Q2 2022 Comfort Systems USA Inc Earnings Call
Good morning, and welcome to the comfort systems USA second quarter 2022 earnings Conference call all participants will be in listen only mode.
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Please note. This event is being recorded I would now like to turn the conference over to Julie <unk> Chief Accounting Officer. Please go ahead.
Thanks, Kay good morning, welcome to comfort systems, Usa's second quarter 2022 earnings call our comments today as well as our press releases contain forward looking statements within the meaning of the applicable securities laws and regulations. What we will say today is based upon our current plans and expectations.
Our systems USA.
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.
Slide presentation have been provided as a companion to our remark.
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 Grant Mckenna, Chief Operating Officer, and Bill George Chief Financial Officer, Brian will open our remarks.
Alright, Thanks Julie.
Good morning, and thank you for joining us on the call today.
Before we start.
I want to sincerely, thank our employees across the country working through so many tough challenges, including record heat and achieving amazing results for our customers.
We had a strong second quarter.
Thanks to careful planning and superb execution.
Teams continued to perform for our customers and our stakeholders.
We are in the $1 17 per share this quarter compared to 90 cents a year ago.
Unprecedented market conditions resulted in same store revenue growth of approximately 25%.
Driven by increased activity in <unk>.
Markets combined with the effects of cost increases in materials equipped.
Equipment and other inputs.
New work is commencing across our footprint and our backlog and pipeline remain strong.
Cash flow was also excellent this quarter.
Especially since we are investing capital to support our growth.
During the quarter, we also amended our credit facility to increase it to $850 million and improve flexibility and cost.
We want to thank our banks for recognizing the strength of our balance sheet and providing us with this additional financial flexibility.
I will discuss our business outlook.
Shortly but first I will turn the call over to Bill to review our financial performance built.
Brian .
Quite a quarter for us our revenue, especially revenue for the second quarter of 2022, with one point out $2 billion.
An increase of $304 million.
43% compared to last year.
This is the first time, we've exceeded $1 billion in revenue for a quarter.
Our recent acquisitions contributed a total of 128 million of new quarterly revenue and we had same store revenue growth of $176 million.
Our sharp increase in revenue was broad based with a lot of new work, starting and we experienced inflation in equipment and materials and other inputs.
As Brian mentioned, our same store revenue increased by 25% in the second quarter, while our same store employee head count increased 10%.
Same period.
During the second quarter last year, our revenues were negatively impacted by the air pocket from Covid.
Overall for the remainder of the year.
Currently expect double digit same store revenue growth probably in the range of 10% to 15%. Although there are certainly more variable than usual.
Gross profit was $175 million for the second quarter of 2022, a $49 million increase compared to a year ago.
Same store gross profit measured in dollars increased by 23% very close to our same store revenue increase.
Our gross profit percentage was 17, 2% this quarter compared to 17, 7% for the second quarter of 2021.
Our gross profit percentage in our mechanical segment for the second quarter declined from 18, 4% in 2021 to 17, 8% in 2022, while the margins in the electrical segment increased from 13, 8%.
15, 1% over the same period.
The changes in gross profit percentage resulted from the evolution of our business the business mix, because we're doing more new construction. We're early in many of our jobs and materials and equipment are a higher proportion of our cost of goods sold.
SG&A expense for the quarter was $119 million or 11, 7% of revenue compared to $88 million or 12, 3% of revenue for the second quarter in 2021.
Most of the dollar increases from new companies and.
And on a same store basis, SG&A was up moderately considering our growth by $13 million.
Our operating income percentage increased slightly from five 5% to five 6%.
Our tax rate for the second quarter was 21, 1%.
Continue to benefit is expected from the R&D tax credit that we finalized last quarter.
After considering the above factors.
Net income for the second quarter of 2022 was $42 million.
Or $1 17 per share and that compares to net income for the second quarter of 2021 of 33 billion or 90 cents per share.
EBITDA increased from $55 million in the second quarter last year to $77 million this quarter, a remarkable 41% year over year EBITDA increase.
Free cash flow for the first six months of 2022 was 90 million, including the $33 million refund from the IRS for the R&D tax credit that we got in the first quarter.
