Q1 2022 Comfort Systems USA Inc Earnings Call
[music].
Good day, and thank you for standing by and welcome to the Q1 2020 to comfort systems USA earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
To ask a question. During this session you will need to press star one on your telephone. Please be advised that this call is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your host today, Julie shape, Chief Accounting Officer, you may begin.
Thanks, Justin Good morning, welcome to comfort systems, Usa's first quarter 2022 earnings call our comments today as well as our press releases contain forward looking statements within the meaning of the law.
A couple of security laws and regulation.
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 concerning 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.
A slide presentation has been provided as a companion to our remarks.
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 open our remark.
Thanks Julie.
Morning, everyone and thank you for joining us on the call today.
We are pleased to report a fantastic start to 2022.
Our teams are busier than ever and we are incredibly grateful for their hard work and we thank them.
Excluding the tax gains that bill will discuss in a few minutes. We earned <unk> 91 per share this quarter compared to 73 a year ago.
New work is commencing across all markets.
And on a same store revenue increased by 16% compared to a year ago.
Bookings climbed again as demand is strong for our services.
We had good cash flow despite deploying.
Working capital to support our growth.
Yesterday, we also announced a <unk> <unk> increase to our quarterly dividend.
On April 1st we acquired Atlantic Electric headquartered in.
In Charleston, South Carolina.
Atlantic performs electrical contracting in various South Carolina markets.
As well as specialized work on if fields in the South east.
This partnership brings new capabilities and new markets to comfort systems USA.
I will discuss our business and outlook shortly but first I will turn this call over to Bill to review our financial performance Bill. Thanks, Brian Good morning, everyone I've.
I've been doing this call since 2005 and this is the first time I've ever started with tax.
I'm very happy it's for a good reason the reason I'm going to start with taxes. This morning.
Is because our recent tax events affects so many of our numbers. So as previously discussed in January the joint Committee on taxation approved our previously filed refund claims for the 2016 2017 and 2018 tax years.
Primarily to claim the credit for increasing research activities or the R&D tax credit.
Up to the end of last year, we had not recorded any benefit for those refund claims. So this approval in the current quarter triggered recognition of a $30 million benefit for the 2016 to 2018 tax years.
Because these credits were approved for past years, we also reevaluated the realize ability judgment that we have made with regards to the R&D tax credit for the intervening years of 2019 2020 in 2021 and as a result, we recorded a $27 million.
Non cash burned out tax benefit for those years.
After subtracting SG&A expenses related to those tax credits. The net result of those gains was an additional $1 49 in earnings per share this quarter.
Consequently, our effective tax rate for the first quarter of 2022 is a negative 130%.
Additionally, when we evaluated our taxes for the first quarter of this year. We also included consideration of the R&D tax credit and that lowered our tax rate for the quarter.
Excluding the prior year benefits.
Our tax rate for the first quarter was 22%.
And we expect our ongoing normalized rate will be similar in the future.
So with that background I'll now discuss our remaining performance.
Revenue for the first quarter of 2022 was $885 million, an increase of $250 million to $215 million or 32% compared to last year.
Same store revenue increased by 16% a broad based increase that results from strong conditions with a lot of new work starting as well as the fact that last year, we had air pockets relating to Covid.
We're all for the remainder of the year. We currently expect high single digit or low double digit same store revenue growth.
Gross profit was 153 million for the first quarter of 2000 $20 million to $30 million increase compared to a year ago.
Our gross profit percentage was 17, 3% this quarter compared to 18, 4% for the first quarter of 2021.
Our gross profit percentage in our mechanical segment.
Klein from 19, 1% in 2021 to 18, 6% in 2022 and margins in the electrical segment also decreased from 14, 7%.
13% over the same period.
The decreases in gross profit percentage resulted from several factors first new construction is up significantly as a proportion of our revenue.
Second <unk>.
Much of our revenue was on jobs that are early in their lifecycle. When we generally report lower margins due to uncertainty.
Third with the concerns surrounding supply chain and labor.
We are naturally being cautious about cost trends when we estimate the cost to complete ongoing work.
Finally, and importantly.
Materials and equipment are trending higher as a proportion of our Cogs.
Due to price increases.
Material and equipment Cogs, this quarter, where 40% of our cost of goods sold as compared to 34% of our Cogs in the quarter one year ago.
Since we put more markup on labor than we do on materials, a higher proportion of material and equipment in our cost of goods sold lowers our overall margin even as our gross profit per labor hour stays strong.
SG&A expense for the quarter was $118 million or 13, 3% of revenue compared to $88 million or 13, 2% of revenue for the first quarter of 2021.
