FirstService Corporation (FSV) Earnings Call Transcript & Summary

Welcome to the FirstService Corporation Annual Meeting of Shareholders conference call. Today's call is being recorded. Legal counsel requires us to advise that the discussions 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 the future results. Performance or achievements contemplated in these forward-looking statements, additional information containing the factors that could cause actual results to be materially different than in these forward-looking statements is contained in FirstService's most recent annual information form filed with the Canadian Securities administrators and in FirstService's most recent annual report on Form 40-F filed with the U.S. Securities and Exchange Commission. As a reminder, today's call is being recorded. Today is Wednesday, April 8, 2020. And at this time, for opening remarks and introduction, I would like to turn the call over to First Services Founder and Chairman, Mr. Jay Hennick. Please go ahead, sir.

Good morning, everyone. Please allow me to introduce myself again. I'm Jay Hennick, the Founder and Chairman of FirstService Corporation. I'll be acting as the Chair of this meeting. You will have seen from the meeting materials, we put in place precautionary measures for this meeting to deal with the challenging circumstances regarding the spread of COVID-19. As a result, attendance today has been strictly limited, including attendance by our Board members, employees and other representatives. Participating for the company and the meeting today are only Scott Patterson, President and Chief Executive Officer and also a Director; Jeremy Rakusin, CFO; and Doug Cooke, the Corporate Secretary. In these unique circumstances, I would like to thank those listening through the internet at this meeting. This meeting is being webcast live through the FirstService website located at www.firstservice.com, where it will be archived and accessible for 1 year. It is now just past 11:00 a.m., and the annual meeting of shareholders will come to order. With the consent of the meeting, I'll act as Chair, and in accordance with FirstService's bylaws, Doug Cooke will act as Secretary of the meeting. In addition, I'll appoint Anna Sirianni of FirstService to act as scrutineer of the meeting. Rosa Garofalo of TSX Trust Company will be assisting by telephone. I'm now tabling a copy of the audited consolidated financial statements of FirstService for the year ended December 31, 2019, and the auditor's report thereon. You will have received them with the meeting materials. With the consent of the meeting, we'll dispense with the reading of the auditor's report, and the financial statements shall be received. Please note that after the formal portion of this meeting, our CEO and CFO, Scott Patterson and Jeremy Rakusin, will make a short slide presentation, which can be seen via the webcast and is also available on the FirstService website. Notice and proxy materials for this meeting were mailed to shareholders and additional copies are available today. The Secretary will report whether there is a quorum at present.

According to the bylaws of FirstService, a quorum for any meeting of shareholders is 2 or more individuals holding or representing by proxy, not less than 5% of the votes attached to all the outstanding shares of FirstService entitled to be voted at the meeting. In accordance with the preliminary attendance figures received from the Scrutineer and our transfer agent, it is clear that we have a quorum of shareholders. A copy of the final report of the Scrutineer will be annexed to the minutes of this meeting.

I'm advised that there is a quorum present. As the quorum is present, I declare this meeting to be regularly called and properly constituted for the transaction of business. In view of the need to attend to formal matters as a result of this meeting, we've arranged for 2 shareholders, Ryan Bedrich and Anna Sirianni, to move and second motions. The first item of business is to consider a resolution appointing PriceWaterhouseCoopers LLP as auditors of FirstService at a remuneration to be fixed by the directors. In order to be approved, the resolution must be passed by a majority of the votes cast. May I have a motion for the approval of this resolution?

Ryan Bedrich, a shareholder. Mr. Chair, I move that PriceWaterhouseCoopers LLP be appointed as auditors of FirstService to hold office until the close of the next annual meeting of shareholders at a remuneration to be fixed by the Board of Directors of FirstService.

Anna Sirianni, a shareholder. Mr. Chair, I second the motion.

