Q3 2021 FirstService Corp Earnings Call
Okay.
Welcome to the third quarter investors conference call.
<unk> 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 statement 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 'twenty six 2021.
I would now like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead Sir.
Thank you Phil.
Good morning, everyone and thank you for joining our third quarter conference call.
Jeremy Rakuten 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-19 challenges and supply chain obstacles, Jeremy 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 first service residential century fire and our home improvement brands.
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.
First service 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 at first service residential during the quarter was the acquisition of the condo management Division of Atlanta 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 community.
The acquisition extends our significant leadership position in Florida and importantly.
<unk>, 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 first service residential we expect to show high single digit revenue growth.
Benefiting from the recent acquisition and amenity reopening is relative to the prior year.
Moving on to first service 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 bookings.
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, we're 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 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 were 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 expect it to be this past quarter.
Our restoration brands first on site 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.
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.
Okay.
We benefited this past quarter again from the Texas deep freeze, where we closed our 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 digits.
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 on site with.
With the acquisitions of complete DKNY, and 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 a strong leadership and talent that we are excited and proud to have on our team.
Okay.
We continue to carry a solid backlog at our restoration brands and.
And expect that to drive a strong fourth quarter that will get close to our fourth quarter from 2020.
Which was outsized.
$60 million of work from the to 2020 weather events.
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 in 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 of 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.
Thank you Scott good morning, everyone.
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 first service residential and first service brands.
I will provide segmented commentary in just a moment, but first the consolidated recap.
The third quarter first service total revenues came in at $849 million.
Adjusted EBITDA at $94 2 million and adjusted EPS of $1 50.
14%, 6% and 26% respectively.
On a year to date basis, we have delivered strong consolidated results across the board both in terms of topline and profitability and with significant contributions from all of our operations within both divisions.
Financial highlights for the nine months year to date include.
Revenues of $2 $3 9 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.
Third to the $203 $8 million in the prior year 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.
Adjustments to operating earnings and GAAP, EPS, and providing adjusted EBITDA and adjusted EPS, respectively are disclosed in this morning's earnings release and are consistent with our approach and prior periods.
I'll now elaborate on our third quarter segmented results.
Within our first service 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.
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 two factors.
First we have experienced and generally increase in wages across the division.
We can recoup some of this through cost plus contract.
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 reopening during the quarter.
Which yielded a typical.
Up 10% fully burdened margin that average down the overall division margin.
Now to our first service 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 brand 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 cost of $3 9 million during the quarter.
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 non core legacy pest control business based in Florida.
Which was part of our first service residential division.
On an after tax basis.
Divestiture contributed 21.
Two 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 four transactions that will bring approximately $75 million and.
An incremental annualized revenues.
Our deal pipeline remains quite active as our teams continue to be engaged in various 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.
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.
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 a leverage coming in at one two times net debt to trailing 12 months EBITDA.
Down sequentially from our prior second quarter.
Our liquidity and debt capacity also remains strong with approximately $535 million.
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 topline 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, we will see some year over year decline largely due to similar labor cost driven margin dilution at first service 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.
So you can now open up the call to questions. Thank you.
To ask a question.
Please press star one on your telephone keypad to exit question Q press the pound key.
Your first question comes from the line of George do Matt with Scotia Bank.
Your line is open.
Thank you thanks for taking my questions.
Don't 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 thats coming up coming from them.
Just wondering I think the baseline for that previously was mid single digits to high single digits. Just wondering how we should think about kind of that strength on a go forward basis.
Sure Gerard.
It's really.
Executing on on the growth plan and in particular <unk>.
Leveraging our branch network to better position ourselves with national accounts.
Specifically, we are investing aggressively in our sales force.
And each of the quarters this year.
We've recruited high level sales talent.
That did have a number of established relationships. We're also building out our.
Our sales verticals, and particularly focusing on high end more complex.
Customers.
Where we can differentiate ourselves and examples would be healthcare.
