FirstService (FSV) Q3 2026 earnings call transcript

Thank you, Michelle. Good morning, everyone. Thank you for joining our Q3 conference call. As usual, I'm on today with Jeremy Rekusen, our CFO. I'll kick us off with some high-level comments, and Jeremy will follow with more detail. We posted solid results this morning that in aggregate met our expectations and highlight the diversification of our business model. Total revenues for the quarter grew by 6% over the prior year with organic growth at 4%. We continue to face headwinds across a number of our businesses and are very pleased to show this level of growth in a tough economic environment. We believe it bodes well for our fourth quarter and into 2027. EBITDA for the quarter was up 3%, reflecting a consolidated margin of 11.1 compared to 11.4% last year, and earnings per share were up 7%.

Moving to our divisional results, first service residential revenues grew by 5% over the prior year reflecting the net of contract wins less losses condo HOA management is a price competitive business always has been our teams at first service residential continue to do a great job balancing organic growth with margin Q3 represents the eighth consecutive margin with some level of margin improvement while averaging mid-single-digit organic growth. Jeremy will speak more on margins in his comments. Looking to the fourth quarter, we expect a similar result at First Service Residential.

Moving to First Service brands, revenues for the quarter were up 7% with strength at our restoration brands and Century Fire, supported by solid mid-single growth at our home service brands partially offset by revenue declines within our roofing platform revenues for our two restoration brands Paul Davis and first on-site were up 10% from the prior year better than expectation we mentioned during our Q2 call that we had made progress late in Q2 signing work and building our pipeline back to a healthy level during Q3 we continued to see solid activity levels that were generally broad-based across North America we're geographically diversified across our two brands both Paul Davis and first on-site have strong market positions in Canada two of the top three companies by our estimate also first on-site has a very strong position and is the market leader in Hawaii which has been hit by a series of storms over the last several months.

Activity across Canada and Hawaii helped drive our growth in Q3. Conversely, claim activity in the continental U. S. across the industry has been down year to date at the end of Q3. Notwithstanding, we've been successful in signing a number of large-loss projects on the mainland that will be converted to revenue over the next many months. In terms of named storms, Hurricane Isaias hit the Florida Panhandle on October 10 as a Cat 2 storm. It was primarily a wind event with some flooding and in general caused less damage than originally feared. Industry insurance claims have been much lower than expected. Our restoration brands have secured some work from the event, primarily mitigation and board-up, but not a material amount.

Similarly, we've secured roofing repair contracts through our operations at RCA, but again, it won't be material to our Q4 results. We have a solid backlog at our restoration brands heading into Q4 and expect to show mid to high single digit growth for the quarter moving to our roofing segment revenues for the quarter were down four percent on a reported basis and high single digit organically as expected the roofing market continued to be a challenge during the quarter particularly in a few of our larger markets I will say that we did start to see some green shoots across a number of of our branches and finish the quarter with with a backlog that was up sequentially and at the highest level we've seen over the last year looking forward to the fourth quarter we expect to show mid single-digit reported growth and organic growth that is flat to slightly down from the prior year as I mentioned we will see some roof repair work in the Florida panhandle from hurricane is a yes but otherwise the Florida market remains very difficult and is holding us back from showing more improvement in Q4 now on to our home service brands which has a group generated revenues that were up mid single digit from the prior year primarily due to the tuck under acquisition of the Indianapolis California closets operation in Q1 of this year.

