the strong organic growth drivers that Scott commented on as well as contribution from recent tuck-under acquisitions. During the current third quarter, our brands EBITDA came in at $53 million, a 9% increase year-over-year with the resulting 12.4% margin, down compared to 13.3% in last year's Q3. The margin decline was primarily attributable to supply chain constraints affecting the pricing of our raw material input at both our Home Improvement brands and Century Fire Protection, and increased labor costs also related to those supply chain bottlenecks, which caused scheduling issues and inefficiencies within our frontline teams in completing jobs. Reverting now back to our consolidated results, just a couple more comments to note on our overall profitability. First, we incurred a $2 million year-over-year increase in corporate costs during the third quarter that impacted our overall EBITDA and operating earnings, reflecting a normalization of compensation expenses compared to the COVID-driven cost reductions in the prior year quarter. Our total corporate costs of $3.9 million during the quarter is consistent with my comments in Q2 regarding reversion back to an annualized corporate cost run rate in the mid-teens millions of dollars.Second, we realized a $12.5 million gain in other income related to the sale of our small noncore legacy test control business, based in Florida, which was part of our FirstService Residential division. On an after-tax basis, this divestiture contributed $0.21 to our adjusted earnings per share of $1.50 for the third quarter. In terms of capital deployment during the third quarter, we saw strong activity with our tuck-under acquisition program. We invested $46 million during the period on 4 transactions that will bring approximately $75 million in incremental annualized revenues. Our deal pipeline remains quite active as our teams continue to be engaged in varying stages of dialogue with prospective targets. We also incurred $13 million in capital expenditures during the third quarter. And with year-to-date CapEx sitting at $42 million, we are on track with our $60 million full year target. Cash flow was strong during the quarter, allowing us to internally fund a good portion of these capital requirements, while at the same time incrementally strengthening our balance sheet further. Before working capital changes, cash flow from operations was $72 million, up in line with EBITDA growth over the prior year quarter. We realized almost $30 million of operating cash flow after working capital investments required to support both the across the board, strong organic growth of our existing businesses and the recent tuck-under acquisitions. Our balance sheet at quarter end included net debt of $425 million, resulting in our leverage coming in at 1.2x net debt to trailing 12-month EBITDA, down sequentially from our prior second quarter. Our liquidity and debt capacity also remained strong with approximately $535 million of total cash on hand and undrawn availability under our credit facility. To close off our prepared comments with an outlook, you have already heard Scott's top line indicators for the fourth quarter for each of our businesses. On a consolidated basis, we, therefore, expect our revenue growth in Q4 to be in the high single digits. Our consolidated EBITDA margin in the fourth quarter will see some year-over-year decline largely due to similar labor cost-driven margin dilution at FirstService Residential as we saw in the third quarter. On a full year basis, we anticipate our consolidated EBITDA margin to come in at around 10%, relatively in line with 2020 and consistent with our expectations that we communicated on our second quarter earnings call. In terms of our 2022 outlook, we will provide some high-level color during our 2021 year-end earnings call scheduled for early February. That concludes our prepared comments. Phyllis, you can now open up the call to questions. Thank you.

[Operator]

[Operator Instructions]. Your first question comes from the line of George Doumet with Scotiabank.

[George Doumet, Analyst]

I did want to talk about the low double-digit organic growth in restoration, excluding storm activity. That's a big number, I think, Scott, you alluded to that earlier. So can you give us a little bit of color on where that's coming from? And just wondering -- I think the baseline for that previously was mid-single digits to high-single digits, but just wondering how we should think about kind of that strength on a go-forward basis?

[D. Scott Patterson, President, CEO & Non]

Sure, George. I mean, I think it's really executing on the growth plan and, in particular, leveraging our branch network to better position ourselves with national accounts. Specifically, we're investing aggressively in our sales force. We -- in each of the quarters this year, we've recruited high-level sales talent that have a number of established relationships. We're also building out our sales verticals, and particularly focusing on high end, more complex customers, where we can differentiate ourselves, and examples would be health care and defense contractors, chemical facilities where our teams need specialist training and certification, and it's enabled us to really build our verticals. And at the same time -- that's on a national basis. At the same time, our branch network is having real success, winning local and regional business. So it's -- we are focused on building our day-to-day business. Relative to the industry, our dependence on weather events, cat storms is lower. And strategically, that's a goal for us.

