FirstService Corporation (NASDAQ:FSV) Q4 2023 Earnings Call Transcript

FirstService Corporation (NASDAQ:FSV) Q4 2023 Earnings Call Transcript February 6, 2024

FirstService Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the Fourth Quarter 2023 Earnings 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 Administration and in the company’s annual report on the 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 6, 2024. I would like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead.

Scott Patterson: Thank you, Justin and welcome, ladies and gentlemen, to our fourth quarter and year-end conference call. I’m on with Jeremy Rakusin, our CFO. Thank you for joining us today. We’re very pleased with how we finished the year and with our momentum, as we head into 2024. Before I jump into the quarterly results, I want to make a few comments about the year. We closed out 2023 with our revenue up 16% over 2022 and our EBITDA up 18%. Very strong results. Organic growth for the year at 10% accounted for over half of our top-line increase. And importantly, the organic growth was balanced equally across our divisions. Both FirstService Residential and FirstService Brands grew organically by 10%. We’ve had some time now to reflect on these results for the year, and we could not be more proud of our teams for how they performed.

2023 represents the third consecutive year with organic growth at 10%, and that is a reflection on our teams and their ability to consistently gain market share. Now I’ll turn to the fourth quarter. Total revenues were up 6% over the prior year and right in line with our internal expectations. The growth for the quarter related entirely to acquisitions. Organic growth was 0 due to a very strong Q4 last year, driven by significant loss claims activity from hurricanes Ian and Fiona that led to outsized revenues for our restoration brands. EBITDA for the quarter was flat at $103 million and again, right in line with our expectations. Jeremy will jump into the margin and earnings per share detail in his comments. Looking at our divisional results.

FirstService Residential revenues were up 12%, 9% organically. The results are consistent with the previous three quarters this year and reflects solid growth from net new contract wins and again, was broad-based across North America with all of our regions showing gains. Looking forward to the coming year, we expect to show growth at FirstService Residential at the high single-digit level with organic growth starting to ease back during the year into the mid-single-digit range, which is our long-term average in this business. This is the contractual recurring revenue model with only modest swings quarter-to-quarter. Moving on to FirstService Brands. Revenues for the quarter were up 1% compared to the very strong prior year quarter that was up 28% over the same quarter in 2021.

Revenues declined 7% on an organic basis with gains at Century Fire and our home improvement brands more than offset by the headwinds at our restoration brands. Let me go through each segment and I’ll start with restoration, which includes our results for Paul Davis and FirstOnSite. Revenues for the quarter came in lighter than expectation and were down more than 10% against a tough comp in the prior year. We experienced very mild weather patterns across North America during the quarter. And in addition, our remaining Hurricane Ian related backlog did not progress as we expected. We produced only a modest amount of storm-related work about $15 million during the fourth quarter, which historically is our strongest storm-related revenue quarter.

By comparison, we generated $85 million in revenue last year from Hurricanes Ian and Fiona. We’ve seen an uptick in activity in Q1 from the frigid weather that much of North America experienced in mid-January, and we expect a solid quarter, but it will not be at the level we experienced in Q1 last year, off the back of winter storm Elliott and the hurricanes. Our expectation is that Q1 restoration revenues will be down at least 10% from prior year. Moving now to our home improvement brands, including California Closets, CertaPro Painters, Floor Coverings International and Pillar To Post Home Inspection. As a group, these brands were up mid-single digit versus the prior year, with organic growth low-single-digit, very similar results to those we posted in Q3.

We continue to face real headwinds in home improvement and lead activity continues to be sluggish, still off year-over-year. It’s a real tribute to the tenacity of our teams in this segment that we’ve driven growth the last two quarters in this environment. Interest rate levels and record low home sales have negatively impacted consumer demand and we don’t expect this to abate until late in the year or next year. That said, our teams in home improvement are confident that they can continue to grind out modest gains through 2024. I’ll finish my review of the Q4 results with Century Fire, which had another very strong quarter, exceeding our expectations with organic growth near 20%. Similar to previous quarters this year, we are seeing strength across each of installation, service and inspection in our National Accounts division, and almost all our branches are performing and growing.

The Century team has really done a great job this year. Looking forward, we’re expecting continued strong results, but certainly more modest growth off the back of the 20% growth this year. Backlogs are solid, about flat with prior year-end. Based on current bid activity, our expectations for 2024 growth at Century is high-single digit which is more in line with our experience prior to this past year. Before I pass over to Jeremy, I want to spend a few minutes introducing our new platform acquisition, Roofing Corp of America, which we closed in late-December. Roofing Corp is a $400 million revenue business that operates from 16 branches across 11 states. It offers end-to-end roofing services, including new installation, reroofing and repair and maintenance primarily to commercial property owners and managers.

