FirstService Corp (FSV) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-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 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 Thursday, August 6, 2015.

At this time, for opening remarks and introductions, I'd like to turn the call over to Chief Executive Officer, Mr. Scott Patterson.

Please go ahead, sir.

Thank you, operator. And welcome, everyone, to our second-quarter conference call which is our first conference call as an independent public company. I'm very pleased to be here today with our new Chief Financial Officer, Jeremy Rakusin. And together we will walk you through the results for the quarter and answer any questions you may have.

Let me kick it off and say first that we are very pleased with the results we released this morning, which were significantly above prior year, and came in really spot-on with our expectation. For the quarter, revenues were $326 million, up 12%. Adjusted EBITDA was $32.3 million, up 27%; and adjusted earnings per share came in at $0.40, up 38%.

We are particularly pleased with the organic growth for the quarter of over 9%. Both FirstService Residential and FirstService Brands had very strong quarters in terms of organic growth.

At FirstService Residential, we continued to win market share across North America. Organic growth was broad-based, with each of our regions growing at approximately the same level, driven primarily by contract wins from competitors and strongly supported by new development wins.

FirstService Residential is the largest residential property management company in North America by a significant margin. We leverage our scale and capital to bring cost savings and other value to our clients that cannot be replicated by our smaller competitors. As a result, we are very well positioned to keep our current contracts and consistently win new contracts. And this is reflected in an organic growth rate which has averaged 8% over the last five years.

At FirstService Brands, we grew organically by more than 10% for the quarter, driven by continued strong growth at California Closets, CertaPro Painters, Floor Coverings International, and Pillar To Post Home Inspection, all of which posted growth well in excess of 10%. Of special note was our Company-owned California Closets operations, which as a group grew more than 20% for the quarter.

FirstService Brands consists of seven separate brands, all leaders in their respective markets. The brands have a well established reputation for quality and service excellence which fuels consistent organic growth through word-of-mouth referral.

In a few minutes, I will ask Jeremy to walk through our divisional results in more detail and to provide important information around our cash flow for the quarter, and our balance sheet and deposition at June 30.

Before I do that, I want to talk about a few other highlights during the quarter, starting with the acquisition of our Paul Davis Restoration franchise in central Pennsylvania. The acquisition represents the launch of our strategy to selectively acquire our more successful operations in major markets. The goal is to create a Company-owned platform that leverages best practices, and the Paul Davis culture for service excellence to provide a consistent and streamlined service offering to national accounts.

Paul Davis Pennsylvania was one of our larger franchises nationally, with four offices and operations that extend into South New Jersey. Average revenue for the last two years was slightly better than $10 million. We are delighted that Stephen Rotay, founder and CEO, will continue to lead the day-to-day operations and partner with us as we develop a Company-owned strategy in that region over the next several years.

During the quarter, we also added to our California Closets Company-owned portfolio with the acquisition of California Closets Denver, which brings the number of our Company-owned operations to 11. In addition, we closed two small tuck-under acquisitions within our FirstService Residential division.

The other highlight during the quarter is of course our spin-off as an independent public company from the old FirstService Corporation, effective June 1. Want to take this opportunity to thank our finance, accounting, tax, and legal teams for all the work they have put in over the last 12 months to make this happen. This was an immense effort to effect this transaction, and the real heavy lifting fell on relatively few shoulders. They know who they are; and, again, I want to take this opportunity to thank you for all your efforts.

The separation is now complete. We are operating entirely independently. To be conservative this quarter, we took an extra week to report, but we expect to be back on our regular rhythm next quarter.

And, with that, I will hand off to Jeremy to walk you through the financials.

Thank you, Scott. In our press release issued earlier this morning, FirstService recorded strong consolidated operating results in our second quarter ended June 30, with balanced performance from both FirstService Residential and FirstService Brands. As Scott mentioned in his opening remarks, revenues for the quarter were $326 million; adjusted EBITDA was $32 million; and adjusted EPS came in at $0.40, up 12%, 27%, and 38% respectively.

For the six months year-to-date, our consolidated results were as follows: revenues increased to $598 million, up from $538 million last year, an increase of 11% which included organic growth of 8%, or 9% in local currency terms. Adjusted EBITDA increased by 25% to $41.6 million, up from $33.3 million last year with a margin of 7%, up from 6.2% in the prior-year period. And adjusted EPS was $0.41, up 32% versus $0.31 per share recorded during our same six-month period last year.

