Colliers International Group Inc (CIGI) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the FirstService Corporation second-quarter 2009 results conference call. Today's call is being recorded.

Legal counsel requires us to advise that the discussion scheduled to take place today may contain forward-looking statements that involve risks and uncertainties. Actual results may be materially different from those contained in these forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the Form 10-K and in the Company's other filings with Canada and US Securities Commissions.

As a reminder, today's call is being recorded. Today is Wednesday, July 29, 2009. At this time for opening remarks and introductions, I would like to turn the call over to the Founder and Chief Executive Officer, Mr. Jay Hennick. Please go ahead, sir.

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

This morning FirstService reported second-quarter financial results. Revenues were down 7% to $425 million, EBITDA was down 13% to $41.2 million, and adjusted earnings-per-share was $0.46 per share compared to $0.56 last year.

As you would expect, the entire shortfall came from Commercial Real Estate. Revenues in that segment were down 32% versus the prior year or about 28% if you adjust for foreign currency changes.

But FirstService is much more than just a commercial real estate services company. Our business is well diversified with more than 70% of our EBITDA coming from Residential Property Management and Property Services segments, both of which had very good quarters. In Property Services results were solid at Paul Davis Restoration, the largest franchise provider of restoration services to the insurance industry, and particularly strong at Field Asset Services, America's leader in property preservation and foreclosure services. Both of these service lines more than offset the weakness from our more consumer-oriented franchise systems.

Overall the quarter was exceptional in this segment with revenues up 42% and EBITDA up a strong 90% over the prior year. The resilience in our Residential Property Management segment also continued to show through as it has consistently over many years. Revenue and EBITDA were up nicely over the prior year, all organic, despite a slowdown in new construction and cutbacks in certain nonessential services. This segment has tremendous attributes that will continue to drive our growth for many years to come. It is in a highly fragmented market, and we are the industry leader with a market share of just under 2%, so there is lots of room to grow.

The market itself will continue to grow as more communities move from self-management to professional management and as more consumers look for second homes or retirement properties in the years ahead. And with our industry-leading technology, significant buying power and national footprint, we have a real first mover advantage that we can leverage to help clients save money and enhance their property values, both of which will create additional competitive advantages for us. John and Scott will comment more on our financial and operating results in just a few minutes.

The real question for all of us is, where does FirstService go from here? What do we expect for the balance of this year, 2009, and what are our prospects for 2010 and beyond?

Let me begin with the obvious. We have built FirstService one step at a time over a long period of time with the care and discipline of a management team with a significant equity stake in the business and one that has a clear strategy and vision for the future. We operate in a $1 trillion industry with multiple opportunities to provide services to real estate owners whether commercial or residential. FirstService is already the market leader in three important service segments with global growth opportunities in multiple service lines in Commercial Real Estate and Residential Property Management and in Property Services. We have a proven business model and way of doing business that has stood the test of time. Ever since we listed on the NASDAQ in 1995, our compound annual return has been around 17%, and that is despite the decline that we have experienced in our share price over the last 18 months.

Needless to say, a 17% annualized return compares very favorably to the widely published NASDAQ Index, which has returned only 6% per year over the same period of time.

And finally, we have the financial strength and available capital to continue to pursue our proven growth strategy and continue to create value for our shareholders.

Looking forward, in Commercial Real Estate, we expect continued softness for the balance of this year and well into 2010. We will continue to monitor our costs closely, and we will be aggressive about strengthening our global platform, already the fourth largest in the world, at a time when others in our industry are under significant financial and operating pressures.

Adding FirstService Williams in New York late last year, recruiting Dylan Taylor and others to drive our rapidly growing North American Corporate Services and commercial property management businesses, and several other like initiatives are just some of the steps we are taking. And if the volume of investment transactions begins to increase and debt markets began to stabilize, our operating results in this segment should respond very quickly, particularly with the lower cost structures we now have in place.

In Property Services we expect our overall results to continue to track the results we have delivered so far this year, which means a strong finish to the year setting us up well for 2010. Field assets should continue to grow with increased property preservation and foreclosure services demand at least through 2010.

