FirstService Corporation (NASDAQ:FSV) Q1 2024 Earnings Call Transcript April 24, 2024
FirstService Corporation beats earnings expectations. Reported EPS is $0.67, expectations were $0.66. FSV 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 First Quarter Investor’s 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 Administrator’s 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 April 24, 2024. I would like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead.
Scott Patterson: Thank you, Justin. Good morning, everyone, and thank you for joining our Q1 conference call. Jeremy Rakusin is on with me, and together we’ll walk you through the results we released this morning that were generally right in line with our internal expectations. Total revenues were up 14% over the prior year, driven entirely by acquisitions, primarily our acquisition of Roofing Corp of America in December. Similar to our Q4, organic growth in the first quarter was nil, due to very strong revenues in last year’s Q1 from hurricanes Ian and Fiona. EBITDA of the quarter was up incrementally to $83 million from $82 million in the prior year. The results reflect trends and themes that we saw in our Q4 results and discussed in our year-end call.
Jeremy will take you through margin detail and the balance sheet in his comments. Looking at our division of results, First Service residential revenues were up 11%, 8% organically and generally consistent with what we’ve seen from this division over the last year. Organic revenue growth was driven from net new contract wins. During the quarter, we announced the acquisition of Florida-based Rizzetta & Company. Rizzetta provides consulting and management services to HOAs in Florida and also to community development districts, which are known as CDDs. A CDD is a special purpose local government that exists in Florida and also certain other states including Georgia, Texas, and California. The CDD structure provides the ability to finance new development with tax-free municipal bonds.
Rizzetta brings up particular expertise in CDD management and introduces a new service offering for us that we believe we can grow within Florida and also to other states. Looking forward at First Service residential for the balance of the year, we’re reiterating our expectation for high-single-digit level growth with organic growth easing back towards the mid-single-digit range. Moving on to First Service brands, revenues for the quarter were up 16%, driven primarily by the acquisition of Roofing Corp of America, but also several tuck-unders within our restoration and fire safety segments. Organically, revenues were down 6% versus the prior year with gains at Century Fire offset by declines at our restoration brands, very similar to our organic results in Q4.
Let me give you a high-level review of each segment. I’ll start with restoration, which includes our results from Paul Davis and FirstOnSite. Revenues for the quarter were down by almost 10% and organically were off 15% versus a very strong Q1 in the prior year that was up 30% versus 2022. Similar to Q4, we continued to experience mild weather patterns across North America during the quarter. Residential and commercial claim activity was well off what we would expect on average. Revenues generated during the quarter from our remaining Hurricane Ian backlog amounted to about $10 million, compared to over $80 million from Ian, Elliott, and Fiona in our prior Q1. During the quarter, we were pleased to report the acquisition of Atlanta-based All Restoration Solutions by FirstOnSite.
All Restoration has a strong position in the Georgia market with four branches and a blue-chip client base. The addition brings to us a strong leadership team and is very complimentary in terms of geographic footprint and customer serve. We’re excited about our opportunity in the Atlanta market and throughout Georgia. Looking forward to Q2 and Restoration, we expect revenues to continue at approximately the same level sequentially, which would again result in a 10% revenue decline from Q2 of last year. I will now touch on our new roofing segment, which delivered a Q1 in line with our expectation. Q1 will generally be a modestly weaker quarter for us in roofing, as it is in painting, due to winter weather in certain of our regions and the inability to consistently work on exteriors.
We had budgeted for this during our due diligence, and it rolled in as expected. Looking forward, we expect sequentially stronger results for the balance of the year. Now to our home improvement brands, which as a group were up modestly year-over-year, low-single-digit growth in total and flat organically. We’re pleased with our results given current market conditions with home improvement spending down across North America. By matching last year’s revenue levels, we are taking share across each of our brands. Lead activity remains sluggish, and we don’t expect it to improve for the balance of the year unless we see some rate cuts. We may see some modest fluctuation quarter-to-quarter, but otherwise we are confirming our expectation to end the year slightly up in home improvement.
And finally, a look at Century Fire, which had another strong quarter with low-double-digit organic growth, really a continuation sequentially of the strength we saw all last year with Century. Looking forward to the balance of 2024, we’re confirming the expectations we laid out in our year-end conference call. That is continued strength at Century with year-over-year growth trending to high-single-digit based on increasingly tough comp quarters upcoming. I will now hand over to Jeremy.
