FirstService Corporation (NASDAQ:FSV) Q3 2023 Earnings Call Transcript
FirstService Corporation (NASDAQ:FSV) Q3 2023 Earnings Call Transcript October 26, 2023
FirstService Corporation misses on earnings expectations. Reported EPS is $1.25 EPS, expectations were $1.29.
Operator: Good day and thank you for standing by. Welcome to the Third Quarter Investors Conference Call. Today’s call is being recorded. Legal counsel requires us to advise that the decision scheduled to take place today may contain forward-looking statements that involve known and unknown risks and uncertainties. Actual results maybe materially different from any future results, performance or achievements contemplated in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the company’s Annual Information Form as filed with the Canadian Securities Administrators and in the company’s Annual Report on Form 40-F as filed with the U.S. Securities and Exchange Commission.
As a reminder, today’s call is being recorded. Today is Thursday, October 26, 2023. I would like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir.
Scott Patterson: Thank you, Michelle. Good morning, everyone and thank you for joining our third quarter conference call. Jeremy Rakusin is with me and we are pleased to be on the line with you today to report on the strong Q3 results we released this morning, results that reflect solid performance across each of our brands. We are very pleased with how the quarter played out. Trends and momentum that drove the last several quarters for us continued into Q3 despite increasing headwinds relating to a challenging macroeconomic environment and softening consumer demand. Organic growth during the quarter was 10% on a consolidated basis. We are taking market share and that is a tribute to our operating teams and their relentless focus on customer experience.
We are growing organically while many of our markets and competitors are flat to down over the last quarter. Total revenues for the quarter were up 16% over the prior year, with the organic revenue growth, as I just said, at 10%, balanced about evenly between our two divisions. EBITDA for the quarter was $112 million, up 17% from 2022, reflecting a margin of 10%, approximately the same level as prior year. And earnings per share were $1.25, up 7%. Jeremy will dive into the profitability metrics in more detail in a few minutes. Looking now at high level results for our divisions, starting with FirstService Residential where revenues were up 12%, with the organic growth over 9%. Results in this division were right on expectations. Top line growth was broad-based with solid contribution from each of our six regions in North America.
Organic growth was driven by continued strong net new contract wins, leading to higher management fee and labor-related revenue. Looking to the fourth quarter at FirstService Residential, we expect to again show low double-digit revenue growth with organic growth at a mid to high single-digit level. Moving on to FirstService Brands. Revenues for the quarter were up by 20%, with organic growth at 11%, driven by strength at our restoration brands and Century Fire. Our restoration brands, Paul Davis and First Onsite together recorded revenues that were up by about 25% versus the prior year, with one-third of the growth generated organically. We booked approximately $25 million from named storms during the quarter, including continuing work from Hurricane Fiona, Hurricane Ian and Winter Storm Elliott.
This compares to a negligible amount from named storms in the prior year quarter. Excluding storm work, we had a solid quarter and are pleased with the day-to-day activity levels across our branch network at both brands. During the quarter, we added to our footprint in restoration with 3 announced tuck-unders. First, on site acquired Case Restoration based in Nashville. Case is a full-service commercial restoration company with specific expertise in large loss claims. This acquisition significantly enhances our capability and client coverage in Nashville, which is an important market for us long-term. At Paul Davis, we added to our company-owned platform with the acquisitions of our franchised operations serving Richmond, Virginia and Reno, Nevada.
The Richmond branch complements our previously acquired Raleigh, North Carolina operation, expanding our footprint in the Mid-Atlantic region. Similarly, the Reno location augments the scale and service capabilities of our existing Nevada and Utah company-owned operations and the branches will operate collectively as 1 region. Looking forward, we expect our revenues for restoration in Q4 to be down from a year ago, up to 10% based on current backlog and trends. We generated $85 million in Q4 last year from Hurricanes Ian and Fiona, which led to an outsized result for us in a tough comparison. We continue to work through the remaining backlog from Ian, Fiona and Winter Storm Elliott and expect to generate revenue from named storms at a similar level to this past quarter in the $25 million range.
As I mentioned earlier, we are very pleased with current activity levels. And outside of named storms, our backlog from day-to-day activity is strong. We expect to have a solid Q4 in restoration. Moving now to Century Fire, where we had a very strong Q3 with record revenues. It was similar to Q2 with almost all our 30-plus branches growing sequentially and versus the prior year. We expect another strong quarter upcoming with growth in the 10% range against a very strong Q4 last year that was up 20% organically versus 2021. And I’ll finish with our home improvement brands where we saw our growth slow during Q3, up mid-single digit year-over-year in total with organic growth at a low single-digit level. Higher interest rates, record low home resales and a challenging macroeconomic backdrop has significantly impacted consumer demand.
Our leads are off 10% versus a year ago. As I mentioned last quarter, we continued to drive growth through improved lead conversion and close ratios. We expect a similar result in Q4. Our teams believe we will continue to drive single-digit growth against the prior year comp that was relatively weak. Let me now call on Jeremy to review our results in more detail.
