Q1 2022 FirstService Corp Earnings Call
Welcome to the first 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.
Our results may be materially different from any future results.
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 April 27th 2022.
I would have liked to turn the call over to Chief Executive Officer, Mr. Scott Patterson.
Please go ahead Sir.
Thank you Krish.
Good morning, and welcome everyone.
Thank you for joining our Q1 conference call I'm on the line today with Jeremy Rakuten and together, we will walk you through the results. We released this morning.
<unk> that reflected very strong topline growth across both divisions.
Total revenues for the quarter were up 17% over the prior year with organic revenue growth at an impressive 10%.
EBITDA was up 4%, reflecting a margin of seven 5%.
Compared to eight 4% in the prior year and earnings per share were up 11%.
We're very pleased with the way the quarter played out we continue to be challenged by tight labor market supply chain issues and inflationary pressures.
Our strong top line for the quarter enabled us to overcome the operating challenges.
And deliver a solid bottom line there was modestly ahead of our expectations.
I'll summarize our results for each division and then pass it over to Jeremy to provide more financial detail.
At first service residential revenues were up 12% with organic growth at a strong 7% and the balance from tuck honors made during 2021, the organic growth primarily reflects net new contract wins.
We experienced a modest boost from the reopening of amenity at this facility during the non seasonal first quarter.
This was largely offset by a decline in certain ancillary revenues versus a year ago.
Particularly transfer and disclosure income relating to re sales within our managed communities.
Net net at 7%, we're pleased with the organic growth for the quarter.
Looking forward to Q2 and the balance of the year, we expect to show similar top line growth for first service residential.
Moving on our first service brands revenues for the quarter were up 22% with organic growth at 12%.
And the balance from acquisitions over the last year, including the six tuck under <unk>, we reported towards the end of 2021.
Five and restoration and one in fire protection.
Our restoration brands first onsite and Paul Davis.
Generated revenue that was up 15% over the prior year with.
With 3% organic growth.
Last year, we had a surge in claims from the Texas deep freeze.
Which added over $35 million in revenues to our Q1 numbers.
Posting revenues above this level organically.
Without a similar event.
Is impressive and.
And a reflection on the progress we're making at both brands in terms of adding customers and increasing our day to day business.
Our backlog remains solid and we are expecting a strong second quarter.
Without whether it will be a challenge to match the revenues we achieved in Q2 of 2021.
We booked approximately $50 million in Q2 last year from the Texas deep freeze.
Our best estimate at this point is that we will be slightly down in Q2.
Activity levels are generally strong for our restoration brands and.
And as I mentioned, we feel very good about our market penetration, which should translate into strong results for the balance of the year, but it is somewhat weather dependent.
Moving now to our home service brands.
Which as a reminder includes California closets sort of pro painters.
Floor coverings international and pillar to post home inspection.
As a group home services were up over 25% organically for the quarter.
Flat sequentially.
We entered 2022 with very strong backlogs in these brands and we continue to build dominance through the first quarter.
The combination of AMR Kron in January and supply chain issues throughout the quarter challenge to us.
And it is a credit to our teams that we were able to produce as much revenue as we did.
Activity levels remain strong and our home service brands home prices are up 15% year over year, which should sustain strong home improvement spending.
We continue to incrementally add capacity.
And although we are facing ongoing supply chain challenges.
We expect to show sequential growth in Q2, and another quarter of 20% plus year over year growth.
Moving on to century fire, we had another very strong quarter.
Driven by 20% plus revenue growth, which was half organic.
The commercial construction market, including multifamily and distribution remains very active and century has a strong position in these verticals.
In addition, the service repair and inspection division continues to build momentum.
We expect a similar a similar level of growth at century in Q2 and for the balance of the year.
Let me now call on Jeremy to review our results in detail and to provide a more fulsome look forward.
Okay.
Thank you Scott good morning to everyone. Let me first start by summarizing our Q1 results on a consolidated basis, which overall were better than expected, particularly in the face of operational challenges for.
For the quarter, we reported revenues of $835 million.
A 17% increase over the $711 million for Q1 'twenty one.
Adjusted EBITDA was $62 $3 million up 4% versus the prior year's $59 $8 million in.
