Q3 2023 FirstService Corporation Earnings Call
Good day and thank you for standing by welcome to the third quarter Investors Conference call. Today's call is being recorded legal counsel requires us to advise that the decision scheduled to take place today may contain forward.
And it doesn't involve known and unknown risks and uncertainties actual results may be materially different from any future results performance or achievements.
Supply you did in the forward looking statements.
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 Thursday October 26, 2023, I would like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead Sir.
Thank you Michelle.
Good morning, everyone and thank you for joining our third quarter conference call.
Jeremy Rakuten is with me and we're pleased to be on the line with you today.
To report on our strong Q3 results we released this morning.
Results reflect solid performance across each of our brands.
We're very pleased with how the quarter played out.
<unk> momentum that drove the last several quarters for us.
In Q3 despite.
Increasing headwinds relating to a challenging macroeconomic environment and softening consumer demand.
Organic growth during the quarter was 10% on a consolidated basis.
We're taking market share.
That is a tribute to our operating teams and their relentless focus on customer experience.
We're growing organically, while many of our markets and competitors are flat to down over the last quarter.
Total revenues for the quarter were up 16% over the prior year.
With organic revenue growth as I, just said at 10%.
Balanced about evenly between our two divisions.
EBITDA for the quarter was 112 million up 17% from 2022.
Reflecting a margin of 10% approximately the same level as prior year.
And earnings per share were $1 25.
7%.
Jeremy will dive into the profitability metrics in more detail in a few minutes.
Looking now at high level results for our divisions, starting with first service residential where revenues were up 12% with organic growth over 9%.
Results in this division were right on expectation topline growth was broad based.
With solid contributions from each of our six regions in North America.
Organic growth was driven by continued strong net new contract wins, leading to higher management fee and labor related revenue.
Looking to the fourth quarter at first service residential we expect to again show low double digit revenue growth.
The organic growth at a mid to high single digit level.
Moving on our first service brands revenues for the quarter were up by 20%.
Organic growth at 11% drill.
Driven by strength at our restoration and brands and century fire.
Our restoration brands, Paul Davis and first on site.
Together recorded revenues that were up by about 25% versus the prior year with one third of the growth generated organically.
We booked approximately 25 million for named storms during the quarter.
<unk> continuing work from Hurricane Fiona Hurricane Ian and Winter Storm Elliot.
This compares to a negligible amount for named storms in the prior year quarter.
Excluding storm work, we had a solid quarter and are pleased with the day to day activity levels across our branch network at both brands.
During the quarter, we added to our footprint and restoration with three announced Scott garners.
First on site acquired case restoration based in Nashville.
Cases, a full service commercial restoration company.
With specific expertise in large loss claims this.
This acquisition significantly enhances our capability and client coverage in Nashville.
Which is an important market for us long term.
At Paul Davis, we added to our company owned platform with the acquisitions of our franchised operations, serving Richmond, Virginia in Reno, Nevada.
The Richmond branch compliments, our previously acquired Raleigh, North Carolina operation.
Expanding our footprint in the mid Atlantic region.
Similarly, the Reno location augments the scale and service capabilities of our existing Nevada, and Utah company owned operations.
And the branches will operate collectively as one region.
Looking forward, we expect our revenues for restoration in Q4 to be down from year ago up to 10% based on current backlog and trends.
We generated $85 million in Q4 of last year from Hurricanes Ian Yana.
Which led to an outsized result for us and a tough comparison.
We continue to work through the remaining backlog from the R&R and winter storm Elliot and expect to generate revenue for named storms at a similar level to this past quarter and the $25 million range.
As I mentioned earlier, we're very pleased with current activity levels.
And outside of named storms, our backlog from day to day activity is strong we expect to have a solid Q4 and restoration.
Okay.
Moving now to century fire, we had a very strong Q3 with record revenues.
It was similar to Q2 with almost all our 30 plus branches growing sequentially and versus the prior year.
We expect another strong quarter upcoming with growth in the 10% range.
Against a very strong Q4 of last year that was up 20% organically versus 2021.
And I'll finish with our home improvement brands, where we saw our growth slowed during Q3.
Up mid single digit year over year in total with organic growth at a low single digit level.
Higher interest rates record low home resales.
And a challenging macroeconomic backdrop has significantly impacted consumer demand.
Our leisure off 10% versus a year ago.
As I mentioned last quarter, we continued to drive growth through improved lead conversion and close ratios.
We expect a similar result in Q4.
Our teams believe we will continue to drive single digit growth.
Against the prior year comp that was relatively weak.
Let me now call on Jeremy to review our results in more detail.
Thank you Scott Good morning, everyone. As you just heard first service delivered strong financial results for the third quarter on both a consolidated and segmented basis.
For the quarter, we recorded consolidated revenues of 1.12 billion up 16% and adjusted EBITDA came in at $111 9 million.
A 17% increase relative to the prior year period.
Although the operating line, our adjusted EPS was $1 25.
At a more modest 7% quarter over quarter, reflecting the higher interest rate environment this year compared to 2022.
Highlighting our consolidated performance for the nine months year to date, we have delivered revenues of $3 billion to $6 billion.
Up from $2 73 billion in the prior year period, an increase of 19%, which includes 14% organic growth.
Adjusted EBITDA sits at $312 4, million% to 25% increase year over year with our overall EBITDA margin at nine 6% up 50 basis points versus nine 1% margin for the prior year period.
And lastly, our adjusted EPS year to date is $3 56 and.
An increase of 18% over the $3 <unk> reported for the same period last year, even in the face of a more than doubling our interest expenses.
