Q1 2020 Earnings Call
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Good day, and welcome everyone to the quarter, one twentytwenty comfort systems, USA and things.
By the comfort systems USA.
My name Sheila O'neill free [laughter] today during the presentation. Your line fill the main I'm definitely you acquire assistance anytime just Keystone is there any telephone and of course nature would be happy to help you I'd have I thought. It. This conference is being recorded replay purposes and knock down days to Julie Okay go ahead.
Thanks, Sheila good morning, welcome to comfort systems, USA first quarter earnings call. Our comments this morning, as well, but press releases contain forward looking statements within that meeting other private securities litigation that that Nike 95.
Well, we will pay today is based on a current plans and expectations a comfort systems USA.
Plans and expectations include risks and uncertainty that might cause actual future activity and the bulk of our operations to be materially different from those set forth in our comments.
You can read in more detail lifting and commentary concerning or specific risk factors in our most recent form 10-K and form 10-Q as well as in our press release covering these earning.
Presentation has been provided as a companion to our remark.
Okay, No posted on the Investor Relations section of the company's website found that comfort systems USA Dot com.
Joining me on the call today, our Brian Lane, President and Chief Executive Officer, and Bill George Chief Financial Officer, Brian What our remarks.
Okay. Thanks Julie.
Good morning, everyone and thanks for joining us on the call today.
Let me start bison Sealy thanking all of our comfort systems USA employees for their work in commitment.
Especially their incredible courage and resilience during this global pandemic.
As you all know these are challenging times, but comfort systems is rising to the occasion and we had been very fortunate so far.
Oh, with 19 began impacting our business and very significant levels and the second half as much.
In spite of that we had good morning, good earnings and terrific cash flow in the first quarter.
Backlog is holding up.
We will get into the into those details in a few minutes, but I want to comment a bit more about the immediate challenges we are facing.
Most important.
We are working to keep our employees in our community safe.
Well locations have been working to implement C.D.C. and Osha guidelines to ensure our workforce in our community is kept safe and healthy during cold 19.
And in addition to working to meet these guidelines we are taking many other actions.
In various markets, we have implemented segmenting and designated work so.
Yeah, good start times temporal scanning and screening.
Disinfecting equipment and work areas.
Just one thing and the wearing a protective face and knows personal protective equipment.
As you know we operate in scores of different markets in dozens of states.
Leadership in each location is conforming to the measures that are required locally and seeking the path that will work best keep our people safe and well.
That is a true strength of comfort systems.
Our overall business was affected the closing weeks the first quarter.
And of course those effects are continuing.
Hi service business experienced the most immediate and pronounced negative impacts.
Largely as a result, the building closures or decisions made by customers to limit building access.
Although our construction activities I considered essential services in most markets.
We have also had certain jobs temporarily closed due to government pronouncements.
Due to decisions by owners and when sites reported positive test for Covidien 19.
While we have seen some construction jobs delayed so far we have not experienced material cancellations.
In addition to actual stoppages a project in service work has experienced efficiency challenges.
As a result of the important precautions that we are taking.
But our amazing teams across the U.S. still managing to accomplish great work and I being productive in light of these circumstances.
Our local leadership project management, and especially our field work is have been extraordinarily effective.
Exceeding my high expectations for how they would respond at a time like this.
In the midst of these challenges.
We have started 2020 on a very good notes.
Revenues were $700 million compared to 538 million in the prior year.
And our growth included a 6% increase on a same store basis.
We're in 48 cents per share in the first quarter.
And that result is despite a direct impact of nine cents due to cold bid 19.
In addition to the directly quantifiable impacts.
As I described above we are also impacted by less quantifiable ways by Colvin 19, including weakness in service and productivity challenges in Proto and project work.
As of March 31, 2020, a backlog was strong and is more than $200 million higher than the prior year on a same store basis.
We are reporting fantastic first quarter cash flow, which is a tribute to our teams focused on cash and they traditionally weak cash flow quarter.
Before I turn sometime over the Bill I also want to mentioned our acquisitions.
During February we added a strong company in North Carolina style electric to our electrical segment.
In addition to having a great contracting business in customer list.
They will strengthen a modular construction business in North Carolina.
Style.
Local business already have a long history of successful collaboration.
On April 1st we completed the acquisition of tests, which we believe will make us the leading modular and off site construction expert across the growing modular mechanical contracting industry.
With the task now is part of comfort systems USA.
And when considered in connection with our existing capabilities that yes in North Carolina.
We believe that we now have unmatched capability to complete complex modular and off site construction and the growing modular construction industry.
Our site construction business is particularly strong in the technology.
Medical and pharmaceutical industries.
This combination gives us a great opportunity to cross sell out capabilities to our existing customer base at all of our locations.
