Scott Patterson - President, CEO & Non-Independent Director Jeremy Rakusin - CFO.

Anthony Zicha - Scotiabank Global Banking and Markets Stephen MacLeod - BMO Capital Markets Marc Riddick - Sidoti & Company Varun Choyah - CIBC World Markets Brandon Dobell - William Blair & Company.

Welcome to the Second Quarter Investors 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 differ 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, July 26, 2017. I would like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir..

Thank you, Operator. Welcome, ladies and gentlemen, to our second quarter conference call. Thank you for joining us. With me today is our CFO, Jeremy Rakusin.

As usual, I will kick off the call with a high-level review of the results and walk through some of our growth drivers and quarterly highlights and then Jeremy will provide more detailed comments around the financial results and our balance sheet.

Let me open by saying that we are very pleased to report another strong quarter that exceeds our expectations and keeps us well on track to meet our financial goals for the year. Revenues were up 13% over the prior year quarter, with the increase driven equally from organic growth and the impact of acquisitions made over the last 12 months.

EBITDA was up 18% or 50 basis points over the last year, reflecting continued margin improvement at FirstService Residential and earnings per share were up 17%. Both of our divisions had strong quarters and contributed to overall results. At FirstService Residential, revenues were up 5%, 4% organically.

Organic growth was broad-based across all regions, but led by our high-rise markets, with particular strength in New York and Texas. Growth was balanced between new contract wins and increases in ancillary services. New development remains healthy in some markets and accounted for about 25% of organic growth during the quarter.

At FirstService Brands, we reported revenues, which were up 37% over the prior year, driven by very healthy organic growth of 11% with the balance from acquisitions completed in the past year, including 2 California Closet operations, 4 Paul Davis operations and the Advanced Fire partnership deal, which closed late last year.

The double-digit organic growth at Brands is the result of 3 principal drivers. First, Paul Davis Restoration benefited from strong market activity to report mid-teens organic growth relative to prior year. Tornado, hailstorm and flood damage is up significantly in 2017, particularly during the first quarter in the U.S.

south and midwest, which drove Q2 restoration activity. Our company-owned Paul Davis operations were favorably positioned geographically and operationally in terms of available capacity, which led to a very strong quarter that outpaced the Paul Davis system as a whole.

The second driver was the healthy housing and home improvement market, which led to double-digit organic growth at California Closets, CertaPro Painters, Floor Coverings International and Pillar To Post Home Inspection. Home prices continue to rise, which has served to fuel home improvement spending.

People are tending to stay in their homes longer and invest rather than selling and trading up. Rising mortgage rates will extend this trend. The healthy housing market is expected to continue and we expect to benefit at least through the balance of the year.

The third organic growth driver for us at FirstService Brands in the second quarter was at Century Fire, where our sprinkler and alarm installation operations benefited from strong construction markets and as we made significant strides in expanding our repair, service and inspection capability across our 13 offices.

We continue to be very pleased with our progress and result at Century Fire in the 15 months since we partnered with the team there. During the quarter, there were a few highlights of note within the FirstService Brands division and I mentioned 2 in the first quarter call, but I'll remind you.

Early in the quarter, we announced the acquisition of Paul Davis Omaha, which established a midwest region for us and brought to 5 the number of operations we own. We continue to evolve the strategy at our Paul Davis company-owned platform and invest in talent and shared services infrastructure to prepare for future growth.

Of note, during the quarter, we were very excited to bring on Meg Boyle as CFO and COO of our company-owned operations. Meg has been a part of Paul Davis National for many years and is respected as one of the best operators in the system. She will help considerably in terms of day-to-day operational effectiveness.

Another highlight during the quarter was the opening of our California Closets eastern manufacturing center in Grand Rapids, Michigan. This facility, together with our western manufacturing facility in Phoenix, gives us the capability to serve all of our company-owned operations.

We have transitioned our Chicago operation to Grand Rapids and are now preparing to move to Washington, D.C. operation. Once complete, we will look at the rest of our eastern and midwest operations. We are right on track with both of our manufacturing facilities in terms of timing and all of our critical cost and efficiency metrics.

With that, let me ask Jeremy to take us through a more detailed review of our results..