Our adjustments to operating earnings and GAAP EPS in providing adjusted EBITDA and adjusted EPS, respectively are disclosed in this morning's earnings release and are consistent with our approach and prior periods.
I'll now walk through the third quarter segment results for our two divisions.
At first service residential we generated revenues of $537 8 million.
A 12% increase over Q3 2022.
This strong top line performance drove EBITDA of $56 $6 million, representing 14% year over year growth.
Our current quarter EBITDA margin yield of 10, 5% relatively in line with the 10, 4% in last year's Q3.
But broadly distributed growth across our markets and service offering is also driven balanced.
The ability for the year with our year to date EBITDA margins sitting at nine 6% again relatively comparable to nine 8% in the prior year.
Within our first service brands Division, we generated revenues of $579 3 million during the current third quarter up 20% versus the prior year period.
Our brands EBITDA increased by 24% to $67 million with a 10, 5% margin up 40 basis points from 10, 1% margin in last year's third quarter.
Our brands margin improvement reflected operating leverage benefits derived from the strong division topline performance, particularly at our century fire protection and restoration service lines.
With the quarter over quarter margin improvement at both of our operating divisions, our consolidated margin ticked up slightly to 10% flat.
Notwithstanding higher corporate costs in the current quarter due to foreign exchange fluctuations.
The strength in our operating and financial performance across our businesses also extended to very strong cash flow conversion during the quarter.
We delivered $84 million in cash flow from operations with.
Without any additional working capital as accounts receivable collections offset other operating requirements.
Our nine months year to date operating cash flow of $170 million is up more than threefold versus the prior year period.
Capital expenditures during the quarter totaled $23 million with the year to date tally sitting now at $68 million for the full year, we expect to be at or slightly lower than our previous targets of $80 million in maintenance spending and $100 million evolving capex.
Acquisition investment during the quarter was modest reflecting the completion of a few restoration tuck under transactions that Scott referenced year to date, we have deployed over $110 million in acquisition capital and we are pleased with our tuck under program activity in contributing over and above are strong.
Organic growth.
We also continued to advance our deal pipeline to surface additional attractive investment prospects across our service lines.
Our balance sheet at quarter end included net debt of just over $640 million computing to leverage at one five times net debt to trailing 12 months EBITDA down slightly from the one six times level with growth for both the previous second quarter and 2022 year end.
And relatively consistent with longer term historical trends.
We also have approximately $450 million of total cash on hand, and undrawn availability under our credit facility we.
We are well positioned with our conservative and flexible capital structure and ample liquidity to aggressively deploy capital towards future opportunities as they may arise.
In terms of outlook for closing out 2023, our consolidated revenues for the fourth quarter will likely see more tempered mid single digit growth.
As Scott noted Q4 2022 included $85 million in revenues from Hurricanes.
Late last year.
Without any similar pending storm related events as we sit today in the current fourth quarter, we expect that revenues from our restoration operations will be down year over year with all of our other brands growing at high single digit to low double digit percentage ranges.
In terms of profitability, we expect that Q4 consolidated consolidated EBITDA will be roughly in line with last year's fourth quarter due to a year over year decline in restoration profitability drip.
Driven by both lower revenues and a margin decline without the benefits of storm related work.
We anticipate continued strong and profitable growth across our remaining operations.
With this outlook combined with our nine months year to date results. We will deliver 2023 annual total revenue growth in the mid teens percentage range with a similar level of consolidated EBITDA growth.
Very impressive performance for the year.
During our next earnings call in February covering off by year end results. We will also provide a high level 2024 outlook encompassing upcoming budget and strategic.
Strategic planning reviews with our brands.
That concludes our prepared comments.
Operator, please open up the call to questions. Thank you.
Thank you at this time, we will conduct a question and answer session to ask a question. Please press star one on your Charlestown and wait for your name to be announced to withdraw. Your question. Please press star one again please.
Please standby.
The Q&A roster.
The first question comes from Faiza <unk> with Deutsche Bank. Your line is open.
Hi, Thank you so much good morning.
To follow up on the comments you made around the home improvement brands, where you saw growth slow.
I mean, it sounds like it was still pretty reasonable at mid single digit year over year growth in your.
Indicating that it would be low single digit next quarter, how much of a lag is there as it relates to.
Consumer demand and you mentioned leads are off 10% versus year ago.
How should we think about this business and in 2024.
You mean current conditions persist and I'm curious if you think of this business is a leading indicator to any other part of your business, whether it's on first service residential or.
I feel that there isn't that much of a macro component elsewhere in your portfolio, but curious how you would think about it.
Right. Okay. So there's a lot there so let me let me start to work through it.
Okay.
Definitely consumer demand for home improvement is down.
We see it.
A number of industry research groups and indicators that point to it being down and we don't expect.
The environment to improve.
Over the next several quarters.
But you've heard me say before that.
Our teams are very resilient and focused on growth and these markets are very large.
And our teams.
The belief system is that we can scratch out growth even in a down market, we have proven that over the last few quarters.
With a focus on close ratio and lead conversion and and we've also been.
More aggressive I think in terms of marketing with.
With some utilization of discounting and promotion.
There is not much of a lag.
In this business our backlog is measured in.
And weeks.
And so.
Changes in consumer demand will impact us pretty quickly.
One way or the other.
The.
In terms of it being a leading indicator.
It's not.
It's not a significant leading indicator for any of our other businesses.
Most of our our two largest businesses first service residential and restoration are both really agnostic to consumer demand and more driven by whether in the case of restoration and in the case of first service residential I mean, the community's needs to be managed.
Good markets and bad markets. So.
We don't see it as a as a significant indicator for us.
I'll leave it at that I don't not sure I answered all your questions.
That's very helpful. Thank you and I just have.
