FirstService Corp (FSV) 2016 Q2 法說會逐字稿

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 Wednesday, July 27, 2016. I would like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, Sir.

Thank you, operator. And welcome, ladies and gentlemen, to our second-quarter conference call. Thank you for joining us.

With me today is our CFO, Jeremy Rakusin. I will kick off our comments with a high level review of the results of some of our quarterly highlights, and then Jeremy will provide a more detailed walk-through of the financial results and the balance sheet.

Let me open by saying that we are extremely pleased with the results we reported this morning, with revenues up 18% over the prior year, EBITDA up 25%, and earnings-per-share up 30% -- very strong results, which reflect solid organic growth of 7%, continued margin improvement at FirstService Residential, and the impact of Century Fire for the full quarter. Both of our divisions recorded double-digit revenue growth, supported by strong organic growth, in line with our stated long-term targets.

The diversity of our service lines in combination with our relentless focus on customer service have enabled us to deliver consistent organic growth over the long-term. And we don't see this changing.

At FirstService Residential, revenues grew 10% in total, 7% organically. Organic growth was driven equally by new contract wins and increases in ancillary services, and also balanced is between the high-rise condominium and Homeowner Association verticals. Regionally, we enjoyed particularly strong growth in California, the Dallas and Austin markets in Texas, Washington, DC, and at the end of this quarter, north of the border in the Toronto and Vancouver markets.

New development accounted for about 25% of the organic growth. During the quarter, we announced the expansion of FirstService Residential into the Boston market, with the acquisition of the Niles company, one of the longest-standing and most respected property management companies in the market. This is a strategically important addition for us.

Boston was one of the very few major markets where we did not have a significant presence. And the acquisition is timely. Boston has been experiencing a development boom in recent years, and we are already leveraging our entry in the market to secure new projects with existing developer relationships. We expect strong growth in this market in the coming years, particularly in the high-rise environment.

Moving to FirstService Brands, we reported revenues which were up over 50% for the quarter, due primarily to the addition of Century Fire, which closed effective April 1. Organic growth was 8% for the quarter, driven by double-digit gains at CertaPro Painters, California Closets, and Pillar-To-Post home inspection.

Organic growth for our home improvement brands were solid during the quarter but down sequentially from the first quarter, when we enjoyed very favorable weather conditions relative to the year-prior. Currently, activity levels are very strong, and we expect a healthy housing market to continue to drive solid organic growth for our brands through the balance of the year and into 2017.

Our first three months with Century Fire were very productive. In terms of performance, we generated strong results that were spot-on with our expectation, and in line with management forecasts that we reviewed during due diligence. In addition during the quarter, we spent considerable time with our new partners, agreeing on strategy and setting priorities. And I can tell you that we are very excited about our direction in the fire protection business.

Earlier this month, we announced the expansion of our company-owned operations at Paul Davis with the acquisition of our Northwood franchise and at California Closets with the acquisition of the important Washington, DC market. In Florida, we partnered with Marguerite and Michael Mumford, who will continue to lead the day-to-day operations and help us build out the Southeast region of our company-owned Paul Davis operation.

As a reminder, our strategy is to buy in the more successful franchises in major markets to create a $200 million-plus company-owned platform that leverages best practices and the Paul Davis culture for service excellence to provide a consistent and streamlined service offering in national accounts. The Northwood operation generates revenue in the $10 million range and is a very important step for us in terms of executing on a strategy.

The Washington, DC California Closets acquisition represents our 13th company-owned operation within the California Closets system, which comprises 80 operations in total. While the Washington operation is currently not material in terms of revenues, it represents a significant market opportunity for us. And we expect this operation to grow ratably over the next several years.

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 reported strong consolidated operating results in our second-quarter ended June 30, with both of our divisions, FirstService Residential and FirstService Brands, contributing significantly to our overall performance. As Scott mentioned in his opening comments, revenues for the quarter were $385 million; adjusted EBITDA was $40 million; and adjusted EPS came in at $0.52, up 18%, 25%, and 30%, respectively.

For the six-months year-to-date, our consolidated results were as follows: revenues increased to $693 million from $598 million last year, up 16%, which included 8% organic growth and the remaining half from recent tuck-under acquisitions. Adjusted EBITDA increased by 27% to $53 million, up from $41.6 million last year, with a margin of 7.6%, up from 7% in the prior-year period; and adjusted EPS was $0.60, up 46% versus $0.41 per share, reported during our same six-month period last year.

Our adjustment to operating earnings and GAAP EPS in arriving at adjusted EBITDA and adjusted EPS, respectively, are outlined in our press release issued this morning, and are consistent with our approach and disclosures adopted in prior periods.

