Colliers International Group Inc (CIGI) 2005 Q2 法說會逐字稿

Welcome to FirstService Corporation's Second Quarter Financial Results Conference Call. Today's conference is being recorded. Legal council requires us to advice that the discussions 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 then the Company's other filings with Canada and US Securities Commission. At this time for opening remarks and introduction, I would like to turn the conference over to the President and Chief Executive Officer of FirstService Corporation, Mr. Jay Hennick. Please go ahead, sir.

Thank you and good morning everyone. As the operator said, I am Jay Hennick, President and Chief Executive Officer of the Company and with me today is John Friedrichsen, Senior Vice President and Chief Financial Officer. This morning, FirstService reported very strong second quarter results. Earnings were up 30 percent, diluted earnings per share up 44 percent, and revenues up 17 percent over the same quarter last year, an excellent performance. Based on these results and the strength we are seeing for the third and fourth quarters, we decided to tighten our EPS outlook to between $1.47 and $1.55 for the full year, growth of almost 20 percent if you take the top end of our range. And this does not include the incremental EPS we expect to generate from the acquisition of CMN, our new Colliers International commercial real estate platform, or the results of any further acquisitions we complete before year end, all of which would be added to the outlook. With our current momentum and the acquisitions we have in the pipeline, we are confident we will finish the year strongly and enter the next fiscal year in excellent position for the future.

With that said, here is how we are going to handle today's call. First I call on John to provide you more detailed financial information about our results for the quarter, and then I will return to cover the operational highlights, and we will take any questions at the end of the call. John?

Thank you, Jay. In our second quarter ended September 30, FirstService generated record revenue and earnings and outperformed our internal expectations. Our strong earnings combined with modest year-to-date investments in acquisitions and capital expenditures resulted in a strengthened balance sheet and this leads well for continued growth.

In our second quarter, revenues grew 17 percent to $184.8 million from a $157.4 million in the prior year. Consolidated internal growth was 10 percent with the balance of the acquisitions completed after the second quarter of last year. Approximately 2 percent of the internal growth in revenue was attributable to the increase in the Canadian dollar relative to the US dollar.

Now turning to the segmented-basis review, revenue from our Residential Property Management operations totaled $78.9 million, an increase of 18 percent over the prior-year period revenues of $66.8 million. Internal growth was 10 percent with the balance attributable to acquisitions completed in the third quarter, last February and April and in Chicago this past June. Increased revenues arriving from current and new property management contracts across our regional markets, particularly Florida, along with higher revenues in our commercial swimming pool operations contributed to the increase in revenues.

In our Property Improvement Services segment, second quarter revenues totaled $32.3 million, up from $24.9 million or 30 percent reported in the same period last year. Internal growth was 12 percent and the balance attributable to the 4 acquisitions completed in October of last year. Internal growth was generated across our various franchisees including California Closets, Paul Davis Restoration, College Pro and Certa ProPainters, and Pillar to Post. Please note that we have changed the name of this reporting segment from Consumer Services to Property Improvement Services to more accurately communicate the type of services provided by the operations in this segment or service line.

Integrated Security Services revenue totaled $35.6 million in the second quarter, up 21 percent from the $29.5 million reported in the same period last year. Internal growth attributed 11 percent of the increase while approximately 8 percent was attributable to acquisitions, and 2 percent due to the impact of a stronger Canadian dollar on our Canadian operations.

Our Canadian operations continue to generate strong year-over-year results including higher system revenue while the Florida and Texas operations recorded last February contributed slightly stronger revenues than expected. Online and business services revenue increased by 5 percent to 38 million from 36.1 million in the second quarter of last year. About 3 percent of this growth was attributable to the impact of the higher Canadian dollar compared to the same quarter last year. Revenues for the quarter reflected a reduction in volumes generated by our US textbook fulfillment operations due to funding cutbacks and a low point in the textbook adoption cycle, particularly in Texas.

