Q3 2022 Comfort Systems USA Inc Earnings Call
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Good morning, and welcome to the comfort systems third quarter 2022 earnings Conference call.
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Jim Compton, Julie <unk>, Chief Accounting Officer. Please go ahead.
Thanks, Anthony and good morning, welcome to comfort systems, Usa's third 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 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.
Slide presentation has been provided as a companion to Mark the presentation. That's posted on the Investor Relations section of the company's website found at comfort systems USA Dot com.
Joining me on the call today are Brian Lane, President and Chief Executive Officer, and Bill George Chief Financial Officer, Brian will open our remarks.
Alright, Thanks Julie.
Good morning, everyone.
We had another great quarter with continued increases in revenue earnings and backlog.
And we are really grateful for this success created by our by our employees amid unique challenges.
We earned $1.71 per share this quarter compared to $1 27, a year ago.
Our results. This quarter include a net gain of 10 cents per share related to legal matters and four cents related to tax benefits from prior years.
This quarter marks the first time that we have achieved a $100 million in EBITDA in a single quarter.
Strong activity levels and ongoing cost increases in equipment and other inputs have again produced same store revenue growth of over 20%.
Bookings increased this quarter and we continued to experience solid bidding and planning activity.
Our strong cash flow also continues and is especially satisfying since we are investing working capital to support our growth.
We have also announced an increased dividend to <unk> 15 cents this quarter.
I will discuss our business and outlook shortly but first I'll turn this call over to Bill to review our financial performance built thanks.
Thanks, Brian and good morning.
Revenue for the third quarter of 2022, with 112 billion, an increase of 286 million or <unk> 34 per cent compared to last year.
Our recent acquisitions contributed a total of $97 million of new quarterly revenue and so we had the same store revenue growth of $198 million or about 23%.
That sharp increase in revenue was broad based and was driven by strong market conditions inflation of equipment and materials also contributed to revenue growth.
Our same store revenue increased by 23% in the third quarter and same store employee head count increased by 8% in the same timeframe.
For the fourth quarter. We currently expect double digit same store revenue growth, although there are more variables than usual.
Gross profit was $202 million for the third quarter of 2022.
A $43 million increase compared to last year and the first time, we have ever reported over $200 million of gross profit in a single quarter.
Our gross profit percentage was 18, 1% this quarter compared to 19, 1% for the third quarter of 2021.
The decrease in gross profit percentage resulted from the change in project mix, including the pass through of inflation related of inflated materials and equipment costs.
Gross profit percentage was impacted by a decline in gross profit margins in our mechanical segment.
Paired to extraordinary performance last year, partially offset by a strong increase in the electrical segment, which was further enhanced by a job related litigation gain.
SG&A expense for the quarter was 121 million or 10, 8% of revenue.
<unk> to 95 million or 11, 4% of revenue for the third quarter of 2021.
Most of the dollar increase was from new companies.
Our operating income increased by 27% or $17 million as compared to the third quarter of 2021.
Our tax rate for the quarter was 17, 4%.
During the current quarter, we filed our 2021 federal tax return and we included the R&D tax credit in this original return.
And as a result, we increased our estimated tax benefit related to the R&D tax credit for the current year as well as for the years 2019 to 2021.
That was a gain of <unk> for the third quarter of 2022 that related to prior years.
We continue to view, our normalized tax rate to be approximately 22% to 23%.
Net income for the third quarter of 2022 was $62 million or $1 71 per share.
The $1 71 per share includes a 10% net gain related to legal matters.
<unk> related to the revised estimate for the R&D tax credit related to 2019 to 'twenty to 'twenty one.
Net income for the third quarter of 2021 was $46 million or $1.27 per share by comparison.
EBITDA increased from $82 million in the third quarter last year to $101 million this quarter, a 23% year over year EBITDA increase.
Brian pointed out this is the first time in our history that we've achieved over $100 million of EBITDA in a single quarter.
Free cash flow for the first nine months of 2022 was 137 million include.
Including the $33 million refund from the IRS tax credit.
