FirstService Corporation (FSV) Earnings Call Transcript & Summary

10% plus revenue growth. Let me now hand off to Jeremy.

Thank you, Scott. Good morning, everyone. As you just heard, we're pleased with our consolidated third quarter results, particularly given the organic top line performance, which exceeded our expectations. . For the quarter, we recorded revenues of $1.53 billion, up 6% and adjusted EBITDA of $170 million, a 3% increase relative to the prior year period. Our consolidated EBITDA margin for the quarter was 11.1%, down modestly from last year's 11.4% level. Adjusted EPS during Q3 was $1.89 and resulting in growth of 7% quarter-over-quarter. For the 9 months year-to-date, our consolidated financial performance includes revenues of $4.3 billion, up 4% over the $4.1 billion in the prior year. Adjusted EBITDA at $437 million increase year-over-year, with our overall EBITDA margin at 10.2%, relatively in line with the 10.3% margin for the prior year period. And lastly, our adjusted EPS year-to-date is $4.57 and reflecting 4% growth over the $4.39 reported for the same period last year. Our adjustments to operating earnings and GAAP EPS in providing adjusted EBITDA and adjusted EPS, respectively, are disclosed in this morning's earnings release and are consistent with our approach in prior periods. Turning now to our segment performance. I'll start at FirstService Residential. In the third quarter, we generated revenues of $633 million, resulting in 5% growth over the prior year period. EBITDA was $71 million, a 7% increase over the third quarter of last year. Our current quarter EBITDA margin came in at 11.3% with the basis points of margin expansion versus the prior year quarter, matching our year-to-date margin improvement as our operating teams further optimize labor costs and find incremental efficiencies. In the fourth quarter, we will see a continuation of these efforts and together with the seasonal benefit from exiting noncore Aquatics operations earlier this year, we expect our FirstService Residential division to show more significant margin expansion than the year-to-date performance. Looking next at our FirstService Brands division, we generated revenues of $898 million during the current third quarter, up 7% over Q3 '25. EBITDA for the division was $102 million matching the prior year level. Our margin of 11.3% compressed 80 basis points compared to the 12% -- 12.1% margin in last year's third quarter. The lower margin was primarily reflected in our roofing operations, which was impacted by both the declining revenues that Scott noted as well as gross margin compression due to competitive market pressures at certain key branches. In addition, the division profitability included a modest decline in home improvement margins partially offset by an uptick in margins at restoration brands on the back of their strong revenue growth in the quarter. Now provide a summary of our cash flow and capital deployment. During the third quarter, we generated almost $125 million in cash flow from operations prior to working capital up 6% year-over-year, in line with earnings growth. Our cash flow after accounting for working capital requirements was $84 million, with the decline quarter-over-quarter due to higher work in process inventories and accounts receivable in conjunction with increased activity and pipeline levels in our restoration brands. Year-to-date, we have generated more than $300 million in operating cash flow at a healthy 70% of EBITDA conversion rate. Capital expenditures during the quarter totaled $28 million and spending year-to-date sits at $88 million below our 2025 levels. We expect full year CapEx to now come in at approximately $125 million, in line with last year and lower than our original 2026 budgeted CapEx of $140 million. With modest tuck-under opportunities tempering our acquisition spending at $25 million for the quarter, we focused our capital deployment efforts on buybacks of FirstService shares. In Q3, we repurchased 2.2 million shares at a cost of a little more than $300 million under our normal course issuer bid. Year-to-date, since the beginning of the second quarter, we have now repurchased $4.1 million or 9% of our outstanding shares. This has contributed to stronger EPS growth in our Q3 results and we believe that this investment will yield attractive returns over the long term. We currently have remaining capacity to buy back an additional 2.6 million shares under our existing normal course issuer bid which expires in late August 2027. We will continue to judiciously balance our share repurchases after taking into account other factors, including our acquisition pipeline opportunities the market valuation of our FirstService shares and balance sheet, all with the intention of driving long-term value for our shareholders. And on the topic of our balance sheet, we ended Q3 with net debt of $1.4 billion, resulting in a leverage of 2.4x net debt to trailing months EBITDA and up sequentially from 1.8x at the end of the previous second quarter, largely due to our share buyback activity. This capital structure remains conservative and well within our comfort level given the strong free cash flow model of our enterprise. We also have approximately $500 million of total cash and credit facility capacity providing us with ample financial flexibility and liquidity. Wrapping up with our balance of year outlook, the aggregation of the brand-by-brand top line indicator Scott has provided will drive to similar mid-single-digit consolidated revenue growth for our upcoming fourth quarter as we delivered in the third quarter. This will also culminate in mid-single-digit growth in consolidated annual revenues for the full year and at the upper end of the range we expected at midyear. On the EBITDA line, for Q4, we expect consolidated margins to be slightly higher than prior year driven by FirstService Residential, as noted in my earlier comments. For the full year, we are maintaining our target provided at the end of Q2 of mid-single-digit consolidated annual EBITDA growth and margins relatively in line compared to prior year. During our February year-end earnings call, we will provide more details on our outlook for 2027. And that now concludes our prepared comments. Michelle, you may now open up the call to questions. Thank you.