A separate question if that's okay and then just around some of the acquisitions that you've made particularly on the reservation side or the.
Fire side and I'm curious, how you think about.
Synergies are the benefits of scale like it seems like there's still a lot of white space opportunity. So maybe talk a little bit qualitatively or if you can add some numbers to it that would be helpful. In terms of what youre seeing is there a synergistic benefit and should we expect higher margins as you as you grow in scale and when does that.
And.
Yes, both of the business as you mentioned.
We're filling out our footprint.
And.
The biggest benefit is that we are.
Better positioned.
We're able to respond to our national accounts.
And restoration, we have between both brands over 400 branches, and we're very well positioned to respond to our.
Our insurance carriers and our national commercial accounts.
Sachin century, we continue to build out primarily in the southeast and mid Atlantic regions.
And I can.
That national account program the more that we can self perform the more we can.
Keep for ourselves because we do use a better network elsewhere.
So that the prime it's not as significant.
Level of efficiency that is created from scale.
It's more of a positioning.
Positioning in the market and with our clients because both businesses, our local service delivery and so we're adding labor.
When we when we add branches.
Great. Thank you very much.
Please standby for the next question.
The next question comes from Stephen Macleod with BMO capital markets. Your line is now.
Operator: Good day and thank you for standing by.
Sure.
Operator: Welcome to the third quarter investors conference call. Today's call is being recorded.
Thank you good morning, guys.
Steve just a couple of good morning, just a couple of questions that I wanted to follow up on <unk>.
Operator: Legal Council requires us to advise that the decision scheduled to take place today may contain forward looking statements that involve known and unknown risk and uncertainties. Actual results may be materially different from any future results, performance or achievements come to play 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 40F as filed with the US Securities and Exchange Commission. As they reminder, today's call is being recorded.
On the residential side I mean, Scott I think you've covered it often in your in your prepared remarks, and the Q&A, but just curious can you just confirm are you seeing any macro impact to the residential business as it relates to residents' ability to pay fees or cost pressures youre seeing pricing pressures youre seeing on contracts things like that.
There's two different things there, we're not seeing any pressure on monthly management fees and delinquencies as it relates to the residents.
But certainly.
Budgets are increasing.
At communities in terms of primarily through <unk>.
Increased insurance premiums.
And I would say, particularly in <unk>.
Risk areas.
Operator: Today is Thursday, October 26, 2023.
Texas.
In Florida, but <unk>.
Michelle: I would like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir. Thank you, Michelle.
Generally the high rise environment and.
And so the increasing inflation across their cost structure is certainly.
Put pressure on it budgets.
Scott Patterson: Good morning, everyone, and thank you for joining our third quarter conference call. Jeremy Rekousen is with me and we're pleased to be on the line with you today to report on the strong Q3 results we released this morning. Results that reflect solid performance across each of our brands. We're very pleased with how the quarter played out. The trends and momentum that drove the last several quarters for us continued in the Q3 despite increasing headwinds relating to a challenging macroeconomic environment and softening consumer demand.
And.
And put pressure on us around pricing, which is <unk>.
Stephen you've followed us for a long time, I mean, thats nothing new in this business for us.
Yes, yes.
Sorry, yes.
Yes.
Great Scott.
Pricing pressure is always there.
Well that's helpful.
And then just as you think about the brand's business in Q4 with the with the restoration business.
We did see a couple of storms, we did see some storm activity in.
Earlier this fall.
Scott Patterson: Organic growth during the quarter was 10% on a consolidated basis. We're taking market share and that is attribute to our operating teams and their relentless focus on customer experience. We're growing organically while many of our markets and competitors are flat to down over the last quarter. Total revenues for the quarter were up 16% over the prior year with the organic revenue growth as I just said at 10% balanced about evenly between our two divisions.
I'm just curious are you seeing any backlogs building from those storms and then secondary to that just when you think about Q4 and the the comp.
Again, a growth sort of sort of slowing against the tough comp can you just talk a little bit about what kind of margin impact that might have on on Q4.
Right, Okay I'll deal with the first part of the question, we didn't see a significant pickup in our backlog related to some of the regional events you spoke about in Florida.
That storm really had an area that wasn't.
Scott Patterson: EBITDAF of the quarter was 112 million up 17% from 2022 reflecting a margin of 10% approximately the same level as prior year and earnings per share were $1.25 up 7%. Jeremy will dive into the profitability metrics in more detail in a few minutes. Looking now at high level results for our divisions starting with first service residential where revenues were up 12% with the organic growth over 9%.
Heavily populated or did not have.
Much of our footprint as it relates to our national accounts and then in the north.
North East again similarly.
Okay.
It didn't lead to a lot of.
Mitigation and restoration work.
Jeremy over to you on margin.
Yeah. Thanks.
Scott as.
Steve Yes, the lack of.
Comparable weather related activity means that margins will be down at restoration.
And that obviously impacts the overall first service brands Division.
Scott Patterson: Results in this division were right on expectation. Top line growth was broad based with solid contribution from each of our six regions in North America. Georgia. Organic growth was driven by continued strong net new contract wins, leading to higher management fee and labor-related revenue. Looking to the fourth quarter at FirstService Residential, we expect to again show low-double-digit revenue growth with the organic growth at a mid to high single-digit level. Moving on to FirstService brands, revenues for the quarter were up by 20 percent with the organic growth at 11 percent driven by strength at our Restoration Brands and Century Fire.
Again, we see that being down year over year.
Robert Lee relatively similar coming in relatively similar sequentially to the current third quarter for that division.
Okay.
Okay I see so you would expect.
Q4 margins to be similar to what they were in Q3.
Bringing the bus I mean, obviously moving parts, but direction yes.
