Comfort Systems USA Inc (FIX) 2021 Q3 法說會逐字稿

Good ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2021 Comfort Systems USA Earnings Conference Call. (Operator Instructions). Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker host today, Julie Shaeff, Chief Accounting Officer. Please go ahead.

Thanks, Olivia. Good morning. Welcome to Comfort Systems USA's Third Quarter Earnings Call. Our comments this morning as well as our press releases contain forward-looking statements within the meaning of applicable securities laws and regulations. What we will say today is based on the 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 comfortsystemsusa.com.

Joining me on the call today are Brian Lane, President and Chief Executive Officer; Trent McKenna, Chief Operating Officer; and Bill George, Chief Financial Officer. Brian will open our remarks.

Okay. Thanks, Julie. Good morning, everyone, and thank you for joining us on the call today. We are happy to report a fantastic third quarter. We earned $1.27 per share on revenue of $834 million. Same-store revenue grew by 9% compared to the third quarter of 2020 as work and bookings are returning as COVID challenges decrease.

Our backlog was over $1.9 billion this quarter, which is a $270 million same-store increase over this time last year. Our free cash flow continues to be strong, and yesterday, we increased our dividend by 8%. Our essential workforce continues to perform at an outstanding level and we are grateful for their strength and perseverance during these challenging times.

For the third quarter, we closed our acquisition of Amteck, which focuses on electrical projects and service in Kentucky, Tennessee and the Carolinas. Amteck brings an exceptional set of capabilities and relationships and a strong reputation in industrial markets such as food processing. We are thrilled to have them as part of Comfort Systems USA.

I will discuss our business and outlook in a few minutes, but first, I'll turn this over to Bill to review our financial performance. Bill?

Thanks, Brian, and hello, everyone. This will be pretty brief. Revenue for the third quarter of 2021 was $834 million, an increase of $120 million or 17% compared to last year. Same-store revenue increased by a strong 9% with the remaining increase resulting from our acquisitions of TEC and Amteck. .

Gross profit this quarter was $159 million, a $12 million improvement compared to a year ago, while gross profit percentage was 19.1% this quarter compared to 20.6% for the third quarter of '20. Our gross profit percentage related to our Mechanical segment was strong at 20.1% and margins in the Electrical segment have increased significantly compared to last year.

SG&A expense for the quarter was $95 million or 11.4% of revenue compared to $91 million or 12.7% of revenue for the third quarter in 2020. On a same-store basis, SG&A was down approximately $2 million, primarily due to tax consulting fees that we incurred in the prior year. Our year-to-date 2021 tax rate was in the expected range at 24.1%.

Net income for the third quarter of 2021 was $46 million or $1.27 per share. This compares to net income for the third quarter of 2020 of $50 million or $1.36 per share as last year included a $0.17 benefit that resulted when we settled tax audits from past years. Excluding that discrete item from last year, our earnings per share increased by 7% compared to the record level of a year ago.

For our third quarter, EBITDA was up significantly to $82 million, an increase of 15% over the prior year. And through 9 months, our EBITDA is $188 million. Free cash flow in the first 9 months was $139 million as compared to $199 million in 2020. The COVID-induced work slowdown and some temporary tax benefit created unprecedented cash flow last year. Our cash flow this year is robust through 9 months, and we expect continued good cash flow although we are likely to continue to deploying some net working capital to start new projects in many places.

In addition, we will be paying the federal government an extra $16 million of payroll taxes next quarter that were deferred under the CARES Act in 2020. Ongoing strong cash flow has allowed us to reduce our debt faster than expected while still actively repurchasing our stock. Since the beginning of the year, we have repurchased 346,000 shares, which is almost 1% of our outstanding shares at an average price of $73.69. Since we began our repurchase program in 2007, we have bought back over 9.6 million shares at an average price of less than $22.

Brian mentioned that we closed the acquisition of Amteck. Amteck is reported in our Electrical segment, and it is expected to contribute annualized revenues of approximately $175 million to $200 million and earnings before interest, taxes, depreciation and amortization, of $14 million to $17 million. However, because of the amortization expense related to intangibles, the acquisition is not expected to contribute to EPS for the next few quarters.

