Q4 2022 FirstService Corp Earnings Call
Speaker 4: forward-looking statements that involve known and unknown risks and uncertainty. Actual results may be materially different from any future results, performance, or achievements contemplated in the forward-looking statement.
Speaker 5: Additional information concerning factors that could cause optimal results to materially differ from those in the floor of the food statement is contained in the company's annual information form as filed with the Canadian Security Administrators and in the company's annual report on form 40F as filed with the US.
Speaker 6: security and exchange permission. As our reminders today call it being recorded. Today is February 7th, 2020. I would now like to turn the call over to Chief Executive Officer Mr. Scott Patterson. Please go ahead.
Speaker 7: Thank you Howard.
Speaker 8: Good morning everyone.
Speaker 9: Thank you for joining our fourth quarter and year-end conference call. Jeremy Racoosin is on the line with me this morning.
Speaker 10: And I will open by saying that we are extremely proud with how we closed out the year.
Speaker 11: Our teams drove very strong top line organic growth, who was our strongest growth quarter of the year.
Speaker 12: And importantly, we delivered even stronger growth at the EBITDA line.
Speaker 13: Our teams have been battling inflationary cost pressures and margin headwinds all year.
Speaker 14: The margin results for the quarter in large part.
Speaker 15: credit to their year-long discipline around cost containment and incremental pricing which you can see right now in the forecast.
Speaker 16: We also benefited from operating leverage in our brands division.
Speaker 17: Total revenues for the quarter were up 19% over the prior year, with organic revenue growth an impressive 15%.
Speaker 18: boosted by particularly strong growth in our brands division.
Speaker 19: EBITDA was up 23% reflecting a margin of 10.1% versus 9.7%.
Speaker 20: in the prior year.
Speaker 21: Jeremy will jump into the margin and earns per shared detail in his comments.
Speaker 22: Looking at our divisional results, first service residential revenues were up 9% 8% organically.
Speaker 23: The organic growth was again driven by net new contract wins and was broad-based across North America with all of our regions showing solid gains.
Speaker 24: Just after a year and we were very pleased to announce two acquisitions for First Service Residential in the New York City market.
Speaker 25: Tutor Realty Services and Charles H. Green Thull Company.
Speaker 26: Together add over 350 co-op and condominium properties to our New York City operations.
Speaker 27: The two marquee portfolios further extend our dominant leadership position in the market.
Speaker 28: We're excited to welcome the Tudor and Greenthall teams to the First Service residential family.
Speaker 29: and look forward to working together to bring additional value to our new communities.
Speaker 30: Looking forward.
Speaker 31: to 2023.
Speaker 32: We expect to show growth at First Service Residential at or above 10%, very similar to what we experienced this year.
with their organic growth amid the high single digit.
This is a contractual recurring revenue model with only modest swings quarter to quarter as ancillary revenues fluctuate.
Moving on to first service brands.
Revenues for the quarter were up 28% with 3 quarters of the growth coming organically.
The impressive organic growth number was supported across the board by strong results at our restoration brands,
Home Improvement Brands and Century Fire.
Let me go through each.
Starting with restoration.
which includes our results from Paul Davis and first on site.
Revenues for the quarter were very strong, up about 30% from Q4 of 2021.
Split two-thirds organic growth.
and one-third from Tuck under acquisitions over the last year.
During the quarter we generated about 85 million from hurricanes Ian and Fiona.
which compares to $40 million of revenue booked in the prior year quarter from SCORM activity.
primarily hurricane Ida.
Organic growth excluding named weather events was mid-single-dention.
During the quarter we completed two tuck under acquisitions within restoration.
one under first on site and one as part of our Paul Davis company-owned platform.
At first on site, we acquired emergency restoration.
a regional provider of water mitigation and property restoration services in New Orleans.
This is an important addition to our footprint.
that enhances our client coverage in a region that regularly gets hit with weather.
And we're off to a great start with this new operation in terms of booking work and adding customers.
At Paul Davis, we acquired our franchised operation serving the Salt Lake City and Las Vegas metropolitan areas.
This business is one of the largest franchises in the Paul Davis network and the largest restoration company in Salt Lake City.