Jeremy Rakusin: Thank you, Scott. Good morning, everyone. I’ll start by summarizing our first quarter results on a consolidated basis, which track closely to the indicators we provided during our most recent 2023 year-end earnings call in early February. For the quarter, we reported revenues of $1.16 billion, a 14% increase over the $1.02 billion for Q1 ‘23. Adjusted EBITDA was $83.4 million, up a modest 2% year-over-year, with a 7.2% margin for the quarter, compared to a margin of 8.1% in the prior year quarter. And our adjusted EPS was $0.67, compared to $0.85 per share in the prior year. Our adjustments to operating earnings and GAAP EPS and arriving at adjusted EBITDA and adjusted EPS respectively are consistent with our approach in prior periods.
I’ll now summarize the segmented results for our two divisions. First Service residential generated revenues of $496 million, up 11% over last year’s first quarter, while EBITDA was $35.6 million and 11% increase, as well over the prior year. The EBITDA margin for the division came in at 7.2% matching the prior year. During the balance of the year, margins will increase sequentially as our seasonal amenity operations ramp up. And as previously indicated, the margins will remain roughly in line with prior levels. Now to First Service brands where we reported revenues of $662 million for the current quarter, up 16% over last year’s Q1. Our EBITDA for the division was $55.5 million, a 1% increase versus the prior year quarter, and the margin was 8.4% down 120 basis points versus last year’s 9.6% level.
As Scott noted, our restoration operations faced a headwind of $80 million in prior year storm-related revenues, and that was the principal driver behind the margin decline for the division. We also incurred some margin compression in our Home Services segment as the businesses implemented increased promotions and marketing spending to preserve their top line performance. Century Fire Protection continued to deliver strong margins, and our new Roofing Corp of America investment performed in line with our expectations. Wrapping up our P&L review with items below the operating divisions, our corporate costs were up significantly over prior year. Most of the $3 million increase was due to the negative non-cash effect of foreign exchange movements during the quarter.
Higher interest costs also reduced our earnings per share as in prior quarters. In this particular Q1, it was up almost double the level of the prior year with a negative impact of $0.13 per share. Finally, our consolidated tax rate increased from 26% last year to 29% in the current quarter, which is right in line with our tax rate expectations for full-year 2024. Turning to our consolidated cash flow, we generated $56 million of cash flow from operations before working capital changes. Q1 is our seasonal trough cash flow period when some of our businesses have lower revenues and higher operating expenses and working capital requirements as they invest for the balance of the year. We netted $10 million of cash flow after these operational working capital investments, excluding almost $20 million for recent acquisition-related earn-out payments.
Capital expenditures during the quarter were $25 million, up modestly over the prior year spending level, and tracking to our CapEx guidance for the full-year of roughly $115 million. During the quarter, we also deployed just over $30 million of capital towards the two tuck-under acquisitions, which Scott referenced. Our teams have an active tuck-under prospect pipeline across several of our brands, including property management, restoration, roofing and fire protection as we look to augment our organic growth with acquisitions in these business lines. Concluding the reported financials commentary is our balance sheet. We closed the quarter with net debt at a little under $1.1 billion, an increase of $80 million since year-end, reflective of the cash flow movements I just walked through.
Our leverage, as measured by net debt to trend 12 months EBITDA, sits at 2.3 times, increasing modestly over the 2.1 times level at year-end, as is relatively typical after our seasonally lowest Q1. Liquidity, including our cash and undrawn bank revolver balance is approximately $360 million. The strength and flexibility of our balance sheet remains a cornerstone of our conservative approach to driving further growth. Looking forward, in the upcoming second quarter, we are forecasting consolidated revenue growth similar to Q1 in the low-teens percentage range. EBITDA is expected to increase at a mid-single-digit growth rate, with residential division margins relatively flat, while brands’ division margins will remain down year-over-year in the face of continued tough weather-driven restoration prior year comparisons.
With the reported first quarter and pending Q2 lining up with our expectations, our outlook for the 2024 full-year, which are provided with our 2023 year-end results in February, remains on track. That concludes our prepared comments. Operator, could you please open up the call to questions now? Thank you very much.
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