FirstService Corporation
Q4 2020 Earnings Call Transcript

Published: 9 Feb 2021

[Operator:]

Welcome to the Fourth Quarter and Year End Investors Conference Call. Today's call is being recorded. Legal counsel requires us to advise that the discussions scheduled to take place today may contain forward-looking statements that involve known and unknown risks and uncertainties. The actual results may be materially different from any future results, performances or achievements contemplated in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in 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 U.S. Securities and Exchange Commission. As a reminder, today's call is being recorded. Today is February 09, 2021.

[Scott Patterson:]

Thank you, Jason. Good morning everyone. Welcome to our fourth quarter and year end conference call. Thank you for joining. Jeremy Rakusin, our CFO is on the line with me today and together we will walk you through the very strong quarterly results we released this morning, which again reflect the resiliency of our business model, the strength of our market leading brands and the dedication of our teams. I will start with a high level review of the numbers and some highlights for the quarter. And then Jeremy will go through the quarterly financials and summarize the full year results. Total revenues for the quarter were up 15% over the prior year with the organic revenue growth at an impressive 11%. We consider ourselves an organic growth company first and are very proud to finish a crazy year like 2020 with organic growth in the double-digits. Balance of our growth for the quarter came from tuck-under acquisitions, primarily in our commercial restoration platform, but also under Century Fire. EBITDA was up 25% year-over-year and reflects 80 basis points of margin improvement driven primarily by higher margins at FirstService Residential, but supported by a positive uptick at FirstService Brands also. Jeremy will break it down for you in a few minutes. And finally earnings per share were up 55% to $1.02. At FirstService Residential revenues were up a solid 4% versus the prior year all organic. Reflecting continued positive sequential momentum over the last three quarters, we were 9% in the second quarter, flat in the third quarter and now up 4%. The year-over-year increase was enhanced this quarter by very strong ancillary revenues, including transfer and disclosure income and project management related services. Home sales in our managed communities and the related services we provide were up in excess of 20% compared to the prior year. In addition, we saw increases in the services we provide relating to maintenance, project management and construction, particularly in the Midwest where many of our communities suffered wind and hail damage during the year. The relative sequential improvement from a flat year-over-year comparison in the third quarter to up 4% in the fourth quarter is in part due to seasonality as many of our amenities, which have been impacted by COVID related lockdowns are seasonal and normally shutdown in the fourth quarter reducing the negative year-over-year impact relative to the third quarter.

[Jeremy Rakusin:]

Great. Thank you, Scott, and good morning, everyone. As you've just heard, we closed out 2020 with a strong kick to the finish line in the fourth quarter. Our consolidated results included quarterly revenues of $775 million, adjusted EBITDA at $79.9 million and adjusted EPS of $1.02, up 15%, 25% and 55% respectively versus last year's fourth quarter. Financial results for the full year also showed impressive growth over 2019, particularly given the COVID-19 challenges since last March. More specifically, we reported annual revenues of $2.77 billion, up 15%, including 4% overall organic growth. Our adjusted EBITDA came in at $283.7 million, a 21% increase with a 10.2% margin, up 40 basis points over the 9.8% level in 2019. And the bottom line impact was adjusted EPS of $3.46, up 15%. Our adjustments to operating earnings and GAAP EPS to arrive at our adjusted EBITDA and adjusted EPS results respectively are disclosed in this morning's release and are consistent with approach in prior periods.

[Operator:]

Certainly. Your first question comes from the line of George Doumet from Scotiabank. Your line is open.

[George Doumet:]

Yes. Good morning guys. Congratulations on a very strong quarter. Just to clarify Jeremy's comments on the guidance for Q1, does that – does that exclude all restoration activity or is that inclusive of it?

[Scott Patterson:]

It's inclusive of it, but there's very little spillover from the activity that we saw in Q3 and Q4 in terms of storm and large loss claims work relating to those storms.

[George Doumet:]

Okay. That's helpful. And maybe you guys alluded to kind of the rebranding efforts in restoration and expecting a higher cadence of organic growth X weather related events in the first half. Can you maybe provide us with an update on, on how that's going?

[Scott Patterson:]

Sure. George it's in process. We're in the middle of it. The name was unveiled a couple of weeks ago and the official brand, logo and messaging will be formally launched in March next month. The name, the name will be First OnSite, two words very similar to the brand we operate under in Canada, which is one word FirstOnSite. Sure, as I said, we're in the middle of it. It's a big step. A lot of work bringing together seven brands as one, but it's also very exciting and there is a lot of momentum internally as the teams learn more about the logo and the launch and coming together as one company. So it's in the future you will hear us refer to our platform as FirstOnSite.

