Q1 2021 Comfort Systems USA Inc Earnings Call
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Good day and welcome everyone to the Q1 2021 comfort systems USA earnings Conference call.
My name is Matt and I will be your operator today.
During the presentation your lines will remain only simple lately.
Pretty quiet assistance at any time, Please press star zero on your telephone and a coordinator will be happy to assist you I'd like to advise all parties. This conference is being recorded.
I'd like to hand over to Julie <unk>, Chief Accounting Officer. Julie. Please go ahead go ahead.
Thanks, Matt Good morning, welcome to comfort systems, USA first quarter 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 our current plans and expectations of 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 detailed listing and commentary confirming our specific risk factors in our most recent form 10-K and form 10-Q as well as in our press release covering these earnings.
The presentation has been provided as a companion to our remark.
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, Trent Mckenna, Chief Operating Officer, and Bill George Chief Financial Officer, Brian will open our remarks.
Okay. Thanks, Julie and good morning, everyone and thank you for joining us on the call today.
We are pleased to report a strong start to 2021.
Earnings improved substantially with earnings per share of 73 cents.
Compared to 48 net pandemic impacted first quarter.
Yeah.
This quarter, we achieved unprecedented first quarter cash generation, thanks to strong execution.
As well as the receipt of large advanced payments.
Orders and project.
Our backlog has also strengthened sequentially and we see good trends in underlying activity level.
Especially in our industrial technology and modular market.
Overall, we are optimistic about our prospects for the next several quarters.
I will discuss our business and outlook in more detail in a few minutes, but first let me turn this call over to Bill to review our financial performance built thanks, Brian Good morning, everyone as.
As Brian said our results were again very strong first quarter revenue was 670 million a decrease of 30 million compared to the same quarter last year.
Our same store revenue declined by $83 million.
However, our recent acquisitions added approximately $53 million in revenue this quarter.
You may recall that last year, we had large data center work ongoing in Texas and that created high revenue in the comparable period.
We will continue to face a tough revenue comparison in the second quarter of 2021, but to a lesser extent in this quarter.
Gross profit was 123 million for the first quarter of 2021, an increase of $6 million and gross profit as a percentage of revenue rose to 18, 4% in the first quarter of 2021 compared to 16, 7% for the first quarter of 2020.
The improvement in gross margin results from stronger margins in electrical.
SG&A expense was 88 million or 13, 2% of revenue for the first quarter of 2021.
Compared to 93 million or 13, 3% of revenue for the first quarter of 2020.
On a same store basis SG&A declined by 6 million 11 million that decrease included a 6 million dollar reduction in bad debt expense.
As last year's Collectibility concerns from retail that other customers are trending better than we predicted.
The remainder of the decline in SG&A was the result of cost discipline.
Our 2021 tax rate was 24, 8% compared to 27, 6% in 2020.
Our current year tax rate benefited from permanent differences related to stock based compensation and we expect it to trend upwards into our normal range for the full year.
Overall net income for the first quarter of 2021 was 26 million.
Or 73 cents per share as compared to 18 million or <unk> 48 per share in 2020.
For our first quarter EBITDA was 51 million, a 39% improvement over last year and our trailing 12 month EBIT.
As a record $264 million.
Free cash flow in the first quarter was $80 million as compared to $15 million in Q1 2020. This year's this quarter's free cash flow is far higher than we've ever achieved in the first quarter as we received advance payments on large projects that are commencing.
And our lower same store revenue led to some temporary harvesting of working capital.
As we execute these projects over the next few quarters and if organic revenue improved in the second half as expected we will see some absorption of working capital.
Our free cash flow over the trailing 12 month period is $330 million and that strong performance has returned our leverage to well under one times EBITDA. Despite our many ongoing and recent acquisition.
That's all I have Brian.
Okay. Thanks Bill.
I'm going to spend a few minutes discussing our backlog and market.
I will also comment on our outlook for the remainder of 2021.
Backlog at the end of the first quarter of 2021 with 1.66 billion.
We believe that the effects of the pandemic are beginning to subside as same store backlog increased sequentially by nearly $150 million or 10%.
Although we expect some delays in bookings will continue through the second quarter.
We remain optimistic about trends for the second half of the year.