This is good cash flow as we invest in growth.
Our debt at the end of June was 460 million as Brian mentioned, we increased our credit facility to 850 million.
The new facility includes improved credit costs, greater capacity and even more favorable covenants.
The amendment also adds flexibility with respect to acquisitions dividends and stock buybacks.
We are actively repurchasing our shares in the first six months of 2022, we have repurchased 388000 shares for approximately $33 million and since we began our repurchase program. In 2007, we have bought back $10 1 million shares at an average price of $24 12.
That's what I've got on financials Brett.
Alright, Thanks Bill.
I'm going to spend a few minutes discussing our backlog in markets and I will comment on our outlook for the rest of 2022 and done inflation and supply chain considerations.
Our backlog at the end of June was $281 billion year over year same store backlog is up by $702 million or just over 38%.
With increases across most of our operations with notable strength in Texas and North Carolina.
Sequentially same store backlog increased $52 million.
Our industrial revenue was 46% of total revenue in the first half of 2022.
This sector, which includes technology life Sciences, and food processing remains strong and is heavily represented in new backlog and in our pipeline.
Institutional markets, including education health care and government.
Solid and represent 32% of our revenue consistent with last year.
Finally in the commercial sector is doing well.
Without changing mix is now a smaller part of our business is about 22% of revenue.
Year to date construction was 78% of our revenue with 48% from construction projects for new buildings.
And 30% from construction projects in existing buildings.
Service is 22% of our year to date revenue.
With service projects, providing 90% of our revenue and pure service, including hourly work, providing 13% of revenue.
Year to date service revenue is up approximately 33%.
Including a same store service revenue increase of 15%.
Overall service continues to be a consistent and growing source of profit and cash flow at comfort systems.
And all are 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.
And we are raising our own standards and the areas in the areas of sustainability diversity and governance.
Inflation is widespread and in the coming months, we expect continued challenges in the cost.
And availability of the inputs that we use to serve our customers.
Although conditions are hard to predict in the near term.
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.
She has supply risk and to mitigate these challenges.
We have a good pipeline of opportunities and so far we have been able to maintain activity levels and productivity despite supply chain challenges.
We are watchful of world events and fed tightening.
However, given the ongoing demand our record backlog and our focus in the industrial and institutional sectors.
We anticipate continued strong earnings and cash flow in the coming quarters.
This month marks 25 years and comfort systems USA was formed.
As we look ahead, our priority is to preserve and grow the best workforce in our industry.
So we can continue our legacy of constructing installing maintaining repairing and replacing our nation building and then helping our communities achieve sustainable growth.
We are optimistic about 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, we are grateful for their dedication and we are committed to develop and reward our unmatched team members.
As they serve their communities.
I want to end by thanking our 14000 employees.
Their hard work and dedication.
I'll now turn it back over to Kate for questions. Thank you.
We will now begin the question and answer session to answer a question you May Press Star then one on your Touchstone song.
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My first question is from Julio Romero with Sidoti. Please go ahead.
Hey, Good morning, Brian Bill Julie Trent.
Morning morning.
Hey, so I wanted to start on the top line.
You mentioned for the remainder of the year you expect.
Same store sales growth in the range of 10% to 15% for the remainder of the year how much of that do you think is going to be increased activity versus cost pass throughs.
So that's a that's a really good question what are the reasons I mentioned, our same store headcount increase in my prepared.
Script was because to help people dimensionalize that so in the in the second quarter, our revenue was up.
25% same store or same store head count was up about 10%.
You know we have a big group of temp workers at any given time that was up by a little more than 10%. So my best estimate is that in the second you can't.
We don't know what would have happened without all of the craziness with supply chain, but my best estimate is that about half of our growth.
Same store, a 25% growth roughly half of that was just asked.
Doing more work irrespective of inflation and the other half was driven by inflation for the rest of the year.
I don't have a better you know.
I don't have a better estimate than that it's hard you know theres a lot of moving variables right now.
No that's fair and you called out the variables.
As well so I mean.
So I guess, how how would you have to think about maybe gross profit percentage in the second half of the year.
