Colliers International Group Inc (CIGI) 2004 Q1 法說會逐字稿

Welcome to FirstService Corporation's first quarter 2003 earnings release 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 risks and uncertainties. Actual results may be materially different from those contained in these 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 report on Form 10-K and in the company's other filings with Canada and U.S. Securities Commissions.

At this time, for opening remarks and introductions, I would like to turn the call over to the President and Chief Executive Officer at FirstService Corporation, Mr. Jay Hennick. Please go ahead, sir.

Good afternoon everyone, and thanks for joining us. As the operator mentioned, I'm Jay Hennick, President and Chief Executive Officer of the company, and with me today is John Friedrichsen, our Chief Financial Officer.

The format for today's call will be the same as it has been on previous calls. First John will begin with the detailed financial results and then I'll follow with some operational comments. And then at the end of the call, if you'd like more detail, please speak up during the question and answer period.

With that, I'd like to call on John.

Thank you, Jay.

Overall, our first quarter rolled out better than our expectations and we were generally pleased with our results in what continues to be a tough operating environment. Revenues and cash flow from operations were both up, borrowings declined for the quarter compared to last year.

Consolidated revenues grew 8% to $157.8 million with the impact of tuck-under acquisitions completed after the first quarter of last year accounting for just over 2% of this growth.

On a segmented basis, revenue from our residential property management operations totaled $62.1 million, an increase of 9% over the same period last year with 5% of the growth related to tuck-under acquisitions. Core management operations continued to deliver solid increases in this segment.

In our Consumer Services segment, we continue to experience good performance across our various franchise systems and company-owned operations. First quarter revenue totaled $32.3 million, up 11% over the same period in the prior year with 4% of this growth contributed by the previously announced California Closet branchise acquisitions completed in the third quarter of last year.

Integrated Security Services revenue increased 11% to $30.2 million in the first quarter relative to the same period a year ago despite a tough comparison quarter last year in which we experienced higher than expected growth. As no acquisitions have been recently completed in this segment, all of the growth was generated internally.

Several large security systems and installation projects contributed to the increase in revenues during the quarter.

Finally, in Business Services, revenue was up by 2% to $33.1 million. While we experienced growth in our business process outsourcing operations, our customer support and fulfillment operations experienced declines due to lower volumes and the year-over-year impact from the previously announced loss of the significant fulfillment client.

EBITDA on a consolidated basis for the quarter was $17.1 million down 7.6% from $18.5 million in the prior year quarter while our EBITDA margin was 10.8% down from 12.7% last year. On a segmented basis, EBITDA and residential property management increased marginally to $6.6 million in the first quarter from $6.5 million last year.

EBITDA margins declined from 11.4% to 10.7% primarily as a result of a shift in mix with lower restoration revenues in our south Florida operations, which typically carry higher margins than our core management services. The reduction in revenues resulted from our previously announced plans to streamline this operation and focus on smaller, more profitable projects.

We have made significant progress in this initiative and expect to see the benefits of this in the coming quarters.

In Consumer Services, EBITDA increased slightly to $6.1 million in the first quarter from $6 million last year. EBITDA margins were 18.9% versus 20.7% in the prior year with the decline due primarily due to a higher proportion of revenues from company-owned operations which carry lower margins than our franchise operations.

EBITDA contributed by our Integrated Security Services segment was the same as last year, $2.1 million while margins were 6.9% compared to 7.7% in the prior year. While margins for the first quarter were pretty much in line with the 6.8% generated for all of fiscal 2003, they were somewhat lower than the first quarter of last year primarily due to the impact of lower margin revenues generated from several large systems installation projects during the quarter.

EBITDA contributed by our Business Services segment was $3.8 million in the first quarter compared to $5.1 million in the same quarter last year. EBITDA margins declined 11.3% compared to 15.7% due to margin declines in DDS and Watts Communications, our customer support and fulfillment operations.

Operationally, the decline in margins was due primarily to lower volumes in this part of our segment compared to last year as well as the impact of the loss of a large fulfillment client late last year. We expect to see some modest improvement in margins going forward as we fill capacity in our customer support and fulfillment operations with revenues from recent contract wins.

