Scott Patterson - President and Chief Executive Officer Jeremy Rakusin - Chief Financial Officer.

Stephen MacLeod - BMO Capital Markets Frederic Bastien - Raymond James Anthony Zicha - Scotiabank Marc Riddick - Sidoti Varun Choyah - CIBC.

Welcome to the third quarter investor's conference call. Today's call is being recorded. Legal counsel requires us to advise that the discussion 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 any future results, performance or achievements contemplated in the forward-looking statements.

Additional information concerning factors that could cause actual results to materially different from those in the forward-looking statements is contained in the company's annual information form as filed with the Canadian Securities Administrators and in the company's annual report on Form 40-F as filed with the U.S.

Securities and Exchange Commission. As a reminder, today's call is being recorded. Today is Wednesday, October 26. I would like now to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir..

Thank you operator and welcome, ladies and gentlemen, to our third quarter conference call. Thank you for joining us. With me today, of course, is our Chief Financial Officer, Jeremy Rakusin. And together we will walk you through the results for the quarter and answer your questions.

This morning, we announced very strong results for the September quarter with revenues 17% over the prior year, EBITDA up 20% and earnings per share up 24%.

The revenue growth was largely driven by acquisition of Century Fire earlier this year but also supported by solid mid single-digit organic growth and tuck-under acquisitions within both of our divisions.

As we have indicated in the past, our long-term goal is to average greater than 10% revenue growth with leverage of the EBITDA line and then again at the earnings per share line.

This quarter's year-over-year increases of 17% revenue, 20% EBITDA and 24% EPS certainly keeps us on track of that our long-term goal and also sets us up to achieve our more specific full-year targets for 2016. At FirstService Residential, revenues grew 8% in total, 5% organic.

Organic growth was balanced between increases in management fees from new contract wins and increases in ancillary service revenue. Regionally, growth was driven by strong results in California, the U.S. Midwest and Canada, particularly the Toronto market where new development continues to be very strong but also Vancouver.

Organic growth for the division was somewhat tempered this quarter by low single-digit increases in a few regions including our large Florida business. Importantly, at FirstService Residential we continued to show solid and continuous improvement in our EBITDA margin, up 50 basis points this quarter and 80 basis points year-to-date.

Jeremy will expand on this on his comments. Moving on to FirstService Brands.

Revenues were up 53% versus the prior year, due primarily to the acquisition of Century Fire Protection, but also influenced by the Paul Davis and California Closets tuck-under acquisitions completed over the last 12 months in advance of our company-owned strategies in those brands.

Organic growth for the quarter was 7% driven by strong growth at California Closets, Floor Coverings International and Pillar to Post Home Inspection and supported by solid result at Paul Davis Restoration and CertaPro Painters.

These results were offset somewhat by year-over-year revenue declines at two of our smaller brands, College Pro Painters and Service America. The seasonality College Pro was significant with over 40% of annual revenues earned in the third quarter.

This year the number of seasonal franchises is down at College Pro and the resulting revenue decline diluted growth for the division. At Service America, the commercial side of our business, large HVAC installation and repair was down from prior year, in line with slowing new development in the Florida market.

The drag on divisional organic growth in these businesses was about 200 basis points. Other wise, our brands continued to be buoyed by home improvement market that remained strong.

Rising home values and tightening inventory of for sale homes will continue to drive this market well into 2007 and we continue to work on expanding capacity in many of our brands to capitalize on this momentum.

During the third quarter, we announced the acquisition to two Paul Davis franchises, North Florida and Connecticut, an important step for us as we continue to build a national company-owned platform at Paul Davis. North Florida will serve as the hub of our U.S. Southeast region while Connecticut will expand the geographic reach of our U.S.

Northeast region with our Central Pennsylvania operation acquired in the second quarter of last year serving as the Northeast hub.

Also during the third quarter, we advanced or initiated discussions on several incremental acquisition opportunities and accelerated planning around necessary shared services infrastructure for the company-owned platform at Paul Davis.

During the quarter, we also announced the acquisition of our California Closets franchise in the important Washington DC market which brings the number of company-owned operations to 13 in a system that comprises 80 California Closet operations in total.

Seven of the 13 company-owned operations are now utilizing our centralized production center in Phoenix and we are seeing continual improvements in efficiency as we incrementally add to capacity utilization.

We are right on track with our Western production facility and look to open our Eastern production facility in Grand Rapids, Michigan in the first half of 2017. At that time, we will start to transition products from company-owned operations in the Midwest and on to East Coast.