This yielded a seven 5% margin for the quarter.
Compared to a margin of eight 4% in the prior year quarter.
And finally, our adjusted EPS was <unk> 73.
Representing 11% growth over the 66 cents per share in Q1 'twenty one.
Our adjustments to operating earnings and GAAP EPS in arriving at adjusted EBITDA and adjusted EPS, respectively are consistent with our approach and disclosures in prior periods.
I will now summarize the segmented results for our two divisions.
First service residential generated revenues of $394 million up 12% over last year's first quarter.
While EBITDA was $34 million, a 3% increase over the prior year.
The EBITDA margin for the division came in at seven 7% and as expected was down 70 basis points over the eight 4% margin last year.
The margin was impacted by the same two factors, we called out in the prior fourth quarter.
Wage inflation and the increased mix of labor driven services relative to higher margin and salaries.
When comparing the division's margin to Q1 2020, the last pre pandemic quarter encompassing more normalized labor market and revenue mix dynamics.
Our 7.7% margin this quarter was 70 basis points better.
So in summary, we are pleased with how our teams are managing through existing inflationary pressures.
For the remainder of 2022, we are expecting to close the year over year margin gap within the first service residential division with the margin improvement weighted towards the second half of the year.
Shifting to our first service brands Division, we reported revenues of $440 million during the first quarter up 22% over last year's first quarter.
EBITDA came in at $36 $1 million, an 8% increase over the prior year quarter.
The division margin declined to eight 2% versus last year's nine 3% level.
We had forecasted the margin decline, particularly given the current quarter headwind in restoration against the prior year, Texas freeze surge work.
We also faced operational disruptions during the quarter, both with our labor due to omicron in January and with ongoing globally impacted supply chains.
While these challenges resulted in higher cost and inefficiencies and completing jobs in several of our brands. We still delivered an overall division margin this quarter that well exceeded the pre pandemic Q1 2020 margin of seven 5%.
Our businesses have remained nimble and resilient covering off inflationary pressures either in relative lockstep or with a modest lag.
We are confident we will show incremental improvement in our brands division year over year margin performance in the coming quarters.
Turning to our consolidated cash flow, we generated more than $50 million before working capital changes a modest increase over last year's first quarter.
With the seasonal trough Q1, we had working capital investments in those businesses that ramp up operations for their balance of your peak cash flow periods.
Our operating cash flow will be stronger in all remaining quarters of 2022.
Capital expenditures during the quarter were $16 $5 million up modestly year over year.
We expect total capex for the year to come in at $85 million to $90 million lower than the $100 million target. We provided at the outset of the year.
With the normalized portion in the $65 million to $70 million range and tracking within our typical 20% of EBITDA level.
We did not close any acquisitions during the quarter, but as you heard from Scott the flurry of tuck hundreds at the close of 2021 contributed to our strong revenue growth in the current quarter and will continue to add to our top line performance for the balance of the year.
Acquisition activity can vary from period to period, and we made progress during the quarter and replenishing our deal pipeline to a healthy level that should convert in coming quarters.
Our balance sheet also remains strong in every respect.
We ended the first quarter with net debt of $515 million, resulting in leverage as measured by net debt to trailing 12 months EBITDA at a conservative 1.5 times and relatively in line with year end.
During the first quarter, we bolstered our debt capacity by increasing the size of our revolving bank credit facility to $1 billion.
With an unsecured credit structure and more flexible terms.
The current Undrawn balance on this revolver plus cash on hand provides us with ample liquidity of approximately $550 million to drive further growth.
Looking forward our outlook for the full year remains intact and consistent with the indicators I provided with our 2021 year end results in February .
Strong contributions from all of our businesses will drive aggregate low teens year over year top line growth.
With incremental improvement in our margin performance expected, particularly in the back half of the year.
We expect to finish 2022 with our consolidated margins relatively in line with 2021 , resulting in double digit annual EBITDA growth.
That concludes our prepared comments section I would now ask the operator to open the call to questions. Thank you.
Thank you.
To ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key.
<unk> as we compile the Q&A roster.
Our first question comes from George domain of Scotiabank your.
Your line is open.