Turning to earnings before interest, taxes, depreciation and amortization consolidated EBITDA from second quarter totaled 22.5 million up from 19.1 million in the prior year quarter, an increase of 18 percent. The consolidated EBITDA margin for the quarter was 12.2 percent up from 12.1 percent in the prior year. EBITDA generated by our residential property management division were 7.4 million in the second quarter compared to 6 million in the same period a year ago. Meanwhile EBITDA margins increased to 9.4 percent compared to 9 percent in the second quarter of last year, primarily due to higher productivity during the quarter. Property improvement services: EBITDA increased to 9.2 million compared to 7.3 million in the second quarter of last year with EBITDA margins slightly more than a quarter due to variation in the mix of revenues generated by our various franchises compared to the same quarter last year. Second quarter EBITDA in integrated security services increased to 2.7 million from 2.2 million last year while marked EBITDA margins were 7.5 percent the same was recorded in the same period year and also in our first quarter of this year.

For the quarter end business services EBITDA was 4.8 million compared to 5.2 million in the same quarter last year. EBITDA margins were 12.7 percent compared with 14.3 percent last year. The decline in EBITDA and lower margins were primarily a result of lower volumes in our textbook fulfillment operations as previously mentioned and also impacted by excess capacity in certain branches within our US fulfillment operations. As I have outlined in my previous comments on prior conference calls, translation of our Canadian dollar of the nominated results in the US dollars arguably impacted by a strengthening dollar. However, a portion of our results in our business services segment negatively impacted offsetting any gains to EBITDA. This portion relates to customer support services provided to US customers and invoiced in US dollars. With a corresponding delivered as service in Canadian dollars. Excluding the impact of foreign exchange the EBITDA margin in business services would have been 13.5 percent versus 12.7 percent reported. Net earnings from continuing operations for the quarter were 9.5 million up 30 percent from 7.3 million reported in the second quarter of last resulting in diluted earnings per share from continuing operations up 63 cents compared with 51 cents in the prior year period, an increase of 24 percent.

Turning to our balance sheet, our net debt position at the end of the quarter was approximately 135 million compared to 141 million at year end while our leverage expressed in terms of net debt EBITDA was under 2.2 times and well below our operating range of 2.5 to 3 times providing ample financing, capacity for growth. Third and first two quarters of the year we invested approximately 8.5 million in acquisitions and approximately 7.3 million in capital expenditures. For the year we expect to incur approximately $14 million in CapEx. As at quarter end, our $19 million revolving credit facility was fully available to fund growth opportunities including the previously acquisition of CMN International Inc. the largest member of the Colliers International commercial and real estate services network, which we anticipate closing by the end of November.

A deadline in our conference call announcing the signing of definitive agreement to acquire 70 percentage with CMN for the 12 months ended August 31, 2004 CMN generated revenues of approximately $280 million and EBITDA of approximately 18 million. As FirstService owned CMN during this period CMN was contributed incremental earnings per share in the range of 20 to 24 cents per diluted share per service. As Jay will comment on further, we are very excited about having CMN in our new platform in commercial platform services market and a significant growth opportunities it will provide to both the shareholders of FirstService and our management partners within CNN. Looking forward the balance of fiscal 2005, we have revived the outlook for our existing operations presented during the first quarter conference call.

The estimated revenue is between 660 and 680 million. EBITDA between 62 and 64 million and diluted earnings per share between $1.45 and $1.55. Now the following revised outlook assumes an average exchange rate of 77 US cents to the Canadian dollar for the entire year ending March 31, 2005. And average interest can increase 180 points during our current year and exclude the impact of any acquisitions completed from today's date and the end of year including the CMN acquisition. In updating our current view outlook for our existing operations we are maintaining our revenue range for the year at 660 to 680 million. EBITDA range of 62 to 64 million, while updating our diluted earnings per share range between $1.47 and $1.55. We expect to provide a further update through our outlook for fiscal 2005 on completion of the CMN transaction. And consistent with prior years, provide a preliminary fiscal 2006 outlook, in conjunction with the release of our third quarter results at the end of January. Now I would like to turn things back over to Jay for his comments. Jay?

Overall as I said we are very pleased with our second quarter results and confident that if a few things go our way, we will finish the year with earnings and earnings per share up about 20 percent over the last year. I am also excited about our planned acquisition of CMN International that we announced on October 14. CMN is the largest member of the Colliers International network, with more than 4100 employees operating from 80 offices and 20 countries throughout North America, Asia Pacific, Central Europe, and Latin America. They provide a variety of commercial real estate services including leasing and sales brokerage, property and facility management, something that we are very familiar with, and evaluation in advisory services. The proposed transaction has been approved by both boards and is subject to shareholder and court approval. We expect all approvals to be in place and the transaction to close as planned on November 30.