Before I ask Jeremy to walk through the financial results, let me just add that we enjoyed another very strong quarter from Century Fire Protection. Revenues are growing and the margins are strong meeting or exceeding the pro forma that we developed during due diligence.

I would also say that we are made progress in identifying strategic tuck-under acquisitions and look forward to adding to those platform over the next several years.

Jeremy?.

Thank you Scott and good morning everyone. As highlighted by Scott in his opening remarks, we reported a strong quarter with revenues at $409 million, adjusted EBITDA at $47 million and adjusted EPS at $0.62, up 17%, 20% and 24% respectively. Looking at our consolidated results for the nine months year-to-date.

We generated revenues of $1.1 billion, up from $948 million in the prior year period, an increase of 16%. Adjusted EBITDA was $100 million, a 24% increase over the $81 million last year driven by our topline growth as well as margin expansion of 9%, up from 8.5%.

And adjusted EPS was $1.22, up 33% versus $0.92 per share reported for the same period last year. As further outlined in this morning's press release, we report both operating earnings and GAAP EPS as well as adjust EBITDA and adjusted EPS, the latter of which reflect adjustments consistent with our approach and disclosures adopted in prior periods.

Leading off our segmented highlights for the quarter. FirstService Residential generated revenues of $300 million, an increase of 8% year-over-year. Our EBITDA for the division increased 14% to $28.9 million, accompanied by margin expansion to 9.6%, up by 50 basis points over last year's 9.1% margin.

Once again, the margin progression was driven by continued efficiencies from streamlining and centralizing operations across our FirstService Residential platform and positioning us to add new business more profitably. To recap where we sit with our EBITDA margin trend, we exited 2015 at 6.8% for this division.

With our nine-months year-to-date margin up by 80 basis points versus last year, it's clear we will comfortably surpass a 7% margin for the full year and this result would keep us on track to hit our previously communicated target of 8% margin by 2018, 2019. Shifting to our FirstService Brands division.

This segment generated revenues of $109.2 million for the third quarter, up 53% versus the prior year period. The sizeable topline growth included 7% organic growth as well as contribution from several year-to-date acquisitions, the largest being Century Fire Protection.

We recorded EBITDA of $20.3 million for the quarter, an increase of 22% over the prior year period. We did see an expected lower margin of 18.6% for the quarter down from 23% last year due to the significantly higher proportion of lower margin company-owned operations now included in the FirstService Brands division.

Theses recently acquired businesses, primarily Century Fire as well as new additions to our California Closets and Paul Davis company-owned platforms, as Scott referenced, have been strong performers in contributing to our FirstService Brands' financial results.

With respect to our consolidated cash flow, the cash generation was very strong for our peak seasonal quarter at $37.5 million before working capital changes, almost doubled the $20 million in Q3 2015. And including the impact of working capital changes, operating cash flow was $48.7 million, up 43% versus the prior year quarter.

For the nine months year-to-date, our $89 million of operating cash flow has been driven by a combination of strong topline growth at both of our divisions, improved profitability at FirstService Residential and efficient cash flow conversion.

Turning to our capital spending, where we had outlaid $20 million year-to-date, we expect maintenance capital expenditures to finish the year in line with the upper end of our $25 million to $30 million range, including CapEx from Century Fire and other recently acquired businesses.

On the acquisition front, we have spoken previously about our heightened level of transaction activity this year and that is evidenced by the $80 million of acquisition spending through the first nine months of this year, well exceeding the $12 million for all of 2015.

Even excluding the larger Century Fire acquisition, we have been more active in terms of number of closed transactions and total deal value. Our tuck-under acquisition pipeline and dialogue with potential targets continues to be active and we hope to close a few more transactions before year-end.

Our strong free cash flow during the year also enhanced our balance sheet position. Net debt was $194 million at quarter-end, resulting in leverage of 1.6 times net debt to trailing 12-months EBITDA.

This leverage level is almost in line with the 1.5 times at the end of 2015, even after the aforementioned $80 million of acquisition spending year-to-date.

With this conservative capital structure, we are in an exceptionally strong financial position with ample flexibility to drive organic growth and pursue all of the tuck-under acquisitions in our deal pipeline in support of our businesses.

As we now progress through the fourth quarter, we feel very confident about getting our full-year financial targets. Together with the strong performance year-to-date, our visibility is underpinned by the significant proportion of our recurring revenue and the solid performance indicators across our businesses.

In terms of outlook for 2017, we will provide some high-level commentary around our expectations on our next scheduled earnings call addressing our 2016 year-end results. That now concludes our prepared comments. I would ask the operator to please open up the call to questions. Thank you..