Overall, we are very comfortable with the backlog we have across our operating locations.
We are seeing good trends.
A line activity level, especially in our industrial techno all day and modular market.
Our industrial revenue was 40% of total revenue in the first quarter.
We expect this sector to continue to grow as the majority of the revenues at our new accompanies a T. A M and T E C. Our industrial and industrial is heavily represented new backlog.
Institutional markets, which include education health care and government.
35% of our revenue.
That is roughly consistent with what we saw from 2020.
The commercial sector is now about 25% of our revenue.
So the first quarter of 2021.
Construction was 77% of our revenue with 45% from construction projects for new buildings.
And 32% from construction projects in existing buildings.
Service was 23% of our first quarter 2021 revenue.
With service projects, providing 9% of revenue.
And pure service, including hourly work, providing 14% of revenue.
Year over year service revenue is up approximately 4% with improved profitability.
We are seeing good opportunities and indoor air quality.
Just help many of our service departments returned to pre pandemic volume.
The high interest in I, a few plays to our strength.
Solving problems for our customers.
And air quality considerations help us differentiate ourselves in both service and construction.
Our mechanical segment continues to perform extremely well.
Our electrical gross margin improved from five 5% in the first quarter of 2022.
The 14, 7% this year.
Finally, our outlook.
Backlog stretton strengthened this quarter and the effects of the pandemic operating.
We expect some continued organic revenue decline from the second quarter of 2021, but less than we experienced in the current quarter.
We continued to see strong project development and planning activities among our customers.
Especially in technology and other industrial verticals.
Our large operations are in places where companies continue to invest.
Such as Texas, North Carolina, Florida, and Virginia.
It was one year ago, we reported our first quarter at a time when everyone was adjusting to the risk and uncertainty of the pandemic.
Looking back at our success over the last year.
I am more grateful than ever for how our people overcame unprecedented challenges.
I'm, Don did courage and perseverance on customer sites across our nation.
I really think that.
We will continue to work hard to keep our workforce and our community healthy and safe.
We look forward to continued strong profitability and good cash flow in 2021.
And a strong pipeline makes us optimistic about activity levels in the second half of this year and into 2022.
We will continue to invest in our workforce.
Which will improve our formidable mechanical and electrical businesses in existing and new geography.
Thank you once again to all our employees for their hard work and dedication.
I'll now turn it back over to Matt for questions. Thank you.
Thank you very much for everyone. If you wish to ask questions. Please press Star then one on your telephone so she didn't decided to withdraw the question simply press star two or two thank you.
Yeah.
And the first question is coming from from Adam Thalheimer. Adam. Please go ahead go ahead.
Oh, Hey, good morning, guys great quarter.
Good morning, Adam Thanks, a lot.
Bill how do you.
See SG&A trending this year.
So I think that there is that if theres a slight upward pressure it will be because travel starts to resume and we begin to do more.
We continued our training, but it was online we'll get back to some more in person training, but.
But in general I'm, I'm really really happy with our SG&A. You had told me we'd have this kind of same store revenue declined and has still get SG&A leverage I would've been.
I am thrilled and I I actually think we've got good control on our SG&A now will stay in that 13% a little above that level, most likely until revenue starts to.
Cash pick up later in the year, but.
Yeah, No we feel great day add onto that just goes to show you the great job that you know that.
Your operating companies do do in monitoring the overhead is not bringing it back until we really need it so they've done a terrific job.
Okay.
And then.
I kind of hate when people ask companies. This question because what are you going to say, but on acquisition.
You guys have done such a great great job.
And you usually don't do you know big acquisitions during the construction season. So it's the best chance for something kind of next next.
Next winter.
What are you seeing out there I guess, that's the question.
So here's what we're seeing.
We're seeing really good activity.
Who really value what it would mean to be a part of comfort systems. The fact that the company has not put out or sell the day after they sell it.
That we are going to bring their balance sheet into our balance sheet and make them a part of us.
We're a forever buyer you know so that's very attractive to people at the same time there are some corners of the market without if you are willing to let your company be levered up and endangered, though you can you can get really really good sort of sticker price thing the structure might not be might have some drawbacks.
The sticker that that'll get the pricing that they will give you is pretty high so to boil that down I really like our chance to buying some of the kind of companies that really fit with our.
