Colliers International Group Inc (CIGI) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to FirstService Corporation's second quarter 2007 results conference call. 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 actions and conditions which will, among other things, impact demands for the company's service 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 and Exchange Commission.

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

Thank you, and good morning, everyone. I am 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 record second quarter results. We announced the acquisition of Service America and we again increased our financial outlook, for the fourth time this year.

For the quarter, our revenues were up 24%, EBITDA increased 12%, and EPS was up 17%. In addition, our cash flow was very strong, up almost 50% over the same period last year. John will provide you with detailed financial results in just a few minutes.

Over all, we're also very happy with our results. Each of our service lines continues to show solid year-over-year internal growth, as you'll hear from Scott in his operational review.

We also announced that our residential property management business acquired Service America, Florida's largest provider of home service contracts for home appliances and heating and air conditioning systems.

And speaking of acquisitions, so far this year, we've added a total of $16 million of annual EBITDA for our acquisition program. Our goal, over the next five years, is to double our size to about $2.5 billion in revenue and more than double our share value from current levels. To accomplish this, we're going to have to grow internally at about 10% per year on average and add about $12 million of EBITDA through acquisitions. With internal growth running at about 13% so far this year, and with the $16 million of EBITDA already acquired, we have an excellent start on our five-year goal.

In fact, we continue to be very busy on the acquisition front. I hope we will be able to complete at least one further acquisition before year end to drive ourselves forward even further.

Let me now tell you a little bit more about Service America. Service America has been a well-known and well-respected consumer brand in the state of Florida for more than 30 years. Last year it generated about $30 in revenue, contracting with more than 65,000 individual homeowners. As I mentioned, Service America provides repair and maintenance services on contract for major home appliances and for other HVAC systems.

The transaction was a standard first-service transaction where we partnered with a strong and able management team who will remain with the business and work with us to build value over the long term. The opportunity is to cross-sell Service America's service contracts to our existing customer base of more than 200,000 individual homeowners in the state of Florida alone and, over time, to expand operations into other U.S. markets where we have the advantage of being the resident property manager.

Interestingly, one of the cofounders of Service America is none other that our own Mike [Swath], who continues to be active in our residential property management business. Having Mike on our side will come in very handy. Mike has a unique knowledge of both businesses, which will be very helpful as we pursue new strategies to grow Service America by offering its services to our existing customer base.

We also increased our outlook to reflect the current view of our operations for the balance of the year as well as for the impact of the Service America acquisition. The current range of between $1.23 and $1.31 results in growth of between 22 and 30% over last year and doesn't include a benefit of any further acquisitions we might make. Needless to say, this is excellent year-over-year performance by any standard. However, I should also say that, with our current momentum, and with the acquisitions we've already completed so far this year, next year is beginning to shape up very well as another year of strong overall growth.

Now, let me ask John to take you through our financial details for the quarter. And once he's completed, Scott will take you through the operational review and then we'll open things up to questions. John?

Thank you, Jay. As Jay already outlined, we reported strong overall results in our second quarter ended September 30th, with all four of our operating segments generating solid growth over last year and our residential property management business leading the way for the quarter.

Our earnings translated into substantial free cash flow generation in the second quarter, with the timing-related working capital investment seen in Q1 reversing. With an increase in cash and a balance sheet that has never been stronger, we are well positioned for future growth. Once again, our results reinforce the advantage that our service line diversification provides to our shareholders, something we believe is a key to successfully managing future growth while mitigating risk and that will differentiate us from our peers as we move through the business cycle.

Here are the highlights of our consolidated results for the quarter, all of which are from continuing operations. Revenues were up 24% to $338.7 million with 11% internal growth, of which 2% was due to a stronger pay in in Australian currencies relative to the U.S. dollar, the balance related to acquisitions.

EBITDA was up 12% to $32.1 million. Adjusted net earnings up 13% to $13.1 million. Adjusted diluted earnings per share up 17% to $0.42 per share. And cash flow from operations increased 49% to $26.1 million.