Thank you, Scott. As highlighted in this morning's press release and as reflected in Scott's comments, FirstService reported strong consolidated second quarter results. To summarize the quarter, revenues were $435 million with adjusted EBITDA at $47.6 million and adjusted EPS at $0.61, up 13%, 18% and 17%, respectively.

For the 6 months year-to-date, our consolidated financial highlights include, revenues of $811 million, up 17% from $693 million last year, with 7% organic growth and the balance from recent tuck-under acquisitions; adjusted EBITDA increasing by 29% to $68.3 million, up from $53 million last year with a margin of 8.4%, up from 7.6% in the prior year period; and adjusted EPS at $0.77, up 28% versus $0.60 per share reported during our same 6-month period last year.

Our adjustments to operating earnings and GAAP EPS in arriving at adjusted EBITDA and adjusted EPS, respectively, are summarized in this morning's press release and are consistent with our approach and disclosures in prior periods.

In terms of our segmented financial highlights for the quarter, I'll start with our FirstService Residential division, which delivered top line growth and profitability in line with expectations. Revenues in the second quarter were $303 million, up 5% over the prior year period.

EBITDA was $28.7 million, an increase of 9% year-over-year and yielding a margin of 9.5%, up 40 basis points from the 9.1% margin in the second quarter of last year. This margin expansion was attributable to effective management of our labor costs across our operations.

We continue to realize efficiencies from our systems implementations over the last few years and through optimizing our resource allocation in a relatively tight labor market. We expect our FirstService Residential business to realize further margin benefits from these operational improvements during the balance of this year.

Turning now to our FirstService Brands division. We recorded revenues of $132 million for the quarter, up 37% year-over-year.

Beyond the very strong 11% organic contribution that Scott referenced, Brands growth was further fueled by several recent tuck-under acquisitions, which expanded our company-owned operations at Paul Davis Restoration, California Closets and Century Fire Protection.

FirstService Brands reported EBITDA of $22.1 million for the quarter, a 32% increase over the second quarter last year. Our second quarter EBITDA margin moderated by 50 basis points versus prior year, due to increased mix from lower margin but faster growing company-owned operations.

However, we were pleased with the division's 16.8% margin level for the quarter. Strong top line performance across our company-owned operations and at our franchise systems, which benefit from elevated home improvement spending, provided good operating leverage to drive increased profitability within those businesses.

Our overall profitability growth converted into strong consolidated cash flow from our operations. For the quarter, we generated $33 million of operating cash flow before changes in working capital, up 24% versus Q2 2016. Inclusive of working capital changes, we produced $41.6 million of operating cash flow for the second quarter.

In terms of our investment activity, we incurred $9 million in capital expenditures during the second quarter in support of our operations.

For the full fiscal year, we anticipate maintenance CapEx approaching $35 million and together with other growth-related investments, including our California Closets eastern manufacturing center, total CapEx will be in the range of $40 million.

Our acquisition spending during the quarter was lighter-than-typical, as we completed 1 modest size tuck-under acquisition. Notwithstanding this lower transaction activity from a year-to-date perspective, we are on track with our goals for annualized revenue contribution from recent acquisitions.

Our deal pipeline continues to be active, and we continue to focus our efforts around our Paul Davis and California Closets company-owned strategy, expansion of our Century Fire Service platform and tuck-unders within FirstService Residential.

With respect to our balance sheet, our net debt position at June quarter end declined to $218 million, down from $240 million at the end of Q1 on the back of our strong free cash flow during the second quarter.

Our leverage currently stands at 1.5x net debt to trailing 12 months EBITDA, down sequentially from 1.7x at the end of the first quarter and in line with the 1.5x level at 2016 year-end. We have approximately $130 million of total undrawn availability under our revolver and cash on hand.

With this ample level of liquidity and our conservative capital structure, we are very well positioned to continue investing in priority growth areas across all of our businesses. That concludes our prepared comments. I would now ask the operator to please open up the call to questions. Thank you..

[Operator Instructions]. First question comes from Anthony Zicha from Scotiabank..

