FirstService Corporation Price & Performance (FSV)

Good morning, everyone. Thank you for joining our Q1 conference call. We reported solid results this morning that we're very pleased with in the current environment. I'll provide a high level review and touch on some of the highlights and then pass to Jeremy Rakousin for a more in-depth discussion of the results. Total revenues were up 8% over prior year, driven primarily by tuck under acquisitions over the last twelve months. Organic growth was slightly positive with gains at FirstService Residential largely offset by a modest decline across the FirstService Brands division. EBITDA for the quarter was up 24% reflecting a strong 110 basis point improvement in our consolidated margin. A number of our brands showed margin improvement Jeremy will walk through the detail in a few minutes. Finally, our earnings per share for the quarter were up an impressive 37%. Looking at our divisional results, FirstService Residential revenues were up 6%, half organic and half from a few small tuck unders over the last twelve months. The results were in line with expectation. We had a solid quarter of contract wins and retention, as we continue to work our way back to our historical mid single organic growth rate.

Looking forward at FirstService Residential, we expect similar or slightly better organic growth in Q2, and sequential improvement for Q3 and Q4. Moving on to FirstService Brands. Revenues for the quarter were up 10% driven entirely by tuck under acquisitions. Organic growth for the division was slightly down with gains at Century Fire offset by organic declines in home services, and our roofing platform. I'll give a high level review of each segment and start with restoration. Revenues were generally in line with expectations for the quarter. Up mid single digit flat organically. We had solid growth in The U. S. With support from Hurricanes Helene and Milton, from which we generated a little over $10,000,000 for the quarter. This was tempered by modest year over year declines in our Canadian operations. The Canadian operations of First On-site and Paul Davis account for about 30 of our North American restoration business. Our overall restoration backlogs quarter end are solid and at similar levels to year end and prior year. Looking forward to QT, Q2, we expect revenues to continue at approximately the same level sequentially which would result in similar year over year results to Q1, flat to modestly up.

I'll now touch on our Roofing segment, which delivered Q1 revenues that were up almost 50% year over year, driven by the acquisitions of Crowther Roofing and Hamilton Roofing in Florida. Organically, the revenues were lower than expected and down about 10 from the prior year quarter. There are two principal reasons for the reduction. One was weather in January and February, which reduced our production hours relative to the prior year. And secondly, we're seeing the expected awarding of some large commercial reroof and new build contracts deferred. Bid activity has been solid, but the awarding of contracts has slowed We see it as a timing issue only and directly related to current economic uncertainty with tariffs. Looking to Q2 in roofing, we will again benefit from the year over year impact of the Florida acquisitions, and expect our revenues to be up between 2530% versus prior year. Organically, we expect to be down modestly due to the continued impact of contract deferral. The underlying demand dynamics remain strong. And we're optimistic that contract awards will accelerate as we move into the back half of this year. Moving to Century Fire, we had a strong quarter, generally in line with the expectation with revenues up over 10% and organic growth mid single digit.

The Century results were bolstered by particularly strong growth in repair, service, and inspection revenues. Similar to my comments relating to roofing, we did see some deferral of expected larger commercial installation contracts from Q1 into Q2 or later in the year. Again, we see this as timing only. Our backlog continues to build at Century, and we expect continued strong results for the balance of the year with organic growth in the high single digit range. Now on to our home service brands, which as a group generated revenues that were down about 3% year over year, just below expectation. It's been well documented over the last few months that consumer confidence has deteriorated due to the persistence of high interest rates and the economic uncertainty. Our lead flow reflected this in Q1 and was down year over year, As I indicated on our last call, our tried and true economic indicators, home equity values, and home prices. Point to increases in home improvement spending. We remain optimistic that pent up demand is building and we will start to see it in increased bookings in the second half of this year. Our lead flow is stabilized, and our teams continue to drive increased lead conversion.

