FirstService Corporation (FSV) on Q2 2021 Results - Earnings Call Transcript
Operator: Welcome to the Second Quarter Investors Conference Call. Today's call is being recorded. Legal counsel requires us to advise that the discussion scheduled to take place today may contain forward-looking statements that involve known and unknown risks and uncertainties. Actual results may be materially different from any 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, 2021.
Scott Patterson: Thank you, Branna and good morning, everyone. Welcome to our second quarter conference call. Thank you for joining us today. I'm on the line with Jeremy Rakusin and together, we will walk you through the quarterly results we released this morning. That reflected very strong growth over the second quarter of 2020, which of course was the first quarter materially impacted by the pandemic. Total revenue for the quarter were up 34% over the prior year, with organic revenue growth at 25%. Organic growth was strong at both divisions and at every material business line really across the board. And it reflects three main drivers; the reopening of seasonal amenities, very strong home improvement spending and continued work from the Texas deep freeze event in February of this year. Organic growth was 25% versus a depressed 2020, due to the COVID lockdowns versus 2019 organic growth was 10%. And that figure does not include FirstOnSite, which we did not own at that time. The organic growth exceeded our expectation and in particular, was impressive given the current labor market. The number of open positions we have across the company is unprecedented and it definitely limited our capacity and tempered our growth. The balance of the top line growth for the quarter 9% was from tuck-under acquisitions over the last year in restoration, fire protection and property management. EBITDA was up 26% year-over-year and earnings per share were $1.21, up 41% over the prior year. Jeremy will provide more detail on these metrics in his prepared comments. At FirstService Residential revenues were up 20% with organic growth at 16%. The principal driver of organic growth was the reopening of seasonal pools, fitness centers and other amenities in the Northeast U.S. and Canada. The reopening accelerated quickly through the quarter and by quarter-end approximately 90% of our managed facilities were open and staffed. We will see some additional reopening in the third quarter and expect to be back close to 100% by year end. There are a small number of seasonal pools that will not open this year, but the impact is not material to our results. Outside of amenity reopening, we generated solid organic growth driven by contract wins and gains in ancillary services. Relative to the second quarter of 2019, the FirstService Residential division was up 9% organically. Looking forward to the balance of the year, we will see some incremental year-over-year benefit in the third quarter from seasonal amenity reopening.
Jeremy Rakusin: Thank you Scott, and good morning everyone. As you just heard, we reported strong financial results for the second quarter, with both significant growth over last year and our performance relative to our internal expectations. I will provide a segment breakdown momentarily, but let me first reiterate our Q2 consolidated results. Revenues were $832 million, adjusted EBITDA was $89.8 million and adjusted EPS came in at $1.21, up 34%, 26% and 41%, respectively. Combined with our first quarter results, our six months year-to-date consolidated financial performance is as follows. Revenues of $1.54 billion, an increase of 23% over the $1.26 billion last year. Adjusted EBITDA of $149.6 million, representing 30% growth over the $115.1 million last year, with a margin of 9.7%, up from the 9.2% in the prior year period. And adjusted EPS at $1.87, up 52% versus $1.23 per share reported during our same 6-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 press release and remain consistent with our disclosure in prior periods. Turning to our segments and financial result - highlights for Q2, I'll lead off with our FirstService Residential division. Second quarter revenues came in at $406 million, a 20% increase over the prior year period. We were pleased with this year-over-year growth given the comparison to last year's quarter, which itself was only down less than 10% in the eye of the pandemic.
Operator: Your first question is from Stephen MacLeod of BMO Capital Markets. Your line is now open.
Stephen MacLeod: I just had two questions here. Scott, you mentioned in your prepared remarks that restrictions around labor, kind of limited your growth in the quarter. I'm just curious if you're able to quantify or give an indication as to how much further you think growth would have been as you had the labor to meet the demand?
Scott Patterson: You know that's hard to know. Stephen, we've tried to come at that a few different ways. But I'm not prepared to quantify it or really able to accurately. But certainly, in our home improvement brands we are booked out farther than we want to be. And there are leads and estimates that we can't get to. And so, I think there would have been incremental growth in home improvement and it, really the other businesses it's similar situation. We do have more open positions than we have historically at FirstService Residential. Some of our communities are temporarily short staffed and those would be bodies that would be reimbursable. So that's also tempering the top-line in that business.
Stephen MacLeod: Okay. But it's - okay, okay I see. Thank you. And then maybe secondly, Scott, you gave some good puts and takes around what your Q2 expectations are in the FirstService Brands business, or sorry, back half expectations just around the home improvement restoration and Century Fire. And I'm just wondering, how that stacks up on a segment, total segment basis, just when you think about all the moving parts around those three major business drivers?