As described in detail in this morning's press release, adjusted EBITDA and adjusted EPS include certain adjustments to operating earnings and EPS, respectively, as determined under GAAP. We believe adjusted EBITDA and adjusted EPS are the most appropriate measures for investors, as they provide a clearer picture and basis of comparison of underlying operating performance from period to period. These metrics are consistent with the approach and disclosures adopted in prior periods by old FirstService, prior to our recent spinoff.

In terms of our segmented operational and financial highlights for the quarter, let me first start with our FirstService Residential division where revenues were $263 million, up 11% year-over-year. Particularly strong performing regions were in Texas, the West, the greater Toronto area, and South Florida, with solid contribution for most of our other markets.

Developer and high-rise condominium segments continue to be areas of strength for us. And we were able to augment our core property management fee revenue with increases in on-site stacking services and other ancillary revenue as differentiators with these clients.

EBITDA in the second quarter was $20.5 million, an increase of 41% over the prior year. Our margin was 7.8%, significantly higher by 160 basis points versus the second quarter of 2014 when we experienced higher-than-expected medical costs. Increased contribution from higher-margin ancillary revenue in this quarter added to the year-over-year margin improvement.

Now onto our FirstService Brands division, where we recorded revenues of $63 million for the quarter, up 14% year-over-year. In the second quarter, our franchise systems continued to enjoy buoyant markets for home remodeling in general, with most of our businesses recording double-digit revenue growth compared to prior-year.

Paul Davis Restoration experienced improved year-over-year performance in the second quarter compared to Q1, with single-digit organic revenue growth. At our corporate-owned California Closets stores, we had outstanding top-line growth which outpaced our franchised operations.

The second quarter also marked the opening of our California Closets West regional manufacturing facility in Phoenix at the end of June. We continue to incur transition costs as we transfer production from six of our 11 corporate-owned stores to the Phoenix facility; three of the six have been migrated thus far.

The SKU and revenue mix towards our faster-growing corporate-owned operations, and the regional facility ramp-up, resulted in a mild tempering of our EBITDA margin to 21.6% for the quarter.

Turning to our cash flow, we reported strong operating cash flow for the quarter attributable to the significant profit increase delivered by FirstService Residential, and steady contribution of FirstService Brands, and reflecting the positive seasonal factors impacting our operations which we expect to continue in the third quarter of this year.

It was a modest negative impact to our cash flow from a spinoff-related tax charge we incurred in the quarter, resulting in an abnormally high tax rate. On a normalized basis, our effective tax rate should be in the mid-30% range.

During the quarter, we prudently allocated capital with approximately $4 million of cash invested in the acquisitions highlighted by Scott earlier. We also reduced the net level of non-controlling interest on our quarter-end balance sheet to $71 million, even with some offsetting impact from recent partnership structured acquisitions.

An additional $7 million in capital expenditures was incurred during the second quarter. And we anticipate investing in the order of $20 million in total CapEx for the full year, in line with our expectations.

With respect to our balance sheet, we closed our June quarter-end with a net debt position of $170 million, resulting in leverage of just under 2 times net debt to trailing 12-month EBITDA. This leverage is a little lower than anticipated, given strong free cash flow generation at both FirstService and Colliers in the lead-up to the spinoff, which resulted in lower net debt allocation on the capital structure split between the two companies.

We have continued the borrowing arrangements we have had for many years with our existing lenders, and we continue to value these long-standing relationships. As part of our capital structure, we have $150 million of long-term senior notes with attractive pricing, and which mature in 2025. We also have a $200 million revolving credit facility with our syndicate of banks, which is currently well less than 50% drawn.

Our current blended interest rate at the existing leverage level is approximately 4%. With undrawn to availability under our revolver and cash on hand totaling more than $175 million, we have ample capacity to pursue our acquisition strategy and invest in accretive growth opportunities.

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

(Operator Instructions).

Anthony Jin, RBC Capital Markets.

Good morning. I was just curious as to the drivers of organic growth this quarter in residential. Could I get a sense of the proportional splits from the new developments or pricing, increased services, et cetera?

I'll give you a ballpark breakdown, Anthony: 9% organic growth; I would say 60% range, with the competitive wins. 20%, maybe a little better, for new development. Almost 10% self-management; and I would say about 10% from increased penetration of existing budget with ancillary services -- ancillary services ranging from on-site staffing-related services to our transaction-related services -- banking, insurance, et cetera. Pricing would be sprinkled throughout, and I would say on average this year, we're expecting price increases of slightly better than 1%.

Okay. And with respect to your pipeline of new development contracts, can you characterize how the management services contracts are trending, and maybe comparing the pipeline versus last year?