As outlined in prior conference calls, the adjustment to net earnings, earnings per share, represents the non-cash rapid amortization of short-lived intangible assets relating to pending commercial real estate brokerage transactions and listings recognized on acquisitions completed within our commercial real estate services platform. After factoring in the impact of this amortization, GAAP diluted earnings per share in the quarter were $0.38 versus $0.35 last year.

As I just mentioned, our cash flow from operations for the quarter was strong, with just over $26 million generated during July, August, and September. During this period, we also invested just over $5 million in acquisitions and $4.3 million in capital expenditures. For the six months ended September 30th in the current year, we have invested $41 million in acquisitions and about $11 million in capital expenditures. For the full year, we expect our CapEx investment to remain below our self-imposed annual CapEx limit of 2% of revenues and 20% of EBITDA.

Turning to our balance sheet, our net debt position at the end of the quarter was approximately $120 million, while our leverage, expressed in terms of net debt to trailing 12-month EBITDA, was 1.1 3 times, down from 1.2 6 times at the end of our first quarter and a gain of well below our historical operating range of 2.5 to 3 times EBITDA. With cash on hand of about $120 million, our $110 million revolving credit facility fully available to fund growth opportunities, and our low leverage, we have ample financial capacity to fund a significant level of future growth without issuing any additional equity.

Looking forward to the balance of fiscal 2007, we have updated the outlook, as Jay indicated, for our existing operations presented during our first quarter conference call. The following revised outlook reflects the contribution of the Service America acquisition announced earlier today, assumes no material change in current economic conditions in our major markets, and excludes the impact of any further acquisitions completed between November 1st and the end of our current fiscal-year ending, March 31, 2007.

We are increasing our estimates for the current year as follows -- revenues in a range of $1.225 to $1.3 billion; EBITDA in a range of $107.5 to $115.5 million; and adjusted diluted EPS in a range of $1.23 to $1.31 per share.

Now, I'd like to turn things over to Scott for his comments. Scott?

Thanks, John. As you've heard, we continued to generate stronger growth during the second quarter driven by several acquisitions over the last year, but also due to strong internal growth of 11% on an aggregate basis -- the seventh consecutive quarter in which our internal growth has been 10% or better.

I'm going to spend a few minutes on each of our platforms, setting out brief operating highlights and internal growth drivers, and then we will open the call to questions.

Let me start with our commercial real estate platform, Colliers International, where revenues for the quarter were up 37%, primarily as a result of the acquisitions of Colliers Seeley in November of last year and PRDNationwide and Cohen Financial during the current year.

Internal growth for the quarter was 5%, driven by healthy double-digit organic growth rates in Canada, Asia, Central Europe, and Latin America, but tempered somewhat by slightly weaker revenues in the Western U.S., primarily the U.S. Southwest, including the Los Angeles region. This region had a very strong Q2 last year, creating a tough comparison.

In addition, coincident with the Seeley acquisition last year, Colliers undertook an integration initiative that included, among other things, the consolidation and relocation of several offices in this region. This has resulted in some disruption and short-term opportunity cost in terms of lost revenue. Over the longer term, however, we are confident the process will result in higher employee productivity and increased profitability in the region.

Outside of this region, we generated solid results and experienced strong growth -- really, around the globe -- supported by healthy markets and strong market positions. At quarter end, our global pipeline of pending transactions was very strong. The North America pipeline, including that in the U.S. Southwest, was consistent with this, reflecting numbers that were at all-time highs. This strong pipeline provides us with sufficient visibility to be optimistic about the outlook for this division through to the end of this fiscal year.

Another metric, which is nonfinancial in nature but one we follow closely and also causes us to be optimistic about our outlook, is employee and, specifically, producer recruitment and retention. I've mentioned before on our calls that a key Collier strategic initiative and competitive differentiator is its investment in people development, recruitment, and retention. Q2 marked another quarter where we made significant strides in this regard, and we expect Q3 to be similarly strong in terms of retention and producer recruitment.

