Colliers International Group Inc (CIGI) 2014 Q1 法說會逐字稿

Welcome to the first quarter investors conference call.

Today's call is being recorded.

Legal counsel requires us to advise that the discussions scheduled to take place today may contain forward-looking statements that involve known and unknown risks and uncertainties. Actual results may be materially different from any future results, performance, or achievements contemplated in the forward-looking statements.

Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the Company's annual information form as filed with the Canadian Securities Administrators and in the Company's annual report on Form 40-F as filed with the US Securities and Exchange Commission.

As a reminder, today's call is being recorded. Today is Tuesday, April 29, 2014.

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, Operator, and good morning, everyone, and thanks for joining us on today's call. With me is Scott Patterson, President and Chief Operating Officer, and John Friedrichsen, Senior Vice President and Chief Financial Officer.

This morning, FirstService reported record first quarter results for the seasonally slow first quarter. Colliers International continued to build on its momentum from last year with robust first quarter results, delivering strong increases in revenues and profits from both internal growth and acquisition.

Revenue at FirstService Residential was solid, with management fee revenues up considerably across the board, while profits were impacted by planned investments in technology and shared infrastructure to support the new FirstService Residential brand, enhance customer service, and create efficiencies going forward.

FirstService Brands also had a very good start to the year, with strong internal growth at several of our market-leading service brands including Paul Davis Restoration, California Closets, and CertaPro Painters.

Scott and John will have more to say about our operational and financial highlights in just a few minutes.

As we mentioned on our fourth quarter conference call in February, we completed our first tuck-under acquisition in the UK at Colliers, adding an outstanding retail specialty firm to strengthen our retail practice in the UK and leverage our opportunities in Europe and throughout the rest of our global platform.

We continue to be pleased with the progress at Colliers UK, a company we acquired in 2012. We expect this current year, 2014, to be a record year for them, as they continue to build out their platform one step at a time.

In the US, Colliers also continued with its momentum. We have been very strategic and bold in a number of areas. We're actively recruiting proven producers in major markets and investing in top managers and business leaders where we believe that they will help us accelerate our growth even further.

Our new US president, Craig Robinson, is a perfect example. Headquartered in New York, Craig is a graduate of Harvard and MIT, and brings extensive experience in corporate services and in government and the public sectors. We look forward to great things from Craig, and as he puts his mark on our rapidly growing business in the US, we continue to look for good things in the years to come.

In terms of acquisitions, our pipeline is very interesting right now. We are pursuing several smaller acquisitions across the board. Pricing on larger deals has increased considerably, especially with lower interest rates and the availability of debt capital.

As always, we remain disciplined in our approach, looking for going-in returns of at least 15%. We are however prepared to take on larger, more strategic acquisitions if they are compelling and if we are confident that we can generate even higher returns once they're integrated.

One of our key competitive advantages that really we don't talk about very much is the deep database of more than 6,000 targets we've developed over the years. With the recent rebranding of FirstService Residential and the strength of Colliers International and our other property service brands, we can be more aggressive about smaller deals that can be easily rebranded and integrated, transactions that will have an immediate impact on near-term results.

Smaller transactions can be purchased more effectively and on the right business terms and are obviously very accretive to earnings. And if they're done smartly, they can help us strengthen existing operations, add services, and expand operations to contiguous regions.

Looking forward, we expect to continue our strength at Colliers for the balance of the year. FirstService Residential should be able to deliver solid internal growth while steadily increasing its margins, and FirstService Brands should continue to grow its revenues and profits as long as the US economy continues at its current pace.

So, overall, we are confident that FirstService is on track to deliver another strong year of year-over-year growth in revenue, EBITDA, and earnings per share for the full 2014.

Now, let me turn things over to John to take you through the financial details for the quarter. Scott will follow with his operational report. And then, we'll open things up to questions.

John?

Thank you, Jay.

As announced in our press release earlier this morning and covered by Jay in his opening remarks, FirstService reported very strong first quarter financial results that included contributions from all three of our service platforms.

Consistent with our first quarter in each of the last four years, Colliers International, our commercial real estate operation, was the main contributor to our growth in revenues and adjusted EBITDA, while our property services division also reported excellent results and strong revenue and adjusted EBITDA growth compared to last year, and in both of these cases, a strong start in a seasonally weaker first quarter of the year.