That's all I have on financial, Brian.

All right. Thanks, Bill. I am going to spend a few minutes discussing our backlog and markets. I will also comment on our outlook for the remainder of 2021 and full year 2022.

Backlog at the end of the third quarter of 2021 was $1.94 billion. Our sequential same-store backlog was up slightly, which is great by the end of the third quarter due to the heavy backlog burn this time of the year. Year-over-year, our backlog is up by over $500 million or 36%. Same-store backlog increased by 19%, a broad base increase.

We believe that the impact on activity levels related to COVID-19 have now stabilized and we expect to continue seeing good trends in work availability in the coming quarters.

Industrial customers were 43% of total revenue in the first 9 months of 2021. We think this sector, which includes technology, life sciences and food processing will remain strong for us as Industrial is heavily represented in new backlog as well as in our recent acquisitions.

Institutional markets, which include education, health care and government are strong and represented 33% of our revenue. The commercial sector is also doing well, but without changing mix, it is now a smaller part of our business at about 24% of revenue.

Year-to-date, Construction was 77% of our revenue with 46% from construction projects for new buildings and 31% from construction projects in existing buildings. Service was very strong this quarter, and our increasing service revenue was 23% of our year-to-date revenue with service projects providing 9% of revenue and pure service, including hourly work, providing 14% of revenue. Year-to-date, service revenue was up by 11%. And with our continuing strong margins, our service earnings were up by a similar amount. Service has rebounded as buildings are open and profitable small project activity is back. Overall, service continues to be a great source of profit for us.

Finally, our outlook. Our backlog is at record levels. Project development and planning activities with our customers are continuing. We are paying more for materials, but so far, our teams have coped successfully with challenges in material availability and cost. We are closely monitoring material shortages and costs and are taking steps to add additional protections on new work.

Vaccine mandates by certain customers have post challenges in our ability to pursue certain work. All the staff are maintained scheduling on work that is subject to such mandates. So far, we have been able to meet our customers' requirements. However, the occupational safety and health administration, OSHA is drafting an emergency regulation on vaccinations and it is impossible to predict the scope, timing and impact of the new regulation on us or our industry or on the U.S. economy.

The underlying trends in customer demand and opportunities are very positive. And so despite challenges, we continue to anticipate solid earnings and cash flow for the remainder of 2021, and we feel that we have good prospects for 2022. Over the last few years, we completed a series of transformative acquisitions that have built upon our unbroken history of profitability and cash flow to increase our scale, deepen our exposure to complex markets, including industrial, technology in pharma and expand our recurring service revenue. Each investment has strengthened and expanded our unmatched nationwide community of skilled workers.

We are also experiencing increasing benefits from our substantial and ongoing investments in training, productivity and technology. These acquisitions and other investments have laid the foundation for the current strong results and gives us confidence as we move forward. Above all, we are mindful of the ongoing challenges that our employees across the United States continue to confront and we are deeply grateful for their perseverance. We are committed to providing our workers and thus, our customers with unmatched resources, opportunities and support.

I will now turn it back over to Olivia for questions. Thank you.

(Operator Instructions) Our first question is coming from the line of Sean Eastman with KeyBanc.

And next question in queue coming from the line of Adam Thalhimer with Thompson Davis.

Congrats on a great quarter. Is it too early to have an outlook on just core non-res growth next year?

Core non-res. Yes. I mean I would say that we have a good opportunity to achieve better growth than we've achieved in the last several years. I think we would expect mid-single digit growth, maybe with a little upside. We just had 9%, but that was also -- a year ago, we had some COVID effect still even though our third quarter last year was surprisingly good, mid-single digits...

Yes, I'm -- we're optimistic going into next year, if you look at how much our service has grown, the strength of our backlog and still, there's a lot of opportunities we are looking at. So 2022 will be in good shape.

What are you seeing on the M&A front?