The second quarter EBITDA margin was 5.6% compared to 7.4% in the prior year. The margin dilution largely reflects integration and office relocation costs in the U.S. Southwest and investments in corporate infrastructure and management resources to support continued growth.

Our expectation for the full year is a margin of approximately 8%, which is the same as that achieved in fiscal '06 but on much higher revenue.

Let me now discuss residential property management, which grew internally at close to 20% for the quarter, continuing the impressive organic growth that this division has achieved over the last couple of years. The growth in the second quarter was, again, driven primarily by the year-over-year impact of the significant number of net new contracts won over the last 12 months. At September 30th, the number of units under management was up by over 15% compared to the prior year.

One of the keys to our internal growth strategy is to enhance our unit volume growth by layering in accelerated services across our association base where opportunities arise, and always at the discretion of the client. We continue to achieve success with this initiative, and our quarterly internal growth reflects this.

On a percentage basis, our growth is being led by new contract wins in the Mid-Atlantic region and in Las Vegas, followed by south Florida and Phoenix. And consistent with the last several quarters, the unit growth is being driven by new development. Our size, experience, and leading-edge systems and processes position us very favorably with the large developers and homebuilders relative to our competition. We have benefited from this competitive advantage throughout the hot development market of the last couple of years.

As I indicated last quarter, this market has cooled considerably this year. And while we expect continuing to benefit through the balance of fiscal 2007 from those new developments currently under construction, we expect our internal growth to decline from the 20%-plus base to a sustainable low- to mid-double-digit rate. Currently, we are adding units that would trend toward a 10% volume increase for fiscal '07.

It is worth nothing that the percentage of our unit growth coming from new development is down from a year ago as we are refocusing our efforts and resources on winning existing units that are either self-managed or managed by competitors.

The EBITDA margin for the quarter was 10.8%, up from 10.2% in the prior year, driven primarily by operating leverage.

Moving on to property improvement. Our revenues in this division grew 9% for the quarter, 6% organically, with the balance of the revenue growth coming from the recent acquisitions of the Handyman Connection franchise system and the California Closets franchise operations in Fresno and Sacramento.

The internal growth was driven primarily by system-wide sales gains in the major franchise systems, including Certa Pro Painters, California Closets, Paul Davis Restoration, and College Pro Painters, but tempered somewhat by declines in the system-wide sales for our Pillar to Post home inspection franchise system due to the slowdown in the residential resale market. Our branchise operations, as a group, grew internally at a mid-single-digit rate.

We are selling few new franchises, so the increases we are generating in system-wide sales are being driven by increases in franchisee productivity. This is somewhat unique in the service franchise industry and is the result of our constant focus on improving the franchise model to enable our franchisees and branchisees to leverage their infrastructure and increase sales. We expect this trend to continue, which will enable us to consistently grow at rates that exceed the market -- which, for this division, is the home remodeling market.

The 6% internal growth we achieved this quarter is conservatively representative of the mid- to high single-digit internal growth we expect to generate on a consistent basis in this division in the future.

The EBITDA margin for this division was 30.7%, down slightly from the 31.5% a year ago, due primarily to the timing of certain seasonal expenditures.

Integrated Security. Our revenues for the quarter in our security division grew internally by 12% on a year-over-year basis. Internal growth was particularly strong in our U.S. operations, driven by a general increase in the sale and installation of access control systems from CCTV. We experienced this growth across most of our U.S. branches. Our Canadian operations generated solid high single-digit internal growth, which was similarly driven by increases in systems sales and installation.

The pipeline was very strong on September 30th and activity levels remain high for both our U.S. and Canadian operations, and, as a result, we are optimistic about the revenue outlook for the balance of the year.

Our EBITDA margin for the quarter was 5% in this division, approximately the same as the prior-year quarter and the previous quarter, sequentially.

Operator, I now pass the call back to you and we can receive questions.

Thank you. [Operator Instructions] We'll take our first question from Sara O'Brien with RBC Capital Markets.

Hi, guys.

Good morning.