Scott will have more to say about each of our segments in a few minutes, after I address our overall consolidated financial results from continuing operations for the quarter and then provide comments in our capital usage and balance sheet.

So, for the first quarter of 2014, consolidated revenues increased to $548 million, up 15%, from $476 million in the first quarter of 2013. This growth was attributable to 9% internal growth, with 6% from acquisitions.

FX negatively impacted the revenue growth in the first quarter to the tune of 3%. So, that consolidated growth measured in local currencies was actually 18% for the quarter.

Adjusted EBITDA came in at $22.8 million, more than double the $10.5 million reported in Q1 of last year.

And adjusted earnings per share came in at $0.09, compared to a loss of $0.20 per share reported in the same period last year. Our adjustments to GAAP EPS in arriving at adjusted EPS are outlined in our press release issued this morning and are consistent with those outlined in past quarters.

Turning to our cash flow and investing activities during the first quarter, cash flow from operations before working capital changes increased substantially, to $9.7 million, up from $1.5 million in Q1 last year.

Inclusive of working capital changes, cash flow from operations was negative, $86.8 million, compared to negative $66.8 million last year, where heavy cash usage is required to fund broker commissions and variable compensation related to accruals from year-end, which are all typically settled during the first three months of the year.

Reported cash flow this year was also negatively impacted by a $20 million contingent note payment on a prior acquisition, which in our view would be better characterized as an investing activity, though GAAP requires inclusion as an operating activity for cash flow reporting purposes. Adjusted for this item, cash flow from operations after working capital changes was approximately flat with last year.

We invested $24 million in acquisition activities during our first quarter, of which $13 million was for new acquisitions and the balance for increased stakes in existing subsidiaries.

Meanwhile, our capital expenditures totaled $7.7 million, up from $5.7 million last year and in line with our expectations for the quarter.

Turning to our balance sheet, our net debt position stood at about $366 million at the end of the quarter, compared to $230 million at our December 31 year-end and compared to $419 million at the end of the first quarter last year. The increase from our year-end amount was attributable mainly to a working capital usage and capital investments noted previously.

Our leverage ratio, expressed in net debt to EBITDA, stood at 1.8 times, up from just over 1.2 times at year-end, but down significantly from the leverage of 2.45 times at the end of our first quarter last year.

In terms of our financial capacity, with cash on hand and committed availability under our revolver, we had about $150 million of liquidity at quarter-end to fund operations and other investments needed to execute our growth strategy.

Now, over to Scott for the operational highlights.

Scott?

Thank you, John.

As you have heard, we had a very strong start to the year at Colliers. Revenues were $303 million, up 28% in local currency, 18% organically.

Our growth globally was led by particularly strong results in Europe and the Americas and supported by another very strong quarter in Australia and New Zealand. By service line, our global growth was driven by brokerage, with investment sales activity across all regions up by more than 30% and leasing revenues up a solid 11%.

Revenues for our Americas region were up 19%, driven by record investment sales in both the US and Canada. The increase in sales activity in the Americas was broad-based, with nearly every market showing year-over-year sales growth. Investor demand for North American commercial real estate remains very strong, with both domestic and foreign sources of capital.

Sales growth was supported by a mid-single-digit increase in leasing revenues in the Americas, in line with a steady recovery in the market and improved fundamentals in the office, industrial, and retail sectors.

In our Asia-Pac region, revenues were up 13% in local currency, driven by very strong brokerage activity in Australia and New Zealand, reflecting a continuation of the [blant] markets we saw during the last half of 2013.

Revenues in Australia and New Zealand were up 20% in local currency, which translates into an only 6% increase in US dollars, due to the 14% decline in the Australian dollar over the last 12 months. Revenues for the balance of Asia-Pac were up 5%, with most service lines in countries showing modest growth over the prior year.

Government-implemented real estate cooling measures in China, Hong Kong, and Singapore and a slowing economy in China resulted in a soft real estate market across the region in Q1.

The leasing environment remains weak, and domestic capital is increasingly looking overseas in search of higher yields. The strength we have seen in the Australian, European, and North American investment sales markets is in part a reflection of this shift in investor focus.