With revenues of above $280 million in EBITDA, of 18 million, Colliers International will form the new commercial real estate platform for FirstService. We will also take our annualized revenues of FirstService over the billion-dollar threshold, which is a tremendous accomplishment for our Company and our management team. But more importantly for our shareholders as John mentioned the transaction will be financed without additional equity, which makes it very accretive to our earnings and to our earnings per share. We expect the current operations of CMN to add at least 20 cents per share to our EPS next year giving us an excellent bench start for fiscal 2006. As you will recall from our letter to share holders in our annual reports and from my many comments on conference calls over the last year establishing a new platform for growth has been a priority for us. And CMN is a perfect fit with their proven business model. It has excellent growth potential.

They can grow internally by increasing their market share in existing operations and with operations in 20 countries that's a lot of internal growth. We can grow with the new markets through the acquisition of other Colliers affiliate and there are many opportunities there as well. And they can grow by adding complementary commercial real estate services like property management, asset management and commercial mortgage brokerage just to name a few. As you know an experienced and motivated management team has always been a key component of every FirstService acquisition and this transaction is no exception. The management team, key employees had experienced throughout the network of Colliers have a long a history of success in this business. And more importantly they share values and entrepreneurial approach to business. However best of all, they will remain our partners going forward.

Having active managers, employees and brokers, as shareholders of CMN is not only consistent with our partnership philosophy at FirstService, it will be a real advantage in the market place in the future. In the service industry high quality individuals that can make a real difference to the future need to have a vested interest in the value they help create. Our plans for CMN will be to capitalize on this partnership approach and to use it as a means of recovering and retaining the highest quality people in the industry as we've done so often in our other service segments. FirstService owns many market leading brands in this transaction as another. The Colliers International brand was ranked as the number three commercial real estate brand in the world by an independent survey and CMN itself was further distinguished by the rank number one, two or three in every market it serves.

Finally, like other FirstService business segments, CMN generates strong cash flows that can be used to reinvest in our growth. This business required relatively little lower capital reinvestment and the business model is highly variable. For the most part brokerage commissions are only paid when transactions are completed. And supporting all of this is the recurring nature of your customer relationships. In addition to being geographically diversified and having a large share of every market, in which they serve CMN has a sophisticated customer base that relies on them for their real estate needs as they are on. Approximately 65 percent of their brokerage customers return each year and of course a 100 percent of their property management and facility management customers use Colliers year after year. I'm confident that the CMN acquisition would be an excellent new platform for growth and I am personally looking forward to all of the future growth opportunities that this new business division perhaps will create.

Now let me quickly touch on some of the other operational highlights for the quarter. Our number one performer again this quarter was our property improvement segment with very strong year-over-year growth in revenue and profits. Contributing to this strong performance was California Closets, which was up more than 20 percent in both system related sales and profits, Paul Davis Restoration which has seen its revenues and profits increase after the hurricanes in Florida and both CertaPro, College Pro Painter franchise systems, which posted record results for their seasonal summer period. The same can also be said for the results of our Company owned California Closets franchise operations that continued to generate strong results from their service, now totaling more than 35 million in annual revenues. We've been able to grow these operations much faster as company-owned businesses than franchises, demonstrating once again that are strategy of selectively repurchasing these California Closets franchises and converting them into company-owned operations with management as our partners has given us an another excellent way to grow our business.

During the quarter California Closets and Dorel Industries of Montreal announced a licensing initiative under which Dorel will manufacture ready-to-assemble storage systems and related furniture under the California Closets , and distributes them through selected national retailers in the US and abroad. This new offering will not conflict with our traditional made-to-measure California Closets products and will be designed and sold to customers wishing simple, less expensive alternatives to a professionally designed and installed product that California Closets provides. Dorel is a well known and highly regarded consumer products company and has built its reputation on manufacturing and distributing high quality products through major retailers.