As many of you know, the Canadian dollar increased significantly relative to the U.S. dollar during our first quarter with the average Canadian U.S. dollar exchange rate increasing from 64.3 cents in our first quarter last year to 71.5 cents in our first quarter this year, an increase of about 11%.

On a consolidated basis, our Canadian operations accounted for approximately one-third of our revenues in the first quarter impacting our consolidated revenues positively by $4.8 million. However, the impact of consolidated EBITDA was essential neutral declining about $100,000 during the quarter on account of the change in FX rates.

While the translation of our Canadian dollar denominated results into the U.S. dollars in positively impacted by a strengthening of the Canadian dollar, a portion of our results in our Business Services segment is negatively impacted offsetting any gains to EBITDA. This portion relates to customer support services providing to U.S. customers in invoice in U.S. dollars and the corresponding costs to deliver the service in Canadian dollars.

Turning then to net earnings. Net earnings for the quarter on a consolidated basis were $6.5 million or 46 cents per share compared to $7.4 million or 50 cents per share in the prior year. Meanwhile, cash flow from operations for the quarter increased to $12.1 million from $7.5 million, an increase of 63% over last year.

Our net debt at quarter end declined again as it has the past four quarters to $147 million from $153 million at our March 31st year end while our leverage expressed in terms of net debt to trailing 12-month EBITDA was 2.76 times, comfortably within our operating range of 2.5 to 3 times and well below the maximum permitted by our debt covenants 3.5 times.

Looking forward to the balance of the year, we are maintaining the outlook presented during our fourth quarter conference call, which estimated revenue between 540 and $560 million, EBITDA to be between 53 and $55 million, and earnings per share between $1.20 and $1.30, all of which exclude the impact of any acquisitions that may be completed prior to March 31, 2004.

Now, I'd like to turn things back over to Jay. Jay?

Thanks, John.

As John has mentioned, we're pleased with our results for the quarter. They came in better than analyst estimates and better than our own internal targets.

Revenue and profits in three of the four divisions were up over a very strong first quarter last year and even Business Services came in ahead of expectations. And cash flow from operations, which is another key indicator of our success also came through very strongly at $12.1 million, up 63% as John has mentioned the first quarter of last year.

Let me quickly turn to our operations. Consumer Service continued to generate strong results with revenues and profits up nicely over the prior year.

Contributing to this performance, the Serta Pro and College Pro Painters franchise systems were both off to a great start and based the on the seasonal bookings to date, we expect another very strong year of performance this year.

Paul Davis Restoration also hit the ground running. System-wide sales, which hit a record of $270 million last year were up 15% in the first quarter alone.

Part of the success can be attributable to the damage caused by poor weather conditions in the Eastern U.S. earlier in the year. These storms caused considerable damages to homes and businesses and our Paul Davis franchisees benefited as insurance companies and homeowners looked to us to provide the repair and renovation services.

With this head start, we're optimistic that Paul Davis will also have another record year over the next 12 months.

And system-wide sales and profits at California Closets are also ahead of where they were last year and we continue to be excited about our growing branchise program. We currently operate four company-owned branchises in Boston, Seattle, Chicago and Jacksonville which generate about $19 million a year in annualized revenue, and we hope to add at least one more to this group before year end.

In Consumer Services, we would also like to add another complimentary franchise system this year. We believe our management and training systems for franchise organizations are second to none, and we can add significant value to the right franchise system both by sharing best practices and helping their franchisees cross sell services to our clients in the residential property management division.

In Integrated Security, our operations in the U.S. northeast delivered very strong results for the quarter while our Canadian business came in a little lower than expected, although we expect their results to strengthen as the year progresses. During the quarter, the Frazer Valley Health Authority in the province of British Columbia awarded our Canadian operations intercom security a five-year, $14 million contract to provide a variety of security services to a group of 14 hospitals.

Under the terms of the contract, we'll take over all manpower and electronic security systems currently in place and will provide additional recommendations to upgrade the level of security that will create additional revenue and profit opportunities for us during the course of the next five years and beyond.

As mentioned, our U.S. operations had another strong quarter, building on their earlier success with the design and installation of a large access control and optical turnstile system at 16 buildings at the Rockefeller Center in New York city and the new Morgan Stanley head office in Westchester County.

