FirstService Corp (FSV) 2017 Q1 法說會逐字稿

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 for 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 reform -- report on Form 40-F, as filed with the U.S. Securities and Exchange Commission. As a reminder, today's call is being recorded. Today is Wednesday, April 26, 2017.

I would like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir.

Thank you, operator. Welcome, ladies and gentlemen, to our first quarter conference call. Thank you for joining us today. This morning, we announced very strong results for the March quarter, driven largely by acquisition activity over the last 15 months, but also supported by solid organic growth. I'll spend the next few minutes walking you through some of our highlights for the quarter, including some color around our acquisition activity and organic growth drivers, and then Jeremy Rakusin, our CFO, will follow with a financial review and a look forward.

Revenues for the quarter were up 22% over the prior year with organic growth at about 6% and the balance from more than 10 acquisitions made since the beginning of 2016. The Century acquisition accounted for about half of the total revenue lift from acquisitions for the quarter. Our consolidated EBITDA margin for the seasonally weaker quarter was 5.5%, up 140 basis points over last year, reflecting the impact of nonseasonal acquisitions and the continuing margin improvement at FirstService Residential. Jeremy will expand on this in his prepared comments. And finally, our earnings per share for the quarter more than doubled from the prior year to $0.17.

At FirstService Residential, our revenues grew by 6% with organic growth at almost 5%, driven by strong momentum in our major urban high-rise markets, particularly New York City, Southern California, Dallas and Toronto. Again, this quarter, ancillary service revenue grew at a modestly higher rate than management fees, reflecting some success in penetrating our existing management accounts with incremental services. As a reminder, in ancillary services, we include transaction services, such as insurance as well as property services, such as janitorial, front-desk concierge, pool maintenance and other similar services that often require full-time sited staff. Organic growth for the quarter in this division of 5% is consistent with the level we reported the last 2 quarters and in line with the mid-to low single-digit rate that we expect to see in this business for the balance of the year.

Turning now to FirstService Brands, where we posted a very strong quarter, with revenue up 91% over the prior year. Much of the growth was driven by acquisitions, but we also generated strong organic growth of 10% over a very robust Q1 of 2016 when we reported 13% organic growth. We're quite pleased with the momentum we have in our Brands division right now.

Organic growth was driven by strong double-digit growth at Paul Davis Restoration and California Closets, and in both cases, the results were similarly strong for the company-owned operations and the franchise system. We also experienced solid growth at Pillar To Post Home Inspection and Floor Coverings International, which benefited from ongoing strength in the housing market. Existing home sales and home prices were up significantly in the quarter relative to the prior year. And remodeling and home repair spending in the U.S. was also up over 7% nationally for Q1.

During the quarter and into April, we made considerable progress with our company-owned operations at Paul Davis Restoration and California Closets. At the beginning of the quarter, we closed the acquisition of Paul Davis National, our large-scale disaster recovery business. I previously discussed this acquisition on our year-end conference call, pointing out how important this is for our long-term strategy and that it gives us the capability to mobilize around large natural disasters anywhere in North America. This large loss capability is very important, in terms of positioning ourselves with national customers.

Just after quarter-end, we announced the acquisition of Paul Davis Omaha, which establishes a Midwest region for us and brings to 5 the number of operations we own. As a reminder, our goal is to own the major markets and create a consistent, transparent national service offering, specifically targeted at national insurance companies and commercial accounts. We established this strategy less than 2 years ago, and we're very pleased with the progress we've made and the momentum we have.

At California Closets, we announced the acquisition of our Orange County California franchise during the quarter. The Orange County operation is one of the largest within the California Closets system. It is an important addition to our company-owned platform due to its size and influence in the system, but also to the impact it will have on capacity utilization at our Phoenix manufacturing center. This deal brings the number of company-owned operations to 14 and closer to our goal of owning 20 to 25 of the major markets and 50% of the system-wide sales over the next 4 or 5 years.

Another recent highlight for us at California Closets is the opening last week of our Eastern manufacturing center in Grand Rapids, Michigan. We're right on schedule with this facility, which, together with Phoenix, will give us the capability to serve all of our company-owned operations. We're in the process of transitioning production for our Chicago and Washington locations, and once complete, we'll move on to the rest of our Eastern and Midwest operations.

Before Jeremy steps in, I want to say that we're very pleased with the way we started the year, both operationally and in terms of our acquisition activity. And we believe we are well on track to achieve our goals for 2017.

Jeremy?