We did several acquisitions in the second half of 2021, so most of the dollar increases in new companies.
On a same store basis SG&A was approximately up approximately $13 million. However.
$4 5 million of that increase relates to tax consulting fees and other expenses related to the prior year R&D tax credits that were recorded this quarter.
Excluding these costs SG&A as a percentage of revenue decreased from 13, 2% last year to 12, 8% this quarter.
The remaining same store increase resulted from factors, including compensation cost head count and travel and training expenses.
Our earnings this quarter benefited from changes in our earn out liabilities.
Each quarter, we examine our estimates related to our earn out liabilities and with all the acquisitions. We've done. We currently have several large earn out that are ongoing which is a source of variability. This year as we re estimate the likely outcome for each outgoing calculation every quarter.
This quarter, we reported a net gain of $4 million or 10 cents per share as compared to a net gain last year of 1 million or four cents per share in the same quarter.
The game this year was significantly increased by some external the variables that affect the calculation, especially the current movement in interest rates and volatility.
Ongoing interest rate uncertainty adds to the predictability of these valuations in the next few quarters.
After considering all of the factors above and including the tax credits.
Net income for the first quarter of 2022 was $87 million or $2 40 per share and excluding the prior year R&D tax credits and the SG&A expenses incurred related to those credits. Our net income was $33 million or 91 cents per share, which again includes 10 cents of earn out game.
This compares to net income for the first quarter of 2021 of 26 million or <unk> 73 per share, which included four sets of earn out game.
Even though this quarter was up sharply from last year as EBITDA increased by 18% to $61 million.
Free cash flow for the first quarter of 2022 was $56 million and this includes the $33 million of cash that we received from the IRS related to the 2016 to 2018 R&D tax credit.
Even if we normalize for the tax benefit.
We believe this is good cash flow for our first quarter, especially considering the significant investment we are making at working capital as new work starts and in light of our significant organic revenue growth.
By comparison last year, we had cash flow of $80 million as you may recall last year, we received advanced payments on some large projects.
And our working capital was benefiting from temporarily lower revenue from the Covid Air pocket.
Our debt at the end of March was $412 million.
And part of the borrowing funded the April 1st acquisition of Atlantic Electric that Brian mentioned earlier.
Finally, we're continuing to actively repurchase our shares with a portion of our cash flow in the first quarter of 2022, we repurchased 162000 shares and since we began our repurchase program. We bought back nine 8 million shares at an average price of $22 77.
So.
That's what I've got on financials Fred.
Okay. Thanks Bill.
I am going to spend a few minutes discussing our backlog and markets I will also comment on our outlook for the rest of 2022.
And on inflation and supply chain considerations.
Our backlog at the end of March was 273 billion sequentially same store backlog increased $421 million or 18% and.
An increase that is broad based.
Year over year same store backlog is up by $844 million or just over 50%.
With increases across most of our operations.
And with notable strength in Texas, and North Carolina.
Our industrial revenue was 46% of total revenue in the first quarter.
This sector, which includes technology life Sciences, and food processing will.
We will remain strong for us.
As industrial is heavily represented in new backlog.
Well as in our recent larger acquisitions.
Institutional markets, which include education healthcare and government.
Are also strong and with 32% of our revenue, which is consistent with what we saw in full year 2021.
The commercial sector is also doing well, but without changing mix. It is now a smaller part of our business at.
At about 22% of revenue.
Year to date construction was 78% of our revenue.
With 49% from construction projects for new buildings.
And 29% from construction projects in existing buildings.
Full year 2021, new construction was 46% of our business.
So we have seen an increase in that sector.
Service increased this quarter by 30% compared to last year <unk>.
Including a same store service revenue increase of 13%.
Service is 22% of our year to date revenue with service projects, providing 8% of our revenue and pure service, including hourly work.
Providing 14% of revenue.
Our service maintenance base increased by 5% in the first quarter to an all time high of $154 million.
Overall service continues to be a consistent and growing source of profit and cash flow at comfort systems.
In all our activities, including both service and construction, we are uniquely positioned to encourage and support our customers.
As they seek to improve the efficiency and sustainability of their buildings and operations.
I'm also pleased to announce that we recently published our 2021 sustainability report on our corporate website and you can find it at the top of the main page and on the governance tab of the investors section of our website.
That report will help you see what we are doing as well as how we can certainly help our customers to make progress towards their sustainability goals.
We have continued to increase transparency.
Great our actions and policies and raise our standards in the areas of sustainability diversity and governance.
We are experiencing strong demand in 2022, and we continue to invest in the what I'll lay before us.
As with other sectors of the economy. We are also experiencing supply constraints constraints and cost increases reduced availability and frequent delays in delivery of various materials and equipment.