So we keep saying that we'll probably take a pause after we do these deals that are big for us. And I think that, that's less likely now. There are some people we're talking to. So we're very mindful of changes in the capital gains rate. So I think we have an opportunity to do some transaction, a transaction or some transactions in the next few months. I will say that we're pretty much only doing relationship deals right now, people we've talked to for a long time, who now have an interest. I think maybe it's a good time to sell with tax changes coming.

We're not engaging in processes or bidding for companies. They're very -- it's a very frothy market for people chasing assets that are -- the kind of assets that can be put in an auction and we're not doing that.

Yes. Adam, as you know, Bill does all of our deals. And if we continue on what's happened in the last 10 years, it will be good for us.

Okay. And then lastly, you had a nice uptick in backlog within Electrical. Can you talk a little -- was that Walker? Can you talk a little bit about the outlook for Walker?

So I'll answer that one. I mean Walker has done a terrific job this year. Basically, it will double their margins. They are in Texas and there's plenty of opportunities in Texas, particularly Dallas, San Antonio and now Houston has picked up pretty steadily. So I think going forward, the combination of their backlog and opportunities, I think Walker is well poised to have a very good end of this year and a good 2022.

Our next question coming from the line of Brent Thielman with D.A. Davidson.

The service work looks like sort of collectively grew 10% this quarter. Brian, I just want to get your thoughts on whether you think you can sustain the sort of growth rates in that side of the business going forward?

One thing I would keep in mind, remember, service was kind of cut -- shut down a bit in the middle of last year. So this is a combination of a little bit of bounce back and really good growth.

Yes. I think, Brent is -- you've been with us a long time, and we've continued to invest in service, both on the sales front and execution. So we will continue to grow that business pretty steadily, mid-single digit, a little bit more as we go forward. So that is a real source of strength now that we're consistently getting performance from.

Brian, any -- or Bill, any thoughts on allocating more capital then you typically have to building up that business or continue as is?

I think we're going to continue it as is. So that we make sure that, we keep our capability in line with customer expectations. We don't want to disappoint anyone. So we believe slow and steady growth, make sure we keep our employees and our customers happy, we can deliver a top shelf service to them.

Right. And there's 2 ways we deploy capital. One is investments in the existing business. We don't leave any opportunity behind to invest in the existing business. It's a very capital-light business, but we do buy capital, we've really invested in like handheld, various technologies. And we also really invest in training like we have had -- we've been on -- we've just really, really been into training in all parts of our business and maybe especially service for years now.

So we don't really -- there's not a dollar I know if we could invest, that we don't invest. When it comes to acquisitions, we really just buy the best available company, and we love it. It is definitely a plus if they have a nice service business.

But if they can also go build complex food plants like Amteck, we love that, too. We just keep -- try to keep doing what works. And we love -- we love great workforces, complex capabilities geographies where you're really -- people have to drive a long way to find somebody who can do what you can do. Those are the kind of things we love.

Okay. That's great. And I think this is kind of a follow-up to Adam's question, but you talked a lot about the industrial vertical, and it's obviously been fantastic for you. I just want to get a pulse on some of these other markets you're in, and I know they're shrinking as a percentage of the pie, but looking at, at this sector, this quarter, areas like education were down, a couple of other verticals in there that were down. Do you think we'll be in a place in 2022 where some of these areas see a more material turn?

Yes. I just think it's down percentage, but they're actually growing in real dollars. Education has been pretty consistent for us, particularly at the university level, as you know. We got some K-12 work, and I think you'll get some IQ opportunities as we go on. Medical's picked up for us. We got some good growth in our backlog in medical. And in commercial buildings, it's more on the service and tenant fit-out type work. So the other markets, a good slight growth with industrial, obviously, with the most growth opportunity. Bill?

I agree.

Okay. Just the last one, I guess, is just on the electrical margins, I mean you've seen some real stability here this year in terms of what you reported there. And any thoughts kind of going forward, these are really -- sustain level?

Yes. So this is an opportunity for Comfort Systems, right? So Walker have very significant improvement. But keep in mind, we've also bought some really good electrical companies, and they are now in that segment, and they bring in very, very good margins. So it's probably -- it's unlikely probably that we will get to overall electrical margins that are as high as our overall mechanical margins on average over long periods of time, in part because of the service component is a little bigger in mechanical. But I really like our opportunity to continue to pull a little bit of the improvement out of electrical.