The first question was just about the commercial real estate slowdown. I understand it was a bit of an aberration in the quarter for the U.S. Southwest market. But is there anything in particular that was driving that in-- I mean, is it something that you can see rebounding substantially in the next quarter which drives a lot of your Q3 earnings?

Well, I think the-- Sara, it's Scott. Firstly, it's important to recognize that we had an extremely strong quarter in all of CMN last September. In the Southwest region, specifically, we had a very strong quarter with several large deals closing. So out of the gate, we have a very tough comparison. I think our expectation, based on the pipeline we have and the discussions we've had with that management team, is that we are expecting some stronger December and March quarters in this region. In the rest of CMN, we're clicking along pretty well.

Okay. And in terms of the margin-- I mean, how much was one-off because of office relocation and productivity losses? And can you regain your margin up to sort of previous levels?

I mean, we think we can. We're looking at a margin of 8% for the year. There are many, many moving parts when looking at the margin dilution. You try to capture it as succinctly as we can, but the reality is there are quite a few things impacting it. The bulk of them have to do with integration and office relocation costs, which are real in the Southwest U.S.

And also, there are a number of corporate costs, which were-- some of them have longer-term benefit for the company, but took place in the second quarter. And so there is a timing aspect to some of the margin dilution. And we do expect to see our margin improve the next couple of quarters.

Okay. When you say corporate costs in Q2, is this beefing up the corporate real estate team, or what exact kind of costs are you talking about?

There were some-- a number of hires early in the year. There were some expenditures for marketing that were significant and occurred in the second quarter which will have a long-term benefit. And there were other expenditures in systems and certain other infrastructure costs which had the same impact.

Okay. Maybe just switching to residential property management, with the slowdown we're seeing in units being developed, but also the economic slowdown we're sort of looking for in the back half of the year, or the back quarter, are you expecting ancillary services within residential property management to be impacted? And given those are the higher margin, I mean, would that sort of take a toll on your margin over all?

No. I mean, we're expecting the unit growth to come down from historical levels, but we're always increasing our penetration with our ancillary services. So we don't expect an impact on the margin.

Okay. And maybe just a last question on property improvement. You talked about the slight margin decline being sort of seasonal expenses. Can you just expand on what that is, exactly?

There are some seasonal businesses in that group -- College Pro is the largest. There were certain expenditures related to College Pro that took place in September this year which occurred in October last year.

Okay. And, like, just what kind of--?

It's not significant. Those margins-- the margin's approximately the same.

Okay. Okay, great; thank you.

Next we'll hear from Raymond James's Frederic Bastien.

Good morning, guys.

Good morning.

I noticed a couple of weeks back that Cohen Financial secured 53 million in debt and equity financing in Dallas. Have there been other notable deals booked by Cohen since it's joined FirstService?

That was one of the deals. There was-- actually, just after we completed the transaction, there was a very significant transaction that impacted our numbers positively last quarter, which was really a trend-setter in the state of Florida, and Cohen Financial was very instrumental in arranging close to $100 million worth of primarily mezzanine capital for a variety of well-known developers there. So the answer is yes.

Okay. And how's the outlook, going forward, for Cohen? And also just curious to know how PRDNationwide's doing in Australia?

Well, Cohen is doing, actually, very well. They are-- the outlook for them is very positive. They are working hard at putting together an integration plan where they can originate additional loans through the Collier's channel, which is very interesting, and was one of the core reasons for that transaction -- being able to help our clients not only buy real estate but also finance it. So we're cautiously optimistic that Cohen Financial will enjoy some great growth over the next couple of years. So, yes, doing nicely, and we're very comfortable with it so far.

PRD in Australia -- and Scott, maybe you want to add something on PRD. But PRD is also doing very well. It started last quarter-- we had it for just part of the quarter last quarter, and so it started off a little bit light. But it's rebounded nicely and the integration of their operations-- and I think we talked about it-- I spent time talking about it on the last call. That was an acquisition where we were taking pieces of PRD and integrating it into the Colliers branches in Australia so the integration plan was something that was well mapped out. And that's doing very nicely. So we're also happy with the way that's moving along.