[Operator Instructions]. And the first question we have comes from Stephen MacLeod from BMO Capital Markets. Please go ahead..

Thank you. Good morning..

Good morning Stephen..

Good morning Steve..

I just wanted to just sort of drill down on the topline a little bit. We did see some organic growth moderation in FSR and FirstService Brands.

And, Scott, I may have missed this in your prepared comments and if so I apologize., but could you just provide a little bit of color around what some of the drivers were, either on a year-over-year or just some moderation from Q2? And how you expect that to unfold through the back couple of months of the year and into 2017?.

Sure. Well, let me speak to brands first where our organic growth was 7%.

In my prepared comments, Stephen you might have missed it, I did speak to some drag on that divisional organic growth coming from two of our smaller divisions or two our smaller platforms, College Pro and Service America, both with declining revenue year-over-year in the quarter which countered for about 200 basis points of drag in terms of organic growth.

College Pro is a seasonal business and almost half of its revenue is earned in the third quarter. We have fewer franchisees, seasonal franchisees in that business, resulting revenue decline is the principal driver in the year-over-year decline.

Yet, Steve, we have owned that business now for 30 years and over the last several years, it has become more difficult to recruit students to run painting franchises and it's more difficult to recruit students to paint.

And we see similar challenges in our pool business in terms of recruiting lifeguards, millennials and generation Z or Zed in Canada don't want the paint or lifeguard as their first choice. So these are challenges for us that we are overcoming and not material.

But we will scale down College Pro to those regions where we are having success in recruiting and again, it's not material. But we expect that a 7% or 9% without that drag, that's a good number for us at Brands. And we have been maintaining mid to high single-digit and I expect that we will see that in the fourth quarter and go-forward.

At FirstService Residential, I referenced in my comments that in our more mature markets we are seeing lower organic growth.

And it's coming from us, an effort on our part really, that over the last 18 months we have gone through a very rigorous profitability analysis account-by-account, contract-by-contract and we have identified a number of contracts, particularly in our more mature markets and particularly long-term contracts where we are not earning a margin.

Over time, our price increases have not matched increases in cost and this has been an ongoing effort for us. The resulting re-pricing discussions have led to resignations on our part and in some cases clients have chosen to seek out lower-priced alternatives. And we are really seeing this in our mature markets, Florida, Arizona and Nevada.

We will continue to see it, I think, through 2017. We are winning at the same rate, importantly, but our retention in those regions will be lower this year and next. We have been as high as 97% in the past. Our sweet spot, our target is 95%, 96%.

We are going to be closer to 93% in those regions in the next couple of years which, I think, we will see that in our organic growth in the fourth quarter and through certainly the first few quarters of 2017.

But I think we are also seeing some of that benefit in our margin, up 50 basis points this quarter, as we reallocate resources more effectively and more efficiently. And longer term, we think we will win those accounts back based on our level of service. These are long-term accounts.

Many of them, longtime clients that the clients we are confident will see the difference and we will see them back. So in terms of long-term trajectory we don't see it as significant..

Okay. That's great. That's a lot of detail. Thank you.

So on the FirstService Residential side, would you sort of expect that mid single-digit organic growth rate to continue into Q4 and into then into the first part of 2017?.

Yes. I would say, mid or lower. And Brands, mid to high. And we expect on a consolidated basis to run in the organic growth of mid single-digit and 10% plus topline as our overall target..

Yes. Okay. That's very helpful. Thank you.

And can you just talk a little bit about more generally your acquisition pipeline for 2016 and into 2017?.

Right now it's quite active.

We are looking at opportunities across both divisions but probably more focus and activity right now on FirstService Brands as we continue to engage in discussions around both company-owned strategies, Paul Davis and California Closets and also as we more actively seek out opportunities in fire protection in collaboration with our partners at Century.

At FirstService Residential, I would say that the pipeline is consistent with levels we have experienced really over the last 18 months. Ongoing discussions for tuck-under profit management companies to extend our footprint or increase share in the same market and ancillary service opportunities that will fill out our offering in certain regions..

Okay. That's great. Thank you very much..

All right. Next question comes from Frederic Bastien from Raymond James. Please go ahead..

Good morning and thanks indeed for the color on the organic growth profile there. Just curious, running through this income statement and I noticed the acquisition related items was a negative, a reversal in the quarter.

What's that relating to?.

So Frederic, yes, it's Jeremy. We took out a partner arrangement. We had an earnout. And we negotiated an early settlement to take that out early and the accounting treatment results in a pickup in the income statement..