We are confident this new relationship will generate significant incremental royalty streaks for FirstService beginning in late fiscal 2006. And finally, we continue to be impressed with the operating results and growth opportunities at Pillar to Post, North America's number one player in Home Inspection . Since the acquisition of this franchise system last October sales and profits have tracked well in excess of our initial expectations and we expect these results to continue for the balance of the year. Second quarter results were also up nicely in our commercial integrated security operations and our margins are also moving in the right direction. In Canada, Intercon security posted good results for the quarter on the back of very strong system sales and excellent management of their security manpower operations and their new sales pipeline remains at record levels which should translate into continued strong performance for the balance of the year.

In the United States, our security services and technology operations or SST also posted solid results. New branches in West Palm Beach, Florida, Eastern Texas that came as a result of smaller acquisitions completed last year of operating ahead of plan. We're now fully integrated into SST's operations, they operate after the SST brand name and they utilize our proprietary enterprise software system. Residential Property Management also has a good quarter with revenues, profits and margins up nicely over the prior year including the revenues and profits from our commercial swimming pool management operations that are part of this segment. During the quarter, the 2 hurricanes in Florida impacted our operations primarily in Jupiter and Vero beach in particular.

These branches were without power for several days and there were substantial damages in many of our clients properties. Although we were able to generate incremental revenues and profits during the clean up this was offset by a large down time that other operations in this market that has to delay the provision of their services and so things returned to normal. Overall, we're very proud of our panel of operations handled this situation. Many of our employees went above and beyond the call of new and support and reassured our clients at this time of crisis. We have always believed that if we stand tall with our customers at signs like these we will do much to solidify our existing relationships and demonstrate to others and other perspective customers in particular why we should be their management company of choice.

Based on the reaction of our clients since the hurricanes and the flood, our new businesses opportunities we have received since, we're confident our hard work will pay off in more ways than one. During the quarter we were also very successful in our Washington D.C., operations winning several large new community association contracts totally more than 10,000 residential units. This operation has always been a very solid performer for us but over the last year, business has just taken off. The acquisitions completed so far this year in Chicago and Vero Beach in the Wellington, Florida are operating to plan a better and we continue to be excited about the growth opportunities in these markets. In Chicago, we've been able to capitalize on many of the best practices and new sales initiatives we use in other high rise markets like Miami and New York but we have really only scratched the surface. In Central Florida, the Mansion's new construction broke but the Atlantic coast has helped us grow their client and put is in a position to really recapitalise on the growing residential and vacationing markets there.

As John has mentioned, revenues have resolved were slightly ahead of last year and EBITDA, although significant came in slightly below this last year as we had anticipated. In fact as we explained in our first quarter conference call and John did again today, we extracted both revenues in profits to be below last year for this second quarter as a result of the expected government funding contracts were in Central US states. As expected these CapEx impacted the results of our brands in Texas, Georgia, Oklahoma and New Mexico. Based on the forecast so far next year, we expect the volumes to return to historic levels. Otherwise resolved this operating well under it's new management team and we have several new business opportunities in the pipeline that could give us a very strong finish this year. Those are the highlights for the quarter.

But, before I take questions I would like to comment on the actions taken this morning but the FDI new union. As most of you know this union has been trying to organize our own circles and workers in Florida. After a more than a year of efforts, they have not been successful. Their current tactic is to intimidate and smear for service and its companies so that we'll simply sign over our people to this union without giving our people the democratic right to vote. In fact, this is a tactic that may impact the against the law. FirstService has always supported the rights of its employees to vote on whether they wish to be represented by a union and to decide what's best for them and their families. To the union, you're wasting your time. I suggest you redirect your efforts and your resources towards other companies and employee groups that maybe more sympathetic to your motives and tactics.

After a full year, I would have thought you would gotten the message. And in turn with your report this morning on our new acquisition none of our shareholders or analyst or anyone else for that matter values your insight or your questions or it's ruled by your motives. We all know you are not a registered investment dealer or registered to give any investment advice for that matter. We all know you have limited knowledge about FirstService, our strategy or our business model. And we all know you have absolutely no regard for us except for track record including our strong record of good corporate governance. Now ladies and gentlemen, John and I would be pleased to take your calls and questions. Operator. Operator we're ready for questions.

(OPERATOR INSTRUCTIONS) John Diesel, Raymond James.

Good morning. Just on the Resolve, the business services division, where is the utilization rate now in the fulfillment business. I know you've been trying to get that up, just wanted to clear up where that was. And then secondly, on the run rate basis, how much does the CSS, the Customer Support Services portion of Resolve, how much does that account for?