Over the next few years, you'll see us being very opportunistic about some of these high profile security installations. Although they typically carry lower margins on the installation as John has already mentioned, the continuing benefits of being able to service these systems over the long-term and selling additional services to the tenants in these facilities will provide us with significant opportunities over a many year period.

Residential Property Management also had a solid quarter with revenues up nicely over the prior year while profits came in about the same as last year. The difference in margin is almost all attributable to the planned reduction in restoration activities and a continued pressure on insurance costs. But we remain very bullish about this business and the opportunities we continue to see.

Our strategy is simple. We want to add units under management, which we do both internally and through acquisition and then leverage our management relationship to get a greater share of the budget that comes with it.

Today, we manage more than 2,000 properties with 400,000 residential homes and we administer more than $800 million a year in service purchases by our clients.

Core management fee revenues were up nicely for the quarter versus year ago and our recent acquisition of Coopers Square Realty of New York city is fully integrated now into our operations. And having influence over how our clients spend their money, as I mentioned, puts us really in an excellent position to capitalize.

Revenues generated from ancillary services like lock box, insurance and real estate brokerage and lender services were all up nicely over the prior year quarter. For the full year, we expect to generate in excess of $2.8 million from these services, most of which fall directly to the bottom line.

Also during the quarter, the legislation governing property management in the state of Florida, our largest market, also changed to our benefit allowing us to charge more for disclosure and property transfer services, services that we're required to perform as property managers. With this change we can now increase the fees we charge for these important services without any additional costs thereby increasing our margin in this area by about 25%.

Over the last few months, we've also been more aggressive in our search for acquisitions. We hope to be able to add at least one new platform and several tuck-under acquisitions to our operations before year end.

Business Services came through with a better quarter than we anticipated albeit below last year. Revenues and profits continue to be affected by the departure of a large pharmaceutical client in the fourth quarter of last year and as well we continue to see lower volumes from some of our clients in the fulfillment area.

But I have to say that we're feeling better about some of the things that we're seeing in business services and we expect our results in this area to continue to improve as the year progresses. Since the third quarter of last year, we've been successful winning some new business in fulfillment both in the U.S. and Canada and our pipeline of new opportunities continues to strengthen.

Some new clients include the National Football League, the American College of Physicians and Volvo, Canada. We were also successful building on existing relationships in the pharmaceutical area with the addition of a significant new piece of business from GlaxoSmithKline and also from Professional Detailing which is a large marketer of pharmaceutical products.

And our business process outsourcing operations in Canada also had a strong quarter. New contracts entered into last year in the student loan servicing area and credit in affinity card processing benefited us this quarter and will continue to contribute for the balance of the year.

And notwithstanding the delayed implementation of the Canadian government's new firearms registration program, there's good reasons to expect it will proceed as initially planned probably later this year or maybe in the first part of next year. But it is on plan to continue.

As John has mentioned, our cash flow continues to be very strong and we now have just under $100 million available to fuel our growth without having to raise additional equity or diluting our shareholders and this puts us in a very enviable position.

And our pipeline of acquisition opportunities is stronger today than it has been at any time in the past two years. And if we're able to get some deals done over the next few quarters, we should be able to add significantly to our expected earnings and earnings per share for the year. For example, for every one million of EBITDA we add to our business, following our proven First Service acquisition model, we should add about 2 cents per share which means that if we're able to spend between 20 and $30 million before year end, we could finish the year in a very strong position relative to our earlier guidance.

But as always, we will not complete any acquisitions that do not meet our criteria for price, for structure, and of course for quality of management.

Those are the highlights for the quarter, and now operator, we'd be pleased to take any questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touchtone telephone. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and we'll take as many questions as time permits. Once again, please press star one to ask a question. If you do find that your question has been answered, you may remove yourself by pressing the pound key. And we'll take our first question from Eric Slegister with First Boston.

Thanks. Good afternoon, guys.

Hi, Eric.

I was wondering if there's any update on the strategic initiatives you discussed last quarter?

No new update, Eric. We're continuing to look at it. We want to see how the next quarter or two roll out, and I think we'll probably be in a better position to make some final decisions. But nothing new to report.

Okay. And also, you announced the fist contract wins within Business Services in some time, and I was wondering if you see any change in the spending environment?