Organic growth was positive but modest. Our teams continue to battle headwinds and produce results in this segment. During the quarter we again improved conversion and close ratios and drove a higher average job size to overcome a year-over-year reduction in leads and activity. Both the housing market and consumer sentiment worsened during the quarter and are at historic lows home improvement indices and forecasts are pointing to lower levels of activity in the coming months and we expect to see that in our near-term results looking at Q4 we expect revenues to be flat and aggregate and down low single-digit organically and I'll close with century fire where we had another strong quarter in line with expectation revenues were up over 10% versus the prior year including high single-digit organic growth late in the quarter we closed on the acquisition of ANA fire protection based in Greenville South Carolina ANA is a leading provider of fire sprinkler design installation inspection and repair services to commercial customers across South Carolina and into North Carolina and North Georgia Jake gil strap president of ANA will continue to lead day-to-day operations ANA represents another in a long line of exciting partnership transactions at century fire that have expanded our geographic footprint and enhanced our service capability looking forward for Century, our quarter end backlog ticked up sequentially again, and we expect to finish the year with a similarly strong 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 a dollar one dollar eighty nine cents resulting in growth of seven percent quarter of a quarter for the nine months year to date our consolidated financial performance includes revenues of four point three billion dollars up four percent over the four point one billion dollars in the prior year adjusted EBITDA at four hundred and thirty seven million dollars a 3% 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 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 segmented performance, I'll start at first service 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 30 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 non-core aquatics operations earlier this year, we expect our First Service Residential Division to show more significant margin expansion than the year-to-date performance. looking next at our first service brands division we generated revenues of 898 million dollars during the current third quarter up 7% over Q3 25 EBITDA for the division was 102 million dollars matching the prior year level our margin of 11.3 percent compressed 80 basis points compared to the 12 percent 12.1 percent 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, I'll 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 a 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 total $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 issue 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 first service 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 2.4 times net debt to trailing 12-month EBITDA, and up sequentially from 1.8 times 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 your 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 deliver it 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 mid-year.

On the EBITDA line for Q4, we expect consolidated margins to be slightly higher than prior driven by first service 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.

Yeah, it's hard to parse out how much of it is due to top-line declines versus margin compression. Both are contributing factors, and we're obviously taking 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 well 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.

Yeah, 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, you know, Hurricane Isaias sort of tempered quickly as soon as it hit landfall. And the water damage wasn't near what was feared.

So there were strong winds. 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.

It's about the same level as Q2, Stephen. And then, during Q3, what we did see is more water mitigation work than 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.

When you say the residential business, they're going to be...

Yeah, 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.

No, I was going to say, the full year indicators 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 pieces for Q4.

We started with a much lower leverage level. I think right now it's going to be in lockstep with generating free cash flow, which our businesses always collectively do, and we'll be using free cash flow to buy back shares, assuming that the stock price is at levels that we feel are attractive to be doing that. and has also qualified, as you said, by our acquisition pipeline opportunities.

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 his comments will be slow to materialize And, you know, I think we'll have more to say on the margin profile for our brands collectively with indicators for each in our February call.

Steven, when you say new communities, are you talking about new development?

Yeah, I mean, we have a strong sales pipeline in that business. We're working on it all the time. You know, I did say in my prepared comments, we're trying to balance price and margin, organic growth and margin, because these situations are always very price competitive. So our focus is on larger, more complex management opportunities, high-rise and master-planned. And historically, we have benefited from new development, and that is slower in this environment.

So there's a higher proportion of our new winds coming from existing communities. So I would say 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.

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

Yeah, 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. You know, if you, ex-Florida, let me put it to you this way, ex-Florida Q4, we would show, you know, single-digit organic growth. So we have a few branches that are still showing weakness, but the majority of them 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.

We're seeing a little from new construction. It's heavily weighted to re-roof, but we are seeing some wins recently, new construction wins.

It's part of it, but it's really just the pickup, which is modest, but it is an increase in activity.

and new construction is part of that, but we're also seeing it in other areas also.

So there's a few, let me approach it a few ways. We're still working on a number of jobs that involve mitigation, quick-turn mitigation that never really hits our backlog. So, while the backlog is at a similar level, we are very active on a number of different projects. And then to your pipeline comment, we do have some activity that could lead to some larger projects that will that will hit the backlog and and see it tick up by the end of Q4 but that you know that's a certainly not a certainty at this point there's a lot that depends on that got it yeah I think that's that's helpful and maybe just one last question capital allocation is it a target leverage here in the context of you being very active on buyback.

No. And that's syncing up with my earlier comments on a prior question. You know, mid-twos of leverage, we're at 2.4, so we're in the zone of still at our comfort level, but don't want to go much higher than that, except for a very temporary period. So that's why I think our buyback activity will be, again, more judicious and in lockstep with free cash flow generation.

Yeah, I mean, certainly all of those, many of those factors come into play, Tim, but our focus on roofing acquisitions really hasn't changed from the beginning. So we're focused on re-roof, we're focused on commercial, and we're focusing on partnering with founders and longtime owners and continuing to grow the business with them in partnership. And so that hasn't changed.