Remember what Brian said about Walker has got good opportunities, and that's really true in all of our businesses, and it's true in electrical, and they probably -- as a segment, it probably has a little more room to get better.

Yes, Brent. Just -- I mean we're really happy with the electrical business and what we see the future of. I think that's going to be a really strong element for Comfort Systems on a long-term basis.

Our next question coming from the line of Julio Romero with Sidoti.

I wanted to ask about the order trends. They've obviously trended very nicely. We've seen sequential growth for 4 straight quarters. How do you expect to see orders trend over the next couple of quarters? And are you, at this point, kind of turning down any projects at all?

Our booking season usually is the winter, and that's not changed. So we have -- I think as far as the timing, we never -- we can't really control when the pieces of the paper gets finalized. But over the next 6 months, I think we have -- the bookings should continue to get better, the next sort of the net bookings and pricing is good in those bookings.

We are -- when we're busy, we're picky. And also right now, there are some places where we're not pursuing work where there might be a vaccine mandate, although you were hearing more about that 30 days ago than you are now. But in part, we're doing that because we can, right?

Yes. Julio, just to follow on that, I think the discipline we're maintaining on no go, go no go, what our projects to take. I think the operating folks are really doing a terrific job about what opportunities to pursue and maybe wants to pass over. So I'm really pleased with how that's going.

Got it. Yes, being picky is certainly a good thing in this market. And I guess you mentioned not being as attractive to areas where there may be some vaccine mandates. Are you seeing any other kind of bottlenecks on the labor side, vaccines or any other bottleneck that you may be seeing?

So there are places with certain types of customers we're talking a lot about vaccine mandates, especially 30 or 60 days ago. And we are making good progress in seeing more of our workforce vaccinated, but our workforce is, they're in a cohort that has lower vaccination rates than the national average.

And so when we look at work that requires a vaccine, we look at what we have in the way of availability and which -- what our workforce looks like, and we decide whether that's a good project to pursue, and we take that also -- have to take that into account in our pricing. As far as other bottlenecks, our bottleneck is always labor, right, Brian?

Yes, it's always a labor, Julio and we -- luckily we have a lot of folks working here and they're managing across companies as best, we're constantly in the market, looking for good people. So we're managing it like we've done for 50 years.

By the way, just about vaccine mandates, this is not a Comfort Systems' issue, right? This is a U.S. United States issue, if the federal government when they promulgate those regulations decides to sit down somewhere between 15% and 40% of our blue-collar workforce that's going to have -- that's going to affect the nation. Comfort Systems, actually, we're well positioned for that. 25% of our revenue is in Texas. Our next biggest state is Florida.

So these are -- we think we're actually very well positioned for the worst case of that compared to anybody you could compare it to that we know of. But having said that, it does feel like it's trending towards sort of, there are more people getting vaccinated and there's customers are sort of looking at different ways of keeping their job sites safe.

Got it. So I guess any industry pain points where everyone's feeling labor tightness might in some way play to your advantage on a competitive balance?

It happened in the past.

Yes, it happened in the past. And Julio, we're a good employer. We're good to work. So we're very attractive to folks out there that want to do a mechanical electrical plumbing type work.

Congrats on a nice quarter and best of luck in 4Q.

Thank you very much.

And our next question coming from the line of Sean Eastman with KeyBanc.

Can you guys hear me this time?

Yes.

Just wanted to keep you on your toes there. So just out of curiosity, what -- do you have a sense for the vaccination rate of Comfort Systems workforce?

That's really -- the thing about Comfort is there isn't a workforce for Comfort Systems. There's workforces in Massachusetts and there's workforces in Florida. And so I would say that overall, I'd say we're definitely above our -- people think our industry is about 50% vaccinated.

In my opinion, we're above the industry average for that. We've done a lot to try to make that happen. And also, sometimes people don't necessarily -- they can be vaccinated and not reported, right? There are times when you're in a melee where you don't want to admit that you're vaccinated. So It's hard to measure.

