Colliers International Group Inc (CIGI) 2015 Q1 法說會逐字稿

Good day ladies and gentlemen. Welcome to the first-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, April 28, 2015. 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 welcome everyone. With me today is Scott Patterson, President and Chief Operating Officer, and John Friedrichsen, Senior Vice President and Chief Financial Officer. Today we will discuss our record results for the seasonally slow first quarter as well as provide an update on our plan to separate FirstService into two publicly traded companies.

Let me first deal with our results. For the quarter, revenues were $608 million, up 17%; EBITDA $24 million, up 7%; and earnings per share came in at $0.11 per share, up 38% over the prior year. In a few minutes, John will provide more details on our financials and discuss the results from Colliers. Then Scott will provide his overview of FirstService Residential and FirstService Brands.

Overall, each of our service lines generated solid revenue growth, continuing on the strong momentum coming out of last year and despite currency headwinds. Each one of our divisions is well-positioned to continue delivering strong growth in revenue, EBITDA and earnings per share for the balance of the year.

In terms of acquisitions, we began the year with the addition of Strategic Building Solutions, one of the leading project management firms in the Northeast. Founded in 1996, SBS, who will rebrand as Colliers International, currently manages more than $1 billion in construction projects and more than 10 million square feet of lead register real estate in their energy services group. With more than 70 professionals operating from three offices, SBS will build on the strength of the Colliers global project and sustainability management capabilities, adding depth across multiple industry sectors. Together, Colliers has about 1,000 project and sustainability management professionals operating on a global basis.

Let me now turn quickly to the proposed spin out. Last week, our shareholders overwhelmingly approved a plan to separate FirstService into two independent public companies, Colliers International, a global leader in commercial real estate, and new FirstService Corporation comprised of FirstService Residential and FirstService Brands business units. This was the next step in our spin out process. Subject to final regulatory and court approval, we anticipate being in a position to complete the tax-free distribution of shares to our shareholders on or about June 1.

We are extremely excited about the prospects for both Colliers and new FirstService. Standalone, each will have a sharper focus, more flexibility, and be able to deliver better value to shareholders in the years to come.

Now let me turn things over to John. Scott will pick things up from there, and then we will open things up for 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. I will address our overall consolidated financial results for the quarter as well as our capital usage and balance sheet followed by an overview of Colliers' first-quarter results.

So for the first quarter of fiscal 2015, consolidated revenues increased to $608 million, up 17% in local currencies from $545 million in the first quarter of 2014 with 10% of our growth generated internally and the balance from acquisitions. Revenue growth in US dollars, our reporting currency came in at 12%.

Adjusted EBITDA came in at $23.9 million, up from $22.3 million reported in Q1 last year, and adjusted earnings per share came in at $0.11 compared to $0.08 per share reported for the first quarter 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 was down slightly to $16.9 million from $17.3 million in Q1 of last year. Inclusive of working capital changes, cash flow from operations improved from a negative $86.9 million to negative $73.7 million in Q1 despite the heavy cash usage as broker commissions and variable compensation related accruals from year-end were settled as usual during the first three months of the year.

We invested $11 million in acquisition activities during our first quarter, of which $5 million was for new acquisitions, and the balance for increased stakes in existing subsidiaries. Meanwhile our capital expenditures amounted to $5.1 million, down from $7.7 million last year.

Turning to our balance sheet, our net debt position stood at about $435 million at the end of the quarter compared to $337 million at our December 31 year-end and $366 million at the end of our first quarter last year with the increase from year-end attributable mainly to working capital usage and capital investment noted previously.

Our leverage ratio expressed as net debt to EBITDA stood at 1.9 times, up from just over 1.4 times at year-end and up slightly from our leverage of 1.8 times at the end of our first quarter last year. Had the spin out of new FirstService occurred at the end of Q1, pro forma leverage for Colliers and new FirstService would have been 1.5 times and 2.5 times respectively and in line with the expected leverage levels for these businesses on a standalone basis.

In terms of our financial capacity, with cash on hand and committed availability under our revolver, we had over $200 million of liquidity at quarter end, a level ample to fund our operations and other capital investments, including acquisitions needed to execute our growth strategy.

Turning to our commercial real estate division, Colliers International generated revenues of $335.7 million in the quarter compared to $299.5 million last year, an increase of 22% on a local currency basis split evenly between internal growth and contributions from acquisitions. Revenue growth was led by a 30% increase in leasing related revenues and a 173% increase in project management revenues with a substantial portion of the latter increase contributed by Colliers France acquired in the fourth quarter of 2014. Meanwhile capital markets related revenues were up 1% versus last year with our growth rate moderated by tough comparables in Q1 of 2014.

