FirstService Corp (FSV) 2015 Q4 法說會逐字稿

Welcome to the fourth-quarter investors conference call. Today's call is being recorded. Legal counsel requires us to advise that the discussion scheduled to take place 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 in the US Securities and Exchange Commission.

As a reminder today's call is being recorded. Today is Wednesday, February 10, 2016. For opening remarks and introductions I would like to turn over the call to Chief Executive Officer Mr. Scott Patterson. Please go ahead, sir.

Thank you operator. Welcome ladies and gentlemen to our fourth-quarter and year-end conference call. Thank you for joining us. With me today is Jeremy Rakusin, our Chief Financial Officer. I will kick us off and walk through some of the quarterly highlights. Jeremy will follow with a financial review of the quarter and the year.

This morning we announced very strong results for the December quarter. Results that capped off a great year for us. Our first year as an independent public company after the June 1 spin-off from Colliers International. Revenues were [$316] million up 12%.

Our EBITDA margin hit 7.1%, which is 240 basis points greater than the margin in Q4 of last year, and earnings per share came in at $0.28, more than double the number we reported in the fourth quarter of 2014. So very strong results, which were right in line with our expectations.

Again this quarter I want to highlight organic growth, which in local currency came in at 10%, 9% FirstService Residential and almost 14% in FirstService Brands. Organic growth at this level is a great reflection on our operating strategies and on the hard work of our operating teams across the businesses. It is very gratifying to see it come through. We're clearly winning market share both of our divisions.

At FirstService Residential our revenues grew over 10% in total, with strong results reported in each region across North America. We experienced particularly strong growth in Texas, the mid-Atlantic region including New York City, and here in Toronto.

In these markets and in general our growth was buoyed by contract wins in our high rise and lifestyle verticals where we had a differentiated service operating and market position. Our growth in these verticals was again enhanced during the quarter by new development, which accounted for about one third of our core organic growth in total.

Last week we reported for acquisitions in our FirstService Residential division, all solid transactions that fit very well with existing operations and that we completed well within our targeted valuation frames. K.A. Diehl Community Management Specialist provides us with a leading presence in the attractive Myrtle Beach South Carolina market, a market where we were only nominally represented before the acquisition.

In Bruner & Rosi extends our leadership in the San Diego market and establishes for us in North San Diego. We also reported to pool maintenance tuck-unders which add to our service capability Las Vegas and the Mid-Atlantic.

These four acquisitions are very representative of the tuck-unders we look for that either add to our geographic footprint is in the case of K.A. Diehl in South Carolina, enhance our position and an existing market, as in the case of Bruner & Rosi in San Diego, or add to our full service capability through the addition of ancillary services, services like pool maintenance and repair. We hope to close several more like this over the course of 2016.

Moving on to FirstService Brands total growth reached 20% for the quarter, with well over half coming in organically driven primarily by very strong results in California Closets. Both the franchise organizations and our Company-owned operations delivered excellent growth and results during the quarter, and all key metrics including leads, bookings, and average job size point to continued strong activity levels in 2016.

Results for the quarter were supported by mid-teen organic growth at two of our smaller franchise systems; Floorcoverings International and Pillar to Post Home Inspection. Although smaller today we're very excited about the future opportunities of both of these systems and we expect them to be growth drivers for years to come.

Just after year-end in early January we reported the acquisition of our Los Angeles California Closets franchise, which advances our strategy of acquiring key major market franchises and integrating them into our California Closets company-owned platform with centralized production. LA is one of the top markets in North America and we believe we have an opportunity to significantly grow this operation topline, while also improving profitability through centralized production.

We currently have 5 of our 12 Company-owned operations utilizing the Phoenix production facility. We expect LA will be the sixth with transition planned for Q2 of this year, and we will be up to 8 of 12 by Q1 of next year. The facilities delivering on quality expectations and turnaround times and has capacity utilization continues to increase we expect to see consistently improving margins.

Before Jeremy steps and I want to say we're very pleased with the way we finished the year. We feel like we have solid momentum carrying us into 2016. We got out of the gate quickly with some quality acquisitions in January, we have a solid pipeline of acquisition opportunities, and our teams continue to execute operationally. It's early, but we feel like we are firmly on the path to achieve our goals for 2016.

Jeremy will comment more specifically on the outlook for 2016 in his prepared comments, and I will pass the mic to him now.