Yes, yes.
That's that's.
Great I'll pass it back to the line. Thank you.
Please standby for the next question.
Yeah.
The next question comes from Stephen Sheldon with William Blair. Your line is open.
Hey, Thanks, and really nice job in the quarter.
Scott Patterson: Our Restoration Brands, Paul Davis and First on site, together recorded revenues that were up by about 25 percent versus the prior year with one-third of the growth generated organically. We booked approximately 25 million from name storms during the quarter, including continuing work from Hurricane Fiona, Hurricane Ian, and Winter Storm Elliott. This compares to a negligible amount from name storms in the prior year quarter. Excluding storm work, we had a solid quarter and are pleased with the day-to-day activity levels across our branch network at both brands.
First on the organic revenue growth in residential I think it continues to be outstanding I think you've historically said that sourcing labor for contracts that is usually the biggest impediment limiter to grow <unk>.
So curious what you're seeing on the labor side right now is it getting any easier to source labor and have you changed anything materially on the execution side to allow you to better recruit and retain labor.
The labor market continues to improve for us and we're really seeing it across all the brands.
First service residential maybe the best example, because you've heard from us over the last few quarters that we've been.
Scott Patterson: During the quarter, we added to our footprint and restoration with three announced talk-unders. First on site acquired case restoration based in Nashville. Case is a full-service commercial restoration company with specific expertise in large-loss claims. This acquisition significantly enhances our capability and client coverage in Nashville, which is an important market for us long-term. At Paul Davis, we added to our company-owned platform with the acquisitions of our franchise operations, serving Richmond, Virginia, and Reno, Nevada.
Phil Wenger.
Our open positions and we're sort of back to historical levels.
I think the market has certainly eased.
Yeah.
We're seeing more applications were filling more jobs more quickly our turnover has improved but at the same time.
The second part of your question Stephen we have certainly.
<unk> invested in.
Resources and technology around recruiting and also Onboarding and so it's.
Scott Patterson: The Richmond branch compliments are previously acquired Rawley, North Carolina operation, expanding our footprint in the Mid-Atlantic region. Similarly, the Reno location augments the scale and service capabilities of our existing Nevada and Utah company-owned operations, and the branches will operate collectively as one region.
It's hard to.
Discern or put a pan air.
The improvement in weather.
<unk> been the architect of that or whether the market is coming back to us, but yes, I think it's a little of both.
Got it.
I guess is that.
Typically talked about 3% to 5% organic growth in that business.
Given you're seeing some of that the way the changes that you've been able to kind of push through that didn't improvement on the execution side and maybe has your thought process there changed somewhat the organic the right organic growth profile to think about that we should be thinking about.
Scott Patterson: Looking forward, we expect our revenues for restoration in Q4 to be down from year ago, up to 10% based on current backlog and trends. We generated 85 million in Q4 last year from Hurricanes Ian and Fiona, which led to an outsized result for us in a tough comparison. We continue to work through the remaining backlog from Ian, Fiona, and Winchester Storm Elliott, and expect to generate revenue from named storms at a similar level to this past quarter, in the $25 million range. As I mentioned earlier, we're very pleased with current activity levels, and outside of named storms, our backlog from day to day activity is strong. We expect to have a solid Q4 in restoration.
It's been much stronger this year definitely we're getting a little more price.
We continue to carry some momentum from.
Scott Patterson: Reformation.
Strong sales late last year and early this year, that's starting to normalize.
So it's it's.
It's easing its way back down.
Mid to high I would say.
I'm comfortable with right now.
Got it.
Tick higher yep.
Got it that's helpful. And then just at century fire given that half of that business.
Inside the new construction activity for installations, just curious about that sub sector exposure there.
At century fire more exposed to certain subsectors for construction and thinking about opex versus industrial versus.
Scott Patterson: Moving now to Century Fire, we had a very strong Q3 with record revenues. It was similar to Q2 with almost all our 30 plus branches growing sequentially and versus the prior year. We expect another strong quarter upcoming with growth in the 10% range against a very strong Q4 last year that was up 20% or organic versus 2021.
Multifamily more exposed to certain of those versus others and how are you thinking about the growth outlook. There given any visibility you have into new construction over the next few years.
Right.
Certainly in terms of our backlog.
We feel very good about Q4, and I think it will carry into Q1.
But.
As you suggest the commercial real estate market is less than robust right now.
Scott Patterson: And I'll finish with our home improvement brands where we saw our growth slow during Q3. Up mid-single-digit year-over-year in total with the organic growth at a low single-digit level. Higher interest rates, record low home resales, and a challenging macroeconomic backdrop has significantly impacted consumer demand. Our leads are off 10% versus year ago. As I mentioned last quarter, we continue to drive growth through improved lead conversion and close ratios. We expect a similar result in Q4. Our teams believe we will continue to drive single-digit growth against a prior year comp that was relatively weak.
So we're keeping a very close eye on on backlog.
We do have a strong presence in multifamily and distribution warehouses.
Office retail across the board, but.
I think generally if.
Commercial real.
Real estate, new construction slows dramatically we would.
Some point, we're going to see that.
50% of that business would be new install 50 percentage recurring service inspection repair.
Got it thank you.
Please standby for the next question.
The next question comes from Michael <unk> with Scotiabank. Your line is open.
Jeremy Rakusin: Let me now call on Jeremy to review our results in more detail. Thank you Scott.
Hey, good morning, guys.
Scott you started off with.
