FirstService Q2 2026 Earnings Call Transcript

FirstService (NASDAQ:FSV) held its second-quarter earnings conference call on Thursday. Below is the complete transcript from the call.

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The full earnings call is available at https://edge.media-server.com/mmc/p/oxxtnaae

Summary

FirstService Corporation reported a 2% year-over-year increase in revenues to $1.45 billion for Q2, with adjusted EBITDA up 3% to $161.7 million and adjusted EPS up 2% to $1.75.

The company highlighted strong performance in Century Fire with over 10% revenue growth, including acquisitions of Titan Fire Protection and GSC Fire and Security.

Challenges were noted in the roofing segment, with revenues down 6% due to market weakness and project delays, although the acquisition of Scheffer's Roofing aims to strengthen market presence.

The restoration brands expect approximately 5% growth in the second half of the year as backlogs improve, though there are concerns about conversion delays due to permitting and insurance issues.

FirstService Residential showed 5% organic revenue growth, with expectations for continued margin improvements, driven by operational efficiencies.

Cash flow remained stable with $112 million in operating cash flow, and the company executed share repurchases worth nearly $250 million, maintaining a conservative leverage ratio of 1.8 times.

Management expressed optimism about long-term growth prospects, particularly in restoration and roofing, with ongoing investments in platform and acquisition opportunities.

The company anticipates mid-single-digit revenue growth for the full year, with expectations for similar growth patterns in the upcoming quarters.

Full Transcript

Scott Patterson, CEO

And we expect similar results for the balance of the year. Moving on to FirstService Brands, revenues for the quarter were up 1% with strength at Century Fire tempered by approximately flat results at our restoration and home service brands and largely offset by revenue declines within our roofing operation. I'll walk through each of the segments. Revenues for our two restoration brands, Paul Davis and First On Site, were down slightly from the prior year.

As we pointed out at the last two quarter ends, we entered the year with a weakened pipeline due to the mild weather experienced in Q4 of last year, which has impacted us in the first half of this year. Towards the end of Q2 and into July, we made significant progress in signing work and bolstering our pipeline back to historically healthy levels. In particular, we won a number of large loss projects across North America that will convert to revenue over the next 12 to 18 months.

In addition, we're seeing opportunities for specialty construction projects that have arisen through our restoration work with certain customers and in certain verticals. Looking forward, we expect to show approximately 5% year over year growth in the back half of the year for our restoration brands. It's a modest outlook relative to the uptick in activity as it's difficult to forecast how quickly the recent backlog additions will convert to revenue.

Our experience suggests that scoping, permitting, and insurance navigation could create delays in generating revenue. Storm and hurricane activity in the coming months could add to the backlog and improve this growth outlook. Moving to our roofing segment, revenues for the quarter were down approximately 6% on a reported basis and 10% organically, lower than our expectation. There are a few factors that impacted our top line during the quarter. First and foremost, the market remains stubbornly weak and ultra-competitive.

Both the new construction market outside of data centers and the reroof market, and the market conditions are particularly acute in two of our larger branch regions, Las Vegas and Southwest Florida. In both markets, we have intentionally moved away from certain low-margin work that was in our pipeline. The other factor during the quarter was the delay of a few large reroof projects that we expected to complete during the quarter. The delays accounted for half the miss relative to our expectation.

All the projects remain in our backlog. The roofing market has been a challenge for us in the past year. It's been a difficult environment and, with ongoing macroeconomic uncertainty, unlikely to improve materially in the near term. That said, we strongly believe that the long-term thesis is unchanged. Roofing is a huge market and an essential service with long-term tailwinds. We believe in our team and are focused on continuing to build the platform.

As evidence of our ongoing belief in the opportunity, we closed on the acquisition during the quarter of Scheffer's Roofing in Kansas City. Scheffer's is a leader in the market, serving customers throughout Missouri and northern Arkansas, and strengthens our presence in the important Midwest region. Looking forward to Q3, we expect our roofing operations to be down slightly with organic growth off in the mid-single-digit range. Moving to Century Fire, we had another strong quarter that was right on expectation and mirrored our Q1 result with revenues up over 10% versus the prior year, including high single-digit organic growth.