Turning to our Europe region, revenues were up 70% year over year, including Colliers Germany, and 20% organically, excluding the acquisition. Organic growth was driven by strong results from our operations in the UK, the Netherlands, and central Europe, primarily Poland, Romania, and the Czech Republic.

By service line, our organic growth in Europe was led by very strong leasing revenues, reflecting the economic recovery which has spread from the UK across much of Europe and continues to strengthen.

The exception for us in this region is Russia and the Ukraine, where the political turmoil has impacted both economies. We expect the postponement of many capital transactions and office relocations until stability returns, and a sharp reduction in capital inflows from investors based outside of the region.

Our operations in Germany reported very strong results in Q1, which exceeded expectation and were driven by several large investment sale transactions and strong leasing results in Munich and Frankfurt.

Colliers generated EBITDA of $16.2 million, or 5.4%, up materially from the prior year and a very strong result for the seasonally weak Q1. The increase is generally due to higher revenues and operating leverage across all regions, plus the positive impact of adding recent acquisitions.

In summary, we are very pleased with the Colliers performance for the quarter. We exceeded expectation in each of our regions. The tone in the market generally continues to improve, and we remain optimistic about the second quarter and the balance of the year.

Moving now to residential property management, revenues were $216 million for the quarter, up 7% over the prior year. Growth was driven by new contract wins, which led to 10% increases in management fee revenue, offset in part by declines in ancillary fee revenue.

Each of our four regions experienced solid growth for the quarter in terms of contract wins, with particularly strong year-over-year growth in California and Texas. New development again contributed approximately 25% to our organic growth, led by wins in Toronto, south Florida, and the Carolinas.

Offsetting our growth in management fees was a decline in certain ancillaries, including transfer and disclosure revenue, collection revenues, and maintenance and construction services relative to the prior year.

Our EBITDA margin in the quarter was 3.8%, down 150 basis points from the prior year. Over half of this decline was budgeted and expected in Q1 and relates to increased investment in technology and centralized shared services infrastructure to support the new FirstService Residential brand.

We brought together 20 different brands in 2013, but we did not bring together the operations. There are many opportunities to centralize or regionalize certain functions which will create efficiencies, improve customer service, and enable us to provide consistent service delivery across North America.

Our margin was also negatively impacted in Q1 by ancillary revenue declines that we did not foresee, three areas in particular. The first relates to transfer and disclosure revenue, which are fees earned for services provided when a unit in one of our managed communities is sold. We are responsible for providing disclosure documents and resale certificates to new homeowners and attesting to the accuracy of the information.

These higher-margin revenues were significantly lower than expectation for the quarter, as rising mortgage rates, higher home prices, and harsh weather conditions drove existing home sales across the US down 7.2% in the quarter, as compared to the first quarter of 2013.

A second factor in our communities relates to the continuing decline in collection services year over year. The occurrence of late and delinquent fees is down significantly, helped by an improving economy, higher employment, and increase in home values.

And a third factor relates to the steep decline in pool renovation activity in the first quarter relative to a year ago, due to the extreme winter weather across much of North America. Our pool operations in the mid-Atlantic, northeast, and Canada are generally very active in the first quarter, with repairs and renovations which carry a higher margin than our core management business.

Looking forward, we expect a significantly improved margin in the second quarter and for the balance of the year. We indicated in our last call that our goal for the year was 7.5%. The sluggish home resale market and the resulting impact on our transfer and disclosure revenues will make that goal difficult to achieve, but at this stage we are still targeting this level.

We expect to make up the shortfall in pool construction revenue over the balance of the year. And later in the year, we expect to start realizing efficiencies from our recent infrastructure investments. In addition, organic growth remains strong, and we will continue to incrementally improve margins in our core management business through operating leverage.

Let me now turn to our property services division, which consists of our FirstService brands businesses. We continue to generate strong internal growth in this division, following up a solid finish to 2013, with 11% growth in the first quarter.

Paul Davis Restoration, California Closets, and CertaPro Painters all reported strong double-digit, year-over-year growth for the quarter. Paul Davis benefited from the very harsh winter conditions experienced across North America, which resulted in significant damage and a high level of restoration claims relative to the prior year. California Closets and CertaPro continue to enjoy improved markets for home remodeling in general, which are up over 10% from prior-year levels.