When we partnered with the RCA team, we bought a number of branches. We were 70% re-roof, 30% new construction. We would like to tilt that more towards re-roof as we move forward with acquisitions and also significantly increased the service component, which we've been successful at doing in Century Fire and we're very focused on at RCA.

No, I mean, that's a good point, and I should have added that. Certainly, we're focused on expanding our geographic footprint, and we have a particular focus on white space areas for us where we want to be. So we won't buy the businesses we own in local markets. Those are our partners. We're not going to double down on those markets.

So, yes, we have priority white space that we're focused on.

It would be modest, Frederick. You know, multiples remain very high. I think there are fewer bidders on average for situations we're seeing. But our focus is really on developing relationships with Taka. Like the ANA fire deal that we announced this week, you know, that's a family-owned business. They're familiar with Century Fire, familiar with the Century's reputation, familiar with other companies that have achieved great success post-partnership with Century. So we're trying to really differentiate ourselves in situations like that rather than competing on opportunities that are being widely marketed, if you will.

So honestly, I don't see the competition reducing right now.

Well, I think that we will see in roofing, in restoration, we will see private equity-owned companies that, you know, fail. It's a tough environment in both restoration. I mean, I think we're sort of breaking the mold a little bit because claims have been down for a few years. There haven't been gulf storms. You know, we had one recently.

So a lot of companies really depend on that activity. And in roofing, it's just a very weak demand environment. And we're seeing distressed situations. We're getting lots of calls from folks inquiring about joining our platform. I think it's going to have to be an extended period of weakness here to see some of these things. But I think the multiples in roofing are probably coming down a bit. not seeing it in fire or first service residential residential property management but I think in roofing we are seeing multiples come down a bit thanks Tom that's helpful thank you one moment for our next question our next question will come from the line of Darrell Young with Stiefel your line is open please go ahead good morning everyone I just wanted to ask on the restoration business, if the new large contracts that you have in the pipeline, would these be traditional jobs that you would have worked on in the past, or are these new construction with a different, I guess, revenue and earnings profile to them?

No, we're not taking on or looking at any fixed-price contracts or any sort of different type of contract that would not that we would we'd not be deploying our sort of expertise typical expertise so there's no additional execution risk it's a you know it's a balance that I we have in the last few quarters started to look at opportunities that are with with the same customer base and in the same verticals but involve more capital improvements and and new construction we've been asked to bid submit bids really based on our experience and reputation. So we do have a few wins and we're waiting to hear on other opportunities, but it would be very similar to what we do in a large loss restoration job.

I don't know if I answered your question.

No, I think what really happened was the re-roof work got pulled forward with Hurricane Ian. So, you know, that sort of pulled forward a few years of re-roof work, and really more so than we even understood. good and so while our benefit our business has benefited at the time and have have you know even at this time last year had some hurricane in in the backlog the fall off has been pretty significant since then so they're not waiting. It's just got the storm basically created all the roof work at a point in time.

Yeah, I mean, we've been run rating for the year at around 30 basis points of margin improvement, so that's kind of core and expect that to continue for Q4. And then overlaying on top of that would be, again, not having this residential aquatics business that typically loses money in the seasonal trough period of Q4, not in our numbers. So, you know, I'm not going to put a precise number on where we'll get to our margin improvement, but I'm going to say at least double the 30 basis points that we've seen year to date.

Within the brands division overall or one of the particular business?

No, home service brands will be – our expectation is they've been down the last couple of quarters, a combination of flat revenues, lower volumes, and marketing spend to support the top line. But we'll be roughly in line in Q4s, again, And depending on how we address the – we're always tweaking the dial there around our marketing and promotional activity to support the top lines. And we're looking at that in the context of our lead flow and other front of the funnel indicators. But home services margins should be roughly in line with Q4 last year in the upcoming quarter.

There's not a lot. I mean, we've only spent 25 million of spend in the current quarter. You know, it's going to be on a quarterly basis. We're talking about, you know, mid-single digits of revenue. Some of the other acquisitions that we did were a lot earlier in the year, so we'll be lapping most of that next year. So most of our growth into 2027, again, will give more color in February. is going to be organic unless we close other acquisitions in the balance of the fourth quarter.