FirstService Corporation
Q1 2016 Earnings Call Transcript

Published: 27 Jul 2016

[Operator:]

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-S as filed with the U.S. 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.

[Scott Patterson:]

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 and 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 that 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 their stated long-term terms. The diversity of our service lines and 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. Also balanced 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 again this quarter, north of the border in the Toronto and Vancouver markets. New development accounted for both 25% of the organic growth. During the quarter we announced the FirstService Residential into the bathroom market, with the acquisition of the Niles Company – one of the longest standing and most respected property management company in the market. This is a strategically important addition for us. Austin was one of the very few major markets where we did not have a significant presence. And the acquisition is timely, bathroom 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 Home Post 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 to have 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 was very productive. In terms of performance, we generated strong results that were spot-on with our expectation and in-line with management forecast 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 North Water franchise and at California Closets with the acquisition of the important Washington DC market. In Florida, we partnered with Marguerite and Michael Mumford will continue to leave the day-to-day operations and help us build out the Southeast region of our company and onto Paul Davis operation. As a reminder, our strategy is the buying 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 streamline service operating in national accounts. The North Florida 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 Closet 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 rapidly over the next several years. With that, I'll hand out to Jeremy to walk you through the financials.

[Jeremy Rakusin:]

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

[Operator:]

Thank you. [Operator instructions]. Our first one comes from Anthony Zicha from Scotia Capital. Please go ahead.

[Anthony Zicha:]

Hi. Good morning, gentlemen. Scott, what are your growth expectations for Century Fire and what kind of margin performance could we be looking forward to?

[Scott Patterson:]

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 acquisitions 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 operations with tuck-under. 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 and the 8% to 10% range.

[Anthony Zicha:]

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

[Scott Patterson:]

I think our expectation is that we will continue at mid to high single digit, which has been our direction overall. It will be slightly different between the two divisions. But FirstService Residential new development remain strong. We continue to win new contracts both through new development and through competitive wins. I think our growth at FirstService Residential will be closer to mid-single digit than high and then perhaps at Brands with the continuing strength that we're seeing in the home improvement market, perhaps our growth rate will be closer to high single digit than mid.

[Anthony Zicha:]

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

[Scott Patterson:]

Thanks.

[Operator:]

Thank you. And our next question is from Samir Ghafir from Raymond James. Please go ahead.

[Samir Ghafir:]

Hi, good morning. 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?

[Scott Patterson:]

Sure, Samir. It's Scott. 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 extending 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 have 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 the certain of them and we're hopeful that we will add to our company-owned platforms before the end of the year. And then 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.

[Samir Ghafir:]

Okay, great. 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?

[Scott Patterson:]

I don't think so. 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.

[Samir Ghafir:]

Okay, great. That's all I have this morning. Thanks.

[Jeremy Rakusin:]

Thanks, Samir.

[Operator:]

Thank you, Samir. And our next question comes from Brandon Dobell from William Blair. Please go ahead.

[Brandon Dobell:]

Thanks. Good morning, guys.

[Scott Patterson:]

Hi, Greg. Good morning.

[Brandon Dobell:]

Couple of questions. First, within brands, organic growth was a little bit slower this quarter than we've seen on 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 chain full of quarters, should it look more like this, or more like what we saw back in 2015?

[Scott Patterson:]

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 effectively pulled some work from Q2. In the Q1, due to the favorable weather, but as you pointed out, we had strong growth, really throughout 2015. I think looking forward; we were comfortable with that 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 the activity levels are very robust right now, but we do have some tougher cops to run up against in the third and fourth quarter because of the strength we saw last year.

[Brandon Dobell:]

Okay. You guys still on track for the second production facility in California closets? I guess kind of an add on to that, how do we think about the cadence of margins looking out the next handful of quarters up to this quarter? Year-on-year, EBITDA margins are down. Should we expect that to continue for a couple more quarters and there are six quarters, or trying to get a sense of when you start to benefit from some of these efficiencies that you're building in and when the investments and company on stores start to turn into higher margins?

[Scott Patterson:]

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

[Brandon Dobell:]

Okay.

[Scott Patterson:]

For the tougher part. We're on track for our eastern manufacturing center to open in the first half of 2017 and that will be important for us. We have 13 operations right now. We are rolling our 7th operation into the Phoenix facility and we're going to top over that at eight. So we're missing out on the opportunity with the other five. That will be an important opening for us next year. Jeremy, maybe you can cover up the margins?

[Jeremy Rakusin:]

Yes, Brandon. On the Brands margin for the Century Fire, it's going to contribute to the dilution of margins when we look at what Brand did in 2015, you're 17.5%. The Century impact once we lack a full year having that in the fold 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 acquisition, not just at Paul Davis [ph] but also Century itself, adding some of those lower margin acquisitions into the fall together with our franchise operations. We've got a bunch of moving parts there. I would say over 100 basis points, down from 2015 and then this really depends on how those moving parts contribute over the next couple of years.