Yeah. Good morning, guys Scot when you characterize the labor environment is generally better same or more challenging since the start of the year and maybe just your general outlook over the coming months or are we seeing any green shoots there.
I would say, it's approximately the same as the beginning of the year.
I mentioned on our last call that we were having more success recruiting and I think that that still holds in general, but I would say, it's incremental it's still a very tough labor environment, we have many open positions.
And we're still capacity constrained at a number of our businesses. So.
It's a grind I expect it to continue but.
We're making headway and obviously.
Still driving.
Strong revenues.
Okay great.
Can you talk a little bit about where we are.
With resigning those higher fixed price contracts.
Renewals at MSR and is that to date had any impacts on retentions or are we still kind of trending in the mid nineties.
Yeah.
It's a fluid situation.
George we.
We have contractual relationships.
That lock in a fixed price and we've been working through price increases for many months now educating our clients.
Being very transparent about our wage and cost increases.
We're definitely having.
Some success in passing through the increases.
But it will be an ongoing process as you heard from <unk>.
Jeremy It will.
We'll continue through the balance of the year.
<unk>.
And second part of your question.
We're keeping our accounts.
We're having very healthy discussions with our clients and in our retention should be right in line.
With our expectation this year.
Okay. Thanks, and just one last one for Jeremy can you maybe talk to the reason why.
We dropped our capex by $10 million to $15 million for this year and just to confirm.
For 2023, Capex should be in the $65 million to $70 million range right.
George the reason for the drop is more in the one off category. So a couple of the regional office moves at our first service residential operations. There is some of it will not get incurred this year and we'll roll a bit into next year.
Yes, $65 million to $70 million.
As a percentage of revenues, 2% and 20% of EBITDA. That's our normalized spend that's what we would expect for 2023, we haven't done budgets, if theres a bit of this role.
The 10 to 15 million that's coming off this year into next year that would be incremental.
So its really timing on the one off capex.
Got it alright, thanks, guys.
Okay.
Thank you.
Yes.
Our next question comes from Stephen Macleod BMO capital markets your.
Your line is open.
Thank you good morning, guys good morning.
I just wanted to ask a little bit about the home improvement business. So you cited exceptionally strong growth in that in those service lines.
Can you just talk a little bit about sort of why you're seeing why do you think youre seeing growth being so strong whether there are pockets of growth within the lines and where those might be.
And then how you expect that growth to kind of evolve as the year goes by I think previously you had suggested that you would expect it to be strong at least through the first half of the year, but I'm just wondering if that expectation has changed at all.
Right.
The reason that.
We're seeing the strength is really driven off of the home price increase.
Year over year, or 15%, which is a massive increase in home equity and home equity historically has been a big big driver of home improvement spending so that certainly gives us comfort comfort that it will continue for the balance of the year.
We are booked.
Through Q2, I provided an outlook for Q2.
There is less visibility for us obviously in the back half of the year.
But at this point.
We're comfortable that the work will be there.
Remember that.
We've been capacity constrained at these brands for some time now trying to catch up.
Two the market opportunity and the leads and we're really still doing that continuing to add capacity recruiting aggressively so.
Getting.
The work right now is not a problem for us.
Based on our capacity.
Okay. Okay. That's.
That's helpful.
And then maybe just on century fire I missed the number that you gave I apologize in your prepared remarks around the growth.
And I think you said it was split sort of 50 50 organic.
Versus acquisitions I was wondering if you could repeat that number yes.
20% plus is what I said.
Half organic.
And.
Let's say, it's a level that we see for the balance of the year really.
Great and then maybe just finally on the acquisitions.
Jeremy you suggested that you've done a good job of replenishing your pipeline.
Should we think about the <unk>.
Areas, where targets of acquisitions sort of similar to to what your recent activity has been sort of focused on the restoration business and complemented by some of the other segments.
Yeah exactly I mean, it does include activity.
Across both divisions, but it will likely be weighted towards restoration and fire again this year.
Great.
Okay. That's it for me. Thank you guys. Thanks, Steve.
Thank you.
Next we have.
Halloween Doug.
Thank you.
Your line is open.
Yes, hi, Thank you good morning.
So I just wanted to ask about Europe .
Confidence in getting back to flat margins.
