FirstService Corporation (FSRV) Annual Shareholders Meeting Conference Call April 17, 2013 4:00 PM ET
Jay Hennick - Founder & CEO
Scott Patterson - President & COO
John Friedrichsen - SVP & CFO
……..as there is no further business, I declare the formal portion of this meeting terminated. I will now turn over the podium to Mr. Hennick, who will start the management presentation. Thank you.
Thank you, [Peter]. Good afternoon everyone. Welcome to this year’s annual meeting of the shareholders. I'm pleased to have with me today our Chairman, Peter Cohen; Scott Patterson, President and Chief Operating Officer; John Friedrichsen, Senior Vice President and Chief Financial Officer and at the far right your left Doug Cooke, Vice President and Corporate Secretary.
In a few minutes Scott will highlight some of our operations. John will follow with some overview of our financial results and then I'll close with some thoughts on where we expect FirstService to be in the years to come. Since 1993 our goal has been focused and consistent. It’s been to create value for shareholders one step at a time. Year after year we have followed the disciplined approach, concentrating on global real estate services, strengthening existing operations, and ceasing on growth opportunities when they presented themselves.
2012 was another excellent year for FirstService. Revenues hit a record $2.3 billion. We generated exceptional return from Colliers International, FirstService Residential, and FirstService brand, even though results from field assets were a bit disappointing. Most of you will recall a few short years ago during the financial crisis Field Asset was generating exceptional cash flow for FirstService. Those earnings were incredibly important to us at the time and they gave us the firepower we needed to invest in Colliers at the absolute perfect time in the economic cycle. Now those investments are paying off handsomely, as you will hear in the next few minutes.
Capitalizing on market conditions at the right time is just one example of how our disciplined approach works, and its one of the key reasons why FirstService has been able to deliver outstanding returns to shareholders over a long period of time. Looking forward, we continue to create value through our three growth engines. Colliers International, one of the top global players in commercial real estate; FirstService Residential, North America’s largest residential property manager; and Property Services, a leading North American provider of essential services delivered through company owned operations, franchise systems and contractor network.
Over the past few years Colliers International has grown to become our largest business, corporate revenues are about $1.3 billion, and system wide sales including revenue generated from our franchises and affiliates are in excess of $2 billion a year. Around the world more than 12,000 Colliers professionals operating from 482 offices in 62 countries are united by a spirit of enterprise. That means taking initiative, thinking creatively, working collaboratively all to accelerate the success of their client. Being enterprising is the essence of the Colliers’ brand and the results are really quite striking.
Last year, Colliers’ revenue and EBITDA grew by 18% and 52% respectively and margins increased a full 150 basis points to almost 7%, well on our way to our stated goal of 10%. Growth in the United States was an impressive 21%. Strong market share gains and continued growth in investment sales and capital market as well as rapid expansion of multi market assignments with clients like McKenzie, NASDAQ, Credit Suisse among many others. Revenues in Canada, Australia and Asia also reached record levels with regional EBITDA margins well in excess of our 10% goal. And while market conditions in Europe remain challenging, FirstService took advantage as we have done so often in the past by completing the acquisition of Colliers UK adding 13 offices, 700 employees and about a $100 million in annualized revenue.
Last month we announced another important acquisition, the addition of Colliers Germany, adding market leading players in Munich, Stuttgart and Berlin and oversight of the important relationship with affiliates in Düsseldorf and Frankfurt. Germany is one of the strongest, most established and best performing markets in Europe and for us it represents an enormous growth opportunity. Having a leadership position in Germany, the anchor of the entire EU is essential to our strategy. It not only accelerates our growth in the region, but it reinforces our ability to serve client in Europe and around the world.