The meeting will now vote on the motion. While we normally would take a vote by way of a show of hands, there are no shareholders voting in person today. Accordingly, we will read the votes received by proxy on this matter. We received 27,355,858 votes by proxy voting for the motion. And 587,248 votes by proxy voted as withheld. I therefore declare the motion carried. The next item of business is the election of 8 directors. These directors will hold office until the close of the next annual meeting of shareholders or until their successors are elected or appointed or they are otherwise ceased to hold office. The management information circular states that there are 8 proposed candidates. The Secretary will please read their names.

The names of the Director nominees are Brendan Calder, Bernie Ghert, Jay Hennick, Scott Patterson, Fred Reichheld, Joan Sproul, Michael Stein and Erin Wallace.

Thank you. I remind shareholders that directors are to be voted on individually in accordance with FirstService's majority voting policy. I now recognize Anna Sirianni.

Anna Sirianni, a shareholder. Mr. Chair, I nominate each of the 8 persons whose names have been read to this meeting for election as directors of FirstService to serve until the close of the next annual meeting of shareholders or until his or her successor is elected or appointed or he or she otherwise ceases to hold office.

We note that there's no further nominations, and I therefore declare the nominations closed. May I have a motion in favor of the election of each of the 8 persons nominated?

Ryan Bedrich, a shareholder. Mr. Chair, I move that each of the persons nominated be individually elected as directors of FirstService until the close of the next annual meeting of shareholders or until his or her successor is duly elected or appointed or he or she otherwise ceases to hold office, subject to and in accordance with FirstService's bylaws and majority voting policy.

Anna Sirianni, shareholder. Mr. Chair, I second the motion.

The meeting will now vote on the election of each director. Again, there is no shareholder voting in person today, so we will read the votes received by proxy on the election of each director. For Brendan Calder, we received 27,523,406 votes by proxy voting for his election and 419,700 voting against. For Bernie Ghert, we received 20 million -- 27,935,310 votes by proxy voting for his election, 7,796 votes by proxy withheld. For Jay Hennick, we received 27,056,788 votes by proxy voting for his election and 886,318 votes by proxy voted as withheld. For Scott Patterson, we received 27,849,989 votes by proxy voting for his election, 93,117 votes by proxy voted as withheld. For Fred Reichheld, we received 27,523,406 votes by proxy voting for his election, 419,700 by proxy voting as withheld. For Joan Sproul, we received 27,914,856 votes by proxy voting for her election, 28,250 in votes by proxy voted as withheld. For Mike Stein, we received 26,819,949 votes by proxy voting for his election and 1,123,157 votes by proxy voted as withheld. And for Erin Wallace, we received 27,527,334 votes by proxy voted for her election and 415,772 votes by proxy voted as withheld. I declare the motion carried with respect to each of these nominees. The final item of business before this meeting is the consideration of the nonbinding advisory resolution on FirstService's approach to executive compensation. Despite being an advisory vote, the Board and the compensation committee will take the results of the vote into account when considering future compensation policies, procedures and decisions and in determining whether there is a need for further change and in its -- in the engagement of shareholders on executive compensation and related matters. The form of the advisory resolution is set out on Page 39 of the management information circular in order for the advisory resolution to be passed and must be approved by a majority of the votes cast. May I have a motion for the approval of this advisory resolution?

Anna Sirianni, shareholder. Mr. Chair, I move that the advisory resolution that shareholders accept the approach to executive compensation disclosed in the management information circular delivered in advance of this meeting, the form of which is set out on Page 39 of that circular be approved.

Ryan Bedrich, shareholder. Mr. Chair, I second the motion.

We received 26,513,250 votes by proxy voting for this motion and 1,429,856 votes by proxy voting against this motion. I therefore declare the motion carried. As there's no further business, I declare the formal portion of this meeting to be terminated, and I would now like to call on Scott Patterson and Jeremy Rakusin for their prepared remarks. Thank you.