And augment our already strong industrial segment, which increased to 39%.
Total revenue in the first quarter.
In the midst of these challenges we continued to invest and we remain optimistic.
I will discuss our business outlook in more detail in a few minutes, but first let me turn this call over the build to review the details of our financial performance Bill. Thanks, Brian Good morning, everyone.
So first quarter revenue increased by 30% at 700 million this quarter compared to the same quarter last year, which means as Brian said same store revenue also increased by 6% the rest of due to our acquisition.
Quarterly gross profit increased by 10 million to a total of 117 million in the first quarter at 20.8 compared to the same quarter last year. The gross profit dollar increase was due to the Walker acquisition.
First quarter gross margin was 16.7 versus the 20.8 compared to 19.8% and 2019.
The decline in gross profit percentage is the continuing result of the addition of our electrical segment, which is weighted to large and complex projects with significant amounts of material and equipment pass through.
And which has a lower percentage of service.
And with the effect of inefficiencies from Cobot 19.
Our electrical segment was added at the start of the second quarter of 2019. So this is bill last quarter, where that segment will not have been included in the year earlier quarter.
Our electrical segment. In addition to their large project mix and lower service component experienced specific project challenges, including the impact of Kobin 19 on productivity and certain adjustments that impact our gross margin.
With larger projects and less service, our electrical segment also lowered our SDN acres.
Net income for the first quarter was of 2020 was 18 million or 48 cents per share as compared to 20 million or 53 cents per share in 2019.
As bright as previously mentioned, we had approximately nine cents of direct coated 19 impact and we were additionally impacted less quantifiable ways by cobot nicely, including weakness in service and productivity challenges in project work.
For the first quarter EBITDA was 37 million compared to 38 million for the prior year small decline in EBITDA results from the negative effect of covert 19.
Offset by EBITDA. It was contributed by Walker.
Now that ran through our various profit measures before I move on the other aspects of our financials I want to take a few minutes to comment on potential ramifications for our company from galvanizing and talk briefly about the mechanics of how and when that is affecting and will affect us.
I'm going to talk about some of the risk we're basing how they create more potential volatility in our results in judgment and the timing for how they could unfold.
The global pandemic brings with it many proximate risks most of which are fairly obvious worksite are subject to closure and reopening.
Precautions and adjustment measures create an efficiency that's hard to measure and as you saw this quarter the challenges for our customers can affect the timing of in some cases their ability to pay for services.
Although we have not seen job canceled that is a possibility and even the likely deferral some work and create air pockets and planning challenges.
There are also second order risks that are less product.
The most obvious the effect of these challenges on industry activity and business cycle condition.
The volatility of the results. We are suddenly experiencing can also affect judgmental areas and we will need to closely monitored ramifications for accruals relating to risk our medical costs purchasing rebates and our intangibles such as goodwill.
As the next few quarters unfold, we will see these effects.
This quarter, we reconsidered certain receivables.
There are exposed receivable exposures in light of the effective cobot 19 on certain of our customers and as a result, we increased our receivables accrual.
As a result of our bad debt as a result, our bad debt expense for the first quarter was 4.6 million, which is a stark increase from last year when our bad debt was only 200000.
We also is that reassessed our jobs in light of productivity challenges.
We currently believe.
Second quarter, we'll see the greatest direct impact, especially on revenue as we cope with additional service delays in job stoppages and as we continue to adapt to changes that can affect efficiency. During the second half of the year. Although we're optimistic conditions will improve there will still be productivity impact and we may see.
Our pocket that arise from delays or the slow return of small at work.
We believe we're prepared to confront the challenges we believe that our investments in service and our growth in the industrial segment, the technology medical and pharmaceutical critical give us a good opportunity to cope with these challenges successfully.
We believe that we've been based these challenges in 2020 that we will emerge stronger.
So with that his background, let me now comment a few more areas from the first quarter.
SGN expense was $93 million or first quarter of 2020.
Compared to 79 million for the first quarter of 2019.
In a increased primarily due to as DNA from new acquisitions as well as an increase in bad debt expense.
The increase in bad debt expense was primarily driven by concerns about collectability of certain receivables due to the business interruption caused by the global pandemic, specifically with respect to receivables with retail restaurant.
Payment.
As you may as a percentage of revenue was 13.3% in the current quarter compared to 14.7% in the first quarter 2019, we continue to benefit from SDMA leverage largely due to be electrical segment, which requires lower levels of that.
Our 2020 tax rate was 27.6% compared to 25.9% in 2019.
Our prior year tax rate benefited from permanent differences related to stock based compensation.
Cash flow for the quarter was remarkably strong as our free cash flow was a positive $15 million.
There to negative 7 million in 2019.
This is a traditionally we cash flow quarter. So this positive cash flow is a notable achievement for our operators.