Scott Patterson: I don't have that in front of me. Jeremy, do you have a sense...
Jeremy Rakusin: Yes Steve, stronger in Q3 versus Q4. But I think the aggregate piece is suffice I think you could, weight the Scott's commentary more towards Q3 versus Q4. And Q4 is somewhat dependent on what happens in restoration in terms of storm activity.
Operator: Your next question is from Stephen Sheldon of William Blair. Your line is open.
Stephen Sheldon: I just want to ask a little bit more, I guess, about the home improvement brands. I think you would talk some about potentially turning away some business as you don't want a long gap between the booking and the installation for the customer especially, I think in businesses like California Closet. So just wanted to ask, it sounds like - has that continued? And as you look across your businesses, have you seen any signs that the hiring challenges could be alleviating at all?
Scott Patterson: I don't know that we're proactively turning away business Stephen, but we have limited our marketing spend. So it’s not to amplify our capacity issue, I would put it that way. As I mentioned, we're not getting to some leads, we're not able to provide estimates for all prospective customers, and we're booking jobs too far out. So it's - that impairs the brand experience and that's something we're working very hard to rectify through communication with customer and really proactively managing those relationships. We are making headway and improving our pace of recruiting, I would say largely because we've invested in it, we've added resources we've generally increased our efforts around recruiting consistently, really over this last six months or nine months. So we're making headway. And as I mentioned, I think we expect to see sequential improvement, particularly in home improvement in the third quarter as a result of adding capacity. But I'm not sure that the market is getting any easier or opening up at all in terms of labor. I don't know if that answers your question.
Stephen Sheldon: No, that's helpful. Appreciate that. And then as a follow-up to the corporate expenses, I think the - I think picked up here just a little bit this quarter to just under $5 million on an adjusted basis. I just want to ask if we should expect just to kind of be a new baseline to grow from moving forward? And I think this is the highest it has been are there any, I guess, unusual items in there this quarter to call out that may have driven some of that increase?
Jeremy Rakusin: Steve, it's Jeremy. Yes I mean, compared to last year's Q2 we had significant salary cuts and other head office expense reductions. But this quarter would have reflected normalization. We accrue every quarter for bonus accruals. So there would have been a catch-up versus Q1 as we see visibility for the balance of the year. We've added a couple of additional resources at our head office as well. I'd say a mid-teens for the year, mid-teens million dollars of head office or corporate costs is a good number to go, going forward. We've also had FX the stronger Canadian dollar would have also amplified maybe versus looking back a couple of years strong Canadian dollar converted to U.S. dollars would have an impact as well.
Operator: Your next question is from Matt Logan of RBC Capital Markets. Your line is now open.
Matt Logan: Maybe following up on the labor market and some of the challenges you're facing there. When we think about the margin, do you find that you're able to offset some or all of the rising labor costs with higher prices? Or is this simply just the fact that you can't get the labor at all?
Scott Patterson: We are experiencing some wage inflation and certainly to-date, as evidenced by the margins you saw in the release, we have been able to offset that. But maybe, I'll pass it over to Jeremy, he's been digging into the wages across the company. I'll let him amplify.
Jeremy Rakusin: Yeah, sure. Thanks, Scott. As Scott said, ability to preserve margins thus far, again I think is reflected in our results, but it is evolving. As we speak, some pockets seeing more wage inflation than others. It does vary by service line, by role or position and by market. And at FirstService Residential, we have a lot of cost plus contracts. So our ability to pass that through directly does give us good cover. And then at some of our other brands, particularly in home improvement, in terms of wage inflation around our installer crews or painting crews, our ability to pass on along in terms of pricing our jobs has been good. Thus far, it's on a little bit more of a lag. So it's not a direct pass through. But again, we keep a close eye on this. We're monitoring closely and it's continuing to evolve, and so far, so good.
Matt Logan: And maybe turning to your capital allocation and target leverage, how should we be thinking about tuck-under acquisitions or the potential for larger M&A with leverage now down and kind of a low one turn range?
Scott Patterson: You know, it really did..
Jeremy Rakusin: Go ahead, Scott.
Scott Patterson: I was just going to say, it doesn't impact us in terms of accelerating activity. We have a pipeline, we have a process, we have a rhythm, and we just want to ensure that we always have the capacity to continue to drive our M&A program. Jeremy, I'll let you add to it.
Jeremy Rakusin: Yeah. Matt, I was going to make a similar point, so that our leverage doesn't do drive how aggressive we get on M&A. It's sort of a result of it. But if we grow acquisitions at mid-single-digits, the chances are we may have some very modest annual deleveraging. And then it's something in terms of what we do with capital deployment after our acquisition spend, we revisited with the Board. And Scott and I, make our recommendations. But I don't think we're at that point now, acquisition, spend and size of acquisitions, again can be episodic and can change from quarter to quarter. And I think we still got ample opportunities with our pipeline.