Jeremy Rakusin: Thank you, Scott. Good morning, everyone. As you just heard, FirstService delivered strong financial results for the third quarter on both a consolidated and segmented basis. For the quarter, we recorded consolidated revenues of $1.12 billion, up 16%, and adjusted EBITDA came in at $111.9 million, a 17% increase relative to the prior year period. Below the operating line, our adjusted EPS was $1.25, up a more modest 7% quarter-over-quarter, reflecting the higher interest rate environment this year compared to 2022. Highlighting our consolidated performance for the 9 months year-to-date, we have delivered revenues of $3.26 billion, up from $2.73 billion in the prior year period, an increase of 19% and which includes 14% organic growth.
Adjusted EBITDA sits at $312.4 million, a 25% increase year-over-year with our overall EBITDA margin at 9.6%, up 50 basis points versus a 9.1% margin for the prior year period. And lastly, our adjusted EPS year-to-date is $3.56, an increase of 18% over the $3.02 reported for the same period last year, even in the face of a more than doubling of our interest expenses. Our adjustments to operating earnings and GAAP EPS and providing adjusted EBITDA and adjusted EPS, respectively, are disclosed in this morning’s earnings release and are consistent with our approach in prior periods. I’ll now walk through the third quarter segment results for our two divisions. At FirstService Residential, we generated revenues of $537.8 million, a 12% increase over Q3 2022.
The strong top line performance drove EBITDA of $56.6 million, representing 14% year-over-year growth. Our current quarter EBITDA margin yielded 10.5%, relatively in line with the 10.4% in last year’s Q3. The broadly distributed growth across our markets and service offering has also driven balanced profitability for the year, with our year-to-date EBITDA margin sitting at 9.6%, again relatively comparable to 9.8% in the prior year. Within our FirstService Brands division, we generated revenues of $579.3 million during the current third quarter, up 20% versus the prior year period. Our Brands EBITDA increased by 24% to $60.7 million with a 10.5% margin, up 40 basis points from a 10.1% margin in last year’s third quarter. Our brands margin improvement reflected operating leverage benefits derived from the strong division top line performance, particularly at our Century Fire Protection and restoration service lines.
With the quarter-over-quarter margin improvement at both of our operating divisions, our consolidated margin ticked up slightly to 10% flat, notwithstanding higher corporate costs in the current quarter due to foreign exchange fluctuations. The strength in our operating and financial performance across our businesses also extended to a very strong cash flow conversion during the quarter. We delivered $84 million in cash flow from operations without any additional working capital as accounts receivable collections offset other operating requirements. Our 9 months year-to-date operating cash flow of $170 million is up more than threefold versus the prior year period. Capital expenditures during the quarter totaled $23 million with the year-to-date tally sitting now at $68 million.
For the full year, we expect to be at or slightly lower than our previous targets of $80 million in maintenance spending and $100 million of all-in CapEx. Acquisition investment during the quarter was modest, reflecting the completion of a few restoration tuck-under transactions that Scott referenced. Year-to-date, we have deployed over $110 million in acquisition capital and we are pleased with our tuck-under program activity in contributing over and above our strong organic growth. We also continue to advance our deal pipeline to surface additional attractive investment prospects across our service lines. Our balance sheet at quarter end included net debt of just over $640 million, computing to leverage at 1.5x net debt to trailing 12 months EBITDA, down slightly from the 1.6x level for both the previous second quarter and 2022 year-end and relatively consistent with longer-term historical trends.
We also have approximately $450 million of total cash on hand and undrawn availability under our credit facility. We are well positioned with our conservative and flexible capital structure and ample liquidity to aggressively deploy capital towards future opportunities as they may arise. In terms of our outlook for closing out 2023, our consolidated revenues for the fourth quarter will likely see more tempered mid-single-digit growth. As Scott noted, Q4 2022 included $85 million in revenues from Hurricanes Ian and Fiona late last year. Without any similar pending storm-related events as we sit today in the current fourth quarter, we expect that revenues from our restoration operations will be down year-over-year with all of our other brands growing at high single digit to low double-digit percentage ranges.
In terms of profitability, we expect that Q4 consolidated EBITDA will be roughly in line with last year’s fourth quarter due to a year-over-year decline in restoration profitability driven by both lower revenues and a margin decline without the benefits of storm-related work. We anticipate continued strong and profitable growth across our remaining operations. With this outlook, combined with our 9 months year-to-date results, we will deliver 2023 annual total revenue growth in the mid-teens percentage range with a similar level of consolidated EBITDA growth. Very impressive performance for the year. During our next earnings call in February, covering off our year-end results, we will also provide a high-level 2024 outlook encompassing upcoming budget and strategic planning reviews with our brands.
That concludes our prepared comments. Operator, please open up the call to questions. Thank you.
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