Feel good about our cash prospects despite the ongoing challenges.
As of today, our debt balances 348 million and includes borrowings under our credit facility of 291 million.
We have two principal financial covenants under our facility.
The first one is a total leverage ratio, which cannot exceed 3.0.
Leverage ratio as of March 31, 2020 was 1.5 and today, we have very substantial additional capacity of 244 million.
The second financial Covenant is the fixed charge coverage ratio, which is required to be at least 1.5 and which on March 30, Onest was 10.7.
So we believe that trailing 12 month requirement by more than 700%.
Those you view, who has been around our company for a long time are well aware that we run our balance sheet in order to be ready for at times like this.
During April we were able to take advantage of our strong balance sheet to enter into a swap agreement to fix the variable portion of our interest calculation for a substantial portion of our debt.
As a result of the swaps we executed we expected about 75% of our bank debt, which up to now had variable interest rates will bear interest at.
At a roughly 2% fixed rate for the next 30 months.
Immediate decrease of about a half a percent even from the low rates we were good.
During the first quarter, we purchased 237000 of our shares at an average price of 37 85.
Late in the first quarter and specifically as the scale of coated 19 challenges became apparent we withdrew our automated share repurchase plan and us we've stopped purchases for now.
We will reevaluate that as action that that action if conditions develop.
That's all.
Yes.
Okay. Thanks Bill.
I am going to spend a few minutes discussing our backlog in various sectors in markets.
I will also comment on our outlook for the second quarter and beyond.
Backlog at the end of the first quarter of 2020 was 1.6 billion.
Same store increase of 252 million or 22% compared to March 31 2019.
Primarily due to the strong reputations in performance of our many locations.
Sequentially, our backlog was roughly flat.
With that small some sequential increase in our mechanical segment.
And then sequential decline in our electrical segment.
And overall, we remain at the high levels that we reported at year end.
Most sectors have remained strong with particular strength and industrial.
Industrial revenue increased to 39% of total revenue in the first quarter.
Institutional markets, which include government healthcare and education was 36% of our first quarter revenue, which is consistent with what we saw in 2019.
The commercial sector was 25% of our revenue.
With the acquisition of task and NSTAR electric we expect to continue to grow our off site construction business, particularly in the technology medical and pharmaceutical industries.
For the first quarter of 2020 construction is 79% about total revenue.
With 49% from construction projects for new buildings.
And 30% from construction projects in existing building.
For the first quarter of 2020.
Service is 21% of our revenue.
With service projects, providing 8% of revenue.
And pure service, including hourly work, providing 13% of revenue.
Beginning in late March service business experienced the first and most pronounced negative impacts associated associated with Covance 19.
Largely as a result of building closures or decisions by customers to limit building access.
Although our construction activities have been classified as essential services in most markets.
We have had certain jobs temporarily closed due to government action.
Decisions by on his or upon positive test with Covance 19 of work is at various sites.
We have also had some delays and the and the award of New work.
We have been informed of instances of delayed stops.
Up until now we have not experienced material cancellations in our backlog.
In addition, we have implemented safety precautions and other Colgate 19 related guidelines that have added cost our inefficiency as we work to create a safer environment for our team members communities.
Geographically Colgate 19 has impacted us more in the northeast and up and Midwest.
Especially in states, where construction has not always been classified as essential.
Particularly in New York, Michigan in Washington State.
Finally, our outlook.
We expect to experienced the most significant impacts from co bid 19 during the months of April may and possibly June.
However that will depend on how national of national events unfold.
We also expect that covert 19 will affect us for remainder of 2020.
Assuming that some relief as evidenced by June.
We currently believe that earnings per share in the second quarter.
We will be considerably positive.
Perhaps achieving levels there are about one half of the same quarter inch Wayne 19.
We also anticipate improvement from those levels and the second half with 2020.
However, we are preparing for a wide range of economic circumstances in 2020 and beyond.
We have a great workforce and we feel confident that we can continue to be profitable.
Cash flow positive and that our ongoing investments will continue to pay off and will accelerate our growth.
Once trends returns to our industry.
Thank you once again to all our employees to be hard work and dedication.
I'll now turn it back over the.
Over the Sheila for questions. Thank you.
Thank you so much.
Question.
Keith Donovan Vaughan on your telephone.
And then decide chemical your question Keith fell 10, Kevin.
Hi at the first question comes from the line of Sean Eastman of Keybanc capital. Please proceed.
Hi, Thanks, gentlemen, thanks for taking my questions.
Sean start.
I just like the started on the service business.
Early it seems like the most material near term disruption, but just curious to get your sense on how you'd Fran demand recovery once.
The environment Normalizes Im just curious on.
How you'd frame what demand looks like on the buildings that have been empty or near empty.