Matt Logan: And when we take a step back and look at the M&A environment, are you seeing elevated acquisition multiples, or maybe just some color in terms of what you're seeing on the ground for residential, restoration and home improvement?
Jeremy Rakusin: It's very active, in general, the market. More activity in restoration and fire protection for us, due to the active consolidation and presence of many private equity buyers, frankly. Certainly, multiples are increasing. We historically have focused on expanding our footprint with smaller acquisitions. And so the impact at that level is not as significant as it is, as you get to the larger companies. But certainly, we're seeing multiples increase across the board.
Matt Logan: And maybe one last housekeeping question here for me. In terms of the storm-related activity and the large loss revenues, with the EBITDA margins be consistent with prior quarters at around 10%.
Jeremy Rakusin: Yes.
Matt Logan: On those incremental revenues.
Jeremy Rakusin: Yes.
Operator: Your next question is from Frederic Bastien of Raymond James. Your line is now open.
Frederic Bastien: If we strip out the impact of weather-related events, do you think your commercial restoration activities can maintain a high single digit organic growth in the foreseeable future through market share gains and just expansion of your services?
Scott Patterson: We do. Frederic, we do. We've certainly seen that to-date. This past quarter, we grew organically at over 10%. We're investing aggressively in our sales team and we are driving new national accounts. We're also believe we're increasing the wallet share of our existing accounts. And we've had some success with leveraging the expertise and relationships from our tuck-under acquisitions across our footprint. A great example is the healthcare expertise set at Roland. It's been a year since we completed that deal and we've had considerable success, expanding our healthcare vertical in the last 12 months. And we're seeing that in a very healthy backlog heading into the back half of the year. So you know quarter-to-quarter, the storms will cause some fluctuation, but we do believe there will be steady and solid organic growth underlying that.
Frederic Bastien: Great. And can you comment on sort of the rebranding efforts and how that has gone? And whether it's also driven through incremental traffic?
Scott Patterson: I mean, it's - we're very happy with the way the rebranding has gone. It honestly feels like, we've been FirstOnsite for a few years now. It's totally entrenched internally and we believe gaining considerable traction. Externally, the one area we've seen early gains is cross border and extending national relationships that we have in the U.S. or Canada, to becoming North American relationships. And certainly, one brand and one message is helping make that happen.
Frederic Bastien: Good to hear. Changing gears, I was a little surprised to see tuck-in acquisitions contribute as much as they did for - did to FirstService Residential's growth. My math suggests that they would have added anywhere from $13 million to $14 million bucks of revenue. But that, you don't read the press release, your tuck-in acquisitions anymore on the FirstService Residential side. So I was wondering if you could provide a bit more color on that.
Scott Patterson: Sure. Jeremy?
Jeremy Rakusin: Yeah, sure. Firstly, I'd say we're selective in what we press release. We did press release the FirstService Residential Property Management business in New York City, Midboro. But there is some ancillary service providers that we acquire that are small and because they're in the ancillary category, whether that's pool or pool management, pool maintenance, fitness. If they're one-offs like that and they're small, we don't tend to press release them. So that would have probably plugged the difference between you know the disclosed Midboro release and our net acquisition growth.
Frederic Bastien: And my apologies, I missed how much incremental restoration work you've got relative to the deep freeze. Would you mind just reminding me.
Jeremy Rakusin: $50 million.
Operator: Your next question is from Daryl Young of TD Securities. Your line is now open.
Daryl Young: Question around the restoration side. And I guess just as we head into the back half of the year, as you alluded to, the hope would be to stay flat at a minimum. How should we think about some of the extreme weather events that are happening right now across North America, in terms of fire versus named storms for your business, and what - which ones would be the biggest contribution. Just if you are kind of rank through fire versus wind and hurricanes?
Scott Patterson: Wind and water damage generally generate more revenue opportunities for us, particularly with our strong footprint on the East Coast and in the Midwest. As we build out, continue to build out our footprint on the West Coast, wildfires will become a bigger part of our business. But in general, the work required around wind and water far exceeds the work required around wildfire damage, I would say.
Daryl Young: And then just on some of the tuck-under acquisitions and I'm thinking Maxim's. You seem to be targeting much more specialized restoration tuck-unders, is there any specific verticals. I mean, you got to healthcare with Roland. Are there any specific other verticals that you'd like to be in, in restoration that are more niche maybe?
Scott Patterson: I would say, we're targeting to strategically increase our footprint. And so Maxim's in New York City was very important for us, because we did not have a presence in New York City and to properly serve our national accounts. We needed a significant presence and Maxim has brought us that. So I would say, it's more about footprint and then the particular verticals and specialties within a company are also you know interesting and we take that into account. And they can kind of help drive growth, certainly as Roland has for us. We're not targeting any niche services at this point.
