Q2 2021 Comfort Systems USA Inc Earnings Call

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[music].

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Good day and thank you for standby welcome to the second quarter 2021 comfort systems USA earnings Conference call. At this time, all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star 1 on your.

And if you require any further assistance. Please press star Zero as a reminder, this conference call and being recorded on them.

And I'd like to turn the call TJ Shaikh Chief Accounting Officer. Please go ahead.

Thanks, Charlie Good morning, welcome to comfort systems, USA second 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 upon the current plans and expectations of comfort systems USA those plans and expectations include risks and uncertainties that might cause.

And actually actual future activities and results of our operations to be materially different from those set forth and our comment.

You can read a detailed listing and commentary concerning our specific risk factors and our most recent form 10-K and form 10-Q, as well as and our press release covering these earnings.

A slide presentation has been.

And 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.

Joining me on the call today are Brian Lane, President and Chief Executive Officer, Tret, and Mckenna, Chief operating Officer, and Bill George Chief Financial Officer.

And provide Brian and we'll open our remarks.

Okay. Thank you Julie.

Good morning, everyone and thank you for joining us on the call today.

We are happy to report and excellent second quarter.

And 90 cents per share despite some revenue headwinds arising from pandemic related.

Third delays and some areas and project.

On a sequential backlog increased by $180 million this quarter on a same store basis and.

Our year over year same store backlog also increased by $200 million.

And this is the first time since Jim.

The pandemic decline that we have seen the same store increase and our backlog from the prior year.

These increases support I believe the direct pandemic effects are abating.

Our free cash flow continues to be strong and yesterday, we increased our dividend.

Since then our essential workforce proved its mettle during the recent challenges and they continue to excel as circumstances improve.

We are grateful for their strength and perseverance.

We are optimistic about our prospects for the next several quarters.

We recently announced.

And that amtech, who will be joining comfort systems USA and the acquisition and net acquisition is expected to close and the third quarter.

And <unk> provides electrical contracting solutions and services, including core electric and low voltage systems as.

And as well as services with plans have made.

<unk> retrofit and emergency work.

And tech is headquartered in Kentucky and.

And focuses on the southeastern United States, including Kentucky.

Tennessee and the Carolinas.

And tech brings experienced professionals and a fantastic.

And the reputation for electrical contracting and services and industrial markets such as food processing.

And Teck will add world class capabilities and complex projects.

Deep customer relationships design build confidence.

And opportunities for synergy.

I will discuss our business and outlook and a few minutes, but first I will turn the call over to Bill to review our financial performance Bill.

Thanks, Brian.

And before I review second quarter details I want to discuss the impact of Covid and how that has affected the composition and timing of earnings and.

Revenue, so far this year and and the comparable periods last year.

Our first quarter results and 2020 were lowered by Covid as.

As we closed the quarter last year in the midst of governmental orders and building and job shut down we were very concerned about how the pandemic and work precautions would affect our productivity.

And accordingly, the judgments we made to close the first quarter last year led us to expect higher costs on jobs and reduced margins and we also reserved certain receivables.

3 months later by the time, we were closing our second quarter. It had become clear that our activities were deemed essential and that we could work a.

Productivity levels are would be paid for lost productivity in most cases.

As a result.

We reassess some cautious estimates and partially as a result of those judgments and the second quarter of 2020 was particularly robust.

We continued to benefit from those factors and.

Good for your time from order as well and.

And the third quarter of 2020 also benefited from a very discrete gain relating to the settlement of open issues with the IRS for our 2014 and 2015 tax years.

As a result.

Although underlying trends are strengthening we continue to pay and the tough comparables.

And the third quarter.

Now during the first half of this year and a year later, we have good execution and productivity. However, we have had some revenue softness due to delays and work preparation and pre construction due to the pandemic.

We are also towards the end of closing out some work that was performed under the.

The worst conditions of the pandemic and.

And so the margins we achieved this quarter reflect a little of that headwind.

Fortunately those effects are subsiding, and our research and backlog and active pipeline as a sign of good demand and prospects and so with that background and context, Let me review the numbers.