And you know how the business comes back once you will get back to work.
And that's a really good question I'm always optimistic about service I think this is just a blip personally I think as you've seen some in a warmer weather increase.
People still need to take care of there.
The buildings, they just can't let them see document I mean, we're seeing good activity in service in the southeast still today.
Also I think there's going to be opportunity as we go forward looking at the way it flows through a building looking at built is so I think there's going to be opportunities and I think service can come back.
Very very quickly so we're pretty optimistic going into this summer.
That will happen. So bill do you have anything you're good night.
Okay, Great really helpful makes sense and then.
Maybe just broadly if you can comment on what the bidding bidding environment is like currently has has bidding paused or stopped for new construction in the interim or are you guys still bidding and booking work at this point you know Thats dead, So Sean bidding activity.
Probably surprisingly is still quite good.
Maybe a little bit more active in different parts of the country, but in general we aren't seeing a lot of opportunities.
Sure look at still.
You know some opportunities like in New York State for example, with Abbott, both in Maine and facilities in.
Outside of Syracuse that need some quick bill.
But I looked at a couple of bonds one of the small any one last night so the activities.
As far as I'm concerned still pretty good Bill do you have made yesterday I think I actually saw committed couple even phone calls. This morning, just to double check there is activity. There is you know there were in the last month, there we're going to be job interviews that were canceled or delayed while that canceled or delayed so theres going to be.
Delay, obviously, you shutting down their shutdown I also think that there may be over the next quarter to a little bit slow return of the quick turn work our book of business for projects is made up of projects that are developed for a really long time, but as you know our average project size is like I don't know.
And one hundreds of thousands and a lot of that quick turn work. So we'll have to wait and see how fast that gets going again. That's one of the reason we mentioned that the possibility of air pocket, but I have not yet talk to anybody who said.
The thing that we're going to happen that aren't going to happen now.
That could come but that hasn't come so far and Sean you take like I mentioned in my script developed.
New York, Michigan, New actually I think coming back a little bit Washington State.
No recently I think the other day has started turning it around to Ed yes construction so.
I think will be our right. It just just now this is going to play out long term so.
Okay helpful. One last one for me you guys mentioned the farm medical technology, you know opportunity set holding out well a few times in the scripts Im just wondering if.
There is already signed.
Of strengths there.
Or.
Just how you expect these opportunities to play out.
So on on technology, we've had baby technology customers contacting us.
Thats for reinsurance does this long slow us down so that's encouraging.
On pharma that step takes a little while we get going but I do think that.
Maybe America, we'll see some charman.
Possibility of having more important pharmacological ingredient.
Repaired and the us rather than far away. So were I think I think it's pretty I feel pretty optimistic I hope to get magically transforms thing within a quarter or two but I think these are.
Some good fundamental characteristic.
John.
We are really really well positioned in pharmaceuticals.
And the sectors I know, we mentioned the numerous times for a reason.
So we're pretty optimistic that thats going to come back and they'll be a lot of opportunities for us going forward. So I think it's pretty exciting actually.
Excellent.
I really appreciate the time, thanks, guys have a good day.
Good luck out there. Thank you.
Thank you on the next question comes from the line of Joe Mondillo of todays TNK. Please go ahead.
Hi, guys. Good morning point, Joe are you.
Doing well.
Meanwhile, as well.
Doing terrific. Thanks.
Good to hear very good there.
Terms that you are sort of to Q outlook could you help us understand how you're thinking about that you sort of talked about how potentially down 50%, but I think there's probably a range any other information that you can give us whether it's how april's trending or how you're thinking about that twoq.
Guidance that you sort of provided yep. So we gave we gave that.
Guidance, because it's the best thing that we have but there are going to be facts that develop on the ground.
As April goes we have jobs closed down as we speak because of cobot tests, we have jobs that closed for two days, we have job that closed for a week walkers had.
Probably more job closes the closures than anybody else on some of their they're bigger jobs.
We don't know how thats going to develop.
But thats still out a we're talking about out of thousands of jobs. So is that we still have work to do we think service will pick back up.
Really it's what we said in our press release. This is assuming we start to get rid of noticeable relief in June that we're very vulnerable to changes in.
Government pronouncements, we have certain states where were shut down because the way that the governor worded the order shuts down. So there is we are subject to facts and circumstances as they develop but right now assuming things trend at these levels for let's say another month in start get a little better in June that guidance, we gave us.
What we're thinking.
It was interesting Joe we have an opportunity outside of Syracuse, and we got to call last Wednesday were already on the site.
Today. So there is some opportunities a net quick and they need someone would have footwork once they can get the a quick so we're well positioned in some of these opportunities.
Particularly as it relates to some cobot 19 remedies.