We're excited to partner with Brandon Radmaul and his team.
and believe we have an opportunity to significantly grow these markets.
We now own 14 operations within the aggregate network of 330 Paul Davis operations across North America.
Looking forward in restoration, we're expecting a solid front half of the year.
We're carrying a strong backlog into Q1.
both from Hurricane Ian and Winter Storm Elliot, which hit the last week of December .
Elliott was highly unusual in its scope.
Stretching from the gray lakes area down to the Mexico border.
about 60% of the North American population faced
some sort of winter weather advisory or temperature warning.
Many of our branches in the US and Canada saw a spike in activity.
primarily relating to wind damage and water damage from burst pipes.
Her pipeline is up about 25% compared to last year.
which will provide a boost for us the next couple of quarters.
We expect to show year-over-year revenue growth of about 20% over the first six months weighted towards Q1.
It is difficult to estimate how quickly we can work through the backlog and where exactly the revenue will fall. Suffice to say, we are off to a strong start in restoration and we will provide more visibility at each quarter end.
Moving now to our home improvement brands, including California closets, lunar visits, certified pro painters.
floor coverings international and primitive post home inspection.
As a group, these brands were up about 10% against a strong Q4 from 2021 that was up 30% over the year prior.
December weather impacted our ability to complete as much work as we expected.
And our revenues reflected as much. We fell a bit short of our internal estimates.
All that work now flows into January and we will make it up.
Looking forward, we expect continued growth in 2023. At this point, we estimate growth in 2023.
at a high single digit level against a very strong 2022.
The macro environment is mixed.
Home sales are down significantly.
while home prices and home equity levels are holding.
In general, we're facing modest headwinds in home improvement, but our teams feel strongly.
we will battle through and continue to grow.
The markets are very large.
The work is there and we have the teams and brand strength to secure it.
During the quarter, we further expanded our company-owned operations at California Closets.
with the acquisition of our franchise territory in Portland, Oregon.
adding a market with significant future growth potential.
We now own 21 of the 80 California Closet locations, which account for about 50% of system-wide sales.
Now I understand to refire which had a very impressive fourth quarter up almost 30% from the prior year.
with over 20% organic growth.
All aspects of Century service offering including sprinkler and alarm installation.
Service inspection and repair.
and national accounts showed strong momentum in the quarter.
Bit activity and backlogs remain very strong.
And while we do start bumping up against big comparative quarters, we still expect to generate double-digit growth at century this coming year.
Before I pass on to Jeremy, I want to reiterate how pleased we are with our Finish to the Year and our 2022 Full Year performance.
Again, this year we generated in and around 10 percent organic growth.
which is a true credit to our teams and their ability to consistently take share.
Over to you Jeremy.
Thank you, Scott. Good morning, everyone. Scott just highlighted we are pleased with our 2022 financial results, culminating in a particularly strong fourth quarter to cap off the year.
I will first summarize our consolidated performance for the quarter in full year and subsequently provide more segmented detail within our two divisions.
During our Q4, we delivered consolidated revenues totalling $1.02 billion and adjusted EBITDA of $102.5 million, up 19% and 23% respectively, with our margin increasing by 40 basis points to 10.1%.
For the full year, consolidated revenues were $3.75 billion, a 15% increase year over year.
Adjusted EBITDA came in at $351.7 million, up 7% over the prior year and yielding a 9.4% margin compared to 10.1% in 2021.
In terms of our net earnings, in the fourth quarter adjusted EPS came in at $1.22, up a penny versus last year's fourth quarter.
For the full year, we recorded a just an EPS of $4.24.
down from $4.57 in 2021.
Two items negatively impacting our Euro-Vier earnings per share performance were non-operating one-time gains in the prior year 2021 and higher interest costs in 2022.
As discussed on last year's Q4-21 call, we reported during that quarter a gain on sale of a building.
And then earlier in 2021, we also realized the gain on sale from a non-core business.
These two gains resulted in other income of almost $20 million pre-tax with an aggregate 33 cents positive impact to earnings per share in 2021.
And in 2022, the higher interest rate environment and our larger average debt levels triggered a $9 million increase in interest costs compared to the prior year, a headwind of 15 cents to our earnings per share.