The FirstService partnership model has always been an important competitive advantage for us and Colliers adopted it with great success, partnering with management is often the difference between completing an acquisition or not. It opens doors, it changes the nature of the discussion, and it allows for transactions that are truly win-win, a critical factor especially when you consider we aspiring service businesses that are heavily people intensive. As a rule, FirstService partners are people who have build their businesses over a long period of time and have very deep market knowledge. They also understand that the market is changing increasingly clients are looking for service providers that can deliver seamlessly on a national or global basis.
FirstService partners are also entrepreneurial or as Colliers would call it enterprising. They want the benefits of being part of a larger, more and better capitalized organization, but they also want to retain a meaningful stake in the businesses as they run day-to-day. For FirstService and for Colliers this is always been at the core of our partnership philosophy and is always been part of this secret [sauce] that had made it successful over many years.
The new partners in Colliers, Germany are an excellent example of our partnership philosophy in action. But in truth, our new partners in Germany are really not all that new; you see they have been our Colliers affiliates or agents. We’ve worked together with them on many client engagements over the years. So in fact coming together was really just a natural step for both of us. I know they are listening today through the internet, and I would like to formally welcome them in to the FirstService family. So I would like to ask for a big round of applause to welcome the entire team from Colliers.
Before I turn things over to Scott, I would like to comment on the other announcement this month to eliminate our preferred shares and institute a dividend on our common shares. Simplifying our capital structure is a prudent move for a number of reasons, as John will explain in a few minutes. Put simply instituting a dividend on our common shares opens up a new source of investment income for our common shareholders in addition to the obvious capital appreciation they have received and will continue to receive in the years to come. But it also does something else; it introduces our shares to a whole new universe of dividend oriented investors which of course will help the liquidity in our shares.
With that I would like to ask Scott, to come up to the podium and provide some of its operational highlights, Scott.
Thank you, Jay, and good afternoon ladies and gentlemen. Jay has just provided an update on Colliers and the significant opportunities we have in commercial real estate. So I will focus my comments on updating our other division, residential property management and property services. 2013 will be a very exciting transitional year at FirstService Residential, so let me start there. As a reminder in this business, we manage low, medium and high rise condominiums and co-ops and large scale, lifestyle home owner association. We entered this business in 1996 with the acquisition of a $10 million company in Boca Raton, Florida.
Since that time, we have grown significantly balancing high-single-digit organic growth with consistent add-on acquisitions and today revenues in this division are $850 million. We manage 6500 communities, comprising 1.3 million units from 107 offices across North America. Things are very good in this business. We are the market leader through 19 separate brands across North America.
In 2012 revenues grew by 10%, 7% organically. We expect similar growth this year and we can continue down this path of growth for the long term. We believe we are in a position to be much more, to grow more quickly, to create something truly special. However to do that we need to be bold, we need to change the status quo. Let me explain.
We are the largest company in this industry. The number two player has less than half of our revenue. The number three player is about one-eighth of our size. Not only are we the largest we are also the best capitalized company. And without question we have the deepest and most experienced talent pool. These are facts.
Bottom line is we have a clear leadership position and this position is unassailable. It is not going to change. This is a business that grows one contract at a time or through one small acquisition at a time. We have a unique and sustainable position, or as Warren Buffet would say, we have a business with an unreachable moment. In fact, it is hard to name another market or industry where there is a similar position of leadership.
You might think [of someone]. As the largest invest capitalized we can create value for our clients that others cannot, a clear differentiator. We are doing this today. We have many differentiators that we have discussed here before, but we believe we can do much more by coming together as one brand, a single, well-defined and forward-looking brand with one voice, one common message, FirstService Residential.
Coming together in this way will enhance our ability to leverage our size to create even more value for our clients and our shareholders. It will also enable us to start to build lasting brand equity. The new FirstService Residential brand reflects more than a year of work seeking inputs from across the organization about our values, our strengths, opportunities. The brand will be built around our differentiator and a culture of service excellence. We see service excellence as our most important long-term differentiator.
We've made great strides over the last few years in enhancing our service culture and this is reflected in our client retention rate, which have increased from 92% in 2009 to our new normal 96% plus. We constantly measure our service quality and customer experience through the net promoters for operating system which is core for us. We believe the new unified brand will enhance our ability to build a customer-centric culture.
