Q4 2020 Comfort Systems USA Inc Earnings Call
Good day, and welcome to the quarter for 'twenty and 'twenty comfort systems, USA and earnings conference call Tringle presentation. Your lines remain on listen only if we acquire systems that anytime. Please key star zero on your telephone and on a coordinate and we'll be happy to Steve I would like to guys opine on this call and recorded for replay purposes and.
Ladies and do you also see Julie <unk> Chief Accounting Officer. Please proceed.
Thanks, Bonnie good morning, welcome to comfort systems, USA fourth quarter, and full year, 'twenty and 'twenty earnings call. Our comments this morning, as well as our press releases contain forward looking statements within the meaning of the private Securities Litigation Act of 1995, what we will say today is based on the current plans and edge.
For the patient comfort systems USA, those plans and expectations include risks and uncertainties that might cause actual future activities and results of our operations to be materially different from those set forth in our comments.
You can read a more detailed listing and commentary concerning our specific risk factors and our most recent form 10-K, as well as and our press release covering these earnings.
On slide presentation has been provided as much as a companion to our remark.
And the presentation is posted on the Investor Relations section of the company's website found at comfort systems USA Dot com.
Joining me on the call today are Brian Lane, President and Chief Executive Officer, and Bill George Chief Financial Officer, Brian will open our remarks.
Okay. Thanks Julie.
Good morning, everyone and thank you for joining us on the call today.
Due to the commitment and resilience of our people we were able to overcome unprecedented challenges during 2020.
To achieve record earnings and cash flow.
In addition to the ongoing challenges from the pandemic.
And on the organization also experienced and overcame significant adversity and Texas just last week.
And 2020, and we got more than 20% of our revenue in Texas, where we have multiple strong mechanical capabilities and many markets and <unk>.
Texas is also the home.
Our largest electrical team.
Virtually all of our operations were closed for at least three full days with lots of productivity well last week.
And now back to full capacity.
I am deeply grateful for the courage and perseverance that our field employees demonstrated.
Last week, and Texas and in many other markets that experienced terrible weather.
And I am and all of our field.
Steel Workforces grit and perseverance through Covid.
Every day, our essential work and overcame the challenges they face.
We continue to work hard and keep.
Keep on workforce and our communities safe and healthy every day.
Yeah.
2020 was a record year for comfort systems USA.
We finished the year with strong fourth quarter earnings per share of $1 17.
And for the full year, where and what all of those are nice.
This marks the highest annual EPS and the history of our company, even without our tax and valuation gains.
Revenue for full year 2020 was also a record at $2 $9 billion.
Our backlog our backlog is up slightly from September.
And we have very good ongoing bidding activity as we start 2021.
On 'twenty and 'twenty free cash flow was an unprecedented 265 million and.
And yesterday, we again announced an increase and I did it.
At the end of 'twenty and 'twenty, we acquired and Tennessee Electric company headquartered in Kingsport, Tennessee.
And we expect they will contribute $90 million for a 100 million of revenues and 2021.
This acquisition was closed on December 31, and 2020, so the balance sheet and backlog are included as the last day of December.
She has a strong and electrical and mechanical contractor.
But T. C. Also brings unique industrial construction and plant service expertise and relationship with complex industrial clients.
And the results will be reported and our electrical segment, starting in 'twenty and 'twenty one.
In December we promoted shrimp Mckenna Chief operating officer.
Try and has been with comfort systems USA for 16 years.
And I believe he will be a valuable leader as we continue to grow and improve our operations by the way I am not going anywhere, but this added depth and will provide much needed bandwidth to our senior team.
Before I review, our operating results and prospects.
And I ask Bill to review, our financial performance and Bill.
Thanks, Brian.
Yeah. So as Brian said, our results were again very strong I'm going to just briefly point out some things for most of the line items for our P&L.
And so fourth quarter revenue was $699 million, a decrease of 21 million compared to the same quarter last year.
Our same store revenue declined by a larger 68 million. However, our recent acquisitions of Gis and star offset that decline and somewhat as they are.
