Q4 2019 Earnings Call
Good day, everybody and welcome to the taste coal, which will be beginning shortly.
You do require assistance anytime I'm pleased to I'll stop there on your phone Oh PREIT Toby happy to assist you in the meantime, we will continue to type music. Thank you feel patients.
[music].
Good day, everybody and welcome to the Q4 2019 comfort systems USA earnings Conference call hosted by Judy shaft, Chief Accounting Officer drilling presentation. You all lines will remain on this not only if you do require assistance anytime. Please keep starts arrow on your phone ethanol prices.
Well be happy to assist you.
I'd also like to advise all parties. This call is being recorded for replay Pepsis I'd now like context a journey. Please go ahead.
Thanks, George Good morning, welcome to comfort systems, USA fourth quarter and full year 2019, earning call. Our comments this morning and wells. Our press releases contain forward looking statement, we're gonna meeting other private Securities litigation back at 1995, what we will say today is based on a current plans and expectations.
One of comfort systems USA.
Plans expectations include risks and uncertainties that might cause actual future activity and results of our operation to be materially different from those set forth in our comment.
You can read a more detailed lifting and commentary concerning our specific risk factors in our most recent form 10-K at wells in our press release covering these earning a slide presentation will accompany our remark. The slides are posted on the Investor Relations section of the company's website found that comfort systems USA Dot com.
Joining me on the call today, or Brian Lane, President and Chief Executive Officer, and Bill George Chief Financial Officer, Brian <unk> Mark.
Alright, Thanks Julie.
Good morning, everyone and thank you for joining us on the call today.
Let me start by thanking all that comfort systems USA employees for their hard work and great result.
2019 was a record year for common systems USA.
We finished the year with strong fourth quarter earnings per share of 92 cents.
And for the full year, we earned we'd all than eight cents per share.
Revenue for the full year 29 gene was $2.6 billion.
We generated strong full year free cash flow of 112 million.
Our backlog is robust at 1.6 billion, an increase of 195 million or 17%.
Prior year on a same store basis.
In December we amended our credit facility and increased our financing capacity to $600 million from 400 million.
This new capacity reflects our strong financial position.
Gives us additional financial strength to make strategic investments and opportunistic acquisition.
Earlier this month, we announced the acquisition of stock electric.
Headquartered in Greensboro, North Carolina.
We have worked with style for decades and are very happy to have stopped as part of the company's systems you as a family.
This investment at the finest electrical contractor in North Carolina to our electrical segment.
And allows us to grow and expand our capabilities in a modular and off site construction business offering.
We believe that off site construction is growing in importance to our customers and provides a great way to maximize the productivity and safety.
Of our highly skilled workforce.
We plan to keep investing in module and off site construction.
Walker Engineering, which we acquired at the beginning of the second quarter up 29 team.
Continues to perform at.
Or above our expectation.
Although we did not expect them to be initially accretive.
Walker contributed approximately five cents earnings per share during the last nine months of 2019.
I will discuss our outlook in more detail in a few minutes [laughter], but first let me turn this call over the Bill we view the details of our financial performance, though.
Thanks, Brian.
Please refer to slides to through sectors I provide some explanations and details.
Our financial results.
Fourth quarter revenue was seven 720 million, an increase of 131 million or 22%.
Compared to the fourth quarter of 2018.
The increase is due the due to the acquisition of Walker, which is reported in our electrical segment.
Same store revenue was off slightly declining 1% for the fourth quarter.
Revenue for full year, 2019 was 2.6 billion, an increase of 432 million or 20% compared to 2018 and most of that increase was related to the Walker acquisition.
On a same store basis revenue in 2018 was 2% higher than in 2018.
Gross profit was 133 million for the fourth quarter of 2019.
Increase of 14 million or 12%.
Fair to the fourth quarter of 2018.
Gross profit as a percentage of revenue was 18.4% in the fourth quarter of 2019.
Compared to 20.1% in the fourth quarter of 2018.
For the full year of 2019 gross profit increased 56 million.
The gross profit margin was 19.2% in 2019.
Her to 20.4% in 2008.
Of the 56 million increase in gross profit that we reported this year 35 million was earned in our electrical cycle.