And more detail.

Revenue for the 2021 second quarter was $714 million, a decrease of $30 million compared to last year and our same store revenue declined by $46 million.

Gross profit this quarter was $126 million lower by $19 million.

And gross profit as a percentage of revenue declined to 17, 7% this quarter compared to 19, 6% for the second quarter of 2020.

Our gross profit this quarter reflected the headwinds that we're experiencing and construction, particularly and our mechanical segment.

If you compare the 6.

On a period this year to the same period and 2020.

Gross profit was 18, 1% for the first 6 months of 2021, which is roughly equivalent to 18, 2% for the first half of 2020.

SG&A expense for the quarter was $88 million or 12, 3%.

Net of revenue compared to $85 million or 11, 4% of revenue for the same quarter in 2020 on.

On a same store basis SG&A was similar to last year with the same store increase of $1 million.

Our 2021 tax rate was 23, 8%.

<unk>.

To 27, 6% and 2020.

Our quarterly tax rate benefited from permanent differences related to stock based compensation and we expect a more normal rate and the second half of the year.

Net income for the second quarter of 2021, and was $33 million or <unk> 90 per.

Sure and that resulted that has that result included 10 cents of income related to the revaluation of our contingent earn out obligations.

We have 4 large earn outs active and 2021 and so we expect more variability than usual and earn out valuation this year.

Our net income for the second quarter.

And in 'twenty was $39 million or a $1.80 per share for.

And for our second quarter, EBITDA was $55 million and year to date, we have $106 million of EBITDA.

Free cash flow and the first 6 months was $101 million as compared to 151 million for the first half of.

<unk> 'twenty.

The slowdown and some temporary tax benefits created unprecedented cash flow last year.

Our cash flow is very strong through 6 months, but as activity levels and improve we are likely to continue deploying some working capital to us to start new projects and many of our geographies.

Ongoing strong cash.

Cash flow has allowed us to reduce our debt faster than expected and also to remain active in repurchasing our stock and we have reduced our outstanding share count for 5 consecutive years.

Brian mentioned that we recently entered into an agreement to acquire amtech.

And that transaction is expected to close shortly and during the.

2000 and quarter, we have not yet closed amtech, so no revenue or backlog as yet included.

Amtech will be included in our electrical segment and it is expected to contribute annualized revenues of approximately 175 million to $200 million and EBITDA of $14 million to $17 million.

In light of the required amortization expense related to intangibles and other costs associated with that transaction. The acquisition is expected to make a neutral to slightly accretive contribution to earnings per share for the first 12 months to 18 months.

So that's all I have on financials Brian.

Okay. Thanks Bill.

I am.

Third and spend a few minutes discussing our backlog and markets.

I will also comment on our outlook for the remainder of 2021.

New bookings significantly exceeded backlog performed during the second quarter.

Backlog at the end of the second quarter of 2021 was 1.8.

Moving to <unk> billion.

We believe that the business impact relating to COVID-19 have now stabilized.

And as a result same store backlog increased sequentially by 11% or $180 million.

That is a strong increase particularly for our second quarter.

The increase is broad based with strength across our markets.

Most notably and industrial projects.

Although delays might modestly impact activity levels for the third quarter, we see strong underlying trends and the coming quarters and we are comfortable with the backlog we.

<unk> flow across our operating locations.

Our industrial activities were 42% of total revenue and the first half of 2021.

We think this sector will continue growing as the majority of the revenues at our new companies of Taas.

And T E C. Our industrial.

And because industrial is heavily represented and new backlog.

Institutional markets, which include education healthcare and government.

On a strong and with 33% of our revenue.

The commercial sector is also solid.

But with our changing mix it is now.

Have a 25% of our revenue.

For the first 6 months of 2021 construction was 77% of our revenue with 46% from construction projects for new buildings.

And 31% from construction projects and existing buildings.

Service was a great story this quarter and.

And service revenue was 23% of year to date revenue with service projects, providing 9 percentage of revenue and pure service, including hourly work, providing 14% of revenue.