Added $48 million and revenue this quarter you may recall that last year at this time, we had large data center work in Texas that created very high revenue and the comparable period.
We will continue to face tough revenue comparison through the first half of this year, especially in electrical and as a result of last year's big deployment.
Revenue for the full year was $2 9 billion and increase of 241 million or nine per cent compared to 2019 full.
Full year same store revenue and 2020 with 2% lower than in 2019 due to the factors I just mentioned.
Gross profit was 137 billion for the fourth quarter, and 2020 and increase of $4 million and gross profit as a percentage of revenue rose to 19, 6% and the fourth quarter of 'twenty and 'twenty compared to $18 four per cent for the fourth quarter of 2019.
For the full year gross profit increased $45 million and our gross profit margin was approximately flat at $19 one per cent.
SG&A expense was 89 million or $12 seven per cent of revenue for the fourth quarter of 2020 compared to 87 million or <unk> 12 per cent of revenue for the fourth quarter and 2019.
The prior year fourth quarter and benefited from insurance proceeds associated with the cyber as a debt of approximately $1 6 million and that reduced SG&A last year for.
For the full year SG&A as a percentage of revenue was $12 five per cent for 2020 and compared to 13.0 per cent for 2019.
On a same store basis for the full year SG&A declined <unk> 6 million.
And that decrease was primarily due to austerity relating to COVID-19, such as reductions and travel related expenses.
During the fourth quarter of 2020, we revalued estimates relating to our earn out liabilities and as a result, we reported and overall gain of 7 million or <unk> 18 per share for.
For the full year the gain associated with the acquisition earn out valuation changes was 20 cents per share.
These gains were due to lower than forecasted earnings associated with our recent.
Acquisitions, especially at Walker, which was more affected by Covid and our other operations.
Our 2020 tax rate was 21 six per cent compared to 24, 7% and 2019.
During the third quarter of 2020, we finalized advantageous settlements with the IRS from their examination of our amended federal tax returns for 2014 and 2015.
On a go forward basis, we now expect our normalized.
Active tax rate will be between 25 and 30% on.
2014, and 2015 and are now settled and we have open orders relating to refunds, we are claiming for the 2016 2017 and 2018 tax years, but we believe that any benefits that arrive Brian from those years would most likely be recognized in 2020.
Two or beyond.
So after giving effect to all of these items, we achieved record net income specifically net income for the fourth quarter of 2020 was $43 million or $1 17 per share as compared to 34 million or <unk> 92 per share and 2019.
Earnings per share for the current quarter included that 18th gain associated with earn out and revaluation.
Our full year earnings per share was $4 90 per share compared to $3 eight per share and the prior year.
The current year also included a tax benefit of 17, and said that we reported and the third quarter of 2020 from a discrete tax item.
The gains associated with earn out revaluations, which for the full year was 20.
For the first and fourth quarter, EBITDA was $63 million, which is 6% higher than the fourth quarter of last year.
Our annual 2020, EBITDA was a milestone achievement for us as our full year EBITDA was $250 million.
Cash flow for 2020 was extraordinary.
Our full year free cash flow was 265 million.
Compared to $112 million and 2019.
Our 2020 cash flow includes roughly $32 million of benefit that's a direct result of the federal stimulus Bill, which allowed us to defer payroll tax payments and the last nine months of 2020.
These tax deferrals will be repaid in two equal installments and the fourth quarters of 2021 and 2022.
Even with our acquisition expenditures, we were able to reduce our debt to less than one churn of trailing 12 month EBITDA.
2020 was our largest year for share repurchase.
Hi.
We reduced our overall all shares outstanding by repurchasing 685000 of our shares at an average price of $43.99.
Since we began our repurchase program and 2007, we have bought back over nine 3 million shares at an average price under $20.
That's all I have Brian.
Okay. Thanks Bill.
I am going to spend a few minutes discussing on backlog and markets I will also comment on our outlook for 2021.
Our backlog our backlog level at the end of the fourth quarter of 2020 was $1 five 1 billion.
Sequentially, our same store backlog increased by $10 million with particular strength and a modular backlog.
Same store backlog compared to one year ago has decreased by 375 million on.