Our electrical segment business mix is weighted to large and complex.
Projects with significant amounts of material.
Witness pass through costs, and therefore tend to have lower average gross profit margin.
Our electrical segment also had less service revenue.
And that also correlates with lower gross profit margin and lower Jumei percentage.
Additionally, because our electrical segment in 2019 was created by a single large acquisition that occurred within the year.
Acquisition related adjustments for the transaction lowered the gross margin reported for our electrical.
For the fourth quarter of 2019.
Electrical segment gross margin would have been 3% higher over 3% higher without those adjustments and for the full year 2019, electrical segment gross margins would have been over 2% higher on an annual basis without the acquisition related adjustment.
Without our electrical segment, our full year gross profit percentage would've been 20.7% a difference of 1.5% that arises from a combination of the lower gross margin in their business, there and certain purchase adjustment that I, just mentioned them that impact our gross margin.
With these larger projects and less service Walker has lowered our as few percentage.
Net income for the fourth quarter of 2019 was 34 million or 92 cents per share as compared to 25 million or 67 cents per share in 2018.
We recorded a gain of eight cents per share in the fourth quarter of 2019 due to insurance proceeds we received.
To reimburse us for lost productivity and other hard and soft costs.
Earlier this year as a result of the cyber answer that we suffered in April 2019.
Approximately 1.6 million of the gain was recorded as a reduction of ESG today and the remainder was recorded as a reduction to cost of services.
We do not expect any additional insurance proceeds or other recoveries related to that is.
Our full year earnings per share was $3, an eight cents per share in 2019 compared to $3 per share in the prior year and so we had another record year.
For the full year, EBITDA was 214 million compared to 192 million for the prior year.
The increase in EBITDA is primarily due to the Walker acquisition and our new electrical segment.
Our overall as you know expense was 87 million for the fourth quarter of 2019.
<unk> 80 million for the fourth quarter of 2018.
The dollar increase enough DNA was result of our Walker acquisition, including additional amortization.
We had good SDMA leverage in the fourth quarter as SDMA had a percentage of revenue for the fourth quarter 2019 that declined to 12.0%.
Paired to 13.7% for the fourth quarter last year.
As you know in the fourth quarter was helped by the insurance recovery, We mentioned and we also had lower incentive compensation expense.
For the full year as soon as a percentage of revenue was 13.0% compared to 13.6% prior full year.
The overall improvement in the US DNA percentage was as explained earlier largely due to the electrical segment, which as larger progress projects, requiring proportionately lower levels of best year.
Our 2019 tax rate was 24.7% compared to 24.1% in 2018.
The 2018 tax rate benefited from a discrete tax item, while the 2019 tax rate benefited from discrete benefit from the energy efficient commercial building production.
Also known as a 179.
We currently estimate our future effective tax rates will be between 25 and 30%.
However, our effective tax rate in 2020.
Good tend towards the lower end of this range due to the reached an extension of that same 179 de deduction. It's now been extended through the end of calendar.
Cash flow for 2019 was strong and our full year free cash flow flow was 112 million compared to 122 million in 2018.
This strong cash flow is allowed us to pay down our debt by over 70 million between the Walker acquisition on April one at the end of 2019.
We feel great about our cash flow prospects for 2020, we're also happy to announce another dividend increase this quarter.
This makes the seventh consecutive year that we have increased our dividend.
As Brian mentioned, we amended our credit facility in December to increase the amount available by 200 million to a total of 600 million.
We're happy to have been able to lock in favorable pricing as well as financial covenants that recognize our strength and reward our conservative long held approach to balance sheet management.
We also procured even more flexibility to complete transactions and return capital to our stockholders.
Above all our amended agreement now expires in January 2025, and that gives us good visibility and stability as we continue our strategic about.
During the fourth quarter, we porch purchased 84000 of our shares at an average price of $50 in 27 said.
In 2019.
Overall, we purchased 429 9000 shares over the course of the full year.
Since we began our stock repurchase program in 2007, you bought back 8.6 million shares at an average price of 17.
Directly returning over $150 million our share our shareholders.
Well I have openedge right.
