Colliers International Group Inc (CIGI) 2006 Q3 法說會逐字稿

Good day, everyone, and welcome to FirstService Corporation third-quarter financial results conference call. Today's call is being recorded.

Forward-looking statements include the Company's financial performance, outlook and statements regarding goals, beliefs, strategies, objectives, plans or current expectations. These statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to be materially different from any future results, performance or achievements contemplated in the forward-looking statements. Such factors include general economic and business conditions which will, among other things, impact demand for the Company's services and the cost of providing services; the ability of the Company to implement its business strategy, including the Company's ability to acquire suitable acquisitions, candidates on acceptable terms and successfully integrate newly acquired businesses with its existing businesses; changes in or the failure to comply with government regulations and other factors which are described in the Company's filings with the Ontario Securities Commission and the Securities Exchange Commission.

At this time, for opening remarks and introductions, I would like to turn the call over the Mr. Jay Hennick. Please go ahead, sir.

Thank you, operator, and good morning, everyone. I'm Jay Hennick, Chief Executive Officer of the Company and with me today is Scott Patterson, our President and Chief Operating Officer; and John Friedrichsen, Senior Vice President and Chief Financial Officer.

This morning, FirstService reported very strong third-quarter results with residential property management and commercial real estate posting particularly impressive numbers relative to the prior year. Overall, revenues were up 57%, earnings up 21% and earnings per share up 14% over the prior year, which itself was a record quarter for FirstService.

Cash flow from operations was also strong, up double last year and our balance sheet is in the best position it has been since we became a public company. With more then $180 million in cash and unused credit facilities, we are in an excellent position to continue growing our business without having to go back to the capital markets. Adding earnings and earnings per share without diluting our shareholders has been an important goal for us for many years and is one of the main reasons we have been able to generate excellent returns for our shareholders over the long term. In fact, during the quarter, we purchased just under 500,000 shares under our issuer bid. Repurchasing these shares for cancellation has reduced the number of shares we have outstanding by about 1.6%.

As mentioned, residential property management had a very strong third quarter, with operating margins up considerably as well. Most of the revenue increase came from new contract wins in markets like Florida, New York, Phoenix and Las Vegas, but we also benefited by selling additional services to our customers. Leveraging the relationship we have as property manager to gain a greater share of the budget we manage, which now is about to $2 billion a year, has been an important part of our strategy for this business. Providing additional services like on-site maintenance and staffing, among others, not only increases our revenues and profits but it also creates a strong competitive advantage for us in the marketplace. We remain pleased with our Colliers International commercial real estate platform. Results to date continue to be better than expected, not only in North America but also in the Far East and Eastern Europe. We believe that commercial real estate business offers FirstService enormous potential for the future. The market is huge, it's a highly fragmented business with lots of acquisition opportunities and there are many avenues to expand the breadth of our services and grow our revenue streams.

As importantly, we're partners with a strong and experienced management team. A team with a global vision for their business that with our help now have the resources and expertise to make their vision a reality.

During the quarter, we took another important step with the acquisition of Colliers Seeley. Based in Los Angeles, Colliers Seeley is one of the largest commercial real estate players in Southern California, a market which is the second-largest in the U.S. Together, our commercial real estate platform, Colliers International, now generates about $475 million in annualized revenue from its 100 offices in 21 countries around the world.

Given the strong results to date, we decided to increase our guidance again for the third time this year. We now expect our earnings per share for the year to be between $1.16 and $1.20, up from $0.90 last year. Taken at the midpoint of this new range, this represents another year of more than 20% growth for FirstService, the eleventh time in our 13-year history as a public company that we have been able to achieve this goal. As always, our outlook does not include the benefit of any further acquisitions we might complete, all of which would be added to today's numbers.

In terms of acquisitions, we continue to evaluate several opportunities. Those of you who are familiar with FirstService know that evaluating and executing on acquisitions in a disciplined manner is a core competency of our management team. With our strong balance sheet and ample liquidity, we are in an excellent position to capitalize when the opportunity is right as we continue creating value for our shareholders one step at a time.