Of which approximately one third related to unexpected decline and our electrical segment.
We are also experiencing delays and booking and and project start.
And about large private company.
Overall, we are comfortable we are very comfortable with the backlog.
We have across our operating locations.
Is that booked work at the end of 2019 includes a large data project.
And that comparison represented an unusually high level of backlog.
Most of our sectors continued to have strong quotation activity.
Even the sectors, where bookings have been delayed.
And it's particularly true on our industrial business, which includes technology manufacturing pharmaceuticals and food processing.
Our industrial revenue has grown from 39% of total revenue in 2020 compared to $3 43, 4% a year ago.
We expect this sector to continue to be strong.
And the majority of Ta and T E C revenues are industrial.
Institutional markets, which include education health care and government with 36% of our revenue and.
That is roughly consistent with what we saw in 2019.
The commercial sector was 25% of our revenue.
For 2020 construction was 79% of our revenue.
With 47 per cent from construction projects for new buildings.
And 32% from construction projects and existing buildings.
Both of our construction and service businesses achieved record operating income margin.
Service was 21% of our 2020 revenue with.
And with service projects, providing 8% of revenue and <unk>.
Service, including hourly work provide.
Providing 13% of revenue.
Beginning in late March our service business experienced the first and most pronounced net.
Negative impacts associated with COVID-19.
Largely as a result of building closures and decisions by customers to limit facility access.
We are seeing good opportunities and internal internal air quality.
Which has helped many of our service departments returned to pre pandemic volume.
The most important element of by a Q is this is not just the immediate revenue, but also the opportunity to use our unmatched expertise to create new relationships.
This really plays to our strength and solving problems for our customers.
And it is not just the service story.
And as air quality considerations really add to our ability to differentiate and add value and construction and at times will increase the size and complexity of even large project.
Overall, our service operations ended the year with improved profitability.
And up today and they are back to price volume.
Despite pandemic related challenges and mechanical segment performed incredibly well during the quarter.
We are grateful for our performance this year and our prospects on much better than we would have expected this past spring.
Our electrical segment had a tough for 2000, Twenty's and we would've liked but.
But we currently expect good margin improvement and electrical and 2021.
Finally, our outlook.
Our backlog strengthened this quarter.
But on near term business continues to reflect some delays and bookings and starts that will that will result in same store revenue headwinds and the first half of 2021.
At the same time.
We have really strong project development and planning activity with our customers.
We are increasingly optimistic about 2021 and beyond because of that strong pipeline.
We currently expect full year 2021 results.
Debt similar to but lower than the record results that we achieved in 2020.
We continue to prepare for a wide range of potential circumstances and nonresidential construction.
And the coming quarters.
However, we received strong trends, especially in industrial technology and manufacturing and we.
And thank our geographic markets favorably position with.
And with comparatively strong prospect.
We look forward to good profits and cash flow and 2021.
We have and unmatched workforce and a great and essential business and.
And we will continue to invest a reliable cash flows and make the most of these advantages and opportunities.
Thank you once again to our employees for your hard work and dedication.
I will now turn it back over and it's Sunny for questions. Thank you.
Thank you your question and answer session will now begin if you wish to ask a question on the audio. Please key star then one on your telephone. Please just remind me to ask a question on the ordeal. Please key star then one on your telephone thank you.
We have a question on the audio it comes from the line of Sean Eastman from Keybanc Capital markets. Please proceed Sean you live and Nicole.
Hi, Tim.
<unk>.
Alright, thank you.
So I just wanted to start on the on the bookings I mean is it fair to say the bookings were better than expected and the fourth quarter and and you know the the commentary is that you're still seeing some delays and the near term but.
And if I'm hearing you right. The bid pipeline is quite strong. So maybe you could expand on that and maybe comment on.
Hum.
What's improved maybe where the bid pipeline is relative to say this time last year and and and do you think we're going to see some some larger projects get awarded in 'twenty and 'twenty one.
And Sean that's a great question.
On the fourth quarter trading book to burn was over one and I'll be the first time and a year and.
So we see and plenty of good opportunities.