Did that also influence the amortization line on this? Or is that completely unrelated? It was higher than what we have seen in the run rate we had seen in the first half of the year and also higher than what we had expected..

Yes. It's a separate impact. The amortization is a little bit higher. We have been more active, as mentioned, on the acquisition front and in particular the Century Fire one has some intangibles that require a little more rapid amortization content post closing, but that should settle down six to nine months out from here..

Okay.

So we should expect somewhere in between Q2 and Q3 in terms of run rate for a couple of quarters?.

Yes. It will be a little higher for the next couple of quarters on an annual run rate base, probably up $3 million on an annualized basis and then come back down to low double-digit millions on an annual basis..

Okay.

And Jeremy while I still have you, can you give us an approximation of what you believe the tax rate will be for the full year and also the percentage of NCI that we should be modeling into our expectations?.

Yes. For the full-year tax rate, it's probably going to be mid-30s, in and around 35%. And NCI's share of earnings, I think a good number the way we have been tracking this quarter and year-to-date 12% to 13%. It is a little tougher to handicap based on mix but I think that's a good working number..

I am sorry. I missed the tax rate..

35%..

Okay. All right. Thanks guys. That's all I have..

Thanks Frederic..

All right. Next we have a question from Anthony Zicha from Scotiabank. Please go ahead..

Hi. Good morning gentlemen. Scott, could you give us a bit of insight on the competitive landscape in the U.S. and in Canada? And what are the fastest growing markets that you see on the residential side? And could you give us a bit of insight into 2017? Do you think that there was an impact this year because we are in an election year in the U.S.

and should that help things get better in 2017?.

Okay. Let me start through those. Competitive environment, no real change, Anthony, in really any of our markets. I think you know and I would really just imply that residential property management is a very price competitive market and it really always has been.

We are not the low cost provider and that will lead to situations where boards go up to bid and where they will choose lower cost options. And we lose business on price every year. We expect that that will continue.

Our goal is to continually improve our level of professionalism, our knowledge leadership, service delivery so that we can negate the impact of lower price alternatives, prove up our differentiators and ultimately win back business after the client has experienced the competition and increasingly we see that.

In terms of fast growing markets, let me speak to new development as it relates to FirstService Residential. In general, I would say it's still healthy, quite strong in Toronto, quite strong in New York City, solid in most other markets, slowing in Florida, slowing in Texas.

In terms of the Brands side and the home improvement market, really it would line up to some extent with new development, but I would say it's quite broad and continues to be strong really across North America but in the U.S. in particular. We haven't seen any impact from the U.S.

election and if we have we are not aware of it and we are not expecting a big pickup post-election or in 2017. I think it will continue along the same kind of trajectory that we are seeing. We do expect home-improvement spending to be strong well into 2017.

Did I catch all your questions?.

Yes. Thank you. And just one more. We talked about the M&A pipeline being target rich. Could you give us some color in terms of M&A opportunities around Century Fire and how big is the market and what kind of growth is that market experiencing? Thank you..

Well, strategically at Century we are focused on certain markets, Florida, North Carolina and Texas. So we prioritize those areas. And then, as I had mentioned previously, they have 12 offices and operate really in three service areas, sprinkler, alarm and fire extinguisher. But we do not have a full service offering in all 12 offices.

So we are looking to fill that in, in some cases with tuck-unders, in other cases through recruiting and moving talent. So our opportunities would be in those areas and they tend to be smaller businesses.

These are tuck-under acquisitions that either bring a particular expertise, a particular service or create an office that can be a smaller regional platform. But they would be similar in size to some of our other tuck-unders that we do within Brands or within FirstService Residential..

Okay. Well, thank you very much..

Thanks Tony..

All right. And the last question we currently have in the queue comes from Marc Riddick from Sidoti. Please go ahead..

Hi. Good morning..

Hi Marc..

I wanted to touch on a couple of quick things.

One, with Century Fire now, it's been about six months or so and I wanted to get a sense of where you see the business now compared to when the deal was done? If you are seeing similar to what you were expecting going in? If you see additional opportunities? Some of the differences that maybe you see now that maybe have changed since the initial deal was announced? And then I have a couple of follow-ups..

Sure. It's really continuing down the path that we had expected. But I will say that we are pleasantly surprised with the topline and bottomline performance. It's right on or better than our expectation and we see lots of opportunity for that to continue over the next few years.

Again, just reiterating some of my previous comments, strategically we have been spending a great deal of time laying out what we want to accomplish over the next 24 months. And I will say that we are moving down that list of action items with pace and accomplishing a great deal with this team.