Alright, Thanks Bill.
I'm going to spend a few minutes discussing our backlog and activity in various sectors in markets.
These are covenant slide seven to nine.
I will also comment on our prospects for the rest of this year.
Backlog at the end of the fourth quarter of 2019 was 1.6 billion is same store increase of 195 million was 17%.
Can be at the end of 2018.
Primarily due to continued market strength.
And the strong reputation and performance.
Our many location.
Sequentially on backlog was essentially flat down $7 million.
As expected.
Electrical segment backlog retreated declining by 43 million compared to the ended the third quarter of 2019.
As we mentioned last quarter.
Walk up a very large project in the third quarter net burned heavily.
During the final months of between 19.
Mechanical segment backlog increased sequentially by 36 million or 3%.
In addition to our strong backlog improvement.
We have a good balanced across our various end users sectors.
Institutional markets, which include government healthcare and education.
With 36% of our revenue between 19.
The commercial sector was 30 instead of our revenue.
And industrial provided provided the remaining 34%.
With our new electrical segment, which will include the site acquisition in 2020, the industrial market will continue to be a very important sector for us.
Please turn to slide nine brought current revenue mix.
With 29 team construction to 76% of our total revenue.
With 46% home construction projects for new buildings.
And 30% from construction projects in existing buildings.
We have being helped by good fundamentals and trends in non residential construction.
And we continue to book projects with good market pricing in a broad distribution across end use sectors.
Geographically, we experienced strong results in most of our markets with particular strength in North Carolina.
Virginia in Florida.
We continue to make investments in our service business.
With 2019 services, 24% of our revenue.
With service projects to provide a 9% of our revenue and pure service, including the hourly work, providing 15% of our revenue.
Our service business is doing very well.
On an absolute and same store basis.
Many 19 service results.
Well higher in both volume and profitability in 2018.
Our service maintenance base of annually contracted revenue is 128 million at the end of the year.
Which is a record for us in an impressive 4% increase.
End of 2018.
These service maintenance contracts not included in our reported backlog numbers.
The 2020, we remain focused on one generating and wisely investing free cash flow.
To.
Protecting the mine and on mechanical segment.
Three improving the margins our electrical segment.
And for continuing to partner with the best and meet the contractors.
Prudent acquisitions.
Finally, our outlook.
Our backlog is solid.
Our markets are active.
We have strong a project pipelines and we are experiencing good service project demand.
We expect mid single digit revenue growth and our mechanical segment on a same store basis during 2020.
And our best estimate is that an electrical segment will be flat or down just slightly.
As we pursue opportunities with discipline.
And planning.
Overall, we expect that combined revenues will be up by low to mid single digits.
We see good trends in our business the pricing environment remains good and we are optimistic that market conditions for 2020, who continue at the strong levels that we have experienced.
To start up 2018.
Our sense is that the markets will remain very supportive and we believe the comfort systems team is well positioned to capitalize on these opportunities.
We are stronger than ever.
Thank you once again to our 12000 employees for their hard work and dedication.
Ill now turn it back over to George for questions. Thank you.
If anybody does wish to ask your question <unk> style Dolphin mall on your time.
We'll be advice when to ask your question no questions will be honest in the old over safe.
Our first question comes from the line all from Sean Eastman you are lies in the call. Please go ahead.
Gentlemen.
Morning, Sean.
First one for me is.
And a nice finish to the year by the way compliments.
I'm curious with the acquisition of Star here tacking onto the electric co presidents I'm just curious what can you tell us about your.
Major customer response to comfort systems, entering the electrical space and adding that vertical.
We have a huge advantage there which is both of the markets that these companies were based and.
Already contain one of our very best.
Some of our many great companies.
So customers really we're very comfortable with that because.
For example in Dallas, They saw asset acquired Dyna 10, many many years ago and they they've seen that Dyna 10 continued to be just a fantastic partner for them and by the same token half the jobs that star is on any given day, our subsidiary environmental Air systems was on those jobs with them. So.
The level of these two acquisitions, we're really in our to our largest market by revenue in one of our top three or four markets by revenue. So then Sean I visited the project in Dallas with both the mechanical electrical gene with the customer and he was very favorable on positive that we had both of these specialty coffee.