In summary, we had a great quarter, all of our service lines are doing well, our balance sheet is strong and we are in an excellent position to capitalize on the opportunities ahead.

Now let me ask John to take you through the financial details for the quarter. Scott will then provide his operational report and finally, we will open things up for questions. John?

Thank you, Jay. As Jay has already highlighted, our operations delivered another strong performance in the third quarter, extending a performance this year that was strong from the outset. Our service lines all contributed to the solid results, with residential property management and commercial real estate services leading the way with strong year-over-year growth in the quarter. Cash flow generated to date this year has been at an all-time high and our balance sheet is stronger than ever, providing us with the liquidity and flexibility to support our growth plans.

Once again, this quarter demonstrated the advantage of our service sector focus and diversification across service lines, producing impressive overall results and reinforcing the effectiveness of our business model.

Revenues in our third quarter increased 57% to 342 million from 218.2 million in the prior year and term growth was 17%, with acquisitions contributing the balance.

Meanwhile, EBITDA totaled 28 million, an increase of 15% versus 24.3 million in the third quarter last year. Adjusted net earnings increased 21% to 10.3 million from 8.5 million last year, while adjusted diluted earnings per share was $0.32, up 14% from the $0.28 in the prior year period.

The adjustment to net earnings and EPS represents non-cash amortization, or short-lived intangible assets, relating to the pending brokerage transactions and listings recognized on recent acquisitions in the Company's Colliers International commercial real estate services platform.

For the nine months ended December 31, 2005 revenues were up 67% to 946.1 million versus 565.9 million in the prior-year period, while EBITDA was 95.7 million, up 46% from 65.4 million. For the nine months, adjusted net earnings were 35.9 million, up 42% compared to 25.4 million, while adjusted diluted earnings per share were $1.13, up 36% from $0.83 during the same period last year.

Our operations generated significant cash flow in the quarter, as Jay indicated, bringing year-to-date cash flow from operations to 70.7 million, about double the 35.6 million generated in the same nine-month period last year.

To date, we have invested about 23 million in new acquisitions, most of which relates to an 11% increase in the ownership of our existing Colliers International operation, originally acquired just over a year ago and the acquisition of a majority interest in L.A.-based Colliers Seeley. Both the increase in our Colliers International stake and the Colliers Seeley tuck-under acquisition were completed during our third quarter.

We have invested 20.6 million in CapEx through the first three quarters of fiscal 2006 and expect to invest between 23 and 24 million for the full year, which will be within our self-imposed limit of 2% of annual revenues.

During the third quarter, we also used our cash flow to repurchase shares under our normal course issuer bid, spending about 11.2 million to acquire just over 472,000 shares at an average cost of $23.68 per share, again representing about 1.6% of the number of shares outstanding prior to the repurchase.

We will continue to utilize our cash flow and available cash on hand to repurchase our shares from time to time when we believe the marketplace does not fully reflect their value.

Turning to our balance sheet, our net debt position at the end of the quarter was approximately 172 million, up only slightly from the 169 million at the end of our second quarter despite the acquisitions, CapEx, the share buyback activity in the quarter and still, $10 million lower than the 182 million reported at our last year end. Our leverage, expressed in terms of net debt to EBITDA, decreased from 2.1 times at our last year end to about 1.5 times at the end of the quarter, an all-time low and well below our operating range of 2.5 to 3 times, providing ample financing capacity to support our growth and other value creation initiatives.

During the quarter, we canceled our last interest rate swaps on approximately 86 million and long-term debt for a nominal gain. As a result, all of our 236 million in Senior Notes are now at fixed rates, for the weighted average interest rate of approximately 6.6%. This interest rate will decline to less than 6% over the next four years, facing the current amortization schedules of our Senior Notes. And at quarter end, our $110 million revolving credit facility was undrawn and fully available to fund growth opportunities.