Year to date service revenue is up approximately 12.

But with improved profitability.

Service has now rebounded to full activity levels buildings are open and profitable small project activity is back and we continued to help customers with their indoor air quality.

Overall service was a major source of profit for us this quarter.

Water and really helped offset the temporary air pockets and construction.

On mechanical segment continues to perform well despite being most impacted by the pandemic related air pockets.

Our electrical gross margins improved from 6.5%.

6 months of 2020 to 14, 3% this year.

Finally, our outlook.

Our backlog grew this quarter and strength is returning.

Project development and planning activities continued to be strong with our customers.

We.

And the free confidence and recent acquisitions and are excited about the pending addition of amtech.

We also continued to invest and our workforce and businesses in order to grow earnings and cash flow.

For the balance of 2021.

Pandemic recovery will continue to affect revenue timing.

We are.

And we also face a tough third quarter comparison as Bill mentioned.

As work picks up we will be impacted by timing and we will invest some working capital and audit to ramp up.

For the next few quarters, we will have relatively fewer closeouts also.

Yeah.

We are paying more from materials, but so far and material availability and increases have been manageable.

We are closely monitoring and material shortages and cost and are taking steps to add additional protections and new on new work.

All of these considerations.

<unk> make it hard to predict exactly how the next quarter or 2 will unfold, but the underlying trends and opportunities are very positive.

Despite some moving pieces and carryover effects and the near term, we look forward to continued profitability and our increased backlog and strong pipeline.

And we can expect stronger activity levels later, this year and into 2020.2.

We are optimistic about finishing 2021 on a strong note.

And we are even more optimistic about 2022.

Thank you once again to our employees for your hard work and dedication.

<unk>.

I'll now turn it back over to Charlie for questions. Thank you.

Thank you so as a reminder, if you have a question at this time. Please press Star then the number 1 key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue press the pound key.

And your first question comes from the line and Sean Eastman with Keybanc capital markets. Your line is now.

Hi, Tim Thanks for taking my question Lauren.

Morning, Sean.

Good morning, guys good morning.

So Brian and in your prepared remarks, there youre talking about.

M B and confidence.

And then and the second half and then even more confident and 2020.2.

You know, it's kind of unusual for you guys to speak about the out year.

And so bullishly right. So obviously, we saw great bookings and the second quarter.

Yeah.

Beyond that what what's really underpinning that confidence.

Especially considering we've got you know some of the supply chain and and labor availability uncertainty here.

Yeah, well I think.

First of all.

And we're seeing a lot of opportunity still throughout the country.

It's.

And we like work we're good at and so that gives me a lot of confidence that we will be able to execute well on the field and.

And on files, we can see that's going to continue for the rest of this year into next year and the multiple new 2 new opportunities, particularly on if you look at the industrial sector Datacenters and pharma.

The.

And medical facilities labs food processing.

Medical and general on the retrofit side, and some new building and education, So I'm pretty confident what we're seeing I think the momentum will continue.

I guess your question about the materials and labor and Im sure well documented.

But I think we're doing a really good job managing it on them.

And here you are front in particular.

We have really good relationships with our vendors a long history with them we treat them.

Currently we pay them on time.

And we're letting them know what's coming as early as we can and all of us are on the phone with themselves.

I mean, we're going to manage our way through we've been through.

Times before none of us and new at this.

And of course on the labor front.

You do everything you can I think stuff like pre fabrication and modular.

It helps us reduce our dependents a little bit on.

On labor, but.

Route and bringing them and training them and.

And but I'm pretty optimistic we've got a lotta dwell.

Seasoned professionals out there doing the work and we will get growth.

Okay. That's helpful. Brian.

On another high level, 1 from me as you.

This big shift and mix, we've seen over the past several years with industrial overtaken commercial and and a big way.

I think you know.

And that's been deliberate with acquisitions being a big part of that.

We've also invested heavily and service over the past several years so just.

You pointed it in that context, we're looking at our forecast and.

2 a positive inflection and activity.

What do we really need to consider and our models considering.

Okay.