Tracked is on the rule.
And what great markets right, Texas in North Carolina.
Yeah, absolutely all right Thats, great Thats excellent and and then the outlook commentary in the K does hold in modular construction on the list of focus items for investment and others a bit of an angle there with star in partnership with the cash maybe you guys could just talk a little bit.
At about what your embarking on there.
And what we might see here in 2020.
Just to.
So let everybody know what modular and Offsite construction is right, but the in arcade when we talk about modular construction, we're talking about building very sophisticated systems in a plant that are exactly what you would have built.
On the built job site cracked as bright as a practical matter.
From the point of view of content and then transporting it there may be on 10 semis in some cases on over 100, semis and putting it together on the spot and.
We've done that for many years, when we bought environmental Air systems. They had 30 to 40 million of that work last couple of years there than in the 100 million dollar range of that work and their margins have gone up over the time weve on them. So we really like that business, we've been investing in them.
Then we start electric Meanwhile, it's been a great partner for us in construction in North Carolina, but they've been we've been a customer of theirs for many years so last year.
Star Electrician did about $10 million worth of work for Eas is.
Business, mostly an offsite construction and mostly inside the walls of our plants. So by teaming up with this company. We've got a relationship with for so long, we're able to internalize that capability and.
Up until now if a customer wanted us to build an electrical room for them. When we were building, let's say a chiller plant for them.
We would only do that if needed to get the order for the chiller plant because we were going to put somebody else's workforce to work now with star being part of the family.
We can go add that product to a product that we.
We are.
Just as good for us in that were just as excited to sell as our mechanical offsite construction. So thats a long answer but hopefully that helps people understand this is already happening. We're just internalizing it and we have not been pushing to market that because it wasn't our labor that was doing the work in the reality is comfort makes its money on labor. So now we'll be able to that.
That really adds a product for us a service offering for us.
Really interesting stuff last quick one from me.
Margin progression.
The electrical piece of the business.
Considering thats a big initiative. This year, just curious maybe some rough guideliner and what we can expect in 20 years versus maybe what.
2021 looks like.
It's Sean this is about a typical acquisition for us at the beginning overtime the gross margins always improve.
Yes I.
I can't give you a metrics today, but.
The blocking and tackling a mobile with training working which is the company's sharing best practices. So it all the time they'll improve allied tags.
It's impossible to call, but now they're working on it and there.
No you get to improve that as well.
Excellent I appreciate the time, thanks, Gents Alright, you do thing.
Our next question comes from the line off Brent Salem utilizing Nicole. Please go ahead.
Hey, Thanks, good morning.
Well I grant.
Hey.
I guess first on.
Walker, you've talked about managing that growth.
This year 2020, how do you see them kind of rebuilding that book of business through this year and say burn off some of it.
Larger work does that backlog for them to start to pick up in the second half and can you talk a little more specifically about the initiatives you have for that business. This year.
So the first thing I would say is as far as their backlog it will be lumpy right. When they as you know we've talked about they booked a very large job.
Last year in the third quarter this year revenue heavily.
You know like 20 million a month or a couple of months at one point.
Since then there's still on that job by that way in the first quarter well.
That burns backlog heavily and then it gets booked in big lumps on that very site. They feel like bill probably get the next phases, but having said that it's going to be lumpy and people are just going have to understand that that that's how it has to be as far as rep margins go when they have a big job like that is cost plus.
Guarantee fee based with a guaranteed maximum price right. It has a very large amount of materials that are delivered so during the quarters in months, where they revenue heavily on the job like that they will have.
Even lower gross margin, but unbilled, but extraordinary absorption rate of overhead so.
So they do that will develop over the course of this year. So there is a combination of.
The lumpiness of it and then also.
A couple of their markets, where they are just without here without rival and a couple of markets, where we think they can and they believe they can be a little pickier. So that will also were not comparatives not accompany that really chases revenue and we don't like to do work for practice.
So theres a lot of moving pieces, but the underlying trends should be very good.
And I don't know, but.