Scott, could you give us a bit of color in terms of your market share in Florida, like where do you stand? How much do you figure you could increase that over time? And could you also give us a bit more color on your progress on your eastern manufacturing facility relating to California Closets?.

Sure. Okay. Presumably, you're talking about FirstService Residential with the market share question. Let me just say, across North America, our share is somewhere between 5% and 10%, depending on how you measure it. And in Florida, which is our largest region, our share is a little better than that, probably between 10% to 15%.

And where we can get to, I mean, it's a very, very fragmented market, both across North America and in the State of Florida. So it's - I don't know if we have a market share target, but we certainly believe we can continue to increase our share for years and years to come.

In terms of our Grand Rapids facility, which we just opened this quarter, yes, I would say, we're right on track in terms of our timing. We've transitioned production from our Chicago operation to Grand Rapids this quarter. We will move D.C.

and then we will look at our other eastern and midwest operations, starting with Boston, Toronto and then our Florida businesses. So we did a great deal of learning with our Phoenix facility, which is doing very well. And so we've got a great blueprint for how to rollout over the next year to 18 months with the transition of production..

Okay, great. And then a question for Jeremy.

Considering you're targeting about 20 to 25 corporate franchises over the next 4 years, what kind of capital investment would that entail?.

You're talking about the - on the California Closets side of the company-owned?.

Yes and Paul Davis together..

Yes. So California Closets, we own 14 today. So we're roughly 2/3 of the way to our ultimate goal. Approximately another $25 million, perhaps $30 million of capital to deploy in that service line. With respect to Paul Davis, it's an initial target of 20 to 25. We only own 5 today. It's a newer strategy for us.

In terms of capital to get that first 20 to 25 tier would probably involve in the order of $60 million of capital..

Next, we have a question from Stephen MacLeod from BMO Capital Markets..

Just wanted to circle around on the margin profile on the FSR business. I mean, in the past you've talked about the 8% target. It looks like you're well on the way to achieve that or exceed that in 2017.

Can you just talk a little bit about how you expect that to evolve through the year as well as going forward in terms of incremental margin gains and whether the low-hanging fruit is sort of in the rearview mirror at this point?.

Yes, sure. I'll take that one, Steve. It's Jeremy. Yes, the 8% target that we established originally for '18 '19, we will hit that and be a little bit better than 8% by the end of 2017. The low-hanging fruit largely has been done. We expect the incremental margin improvements beyond this year to be a lot smaller than what we've seen over the last couple.

And we've talked previously around the streamlining initiatives and the centralization of a lot of our back-office functions over the last couple of years. And that continues to be benefit that we will reap in the coming years.

But that will be smaller, because we've either largely completed a lot of those initiatives or in the case of client accounting, we're 2/3 of the way through. So it's again, headcount reductions being more efficient with our cost, payroll-related costs.

A lot of them are semi-fixed, so we get a little bit of operating leverage on that and just further optimization of resources as we've invested in our systems and centralizing our functions..

All right. Okay. That's great.

And then just on the FSR business, can you talk a little bit about where you are in your ongoing contract review that you highlighted sort of in the back half of 2016?.

I would say, it is ongoing, Steve, and it will be in the sense that we remain very disciplined around renewals and pricing decisions in general in that business. As I've mentioned in the last several calls and in the past, we are not the low-cost provider. It is a very price-competitive business.

And so our - when contracts are put out to bid, they will generally be a lower cost alternative. For the most part, our boards have not experienced another management company. And so boards will seek a lower cost alternative. We are taking a longer-term approach to this business.

Confident that our service delivery, our knowledge leadership will over time result in these contracts coming back to us, if they did leave solely on the basis of price. And so that will be an ongoing journey for us. So it's - I would say it's a - it will become a regular part of our discipline going forward..

Okay. It makes sense.

And then just finally, on the FSB business with Grand Rapids coming online, could you talk a little bit about when you expect to optimize the full benefit from manufacturing savings related to having Phoenix and now Grand Rapids open?.

Let me start with that and then I'll pass it to Jeremy. In Phoenix, we are currently at 2 lines, two shifts. We will be transitioning Seattle into Phoenix in the second half of this year and ultimately - and then the Orange County business, which we acquired earlier this year, which will take us to 3 lines, 2 shifts.