We also expect to add some new clients and expand services, all of which should pay heavy dividends even as the number of foreclosures begins to slow. As mentioned, we expect Residential Property Management to continue to grow consistently quarter after quarter for the foreseeable future. We will continue to add services to our existing customer base, add new customers and create new programs to add value to both. We will also continue to pursue tuck-under acquisitions in existing and new markets to augment our market leadership. So all-in-all I would say the quarter was better than we had originally anticipated. Two of our three service lines continue to do well, while one Commercial Real Estate is at the low point in the cycle with nowhere to go but up. FirstService has the capital and expertise to continue to execute on our proven business model, and we will continue to leverage these to strengthen our businesses, despite more difficult market dynamics.

And perhaps most importantly, we have a strong management team with an equity stake and all the incentive in the world to continue to create value for our shareholders one step at a time.

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

Thank you. As announced earlier this morning and Jay already highlighted, FirstService reported respectable consolidated results for our second quarter, despite challenging market conditions caused by the global recession and the broad contraction in credit availability, particularly that to finance commercial real estate transactions.

The following consolidated results are from continuing operations. Revenues decreased 7% to $425.3 million from $454.8 million last year, of which 6% was due to Foreign Exchange, mainly the decline in the Australian and Canadian dollar relative to the US dollar.

EBITDA declined 13% to $41.2 million from $47.1 million with an overall EBITDA margin of 9.7% compared to 10.4% last year, due primarily to the contraction in margins within our Commercial Real Estate operations driven by lower revenues. Adjusted net earnings declined 24% to $13.6 million from $18 million, and adjusted diluted earnings per came in at $0.46, down 18% from $0.56 per share last year.

As outlined in our press release and summary financial results for at least this morning, EBITDA adjusted net earnings and adjusted EPS are reported before the impact of cost containment charges totaling $2.9 million in the quarter relating to cost management initiatives and our Commercial Real Estate operations. Adjusted net earnings and EPS include certain other adjustments, which we believe are not indicative of the true earnings from our operations, all of which are outlined in detail in our release.

Now I would like to address a couple of accounting and financial reporting matters that should be clarified. Firstly, regarding taxes, our consolidated tax rate remained elevated in our second quarter with a reported rate of 50%. Though after adjusting for a tax valuation allowance relating to tax losses available for carry forward totaling $2.5 million, our adjusted tax rate calculates out to about 39%.

It should be noted that our tax provision is estimated based on forecasted annual results as required by GAAP, and that based on our year-to-date results, our tax provision, again adjusted for the year-to-date tax valuation allowance of $15 million, comes out to $4.2 million, representing a normalized tax rate of about 26% over year-to-date earnings before tax totaling $16.1 million, which also includes the -- excludes the non-tax-deductible goodwill charge of $29.6 million we reported in the first quarter. This normalized tax rate of about 26% is our best estimate at this time for the full year 2009.

Secondly, as outlined in our Q1 financial reporting, we have transitioned to the new reporting required in connection with minority interest now referred to as non-controlling interest or NCI. The NCI share of earnings line on our P&L, which is the same as what we used to report as minority interest share of earnings, totaled $2.8 million for the quarter and represented about 23% of our reported net earnings for the second quarter. And after adjusting for the tax valuation allowance previously mentioned, it works out to about 20% of our net earnings.

The newer component of NCI is the line item noncontrolling redemption increment on our P&L, which totaled $8.9 million in the quarter or $0.30 in GAAP EPS and which represents a non-cash charge to our P&L on account of an increase in the value of our non-controlling interest based on changes in the value of the equity held by minority shareholders. It is this amount which we have adjusted out of our earnings and EPS in arriving at our adjusted net earnings and EPS as outlined in our press release this morning and which we believe more properly reflects the current results from our operations.

Moving from the P&L to our cash flow statement, while operating cash flow before working capital declined to $24.4 million from $33.6 million in the same quarter last year, note that it was up significantly from less than $1 million in the first quarter. Furthermore, working capital changes were neutral in the quarter compared to significant usage that we had both in the comparative quarter last year and in our first quarter this year. So operating cash flow after considering working capital changes from continuing operations came in at $23.6 million compared to $1.7 million in the same quarter last year.

We continue to invest in our three platforms during the quarter though at a reduced level, down 13% with $7.1 million invested in CapEx compared to $8.2 million in the same quarter last year. We expect to invest in the range of $20 million to $22 million in CapEx in 2009.

During the quarter we also repaid $14.2 million of principle on our 8.06% notes, essentially funding this through our revolver, which bears interest at a considerably lower rate, thereby favorably impacting our interest costs going forward.

