FirstService Corp

TSX:FSV

Earnings Call Transcript 2021-Q4

[Operator]

Welcome to the fourth quarter and year-end investors conference call. Today's call is being recorded. Legal counsel requires us to advise the discussion scheduled to take place today may contain forward-looking statements. They may involve known and unknown risks and uncertainties. Actual results may materially differ 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 February 15, 2022. I would 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, Misty. Good morning, everyone. Thank you for joining us today, and welcome to our fourth quarter and year-end conference call. Let me open by saying that we are very pleased with how the year finished. We generated strong top line and EBITDA growth despite a very challenging operating environment, with continuing pandemic challenges, labor shortages and supply chain interruptions. The results are a direct reflection on our amazing teams who, throughout the pandemic almost 2 years now, have been unwavering in their commitment to deliver on our service promise. So I want to kick off the call with a big year-end shout-out to the operating teams across FirstService. Thank you for all you do. Now let me jump into the results with a high-level review, and Jeremy Rakusin, who's on the line with me, will follow with more detail. Total revenues for the quarter were up 11% over the prior year, with organic revenue growth at 3%, relative to a very strong Q4 in 2020. EBITDA was up 5%, reflecting a margin of 9.7% versus 10.3% in the prior year. Earnings per share were $1.21, up 19%. Jeremy will bridge the year-over-year movement in profitability in his comments. At FirstService Residential, revenues were up 12%, with organic growth at 5% and the balance primarily from the Q3 acquisition of the Condo Management division of Atlantic Pacific. The organic growth was solid at 5%, particularly considering the very strong comparative quarter from last year that included a surge in ancillary revenue, primarily transfer and disclosure income and project management-related services. We did not match the same level in our most recent quarter and the reduction also impacted our margins. Jeremy will speak to this in a minute. Otherwise, we are very pleased with the growth that primarily reflected new contract wins. Looking forward to 2022, we expect to show growth of 10% or above at FirstService Residential, split about 50-50 between acquisitions and organic growth. Given the consistency and recurring nature of the revenues, we should see these metrics approximately play out across each of the quarters. There will be some give and take as ancillary revenues fluctuate, but it is a good proxy for how we expect the year to play out. Moving on to FirstService Brands. Revenues for the quarter were up 9% with organic growth at 2% and the balance from tuck-under acquisitions over the last year, primarily within restoration and fire protection. The organic growth number reflects the weighted average growth from our restoration brands, our home service brands and Century Fire. Let me break down each, and I will start with restoration, which includes our results from FIRST ONSITE and Paul Davis. Revenues for the quarter were very strong and matched our results from Q4 of 2020. You will remember we benefited from Hurricane Laura and the Ira windstorms in the last half of 2020 and generated $60 million of related revenue in the fourth quarter. We knew it was a looming hill to climb to match the fourth quarter results, and it is a credit to our teams at FIRST ONSITE and Paul Davis that we were able to do it. We benefited from almost $40 million of revenue from Hurricane Ida during the quarter and outside of this event grew our business through national accounts and increased share of existing customers. Organic growth, excluding named weather events was mid-single digit. Including the weather events, organic growth was modestly down due to the tough comparison. During the quarter, we expanded our geographic coverage and enhanced our service capabilities with the completion of 5 restoration acquisitions, 4 within FIRST ONSITE, our commercial platform; and 1 within Paul Davis, our residential platform. At FIRST ONSITE, we added A-1 Flood Tech, serving the Washington, D.C. and Maryland markets; Bales Restoration, serving metropolitan Seattle; Emergency Fire & Water Restoration, serving Southern Wisconsin; and Kauai Restoration, the leading service provider on the island of Kauai, which solidifies our market-leading presence in Hawaii. At Paul Davis, we added Stat Services, a residential restoration company in Williamsburg, Virginia, adding a new market territory to the Paul Davis network of 330 locations across North America. With each tuck-under acquisition, we add talent, capability and new relationships, and importantly, we enhance our ability to respond to our national commercial accounts and insurance carriers. Looking forward in restoration, we are expecting another strong year in 2022. Although we are largely through our work related to Hurricane Ida, we entered the year with a robust backlog of jobs across North America, including many commercial and industrial large loss claims from floods and fires. Last year, we had a surge in claims and revenue from the Texas deep freeze, which drove record Q1 revenues for our restoration brands. Our goal this quarter is to meet or surpass the prior year quarter, and our backlog would support this. Moving now to our home service brands, including California Closets, CertaPro Painters, Floor Coverings International and Pillar To Post, as the group to home service brands were up 30% for the quarter, all organic. We were particularly pleased with the sequential growth of 18% relative to Q3. We struggled with capacity during Q2 and particularly during Q3 of 2021 due to the resurgence of COVID, tight labor market and supply chain issues. We had the backlog and it is a credit to our teams in home services that we were able to effectively increase our productivity by almost 20%, Q4 over Q3. Activity levels remain strong in home services, and we expect it to continue at least through Q2 and likely through the year. Like the rest of North America, our capacity was hit hard in January by Omicron, which will have some impact on Q1, but we are largely through it today and expect to finish the quarter strong and show 20%-plus growth for Q1. At Century Fire, we continue to show strong top line growth, up low double digit versus the prior year with high single-digit organic growth. The commercial construction market remains very strong, and Century enters 2022 with a record backlog and very strong bid activity. In addition, the National Account Service and Repair Program continues to build momentum. We expect to see double-digit organic growth this year at Century beginning in Q1. In late December, we were very excited to close on the acquisition of Chesapeake Sprinkler Company based in Maryland and serving the Baltimore and Washington, D.C. metropolitan markets. Chesapeake is a full service fire protection company and fulfills a key strategic goal for Century of expanding within the Mid-Atlantic region. We welcome Tim Anderson, CEO, and his entire team to the Century family. Before I call on Jeremy, I want to reiterate how pleased we are with our finish to the year and our performance during 2021. Organic growth for the full year was 10%, which well exceeds our average annual target and is a great reflection on the health of our brands and evidence of our ability to take market share. I want to again thank our operating teams for their continuing commitment and tenacity in a tough environment. Our culture and business model have enabled us to thrive the last 2 years and gives us confidence for 2022. Our markets across the board remain very active, and we expect another excellent year of growth. Over to you, Jeremy.