Brent also yeah, we have a number of tools to help help them go through this they're very receptive that they've been terrific corporate citizen since they have joined us.
Yes, okay.
And then can you talk about that development at that same store backlog I think it's at 16% year on year is that spread pretty evenly across your geographies.
Yes, we got we.
And the cross end uses which I said it.
My commentary I think thats the.
No the biggest.
Pleasure that we're seeing in these numbers that it's broad based across the country. We're not really seen any weakness is Brent.
And across end uses so.
That's why that's leading to our optimism for this year and also we don't we don't have a customer over 5% of our business. So we got a good diversified customer base as well, so it's really where we want to be.
Yes, and then bill should we be thinking about free cash conversion this year any differently than in the past just with the inclusion of Walker and now star I mean, any air or any shift in the business mix or or typical to what you've seen historically. So so we will continue to cash flow our after tax earnings plus a little bit for non cash.
Items like stock expense.
Having said that we we got it ahead of ourselves in 2018, a little bit we had a fantastic plus 70 million fourth quarter cash flow conversion third quarter. This year, we were over 70 million, which by the way is one of the reasons why those incentive accruals in the third quarter made the SGN, a look a little bigger than the.
Fourth quarter, just proportionately not as not as big if you compare the two years we.
We intend to buy incentivized cash flows. So we when we have a lot of cash flow, we have a lot of comp expense.
We think we're very well positioned for cash flow. This year, because we can him into the year as you can see on the base of our of our financials with really big receivables. There. These big projects that we're talking about their good payers, but with your revenue in that much you can keep up so as those begin to ramp down we'll see cash rolling.
And from those and then in every other way across our service business. We're just very.
Very well positioned very well positioned for cash flow for this year.
Yep.
Last one for me I guess just since its topical in the news these days you.
Are you seeing her foresee any supply chain issues with respect to any activities right now is that a concern from your folks in the field.
Right. Thanks for asking we bought out to all our supply is and as we sit here right now we see no no issues with them supplying what we need today.
Yes.
Okay, great congrats on the year and best of luck.
Thank you.
Our next question comes from the line of.
So in case you our lives Nicole. Please go ahead, sorry fellheimer.
Morning, guys.
Morning, Adam.
The.
Brian You said low to mid single digit total revenue growth. This year does that that's organic.
Yes, yes.
Okay, and then have you closed star.
We had styles already for Yep.
Okay, and what's the revenue contribution from star.
So that I would say I think in our press release, we said, we expect annualized revenues of about 90 million and EBITDA of five to 6 million initially and we think there's definite.
Opportunities to improve both of those numbers over time as these two companies work together.
Got it and then are there.
I guess, you just answered the question, but their margin profile versus walkers and high level.
It's very similar actually it's very similar but.
You know Walker and a couple of has had a couple of Super high revenue quarters, I, just mentioned, but I think they're very they're very similar margin profiles initially.
Yes, what's interesting about walk Adam is that yes, maybe the gross margin lower but theyre overheads lowest so they're operating income isn't.
That far off from went out mechanical people do.
Right now I get that.
And then [laughter].
More and modular just ended a margin benefit bill overtime.
Well, so as I would say, it's more of a volume benefit and here's why to for two reasons, one more product to sell to it addresses the labor issues right. So we get very good margins in that business.
I don't expect them to necessarily shoot up precipitously.
We are more constrained with the amount of volume that we can do.
On a job site with stainless steel welders and pipe Fitters you can you can expand production more readily in these hundreds of thousands of square foot of space.
People are in a controlled environment, they could learn more discreet task and do it over and over and then they can train one up in one down on that so it's really away. The reason we think it's very important to the future is this a way to actually maintain or even increase the quality and sophistication of the product.
Are delivering but do it with a.
An ability to sort of cope with the fact that the skilled many year to experience Labor force is less available than it has been.
Okay that makes a lot of sense great. Thanks, guys.
Thank you.
Our next question comes from for line of Joe Montana.
Sorry, Joe.
You are lysenko. Please go ahead.
Hi, guys good morning.
Good morning, Joe.
So your competitor, who we were just on their coal.
Okay.