Looking to Q2, we expect revenues to be slightly down relative to the prior year. Before I pass to Jeremy, let me add a few comments. The direct impact of tariffs to FirstService are immaterial. However, as I have indicated in my comments, we are seeing a moderate indirect impact. The economic uncertainty in the market today that has resulted from the trade war is causing many commercial and residential consumers to pause. It's undeniable. I opened this call by saying that we were very pleased the results in the current environment, and I want to reiterate that point. We grew organically in Q1, albeit modestly, while driving enhanced margins. It's a testament to the diversification of our business model and the resilience of our brands. The demand drivers across our markets remain compelling and we are optimistic we will see accelerated activity levels with market stability. On that note, over to you, Jeremy. Thank you, Scott. Good morning, everyone. We are pleased with today's first quarter financial performance, which delivered strong year over year growth in our key profitability metrics. To summarize the consolidated results for the quarter, we reported revenues of $1,250,000,000 an 8% increase over the $1,160,000,000 for Q1 twenty four.

Adjusted EBITDA was $103,300,000 up 24% year over year with an 8.3% margin and resulting in 110 basis points of improvement over the 7.2% margin in the prior year quarter. And our adjusted EPS was $0.92 reflecting 37% growth over the prior year. Our adjustments to operating earnings and GAAP EPS in arriving at adjusted EBITDA and adjusted EPS, respectively, are consistent with our approach in prior periods.

To now walk through the segment results for our two divisions, I'll start with FirstService Residential. The division generated revenues of $525,000,000 up 6% over last year's first quarter, while EBITDA was $41,600,000 a 17% growth rate over the prior year. This resulted in EBITDA margin of 7.9%, a 70 base points increase over the 7.2% level in Q1 'twenty four. This margin expansion was driven by cost efficiencies that we realized in our property management operations that are dedicated to servicing our community clients. Including in areas around client accounting, and contact centers. Our operating leaders and teams have been working on these initiatives for some time, and these efforts became more evident in Q1. As we emerge from the past eighteen months of industry headwinds, which we have spoken about at length. I would note that the magnitude of the margin improvement was also amplified in our seasonally weakest first quarter. In future quarters, and particularly the second half of twenty twenty five, the year over year margin expansion will taper to more modest amounts, as our top line ticks higher with the resumption of normalized service levels at our managed communities thus driving a greater mix of sited labor revenue.

Now onto our FirstService Brands division. Where we reported revenues of $726,000,000 for the current quarter, up 10% over last year's Q1. Our EBITDA for the division was $67,800,000 a 22% increase versus the prior year quarter. The resulting margin was 9.3%, up 90 basis points versus last year's 8.4% level. And primarily driven by our home services and restoration businesses. Within home services, our California Closets brand continued to realize the benefits from operating efficiencies and the reduction in promotional activity. Both of these initiatives kicked into higher gear in the second quarter of twenty twenty four, So as we lap that period, we expect home services margin performance to be roughly flat year over year for upcoming Q2 and going forward. Restoration margins were also up over Q1 twenty twenty four as we continue our multiyear journey to streamline our operating processes and optimize our cost structure. As we reiterated before, profitability metrics within restoration are dependent on weather, job activity levels, and type of work mix. And therefore, we don't expect the margin improvement to play out each and every quarter. But rather over time. Our teams across all the service lines in our Brands division been highly focused and successful in grinding out sales and driving market share during a challenging macro environment while ensuring they get a healthy return on bottom line profitability.

With respect to our consolidated operating cash flow, we generated more than $75,000,000 before working capital changes and over $40,000,000 including the impact of working capital. This cash flow conversion was both meaningfully higher than prior year and at a solid level, particularly given the Q1 seasonal trough for some of our businesses. Capital expenditures during the quarter were just shy of $30,000,000 up modestly over the prior year, and pacing within our full year CapEx guidance of roughly $125,000,000 We deployed minimal upfront cash towards tuck under acquisition spending during the quarter, as we remain disciplined and selective in a competitive transaction valuation environment. Finally, looking at our balance sheet, our debt and cash balances were relatively unchanged at the end of the first quarter compared to 2024 year end, and therefore our net debt remained at $1,100,000,000 Our leverage is conservative sitting at two times net debt to trailing twelve months EBITDA, and in line with year end. During the quarter, we also bolstered our debt capacity and flexibility by increasing and extending our five year revolving bank credit facility to $1,750,000,000 plus an additional $250,000,000 accordion feature. Our liquidity, reflecting cash and undrawn credit facility balances, is sizable at more than $800,000,000 putting us in a very strong financial position to deploy capital as opportunities arise in our acquisition pipeline.