And that big shift and the profile and mix of business.

As far as your.

Our model goes I don't know, but the most important things about those changes.

R and the complex space, you have a much better opportunity to get reliable margins and to charge for.

The labor that we have that.

You know that's really what you invest.

And when you buy comfort systems.

Group of people, who can do hard thing.

M.

And I'm not sure it really changes the modeling I do think you can.

Industrial will go up for the rest of this year, but almost certainly just because we'll have a full year of 2 companies that are virtually 100% industrial.

And then and as Amtech comes in they have a richer industrial mix then.

Then and then we have on average and they have a particular expertise and things like food processing.

And certain types of industrial facilities that really we didn't have a lot of exposure to and a really.

And <unk>.

Sort of.

Its shape, the geography, where were really excellent at this stuff a little bit to the data and our sweet spot and the greater south east, but it saved us a little more to the west of the South East and some areas that we think are just really really attractive in the coming years.

Okay.

Great helpful and last 1 from me is.

Yeah, and 1 of the lower gross margin.

And so we've seen and some time from you guys could you just walk us through some of the moving pieces, there and it sounds like no real change and margin expectations on a go forward.

And this is my sense.

Yes, if you look at where we had year to date were over 18% shy on I mean, you look at a 3 month timeframe I think we're really executing really well and the field I think we'll be back to a normal spot I think this is just.

And 1 quarter decline and my opinion, Yeah, you think about it.

A.

Our year with all the craziness over the last year 1 of the things that happened last year was people had to work out on job sites with masks on and they could low fewer people and an elevator and just more distance and heart longer timeframe to just get on to the job site. As you were getting your temperature taken so.

So a year ago, we found out we can still work with good productivity that doesn't mean it doesn't affect somebody if they have to wait and extra minutes to get in and we're paying them, that's 10 minutes and lost productivity.

I think that on.

Many of our jobs you know we had some loss productivity. It's just that we had money and our cost codes.

And to cover it but when you get to the end of the job, we're finishing a lot of those jobs, that's still going to affect how much.

Pick up Youre going to have at the end right and and.

Also.

We are in a period of time, when we have a little bit we have some sporadic sporadic air pockets in places where they are about to get really busy.

And as you might imagine if you've got welders and pipe Fitters, and plumbers and master electricians, and you're going to be pretty slow to lay those guys off.

When youre facing a giant.

Out of work so I.

I think what Youre seeing is an amazing.

Outcome as our guys are managing through.

And inflection point, and a little bit and a little bit of an air pocket and we're thrilled to make a ton of money and and be positioned the way, we are and I couldn't be happier and the way, we're performing and construction and service right now.

Okay. That's really helpful. Thanks, guys alright. Thanks.

Thanks, Sean.

Your next question comes from the line of Adam Thalheimer bed Thompson Davis Your line is now.

Hey, good morning, guys and good morning, Adam.

Bill or Brian how are building owners are people thinking about building a building thinking about rising materials prices.

And so as far as we can tell.

When you talked to virtually any of our companies, there's still a ton of planning going on right.

I think that nobody likes it when they have to pay more for something there are certainly there are certainly places where people were budgeting something and theyre seeing a little bit of sticker shock and.

Turn it and they're happy to talk a little bit more.

But the reality is for most of these businesses the capital expense and building a building is spread over the next 40 or 60 years.

If it's a good investment.

You know, a 10 or 15% increase and the total price.

It is very unlikely to turn something into.

And their investment, especially if you think about it people keep we're facing that this is the second time in my career in this industry, where we where we're facing.

Big very quick.

Increase and material cost the last time was 2000 and by the summer of 2005, there was an awakening where people said.

And said Oh, China is here to stay and Theyre going to use a lot of the world's resources and building supplies doubled over and about a 6 month period.

We managed through that with you know just I mean, just less and $1 million I think of effect, but also the biggest reason I feel much much better this time has lapsed.

About his time.

This big price quote unquote problem was a real problem, because something was going to happen and a place that I don't do work very hard as the CFO of a company that builds and things that they say Oh this factor.