The first quarter.
This is a strong cash flow considering the investments, we're making in working capital as we fund our growth.
Our debt at the end of September was $381 million and our debt to EBITDA ratio at quarter end stands at 1.2.
We are actively repurchasing our shares in the first nine months of 2022, we have repurchased 425000 shares for a P.
Proximately $36 million.
So all I have.
Alright, Thanks Bill.
I am going to spend a few minutes discussing our backlog in markets and I will comment on our outlook for the rest of 2022 and 2023.
And on inflation and supply chain considerations.
Our backlog at the end of September was $3 25 billion.
Our year over year same store backlog is up $1 $1 billion, 57%.
With increases across most of our operations.
Sequentially.
Our same store backlog increased $443 million.
Which is remarkable for a third quarter as we are also burning backlog at record levels.
In addition to strong demand in technology and other industrial sectors.
An important factor driving our backlog higher is that our customers are committing orders to lock in our labor. So that we can place equipment orders earlier in order to allow for exceptionally long lead times for manufacturers.
Industrial revenue was 47% of our revenue in the first nine months of 2022.
This sector, which includes technology life Sciences and food processing.
Remains strong.
And just very very heavily represented in new backlog and in our pipeline.
Institutional markets, including late including Education health care and government.
Solid and represent 32% of our revenue consistent with last year.
Finally, the commercial sector remains active.
But without changing mix. It is now a smaller part of our business at about 21% 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 was particularly strong during the third quarter.
Overall service is 22% of our year to date revenue.
With service projects, providing 9% of our revenue.
And pure service, including hourly work, providing 13% of revenue.
Year to date service revenue and 674 million a 33.
Percent increase.
With same store service revenue up by 16%.
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 encouraging and supporting our customers.
They seek to improve the efficiency and sustainability of their buildings and operations.
And we are raising our own standards and the areas of sustainability diversity and governance.
Inflation.
<unk> is widespread and 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.
The materials earlier than usual, while seeking to collaborate with customers to shift supply risk and to mitigate these challenges.
We have a very 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 growing demand our record backlog and strength in the industrial and institutional sectors.
We anticipate continued strong earnings and cash flow in the coming quarters.
As we look ahead, our priority is to preserve and grow the best workforce in our industry.
So we can continue our legacy of safely constructing installing and maintaining and repairing and replacing our nation's buildings, while helping our communities achieve sustainable growth.
With the highest backlog in the history of comfort systems USA, we will continue to invest in our workforce technology and execution capabilities.
Two our amazing workforce, we are optimistic about the remainder of 2022 and 2023.
I want to end by thanking our 14000 employees for their hard work and dedication.
I'll now turn it back over to Anthony for questions. Thank you.
We will now begin the question answer session.
Last question you make one star then one on your telephone keypad.
If you're using a speakerphone please pick up your handset before pressing the key.
Your question. Please press star two.
At this time, well pause momentarily materially going to some of our Boston.
Our first question will come from Julio Romero with Sidoti and co.
You May now go ahead.
Thanks, Hey, good morning, Brian Bell Julie.
Morning, starting on the U S.
Hey, good morning, Oh, starting on the revenue the organic growth, it's the second straight quarter of 'twenty.
20% plus growth broke 1 billion in organic sales and.
Sales I should say just talk about the trend line for organic growth ex of cost pass throughs I know you mentioned.
Same store head count of 8% is that kind of the baseline for.
Organic growth.
Yeah, So no I would not say that's the baseline because of course.
We're charging more for those 8% right. So there is inflation in that number and also.
Our temporary labor is up quite a lot by more than 8%. So I think the best.
I'll bet you can't know what you can't know what would have happened without inflation, but our best estimate continues to be that about half of our same store growth.
It is caused by inflation and market conditions and about half of our same store growth is just us doing more work.
You know true underlying growth and as far as the first part of your question about sort of the trend line. So you know we are still we had a a reasonably soft comparable compared to a year ago, we were still coming out of Covid.