We are recognizing these challenges and our job planning and pricing.
And we are working to order materials earlier than usual and seeking to collaborate with customers to shift supply risk and to mitigate these challenges.
We have a good pipeline of opportunities and so far we have generally been successful in maintaining activity levels and productivity despite supply chain challenges.
We are also mindful of world events and fed tightening.
However, considering the strong demand and a record backlog, we now expect continued growth in 2022.
And we also expect that our EPS will trend upward.
Although not at the same pace as our same store revenue considering our current mix of business.
We believe the good trends outweighed the challenges and we and we remain optimistic about our prospects for 2022 and beyond.
With the highest backlog in the history of comfort systems USA, we will continue to invest in our workforce technology execution capabilities and our service businesses.
Our skilled workforce is the heart and soul of comfort systems USA.
And we will continue to develop and reward our unmatched team members as they strive to work safely to build and serve their communities.
I'll now turn it back over to Justin for questions. Thank you.
And thank you as a reminder, that the question you will need to press star one on your telephone.
To withdraw your question press the pound key please standby, we compile the Q&A roster.
And our first question comes from Sean Eastman from Keybanc capital markets.
<unk> is now open.
Hi team thanks for taking my questions Sean.
Good morning morning, Brian .
Brian just high level, one for you I mean.
The backlog trend relative to the organic growth numbers, you've been putting up is remarkable.
Remarkable how would you explain that to investors.
In broad strokes and and how sustainable you think this strength is.
I think I'm sure you've noticed a long time.
We are really proud of.
The Labor force.
And the project planning that we do.
We were able to have really good customers.
We have terrific vendors that are working through with us.
Dwell of challenges that are out there. So when you combine all of that.
And work with everyone and communicate with them.
I think that we'll be able to get to our backlog in reasonable shape. There are challenges. We all know everybody is talking about them, but we're just doing the best we can to.
To serve our customers and we will take care of our people and our vendors to execute efficiently and productively.
Yeah.
As far as the.
The underlying trend.
We don't know what will happen, but at this moment there is no sign of any curtailing demand.
A lot of demand and other.
The work we do.
Attunity is we're seeing is still very good Sean.
Got it good to know and and I'm just.
Just in light of the <unk>.
Margin pressure from a year over year perspective.
And part of that bridge being that.
Earlier stage.
New construction work ramping up and also this.
Kind of caution and contingency around.
Estimated cost to complete.
How does that dynamic evolve when do we sort of get on the on the back end of a projects and maybe you can start to release some of that contingency I'm just kind of curious the timing element there.
So I'll, let I'll start and Brian can add anything he wants you know so.
You guys are leaving.
Resources and jobs because of concerns about all of the challenges that they're facing right. So that makes.
The fact that we have very good pricing today. The fact that we are positioning ourselves.
To be able to deal with challenges on a cost basis.
It gives us more opportunity maybe than we've ever had for improvement late in jobs at the same time.
The cost challenges are real.
The supply chain problems, a real there's a reason why they're doing that and so.
There's a lot of execution to do this summer.
As far as when we start to see that.
Get the question answered it'll be after the summer so fourth quarter, our guys will take a very hard scrub of jobs will be most of this work by the way we won't be done with this year.
That's starting right now in fact very little of it but they'll take a hard scrubbing. That's when you might you'll really get to I think started to get a good flavor for that if you had to if I had to guess I think it'll be a mixed bag I think we'll have some home runs and we'll have some jobs were.
People really are scrambling and spending some money to make sure the customer gets what they need but I think we'll be in a good place overall.
Okay.
Helpful.
And then lastly, just as I think about backlog as a predictor of revenue and I appreciate the walk up on the organic growth outlook for this year.
And just in light of the the big shift in mix in the business should the.
The burn on that backlog kind of come down.
Versus what we've seen over the past say five years on average does that makes sense yeah. Yeah Theres two factors. So the mix has been moving really more than ever which is astounding towards industrial.
And industrial does have a quicker burn generally speaking then the rest are just for example, health care, which probably has the longest burn.
Some of the new industrial projects are very big.
And people are committing earlier right, they're trying to lock up.
Just like we're ordering stuff earlier, they are committing to us earlier, right, which pushes pushes backlog up so if I were to bake those two together I think the backlog has a.
A longer burn than usual thank goodness right.
Thank goodness, yes, but it's.
It's within the range, though Shaun model.
Yep Yep, Okay, great I'll turn it over there. Thanks, a lot guys. Thank you.
And thank you.
And our next question comes from Julio Romero from Sidoti. Your line is now open.
Hey, good morning.