Defense contractors chemical facilities.
Where.
Our teams need.
Specialist training and certification and.
And it's enabled us to really.
Build our verticals.
And at the same time and that's on a national basis at the same time, our branch network as having real success, winning local and regional business. So.
<unk>.
We are focused on building our <unk>.
Day to day business.
Relative to the industry our dependence on.
Weather events cat storms as is lower and strategically that that's the goal for us.
Okay, Thanks for that and things.
Staying on this vertical but maybe switching gears to the M&A part of it is that ultimately the strategy.
Our game plan in terms of how big we want to get in this segment in which markets.
To have maybe a pop presence brand.
Well I mean, certainly there is.
This is a $60 billion market.
And.
Where.
Number two and on the commercial side number two on the residential side.
With a very modest market share so.
We can be multiples.
In terms of.
Relative to our current side.
And strategically all the major markets.
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.
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 lockbox to those can you talk a little bit about that and maybe how much of this quarters.
8% organic growth was pricing versus volume should we expect those trends to continue.
Jeremy.
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.
Historically being a percent percentage and a half 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.
And those can be one year of a multiyear contract.
And then continuing to work on operating efficiencies that I've always been in progress over the last five six years.
The teams are always working to extract some of those so those two factors in combination will.
It will allow us to.
Again, recoup any of the margin impact due to wage inflation.
Okay, great. Thanks, guys. Good luck.
Thanks.
Your next question comes from the line of Scott Thompson with CIBC.
Good morning, gentlemen.
Good morning.
In the home improvement brands, what are you seeing in terms of average average ticket side, so kind of adjusted for.
Recent inflation that you can.
Maybe another way to put it is are you seeing a change in the.
Demographics for your business.
Im just digesting Scott in terms of a change in demographics.
I think certainly.
Millennials, we're focusing much more on on the.
The younger generations.
As they become homeowners.
And buyers of our of our services.
I'm not sure I understood. The first part of your question.
Yes.
I guess it relates to organic growth, but basically on the on a per call basis are you seeing that.
<unk>.
That revenue per call go up.
Or is that a metric even track.
No. It is certainly average job size is something we track and we are 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 is still a lag because we are booked out two to three months.
But.
Certainly.
15% growth this quarter expecting 20 next quarter most of that is volume.
But there is there is some some price and then at the same time.
Our scene.
Consumers take on and book larger jobs more ambitious.
Renovation work and so where we're seeing that also.
That's exactly what I was looking for and just on the residential business you said, 90%.
Residential facilities or amenities I guess.
Our open what's the outlook for the remaining 10%.
Well many of them that are.
Our open are seasonal and so it'll be.
2022.
Okay.
Expect a full resumption.
We do we did okay.
That's it thank you very much I'll turn it over.
Your next question comes from the line of Frederic Bastien with Raymond James.
Hey, good morning, Scott.
Got you.
Any upfront with us about your expectations for organic growth to return to the mid single digit rates for both MSR and FSB 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.
Well I think.
First service residential we expect.
That to settle back to that.
Low to mid single digit organic growth.
And then the brands.
There is some moving parts home improvement.
Everything that we.
Key points to continued strength.
Through 2022.
So that will.
That will be a tailwind for us.
We expect.
Century fire continues to be.
Continues to be strong.
And then restoration, we've just got to very very tough comps.
Going into 'twenty, two that we're going to be dealing with so.
I mean I feel good about.
Organic growth across the board honestly.
I think 22 and brand it really depends on.
Restoration.
Okay cool thanks for that now if we just look at restoration and and also.
Century fire <unk>.
You've done a number of tuck in acquisitions, and just wondering where your footprint resides now with both sort of businesses.
Whether there is still some white space areas Youre looking at right now.
Growth.
We have we have.
Right deal of white space and opportunity in both of these businesses century fire.
Southeast.
Yes.
We are still have white space and in Texas.
Parts of Florida.
And then we have.
Through acquisitions this year moved into the mid Atlantic and there's 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.