Lot of its timing do you get the rate paid worked and put into backlog.
So we're relatively optimistic throughout the country with new opportunities with CN and the sector as we talked about.
There's a lot of stuff we're working on.
Getting good feedback from customers that they're ready to go it's more of a timing issue.
And I think the first half Youll see us book and you'll see US book and this stuff, but I was really pleasantly surprised and.
And with Quad and particularly in the module a sector, where we received a lot of really strong opportunities and and I'm really confident that's going on that's going to continue on as we go through 2021.
Okay, great excellent and then.
Just trying to think through the puts and takes on margins I guess the question really is where are margins trending directionally in 'twenty and 'twenty one.
Service is back at 2019 volumes entering 'twenty, one and electrical should be contributing at higher margins is there anything else, we need to to think about there.
So this is bill.
I think that the margins, we achieved and mechanical are pretty sustainable it might be hard to quite crusher at the way they just did but.
Especially as we get to the second half of the year I like our margins there I think we have and.
Improvement in electrical and one we have a we have a rep.
And frankly, we have a manageable comparable and electrical and by the way electrical did pretty well for us at our best cash flow for the year It had.
You know it was a nice EPS contributor so it's not that electrical did bad but they have room, they definitely have room in the coming year for improvement.
And then I do think you know SG&A Mei Mei and SG&A will creep back just a little you know maybe a couple of basis points because of travel will wake up a little bit and people really really got after their costs and the middle of this past year. So.
We'll start training EBIT, we kept training, but we will probably do more of that and so there'll be a little bit more of that but it looks good and you know Sean just to add on on the margins I mean, the execution was just stellar and on my opinion.
Yes.
And we still have the same folks out there they're still going to do good do good work for us so.
And I agree with everything Bill said.
Okay, Great and last one for me I mean, you guys talked about the indoor air quality.
Developing and the opportunity set there.
But you know if you read through this new administrations platform I mean, there's a lot of talk on and you know.
Retrofitting buildings and.
And.
Reducing building emissions and is that is that something that youre seeing develop and the pipeline and you know.
Do you think that's interesting and potential positive for for comfort systems.
Sure, It's Brian again, absolutely.
We're seeing a lot of opportunities already we've had a lot on work booked and completed.
Whole range of solutions for a building a lot of it is right now focused I think on the service side of it to get people back and the building and small project.
And I think if you look at the next 12 to 24 months I think you're going to you're going to see it.
Significantly larger portion of new build construction.
Where are they going to expect it's going to go into its going into engineering already.
Whether it's.
We get chiller and as big a duck et cetera, et cetera. So I think it's going to be a very good opportunity for comfort systems for a long time.
Okay, very interesting and thanks for the help guys.
Thank you Sean.
Thank you. Your next question comes from the line of Adam <unk> from Thompson Davis, Please see Adam you're alive and Nicole.
Hey, good morning, guys nice quarter.
Thanks.
Ryan can you walk us around the country, a little bit just geographically what you're seeing.
Yes.
M.
Absolutely Adam.
And all up and up and then northeast.
We will see a lot of outstanding up really outstanding opportunities.
And New Hampshire.
New York Central New York.
We're almost sold out really no as you come down the coast the mid Atlantic We got exceptional companies there.
What are your enrichment and Virginia that show and during the day of valley those folks have a lot of opportunities.
And the pharmaceutical business and that net <unk> woods without voting and Greensboro and that area and I think there's plenty of opportunities I mean, where do you live and Adam you know what you see it.
And there's a lot of stuff going on down there the southeast and you'll probably hear this from everyone is really strong Florida is very strong.
He has helped give us very good and Florida.
So we see we see a significant amount of opportunities Georgia.
What about you have industrial battery plants or whatever going through.
Texas has probably had a little bit of a lull, but I believe that's going to pick up there's still a lot of companies moving here Dallas very strong San Antonio.
Extremely strong.
And.
And Austin is very good Houston is probably the slowest and the markets, but Texas is Texas.
On the west.
And we're not as big out west as we our eastern and Mississippi.
Denver is very good Phoenix was good and the non California.