Thank you Scott and good morning everyone. Before walking through our full-year results and segmental performance, let me first reiterate the strong consolidated fourth-quarter performance as Scott mentioned in his opening remarks. Revenues of [$316] million up 12% versus the prior-year quarter. Adjusted EBITDA $22.3 million up 67% and adjusted EPS of $0.28 up 115% versus Q4 2014.

With respect to our consolidated full-year results for 2015 our performance across the board hit the targets we established at the beginning of the year. Specifically, annual revenues were $1.26 billion and almost 12% increase over the $1.13 billion for 2014. This included organic growth of 8% or 9% in local current currency terms.

Adjusted EBITDA was $103 million a significant 37% increase over the $75 million last year, with margins expanding by 160 basis points to 8.2% up from 6.6%, and adjusted EPS was $1.20 up 43%, versus $0.84 per-share recorded for 2014. As our finding of prior conference call disclosed in this morning's press release, there were certain adjustments made from GAAP operating earnings and per-share earnings to arrive at our adjusted EBITDA and EPS results, all of which are consistent with our approach and disclosures about prior period.

Now onto our divisional review were I will focus more detailed around the fourth quarter. At our FirstService Residential division revenues were $251 million for the quarter, a 10% increase versus the prior year period. Our EBITDA almost doubled year-over-year to $13.7 million on the back of 250 basis points of margin expansion to 5.5%, from a 3% margin in the prior-year quarter.

Our margin in Q4 of 2014 would have been 4.3% on a normalized basis excluding approximately $3 million of costs related to higher-than-expected medical benefits. So we still realize the 120 basis points of margin improvement in the fourth quarter largely due to continued operating improvements.

For the full year FirstService Residential generated the same level of strong organic revenue growth that Scott cited for the fourth quarter, 8% in reported currency and 9% in local currency terms adjusting for the effect of FX.

The residential division also realized strong profitability for the year with a 6.8% margin, a significant increase from 2014 results, which showed a 5% reported margin and a 5.9% normalized margin, adjusting for $9 million of nonrecurring Medical expenses in that year. Most of the 90 basis points normalized margin improvement once again came from efficiencies in our operating platform.

Turning to our FirstService Brands division for the fourth quarter we generated revenues of $65 million, up 20% versus the prior year period. EBITDA grew by 25% to $11.3 million for the quarter on the back of our exceptionally strong topline growth, together with operating leverage in our franchise operations. As a result we saw our margin increase to 17.4% from 16.6% in Q4 of 2014.

On the year, FirstService Brands also showed robust organic growth of 10% or 11% in local currency terms. Our 17.4% margin for the full year was not far off the 17.8% margin in 2014, despite weather-related headwinds are most of the areas in our largest system restoration, as well as the centralized manufacturing investments and transition costs in 2015, impacting our California Closets Company-owned operations.

Turning back to our consolidated results, FirstService ended 2015 with strong cash flow from operations with $87 million for the full year and $11 million for the fourth quarter, which is a seasonally weaker one than our second and third quarters. Our acquisition spending of $12 million for the year was a little lighter than expected, as we expect the pace of our tuck-under acquisition activity to increase in 2016, some of which we've already seen through the year-to-date announced acquisitions that Scott highlighted in his comments.

Capital expenditures for the year came in line with our expectations at almost $20 million and less than the $22.5 million incurred in 2014. For 2016 we expect our CapEx to be in the range of $20 million to $25 million.

On our balance sheet year-end net debt was $156 million resulting in leverage of one and a half times net debt to 2015 adjusted EBITDA, at very similar levels to our previous third quarter and significantly below the debt to leverage metrics in the 2014 year-end financials presented on a pro forma basis for the earlier spin-off.

Given our current modest leverage we announced yesterday a 10% hike to our quarterly dividend from $0.10 to $0.11 or $0.44 on an annual basis and based in US dollars. Total dividend outlays were the year will be approximately $16 million. We believe this increase dividend fits well in the context of our position is a growth company first and foremost, and provides us with maximum flexibility in deploying capital for a wide range of acquisition opportunities.

At the same time our continued strong cash flow generation will allow us to maintain a prudent and conservative capital structure. As we look out to the remainder of 2016 we continue to feel confident about our ability to generate low double-digit topline growth. Consistent with recent years we estimate that organic revenue growth will be in the mid- to- high single digits, with the balance coming through top vendor acquisitions.

We also expect to achieve incremental progress in our steady march towards the targeted consolidated EPS margin of 10% in 2018, 2019, after exiting 2015 at 8.2% margin. Our FirstService Residential division will be the driver of this margin expansion to further realization of operational efficiencies. We saw meaningful progress in 2015, taking us to a 6.8% margin for this business and we expect to make further strides in this area in 2016 towards our eventual 8% margin target.

