FirstService Corp. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Consolidated revenues up 25% year-over-year with organic growth at 6%, driven by Roofing Corp. of America acquisition and restoration brands' growth. EBITDA up 43% with margin of 11.5%, 150 basis points better than prior year. EPS up 30%.
• FirstService Residential: Revenues up 4%, organic growth 3% due to HOA budget pressures from rising costs, especially Florida legislation. Expect organic growth to pick up from low-single-digit range.
• FirstService Brands: Revenues up 44% driven by acquisitions and restoration brands' strong growth. Restoration brands had 25% revenue increase vs prior year. Roofing segment seasonally down in Q4. Century Fire had low double-digit growth. Home improvement brands had low-single-digit decline but optimism for improvement in 2025.

Segment Performance

• FirstService Residential: Generated revenues of $560 million, up 4% year-over-year with organic growth at 3%. EBITDA was $58.6 million, a 4% increase. The principal driver was HOA budget pressures from rising costs, especially in Florida due to legislation requiring cash reserve funding for maintenance and repairs. Organic growth is expected to be in low-single-digit range in next few quarters then pick up.
• FirstService Brands: Revenues were $836 million, up 44% year-over-year driven by acquisition of Roofing Corp. of America and tuck-unders. Organic growth was 10%. Restoration brands (Paul Davis and FIRST ONSITE) had 25% revenue increase vs prior year, organic growth north of 15%. Roofing segment had solid results from Roofing Corp of America, seasonally down in Q4. Century Fire had low double-digit revenue growth. Home improvement brands had low-single-digit revenue decline with optimism for improvement in 2025.

Guidance

• Q4 revenue growth expected to exceed 20%.
• FirstService Residential anticipates relatively flat margins in Q4. FirstService Brands expects higher year-over-year margins in Q4.
• Full-year 2024: Consolidated revenue growth approaching 20%, EBITDA growth north of 20%, exceeding prior second quarter expectations.

Risks

• HOA budget pressures in Florida from rising costs and legislation could continue to impact residential segment growth in short term.
• Competitive M&A environment with high multiples in roofing and other segments, which could affect acquisition decisions.
• Uncertainty in quantifying future revenues from storm-related mitigation work as jobs need scoping and insurance approval.

Question and Answer

Q: On the residential side on the HOA budgetary environment, how long could that remain challenged as we think about segment growth there over the coming years? And are there any ulterior benefits from this?

A: Over the last year, Boards are asking for concessions, reducing sited staff, but it's normalizing. Will carry through first couple of quarters in 2025, then expect to get back to mid-single digit long-term average. There are incremental opportunities like facilitating loans to Boards and project management services.

Q: Updated commentary on what you're seeing in the M&A pipeline. Are there certain businesses where you'd expect to deploy capital more than others?

A: Roofing is most active due to market consolidation, but multiples are high. Will be careful and pick spots.

Q: Were you referring specifically to roofing? Or are you seeing multiples elevated in other parts of your business?

A: Multiples are high across the board, but roofing is where activity is happening now.

Q: On the brand's margin, which was quite strong in the quarter. Is there any way to quantify how much of the year-over-year growth was driven by strong operating leverage within the restoration business as compared to home improvement?

A: Restoration driven higher revenue and activity levels driving operating leverage was more than half of the impact.

Q: On the brand's outlook, is there room for storm-related revenue to potentially move higher?

A: Mitigation can lead to reconstruction, but there's uncertainty as projects need scoping and insurance approval. Will have more clarity on next call.

Q: Are you starting to see any impacts on organic growth from competitive M&A?

A: It's competitive, but feel good about organic growth opportunity.

Q: On SSR residential organic growth, can you quantify like how much was due to the pricing pressure? And how much was it due to reduced scope of work?

A: It's about 3% organic growth, due to timing of contracts with concessions and net of wins versus losses, seasonal amenity services had moderate impact.

Q: Is the slowdown in organic growth mostly a Florida problem?

A: Focused on Florida, but rising costs in general and insurance impact communities elsewhere, but not as elevated as Florida.