The Comparables get a little tougher in the fourth and first quarter, but they're still really favorable comparables. If all you were looking for is the same store revenue growth.
By the second quarter of next year, we'll be comping in for the rest of next year, we'll be comping.
Big numbers, we're posting right now that are up you know as our second quarter was up 25%. So a year from now.
You know depending on what inflation is doing it's much much harder to prognosticate that you're gonna grow from there even if we don't go in and by the way of inflation abate right that that could create at least some of our.
Sort of a turnaround.
Round and that effect, but I would say, we don't think that would mean, we would earn less money in fact, if anything it could be slightly favorable if prices were to get better. So what you would see is you'd see lower revenue growth, but of course, the margins would get better because we'd have less of that material pass through the long question, but the comp.
Located situation as well long answer I'm sorry.
No I totally and I appreciate the comprehensive answer there I'm just.
Just on the increase in bookings, it's up almost $500 million.
Sequentially, just how much of that.
Are you able to parse out how much of that is driven by the larger industrial projects that are kind of committing earlier.
Yeah.
Julio it's Brian so it's.
We got broad based increase in backlog.
To be honest, but for sure. We are we are getting increased bookings and youll see that continue into the fourth quarter, but.
You know the backlog increased quite frankly is is broad based.
Incidentally.
Service was up by exactly the same percentage year over year as construction. So I think it's really it's all across the board that game, but for sure you'll probably see in the coming quarters more of that coming from these industrial bookings because they're just so big and also this third quarters are always strong service quarters.
Understood and then maybe last one for me is on on the segment.
This is the first time that electrical gross margins outpace mechanical is that kind of an inflection point for the electrical segment have you kind of reach.
Some critical mass where you start to see some better operating leverage there yeah, well I mean, we've had.
Pretty consistent steady state growth in gross margins.
I mean, I think we have really terrific electrical companies, we had a challenging job.
A few years ago, they've got helped by a litigation.
For sure, but we have improved significantly better across the board in electrical and I'm pretty optimistic we'll continue to see improvement in the gross margins as we go forward.
Okay very good thanks, very much for taking the questions. Thanks.
Our next question will come from Sean Eastman with Keybanc you May now go ahead.
Hi team fantastic quarter.
Many compliments.
So this.
Kind of early project commitments dynamic that is.
Part of the momentum in the bookings, we're seeing in the quarter.
How would you characterize the duration of the backlog at this point and.
Does this early commitment on orders suggest there is some pull forward in the bookings we're seeing this quarter or is the message that bookings momentum still continues post quarter end.
So definitely.
There's more there's pull forward right I mean, because if they book earlier.
Earlier than they would have been now does that mean, they won't continue to book heavily.
The question is at some point do they stop looking earlier, because the lead times for equipment become less though because the market softens in I think.
There's certainly no sign of that and what's actually happening in our business of course.
We don't know that could change in a month or a year.
Right right now I don't know, Brian it's very robust, it's very robust and you know as ive been seeing a backlog extend.
It's probably the highest number we've had longer than a year Sean so.
We've seen it.
So I think it's actually picked up quite frankly, you know we have companies that aren't selling for 2023 of their full yeah, and if you think about that that's why people are committing earlier because I understand Oh. These guys are getting full if we want a building we better get we better get.
You know and equivalents one thing. He also got a you know the labor right you got to make sure you know they want to make sure we have the people to do it so.
Yes, so kind of fair to say that.
Pretty.
Abnormally high visibility for 2023.
At this point.
Unprecedented breath at least since I know in the 20 years I've been here for sure.
Yes.
Okay got it and then just this notion of.
Locking up your labor resources early.
You guys are kind of the.
I mean, theres a lot of scarcity in the system I suppose but the labor resources is it really kind of core.
Scarce resource in the project lifecycle and I, just wonder how you think about monetizing.
Locking up those resources early particularly in kind of an uncertain cost environment as well.
Well as you might imagine.
If someone in one of the many many cities we're working at is very busy.
If you want them to do work, you're going to have to pay them well for it so archive.