North for relatively small.
And on capabilities and the Utah market with a very good company there and it has a lot of strength.
So we're really optimistic about Utah, and then of course up and up in the middle of the country and we have some of our strongest companies that we had I think youll see them, maybe a little soft for the first quarter, but there were opportunities are good. So we see pretty good balance throughout the country and opportunities and southeast mid Atlantic probably being the strongest.
To give you my view right now for Midwest is going and Keith.
And the upper Midwest rocking along yeah, we've got a couple of companies there.
Of multi decade histories and performance.
Does that help Adam.
And then do you see aggressive.
Bidding anywhere or is that pretty much just unchanged.
Yes, I think.
No it doesn't.
There's a little bit but.
We've got probably a little bit on margin pressure got some of the PPE money that's may be running around on some of these projects.
But in general it's not 2008, 2009, and 2010, where people were just bottom dull and.
This from just rough philosophy on him to repeat we're very prudent risk managers about the type of work very selective on the type of work we make so we're not we're on.
And I'm going to dive in to take work.
Bill do you want and analysts and I think on jobs and $10 million and below there's a handful of markets, where theres contractors given away the labor They got paid for by the federal government with the PPP loans. The good news is that's not really the work we want and.
And really part of part of our little bit of delay here.
Brian what Brian just alluded to it and our guys are very.
Demanding and disciplined.
We're gonna be good.
And then and I hear you loud and clear on the.
Modular and my assumption would be on modular.
I Dunno, you face any of them and a.
Competitive issues.
When it so modular and we had some really great technology bookings and the fourth quarter on some programs we've been working on.
For a long time and so it's nice to see those programs get really get purchase orders and get going.
You know for US I agree I mean, I think the modular solutions, we offer people our biggest problem is having people figure out.
How good it is honestly, but more and more of our.
And I'm, sorry, I don't think we could be happier with the performance of the companies that do modular and comfort systems.
Cool, Okay, Thanks, guys, alright on and take care.
Thank you. Your next question comes from the line of Brent Thielman from D. A Davidson, please see Brent and light and Nicole.
Okay.
And you hear me.
Hello.
Brett how are you doing.
Hey.
And when they come back to taxes, just wondering if.
And that's kind of a distraction on the.
Commentary around that whether that's a net.
Headwind and the first quarter.
So for Texas, and the first quarter.
We lost three to five days of work.
A lot of it was made up on the weekend and our modular plant here you know we have about.
Two two thirds of a million square foot 600000 square feet of modular space. They lost three production days, but they made up at least two of them over the weekend. So I don't think it's I think it's a rounding error I don't think it's something that.
That would be slightly less revenue plus grant the service business.
Every person and that even thought of doing service busy, particularly on the plumbing side as you can imagine it's still going on quite frankly.
At this stage, so we've got a real uptick and our service business over the last two weeks and Texas is not a terrible time to be good at fixing any kind of pipe.
And you can fix might've been tendered and are way up.
And actually our electrical company was able to pull and <unk>.
But out of the half for some of their customers to keep their generators going and stuff and we really that's just a little bit of money now, but we really think we might have created some good some good momentum with some customers by doing that.
So I think in the aggregate, it's not going to be a big issue between the weekend work and the service work and.
Okay. Okay.
And then yeah.
Brian or bill some of that debt first half holes that you talked about condos.
And no scope potentially be filled with short duration related work just depending on how the next few months ago I just wanted to get your thoughts around that yes on the first first thing I would say is it's not really empty right. It's just not as good as it was last year. So people are guys have plenty of work to do there is no I don't know of any shorten workweeks anywhere no no.
Last year was off the charts and.
So it's just a dollar it's a relative air pocket. The other really interesting thing when you talk about the first half is keep in mind, we had an odd well we had a.
When we say that we are going to be have a little bit of relative slowness and the first half we're talking about compared to a normal pattern, we're not necessarily talking about compared to last year keep in mind last year. The first quarter was the COVID-19 quarter.
And we will probably came in and we came in much below what a normalized quarter would have been even though we did better than we expected the second quarter and really what that will be a tough tough comparable for us because frankly some of the money came right back and the second quarter last year, and we just had and off the charts second quarter last year and the midst of what was going on.