<unk>.
Okay. So.
You talk about the mix of new bookings that are coming.
In terms of the mix of maybe new construction versus existing building construction and maybe as well I'll talk about the mix of electrical versus mechanical yeah. So I'll go first and then bill so.
In terms of the backlog, we're seeing a pretty consistent trend.
<unk>.
$45, 50% is in the is in the construction range heavily new construction today, there's a lot of new projects going on.
We are seeing.
A lot of electrical work, particularly in Texas.
So I think youll see.
Electrical pick up although mechanicals things sustained strong but electricals.
We will be increasing as a percentage of our business going forward, yeah, I would agree with that.
Okay.
I guess, what's the biggest change to the operating environment that you've seen over the past two months since your February call.
Yes.
So the biggest change in the last two months.
Is the lack of change like the most surprising thing in the last two months.
But there seems to be no let up in people.
You know sort of still wanting to onshore pharma is still very.
Very high levels of interest.
So we know.
Everybody across the economy is taking a hard look.
So far there's no sign of that with our customers. So I'd say most of that's surprised about but the thing. That's most notable is there may be changes coming but they're not apparent right now I think Julio I agree the broad based strength a bit to us.
Still hanging in there so.
Not much change you may recall that when we were coming out of a couple of recessions in the past we were kind of famous for everybody would say things are getting better and we'd say well, we're really hoping they do but we don't see any sign of it.
We're usually right in this case.
Maybe the world's about in but we're not seeing any sign of it.
Got it interesting dynamic there and maybe last one from me is just if you could talk about maybe the M&A pipeline.
Given rising interest rates and maybe more challenges for some of your.
Some of the other industry players are you starting to see any change in valuations for some potential acquisition candidates you may have had your eye on.
So the answer is for ones, we've had our eye on though the relationship deals are the same for stuff that people are hiring a broker there. There's a lot of stuff that we wouldn't be interested in but we see it seems like they they certainly are expecting to get higher pricing I've seen instances, where that's confirmable, but there seems to be higher price.
Expectations. So we're really happy we had these deals we just did that were based on long term relationships I think it was good timing for us to get a lot of good deals done last year this year.
You know, we are probably going to take a breath and we'll probably continue to do some tuck ins, but theres a lot of reasons why you know we've got work to do to integrate and make sure we do that right.
Pricing is high two of the deals we did late last year two of the bigger deals would have happened. This year. They just happened sooner because there was a conviction that people had for a period of time the capital gains rates were going up that turns out pretty good breadth I think this year also.
In the midst of uncertainty isn't necessarily the time to pile into acquisition. So I think we'll be pretty calm this year, but I think we will keep really developing the pipeline and it's still good.
Great. Thanks, very much for taking the questions.
Yes.
And thank you.
And our next question comes from Brent Thielman from D. A Davidson your line is now open.
Hey, Thanks, guys.
Hey, Brian when you look at 2.7 billion dollar backlog.
Go out and execute on how do you how do we sort of think about the incremental capacity you'll have to address kind of that smaller book and burn work and then I guess second part of that is.
Do you have a workforce capable.
Porting and even larger book of business.
Yes so.
Really good questions Brian .
Luckily <unk> Bill as Bill mentioned, we it just broad based.
So a larger companies have a largest share to work so from a capacity and labor standpoint.
You know we are in good shape, we spend a lot of time as.
As you know you've known us a long time.
All of this work labor planning.
Make sure we have the right resources.
We're also very fortunate.
You know what an acquisition that bill didn't it.
At the end of last year, a company called Kodiak, which supplies us.
You know it was labor throughout the country. So we do have multiple sources to increase our capacity. So I think right right now as I sit here with you. We are in good shape with the backlog, we have and will continue to win work and do it but our guys are really good at.
Looking at their Workforces, how much you can take and when it's going to take it. So we're very fortunate with the folks that we have you know running our organizations and making sure. They can take work that we can do so if you don't mind I'll add one more specific consideration which has been.
In the same way that our cost of goods sold going from 34%.
40% of materials and equipment.
The same way that made our revenues bigger it makes the amount of labor in our backlog proportionately smaller so we've got jobs that are.
On the very big and we have jobs that a couple of years ago, where at a certain size that we're at.
You might top out with 300 people have jobs are the same size, where the highest number of workers you're going to have on the job site or 200 people.
Yeah.
<unk>.
You know what happens is it material start to come back down then you know it will make the backlog a little sluggish and suddenly we'll look smart on the margin line right, but for now the trend is definitely towards more materials paying more for them.
That makes the backlog bigger as well, but we're in reasonable shape right now, but yeah, not a lot of spare capacity.