90% of the revenue is commercial and the focus go forward is commercial. It’s a business that has come together over the last five years through acquisition. We spent significant due diligence time on each acquired company and each branch and came away very impressed with the businesses that make up Roofing Corp and with the teams, both corporately and at the branch level. We’re excited about the opportunity in Roofing and excited to be partnering with this group, led by Randy Korach, CEO. We’ve been looking at roofing in general, since late-2020. I’ve mentioned in anonymous call in the past. It shares many of the same characteristics as our other businesses in terms of being an essential property service operating in a huge fragmented market with growth potential, both organically and through tuck-under acquisition.

It’s also highly complementary with restoration and fits well with the broader thesis we have around repair, maintenance and restoration of the built environment and the growth potential in that space. Growth from the continual expansion of the built environment, but also from the increased frequency and volatility of weather. Restoration, roofing, painting, flooring, we will benefit from weather across all these businesses in the coming years. Roofing Corp. finished 2023 with momentum. We have a strong backlog of work and we expect solid organic growth in the mid- to high-single-digit range for 2024. We also expect to be active in terms of building the acquisition pipeline and seeking out tuck-unders. With that, let me pass you over to Jeremy, who will provide a more detailed review of our performance and pull together a consolidated look forward for 2024.

Jeremy?

Jeremy Rakusin: Thank you, Scott. Good morning, everyone. Scott just highlighted, we are pleased with the strong full year 2023 financial results we delivered, even in the face of a more tempered fourth quarter, when we were up against very strong prior year Q4 2022 headwinds. I will parse out these details in my commentary, starting first with a summary of our consolidated performance and following up with a segmented breakdown across our two divisions. During the fourth quarter, we reported consolidated revenues totaling $1.08 billion and adjusted EBITDA of $103.3 million, up 6% and 1%, respectively, with our margin at 9.6% compared to 10.1% in the prior year period. For the full year, consolidated revenues increased 16% to $4.33 billion, underpinned by a strong and broad-based 10% organic growth.

Adjusted EBITDA came in at $415.7 million, up 18% over the prior year and yielding a 9.6% margin, up 20 basis points compared to 9.4% in 2022. From a net earnings perspective in the fourth quarter, adjusted EPS was $1.11, down from $1.22 in last year’s fourth quarter. For the full year, we reported adjusted EPS of $4.66, up 10% over the $4.24 in 2022. Our annual interest costs almost doubled versus the prior year, largely attributable to the higher interest rate environment. Higher rates in 2023 compared to 2022 at a more than $0.30 per share or 7% negative impact on our adjusted EPS growth, which otherwise would have matched our EBITDA annual growth rate in 2023. Note that these comments on our adjusted EBITDA and adjusted EPS results, respectively, reflect adjustments to GAAP operating earnings and GAAP EPS, which are disclosed in this morning’s press release, and are consistent with our approach in prior periods.

Now I’ll provide additional commentary on our division results for both the fourth quarter and full year. At FirstService Residential for the fourth quarter, revenues were $496 million, up 12% versus the prior-year period, and the division reported EBITDA of $43.5 million, up 14% quarter-over-quarter. Our margin for the quarter was 8.8%, modestly higher than the 8.6% level in Q4 2022. For the full year, revenues hit the $2 billion mark increasing by 13% over 2022, including 10% organic growth. We also delivered an 11% increase in annual EBITDA with our full year margin at 9.4% and in line with the 9.5% margin for 2022. The margin is also down the middle of our typical 9% to 10% annual margin band for the FirstService Residential division and a range consistent with what we also see for 2024.

Shifting now to our FirstService Brands division and focusing first on Q4. We recorded revenues of $583 million, a 1% increase. As Scott referenced, our restoration operations had lower revenues versus prior year, due to the mild weather during the current quarter compared to the contribution from significant hurricane events in late-2022. The Brands division saw solid organic revenue growth, excluding this restoration-related headwind. For the fourth quarter, our Brands division EBITDA came in at $61.1 million, down 9% versus the prior year quarter. Our division margin during the quarter was 10.5%, down from 11.7% in Q4 2022. And as expected, matched the margin level for the prior sequential third quarter, which we noted in our Q3 earnings call.