Note that these comments on our Justice E.B.D.A. and the Justice E.P.S. results, respectively, reflect adjustments to GAP operating earnings and GAP E.P.S., which are disclosed in this morning's press release and are consistent with our approach in prior periods.
Now, I will provide additional commentary on our division results for both the fourth quarter and full year.
At first service residential for the fourth quarter, revenues were $442 million, up 9% versus the prior year period, and the division reported EPD-A of $38.1 million, up 7% quarter over quarter.
We saw a margin for the quarter coming at 8.6%, slightly lower than the 8.8% margin in Q4 2021.
For the full year, revenues increased by 12% over 2021, including 8% organic growth, yielding an 8% increase in annual leave of the year.
We are very pleased with this profitability profile, particularly in the face of a significant decline in home reseller activity.
in the latter part of the year, which drives higher margin transfer and disclosure and auxiliary revenue.
First Service Residential will tend to generate 9-10% annual margins and typically be towards the upper half of the span, with revenue mix and seasonality factors driving where we ultimately land in any given reporting period.
We finished the year with a 9.5% EBITDA margin, so right down the middle of our typical range.
And our margin outlook for 2023 is expected to be within the same vicinity.
Thank you.
Now, into First Service Brands.
In the fourth quarter, the division recorded revenues of $578 million, a 28% increase, and EBITDA was up a similar 27% to $67.4 million.
with our margin at 11.7% relatively in line with Q421.
For the full year, top-line performance was very strong, with 19% total revenue growth, including 11% organic growth.
Our annual EBITDA grew 4% and yielded a 9.9% margin versus the prior year of 11.3%.
We spoke in earlier quarters during 2022 about the year-over-year decline in BRAND's division margins being a function of first on-site restoration, ongoing platform investments, combined with mild weather.
in the current fourth quarter with the benefit of Hurricanes Ian and Fiona.
first on-site performed at a better margin than prior sequential quarters, contributing to the inline Q4 margin performance for the division.
Finally, to close off my commentary on the P&L, we reported lower corporate costs in both the fourth quarter and for the year compared to prior 2021 periods. The biggest driver was lower incentive compensation for our corporate executive management and employee teams. else's your preferred source of zeroitions on how people pay.
reflecting alignment with more tempered earnings performance for the year.
Turning now to a few perspectives on our cash flow and capital deployment. For the fourth quarter, cash flow from operations before working capital was $86 million, up 30%.
and after working capital delivered $54 million, an increase of almost 70% over the prior year period.
We incurred $22 million of capital expenditures during Q4, resulting in a full year capex total of $78 million, which came in lower than our most recently indicated target of $85 million.
We expect 2023 capital expenditures to be higher at approximately $100 million, which includes a significant first service residential office move that was deferred from 2022.
excluding the spending for that move, I could solidate a capex would come in at roughly $80 million.
which would be in the circle of our typical 2% of revenues and 20% of EBITDA thresholds.
The fourth quarter also saw a resumption of strong Tuck under acquisition activity after a couple of quiet quarters.
We deployed approximately $45 million of acquisition capital during Q4. And as you heard from Scott, our recent transactions span across various of our brands within both divisions.
and will drive incremental revenue growth into 2023.
We are an organic growth company first and foremost, and we clearly see the opportunities for each of our businesses to extend their track record of winning share and growing at healthy rates for many years.
And so we continue to prioritize that capital deployment towards organic as well as strategic acquisition growth initiatives.
At the same time, our ability to consistently deliver earnings and cash flow, which compound over time provides us with capacity to also incrementally return capital to our shareholders.
Yesterday, we continued this trend with the approval of an 11% dividend increase to 90 cents per share annually in US dollars up from the prior 81 cents.
We have now more than doubled our annual distribution with dividend hikes of 10% plus over the past eight consecutive years.
Our 2022 urine balance sheet remains strong in every respect. We closed out the year with just under $600 million of net debt and I leveraged at 1.6 times net debt to adjust the DPA.
modestly up from 1.4 times at 2021 year-end, but still at a very conservative level.
A liquidity example at $520 million reflecting significant cash on hand and capacity under a revolving bank credit lines.
We also have master shelf facilities with our longstanding senior note holders, which we put in place during 2022, providing additional sources of debt financing and where we can potentially term out fixed rate debt tranches as market conditions and our capital requirements dictate.