Adjusted EBITDA for Colliers was $16.3 million for the quarter compared to $15.8 million with our EBITDA margin of 4.8% versus 5.3% in the prior-year quarter. The decline in margin was primarily attributable to the increase in project management revenues previously noted but include a significant component of low margin pass-through revenues and which will have a lower drag on margins as we progress through the balance of the year.

Revenues in the Americas came in at $183.7 million, up 15% on a local currency basis, led by a strong performance in our US business with revenues up 25% over Q1 of 2014 and dominated by a 45% increase in leasing related revenues. Revenues in our Canadian and LatAm operations were approximately flat with prior year on a local currency basis with our Canadian business having a particularly tough comp due to a very strong first quarter in 2014.

Moving to Europe, revenues were $81.7 million, an increase of 63% on a local currency basis. Overall revenues were up over 30% in the UK and down 6% in Germany, primarily due to a tough Q1 comp which saw an exceptionally strong start in capital markets revenue in our German operations last year. Our overall increase in Europe revenues was led by a 36% increase in leasing related revenues with strong increases in our UK and Germany operations and a sizable increase in project management revenues contributed primarily by newly acquired Colliers France, as previously mentioned.

And finally, in our Asia-Pacific region, revenues were $70.1 million, up 4% in local currencies compared to Q1 2014 and were led by an 11% increase in China and Hong Kong, where leasing revenues were up 17%. Revenues in our Australian operation were up 4% led by increases in capital markets and property management revenues with leasing revenues flat with last year.

Looking across our global operations, both our pipelines and most markets in which we operate continued to reflect solid commercial real estate activity which we expect to continue for the balance of the year and combined with Colliers' strengthening global platform, supportive of achieving our growth objectives for 2015.

Now over to Scott for the FirstService Residential and FirstService Brands operational highlights. Scott?

Thank you, John, and good morning everyone. As you have seen and heard, the new FirstService divisions, FirstService Residential and FirstService Brands, reported solid results in the first quarter. Let me walk you through each, starting with FirstService Residential, where we reported revenues of $225.8 million, up 10.3%, 8% organically as we continue to win new contracts across North America.

Growth was particularly strong in Toronto, the mid-Atlantic region and Florida and was driven primarily by market share gains -- that is wins from competitors -- but also fueled by new development and self managed communities transitioning to professional management. Ancillary revenues from property services and transaction services, including transfer and disclosure fees, insurance and banking, were also up year-over-year and supported the strong internal growth experienced during the quarter.

EBITDA for the quarter was $9.3 million or 4.1%, up 30 basis points from the prior year and in line with expectation for the seasonally weak quarter. The margin reflects continuing investment in our operating infrastructure as we move to a more centralized shared services platform. As I have indicated in prior calls, we expect this investment to continue into next year with efficiencies from the investment anticipated later in 2016 and beyond.

Last year, our margin was negatively impacted by escalated employee health costs. We can say after Q1 that we are comfortable that redesigned medical plans and increased sharing with associates and customers has reset the cost that we will bear this year, and we are on track to increase our margins to the 6.5% to 7% range for the full year.

In summary, we posted a solid first quarter at FirstService Residential with continuing strong organic growth and a margin that is tracking to expectation.

Let me now turn to FirstService Brands, which generated revenue of $46.4 million for the quarter, up 14% from the prior year, 10% organically. Organic growth was driven by very strong momentum at California Closets, CertaPro Painters, Pillar to Post Home Inspection, and Floor Coverings International. California Closets and CertaPro each grew at greater than 20% for the quarter relative to year ago. Organic growth for the division was tempered by a 9% year-over-year revenue decline at Paul Davis off a record Q1 in 2014.

Ice storms and harsh winter conditions in late 2013 and early 2014 resulted in significant damage and record claims last year. Weather conditions in February and March of this year have led to a significant backlog at quarter end and we expect an improved year-over-year comparison at Paul Davis for Q2.

EBITDA for the seasonally weak first quarter was $1.3 million compared to $1.5 million in the prior year. EBITDA in the quarter reflects investment in our California Closet Company-owned operations in preparation for expansion of the portfolio. The investment versus the prior year includes the recruitment of a centralized team, plus the setup of our new West region production facility that will serve 6 of our 11 Company-owned operations. Currently, each of our operations produces, assembles and stages their own custom closet solutions prior to installation. Consolidating production in the new facility will result in significant economies of scale while improving quality and turnaround times. The facility will be fully operational in June.

Looking forward to Q2, we expect continued strong year-over-year organic growth at FirstService Brands with margins that are comparable to or slightly better than prior year.