In the shelf.
Atlanta area, where.
There is.
Higher storm activity.
So again, Texas and the southeast in general.
Great. Thanks, Thanks, Scott next one for Jeremy.
The rate of earnings attributable to non controlling interests is pretty hard for us to predict and model, but it seemed to have come in a little lower than at least it came in lower than we had forecast was there anything unusual in the current quarter and can you give us a sense of where that.
Got it right that percentage will end up in the year.
Yes.
Order to court as 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.
Okay. Thanks, I'll turn it over.
Your next question comes from the line of Stephen Macleod with BMO capital markets.
Okay.
Thank you good morning, guys.
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 topline and brands versus residential.
If thats the case is there any way to quantify sort of how much.
The more you were held back because of some of the labor.
Shortages.
Even it impacted us in every business.
I think.
But you're right it was probably.
We felt it more on the brand side home improvement I think to a certain extent and restoration also.
I mean, we continue to have an unprecedented number of of open position.
But I'm not.
I'm not sure we can quantify it we expected 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.
Okay, Yes.
Understandable.
And then maybe when you think about.
Labor inflation on the residential side.
Presumably with your scale youre 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 we could potentially see heading into 2022.
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.
And so they.
That's their approach to these accounts.
And they are comfortable.
Earnings.
Our lower margin significantly lower in some cases so.
I don't see the opportunity.
On the organic growth side necessarily now.
Okay. Okay. That's that's great okay, well that's it for me. Thank you.
Thanks.
Your next question comes from the line of Stephen Sheldon with William Blair.
Hey, Thanks, good morning.
First in the residential segment had another really strong quarter of organic growth. There curious if if looking at the segment by property type or if youre 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 a 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.
Yes, I think the.
If theres a change in mix, Stephen it's very subtle but we.
We are winning larger.
High rise.
Opportunities and large master planned communities.
Life style.
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 towards that type of property in our portfolio.
Got it Thats helpful.
And then just wanted to ask on that going back to kind of labor pressures.
Across the organization and maybe the month to month cadence there.
Did that pressure become even more pronounced throughout the quarter and and would you expect it to become an even bigger headwind to growth as you think about the rest of this year and into 2022.
It.
It definitely intensified.
Through the quarter unhedged over I guess I'm going to say the last five or six.
Five or six months.
The competition for talent is.
Is fierce.
And.
For first service 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 unit.
I think we are we're making the decision internally to pay the people. We know the people we trust the people that carry our values. Because we are seeing clearly that will we will need to pay that higher amount for someone new.
So I think we're maybe moving.
Perhaps a little bit in front of.
Of others.
And we will see it continue.
Into the fourth quarter, but but we're also the.
As we 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 theres going to be a lag we have multiyear contracts, we're not getting it back.
Immediately.
But we will work our way through this.
Makes sense appreciate the color.
Again to ask a question please press star one.
Your next question comes from the line of Matt Logan with RBC capital markets.
Thank you and good morning.
Scott you provided some really good commentary on the restoration business, but we are on the call and I know you don't have a formal five year plan.
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 rate the overall mix by division.
And maybe some updates for your other brand new businesses would be appreciated.
It's.
Like all our businesses Matt.
An organic growth company first.
That's our focus so where we're doing.
All the hard work.
Necessary to drive that over.
Over the long term and aspirational, we want first onsite and Paul Davis could be iconic brands.
And.
We're doing more of that foundational work at first on site right now with.
The operating platform.
Investing in at recruiting.
To drive it.
I've talked about recruiting sales teams and building out our branch network and this is all around.
Long term organic growth.
<unk>.
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 is very active consolidation and restoration right now so you've seen us.
Be active we'll continue that.
But it's not going to continue the acquisitions won't continue at the same pace and will be will be driving the organic growth. So it's.
In terms of getting out to 'twenty five.
We're looking beyond that and we will be a leader in this business on.
On the commercial side.
Aspirational on the residential side too, but it's over it's over the long term.