Profitability and margins were lower within our restoration businesses as a result of the reduced weather-driven activity levels and revenues. Margins at our home services brands also moderated in the fourth quarter compared to prior year as increased promotional pricing and marketing initiatives were implemented to preserve our top-line growth. For the full year, revenues were very strong, up 19%, including 11% organic growth. Our annual EBITDA grew 24%, resulting in a 10.4% full year margin, up 50 basis points versus the prior year of 9.9%. We will continue to experience quarterly and even annual shift in our Brands division margins into 2024 and beyond, particularly in light of our restoration operations, which depend on certain levels of baseline weather-driven activity.

The more periodic and larger area-wide storm events can further exacerbate the year-over-year margin profiles within restoration and thereby influence the brand’s margin comparisons. Despite these near-term fluctuations, our focus continues to be on the longer-term secular market opportunity for our restoration, repair and maintenance brand to deliver attractive compounded growth rates. Finally, to close off my commentary on the P&L, we reported lower corporate costs in the fourth quarter, due to the benefit of foreign exchange movements. We also had larger than typical acquisition-related items during the quarter, which negatively impacted GAAP operating earnings and GAAP EPS, which have no effect on our EBITDA and adjusted EPS performance metrics.

Of the $16 million amount in Q4, most related to earn-outs tied to prior tuck-under acquisitions and transaction costs for the larger Roofing Corp of America acquisition that Scott previously described. Now I’ll walk through a summary of our cash flow and capital deployment. For the fourth quarter, we delivered cash flow from operations after working capital totaling $110 million, double the level during the prior year period. For the full year, operating cash flow was $280 million, up significantly over the $106 million in 2022, driven by strong operating earnings growth and conversion of working capital investments in our restoration operations from prior-year hurricane activity levels. We incurred $25 million of capital expenditures during Q4, resulting in full year CapEx of $93 million, which came in lower than our most recently indicated target of $100 million.

In 2024, we expect total capital expenditures to increase in line with the growth of our operation to approximately $115 million. Maintenance CapEx represents the predominant amount of the spending for service vehicle fleet, IT and office leasehold replacement cycles across our brands and will continue to represent roughly 2% of revenues and 20% of EBITDA on a consolidated basis. The fourth quarter also saw significant acquisition spending totaling $434 million, with the bulk of that amount to finance the Roofing Corp transaction. For the year, we deployed almost $550 million towards acquisitions and excluding the Roofing Corp transaction, our tuck-under acquisition program spending totaled close to $150 million, which contributes a mid-single-digit percentage of incremental revenue growth above our organic growth base.

Beyond these growth-driven capital deployment priorities, we also continued our trend of growing our dividends by yesterday approving an 11% dividend increase to $1 per share annually in U.S. dollars, up from the prior $0.90. We have now annually hiked our dividend 10% or higher every year over the past decade. Our 2023 year-end balance sheet continues to be strong even after the larger Roofing Corp investment. We closed out the year with just under $1 billion of net debt, and our leverage sits at a conservative 2.1x net debt to adjusted EBITDA, up only 0.5 turn from the 1.6x level at the end of 2022. After current year-end, this past January, we also bolstered our liquidity by tapping into $125 million of senior unsecured notes, under our noteholder Master Shelf facilities, which have five to seven year maturities with interest coupons in the 5.5% area.

Together with our cash on hand and availability under our bank credit facility, our current liquidity is approximately $400 million, which is ample for us to drive further acquisition growth as we work through our existing deal pipeline. Looking forward, you’ve heard Scott comment on the individual brands top line near-term growth indicators. With all that in mind, we see upcoming first quarter consolidated revenue growth to be approximately 10%. Q1 margins will be lower versus prior year with the residential division margin roughly flat and the Brands division margin down due to our restoration operations, which are comparing against approximately $80 million of hurricane-related revenue in Q1 ’23 that will not repeat in the first quarter of 2024.

For the full year, on a consolidated basis, we expect to deliver top-line growth in the low-teens percentage range with a healthy base of organic growth on the back of continued momentum with our brands, together with approximately $400 million revenue contribution from our Roofing Corp acquisition. With respect to profitability, residential margins will likely perform in line with prior year quarters, while our brands margins should see modest year-over-year improvement during the latter half of the year, when we are no longer comparing against the 2023 hurricane and winter storm events. Piecing it all together, we expect our consolidated EBITDA margin for the full year to be relatively in line to slightly up versus 2023. This now concludes our prepared comments.