John, in terms of capacity utilization, we're somewhere in the low 70s, slightly up but not materially from where we've been for the last little while. So, we continue to work on filling that capacity, which was -- your second question, I'll have to get back to you, I don't have that information with me.

And then the platform in Chicago, you do have some rental properties there. Can you remind me if that is -- is that lower or higher margin than your usual type of property management?

It's generally a lot higher John, in terms of bucks.

And then so, the second part of that then -- do you have plans to grow that at all in Chicago or even in other geographies -- the rental portion I'm talking about?

Well, actually in Chicago, we're looking at something right now to augment that business. It's a very good business for us. And there is an opportunity we're looking at. The rental business is very similar to what we do in high-rise management with the only exception being, in the rental business you get paid based on the percentage of the revenue generated. So, the responsibility of the manager is to fill the rental units. So, it's a business that fits with us, it's a great growth opportunity for us in our property management business. It's wonderfully due and in many markets in a limited way. But our focus has been to continue to grow our base business there and cross sell our services because there's huge opportunities for growth there as well. So, it's just another great opportunity on our list of things that we can capitalize on in our property management segment.

Great and then sticking with the property management, the uptick in margins there was encouraging. Just wanted to know whether I could read into that. The painting and restoration problems of the past, are those exactly that, a thing of the past now?

It's basically a stable situation there and that side of the business. We still have our challenges. We're working through them. And I think at this point is a stable situation.

That's great, thanks a lot.

(OPERATOR INSTRUCTIONS) Matt Litfin - William Blair

Good morning. Question on -- I notice your internal revenue growth rate has accelerated here and was better than we had modeled. Do you believe that excluding the potential CMN acquisition that that level of revenue growth is sustainable, say over the next year or do you expect that to tail back off as you get bigger?

Like our internal, you know, we've always talked about internal revenue growth released in the existing North American Economy, being in the high single digits. I think we still look at that as being a reasonable expectation. Things have been a little bit busier over the last I guess, year or so. But we're not convinced that that is sustainable in terms of double-digit growth. High single digits is something that we're very comfortable with.

And just as a follow-up, maybe you could apply the same set of answers to the new business, CMN and also comment on how you view it's cyclicality relative to the other 4-platform mix that you currently operate?

In terms of growth, we're looking at mid to upper single digit growth for the existing business, the way it is now. That will any new service lines. that we're maybe very complimentary to what they did today that we would enter.

Given the distant business away as a constitute today, that's what will be the growth. In terms of all facility we expect it to be slightly more volatile. Offsetting that is some tremendous growth potential that we see in their existing markets and new markets that we can enter. Net-net is a very, very positive situation for us going forward.

Okay, one final one if I might, let's just assume that CMN gets closed, and you look into next year. Do you --- I guess the question is how do you view or your acquisition activity relative to this year, you see that being higher, you see it being lower because of the recent platform acquisitions. What are your thoughts there?

We haven't formalized our views on that just yet Matt. As you know, we get together once a year and do a sort of a review of where we go from here, and last year when we met on that, we decided that our -- based on our then current business units, $10 million of incremental EBITDA acquired was a good target for us. We think that, my current thinking is of course we have that carcass with the guides, but my current thinking is that we'll probably still have that same target, maybe tweak it up a little bit. But those are the types of acquisitions that are top thunders they have done our way, they have done at multiples that are attracted to us an to our individual business segments, and CMN does offer us a whole new arena of top thunder growth opportunities, and that's one of the reasons that we saw adding a new platform is critical to our growth.

FirstService is growing rapidly for us to grow 50 percent internal growth, 50 percent through acquisition, the numbers we get become very large on an annualized basis, and we felt that we needed to have another engine for growth to continue to maintain a very, very strong growth track record going forward. Our view going forward for the next 12 months is with CMN and some acquisitions we should be again well over 20 percent growth next year, with some luck. So those are the kinds of numbers that we generated on a -- I think 9 consecutive year basis, we took a rest for 2 years, I think our growth was down a little bit, but it is going to return to close to 20 percent this year, and we think for the next year and maybe two, we'll be able to be back with some luck at those kinds of levels. So in terms of the exact amount I don't know yet, I wouldn't want anybody to fake any of those numbers into their estimates, because if we can't do them our way on our returns, we just don't need to do any acquisitions. So this is a business model that works, it's worked for so many years and the beauty of CMN is, we can just continue to play the same game as we have for so many years, and we now have a new field to play it on.

