Q2 2023 FirstService Corporation Earnings Call
Okay.
Good day, and thank you for standing by welcome to the second quarter Investors Conference call.
Today's call is being recorded.
Legal counsel requires.
Is that the discussion scheduled to take place today may contain forward looking statements.
All known and unknown risks and uncertainties.
<unk> results may be materially different from those from those any other future results.
Performance or achievements contemplated in the forward looking statements additional information concerning factors that could cause actual results to materially differ from those in the forward looking statements is contained in the company's annual information form as filed with the Canadian Securities administrators and in the company's annual report.
On form 40 F as filed with the U S Securities and Exchange Commission.
As a reminder, today's call is being recorded today is July 27, 2023, I would now like to turn the call over to Chief Executive Officer, Mr. Pat Patterson.
Your line is open.
Thank you Lisa.
Morning, everyone.
We appreciate you joining our 2023 second quarter conference call.
On the line today with Jeremy were crucial our CFO .
I'll kick us off with some high level comments or Jeremy will follow with more detail.
As you saw this morning, we reported very strong results that reflect continuing trends and momentum.
That drove our Q4 of last year and the first quarter of this year.
Total revenues for the quarter were up 20% over the prior year with.
With organic growth at 15%.
EBITDA was up 30%, reflecting a margin of 10, 6%, which is an 80 basis point improvement over the prior year.
Similar to our previous two quarters outsized organic growth in our brands Division boosted our topline and led to enhanced margins from operating leverage.
Earnings per share for the quarter were also up 30% in line with the increase in EBITDA.
Let me move to highlights for each division <unk>.
Starting with first service residential.
Where revenues were up 13% in total with the organic growth again, hitting double digits at 10%.
As I stated in my Q1 comments, we entered this year with momentum from strong sales in the fourth quarter of 2002 combined with solid client retention.
This favorable momentum continued through our Q2.
The other trend that is helping us in terms of a year over year comparison is an increase in labor and services with.
With many of our larger cost plus contracts.
We have reduced the number of contracted but unfilled position as compared to a year ago.
Which increases revenue and a cost plus environment.
Yeah.
Looking forward to the last half of the year, we expect to show similar low double digit topline growth for first service residential with organic growth at a high single digit level.
Moving onto first service brands revenues for the quarter were up 27% with organic growth at 20%.
Driven by very strong results at our restoration brands.
Supported by solid double digit growth at century fire and our home improvement brands.
Our restoration brands, Paul Davis, and first on site together recorded revenues that were up over 40% versus the prior year.
With about two thirds of the growth generated organically.
We booked approximately $35 million from named storms during the quarter.
Split between Hurricane in in Winter Storm Elliot.
This is down from $75 million plus in Q1.
But significantly higher than storm related revenues in Q2 of last year.
We're pleased with the performance from our restoration brands in Q2.
Sequentially relative to Q1, we generated less than half the storm related revenue.
But booked approximately the same total revenue for the quarter.
Which reflects positively on our day to day activity levels across our branch network.
Excluding storm related revenue, we generated solid double digit organic growth in restoration for the quarter.
Looking forward and restoration, we expect to show continued year over year growth for Q3.
But at a more modest level than we have seen in the past three quarters.
Our backlog is solid and above prior year's level.
A portion of the backlog is reconstruction work related to hurricane yet much of this work is slow moving.
We weighed on permits.
Our engineering studies or insurance confirmation or materials.
The work will be completed over the next year as hurdles are cleared and issues resolved.
The backlog excluding this portion.
Is approximately at prior year's level.
At this juncture, we expect to show year over year growth of 10% or more for Q3 somewhat dependent on the America Ian related reconstruction that gets completed between now and September 30.
As I mentioned earlier, we're pleased with the level of day to day work, we've been securing through our branch network.
And I expect a solid finish to our year and restoration.
Moving to century fire, we had a strong quarter right in line with our expectations.
Low double digit organic growth against a tough comparative quarter in the prior year.
All of our branches and service lines continued to perform.
And we expect similar results for the balance of the year.
The year over year growth rates will moderate in Q3 and again in Q4.
Due to the strong sequential growth, we were generating from quarter to quarter throughout 2022.
And I'll finish with our home improvement brands.
Which as a group were up over 10% versus the prior year with high single digit organic growth.
This is an impressive result, and a real credit to our operating teams.
The home remodeling sector in general is facing headwinds.
From higher interest rates and very sluggish home resales.
Our leads continue to lag year ago levels.