Looking forward to the balance of fiscal 2006, we have updated the outlook, as Jay indicated, for our existing operations presented during our second-quarter conference call and had estimated revenues of forward 1.125 and 1.175 billion, EBITDA between 102 and 108 million, and adjusted diluted earnings per share at between $1.08 and $1.16.

The following revised outlook assumes no material change in current economic conditions in our major markets and excludes the impact of any acquisitions or divestitures completed between today's date and the end of the year.

And updating our current year outlook for our existing operations, we are increasing our revenue range for the year to between 1.2 and 1.225 billion, EBITDA in the range of 107 to 110 million, while updating our adjusted diluted earnings per share range to between $1.16 and $1.20.

We are also introducing our preliminary outlook for fiscal 2007, with revenues estimated at between 1.3 and 1.4 billion, EBITDA of 116 to 126 million, and adjusted diluted EPS in the range of $1.27 to $1.37 per share. As with our revised outlook for our current year, our preliminary outlook for next year assumes no material change in current economic conditions in our major markets and excludes the impact of any acquisitions or divestitures completed between today's date and the end of fiscal 2007.

Now over to Scott for a review of our operating performance by segment. Scott?

Thanks, John. As I did last quarter, I will go through each of our divisions, provide brief operating highlights and a little more detail around internal growth.

Let me start with residential property management, where revenues grew 32% from the prior year, almost all organic growth. The revenue growth is being driven primarily by new contract wins but also from providing incremental and facility services to existing contracts and relationships. This ancillary service revenue was higher than expected in the third quarter as a result of the damage inflicted by Hurricane Wilma. Most of our South Florida clients required incremental cleanup, tree trimming, and landscape repair and replacement services. Our growth for the quarter excluding Wilma-related revenue was 25%.

As indicated last quarter, our contract wins are driven by three factors -- first, growth in the market. Through new construction and condo conversions, the number of community or condo associations in the U.S. has grown at about 8% the last two years. Growth in most of our regional markets has been higher than that. Secondly, there's a continuing trend of [latent] self-management and toward outsourcing the management function through a professional management company and we are benefiting from that. Thirdly, we are increasing our share in every market as we continue to enhance our competitive advantage. Most of our organic growth this year has been driven by the first factor, new development, particularly in South Florida and we expect this trend to continue through our fourth quarter into early next year. We are, however, increasing our focus on existing communities to balance our growth going forward and to ensure we have continued momentum when the new construction market does the slow down.

Our EBITDA margin for the quarter was up 107 basis points over the prior year to 8.8%, due to operating leverage and increases in our higher margin and facility services revenue.

Turning to commercial real estate. As you've heard, we continue to show strong results in this division. Revenues for the quarter were 141.2 million compared to reported revenues of 49.6 million in the prior-year quarter, which represents the month of December only, as the CMN acquisition closed effective November 30, 2004. Revenue growth relative to the whole quarter last year was 33%, 22% organic.

The strong performance is being driven by increased brokerage services as we continue to enjoy a healthy international investment market. We experienced particularly strong growth in North America, but achieved double-digit increases in many of our major international markets also, including Hong Kong, mainland China, Australia and central Europe. Importantly, we're growing faster than our regional markets and believe we continue to improve our competitive position in North America and internationally. At quarter end, our pipeline of transactions remains strong relative to historic levels and we expect Colliers to continue to perform well for the balance of the fiscal year and into next year.

Our third quarter EBITDA margins for Colliers was 8.2%, which approximates the margin [seen by] Colliers in the same prior-year period. The reported margin in the prior year reflects the results for the month of December 2004 only, which is the seasonal peak month for this business.

As Jay mentioned, we closed the Colliers Seeley acquisition during the quarter. The integration process, while ongoing, is proceeding very well. The initial focus of the integration has been to move Seeley onto CMN's information technology and service delivery platform and to introduce Seeley to CMN's industry-leading training programs. We are very optimistic about the future prospects for our combined Colliers Seeley in the Los Angeles marketplace.

Moving on to property improvement, where we had another strong quarter, with revenues up 21% over the prior year, 12% organically. The organic growth in this division was driven by two general factors.