Our goal is for FirstService Residential to be the benchmark in residential property management to set a standard for quality and service that is unmatched in the industry. When we achieve this, clients will choose to conserve by FirstService Residential. The best people will want to work for FirstService Residential and aspirationally, homeowners will look to buy property in a FirstService Residential management community because they know their lifestyle and most important asset will be managed by them.
We truly believe this is possible and we efficiently start down this path on June 27 when we re-brand all of our residential property management company at FirstService Residential. To help make this aspiration reality, we have recruited the new leader. Three weeks ago, we were thrilled to announce the appointment of Chuck Fallon as CEO, exiting Gene Gomberg who is remaining with us in a very active role as Chairman. Chuck brings in impressive background and strategy, operations and sales and highly competitive service organization. Importantly, he has held leadership position in several successful Fortune 500 companies with well-known brands.
Chuck has a deep commitment to delivering exceptional customer service and will be building on the legacy of service established by Gene and the rest of our operating partners with FSR. We're all very bullish [both across] FirstService Residential and are confident that Chuck is the right person to build the brand and to lead this division to the next level.
Now let me give you a quick update on our Property Services division, which includes FirstService Brands and Field Asset Services.
FirstService Brands owns and operates nine property service brands, comprising over 1800 franchises, plus 11 company-owned operations that generate in excess of 1.1 billion of sales. 2012 was a good year for FirstService Brands. Revenues were up by 5% in a tough home improvement market, while EBITDA grew materially by 20%, thanks to streamlining efforts over the three years. We anticipate double-digit revenue growth over the next several years at FirstService Brands, driven primarily by increases and productivity.
All key measures across the operation including lead, average job size and close ratio are trending upward as the home improvement market pick up stream. Home improvement spending is estimated to increase by over 10% in 2013, which is the strongest level since 2012. We have a great team at brands and we are very optimistic about our prospects in this business.
Finally an update on Field Asset Services, which provide distressed property preservation services. As you know foreclosure goings have been steep and steady decline for over two years in the U.S. and revenues of Field Asset Services has fallen. The severe price competition in our market is beginning to stabilize and FAS has repositioned itself to effectively compete the new paradigm. We believe we have developed the strong difference versus our competitors in this business and there are signs supporting this as several meaningful new clients have been added over the last six months.
There is still uncertainty around future portfolio volumes and we have modest expectations for FAS for 2013. Whereas the market continues to stabilize we are comfortable that field assets will be poised to again become a meaningful contributor to our annual earnings at FirstService.
Let me now ask John to take the podium for financial review.
Thank you, Scott, and good afternoon, everyone. Against the backdrop of global markets that's seemed to be throwing falls, changeups and even the occasional (inaudible) FirstService made the most what 2012 on a way. Steady hand and a clear field division enabled us to deliver solid results last year and also laying the ground work for the important years ahead.
Scott have already highlighted some key strategic moves and updated on operation. So let me spend a few minutes providing financial review focused on our consolidated financial results for last year balance sheet and look forward. I am pleased to report that in 2012 we have the slowly improving economic conditions in most of our global markets.
FirstService had another successful year with record revenues of more than $2.3 billion, up 4% over 2011; while generating adjusted EBITDA of a $156 million and adjusted earnings per share of $1.62 both down versus the prior year. I won't get into the various components of our results; these have already been covered previously, but despite earnings that were down last year I'm still smiling, thinking about the really great momentum we are building to achieve stronger financial results in the current year and beyond.
Shifting from operating results and cash flow, our cash flow in 2012 totaled $103 million, up 26% and just over $80 million in 2011 and a strong showing to say the least. Market conditions continue to improve. We carefully allocated capital to strategic acquisitions during 2012 investing just over $19 million in Colliers UK and several smaller residential property management [services]; an amount we've already significantly exceeded in 2013 with the Colliers Germany acquisition.