[George Doumet:]

Okay. Thanks for that. And maybe looking ahead beyond Q1; can you maybe talk a little bit about margin , like as the anniversary, maybe the higher ancillary piece and as we re-embarking higher – in terms of hiring some folks that we let go. How should we think of the margin expansion for the remainder of the year?

[Scott Patterson:]

George, I wouldn't ascribe too much margin improvement for the year on a consolidated basis. Well, first of all, for Q1, I said margins a little bit higher and I'd skew that towards FirstService Residential, because there is – we're only the partway through the quarter, but continued momentum on some of that higher margin and so revenue. But assuming that normalizes, FirstService Residential and FirstService Brands should see pretty flat margin profiles year-over-year. In a pre-pandemic, we said this was a top line growth story primarily, and each business continues to try and grind out margin improvement in that – that would continue to be the case going forward. In terms of the cost savings we talked about that, a lot of that coming back on as we reopened facilities as we brought some of our labor driven services back in place. A lot of our costs are labor and variable cost driven. And, we do have some savings in other areas like travel, entertainment and so on, but it's less material to the top line. We continue to evaluate our staffing models and if we can continue to optimize costs, we will always look to do that.

[George Doumet:]

Okay. Thanks. And just one last one that for me, in your prepared remarks you've been obviously talking about a full pipeline and also what seems to be a – maybe a historically under-leveraged balance sheet. As COVID restriction to maybe ease into the back half of the year, should we expect accelerated M&A activity?

[Scott Patterson:]

George, we're back into our rhythm on the M&A front. And so I don't really see emerging from the pandemic as changing that honestly. The market is very active right now. Despite the pandemic and the competition is for acquisitions, there's probably never been greater. So – but we're holding our own and as Jeremy said, our pipeline is solid.

[George Doumet:]

Okay. Thanks for answers. Great quarter.

[Scott Patterson:]

Thanks.

[Operator:]

Your next question comes from the line of Stephen MacLeod from BMO Capital Markets. Your line is open.

[Stephen MacLeod:]

Thank you. Good afternoon or sorry good morning guys.

[Scott Patterson:]

Good morning.

[Jeremy Rakusin:]

Good morning.

[Stephen MacLeod:]

I was just wondering if on the FirstService Brands side, if you could just provide some color as you've done in the past couple of quarters about what the dollar and EBITDA impact may have been from the outsized weather related and large loss claim activity.

[Scott Patterson:]

Jeremy, why don't you handle that?

[Jeremy Rakusin:]

Yes. Steve that $60 million of revenue, so when you combine that with the $45 million in Q3, back half of this year storm-related activity, a little over $100 million. Margins pretty in line with similar to Q3 in line with the overall margin profile for Global, which is in the area of 10%. There was some lower margin jobs scattered within there, sprinkled within there, but it's pretty close to the margin profile that we articulate Q3, which again is around 10%.

[Stephen MacLeod:]

Yes. Okay. That's great. Thank you. And then just as you think about the storm activity levels going forward, I mean, obviously nobody has a crystal ball, but when you look back on Q3 activity, does it seem like a potential outlier in terms of the magnitude of activity or is that maybe too hard to pin down at this point?

[Jeremy Rakusin:]

We're not sure.

[Scott Patterson:]

Yes. When we looked at this opportunity and looked at Global and its history; on average between 15% and 20% of annual revenues come from the large storms, the type that we saw this year. And that's what we're going to end – that's where we ended up in 2020. So it was right in line with that long-term average. But you will have years where you have more or less in 2019 was a year where we saw, well less than 10% in storm activity. Jeremy, anything to add to that.

[Jeremy Rakusin:]

No. Echo your sentiments.

[Stephen MacLeod:]

Okay. That's helpful. Thank you. And then just maybe within the FirstService Brands business, did I understand correctly that when you think about home improvement, Century Fire, Global Restoration or maybe now FirstOnSite. You would expect those businesses each to be up sort of low-single digit in the first quarter? Is that right? Or were there some other movements that I didn't quite catch?

[Scott Patterson:]

I think that's, – I think that's fair. The Century Fire and home improvement brands will certainly be low-single digit. We do have a solid pipeline on the restoration side and that would be – that will be single digit and it's just unclear where it'll fall at this point.

[Stephen MacLeod:]

Okay. That's great. And then maybe just finally on the residential business; when you've had some strong resale activity helping the ancillary services, as you think about amenity sort of opening back-up as the vaccinations take hold. Do you see an opportunity for organic growth to accelerate beyond kind of that 3% to 5% range in 2021 or even beyond?