David Newman, National Bank Financials.

Just on the SG&A and also the sort of percent of sales and year-over-year, that it was up a little more than I would have expected. Is there some additional cost there, such as working on CMN, and we just see our expected run rate going forward, and do you expect synergies on the back of the CMN international acquisition that might give you overall take that down as a percentage of overall revenues?

David, I wouldn't read too much into that, year-over-year there may be slight variation in terms of how certain costs get out of here within our given businesses, where the cost of revenue line or SG&A, there really had been no changes amongst our various businesses in terms of taking on additional overheads that should be characterized or disclosed in typically SG&A, so now with respect, no significant cost attached to the CMN acquisition to date, we will continue those as we always do in terms of the proper acquisition accounting. And then, with respect to synergies, we did not take any synergies into analysis we have done, we will work with the CMN team to determine whether or not together we think that there are opportunities to reduce cost if it makes sense, but the primary focus clearly would be growth and leveraging, what we already have in place in terms of outstanding costs.

And just overall a big part of your story is obviously new accounts, account retention, and the activities are taking place in each one of your units. Is there any color that you can add in the quarter on each one of the groups that we can look to, business services they are getting more accounts etcetera?

I think -- I think the beauty of property management for example is retention rates were in the high 90s, that's remained the same, in fact I think our retention rates are even better this year than it's been in the last couple of years. Franchising is all long-term contracts, business services long-term contracts, there are no new contracts that we are aware of that, God forbid, we're going to lose. There are a lot of interesting things cooking, nothing is overall material to us, but we could have a good finish to the year at business services. But there is a bit of frustration I think . They would like to have converted a couple of these big opportunities that they've got on their plate a little faster, perhaps but you know if -- there is obviously a very important person on the other side of the equation called the customer, and if the customer is not ready we're not ready. So -- but there is some interesting things and we're hoping that we'll be successful, and some of them will also come with our capacity utilization, which is that we've talked about in previous calls. If we can move that excess capacity front you know from 30 percent to 20 percent or better, it is a huge margin impact to resolve, but we're focusing on that.

And just overall Jay, in terms of the whole Asian outsourcing team, are you seeing anything at all that will lead you to believe that it's having any impact on your US operations or business services in general?

Well, John is going to get back to one of the other analysts, the actual percentage of our - the only component of business services that I think is really something that could be moved offshore, and that's the call center component of our business. I think this is a guess and David, John will follow-up if you want. I would say it is 15 percent to 18 percent of the revenue, we've been pretty smart I think in retrospect in the way we managed that business, we have a limited number of call centers, I have always had a limited number of call centers with long-term customers that are still there. And in fact we're bursting at the seats in that business, and if a few things go away for the balance of the year, we might be in the fortunate position of looking for some excess capacity from others. So, we run that business very tightly for obvious reasons, and so we don't -- we're not being impacted by that. if our quality fails or if other things might happen, but we just don't see it.

Okay. And what sort of margins do you get on it? Would you look to ever sell it to someone else?

In fact our margins in that business are lower than our traditional business services margins. So, it actually brought down our overall business services margins since we acquired the last business. The answer is no David, because it is a fundamental part of the business, it's the other half of the equation, so for example, for Reader's Digest, we're taking calls on client enquiry and then we're fulfilling products for them. So it's as simple as we're the front part of their business, and also the back part of their business, this is just being executed in two different places. So, the contracts are really all inclusive contracts with our clients, where we're doing sort of more of an end-to-end solution as opposed to just traditional call center type of activity, although we do some of that too.

Okay. And last question if I may, just on the CMN International. Obviously the more volatile component is the brokerage component. Ideally Jay, where would you like to see that as the overall percent of revenues at CMN?

It's interesting the beauty of the broker component of the business, which is a large percentage, is that it is highly variable, so you only pay commissions when commissions are run. And historically when you look at this business and other real estate costs for example, especially those like CMN that are highly diversified into different geographic regions -- CMN is in 20 different markets -- it is amazing that when things are not as strong in North America, they are stronger in the Far East, for example, or Asia Pacific, and so the results often balance out. So, to answer your question more specifically, we will take as much brokerage business as we possibly can, and the way we will change the mix is by adding incremental services, and you in fact need the brokers for that because they are going to the best referrals for property management services, for commercial brokerage services etcetera. So, having strong brokerage will take them all -- all day long.