[Operator Instructions] Our first question is going to come from the line of Aaron Kyle with CIBC.

Congratulations on the strong quarter. It's good to see brands organic growth return in the quarter. I just want to ask a question on the margins. So I appreciate you touched on it there. Jeremy, on the roofing. But are you able to break out how much of that pressure in the roofing business is truly competitive pricing pressure versus lower volumes? And then as it relates to that, just with competition pressure continuing to increase or at least remain consistent. Do you expect the margin profile in that business can recover before the roofing volumes return?

Yes, it's hard to parse out the -- how much of it is due to top line declines versus margin compression, both are contributing factors. And we're obviously taken the approach in this competitive environment to make sure we're being competitive to get enough projects in the hopper and protect the top line as best as possible. We expect these competitive pressures to be there for a decent period of time. It's mainly concentrated in Florida, but it is in some other locations across our branches as well. But equally meaningful contributions due to the decline in revenues as the gross margin impact. Scott, I don't know if you want to provide any further outlook on the top line competitive pricing dynamics.

No. I think certainly, in terms of line of sight, we expect it to continue to be very, very competitive over the near term, yes.

Maybe just a follow-up on that, how much visibility would you say that you have into this business? Because I appreciate there are several branches kind of spread across several states. -- what would you say in terms of your visibility into the next months?

Listen, we have -- we're just starting on our ERP implementation. So right now, we're working on off different systems. So our visibility relative to our other businesses is limited. The visibility we have is related to our backlog and then coming up with our -- in our bid activity and then trying to assess timing around converting that backlog into revenue. And honestly, we've had difficulty forecasting that the last several quarters. So we're implementing this system. It will improve our information, data and visibility markedly. So we'll be through that in 2027.

That's helpful. And maybe just 1 more for me on the restoration business. Just as we think to Q4 and the impact from Hurricane ISIS. Sounds like from some of your prepared remarks, the impact of ForService might have been a bit lower than we had anticipated. So any color you can give us there in terms of how we should think about modeling name storm revenue for Q4 would be helpful.

Yes. It will be immaterial to our results. We have a lot going on in restoration, but it's not really tied to the recent hurricane. I mean we've learned over the years that every storm is different. It depends on Hurricane uses. Sort of tempered quickly as soon as it hit landfall and the water damage wasn't near what was feared. So there was -- there were strong wins. We do have some roofing repair work, some restoration work, but it's not material and doesn't form a big part of our backlog at all.

And one moment for our next question. Our next question will come from the line of Stephen MacLeod with BMO Capital Markets.

Just wanted to follow up on the residential business. I mean, maybe just specifically on restoration. I guess notwithstanding the fact that the hurricane I say us, is not that material to the backlog. Can you just talk a little bit about what your backlog sort of looks like right now and whether you saw it grow from what you had referred to or what you had talked about at the end of Q2?

It's about the same level as too, Stephen. During Q3, what we did see is more water mitigation work then was visible at the time of our Q2 call. And mitigation really never hits our backlog. It's quick turn work and some of the activity I described in Hawaii and across certain regions in Canada, comprised a healthy level of mitigation and that was a big driver for us in Q3.

Okay. That's helpful. And then maybe just on the Q4 margin outlook. You gave a lot of color specifically on the residential business. You gave a lot of color around the top line expectations for Q4. I'm just curious, would you expect that the margins will continue to remain under pressure in the residential business into Q4?

When you say -- you mean when you say the residential business.

Sorry, I meant to say brands.