During the quarter we announced the acquisitions of Titan Fire Protection, based in Tampa, Florida, and GSC Fire and Security, based in Austin, Texas. Titan is a sprinkler installation company serving commercial customers across Central Florida. GSC is an alarm installation and service company serving the Austin and San Antonio markets. In both cases, Century will look to partner with the management teams to broaden the service capability and provide both sprinkler and alarm install and service across the respective customer bases.

Looking forward for Century, we finished the quarter with an improved backlog sequentially and expect similar strong 10% plus year over year growth for the third and fourth quarters. Now on to our home service brands, which as a group generated revenues that were up slightly versus a year ago, modestly better than our expectation. As a reminder, our home service brands include California Closets, CertaPro Painters, Floor Coverings International, and Pillar To Post Home Inspection.

Activity levels at these brands are closely tied to the housing market and consumer sentiment, both of which continue to hover around 10-year lows. The teams continue to do a great job driving increases in close ratio and average job size to eke out revenue gains. We're not getting any helpful market improvement and we're not expecting any over the back half of the year. Market indices and economic forecasts all suggest continued weakness in the housing market and consumer confidence.

Looking forward for our home services group, we expect the teams to continue to take market share to drive similar results for the third and fourth quarters, with revenues that are slightly up year over year. Let me now hand off to Jeremy.

Jeremy Rakusin, Chief Financial Officer

Thank you, Scott. Good morning, everyone. As always, I'll provide details of our segmented financial performance, summarize our cash flow, capital deployment and balance sheet position, and close out the commentary with a look forward. But first, a recap of our consolidated financial results. Revenues for the second quarter were $1.45 billion, up 2% year over year, and we reported adjusted EBITDA of $161.7 million, up 3% versus the prior year. Adjusted EPS came in at $1.75, a 2% increase over Q2 2025.

This brings our year-to-date consolidated financial performance for the first half of the year to revenues of $2.77 billion, an increase of 4% over last year. Adjusted EBITDA of $267 million representing 3% growth over the $260 million last year with a margin of 9.7%, down 10 basis points year over year, and adjusted EPS for the first half of the year sits at $2.69 versus $2.63 in the prior year period. Our adjustments to operating earnings and GAAP EPS to calculate our adjusted EBITDA and adjusted EPS, respectively, have been summarized in this morning's press release and remain consistent with our disclosure in prior periods.

Reviewing the second quarter segmented financial performance, I'll lead off with our FirstService Residential division. Quarterly revenues came in at $617 million, up from over the prior year and, as Scott mentioned, up 5% organically. EBITDA for the quarter was $69 million, a 6% year over year increase with an 11.2% margin, up 20 basis points over the 11% margin in Q2 of last year. For the first half of 2026, our division EBITDA margin sits at 9.9%, up 30 basis points compared to the equivalent prior year period.

During the remainder of the year, we expect margin improvement to continue at similar pacing to the year-to-date performance as our teams continue to extract efficiencies in various areas of the enterprise. Shifting to the FirstService Brands division, our financial metrics for the second quarter were relatively comparable to last year's Q2, including revenues of $832 million and EBITDA at $96 million, both up 1%. Our margin during the quarter was 11.5%, down 10 basis points, with the quarter-over-quarter performance better than both Q1 and our expectations heading into the current quarter.

In particular, Home Services margins performed relatively better as we continue to optimize the balance of marketing and promotional investments in support of lead flow. Turning to our cash flow profile, we generated $112 million in operating cash flow during the second quarter prior to working capital movements and in line with the prior year. Cash flow after accounting for working capital changes was $130 million for the quarter and sits at almost $220 million year to date.

Our capital expenditures during the quarter were a little over $30 million, and with our year-to-date total at $60 million, we expect our annual CapEx to be roughly $130 million, less than our initial target of $140 million we provided at the beginning of the year. As acquisition spending on tuck-under deals during the quarter was just over $40 million, the combination of our recent free cash flow performance together with conservative debt levels on our balance sheet supported our decision during the second quarter to also execute share repurchases under our normal course issuer bid.