Yeah.
So Julio it's Brian I'll give is broken and then bill can follow on so I mean, if you look at where we are right today, we're really happy.
With our gross profit in the execution.
Getting on projects for sure.
The good news for that is we're relatively still early and a lot of odd jobs. So that was not really driven by any closeouts of pickups in particular, it just good fundamental blocking and tackling that's driving that so I think as we go through the rest of the year.
I think service would mean well maintained strength, particularly with the heat was seen throughout the country. We're really.
So we're extremely busy we're extremely busy in service.
And I would anticipate that I.
I don't know how many closeouts would get this year, but we will maintain our and the range will currently and I think through the end of the year builds or anything yeah. So we were 17, 2%.
A year ago, we were 17, 7%.
That range is good the 17% to 18% range, we've been asking ourself that right at the heart, there's never been a harder time to predict that.
Typically our second half gross profits are higher than our first half gross profit, but typically we're not we have a larger proportion of our jobs that are going to be getting to close out more of those closeouts.
John the big jobs that are really driving us are slipping into next year. So I think the best guidance. We can give to people is that you know.
<unk>.
That same range 17 to 18.
And on these revenues, obviously that kicks out a pretty good a pretty good result.
Yeah, No that's helpful and I guess, just maybe last one for me is on the on the new revolver, maybe any comments on that.
You know how the increased debt facility.
Does anything with regards to capital structure and uses of cash et cetera.
You know so it's nice to have a much it's a it's all revolver.
The flexibility that we obtained was extraordinary for things like if we chose to do big acquisitions or buybacks, we have really unprecedented flexibility to do that.
Better pricing so the pricing grid.
Unambiguously came down which was already pretty low.
We moved to a net leverage ratio as opposed to a total leverage ratio, which is much more we already we were already crushed.
Our covenants are already very very friendly, but we and we moved to our interest coverage ratio instead of a fixed charge ratio.
Both of which give us extremely good opportunity I mean, we really.
It really really easy to meet covenants, given how we run our business. So I don't know, we're really thrilled we think our timing was really good as well we know a lot of our bankers are telling us all the clients are and they're about to do a renewal I think we just got lucky and did it.
Right when we should've.
Got it.
Thanks for taking the questions and I'll pass it all right. Thank you.
The next question is from Brent Thielman of D. A Davidson. Please go ahead.
Hey, Thanks, good morning, guys.
Morning, Brett I guess.
Brian or bill or I guess first question is just.
You touched on it a little bit.
It sounds like Youre getting booked sort of further and further out and I'm trying to conceptualize just kind of the.
The burn rate on this backlog right now and the other element I guess, that's that's in there is sort of the inflationary component to the dollars of backlog you report. So I mean any help in terms of how you expect.
It kind of burned through this backlog these large jobs you've got.
Yes, so I think.
Our burn rate is going to be pretty typical you know our average size is still roughly 777000, so well burn a large chunk of it in the next six to nine months as usual.
About two thirds to 70% or so.
But we are you know obviously one of them were upheld through 2023 with some of these larger opportunities. So I think the pace that we're burning it is as good and it's a it's a good mix for the labor and the size of our operating companies that have the work.
So I think at this point, we're really we're really happy with the burn rate as we've got it forecasted build right and you know our backlog is going to be very big.
At a moment when we're on average early in jobs right because that means there's more on average work left to do.
Unusual for the number of jobs, we have right. So we keep saying that our web schedules or gum that that's one of the reasons why.
We're pretty comfortable that we have the manpower to do this work, it's a pretty eye popping.
Pretty eye popping increase in same store backlog.
But.
There are things that are making that accentuating that backlog currently the other big thing that's accentuated in the size of the backlog since its measured in dollars is the inflation.
So.
Pat.
Manpower essentially their timing.
I think they think they've got it exactly right, let's see they've got a pretty good track record.
Second question was on.
Maybe to follow up on that.
How do you when you're booking a $1 billion plus a quarter here. It sounds like your markets are still really strong I mean, how do you think about.
Our backlogs are the bogs as we moved through the rest of the year.