Jeremy Rakusin: Good morning everyone. As you just heard, FirstService delivered strong financial results for the third quarter on both a consolidated and segmented basis. For the quarter, we recorded consolidated revenues of $1.12 billion, up 16%, and adjusted EBITDA came in at $111.9 million, a 17% increase relative to the prior year period. Below the operating line, our adjusted EPS was $1.25, up a more modest 7% quarter-over-quarter, reflecting the higher interest rate environment this year compared to 2022.
I think some comments on market share so I just wanted to.
To kind of get a little bit more detail on this but for home improvement.
And the century fire, but is it possible at all to break down what you think is market share growth versus industry growth.
And then in your view do you still think you have that leavers to continue to push maybe a similar market share gain for those two segments into 2024.
It's easier to.
Create clarity and.
In the home improvement business, because there are a number of.
Jeremy Rakusin: Highlighting our consolidated performance for the nine months year to date, we have delivered revenues of $3.26 billion, up from $2.73 billion in the prior year period, an increase of 19%, which includes 14% organic growth. Adjusted EBITDA sits at $312.4 million, a 25% increase year over year, with our overall EBITDA margin at 9.6% of 50 basis points versus a 9.1% margin for the prior year period. And lastly, our adjusted EPS year to date is $3.56, an increase of 18% over the $3.02 reported for the same period last year, even in the face of a more than doubling of our interest expenses. Our adjustments to operating earnings and gap EPS and providing adjusted EBITDA and adjusted EPS respectively are disclosed in this morning's earnings release and are consistent with our approach in prior periods.
Research groups that follow it pretty closely.
<unk>.
So we feel we feel very confident that we're taking share and.
Closet organization space painting.
The significant brands, we have floor coverings.
Tougher at century fire.
But the organic growth, we're seeing is quite strong.
<unk>.
I think that we're driving a lot of it.
As we've made acquisitions, where we're adding services.
Where necessary to ensure all our branches our full service center.
Adding alarm to sprinkler businesses, and vice versa, adding service tech primarily installation businesses.
It's been a significant growth driver for us to add services to the existing customer base and so.
We're taking wallet share in that instance.
It's Jeff.
Jeremy Rakusin: I'll now walk through the third quarter segment results for our two Residents. At FirstService Residential, we generated revenues of $537.8 million, a 12% increase over Q3 2022. The strong top line performance drove EBDA of $56.6 million, representing 14% year-over-year growth. Our current quarter EBDA margin yielded 10.5% relatively in line with the 10.4% in last year's Q3. The broadly distributed growth across our markets and service offering has also driven balanced profitability for the year.
Definitely.
A higher number are organic growth than the market, but it's not it's not crystal clear and in terms of.
Driving this into 'twenty four I think we'll continue to take share the question is.
The market and what kind of support we get from the market.
That's helpful. Thanks.
And then maybe flipping over to restoration I think previously you talked about making investments in that business.
Once completed would drive.
<unk> margin expansion.
I think over several years.
So just curious on how those investments are progressing.
Timelines on potential margin expansion for that business obviously.
Jeremy Rakusin: With our year-to-date EBDA margin sitting at 9.6% again relatively comparable to 9.8% in the prior year. Within our $3 million during the current third quarter, up 20% versus the prior year period. Our brand's EBDA increased by 24% to $60.7 million with a 10.5% margin of 40 basis points from a 10.1% margin in last year's third quarter. Our brand's margin improvement reflected operating leverage benefits derived from the strong division top line performance, particularly at our Sanctuary Fire Protection and Restoration Service lines. With the quarter over quarter margin improvement at both of our operating divisions, our consolidated margin picked up slightly to 10% flat, notwithstanding higher corporate costs in the current quarter due to foreign exchange fluctuations.
Recognizing that storm impact.
Aside.
As it relates to these vessels.
And Michael it's Jeremy.
Investments on track.
We're probably two thirds of the way now.
<unk> of Onboarding, Our branch network. We said this would carry on through this year and likely into part of 'twenty four and then.
After that we will evaluate the opportunity.
For reaping the benefits of that investment so I suspect at some point in 'twenty four and into the later years, we will see that and we'll get greater clarity as we go through budget and strategic plan reviews.
In the next couple of months with with both restoration as well as all of other businesses clarity on 24 and beyond.
Yes.
Very helpful. Thanks, guys.
Okay.
Please standby for the next question.
The next question comes from Tom Callaghan with RBC. Your line is open.
Jeremy Rakusin: The strength in our operating financial performance across our businesses also extended to very strong cash flow conversion during the quarter. We delivered $84 million in cash flow from operations without any additional work in capital as accounts receivable collections offset other operating requirements. Our nine months year-to-date operating cash flow of $170 million is up more than threefold versus the prior year period. Capital expenditures during the quarter total $23 million with the year-to-date tally sitting now at $68 million.
Thanks, Good morning, guys.
Maybe just.
Just one on my end My question you asked but maybe you could just some comments on the acquisition pipeline you guys alluded to in the prepared remarks, there I know youre a little more active towards the end of last year and early this year, but kind of where it stands right now maybe relative to last year and is there a specific focus or is it kind of broad based across.
The restoration in residential side of things.
The.
Our pipeline is solid.
Relative to last year.
Jeremy Rakusin: For the full year, we expect to be at or slightly lower than our previous target of $80 million in maintenance spending and $100 million of all in CAPEX. Acquisition investment during the quarter was modest, reflecting the completion of a few restoration tuck under transactions that Scott referenced. Year-to-date, we have deployed over $110 million in acquisition capital and we are pleased with our tuck under program activity in contributing over and above our strong organic growth.
Thinking back we did close some fourth quarter deals last year. So.
It's.
I think it would be close to where we were last year at this time, but it's generally in line with where we've been.
And.
Jeremy talked about our spend this year, we're very comfortable with what we've accomplished so far it's it's right in line with where we've been the last few years.