[Jeremy Alan Rakusin, Chief Financial Officer]

Great. Thank you, Scott, and good morning, everyone. As you've just heard, 2021 was another year of strong financial performance at FirstService. We closed out the year with a fourth quarter that included consolidated quarterly revenues of $857 million; adjusted EBITDA at $83.5 million; and adjusted EPS of $1.21; up 11%, 5% and 19%, respectively, versus last year's fourth quarter.For the full year, our businesses collectively delivered very robust growth which was particularly impressive in the face of macroeconomic challenges in the labor markets and the continuing effects of the pandemic. Our consolidated annual results included revenues of $3.25 billion, up 17%, including 10% overall organic growth. Adjusted EBITDA coming in at $327.4 million, a 15% increase, with a 10.1% margin in line with the 10.2% level in 2020; and adjusted EPS of $4.57, up 32%.Our adjustments to operating earnings and GAAP EPS to arrive at our adjusted EBITDA and adjusted EPS results, respectively, are disclosed in this morning's press release and are consistent with our approach in prior periods.I'll now walk through our segmented results for both the fourth quarter and full year within our 2 reporting divisions: FirstService Residential and FirstService Brands. At FirstService Residential, for the full year, revenues increased by 12% over 2020, including 8% organic growth, yielding a 13% increase in annual EBITDA. Our 9.9% EBITDA margin was in line with the 9.8% in the prior year, consistent with our messaging over the past couple of years that top line growth would be the primary driver of financial performance. Specifically in relation to the fourth quarter, revenues were $406 million, up 12% versus the prior year period, and the division reported EBITDA of $35.7 million, up 1% quarter-over-quarter. We saw our margin for the quarter come in at 8.8%, 100 basis points lower with 2 factors contributing to the decline. First, as you heard from Scott, our margin declined with reduced higher-margin ancillary services revenue versus Q4 2020 when we called out a significant surge in home resale-driven transfers and disclosures as well as project management job activity. By way of further relevant comparison, our 8.8% margin in the current fourth quarter lines up favorably to the 8.6% margin we delivered in Q4 2019, when we had a more normalized contribution from ancillary revenue.Second, as we initially commented on in the third quarter, we are seeing wage inflation in several areas of our business, which negatively impacted our Q4 margin. We expect wage pressures to also influence our margin in the upcoming first quarter but are confident we will work through these headwinds during the balance of the year as we go through contract renewals. In addition to the strong expected top line growth Scott referred to, we anticipate that our 2022 full year EBITDA margin at FirstService Residential will end up coming in roughly flat versus prior year.Now on to FirstService Brands. For the full year, performance was very strong with 23% total revenue growth, including 13% organic growth, which drove a 21% increase in EBITDA. Our segment EBITDA margin of 11.3% remained relatively flat with the prior year of 11.4%. Once again, as expected, the division performance was top line growth driven with balanced strength from our home improvement, restoration and fire protection businesses and a healthy contribution from recent tuck-under acquisitions.In the fourth quarter specifically, FirstService Brands recorded revenues of $451 million, a 9% increase, and EBITDA was up 10% to $53.3 million, with our margin at 11.8% level with the prior year. In the upcoming first quarter, we anticipate our Brands division margin to be down versus prior year for 2 reasons. First, Scott touched on the significant Texas freeze work we saw at FIRST ONSITE in the first quarter of last year, and with that event came higher-margin mitigation jobs. In the absence of any similar weather-driven event in the upcoming quarter, FIRST ONSITE's margin will be lower due to less favorable job mix.The second factor plays Omicron. Scott commented on the disruptive effect in pockets across our operations during January. And we are seeing this percolate into our labor costs in terms of paid time off, sick leave, overtime pay and related inefficiencies in getting jobs completed, whether it be in home improvement, fire protection or restoration. We would expect upcoming Q1 Brands EBITDA to be relatively in line with last year, with the broad-based strong top line growth across our service lines, offsetting the margin impact.I also wanted to briefly call out 2 other items impacting our consolidated profitability. First, our corporate costs came in at $17 million for the full