As we get to the back half of <unk>.
And I'm curious if you're depending on you know pricing certain weather events, just more color would be helpful.
Sure I'll take that thanks Faiza.
On the residential side it is both pricing and Scott spoke to some of that on some of the earlier question as well.
Taking a closer look at our cost structure opt.
Operational efficiencies.
We talk about the service delivery model and offering some of the the role from our front end property managers.
But a lot of just cost around.
Telephony.
Payroll head count.
Together with pricing and and again, we see that picking up in terms of closing the gap in Q3 and Q4 on the brand side.
The ability for us to capture any cost increases through pricing is pretty good some of it's relatively immediate some of it's on a quarter lag. So whatever the challenges that we're seeing in the current quarter around supply chain.
Or wage inflation, we believe we will capture in Q3 and so forth. So.
There's a part of that and then the weather aspect at first on site tends to be skewed towards the <unk>.
Back into the or all of restoration in fact, Paul Davis, as well and so margins should be better for that business in a typical year in the back half.
This upcoming Q2, we had the headwind versus the Texas freeze work of last year, and we don't see the same level of activity in Q2 of this year. So another reason why.
Improvement in brands will be.
More skewed to the back half of the year.
Okay.
Makes sense and then just secondly, I know, there's a lot of conversation around a potential recession in the U S and I'm curious if you could.
Like how much of your business would be.
More cyclical versus defensive I know you just you talked about home improvement and how when prices tend to impact home improvement spending.
I'm curious if you could share more color around you know, how a recession might impact which parts of your business might get more impacted.
Sure, let me start with that.
I'll pass it over to you, but it's.
I appreciate the question Faiza, but it is.
Feels a bit odd an ironic to be talking about a recession. When we're out recruiting aggressively trying to increase capacity to tackle the work and the opportunity we have in front of us right now but.
But I do understand the question.
And the concern we've proven over the years and during past downturns to have a very resilient business model in.
Keep in mind that.
Our two largest businesses are largely immune.
From economic cycles restoration.
Is influenced by weather.
First service residential.
As a contractual business and our communities need to be managed so there neither of them are discretionary spends.
Century fire has some exposure.
Through new construction.
In the home service brands has some exposure I think particularly.
California, Closets, but I think the thing to remember and in home services and all of our brands really is that we have very modest market shares.
And these are huge markets.
And then a downturn these markets will still be huge and it's on us to go out and get the work.
But Jeremy maybe you can provide a little color around the.
The home service brands and in our.
Risk.
Sure So home improvement this year around 25% of our brands Division.
13% of consolidated so it's a $400 million total revenue exposure about $300 million of that is Cal closets, which is really the one that could be the most exposed when we've looked back at it or other home improvement brands like painting and floor coverings. They were very resilient even.
During the great financial crisis, So, California, closets, and 300 million ish of revenue exposure. There and then Scott also commented on you know century fire.
Half of it's recurring contractual revenue but.
But the other half tied to new development would be exposed that's about 50% of a 300 million plus business.
Tied more to commercial new development. So it really depends what type of downturn home improvement housing century more commercial so they you.
You may not see both get hit at the same time, if if there was any exposure to those macro factors.
Great. Thank you so much very helpful.
Thank you.
And next we have Scott.
One moment organic growth do you have a sense of how much that 12% organic growth.
Our service brands.
<unk> attributable to mix and how much to price.
Particular price increases in excess of inflation, just trying to get a sense of the.
Sensitivity to.
To inflation.
Hey, Scott.
Was your question just relating to brands, we love this is relating to <unk>.
Exactly just relating to brands.
Jeremy has been digging into this so I'm going to pass it over to him.
Yes, Scott I mean, the first point to make is any pricing that we're taking is not.
Not taking more price than what our costs are increasing so we're not looking to expand our margins over and above the labor wage inflation of the raw material supply chain costs that we're incurring but you know in our home improvement brands.
Order of magnitude, 5% to 10%.
Price increases.
To account for those those cost increases at <unk>.
Restoration.
There's a couple of different segments commercial.
Commercial restoration that a little bit easier for us to pass through we have these master service agreements with our major clients, we have priced tear sheets that we continuously updating so it's it's almost.