[Jeremy Rakusin:]

That's not clear to us. The amenity management business will come back, but I think we'll also change and the capacity levels at many of these facilities will not immediately get back to where they were pre-COVID and perhaps they never will, and that will impact our staffing levels. So there's some uncertainty around that side of the business, I would say right now and where we finally ended up with it. And in terms of the long-term growth rate, do you know that the low-to-mid the 3% to 5%, whatever it is, is that's where we believe we will be on average.

[Stephen MacLeod:]

Okay. Well, that's great. Thank you very much, and congratulations on a strong quarter.

[Jeremy Rakusin:]

Thanks, Steve.

[Scott Patterson:]

Thank you.

[Operator:]

Your next question comes from the line of Frederic Bastien from Raymond James. Your line is open.

[Frederic Bastien:]

Hey, good morning guys. You've addressed some of those questions already, but obviously your 2020 results were far better than what you and all of us had anticipated at the onset. But it does raise the bar for 2021, 2022. How are you feeling about your ability to tack-on additional organic growth especially on the FirstService Brands side over the next couple of years?

[Scott Patterson:]

I think Frederic, if you normalize for storms; we expect to grow in every business organically. The storm activity will influence quarter-to-quarter; year-to-year as we've discussed in the past, but we expect all our businesses to grow in the future and our long-term goal is mid-single digit on average.

[Frederic Bastien:]

Right. Given how strong the housing market has been in the U.S. I mean, we do expect brands to outpace that type of growth in the short-term?

[Scott Patterson:]

Well, the housing market has helped us on the FirstService Residential side with the transfer and disclosure income, particularly in the third and fourth quarter. And then I think we'll get a little boost in the first quarter. On the home improvement brands, certainly home sales benefit us, but it's offset by this – by the COVID and the reluctance on the part of homeowners to bring crews into their homes. So there's – as we emerge from the pandemic, we would expect to see organic growth with those home improvement brands and we haven't in 2020.

[Frederic Bastien:]

All right. Okay. That's all I have. Thanks guys.

[Scott Patterson:]

Thanks, Fred.

[Operator:]

Your next question comes from the line of Stephen Sheldon from William Blair. Your line is open.

[Stephen Sheldon:]

Hi, thanks. On a comment, I think you talked about adding service capacity in the home improvement businesses. Any commentary on when you began to add those resources and maybe what that reflects in terms of your outlook for those businesses? Or are you may be expecting activity to pick back up later in 2021 and are investing a little bit ahead of it? Just any detail there?

[Scott Patterson:]

Well, we cut back in Q2 significantly, and in retrospect, perhaps we were too severe in our cutbacks, but we just didn't know what was in front of us. And in terms of building back that labor force in getting our capacity back online; designers, installers painters, we run into a labor market that has tightened. And because a lot of companies are looking to do the same in an new home construction in particular is very, very strong right now, which creates competition for painters and frontline staff at Paul Davis and Global and installation talent at . So we are hiring and building back our capacity. We do have solid leads in sales activity, and as we begin to emerge from the pandemic and homes open up, we do expect to see stronger performance with the home improvement brands.

[Stephen Sheldon:]

Got it. That's really helpful. And then congrats on the Fire acquisitions in the quarter, as you continue to complete tuck-in acquisitions in that business, I guess, what types of synergies do you realize? Is there anything similar to what you see on the restoration side, where more scale drives a stronger ability to win national accounts or California closets where you have the ability to shift manufacturing more to company owned operations, where you have incremental capacity. Just any detail on how we should think about the synergy that we continue to scale that business?

[Scott Patterson:]

Yes, I think, it's very similar to Global Restoration and national accounts. These tuck-ins actually worked with us on our national account program. They were valued companies part of our vendor network. And so anytime you can bring that in-house, I think you benefit. But you – having them close to us, we got a great sense for the cultures and the quality of the organizations. So it does help us in terms of selling future national accounts. But I think there's also an opportunity to fill out their service line. One of the priorities at Century Fire from day one is to have a full service capability at each and every branch location. And there is an opportunity for us to build out the service side of these two tuck-ins, Aegis and Cornet.

[Stephen Sheldon:]

Great, thanks for taking my questions and congrats on the results.

[Scott Patterson:]

Thanks, Steve.

[Operator:]

Your next question comes from the line of Matt Logan from RBC Capital Markets. Your line is open.

[Matt Logan:]

Thank you and good morning.

[Scott Patterson:]

Good morning, Matt.