I'm sorry, Eric, can you ask me that again?

You announced the first contract within Business Services, you know in some time.

Yeah.

I was wondering if that was attributable to, you know, a change in the spending environment or improved sales effort or if you could provide, you know, more color on that?

Yeah. You know, as you know, and many of our shareholders know, the past 18 months has been very difficult in terms of winning new business.

And the DDS, our fulfillment operations, the period of time before which you actually win a contract is very long. And we for a long period of time were finding clients not making any decisions. We're seeing that change. We've had some great results over the last probably four or five months. We continue to have some pretty exciting things happening. But it is still a very cautious environment.

I think that clients are making decisions again, which they weren't making six months ago, but it is still a very cautious environment. They're including in decision making lots of management layers whereas in past years, it was much more at our, you know, sort of our related area. We're now finding Senior Vice Presidents, Presidents, CFOs involved in the decisions but decisions are being made.

Okay. Thanks.

Our next question is from Matt Lipton at William Blair and Company.

Hi. Good afternoon. Congratulations. I have a couple of questions here. First, can you guys update us as to your latest thoughts on the best use of your free cash flow other than, you know, obviously for acquisitions?

Well, I guess until such time as alternatives for that cash flow are decided upon, Matt, repaying our debt is what we have been doing and we're going to continue to do. We are, as Jay said, very focused on acquisitions. The pipeline is looking better than it has for sometime. We're feeling better about it, and that's where our money will be spent.

With respect to other acquisitions, I think as Jay said, Matt, we've looked at a bunch of things. Nothing stands out right now as the way to go, but we'll continue looking at it over the next couple of quarters.

But our cash flow, Matt, is very strong, and you know, if we were to spend 20 to $30 million on acquisitions, it comes right out of our cash flow, which is a wonderful position to be in. But John's right. We've been using our excess cash to just pay down our debt.

Thanks. Also, I noticed you obviously have made some progress on the working capital front. How much more room for improvement do you have there?

I don't know whether we've got a whole lot, Matt, honestly. You know, we have been working and we have everybody focused on it. But, you know, we still have a business to run clearly, and you know, I don't think we can do a whole lot more. But there's some areas of improvement, but I would say it would be small on the working capital side.

One more short one if I might. To what do you attribute the strength in the securities services business in the U.S. during this quarter?

I think it has to do with the fact that we've been opportunistic on some of these large jobs. And I mean, there's significant revenue opportunities for us, and they pay huge dividends over a long period of time, but it's been three or four large opportunities that we were successful winning that have really contributed to the revenue growth.

Great. Thank you and congratulations again.

Thanks.

Thanks, Matt.

And now we'll move to Bill MacKenzie with T.D. Newcrest for our next question.

Thanks. Hi, guys. First question. Just was wondering if you could add a little bit of color on the new contracts within the Business Services segment in terms of you know the magnitude of these contracts relative to the lost contract that you referred to previously? And also how the margins compared to the current margins. You talked about margins expanding. I'm just wondering if that's -- I'm assuming that's primarily due to overhead absorption that you get in new volumes through your facilities. I'm also wondering on the pricing how it looks. And also the timing of the ramp up of these contracts.

Bill, I'll let John handle the margin in a second. I'll give you some color. We have been very successful in some contract wins. Some of them have been in the cards for a long period of time, finally started to come through as people started to make some decisions.

We are well beyond the aggregate amount of revenue that we lost from that large client. But it's distributed a little differently. The one client was out of our branch in Philadelphia, and the rest of our revenue is in part like the College of Physicians is in Philadelphia. The additional Glaxo was in Philadelphia, but many of the other new client wins are really scattered about the balance of our branches.

But we're comfortable that we are going to offset that client loss significantly, and you should start seeing it come through almost this coming quarter we're in now, the second quarter. You should start seeing it. But John may talk about the margins and that may impact in the second.

In terms of margins, I think you alluded to it. As you know, we have had and continue to have some excess capacity in that business. And that business probably more than our other businesses has a higher element of fixed costs and the extent we generate these additional revenues we will have a fairly significant impact in terms of our impact on EBITDA.

So that's really the impact on margins and hopefully we will see the impact of this over the next couple of quarters, though I don't think we'll see the full impact probably until the third quarter.