Okay and in terms of your comments that you made about sort of covanta impacting even the second half a year, but.
Most likely improvement from the Twoq you levels.
What are the biggest sorta impacts that you're anticipating to the business out once we even start to reopen by June or July.
I'll go first okay.
First of it so there's a couple of big one.
So so immediately we had to look at our receivables and say, okay. We got this customer they're not paying that ran right now.
Should we impair the receivable so to some extent, yes. So as you have those kind of immediate impact.
They had us even by the end of March then this quarter you have the actual stoppages that closed building. Once you get passed this quarter I think your biggest risks our air there's productivity and Theres air pockets productivity.
So at the end of the first quarter and we'll do that again, we closed March we have to estimate how much it will cost us to complete a job we have to take into account when we make that estimate all of the facts and circumstances that we know about well at the end of March we now knew that we can only book for people in an elevator on a vertical job where before we put.
10, we now knew that scissor lift there only have one guys standing on the platform rather than two we knew our guys would be backed up getting their temperature taken so.
Because of that we wrote down some of our job.
Well that new margin that their AD is what they'll play out for the for the rest of the year. So we have jobs, we lowered their margin one time, obviously the jobs that are new are the ones that that's going to have the bigger impact on the other concern I have and these are just these are incremental concerns, but they matter is air pockets I really believe that some of this quick turn.
Good work will be slow to come back we actually think we may have some competitors, who are who are getting these loans and half debt.
I have to have a certain number of people working to be for given their loans may take work cheap here and there, especially that last minute quick turn work, we've seen a little bit evidenced that that might happen.
We have concerns that.
We may be slow getting some of our labor back because some of the because of concerns employees have about coming back but also because in some cases, they're being paid pretty well not to work. So all of those are what we're baking into those considerations.
So overall, we feel like well we've got a good business. Our guys are fantastic. They know they want they want to work hard and they know how to make money. But these are the this is the real world in those those are real things and they're going to matter a little bit.
Hey, Joe we're talking about this topic and we've talked a lot about the field, but we are really fortunate here.
We've had a work remotely and I'm talking about the finance administration accounting folks both the corporate in the operating net you know that Julie leads the charge and she opens up these comments.
I can't think dumb enough data were able to meet all the deadlines and get us ready for this call today.
There's a lot of hard work.
Think Julie spent a few night and making sure that we would tie it up so I really want to thank them for all the hard work and how professional and discipline they were so.
Just a follow up on that question.
Are you.
Do you.
Sorry lost my train of thought my last question and I'll hop back in queue I'm, just a follow up on.
The prior question regarding new project work.
Looking back to pass.
Sort of occurrences in the economy.
Obviously, we've never seen something like this with a pandemic, but we have seen some shocks in the system 2008 2001 2000.
When you look back at those time occurrences would you.
Would you anticipate in this time around to feel an impact to new project work six weeks into sort of the shock if you will.
Or.
Bidding and new project work would it take a little bit a more time, just wondering what should we expect to feel.
The effective.
New project work being affected by this at this point in time or if it's going to take a little longer if it will happen at all.
Ill take I'll take that question. So this is give or take fysixteen quarterly call and I will agree I agree with you that weve never seen anything like this.
There are some big differences from those prior events you are talking about the biggest difference to me is comfort systems is a very different company today, our biggest segment going into the most recent the financial crisis was multifamily today at 3% of our revenue.
Yes.
Second pharma that we Didnt have then we've made a big investment in service. So those are big differences that makes me feel like this will enroll in a better way as far as when these events. It I think theres two things going on there is the effects of the emergency that just happening right now and that will be more in the made that will.
This year that will be in the nature of some air pockets because of deferrals that lower productivity and then there is the question of what the impact will be on the business cycle next year I would say the biggest difference between.
That the hardest the thing that makes it the hardest to calculate for me one really big difference between this and the other two bid.
Recessions that I had been a comfort systems bore was when the 911 recession hit in the financial crisis recession hit we were already in an unbalanced situation. We were already seeing big increases in unemployment in the United States. We had high levels of vacancy that has already happened. So we were at the started.
A recession and then we had a shock what's different. This time is this shop came when the fundamentals, whereas good as they've ever been when people were reashure a when the tax regime was well was less was more welcoming lets say when we had achieved an abundant energy when.
We have good things were going on it I think that could make a big difference, but I'm going to be honest with you.
It's really hard call about what what kind of recession that triggers we're trying to prepare for all of into our.
Okay, well, thanks, I'll hop back in queue. Thank all right. Thanks, Joe.
Thank you and the next question comes from the line all Brent Thielman of D.A. Davidson. Please proceed.
Hey, Thanks, good morning.
Hi, Brad how you doing.
Doing well thank you good.