[George Doumet, Analyst]

Okay. And staying on this vertical, but maybe switching gears to the M&A part of it. Is there ultimately a strategy or a game plan in terms of how big we want to get in this segment? And which markets you'd like to have maybe a top presence in?

[D. Scott Patterson, President, CEO & Non]

Well, I mean, certainly, there is -- this is a $60 billion market. And we're #2 on the commercial side, #2 on the residential side, with a very modest market share. So we can be multiples in terms of -- relative to our current size. And strategically, all the major markets, we need to have a very strong presence in all the major markets and be able to serve national customers across North America, and we continue to drive towards that.

[George Doumet, Analyst]

Okay. Just one last one, if I may. The residential segment, of the 70% of that business that's not cost plus, can you maybe explain how we adjust pricing and wages? I think, Jeremy, you did call out a lot talk to this. Can you talk a little bit about that? And maybe how much of this quarter's 8% organic growth was pricing versus volume? Should we expect those trends to continue?

[D. Scott Patterson, President, CEO & Non]

Jeremy?

[Jeremy Alan Rakusin, Chief Financial Officer]

Yes. Sure. So just the back end of your question, George, most of it's volume. I mean, in this industry, pricing is very modest. It's historically been 1%, 1.5%-ish, and that's no different. So in terms of dealing with the non-pass-through cost-plus components, we believe that we're going to capture some of that wage inflation back through price increases as contracts renew, and those can be 1-year or multiyear contract, and then continuing to work on operating efficiencies that have always been in progress over the last 5, 6 years. And the teams are always working to extract some of those. So those 2 factors in combination will allow us to, again, recoup any of the margin impact due to wage inflation.

[Operator]

Your next question comes from the line of Scott Fromson with CIBC.

[Scott Douglas Fromson]

In the Home Improvement brands, what are you seeing in terms of average ticket size? So kind of adjusted for recent inflation, if you can, or maybe another way to put it is, are you seeing a change in demographics for your business?

[D. Scott Patterson, President, CEO & Non]

I'm just digesting, Scott. In terms of a change in demographics, I think, certainly, millennials -- we're focusing much more on the younger generations as they become homeowners and buyers of our services. I'm not sure I understood the first part of your question.

[Scott Douglas Fromson]

Well, just, I guess it relates to organic growth, but basically on a per-call basis, are you seeing that revenue per call go up? Or is that a metric to even track?

[D. Scott Patterson, President, CEO & Non]

No. It is. It certainly average job size is something we track, and we're seeing increases at each of our businesses. Some of that is price. We are more nimble in terms of increasing our price and responding to cost increases. In the Home Improvement brands, there's still a lag because we're booked out 2 to 3 months. But certainly, we -- 15% growth this quarter, expecting 20% next quarter. Most of that is volume, but there is some price. And then at the same time, we are seeing consumers take on and book larger jobs, more ambitious renovation work. And so we're seeing that also.

[Scott Douglas Fromson]

That's exactly what I was looking for. And just on the residential business, you said 90% of residential facilities or amenities, I guess, are open. What's the outlook for the remaining 10%?

[D. Scott Patterson, President, CEO & Non]

Well, many of them that aren't open are seasonal, and so it will be 2022.

[Scott Douglas Fromson]

Okay. So you expect the full resumption?

[D. Scott Patterson, President, CEO & Non]

We do. We do.

[Operator]

Your next question comes from the line of Frederic Bastien with Raymond James.

[Frederic Bastien, MD & Equity Research Analyst]

Scott, you've been pretty upfront with us about your expectations for organic growth to return to the mid-single-digit rates for both FSR and FSP at some point? Certainly, it looks like we're going to be well above that in Q4. But how much visibility do you have beyond that, and heading into 2020?

[D. Scott Patterson, President, CEO & Non]

Well, I think FirstService Residential, we expect that to settle back to that low to mid-single-digit organic growth. And then the brands, there's some moving parts. Home Improvement, everything that we see points to continued strength through 2022. So that will be a tailwind for us, we expect. Century Fire continues to be strong. And then restoration, we've just got the very, very tough comps going into '22 that we're going to be dealing with. So I mean I feel good about the organic growth across the board, honestly. I think, '22 and brands, it really depends on restoration.