Looking forward, in the upcoming second quarter, we are forecasting consolidated revenue growth similar to the 8% growth rate in Q1. EBITDA is expected to increase at a low double digit growth rate, with the residential division margin up and Brands division margin in line to slightly up compared to last year's second quarter. Scott commented on the macro uncertainty that is somewhat clouding our visibility on the top line in some of our brands division service lines. But we believe that any headwind impact is timing related and will be offset by pent up demand. Pent up demand At the same time, we are driving margins and profitability as evident with the strong Q1 performance under our belt. Providing us with confidence in delivering on full year expectations for 2025. That concludes the prepared comments segment Operator, you can now open up the call to questions. Thank you very much.

Please stand by while we compile the Q and A roster. Our first coming from the line of Stephen MacLeod with BMO Capital Markets. Your line is now open.

Thank you. Good morning, guys. Thanks for the color. Just a couple of questions. Just with respect to the macro weakness, could you just remind us sort of what you would consider to be your consolidated, like exposure to macro gyrations, consumer spending and as you mentioned, of the commercial pushbacks you're seeing as well or delays?

Sure, can take the first cut and then I'll let Scott layer in. I mean, terms of the business that we've always said, whether it's related to tariffs or other macroeconomic exposure, said the home improvement business, which is north of $500,000,000 tied to residential homeowner and consumer sentiment. And then half of century fire and a third of roofing, tied to commercial new development would be about another $500,000,000 So know, dollars 1,000,000,000 on $5,000,000,000 plus 20% of consolidated FirstService residential FirstService Corporation revenues would be exposed, some to residential and some to commercial. So modest. Scott, anything to add?

Yeah, no, I don't have anything to add to that, Jeremy. Thank you.

Okay.

That's great. Thanks, Jeremy. That's kind of the ballpark I was thinking. I just wanted to confirm that. And then maybe just sticking with the brands business, you talk a lot about sort of delays and projects. But your leads are up, but people are just just not converting, but you think that's going to come back through pent up demand. Like are you seeing any change to conversions or is it just that the leads are building and customers are staying warm, they're just not committing? Is that sort of how to think about it?

I think that's right. I mean, it is different with the home service. Brands and with the commercial delays we're seeing at, Century Fire and Roofing We we particularly on the commercial side, we see it as timing.

Work needs to be done I think that customers I mean, uncertainty causes hesitation, and that's really what we're seeing. They're getting bids. They're seeing what the pricing environment is. They have work to do. They're not committing. But, we don't think that these deferrals can go on for a significant length time. Residentially with home services, it's a little bit different. I mean, consumer confidence is down We saw this morning that existing home sales were down 6% in March. It's another indicator that the consumer is positing on capital outlays while until there's more certainty in the market. [indiscernible] you know, if we get into a recession or a deeper recession, I think that the consumer confidence could stay at at current levels.

However, you know, the homeowner on average is wealthy. The average home equity is, is significant. Relative to history. And home prices continue to tick up creating more equity. And certainly, historically, this has pointed to healthy home improvement spending. So we think as soon as the market stabilizes, we're gonna see it. And we're optimistic that it will be later this year.

That's great.

Thanks, Scott. And then maybe just finally, just on the M and A environment, if you do see if we do see a period of more slowdown or delays, you talked about your obviously in a strong financial position. Like what are you seeing in terms of multiples? And are you seeing potential targets beginning to emerge?