Thank you, Scott, and good morning, everyone. As highlighted in our press release this morning and as you just heard from Scott, we reported exceptionally strong quarterly results, with both of our operating divisions delivering significant earnings growth. I will summarize our overall consolidated and segmented financial results for the quarter, our cash flow and balance sheet position, and finally, wrap up with our capital investment profile and outlook for the balance of the year.

First, let me recap our consolidated financial results for the first quarter. FirstService reported revenues of $376 million, up 22% over the $308 million in Q1 2016. Adjusted EBITDA was $20.7 million, a 63% increase over the prior year's $12.7 million, and yielding a 5.5% margin for the quarter, up 140 basis points year-over-year. And our adjusted EPS was $0.17, more than double the $0.08 per share reported for the same period last year.

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

Focusing on our divisional highlights for the quarter, I will start with FirstService Residential, where we generated revenues of $266 million, up 6% over last year's first quarter. The business delivered $14.4 million of EBITDA, a strong 23% increase, and driven by significant margin expansion to 5.4%, up by 70 basis points over last year's 4.7% margin. Our FirstService Residential platform continues to make operational improvements, extract cost efficiencies and drive operating leverage in delivering superior profitability performance.

Turning now to FirstService Brands. We recorded revenues of $110 million, up 91% over last year's first quarter. This outsized growth was primarily driven by significant contribution from acquisitions completed within the last 12 months, including the Century and Advanced deals within Fire Protection and 5 Paul Davis and California Closets company-owned acquisitions.

EBITDA for the division increased almost threefold to $8.9 million, up from $3.2 million in the prior year quarter. FirstService Brands margin expanded to 8.1%, significantly higher than the 5.5% margin in Q1 2016. This margin improvement was attributable to 2 factors. First, strong top line growth at our Paul Davis and smaller franchise system platforms yielded good operating leverage at the earnings level. Second, the contribution of Century Fire for the current quarter altered the margin mix and averaged up the division margins compared to Q1 2016, which had a more seasonal profile during our period of lowest activity levels.

The aggregate profitability growth across our Residential and Brands divisions converted into strong consolidated operating cash flow. Cash flow from operations before working capital changes was $16 million for the first quarter, almost double the $8.3 million in the first quarter of 2016. Inclusive of working capital changes, operating cash flow was up more than fourfold to $7.6 million.

Our cash flow also helped maintain a strong balance sheet position at quarter-end. Our net debt was $240 million at the end of Q1 with a 1.7x leverage ratio measured as net debt to trailing 12 months EBITDA. These levels compare to $208 million of net debt and 1.5x leverage at 2016 year-end. This modest uptick in our debt level is attributable to higher levels of both seasonal working capital and growth capital investments relative to cash flow in Q1.

In terms of our capital investment activity, during the first quarter, we deployed $20 million in aggregate towards capital expenditures and acquisitions, roughly split 50-50. Looking forward, our full year CapEx in support of existing operations should be in the mid- to high $30 million range, as noted in our prior year-end earnings call.

With respect to tuck-under acquisitions, we expect continued activity for the balance of the year across our service line verticals. Our deal prospect pipeline remains strong. We have significant balance sheet capacity, and we have all the necessary resources committed to further advancing our growth initiatives.

In summary, our strong Q1 performance and key business indicators reinforce our previously stated 2017 full year outlook of low double-digit revenue growth and an EBITDA margin in excess of 9% on a consolidated basis.

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

(Operator Instructions) So we have a couple questions lined up here. The first question is from Stephen MacLeod from BMO Capital Markets.

I just wanted to circle in around on the FSB margins. And Jeremy, you cited some seasonality, I guess. Was that the real driver of the strength? I mean, can we assume that, excluding Century Fire not being as seasonally weak in Q1, the margin profile was relatively stable for the balance of the business?

Century Fire was a big contributor as well as the other acquisitions that we brought in, primarily the Paul Davis acquisition, would have upped the margins as well, and strong performance within Paul Davis and a couple of the other franchise systems. So that, in aggregate, Century, the biggest component, but others also driving the margin improvement quarter-over-quarter.

Okay. That's great. Can you just talk a little bit about how you expect the balance of margins -- balance of the year margins for the FSB business? I mean, at Q4, you had sort of talked about, on a full year basis, margins being somewhat comparable to 2016. Is that still the case? Or does that change the outlook based on the Q1 strength?

Yes. No, I've said previously, Stephen, on a full year basis, mid-teens margin for FirstService Brands, last year we finished a snick over 15%. We'll be either in or around there. We may be a little bit lower, a little bit higher. But I would say long term mid-teens. I would not read across the margin improvement quarter-over-quarter as being a driver.

Yes. Okay.