We expect these favorable markets to continue in the near term. Our leading indicators remain quite strong in this business, but we are somewhat cautious that the decline in existing home sales in the first quarter may serve to moderate year-over-year growth in home improvement spending later in the year.

Our margin for the seasonally weak first quarter was 2.8%, up from a roughly breakeven result in the prior year. The margins for Paul Davis, California Closets, and our other non-seasonal systems were modestly up, on operating leverage, but largely offset by seasonal losses from our painting businesses, which approximated prior-year levels.

That concludes our prepared comments, and I would now ask the Operator to open up the call to questions.

(Operator Instructions) David Gold, Sidoti.

Just following up a little, if you can, I wanted to get maybe a better sense on the infrastructure spending. I'm not sure if there's a good way to break out how much that hindered profitability in the first quarter, and then, how much we should expect for the remainder of the year?

Well, David, first of all, the increase in spending is -- it will continue for the balance of the year and for the next few years. It's a multi-year initiative to essentially bring together many functions that we currently do, in some cases in over 100 offices across North America. Many of these functions are IT and administrative in nature, and we will -- the centralization will result in significant efficiencies, but we need to hire the people and build the infrastructure in front of that.

To answer your question about the quarter, well over half of our margin decline related to this general increase in spend.

We are very focused on balancing this with growth, and it's our intention to balance the investment with improved operating leverage. And our goal is to show incremental margin improvement annually. And as I indicated in my prepared comments, that's going to be difficult this year, but certainly 2015 and beyond, our intention is to show annual improvement as we march towards a 10% margin in this business.

So, the shared services setup, is that the multi-year project? Or, is the thinking that that's something that we'll get through maybe this year, and then there are other projects or infrastructure-wise there or areas where you should be [maybe thinking about] investments?

No, the shared services is the multi-year project.

Gotcha. Okay. And then, more broadly, when we think about the pickup in leasing that seems -- if it's underway, certainly in Europe and maybe early stages in the Americas, curious how you guys feel that you're positioned right now? Are you staffed appropriately there? Or, is there more hiring to be done?

We continue to recruit aggressively. Focus areas include major markets in the US and London, in particular. And certainly, we are looking and having success in adding professionals with particular expertise in leasing. So, that's a focus area of ours.

We do believe we're growing at least at pace with the market, and perhaps better than market. So, still work to be done, but we're very optimistic about where we are.

Perfect. And then, just one last, also on leasing. When you think about the market, based on the pipelines that you're seeing, what's your expectation for the year, improvement-wise particularly, with regard to the Americas?

At the Americas, we will show, definitely show organic growth. We had a great start to the year, but we had a very, very strong second and fourth quarter. Our internal target is something less than 10% overall growth for the Americas. Feeling better about that after Q1.

Overall, 10%. That's specific to leasing? Or, that's the Americas, period?

The Americas.

Perfect. Perfect.

Damir Gunja, TD Security.

I'm just trying to think about the sustainability of some of the investment sales activity in Canada and the US. I think you just partially answered the question, but was there anything of note in the quarter? Or, is the trend of capital inflows something that could continue to drive these outsized results?

I would say that the markets are very strong right now, very conducive to activity. Financing is available. Interest rates are still relatively low. And yields remain 2.5 to 3 times 10-year Treasury, which is very attractive to both domestic and international funds.

So, we think it will continue. Our pipelines are strong. We think it's going to continue through the balance for this year, in the Americas certainly, and we continue to feel good about investment sales in Europe and in Australia, in particular.

Okay. Great. And maybe just secondly, on the acquisition pipeline, clearly sounds like this year is going to be robust and could even potentially exceed last year's acquisition level. Just one question on the potential larger, more strategic opportunities, could you give us a sense of, should they materialize, what sort of size range we should be thinking about?

Well, first of all, I would say that I don't know whether we'll be able to do what we did last year in acquisitions. There's a lot of smaller transactions that we're doing every single day, and we believe that we can do those cost effectively, and they're accretive, and they add a lot to our base operations.