I don't know if theres anything else you want me to fill in around that but let me pause there.
Do you think theres any white space in businesses outside of kind of where youre at today.
Property related services that arent restoration or.
Clauses to home inspections or things that you see opportunity.
Might be a potential vertical.
Yes, there are opportunities that are tangential I would say.
Tangential to restoration, perhaps tangential to some first service residential.
And you think about.
Storm damage and weather.
Weather events and restoration in general and everything that goes into that.
We provide some of those services and there is opportunities to increase seat.
Breadth of services that we provide.
First service residential you'd think about.
All of the.
Staff and services provided to building.
And and where we can expand and so we're always thinking about those.
Those things I don't know that its necessarily a new vertical.
As much as.
Expanding the services that we provide to existing customer.
Okay, and maybe just one housekeeping item for me if you don't mind changing gears in terms of the strong revenue this quarter it was about $30 million.
On my numbers right.
What was that on an EBITDA basis.
Would have been.
Pretty similar as is typical in some of the other quarters.
Matt.
Around 10%, which is.
First onsite has performed.
For the last six quarters.
Okay. Thanks, Jeremy I appreciate the color I'll turn the call back.
Okay.
And at this time there are no further questions.
Thank you Phil and thank you everyone for joining we look forward to.
Our year end call in February.
Okay.
Ladies and gentlemen, this concludes the third quarter investors conference call. Thank you for your participation and have a nice day.
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[music].
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[music].
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Welcome to the third quarter investors conference call.
<unk> 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.
Helpful.
Our achievements contemplated in the forward looking statement additional information concerning factors that could cause actual results to materially differ from those in the forward looking statements is contained in the Companys 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 26, 2021, I would now like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead Sir.
Thank you Phil.
Good morning, everyone and thank you for joining our third quarter conference call.
Jeremy Rakuten 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-19 challenges and supply chain obstacles, Jeremy 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 first service residential century fire and our home improvement brands.
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, and the profitability metrics in his prepared comments.
And first service 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 at first service 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.
The managers of marquee portfolio of about 100 communities.
The acquisition extends our significant leadership position in Florida and importantly.
<unk>, 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 first service residential we expect to show a high single digit revenue growth.
Benefiting from the recent acquisition and amenity reopening is relative to the prior year.
Moving on to first service 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 bookings.
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, we're 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 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 expect it to be this past quarter.
Our restoration brands first onsite and Paul Davis.
There were up over 10% relative to Q3 of last year with mid single digit organic growth. This is a strong result.
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.
Okay.
We benefited this past quarter again from the Texas decrease 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 digits.
Which is a positive reflection on our momentum in growing day to day business by signing new customers and gaining incremental.
Incremental share of existing accounts.
We were excited during the quarter to expand our footprint at first on site with.
With the acquisitions of complete decay in the Florida Panhandle region.
More restoration in central Indiana.
In insurance restoration specialist.
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 a strong leadership and talent that we are excited and proud to have on our team.
Okay.
We continue to carry a solid backlog at our restoration brands and.
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 to 2020 weather events.
Factory 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 in 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 is a great reflection on our teams.
And their ability to win in the market.
Day to day.
Over to you Jeremy.
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 first service residential and for our service brands.
I will provide segmented commentary in just a moment.
First the consolidated recap.
For the third quarter first service total revenues came in at $849 million.
Adjusted EBITDA at $94 2 million and adjusted EPS of $1 50.
14%, 6% and 26% respectively.
On a year to date basis, we have delivered strong consolidated results across the board both in terms of topline and profitability and with significant contributions from all of our operations within both divisions.
Financial highlights for the nine months year to date include.
Revenues of $2 $3 9 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.
Paired to the $203 $8 million in the prior year 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 and providing adjusted EBITDA and adjusted EPS, respectively are disclosed in this morning's earnings release and are consistent with our approach and prior periods.
I'll now elaborate on our third quarter segment results.