This factor that's raising cost that is driven by the fact that people really want to build thing is a problem.

Problem net net.

At some point you have to accept the fact that if you're going to be and a really robust market there.

You know you're going to move a little bit on the supply curve. So I don't know I think it is good news and that's.

Interesting.

We have a very collaborative discussions throughout.

Everybody on a project customers subs everybody else.

<unk> about EPS yourself, it's not like it's affecting a few sectors right. It's broad based so it would be.

Just trying to work together and get these jobs builds and it's self correcting if people stop wanting building.

And it hasn't been material price yeah.

We don't want that.

Yeah.

Can you comment a little bit on pricing.

And obviously, a good bookings and Q2 it sounds like the bidding still steady, but what are you seeing on pricing I think I think pricing is good I mean.

It's been pretty stable and new opportunities that we're looking at so.

And I think it'll be okay.

Yeah.

And then Hey, Bill can you repeat those amtech numbers and was that a.

And those rest of your numbers now so.

And so we basically and our press release, we said that what AMETEK as a part of comfort systems.

You could expect 175 million to $200 million of revenue and 14.

And the $17 million of EBITDA.

And.

You know, we do that with each 1 of our acquisitions. It's just to give people an idea of what we bought obviously, we try to put numbers and that we think are you know very.

Fair, and Matt and <unk> and achievable, but I will say also those are numbers.

And that we expect them to average and years to come and there'll be years, when they do much better than that and.

And like all companies if somebody if we have a company and little rock, Arkansas, and Nobody's building ability and little rock, Arkansas, The greatest company and the world might have a soft year to cause and so it is we are a portfolio, but I very.

I've never felt more comfortable with.

Sort of my view of the prospects of some acquisitions that were.

And we've done.

Great. Okay, Thanks, guys, alright, and take care.

Your next question comes from the line of rent and kill many weight D. A Davidson your line is now moving.

Yeah.

Okay, great. Thanks.

Hey, Bill does the cash flow get better from here and the second half and now you're going to have some working capital requirements and I wonder.

He said probably worked out and system improvements and we can do better then we will probably do better than $20 million on the fourth quarter is usually a good cash flow quarter for us, but the 1 thing I would say.

If we were to go back to that I pop and cash flow it wouldn't necessarily be good news, it's actually well cash flow less than our earnings for the next 3 or 4 quarters. If our revenues are going up the way, we expect them to because definition of leap in general we'd pay people their wages before we on a weighted average get paid for the work we do.

Do so it's good news I think that but the good news is I think about very good cash flow I don't.

I don't know if we can match the first half of the third quarter and the second quarter. We just you know a low number there is 1 factor that's just.

Just out there that's math and that is last year they gave us.

Permission not to pay our payroll taxes and as you're aware, we're and assembled workforce, we have a lot of payroll taxes.

And we have to make up half of that and the fourth quarter of this year and we have to make up the other half of that and the fourth quarter of the next year. So that's definitional and going to knock tenor to I think $20 million off or something and the fourth quarter and as we just do a catch up on that.

Okay.

And I and I know I think the electrical profitability over the last couple of quarters is a pretty interesting story and revenue down a lot and obviously much improved.

I wanted to get your thoughts and indeed can you build on these levels as you start to accelerate some of this new work I'm not asking about timing, but just more.

And whether this is kind of the baseline we ought to think about for that side of the business that you can build on it and get more active.

So hey, Brian This is Brian and yes, there has been a marked improvement and the profitability of electrical and as you know we announced early when we got into electrical that we'd probably.

Before we.

Grew it again, but I'm very optimistic about the possibilities and improving margins and electrical particularly with amtech journey as we've got a good critical mass of sharing best practices et cetera, using prefabrication and so I think from modeling sake.

Shrink and be a good baseline, but I'm optimistic we will get better.

Okay I appreciate it guys. Thank you.

Thanks.

Your next question comes from the line get plenty of Romero with Sidoti and company Your line standard.

Hey, good morning, Thanks for taking the questions.

This morning.