[Jeremy Rakusin:]

Good morning, Matt.

[Matt Logan:]

Scott, when you talked about the storm revenues within Global Restoration being in line with the long-term average about 15% to 20%. Can you confirm that that was on a revenue basis?

[Scott Patterson:]

Yes. Revenue.

[Matt Logan:]

And maybe just for some – some color in terms of how we're thinking about the long-term effect of storm revenue. Would the long-term average margin on those storm revenues be around that 10% mark or would that be higher?

[Scott Patterson:]

Jeremy?

[Jeremy Rakusin:]

Yes, again, Matt, I think our comment on this last quarter it really varies depending on the types of storms, the customers that we're dealing with and the types of jobs. And even within the jobs that we've done, these last two quarters some were higher margin, some were not. Mitigation tends to be higher margin than the bigger week construction work. So it really also depends on the type of damage that's been done. Very hard to describe it, but I would say 10% is a good middle of the fairway type margin to ascribe to whatever we call out on the revenues. And if there's anything unusual that deviates from that we would specifically flag it.

[Matt Logan:]

So that 10% would be in line, let's say, the five-year average for the business?

[Jeremy Rakusin:]

Yes, roughly, yes.

[Matt Logan:]

Okay. And maybe turning to acquisitions, you talked about an M&A pipeline and having just a high degree of activity both for yourselves and for your competition. What business lines are the focus of acquisitions? Are there any that really stand out to you that you'd like to build out more than others?

[Scott Patterson:]

Well, we've certainly been more active in commercial restoration and Century Fire. And I think that part of the reasoning – certainly strategically we have very specific ideas on where we want to grow geographically and what service lines we want to focus on. But those are both markets that are consolidating. And so I think a lot of the families and small business owners are recognizing that. And so there are more opportunities I would say than some of our other lines.

[Matt Logan:]

And in terms of other opportunities to bring in service providers that you're already doing business with that, would that be one of the channels for acquisitions going forward? Are there more opportunities like that?

[Scott Patterson:]

Sure. I mean, that's certainly when we're looking at a particular area geographically, I mean, who do we know who's servicing us today, who do we partner with for sure. That's how we start.

[Matt Logan:]

And the multiples for those acquisitions, can you give us a sense for the general range of what you're seeing for buyer and restoration acquisitions today?

[Scott Patterson:]

They're certainly going up. There's a lot of private equity capital prowling around our markets and that is tending to drive purchase prices up. So if we've averaged in the five range two years ago, that's – that will be higher in 2020 and higher in 2021. And go forward I expect it's hard to say. I can't – I'm not going to give you a number because there's a lot of variability.

[Matt Logan:]

Fair enough. And in terms of the cadence of deploying capital on the balance sheet, would you expect to have leverage in the mid two times range in 2022?

[Jeremy Rakusin:]

It depends on the size of the acquisitions. Those would be pretty a sizeable, Matt, because again when we acquire a business, you get credit for the acquired EBITDA. So going from 1.4 times to mid twos would be – there'd have to a lot of acquisition activity or upsize to move at that significantly over the next 12 to 15 months.

[Matt Logan:]

Any sense for how we should be thinking about that? Would this be in and around two turns? Would that be a better estimate for thinking about leverage?

[Jeremy Rakusin:]

It really depends. If we just deploy and add acquisitions to the tune of kind of 5% revenue growth, I don't see our leverage increasing much from where we are today, maybe it goes to high ones, but it really depends on how many deals we closed and the size of them.

[Matt Logan:]

So certainly if the right deal came along, there could be a larger acquisition. That's more than the 5% of revenue. But otherwise kind of leverage in the steady state kind of 1.5 term range.

[Jeremy Rakusin:]

Yes. It's just the nature of the industries we're playing and they tend to be smaller, more fragmented. So the acquisitions tend to be smaller, but we've got the capacity, as I said – in our comments we've said it before. We'd feel comfortable being a 2 to 2.5 times, but it's just the landscape of acquisitions. We don't really build those more sizable acquisitions into our default thinking.

[Matt Logan:]

Well, I appreciate the commentary. That's all for me. Thank you very much.

[Scott Patterson:]

Thank you.

[Jeremy Rakusin:]

Thanks, Matt.

[Operator:]

Your next question comes from the line of Daryl Young from TD Securities. Your line is open.

[Daryl Young:]

Good morning guys.

[Scott Patterson:]

Good morning, Daryl.

[Jeremy Rakusin:]

Good morning, Daryl.