The pipeline will be stronger than this time last year, but it was quite robust last year as well. It has been for the last few years. It is, for us, focused more on high-rise and lifestyle or active adult communities where we have a very specific service offering -- a specialized service offering, where we have specialized teams and we're recognized by the developers as second-to-none. And we expect that new development -- which has accounted for about 20% of our organic growth for the last five years -- we expect it to continue to be a driver for us, at approximately the same level for the next several years.

Okay. And then if I can just switch over to margins, they were a little bit higher than I expected in residential. Was that specifically related to higher -- the banking transactions revenue in this quarter? Was there a little bit more to it than that?

Yes, Anthony, it's Jeremy. I'll take that one. The margin expansion was 160 basis points. A big chunk of that was the normalization from medical costs last year; call it in the order of 120 basis points of that. And the remaining 40 basis points was really a function of mix: the higher-margin ancillary revenue; as you mentioned, banking, insurance, and other ancillary revenue.

Jeremy, just a follow-up on that. You mentioned that you do expect it to continue through Q3. Can you just provide an update in terms of where you expect margins to come in for this year, and perhaps on expectations over the next three years, as your IT infrastructure spend comes off?

The picture hasn't really changed from what we said in February, and through our roadshow meetings with investors and analysts leading up to today. We just kind of said that our margins for the full-year 2015 will be in the high-single-digits; higher than 7.4% normalized that we reported last year on a consolidated basis. And the impact that we see from the efficiencies of investing in the FirstService Residential operating platform -- we see that as a late 2016 and onward initiative. And so the margin expansion that will drive FirstService Residential and our consolidated performance, due to that initiative, will really be more gain, a 2017 onward initiative.

Okay. Thank you. I'll pass the line.

Anthony Zicha, Scotiabank.

Hi, good morning, gentlemen. Could you provide us some color in terms of the operating environment in the US and in Canada? Which regions are your strongest performers? And with reference to the operating environment, how does it compare today versus the beginning of the year? Are we seeing some accelerated momentum?

Anthony -- Jeremy, in his prepared comments, identified Texas, the West, and Toronto and Florida as being our higher growth markets in FirstService Residential for the quarter. They were, and we expect them to continue to be, but we are experiencing strong growth really across the board. The operating environment I think is generally pretty strong. The economy is growing, and it's broad-based at FirstService Residential.

At FirstService Brands, the key driver for us is home-improvement spending. Sale of existing homes, home equity values -- those are the big drivers of our home and commercial services. And sale of existing homes were actually down in 2015, which tempered our growth, I would say, in the first six months a little bit. But existing home sales are up pretty strongly, close to 10% this year. And we expect that to be a key driver for us really through 2016 in our brands business.

Okay. And, Scott, could you give us some color in terms of progress in terms of recruiting on the FirstService Brands side franchises?

Well we are always recruiting, Anthony, but it's not a big driver for us in that business. We -- CertaPro, California Closets, Paul Davis Restoration -- these are more mature systems. And our focus is on franchisee productivity, and that is helping our franchisees grow the size of their businesses. Pillar to Post, Floor Coverings International, are smaller higher-growth systems. And there's a big push in those two systems in terms of adding franchises, and I would say particularly with Pillar to Post it's going for very well right now.

Okay. Well, thank you very much.

Frederic Bastien, Raymond James.

Good morning, guys. Scott, can you discuss your dividend policy and your thinking around paying potentially a much higher dividend, down the road?

I'll let Jeremy take that.

Hi, Frederick. Right now, we again assume the dividend that was in place at old FirstService -- $0.40 per share at $3.5 million of cash outflow per quarter, or $14 million for the year. I would say, right now, our leverage is at 2 times, at the lower end of what we said would be our target range. If we de-levered meaningfully below 2 times, I think Scott and I are going to be open-minded about our cash flow requirements.

We are in ramp-up mode in terms of some of the acquisition initiatives. The Paul Davis internalization strategy is in its early phase, and the pace of acquisitions will be dictated in terms of capital usage there. But we're going to be mindful of our capital allocation, and also with the discussions with our Board about how we allocate capital in the future, to the extent we need to consider alternative uses.

Thanks. That's all I have. Thank you.

Brandon Dobell, William Blair.

Guys, within property services -- I'll start with property management. How should we think about the strength of the rental market as a -- I guess, call it, current tailwind or current headwind, with an eye toward at some point if the market gets more balanced, meaning there's a little more supply of rental units out there, so rent growth slows. What does that transition in the market do for growth? Or maybe ancillary services -- just trying to figure out how the end market dynamics are going to shift in a couple of years, and what that means for your growth.