year, a significant increase over 2020, when we took aggressive expense reduction measures across the board to address the uncertainties of COVID. Second, during the fourth quarter, we realized $7 million in other income related to a gain on sale from a building owned by FirstService Residential in Florida. On an after-tax basis, this divestiture contributed $0.12 per share to our adjusted earnings per share for the fourth quarter and for the year.I'll now provide some commentary on our cash flow and capital deployment. Cash flow from operations before working capital was strong, both for the fourth quarter, up 30%; and for the year, increasing by 28% over the prior year. Operating cash flow after working capital declined over both the quarter and the year, resulting from the comparison to the unusual positive working capital flows in 2020 when COVID-driven cash preservation was a key priority for us. 2021 full year operating cash flow after working capital came in at a relatively normalized level after excluding more than $30 million of nonrecurring payments for COVID-deferred payroll taxes from the prior year and for contingent value consideration from recent tuck-under acquisitions.We also had an exceptionally strong year on the acquisition front in 2021. We deployed more than $160 million of capital during the year, which included a surge of activity at year-end, resulting in almost half of that spending tally coming in the fourth quarter. We closed on 18 tuck-under transactions that collectively generate more than $200 million in revenue on an annualized basis. Because of our strong sprint to the year-end finish line, roughly 2/3 of that acquired annualized revenue will be incremental for 2022. We have continued to replenish our transaction pipeline, and as always, are actively looking at several opportunities across our businesses.We also incurred capital expenditures of $58 million in 2021, slightly lower than our most recent guidance of $60 million. We have typically targeted our annual CapEx at roughly 2% of revenues and 20% of EBITDA and have consistently come in at or below these levels in recent years. However, we expect our 2022 capital expenditures to be higher than these benchmarks at closer to $100 million for 3 reasons: reduced and deferred spending during the eye of the pandemic, particularly in 2020, requires some catch-up.We also have a couple of planned significant headquarter office moves within our operating businesses that have build-outs and leasehold improvements. And then finally, the recent surge of tuck-under acquisitions I just referred to, will require some additional growth capital. Excluding these items, our spending for the upcoming year would land at our normalized target level.Finally, a look now at our 2021 year-end balance sheet. We closed out the year with $487 million of net debt, resulting in our leverage at 1.4x net debt to adjusted EBITDA, level with 2020 year-end. Our liquidity is ample at $470 million, reflecting significant cash on hand and capacity under our revolving credit line. The collective cash flow generation of our businesses kept our balance sheet strong, even with the normalized resumption of working capital investments and an elevated level of acquisition capital spending.Consequently, our Board of Directors yesterday approved an 11% dividend increase to $0.81 per share annually in U.S. dollars, up from the prior $0.73. We have now hiked the annual dividend by 10%-plus for the past 7 consecutive years since our 2015 spin-off into a new public company, resulting in a doubling of our dividend over that time.Looking forward, Scott and I have provided some segment indications for the upcoming first quarter. On a consolidated basis for Q1, which is our seasonally weakest quarter, we expect strong double-digit revenue growth sufficient to offset a decline in margins so that our consolidated EBITDA should be flat to modestly up quarter-over-quarter.For the full 2022 year, we are highly confident in extending our lengthy track record and delivering once again on our target of 10%-plus consolidated revenue growth on the back of balanced organic and acquisition growth. In fact, we believe with the strong market fundamentals driving demand for our services, together with recent acquisitions that we have cemented, we will finish the upcoming year with total top line year-over-year growth in the low teens range.Margins are expected to incrementally improve versus prior year as we move from Q1 through the remaining quarters. And we expect that by year-end, our annual margins will be relatively in line with 2021, allowing us to deliver double-digit consolidated EBITDA growth for the year.This concludes the prepared comments section. Operator, would you please open up the call to questions. Thank you.