Well I think if you look at how much we're burning them right now I think the backlog will probably price stayed pretty steady knowing how many opportunities are out there I don't think we'll see.
An increase in it.
We're burning as you can tell are extremely high right.
My book, the Bruins over one for the quarter.
And I think we'll hold that Brent down at least for the next couple of quarters, we don't know when it'll happen, but there'll be a moment when material in.
Material costs moderate at some level I believe and obviously that will moderate the dollar amount of our backlog, but we think and we think the demand for our labor.
Foreseeably very very really very very robust honestly.
As far as.
Backlog is dollar denominated so when you're predicting it there are variables in there that don't really matter for how much money. They made that we make.
But they do matter, who are like sort of what our revenue how much revenue do we try to focus on is gross profit per per hour worked right now.
Sorry, and just to follow on that.
The type of work, we're winning as a type of work we're good at.
So it's really in our wheelhouse so.
Obviously, the guys are doing a great job managing it and execute it.
Yeah absolutely.
Maybe just one more for me.
The mechanical margins just quarter over quarter, I guess that would have typically thought they would pick up from the first to the second quarter.
Looks like that did happen in electrical but I guess any other color around that.
Terms of the quarter.
Quarter over quarter decline.
There were not meaningful.
Page.
Essentially what you had was I think people are dealing with higher cost materials and I think I think people are.
I know really people are being very very careful with how they recognize profit right now, they're really making sure.
They got the money and they need for all of the all of the variables that are out there.
And you know I do.
No no. It's perfectly the question is is mechanical healthy.
Very very healthy I will also say this the.
The shift in job size and in new work is bigger than mechanical than it is in electrical because mechanical or electrical division already had really.
A much higher proportion of their work was already.
What we are shifting to as a company. So there's less of a shifts with them. So some of that is always up some of that was mix I'm sorry, if that's not soon.
On the electrical front run it we were just.
We really had good steady state improvement.
I mean, the companies that have joined US are really strong and in the work. They have is good at it's just as bill said it tends to be bigger.
And they're.
They're just doing a doing a really good job of doing it right now.
You know I would say.
There was a lot of new construction and it became started being worked on in mechanical this quarter, yes look at our that's where we look at our revenue rate revenue up 25%, it's not because we ran an extra service calls.
Yep Yep, Okay, well I appreciate it guys congrats on a strong quarter alright, thanks, Brian .
The next question is from Sean Eastman Keybanc. Please go ahead.
Hi, guys, great update here and thanks for taking my questions.
I just wanted to round out the margin discussion we've got some good color on gross margin but.
Slightly.
The SG&A leverage in the second quarter was.
Quite notable.
I just wondered how to think about that on the 10% to 15% organic growth in the second half.
Maybe to try and push you guys a little harder I mean as you know.
Uh huh.
Flat operating margin potentially in the range of expectations for the full year.
Any thoughts around those last few pieces of the puzzle there would be helpful. So so so.
SG&A went from 12, 3% of revenue to probably an all time low at 11, 7% of revenue you can see we had fantastic absorption of over.
On these jobs.
Really no reason to think that won't continue I don't think it gets a lot better because like we said we have tougher comparables.
A year ago, we had higher revenue in the second and third in the third and fourth quarter, because we were coming out of it.
Started to come out of Covid, So we had more comparable absorption.
But I I think I.
It might get my best guess, if I'm being honest is that that will.
11, 7% is probably a good number it probably can do well, we'll keep we'll keep the absorption we've got hard to see how we get.
Much more yeah.
Because yes, comparables are turning a little harder for us on the revenue side.
You got to pay people.
Okay, great great and just in terms of the updated message on.
The supply chain challenges I mean, clearly persisting in terms of.
Operating conditions.
But just after.
<unk> some of the bigger busier summer months are you feeling better or worse about comfort systems ability to manage through that sort of unscathed.
Well I mean, I think right now.
The folks that are running on this work, they're doing a tremendous job.
Managing the supply chain, Sean as you know as we've talked about it it's a day to day event.
And if you just get a little bit more specific if you talk about pipe valves and fittings, we're seeing stability there in terms of pricing.