We also increased our investment and capital expenditures in 2012 by 19% to $44.4 million though this was skewed higher by about $6 million to consolidate and fit out new premises for Colliers UK in Central London. Adjusted for this large CapEx last year, our CapEx was up only about 3%. As the economy continues to recover and we grow our EBITDA, we expect our CapEx to decline as a percentage of EBITDA to about 20% and we should see a return to that level in the current year.
Turning to our balance sheet and capital structure; after extending and increasing our revolving credit facilities to $350 million early last year, as 2012 unfolded, we took a closer look at the longer-term private placement alternatives and negotiated a new debt issue of $150 million in senior notes of two prominent US insurance companies closing just after year-end. At a very attractive fixed interest rate of 3.84% over a 12 year period maturing in 2025 with better aligned the time horizon of our capital structure and our long term investments in our operating business. Our last year senior note issue was in 2005 and since then we've been able to reinforce the benefits of our service line diversification, strong cash flows, high levels of recurring revenues and prudent approached allocated capital. In fact we were rewarded for this track record by securing long-term debt financing at rates materially lower than recent debt capital raises by two of our peer companies.
Our conservative balance sheet and modest leverage has provided a solid financial foundation and this has always been an important element of the FirstService strategy. We entered 2013 with our leverage measured in terms of net debt to EBITDA at just under two times and annual interest coverage of just under eight times. Of course net debt includes $77 million and 6.5% convertible debentures which are convertible for common shares at $28 during 2014 or earlier if our shares trade above $35 for an extended period in the current year. Proforma for the conversion of our debentures into equity, our leverage at the end of 2012 would have been 1.4 times and interest coverage of more than 10 times.
As illustrated by these metrics, our financial wherewithal is clear and supportive of our investment grade rating on our debt, something we are very proud of and focused on maintaining. More recently, we stepped back to the future with our recent announcement to eliminate our preferred shares. When these were created in June 2007 about a year before the onset of the global financial crisis, the investing world was a very different place and interest in growth companies paying a modest dividend with lukewarm affect.
Fast forward five years and the reality of less predictable returns has refocused investors on dividends to provide some level of annual yield to complement capital appreciation. Combined this with an overly complicated capital structure, which included the common shares, preferred shares and a convertible. We made a decision to return to our common share only capital structure, pay a modest dividend more broadly across our common shareholder base, expand our market capitalization, and perhaps most importantly, provide a greater flexibility in the future.
Once the preferred shares are eliminated and the convertible debentures converted, FirstService will have approximately 36 million shares outstanding, a market capital of over 1.2 billion based on our current market share, and a very manageable annual common dividend of about 14 million, funded from our substantial annual cash flow with no significant increase from the current outflow, leaving plenty of capacity to continue funding our operations and growth plans.
So with our past results, track record and balance sheet as a backdrop, let me conclude by outlining what we believe is a very real and possible outcome of executing our one step at a time approach to building out businesses and value for our shareholders. I will keep it relatively simple. What if we assume that FirstService generates internal revenue growth of 5% per year? What if we acquire additional operations adding another 5% for the prior year revenue through tucking our acquisitions? And what if we increase our EBITDA margins in our commercial real-estate and residential property management operations to 10% by the end of year, fifth year our stated goal.
If we are able to accomplish all three of these over the next five years, FirstService will generate about 3.6 billion in annual revenues, more than 360 million in EBITDA, and earnings per share of almost $4, a compound annual growth rate are 19%. Applying today’s market multiple of EBITDA or earnings per share, valuing our shares, drive the share prices about $70 and a very substantial increase in shareholder value during the next five years. And while there are never any guarantees about future, this is the kind of thinking we bring to FirstService each and every day, not only because it's a right way think about building our company, but because we are significant share owners too, and aligned in picking the maximize return for FirstService shareholders.