That now 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.

Scott, can you give some color as to the proportion of your served markets, where you have full coverage of services in the residential space, where you can see some improvement on your coverage? Specifically related to the ancillary services and the markets where you are currently at where you simply need a lot more density -- say residential property management [carpet] before you can offer the full service?

Okay. I would say that there are no markets where we are completely filled out in terms of ancillary services. Florida market would be the closest. We've been there the longest. We have perhaps our largest market share there, and we've been working hard on the full-service capability, really, since the beginning there some 20 years. We still have a lot of room in Florida to add other ancillary services and certainly add market share as well. Virtually every market, we have an opportunity to increase market share and increase ancillary services. And there are some markets where we don't operate today in terms of property management, so it's a priority for us to gain a foothold in those markets and then to start to gradually build out the ancillary services.

Okay, and then with respect to what you just mentioned in the M&A, can you perhaps discuss or give a little bit more color, as to your pipeline of the mix of transactions that would be more in the residential space or in ancillary services? And perhaps, we use the word ancillary, but perhaps give more color in terms of specific types of services that you're looking at?

Sure. Residential property management would be our priority and we're looking at trying to increase our pipeline in that area. It's taken a little while to get our rhythm back, [some spend], but we're feeling very good about the activity levels in residential property management today. Again, extend our footprint or increase our market share in the markets we exist in.

Ancillary services -- the pipeline I would say is quite strong as well. And some of the things you've seen from us in the past -- janitorial, pool maintenance, front desk concierge, security in some places, and really being open-minded about recurring services within our managed environment -- that can include many other things like elevator services, fire suppression services, and so on. So we're open-minded to recurring services that are within the budgets of our managed communities. But I would say our focus is more on the regular day in and day out side of services -- so janitorial, pool, security, front desk, concierge.

Okay, and Jeremy, just want to touch very quickly on the margins. We've seen some nice increases on both divisions. Now you provided your outlook of 10% for the business by 2018/2019. But just given that 2015 was relatively strong, can you talk about how that margin expansion is going to play out over the next couple years? How much could we expect from 2016? Thank you.

Anthony, I would view the march to that 10% target as being very steady, incremental. I wouldn't attribute any greater proportion or lesser to 2016 versus 2017 and 2018. I think it's going to be steady. We started to see more of it in the back end of 2015 start to take hold. And again, I think it's going to be a very steady march.

Okay; thank you.

Frederic Bastien, Raymond James.

Thank you.

I just want to build on that last answer a bit more. You did finish at 6.8%, which makes your 2018 target of 8% margin seem quite reasonable if not conservative. How do you feel about your ability to potentially meet that margin goal faster?

Our comfort level is that 2018 to 2019 timeframe, it's a big business. Now we're talking about a business that's got $1 billion in revenue and incremental basis points on that. If you look out -- taking 120 basis points over the next three years in equal type of bites is good progress; and I think that's really our comfort level.

Okay, thank you.

I'm just wondering how big of an impact the centralized production in Phoenix had on FirstService Brands margins? Was it responsible for the entire margin gain that you reported in Q4? Or were there some puts and takes there?

I would say there are some puts and takes -- very strong revenue growth both in California Closets and in a couple of our other franchise systems, so you're going to get natural operating leverage from those. I would say that the progress on the centralized manufacturing will be something that more takes hold in 2016 and the years beyond.

Okay. The last one for me.

Just wondering which brands you would expect to experience the strongest growth rates this year? Obviously, California Closet was very strong in 2015, but are we expecting more of the same in 2016? Or should we see more or different brands take over the growth?

The housing market is very healthy right now, particularly in the US. Existing home sales are up. Home prices are up, which are taking home equity values up, and the combination is really fueling the home improvement market. All seven of our brands are tied to home improvement in one way, shape, or another. Paul Davis is a little different in that it's more weather-influenced. I would say that we expect healthy growth from our brands that are more directly tied to home improvement, like CertaPro Painters, California Closets, Floor Coverings International. And we do see -- we had a strong fourth quarter, as you saw -- we see continued strength into 2016.

Thank you very much.

David Gold, Sidoti & Company.

Good morning.

Good morning, David.

Just a couple questions for you.

First, on the synergies that you're looking for on the residential side, can you give us a sense for two things: one, the success that you've had there, where that's come from; and two, what the big potential drivers are for that?

David, you said synergies?

