FirstService Corporation Q1 2023 Earnings Call
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Welcome to the first service Corporation first quarter investors Conference call.
Today's call is being recorded.
Legal counsel requires us to advice 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.
I played it 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 Wednesday April 26 point 23, I would like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead Sir.
Thank you Shannon good morning, and welcome everyone to our Q1 conference call. Thank you for joining us.
As usual Jeremy Rakuten is on the line with me today and together, we will walk you through the results. We released this morning.
<unk> that reflect continued very strong growth in both divisions.
Total revenues for the quarter were up 22% over the prior year with organic revenue growth at 17%.
Again, this quarter boosted by particularly strong growth in our brands Division.
EBITDA was up 32%, reflecting a margin of eight 1% a 60 basis point increase over last year's Q1.
Primarily resulting from operating leverage and brands.
Earnings per share were up 16%.
We're very pleased with our performance to start the year and confident that it sets us up for a strong 2023.
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 13% with organic growth at a very strong 11%.
Organic growth reflects net new contract wins and increases in labor and services provided to existing accounts. We entered this year with momentum off the back of a strong strong sales in the fourth quarter and solid client retention.
Our growth was broad based across North America, with particularly strong results in the southeast and Texas driven by wins in our high rise and lifestyle verticals.
And speaking of high rise at.
At the end of March we were very pleased to close on the acquisition of Cross bridge condominium services.
The largest condo management company in the greater Toronto market.
Together, we are now the clear leader in the fastest growing high rise condo market in North America.
Sandra Zulli, Andy and Tracey Gregory have led cross bridge for many years.
And we are delighted that they are partnering with us and will continue to lead day to day operations.
Looking forward to Q2 and the balance of the year, we expect to show similar low double digit topline growth for first service residential.
With organic growth likely settling in at a high single digit level.
Moving on to first service brands revenues for the quarter were up 30% with organic growth at 23% driven.
Driven by very strong results at our restoration brands and century fire.
Okay.
Our restoration brands, Paul Davis and first on site.
Together recorded revenues that were up about 40% over the prior year, which with almost three quarters of the growth coming organically.
We generated $75 million to $85 million from named storms during the quarter, including hurricanes be owner and Anne and Winter Storm Elliot.
Sequentially, it's a similar level to the revenues generated in Q4 and significantly higher than storm related revenues in Q1 of last year.
Winter Storm Elliott impacted a very wide geography, it's difficult to nail down revenues directly related to the event, which is why we have the range this quarter of storm related revenue.
During the quarter, we were excited to expand our Paul Davis company owned platform.
With the acquisition of one of our largest franchises with operations in Houston.
In North Carolina, and Nashville, Tennessee.
We're partnering with Bob Helier across these three major markets.
Together, we have ambitious growth plans.
Davis brand has significant opportunity in these markets.
Looking forward and restoration, we expect another strong quarter upcoming.
Our backlog remains solid it's up significantly over prior year levels.
Which will lead to strong year over year growth in Q2.
Including the impact of recent acquisitions, we expect to show growth in.
In Q2 of about 40% relative to a weak quarter for us in 2022, there was light on storm related revenue.
The back half of this year is difficult to forecast at this point.
We expect to have some hurricane in related backlog that carries into Q3.
But it is too early to quantify.
In general activity levels are strong for our restoration brands and we feel very good about our market penetration and positioning relative to our competition.
Moving now to century fire, we had another very strong quarter with organic revenue growth in and around 20%.
I said in my prepared comments at year end net century.
Momentum across all service lines and that's what we saw during the quarter.
<unk> sprinkler installation in.
Inspections and repairs in national accounts.
All up organically by double digit percentages.
The backlog at century is stable and bid activity remains solid.
And we expect continued strong results over the balance of the year, albeit against tougher comps.
We expect double digit organic growth, but not at the same elevated level as the last two quarters.
And now under our home service brands, which as a group were up close to 10% over the prior year with organic growth accounting for about two thirds of the lift.