Yes, Brian I know you had some work at Walker, Kevin ended the quarter that it had some lower margin I think attached to it sounds like that might have been amplified by.
Yes, some of the coconut impacts.
To that now and I guess any yet kind of how that works on the electrical margin.
This quarter and I guess to take that a step further how do how do we think about.
I know, there's a lot of variable next couple of quarters, how do we think about that target gross profit margin in the business is reduced to 2020.
So that is.
Even if you set aside the.
The uncertainty that period for all of us.
Not our Super easy question to answer let me tell you first about Walker So no Walker historically before we bought them they've had they really have never made money in the first quarter that was not.
Culturally something that they had an expectation.
And then this quarter they really were published in the mouth and a lot of ways. They they had I don't know some of it might have been in April but they've had multiple covance shutdowns. They had bad weather on an important project that was that had challenges.
And so.
This was this was a quarter that I believe will not even be remotely indicative for them. They also still have a little bit of those purchase adjustments coming through so.
I think that I think that.
This quarter is not at all indicative of what our electrical segments going to look like we just added to our electrical segment as well a nice company in North Carolina. So that also as a variable there as far as what our gross margins are going to look like.
Electrical has less service electrical has.
Less overhead and more project work it has more direct and indirect costs in its cost of the.
Overall cost of sales.
So they will have they will average down our gross margin. So we were going to be 20, or 21, I would expect we might be a 100 to 300 basis points lower depending on the volumes in that sector. They also have another factor, which is they do a higher proportion of cost plus the work.
And cost plus the work is very attractive in some ways because of the certainty of it but it doesn't give you the opportunity for high gross margins that you did get with fixed price work. So.
Well average us down where that shakes out.
I think that converts long term gross margins were trending up I think this lower that they will average of down.
But I did the underlying long term trend is still good.
Yeah and Brad. This is Brian just this is still if there's a fundamentally sound company. They do very good work. We recently started working with them as we usually do one training set et cetera been derailed a little bit by current circumstances, but on a long term basis. This is going to be a very good company for us this quarter their biggest job shut.
Twice that didn't help.
For multi day.
It's not okay with your work, it's just the event so.
Yep Yep got it but Mitch I mean should we take from that.
The sequential improvement.
Yes.
Yes, well just throw out the second quite well electrical I would expect there I would expect them to have better margins in the second quarter to us to have better margins in electrical and the second quarter covered as a whole the second quarters. When we're really going to we only had two weeks of covet impact in the first quarter right and we got which will give full load. We tell you we're going to earn half.
As much as last year that obviously includes a lower gross margin yes.
Set aside the second quarter, then I think we start to trend upwards and I think without co that you would is this would have been a fantastic year yeah.
Yep.
Okay, and then on on task.
When you guys came out originally I think you'd said 170 to 190 million in its first.
Yeah is that still the right ballpark to think about here.
No I.
Think passes on track for this year.
When we buy a company we develop a conviction about what it will contribute to comfort systems.
Overall for years to calm.
We bake into that that there will be recessions and strong markets over that period of time I'm completely comfortable that task is still going to provide for us in years to calm the levels of revenue and earnings that we talked about in our press release I also think they're going to have there they are there.
Working hard and very good work for the next couple of quarters.
If there is a big risk if theres a recession of any kind in 20 or 21, theres going to be recession. In 2021, I think that still be profitable I think we'll still be profitable, but which year, we get that return and I don't know, yes, so Brett we visited devil little bit ago here.
It's still very busy in their prospects a very good if things progress on a normal time. So we feel great. We feel really yeah, we really feel good about that company look they're going to add to the strength of copper systems, because they're going to add EBITDA. Yeah. All right. Thank you you listen to what I said about our capital structure. The key to all of those are the only two covenants.
EBITDA.
Okay and last one for me you guys.
Bill you stepped up the.
Accrual on the balance sheet I guess attached maybe send the receivables is that related to concerns in any particular sector market or or maybe even geography.
So that is primarily.
We took accruals against many of our receivables for retail businesses. We have a national accounts business is based in Indianapolis, but goes nationwide uses our companies and other companies to do work a fair chunk of that work is for retail organizations. We also have a strong.
Similar site based business. This operated out of Tampa, Florida that came with BC eight when we bought them. We felt like it was prudent in light of circumstances in light of honestly Wall Street Journal articles to take their entire list of receivables and scrub it top to bottom get as much intelligence as we could about the various.
Retail company and try to do everything we could to make sure that whatever concerns we had we address them.
Hey, one of the situation and you know.
Thats, what we tried to do and that accrual reflects us doing that so it's the vast majority of it is retail.
Okay. Thank you guys appreciate the color. Thank you.
Thank you and then next question comes from the line of Adam Thalhimer Tom.
Thank you Sir please go ahead.