And then we have you know what.
You just saw we had tough comparables on the third and fourth quarter, a big part of this is not comfort, saying Oh, we have a problem next year no. We're gonna make a ton of money and flow a lot of cash and it's just that you know we just we're coming off the tough comparables and low.
We still have a b and a half for the construction work to do so we're going to do that well and we were a year ago. We had some 100 million plus jobs, which is unheard of for us and heavy.
And that's the only time that's ever happened actually.
Right, Okay and then.
And one other thing I know I share.
It is even if we have a revenue headwind our margins will be better right. A lot of that work was the work at low low gross margin with a lot of material pass through so our mix of work from the point of view of margins is much better for this year.
Okay.
And then the debt the latest acquisition.
And then the margins attached to that.
How did they compare to the core.
Electrical business for free.
Comfort.
They will average up the margins of our overall electrical business, because they're still heavily industrial and.
And so they do a ton of like.
Stainless steel and stuff like that today.
They've got about just about every kind of welding capability, you can think of Brian and.
And they are and Theyre doing it for the hardest customer on the world and daily doing it well and they and so their margins are more like our mechanical margins. So you know.
And that can only battle on the health.
And so on.
For the impressive.
Yeah.
And there's some things they're doing that.
You think you can take away to your own business there.
Over a long period of time, you don't just across the street and.
Start doing what theyre doing but what's interesting Brent day, how data already worked with a bunch of our sister companies around them for sheet metal Hall from some of the three application and we think that there's going to be enhanced that they can do more work in the and the area there in Kingsport, Tennessee.
Okay.
And then lastly with.
Moving into the CEO role and Brian glad to hear you're still sticking around but just wondering if that we can take from that that you're going to be even more focused on.
Yeah and business development M&A opportunities going forward, just curious about that transition.
And all Bill Georges.
Unique and as good as they get on M&A debt.
I've ever seen.
Probably do a lot more work on development and probably on electrical side of the business and some of these other businesses but.
And it's gonna be trends will be rolling into the day to day operations. So we'll see how that goes for Brian.
Let's just say, we haven't been overstaffed, and we haven't been dealt with debt.
And it's exciting for him and it's exciting for the company and our long term.
Yep.
Okay, well congrats on a on a strong year. Thanks for taking the questions alright. Thanks, Brian.
Thank you just to remind everybody to ask a question on the ordeal. Please key star then one on your telephone.
Your next question comes from the line of Julio Romero from Sidoti <unk> Company. Please <unk> your line for Nicole.
Hey, good morning, Thanks for taking the questions.
And welcome.
Hey, So you spoke to the margins of the Tennessee electrical acquisition.
Could you speak to the cadence of revenue and our earnings that can be kind of in line with the electrical segment.
They'll do we expect them to contribute about $100 million of revenue for this year at margins really equivalent to comfort overall really which are very good obviously.
More like the average margins of comfort and then the average margins you've seen and electrical.
Okay.
And I wanted to Peel back your commentary about IQ and creating new relationships.
Can you give us a little more color on that are you alluding to some share gains there.
Yeah.
We're in multiple markets.
Throughout the country.
So we're picking up more school work, then we probably have done and the path a little bit more industrial work.
So it's just debt, we have a pretty developed capability and.
And pretty much all of the aspects of IAA Q solution options and presenting to a lot of customers.
And customers and maybe we hadn't called on and typically before and the construction sector. So it's it's a really good opportunity for us with something that we're very good at.
Got it that's all I have for now Okay, alright, Thank you and thing.
Thank you Daniel current questions and I'll hand back over to Brian Lane.
And remarks, thank you.
Thank you and closing.
I want to again, thank our wonderful employees.
The results our team has accomplished this year with truly amazing.
And I've never felt better about the company and its future.
We are looking forward to seeing you again in person soon but in the Meanwhile, please be safe. Thank you.
Thank you for all speakers that concludes your conference call for today you may now disconnect. Thank you for joining and Julie divest of your day.
Yeah.