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

(Operator Instructions). Anthony Zicha, Scotiabank.

Good morning gentlemen. With reference to Colliers, you had mentioned that positive trends continue in the marketplace. Could you remind us, could the margins be better this year than last year?

I don't know necessarily they?ll be better than last year. We finished very strong, and the headwind that we have this year is primarily FX. So FX -- non-US operations tend to generate a higher margin, so with translation of those currencies into fewer US dollars as a result of the foreign-exchange changes, we would expect that to have a bit of a dampening effect on the margin, at least on a same-store basis.

Okay. John, in terms of acquisitions, what is the pipeline looking like and where do you see the best prospects?

It's Jay here. Acquisitions continue virtually across the board. Our pipelines are solid, both at Colliers and new FirstService. And we believe that we can continue to generate some excellent tuck-in acquisitions for the balance of the year pretty much online with what we did last year is our expectation. But of course, with acquisitions, you never know.

And do you have a priority, Jay, in terms of Europe or US, considering you?ve made acquisitions in the UK and Germany, and finally in France? So they are all equally distributed?

Acquisition priorities are going to change effective June 1. So you know, we probably have two priorities, one of which I can speak to with Colliers, and Scott may want to chime in as it relates to new FirstService.

But in terms of Colliers, there's no priority for us. We have established a fantastic platform. It is now global with most major markets covered. And so our focus is strengthening the core in virtually every market in which we operate. So, there's no particular priorities other than perhaps focusing on some recurring revenue streams in a couple of markets where we are a little lighter than most. But in terms of Colliers, that would be my view.

And in respect to new FirstService, at FirstService Residential, really the focus is to continue the activity that has been ongoing for 20 years. We have nurtured relationships with local management companies. As you know, that's a very fragmented market. We are always in discussions with a handful of management companies that fill out our footprint, or add to our service capability, so that will continue.

And then as it relates to FirstService Brands, we have a strategy to ? that I talked about on the last couple of calls -- to expand our Company-owned portfolio at California Closets and also at Paul Davis Restoration.

Okay. Super. Scott, just one more question. What are the fastest three growing franchises that we have? And in terms of prospects or geographic locations, where would be the most active areas?

California Closets and CertaPro Painters are the fastest-growing systems, and then a couple of our smaller systems, Pillar to Post and Floor Coverings International, are both fast-growing. We expect them to become bigger systems to us over the years. These are all systems that have a footprint across North America, so in terms of geography, there's no particular focus area or area that is growing more quickly.

Okay. Thank you very much.

Anthony Jin, RBC Capital.

Hi, good morning. I just want to start with FirstService Residential. In your recent investor presentation, the revised goal for FirstService Residential margins was about 8% by 2018. I believe previously it was 10%. Could you help me reconcile the differences?

I missed it after previously.

It was 10% previously, like 10% margins for 2018 last year. I was looking for a reconciliation in terms of what happened to those 200 basis points.

I think there's a -- we won't get to 10% by 2018. I think there's still a possibility we can get to 10%. We have clear line of sight to 8% by 2018 and that will increase from current levels, primarily as a result of the efficiencies from our ongoing investment in our operating platform. Thereafter, it's going to be through operating leverage and focusing on growing our ancillary revenues at a quicker pace, but that will be slower in coming.

Are you seeing any pricing pressures on contract renewals?

No, we are seeing the pricing pressure ease from what we've experienced over the last few years in most regions, not in all.

Okay. I just want to understand in that guidance or the outlook. Are your expectations of what's to be higher or lower housing turnover and new development wins?

I'm going to have to ask you to repeat that.

I just want to understand your guidance a little bit more and I want to get a framework for what you are expecting in terms of the housing turnover, like existing home sales, how you expect it to trend over the next little while. Do you expect a pretty good recovery or pretty much status quo is okay?

Our market is growing at 2% or 3% in terms of new communities being developed. New development for us accounts for about 20% of our organic growth. Sale of existing homes really doesn't impact our business significantly except as it relates to transaction fees as homes are sold in and out of our communities.

So I mean development is a component of our growth and we see it continuing. We've grown through new development every year through the last five, even through the period 2008, 2009, 2010. Does that answer your question?

Yes, it does. If I can touch on -- John, if I can touch on a modeling question just as a go-forward basis. What should we look at in terms of the NTI interest of earnings and the redemption increment post-split?

Are you talking about across the board?

Yes. Well, I guess understanding what happens with Colliers specifically, given that there's a subsidiary that's been consolidated for 2 million shares there?

Yes. You can look at probably in the I'd say 25% range for Colliers and probably closer to 20% for new FirstService.