The bigger deals are more costly, but we would look at bigger deals in more -- in strategic locations where we think the momentum created by the deal will generate falloff revenue, or additional revenues, in other regions.

So, size-wise, we'd look at virtually anything within reason, but a larger acquisition for us is $20-plus million in revenue, up to $200 million, $300 million in revenue if we found the right one.

Thanks. Appreciate that.

Brandon Dobell, William Blair & Company.

A couple of things. I think, Colliers first, you talked a little bit about focusing on recruiting talent, that kind of thing. Any evidence or sense of it getting more expensive to find good people, good lateral hires? Is there any kind of, not bidding war, but just more pressure on splits as you bring guys in?

Not necessarily more pressure on splits as we bring recruits in, but it is very competitive to secure the recruits, and it generally involves some inducement -- financial inducement, forgivable loan, upfront payment -- and it's very competitive right now. But we continue to have success.

(multiple speakers) markets, I would say, Brandon, especially the major markets. But not as much in the secondary markets, I don't think.

Okay. Would that stay true if we compare trend in the US versus trends in some of your bigger markets in Europe?

Focus areas for us are London right now and our major markets in the US, and I would say it's similarly competitive.

Okay. Gotcha. Any sense of progress in commercial property management or more broad corporate services? We've heard your peers talk a lot about just broadening of things that they're trying to do for clients. Maybe some sense of what the strategic direction there looks like, especially given the progress in leasing you guys are having?

Well, management services this quarter was up 25%. And so, we see that as a very, very positive in a low-growth quarter. Corporate services continues to gain momentum, although we'd like to see it continue to accelerate.

And we have been looking at widening the services that we might perform in corporate services, but so far we've taken the position that we don't want to extend beyond our core services to, say, for example, facility management, that might generate a much lower margin if we take on those types of services.

But we are looking at it all the time, and we may find ourselves a very interesting opportunity in that space which can create some value for us longer term.

Okay. Maybe over in the residential property management segment for a second, given how strong multi-housing is in the US right now, do you think that makes it more conducive or easier or harder for the acquisition story to play out there (i.e., are potential targets looking at selling out now given how good things have been or saying, hey, things are going to be good for a while given all the demographic and those just kind of housing market changes)? So, it's going to be more expensive to make acquisitions in that category?

The strength of the housing market really doesn't impact residential property management businesses. I mean, it does in the sense that -- and I referenced in my comments -- existing home sales are down and that impacts us in terms of certain services we provide.

Yes.

So, it would have an impact on revenue and margin, but it's not a big driver for residential property management businesses and the valuation, in general.

Okay. And then, final one from me. John, just to make sure we're on the same page, any shots at tax rate and capital spending the balance of the year?

Well, capital expenditures will be somewhere around $50 million this year, which is -- I had indicated that on our year-end call, and that is [apt]. So, it will be elevated relative to our more normalized $40-ish million, mainly on account of some expenditures related to premises in some of our large cities, including New York.

And then, tax rate is going to be somewhere around 30% to 31%, 32%, in that range, again dependent on where we're generating our revenues and profitability. But our best estimate based on what we know right know would be in that low-30% range.

Okay. Great.

Frederic Bastien, Raymond James.

Guys, given the strong start to the year at Colliers and a pretty optimistic outlook, is there anything keeping you from attaining 10% margin this year?

Frederic, 10% remains a 2015 goal for us. We've talked about recruiting and our focus in that area, and we'll continue to invest while finding the right balance between investment and margin enhancement.

I would also point out that we had a very strong fourth quarter; second quarter, also. So, the gains in the first quarter, it's not clear to us that we'll be able to carry those right through the end of the year.

Okay. Thanks for that. You also on -- just switching gears to FirstService Residential, you highlighted that your pool ancillary services were impacted by the harsh weather. Are you able to quantify the impact that it had on the margin in the quarter?

Each of those ancillary services were 25 to 30 basis points (multiple speakers).

So, the three things you highlighted?

Yes.

Okay. Now, lastly, just more big picture here, given the strength of your balance sheet and also the likelihood that your upcoming acquisitions won't break the bank, I was wondering if a potential dividend increase might be in the cards? Just wanted to get your thoughts on that.