During the quarter we purchased more than 1.8 million shares at a total cost of almost $250 million, or an average price per share of US$135.91. With these buybacks, our leverage as measured by net debt to EBITDA increased modestly to 1.8 times from the 1.5 times level at the end of Q1. Our leverage remains conservative, and we still have ample liquidity with more than $800 million of cash on hand and undrawn bank credit facility balances. This current financial flexibility allows us to continue opportunistically repurchasing additional FirstService shares under the buyback program when we see the valuation of our large, diversified enterprise trading at a meaningful discount to smaller private market businesses in our respective industries. At the same time, we are focused on building our tuck-under deal pipeline to deploy growth capital when we see acceptable acquisition valuations and target return thresholds. Concluding with an outlook, our FirstService Residential division will deliver growth in the balance of the year largely mirroring recent quarters: mid-single-digit top-line growth with modest year-over-year margin improvement.

For the Brands division, Scott has provided top-line growth indicators for each of the operating businesses, which aggregates to mid-single-digit revenue growth in the back half of the year. This performance will be skewed to the fourth quarter and influenced by the amount of restoration backlog-to-revenue conversion from the increased pipeline activity levels that Scott referenced, as well as capitalizing on any potential seasonal spikes in weather activity in the coming months.

Putting it all together, on a consolidated basis for the upcoming third quarter, we expect both revenue and EBITDA growth to be similar to the second quarter in the low-single-digit range. For the full year, consolidated revenue growth is expected to be similar to or modestly better than our year-to-date top-line growth, and we are anticipating mid-single-digit annual EBITDA growth over 2025. That concludes our prepared comments. Lisa, you may now open the call to questions.

Thank you.

Lisa, Operator

Thank you. As a reminder, if you would like to ask a question, please press star 11 on your telephone. If you would like to remove yourself from the queue, press star 11 again. We also ask that you please wait for your name and company to be announced before proceeding with your question. One moment while we compile the Q&A roster. Our first question will be coming from the line of Stephen McLeod of BMO Capital Markets. Please go ahead.

Stephen McLeod, Analyst at BMO Capital Markets

Thank you. Good morning, guys. Good morning. I just wanted to just circle around on the roofing business. You know, obviously the backdrop is quite weak and you referenced a continued competitive environment. I'm just curious if you see any—I mean, I know you gave the outlook for the balance of the year, but just curious, kind of what factors you're looking for to potentially see a light at the end of the tunnel with respect to some of the reroofing projects that have been delayed and how your backlog currently looks.

Scott Patterson, CEO

Yeah, let me start with the backlog, Stephen. It's down year over year, but it is up in June sequentially over May and May was up sequentially over April. So we are moving in the right direction but slowly, and I would say battling headwinds. You know, the misses in Q2 were really, as I suggested, from some jobs that were delayed. They all still remain in our backlog, but we don't have start dates. There's a number of factors associated with each.

The largest is an insurance claim relating to hail damage and it's caught up in negotiations between the owner and insurance carrier. It will take place, it's just a matter of when. And then, as I suggested, we've intentionally moved away from jobs that were in our pipeline due to the tight pricing, which was beyond our comfort level, particularly in southwest Florida.

Stephen McLeod, Analyst at BMO Capital Markets

Okay, that's helpful. And I guess you noted that one of the largest sort of projects in the backlog was related to an insurance claim. You know, how much of the delays you're seeing are attributable to factors such as that versus the macro backdrop and companies just saying we'll do this next year when we have better visibility?

Scott Patterson, CEO

I think the delays are primarily related to delays in construction, and whether that's other contractors finishing their bid on time and pushing it out, or insurance-related issues, because all of the projects I'm referencing were in our pipeline and we expected to complete. But in terms of building the pipeline more quickly, we're seeing softness in the market.

Stephen McLeod, Analyst at BMO Capital Markets

Okay, that's helpful. Thanks, Scott. And then maybe just one for Jeremy. Just on the NCIB, you know, you were obviously very active in the quarter and I know you talked a little bit about the balance between funding M&A as well as being active when the stock price is materially dislocated from fair value. I'm just curious how you prioritize those two things and how active you expect to be on the buyback in the back half of the year.

Jeremy Rakusin, Chief Financial Officer

Yeah, I mean, we've been buying at current levels and you can be sure that we will continue to do so. Just given our balance sheet is still quite conservative, under two times. I mean, we'd feel comfortable going at least to the mid-2s level. Like 2.5 times would be a strong comfort level for us. We're always going to look at our pipeline, so if we see imminent deals that are of size and provide attractive returns, that would take priority. But we think we can do both with our current balance sheet and the $800 million plus of liquidity; we can do them in tandem. So a lot of flexibility to use the buyback program as well as not compromise our tuck-under acquisition prospects.