Thank you, Jay, and good morning, everyone, and welcome again to our Annual General Meeting for 2019. As Jay mentioned, I will be presenting today with Jeremy Rakusin, our CFO. This meeting is an opportunity to report and reflect on 2019 and that will be our purpose over the next several minutes. I will close today with a brief look forward, and Jeremy and I will provide more detailed comments on the current environment on April 23 when we report on Q1. 2019 was an exciting action-packed year for us at FirstService Corporation. We had a number of headline events that have changed our company and will help drive our growth for years to come. These include, among other things, the largest acquisition in our history. Global Restoration, and during the fourth quarter, our first equity offering in over 20 years. I will spend more time talking about these milestones in a moment. First, I want to talk about what happened behind the headlines. I am as excited and as proud of the day-to-day incremental gains we made during 2019 as I am about our big highlights. Our operating teams recognize that our key differentiator is our relentless focus on service excellence. All of our brands are built around service excellence and this alignment across FirstService defines our culture. We all know that this focus drives customer retention and word of mouth referral and is the principal ingredient that fuels our organic growth. Now as you know, we are an acquisitive company. Acquisitions are a key part of our growth strategy, but we consider ourselves an organic growth company first. That is our priority. Organic growth is the true measure of brand health, and in 2019, our teams generated organic growth of 7%. That is a strong number and one that we are proud of. In fact, over the last 5 years, we have averaged 7% organic growth. It serves as a bedrock level of growth for us and affords us the opportunity to enhance it through acquisition to deliver superior growth. And we did that in 2019 with total top line growth of 25%. Underneath that, our EBITDA was up 23% and earnings per share, up 15%. Over the last 5 years, our revenue is up a compound annual rate of 16% with EBITDA at 23% and earnings per share at 24%, an enviable track record that we are very proud of. If we take a look at each of our divisions, we will see that we have had strong contributions from both. At FirstService Residential, total revenues grew by 13% in 2019 with organic growth at 7%. We continue to win market share in residential community management, particularly in the high-rise environment and with large single-family home communities. These communities generally require a more comprehensive service offering, including sited staff. And we excel in these situations relative to our competition. The top line revenue benefited from 2 acquisitions early in the year in Chicago. We added Lieberman Management Services and DK Condo in Q1 and cemented our leadership position in this important metropolitan market. The Chicago operations performed very well in 2019, exceeding expectation, all while going through significant transition, including systems integration and rebranding under FirstService Residential. The strong results are a great reflection on our leadership in the Chicago market and the operating teams at FirstService Residential. At FirstService Brands, revenues grew an eye-popping 47% over the prior year. The increase was primarily due to acquisitions, but it was supported by very solid organic growth of 6%. A closer look at the organic growth reveals that 5 of the 6 brands grew by over 10% during 2019: California Closets, Certapro Painters, Century Fire, Pillar to Post and Floor Coverings International. I can assure you that these markets were not growing at 10%. We are taking share across the board with these brands. The one outlier was Paul Davis, and that was more of a reflection on industry activity than it was on Paul Davis. We generated very strong revenues in 2018 in this business, driven by storm activity, which simply did not recur in 2019. We will have years and quarters like 2019 in the restoration business, but we believe strongly in the long-term market opportunity as evidenced by our acquisition of Global Restoration. This was a game-changing deal for us and certainly a 2019 highlight that I want to elaborate on. Global is the second largest commercial and large loss property restoration firm in North America. It operates out of 70 regional offices, primarily under 2 highly recognized brands: Interstate Restoration in the U.S. and First OnSite Restoration in Canada. Our go-forward strategy with Global will be to expand our geographic footprint, both organically and through tuck-under acquisitions to enhance our service capability with existing customers and position ourselves to secure additional national contracts. We got out of the blocks quickly with this strategy and have closed 6 tuck-unders to date, 4 in the U.S. and 2 in Canada, enhancing our geographic footprint and further strengthening our leadership team. Global is very complementary to our existing Paul Davis franchised and company-owned operations, which is a leading player in the residential segment of the restoration industry. So we have the #2 company in residential with Paul Davis and the #2 company in commercial large loss with Global. And today, we are in a position to provide full service restoration across every customer segment in the industry. The restoration market is huge and very fragmented, similar to our other markets. In addition, the market is growing due to the increasing frequency of weather events, the growing installed base of commercial and residential properties and the increasing cost of mitigation and reconstruction. We are in a very strong position in this market. We've partnered with the best management teams in the industry, and together, we are firmly focused on becoming the #1 player in North America. I will now ask Jeremy to review the financial results and then I will return with some closing comments. Jeremy?