And then just one other point. As we bring in more company-owned, that could trend the margins down. But as I've previously said, we will do that if we're buying good acquisitions and adding good revenue and cash flow.

Yes. Okay. That's great. And then, I guess, on the FSR business, home renovation spending in the U.S. was a driver on the Pillar to Post side and Floor Coverings International side. What are you seeing in terms of the outlook for the home renovation spend environment through 2017?

It's expected to remain strong, Stephen, certainly all our indicators show that, external indices as well as all our internal metrics, in terms of lead activity and that sort of thing. So our expectation is strength through the balance of this year.

The following question is from Brandon Dobell from William Blair & Co.

Maybe, first, just as you think about organic growth within residential, in the quarter to start with, how much of that is just optics on what feels like a relatively easy comparison, just given strategies you guys employed to get out of some of the [contracts] but also just weakness in some of the markets versus, let's call it, kind of real organic strength? Maybe try and put some (inaudible) around the 2 reasons for the 5% organic growth rate?

Yes. Our Q1 comp in 2016 wasn't necessarily an easy comp. I think that our discipline around renewals and pricing probably was a little bit more firm later in 2016. So I don't see the comp as being particularly relevant, but the mid to low organic growth rate that we've seen the last 3 quarters feels like a range that is sustainable for the foreseeable future. And our expectation is that, it will be in and around the same range, perhaps a little incrementally higher, perhaps a little incrementally lower, certainly through the end of this year. And we will keep you apprised if we see a change.

(inaudible) which still remained relatively strong, but just a little (inaudible)

You're breaking up a little bit, Brandon. But I think your question was around new development. At least, I'll answer that. And then if it wasn't the question...

Right.

Okay. No, new development remains fairly robust, particularly in New York City, Toronto. Many of our strong high-rise environments, Dallas. We see signs of slowing certainly in South Florida and starting to slow in Toronto. But over the next few years, we expect it to remain probably 30% of our organic growth or thereabouts.

Okay. And maybe dovetailing on that. In some of the major or more important markets, maybe if you could compare the potential tuck-in acquisition landscape to either new markets or markets where you don't have a lot of scale yet? How do they feel, either evaluation-wise or opportunity set-wise?

I think the opportunities are perhaps more prevalent in areas where we're weaker or not. In some of our major markets, our market share is -- and ability to win versus our competitors, our differentiators reduce the attractiveness for us of making tuck-unders, because we believe we'll just win the business in -- particularly the urban high-rise market, some of the ones I mentioned.

Yes. Okay. And then shifting over to Brands for a second. You talked about strength in Paul Davis recognizing that acquisitions had an impact here. But just on the organic side of Paul Davis, is there anything notable about maybe a strategic change, a go-to-market change, new product services, et cetera, that's driving organic? Or is the organic just being driven by you guys having a little more control the past year or two over the total network and therefore able to work on some easy comparisons after acquiring -- the last couple of years, acquiring operations from operators who didn't want to grow those businesses?

Yes. A couple of things. The system, in general, had a strong quarter. And in part, it just reflects the environment and the activity, the number of wind storms and areas of flooding, which drove up claims. We certainly participated in that. We have made a big push to enhance our offering in the commercial space and broadening our positioning beyond primarily residential, and we are starting to see the impact of that. And then with our company-owned, we had a strong quarter. And I think in part reflects our impact on the businesses in terms of recruiting, increasing our capacity and increasing our ability to take on more work, and we saw that in the first quarter, particularly with the mid-Atlantic region which we've owned now for about 15 months.

Okay. That makes sense. And then final one maybe for Jeremy, as we think about some of the noncash items, like G&A, stock-based comp, how do we think about the rest of the year, relative to the first quarter results from those items?

So Brandon, on depreciation in the order of $25 million; amortization of intangibles around mid-teens, kind of $15 million, possibly a snick lower; and stock-based comp in the order of $4 million for the year.

The following question is from Frederic Bastien from Raymond James.

Your pace of acquisition has been accelerating of late. Is this a new norm and something that we should be expecting on a go-forward basis?

Well, there's really a few things that are driving that, Frederic. The addition of Century, which led to the Advanced tuck-under in November and then really sort of getting our stride under us as it relates to our company-owned platforms, Paul Davis, in particular, which, as I mentioned in my prepared comments, is a new-ish strategy for us. And we've made 5 acquisitions in a relatively short period of time. That -- the pace of activity at Cal Closets and Paul Davis will slow, not perhaps -- not necessarily this year, but certainly over the next few years, so I would not say that it is a new norm.

Okay. And then just building on that, your M&A focus, obviously, is it still on this company-owned strategy and also building up the Century Fire business? Or are you also actively looking at new potential franchises?

