Colliers International Group Inc (CIGI) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the third-quarter investors 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 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 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, October 28, 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, and good morning, everyone. As the operator said, I'm Jay Hennick, Founder and CEO of the Company. With me today is Scott Patterson, President and Chief Operating Officer; and John Friedrichsen, Senior Vice President and Chief Financial Officer.

This morning, FirstService reported record third-quarter results, continuing the momentum of the first half of the year. Revenues were up 14% to $685 million. EBITDA increased 17% -- sorry, 7% to $59 million, and adjusted earnings per share came in at $0.75, up 9%, versus the same quarter last year.

Colliers International led the way again with another strong quarter, generating double digit growth in both revenue and EBITDA. In addition to the strong internal growth, Colliers also completed two significant acquisitions. The first was a large retail property management company in Australia, bringing with it 45 large-format shopping centers. We are now the third largest -- the largest third-party property management company Down Under, with lots of growth opportunities in this and other related areas.

The second acquisition completed just after quarter-end was one of Colliers' largest acquisitions to date, AOS Group, a market-leading commercial real estate and workplace consulting firm with more than 450 professionals and annualized revenues of about $100 million.

The acquisition gives Colliers a large footprint in France and a new one in Belgium, but it also strengthens and diversifies its platform in Europe. AOS specializes in creating enterprise value for clients, optimizing their real estate needs, enhancing their workplace design, its functionality, cost-effectiveness, and sustainability from initial concept to execution.

AOS offices in France, Belgium, UK, Spain, Netherlands, and Switzerland have already been rebranded as Colliers International and have been integrated into our operations. We also expect the Colliers brand to accelerate the growth of both businesses in the years to come.

AOS' services can now be offered to Colliers' clients seamlessly and on a global basis in all 63 countries. Put simply, this is a win-win transaction and a very exciting one for both act -- for both organizations.

I should also mention that the FirstService-Colliers partnership philosophy made a huge difference in securing this landmark acquisition. Joining forces with outstanding professionals like Gilles Betthaeuser and his team, business leaders who have a deep passion for their business and a desire to retain equity in the businesses they operate day-to-day have always been a key competitive advantage for FirstService and Colliers.

We expect continued momentum for the balance of the year, and we believe the opportunity to continue to grow our business in major markets by adding and diversifying services and through acquisition, and all under the Colliers International global brand, will pay huge dividends in the years to come.

Revenues of FirstService Residential were also up 10% during the quarter, mostly from solid internal growth, as we continue to benefit from record retention rates of 95% or better on long-term management contracts. As you saw, EBITDA growth was impacted by employee medical costs, which we expect will continue for the balance of the year. Scott will have more to say about this in just a few minutes.

In addition to the strong internal growth, FirstService Residential also grew through acquisition. During the quarter, we completed three acquisitions in California, in Texas, and in Minnesota. And just after the quarter end, we completed a fourth in Arizona.

Like our other operations, our growth strategy is to grow internally and through acquisition. However, in the case of FirstService Residential where acquisitions are of highly recurring residential management companies, our return on invested capital can be particularly lucrative.

One of the reasons is the leverage we bring. Not only can we help our acquisitions enhance service delivery in their markets but we also bring additional value to their clients through the many national programs we have, most of which create incremental profit opportunities for FirstService.

And finally, in property services we also had an excellent growth quarter with revenues up 12% and EBITDA up nicely as well. While we reported solid revenue gross -- growth across the board in property services, it was particularly strong in our company-owned California Closets branches where approve -- where improving operating efficiencies and better consumer demand are both combining to drive better results.

In addition to the usual internal growth, the [case] for FirstService Brands has always been to continue to grow through further leverage that might benefit our company. Each of our franchise brands is a market leader and has an established reputation for quality and service excellence. If we can continue to drive incremental revenues to our franchisees, we will increase our profits naturally through additional royalties.

But we also believe that we have an opportunity to expand company-owned operations in some of our other service areas in the same way as we did with California Closets, and we're currently looking into this in more detail. FirstService Brands is a key part of the long-term focus of FirstService and we are excited about the prospects for this business in the future.