We're pleased with this performance in an increasingly uncertain environment.
Leads are down at our home service brands as homeowners pair back or delayed projects due to higher interest rates and the threat of a recession.
Our teams remain confident that we will continue to drive growth this year I've set up for the.
The markets are huge and the work is there even in a flat to down home improvement environment.
Let me now call on Jeremy.
To review our results in detail.
Thank you Scott good morning, everyone I'll start by summarizing our first quarter results on a consolidated basis, which and broad based terms largely resembled our prior Q4 reporting period, but.
Common theme being very strong organic growth across the board with the incremental revenue performance driving margin improvement and superior operating earnings growth.
For the quarter, we reported revenues of one point or $2 billion, a 22% increase over the $835 million for Q1 'twenty to adjusted.
Adjusted EBITDA was $82 1 million up 32% versus the prior year's $62 3 million.
And this yielded an eight 1% margin for the quarter compared to a margin of seven 5% in the prior year quarter.
And our adjusted EPS was <unk> 85.
Over the 73 per.
Per share in the prior year.
We delivered this strong 16% year over year earnings per share growth, even in the face of higher interest costs, which were more than double versus Q1 'twenty two.
Our adjustments to operating earnings and GAAP EPS in a rising at adjusted EBITDA and adjusted EPS, respectively are consistent with our approach in prior periods.
I will now summarize the segment results for our two divisions.
First service residential generated revenues of $446 million up 13% over last year's first quarter.
EBITDA was $32 million, a 5% increase over the prior year.
The EBITDA margin for the division came in at seven 2%.
Down 50 basis points versus the seven 7% margin last year.
The margin was impacted by a higher mix of low margin.
Labor driven services, which grew significantly as we both won new contracts and increase the penetration of existing accounts.
During the seasonal trough Q1 period for a portion of our amenity management offering this ramp up of labor without associated revenue accentuated the margin impact.
For the coming second quarter, we expect our residential margin to be roughly in line or mildly lower than the prior year period.
Shifting to our first service brands Division, we reported revenues of $573 million.
During the first quarter up 30% over last year's first quarter.
EBITDA came in at $54 8 million, a 52% increase versus the prior year quarter.
The division margin increased to nine 6% up 140 basis points versus last year's eight 2% level.
On our last earnings call, we had forecasted the margin improvement driven primarily by our restoration operations, which capitalized on weather related storm activity during the current quarter.
Impaired against the mild weather patterns last year.
For upcoming Q2, we are anticipating brands margin improvement on the back of a similar sequential contribution from our restoration operations as the current quarter.
Turning to our consolidated cash flow, we generated $63 million of cash flow from operations before working capital changes up 24% over last year's first quarter.
Working capital investments absorbed this operating cash flow as is relatively typical during our seasonal trough Q1, when some of our businesses ramp up operations for the balance of your peak cash flow periods.
These working capital requirements also included a significant increase in accounts receivable at our restoration operations due to the storm driven activity over the past couple of quarters.
And this a our increase in fact reflected a more than $70 million swing versus Q1, 'twenty, two which lacked any meaningful weather activity.
Capital expenditures during the quarter with just over $20 million up modestly year over year.
We maintain our capex guidance for the year of roughly $100 million.
And $80 million on a normalized basis, excluding one time office moves described in our prior Q4 call.
Finally during the quarter, we deployed approximately $80 million of capital towards three tuck under acquisitions, which were a little larger than our typical size tuck ins.
We continue to be active in cultivating our deal pipeline as we look to be assertive in the current environment.
Finally, our balance sheet with the cash flow commentary I just provided we closed the quarter with net debt of just over $700 million.
Resulting in leverage as measured by net debt to trailing 12 months EBITDA at one eight times.
Liquidity, including our cash and Undrawn bank revolver balance is approximately $380 million.
Our leverage is conservative and liquidity example to achieve our growth targets.
Looking forward our outlook for the full year is relatively consistent with the high level indicators I provided with our 2022 year end results in February .
We see the previous 10% annual revenue growth target ticking up to the low teens percentage range for three reasons.