On the Brand side, our focus is on the company-owned and Century. We are open-minded always to new systems that fit and that are complimentary and resemble the other markets and essential property service. Very large market where we would have a leadership position. Always open-minded, but certainly nothing in the works today, I would say, in that regard. And then the other focus is obviously FirstService Residential and continuing that pace of activity.

Okay. And is it fair to say that when you -- if you're opportunistic on new potential franchises, obviously price would be a hot topic. I would assume that networks out there that might be available would be expensive?

Likely, yes.

The following question is from Michael Smith from RBC Capital Markets.

Just wondering if you could (inaudible) us just a little more color on the -- for the residential business, the ancillary revenue strategy there? You've obviously had a pickup in margin in Q1. It sort of sounds like there's a concerted effort to sell more of the higher-margin services, particularly to the high-rise.

Yes, Michael, the pickup in margin was not really attributable to increasing ancillary service revenue. That would not have materially impacted it. The margin increase is really the -- Jeremy touched on it, the ongoing efficiencies as we build out the operating platform.

There is not an increasing push relating to our ancillary services. We always look to provide a full service offering where we are capable. And in those cases where we win the management contract only, then we're building that relationship with the customer and looking for opportunities to bring more value to that customer whether that be an insurance product where we are providing more coverage at a lower cost or if we are very confident in a property service -- a property ancillary service, such as pool maintenance or janitorial, and if we believe we can bring value to the customer, again, in the form of a lower cost or a better service, then we will offer that, always fully disclosing all of our related services to the customer.

So it's not an increase in -- and generally, we would look for ancillary service revenue to grow in lockstep with management fees. It's been a little higher over the last few quarters. And I think it reflects, in part, the fact that our management fee growth has moderated to the mid- to low single-digit level over the last few quarters.

Okay. That was helpful. But where are you -- where would you say you are in driving operation efficiencies? Are you just getting started or near the end?

I'd say we're towards the end. We're through many of our comprehensive systems, and we're down to client accounting, in particular, which will be another 18 months anyway. But we continue to make progress in terms of realizing on the efficiencies from the implementations of these systems. So to specifically answer your question, I'm going to say we're 2/3 or 3/4 of the way through.

Okay. Good. And just switching gears, you must be seeing some labor inflation. Just wondering, in the residential business, what percentage or what's the split between cost-plus contracts and fixed-price contracts?

It's really more of a regional thing. In Florida, we are primarily cost-plus, and that would be about 30% to 35% of our business. We have some cost-plus in other regions, but it's primarily Florida. We're definitely seeing wage inflation I think more so this quarter than we've seen, and we expect it to continue. We're having reasonable success in passing that through, and we expect that we will. But it is a very tight labor market, and it is our greatest challenge right now, recruiting and retaining strong talent. And that really cuts across all our businesses in all our markets.

Okay. And lastly, is Q2 ahead of plan so far?

I wouldn't say necessarily it's ahead of plan, but I'm not -- Q1 wasn't necessarily ahead of plan, certainly not materially. The seasonal nature of Q1 amplifies the impact of our nonseasonal acquisitions. And we'll see less of that in Q2, Q3. Yes -- no, we think we're well on track this year certainly, Michael.

The following question is from Anthony Zicha from Scotia Capital.

Scott, can you give us a bit of color in terms of what kind of CapEx investment would be required to buy 20 to 25 franchisees over the next 4 years? And do you also give us an idea in terms of your CapEx spending related to, I guess it's California Closets, new plant facilities, like, you're opening up a new facility in the East. Then when could we expect a third one?

Tony, it's Jeremy. I'll take those. So just on investing in the Paul Davis and Cal Closets, so with Paul Davis, we own 5, we're targeting 20 to 25. That's probably going to involve another $60 million, potentially $70 million of capital, rough. And then on California Closets, we own 14, going -- again, targeting 20 to 25. Probably need to spend another $25 million to $30 million of capital. So that's on the acquisitions of the company-owned on those 2 systems.

And then in terms of the buildout of the California Closets facility, we're only -- we just opened our second facility, and we're done. There's no third facility to come. There's a Western facility that was paid for and done about 18 months ago or more. We just opened the Eastern manufacturing facility that Scott alluded to in his comments in Grand Rapids, Michigan. We incurred a couple of million dollars of spending in Q1, and we have roughly another $1.5 million to go. It's about $3.5 million of CapEx to set up all the lines on that plant.

Okay. And what kind of payback you're looking at in terms of that plant?