Right. On the resi side you had mentioned you see synergies there helping to drive the margin improvement over the next couple of years.

This has been a journey that we embarked on a couple of years ago, and obviously we started to see the margin improvements take hold in 2015. It's multifaceted. It all relates to centralization of back-office functions, call center, client accounting, corporate accounting -- areas like accounts payable, building out an HR enterprise-wide platform and national sales organization. And it's taken a lot of those costs that are embedded in over 100 local offices around the nation and centralizing them or regionalizing them -- but really doing a streamlining and a consolidation of those back office functions. A lot of IT and automation around them as well. And that's part of the multi-year plan to take us to 8% margins in that business in 2018/2019.

Got you.

As far as the timeline over the next couple of years to get that done -- are there spots where you might be able to accelerate? I know, obviously to ask about margin potential over the next year, but just thinking about the synergies that you have outlined -- any reason to think that maybe it couldn't be done in a year?

We think it's just going to be a steady pace, again, going from 6.8% in that business to the 8% incrementally. There's phases in terms of implementation of these initiatives and we just don't see any reason to [go and drop] thinking an acceleration of the realization of that target margin.

Got you.

And then one other question. On the other side of the business you've seen some success from centralizing production. Are there other opportunities on the Company-owned system side for centralizing so that we might see even better margins than you're thinking currently?

There are, in terms of shared services as we build up the national platform and California Closets. It's very early days of Paul Davis, so I won't speak to that. Certainly, doing some of the same kinds of things that we've been undertaking for FirstService Residential -- centralizing accounting and those sorts of things. But much of that is really built into our communication and what we expect from the future margin enhancement in this business. We've communicated 8% to 10% currently, going into the low teens from centralized production in Phoenix, and we will have an East Coast facility probably in 2017. But that will incorporate our thinking around shared services and capture that in that guidance.

Got you. Perfect. Thank you so much.

Thanks, David.

Anthony Zicha, Scotia.

Good morning, Scott.

With reference to the FirstService Residential, we saw 30% growth that was coming from new development, so the remaining portion of 70% -- that comes from market share gains, right?

Primarily, yes.

And who's losing market share there? If you can give us an idea.

There are 7,000 companies and there is still a portion of the market that is self-managed. So it would be a combination of taking accounts from any and all competitors that we compete against in our markets. But also the trend from self-management to professional management. We do win those accounts every quarter as well.

Okay, and Scott, when you look at entering the market, what are the metrics that you look at going forward?

When we look to enter a market we are looking to acquire a partner with the local market leader, similar to what we did in Myrtle Beach, the deal we announced last week. In terms of a go-forward, we have a multi-month onboarding plan where we will start to introduce our best practices in a prioritized way. Some of them will bring value more quickly than others, but it would be a slow process in terms of bringing them into the FirstService Residential fold and starting to win in that market on a consistent basis the way we do in our other markets.

Okay, and one last question -- backtracking a bit -- what proportion of the market is self-managed?

35%.

So huge opportunity still for that shift, and the momentum is continuing that way? The ownership associations are outsourcing?

They are, particularly the larger communities, high rise buildings, and large homeowners' associations. That's where a professional management company and us in particular can bring real value.

Excellent, thank you very much.

(Operator Instructions)

Stephen MacLeod, BMO.

Thank you, good morning.

Good morning.

I just wanted to drill down a little bit on the top line outlook for each business. Can you just talk about whether the top line outlook differs between FSR and FSB with respect to your mid single-digit to high single-digit organic growth outlook?

I would say there isn't a material difference. The strength we saw in the fourth quarter in Brands probably would -- in a way, we expect that to continue, so I'm guessing that we will see higher organic growth at Brands this year just based on the current strength that we see. But our view is really still low double-digit in both. If our Company-owned strategy were to accelerate, that could influence the Brand's top line in 2016 and 2017 if we have a little bump there. There are a number of discussions ongoing. The California Closets and Paul Davis -- we prioritize the markets that we want to be in and are in communication with a number of those markets. It doesn't mean that we'll get anything done this year, but we're making progress.

Right, okay.

So it sounds like you're incrementally a little bit more positive on the 2016 outlook for FirstService Brands from a growth perspective?

Based on the housing market.

Okay. And then, do you still expect to be active on the NCIB this year?

It's open, obviously that the fourth quarter was bigger than is typical, but we will really use that primarily only to offset any option exercises and avoid (inaudible) shareholders.