You know what availability.
Stuff. This challenge is something that has an electronic chip in it like a vehicle a big equipment.
You know this is a day to day management process, it really hasn't slowed us down in a meaningful way.
Yeah.
But you know we don't there's no there's no secret sauce here, we're staying close to your vendors customers being transparent.
And getting ahead of it as best we can.
And a number of them.
Yeah.
Got it.
Okay, and then and then on the industrial.
Yeah. This has been a great growth story for a number of years now.
How would you characterize it.
Yes.
In your discussions with the customer base there how.
Sensitive those capital programs are going to be around the <unk>.
Rotter macro.
How is that.
Industrial growth story evolved at all I mean.
You know we've been talking about data centers for awhile pharma food.
But now we're hearing more about battery and semiconductors.
Sort of any evolution that youre seeing.
Come through as we just think about the next couple of years around this story.
Yes.
You know so so these those types of customers. They don't worry about they don't have financing problems right. They've got all the time. So the question is do they have the confidence to build and.
And generally speaking I think there is really really good reason to think that stuff there that they're building is going to be needed.
Obviously battery in semiconductors, right, but even even data I mean, there is unless you know so far because it happened I guess it could so far theres no turn away from data, there's no turn away from catching up on the food processing side Pet foods strong.
So far.
No.
It's gonna have so I'm going to turn it we can't use it hasn't happened yet.
And there's no indications we're still seeing.
A lot of very early us participating in these opportunities Sean so as far as we know right now there is no let up.
It hasn't even really kicked it right the battery hasn't really even kicked in yet theres upside in hospital. So even if there is weakness in some other areas. You can really you can look and see where others.
Other things that you feel pretty good at and add onto that we're seeing good strength in education, our backlogs up in education.
We're still seeing very good opportunities at the University level as well in addition to the others you mentioned.
And then of course service continues to chug, along with healthy growth maybe.
As you know a lot of optionality around around the growth profile on a go forward.
And you know modular.
It's broken up pretty nice too.
Yep Alright, good stuff guys. Thanks for the time alright. Thank you.
Yeah.
The next question is from Adam Thalheimer with Thompson Davis. Please go ahead.
Hey, good morning, guys great quarter.
Thanks.
Hey, Bill can I, just keep going there on the on the modular what what percentage of <unk>.
Revenue is modular now and what's the.
Okay.
Salary growth you're seeing there.
But it won't be far off the 10% I don't think I've seen that yet, but I will say that the astounding because the rest of it how much the rest of it went up right it's keeping pace.
Right now the comfort.
How big you are as a part of comfort.
As a matter of how fast you can grow because everybody else is every other way you can look at the business is growing so fast that.
You can you can grow by 10% and shrink as a proportion of revenues so.
They're keeping pace and there is really really good orders coming out of attack.
And the bio the bio space. These guys. We've added square footage so in the modular space, both in North Carolina, and Tennessee, We've added capacity this.
We're actively adding capacity as we speak.
So you know, they're keeping pace and that's pretty amazing.
Okay.
The 10% to 15%.
Organic revenue growth in the back half of this year, what do you. What's your best guess on what that moderates to next year.
Oh, you're going to have to tell me, what's going to happen with inflation, but.
Let's assume inflation flattens out.
My guess is that moderates to.
I it moderates to mid single digits because.
Honestly, our we can only grow our workforce so fast right now by the way if prices start to come down right prices, you know and I don't mean dropped the floor drops out, but China is not buying as much stuff there reasons to think.
The supply chain doesn't keep gummed up forever, especially for certain very important cost item.
You'll see backlog come down you'll see revenue come down but of course, then we'll look like margin geniuses right. We're never whereas you know we.
We don't really care about revenue, we care about how much money, we make and we think we can make a lot of money as far as we can tell.
Great.
Last one for me I was trying to.
Model.
Electrical revenue.
Because if you had 241 million in Q2, which is a really strong number had to be a record.
Well I guess I had the the acquisition in there too, but what that 241, what does that go to in the back half.
And if you figure that out let me know [laughter]. So here's what we have going on we mode a gigantic.