Hey, Good morning, guys I also wanted to ask about the bidding.
Yes that is that more varied by geography or is it more varied by end market.
I would say geography, both I I did.
It's too soon to tell in a way because they're just hasn't been not much change in behavior.
It's going to if you talk about sort of delayed introduced for job, that's really going to be the industrial jobs because the big jobs. You don't interviewed people for at 800000 dollar job you interview people for a 10 20 40 million dollar job.
So that particular comment relates to the big industrial work and maybe big hospitals, but it might add I'm just see you know in terms of geography. It's.
Pretty broad you know even in Michigan and know that thing is shut down like there is no tomorrow, there's still opportunities we're looking at right.
No we're not doing a lot of weren't Dan because as stage close we still bidding.
The northeast is definitely more traumatized, yes, no question about it.
Night and day from the Southeast for example.
Okay.
How.
How material could that coded remedies b.
Mhm.
You mean in terms of opportunities to build production facilities pharma.
Yes, yes.
That could help certain of our company's recovered as a whole.
It's not going to turn into the basis of our business right I think more importantly, but.
Is there may be additional emphasis from this experience for people to consider that having more of their supply chain closer than China or something would be good right I think I.
I think that.
I mentioned earlier there are senators CNG should we have at least one manufacturer of all of the most important.
Our medical logical substances and shouldn't really.
So so hopefully.
People sort of the underlying trend of re shoring has reinforced by the and if it is the good news for US it would be most likely right in the sectors, where the best stat and it would be in that geography is an awful lot of that I think has come in towards like places like the research triangle in the southeast in the mid Atlantic.
Rick and Texas, maybe.
I like our geography for that and then the last thing as we do a lot of tech.
I think it'd be a hard it'd be a stretch to say that experience would make people want less.
You know less data centers are live streaming.
But the back to back to the pharma thing Adam We got a terrific track record in pharma and that goes a long way in that industry for them to give you more work they like to hire people, who who have done or especially stuff. They want to do in fact yep.
And we got some opportunities right now we're working on it because they know we can do it we can do it fast.
And then what's the nature of Ts is.
Backlog in their end market mix did you say Ta ta.
Yes, yes, yes.
Yes, Hey, I want you just thought yes. Those next year, yes is very very technology focus very attack, maybe 90 plus percent technology focused over the last.
And they have some big customers top 10 Tech names top biotech name.
They do work repeatedly for one of the things. We hope we can do with are really confident we can do with enough time with TJX is diversified.
You know into some of the other industries that we do modular construction, but no. We felt like there in market mix is perfect right now yes. It did they don't have energy exposure adamant that was your question no I mean, there no oil price exposure right. Yeah, yeah, yeah. So knock on wood is based in Houston, but they ship all over the place.
Huh.
And bill what's the Cat you gave us the debt balance today, which the cash cash balance today, well. So the cash balance today is like 30, some 30 million probably like actual cash in the bank. If you did a book cash right that would include cash in transit you might add 20 to 30 million. So if I close my book.
You'd see $50 million, but if you just looked in my bank accounts you'd see a little over 30.
We just try that we're keeping about 10 million more liquid than usual, maybe maybe a little more than that even just because.
But the total debt of 'cause your you close take Ki Ay Aswan April one yes, yes.
So your your 348 of debt that's not even up much from Q1.
Yes, so we had already borrow the money for Ta if you look on our balance sheet on March 31, we had over 100 million because we closed on April 1st we had already borrow the money when March Onest March 31.
So thats actually were down our net debt is down since then slightly.
Okay.
Well, Okay, and then I guess last one from me that as we think through the Q2.
It sounds like the impacts really margins I can your organic.
Sales still be up in Q2.
Oh Boy, we would hope added that answer that question [laughter] I wouldn't be surprised I don't be surprised if not if sequential same store was up but I was just surprised in the first quarter with sequential same store was out but the over under number I think would be an a minus a few percent.
Over last year on same store.
Because we just to be honest, we're still busy right now Adam but we are there are places where were stopped I mean, I've got I got I got a job shutdown will not locked everywhere I go to job shut down for a week in the mid Atlantic is not revenue right. It for one week, it's not revenue.
So we'll see how would you when they count the chicken though.
[laughter] well this is a good color. Thank you very much better you have a good day body thing [laughter].
Thank you and the next question comes from the line of Joe Mondillo of todays TNK. Please go ahead.
Hi, guys just a few follow up questions. If you will know kenworth drill do you have any indirect because I know you don't really don't have any direct exposure, but any indirect exposure to oil and gas I know your 2016, you did see a downturn in the business, but I don't know if that was.
Really related to oil and gas or something else I don't think anybody has less exposure to oil and gas in the in the industry than we do but is some building we're doing service on got.