Moving to our balance sheet, our net debt position at quarter end was $252 million compared to $249 million at the end of our first quarter, and our leverage, expressed in terms of net debt trailing 12-month EBITDA adjusted to include the annual contribution of acquisitions owned for less than a year, was 2.3 times, at the lower end of our historical range and well below the 3.5 maximum permitted by our lending agreements. With modest leverage and more than $150 million in cash and availability under our revolver, we had ample capacity to fund our operations and acquisition-related growth opportunities.

Now I would like to turn things over to Scott for his operational highlights. Scott?

Thank you, John, and good morning. John has walked you through the aggregate results for the quarter, so let me jump right into the divisional results and operating highlights.

Our Residential Property Management business grew by 3% during the quarter comprising 6% internal growth in property management revenues, partially offset by declines in ancillary service revenue. Regionally our management revenue growth was driven by contract wins in the northeast and southwest, including Texas, Arizona, Nevada and California. Management revenue in Florida was approximately flat with a year ago.

In terms of ancillary service revenue, we experienced modest declines in Florida in our landscape and HVAC services business, while the rest of the country was approximately on par with the prior year. Many community boards across the US continue to experience some level of maintenance fee delinquency. As a result, operating cash flow is reduced and operating expenses need to be cut back. This usually results in a deferral or reduction in Property Services, many of which we provide.

The EBITDA margin for the quarter was 10.1%, up from 9.7% in the prior year, as we continue to benefit quarter to quarter from incremental operating leverage as management revenues consistently grow. Looking forward in Residential Property Management, we expect to show continued but modest growth in 2009, driven primarily by marketshare gains.

Let me now turn my attention to our Property Services division, which comprises Field Asset Services, Paul Davis Restoration, and several consumer-oriented franchise systems, including California Closets, CertaPro Painters, Pillar to Post home inspection, Handyman Connection and others. Revenues in this division grew by 42%, driven again by the continued exceptional growth of Field Asset Services, which was up approximately 100% year over year and 12% sequentially relative to the March quarter. The results reflect increasing volumes from all customers, plus significant volumes from new customers added since last year.

Paul Davis Restoration had another solid quarter, growing at a high single-digit rate reflecting its resilient business model and continued market share gains.

In contrast to Field Assets and Paul Davis Restoration, our consumer franchise systems as a group were down approximately 30% from the year ago quarter. Consumer confidence and home remodeling expenditures have trended down consistently since the second quarter of 2007, and our consumer franchise systems have tracked this trend closely.

Late in the quarter we did see some indications that leads and bookings were stabilizing and the pace of year-over-year decline slowing.

Very important to note that despite a 30% revenue decline and consistent declines over two years, every one of our consumer franchise systems were profitable in the June quarter, which is something we are proud of and reflects well on these tenacious and entrepreneurial management teams that continue to find ways to adjust their business models and cost structures to generate a bottom line despite a tough operating environment.

EBITDA in the division was up significantly to $22.7 million from $12 million in the previous year driven by the strong FAS results. The increase in margin from 15% to 20% is all due to operating leverage at FAS.

Looking forward we expect FAS to continue to show similar year-over-year growth for the last half of the year and to continue to grow relative to the first half. The continued decline in home prices and the deteriorating labor market are driving increasing delinquencies, and we believe our volumes will grow through 2010. We expect Paul Davis systems to continue to post solid single-digit growth in the last half of '09 and our consumer franchise systems to show more modest year-over-year declines.

In commercial real estate revenues for the quarter were $143 million, down 32% from a year ago. On a same-store basis, after adjusting for foreign currency and for acquisitions, revenues were down 28%. The recessionary environment continued to impact transaction activity in all markets. Globally sales activity was off 45% compared to a year ago and leasing was down 30%, while property management, appraisal, consulting and property management revenues in the average were approximately flat with the year ago.

Sequentially, however, revenues were up 21% compared with the seasonally weak March quarter, and importantly we generated a positive bottom-line in an extremely difficult environment compared to a loss in the March quarter.

Regionally revenues were down 36% in the Americas after adjusting for acquisitions and foreign currency fluctuations. The decline was balanced in percentage terms between the US, Canada and Latin America unlike previous quarters. We are seeing a moderating of the year-over-year declines in our US business, while our Canadian business and the Canadian real estate market showed greater year-over-year weakness in the second quarter and in the first quarter or in 2008. Again, the revenue declines in the Americas region were entirely related to reduced sales and leasing activity as ancillary service revenues including property management, appraisal and project management were up modestly compared to prior year levels.