First, we experienced increases in the systemwide [scaleup] of all our franchise systems, which directly translates into increases in our royalty revenue. Our strongest growing franchise system in the third quarter was California Closets. Secondly, we continued to achieve strong results from our franchise operations, which as a group generated revenue growth of almost 20%. The leading indicators in this division remain strong and we expect our revenue growth to continue for the balance of the year and into next year.

Integrated security. Our revenues for the quarter grew 8% over the prior year, 5% after adjusting for a strengthened Canadian dollar. Our Canadian and U.S. security operations contributed equally to the growth in this quarter. Certain large U.S. systems installation jobs, which were expected earlier in the year but deferred, came on-stream during the quarter, and as a result, our U.S. revenues were 12% higher in the third quarter relative to the second. The U.S. pipeline remains quite strong relative to a year ago as does the Canadian pipeline and the outlook for the fourth quarter and early next year is positive.

The EBITDA margin for the our security division was 6.9% in the quarter, 90 basis points lower than the prior year but 200 basis points higher than the second quarter of this year. In response to competitive pricing pressure earlier in the year, we made certain fixed top reductions to better align our cost structure with our gross margin. And we saw the benefit of these adjustments in our margin this quarter.

Finally, let me touch on Resolve Corporation, our business services division, where revenues were up 10% in the third quarter, primarily from several new contracts that have been implemented over the past year, including those with the Royal Bank of Canada, Best Buy and Blockbuster. The final phase of the student loan servicing contract at the Royal Bank was launched during the third quarter and that contract is now fully implemented. This ten-year agreement was initially announced in the fourth quarter of last year.

The EBITDA margins that result continue to show year-over-year strength, up 80 basis points in the quarter, reflecting improved capacity utilization in our U.S. branches from higher volumes and continuing space rationalization.

That closes out my divisional commentary. Let me pas it back to Jay to open the Q&A.

Thanks, Scott. Now we would like to open it up for any questions. Operator, please take questions.

(OPERATOR INSTRUCTIONS). Frederick Bastion, Raymond James.

I was wondering if there is any way you can quantify the fact that the benefits you gained from the Hurricane Wilma on the EPS? I know you mentioned that the growth excluding this would have been 25%, but have you actually worked out the contribution on the EPS number?

The revenues were about 4.5 million. The margins on those revenues would have been in the 15% range.

EBITDA margins.

Also, obviously, you're building up quite [the large as these] days and it seems like you could afford to start paying a dividend. What is your stance on that?

It is something that we talked about it on the last conference call. It is something that we are looking at. We have been reluctant to initiate a dividend policy because if we do, we want to make sure that we will be able to continue to honor and grow it and we wanted to make sure that we had the capital we needed to continue to grow our business internally. So it is something that we are looking at and we are looking at and we'll continue to look at and we will see how the year rolls out and then we will take a definitive position on it one way or the other.

David Gold, Sidoti.

Good morning. Just a couple of questions. Jay, just following on some of the comments that you made on the real estate side and the continued strength there. It sounds like the momentum is certainly in place compared to the history that you see; in other words, no signs of slowing there and feel pretty good about say calendar '06?

Our pipeline remains strong relative to last year, which provides four to six months of visibility.

As you look at that business or more broadly, your acquisition plans, either Company-wide or specific to the real estate business, are there other holes there that you feel the need to fill out?

As you know, David, and most of our shareholders know, that our commercial real estate initiative is a process that we're going through in terms of enhancing that platform. We bought it knowing that there was growth opportunities in a variety of areas. We are pursuing those growth opportunities. There are some exciting things. Yes, we would like to fill out some markets in the U.S. for sure and there are some markets in a couple of other areas as well that we would like to fill out.