A relatively direct pass through each project is of a different size when were doing these jobs are different shapes and sizes. So it's really hard to quantify pricing, but we're kind of as we're booking new jobs now we're pricing it in the current cost environment on the residential restoration side, it's a little bit.
Takes a little more time, we're working with carriers and adjusters.
Their pricing.
Mechanisms.
And then finally at century fire.
I think it's back to 5% to 10% the best we can call. It to you got the install work, where we're doing major jobs and pricing it.
Yes.
Lot of our inputs there ours is either labor and steel prices have increased so we're passing along on the repair service inspection side. It would be at the lower end of that 5% to 10% range because it's really just more labor.
And do you have a sense of how much of that.
<unk> growth was mix.
Where does that kind of flat.
Mix in terms of.
In terms of.
Higher.
Higher growth.
Parts of that business.
Well I would say all of the business I mean home improvement century fire all over 20% plus and at first on site more a headwind in fact.
Grew modestly organically.
Even in the face of.
$35 million of Texas freeze work last year.
Okay, and just a quick follow.
Follow up question on Labor tightness as it is it limited to recruiting challenges or is turnover.
As turnover become a factor.
Turnover was a factor.
Certainly through 'twenty one.
But it is starting to return to historical level level. So so less of a factor Scott.
That's great. Thanks, gentlemen that turn it over thanks.
Yes.
Thank you.
Our next question comes from Stephen Sheldon of William Blair Your.
Your line is open.
Hey, Scott and Jeremy Congrats on the results here just a quick one for me and following up on a prior question on the residential side I think you've talked about growing there at 3% to 5% organically.
Nicely above that again this quarter, so I guess, how much of that was driven by.
Roughly driven by abnormal wage inflation would you being closer to that range that you've talked about excluding some of the.
Cost increases the labor cost increases that you've been able to pass through.
The.
A portion of that 7% was price, we think is 2% to 3%.
So it's up from our historical sort of one 1% to 2%.
And as we continue to work it through we'll probably see that inch up a little bit more.
Through the bill Okay, great. Thank you.
Thank you.
Okay.
As a reminder to ask a question. Please press star one on your telephone to withdraw your question press the pound key.
Stab IOP compile the Q&A roster.
And while we do that.
Next question comes from Daryl Young of TD Securities. Your line is open.
Hey, good morning, guys.
Just a question on century fire.
It sounds like a lot of the growth is coming through on the new sprinkler installation side.
That mix historically I think it was 50 50 inspection and monitoring versus new construction has that mix shifted significantly over the course of the pandemic.
No. It's in fact, Darrell it's continued to trend towards the service side.
I think it would have reversed in the last.
Quarter, a bit but it's still.
Sort of 45% install.
55 service thereabouts.
And looking forward on the M&A pipeline, specifically with respect to century fire is the goal to continue to keep that mix relatively stable in the future and then I guess second part.
What kind of valuations are you seeing I know, it's been hyper competitive and the fire space historically.
So is there any changes there.
We're very comfortable with the 50 50 mix and so we are certainly keeping that in mind as we as we look at tuck <unk>.
But knowing that if we buy and install business then we can supplement it with a with the service business and we're doing that all the time with our with our branches as we fill them out.
We have.
The valuations we have not seen.
Change honestly and in the last year.
Year of show, there's still we're still very very high.
Okay, Great and then one last one just on the residential side.
You've already spoken quite a bit about recessionary environment there.
And through the last through the last global financial crisis, you, obviously grew that business and I think you effectively tripled that since then is there any change in the dynamic.
You're skewed towards more ancillary services now than than previously.
Would change the thinking on the ability to grow through another recessionary environment.
No.
There has not been a lot of change in this business in terms of mix.
The level of ancillary.
Revenue that we drive off of.
Communities.
In units.
So I would I would see it being very similar.
Okay.
Okay, great. That's it for me thanks.
Thanks.
Thank you.
And I'm seeing no further questions in the queue.
Return the conference to Scott Patterson for closing remarks.
Thank you Chris and thank you everyone for joining we look forward to reporting on a strong Q2 in July .
Ladies and gentlemen, this concludes the first quarter investors conference call. Thank you off for your participation and have a nice day.
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