Okay, so the sort of traditional FirstService model?

Absolutely.

Bill , TD Securities.

First, just a question on the margins at the property improvement services, the former consumer services segment, John, I think you mentioned mix was part of the reason why it was down year over year. I was wondering if you could elaborate on that little bit more. And also going forward, what are the expectations for margins within that segment or you've had a -- sure you would have mix had changed, but aside from mix, margins have been increasing there -- it's just sort of a level of that going forward?

Yes, the year over year, I mean, we don't look at these margins, the change in margins being significant at all. It is variation in terms of the different revenue streams we are generating from the different systems. We have, as you know, a slightly higher proportion of company-owned operations in California Closets. So, when you own the entire Company and you have a full sort of P&L, the margin tend to be a little bit lower and that would be one of the components. But we think we have a very stable situation by any dramatic change in the mix, which we don't see at this point. We continue generating the same margins we've generated over the last year or so. Certainly, at the current volumes and revenue that we are generating, we will like to continue to generate those kind of margins.

Okay, great. And then just on turning to the fulfillment business, it seems, I guess, to me that it's a at least relative to my own expectations although the see the past utilization levels increase there and I definitely appreciate your comments that the operating leverage is huge if you can get the volumes. I am just wondering, we are couple of years into a better economic growth in the US, I am wondering what your view is towards got it take to get -- to get the higher volumes into those facilities to actually realize that better offering leverage?

I am not sure. It's been a couple of years of robust growth in the US, but it's interesting when we watch the sales pipelines and the opportunities that we pursued, and those that we've been successful at and not successful at. Most of the time, we are not successful, the client is just not making a decision, and so, our closure rates on proposals for those clients that actually go and make a decision -- they are going to outsource -- is very high. So, would we like it to be faster, of course. We are taking some steps to rationalize some stakes over the next probably 6 months, but we are going to have to continue to drive our growth, rationalize where possible, and start to see if we can get some better success. This is a business that generates very strong EBITDA, and in fact, their growth this past quarter is more than we expected, and the EBITDA is better than we expected. So, there are some very good signs there, and it's an exceptionally well-managed and good business with a real strong brand, new brand now in the marketplace under Resolve. So, Bill, you have to give us a little bit more, couple of more quarters to see if we can post some better results, but we are surely doing all the right things and I think going in the right direction.

And then, just the last thing, I know it's still early on the CMN acquisition, but is there any anecdotal sort of feedback that you are getting from brokers or possibly from other branches within the Colliers network globally, or what's the -- what's been the initial reaction from the announced transaction and have you had any bumps on the road to close in these transactions?

That's a very good question. It is deeper than you think there because whenever you'll have the brokerage network, it really is a network. it's a brokerage network, people are on the phone doing deals doing transactions all the time, there is a lot of talk. The interesting thing about this is that, I think the reaction has been and I personally have been involved in meetings with network representatives on an international and US basis. It welcomed us with open arms, in part because CMN itself is the largest component factor of three in the network. They need to be very strong in order for the Collier brand to be strong in every market. There are great opportunities to grow and frankly this existing ownership group, which has done a phenomenal job of growing it to where they are today needed incremental capital to take it to the next level. So it has been exciting I think for everybody. The feedback has been very good and we are excited to getting the gains with these guys and to start to make a difference

And then just one, I guess, final clarification on the capital needs for CMN. Is that more from a sort of building the business in terms buying or doing acquisitions, or are there internal infrastructure capital needs that that business sales in terms of systems or may be combination of both. What is the primary need for capital from within that business?

The beauty of that business is a low capital intensity business, the current owners of the business, the existing shareholders and partners have invested nicely in their business. They've never shrinked on any thing as it relates to providing the higher possible service to their customer in a very competitive business. So I'd say their systems, their processes are all state-of-the-art, obviously they are always looking to make it better. But there is no capital requirements for that. Any future capital required for this business will be growth capital and there are real opportunities there and I think we are going to help in terms of having this segment look a little look more widely than just core brokerage. We're excited about adding incremental commercial property management, facility management both types of services, things that were used but we understand and we think we can add value within industry that are and service lines that are themselves to be consolidated. So, we think there is lots of opportunity and that's where the capital is going to be needed for.