But the other great opportunity with commercial real estate is to expand the number of services that we provide to the same customer base. So it's not just a little bit like property management. It's not just the base brokerage business that's of interest. It's property management, it's mortgage brokerage, it's engineering reports, it's appraisals. The list goes on. And we believe every one of those areas themselves create additional opportunity in this platform. So, yes, the base platform of brokerage needs to be filled out somewhat. We are aggressively looking at that, but we are also very excited about all the other things that could ultimately go through that channel.

One last question, I am thinking -- future thinking on repurchases or plans there if you have any that you can put out there, share repurchases.

I don't understand your question fully, David. We did buy just under 500,000 shares during the past quarter and we'll continue to buy shares when we believe the market is not reflecting the value of our shares.

You don't have a price just now that you are sort of looking as a limit of where you might buy?

David, we have used $25 as the initial target; that is where we were comfortable buying, below 25. And we are going to evaluate whether or not it makes sense to acquire shares above that price before long.

Kevin Steinke, William Blair.

Good morning, it's Matt Litfin. Congratulations on a nice quarter. John, what was the EBITDA contribution for the full December quarter from Colliers last year?

Last year was approximately 10 million -- oh, for the quarter? You're talking about the full quarter. That was before we owned the business, you're talking about.

Yes, I have the December (multiple speakers) --

I don't have that right in front of me. You have got the December? I will have to get back to you with that. I don't have the October -- that was before we owned the business.

Okay. I wonder if you could speak generally to what you're seeing in terms of labor costs, both on wages and benefits? What have you been seeing recently? And also now that you have offered out some forward guidance, what assumptions have you made in terms of any inflation there?

Matt, it's Scott. We're going through a budgeting process as we speak and there's nothing unusual that we are noting and no unusual pressure, upward pressure on our wages or benefits. So we have got some increases at certain of the businesses but there is no across the board increases that we have budgeted.

So maybe a couple, 3 percentage points or so on a year-over-year basis might be a reasonable assumption?

It would be in line with CPI, depending on the region.

Michael Tupholme, TD Newcrest.

Hi, good morning. I'm filling in for Bill MacKenzie today. There is a note in your note to income statement with regards to some businesses that you sold. I was just wondering if you could talk about what those are?

Those were two small businesses that we sold. One was a small franchise system in the lawn care system. As you may be familiar, we divested our Company-owned lawn care business going back over a year ago. And this was a small lawn care franchise system which we sold called Nutri-Lawn. As well, we sold a small commercial real estate operation in Singapore to a partner we had in that business that owned 50% of it. Those in combination generated about a $2 million gain during the quarter.

Okay, and can you quantify the contributions, revenue and EBITDA lost from the sale of those businesses?

The ongoing? The ongoing, they were carrying somewhere around 4 million in annual revenue and about 600,000 EBITDA.

Okay. And just in terms of where that shows up in the cash flow, the proceeds and then sort of the offset to the gain, can you help me understand that?

Are you referring to some [exact] flow statement?

Yes, the cash flow and the --

It is netted against the repurchases of the businesses.

Okay, so it is net of those.

Yes.

And then I noticed or I guess you pointed out that the corporate expenses in the quarter were higher than the previous year and you accounted for that by explaining some of the reasons. I was wondering first of all if that is a normalized level that we can expect going forward. And then secondly, if there's anything else that you didn't mention there that was worth mentioning to account for it?

I don't think there is anything we haven't really highlighted. Those were the key contributors in the year-over-year increase. It's probably a little bit higher than normal. I wouldn't say that's necessarily run rate though. Embedded in those cost increases is Sarbanes-Oxley compliance costs. And like other large companies, we're dealing with those and they're increasing all the time. So, unfortunately, we're going to have to bear those costs at least for the foreseeable future. And then there was some extra accrual for variable performance-related compensation, which was recorded in the quarter given the results to date.

So a normalized run rate might be a little bit lower than this, but generally we're going to see higher costs in this?

That's correct.

And then if I could ask just one more with regards to your tax rate. Noticed that it looked a little higher this quarter. I was wondering if you could help us understand what is driving that and then also comment on what you are assuming for '07 guidance, tax rate?