Okay, and then on the FSB business -- or just to come back to that -- the margins in Q4 were up on a year-over-year basis, down on a full-year basis just modestly. But do you still expect a flat margin outlook in FirstService Brands as Company-owned franchises offset, or -- sorry, as the mix shifts more towards Company-owned franchises?

Correct, that's bang on. We expect them to, over the next few years, stay in around current levels because of the tempering of the Company-owned bringing margins down, but the operating leverage from our franchise operations having offsetting expansion.

Right, okay. And then just one more on the cash flow statement -- you had some working capital -- generated cash this quarter. Was there anything that happened that was unique on a year-over-year basis?

There's two components there. Half of it is related to tax items more attributable to spinoff, and then the other half would be related to accrued liabilities in and around payroll timing and [in sense of comp]. Yes, those would be the biggest buckets of those changes in working capital items.

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

Brandon Dobell, William Blair.

Thanks, good morning, guys.

Good morning, Brandon.

I want to focus on residential for a second. As you think about the growth in 2015, is there a way to parse out the contribution from whether it's growth in ancillary services or growth in service offerings that were introduced during 2015? I'm trying to get a little better idea of the organic growth -- what's coming from stuff that's more recent, which would seem a little bit more, I guess, opportunistic the next two or three years, as opposed to what just -- typical market share opportunity?

Our ancillary services top line grew right in step with the management business. It's obviously a lot of moving parts. We're selling incremental services to communities that we manage currently, and then we are winning new contracts that include the full service offerings, so management plus ancillary services. But they grew right in lockstep in high single digit -- 8% or 9%. Does that answer your question?

Yes, that's helpful. And I guess, back to one of the previous questions -- you think about the contribution from new developments. Any of your markets where it's been a larger contributor the past couple of years? I know there are some markets in the US that have seen a lot of new construction and some markets have seen very little. As part of that answer -- just trying to gauge how you think about 2016 and 2017 -- the risk in some of your larger markets that development slows down as a driver for growth for you?

Dallas and Toronto are two markets that come to mind where new development has been a big driver. These are primarily high-rise in both cases, and high-rise condos take -- let's call it, five or six years from start to finish -- and there are still many projects within that five-year pipeline window. And so we will see continued growth. We know thousands of units that will be taken on this year, thousands next year, as these buildings are completed. But there are a number of new developments on the drawing board that are entering the pipeline just starting to slow. I think Florida and Toronto more so. So we won't see that for a few years.

But I guess the one way to answer it is, in the last five years, new development has accounted for about 20% of our organic growth and I think it will account for about the same in the next five years.

Okay that's helpful.

And then over on the Brands business, how much of your three-year margin trajectory is dependent on buying back some of the franchise operations from the territories out there? Or does buying back territories at a faster pace than maybe you think could happen -- does that change that trajectory?

It does. If we were not to take in any more franchises in the next few years our margin would go up more quickly above current levels. Alternatively, if there were a big spike in activity it would probably come in below current levels. Which is why we're saying, you know, in the next five years it will be up and it will be down, but we expect it to, net-net, stay at around the same level.

Got it. Okay.

And then Jeremy, how do we think about capital spending needs in 2016 relative to what 2015 looked like?

Traditionally, CapEx excluding acquisitions $20 million to $25 million we are expecting for 2016, and we think -- thinking further out, 15% to 20% of EBITDA is a good number to use for maintenance CapEx.

Got it. Okay. Thanks guys.

Thanks Brandon.

(Operator Instructions)

Anthony Jin, RBC Capital Markets.

Hello, Jeremy.

Just -- is there a similar metric we can use for the dividend going forward? I just want to get a sense in terms of what proportion of cash flows or EBITDA you would be looking at?

Anthony, this is something that we're going to revisit with our Board on an annual basis. We're not going to key it to -- we haven't in this particular dividend bump, and don't anticipate keying it to any type of formulaic [payout] ratio. It's obviously very conservative on all those metrics, but it's just something that we're going to look at how we perform, and revisit with the Board on an annual basis.

Okay. And just a quick one on the retention rates in residential -- can you just comment how that is trending recently? And perhaps the visibility through to 2016, just given that, I believe, the retention rates were tracking pretty high last year?

Right, they are in at around 95% from quarter to quarter. They bump up to 96% or veer down to 94%, but 95% is a good number for us. We don't see any dramatic change from that in the coming years.

Okay, thank you.

Thanks, Anthony

There are currently no questions in queue.

(Operator Instructions)

There are currently no questions in the queue.

Thank you, ladies and gentlemen. Thank you for joining, and we will talk again in April. Thank you.

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