[Frederic Bastien, MD & Equity Research Analyst]

Okay. Cool. Now if we just look at restoration and also, I guess, Century Fire, you've done a number of tuck-in acquisitions. And just wondering where your footprint resides now with both sort of businesses, and whether there is still some white space areas that you're looking at right now for growth?

[D. Scott Patterson, President, CEO & Non]

We have a great deal of white space and opportunity in both of these businesses. Century Fire is Southeast U.S. We are -- still have white space in Texas, parts of Florida. And then we have through acquisitions this year moved into the Mid-Atlantic, and there's lots of opportunities for us in the Mid-Atlantic region. Restoration, similarly, we are -- our footprint needs to -- we need to build it out in the Western U.S., and there continues to be opportunity for us in the South, not necessarily in Florida, but in the South Atlantic area where there is higher storm activity. So again, Texas and the Southeast, in general.

[Frederic Bastien, MD & Equity Research Analyst]

Great, Scott. Next one for Jeremy. The rate of earnings that's attributable to the noncontrolling [ addresses ] is pretty hard for us to predict a model, but it seemed to have come a little lower than -- I mean at least it came in lower than we had forecast. Is there anything unusual in the current quarter? And can you give us a sense of where that rate percentage will end up in the year?

[Jeremy Alan Rakusin, Chief Financial Officer]

Yes, Frederic. Quarter-to-quarter, it's hard, as you said, to forecast for you guys, it depends on the mix of our 100% owned businesses versus the partner businesses. But on a long-term or annual basis, I'd say 8% minority interest share of earnings is a good number. .

[Operator]

Your next question comes from the line of Stephen MacLeod with BMO Capital Markets.

[Stephen MacLeod, Analyst]

Just had a couple of questions here on the labor inflation, specifically. I assume -- is it safe to assume that labor inflation and labor availability, would have impacted you more on the top line in brands versus residential? And if that's the case, is there any way to quantify sort of how much more you were held back because of some of the labor shortages?

[D. Scott Patterson, President, CEO & Non]

Stephen, it impacted us in every business. I think that you're right, it was probably -- we built it more on the brand side, Home Improvement, I think, to a certain extent, in restoration also. I mean we continue to have an unprecedented number of open position. But I'm not sure we can quantify it. We expected the Home Improvement brands to be up over 20%. We were at 15%, and we'll make it up the next couple of quarters as we get to that work. But tough to quantify, so many moving parts.

[Stephen MacLeod, Analyst]

Okay. Yes, that's understandable. And then maybe when you think about labor inflation on the residential side. Presumably with your scale, you're well positioned to manage through these kinds of headwinds. Do you see an opportunity for accelerated new contract wins, maybe as smaller competitors or contracts come up for renewal, and they can't find the staffing or have the staffing to renew at a reasonable rate. Is that something we could potentially see heading into 2022?

[D. Scott Patterson, President, CEO & Non]

We're not expecting that. The -- one of the issues is that the competing with these smaller private companies, they compete with us on price. And so they -- that's their approach to these accounts, and they're comfortable earning a lower margin, significantly lower in some cases. So I don't see the opportunity on the organic growth side necessarily, no.

[Operator]

Your next question comes from the line of Stephen Sheldon with William Blair.

[Stephen Hardy Sheldon, Analyst]

Yes. First, in the residential segment, another really strong quarter of organic growth there. Just curious -- if looking at the segment by property type, if you're seeing any different growth trends, especially between mid- and high-rise condos versus other property types? And would you expect any mix shift in that portfolio as we think about the next year, such as a revenue shift more towards the mid- and high-rise condos, as I think just looking back over the last few years, the mix has been. It seemed to be pretty stable there. Just would love any color?

[D. Scott Patterson, President, CEO & Non]

Yes. I think the -- if there's a change in mix, Stephen, it's very subtle. But we are winning larger high-rise opportunities and large master plan communities, lifestyle, new development. It requires a more complex service offering, including event planning, lifestyle and really a breadth of services that not many of our competitors have. So there is a subtle shift towards that type of property in our portfolio.