But in terms of that, Sean, we're making it really easy for folks to get vaccinated that are working here.

Okay. Interesting. And then a higher level one for me this -- over this past quarter, we saw a few of the big OEMs highlight these huge addressable market opportunities surrounding energy efficiency that it seems to be in addition to the IAQ solutions demand. And just considering all these net zero pledges coming out of both the private sector and the public sector, I wondered if that's something Comfort Systems is positioning around?

I actually -- we don't usually sort of talk about huge activities. But our guys, we're in a lot of geographies that with the right expertise and capabilities to benefit from some of the trends that this is driving, for example, electric vehicles. Historically, Comfort is not involved in the automobile industry. But if you need to build batteries, if you need sort of sophisticated electronics, an awful lot of that is right in our wheelhouse, and it's right in the geographies that we're in.

And we're actually -- like I've been in planning meetings lately just at the subsidiaries, where they are starting to the opportunities like that with code names on their boards. And so I do think anything they give the United States a reason to reconfigure things and to redeploy things, we're the guys who can help you do that.

And Sean, this is in theory. We are actually working on a project right now for the maker of electric batteries, so.

It's real life. We got real work with revenue and profit. So you put that on top of life sciences, which are good. And then various other types of technology -- we're in technology, and a lot of this is technology-driven. So we think we're actually pretty -- we think they are good. In addition to internal air quality, we think there are other good things right in the heart of our complex sort of industrial expertise that are being -- that have good prospects because of these changes.

And what's great about our workforce is we're very adaptable to work on multi-type facility, Sean. It's a real strength of ours.

Okay. That's really interesting. And I wanted to check in on the modular business as well. I mean, I felt like the longer-term play there was helping to address the sort of structural labor shortage. Obviously, that seems to be quite an acute situation right now. How is that playing out for you guys? I just wondered maybe on the flip side of that, that business could be a little more susceptible to some of the capacity constraints just around shipping and things like that. But wanted to check back in on that business.

Yes, I would say we definitely have had to put more money in just shipping and quotes for shipping. A lot of what we sell is -- some of the biggest stuff is sort of the buyer ships it. Also, it's an opportunity to improve your labor utilization on certain types of projects. It's 10% of revenue, it was a nice -- it was very profitable this quarter. It was you'd like -- I might have highlighted how well it did this quarter, but pretty much the whole business did well.

You have been highlighting everything, but we had a really nice quarter in off-site construction and modular and we feel like we're doing a good job beginning to find new customers and help them understand how this can help them. But this is the kind of -- this is a strategic thing that you do with 5-year plans, not 2 quarter plans. And we've got some really, really good people working together between our 2 big off-site construction things and they've got a good plan for the coming years. But I mean, we're excited about it.

Yes. And that into the business, Sean, we got great leadership locally, terrific workforce. They're applying technology, advancements in welding, what they're doing is tremendously exciting to me. I love going there. And I think they'll just keep getting better and better.

Okay. Good update there. And then you guys are clearly boasting about the success of the acquisition program here on this call, I think, rightfully so. We kind of touched on how the program has sort of helped position you guys in these growth end markets where you've got these secular drivers, but to the extent you can comment, if you just look back over the last 5 years or even 10 years, I mean what kind of cash returns have you seen from the acquisition program?

I'm going to let Bill answer that one.

That's embarrassing answer. No, the -- it's been fantastic. Like these companies -- so we haven't bought a company of any size since 2008 that hasn't met on average, the projections we have today we bought it. And some of them have exceeded those projections by multiples of what we planned on getting when we bought them. They all -- they actually do better, they also -- they help our cash flow much more than they help our earnings because there's so much amortization in the first few years from these companies and that's one of the reason why...

Now I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Brian Lane for any closing remarks.

All right. Thank you very much. And in closing, I want to again thank our hard working employees. They're doing just a terrific job. We are glad we'll be seeing many of you again in person soon. But in the meanwhile, please be safe. Enjoy the rest of your day, and thank you very much.

Thanks, everyone.

Ladies and gentlemen, that ends our conference for today. Thank you for your participation. You may now disconnect.