Within our first service residential division, we reported revenues of $423 1 million at.
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 two factors.
First we have experienced a general increase in wages across the division.
We can recoup some of this through cost plus contract with.
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 reopening during the quarter.
Which yielded a typical sub 10% fully burdened margin that average down the overall division margins.
Now to our first service 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 acquisition.
During the current third quarter, our brand 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 cause 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 a 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 non core legacy pest control business based in Florida.
Which was part of our first service residential division.
On an after tax basis.
Divestiture contributed 21.
Two 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 four 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 various 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.
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.
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 a leverage coming in at one two times net debt to trailing 12 months EBITDA.
Down sequentially from our prior second quarter.
Our liquidity and debt capacity also remains strong with approximately $535 million.
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 topline indicators for the fourth quarter for each of our businesses.
On a consolidated basis, we therefore expect.
We expect our revenue growth in Q4 to be in the high single digits.
Our consolidated EBITDA margin in the fourth quarter, we will see some year over year decline largely due to similar labor cost driven margin dilution at first service 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 yearend earnings call scheduled for early February.
That concludes our prepared comments.
So you can now open up the call to questions. Thank you.
To ask a question please.
Please press star one on your telephone keypad to exit question queue press the pound key.
Your first question comes from the line of George do Matt with Scotia Bank.
Your line is open.
Thank you thanks for taking my questions.
Didn't 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 coming from them.
I'm 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.
Sure Gerard.
It's really.
Executing on on the growth plan and in particular <unk>.
<unk>, our branch network to better position ourselves with national accounts.
Specifically, we are investing aggressively in our sales force.
No.
And each of the quarters this year.
We've recruited high level sales talent.
That did have a number of established relationships. We're also building out our.
Our sales verticals, and particularly focusing on high end more complex.
Customers.
Where we can differentiate ourselves and examples would be healthcare.
The fence contractors chemical facilities.
Where.
Our teams need.
Specialist training and certification and.
And it's enabled us to really.
Build our verticals.
And at the same time and that's on a national basis at the same time, our branch network as having real success, winning local and regional business. So.
<unk>.
We are focused on building our <unk>.
Day to day business.
Relative to the industry our dependence on.
Weather events cat storms as is lower and strategically that that's the goal for us.
Okay. Thanks for that.
Staying on this vertical but may be switching gears Lee the M&A part of it is there ultimately is strategy.
The game plan in terms of how big we want to get in this segment in which markets.
Like to have maybe a pop presence brand.
Well I mean, certainly there is.
This is a $60 billion market.
And.
Where.
Number two and on the commercial side number two on the residential side.
With a very modest market share so.
We can be multiples.
In terms of.
Relative to our current side.
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.
Okay, just one last one if I may.
The residential segment.
Of the 70% of that business does not cost plus can you maybe explain how we adjust pricing and wages I think Jeremy you did call out a lockbox 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.
Jeremy Scott.
Yes sure.
Just the back end of your question George.
Most of it's volume.
In this industry.
Pricing is very modest.
Shortly being a percent percent and a half ish.
And that's no different so in terms of.
Dealing with the 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 one year or multiyear contracts and then continuing to work on operating efficiencies that.
I've always been in progress over the last five six years and the teams are always working to extract some of those so those two factors in combination.
We will allow us to.
Again, recoup any of the margin impact due to wage inflation.
Okay, great. Thanks for the answers and good luck.
Thanks.
Your next question comes from the line of Scott Thompson with CIBC.
Good morning, gentlemen.
<unk>.
In the home improvement brands, what are you seeing in terms of average average ticket side, so kind of adjusted for.
Recent inflation if you can.
Maybe another way to put it is are you seeing a change in the.
Demographics for your business.
Im just digesting Scott in terms of a change in demographics.
I think certainly.
Millennials, we're focusing much more on the <unk>.
The younger generations.
As they become homeowners.
And buyers of our of our services.
I'm not sure I understood. The first part of your question.
Yes.