[Stephen Hardy Sheldon, Analyst]

Got it. That's helpful. And then just wanted to ask on that going back to kind of the labor pressures across the organization, and maybe the month-to-month cadence there. Did that pressure become even more pronounced throughout the quarter? And would you expect this to become an even bigger headwind to growth as you think about the rest of this year and into 2022?

[D. Scott Patterson, President, CEO & Non]

It definitely intensified through the quarter and has over -- I guess I'm going to say the last 5 or 5 or 6 months. The competition for talent is fierce. And for FirstService Residential, it comes really from hospitality and the reopening. On the brand side, it comes from construction and other home improvement companies. But what we've seen is we've seen our turnover increase at every business. And I think we're making the decision internally to pay the people we know, the people we trust, the people that carry our values because we're seeing clearly that we'll need to pay that higher amount for someone new. And so I think we're maybe moving perhaps a little bit in front of others. And we'll see it continue into the fourth quarter, but we'll also be -- as we continue to be making moves on the price side as contracts come up. And there are contracts do come up for renewal at the end of the year. So we're not going to be able, as Jeremy said, there's going to be a lag. We have multiyear contracts. We're not getting it back immediately. But we will work our way through this.

[Operator]

[Operator Instructions] Your next question comes from the line of Matt Logan with RBC Capital Markets.

[Matt Logan, Analyst]

Scott, you provided some really good commentary on the restoration business earlier on the call. And I know you don't have a formal 5-year plan, but would you mind taking a few minutes to talk about how you see the business evolving through 2025? Any color on things like expected growth rates, the overall mix by division or -- and maybe some updates for your other branded businesses would be appreciated.

[D. Scott Patterson, President, CEO & Non]

It's -- like all our businesses, Matt, we are an organic growth company first, and that's our focus. So we're doing all the hard work necessary to drive that over the long term. And aspirationally, we want FIRST ONSITE and Paul Davis to be iconic brands. And we're doing more of that foundational work at FIRST ONSITE right now with the operating platform and investing in it, recruiting to drive it. I talked about recruiting sales teams and building out our branch network. And this is all around long-term organic growth. And for each of our businesses, we target mid-single digit on average over time. And then we look to enhance that through acquisition now. There's very active consolidation and restoration right now. So you've seen us be active, we will continue that, but it's not going to continue. The acquisitions won't continue at the same pace, and we'll be driving the organic growth. So it's -- in terms of getting out to '25, we're looking beyond that. And we will be a leader in this business on the commercial side, aspirationally on the residential side, too. But it's over the long term. I don't know if there's anything else you want me to fill in around that, but let me pause there.

[Matt Logan, Analyst]

Do you think there's any white space in businesses outside of kind of where you're at today? Property-related services that aren't restoration or closets or home inspections or things that you see opportunity might be a potential vertical?

[D. Scott Patterson, President, CEO & Non]

Yes. There are opportunities that are tangential, I would say. Tangential to restoration perhaps, tangential to FirstService Residential. And you think about storm damage and weather events and restoration in general, and everything that goes into that. We provide some of those services, and there's opportunities to increase the breadth of services that we provide. FirstService Residential, you think about all of the staff and services provided to building and where we can expand. And so we're always thinking about those things. I don't know that it's necessarily a new vertical as much as expanding the services that we provide to our existing customers.

[Matt Logan, Analyst]

Okay. And maybe just one housekeeping item for me, if you don't mind, changing gears. In terms of the storm revenue this quarter, it was about $30 million, if I have my numbers right. What was that on an EBITDA basis?

[Jeremy Alan Rakusin, Chief Financial Officer]

Would have been pretty similar as typical in some of the other quarters, Matt, in around 10%, which is how FIRST ONSITE has performed over the last 6-plus quarters.

[Operator]

And at this time, there are no further questions.

[D. Scott Patterson, President, CEO & Non]

Thank you, Phyllis. And thank you, everyone, for joining. We look forward to our year-end call in February.

[Operator]

Ladies and gentlemen, this concludes the third quarter investors conference call. Thank you for your participation, and have a nice day.