Okay, great. And then Jay, just in terms of the acquisition pipeline, you said things are as best you've seen in a couple of years. I'm just wondering what do you attribute that change to? Is it -- I know you have been somewhat cautious over the last couple of years because of uncertainty in the economy. I'm just wondering if the change in the acquisition outlook is due to your own, you know, view of the economy and acting on opportunities or if it's more reflection of more opportunities coming to you or a combination of both? I just wondered if you would talk a little about that?

Well, I think the economy aside for a second, I think that there was a hesitancy both we saw it in Business Services, but, you know, over the past couple of years to actually do anything acquisition-wise. From our perspective but also from the seller's perspective. That's changing.

People are getting -- we're seeing it getting reflected in Business Services but in the acquisition pipeline, people are saying let's get back to business. Let's do things whereas before they were really in a holding pattern and the way we acquire operations as you know, there's a significant holdback and earn-out component. And people were not as comfortable leaving that exposed in a different marketplace. It's changing now.

And, you know, our pipeline is full, but it's full of small deals, our kind of deals done our way. So we're quite excited about some of the things that we have, but you know, I do want to highlight the fact that these are, you know, tuck-under acquisitions and, you know it's right down our strike zone stuff and I'm really hoping that we can get several of them done before the end of the year.

Okay, great. And just one last question on the fixed asset purchases in the quarter. I think it came in at $4.7 million, which was a little higher than where you've been tracking that in the past. I'm just wondering what was included in there, if there's any integration expenditures that pushed that up, and also what your CAPEX expectation is for the full year?

Bill, within the CAPEX number during the quarter, first of all, it was a little bit higher than we expect for the balance of the year. Included in there is some fleet replacement for businesses in our Consumer Services business and Property Management business. And then I think the biggest thing is a new technology that our communications business has invested in, and which we think it's going to be beneficial going forward. That's a little over $1 million in and of itself.

On a go-forward basis, our number for the year will be between 11 and $12 million which is slightly higher than last year, but still relatively low.

Okay, great. Thanks a lot.

You're welcome.

And now we'll hear from Peter McMullin with Ryan Beck.

Hello.

Hello, Peter.

Couple of things. A couple have been answered already, but one, a lot of companies were plagued by weather during the quarter. You made one reference to it, but just overall, would better weather have led to better results? And my second one is part and parcel of the strategic review. Given the major change in dividend taxation down here, what's your thoughts on the dividend these days? Thank you.

Weather is a funny thing, Peter, because on the one hand, the bad weather was great for Paul Davis and you're seeing their first quarter results were up 15% over last year, and last year was a strong quarter, but what it did do is it delays some of the, you know, painting that our franchisees do and it delays some of the exterior services that we might provide. So, you know, I don't know whether to pray for bad weather or to, because in some businesses, bad weather is fantastic or to rue it.

I do know that I'd like bad weather on weekends, which is not going to be something that most people on this call are going to like. So weather I can't really comment, Peter. It was good for us this year, delayed some revenue, which we're hoping will come through in the second quarter in Consumer Services in particular. So we'll see what happens there.

In terms of the second question, Eric Slegister asked the same thing. We haven't made any final decisions on anything relating to a dividend or otherwise. We're still looking at it.

But we're also looking at our results and seeing where they roll out over the next quarter or two, and we'll see what decisions, if any, make sense for our shareholders. But I don't think we're going to rush into anything unless it's absolutely clear what the right decision is. Got to get you to be a U.S. taxpayer, Jay. Peter, anything else?

Now we'll move to David Newman with National Bank Financial with our next question.

Good afternoon, guys.

Hi, Peter.

Just on the pricing environment. I know you had a lot of competitors playing your space in the last couple of years. Are you seeing an easing up on that and is the pricing correspondingly going up at all?

We, pricing in Business Services is loosening up a little bit. But I'm not sure that we're impacted pricing anywhere else. Maybe security on some of these larger jobs.

Yeah.

Property Management, Consumer Services, you know, we never, you know, famous last words. Pricing is impacted somewhat by the economy but people are spending in those areas.

But pricing has impacted us somewhat in security, but we've taken a little bit of a more aggressive approach to certain jobs that we want to get.