Okay. And just on the --

Sorry, I think those are fair numbers at this point. Again, a lot of this depends on the mix and where earnings come from, but that would be our best estimate.

Okay. And just to touch on the corporate expenses, is this a good run rate to go with, or is it going to touch up a little bit higher going forward?

It shouldn't be materially higher.

Okay, great. I'll pass the line.

David Gold, Sidoti and Co.

Good morning. I just wanted to get a little bit of color on capital markets and leasing sort of post-the tougher comp at least on the cap market side in the first quarter and how you think about the balance of the year in those business lines for Colliers.

Based on our best estimate of visibility and considering our comps from last year, we are looking at sort of low to mid teens in terms of percentage increases would be where we would expect those to come in. Obviously leasing was extremely strong at the beginning of the year. That will probably moderate on a percentage basis. And then capital markets again, we came off some very tough comps, and I think markets and our pipelines are conducive to growth in the low teens would be our best guess now. But again, assuming that market conditions remain pretty much consistent with where they are now.

Okay. So on the cap market side, low teens for the balance of the year or for the year in aggregate?

For the year in the aggregate.

Got you. So, we have a little bit of catch up to do presumably.

Yes.

Great. And then also, maybe a tougher question to answer given the seat that you're sitting in with a month ago before the spinoff, but as we think about or look at Colliers, maybe you can speak a little bit as to the market for talent there, and maybe a little bit by way of hiring plans.

As you know, David, there's lots going on in the industry right now with lots of movement, consolidation, potential transactions. We love our position within the confines of all of the noise going on. We've built a great business over a long period of time, and I think we are in the catbird seat in terms of recruiting and in terms of developing our young people, which is a big push for us in several markets. So I think the opportunity in the next year to two years as some of these transactions either happen or don't, and depending upon who they happen with or don't, all will create opportunities for those that might be uncomfortable to join a firm that's had stability over a long period of time. So we are quite excited about all these moves.

We also have seen our recruiting numbers in the first quarter up materially over the prior year and with higher quality recruits in virtually all markets. And our pipelines for additional people, both managerial and production, in all aspects of our business is just a step above what it has been historically.

Perfect. That's helpful. Thank you.

Brandon Dobell, William Blair.

Thanks. Good morning guys. First on Colliers, going back to the February call, you guys laid out some expectations for 2015. I just want to make sure for Colliers that those expectation still make sense in terms of revenue growth and EBITDA margin goals.

Yes. We absolutely did on February 10th when we announced the spinoff, we had indicated our expectations for each of the businesses, and certainly for Colliers, our expectations which were communicated at that time around expected revenue growth and margins is intact and has not changed.

The same thing to be said for new FirstService? And I guess particularly for new FirstService, some the investments you guys are making, when should we see that start to make a difference in the growth rate, recognizing you guys have given a pretty good outlook for low double-digit revenue growth this year?

We are on track for the low double-digit without ramping up acquisitions. And the other piece of guidance was the high single-digit margin which we are on track for as well. The strategy that will tick up growth is the strategy to expand our Company-owned operations in California Closets and Paul Davis Restoration. And I think we will start to see that impact our growth rate modestly going into next year.

Got it, okay. Turning back to Colliers, what's been the reaction of I guess the existing management producers and the guys you count on to carry the brand? How have they thought about the spin? Has it created any issues with retention of key employees?

It's been the opposite. One of the issues that Colliers has had historically is that its profile as a subsidiary of FirstService was not at the forefront. So, as they were looking to recruit or as they were pitching new client business, they were always explaining the fact that they were a subsidiary of FirstService. Now, as a standalone, they will have their own profile, their own capital structure, and so it makes the story easier for them. I think there's great excitement throughout the organization virtually across the board about what this means and the opportunities for growth.

Our retention rates for key people has strengthened over the past 12 months. I haven't really noticed anything since the announcement. But the platform continues, and the operations continue to get stronger, and they get stronger one step at a time, and all of that is translating into great momentum amongst our key people globally.

Okay. And final one from me, maybe, Scott, if you could size the investments in California Closets for the balance of the year, how much of a headwind do you think it's going to be on the EBITDA line relative the last year, or relative to this quarter I guess?

This quarter is more meaningful because it's a seasonally weak quarter. So I don't think we will see -- we'll continue to invest in the second quarter but it won't have the same impact with the second quarter being a seasonally strong quarter. So it was about $0.5 million in the first quarter. It will be about the same in the second.

Okay, great. Thanks guys.

Stephanie Price, CIBC.

Good morning gentlemen. I was wondering if we could circle back on the June 1 date. I just wanted to gauge your comfort level with the date and maybe walk through the approvals that you still need to get before the spin out.