You can see it in our numbers.
You can see it in the results Shawn.
Yes.
Okay.
We're very fortunate here.
You know the operating company level. These folks have a really good handle on the market you're playing in.
In terms of all facets of the business and you know, we're very fortunate with the companies we have today.
Yes, we can we can see that.
And maybe one last quick one for bill on M&A obviously.
Last couple of years has been.
Quite active it's been quite a good story for you guys.
Any message on.
The next one to two years in terms of what's in the pipeline.
What we.
Could expect to see.
It's certainly so we have two things going on in M&A. One is there are people, we've just talked to per years, where friends.
When they are ready to sell wheel. We are there you know we we've worked on it for years and we May you may see some M&A for sure but in general.
We do think that the market is changing that the cost of capital as an effect on what people are willing to help people are willing to invest capital and that there are a lot of companies for sale right now and I don't mean, the company, we usually buy I mean companies owned by private investors.
I'd say, there's three times as many books pitch.
Pitch books on the Street.
I've ever seen so I think at the moment of inflection and I think we're going to be very very careful we said forever.
We don't have to do a deal in any given year right. We just want to create value over a we play a very very long game for this so I.
I know, it's a bit of a mixed answer, but there's really two parts.
I'd say, we're going to be very very very very watchful right now.
It will show on a bill keeps us track record he's had the last 10 years, we'll be in good shape.
Yeah, no no doubt about that thanks, a lot guys I'll turn it over alright. Thank you.
Our next question will come from Adam Palomar with pumps Thompson.
You May now go ahead.
Morning, guys great quarter great.
Thanks, Adam.
Just out of curiosity.
Can you just follow up on that Bill on the three times the amount of books floating around why do you think that is.
I think it's because if you were if you were somebody you were are an investment firm for whom our business really is is inventory right. If you have a lot of inventory you you you might not want to hold that inventory over the next year or do you might one or at least test the market. So I think that it's really astounding quite honestly, maybe I should be.
And out of school, but in general.
Everything is for sale.
It's you know everything that is owned by people who trade businesses.
Seems to be for everything that I know of is or at least testing the market now do I think they're they're succeeding in selling these businesses.
Wouldn't rule it out, but I don't know because we're not super active we we take a hard look at some of the really best stuff not you know, but in general we don't participate in any of that we we like to get to know people over.
Years, right and that's not really how that works without the 19.
Things that other people had been assembling right. We were very very careful we don't we really understand how hard that is.
How hard it is to put stuff together in ways that will last for decades right.
Barry So far we've never bought a company we've never bought a contractor from anybody, but a human being who lives.
Lives and loves it.
We're done.
What what would be the appetite to I mean, you added electrical and you're you're doing well there what would be the appetite to add something else to the portfolio.
Hmm.
Well, there's not much need to.
For the foreseeable future. So it would have to be something we really felt like.
We had.
A reason to expect.
We expect synergy from right.
And by the way we did we added a labor company, but you know in a way that matters to us it creates a new segment.
I think we're just barely getting started with them.
I think we see a lot of opportunity out of them and just continuing to improve and mechanical electrical businesses that we're in I think it is.
You know constant improvement and it's pretty exciting so we'll keep it that I think.
Okay, and then I guess.
Gotta ask one nitpicky, one just on the margin outlook what are your thoughts on margins.
Q4 and next year.
And some of that relates to like that.
Where we were in these jobs when you start to finish up some large jobs that got started over the last year year and a half.
I'm really happy with the margins that were what.
What cranking out right now we are you know.
18, 1% as I said, probably a tree and times yes.
17 have 18 above that I think are really performing well in the field I think we're getting terrific productivity.
I think we can maintain maintain that level you might get a little improvement as you know our service continues to grow right. We're getting some good margin help from there.
But we continue to perform in the field that 18% range is definitely doable and I think that's a really good number for us to be around.
Q4, and next year it might dip down in Q4.
So there's.
Theres a variable here that we don't know which is right now our volumes are lower because of the pass through a very.
In our cost of goods sold.