Focusing now on our segmented highlights for the quarter, I'll start with our FirstService Residential division, where revenues were $289 million, up 10% year-over-year. EBITDA in the second quarter was $26.4 million, an increase of 29% over the prior-year, and delivering a margin of 9.1%, significantly higher than the 7.8% margin in the second quarter of 2015.

This margin expansion was once again largely attributable to the strides we continued to make in streamlining and centralizing the cost structure of our residential property management operations. In addition, FirstService Residential margins were favorably impacted during the second quarter by strong seasonal results in our pool service operation at American Pool Enterprises.

American Pool generated solid organic growth, which was further amplified by the results of tuck-under acquisitions completed at the beginning of 2016, and which derived most of their revenue in the second quarter prior to pool openings. The seasonality enhanced the Q2 margin expansion and will serve to temper margin levels in the third and fourth quarters of this year.

On a full-year basis, the seasonal impact on margins is negligible, however. And we remain right on track to realize our targeted annual 8% EBITDA margin for FirstService Residential by 2018/2019.

Shifting to our FirstService Brands division, we recorded revenues of $96 million for the quarter, up 52% year-over-year. In addition to the strong 8% organic growth that Scott referenced, the acquisition of Century Fire added a significant component to quarterly growth, together with contribution from a few California Closets and Paul Davis restoration acquisitions completed during the previous 12 months.

FirstService Brands delivered EBITDA of $16.7 million for the quarter, a 22% increase over the second quarter last year. The increased mix of company-owned revenue resulted in a lower EBITDA margin in our FirstService Brands division at 17.3% for the quarter versus 21.6% in the prior-year period. Partially offsetting this impact was ongoing margin improvement at our California Closets company-owned operations through ramped up volumes and operational efficiencies at are centralized manufacturing facility in Phoenix.

Turning to our cash flow, we reported robust operating cash flow of $38 million for the seasonally strong quarter, up significantly year-over-year. Our cash flow performance was attributable to the continued profitability improvements delivered by FirstService Residential and strong growth from company-owned operations at FirstService Brands.

During the quarter, we deployed a significant amount of capital towards acquisitions, totaling approximately $72 million -- the bulk of it earmarked for the Century Fire transaction, but also directed towards several more typical tuck-under acquisitions. An additional $7 million in capital expenditures was incurred during the second quarter in support of our operations. For the full fiscal year, we anticipate total maintenance CapEx being towards the upper end of our previously guided $25 million to $30 million.

Finally, looking at our balance sheet, we closed our June quarter-end with a net debt position of $224 million, resulting in leverage of two times net debt to trailing 12 months EBITDA. This leverages up sequentially from 1.6 times at the end of the first quarter of this year, reflecting the financing of our Century Fire acquisition at the beginning of the second quarter.

Including the annualized EBITDA impact of Century Fire and other recent smaller acquisitions, our leverage stands at 1.8 times. After our heightened pace of recent transaction activity, we still have more than $120 million of total undrawn availability under our revolver and cash on-hand to continue our tuck-under acquisition strategy, and pursue all of the opportunities in our current deal pipeline.

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

(Operator Instructions) Anthony Zicha, Scotia Capital.

Scott, what are your growth expectations for Century Fire? And what kind of margin performance could we be looking forward to?

Good morning, Anthony. Century -- we really see an opportunity at Century to grow rates that are similar to our growth targets at FirstService Residential and the rest of our brands. And that is organic growth at mid-single digit or better, and then total growth at 10% or better through tuck-under acquisitions.

In terms of the acquisition activity at Century, we are currently collaborating with our partners to develop a pipeline. And it's really focused on filling out our service line and our existing 12 operations, where we currently do not have a full service offering across all 12. And one of the ways we want to fill in the service offering is through tuck-unders.

In terms of the margin profile, I think Jeremy has provided some direction on this previously. And that is similar to our company-owned operations in the Brands division in the 8% to 10% range.

Okay. And if we look at the organic growth outlook for FirstService Residential on the branded side, like what would it be? Or what should we expect?

I think that our expectation is that we will continue at mid-to-high-single digit, which has been our direction overall, at least slightly different between the two divisions. That FirstService Residential new development remains strong. We continued to win new contracts, both through new development and through competitive wins.

I think our growth at FirstService Residential will be closer to the mid-single digit than high. And then perhaps at Brands with the continuing strength that we are seeing in the home improvement market, our -- perhaps our growth rate will be closer to high-single digits than mid.

Okay. Well, thank you very much for that information. And excellent results. Thank you.

Thanks, Tony.

Samir Ghafir, Raymond James.

I was hoping you guys could provide a little more color on the acquisition pipeline for the remainder of the year and early next year?