I think we had commented last quarter that our overall tax rate is increasing. The effectiveness of our cross-border program, our tax structure I should say, has diminished somewhat. So we're looking this year for about a 34% tax rate for the year. And during the quarter, we were adjusting to get to that annual rate, so for the quarter, it is slightly higher than that. On a go-forward basis, we're looking at about a 34% tax rate based on our current operations.

(OPERATOR INSTRUCTIONS). Sheila Broughton, Pacific International Securities.

Congratulations on the quarter. I think on the Q2 conference call, capacity was quite close to 80% in the business services. Is it above 80% now?

Nothing material has changed since the second quarter.

And you were saying that you're increasing your share of the annual budget in the property management. Are you releasing where you are about on that now?

I mean, that is a continual goal of ours. We continue to add communities. And whenever we [made of the] communities we add, we would start at the administrative manager only. But no, it's not a number that we have calculated and focused on from quarter to quarter.

And just a small question, just wondering how Pillar to Post is doing?

Pillar to Post is doing very well.

Are you buying a new house?

No, I wish.

Systemwide sales in that business are up this year and the prospects are very good.

Andy [Payne], National Bank.

My first question would be in terms of potential acquisition targets. Would you be able to elaborate a little on what platforms or geographies currently look attractive? Certainly, commercial real estate would be one but any additional insight would be great.

Well, in terms of platforms, as you know, we added Colliers last year but prior to that, we hadn't added a platform since '96. So our intention going forward near-term is business as usual would be continuing to build our existing platforms because we've got great growth opportunities. But within every one of the platforms, there is gas, as we talked about earlier. There's opportunities to add talk under acquisitions. We're pursuing all of those. And we're also pursuing, as I said, opportunities to expand the number of services that we provide to our clients, not just in the commercial real estate market but in all of our other segments.

So, we're trying to be disciplined. We're trying to be opportunistic. We're trying to balance internal growth with acquisition. So, you know, what I'm trying to say is we are going to do it slowly and carefully one step at a time as we have done consistently in the past.

And a follow-up question to one of my colleagues. Earlier you mentioned a 2 million gain on those two dispositions. Is that an after-tax number?

Sorry, could you repeat that last part of that?

I had understood from some of your earlier commentary that the $2 million gain during the quarter -- and would that be after-tax?

No, that is pretax. So you've got tax affected and minority interest affected as well, so it is about $0.03.

Perfect. Two related margin questions. In property improvement, margins were a little lower. Any reason for that decline?

There was one write-up of $250,000 that accounted for most of it, relates to a small California Closet franchisee that ran into some financial issues. And as franchisor, we had sold that franchisee about $250,000 of inventory.

Lastly in security, were you able to capture all of the delayed contracts from last quarter and this quarter? And related to that also, margins slipped a little; just wondering if that was potentially a mix due to greater manpower or some other reason?

No, the reason the margin is down from the prior year is due to pricing pressure. We reference that I think in the first two quarters. The significant contracts that we previously referenced this year, some of them came on stream in the third quarter. We are expecting others to come on stream in the fourth quarter and perhaps first quarter of next year.

(OPERATOR INSTRUCTIONS). Matt Litfin, William Blair.

I had a question on DSO. Obviously, you are much lower than you have been historically and especially this quarter. So I wondered, what is the explanation for that? How sustainable is that, etc.?

Well, look, we're making some progress on the DSO. That has been something that we've been focused on, Matt, as you may know and others may know over the last couple of years. So I think some of the results are indicative of some progress. We're not there where we need to be yet. We've got progress to make in a couple of our areas, segments in particular. And believe me, we're focused on it. So I think when you see to date is sustainable. We have just got to actually improve things a little bit more.

Never satisfied, that's great. Thanks.

Gentlemen, there are no further questions at this time. I'll turn the call back over to you for any additional or concluding remarks.

,Okay operator. Thank you and thanks, everyone, for joining us on this conference call and we will speak to you on the next one. Thanks.

Once again, that does conclude today's conference. I would like to thank everyone for joining us. Have a good day.