[Operator]

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

[George Doumet, Analyst]

Just one short question, Jeremy. On the 2022 guide of low teens for top line. Just wondering, does that include future acquisitions or just the recently announced ones? And second question, just generally speaking, how much of that is pricing?

[Jeremy Alan Rakusin, Chief Financial Officer]

On your first question, it only includes acquisitions that we have already closed and that roll incrementally into '22, no unidentified acquisitions.And on the second question, if pricing is more minimal than volume in all of our businesses, we've talked about the robust demand for our services, it's largely volume driven on both sides of our business and pricing is incremental, really, to cover off cost inflation.

[George Doumet, Analyst]

Okay. That's helpful. And just looking at the Residential segment, their pricing usually takes some time, I guess it's based on the contract renewal. So any commentary there in terms of maybe how far behind we are in terms of catch up when it comes to those contracts and today's labor cost picture?

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

Well, George, 1/3 of our revenue is cost plus contracts. So that's clean and direct. And then the balance relates to fixed price contracts, and I think that's what you're talking about. And as those contracts come up, so our first opportunity really would have been this earlier in January. And as those contracts come up, we engage with our customers around the need to match wage increases, and this always leads to a healthy discussion.We certainly made some headway, not all our contracts come up in January, but a number of them do. We made great strides, and we're confident that really by the end of the year, we'll have recouped much of the cost increases that we've been faced with. And as you heard in our prepared comments, we expect to show strong growth this year while holding our margins. So we certainly believe that that's the case.