Yes.
I guess it relates to organic growth, but basically on the on a per call basis are you seeing that.
That that revenue per call go up.
Or is that a metric even track.
No. It is certainly average job size is something we track and we are 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.
In the home improvement brands, there is still a lag because we are booked out two to three months.
But.
Certainly.
15% growth this quarter expecting 20 next quarter most of that is volume.
But there is there is some some price and then at the same time.
Our scene.
Consumers take on and book larger jobs more ambitious.
Renovation work and so where we're seeing that also.
Thanks, Thats exactly what I was looking for and just on the residential business you said, 90%.
Residential facilities or amenities I guess.
Our open what's the outlook for the remaining 10%.
Well many of them that are open are seasonal and so it'll be.
<unk> 2022.
Okay.
We expect the full resumption.
We do we did okay.
That's it thank you very much I'll turn it over.
Your next question comes from the line of Frederic Bastien with Raymond James.
Hey, good morning, Scott.
Pretty upfront with us about your expectations for organic growth to return to the mid single digit rates for both MSR and FSB 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.
Well I think.
First service residential.
We expect.
That to settle back to that.
Low to mid single digit organic growth.
And then the brands.
There is.
There's some moving parts home home improvement.
Everything that we.
D point to continued strength.
Through 2022.
So that will.
That will be a tailwind for us.
We expect.
Century fire continues to be.
Continues to be strong.
And then restoration, we've just got to very very tough comps.
Going into 'twenty, two 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 when brands it really depends on.
Restoration.
Okay cool thanks for that now if we just look at restoration and and also.
Century fire, you've done a number of tuck in acquisitions, and just wondering where your footprint reside now with both sort of businesses.
Whether there is still some white space areas Youre looking at right now.
So growth.
We have we have.
Great deal of white space and opportunity in both of these businesses century fire.
So feast.
Yes.
We are.
Still have white space and in Texas.
Parts of Florida.
And then we have.
Through acquisitions this year moved into the mid Atlantic and there's there's lots of opportunities for us in the metal Atlantic region.
Restoration.
Similarly.
We are our footprint needs to we need to build it out in the Western U S.
Yes.
And they are.
Continues to be opportunities for us.
And in the south not necessarily in Florida, but in in.
In the shelf.
Atlantic area, where.
There is.
Higher storm activity.
Again, Texas and the southeast in general.
Great. Thanks, Thanks, Scott next one for Jeremy.
The rate of earnings attributable to non controlling interests is pretty hard for us to predict and model, but it seemed to have come at a little lower than at least it came in lower than we had forecast was there anything unusual in the current quarter and can you give us a sense of where that.
Alright, great percentage will end up in the year.
Yes.
And of course, 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.
Okay. Thanks, I'll turn it over.
Your next question comes from the line of Stephen Macleod with BMO capital markets.
Okay.
Thank you good morning, guys.
Just had a couple of questions here on the labor inflation specifically.
I assume.
Safe to assume that.
Labor inflation and labor availability would have impacted you more on the topline and 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.
Shortages.
Even it impacted us in every business.
I think.
But youre right it was probably.
We felt it more on the brand side home improvement I think to a certain extent and restoration also.
I mean, we continue to have an unprecedented number of of open position.
But I'm not.
I'm not sure we can quantify it we expected 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.
Tough to quantify.
So many moving parts.
Okay, Yes.
Understandable.
And then maybe when you think about.
Labor inflation on the residential side.
Presumably with your scale youre well positioned to manage through these kinds of headwinds do you see an opportunity for accelerated new contract wins, maybe as smaller competitors their 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 that we could potentially see heading into 2022.
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.
And so they.
That's their approach to these accounts.
And they are comfortable.
Earnings are lower margin significantly lower in some cases so.
I don't see the opportunity.
On the organic growth side necessarily now.
<unk>.
Okay. Okay. That's that's great okay, well that's it for me. Thank you.
Thanks.
Your next question comes from the line of Stephen Sheldon with William Blair.