Yes. Brands margins will be modestly lower. We're going to grow EBITDA in our mind but the margin will be down, again, largely due to the same dynamics as in Q3 with roofing margins down and every other business sort of roughly in line to partially offsetting that.

Right. Okay. Okay. That's great. And then just -- sorry, go ahead.

No, I was going to say the full year indications I gave for consolidated margins being in line with us growing mid-single digits should get you to be able to sort of fill in the missing piece for Q4.

Yes. Okay. Okay. That's great. And then maybe just finally, on the NCIB, you've obviously been very active you still have a 10% NCIB out there with 2.6 million -- 2.6 million shares of capacity. I mean barring any other change in the acquisition pipeline, would you expect to continue to be sort of very active on that NCIB?

We'd be active, but not as active as we have been starting at the beginning of Q2, we started with a much lower leverage level. I think right now, it's going to be in the lockstep with generating free cash flow, which our business is always collectively do. And we'll be using free cash flow to buy back shares, assuming that the stock price is at rent levels that we feel are attractive to be doing that and as also qualified, as you said, by our acquisition pipeline opportunities.

Yes. Okay. That's great.

And 1 moment for our next question. Our next question will come from the line of Stephen Sheldon with William Blair.

I wanted to ask a follow-up question on roofing margins. It's great to hear that the backlog there is improving. But curious, I guess, are the competitive pressures getting any better or worse than you've seen in the prior few quarters? I guess, how would you -- has there been any changes, I guess, in bidding activity and us and how that -- what that could mean for margins as we think about fourth quarter and into early next year.

We think that the margins will continue to be under pressure. As I said, definitely into Q4, we'll go through budget with the business as we do with all of our brands for the balance of the year and have a better outlook for 2027. But I think any green shoot that Scott articulated in these comments will be slow to materialize and I think we'll have more to say on the margin profile for our brands collectively with indicators for each in our February quarter.

Got it. And then just a follow-up on residential. It sounds like you're expecting similar growth there in the fourth quarter as the third. I wanted to specifically ask about I guess, the new business pipeline, how that's shaking out to win new contracts and support new communities. . And then, I guess, kind of and what that means, I guess, for your visibility into growth for next year?

Stephen, when you say new communities, are you talking about new development.

New customers, so whether it's new development, customers competitive wins against, yes.

Yes. I mean we have a strong sales pipeline in that business, working on it all the time. I did say in my prepared comments, we're trying to balance price and margin -- organic growth and margin and because these situations are always very price competitive. So our focus is on larger, more complex management opportunities, high rise and master planned. Historically, we have benefited from new development, and that is slower in this environment. So there's a higher proportion of our new wins coming from existing communities. So I would say it's it's solid and similar to the level it's been at the last several quarters, which is, I guess, reflected in a stable organic growth rate that you're seeing.

And 1 moment for our next question. Our next question comes from the line of Himanshu Gupta with Scotiabank.

Thank you, and good morning, everyone. So just on roofing first question, what is the preference or strategy here? I mean, are you looking to preserve margins or go after organic revenue growth? And are you like open to take low-margin business in the roofing side?

Yes.Imasu, it's not dissimilar to my comments on residential. We're trying to find that balance. I mean we are certainly choosing not to bid in certain situations but in others, with long-term relationships with strategic relationships, we are adjusting our pricing methodology to be competitive for important customers and relationships. So we're picking our spots. And that's really -- those decisions are being made at the local level. And the situation is very different from branch to branch and market to market. We talked about Southwest Florida. We've talked about Vegas. Those are somewhat unique situations, but it is the strategy a little bit different market to market depending on the competitive situation.

Okay. And then just talking about market to market here, how many branches in moving, do you think are showing negative growth on organic growth basis? So I mean just trying to see that how widespread is the pocket of weakness beyond Florida and Las Vegas? .

Yes. It's -- I mean, we are overweight in Florida, just as a percentage of our revenue, if you will, and opportunity. And so that does weigh on us. If you ex Florida, let me put it to you this way. Ex Florida Q4, we would show single-digit organic growth. So we have a few branches that are still showing weakness, but the majority of them are are looking to grow in the next quarter and certainly next year. And part of that is we're coming up against weaker comps also. But the majority of them are growing.

That's very helpful. And 1 follow-up now. You mentioned moving backlog has improved. I mean, on a quarter-over-quarter basis. Is the improvement led by reroofing business? Or are you starting to see some backlog from new construction as well?