Well, I would say that we're actually hearing about some sale processes that have been deferred pushed to the back half of the year until things settle down. But I would say is the market's still quite active. There's no indication that multiples have changed or certain, you know, no indication that they've come down. But the market's active, our pipeline's active. We expect to transact this year. Over the balance of the year.

That's great. Okay, thanks guys. Appreciate the color.

Thank you.

Thank you. Our next question coming from the line of Scott Fletcher with CIBC. Your line is now open.

I'll stick to the to the brand side of things. On the on the organic decline in the roofing piece, you sort of mentioned 10% range.

Is there any way you could break out how much of that was weather related versus sort commercial delay related? And I assume that would be that those weather related delays would be more likely to come back. Sooner.

Than the commercial delays.

I think that's right, Scott. You know, we It's hard to pinpoint that accurately, but I'll spitball it sort of half and half. You know, some of the new roofing contracts are significant, well over $10,000,000 up to 20,000,000 I mean, it can from quarter to quarter, it can make a difference. And then certainly weather can as well, because it reduces your time on a roof. And we certainly saw that in particular in January and February. This year. During our seasonally weakest quarter, because of winter weather, This year we saw weather in the form of rain and high winds and, smoke from wildfires impact our production hours in non seasonal regions. Like Texas, Louisiana, and California. So that will come back. It won't come back in the second quarter entirely. We see over the balance of the year, But we do see the deferral and the commitment around these new roofs and re roofs we do see that continuing until we see more stability in the market.

Okay, thanks. That's helpful. And then on the restoration side, last quarter, sort of mentioned some unclear timelines on the reconstruction work related to the hurricanes. Is there anything you can update us on, on sort of the pipeline on reconstruction work in the restoration business?

Generally, I can. I mean, it's very slow to convert. Scoping, permitting, environmental approvals, insurance approvals, takes considerable time. We generated a little over 10,000,000 in Q1 from Helene And Milton We do have remaining backlog from these events. We expect to convert it really over the balance of the year. It won't be material to the year or to any particular quarter? I think the real relevant metric is our total backlog. Which is, as I said, in my prepared comments, it's similar to year end and to prior year, which points to [indiscernible] revenue levels.

In Q2.

Okay, great. Thank you. I'll leave it there.

Thank you. Our next question coming from the line of Daryl Young with Stifel. Your line is now open.

Hey, good morning, everyone.

I think this might be the first quarter since I've covered you guys that you've missed on the top line and beat on margins. And I'm just wondering if there's a shift in how you're thinking about managing the business towards more margin centric and maybe dialing back top line growth? Or is this really just a function of some of the weather and whatnot issues you've already called out in the quarter?

Yeah. I mean, well, the margin, Jeremy said in his comments, I mean, the margin efforts are every day and every year. And, the teams are doing a great job really across all the brands. The top line, I mean, you know, also we didn't point it out in our comments, but there's about 10,000,000 of FX impact also from our Canadian operations that hit our revenue that we didn't necessarily foresee.

And otherwise, no, it's really these home improvement again, a little lower than expected. And contract commitment commercially at Century and Roofing. I mean, all of it is much of it tied to the to the trade war and the current environment. And, we think it's all timing. Related that underlying demand drivers remain compelling. And we're very optimistic about really all our brands and the demand environment once we get through this.

Got it. Okay. Then flipping over to the residential business, I think you know, in recessionary environments in the past, you've seen more requests for pricing, I guess, we'll call it more shopping by HOAs.

But you've always done well and taken share in that kind of environment, Is that sort of how you would be thinking about this time as well? Or has anything changed now that you're at a much bigger scale? Well, I mean, the pricing pressure has been been very acute in that business. For the last eighteen months. I mean, we've been talking about that, particularly in in Florida with the with the pressure on the budget, the community budgets, we don't see pricing pressure getting worse or escalating from here.

The, these communities and their need to be managed will continue And it's always price competitive. So I don't, I really don't see it changing.