And in Business Services, we see it loosening up. People are paying for value again like they were two or three years ago and we're hoping that we can continue to move the margin in that business up, you know, back to where it used to be.

Excellent. And in terms of the, you mentioned that you're looking at perhaps a platform in the Property Management side and you talked about perhaps another franchise system. Any color you can add on that, Jay?

When we talk about a platform in Property Management, we really mean in another major city. And, you know, no real color other than we're looking at two great markets. We're hoping to at least do one of them, and that would -- what that means is once we have that beach head or platform in the marketplace, it gives us a phenomenal opportunity to tuck-under that management team and that platform and really double or triple or quadruple the size of the business over the next couple of years as we've done in, you know, several markets.

And in terms of the franchise world, we love that business. We have a great management team. We think we can add lots of value. It's a high margin business. It's highly recurring.

The problem is that there are not a lot of great ones out there, and we're trying desperately to bring at least one or two in house but we talked to everybody that we know that we want to do something with, and so it's just going to be a matter of time before it breaks. But we would love to add another franchise system.

On the platform, would it have to be in a city that's close to your existing operations?

No. A platform would be in a city that is not close to our existing operations.

Okay. On the franchise side, would it be more consumer related sticking with your core business?

Yeah. It's entirely consumer related and hopefully one that we can cross sell through our managed communities because that's really a two for one. We can add value day-to-day in the operations, but we can also help the franchisees underlying the franchise system generate incremental revenues which turns into incremental royalty revenue for us.

Excellent. Thanks, guys. Great job.

Thank you.

At this time, we have one question remaining in the queue. Once again, if you'd like to ask a question or if you have a follow-up question, please press star one. And now we'll take our next question from Ron Schwartz with CIBC World Markets.

Thank you. A couple of quick questions, Jay and John. What do you think is changing right now vis-a-vis the restoration business in terms of things getting better just because are interest rates are still kind of crappy so the seniors aren't exactly making a ton of cash unless they invested in this kind of dog tech stock rally. Is it just because some of these jobs are now getting to the point where the owners of those units just don't have a choice anymore, they have to go ahead?

We're actually reducing our involvement in restoration, Ron. We're only going to take on small jobs that generate very strong margins for us. A couple of years ago when things dried up again, we looked to feed our infrastructure. We're not going to do that anymore. So in restoration, this work has to be done. It's just in a bad economy when people don't want to do it, they can put it off for a year. Maybe two years, but it's a recurring significant expenditure that they have to do.

But we don't have to do it for them unless we can make some serious bucks. And there's no sense in us, you know, marshaling our troops, exposing ourselves in terms of the risks involved if we can't do it at very effective margin. So we have, and you've seen it in the first quarter, you're going to see it again in the second quarter. You'll probably start to see year-over-year strength in Property Management in the third quarter because by that time we will have right sized the business totally.

So it's not the fact that perhaps the market's getting all that better, it's just that you're only going to be exceptionally selective in the work that you're going to be willing to do. And hence, for you guys, it'll get better but it might not for the market as a whole?

Exactly.

Okay. Second question is, just you mentioned in Consumer Services you might be looking for another one or two branchise opportunities. Once you own these things, especially if it's California Closet related, I mean, we've gone through probably one of the best consumer cycles, housing cycles we've seen. Are you worried that perhaps it's going to enter or bring in a little incremental volatility in terms of the overall EBITDA pattern of that business just versus catching a royalty stream?

Well, you know, it obviously does to some degree. Remember, Ron, we're buying this our way so there's generally a three-year earnings guarantee from the seller number one.

Number two, for the most part, the ones that we're buying are mature situations where the seller is really just enjoyed the fruits of the business. We have not typically gone after small opportunities. They've all been meaningful opportunities where we can buy it and it does, for example 700,000 or $800,000 of EBITDA and we see a clear line to a million two, a million three just by bringing some more dry edge discipline to the party. So we're buying it well. In fact I would say, John, you might correct me here but I think that the average price on the purchase of the branchises is below what our average price is on acquisitions.

Yeah, somewhere around 3.8, 3.9 times.

So you essentially factored in --

[INAUDIBLE] After they have paid us a royalty as an expense of the business, so financially it's very good for the company. We do have the downside protection from the seller.