Look, we just initiated this dividend last year, and we're certainly mindful of taking a hard look at this and over the long haul increasing this in line with the free cash flow we generate. So, it certainly will be something that our Board of Directors will consider over the next couple of quarters.

And, again, it will always be a choice between our primary focus, which is allocating our capital to invest in our businesses and grow those businesses -- we think that's the best way to utilize our capital for our shareholders -- but at the same time, recognizing that we are generating significant cash flow and there may be an opportunity to increase that dividend, but certainly only if we feel it's very sustainable.

Okay. Thanks for that. Good quarter.

Stephanie Price, CIBC.

Following on that last question on the allocation of capital, I noticed that you were purchasing stock in the quarter. Can you comment on whether that's something you're looking at doing more regularly? Or, this is just a one-off purchase?

I think we're going to continue to evaluate that as we go along. Clearly, over the long term, we expect our businesses to continue to grow. And if we can continue to allocate capital the way we have been, we will generate a significant return. So, from time to time, we will be opportunistic and repurchase shares, and that was indicative of what our activity was like in the first quarter.

Great. And then, on acquisitions, thank you, Jay, for going into a bit more detail on the acquisition front. Could you maybe talk a bit about what's looking attractive at this point, and the allocation of capital between residential and Colliers in terms of acquisitions?

As I think about our existing pipeline, there is a number of prospects in there, but they're virtually across the board. So, we're looking at some very interesting opportunities everywhere. Capital, as you know, has thankfully never been an issue for FirstService. We always have access to capital to make the right types of acquisitions.

And so, I'm hopeful that before year-end we will have completed several. They may be smaller, with one or two bigger deals in there, but we should have no problem in funding them. And each one of them of course will be accretive and add value to FirstService shareholders.

Okay. Thank you very much.

Stephen MacLeod, BMO Capital Markets.

Just wanted to talk a little bit about FirstService brands. They had a strong start to 2014, especially I think historically the first quarter had operated at a loss. Does that change your outlook for the rest of the year at all? Do you still see 20% margin as the target? Or, do you think you can maybe move above that for 2014?

We're still targeting 20%, Stephen. We have a number of Company-owned operations that carry a lower margin, that are growing at the same pace as our franchise systems, which tempers that margin increase. So, we're still targeting it in around 20%.

And then, on Colliers, Scott, you mentioned the shift in capital moving away from Asia-Pacific into other foreign markets that you benefit from. Is that --? I think that's the first time. I don't recall you talking about that in the past. So, is that a new trend, and is that something you expect to continue? Or, do you see it as a temporary phenomenon?

Definitely saw an acceleration in the last six months and more clear in the first quarter. The yields in Hong Kong and Singapore, in particular, are currently well less than 5%.

And so, that capital is just simply looking elsewhere. And because we have offices in those areas, we're benefiting in the sense that we're bringing opportunities to our clients in those markets from Australia, Europe, North America, but it's something that's definitely increased.

Okay. Great. And then, finally, just, John, I was wondering if you could give a little bit of expectation with respect to your non-controlling interest share of earnings for 2014?

This obviously will move around a little bit; Colliers probably has the biggest impact on it. But our best estimate at this point would be in the low 30%s. So, say 30% to 33%, with some variation being, again, on where our earnings are being generated, principally within the Colliers group.

Great. And then, just finally, on Colliers, with respect to the acquisitions, the Germany acquisitions have performed quite well. Would you say that heading into 2014, they are performing above what your expectations would have been?

Yes. It's been an excellent acquisition. It's an excellent group of professionals, virtually across the country. And we're very impressed not only with what they've delivered so far, but also new opportunities that seem to be bubbling up as a result of being part of the global platform now.

So, we're looking to Germany over the next, I'd say, year or two for some incremental growth in the way of acquisitions, new service lines, strengthening some existing things that they do. So, we're quite excited about Germany.

Great. Okay. Thank you very much.

We don't have any further questions in the queue at this time.

Okay. Ladies and gentlemen, thanks for joining our first quarter conference call, and we look forward to the next one. And hopefully, we'll be able to deliver as well in the second quarter.

So, thanks for joining us, and we'll speak to you soon.

Ladies and gentlemen, this concludes the first quarter investors conference call. Thank you for your participation, and have a nice day.