Got it. Okay. And then do you have handy, what your organic growth rate would be ex that FX impact that you spoke to? Or Well, I'll just jump in. Dollars 10,000,000, Scott said, pretty close to that. That's about a 1% on the consolidated line. We did 1.25 over the $1,160,000,000 last year.

Got it. Okay. That's it for me. I'll jump back in the queue. Thanks, Thank you. Our next question coming from the line of Stephen Sheldon with William Blair. Your line is now open.

Hey. Thanks for taking my questions. First one here, just really great to see the margin expansion in the residential segment this quarter. So can you just give some more detail on how you're driving some efficiencies in client accounting and the contact center operations that you mentioned.

In has your view changed at all in the potential long term margin profile there relative to the nine to 10% range you've talked about?

Yes, Steven. So client accounting is really around headcount reductions. And streamlining our process to get those monthly financial statements out to thousands of communities and the boards that are clients of those communities. And then the contact centers, relating to dealing with inbound requests from our communities and our residences. We're using digital and AI tools technology, in a broad way to take the loads off of our frontline portfolio managers and bring it to the back office, so they can be more in dealing with their boards and can be more productive and increase their load. So it's a whole bunch of, efficiencies, and at the end of the day, this is all about delivering service excellence and enhancing the customer experience at our communities. As to the sustainability of it, we've talked about, as you alluded to, a 9% to 10% margin band. Last year, we were around the middle point of that, and with better margins this year, we'll be in the upper half of that band, [indiscernible] that is our belief for our long term goal. We'll continue to work on other margin enhancements over time, but being at the upper end of the 9% to 10% margin band is is a good target for us, the end of this year.

Got it. That's helpful. And then just as a follow-up, I any updated thoughts about expanding the services portfolio similar to what you guys did when you expanded it into restoration and roofing? Are you entirely focused on growing and gaining market share in current end markets? Or as we're sitting here, a few years down the road, do you think there could be a new business in end market in the portfolio? How are you guys thinking about it? Always open minded Steven, but our focus is on the brands we own today. The one thing I would add is that you know, we have talked about this broader thesis around repair and maintenance of the built environment, which includes restoration, It includes roofing. It includes painting, and there are other adjacencies that are very similar So we are, certainly interested in that broader thesis. Which has many, many drivers and tailwinds [indiscernible] talk frequently about the weather events, But the aging building stock, the, coastal building codes that we're increasingly seeing that are driving repair and maintenance spend So there are, I would call them adjacencies that we're interested in, but they would be part of our current segments and part of our current platforms.

Great.

Thank you, Jeremy and Scott.

Thank you. Our next question coming from the line of Frederic Bastien with Raymond James. Your line is now open.

Good morning.

Guys, I was wondering if you could comment on labor availability availability and also labor costs. I know this was obviously an issue when we saw inflationary pressures a couple years back, but presumably things are getting a lot better you know, just just based on the the margins you deliver. Just wanted to see if you could comment on that, please. Thanks.

Yes, Frederick. Much better. Certainly than a few years ago. Our turnover is down. It's really down to levels that we saw pre COVID and continuing to to improve [indiscernible] wage inflation is has stabilized. And so we're able to recruit more effectively, and we're able to keep our people more effectively And it's, more stable than it's been in in, in a few years.

And is that helping facilitate market share gains? I know this is obviously a key part of the FirstService story is your ability to continue winning market share. Is that is that helping contribute?

Well, [indiscernible] employee experience, for us is critical in delivering on customer experience. So the tenure of our folks, particularly the front line, always helps us in terms of driving customer experience, which which in turn drives repeat business retention and word-of-mouth referrals. So the answer is answer is yes.

Okay. Okay. Great to hear. Thanks. Thanks for your thoughts.

Thank you. I'm showing no further questions in the Q and A queue at this time. I will now turn the call back over to Mr. Scott Patterson for any closing comments.

Thank you, Olivia. And, thank you all for joining our Q1 call. Enjoy the rest of the day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.