Looking forward and synthesizing some of the segmented indicators you have heard from Scott and me, on a consolidated basis, we expect to deliver top-line growth for 2023 in the 10% range.
with a healthy mid-single digit plus percentage contribution from Organic Growth.
This annual outlook is currently skewed with higher growth in the front part of the year, given the year-over-year weather patterns and backlogs in our restoration operations.
Our consolidated EBITDA margin for the full year should be relatively in line to modestly better than 2022.
We see Q1 consolidated margins coming in roughly flat to prior year, with margin improvement in the BRAND's division on the back of heightened restoration activity.
offset by the residential division's tough comparison.
against higher home retail activity in Q1-22.
We see potential for modest year-over-year consolidated margin improvement during the middle of the year, assuming continued top-line momentum with our brands.
This concludes our prepared comments. Operator, could you please now open up the call to questions? Thank you very much.
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Chancellor Chuck in DEMO panels over??.
Great, thank you. Good morning guys.
Good morning guys.
Just a couple of questions. Just on the restoration business and some of the strength you saw in Q4. Thank you for quantifying it at roughly 85 million. I know some of that is expected to flow into Q1 and maybe Q2 as well, but I'm just wondering if you could...
to give us a sense of sort of how much business is left in that backlog.
It's a number that evolves every day as we add new business into the scope of our jobs changes.
So it's not a number. We're not going to be providing the backlog number every quarter. Steven, I'm going to give you some sense for our expectation in the coming quarters in terms of what we can.
complete and convert to revenue. And so we expect to be up in the first six months about 20% as I said in my prepared comments.
A lot of this work, we are now into the reconstruction phase of our EN work.
logistics around that including permitting.
which could lead to delays and supply chain issues which could lead to delays. So it's tough to pin Q1 revenues and the amount of the backlog that will...
will be converted to Q1.
Okay, that makes sense. Thanks for that color.
And then just on the whole of proven business, clearly holding in quite well and expected to hold in quite well even up against a strong last year period, given the macro backdrop. I'm just curious, are there any, could you give a little bit of color around like are you seeing more macro sensitivity and
activity, but it's bounced back.
in the last several weeks.
and so while
The activity levels are down from
A year ago, they're still at a healthy level and it's the leads hold.
where they are today, we certainly...
have the activity to hit our growth goals this year.
Okay, that's great. Thanks Scott. I'll turn it back in line and get back in mind. Thank you.
Thanks, Stu. Thank you. Our next question or comment comes from the line of Steven Sheldon from William Blair. Mr. Sheldon, your line is now open. Hey, thanks and nice results here. I appreciate all the commentary on 2023. I think – Okay.
Rezzy, the growth expectations there stand out a little bit. I think you're talking about organic growth in 2023 being.
a little higher than normal, I think you said, mid to high single digit versus 3 to 5 percent that you've talked about historically. So can you just give more detail about what's driving that? Is that more about the strong contract plans you've talked about recently or is it still kind of more just a blow through in pricing increases that you're driving from wage inflation?
Any detail there and would you expect a normalization back to that 3 to 5% as we look beyond 2020?
Excuse me?
You know, the increase from 3 to 5 to say 5 to 7 or 5 to 8 is certainly some of that is price-steven. We're getting...
two to three percent I think we said the last few quarters and that's still where we are and that seems to have lifted us.
to hitting that at least that mid single-digit more consistently. And we are, you know, we are winning business at and holding our retention and those are the two key variables in this business keeping your accounts and adding new ones.
And so the teams are very focused on that and I would say in the last...
And 22 was strong in that regard, which should carry forward. Each model should be
into this year. Whether we'll see it come come back in in 24.
too early to say but you know if we can grow organically in this business at 5% long term we'll take it.
Great to hear. And just as we think about our models interest expense took a step up this quarter. I think it's probably reflective of the floating rate debt, but just given where things are now.
Is the 4Q interest expense payment at 9 million, is that a good run rate to assume as we think about 2023 at this point?
Yes, I think it's a good number.
It really depends on how much capital we deploy and where debt levels go, but interest rates kind of running in for us blended at five and a half, six percent. And I think, as you asked, the exit rate from Q4 annualized would be a good figure.