The value of the same things that we value and as far as the timing for that you know we do tend to do our standalone in the winter, but sometimes they happen in the summer you have to you have to take them when they're ready to sell and what the biggest.
The biggest variable right now as to what people think it's happening with tax rates right.
So a lot of that may be dependent on weather.
They back day.
You know they back day.
Because when you buy companies, they're usually people we've been talking to for a long time right.
We don't try to work somebody into a frenzy, we buy them when it makes sense for them and for us.
Good day, it's along you know, it's a long game.
Okay and then just.
Quick one on.
Kind of how you guys see P. S shaken out this year because there was some language last quarter about.
Not matching the very strong 2020 and that was removed.
Yeah. So this is this is a hard this is a hard year to comment on because there were a lot of moving pieces last year right. So we had we had the first quarter, where really we were very conservative when we closed our books because we thought out productivity is about to be destroyed by COVID-19 considerations. So had a very easy comparable in the first quarter by the end of the second.
Quarter.
It was clear that the productivity loss was less than we had feared and we had room and a lot of our guaranteed maximum job. So we had a really strong we earned $1 eight last year in the second quarter, that's a tough comparable if you're being honest.
And then in the second half.
How you would view that would depend on we had two discrete items one in each of the last two quarters everybody knows that they are in New York.
Last year's press releases, there you can pick them up all over the place, but we got 17 cents in the third quarter of last year when we.
Settled.
Andy tax.
Got it from the 2014 and 2015 calendar years. So that was 17 cents, but that's just really really discreet and then the and then the fourth quarter in part because of COVID-19 had affected the results of some of our bigger a recent acquisition, we had hiccups from our earn outs, where when it became clear we might not be paid out.
Quite as much as we had expected and that was 18th.
I know the analysts took those off we think we have a good chance of being in the range of sort of those the numbers. We earned last year not counting those extraordinary in some cases in one case noncash items.
But obviously really tough comparables. If you if you add in those those extraordinary pickups is that does that clear I know there's a lot.
Well it sounds like a tweak better than before.
Not telling us to go nuts, but.
It's not it's not firmly down the way you might have thought a couple of months ago.
It turns out we still have to go put in some pipe yeah, no, but and you know in general what we are we are optimistic about the year.
Got it okay. Thanks, guys. Thanks, guys Alright take care.
The next question is coming from from Brent Thielman gentlemen, Brian. Please go ahead.
Hey, Thanks, good morning, good morning.
Good morning, Brian.
Brian the industrial bucket.
The revenue Pie does margin I can remember.
Love to just get flavor, what the bigger drivers of that are in terms of the market from sort of make up that back.
Although of course in Belgium, Bill once a follow on but yes. It.
It's the biggest we've ever had.
Talked a lot about the recent acquisitions heavy industrial focus.
Obviously data centers right now in technology is a big component of that today, but.
But also included in that we're seeing a lot of good pharma and food processing opportunities as well.
So I think those would be the three the three largest areas that we're looking at at the moment Bill anything all day.
Our strength in the mid Atlantic and the southeast.
It's very it's very geographically tied with where people are companies are investing that money and they also theres. Another little just structural issue, which is we bought this great company T Vec and Tennessee.
And at December 31st of last year that company has 100% industrial at the company and the roughly $100 million revenue range. So the full year of those guys will bring in that's going to add industrial just that day.
A J M.
Same store that their way in total.
And Brian in terms of that sector going forward, you know, we're still seeing plenty of opportunities and as I mentioned in the script.
I think it's got a lot of legs to it and the industrial sector going forward.
You know true commercial it is the section that's been shrinking for us.
Right.
Just wanted to mention on an absolute basis, it stayed pretty constant for us.
It's just that the other sectors have gotten bigger.
I'll also say a lot of commercial especially office building.
Is built by developers.
And theyre very sensitive diverse cost right like we'll build office space for pharma companies, but its and its incorporated into something that has mixed use but true office building is often built by developers and they they will frequently they they may not plan to own the asset after they build it after they develop.
They will frequently.
Really be bid oriented and a lot of our guys would much rather negotiate work right now so theres some natural structural things that are making commercial b, a little bit better fit for our competitors maybe.