Stephen McLeod, Analyst at BMO Capital Markets

That's great. Thanks, Jeremy.

Lisa, Operator

Thank you. One moment for the next question, please. And the next question is coming from the line of Stephen Sheldon of William Blair. Please go ahead.

Stephen Sheldon, Analyst at William Blair

Hey, good morning. Thanks, Scott. I wanted to dig in a little more on restoration and some of your comments in the prepared remarks. It sounds like sales activity pipeline has picked up there in the quarter and not tied to big storm activity. So can you just refresh us on the progress building out relationships with larger, more national accounts? Is that becoming more impactful to the trajectory of the business? And then would also love more detail on where the team is finding success with more specialized and complex restoration services like you kind of alluded to in the prepared remarks.

Scott Patterson, CEO

Right. Well, certainly, you know, we've been talking about it for a few years, how hard the team's been working in terms of developing and enhancing the national account roster, but also at the same time really developing expertise in a number of different verticals, healthcare and government, and generally developing a reputation for large-loss claims. And, you know, just here, really, the last four to six weeks, I'd say we've signed, as I said in my prepared comments, a number of large-loss projects that will benefit us over the next 18 months or so.

The projects, they're not related in any way. They're all tied to various regional weather events or specific fire or water damage claims at factories, large warehouses, government buildings, big-box retail, multifamily across North America. So it is a significant sort of rally for us that certainly has enhanced our backlog and, as I said, not likely to help us materially in Q3. These projects are still being scoped, the sizes are not clear. We'll see some in Q4, but it's certainly going to help us in 2027.

And you had a question right at the tail end, Steven, can you repeat that?

Stephen Sheldon, Analyst at William Blair

Oh yeah, I think you answered it just with like healthcare and government, but just... yeah, where you're seeing.

Scott Patterson, CEO

I guess, yeah. You asked about the... I made a comment about specialty contracting and that really has evolved from our expertise and depth of experience in the healthcare sector. You know, we have a number of team members that have specific certification and training around the mitigation and construction in a sensitive healthcare environment. This expertise and reputation has led to other construction opportunities in healthcare and then beyond that other contracting opportunities in general—talking about retrofits and capital improvements and some new construction opportunities.

So we've been asked to submit bids on unique situations based on our experience and we have a few wins, with some pending, and I would say momentum building.

Stephen Sheldon, Analyst at William Blair

Got it. Very helpful. Maybe just following up on restoration then. I think you talked about 5% growth in the back half of the year, so want to make sure I heard that right. And then I know you don't want to talk about next year, but I guess if some of these things are starting to pick up—I mean, I know a lot can ebb and flow with big storm activity—but excluding that, as we think about heading into next year and especially the first half, if some of this stuff picks up, would we be in line to have even better growth, potentially even more than if storm activity gives you opportunities as well?

I guess just how are you thinking about it into next year?

Scott Patterson, CEO

Yeah, I mean we should—we're feeling good about our restoration because of the pipeline where it is today and we're just heading into storm season, and who knows, right. But we do feel good about the position we're in heading into the back half and into 2027 for sure.

Stephen Sheldon, Analyst at William Blair

Great, thank you.

Lisa, Operator

Thank you. One moment for the next question. And the next question is coming from the line of Darrell Young of Stifel. Please go ahead.

Darrell Young, Analyst at Stifel

Hey, good morning everyone. I wanted to touch on residential and your new cross-selling initiative that you announced—I think it's called Resilience First. That looks to be a concerted effort to cross-sell restoration with res. Could you maybe expand on what that is and the opportunity, and whether there's any other cross-sell opportunities you're pursuing expressly? Yes.

Scott Patterson, CEO

You know, that effort and program is between FirstService Residential and our restoration brands and roofing operations. You know, it is cross-selling, but I really think about it as a focus on bringing value to our managed communities and differentiating FirstService Residential from its competitors. And the goal is to reduce the frequency of loss events and then—so prevention—and then minimizing the severity of losses. So we're talking about complementary inspections, training, education, storm preparation.