Okay. And maybe finally, do you have any thoughts on [CB Richards Ellis's] move this morning?

I don't know about you guys -- the guys around the table here, but I think they're--the Trammell business is a tremendous business. And it's a very big price but it's a tremendous business. It'll be interesting to see how that unfolds over the next couple of years. But high-quality company, Trammell.

Great; thank you.

Our next question comes from David Newman with National Bank Financial.

Good morning, gentlemen.

Good morning.

How are you doing?

Good, good.

Good. Just on the organic growth -- if you had to separate it out between, let's say, investment sales versus leasing activity, what was the organic growth? And can you kind of give us an outlook on the two pipelines?

I can't give you specific numbers, David, but leasing grew, certainly, more quickly than investment sales. And I don't have a pipeline broken down between the two.

Okay, but leasing activity is obviously doing quite well. If you had to look back, I guess into cycles, how comfortable do you guys feel looking out? The sustainability of the current cycle?

From my perspective, I think our pipelines are very strong. And everybody has got a special eye on this business and the opportunities in this segment. But our pipelines, as Scott said, have never been stronger. And we think we're going to have a very good balance of the year here, and we think it's going to continue for a while. So our prognosis continues to be good.

And one of the things that we've been aggressive about, as you know, is adding ancillary services to our base business, which-- things like Cohen Financial and PRD, among others. And those are all services that have more recurrabilty and repeat customer relationships. So we're hoping to smooth out our business if, as, and when the markets change. But in the near term, we see it continuing.

Excellent. And, Scott, you mentioned that the-- you're having some success, I guess, in recruiting new producers. Your sort of organic headcount on the producer side -- what are you seeing there?

I don't have a number for you, David, but there are certain products and certain service lines where we have strength and certain where we're not as strong. And where we're having our most success is bringing in high-profile producers in those areas where we most need them. And that's what is significant for us.

And I guess you sort of tilted your commission grid to reward the higher-end guys. Is that having a significant impact in terms of recruiting some of those big hitters?

I think it is. Certainly, it's working for us in many other ways, just in terms of improving our variable cost structure and rewarding the highest producers.

Okay. And just a final question, if I may, guys. On the property management side, how much of your portfolio, if you had to look at it in sort of a very sort of back-of-the envelope-- how much would you say is more housing related and subject to sort of the real estate markets?

Are you talking about new construction?

Yeah, just overall-- if the real estate market-- in terms of engaging some of your property management services, how much of it would be affected by sort of a real estate downturn in the residential side?

Well, it impacts our growth in terms of new development. There are ancillary fees that we generate with resales within the communities we manage. So those fees would be impacted, which will have a small effect on our margin because they tend to be higher-margin services that we provide on resales.

But it's not-- the number of new developments has grown historically at 8% and we think that will continue. It's been higher the last couple of years. So, I mean, longer term, it's not a significant impact. But as I've said a couple of times, longer term, we see our growth rate in this business at low to mid-double digit.

Excellent. Thanks, guys. Solid quarter.

Next, we'll hear from Tim McHugh with William Blair and Company.

Yeah, hi -- it' s Matt Litfin. A question about Service America. Is that a virtual business, like some of the larger home warranty businesses?

No. it's a self-performing warranty business, different than you've seen in some other companies, Matt. These guys started in the self-performance service contract business and have always operated that way.

Okay. And then, what advantages do the bring to the table in that market, and what value can FirstService provide to that company over time, in your opinion?

The big opportunity -- and we'll have to prove it out -- but the bit opportunity is to cross-sell that service to our existing customer base. They do a variety of HVAC and plumbing services, but direct to the consumer; direct to our homeowners. The issue for Service America over the past number of years has been their growth rate has been generally a flat grower. And so the opportunity for us is to help introduce them into our communities and to encourage our customer bases to consider using their services on a more consistent basis. So great business, well managed, strong cash flow, but flat grower, historically. And the opportunity for us is to ramp up their growth.

Yeah. And just following on that, is this an industry that you feel is ripe for consolidation? And do you need to have an RPM presence to want to acquire further home warranty-type businesses?