Wonderful gigantic company in Texas.
For a few years and you know that.
At first they shrunk a little they then become more profitable there back to really serious growth very profitable growth, but we bought some more electrical then you know sometimes when we buy a company. There's a period of time when they historically if you look at like our seven biggest acquisition to last seven or eight years five of the seven.
Shrunk a little bit in the first year or two all of them are bigger than the day, we bought them by a lot today with higher profit margins. So you've got two things going on and we got one we've got one big company coming on strong.
Really in another yeah, yeah. So there's a big there's a really interesting mix right now electrical is new for us, it's hard to predict but I'd take the over.
We're going to get growth out of our logic around the company that's growing is going to win.
I'll take the over but it's really hard to bake, there's a lot of things that can happen, but I tell you what will happen.
Unless with whereas we can tell the new higher margins are good and.
And we're really focused on that and improve in margin in the electrical business Adam.
We've been you know steady as she goes but I hopefully, we'll keep doing that I'd be more I'd be more comfortable predicting.
Good that somewhat improving the electrical margins that I would predicting their revenue it's hard to predict their revenue their margins are.
Well positioned yeah yep.
Do you think you'd get to parity at some point.
Oh I think on the construction business, we are at parity, we're pretty much there on <unk>.
If you take the size of the jobs decides of jobs or whatever.
For electrical to have prolexic taken as a whole to have parity with mechanical taken as a whole electrical gotta be doing better because of mechanical is more service yeah, but keep in mind on the operating income line I think we're at parity there.
SG&A is notably less because that service business has salesmen in commissions.
The transactions and billing departments and dispatchers, you know what I mean so.
And our mechanical service will always be bigger than electrical service yeah. Good because it just did have moving parts moving parts wear out right.
So I don't know that that's even a I hope not because here's what I hope I hope electrical gets to where mechanical is today, but mechanicals gotten farther out on the ground.
Hey, and then on the.
How does the accounting.
Work are you.
Are you pulling less profit from the mechanical like yours large mechanical jobs, just because they're so early and you have supply chain concerns.
And the question I'm going to leave it for Brian .
No no.
A bigger job well it really any job early on.
What happens is you bid a job at a certain gross margin you have a handover meeting where the guys who are going to perform the job.
Take ownership.
Of the job and what the costs are they load the job at a margin that everybody agrees is a reasonable margin to started out but when they do that they leave contingency in the job early on because you straight up don't know how much it's going to rain you don't know whether the drywall guys going to be there whether it when you need when its ready when we are ready to go.
So will other people would be ready to go there is many things you cant control. So early in a job you carry more contingency therefore the job.
On average for comfort since the beginning with no exception in our whole history on average jobs have lower margins at the beginning and we have on average gain over the course of the year. We've never had a year, where we didn't have net gain across our jobs.
And right now.
You might imagine people are undoubtedly being.
Being more careful than usual, but theres a reason there being more careful they don't know about their supply chain labors Labor's tight you know so.
The answer is yes.
Yes, it's we carry jobs that have added more we've carried out we carry jobs carefully early on because if you don't you only have to go out of business. Once and then you got a good thing.
We've never bought a construction company.
That didnt have net pick up in their jobs, because anybody who didn't have that would have a year, where they went out of business.
So very long ago.
It's a very long answer, but not a lot of course of course, yeah yeah.
And then when did the but the large jobs could you talk about starting a lot of large jobs in the in Q2 when do those get to the later stages.
I think some will be the fourth quarter of this year, but most of that you'll see I think in the first the first yearly certain quarter really throughout next year. Yeah. Throughout next year, we'll get back to a normal mix of Closeouts and.
And younger work.
Okay perfect. Thanks, guys separately on the last one in the queue.
All right take care Adam Thanks.
Thanks.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Brian Lane for closing remarks.
Okay. Thanks in closing I really want to thank all of our diligent employees again, we really appreciate all the hard work you do I want to thank everyone for joining the call. This morning.
As you can tell we are very excited about our opportunities and we are optimistic.
Both the second half of this year and beyond hope everybody enjoys the rest of this summer. Thank you. Thanks everybody.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.