But on that front, we're still seeing a lot of good service opportunities and we will have some Iq opportunities.
And we are on the commercial office building Forest service is great.
The majority of our service business is a good point Brian.
Okay. That's that's helpful I guess.
Just thinking about some of the hesitation in the market.
From your customers seems to be abating from.
When I take from your commentary, maybe maybe you could just talk a little bit about what.
Where are you seeing continued delays.
Now one other reason behind that is it access to contractors like yourselves and since the economy. What are you kind of hearing from customers there.
So I wouldn't really call. It hesitation when I talk to our guys with more of the case that it just wasn't a good time to start stuff right in the middle of COVID-19 you had to go get.
Soil play in that county approvals and lots of offices were closed so.
I would not say it was hesitation in defense, but in general.
Our customers the kind of customers, we're talking about we're all we wanted to build stuff.
I think it was just more functionally create some air pockets were created by that and I would say, it's just a matter of this work getting started you know sort of in an orderly manner.
Yeah, Brian the pace has picked up in terms of what we're looking at.
In terms of stuff, we're reviewing here decisions being made quicker. So you can see at least I can feel a significant change in pace.
Okay.
And then I guess a question on the electrical segment margin.
Net back to well it's been a level that you guys had talked about before a lot faster than I thought and.
I'm curious what portion of that comes from that.
Kind of a refocus initiatives you've done internally versus some of the acquisitions you've done.
How are we how are we thinking about the margins going forward from that segment.
The big change from last year, Yeah, Yeah. So I'll go I'll go first and then bill can comment, but thanks for the question first of all the walkout, which we've talked about.
And over a year now work has always been a really an elite electrical contractor in this day to Texas that does not change the work is tremendous.
Just think over time, they probably refocused themselves on the customer base that they were pursuing and stopped certain sectors.
On that hopefully we've been able to help them with little bit of training some technology et cetera.
But at the end of the day it comes down to the folks in the field doing the work they've always done really good work, probably just a touch of refocusing they've always been a great company. So I'm really happy for them that all the work they've put in over the last year really did start to come to fruition for them in the first quarter and really want to close day, one just that one.
One specific question you said about how much of the improvement came from so TEP is 100% in our electrical segment actually T Z Stanford tenancy electrical contractors and they are they have the oldest license to do electrical work in this day to Tennessee.
But they do all day, they do have a mix of really really complex industrial service and projects Nowadays.
They believe it or not their margins were within 100 basis points of walkers margin. So they're the two main parts of our electrical and walkers for margins are fully back into the same range as <unk> reported this quarter. So it wasn't a mix issue.
But we are glad to see it.
Sure sure.
Sure well congrats on a great quarter best of luck here going forward.
Alright, thank you.
Yeah.
And the next one is coming from Julio Romero. Please go ahead go ahead.
Hey, Good morning, Bill Good morning, Brian, Brian Hey, guys. Good morning.
Good morning, good morning.
How do you think your service business progresses throughout the year should be growth rate outpaced new construction or or maybe you know how much of the overall revenue mix makes the service make up in 'twenty one.
You know service has been hovering around 20% to 25%.
You'll see it all pace you know construction.
We continue to grow and it's very methodical, we will continue to invest in it.
Moving hiring people and training.
We're seeing some good opportunities commodity indoor air quality.
In terms of volume.
And I think that'll continue to be a great steady.
Growth in cash flow opportunity for us over a long period of time, Yeah. You know what's interesting about service is that day.
Service has even though service has been shrinking as a percentage of revenue it's never gone down it's done nothing but growth for us and you know it's twice as big as it was just a few years ago, but it's three or four times as profitable, which is what we really care about and.
At the end of the day.
It's got it's got really good prospect, if you think about it if you think about it it's had more organic growth than construction right.
Construction a lot of that growth has come from acquisitions, although we've grown in construction.
Especially in industrial we've really developed a new sort of level of capability, but service has done great. Overall, it's just that our acquisitions have been a lot of industrial project companies and things like that but we have a big focus on to continue to grow it and we will keep the pedal to the metal on service.
Got it got it and on the <unk> opportunity I think I'm not sure if someone asked about education earlier, but I.
I understand that he was driving more school work activity, but I did see the revenue.