It's not really an area that we've thought about consolidation right now. This is a longstanding brand in a market where we have huge penetration and lots of opportunity to cross-sell. So if, again, we can figure out how to leverage the channel nicely, we can then take the show on the road to other markets in which we have the same kind of presence and perhaps make little acquisitions, perhaps start afresh. But it's really yet another way that we're trying to get at our customer base and provide another service to them.

Okay. My final question is a two-part question. Now that maybe some of the froth is off the commercial real estate industry from the last few years, when you look at Colliers, what are the main ways you want to grow that business organically -- 2007 and beyond?

And also then, stepping back, what would you consider to be a reasonable long-term earnings growth rate for FirstService in a steady-state economic environment in the U.S.?

Well, maybe I should-- can handle the second one first. And it really comes back to our goal as an organization -- that we think over the next five years, we can continue to grow, on average, at 10% or better and we can add a number of tuck-under acquisitions on our way. And in doing that, if we're successful, as we have been for a long period of time, we will have doubled or better share value and doubled the size of our business.

As I've said to others, that's, for me, a consolation prize, but it would be a tremendous result for our shareholders in generating a great return for our existing shareholders. So we've looked at FirstService from a standpoint of being a diversified service provider that has fragmented markets that we can continue to grow internally and through acquisition. And if you just roll out the numbers over a five-year period, it's an excellent result.

And I think-- Scott will have a specific comment on commercial real estate, but I think the same thing applies to commercial real estate -- there's just so many ways that we can grow that thing both internally and through acquisition.

And in terms of internal growth, I think while there are many initiatives, let me just focus on two. And one would be something I mentioned in my comments, and that is differentiating itself by investing in people, by keeping the highest producers and attracting the highest producers on a long-term basis.

And then secondly would be to broaden our service line, particularly in the U.S. and specifically property management appraisal, evaluation, services. To fill out our strengths in our service line to secure a broader and more significant customer base.

You know, the other thing I would add to that is transactions like today -- the CB Trammell transaction -- really does have an impact on recruiting and retaining people. And we see that as a potential plus for us on the recruiting side, because whenever you've got two large players that come together, there's overlap, there's client relationship overlap, and there could be a very interesting opportunity for us, as that deal unfolds, to augment certain parts of our business and some of the areas that we should be stronger in, like Scott commented on earlier. So that's something that we're quite excited about as of this morning.

Great; thank you.

Thanks, Matt.

Moving on, we'll hear from Sidoti and Company's David Gold.

Hi; good morning.

Hi, David.

A couple more questions for you. First, I'm not sure I'm quite clear -- on the commercial real estate side, on the margins. Essentially looking at-- well, your guidance of 8% for the year implies a pretty quick bounce-back. And I guess the part I'm not clear on is this quarter's lower margin. How much of that was sort of related to the one-times from transitioning and how much of it's kind of ongoing?

Well, again, there are a number of things impacting that margin. But the bulk of it is from real costs and real investment. There is an aspect of it associated-- because our revenues in the Southwest are slightly down, there is a-- that impacts your margin because you have negative operating leverage. But the bulk of it is real.

Okay. So there's a touch, but the bulk of it is sort of ongoing. So the improvement, go-forward-- I mean, the company shouldn't-- the fourth quarter being the strongest, or some up side from maybe some of the changes you made?

Right. And you do get our revenues-- we're expecting increases in revenues when you get the operating leverage associated with that.

Okay. All right. And then, Jay, if you can speak a little more about thoughts from here on the acquisition front. I know-- I guess in the past you've talked about it being a couple of areas. Just curious if you can update us a little bit on sort of what the thinking is go forward -- where you'd like to put some of that money you have to work.

Well, I alluded to it in my comments, but we are very busy with acquisition opportunities right now. We hope to complete at least one before the end of the year. Hopefully, we can do better than that. These are acquisition opportunities pretty much across the board, with the exception of security. We're not really focused too much on acquisitions in that area right now. But they are all smaller, bought our way, and excellent tuck-in opportunities in our different-- in different service lines.