Thank you, Scott, and good morning, ladies and gentlemen. In 2019, FirstService delivered another year of strong financial results to further build upon its growth track record over the past several years. It was also a watershed year in other respects with several deal-related milestones, which I will discuss in a few moments. First of all, let me summarize our consolidated annual results. We reported revenues of $2.41 billion, a 25% increase over 2018. Our adjusted EBITDA came in at $235.2 million, up 23% year-over-year. And our adjusted earnings per share was $3 even, representing 15% growth versus the prior year. As Scott mentioned, the outsized revenue increase was underpinned by a very strong 7% organic growth overall. The remaining growth came from significant acquisition contribution, Global Restoration being the biggest proportion. Our EBITDA performance saw a very robust and balanced contribution from both of our divisions, FirstService Residential and FirstService Brands. As expected, top line growth was the principal driver of our strong profitability, and so our consolidated margin came in at 9.8%, roughly in line with the prior year. Now on to our cash flow from operations, where we generated $108 million in 2019 compared to $99 million in 2018. The year-over-year growth rate in cash flow is even more impressive when one normalizes the 2019 figure for the more than $60 million in cash paid mid-year in connection with the previously announced transaction to terminate our dual-class share structure. With this normalization, 2019 operating cash flow grew over 70% versus the prior year. We deployed $47 million of this cash flow towards capital expenditures for our existing businesses. CapEx in 2019 represented 20% of annual EBITDA, right in line with the level we have indicated as typically required to support our operations. And so our free cash flow as measured by EBITDA less CapEx continues to hover around the 80% level, a metric clearly indicative of our asset-light business model. I mentioned at the outset that 2019 was a busy year, and that was no more evident than on the acquisition front. We saw a heightened level of activity both in dollar spend and deal volume, deploying $580 million towards 15 transactions. The $505 million Global Restoration transaction was a major milestone, representing the largest acquisition in the 30-year history of FirstService. Scott has already touched on the strategic merits and exciting growth prospects we see from Global and our restoration platform overall. Aside from the Global transaction, our teams also closed 14 additional typical tuck-under acquisitions, requiring approximately $75 million of aggregate incremental investment. We expect these businesses to collectively drive roughly $120 million in incremental annual revenues. This tuck-under acquisition pacing squares well in comparison to our total annual 2019 consolidated revenues of $2.4 billion, implying 5% acquisition growth and aligning with the annual target goal we have typically established. Each of our business lines were successful in adding at least 2 acquisitions to augment their growth. Our restoration platform, in particular, was highly active with several transactions on the heels of the global acquisition, together with a couple of Paul Davis tuck-unders. As Scott said, we have significant growth expectations in restoration, which we expect could play out in a similar fashion to the other company-owned strategies we have executed thus far within our FirstService Brands division. For a bit of context, let's look back 5 years prior to our spin off. You can see that our Brands division ended 2014 with a little over $200 million in revenues and less than $40 million of EBITDA. Today, with a full year impact of Global Restoration, FirstService Brands annual revenues are at $1.2 billion, a roughly sixfold increase over 5 years, and EBITDA is up approximately 3.5x versus the 2014 level. Much of that growth has been fueled by acquisitions to drive our company-owned strategy at California Closets and Paul Davis together with the addition of a new platform with Century Fire Protection, and now most recently, the Global transaction. Most importantly, we've used our strong excess free cash flow to add these businesses at disciplined valuation multiples, thereby increasing our probability of realizing attractive returns on incremental capital deployment. We also acknowledge the benefit we've had from the strong macro tailwinds that have assisted the organic growth in these businesses. And we realize that under certain market conditions, including the current crisis, we could see periodic tempered growth. The key overall takeaway, however, is that over the long term, these company-owned strategies have delivered superior growth for FirstService and driven significant value creation for our shareholders. Lastly, on the topic of our capital deployment. We continued our now long-standing trend of incremental dividend increases for our shareholders. For the fifth consecutive time since our 2015 spin-off into a new public company, we announced in early February of this year, another 10% hike in our annual common share dividend to USD 0.66 per share. Investors have now seen a 65% cumulative increase in the 5 years since our spin off. To wrap up the financial summary for 2019, let me walk through our balance sheet. We've touched on the significant transaction activity during the year in prior comments, and all of this drove some key moves in our capital structure. Throughout the year, we received tremendous support from our bank syndicate. We initially worked with them in early 2019 to upsize our revolving credit facility from $350 million to $450 million. Shortly on the heels of that move, our banking partners stepped up again to help finance the Global acquisition in midyear, providing an incremental $440 million term loan to increase our overall credit facility to $890 million. Post the Global acquisition, our leverage, as measured by net debt to trailing 12 months EBITDA, exceeded the 3x level. To subsequently rightsize our capital structure near year-end, we completed a $200 million share offering, our first public issuance of equity in over 20 years. While we were highly reluctant to dilute existing shareholders, the equity financing allowed us to recalibrate our leverage down to 2.4x at year-end. While higher than the 1.4x level for the prior year, we currently sit within our long-term target leverage range of 2 to 2.5x. We are also well armed in terms of our liquidity with approximately $380 million of combined cash on hand and remaining capacity under our credit lines. As we have often stated previously, maintaining financial strength and flexibility on our balance sheet is a key tenet of our business model and our one-step-at-a-time growth philosophy. And in an environment like today, liquidity and balance sheet strength are even more critical. Now let me turn it back over to Scott for his closing comments.