But I'm sure the guys out there you are saying you come into a Brian but right now we're okay.
Alright, I appreciate that.
Really helpful. The.
Second one was just.
The two segments between mechanical and electrical.
Would you expect to see more of a kind of a positive inflection in margins.
You get towards the more mature stages that these larger projects.
Yeah I mean.
You look at the gross margin in electricals at 13% for the quarter, we were up closer to 15%.
Last year's July .
I'm optimistic as vehicles by we're really early brands and a lot of its electrical work.
So we're really you know.
Watching that closely but if I had to guess.
I am expecting that electrical we'll see a bigger bump in margins as we go throughout the year early next year.
And brother.
[laughter].
Yeah.
[laughter] again.
Just one more you know industrial continues to be a huge driver for you guys.
But I've also noticed in the Q it looks like some of that maybe what might be might associate is kind of light commercial work. The retail restaurant staff seems to be coming around for you at least from a revenue perspective in the first quarter and I realize youre not.
Similarly, emphasizing that work, but I imagine it is getting better for others in the industry too is that is that meeting to a tighter capacity environment.
In general and kind of favoring.
Pricing on the bid because youre going out and looking at new work.
I mean.
Demand is good for pricing right unless youre doing things wrong.
I would say also you'd probably detected a little bit those deals we did in December .
We've done a lot of acquisitions that were heavily industrial a couple of the deals we did.
In December we are.
More of our traditional stuff that we've done in the past, although they have very complex capabilities. They do a broader mix of work and by the way they brought in more service for us.
Some of those deals had very very nice service businesses, especially from the point of view of revenue and customer penetration.
They didn't have quite the margins in service that we.
But to be honest the companies we own today that have those margins and service didn't have them.
When we bought them so hopefully there's an opportunity there.
Okay. Thanks, guys. Appreciate it best of luck. Thank you Brent thanks.
And thank you and our next question comes from out from Adam Thalheimer from Thompson Davis.
Your line is now open.
Good morning, guys, Hey, Adam.
Brian You mentioned, Texas, and North Carolina strong is there anything else to call out some of the other geographies.
Florida, I would say is very strong.
Trying across everywhere around them to be honest with you I picked up you know, Texas is obviously.
It's well documented and everything you read but I think the southeast in particular is Florida is very strong to you kind of get numbers like this though.
Everywhere everywhere being strong, but we picked up Texas, North Carolina, Florida very good.
What are you seeing the data centers.
Steady.
Steady at high levels that Ian.
Consistent and good volumes of work very good.
And then.
Modular high level.
Modular bear.
Very very good demand in modular modular.
We're adding we're adding we're actively adding more square footage today, we have about a million square feet of production space and modular and that's going to be up significantly six months or a year from now because the demand is very good.
Got it and then.
I'm not sure how to ask this question, but it's really a question on supply chain.
And I guess I'm trying to think through like how much variability are you seeing just in your subsidiaries in terms of.
Your larger subsidiaries like and there's some companies that are really sailing through supply chain issues and others are really struggling with it how much variability.
Do you see out there on that front.
You know.
No.
Ton of variability about how this is going.
But not necessarily just like this company versus this company, it's more like the variability is.
You know thematic one month that nobody can get PVC in the next months nobody can get so.
Switch gear.
And then suddenly they seem to get some and it's very it's clear that our suppliers who are very good themselves are struggling to make predictions to us and.
Unfortunately, more often than not they're prediction ends up being longer but occasionally we get stuff, we werent expecting and.
I don't know I'd say, it's very variable, but I don't think it's geographically variable or to company type variable. It's just.
It's just a lot of people try to figure out something that's hard with a lot of variables that.
Windsor ship sitting off the coast is going to make you know get called and it's pretty hard to figure.
I just wanted to add on a little bit to that if you look at the whole chain from your vendors and how they are getting stuff in our customers people, who are very rational about the situation, we're in and everybody knows it.
We're communicating with them being transparent so.
It's really a point in time to really be good at project management and we're lucky there.
We are working with these folks and we have really good vendors and we really do appreciate them trying to help us get through this.
Okay.
Good color, thanks, guys I'll turn it over alright, thanks, Adam.
And thank you and I am showing no further questions I would now like to turn the call back over to Brian Lane for closing remarks.
Alright, thanks, everybody I really wanted to once again, thank our diligent employees as they do on a terrific job working safely efficiently and productively.
Taken care of and taken care of our customers also thank all of you for your interest in comfort systems USA.
So we really do appreciate it and we hope everyone has a wonderful spring and we'll be talking to you soon have a great day. Thank you. Thanks everybody.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Okay.
Yes.
Okay.