[Brandon Dobell:]

Okay. To that point, is the competitive landscape – or I guess put another way, the acquisition opportunity landscape within fire protection, is that as fragmented as I guess – let's call your residential property management or some of the brands and businesses? I guess I'm trying to get a sense of the acquisition opportunities, they're 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?

[Scott Patterson:]

They will be slower tuck-unders and look more like some of the acquisitions for service residential. It is a very fragmented market, but the tuck-unders will be small and really add to the geographic footprint. 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.

[Brandon Dobell:]

Got it. Okay, that's it for me. Thanks.

[Jeremy Rakusin:]

Okay, thanks.

[Operator:]

Thank you and we have three more questions in the queue. Our next one from Stephen McLeod from BMO Capitals. Please go ahead.

[Stephen McLeod:]

Thank you. Good morning.

[Scott Patterson:]

Good morning, Steve.

[Stephen McLeod:]

Good morning. I just wanted to just circle around on the margins as well. Given the deflationary impacts 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?

[Jeremy Rakusin:]

No. That is taken into account. We anticipate any 10% consolidated margins right in that time frame.

[Stephen McLeod:]

Okay. And then on the Century Fire business, if I understood correctly, I think you were saying that margin should be down at least 100 basis points, but I guess is 100 basis points kind of the optimistic view? 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?

[Scott Patterson:]

Yes. I'm talking about, it's really 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 to be done more than 100 basis points. But overall, we do this for service brands division as having a margin profile in the [indiscernible 27

[Stephen McLeod:]

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 two Paul Davis locations? Are you getting positive feedback from your customer base that will maybe push you above what your initial target is in terms of franchises?

[Scott Patterson:]

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

[Stephen McLeod:]

That's right.

[Scott Patterson:]

Yes. I think it's early to get any meaningful feedback. Not until we put together a more sub-standard company, more platform and are able to offer them a credible service offering that is more consistent to see than currently offered by franchise organizations where we'll get any real feedback, I think, Stephen.

[Stephen McLeod:]

Okay, that's great. Thank you.

[Scott Patterson:]

Thanks, Steve.

[Operator:]

Thank you, Steve. Our next question comes from Stephanie Price from CIBC. Please go ahead, Stephanie.

[Stephanie Price:]

Good morning.

[Scott Patterson:]

Hi, Stephanie.

[Stephanie Price:]

I was wondering if you could talk a bit about your footprints 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?

[Scott Patterson:]

There are a few areas where we are not thinking of Northwest and the U.S. in particular, Portland area. Also the Denver Colorado market, those are the two significant areas and we're entrusted in getting there, but there was certainly nothing imminent about that. As markets go, those are certainly not top 10 markets in the U.S. for condo and HOA opportunity, but those will be the next for us.

[Stephanie Price:]

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

[Scott Patterson:]

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

[Stephanie Price:]

Great. Thank you very much.

[Jeremy Rakusin:]

Thanks, Steph.

[Operator:]

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

[Mark Riddick:]

Hi. Good morning, everyone.

[Scott Patterson:]

Hi, Mark.

[Jeremy Rakusin:]

Hi, Mark.

[Mark Riddick:]

I wanted to touch a little bit on the home improvement market and the strength that you're seeing there. 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 mentioned 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?

[Scott Patterson:]

Okay. I've described in previous calls, the real drivers for us in many of our brand businesses and that is existing home sales and home prices. Those are metrics we follow-up. Existing home sales are up both 5% year-over-year. Home prices are up about the same. Those two metrics stimulate home improvement spending and the industries that we track closely to point to home improvement spending and continuing to be strong through 2017, at north of 5%. 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 metric side of the stride.

[Mark Riddick:]

Okay, great. I was wondering on the residential side, if you can 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?

[Scott Patterson:]

No, there aren't any differences in terms of the competitive environment. We continue to add success in way. Our focus is high-rise environment, but we are also seeing success in master planning communities, lifestyle communities, homeowners associations and some of our operations are focused very much on the latter. It's really been similar environment, I would say, for the last couple of years, Mark. 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.

[Mark Riddick:]

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

[Scott Patterson:]

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

[Mark Riddick:]

Okay, excellent. Thank you very much.

[Scott Patterson:]

Thank you.

[Jeremy Rakusin:]

Thanks, Mark.

[Operator:]

Thank you and this is our last question in the queue.

[Scott Patterson:]

Can you repeat that please?

[Operator:]

That question is our last question in the queue.

[Scott Patterson:]

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

[Operator:]

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