Thank you, Jeremy. As has been my practice for the last 2 years, I want to use this opportunity to highlight our social purpose initiative and give you an update. When we began our social purpose journey in 2017, you will remember there was an emphasis on the communities where we live and work. Every office across FirstService organizes and participates in events that support the underserved in their local communities. This emphasis on community continues, and it is a key component of our culture at FirstService. In 2019, we expanded our social purpose platform to include 2 other important pillars: our people and our environment. The FirstService teams have embraced the broader platform. And this past year, we saw many of our operations add initiatives, programs and events that incorporated the 2 new pillars. I had the opportunity to attend and participate in a number of events this year, and I continue to be amazed and extremely proud of the engagement across the company and the impact we are having. I encourage you to check out our website for details and stories about how our teams are bringing our social purpose to life. In closing, I want to touch on our business model and the path forward. Jeremy talked about our equity offering and highlighted that it was our first public equity raise in over 20 years. In 1998, we raised $20 million. Since that time, we have grown our revenues and EBITDA by about 20% on a compound annual basis. We grew our business from $150 million in revenue to over $2 billion with internally generated cash flow and modest borrowings. This track record is a reflection on our powerful cash flow business model and our ability to grow organically. We have contractual and recurring revenue that we grow every year. Our CapEx and working capital requirements are modest, which results in strong free cash flow that we have successfully invested in our business to drive superior growth over a long period of time. You will note that we grew through the last recession in 2008, 2009. Our business model has historically proven to be very resilient. Today, with COVID-19, we face a different level of uncertainty, and several of our businesses will be adversely impacted. The duration and severity of the pandemic remain unclear. But we are optimistic through our diversified service model and balance sheet, we will withstand this economic shock. Furthermore, when we emerge from this crisis, we are optimistic our businesses will reaccelerate quickly and take full advantage of the growth opportunities in their respective markets. Longer term, we believe that our teams and brands will continue to win and take market share, and we have confidence that we will continue to grow at our stated goal of 10% on average at the revenue line and that we'll reach that level at the EBITDA and earnings per share lines. Thank you, everyone, for attending today virtually or dialing in. Please be safe. This concludes our 2019 Annual General Meeting.

Ladies and gentlemen, this concludes the Annual General Meeting conference call. Thank you for your participation.