But our heightened focus on lead conversion and close ratio.
Is enabling us to continue to drive growth.
Looking forward, we expect the environment to remain difficult, but our teams believe they will continue to generate at least mid to high single digit growth through the back half of the year.
Let me now ask Jeremy to review our results in more detail.
Jeremy.
Thank you Scott and good morning, everyone. We are very pleased with our second quarter financial results, which yielded strong year over year growth metrics that closely matched our prior Q1 performance in every respect.
On a consolidated basis revenues for the quarter were $1, one 2 billion up 20% year over year and driving to adjusted EBITDA.
$118 $4 million and adjusted EPS of $1 46.
Both up 30% versus the prior year.
Our six months year to date consolidated financial performance included revenues of 214 billion.
An increase of 21% over the $1 $770 billion.
Last year with the contribution from organic growth at 16%.
Adjusted EBITDA of $204 million.
Representing 30% growth over the $153 $7 million last year with a margin of nine 4%.
Up 70 basis points from the eight 7% in the prior year period.
And adjusted EPS of $2 31.
Up 25% over the $1 85 per share reported during our same six month period last year.
Our adjustments to operating earnings and GAAP EPS to calculate our adjusted EBITDA and adjusted EPS, respectively have been summarized in this morning's release.
And remained consistent with disclosure in prior periods.
I will now breakdown our division financials for the second quarter, beginning with first service residential quarterly revenues came in at $517 million up 13% over the prior year.
EBITDA for the quarter was $55 7 million, a 10% year over year increase.
With a 10, 8% margin down a modest 20 basis points from the 11% margin in Q2 of last year.
We expect the division margin to be relatively flat to prior year and the remaining half of 2023.
Which would result in a full year margin being closely in line with our 2020 to annual performance.
At our first service brands Division, we reported second quarter revenues of $603 million, a 27% increase over the prior year period.
EBITDA for the quarter came in at $65 8 million up 50% year over year.
Our margin during the quarter was 10, 9% up 160 basis points over the nine 3% during last year's Q2.
As Scott previously outlined our restoration operations benefited during the current period from elevated weather related storm activity compared against the dormant level in the prior year second quarter.
<unk> contribution from our restoration platform was the primary driver behind both the higher division topline growth and margin improvement versus prior year.
Just as we saw in Q1.
But the upcoming third quarter, we expect the brands division margin to be more in line with prior year with anticipated tapering and contribution from storm backlog conversion within restoration compared to the first two quarters of this year.
With the brands margin improvement, we have booked year to date, we expect to finish the year with annual division margins up versus 2022.
Moving below the operating earnings line, our earnings per share of $1 46, <unk> during the quarter benefited from a nonrecurring seven.
Per share related to a gain on sale of one building.
This gain helped to offset higher year over year interest expense to drive to a 30% adjusted EPS growth matching our EBITDA growth for the quarter.
Looking at our cash flow from operations, we delivered $86 million up 40% over the prior year quarter.
More than half of the increase came from earnings growth across both divisions.
And then we also benefited from working capital movements, which in the current quarter delivered a slight cash inflow versus a more typical cash requirement as seen in last year's Q2.
With respect to capital expenditures, we invested $23 million during the quarter and supported by existing operations.
And our year to date total of $44 million is pacing with our targeted full year maintenance capex of $80 million and overall spending of approximately $100 million.
Tuck under acquisition activity during the quarter was tempered with minimal capital deployment.
With year to date investments approaching $100 million Risa.
Recent acquisitions will contribute to our growth during the upcoming quarters.
In closing our financial review, our balance sheet remains very strong leverage as measured by net debt to EBITDA moderated to one six times down from one eight times in the prior first quarter.
Liquidity, reflecting total undrawn availability under our revolver and cash on hand remains ample at approximately $420 million.
Our conservative capital structure and financial flexibility allows us to be assertive as we keep our eyes open for opportunities to deploy capital.
Looking forward the strong year to date performance, we are booked thus far reinforces our conviction that our businesses will collectively deliver low teens.
<unk> revenue growth with our consolidated EBITDA margin being roughly in line to potentially a little higher than our annual 2022 level.
That concludes our prepared comments Lisa you may now open the call to questions.
Thank you.
Thank you.
Like to ask a question. Please press star one on your telephone you will hear an automated message advising you handedly raised if you would like to remove yourself from the queue. Please press star one again.
One moment, while we compile the Q&A roster.
Okay.
The first question that we have today is coming from Stephen Macleod.