Hey, Thanks, good morning.
First in the residential segment, another really strong quarter of organic growth. There curious if if looking at this segment by property type or if youre 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 in mid and high rise condos as I think just looking back over the last few years. The mix has been seem to be pretty stable. There just would love any color.
Yes, I think the if theres a change in mix, Stephen it's very subtle, but we we.
Our winning larger.
High rise.
Opportunities and large master planned communities.
Life style new.
New development.
It requires a more complex service offering including event planning lifestyle and really our breadth of services that not many of our competitors have so.
There is a subtle shift towards towards that type of property in our portfolio.
Got it Thats helpful.
Just wanted to ask on going back to kind of 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 it to become an even bigger headwind to growth as you think about the rest of this year and into 2022.
It.
It definitely intensified.
The quarter unhedged over I guess I'm going to say the last five or six.
Five or six months.
The competition for talent is.
Fierce.
And.
For first service 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 unit.
I think we are we're making the decision internally to pay the people we know that people we trust the people that carry our values. Because we are seeing clearly that will we will need to pay that higher amount for someone new.
So I think we're maybe moving.
Perhaps a little bit in front of.
Of others.
And we will see it continue.
Into the fourth quarter, but but were also be.
As we 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 theres going to be a lag we have multiyear contracts, we're not getting it back.
Immediately.
But we will work our way through this.
Makes sense appreciate the color.
Again to ask a question please press star one.
Our next question comes from the line of Matt Logan with RBC capital markets.
Thank you and good morning.
<unk>.
Scott you provided some really good commentary on the restoration business later on the call and I know you don't have a formal five year plan.
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 rate the overall mix by division.
And maybe some updates for your other brand new businesses would be appreciated.
It's.
Like all our businesses Matt.
We are an organic growth company first.
And that's our focus so where we're doing.
All of the hard work.
Necessary to drive that over.
Over the long term and aspirational, we want first on slate and Paul Davis can be iconic brands.
And.
We're doing more of that foundational work at first on site right now with.
The operating platform.
Investing in at recruiting.
To drive it.
I've talked about recruiting sales teams and building out our branch network and this is all around.
Long term organic growth.
<unk>.
For each of our businesses.
We target mid single digits on average.
Overtime.
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'll continue that.
But it's not going to continue the acquisitions won't continue at the same pace and will be will be driving the organic growth. So.
In terms of getting out to 'twenty five.
We're looking beyond that and we.
We will be a leader in this business on the commercial side.
Aspirational on the residential side too, but it's.
It's over the long term.
I don't know if theres anything else you want me to fill in around that but let me pause there.
Do you think theres any white space in businesses outside of kind of where youre at today.
Property related services that arent restoration or.
Clauses to her home inspections or things that you see opportunity.
It might be a potential vertical.
Yes, there are opportunities that are tangential I would say.
Tangential to our restoration, perhaps tangential to some first service residential.
And you think about.
Storm damage in and weather.
Weather events and restoration in general and everything that goes into that.
We provide some of those services and theres opportunities to increase the breadth of services that we provide.
First service residential you'd think about.
All of the.
Staffing and services provided to building.
And and where we can expand and so we're always thinking about those.
Things I don't know that its necessarily a new vertical as much as.
Expanding the services that we provide to existing customer.
Okay, and maybe just one housekeeping item for me if you don't mind changing gears in terms of the strong revenue this quarter it was about $30 million.
Right.
Was that on an EBITDA basis.
Would have been.
Pretty similar as is typical in some of the other quarters.
Matt.
Around 10%, which is.
First onsite has performed.
Over the last six plus quarters.
Okay. Thanks, Jeremy I appreciate the color I'll turn the call back.
Okay.
And at this time there are no further questions.
Thank you Phil and thank you everyone for joining we look forward to.
Our year end call in February.
Okay.
Ladies and gentlemen, this concludes the third quarter investors conference call. Thank you for your participation and have a nice day.