Daryl Young: Okay, great. And then just one last one. I think last quarter, you mentioned on the residential side that some of the disruption of COVID has caused some Board level turnover. I'm just curious if that's - if you've seen any margin pressure or any competitive dynamics that are shaping up as you have more turnover of property management contracts?
Scott Patterson: Yeah. I mentioned last quarter that we were seeing an increase in board turnover, which generally leads or can lead to an RFP. And I would say that is proving out. We certainly saw an increase in the number of opportunities, sales opportunities in Q2 and that continues into Q3. But on the flip side, we had more of our communities go out to bid than we normally see. When communities go out to bid, it does attract price competition. So that would impact our margin over time. I don't think it will be material unless it continues and I think what we're going to see is it will - we will see this settle down. I believe our sales will be - they will be up this year. But our retention will be up a little bit our turnover of accounts will be up a little bit as well. Net-net, we still think we're going to settle into that low to mid-single digit organic growth rate as we get into 2022.
Operator: Your next question is from George Doumet of Scotiabank. Your line is now open.
George Doumet: Yes, good morning guys just a follow-up on the - last question on the higher turnover. I'm just wondering when you layer that in with kind of the ongoing shortage of labor. Do you think or maybe can - still be able to hold that kind of low to mid 90% retention rate that we had in the past or do you see it Scott maybe slipping a little bit lower for a short period of time there?
Scott Patterson: No, no, we will be able to hold it. I mean we always have - it's off maybe a point this year, but still in the 93 to 94 range. We don't see that as being an issue.
George Doumet: And maybe for Jeremy just on that 25% organic growth number that you guys produce in the quarter. How much of that was pricing? How much of that was volume? And maybe just general comments on pricing, which areas of the business are you guys pushing harder on that?
Jeremy Rakusin: Yes well, we've got many different service lines, George, so hard to dissect pricing at FirstService Residential is always modest price competitive spoken about that. We're getting good pricing again to accommodate cost increases in the home improvement business. But out of that 25%, I would say, most of its volume predominantly.
George Doumet: And would you like to give any comment on looking forward, how much do you guys kind of where you see pricing going, maybe through the percentages over the next couple of quarters?
Jeremy Rakusin: Don't have percentages. I think it's really about trying to cover off any cost increases. And as I mentioned earlier, at FirstService Residential we have a big component that's cost plus. So that just gets matched. And then the other business lines, particularly in the Brands division will be a function of us just trying to preserve margin vis-à-vis any labor cost increases and in some instances, very small, our material cost increases.
George Doumet: And just one last one from me, Jeremy on the working capital. Obviously, a pretty pronounced drag is kind of restoration activity is high. Can you talk to maybe where you see that number kind of shaking out in the back half of the year, for the year?
Jeremy Rakusin: It's hard to look at it on a quarterly basis. I've said on an annual basis, 1.5% usage of working capital as a percent of revenues is a good rule of thumb. Now it's going to, I think you've got to look at multi-year averages. We have the weather related business that can really move that working capital usage. We've got cut off times around heavy labor business and payroll timing. So you got to look at it a multi-year annual basis and 1.5% usage on revenue. So you've got a $3 billion business. We're in the order of $45 million-ish, $50 million of working capital usage, but over a longer measurement period than just quarterly.
Operator: Your next question is from Scott Fromson of CIBC. Your line is now open.
Scott Fromson: Just a couple of questions first, on the home improvement businesses are you concerned about moderating growth following these COVID related increases?
Scott Patterson: I think it will moderate, Scott just as you know, there is a certain level of pent-up demand. I think that we're experiencing right now and it will moderate going into 2022. But the home improvement market in general is so strong existing home sales, higher home equity, that will continue to provide tailwinds through 2022, we believe.
Scott Fromson: Okay, thanks. And the - just a question on the impact of inflationary pressures on residential contracts, particular labor, do you see an impact there or there sufficient rate escalators that will cover off?
Scott Patterson: Jeremy?
Jeremy Rakusin: Yes, Scott cost plus contracts roughly 30%-ish of our division revenues, so that directly covers us off. And then we've got, you know on our property management contracts and anything else that's recurring contractual nature that's more than a year would have CPI type price escalators built into them.
Operator: No more questions, and please continue, sir.
Scott Patterson: Thank you, Branna. And thank you everyone for joining us this morning. We look forward to continued strong results in our next report towards the end of October. Thank you.
Operator: Ladies and gentlemen, this concludes today's call - this concludes the second quarter investors conference call. Thank you for your participation. Have a nice day.