In our capital markets. Your line is open great.
Great. Thank you good morning, guys.
Just a couple of questions just wanted to start with the residential business.
Just curious if you can give an outlook or an update on sort of what youre seeing in terms of in terms of pricing and.
Yes, I guess you have some of these fixed price contracts coming up for renewal.
What's the ability or what's the what's the outlook for passing through some of those prices.
Steve I'll take that.
Good Scott, yes, Okay Jeremie, it's it's an ongoing exercise Steven.
We are having contracts renew.
About the year.
As you know it.
It has been and always will be a price competitive market generally how are <unk>.
Smaller competitors compete against us so.
<unk>.
We remain in an inflationary environment and wild wages are stabilized we are still seeing increases as contracts renew we need to cover off these increases.
In some cases, we're getting that increase in some cases, we're not.
We're getting part of it we're getting over a period of time.
So I've talked about in the last several quarters, it's a balance for us between margin and organic growth.
And.
I think that will continue we are I think right now probably at about 3%.
In terms of.
Price increases, 10% organic for the quarter three of that would be price and I think thats the level will be at for the foreseeable future.
Okay. That's great. Thank you.
And then maybe just on the on the home improvement side of things.
You talked a little bit about.
Youre sort of seeing the home remodeling sector are facing headwinds, but still expecting mid to high single digit growth through the back half of the year. So just curious if you can give a little bit of color as to where that is.
Incremental or those those pockets of strength are coming from in light of the weaker macro backdrop.
Yes, I mean, theres a number of things we see this environment as an opportunity to grab share.
So we have invested in marketing.
Sure.
Carefully using promotion and discount.
All to drive leads.
And then we're very focused on converting the leads and closing the sale.
Our leads are down year over year as I think I said in my comments.
But.
We're having greater success in converting them and closing them and certainly marketing and promotions are helping.
The other thing this year is we have a greater.
Capacity in these home improvement brands to complete work with a more stable labor environment through our productivity has improved we're able to schedule work more quickly all of that is helping with the close ratio.
Okay.
Okay. That's that's helpful. Thanks, Scott appreciate it.
Thank you for your question.
Moment, while we get after the next question.
And our next question will be coming from Michael Dumont.
Of Scotia Bank your line is open.
Hey, good morning, Scott Jeremy.
My first question is on.
The resin business.
I Wonder are you at a point, where you think you.
Essentially fill the vacancies maybe call. It you are kind of like normal vacancy levels.
Particularly as it relates to your fulfilling ancillary service just trying to get a sense for the continued momentum of that business on a go forward basis.
Yes, we have we're back to historical levels in terms of our open positions.
So we've made real progress.
Progress over the last six months it's a.
We're in a labor environment that is.
Improved certainly for us and the type of <unk>.
Physicians were trying to fill so.
We have seen.
A little boost to our organic growth the last few quarters, we'll probably see it again in Q3, but it.
It's a temporary.
Boost.
And we won't see it certainly next year.
Got it so it's a bit of a.
Catch up.
Again for the residential business I think you're calling for high single digit growth in the second half.
Versus 10% plus in the first half.
I look to the comps last year it doesn't really it looks like the second half grew much faster than the first half so I'm just.
Trying to wonder why are you, calling for an effect of slowdown in the organic comps in the first half versus the second half, particularly given some of the tailwind here.
Yes, I think.
It's not.
A significant decline, but we will see.
This.
Labor boost we still see that start to fall off so I think we're.
Certainly, making an accommodation for that as we.
Guide towards high single digit.
Otherwise this business is stable month to month quarter to quarter. So we won't we won't see any big moves.
One way or the other.
Okay that makes sense and maybe just a third one for Jeremy.
On the working capital side, I think you'd commented Jeremy.
Neutral.
Typical seasonality is usually it's a draw but theres been nearly call it $175 million of investment in working capital the last four quarters. So just wondering.
How to think about that how correlated it should be to restoration activity.
<unk> in the second half.
Youre right I mean, a lot of the.
The investment in working capital as reflected in the accounts receivable net.
Largely driven by our restoration operations.
We expect to collect on that in the coming quarters. They are.
Longer paying customers good paying customers all backed by insurance.
And.
The timing as to which quarters, it's going to come in.
Hard to predict and it obviously also dependent on further weather driven activity in coming quarters. So.
The timing is always around working capital as I said is very tough to predict quarter to quarter.
We feel comfortable that we are going to convert it and I think.