Our Americas region posted a breakeven second quarter, up from the $2.8 million loss in the March quarter but down from a mid-single-digit EBITDA margin in the prior year. In our Europe region, transaction activity continues to be at a standstill. Sales, leasing and consulting appraisal are all down significantly from prior year and up only slightly from the March quarter. Year-over-year declines were particularly steep in Russia, Romania and Hungary.

One bright spot was our Polish operation, which reported a quarter which was profitable and on par with the prior year and included one of the largest investment sale transactions in all of Europe for the first six months of '09.

The EBITDA loss in our Europe region was approximately $2.8 million, an improvement over the $5 million loss reported in the March quarter but down significantly from the healthy double-digit margin generated in the prior year. The current loss included $1.4 million of severance and lease exit costs relating to our Moscow operation.

In our Asia Pac region, total revenues were down 28%, but after adjusting for foreign currency swings, Asia Pac including Australia was off only 10% compared to a year ago. We were seeing increasing transaction activity in this region, particularly in Australia and China, and in the month of June, our Australia operation reported results that were at year ago levels, which we see as an important marker.

We reported a solid EBITDA margin of approximately 10% in our Asia Pac region for the quarter, which is down from prior year but a significant improvement over the $3.6 million loss reported in the March quarter.

As we looked forward in our commercial real estate division, we expect increased sales and profitability in the second half of the year relative to the first. Our second-half performance will continue to show year-over-year declines in revenue terms, but we believe the significant cost containment measures undertaken over the last 18 months will be reflected in a stronger bottom-line margin relative to the back half of 2008. Total severance and (inaudible) exit costs were $2.8 million during the June quarter, bringing the total to $13 million over the last 18 months. Total annualized savings from these measures is approximately $46 million.

I would now like to ask the operator to open the line to questions.

(Operator Instructions). Frederic Bastien, Raymond James.

Scott, I just wanted to confirm something. In the last couple of sentences, you said you expected that you expected stronger margins from Colliers in the second half of '09 relative to was it the second half of last year?

Yes.

Okay. Mostly due to cost containment, right?

Right.

Okay. I'm just curious, I mean you were fairly cautious understandably with the commercial real estate operations going forward. However, do you think that the worst is behind you?

In certain regions, yes. Australia is an example. But certainly in Eastern Europe we don't think the worst is behind us. So it really depends on the region. Canada had a tough quarter relative to prior year, relative to the March quarter. We think the balance of '09 is going to be similar for Canada. But the US we are seeing some slowing in the year-over-year decline. So perhaps we have hit bottom in the US.

And in Canada it looks like it has been lagging the slowdown in the US, but would you expect that these operations would actually do better than what you have experienced in the US?

Certainly. I mean our sales were down, our revenue was down in Canada year-over-year, but it is still a very profitable operation for us, and it will continue to generate strong profits through this period.

Okay. Thanks for that. With respect to FAS, just wondering how many more quarters you would expect to see strong growth from the foreclosure business?

It is somewhat unclear, but we are communicating with our customers. They are expecting increasing revenues through '09. Certainly all of the research we subscribe to points to increasing volumes well into 2010. The rising unemployment rate and the bleak employment outlook I think is certainly part of what is driving this. And as well home prices have continued to decline, which increases the number of homeowners with negative equity, and that in turn really drives the propensity to default.

So many indicators are pointing to increasing volumes. I think the one risk is perhaps the US government being more forceful in terms of their intervention driving moratorium or loan modification programs, which to date have not really created any momentum.

Great. That was my next question actually. You have been fairly quiet on the acquisition front. You obviously still have a great balance sheet, and you can definitely afford to go ahead and do some more acquisitions. I'm just wondering if your strategy has changed at all in the last six months and whether you continue to see a lot of opportunities out there?

We do see a lot of opportunities. The difficulty is, as you know, we buy very conservatively, and some of the targets are themselves very concerned about their forward numbers. And, therefore, it makes it very difficult for us to structure a transaction that is going to make sense for both of us.

We do have some things in the pipeline. We hope to do a couple of deals in the Property Management area, potentially something in Property Services. Both of these groups have acquisitions that would be relatively small in the overall scheme of things, but there is activity for sure. But there is also a lack of visibility for many in how their numbers are to shake out.