Operator, please open up the call to questions, and thank you.

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Q&A Session

Operator: Thank you. [Operator Instructions] And our first question comes from Michael Doumet from Scotiabank. Your line is now open.

Michael Doumet: Hey. Good morning, guys. Nice quarter. Scott, Jeremy, I think the — maybe just to start on the guidance for the year. So the way I understand it for 2024, the guidance doesn’t include any storm-related activity, which all is equal, would suggest lower EBITDA margins for 2024, but you’re calling for flat to slightly higher EBITDA margins. Which again would imply embedded margins are rising somewhere else. Just trying to see if we can break that down a little bit, where the margin expansion is happening, whether it’s Roofing Corp or something else?

Jeremy Rakusin: Yeah. Correct, Michael. I mean just to put a box around it, the top line low-teens. That does not include, as you said, any additional shot in the arm from storms. It also doesn’t include unidentified tuck-under acquisitions. And frankly, we do acquisitions every year. And if we continue with that cadence, you could see our top line and bottom line, frankly, resemble pretty close to the performance we just delivered in ’23 over 2022. But again, we don’t build that into our thinking. I’d say the residential margins relatively flat, so no real pickup there. In the brands, it would be a little bit of mix. We were adding the Roofing Corp transaction, which we come in at low-double-digit margins, and that has a little bit of a positive mix impact.

And add some of the efficiencies that we’re going to start to see in our restoration operations from the implementation of the operating platform. It’s not going to be in a straight line, but that incrementally over the quarters and into frankly, beyond ’24 will be something that we’re working on and should be a small margin enhancer for us as well during the course of 2024.

Michael Doumet: Super helpful. And maybe a bigger picture here. So I do like the thesis around the roofing business. I wonder to what extent there are synergies between the restoration business and the roofing business. And I wonder, again, if you continue to expand the restoration business, whether or not there are other businesses where you might increasingly look to explore synergies.

Scott Patterson: Michael, certainly, roofing is complementary to restoration and — we — as I said in my prepared comments, we’ve been looking at it for a few years now and really became aware of it or more aware of it through — FirstOnSite in our commercial restoration because we’re regularly seeing opportunities in roofing and either subbing it out or walking away from it. So certainly, we became more aware of the opportunity through restoration, but it is a discrete opportunity that we see big opportunity in. There will be some collaboration certainly between the restoration brands and Roofing Corp, but it is a discrete segment and a discrete opportunity for us. Beyond that, I mean, generally, the thesis around repair maintenance and restoration and the impact that weather will have on that.

I mean, we’re very bullish on it. We think CertaPro Painters will certainly benefit. And we are — CertaPro every year is expanding its commercial capability. And again, we see collaboration between these areas going forward.

Michael Doumet: Really, helpful. Appreciate the color. Thank you, guys.

Operator: Thank you. And one moment for our next question. And our next question comes from Stephen Sheldon from William Blair. Your line is now open.

Stephen Sheldon: Hey. Good morning. Thank you. Just first, can you talk about top of the funnel trends in the home improvement brand? I think you said it continues to be sluggish. Are you seeing that weaken even more than you had seen before? And then just as we think about the next couple of quarters there, how much of visibility do you have into revenue there, just given the backlog that continues to convert?

Scott Patterson: It’s not weaker, Stephen. It’s sort of holding off our lead activity of 5% to 10%. So it’s similar to the last few quarters we’ve had. And we would expect similar results in the first half of the year to what you’ve seen in the last half of ’23. So I mean it’s tough, it’s a grind, but we expect that will be up a bit top line. We are continuing to invest in marketing and continuing to focus on lead conversion and closing rate, which are really two levers more in our control that can help offset the headwinds, and we’re having success with that.

Stephen Sheldon: Very helpful. And then as a follow-up within the fire business, is there much of a margin differential between the installation work tied to construction activity versus the recurring inspection and repair work and just asking that in case we see construction activity paper over the next year or two and the impact that could have on margins in the fire brand, if there is a mix shift more towards the recurring revenue streams there?

Scott Patterson: No, very, very similar. The one — I would say, 2023 margins were similar. Historically, as we’ve experienced price increases in steel and other materials. It’s impacted installation relative to service, which is more labor-driven. But right now, they’re running very similar.

Stephen Sheldon: Thank you.

Operator: Thank you. And one moment for our next question. And our next question comes from Stephen MacLeod from BMO Capital Markets. Your line is now open.