And thirdly, we think we can move the EBITDA revenue and EBITDA, the business up. And fourthly, we're only doing it opportunistically when we have a driver for that business that we think will really make a difference.

Otherwise, what you said is right. There's nothing like a royalty business where you don't have to get your hands dirty but it doesn't necessarily mean if you've got a great opportunity in a business that we known well and have known well, that we shouldn't capitalize on it. The return on capital on those acquisitions are spectacular.

And have you started to increase your pricing on some of these transfer fees within the RPM group or are you just going to use that competitively or strategically where you can?

Transfer pricing? Ron?

In terms of the changes with the Florida legislation where you can now charge more. No. We changed the pricing already. The day after the legislation was passed, we changed the pricing. Okay. I wasn't aware of that.

This was a situation where there was a fixed price in the legislation that was put in place 150 years ago, it seemed. And the -- and we actually retained lobbyist in the state. And it was about a year and a half process to get this updated.

And the legislation changed to the point where we don't have to go back to an order in council each time. Not us, the whole industry but we effectively drove it, so it gave us an opportunity really to bring the pricing of these transfer and disclosure fees more to a level that's consistent with what we get in New York, Arizona, Washington, D.C. et cetera.

And this last question, I guess it's a little more of a philosophic question. Just given your commentary to questions surrounding the whole shareholder enhancement strategy and how you know what, you'll take a look over the next quarter or two and see how that kind of develops. Listening to that I guess one of the things that you guys always prided yourself on and what's certainly made FirstService what is today is kind of the longer-term view in strategy, we're going to stick to our knitting and it kind of doesn't matter, not what's going on around us, but you kind of looked through all of that smoke with an objective in sight.

And it just, and I might be mistaken, but it sounds a little bit that perhaps with the announcement you made last quarter that we're looking into this, it might have been a bit more of a shorter-term reaction to the share price or something else and now you're kind of getting back on board with things that perhaps are firming up or what else not. Should I be reading at all into any of this or kind of is the fundamental objective of the company remain the same and it's kind of the long-term growth in targets and here we go?

Well, you're hitting obviously hitting a nerve. The company is very bullish about what we see, and the only thing that has changed is the strength of our cash flow. And if you think backwards, if we're going to spend 20, $30 million on tuck-under acquisitions, you know, every year, we generate that from our own internal cash flow. We do not need any external financing for that.

So the question is, is this company over the course of the next few years going to step up and do a larger acquisition? In other words, Ron, do we have too much capital available to us or should we accelerate our existing, you know, method of growth if that makes -- if that helps you there.

We're generating strong cash flow more than we need on a day-to-day basis to continue to do our tuck-under acquisition initiatives consistent with what we've done in previous years. We would love to add a new platform, and we've been waiting anxiously for that we do not -- sorry, new service line. We've been waiting anxiously for that and biding our time. We haven't frankly seen it yet.

And when we see it, we'll be ready, but in the meantime, the only thing that has changed is the -- our cash flow just continues to grow. So that's a factor that has entered our thought process a little bit more. And one of the other analysts on the phone did allude to the fact that change in legislation has made it more interesting perhaps to pay a little dividend. So, you know, there's no answers yet. And there may not be an answer. The answer may be let's just keep our head down, keep doing it, wait for our spot.

Okay. So I really shouldn't have either reacted or interpreted it as a very short-term reaction that you are kicking off this process just given that perhaps the earning numbers were a little soft, the stock price probably wasn't where it should have been and that kind of long-term goals and objectives are very well in focus here?

Yeah. Ron, it's me. Absolutely. We're staying the course. Our strategy has not changed whatsoever.

Okay, thank you.

Thanks.

And now we'll hear from Alan Webber with Robotti Incorporated.

Good afternoon.

Hi, Alan.

Two kind of unrelated questions. When you talked about acquisitions, I think you said that like, you know I guess the world has changed in the sense that sellers are willing to start selling companies again and just more transactions being done?

We haven't seen them being done yet, but they're talking.

Right.

Yeah.

And on the Property Management side, when you talked about doing a new platform, which would be great, is it a function of that mentality that you see some sellers starting to negotiate or are there any changes within the actual industry specifically that makes you think maybe you can get one of these done?