So we continue to be excited, probably more excited than when we first entered this partnership..

Okay. That's great. And I did want to touch on one of the, I guess, maybe a little bit of a follow-up on the commentary around looking at some of the profitability and maybe return characteristics of some of the deals that you currently have and wanted to get a sense of time frame as you maybe work through that process.

Is that something that we would expect to be a multiyear process? And if so, if you are looking at a general target return profile there? Or how you are maybe thinking about that and maybe how that's changed versus where things were? Thank you..

Right. No, it's something we have been working on really in earnest, I would say, since the split 18 months ago and that's more coincidence than anything else. So we are largely through it, but the discussions with our clients around re-pricing and earning of margin where we are currently not, have been taking place and will continue to take place.

Many of them don't have contracts that renew until year-end and in some cases into 2017. So we think that this will carry on over the next year but we are largely through the exercise and the math, if you will.

And again, a lot of it relates to clients we have had for years and years and years that we managed through the economic crisis and through a period where pricing was very difficult in this business in terms of getting annual increases and so we are paying attention to all of that..

And is the level of, for lack of a better term, pushback on that that you have experienced so far? Is it along the levels where you would have expected going into this process? Or has it been may be a little better or a little worse?.

No. It's what we would have expected. I mentioned earlier, very price competitive market, lots of lower price alternatives and clients are going to explore that. They simply will..

Okay. But no real surprises there. Okay. Excellent. Great. Thank you very much..

Thanks Marc..

All right. And actually we do have another question from Choyah Varun from CIBC. Please go ahead..

Hi. Good morning gentlemen..

Good morning..

Just two quick questions for me. The first one is on the Brands division. You alluded to the fact that you are on track to open a Western manufacturing facility for the California Closets and open an Eastern facility in 2017.

Now, have those CapEx has been expended? Or do you expect CapEx to flow through for that 2017 facility?.

Yes. The bulk of that CapEx is going to be earmarked for 2017, immaterial for this year..

Okay. Fair enough.

And in your franchising strategy, I guess the bigger picture is centralized operations, but can you remind us of the long-term margins that that could track to, like in the near term it will be down margins but how should we think about this over the long term as you benefit from the franchising strategy?.

Yes. So with respect to California Closets, we are buying these businesses that are 8% to 10% standalone margin performers.

And those centralized manufacturing initiatives, both Phoenix and in Grand Rapids, Michigan when we implement that next year, will ultimately drive margin expansion from that 8% to 10% standalone current comp performance to another 300 to 500 basis points of margin expansion.

So that's the real benefit there beyond the strategic benefits that we have spoken about previously controlled the brand in the major markets. With respect to Paul Davis, we are acquiring company-owned locations there. We are establishing company-owned locations by acquiring franchisees with a similar margin profile, 8% to 10%.

But the establishment of the company-owned platform will not drive any material margin improvement.

That strategy is more driven by a topline revenue growth strategy and that's really about putting together a company-owned platform in the major markets that can deal with our major clients which are the property and casualty insurance companies who are looking for consistency of performance and national program work from the major flood and fire service providers.

And we would be unique in that regard when we put this company platform together, the 20 to 25 major markets that we are targeting at Paul Davis..

Okay. Thanks for that. And my second question regards to capital allocation.

So as you delever, how do you view capital allocation in terms of reinvesting in the business or acquisitions or possibly increasing the dividends? What's your priorities here?.

Our priorities are investing in the business. We were at this level at the end of last year, 1.5 times conservative capital structure. But we have got our traditional tuck-under acquisitions. We are pretty active on the California Closets and Paul Davis front, the latter Paul Davis being one that we just started last year.

So we feel like we have got a meaningful amount of capital to deploy towards that. And then, of course, we acquired Century Fire and that just gives us a whole other avenue to deploy towards tuck-unders as we continue to grow that service line.

To the extent that we are still at a leverage level that's deemed pretty conservative, when we discuss internally with our management team and the Board, we will consider other options. Last year we did decide to put an increase to our dividend of 10%.

That's a conversation we would have with our Board on an annual basis and see where we were at in terms of our past year's performance, the outlook for the coming year and our leverage level. So it's kind of an open question..

Okay. Thanks for that. And I will pass the line..

Thank you..

All right. And we don't seem to have any further questions in the queue at this time..

Thank you operator. Thank you again, ladies and gentlemen, for joining us. And we look forward to reporting a strong fourth quarter in early 2017..

Ladies and gentlemen, this concludes the third quarter investor's conference call. Thank you for your participation and have a nice day..