The last question would be to John. You did mention or you provided some guidance or more clarity on the non-controlling interest items. I'm just wondering what we can expect going forward with respect to these two specific line items?

Well, I mean, first of all, the non-controlling interest share of the earnings in around the 20% range, plus or minus, that may move around a little bit, but that is not totally inconsistent with where we have been in the past, and it really comes down to a mix of where the profits are being generated and what kind of minority interest we have in those different businesses. But I would say this range in the 20% plus range is probably pretty good.

On the increment it is going to come down to just an ongoing valuation exercise that occurs every quarter. And to the extent we see a rise in certain of our businesses again that have minority interests, we are going to see some adjustments. It is really an exercise that is balance sheet focused where we are trying to determine -- GAAP requires us to determine what the valuation is, and the balance gets forced through the P&L in a non-cash charge. And it will move around. I think we will gain some more clarity as overall operating results tend to stabilize going forward, and we get more familiar with the way this amount is going to behave.

Sara O'Brien, RBC Capital Markets.

I am wondering if you could just give a little more detail on the FAS growth and EBITDA? It looks like quarter-over-quarter there is an increase in revenues of about $20 million and the EBITDA margin on that increment would be about 48%. I just wonder if that is the kind of operating leverage we are looking at now? If there is any increase in FAS from here on in, do we look at that kind of a margin as kind of a beef up for the remainder of the year?

Well, year over year certainly the margin is up at FAS. Relative to March, it is not up significantly. There is some leverage that we are experiencing. But it is not up significantly from March.

The other thing that is coming into play during the quarter is the seasonal nature of our consumer franchise systems, which in the March quarter in the aggregate generated a loss, but notwithstanding the revenues were down year over year still generated a healthy margin that approximated the FAS margin in the June quarter.

Okay. So this is something that will be sort of a Q2, Q3 phenomenon, and then maybe we see it fall back down in Q4?

It should come down in Q4 again as the consumer franchise systems dilute the FAS market.

Okay. That is helpful. Commercial Real Estate, I just wondered what do you see in terms of opportunities for Property Management there? I just wondered if we are going to see some lenders pull the plug on loans, do you see that opportunity really building up quickly where they are going to need managers to step in, and is that why you are looking for acquisitions in that business right now?

No, it is not why we are looking at acquisitions in that area now. We, as you know, have focused a lot on recurring revenue, particularly in this segment since that time we acquired the business brokerage was about 85% of the revenue. Today it is about 60% of the revenue. So we have done a great job at turning the business much more recurring Corporate Services, Property Management and other visible revenue streams.

But going forward I think there is a continuing growth in Property Management for a whole bunch of reasons, some of them you have just mentioned. There's lots of discussion, not a lot of movement just yet, but lots of discussion around taking back assets and having people not only manage the assets, but you also have to be able to lease those assets and potentially act as an advisor on the sale of those assets over time. So we think that that piece of our business will grow.

We also have -- we also see big opportunities in Corporate Services. One of the reasons that we recruited Dylan Taylor and some of his team over the last quarter is that there really has only been up until now two big players in Commercial Real Estate that could deliver Corporate Services on a global basis. We have strength globally but did not have strength in the US and believed that over the next 12 months as we continue to build our Corporate Services business, we can take share from the two larger players and utilize our strength globally to deliver some of those services. So we are focused very heavily on Corporate Services and Property Management in the US and think that both of those pieces of our business will grow as a percentage of revenue going forward.

Okay. And sorry, when you said Corporate Services, that is primarily commercial property management?

Corporate Services is more than just property management. It is the entire management of the real estate needs for corporations, which could include facility management, could include Property Management, could include leasing and project management among other services.

Okay.

All of which are contractual or visible revenue streams or repeat revenue streams which just continue to strengthen our platform.

Okay. Great. And I just had a couple of accounting questions. I noticed your other assets increased to about $44 million from $32 million in the quarter. I just wondered what is booked in there?

Other assets?

Yes.

Hang on a second. We have got the Resolve units in there, but there was a -- as you know or may know, it was -- we continue to hold a small stake in Resolve, which was our former business services group. It was subject to a takeover by Davis + Henderson. And our units got written up to take out value, and that transaction was concluded yesterday. So that hit our other assets.

Okay. And noncontrolling interest, what was that adjustment of $8.9 million? Like what part of the noncontrolling interest had a beef up in value?

Well, it was -- you know, you have got ongoing increases at FAS, minority shareholders there. Property Management, Residential Property Management continues to grow. Those are the major components.