Bill Triven with Dundee Securities

I guess, a question on the security service business. Are you indicating you had strong sales growth in Canada? It is that coming from new buildings going up or you actually aiming business, I mean just in competing firms.

It is a little bit of both but I'd say it is more a continuation of the sophistication in the security business. There is always reinvestment in new systems and new ways of doing business CCTV has been as a percentage of our revenue gone up materially and then monitoring CCTV to a central station. So there is a lot coming from retro fitting and upgrading, I'd say the largest percentage is retro fitting and upgrading the existing facility. The other area where we see some relatively expect to continue by the way, it is the whole concept of where SST is going to help Intercom in Canada. SST has built their entire business outside of the downtown force. Intercom has always been a golden market place, which means it is all downtown, high rise, hard and sophisticated office towers in geographic regions. SST's focus is always been on universities and colleges and power generation stations and so on. And although Intercom has spent a good deal of time pursuing those opportunities, a lot of them are left on a North American basis and we are enjoying some success in that area as well. So it's coming from a number of areas.

If the high rise can't do a business of any interest here?

It's interesting, it's something that we know obviously very well, but if you ask Frank and Rene Gulliver and their team they would say that is not the SST Intercom type business because it is traditionally lower margin, and the clients are not as concerned as they should be but are not as concerned about security and surely not prepared to pay the same level of security that you would have at office for example or universities or power stations. So, it could be great opportunity if our clients would actually spend a little bit of money on security.

Okay. Just one other question, Jay, on the -- you did in your comments mentioned that the -- in the residential property business Washington DC has become a very dynamic market for you. And then I think, has cause this. I don't recall you making recent acquisition in that market, but may be you have.

No, no. We've been there for probably 6, 7 years now, Bill. I think it's a combination of 2 things. The market is a rapidly growing market. The management team that was there with when we partnered with them are still there. And one of things that Gene Gomberg, Richard Strunin, and Chip have really impressed upon operators and partners in markets like Washington, that is a high-rise market is to pursue the high-rise market aggressively, and I think traditionally they were pursuing the single family co-op kind of marketplace and in the last probably 18 months they have been very aggressive at the high-rise marketplace, their competitor there is not as strong as they could or should be. And we've enjoyed some great success having high-rise units and with high-rise units there is a larger budget available to -- obviously to capitalize on.

Okay. Very good. Just one final question for John. Well just looking at your financial needs, your working capital is still feasible 13.5 million in the half. Is that -- can you give some idea, which divisions are taking off that additional capital?

Well, it's mainly investment in receivables and given our growth, revenues were up 17 percent and one would expect that receivables are up. We thought we had a little bit more than would like. I think our DSOs on a trailing 3-month basis would be somewhere around 58 days, I think last year it was 56. So, it's up a little bit more in the couple of pockets where on the shop they reported pretty strongly, they got investment in receivables than they should have and we'll expect to see that liquidated and put into cash over the next quarter. And we are working very closely with two of the three operations to focus on that.

And I guess the California Closets franchising business would account for some of that or would it not?

A little bit. Yes, a little bit.

Ron Schwarz, CIBC World Markets.

Just two quickies. Was the impact on the tax or the fulfillment business more or less than was the impact in the first quarter? Jay, I think it was about $600,000.

I think the impact of Jean in the first quarter.

Okay, and then secondly there was an RPM, there was some spillover from Q1, I guess, into Q2 in terms of some of the pool business that's probably goose -- did it goose up the internal growth rate a little bit for the second quarter may be like a percentage point?

Very, very small.

Very small?

Small, but you are right. And when we have the -- we had to extent season this year being a little bit late in the season that offset the later start with more of them falling later. So, it was in small amount, but it was not significant.

Okay. Perfect, That was all, the rest were answered. Thanks.

We have no further questions in the queue at this time. I'll turn the conference over to Mr. Hennick for additional or closing remarks.

Thank you operator, and thanks everyone for joining us. And looking forward to presenting with you again on the next quarter. Thank you.

That does conclude today's call. You may now disconnect your line.