And our pipelines are in decent shape.
Jeremy Rakusin: We also continue to advance our deal pipeline to surface additional attractive investment prospects across our service lines. Our balance sheet of quarter end included net debt of just over $640 million computing to leverage at 1.5 times net debt to 22 year-to-date, and relatively consistent with longer-term historical trends. We also have approximately $450 million of total cash on hand and ungrown availability under our credit facility. We are well positioned with our conservative and flexible capital structure and ample liquidity to aggressively deploy capital towards future opportunities as they may arise.
Okay.
Don't know.
Whether we will close in the fourth quarter or whether that will leak into next year, but we've got activity and it's balanced across both divisions.
That's that's very helpful and maybe just one follow up piece on the residential side.
You've talked about the success with with <unk>.
Repricing there.
The renewals just curious has that impacted retention rates at all or are those healthy are holding pretty steady.
No retentions.
<unk> is at our long term historical.
<unk>.
It's about the same as it has been in the last several years.
Awesome, Thanks ill turn it back.
Yes.
As a reminder to ask a question. Please press star one one on your Touchtone telephone. Please standby for the next question.
Jeremy Rakusin: In terms of outlook for closing out 2023, our consolidated revenues for the fourth quarter will likely see more tempered mid-single-digit growth. As Scott noted, Q4 2022 included $85 million in revenues from Hurricanes Ian and Fiona late last year. Without any similar pending storm-related events as we sit today in the current fourth quarter, we expect that revenues from our restoration operations will be down year over year with all of our other brands growing at high single digits to low double digit percentage ranges.
The next question comes from Frederic Bastien with Raymond James Your line is open.
Yes.
Yes. Thank you good morning.
Scott Scott <unk> bin.
Just follow up really on the M&A questions here, you've been quite active and successful at consolidating restoration and fire protection in recent years as you look forward.
How far are you from where you'd like to be I mean.
Just wondering if you can conceivably double perhaps triple the size of these businesses.
Five years or so.
In the case of restoration.
Jeremy Rakusin: In terms of profitability, we expect that Q4 consolidated EBITA will be roughly in line with last year's fourth quarter due to a year of year decline in restoration profitability driven by both lower revenues and a margin decline without the benefits of storm-related work. We anticipate continued strong and profitable growth across our remaining operations. With this outlook combined with our nine-month year-to-date results, we will deliver 2023 annual total revenue growth in the mid-teens percentage range with a similar level of consolidated EBITA growth, very impressive performance for the year.
I would say that.
Our activity would be slowing our footprint is starting to fill out.
We will become.
More of an organic growth engine.
As we have had.
Have been an art for service residential.
We still have white space that we're focused on.
But I see the next few years won't be.
As active as we have been.
<unk> III century fire, we still got lots of.
Lots of white space in our regions to grow into so.
So I see that.
Continuing to grow short at the same pace as we have been but in both cases.
Jeremy Rakusin: During our next earnings call in February covering off our year-end results, we will also provide a high-level 2024 outlook encompassing upcoming budget and strategic planning reviews with our brands. That concludes our prepared comments.
Fredrik you know that.
First focus is.
He is on organic growth or are we winning the day to day.
At every branch that's our first priority.
And it will continue to be that.
Awesome.
Operator: Operator, please open up the call to questions. Thank you.
Thanks, Thats, all I have great quarter.
Operator: At this time, we will conduct the question and answer session. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we come out of the Q&A roster.
Thanks.
I show no further questions at this time I would now like to turn the call back to Mr. Scott Patterson for closing remarks.
Thank you Michelle.
Thank you all for joining us today.
We look forward to.
Faiza Alwy: The first question comes from Pfizer. Always with Deutsche Bank. Your line is open. Yes, hi. Thank you so much. Good morning. I wanted to follow up on the comments you made around the home improvement brands where you saw growth slow. I mean, it sounds like it was still pretty reasonable at mid-single-digit year-over-year growth and you're indicating that it would be low-single-digit next quarter. How much of a lag is there as it relates to consumer demand and you mentioned leads are off 10% versus euro-go.
Our Q4 and year end report in early February.
Sure.
Okay.
Sure.
Ladies and gentlemen, this concludes the third quarter investors conference call. Thank you for your participation you may now disconnect.
Okay.
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Faiza Alwy: How should we think about this business in 2024 assuming current conditions persist? I'm curious if you think of this business as a leading indicator to any other part of your business, whether it's, you know, on first service residential or, you know, I feel that there isn't that much of a macro component elsewhere in your portfolio, but curious how you think about it. Ltd. Right. Okay, Faiza.
Okay.
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Sure.
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Scott Patterson: There's a lot there, so let me start to work through it. You know, definitely consumer demand for home improvement is down. We see it. You know, there are a number of industry research groups and indicators that point to it being down and we don't expect the environment to improve over the next several quarters. But you've heard me say before that our teams are very resilient and focused on growth and these markets are very large.
Okay.
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King.
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Scott Patterson: And our teams, you know, the belief system is that we can scratch out growth even in the down market. We've proven that over the last few quarters with a focus on close ratio and lead conversion. And we've also been more aggressive, I think, in terms of marketing with some utilization of discount and promotion. There is not much of a lag in this business. Our backlog is measured in weeks. And so it changes in consumer demand will impact us pretty quickly, one way or the other.
Yes.
Okay.
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Okay.
Okay.
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Scott Patterson: The, you know, in terms of it being a leading indicator, it's not a significant leading indicator for any of our other businesses. I mean, most of our, you know, our two largest businesses for service residential and restoration are both really agnostic to consumer demand and more driven by weather in the case of restoration and in the case of first service residential, I mean the communities need to be managed in good markets and bad markets. So we don't see it as a significant indicator for us. I'll leave it at that. I'm not sure I answered all your questions. No, that's very helpful. Thank you.