With the strong results reported today, multiple growth opportunities, several acquisitions completed this year, most of which actually towards the balance of the end of the year, the second half of the year, and our deep financial strength and cash flow, FirstService is better positioned than ever to deliver strong results for the balance of the year and beyond.

Now, before opening things up to questions, I'd like to turn things over to John for some financial highlights. And then Scott will provide his operational report. John?

Thank you, Jay. As already reported earlier this morning in our press release and highlighted by Jay in his opening remarks, FirstService reported strong consolidated results in our third quarter, continuing the momentum from the first half of the year. Here are the highlights of our results from continuing operations.

Revenues were $684.6 million, up from $603 million in our third quarter of last year, with growth of 14% on a local currency basis and internal growth of 10%. Adjusted EBITDA totaled $59.3 million, up 7% from $55.6 million last year. And adjusted diluted earnings per share was $0.75, up 9% over the $0.69 in EPS reported from continuing operations in Q3 of last year.

As outlined in our press release and summary financial results released this morning, adjusted EPS includes certain adjustments to EPS as otherwise determined under GAAP, which we believe are not indicative of the economic earnings from our operations. All of which are outlined in detail in our release and consistent with our approach and disclosures in prior periods.

Turning now to our cash flow statement, we saw strong results in our third quarter, generating $62 million in cash flow from operations, which was down slightly compared to Q3 last year, due to changes in working capital, which will reverse in Q4. Meanwhile, our year to date cash flow from operations is more than double the amount generated in the prior year.

We had an active quarter of investing with $12.7 million of capital allocated to acquisitions and an average multiple of about 5 times current year EBITDA, most of which was funded by divestiture proceeds of $10.8 million and an exit multiple of about 9 times EBITDA.

We continue to invest in our operations, with $7.2 million expended in capital expenditures during the quarter, down from $9.6 million in the same quarter a year ago. Though year to date CapEx of $35.9 million remains well ahead of last year's $21.8 million. And on plan for an elevated level of spend this year in the $45 million to $50 million range, due primarily to new Colliers premises in New York and a couple of other major markets that we have discussed on prior conference calls.

Moving to our balance sheet, our net debt position at quarter end was $349 million, compared to $384 million at the end of our second quarter. Our leverage expressed in terms of net debt trailing 12-month EBITDA was just over 1.5 times, down from 1.7 times at the end of Q2 in the current year, and 1.6 times at the end of Q3 last year.

With a relatively low leverage close to $300 million in available cash and undrawn credit under our bank lines and strong cash flow from operations, we have ample financial capacity to support the growth of our businesses and other capital requirements.

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

Thank you, John, and good morning. As you heard, our strong results at Colliers have continued through the third quarter. Revenues were $372.5 million, up 16%, 12% organically, driven by very strong brokerage activity particularly in investment sales, across all three regions.

Globally, commission revenues on investment sales were up over 30% versus the prior year, with leasing revenues up near 10%. Investment sales activity was particularly strong in the US, the UK, and Australia and New Zealand.

In the Americas region, revenues were up 16%, driven by strong brokerage activity in the US, Canada and Latin America. Investment sales led the way, up 18% across the region, with particularly strong results in the US. Leasing revenues were up 10% in the region, with 20% increases in Canada and Latin America, supported by solid single digit increases in the US.

In our Asia Pac region, revenues were up 19% in local currency, driven by continued strong brokerage activity in Australia and New Zealand, and supported by solid investment sales results in China and Hong Kong.

Revenues in A/NZ were up over 25% in local currency, with investment sales and leasing contributing approximately equally to the year over year increases. Revenues for the balance of Asia Pac were up 6%, driven by double digit investment sales growth, tempered by flat leasing revenues.

Turning to our Europe region, revenues were up a strong 20% year over year, driven by strength in Western Europe, primarily the UK and Germany. The UK was particularly strong, up more than 40% from investment sales, leasing, and appraisal, which were all well up over the prior year.