You know, most of the losses we see in our communities are water losses, and simply educating residents and property managers around water shutoff—certainly when they leave on vacation—or, you know, you get water into one unit, it seeps into neighboring units. And that's the typical loss scenario in our communities, and they can be prevented, and that's what we're focused on. Access to a proprietary leak-detection program for our communities. If we're successful, it will reduce the number of claims, reduce the severity of loss, and drive down insurance costs for our communities. And again, the focus is on differentiating FirstService Residential.

Darrell Young, Analyst at Stifel

Got it. Okay. And then just moving to margins. Performance has, I'd say, continued to be quite strong despite maybe a softer organic growth environment. So I'm wondering if, when organic growth recovers, can you hold the existing benefits, or will there be some costs that maybe come back as activity levels pick up? I guess said differently, is there operating leverage still to come from here?

Jeremy Rakusin, Chief Financial Officer

Yeah, Darrell, you got to look at it business by business. Property management—it's a lot of variable costs as we grow, and that business is performing right down the fairway. We've got a little bit of margin expansion built in. As I said in my prepared comments, on the Brands side pretty well every business—and we obviously speak about the optimistic outlook for growth in restoration—those businesses do generate good operating leverage when you get the top-line growth.

Even if there are some investments that come in support of that growth, it's a net positive to the margin.

Darrell Young, Analyst at Stifel

Okay, that's it for me. I'll get back in the queue. Thanks.

Lisa, Operator

Thank you. One moment for the next question. And our next question is coming from the line of Aaron Kyle of CIBC. Please go ahead.

Aaron Kyle, Analyst at CIBC

Hi, good morning. Thanks for taking the question. I just wanted to go back to the roofing segment and maybe follow up on an earlier question. In your view, in terms of what's impacting the segment from a macro perspective, what would you say is most meaningful or substantial to customer decisions there? Is it rates, inflation, is it the Middle East conflict and oil prices, all of the above? What would you say really needs to change for warrant activity to really start converting there?

Scott Patterson, CEO

Well, remember, Aaron, that first of all, new construction outside of data centers is down year over year, and that's a big chunk of the market, so that's a driver. And a lot of new-construction-focused roofers have turned their attention to the reroof market. So the reroof market is probably flat nationally, but the level of competition around reroof has increased significantly. I think that everything you mentioned—you know, interest rates, Mideast war, inflation—all of that is impacting both of those markets.

But, you know, reroofs can be deferred, but longer term they're non-discretionary. So it is a matter of time. And I think that the competitive environment will normalize because some of the pricing is not sustainable, and particularly in a few of our markets that I've referenced. You know, southwest Florida is a unique situation right now. I mean, we know from our major suppliers that the market's particularly weak relative to the rest of the U.S., and in fact, the data we have, we're off less than the market in general.

And a lot of that—you know, there's a couple things going on. Hurricane Ian effectively pulled forward a few years of reroof work and our businesses benefited at the time. But the last two years we've seen declines off those peaks. And post-hurricane there were a number of roofers that expanded to Florida to capitalize on the surge. So right now there is overcapacity in that market and every job is ultra-competitive. We have a very strong position and we'll be fine.

We just need to let the market settle out. The capacity will normalize. We know operations are pulling out and closing their doors. So it'll just take some time, but we'll be fine in Florida.

UNKNOWN Analyst

Okay, that's helpful there. And then maybe just on the M&A side, just looking at the spend year to date last quarter, I think you flagged that there's been fewer bidders as some funds have pulled back in this environment. But, you know, FirstService M&A spend remains modest compared to historical. It's in line with 2025. But just looking back here, you know, as you think about your capital deployment here, are you taking a more conservative approach as you're evaluating targets or how should we think about the M&A spend on a go forward basis?

Scott Patterson, CEO

We're not necessarily taking a more conservative approach. We're sticking to our discipline, being patient. Frankly, we're not seeing many quality companies come to market and certainly we're seeing fewer companies come to market. So I think there are fewer opportunities. We're being very patient, focusing on the right partnerships and ensuring that it's a fit both in terms of service line, geography, and culture. So I would sort of confirm that we expect this year to be similar to last year at this point, based on the opportunities in our pipeline.

But nothing's really changed for us. It's just the number of opportunities that we're seeing.

UNKNOWN Analyst

Got it. Thank you. I will pass the line.

Lisa, Operator

Thank you. One moment for the next question, please. Next question is coming from the line of Himanshu Gupta of Scotiabank. Please go ahead.