In education declined in the quarter. So I don't know if you can help us help us kind of square those two things.
Yeah, I'd say you know I think we're in the early days of the allocation of the fun.
School, we've done a lot of work resurging.
Very specifically, where the money's going we haven't built a lot of great relationships with school systems. So I think you'll see that continue to grow here.
As people get a better understanding and schools have a better understanding of what they actually want to do well.
Well, we can do anything they need us to do.
And I anticipate that'll be picking up I think pretty soon now that they've allocated the money too by the way a little structural factor if you're comparing the first quarter the full year, China schoolwork happens in the summer yeah, So you're right.
So that's not that wouldn't be surprising.
Yeah, no that makes a lot of sense. So I mean, I guess you know.
Quotation.
Going off in education, and kind of overall activity levels as you see it.
Just a matter of those funds are being allocated interest kind of translate into revenue overtime.
Moving on what they wanted to do.
Right right.
Okay, and then I guess just the last question from me is me, it's a minor one but.
There was a mention of a Utah acquisition.
Within the quarter in the Q. So I don't know if you could talk about that acquisition and how it fits within the broader mechanical segments.
So that was a plumbing company Tastic Little company with unbelievable relationship than it was just an addition to our already very attractive business in Utah, We just wanted to get stronger in Utah.
You know we've never we've never regretted by now.
A truly good plumbing that's for sure.
You know and its really along the lines of we'd love and fantastic people and Workforces, but I think they raised the size of that was 20 or $30 million of revenue. So.
You know, it's just not something we breakout.
To have them, though.
Okay.
Great. Thanks for taking the question questions Alright. Thank you.
And then ex wife's coming from Sean.
Shawn Please go ahead Brian.
Hi, Thanks for taking my questions.
Hum.
I guess, just continuing on the discussion around the funky comparable.
On earnings maybe we can have the same discussion just on.
Same store growth.
You know anything you can point out on the cadence of.
Same store growth trends as we move through the balance of the year to year, yes. So I'm glad you asked actually so same store, we were down 11, 8% first quarter 2021 over first quarter 2020.
Big part of that was very very heavy data center.
You know like.
Hundreds and hundreds and hundreds of people on from datacenter jobs in the fourth and first quarter of last year. So although we will face same store revenue headwind in the second quarter will not be at near the left if it was let's say it was 12% in the first quarter will be low to mid single digits, most likely best guests in the second quarter.
<unk>.
And then for the rest of the year. We think we have manageable revenue Comparables, having said that I would say you know work has started and that can delay.
It is one of the reasons, we were positive about 2022, which is not like US. This early in the year because we have so much work starting in the second half of this year that of course. It has to go into 2022, but there is like some of that timing could matter a little bit right. So so having said that it is their their fair comparables in the second half of the year.
I have a hard time, telling you we'd be up much but we shouldn't be down yeah I agree.
Okay. Okay.
That's helpful.
Theres just a lot of discussion across the kind of industrial world. These days about supply chain disruption cost input inflation.
I mean are those elements you guys are monitoring.
Anything to point out in terms of what we should kind of track as it relates to flow through to fix fix yep.
It's a good question obviously.
We're monitoring that we have.
Long term great relationships with all our vendors.
We work closely with them, we will continue to do so it's really you.
You know up and down depending on where it is so far equipments all been good no problems steel and copper you've probably heard it I'm sure 20 times now.
Pricing up but there is availability.
But nothing that's really impacting us at the moment.
<unk>.
Where we're functioning on job sites to go in and nothing has been delayed so far so we'll continue to monitor it but.
Hum.
Healthier, but thank God, we have the relationships that we do have.
Okay terrific.
Leave it there thanks, so much for the help alright.
Alright, John take care.
Okay.
Thank you everyone. There are no further questions. So I'd like I'd like to turn it back to Brian for closing remarks Mark.
Hey, Matt in closing I want to once again, thank all our wonderful employees and for everyone for joining us on the call. This morning.
We're looking forward to seeing you again in person soon hopefully, but in the Meanwhile, please stay safe and healthy.
You very much have a good rest of your day.
Thank you very much Brian. Thank you everyone, ladies and gentlemen. This concludes the cough once a day you may now disconnect. Good day. Thank you for joining and enjoy your analyst day.
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