Sure, Samir. It's Scott. You know the pipeline is strong. And I would say it's at a level that is consistent with levels we've seen for the last 12 months. At FirstService Residential, we're focused on expanding our geographic footprint, enhancing our share in existing markets, and adding to our ancillary service capability. And we currently have opportunities in the pipeline that would advance all three of those strategic priorities.

At FirstService Brands, our focus is on our company-owned operations at Paul Davis and California Closets, as we've described previously, we've identified those franchises that we would like to own over the next five years. We've prioritized them; we've initiated discussions with certain of them. And we are hopeful that we will add to our company-owned platforms before the end of the year.

And then, as I just mentioned, with Century Fire, we're starting to build that pipeline, and hopeful that we can add to our fire protection business sometime over the next 12 months.

Okay. Great. So just touching on Century Fire again -- is there anything about that business or its potential that perhaps you didn't know a few months ago?

I don't think so. I mean, you know, we've spent considerable time this quarter with that team. We're increasingly impressed with the team and the opportunity. There's nothing new that has come out. They've just really confirmed for us the opportunity and really reassured us that our initial excitement is well-founded.

Okay. Great. That's all I have this morning. Thanks.

Thanks, Samir.

Brandon Dobell, William Blair.

A couple of questions. First, within Brands, organic growth was a little bit slower this quarter than we've seen in the past several quarters. Maybe, Scott, some color on what's going on there. Is that just normal noise? Anything more structural? And as we think about the next handful of quarters, should it look more like this? Or more like what we saw back in 2015?

Right. It is down a touch. In particular, relative to Q1 this year, as I mentioned, we had very favorable weather relative to the year-prior. So we had a surge in Q1. And I think that we pulled -- separately pulled some work from Q2 into Q1, due to the favorable weather. But, as you pointed out, we had strong growth really throughout 2015.

I think looking forward we -- we're comfortable with a high-single digit. I think that's more likely than the 12% or 13% that we saw last quarter in the fourth quarter of 2015. But that said, I will say that activity levels are very robust right now. But we do have some tougher comps to run up against in the third and fourth quarter because of the strength we saw last year.

Okay. Are you guys still on track for the second production facility in California Closets? And I guess as kind of an add-on to that, how do we think about the cadence of margins looking out the next handful of quarters? Obviously, this quarter saw year-on-year EBITDA margins down.

Should we expect that to continue for a couple more quarters? Another six quarters? Just trying to get a sense of when you start to benefit from some of these efficiencies that you are building in, and when the investments in company-owned stores start to turn into higher margins?

Okay. Well, let me handle the first part of the question, and then I'll hand it over to Jeremy for the tougher part.

Okay. (laughter)

We are -- yes, we're on track to -- for our Eastern manufacturing center to open in the first half of 2017. And that will be important for us. We have 13 operations (technical difficulty). We are rolling our seventh operation into the Phoenix facility, and we're going to top out at eight. So, we're missing out on the opportunity with the other five. So that will be an important opening for us next year.

Jeremy, maybe you can cover out the margins?

Yes. Yes, Brandon, so on the Brands margin, clearly Century Fire is going to contribute to the dilution of margins when we look at what Brands did in 2015 -- you know, 17.5%. The Century impacts, once we lap a full year of having that in the fold, we will take the margins down by at least 100 basis points of that 17.5%.

And then that's kind of the new level that we should be looking at, and it will really depend on the ultimate mix of further tuck-under acquisitions, not just at Paul Davis and Cal Closets, but also at Century itself, adding some of those lower-margin acquisitions into the fold together with our franchise operations.

But we've got a bunch of moving parts there. I would say over 100 basis points -- down from 2015, and then it really depends on the -- on how those moving parts contribute over the next couple of years.

Okay. To that point, is the competitive landscape -- or, I guess, putting it another way -- the acquisition opportunity landscape within fire protection -- is that as fragmented as -- I guess the -- let's call it residential property management or some of the Brands businesses? I guess I'm trying to get a sense of the acquisition opportunity.

Are they going to look a lot like the $5 million, $10 million, $20 million ones? Or are there regional providers that look like Century out there that might be opportunities for you?

No, they will be smaller tuck-unders and look more like some of the acquisitions in FirstService Residential. It is a very fragmented market, but the tuck-unders will be small and really add a geographic footprint. The one difference from FirstService Residential is that there are competitive acquirers in the fire protection business. We don't really see that in residential property management.

Got it. Okay. That's it for me, thanks.

Okay, Brandon.

Stephen MacLeod, BMO Capital.

I just wanted to just sort of circle around on the margins as well. Given kind of the deflationary impact from Century Fire and some of the company-owned operations, and this quarter's performance, I guess, does it change your cadence at all towards that consolidated target that you have out for 10% by 2018/2019?