Well, the rental market has been strong, but so has the development of condos and lifestyle communities. We do participate in the rental market in a small way, principally in New York City. But we are finding that a lot of development projects started out as rental are actually converting to condo in the last year, which is good news for us. So the balance between rental and condo -- we really haven't -- we haven't really felt that it's gone back and forward, Brandon.

I don't know if I answered your question.

No, it sounds like it's just New York where you got rental exposure. It's not going to be a broad impact. What you would probably like to see just more is existing home sales pick up, so you've got more churn within the communities that you do manage. It sounds like that's more important than what the rental market might be doing.

Right.

Okay. Jeremy, a couple of quick (technical difficulty) questions. Given now this is the inaugural quarter, some of the items like D&A, stock comp, the acquisition items -- is this quarter a decent proxy for how some of those smaller items should look through the back half of this year? Or should we expect any kind of major movements around what we saw this quarter?

No, I think it's fairly representative. Depreciation is in line with CapEx on the quarter, and on an annualized basis. Amortization relating to acquisition activity -- I would kind of use the current quarter and year-to-date as a good guide on an annualized basis. Same thing for stock-based comps.

Okay. Perfect. And then, Scott, as you think about the M&A environment, has the transition to a public company changed the pace of conversation, the scope of conversations with people you've been talking to for a while? Just trying to get a sense of whether people are more willing or less willing now to talk with you guys, given your newly public status?

I don't think that the attitude has changed from the perspective of the seller. I think that internally here we have more focus and more resources on the effort. That has resulted in a higher level of discussion activity; certainly, I think, higher than this time last year, and maybe on par with the average level of activity that we've experienced over the last five years.

The one area where we're much more active is in the brands, and that's related to our Company-owned portfolio strategies -- California Closets and Paul Davis Restoration.

Yes, okay. And then a final one for me, going back to the earlier question on margins, recognizing there's a couple of drivers for operating leverage here. But maybe, Jeremy, as we think about margin expansion from a modeling point of view, would you expect to see in the near-term the cost of services line be the bigger beneficiary of some of these things going on with medical costs and efficiencies? And then, over time, does that shift down to the SG&A line, as it's more about the technology platform? Or do you think modeling gross margin improvement is the way to keep looking at margin expansion?

A don't think there's much of an impact on the operating leverage from the investment in the operating platform. We really -- if you ex out the medical cost, which year-to-date we've dealt with completely versus last year, I don't think we can (technical difficulty) in the cost of revenue versus SG&A line materially changing in quarters going forward.

Okay. Perfect. Thanks, guys.

Anthony Jin, RBC Capital Markets.

Hi, Scott. Just a quick clarification question for me. In your prepared remarks, you mentioned that California Closets grew above 10%. Does that include your corporate-owned stores?

No, I was speaking about the franchisor.

Okay. Great. Thank you.

Stephen MacLeod, BMO Capital Markets.

I just had a question on the FirstService Brands. The margins were down just a little bit based on the mix shift and the ramp-up on the California Closets manufacturing. Excluding those factors, were base margins up year-over-year?

The answer is yes. With the exception of the higher growth in our corporate-owned stores -- which are lower-margin businesses -- and a little bit on the ramp-up of the Phoenix facility, we would have had higher margins due to operating leverage on our franchise operations.

And the movement within the franchise companies -- Paul Davis is down year-over-year. And so that margin is lower, offset by the strong growth in the brands I mentioned in my prepared comments.

Right. Okay. That's great. And you came out -- Jeremy, as you mentioned, you were at the low end of your leverage range. Do you expect that to move by the end of the year? Or is that kind of a new starting point, based on the allocation of debt prior -- or post-split?

Our best visibility is to kind of say it will be in around 2 times. We've got seasonality with our working capital needs. But I would say it's a good guide to say we will be in and around 2 times.

Right. Okay. Great. And then just one final question, you talked about the consolidated outlook for 2015. Can you just sort of go into a little bit more detail on your 2015 outlook for the split between FirstService Residential and FirstService Brands?

What I would say is that at FirstService Residential, the margins that Scott articulated in Q1 is 6.5% or better for that business. And Brands, last year we did 18% margins. We may be a little lower this year, due to both the California Closets revenue mix and Phoenix facility ramp-up initiative that I've talked about for this quarter; as well as the fact that we had a slow Q1 year-over-year for Paul Davis Restoration, which is a tough make-up for the balance of the year. So it may be slightly down in margins for Brands on a full-year basis.

Okay. Okay. That's great. Thank you very much.

So there are no other questions at this time.

Thank you, ladies and gentlemen. And we will -- our intention is to report, last week of October, for the third quarter. Until then, thank you.

Ladies and gentlemen, this concludes the second-quarter investors' conference call. I thank you for your participation, and have a great day.