[George Doumet, Analyst]

And just a quick follow-up maybe on the Resi segment. Any general comments on competition, kind of the smaller, maybe lower price point competitors out there, maybe what's going on? And can you maybe give a little bit of color on retention rates, how those are trending?

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

Sure. I've said many times before in this call, our competition is smaller private companies, and they compete on price. So there's always price tension in this environment. And there certainly will be this year. And that really is one of the principal reasons why it will take us the year to work our cost increases through. But it's no different than it's always been. Our competition competes with us on price, and we have to continually prove our value. And so we've been successful at that for years and will be successful this year. Our retention rates, we expect this year to be right in that same sort of mid-90s range, 94%, 95%.

[Operator]

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

[Stephen MacLeod, Analyst]

I just had a couple of questions. I just wanted to circle around specifically on the wage environment -- or sorry, the labor environment in the U.S. And I'm just curious if you can give just a bit of color around how labor shortages may have impacted Q4 and sort of how you're addressing that as you roll into this current fiscal year.

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

Well, the labor shortage impacted us. It's really impacted us for the last 18 months. I don't know if there was anything in particular in Q4, except that in the home service brands, I noted that we did dial up our productivity significantly. And so we were -- we did start to have more success recruiting over the last 4 or 5 months on the front line. And also, we're seeing our turnover return to historical levels, and it certainly had popped earlier in the year, in '21.So we're slowly filling open positions and adding to capacity, and we are seeing the labor market loosen modestly. It's still tough. And we still have many, many open positions across the company, but we're making incremental headway.

[Stephen MacLeod, Analyst]

Okay. That's great. And then, Scott, I'm not sure if you specifically addressed this in your prepared remarks, you may have touched on it, but I was just wondering if you could give a little bit of color around the year-over-year differences in storm activity and how that might have impacted specifically revenues in Q4 of this year versus Q4 of last year.

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

We were down in terms of sort of major storm events. We were down over $20 million. And so our total revenues matched sort of the record level we achieved last Q4. But we were down modestly on an organic basis. Ex the storms, we grew organically mid-single digit. Does that answer your question?

[Stephen MacLeod, Analyst]

Yes. Yes. That's great. And then just finally, on the resi side, where are we with respect to amenity open -- amenity reopenings? I imagine maybe with the Omicron surge in late Q4 and early Q1, did that impact or that delay some of the reopenings that you would have otherwise seen?

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

Well, Q4 and this quarter, Q1, are both nonseasonal. So many of the facilities -- amenity facilities we manage are not open in any event. We did have some reopenings in the fourth quarter, and they did have a modest impact on our growth. I think we'll see it more in Q2. We expect to be fully open and operational in Q2 of this year. Now we were last year, largely open, probably 85%, 90%, but we'll see some boost in Q2.

[Operator]

[Operator Instructions] Your next question is from the line of Stephen Sheldon with William Blair.

[Stephen Hardy Sheldon, Analyst]

On restoration, I guess, as you continue to expand more into larger national accounts, can you kind of remind us what that could mean in terms of more visibility and, I guess, stability in that business? I know there's potential volatility in restorations due to weather events, but does that change at all as you continue to win larger accounts where you maybe become less reliant on bigger events?

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

I don't know that it does really change the model, Stephen. You've heard us say in the past that FIRST ONSITE has historically generated 15% to 20% of its annual revenue from area-wide events or named storms. We were within that range in '21. We were within that range in 2020. We were well below it in 2019. As we add national accounts, they will have properties within the path of the storm. And so I think that the national accounts enables us to grow organically year in and year out. But our dollar value from each storm would likewise grow and see us in that 15% to 20% range still.So I don't -- I think it will always be a component for us. We do try to manage it within that level, which we see as a healthy level. We want to continue to drive our day-to-day business outside of these events every year as well.