Well, we don't -- it's not a payback. What it is, it is an ability for us to, once we get good capacity utilization at both the western and eastern facilities, to get significant margin expansion from centralized manufacturing. So taking company-owned operations that are typically yielding 8% to 10% EBITDA margins and taking them up by 300 to 500 basis points once we have the full 20 to 25 up and running and those facilities well used on capacity utilization. We're targeting over $200 million in revenue of company-owned. So you take 300 to 500 basis points of margin expansion on that $200 million, and that kind of gives you the return on what's a pretty modest CapEx expenditure for the facility.

Yes, it's huge. Okay. And one more question. With reference to Century Fire, have we really capitalized on cross-selling opportunities? Or is that to come?

That's to come. That's a long-term incremental opportunity, Anthony, that we've started on. We've seen some level of activity, but that's to come largely.

The following question is from Marc Riddick from Sidoti & Co.

So a lot of my questions have been covered, fortunately. So I guess the one thing I would be left with is the -- I wanted to touch on -- you had made a commentary about some of the windstorms and the weather disruptions that kind of created some opportunities there. So I was wondering if you could shed a little more light on that, whether there was a particular regional focus on that, that happened to be a benefit? I mean, was this a West Coast kind of -- the weather they've had around California, something like that? Or was it sort of across the board fairly equal?

I would say primarily East Coast, Marc, including Canada, where there was some windstorms in the east and in Ontario. And then continuing to do significant work around Hurricane Matthew. Some of these large-scale storms created activity for 4 to 6 quarters post-event, so that continues as well.

Okay. I appreciate that. And I wanted to know if there was some initial thoughts with the Paul Davis Restoration transaction, with having that under the belt for not that long, but I was wondering if there was some further thoughts and feedback around that particular opportunity? And if there are some things that you've kind of discovered newly since that took place?

I think we've really refined our strategy since embarking down this path a couple of years ago. At the end of '15, we named Ken Robinson as the President of the owned operations. Ken is formerly the President of Paul Davis, Canada. Ken is, this year, focusing on filling out his management team, and he's made real strides there. And also focusing on implementing a centralized shared services infrastructure, starting with HR, but also sales, marketing and also the systems -- accounting systems and that sort of thing, and he's making strides in that area as well.

So we've got lots of work ahead of us. I don't think that there's anything new or any changes to the strategy. It's really remained the same, and that is to position ourselves with national accounts. We think we are in a position to do that relative to other franchise organizations. And we're quite confident in our direction in this area.

And I guess maybe the final question I would have is around just the current views around the home improvement market, certainly coming into the year, it felt -- it seemed as though it felt pretty positively there. And certainly the feedback that we've gotten from others in the space seemed to continue to show that the home improvement market looks pretty strong going forward. I wanted to get your thoughts as to, maybe compared to where you're originally budgeting or thinking, if it's incrementally better, about the same or even worse, I guess?

I think a little stronger than we expected. Q1 was up over last half of '16. And I think our expectation, certainly, our hope is that it continues through the summer and into the fourth quarter. Our external indices that we follow point to that, and they do speak to a slowdown starting early '18. So we'll see.

The following question is from Stephanie Price from CIBC.

FirstService acquired both Paul Davis and California Closets locations in the quarter. Can you talk a bit about capital allocation? And how you decide which franchises to acquire as company-owned stores?

We have, in both of those strategies, we have prioritized a list of the markets that we ultimately want to own. And we have a first right of refusal on these businesses. So if you look at it at one way, we will own them at some point, but it depends on the interests of the franchisee and their goals and agenda and the plans that they have for the business. So as they come up on our list, we deal with them. We have lots of capital to affect both of these strategies. So I wouldn't say it's a capital allocation decision as much as a [tacky] opportunity when it presents itself.

That's helpful. In terms of Century Fire, you've now owned it for about a year. Can you talk a bit about how it performed relative to your expectations and some thoughts on future growth from here?

It -- we owned it -- April 1 is the anniversary date, so it's 12 months this month. And it has performed better than our sort of year 1 forecast. Both top line and bottom line performed better modestly. So we're very pleased with where we're at with Century. We also had a strong quarter from Advanced Fire in Florida, our tuck-under business. But both of those businesses are taking advantage of the strong real estate development market, and the results reflect that. And when that market turns, their organic growth will certainly be tempered. And so we're very cognizant of that, and we're focused on continuing to drive our service revenue in both of those businesses, the recurring inspection-related, compliance-related service business.

And can you give us a bit of a breakdown of how much is recurring versus kind of that one-time new development market right now?

About half-and-half.

(Operator Instructions) There are no other questions at this point in time, sir.

Thank you, Oliver, and thank you, everyone, for joining us today. We look forward to chatting again end of July.

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