Some guy in their trading oil probably now let's flip in a most pot Adam it's not im sorry, Joe is not going to affect your model.
Yeah, We don't I don't we got we got very I mean, we buy gasoline stuff, but the gas station.
How about on competition could you talk about.
What you're thinking about maybe your smaller competitors is there any risk of them going on there and not being a positive.
So there's two possibilities one.
They just got loan to a lot of money. They don't have to pay back if they can keep their people working for four months, which mean I'm very worried.
Maybe we've seen that would take some cheap work cheap quick turn work.
So that doesn't help for the next few months I do think there are a lot of businesses remember I do acquisitions in talked a lot of people who.
I think that a lot of these owners are not going to be real happy to dump a lot of capital back into their businesses right now a lot of Denver and their mid Sixtys and 70. So I think we'll see I think you'll see some people.
Actually not like desperately district blowing up I think you'll just see some people choosing to downsize or we've always seen a few Joe some guys just calling it a day just call. It a day, yes. There is some of that sell some of that where there was a company in Virginia, where a guy had a nice business but.
Just all that said it has to be a good time to yeah.
Finish, especially the guys who have small project work they can do that very quickly sometimes.
They will just sell US now I'll just have us higher there guys right they'll just come over and say hey.
By my equipment for 100 Grand and higher my guys, we see some of that right.
Got it and ER in term you mentioned in your prepared remarks that you're preparing for a wide range of economic scenarios, especially as we had to.
Get to the end of the year, and 21, who knows where we're going to be.
What kind of contingencies do you have or and what kind of cost reduction actions can you really.
Make I know your businesses largely people so.
What can you do.
Offset the down side.
So there's two there's two there's two parts to answering that question one is the actual business.
Our business. So it is very there's a variable costs business people show up at somebody else's premises.
And our business also because in the construction industry really construction workers make a pretty good wage.
But they realize that though that there are times when there's less work.
So in general we can scale, our costs pretty pretty really very very effectively to the amount of work we can get.
That changes at the bottom of a bad recession, because you reach a point, where you would you have this core of your business people, who work for you forever that you just want to find a way to keep them busy. So when you see us in our work here like a 2011.
We don't make a lot of money a lot of that is we are deciding rather than make a few a little more money this year and destroy the core of our business, we're going to we're going to keep our guys.
But in general in the ranges we're in today.
Our cost scale to our revenues pretty quickly. So then the question is overhead uncovered SDMA and.
The reality is.
We you have to do what you have to do and that this is a bid margin business anybody who.
Anybody who doesn't control their overhead doesn't hang around for very long, but we've done a variety of cost cutting things even here at corporate may give us have taken pay cuts Joe. So we're doing everything that we think is prudent for the long term viability of the company. We do what we have to do in bad times and people know, we treat them well and good.
So the it usually do that no.
Okay I'm just last question following up on sort of the big near term risk in terms of.
Yeah.
Activity on these jobs that you're already on and.
The margins being hit on at these current jobs what percentage of your jobs.
Would you say are.
Affected by this I I assume some of your jobs.
Productivity, you, you'll be able to maybe meet some of the the margins that were in your original bids.
So here's my answer that.
My answer to that is.
Most more than half of our job the vast majority of our jobs.
Absorb this out of contingency.
You will not see.
Their margins go down crowd, but what won't happen is we were going to make that contingency later, yeah. As the job moved dawn, we will have some jobs that actually have to write down their margins as well.
But.
You know the reality is if you have to spend money on something and you've got to fixed price you might get a little bit of money for like de Mello been remodeled in some cases, but but you'd make less money.
But having said all at Joe that's that's important but number one is the safety and health and wellbeing will do whatever it takes to make sure we protect our people and where they work.
Cover in Bad times, we never try to get the last city.
We try to build for the future we want to come out of a tough time.
As it even more important force, having a bigger share of our industry and being the people that customers to count on.
Okay, well I appreciate it and good luck through the rest of the year. Thanks, Joe. Thanks. Thank you.
Thank you so much and I'd like turn the call back to find Lang for closing remarks, okay. Thank you a one off once again sincerely. Thank our amazing resilience in committed employees.
Without covert 19, we believe 2020 would've been a record year for comfort systems.
However, with the headwinds we are all facing we still believe we will have a very good year.
Last year in the second quarter of 2019, we earned 65 cents per share.
Unfortunately at this point, we don't feel that is attainable in the second quarter.
However, we believe that we will be solidly profitable, but we're optimistic that as the year progress is we can continue to improve.
We're looking forward to see in many of you will get in person hopefully in the near term, but in the Meanwhile, please be safe and healthy. Thank you very much.
Thank you and everyone that concludes the call today you may now disconnect. Thanks for joining.
Okay.
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