One strong Q1 performance to restoration backlog conversion driving incremental revenue in Q2.
Three recent tuck under acquisition contribution.
We are maintaining our view that consolidated margins will be relatively in line or possibly slightly higher versus prior year.
That concludes our prepared comments Shannon you can now open up the call to questions. Thank you.
Thank you to ask a question. Please press star one one on your telephone and wait for your name to be announced to exit the question queue. Please press star one again.
Please stand by while we compile the Q&A roster.
Our first question comes from the line of Michael <unk> with Scotiabank. Your line is now open.
Hey, good morning, guys.
Very impressive quarter Nike see the.
<unk> growth.
First question on.
On <unk> I appreciate raising prices in residential is always a challenge, but given the lower margins.
I'm assuming in part due to the <unk> you spoke about the mix, but also the lower retail activity I Wonder if your thinking with you and maybe some of your peers here.
Is that prices continue to trend higher to offset some of these pressures and dump back towards historical margins.
And labor to expand on that are you seeing any increase in churn and if not can we assume that the 2% 3% could continue for several quarters potentially.
Yes, I think Michael we're probably we continue to make some progress I think our 11% organic growth probably 3% of it is price.
And we will we will get our make our way back to our historical margins.
In this business, we can't we can't.
Recoup our cost increases immediately the competitive environment really.
I think per bench that and so we are now.
We're always in a.
Mode of balancing margin with organic growth and.
I think that will continue but we're confident that.
That our margins will.
Make their way back to historical levels.
Don't forget that transfer and disclosure income, which is a high margin ancillary is still well below historical levels.
And we can increase prices on core management or other services.
To recoup T&D, because again that that will settle in at its historical average as well.
Got it that's really helpful. Thanks for the color.
The second question I think you get off.
A version of this question every conference call. So in keeping with tradition just on home improvement.
Look back through 2019, it looks like the cumulative growth.
'twenty to 'twenty one in particular it was about 50%.
The rates are growing are slowing and obviously our concerns but.
Yes, just to get a medicine for the sustainability.
Our philosophy is any way you can break down price and market share just to give us a sense for how much those contributed to that growth.
Well in that business, we have been able to pass along cost increases so.
Over the last couple of years have been.
Very strong.
Organic growth years, 20% plus.
And.
We were probably close to half of that maybe high single digit.
And price in terms of.
Sustaining growth in this market.
The thesis and our strategy is.
There, we have leadership positions, but very modest share in these markets are huge.
And there is an opportunity for us to grow even in a down environment and.
That's the way.
That's certainly the belief system within our teams and that's the situation. We're in now and as I said in my prepared comments. Our teams are very confident we will grow this year.
Got it and maybe just as a follow up.
If I am to presume that promotional activity is picking up any implications for margins.
Did you say promotion activity.
All activity either in marketing or promotional yes, no that's actually that's actually very true.
Headwinds are stronger in this business that they weren't than they were at year end and.
Definitely seeing consumers defer decisions and cut back on job sites.
For us we see it as an opportunity to take share take more share and so we are investing in marketing and promotion.
That will temper.
Any operating leverage that we might have otherwise seen with increased revenues and it also.
We are talking about price increases.
<unk> would also.
Sort of changed that dynamic too, we'll probably see.
Stable pricing this year, if not a bit of.
That are discounting.
Got it makes sense, thanks, a lot Scott.
Thank you. Our next question comes from the line.
Daryl young with TD Securities. Your line is now open.
Hey, good morning, guys and congrats on the good results.
Okay.
Just following up on the residential property management side, if you strip out that 3% price growth.
You are still delivering huge market share wins and volume growth.
Is there anything that's changed in the market, that's allowing you to perform so strongly and I'm just wondering if maybe theres an increase in HOA outsourcing or.
Theres something following the pandemic.
Boards are more inclined to go with professional services or any color you can give there just is very strong.
No I don't think anything fundamental.
<unk>.
Like that Darryl.