The UK economy continues to improve and both investment markets and occupier markets are poised for continued growth. Much of our growth during the quarter was organic, driven by an improving economy but more so by the significant and successful recruiting that has taken place over the last 18 months, which has transformed our operations in London in particular. The recent acquisitions of BCL and H2SO have added to the momentum and we expect strong results for the fourth quarter.

Colliers' EBITDA for the quarter was $33.9 million, or 9.1%, up from 8.2% in the prior year, due largely to operating leverage. In particular, the 40% plus sales growth we experienced in the UK drove significant margin improvement in that operation.

In summary, we had another great quarter at Colliers and our momentum and pipelines remain very healthy into the fourth quarter. We expect to finish the year strongly, supported by generally favorable market conditions in all three regions.

Looking now at FirstService Residential, we generated revenues of $250 million for the quarter, up 10%, 8% organically, as we continue to win new contracts across North America. Year to date internal growth is over 7%, driven by market share gains and new development in each of our four regions, and we expect this level of growth to continue for the foreseeable future.

Our EBITDA margin in the quarter was a disappointing 6.6%, down from 8.5% a year ago, primarily due to employee health benefit costs, which continue to run at levels significantly higher than expectation and prior year.

In our second quarter call, I explained that in 2013 we had consolidated disparate health plans from across our many offices in the US to align with our rebranding and also to comply with US healthcare reform.

For the first six months of 2014, our utilization experience and actual costs were much higher than expected, based on previous experience and industry actuarial tables. In the third quarter, our experience deteriorated further and our costs were approximately $3 million higher than prior year. We expect our experience to be similar in the fourth quarter.

For 2015, our health benefit plans have been redesigned to better align with market, and will include greater sharing with our associates. In addition, increased health costs have been incorporated into our client budgets for 2015, principally for the thousands of sited associates we have that work full time for a specific property. The appropriate sharing of costs with our associates and clients will reset the burden that we absorb to market levels.

During the quarter, we also incurred a $1.4 million write-off of accrued fees for services provided in relation to the collection of delinquent homeowner dues. In the third quarter, legislation in certain states was clarified with respect to the collection of delinquent fees by third parties.

You will recall that during the recent financial crisis, we were asked as property managers to assist our clients by becoming more involved in the collection process. A change in legislation has impaired our ability to provide these services in the future, and our ability to collect accrued fees for current work in process.

This does not materially impact our future revenues, as we had largely curtailed our service offering in this area. So it is a one-time charge in terms of its impact on our results.

In summary, we are pleased with our performance at FirstService Residential in terms of our ability to continue to grow our business. Our retention rates remain very strong, and we have been clearly differentiating ourselves from the competition and winning market share every quarter.

Notwithstanding this, we remain disappointed with our bottom line performance this year and are committed to improvement in 2015. We will provide greater clarity on our expectations for 2015 in our year-end call in early February.

Let me now turn to our property services division, which consists of our franchise brands, our company-owned California Closet operations, and effective last quarter also includes Service America, a full service air conditioning, appliance and plumbing service company.

Revenues in this division were $61.8 million for the quarter, up 12% over the prior year results, 9% organically plus the impact of our Paul Davis Canada acquisition, which closed during the second quarter this year.

Organic growth was led by near 20% revenue increases at California Closets, supported by solid 10% growth at CertaPro Painters. Divisional growth was tempered by flat year over year results at Service America.

Our margin for the second quarter was 24.4%, down from 27% in the prior year, primarily due to revenue mix change. Our California Closet company-owned operations have been performing very well year to date, and had another exceptionally strong quarter, growing 30% year over year.

Our company-owned operations generate a low double digit EBITDA margin which is much lower than the royalty-based margins from our franchise systems. Looking forward, we expect another solid quarter from this division to finish the year.

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

Perfect. (Operator Instructions) Brandon Dobell, William Blair.

I just want to make sure I got a couple of things just squared away. Sounds like nothing else further on the collection receivables issue to expect in Q4, so that Q3 was the only time we'll see that.

Yes. That's --

Okay. And just to make sure that the healthcare cost impact, should we expect a similar Q4 dollar impact as we saw in Q3?