You see it saw the start of that in this quarter.
Some of our other working capital items swing to the positive.
Perfect very nice quarter guys. Thanks for the answers.
Thank you for your question.
As a reminder, if you would like to ask a question. Please press star one on your telephone one moment for the next question.
Okay.
And our next question will be coming from.
Tom Gallagher of RBC. Your line is open.
Thanks, Good morning, guys maybe.
Maybe just to start on the restoration side and going back to your prepared remarks. There mentioned in Q2 that total revenue was really the same despite kind of that that lower booked amount of storm revenue. In Q2 can you maybe just talk about some of the positive drivers of that day to day activity and is it broad based or is there something specific dry.
That.
Well between the two brands.
We have 430 or 440 branches.
So we are positioned across North America.
<unk>.
While there weren't any named storms in the first six months.
There was widespread weather.
Really throughout North America, and so our branch network.
Benefited from that.
We are.
Responding well to our customers and national commercial insurance carriers on.
And I think we're building.
Building on and improving our service delivery, we feel like we're getting more wallet share. So it is just day to day organic growth across the branch network. The other thing I will say is that we did benefit from a few very large projects that were not storm related.
We are in the business of large loss principally through first on site and we always have large losses on the go but we did get a.
Boost in Q2 from a few particularly large jobs.
Got it that's helpful. And then maybe just one more from me on the M&A front.
Maybe just talk about what youre seeing in the pipeline and then any commentary on any evolution of pricing valuations thus far in 2023.
Sure.
Our pipeline is steady and I would say it reflects a normal level of activity for us.
We didn't close anything in the quarter, but we do have deals in and process them.
There really are I think I said on our last quarter there are typical.
Under family owned.
Business.
I would say that the.
Deal flow has slowed.
<unk> ability of companies has decreased I think it.
It may be because owners believe multiples of that.
Our competition is.
Has moderated.
But we haven't seen that.
Yeah, good businesses are attractive multiples as high as they've ever been in.
Good businesses are attracting many bids.
So it's a.
I don't think the valuations have changed.
Haven't seen it.
I think the deal flows off a bit.
But but I would expect us to close some some of our pipeline between now and year end.
Okay great.
Is it for me I'll turn it back.
Thank you.
One moment for the next question.
And our next question is coming from.
Matthew Suite of William Blair. Your line is open.
Hey, Scott Jeremy you have Matt <unk> on for Stephen Sheldon. Thank you for taking my questions.
I wanted to start with one on residential what is the pace of new HOA construction meant to growth in the residential segment is that becoming a bigger component of organic revenue growth by giving you a newer properties to pursue.
I would say new.
New development for US Matt has always been a stable component of our growth, but it's probably off right now.
Compared to the last five years, we've always given the number that it averages.
Averages about 20% of our growth and Thats, where it is right now I would say.
There are boats.
But it's it has been stronger.
I think the last few years.
But we do it.
It's a core.
Part of our strategy and we have strong relationships.
With developers across North America, particularly.
High rise and large lifestyle communities.
Does that answer your question.
Yes, that's helpful color. Thank you for that.
And then just looking for an update on the restoration technology platform and how that's progressing relative to your expectations and what that platform could mean for margins in the brand segment and if it could move the needle Lenny.
Yes, hi, Matt its Jeremy I'll take that one and making continuous progress.
Ed.
Last call we were approaching the halfway Mark we have a little more than that so it's steady on track.
We've got many branches still to onboard an edge.
Any benefits that we're going to see from that as well.
We will only start to see.
Incrementally realize on that at some point in 'twenty four and beyond multiyear.
But hard to quantify until we.
We've kind of completed getting everyone on one system.
We're going to market with one brand in terms of processes that are consistent and systematic across the board.
Got it that makes sense and then just a quick clarification question here and forgive me if I missed this but how should we think about the impact from weather in the third quarter relative to levels seen in the second quarter, assuming no other name whether events come through.
Yes.
It will be.
Down down quite a bit we're through most of our backlog from winter storm Elliot.
So, we'll see some but down down materially from Q1 and two.
Okay got it thank you both and great quarter. Thanks.
Thanks, Matt.
Thank you for your question at this time I'm showing no further questions in the queue I would like to turn the call back over to CEO for closing remarks. Please go ahead Sir.
Thank you Lisa.
Thank you all for joining today and enjoy the rest of your summer and we will regroup for Q3 at the end of October .
This concludes today's conference call. Thank you all for joining.
Ill disconnect and please have a great day.
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