[Daryl Young:]

Maybe one quick one for me and following up on Stephen Sheldon's question about Century Fire, coming out of a little bit of a different way. I can't help, but see the kind of overlap in the strategy they're winning national accounts and moving banding geographically compared with what you're doing at Global Restoration. Is there an opportunity there to effectively merge those businesses in the future and benefit from sort of a cross-sell of customer base and full service offering?

[Scott Patterson:]

Well, I don't think merge, but certainly collaborate. The national account programs are very similar. The clients are similar. And one of the things in particular in the last year, the virtual selling environment can be a challenge particularly around new relationships, new introductions, and it can be very helpful to get a warm handoff or a warm introduction. So that's where we're focused particularly in the last quarter. So there is collaboration around national accounts with Global and Century.

[Daryl Young:]

Okay, excellent. And then on the restoration side, about a year ago we saw Intact enter into the restoration space. Just wondering if there has been any sort of evolution there in terms of their desire to get bigger in the space, or if you're seeing in the U.S. any insurance direct entry similar to that?

[Scott Patterson:]

We have not seen any other acquisitions of restoration companies by insurance carriers at least I'm certainly not aware of it and not terribly close to this strategy and what's happening at Intact and On Side. I mean, we certainly took note of the acquisition when it happened and it's been pretty quiet since then for us.

[Daryl Young:]

Okay. And you're not seeing sort of any indications of that happening in the U.S. as well?

[Scott Patterson:]

No, no, no. We're not at all.

[Daryl Young:]

Okay, good. That's it for me. Great quarter guys. Thanks.

[Scott Patterson:]

Thanks.

[Operator:]

Your next question comes from the line of Marc Riddick from Sidoti. Your line is open.

[Marc Riddick:]

Hi, good morning.

[Scott Patterson:]

Hi, good morning.

[Jeremy Rakusin:]

Hi, good morning.

[Marc Riddick:]

So a very strong way to finish the year. I did want to sort of touch a little bit – and first of all, I really appreciate all the color that you've already given and the detail there, so it's greatly appreciated. I did want to touch a little bit on maybe sort of bigger picture thoughts around the branding effort and sort of how on the brand side sort of bringing everything under that brand. How you're sort of thinking about the way that might be unveiled to customers as well as educating your own workforce to sort of get that collaboration build that national account opportunity and the warm hand as you described it. And sort of maybe the kind of timeframe that you're thinking about as far as that because generally branding efforts can sometimes take a couple of years to fully get to where you want them to be as far as the benefits of it. So I was wondering if you sort of think about that from a bigger picture standpoint, how you're looking at that?

[Scott Patterson:]

Well, certainly our experience with FirstService Residential, when we rebranded in 2013, we began that effort probably two years in advance and we've been building on it to this day and expect to continue to show it. We expect the same kind of incremental path at FirstOnSite. We've been working on it for 18 months now and well – the formal launch will be March 29. The name has been unveiled, but the work – we – what we do know is that the work is just beginning.

[Marc Riddick:]

Right.

[Scott Patterson:]

And we'll have a kickoff with lots of excitement and communications, so that all our customers and everyone knows what we stand for and who we are. And then we've got to get out and deliver on that brand promise every day. And certainly that's – there's awareness around what we need to do and – but great excitement around it also.

[Marc Riddick:]

Got it. That's certainly understandable. And I guess one other part for me is I wondering you could touch a little bit as far as technology IT spend as far as needs and kind of where you want to go, maybe to get a bit of an update there as to what we may be looking at and some potential target areas as far as improving any data analytics contributions that that might be helpful.

[Scott Patterson:]

Okay. I mean, the technology platform – are you talking about restoration, I'm assuming you are at FirstOnSite?

[Marc Riddick:]

Correct, correct.

[Scott Patterson:]

Yes. Well, it really goes hand in hand with the brand. I mean, we're going to come out and as FirstOnSite, one organization across North America, and we need our platform to behave and deliver on that brand promise. So we have to behave like one company across North America, and we're working hard on implementing that platform today. And again, this it'll take some time, few years but the path is clear and we're on it. In terms of dollars, there's really no CapEx or operating expense that will materially move our numbers if it becomes a steady investment really, which we started last year and we'll continue for the next several.

[Marc Riddick:]

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

[Scott Patterson:]

Thanks.

[Operator:]

There are no further questions. I turn the call back to management for closing remarks.

[Scott Patterson:]

Thank you everybody for joining. Just once again we're very pleased with where we ended up and extremely grateful for our 24,000 for service employees that are bringing it every day. So it's really all related to them and what they've been able to accomplish in the last year. We look forward to connecting at the end of April after Q1. Thank you.

[Operator:]

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