Yes. Yes, we'll experience the same kind of incremental excess costs in Q4. And then we have a reset plan and contracts that start fresh with clients January 1.

Got you. And then looking at leasing in the Americas, pretty strong growth out of Canada, Latin America. How much do you think that that is market share versus market? And then I guess as a follow on there, looking at the single digit leasing growth in the US, do you think that's a good sustainable growth rate for you guys in that business looking out the next handful of quarters?

Yes, I think single digit growth in leasing is a fair expectation looking forward. We -- the pipelines are fairly robust in the US right now and we expect a solid fourth quarter in terms of leasing revenues in the US.

Perhaps some headwinds in Canada with commodity prices and oil prices, which may delay decision making. But again, pipelines are very strong right now.

Okay. And then as we think about modeling the AOS business, is the seasonality of that similar to the rest of Colliers? Or should we think about fourth quarter not being as seasonally strong for that business?

It's John. No, it's a -- it doesn't have the same attributes in terms of seasonality that the other businesses do. In particular the transaction-related revenues. It's much more of a fee for service contractual business that tends to be a little bit more consistent through the year.

Okay. Great. Thanks, guys. Appreciate it.

You're welcome.

Frederic Bastien, Raymond James.

Just want to build on the Colliers. Do you expect or do you have enough visibility so that you're comfortable that you can match or perhaps even exceed the strong performance that you posted in the fourth quarter last year? Was quite a strong quarter then.

It was a very strong quarter. And I think our expectation is that we'll be very close in terms of our results to last year. I don't know we're expecting significant year over year increases.

Even with the acquisitions?

Even with the acquisitions.

Okay. And what's your, I guess in light of what's going on in the global markets, what's your visibility now on 2015? Is that changed dramatically?

No, it hasn't changed. Right now our pipelines and activity remain quite strong in all three regions. There are a few pockets where we have some weakness. But I don't think it's changed dramatically in the past quarter, Frederic.

Okay, that's helpful. Last question from me is on the franchise business. You mentioned that the revenue mix had an impact on the margin in the quarter. Is this a one-time event? Or are you expecting this to be carried over to future quarters?

I think we can expect some dilution to continue. But it's all good news. It's really because of our company-owned operations are performing so well. And we have plans to over time bring in more company-owned stores, as Jay mentioned in his comments. And that will serve to dilute the margin gradually over time.

But that will be offset, presumably, with greater revenue growth?

Yes. It's -- we have an absolute EBITDA growth. Right.

Excellent. Thank you.

David Gold, Sidoti.

So couple things just wanted to touch on. First, as you think about the Colliers business today, and you noted you made the largest acquisition in your history post-quarter. Can you talk about thoughts on the acquisition front going further? Particularly the geographies or services that you want to add?

Yes, we are incredibly excited about the opportunities for growth at Colliers. Not just internal growth, David, but also growth by adding additional services like AOS has done.

But there are countless other commercial real estate services that are being delivered in many different markets that would benefit by being part of a Colliers-branded global platform. And so we are quite excited about some of the things that we're seeing.

We do have an interesting pipeline of acquisitions in the Colliers area. But they're varied. They're not just traditional brokerage operations. But they are real estate services around commercial properties in a variety of different areas. And so we see just many opportunities to continue to grow this business in the years to come.

Got it. And another big side of that is with -- given all the recent deal activity, particularly in the commercial real estate side, can you also speak a little bit, Jay, towards what you're seeing out there by way of price? If there are deals out there that are reasonably priced or presumably the smaller ones are a little more attractively priced, as a guess.

Well, I think there's two or three levels of pricing. In terms of larger acquisitions, and there's some consolidation going on in the industry, pricing is large and high in those areas. That's never been a focus for FirstService.

AOS was one of our biggest acquisitions to date. We see the opportunity for us to continue to strengthen existing operations, primarily smaller businesses. And therefore pricing at more historical levels from our perspective.