Stating similar dynamics between mechanical and electrical being masked a little more growth in mechanical versus electrical could you explain what youre seeing in why.
The growth, so little stronger and mechanical versus electrical.
So I think that.
The two markets are going to have an opportunity to grow based on what buildings are being built so they have a great. They both have the same opportunity from my point of view.
But I would also say that.
We're just being a little pick your with electrical.
So thats one reason I'm sorry, just one also say.
We have a lot of support for the for the competitor your I've, you're referring to EMCORE, they're going through a.
They're going through a little thing with their computer systems that we've been through and it's awful and they're going to get passed it it's not going to matter I bought EMCORE stock. This week, so it's not a.
Not at that that's not going to be something that matters to the long term value and Joe. This is a finish up on bill we feel good about the electrical macondo from an opportunity basis, I think we talked about it all some discipline and playing there but.
We're very confident went that market.
Okay, and then just in general maybe anecdotally have you sense any difference of.
Confidence or tone when you talk to your businesses are your customers regarding just the overall environment.
I mean, it seems like just over if you take a high level approach and look at the market overall it seems like if you look over a course of the last couple of years that things may be slowing a little bit, but certainly we obviously have not seen that in your business just given the orders and backlog that you posted.
This quarter any color around that yes, july's, Brian I'll go first.
Yes, you figured we've been in touch with everyone in the last couple of weeks and what we're hearing is steady and stable.
Which 120, we're really not seeing any kind of.
Sharon as you can imagine right, we're very sensitive to it.
Make sure we're in front of it but as I am as I sit here today, we're not hearing that bill you want to add on to that yeah.
Like saying hi, low yeah.
Okay, and then we've seen interest rates for quite a bit.
And then a pretty.
Severe quick manner. So I don't know if that changes much maybe it needs to fall a little more over a course of time and not so severely relative to a economic scare but.
When you guys see interest rates fall like this does that.
Tell you anything does it provide any.
Customers are projects going forward faster than maybe.
That's where a little higher is that anything that you look at one of the interesting thing that's happened over the last decade for us is.
Comfort has really gone from doing like we used to do multifamily and a lot more developed work.
Now we do virtually none of that are almost very low percentage of that and we do a lot more industrial the reality is.
Our customers have they have money they don't know what to do with in general right. So I think there's but the good and bad of that is they have the funds they need to invest.
A little changes in the interest rate really I think only affect us as it did whatever feedback effects as on the economy I don't see Ida compared to anytime in the past.
The concept of something quote unquote being finance it just never comes up nowadays.
Okay, and then I'm wondering if you could talk about so I don't know if you mentioned this earlier I apologize if you did but in terms of the type of buildings that you're seeing new construction work.
I know a lot of your businesses sort of been Middle America, we've seen the farming sector.
A lot of manufacturing.
Areas in the country that are sort of seeing.
Some pressure and sort of downturn and I don't know if that bleeds into.
The construction works.
Yes.
Next do or.
Right in those regions, where you plan on anything that you're hearing regarding.
That being a factor affecting.
New projects.
I'll go first I would say that.
Our positioning is really good right now data.
Pharma food, even hospitals eyes are peaking open a little bit.
The the verticals we're in.
Seem like they have very level headed strength.
Yes, I just add on.
One place that just hanging in years education, which you know for US is what university level still seeing plenty of opportunities there.
Yeah, a lot of money still in that sector for sure absolutely.
All right well, thanks, a lot guys and have a great day due to Joe. Thank you take care.
Oh, we have no.
I have a coal now if we can hand over to Brian Lang.
Okay, everybody. Thanks for joining the call today, we appreciate it I just want to give a hearty welcome to the folks at the project Management Academy training session in Dallas, It'll listening in hoping joined the call.
29 team was agree if accomplished systems now we are optimistic that 2020 will be a continuation of these outstanding results and based on my confidence on the elite Labor Force.
We have here at all levels of this organization both in the office and out in the field I really appreciate the yeoman's.
As.
Great we want to close out the year, it's very much appreciate it.
Once again, thank you all and we'll see on the road soon have a great day.
[music].
Thank you so that does conclude todays call you may now disconnect. Thank you and joining and have a good day.
[music].