Okay. So nothing real big out there just now.

Nothing really big.

Got you. Perfect; thanks a lot.

Moving on, we'll hear from Bill MacKenzie with TD Newcrest.

Thank you. A couple of things. Just, I guess, starting with a housekeeping question. John, on the other income line, between I guess resolves and the interest on your cash on hand, I thought that number would have been a little bit higher. Was there anything unusual going through there that would have pulled down that other income?

No. that's nothing really noteworthy. You've got-- in that line, you've just got equity pickups from the CMN operations, and those tend to vary up and down. That would be it.

Okay. But resolve still goes through that line, and your ownership in there hasn't changed?

Right.

Okay. And then, Scott, I don't know if you can break this out, but I guess PRD and Cohen, I think, are higher-margin businesses than the rest-- CMN. I'm just wondering about-- you know, we talked a lot about-- on the call about some of the issues that hurt the margins. How much would mix have favorably impacted the margins, either in terms of the quarter or your full-year-- target of 8% for the full year? Because I would have thought that mix and operating leverage, on the other hand, would have been helping margins. I was just trying to be able to isolate that in a little bit more detail.

I don't think there was a big mix impact on-- Our margins, really, outside of the region we focused on in this call are in line or up from prior year. And so it really is isolated to the U.S. and, further, to the Southwest. I think we've talked about it.

Okay. And then, just one last question on the balance sheet. I ask you guys about this issue a lot, but your debt to EBITDA just keeps falling, and this quarter the cash flows were noticeably very strong -- certainly more than in the past. And just wondering -- you guys were buying back stock earlier in the year, and then you held off through the summer. And I'm just wondering what your thoughts are on buy-back. It doesn't sound like you have any sort of larger transactions. Clearly, there's some opportunities out there for you guys to continue to apply capital for some of the more typical FirstService-type size acquisitions, but I'm just wondering, I guess, about buy-back, and at what point do you-- if there's a net debt to EBITDA number, at what point where you say, "Okay, the balance sheet is just now wickedly underlevered," and you need to do something about it?

It's a question that gets asked and all I can say, Bill, in response to that is, we continue to monitor our leverage. We know that at this point, the business does have probably optimal capital structure at this point in time, but it is a long-term game. We know there are, notwithstanding-- the fact that there may not be immediate large opportunities, there are opportunities out there that I think are available to us and if we have the capacity to take those on, it's going to provide a much better return than buying back stock.

As you point out, we were active in the first quarter. We'll continue to monitor this thing. I think we've hit our internal objectives, at least through-- as we have set out at the beginning of the year, in terms of buy-back. But we'll revisit it. And I think it's a dynamic process. We're going to constantly look and see what opportunities are out there to redeploy our capital in our preferred way, which is buying companies, as we've announced this morning. And if we get to the point where we think it's better to buy back stock, we'll do that.

Okay. So there's not sort of a predetermined net debt to EBITDA number? I mean, you've talked in the past about kind of your comfort level and sort of the high end of where you'd want to be. There's no low end of where you don't necessarily want to be?

Not at this point. No, I think it's still too early to make those determinations. I think right now, we know it's low. We also know there's opportunities out there that we'll see if -- it will increase, potentially, and we just have to keep monitoring this.

Okay. All right; thanks.

You're welcome.

Next, we'll here from Alan [Lever] with [Riboti] and Company. [beeps]

Hello?

Hello.

Hi; good afternoon. Just a follow-up on Service America, Jay.

Alan! Alan, it's been a long time! How are you?

I'm doing fine.

That voice is very distinctive. I knew who it was. We didn't hear the operator announce who it was-- so go forward with your question.

Okay. On the Service America, Jay, just-- you gave a little bit of a background, and I was wondering-- I know the HVAC industry did kind of a Wall Street roll-up; not the way you guys do things. And I was wondering if they participated back several years ago, or they've always been kind of independent?

Always independent. They were part of another organization a couple of years ago, and then they became independent. But they've been around, doing the same thing, for a lot of years.