Got you. Perfect. And then, John, just to be sure I understand you correctly. On the medical costs as we go forward or get out of, let's say, 2014, 2015 and beyond, do you expect that that doesn't hinder? And maybe even helps you from an earnings perspective?

Yes. Absolutely. We will strand these costs in 2014 and move forward without that drag.

Got it. So embedded in that would be -- we get away from the drag and then presumably we actually have some pickup, given the changes?

Yes.

Perfect. Perfect. Thank you both.

You're welcome.

Stephanie Price, CIBC.

In terms of FirstService Brands, you mentioned potentially the acquisition of more company-owned stores. Can you kind of talk a bit about FirstService Brands and your thinking on growth in that division?

Well, the first focus would be on acquiring more of the California Closet franchisees as our larger, more successful franchisee owners look to succession. We have continued to look at adding incremental company-owned operations.

Our goal is to own the major markets in North America over time. It gives us more control over the brand and there is also an opportunity to achieve considerable economies of scale by moving and consolidating the manufacturing and board cutting to one or perhaps two regional centers, which will result in improved quality, consistency and ultimately efficiency.

So it is a long-term plan. And really in collaboration with some of our larger franchisees over time.

Okay. And then just continuing in the acquisitions theme, with Colliers, can you talk a bit about acquisitions potentially by geography? And how your Colliers franchise is looking? What holes are you looking to fill geographically?

Well, we believe that for the most part we now have the global platform that we need in different geographic regions. Obviously, we always want to strengthen our market position in different markets. So there's opportunities to do [tucked] under acquisitions.

It doesn't matter whether it's a Colliers local franchisee or not. In fact, the number of Colliers franchisees in different regions is getting less. So you'll see most of our acquisitions going forward, famous last words, obviously. But most of our acquisitions going forward will be of non-Colliers operations in different regions that will strengthen us either in our core services or add additional services like we've been pursuing over the past couple of years.

Great, thank you very much.

You're welcome.

Stephen MacLeod, BMO Capital Markets.

Just wondering if you can talk a little bit about on the FirstService Brands side why your company-owned operations are performing so much better than the franchise businesses? Or is that the way to read it?

They are out-performing the system in general. And in 2013 we started to invest in our company-owned operations more aggressively to ensure that we were setting the tone for the brand. And ensure that we were employing all of the proven best practices across the system, including the style, size and set up of the showrooms, the products carried, the approach to customer service and so on.

We have the years and years of data to know what works. We implemented it now in all of our operations and it's showing. The growth of the company-owned has outpaced the franchise system really all year.

Okay. And so is it also market-specific? Like, are you company-owned -- are you owning the franchises in faster growth geographies?

Not necessarily. We tend to be weighted towards major markets. But not necessarily --

Okay.

-- stronger markets.

Right. Okay. And then just honing a little bit on the margin profile sort of 2015 and beyond in the residential property management business. Do you have a specific target as to when you think you can get back to the historical levels of 9%, 10% in that business?

It's going to take some years. Next year we're targeting between 7%, 7.5%. But we'll add to that clarity in our year-end call. Our long-term goal is still marching towards 10%. And the key for us really is to get through our systems implementations and infrastructure build around our shared service center so that we're able to regionalize and centralize many of the functions that are in some cases taking place in over a hundred locations right now.

There are significant efficiencies available to us but we need to get through these systems implementations, which will take us through 2015. So we're a few years out. But it -- we're confident in our direction. But it will take some time.

Okay. That's great. And then I guess similarly for Colliers, if you match last year's result, you're probably looking at a 10% margin for this year. What kind of leverage do you see going forward in terms of the margin profile?

It will continue. The operating leverage exists in this business model, so it will continue to tick up. But we've enjoyed some significant increases the last couple of years. So it will be more gradual and incremental in the future.

Okay, that's great. Thank you very much.

So there are no other questions at this time.

Okay, ladies and gentlemen, thanks for joining us on this third-quarter conference call. We look forward to visiting with you again when we report our year-end numbers in February. Thanks again.

Ladies and gentlemen, this concludes the third-quarter investors conference call. Thanks for your participation and have a great day.