No, that's taken into account. We anticipate 8% to 10% consolidated margins right in that time frame.

Okay. And then on the Century Fire business, if I understood correctly, I think you were saying that margins should be down at least 100 basis points. But I guess is 100 basis points kind of the optimistic view? Like do you think it would be even potentially lower than that once you roll in some of the other tuck-ins that you've done on the FSB side?

Yes. I mean, I'm talking about purely the impact of Century Fire compared to where we finished 2015. And if we do a lot more on the tuck-under side across all of those company-owned operations, could be down more than 100 basis points. But overall, we view this FirstService Brands division as having a margin profile in the mid-teens for the coming years -- the foreseeable future.

Right. Okay. That's great. And then on the Paul Davis strategy, what kind of feedback have you gotten from your customer base going out and buying now, I guess, it's two Paul Davis locations? Are you getting positive feedback from the customer base that will maybe push you above what's your initial target is, in terms of franchises?

I think it's early to get any real meaningful feedback from our customer base, if I understand your question. Do you mean the national commercial accounts and insurance companies?

That's right.

Yes, I think it's early to get any meaningful feedback from them. And not until we put together a more substantive company-owned platform and are able to offer them a credible service offering that is more consistent and seamless than currently offered by franchise organizations, will we get any real feedback, I think, Stephen.

Okay. That's great. Thank you.

Thanks, Stephen.

Stephanie Price, CIBC.

I was wondering if you could talk a bit about your footprint in the residential side of the division? Are there major markets that you still have to move into? And where are you seeing the most growth there?

There are a few areas where we are not -- thinking the Northwest of the US in particular; Seattle, Portland area. Also the Denver, Colorado market -- those are the two significant areas. And we're interested in getting there, but there's certainly nothing imminent. Those aren't -- as markets go, those are not -- certainly not top 10 markets in the US for condo and HOA opportunity. But those would be the next for us.

Okay. Great. And in terms of acquisitions, now that you've done Century Fire, could you talk a bit about your appetite for other platform acquisitions? And what else could you see sitting in the platform?

We're open-minded, but we do have a great deal of opportunity and activity with the strategies that we have in place today, and that is FirstService Residential, our company-owned, and Paul Davis and California Closets, and now Century Fire. And that is our focus certainly over the next couple of years. That said, we're open-minded to opportunity.

Great. Thank you very much.

Thanks, Stephanie.

Thank you. And we'll go to our last question. And it comes from Marc Riddick from Sidoti & Company. Please go ahead.

I wanted to touch a little bit on the home improvement market and the strength that you seeing there. And I was wondering if you could share maybe a little more granular detail around the strength of what's driving the Brands? I know there was a mention in the press release on the few of those. But I was wondering if you could sort of touch on that, and then maybe what you're seeing there as far as sustainability throughout the rest of this year in the market?

Okay. You know, I've described in previous calls the real drivers for us in many of our Brands businesses, and that is existing home sales and home prices. And those are metrics we follow. Existing home sales are up [about] 5% year-over-year. Home prices are up about the same.

Those two metrics stimulate home improvement spending. And the indices that we track closely to point to home improvement spending continuing to be strong through 2017, north of 5%. So, those are all good metrics for us. And we are seeing that in our businesses, particularly CertaPro Painters, but also California Closets, Pillar-To-Post home improvement, and Floor Coverings International. Those are the four brands that are really very directly tied to home improvement spending and track closely to those metrics I described.

Okay. Great. And I was wondering on the residential side, if you could spend some time on the current competitive landscape, I suppose, as far as new contract wins and that type of thing, if there's any differences or changes maybe since the beginning of the year?

No, there aren't any differences in terms of the competitive environment. We continue to have success in the way our focus is in the high-rise environment. But we are also seeing success in master-planned communities, lifestyle communities, homeowners associations. And some of our operations are focused very much on the latter.

So it's really been a similar environment, I would say, for the last couple of years, Marc. New development does remain strong. I mentioned that in my prepared comments. We've got a strong pipeline, so that will continue to be a driver for us, certainly, for the next couple of years also.

Okay. And generally speaking, as far as going forward, even though -- and I know, certainly, the acquisition with Fire is fairly large, but is it reasonable to sort of generally target, I guess, sort of that 3% to 5% type of acquisition growth going forward on top of sort of where we are currently?

Yes. Yes, that represents our regular cadence in our tuck-under programs, I would say.

Okay. Okay, excellent. Thank you very much.

Thanks, Marc.

Thank you. This was our last question in the queue.

Can you repeat that, please?

The question was our last question in the queue.

Thank you. Thank you, operator. And thank you, ladies and gentlemen, for joining us. We look forward to the third quarter call end of October.

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