So I guess wanted to start on the services side Youre seeing a nice rebound there sequentially is that rebound and service mirroring your increase in and some of the Subsectors industrial and government are multifamily and.

Or is there other subsectors that maybe driving that.

No.

And our sweet spot for service. Unlike construction is commercial so we do an awful lot of service and commercial building.

Do a lot of projects across our <unk>.

Portfolio, but where we get in there and do a lot of demand service, where we have a lot of our preventive maintenance agreement.

Grievances and commercial if you think about it.

Somebody like Duke University, or the Methodist Hospital system, they have their own.

Facilities management teams and so they kind of call us and to do something hard like a project. It's really the it's and our commercial that we think a lot of service.

<unk>.

Got it so I guess, the implication would be to on on the construction side and commercial that that's something where there are pockets maybe affecting you.

And I don't I think service is not.

Service service and I don't know, if you're asking if the air pockets affected us and the second quarter and service I think the answer is no.

I think our service was up.

Or something and.

No I'm sorry, yes.

And I meant to say that because.

The Ah <unk>.

Commercial and other was down.

Year over year on on a revenue side and if services up I guess the implication is that the.

And the construction side of commercial.

Okay, Yeah, yeah, absolutely and it's really improved on the industrial and and the others as we mentioned, but also on the on the service front right. We've got we've got some help with the excessive heat we have and 2 so you have on the HVAC business and there's no question that debt does help us so on but with full pills and service right now.

And by the way I'd also say.

Commercial is not as strong I would say in the United States today is industrial or <unk>.

Even institutional but.

Our commercial numbers coming down and not just indicative of.

Like weakness in commercial is indicative of decisions being made by our subsidiaries.

To take work that debt, that's more complex and better for them, it's indicative of us moving up the food chain really.

Got it that's helpful.

I guess you know if you can talk about.

The mix of what you're seeing and backlog now and I know you mentioned some improvement and particularly.

Clearly and industrial but.

I'm curious if education or any other subsectors.

It might be increasing year over year, and making a bigger portion of your backlog, but not not on the current revenue mix, yes, or no. If you look at if you look on our backlog today industrial is very commence.

Commensurate with our.

Revenue, so that's strong and growing.

And growth out of medical.

For sure bolt and new.

New build hospitals retrofits and medical facilities and also a fair bit of what I call Laboratory research facilities and vaccine development facility.

Our low and.

And education has been pretty stable for us.

M.

Doing a little bit of work with air quality and schools et cetera, but universities is still pretty strong for us Julio so.

All of the sectors and the backlog there there's a majority of them.

And understood.

<unk> and understood.

And are not lodging and entertainment also was up we had a couple of nice bookings and that area this quarter and get some hotels going up which is not what we expected.

Yeah, I haven't seen that much.

Other companies either.

Just last 1 from me here is what do you think.

And see electrical does and in the back half of the year from a revenue run rate standpoint.

What did you say what went on lunch.

And the CLEC P C, Tennessee, Tennessee correct.

Hmm.

That's probably a little too granular there revenues were very light and the first half.

And when.

And I believe and with like 3 months before we did the deal. He was telling me that he had this this period.

And they are picking up they've got some job starting so I think there'll be up considerably, but it's hard for me to I just don't at my fingertips have a number I can put on that.

But I will tell you I was at GE.

And we know Denver, there recently and you know that workload there will be full full tilt the back end of this year for sure.

Okay fair enough. Thanks for taking the questions alright. Thank you.

And that concludes our question and answer session for today, I'll now turn to call and Vivek could Brian.

And I am lane for closing remarks.

Well, thanks, Charlie and closing I really want and once again, thank our wonderful employees and I really wanted to give a shout out to our analysts just wanting.

Separation and they had a lot of calls going on today, we know it.

Really appreciate you joining the call today and your questions.

Well so well.

We're also glad and hopeful to see everybody here in the near future and person.

We're looking forward towards the meantime, everybody be safe and are having a good upcoming weekend and a good rest of your summer. Thank you.

This concludes today's conference call. Thank you for participating you may now disconnect.

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And this 1.

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