Materials and equipment are three points higher of that proportion not 3% higher in total about three points of the 100% higher of our costs.
And that has that Amir chosen equipment passes through at a lower margin. So I think what one of the things you could one way to look at it is we think the margins we're getting on our labor right now are stupendous and we would be very happy for them to stay the same forever.
Find that Theres, some mix issues, where if you made me pick I'd expect our margins to be higher next year.
But that's the assumption in that the unknowable assumption is that I'm assuming inflation.
It gets under control.
Okay.
Got it thanks guys.
Take care.
Our next question will come from Brent Thielman with D. A.
You May now go ahead.
Hey, great Thanks, guys great quarter.
Sort of tailed with Adam's question, I think Julio was as well in that.
I guess more.
Around the electrical business, if you just take away.
The inflationary element heavier.
Your longer term expectations for margins in that business changed just given the performance here as of late.
And of course.
What would those be half to half.
You're absolutely right.
The goal of everything we do operationally is to improve rate to improve our margins to improve our productivity efficiency quality safety.
So we're continuing to work on the electrical business. The companies are we've had nice steady state improvement.
We will see you Gotta do it right do you need to talk about it but I think youll see continued improvement we would get to know I really don't know, but I am I.
I'm pretty optimistic about the electrical business.
An improvement and I wanted to say.
It's not that we're now expecting higher margins, we expected higher margins.
Last year and the year before we had a little bit of softness, but one of the interesting things you saw this quarter was we had a gain on a job by job related.
Big job Brigade job related litigation in electrical well essentially what that was was that was an arbitrator, saying oh, yeah. They didn't they didn't fairly compensates you for work you did.
And to the past two years, starting last year really starting the year before we actually did better in electrical that money should be pushed back to them and I think they're new so so.
The margins. They are at now are their normal margins and I think there is some upside in electrical margins now having said that keep in mind the margin youre seeing that 19% has that gain from that.
So the margins if you back out the gain from that litigation win.
There's still a little below mechanical, but they're really right there all kind of.
Bunge, together and I think but I think they can get that it would be the thing yeah. I think there on the construction side I think electrical is every bit as yeah. If not it's every bit as profitable I'm very optimistic about our electrical companies Brett.
Yeah.
Really helpful.
Just a follow up.
Good to get your thoughts that $1 790.
Energy efficiency deduction, I think got revised with the IRS.
Inflation reduction act any thoughts on the potential implications here for the industry.
So we get if you look back at our last several years, we don't call. It out separately, although you can find it in some places if you look carefully we've gotten a few pennies from that right here's what happens with the ones with the 179 D. The customer gets that unless it's like a public company with the public I mean, sorry, a public entity when it's a public entity we can get.
Take that deduction and give them some benefit for it so we've had direct.
Few cents of EPS from 117 90 for a while in addition it.
Encourages people to do more work, especially more renovation work and now they I think more than doubled it. So one of the things we think might happen is at the margin that will create more renovation work.
Which will be helpful to us it.
It may or May not increase we made the direct benefit we get may or may not go up just because it was small to start with it also.
It's easier for somebody to pass a benefit along with its smaller it's possible they'll they'll demand more for it if it gets bigger because there are kind of you know it's.
Not big enough now for them to pay much attention to it but in general it can it can only be a positive, but let me tell you something.
That's just one of many positives in the bigger positive is like re shoring.
So, but it's every you know a lot of things are pointing in the same direction that's for sure.
<unk>.
Oh, Okay. Okay, great. Thank you I appreciate it guys alright take care.
This concludes our question and answer session.
I'd like to turn the conference back over to Brian Lane for any closing remarks alright.
Alright, thank you.
Closing I really want to thank again, a tremendous workforce and it's throughout.
The organization will get tremendous.
Performance, maybe Buddy and I really appreciate it we also really thank everybody for your interest in comfort systems and your time today.
We are grateful for the questions and the interest for sure and so everybody be safe out there and hope you enjoy the upcoming holiday season, Thanks and have a great day.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.