[Stephen Hardy Sheldon, Analyst]

Got it. That's helpful. And then just on the M&A side, curious if you've seen any changes in M&A valuation expectations from sellers out there, especially with some pullback, I guess, in public market valuations? I know you guys are really disciplined in what you pay, but have you seen any change in expectations and maybe that creating a more favorable M&A environment for you guys to deploy capital?

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

I mean, as you know, most of our tuck-unders are small businesses, and we have been very effective at managing the valuations around those deals in our historical sort of mid-single-digit level. As the size increases, we've seen the valuations really pop. I can't say that we've seen the markets influence those valuations yet, but it's still early. I would think that the interest rate environment and if the market continues at its sort of current levels that we will see a more conducive valuation scenario.

[Operator]

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

[Scott Douglas Fromson]

Question on the home services brands. Do you see rising materials and labor costs, I guess, along with rising interest rates, putting a cramp on consumer demand? Or is the backlog and outlook strong enough to carry you into next year?

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

We believe the backlog and outlook will continue to be strong through this year, Scott. None of our metrics show any pause, and we'll provide updates quarter-to-quarter through the year if we do see any change.

[Scott Douglas Fromson]

Okay. And on the residential management services, are you seeing increased competition from mid-market private equity? Or are your connections and relationships enough to sort of preempt bidding?

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

We've seen private equity enter every one of our markets over the last year. And certainly, we do see it at -- in residential property management as well. It hasn't -- there's always some competition for the acquisitions. I don't think it's dramatically changed the environment. But certainly, there's increased competition from private equity.

[Operator]

[Operator Instructions] Your next question is from the line of Daryl Young with TD Securities.

[Daryl Young, Mining Research Associate]

First question is around Century Fire and specifically the Chesapeake acquisition. Should we think of this very similar to restoration, where you're going to continue to build a national footprint from -- for the fire platform and the sell-through to national accounts?

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

I would say that the path for restoration we are looking today across North America to fill out our footprint, at Century Fire, it's more targeted to the Southeast, and Florida and Texas and the Carolinas in particular. And then we still have work to do within that footprint. And then from -- and you saw with Chesapeake, the Mid-Atlantic also has been a priority for us. We still have opportunity within those 4 areas and then we'll look beyond it from there. I don't expect that to happen this year.

[Daryl Young, Mining Research Associate]

Okay. And then in your opening remarks, I think you made reference to on the restoration platform broadening both your national account and insurance relationships. Was the reference to insurance relationships more on the resi side?And I guess following on that, has there been any -- as you've consolidated the commercial platform, has there been any opportunities you've found or seen with the insurance side to maybe exploit an opportunity there?

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

Certainly, the insurance carriers and national relationships are important for both FIRST ONSITE and Paul Davis, although they are certainly more important for Paul Davis on the residential side. And Paul Davis is adding new national accounts and have this year. Sorry, what was the back half of your question?

[Daryl Young, Mining Research Associate]

Just whether there was any opportunities to drive revenue growth related to maybe a unique insurance relationship for commercial customers or an angle there that...

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

Well, I think the angle is that Paul Davis and FIRST ONSITE have partnered and presented to, I would say, a handful of insurance carriers, a national commercial residential capability that's really unmatched in the industry. And so we're making some headway on that front. We've got a couple of customers as a result of that. And it's certainly something we'll be focused on more in the coming years.

[Daryl Young, Mining Research Associate]

Okay. Great. And then just one last one on the resi side. With all the investment that seems to be going in with pension funds looking for single-family rental investments, is there an opportunity there for FirstService Residential to be a property manager or a partner to some of these pension fund investments that are going into developing those single-family rental communities?

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

We've looked at it. It is a different business model. And it's -- the economics are quite different, and it's not something we're pursuing right now, and I don't really see it in the coming years.

[Operator]

[Operator Instructions] There are no further questions at this time.

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

Thank you, Misty, and thank you, everyone, for joining us today. We look forward to a big upcoming year and kicking it off with our Q1 call at the end of April. Thank you.

[Operator]

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