In summary, with multiple growth opportunities, a disciplined but proactive approach to allocating capital and our solid financial foundation we are very well positioned to deliver on this what if scenario and drive home returns that will score big for our shareholders.
Now I would like to turn things back over to Jay, Jay?
Thank you, John, thanks Scott. So looking back on the last year, there is no question we made great progress to FirstService. Colliers, FirstService Residential, FirstService Brands, all that had excellent years. But you know when you step back and you think about it, creating value really boils down to two simple things; the first is having a clear vision and way of doing business and sticking to it, and so things like the FirstService way which is our proven business model begins with the decentralized approach to management which includes our unique partnership philosophy which I’ve already talked about.
A decentralized approach means having a small head office to deal with a limited number of important tasks, leaving all of the rest to the very capable people on the front lines. The FirstService partnership philosophy goes hand in hand with our decentralized approach and it’s designed to align our managers with our shareholders. Our friend and mentor the late great Peter Drucker called our partnership philosophy, one of our greatest competitive advantages and I could not agree more. Our job at the FirstService head office is to ensure that each of our operations has a growth strategy that aims high on internal growth to grow faster than our competitors might in a given market.
It also means that we augment our internal growth with smaller acquisitions on an ongoing basis especially where we can leverage the massive affect to create additional value. And occasionally we reach a little bit higher for larger acquisitions especially when market conditions are right. Our job also includes monitoring performance, cash flows, capital expenditures, acquisitions also making sure that we are managing our operations effectively and generating the types of returns our shareholders expect. At the same time we encourage innovation to develop and implement important differentiators that set us apart and create value for our clients.
Scott touched on some of these; net promoter scores, which is an initiative to deliver memorable customer experiences. Another is employee net promoter scores which helps us monitor employee loyalty and engagement. If our people aren’t passionate about what they do everyday how can we expect them to deliver memorable experiences. And programs like FirstService Financial and FirstService Energy also deliver value helping clients become more energy efficient; better manage their assets, their operational risks among other things.
The second part of creating value is something that is often overlooked by investors and that's management’s track record for delivering better returns than the overall market for other investment opportunities that might be available. As former NFL coach and recent Hall of Fame Inductee Bill Parcells had said many times, you are what the record says you are and I'm proud to say that our record at FirstService has been very successful indeed.
Even though our shares did not perform as well as we would have liked in 2012, they are up more than 22% so far this year, reminding us once again that creating value is a marathon, not a sprint. If you consider the value of FirstService shares over a 17-year period, since we first listed on the NASDAQ in 1995, a $100,000 investment is worth more than $2.2 million today. That's about a 19% annualized return over a long period of time which is very impressive, especially when you compare it to the 5% you would have earned had you invested in the Toronto Stock Exchange Index with a 4% you would have earned if you had invested in the NASDAQ Stock Index for the same period of time.
So why should you invest in FirstService today because we believe the potential for future stock appreciation is better now than at any other time in our history, because we already have established ourselves as a leader in global real estate services, one of the largest markets in the world and a market with tremendous growth opportunity, because we have three engines for growth and three strong management teams already in place to capitalize on those opportunities and because we have a proven business model and way of doing business that has clearly stood the test of time.
But there's another important reason as well, and that is this, because this management team and all of the professionals and partners throughout the FirstService organization have invested a significant amount of their own money in the shares of FirstService so increasing the value of our shares in the future means as much to us as it does to all of our shareholders.
I would like to conclude by thanking everyone again for coming today, and now I would like to open things up to questions for either myself, Scott, or John. And if you have any questions you either stand up or go to one of the microphones in the middle of the room. So this has now been consistent. For the last ten years there has been no question except for one stage question that we just threw in there about five years ago.
So somebody has got, Brendan got have a question.
That question I can answer. That one I can answer. Anyway, thank you again for coming everyone. Please enjoy the refreshments in the back. Management is around. There is a lot of us around the room today. So if you have any questions, please feel free to step up and ask them. Thanks again for coming.
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