Okay. And then I just wondered, how do your lenders -- I mean you talked about your debt to EBITDA being, I guess, around 2.3 times. How do your lenders look at your pref shares and how do they look at the mark-to-market valuation of the minority interest?

Neither are included in or factored into our covenants.

Does it affect the way you look at how your comfort level if you're going to make an acquisition, do you look at the overall debt including prefs?

Well, at the end of the day, look, we have to consider that there is a dividend requirement there being paid on an annual basis. So we have to be comfortable and sure that we have got the required cash flow to continue paying that dividend. So I would guess we would factor it into any discussion. But at the end of the day, it is not debt. It is preferred share, and we consider it accordingly.

Okay. I just wondered if you are comfortable with the prefs outstanding now? If there's any sort of plan to buy them back or if it is they should be outstanding for the next little while?

I think we are comfortable with it, and as we always do and we have in the past, we will consider looking at any buyback as one of the alternatives we have available for capital allocation. But for the time being, we are comfortable with these being outstanding.

[Salvador Diaz], LOM.

Just quickly on Property Services, are you able to give us what percentage of revenues came from FAS? And I think you mentioned last quarter the margins were in the mid-teens. Did you also say that this quarter was in line with that quarter's margins?

Approximately 70% of the revenues are from FAS. And I indicated that the FAS margin was up slightly from the March quarter, up significantly from a year ago. Does that answer your question?

Yes, it does. And on the consumer-oriented businesses, you mentioned that in June you were seeing some stabilization in the declines but no declining at the slower pace. Is there anything -- what steps are being taken to mitigate the impact of any further weakness in the consumer-oriented operations?

Well, those businesses have been very aggressive in managing their cost structure, number one, and in helping their franchisees to become more successful to manage the franchisee cost structure to ensure that the franchisee is successful. So it is really two pronged -- carefully managing the franchisor and helping the franchisee.

And on CRE, the Commercial Real Estate business, what percentage of revenues were coming from non-transactional services, and what is your outlook on the contribution of non-transactional services going forward?

About 60% will be coming from transactional. And you know, again, visibility is tough. We expect that with an increase in the market, overall it would tend to move up as a percentage, unless, of course, we add additional service lines in the other non-transaction side of the business, which we have talked about.

Okay. Thanks. That is it for me for now.

Bill MacKenzie, TD Newcrest.

Most of my questions have been answered, but I guess just two things. One, on the European business, Scott, could you talk a little bit more about the margins there? I would have thought with the (inaudible) revenues being down, I would have thought it would have been a higher margin business. That is from a mixed perspective. You would have had sort of more of a little bit more pressure on the margins. And you talked a little bit about operating leverage, but there was not a lot of growth there on the management side.

So I was just curious if there was anything else driving and supporting the margins there? Are you guys doing anything from a cost perspective to help the margins, and what is the outlook for margins for that segment for the next quarter and into 2010?

The ancillary services in the aggregate do carry a higher margin than Residential Property Management. But the two services that experienced the largest declines in the past quarter were landscaping, lawn care in Florida, and our HVAC services business in Florida. And those margins for those services are at the same level as Property Management approximately. So that would not have had a significant impact on our margins for the quarter. And the operating leverage was minor. But, as our revenues do grow quarter after quarter, we do get some.

Looking forward we will see similar margins, I think. In the September quarter and then in the December quarter, our pool business has a seasonally weak quarter, which dilutes our margin down probably a couple of basis points down to sort of high single digit from 10-ish. In 2010 we will see more of the same. I mean this margin is very stable and consistent and it has been.

Perfect, that is great. And then in terms of commercial real estate, are you guys comfortable with where you are at now in terms of the cost reduction initiatives that you have put through, or are there more things on the common in Q3, or are there going to be any other of these sort of cost-containment charges, or are we done there from that perspective?

I would say we are largely done. We have a few more leases to deal with. It won't be material, but I think that for the most part we are entirely focused on revenue and less focused on further cuts.

That is perfect. Thanks very much.

Brandon Dobell, William Blair.

Maybe focus on the residential side for a second, excluding FAS. I'm just trying to get a feel for what you see the competitive landscape looking like right now. Do you think it's going to be a much different landscape looking out a year for you guys, and is there any particular region, will that be more or less (inaudible) seem like there would be a lot of other capitalized players that if they are not acquired, they go out of business just with how bad things are. I'm trying to get a feel for in the US where you see some major market share opportunities looking out a couple of years.