And when we get through that, Phoenix will be in a very good place in terms of capacity utilization. And that will be, I would say, well into 2018. We will be doing the same thing with Grand Rapids over the next 2 to 3 years on a very measured basis, 1 operation at a time.

And of course, hopefully, we're adding to the company-owned portfolio along the way. So we're probably 3 years out, but making progress quarter-over-quarter over quarter, as we have to date. And maybe I'll ask Jeremy just to remind you what our goal is in terms of margin improvement..

Steve, yes, exactly what's Scott said, in terms of the progression of margin improvement over the next 3 to 4 years and then also accounting for the fact that we own 14 today and targeting 20 to 25. Our full complement of company-owned operations may take us into the 2020-ish time frame.

But our ultimate margin improvement goal is over 300 basis points of improvement on what are typically today 8% to 10% margin profile company-owned operations. So there will be incremental progression, as Scott said, over the next 3 years, but the full realization of that will only be once we have the full 20 to 25 in place.

And I'm guessing that that's probably in and around 2020..

Next, we have a question from Marc Riddick from Sidoti..

You covered a couple other things already. So I just wanted to sort of focus on the current thoughts on the - you mentioned, sort of the strength in the housing market in your prepared remarks and the press release. So I wanted to get a sense of some of the thoughts that you have as far as expectations for the remainder of this year and 2018.

And generally speaking, is it fair to characterize it as the housing market has been maybe a little stronger than what you're originally modeling for, for the beginning of the year and some thoughts around there?.

Yes, I would say that the housing market was stronger in the second quarter than we might have expected. Home prices, in particular, fueled home improvement spending and home prices are up 6% over the prior year. So we certainly expect the market to remain strong into 2018.

But the other thing, I think in the Brands division that exceeded our expectation was market activity in insurance restoration, so Paul Davis had a very strong quarter and then Century did as well. And then the - our 2 smallest brands acted as a bit of a drag.

College Pro was flat year-over-year and then Service America, which is our Florida-based HVAC company, continues to show weakness relative to the prior year, primarily as a result of the commercial side of the business. But both those smaller brands are small and while they did act as a drag, it was not material..

Okay. And then, I guess, my last question is around - I wanted to get thoughts as to current views on a couple - in particular, the recent acquisitions on Paul Davis Restoration and on Century Fire. I wanted to get a sense of maybe how views or thoughts or long-term goals, aspirations may have evolved, since you initially made those acquisitions.

And so some of the things that you may be learned in the time that you had them now under the umbrella.

I want to see if there has been some evolution as to where you think those brands can go?.

I mean, certainly there's been some evolution. We remain very excited about both and have honestly huge aspirations for both. On the fire side, we've been very focused on building the repair, service and inspection side of that business.

And we've made great strides investing in sales force across the 13 operations that focuses on that business as well as the business development effort around national accounts. Increasingly, we've won accounts over the last 6 to 9 months. The service side of the business is growing more quickly than the business in total.

So we're executing on our strategy. The installation part of our business is very strong and benefiting from real estate development. But we're very cognizant at the same time that it will be - that it will cool when the market cools. So we want the service side to pick up the slack at that point and we believe we're on track to make that happen.

It's a very fragmented business. We're working on strategic tuck-unders. And we - our focus is on growing it organically and through tuck-under acquisition at 10%-plus per year. So it's a long-term opportunity for us. Paul Davis company-owned, really the base strategy hasn't changed.

We're working hard on right now the shared services infrastructure, which is critical in terms of our day-to-day operational effectiveness in that business. And we're making strides again executing, but it's a long-term plan for us.

But there is an opportunity in that market to create a national company-owned platform that provides a consistent service offering, which is what our insurance company customers are really looking for. There is a window in the market and we're very focused on filling it..

And the last question we currently have in the queue comes from Varun Choyah from CIBC..

Going back to the margin expectations and Jeremy, you noted that managing the labor costs as one of the drivers for margins in this quarter. But can you talk about the impact of rising minimum wage in parts of U.S.

and Canada? How is that affecting your ability to manage labor costs?.