So they really were not part of the kind of roll-up?

No, not at all.

Okay. And then, my question is you kind of alluded to the cross-selling opportunity. And I was wondering -- from kind of your thought process, if you can't do much cross-selling, it's kind of a slow growth, good cash grow. Do you view it as kind of an okay acquisition but the home run really can come if you can cross-sell? Is that kind of the way you look at it, or I'm going-- am I--?

No, you've got it down properly. We bought it well on the right terms so the return on our investment capital if they just continue to do what they've been doing will be very good. But if we can figure out how to penetrate, it could be a very interesting area that we could continue to roll out to other markets.

In the old days, the days of Mike Swath that I alluded to in my comment, they sold these warranty contracts to communities on bulk. In other words, if there's 150 units in a building, they sold a contract to the community association on bulk. That has not happened for many years. One of the opportunities could be to try that-- that means of selling again and that would add quite a bit of revenue to Service America and for [inaudible].

Okay. Kind of roughly, what is the percentage of business that's actually warranty versus plumbing and HVAC and like that?

It's almost-- it's all warranty. So they'll sell a contract for $450 or $550, depending upon what appliances you have. You pay a-- I can't find the words -- you pay a small fee on the calls, but everything else is covered in the warranty contract. So it's entirely recurring-- there's some TNN -- probably 10% of the business is time and materials; 90% of the business is these warranty contracts. So it's very recurring, contractual business.

And the contracts are really on what, now? So it's not-- I guess I misunderstood. I thought it was a little more of a-- doing a little more of the heating and air conditioning.

Yes, it's a contract that will cover major appliances -- dishwashers, fridges, stoves, etc., and air conditioning and heating systems. It's valued -- it's valued and estimated and then sold to the client. In effect, it's like an insurance policy. In fact, this company is governed by the insurance department of the state of Florida.

Okay, great. And you have no-- you don't-- like, five years out, even have any guess over how much cross-selling you can do or what-- you have goals? Or is it too-- not possible today to figure that out?

It's too early. But in a year or so, after we've tried a couple of things, we may have a better view of it.

We have approximately 300,000 units in the state of Florida; their current customer base is about 65,000; there's some overlap that exists today. But it gives you a sense.

Okay. Well, you don't need much of a-- you don't need much success in the cross-selling to make it really work the acquisition [cross-talk] their base. Okay, great.

Our next question comes from RS Investments, Bill Wolfenden.

Good morning. I don't mean to beat the dead horse, but a couple of callers ago, you were talking about the buy-back. And I never like to talk about the stock with your company because you guys do such a good job over the long term with building the company, but your stock's actually sort of languishing, almost making sort of a one-year low here, when a lot of the peers that you're compared against are basically making new highs.

I was just curious -- at 7 times EB to EBITDA here on the current-year numbers, it would seem like buying your own company is probably about one of the best investments that you can make. But maybe I'm off on that, and that the acquisition opportunities are significantly lower than that so that you'll be able to get a longer-- better return over the long term. But can you just talk about why, at 7 times, you wouldn't think that your stock was a serious bargain, here/

Well, we have, earlier this year, bought 400,000 or 500,000 shares. John, do you have--?

800,000.

800,000 shares earlier in the year. And so we're not adverse to buying back our stock, firstly. Secondly, our-- based on the average purchase price of acquisitions that we make, we're buying at better than 7 times EBITDA. But your comment is still a good comment, and one that we continue to focus on quite closely.

Great; thank you.

[Operator Instructions] We'll take a follow-up from Frederic Bastien with Raymond James.

Two quick questions on Service America. Was the acquisition done at a reasonable valuation? And second, what kind of margins does that generate?

It was right within our range.

Okay. And what kind of margins does that business generate?

Consistent with the overall RPM segment.

All right -- 10 percent-ish?

Plus or minus, yes.

Okay, thank you.

Gentlemen, at this time there are no further questions.

Thank you, everyone, for joining us, and we'll look forward to speaking to you on the next conference call.

And that does conclude today's teleconference. Thank you all for joining. You may now disconnect.