Brandon, just to be clear are you talking about our consumer franchise systems, Property Services or Residential Property Management?

Ler's focus on consumer because I want to ask the same question in kind of a different way within the Property Management business.

Well, I mean when you look at the services that we provide, particularly painting, that is a perfectly competitive environment. And so that is our competition has certainly increased in that business. Paul Davis Restoration, again it is a competitive business, but we continue to gain share. I don't see any major changes in that marketplace.

California Closets, our competitors I think many of them are suffering and don't have the balance sheet that we have to continue to invest and maintain the way we have. So it is somewhat different by service. But I think in general with the number of people that are seeking employment, that has driven up the number of competitors that we have for these Property Services, and we see that continuing for the next -- certainly for the next couple of years.

Okay. On the Property Management side, two questions. One, are your competitors also taking a consolidation path? There are two or three big firms out there that probably are looking to -- on this call, but they are saying, well, what FirstService is going to do, we are going to try and do as well and build a national platform.

And then second, I've heard a number of cases here in the US kind of the bigger communities where the residents fall way behind on assessments or bankruptcies and foreclosures and upset the apple cart in terms of how the finances for those things work. Maybe address those two issues, that would be great.

So the first is competitors in the Residential Property Management?

Right.

We have had several competitors historically trying to do the same thing as we have. Some of them are around today. Most are not. The business generally is a very competitive business as is our Property Services area. So we see some pressure on pricing across the board. Some of it caused by increased delinquency, but just generally a more competitive environment. We think we have got some competitive advantages that we have been able to use to hold in our business. Our retention rates are pretty much the same as they have been from day one. North of 90% retention on three-year contracts.

So we are very comfortable in our market position. There will always be other consolidators in the business. But I think we have demonstrated to those that are out there that we are the right place to be, and we have been very selective in our approach. We have only acquired market leaders and market leaders principally that don't want to sell. They want to continue to drive their business to the next level, but they want a partner that can bring something more to the party and we have been successful doing that. So that is how I would answer your first question.

The second question relating to what is going on in the industry, you know, I touched on it a little bit. Delinquencies are up, but it really depends on areas. The Southwest, Vegas, Phoenix, markets in California, markets in Florida have higher levels of delinquency. They don't impact us directly because the properties are owned by the owner of -- the properties are owned by others. And our business in collecting delinquent accounts has gone up obviously materially.

How it has impacted us is, as Scott said earlier and I alluded to in my comments, that clients are looking for ways to cut costs because their cash flows are not where they used to be, and that may mean instead of having three building engineers in a building, they will do it with two. It may mean that they will cut back in other areas like that, and so that is impacting some of our ancillary revenue streams. But generally speaking it a business that has been very resilient over a long period of time with lots of client stickiness, and we think it is going to continue.

Got it. Okay. And then a follow-up question for you. As you look at the Commercial Real Estate space, do you guys subscribe to this idea that distressed selling becomes a real driver per transaction velocity starting in, let's call it, the fourth quarter of this year, or do you think there's factors out there? Let's focus on US for a second -- are there factors out there that make that difficult to come to fruition?

I think that is the key. If debt is available, there will be some transaction activity. If debt is not available, it is going to be really tough, and I don't see any debt available right now.

Yes, it makes sense.

(Operator Instructions). David Gold, Sidoti.

Just a couple of quick questions for you. First, the Commercial Real Estate side, can you give a little bit more color on how much revenue is down in the transaction on the sales side versus the leasing side?

David, I think I said in my comments sales are down 45%, leasing 30%.

Perfect. Sorry, I got knocked off for a little bit. Okay. And on the residential side, can you give some color on how much of that revenue is what you would deem as ancillary, basically maybe potentially at risk?

Typically it has been 80/20 I think. 80% Property Management, fee revenue 20% ancillary. It might go to 82%, 18% kind of thing. I don't see it changing much. Scott, what is your thought on that?

Yes, ancillary might be a bit higher than that, but I did not understand the part of the question inferring that it was at risk.

I think in your comments you pointed to -- you did point to some of the ancillary business, potentially basically the ancillary business during the quarter was a little softer, which -- (multiple speakers) it suggests that looking forward it is a little bit at risk.