Yes, so we don't have many or any minimum wage employees across our operations. Nevertheless, that has a trickle-up effect through the labor market. So I would say that over the last 6 to 9 months, we've started to see a little more evidence of wage inflation within our operations, a couple of points.

But we're able to manage it relatively well at this stage through price increases to our clients. We're pricing up the jobs on our brand side of the business accordingly to ensure that we are retaining our margin in this type of market. But yes, wage inflation is not as much of an issue for us yet today, whether it becomes so is unclear.

It's more about the tight labor market and the fact that it's tough to fill some key positions in - within our service lines. And as Scott has mentioned in the past, that tempered - put a bit of a cap on our growth. So that's kind of been a more apparent dynamic. We're managing the wage inflation relatively well at this stage..

Great. And can you talk about like organic growth at the company-owned stores.

Do you notice a difference from franchises since you started buying back these stores?.

We are noticing a difference, but it's very purposeful. And just really building on Jeremy's comments, it is a very tight labor market. And it's difficult to find designers, closet installers, estimators, project managers at Paul Davis. It's something that our franchisees have been dealing with and it's a capacity constraint.

We've been encouraging our franchisees to build capacity for 18 months, 2 years now. But with our company-owned operations, we can control it. And we've been in front of it. We've been investing in it more aggressively. And as a result, we have had the capacity to take advantage of strong markets.

And that we're seeing clearly for us in this past quarter at Paul Davis, where we - on average, we have more capacity than the franchisee system as a whole..

Okay. And switching gears on specifically the Paul Davis part of the business.

Is there opportunity for Paul Davis to win like national accounts from insurance firms? And have you started this discussion? And how do you see that pipeline evolving?.

I mean, certainly there's an opportunity that's central to why we're creating company-owned platform. We're not in a position with 5 operations to market this capability. But it's definitely where we're going..

And we do have one other question from Brandon Dobell from William Blair..

Scott, maybe for you first on residential. You mentioned in your prepared remarks, I guess, particular success or strength in New York and California.

Maybe some more color on what you meant by that? Was that new units, ancillary services, wallet share, competitive wins, et cetera? Just some more detail there will be helpful to understand how you guys are growing in those markets..

Sure. It's really the high-rise environment and winning new contracts, both through new development and competitive wins. The markets called out were New York City and in Texas, quite specifically in Texas, it's Dallas and Austin, and those are 3 markets, where new development continues to be quite robust.

And so that would have taken our growth in those markets higher than on - than the average across the country..

Okay. And then for Jeremy, as we think about within brands in particular, the contribution from acquisitions this quarter relative to what it should look like the next couple of quarters, just want to make sure I get the, let's call it, the pacing of the acquired revenue right, given seasonality and you and your comparisons, that kind of things.

So how do we think about balance of the year relative to other, second quarter or the first half contribution?.

Well, I would say that we've done 3 acquisitions to date, yes, Paul Davis National, which was year-end, December 31, didn't contribute at all to last year; the Orange County business at California Closets and the Paul Davis Omaha. And those in aggregate have roughly $45 million of annualized revenue.

So they are coming in at very - Paul Davis National has been for the full year, but the other 2 will cycle in through the balance of the year. And then, we continue to look at other acquisitions in our pipeline at varying degrees of progress. There is no guarantee that any of them close until we close them and announce them.

But I would be hopeful and are optimistic that we should close at least 1 or 2 more before the year is out..

Okay. Yes. And that's helpful.

And I guess, as you guys think about the opportunity in fire, how do we think about the timing around the opportunity to take the fire business from brands and port it over to the residential opportunity?.

That's a long-term opportunity, Brandon, and we're certainly working on it. They are meeting property managers. They're holding lunch and learns. They are introducing the service offering and the leadership is certainly aligned around creating the opportunity for Century Fire within FirstService Residential.

But it will be one contract at a time, as the vendor relationship contract comes up..

Okay. So we don't have any further questions in the queue at this time..

Thank you, again, ladies and gentlemen, for joining us. We look forward to reporting a strong third quarter, I believe, on October 25. Thank you..

Ladies and gentlemen, this concludes the second quarter investors conference call. Thank you for your participation, and have a nice day..