No, I think the problem with the platform is our strategy for growth in that business has been, you've got to enter a new market with a significant player, history of earnings, great management team in place and then open their minds to possibilities. Some of the things that we're doing in other areas, move their margins. Typically, you see 6% EBITDA margins. As you can see, our margins are in the 10% EBITDA margin range, and that's because all of the additional services and ancillary revenues that we generate.

So we need to have a great platform in place and management team that we think can take more on as we grow the business. So we've been somewhat tied because there's not a lot of those great situations out there. And so when we find one, we're all over it from the standpoint of partnering with these guys.

And I think the fact that sellers are now starting to think again about the future has brought both of those factors together and given us one or two opportunities that in platforms that we might not have otherwise had.

Okay. So a lot of the driving part is what you bring in internally with the service to sell and you need the great management in a new platform?

Right.

Okay. The other totally unrelated, you talk about security business. You quickly mention Morgan Stanley. Can you just kind of go through maybe not the specifics but just kind of you comment that additional services. Just how do you see that kind of thing playing out as, you know, whether it's the Morgan Stanley in particular or somebody else in terms of the additional services and what that really means to the company?

Morgan Stanley because most of their campus is a self-contained campus is not a good example but the Rockefeller Center is or any other multi-high rise office development.

When you put in a base building system, you wire the entire building, elevators, entryways, exit ways, and once you have the base building, tenants have two choices. They can put in their own access control system for their floor, which means if they park underground, they need a card from us. They need a card to get through the lobby and then if they put in their own access system, they have to run their own independent lines, number one.

Number two, they're going to have to carry a different card. If you do base building, you can go to a tenant, you can say I've already run the lines. I will connect your tenant system to the base building system and your one card can take you from the garage right into your office as you see fit.

And so we do have a great advantage because our costs on the new system on an apples for apples basis for the tenants will be lower than they would get from a third party because we don't have to run the lines. I know that's too much detail but at least it gives you a flavor of the opportunity.

So if we put in a base building at the Rockefeller Center and then start selling the tenants in 16 buildings it's quite significant. Now some of them already have access systems, but it's a real opportunity.

Okay, great. And I guess each contract offers a little bit different variation of that.

Depending upon what they want, et cetera, number of doors, number of access points, number of employees, et cetera.

Okay, great. Thanks an awful lot.

Now we'll hear from Bill MacKenzie at T.D. Newcrest.

Just a follow-up on that security comment. Have the, you know, the last couple of quarters that you've been installing the initial buildings for these large contracts, as you talked about the margins have been down year-over-year. I am just wondering if those initial installations are largely done and we should see margins starting to expand or do we still have another quarter to get through the initial installation of these things?

We've been working at the Rockefeller Center now for five months. We probably have another six or seven months before it's done. So it's a long and large installation process, but I think you will see the margins move back subject to any additional jobs that we take on that are the same way. Lower margins. So we'll get diluted somewhat, but as John mentioned, I think our margins overall for security for the first quarter albeit below what they were last year were higher than they were all last year.

Yep.

In the fist quarter. So you are starting to see a bit of that, but we hope over time we can bring that security business margin to, you know, John will kill me for saying this, but 8% probably, you know? 8 1/2%.

Okay. Just one other housekeeping item, looking at the balance sheet, your unearned revenue was down when, you know, versus the first quarter of last year. Normally, you have a big surge in unearned revenue this quarter but it wasn't as much as I would have expected. I was just wondering what the explanation was for that if it maybe it relates to green space and some of the issues that you're facing there, or if there's any other explanations as to why it wasn't higher?

It was just basically a change in accounting, Bill. Our pool business was recognizing unearned revenue on unbilled AR and essentially we've changed that. It's balance sheet neutral of essentially a shrinkage of the AR and then a shrinkage of unearned revenue. Or I think we made that a classified inventory, but it's gone. So there's really no impact other than just a shrinkage of the balance sheet.

All right, great. Thanks a lot.

It appears there are no further questions at this time. Mr. Hennick, I'd like it turn the conference back over to you for any additional or closing remarks.

Thanks for joining us, everyone, and hope to have you participate in the next quarter conference call. Bye.