We had a very strong sales quarter in Q4, and solid retention, which gave us some momentum.
Coming into Q1.
Which which certainly helped them and.
We will.
Certainly our focus on continuing to drive that that balance between wins and losses. The other the other modest push we had in the quarter.
Whereas increased labor.
In services.
Existing large communities in some regions in our south region in particular, we have cost plus contracts.
That specify a certain number of employees on site.
And we have been challenged through the pandemic.
Over the last few years to fill all of these contracted positions due to labor shortages.
In the last year, certainly relative to Q1, we have significantly reduced our open positions.
In a cost plus environment that drives revenues that we'll.
We will see that over the next few quarters.
As well some of that but it's not something that we will see ongoing.
Got it okay.
And then just with respect to the investments being made in the restoration platform.
And the spend that's ongoing there can you give us any updates on how far along long you are I know you've sort of said, it's going to continue across this year.
But are there any benchmarks or indications you can give us.
When that drag me subside.
Jeremy you want to grab that.
Sure. Thanks, Scott.
Daryl.
One of the major initiatives is onboarding our branches onto our.
Operating platform that we built out it's largely technology, driven and I'd say we're approaching.
At the halfway mark on that.
You've got over 100 branches that we need to get onto a single platform. So.
I've said before.
Going to be into 24 before we are complete with that and then that will obviously be the additional small modules on the edges.
Will be.
Continuing to.
Two.
Optimize but it's into 'twenty four and then we should be largely.
Done with the major wave of these investments.
Got it okay I'll jump back into queue. Thanks, guys.
Thank you.
Our next question comes from the line of Stephen Macleod with BMO capital markets. Your line is now open.
Oh, great. Thank you good morning, guys.
Just wanted to follow up on the residential business.
I know you gave a little bit of color around.
Organic growth was quite strong, but just curious if you can give it.
There are a lot of those gains coming from.
Market share gains and if so is it just the natural.
Attrition that happens in the market or is there something else going on where you are being more competitive in driving.
That above average organic growth rates.
Yes.
We continue to have success in the high rise and large lifestyle communities where.
Where we have scale and expertise in and we're seeing as experts. These are.
Large communities.
Operating with 100 plus people on site. These are.
Staff members that need to be recruited onboard and trained managed.
<unk>.
It's complex.
They also require.
Our broad service offering food and beverage.
Amenity management.
And planning and so on so.
Our expertise.
Expertise in this area is well known.
And it's less competitive for us and so we do have certainly a greater win rate when when we have opportunities in front of us like this.
It's a sweet spot for us and a focus of ours. So I think it's it's primarily those verticals Steven.
I see okay.
That's interesting and would you would you would you characterize the runway for those incremental.
Contract gains in that in those verticals high rise large lifestyle communities is that is that is that a large addressable market or is that sort of more of a niche.
I went to the market no. It's large it's large and it's this is not new for us.
This is.
Many years this has been certainly a.
A component or a significant part of our growth.
But.
Think.
The 11%. This this boost I described from.
Only in open positions.
And price.
Not far off our historical rate.
When you take those into account.
Okay I see.
That's helpful. Thanks, Scott.
And then just just on the brands on the brands business.
Jeremy you talked a little bit about the.
Our margin expectation for Q2.
And.
Just curious.
Would you expect or maybe too soon to say would you expect to see a similar type of margin gain in Q2, and then and then secondly I.
I guess on the back.
What was a strong Q1 margin and what's expected to be ongoing margin strength in Q2.
Do you feel like you're well positioned to drive margin growth in the in the brands business on a full year basis.
Well for Q2 for sure I don't know if it will match 140 basis points, but it will have meaningful margin improvement.
In Q2 again.
Largely.
Due to what we see is a similar contribution from restoration as we got this Q1, and frankly Q1 mirrored Q4, so three pretty similar quarters of restoration.
Incremental revenue from the weather driven activity in day to day wins as well.
That's going to drive consolidated margin improvement for the back half.
I think we got to be cautious we need to see.