Yes. There's several regulatory steps that we still need to overcome. Obviously, the courts won't hear anything until all matters are approved and behind us. We are still waiting for final approval from CRA. US regulatory approvals have been obtained, and so there's -- and then of course there is a banking documentation that needs to be put in place between the two organizations, which is well in hand but obviously quite complicated because these are global operations and so on. So we feel pretty confident that June 1 is the date. We are working towards that, and anticipate that will be the -- and hope that will be the closing date.

Okay, great. And then in terms of acquisitions, some commercial real estate competitors have had some large transactions recently. Can you talk a bit about, post spin-out, Colliers appetite in doing a larger transaction, say, in asset management or a property management company?

One of the beauties of this spin out is that Colliers will be able on a standalone basis to consider any type of acquisition, both small or large. So, I think anything is on the table. Having said that, we have always operated both of our operations, or FirstService as an amalgamated organization, very prudently, recognizing the strengths of both operations. So we will not take any action that does anything to underpin our financial strength, which we think is a competitive advantage in the case of Colliers, as it's always been in the case of FirstService. So our appetite is wide open. But we are fortunate to be in an industry where there is just so many tuck-in acquisitions on a global basis that we can buy well and on decent terms and strengthen our operations in different geographic regions. And as long as we can continue to buy assets that strengthen our business at attractive multiples and finance them conservatively, we will continue to grow our business one step at a time as we have with FirstService.

Okay, great. Thank you very much.

Stephen MacLeod, BMO Capital Markets.

Thank you. Good morning. I just wanted to circle back around on Colliers. In the past, you have had that sort of 10% margin goal out there, and I think that was tempered just a little bit in a post-spinoff world. I'm just wondering how you see the margin profile of Colliers sort of evolving over the next several years.

First of all, the 10% goal remains unchanged. If anything, perhaps it gets deferred slightly. It's going to be a function, as I said earlier on this year, we have some foreign currency headwinds which are going to I think dampen margin somewhat but it's also going to get impacted by acquisitions going forward. So to the extent obviously that acquisitions have a margin profile that would be consistent with our current businesses or perhaps higher, it will positively impact margins.

As we continue to grow at this business, we are going to see additional operating leverage, particularly from transaction related revenues. So those are all margin additives. Having said that, I think there are some interesting recurring revenue opportunities that we may consider down the road which perhaps would have lower margins.

So there's a number of factors but needless to say we are still focused on 10%. We think it's achievable and that's what we are driving towards.

Right, okay. That's great. And then you've referenced in this call and on previous calls the lower margin profile of the US business. How do you sort of see that delta moving over time?

We see that increasing. We are still developing our US business. And for us, it's more of a recent story for the US. Where we were several years ago and where we are today is quite different. We've got great momentum in the US, but margins are lagging. But each and every year, we've shown our ability to expand those margins, leveraging the investments we've made in the platform, recruiting effectively. And I think there will be some positive contribution from acquisitions going forward that also positively impact that business. So, they are absolutely on target to achieve 10% or better over the next few years. And again, the entire team is driving towards that.

If I may, I would add we did just take over the Colliers US business in 2010, I believe, and -- 2011? 2010? 2010. And we see the US as a huge growth opportunity and it's in our backyard. In many ways, we have very strong platforms in different geographic regions, and the US is not as strong, for example, as we might be in -- or is not as high a market position for example as we might be in Canada, Australia and other parts in Western Europe now. So, with the huge market, our position only strengthening there, our multimarket transactions increasing, our corporate services successes that we've been achieving all create continued opportunity in addition to the enhanced leverage that John was talking about, market for market growth and strength. So, we are quite excited about the US and believe that, as we continue to grow the business, and we see lots of growth, we will also be moving up the margins at the same time. So accelerated growth and better margins in the near term in the US is a goal for us for sure.

Great, that's very helpful. Thank you. And then is it -- would you characterize your geographic footprint now being complete from a Company-owned perspective on Colliers?

Always open for additions but we are focused only on additions that are major market additions. Geographically around the world, with only the exception of Japan, it's the only major market that we don't own that we operate through a franchisee. And so with that exception, we are very comfortable with our platform now globally, and our focus has turned to strengthening the core, as I mentioned earlier on the call.

Right. That's great. Okay, thank you very much.

There are no other questions at this time.

Okay. Ladies and gentlemen, thank you for joining us on this conference call. And I would normally say we look forward to the next conference call, but with a little bit of luck, the next conference call will be two conference calls, one for Colliers and one for new FirstService. So thanks for joining us, and we hope to speak to you soon.

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