Scott Patterson: And I just have a separate question if that's okay. And that's just around some of the acquisitions that you've made particularly on the restoration side or the, you know, fireside. And I'm curious how you think about, you know, synergies or the benefits of scale. Like it seems like there's still a lot of white space opportunity. So maybe talk a little bit qualitatively or if you can add some numbers to it, that would be helpful in terms of what you're seeing.
Scott Patterson: Is there a synergistic benefit and should we expect, you know, higher margins as you grow and scale and when does that happen? Yeah, both of the businesses you mentioned, we're filling out our footprint. And the biggest benefit is that we are better positioned and better able to respond to our national accounts. You know, in restoration, we have between both brands over 400 branches and we're very well positioned to respond to our insurance carriers and our national commercial accounts, and in century, we continue to build out, you know, primarily the South East and Mid-Atlantic regions.
Scott Patterson: And again, that national account program, the more that we can self-perform, the more we keep for ourselves because we do use a Bender Network elsewhere. So that the primate, it's not a significant level of efficiency that's created from scale, it's more of a positioning in the market and with our clients because both businesses are local service delivery. And so we're adding labor when we add branches.
Scott Patterson: Great, thank you very much.
Stephen Macleod: Please The next question comes from Stephen MacLeod with BMO Capital Markets. Your line is now open. Thank you, good morning, guys. Just a couple of morning, just a couple of questions that I wanted to follow up on. Just on the residential side, I mean, Scott, I think you sort of covered it often in your preparation marks on the Q&A, but just curious, can you just confirm, are you seeing any macro impact to the residential business as it relates to, you know, residents' ability to pay fees or cost pressures you're seeing, pricing pressures you're seeing on contracts, things like that?
Stephen Macleod: You know, there's two different things that we're not seeing any pressure on monthly management fees and delinquencies as it relates to the residents, but certainly budgets are increasing at communities in terms of, you know, primarily through increased insurance premiums. And I would say particularly in the risk areas, you know, Texas and Florida, but generally the high-rise environment. And so the increasing, you know, inflation across their cost structure is certainly put pressure on budgets and and put pressure on us around pricing, which is, you know, you've followed us for a long time.
Stephen Macleod: I mean, that's nothing new in this business for us. Yes, yeah. Sorry. Yeah, I know that's that's great. Yeah, I mean, pricing pressure is always there. That's, well, that's helpful. And then just as you think about the brand business in Q4 with the, with the restoration business, you know, we did see a couple of storm, we did see some permactivity in, you know, earlier this fall. And I'm just curious, are you seeing any backlogs building from those storms?
Stephen Macleod: And then secondary to that? Just when you think about Q4 and the, the comp, again, a growth sort of sort of slowing against the tough comp, can you just talk a little bit about what kind of margin impact that might have on on Q4? Right. Okay. I'll deal with the first part of the question. And we didn't see a significant pickup in our backlog related to some of the regional events you spoke about in Florida.
Stephen Macleod: And that storm really hit an area that was and heavily populated, or did not have much of a footprint as it relates to our national accounts. And then in the Northeast, again, similarly, it didn't lead to a lot of mitigation and restoration work. Jeremy, over to you on margin. Yeah, thanks, Scott. Steve, yeah, the lack of comparable weather-related activity means that margins will be down at restoration and that obviously impacts the overall FirstService brand's division.
Stephen Macleod: Again, we see that being down year over year, probably relatively similar coming in relative to the similar sequentially to the current third quarter for that division. Okay, actually, so you would expect Q4 margins to be similar to what they were in Q3 on the brand. In the boss. Obviously moving parts, but just directly, yeah. Yeah, yeah. Okay, that's great. All the passable acts aligned. Thank you. So, please stand by for the next question.
Scott Patterson: The next question comes from Steven Sheldon with William Blair. Your line is open. Hey, thanks. Been a really nice job in the quarter. First, on your canning revenue growth and residential, I mean, it continues to be outstanding. I think you've historically said that sourcing labor for contracts is usually the biggest impediment we're limited or to grow, but curious what you're seeing on the labor side right now is it getting any easier to source labor, and have you changed anything materially on the execution side to allow you to better recruit and retain labor?
Scott Patterson: You know, the labor market continues to improve for us and we're really seeing it across all the brands. For service residential, maybe the best example because you've heard from us over the last few quarters that we've been feeling our open positions and we're sort of back to historical levels. And, you know, I think the market has certainly eased. You know, we're seeing more applications, we're filling more jobs more quickly. Our turnover has improved, but at the same time, the second part of your question, Steven, we have certainly invested in resources and technology around recruiting and also onboarding.
Scott Patterson: And so it's hard to discern or put a pin in the improvement, whether we've been the architect of that or whether the market has come back to us, but yeah, I think it's a little of both. Got it. And I guess is that, you typically talked about 3 to 5% organic growth in that business. Given some of the way the changes that you've been able to push through the improvement on the execution side, has your thought process there changed on what the organic, the right organic growth profile to think about, that we should be thinking about for that.
Scott Patterson: Yeah, I mean, it's been much stronger this year, definitely we're getting a little more We continue to carry some momentum from strong sales late last year and early this year that's starting to normalize, so it's easing its way back down. I, you know, mid to high, I would say I'm comfortable with right now. Got it. Check higher. Yeah. Got it. The couple. Um, and then just on Century Fire, given that half of that business.