It's not just about restoration and see how the businesses as well, but restoration in particular.
Really dependent on whether we see weather.
In the latter half of this year.
Q3 will be.
If we are comping against last year, there wasn't much to speak up so that could be apples to apples, if we don't get weather, but Q4, if we're looking at further.
We had a strong Q4 in 'twenty, two and it really will be dependent on what weather does and that business. All the other businesses are performing very well on the margin front.
Okay great.
That's it for me thanks, guys.
Thank you.
A reminder to ask a question at this time. Please press star one on your Touchtone telephone. Our next question comes from the line of Stephen Sheldon with William Blair. Your line is now open.
Hey, good morning, and congrats on the results.
First question here I am century fire I know there are some concerns about construction activity slowing here given the macro challenges.
So curious how you're thinking about the risk of slowing construction activity weighed on the growth trajectory of the fire business over the next few years, just given that new construction is at least one factor supporting growth there.
Yes, certainly Stephen work.
Keeping an eye out on our bid activity in backlog.
Our backlogs in a position that gives us visibility.
Really for the balance of the year.
And we feel comfortable.
With the balance of the year, but.
As you suggest.
<unk>.
Certainly.
As I said headwinds in the.
Home improvement market and often.
Residential is a precursor to commercial so.
We're very cognizant of I would say in this last quarter.
Service.
In particular led the way for us in terms of growth should.
So we feel very good about that.
And we continue to.
Focus on that balance between new construction and service repair and national accounts. So it's a fair point.
Got it.
<unk>.
And then this is a question I've asked before and restoration, but how do you think about the strategic benefit of having scale on both the residential and commercial side of restoration.
Specifically hit that benefit changed at all or become even more important especially in times like this where there's a lot of work in storm related work and where you can maybe.
Better or more dynamically allocate labor resources, just any updated thoughts on that.
Well scale and commercial and residential independent of each other as is very important.
As.
Our national.
Commercial.
Occupiers owners.
Managers look to consolidate their their vendors.
So it matters, having branch network matters.
And certainly in residential it matters.
Paul Davis with 330 locations is positioned well with <unk>.
National insurance carriers.
Together, we're not.
Necessarily.
Collaborating in terms of Workforces, but there is lots of referral work back and forth.
And there are joint.
Efforts in terms of.
Sure.
Presenting and positioning ourselves with insurance companies to be the <unk>.
Residential and commercial solution.
And we want a couple of accounts.
Together and so that's really the big opportunity referrals.
And.
And working together with insurance companies.
Great. Thank you.
Thank you.
Our next question comes from the line of Frederic Bastien with Raymond James Your line is now open.
Good morning, guys.
Hey, good morning.
So you made your two largest deals in the past five six years or so when credit tightened.
And private equity paused and we're certainly seeing this kind of dynamic currently so.
So in light of this can you can you please tell us how.
On the vessel, maybe a year out of 10 are one to 10, how excited you are about the.
Your pipeline of M&A opportunities whether.
Large deals or.
More tuck in opportunities.
Well.
The pipeline is solid Frederic I don't want to throw water on here.
Europe segment.
We have we have a number of tuck under transactions in process, but they are typical type.
Tuck under deal small family owned businesses.
Yeah.
We are very pleased with the deals we've announced this year at Paul Davis and first service residential.
And our activity levels are balanced.
But.
Certainly nothing significant in the works but.
As Jeremy said in his prepared comments.
Have a conservative balance sheet, we have a significant amount of liquidity available to us.
Yeah.
Like you we believe that this is an opportune environment for us and.
We are ready for.
An opportunity if we have a shot at.
Thanks, Scott that's all I have thank you.
Thank you I'm showing no further questions at this time I would now like to turn the call back over to Mr. Scott Patterson for closing remarks.
Shannon and thank you everyone for joining.
This morning.
We look forward to our Q2 call.
Hi.
Have a great day.
Ladies and gentlemen. This concludes the first service Corporation first quarter Investors Conference call. Thank you for your participation and have a nice day.
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