Right, okay. I'm sorry. I mean you can only cut it so far, David. You have to maintain the properties. And so I think that we have seen these cuts start as early as 24 months ago. And I think a lot of these services have been deferred and cut to the point where it would be difficult to continue cutting. Certainly there is pricing pressure on all of these contracts, but I don't think there is a significant risk there.

Okay. And then just one last if I could, field assets, two things. One, can you walk us through a little bit how things worked there when you're retained by a lender to work on a property? Presumably there's a lot more work upfront and then maybe some of ancillary -- some monitoring work along the way while it is still under their watch. Would that be the right way to think about it?

Yes, I mean I can quickly take you through the process if it helps. You are right in your comments, David. When the share of -- I hate to be giving you this -- but when a share completes the foreclosure, we take over, secure the property, and do a number of things upfront. But basically what we do is we manage the property from the date of foreclosure to the ultimate date of sale, and you know that means cleaning debris, it means whatever our clients want us to do during that period of time. But one of our jobs is to also allow access to real estate brokers, to show the property for sale or for lease, however the client wants to have that handled.

What has happened historically is average time we would be managing that property would be six months. It is closer to 18 months now. And, of course, we get paid -- after the initial period, we get paid on a monthly basis depending upon how long that property is still being managed by us.

Okay. So presumably for as long as maybe it is sitting -- the shift from 18 is the bank is or the lender is now sitting on the asset quite a bit longer given the environment?

That is right.

Got you. Perfect. Very good. That is all I have. Thank you, all.

Bill MacKenzie, TD Newcrest.

Just on FAS, do you guys try like a backlog or anything like that, or do you have -- how far out -- how many quarters out would you say you have really solid visibility on -- you suggested that 2010 should be an up year. I'm just curious to know how much of that is based on your higher level macro view of everything that is going on out there versus this is business that you have in hand?

I would not say it is necessarily business we have in hand. But we are servicing certain clients, and they have portfolios and they are projecting of us what their volumes will be, and that is really giving us our indication.

Okay. Great. And then just in terms of Commercial Real Estate, last quarter you had suggested that you guys would be EBITDA positive for the year. Do you see that still achievable?

We will be profitable in the last six months. I'm not sure we are in a position to say that we will be profitable for the year.

Sara O'Brien, RBC Capital Markets.

Just to follow up on the Commercial Real Estate, I guess I'm not understanding the comments. I thought before that you said Commercial Real Estate margin would be higher in the second half of the year versus the second half of last year. Am I getting that wrong?

No, no, that is what I said.

But that would imply that your Commercial Real Estate margin would be higher than, like, 6% in the back half of the year. That is accurate?

I don't have those numbers in front of me.

Okay. I'm just wondering why you would expect not to be profitable if that is sort of the case, or it could be possible that you are not EBITDA profitable for the full year?

I think the reference was to the entire year. We will be profitable in the last half for sure. The question is will we make up the shortfall so far this year.

Okay. Okay. But I am understanding the profit margin should be higher in the back half of the year for the last two quarters versus last year's on the calendar basis?

Yes, I mean on a year-to-date basis we have -- we are in a negative position.

Okay. Because last year you guys generated like $21 million in the back half of the year of EBITDA.

Okay. And then just a follow-up question on the Field Asset Services. As the financial institutions hang onto these properties a little bit longer, you said going out to 18 months, are you -- could there be an EBITDA impact? I mean is your margin on the surface of beyond, say, the first couple of months of doing the fixup job? Now that you're just holding on and showing the property, is that a much lower margin business? Should we expect that to impact EBITDA margin going forward, or is that more like a two year out kind of phenomenon?

Well, I think that the margin in the back half will fall because there are still recurring services that are provided. But the initial services, the cleanup and other things that we would do sort of in the front half of that contract, would give us more revenue and more margin. The back half, the more extended period is just going to be recurring services to maintain the property.

Okay. So net net you feel comfortable that in FAS you can maintain the kind of margin you have now because you are already looking at those back half of the contract profit margin being mixed in at this point? (multiple speakers) It is a convoluted way to ask but --

I mean you are asking a tough question. Sure.

Alright. We will go with that. Thanks.

And now, gentlemen, there are no further questions. Please continue.

Okay. Ladies and gentlemen, thanks for joining us, and we will speak to you on the next conference call. Bye.

Thank you. Ladies and gentlemen, this now concludes your conference call for today. We thank you for your participation. You may now disconnect your lines, and have a great rest of the day.