Scott Patterson: Inside the new construction activity for installations, just curious about the sub sector exposure there. The Century Fire is more supposed to certain sub sectors for construction, you know, think about office versus industrial versus multifamily, you know, more supposed to certain of those versus others and how are you thinking about the growth outlook? They're given any visibility having the new construction over the next few years. Right. I mean, certainly in terms of our backlog, we feel very good about Q4 and I think it'll carry into Q1.
Scott Patterson: But, you know, as you suggest, the commercial real estate market is less than robust right now. So we're keeping a very close eye on on backlog. You know, we do have a strong presence in multi family and distribution warehouses, office retail across the board, but. I think generally if commercial real estate, new construction slows dramatically, we would, you know, at some point we're going to see that. 50% of that business would be a new install 50% is recurring service inspection repair. Got it. Thank you.
Operator: Please stand by for the next question.
Michael Doumet: The next question comes from Michael Domet with Scotia Bank. Your line is open. Hey, good morning guys. Scott, you started off with, I think some comment on market chair. So I just want to kind of get a little bit more detail on this, but for the home improvement. And the sensory fire is a possible to break down what you think is, you know, market share growth versus industry growth. And then in your view, do you still think you have the levers to continue to push maybe a similar market share gain for those two segments into 2024?
Michael Doumet: It's easier to create clarity in the home improvement business because there are a number of research groups that follow it pretty closely. And so we feel we feel very confident that we're taking share in closet organization space, painting that the significant brands we have for coverings tougher at century fire. But the organic growth we're seeing is quite strong. You know, I think that we're driving a lot of it as we've made acquisitions.
Michael Doumet: We're adding services. We're necessary to ensure all our branches are full service. And, you know, adding alarm to sprinkler businesses and vice versa, adding service to primarily installation businesses. And it's been a significant growth driver for us to add services to the existing customer base. And so, we're taking wallet share in that instance, but it's definitely, you know, a higher number, our organic growth than the market. But it's not, it's not crystal clear. And in terms of driving this into 24, I think we'll continue to take share. The question is, you know, the market and what kind of support we get from the market. That's helpful, thanks.
Scott Patterson: And I made it a little bit over restoration. I think previously, you know, you talked about making investments in that business that once completed would, you know, drive eventual margin expansion. I think over several years, I'm just curious on how those investments are progressing timelines on, you know, potential margin expansion for that business. Obviously, I recognize that storm impact, you know, aside, as it relates to these investments. Michael, yes, Jeremy, investments on track, you know, we're probably two thirds of the way now, you know, in terms of onboarding our branch network, we said this would carry on through this year and likely into part of 24.
Scott Patterson: And then after that, we'll evaluate the opportunity, you know, for reaping the benefits of that investment. So, I suspect at some point in 24 and into the later years, we will see that. And we'll get greater clarity as we go through budget and strategic planning reviews in the next couple of months with both restoration as well as all of our other businesses, clarity on 24 and beyond. Very helpful. Thanks, guys.
Operator: Please stand by for the next question.
Tom Callahan: The next question comes from Tom Callahan with RBCCM. Your line is open. Thanks, morning, guys.
Scott Patterson: Maybe just one on my question to ask, but maybe just some comments on the acquisition pipeline you guys alluded to in the prepared remarks there. I know you're a little more active towards the end of last year and early this year, but kind of where it stands right now, maybe relative to last year, and is there a specific focus or is it kind of broad based across the restoration and residential side of things?
Scott Patterson: The pipeline solid relative to last year, I mean, I'm just thinking back, we did close some fourth quarter deals last year. So, I think it would be close to where we were last year at this time, but... It's generally in line with where we've been, and Jeremy talked about our spend this year. We're very comfortable with what we've accomplished so far. It's right in line with where we've been in the last few years. And our pipelines and decent shape. I don't know whether we'll close in the fourth corner, whether that will leak in the next year. But we've got activity and it's balanced across both the billions.
Scott Patterson: That's very helpful.
Scott Patterson: And maybe just one follow-up piece on the residential side. You've talked about the success with repricing there on the renewals. Just curious, has that impacted retention rates at all, or are those holding pretty steady? No, retention is at our long-term historical rate. It's about the same as it has been in the last several years.
Scott Patterson: Awesome.
Operator: Thanks, I'll turn it back.
Operator: As a reminder, to ask a question, please press star 11 on your touch, tone, telephone.
Operator: Please stand by for the next question.
Frederic Bastien: The next question comes from Frederick Bastine with Raymond James. Your line is open. Yes, thank you, good morning. Scott, you've been, this is follow-up really on the M&A questions here. You've been quite active and successful at consolidating restoration and fire protection in recent years. As you look forward, how far are you from where you'd like to be? I mean, just wondering if you can completely double perhaps triple the size of these businesses in the next five years or so.
Frederic Bastien: In the case of restoration, I would say that our activity would be slowing. Our footprint is starting to fill out. And we will become more of an organic growth engine as we have been in our first service residential. We still have white space that we're focused on. But I've seen in the next few years won't be as active as we have been the last three. We've sentry fire. We still got lots of, lots of white space and regions to grow into.
Frederic Bastien: So I see that being, you know, continuing the growth sort of at the same pace as we have been. But in both cases, Frederick, you know that our first focus is on organic growth. Are we winning the day to day at every branch? Yes. That's our first priority. And it will continue to be that. Awesome. Thanks.
Operator: That's all I have. Great quarter. Thanks. I show no further questions at this time.
Scott Patterson: I would now like to turn the call back to Mr. Scott Patterson for closing remarks. Thank you, Michelle. Thank you all for joining us today. We look forward to our Q4 and year-end report in early February. Take care.
Operator: Ladies and gentlemen, this concludes the third quarter investors conference call. Thank you for your participation. You may now disconnect.