Great, thank you. Thanks. Thank you. Our next question or timing comes from the line of Daryl Young from TV Security. Mr. Young, your line is now open.
Hey, good morning guys. Just a question around the restoration platform. I think you said excluding storm activity, you were running at mid-single digit organic growth in the quarter. It's very healthy, but it is a bit of a deceleration, I think, from sort of 10% organic growth recently. Is there anything to make of that?
If you X storms.
And I think that's a good number for this business. You know, in Q4.
I think the mobilization around Ian and Fiona
and prioritizing our accounts in an event that was
you know, as
sizable as that was. Probably did detract a little bit from our growth within you know across North America out of our branches.
because of the resources that were deployed to
to that event, but 10% is I think a better number long term for this.
applauding.
Okay, great.
And then with respect to Century Fire.
What percentage of that growth or work would relate to clients that you have as restoration clients as well? I guess just trying to fair it out if there's a lot of cross-sell happening that's helping to supercharge the growth there because it's been very impressive. No, nothing material.
I mean, it's not even a stat we follow.
It's not even a stat we follow.
It's a discreet business and while they have collaborated around national accounts, it's not a material cross-cell.
Okay, great. I'll hop back in with you. Thank you. Thank you. Thank you.
Yeah, just to finish, as I said in my prepared comments, they just...
They're driving really in all aspects of the business right now.
And we expect to see it continue into 23.
Okay, great. Thanks again. Congrats on a good result, guys.
Thanks, Jerome. Thank you. Again, ladies and gentlemen, if you have a question or comment at this time, please press star one one on your telephone feedback. Our next question or comment comes to the line of Mr. Frederick Vashnu from Raymond James. Mr. Vashnu, your line is open.
Good morning, guys. I appreciate it's difficult to call out the restoration volumes you're going to get from the weather events, but when referencing the 20% growth, we don't really have the revenue base from which to extrapolate the...
are still at given the any recent acquisitions.
Jeremy, over to you. Yeah, absent significant weather events laid on top, you know, 800 to 900 is a good number, Frederick, baseline, annualized.
Okay and then so that 20% growth we'd apply that to half of that.
eight to nine hundred million bucks is that correct?
Yeah.
Okay, just wanted to double check. Cool, thanks for that. Working capital obviously with restoration activities and the growth of that particular business you've been investing in working capital. How should we think about...
you know deployment of working capital in 2023. You know, I've made the point before Frederick that your restoration has changed the, you know, the working capital profile and it does, you know, we've got great clients that will pay a bit of takes time as these projects work through and it's, you know,
It's on the back of insurance carrier coverage.
So it's hard to dictate the timing of when we're going to start to see positive working capital swings, although in
In Q4, I think you could see that it was a lot better than Q3 where we were in the mobilization phase. I think you got to take a multi-year view on working capital usage across our businesses and other businesses.
I think because of the moving parts and the seasonality. And I think.
2% of revenues 20% of evade on a multi-year or Protracted period measurement basis is the way to look at it and looking at free cash off of an inversion before working capital is Is something that I would kind of emphasize and?
to take out the volatile swings on working capital.
Okay thanks. Just housekeeping for me, last few ones. What tax rate should be working, should we be working with and similarly non-controlling interest as a percentage of...
after pre-tax profit, just that percentage number would be useful.
In tax rate, we see for 23 in around 26%.
So a little bit higher, we were at 25 in 2022. And non-controlling interest share of earnings, 6% to 7% is a good number. Sort of the way we came out in the middle of that for 22.
twenty to twenty twenty two and in non-controlling interest share of earnings, six to seven percent. So good number sort of where we came out in the middle of that for twenty two. Right.
Thank you both. Great to see earnings and results improve heading into the year. So, quite encouraging. Thanks. Appreciate it.
Thank you.
I'm sure no additional questions on in the queue at this time. I'd like to come to conference by closing the Mr. Patterson for any closing remarks.
Thank you everyone for joining this morning.
And we look forward to reporting on our Q1 towards the end of April . Have a great day.
Ladies and gentlemen, this concludes the fourth quarter of us this August fall. Thank you for your participation and have a great day.
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