Comfort Systems USA Inc (FIX) 2007 Q2 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Comfort Systems second quarter earnings conference call. My name is Jen, and I will be your coordinator for today. At this time all participants are in a listen only mode. We will be facilitating a question and answer session toward the end of today's conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded for replay purposes. I will now turn the presentation over to Mr. Bill George, Chief Financial Officer, please proceed sir.

Thanks Jen. Good morning everyone. Welcome to Comfort Systems USA's second quarter 2007 earnings call. We want to remind everyone that our comments this morning, as well as our press releases, contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. What we say is based on the current plans and expectations of Comfort Systems USA. Those plans and expectations involve risks and uncertainties that could cause actual future activities and results of our operations to be materially different from those set forth in our comments. You can read a more detailed listing and commentary concerning our specific risk factors in our Form 10K that we filed this past March, as well as in our press release covering these earnings.

On our call with me this morning are Bill Murdy, our CEO; and Tom Tanner, our COO, Chief Operating Officer. Bill Murdy is going to open our remarks.

Thank you Bill, and welcome everyone to the second quarter analyst and investor call. We are very pleased today to be announcing record quarterly results, and before going further I'd like to congratulate and thank our management and workforce, many of whom are on the call, for their truly outstanding efforts in achieving these results.

Revenues for the quarter were $281 million versus $264 million for the second quarter of '06, that's up 6.1%. Gross profit was 18.4% versus 16.1% for the comparable quarter last year. Operating income was 5.9% versus 4.6%, and as we have indicated for a long time, we believe that the operating income percentage that we are capable of is in that range, at the high end of that range.

At the bottom line we had earnings of $10.5 million versus $7.9 million for Q2 '06. In addition, free cash flow was very strong at $19 million. Bill will have more to say on that in a moment.

Our backlog at $720 million is just shy of an all time record, and is up 4.3% from the backlog at the end of the second quarter of '06. That, by the way, is in spite of our purposeful reduction in backlog at our Atlas subsidiary, which focuses on multifamily residential. Tom will have more to say on the backlog in his remarks.

Going forward we see continuing strength, especially in schools and healthcare, hospitality and commercial office pretty much across the country. And also strength in the apartment and condo markets in most areas of the country. We, by the way, continue to book new work in the multifamily sector, though as we've indicated, at a reduced volume in order to stay within our operating capability there.

Outside of new construction I think we are seeing the aging of installed equipment and a desire for energy efficiency converge to provide us lots of opportunities in retrofit, repair and maintenance, and we continue to build and emphasize that half of our business. We believe we're well positioned for the future, both in construction and in service, but nonetheless continue to look to bring on new geographic coverage and capability in both of those areas via acquisition. We may have some things to announce soon in that area.

At this point I'd like to turn the mic back over to Bill George, our CFO. Bill?

Thank you Bill, and good morning everyone again. As you know Bill just reviewed the results, and I want to spend a few minutes to give you a little more financial detail regarding our multifamily sector, and then I plan to comment briefly on a few items individually, including cash, our stock repurchases, investments we are making through SG&A spending, the backlog and our tax rate.

As we projected in our first quarter call, our multifamily operations, located in our large subsidiary Atlas Comfort Systems, continued to struggle. Atlas lost approximately $3.5 million in the second quarter of 2007. Although that is significantly less than the $7 million loss that Atlas posted in the first quarter, it is still disappointing, and still weighed on our quarter.

Revenues at Atlas have reached more manageable levels, and other measures such as cash collections and receivables aging have shown strong improvement. We continue to believe that their results for the second half of this year will approximately break even, and that they will contribute positive earnings next year.

Our operations were very successful in generating positive cash this quarter. We had positive free cash flow of more than $19 million, nearly three times the amount we reported in the second quarter of last year. You may recall that we ended the first quarter of this year with negative cash flow of about $15 million, which was almost identical to our working capital investment in the first quarter of 2006. This year our second quarter cash flow exceeded our second quarter of last year by $12 million, and we are already $4 million positive for the full year, a level that we did not attain last year until the fourth quarter.

Based on these strong results, we continue to believe that we will be very successful in achieving strong cash flows for the rest of 2007, and we are optimistic that we will end the year with strong cash performance. Our cash balance at quarter end was $88 million compared to $69 million at the end of the first quarter, and we remain debt free.

We purchased a modest amount of our stock in the first quarter, and since the beginning of the second quarter our automatic purchase plan has continued to operate, and as of market close yesterday we had purchased just over 43,000 shares since we began our stock repurchase a few months ago. Subject to the requirements of the Federal Securities Laws, we expect to be active, but opportunistic, in purchasing shares over the next few months.

SG&A expenses were higher in the second quarter of 2007, although they are down as a percentage of revenues from the first quarter. As we indicated in the first quarter, the year-over-year increase reflects the hiring of selling and administrative people to support our growth, investment in our service activity expansion, our recent acquisition and entry into new geographic areas, and increased compensation accruals at all levels of our organization that reflects strong results at many locations.

Although SG&A has not declined as a percent of revenues, we believe that we are getting leverage on SG&A in our operations, but we are spending that leverage by choosing to make investments to increase future revenue growth.

As Bill mentioned, total backlog was up again and continues at very robust levels. The $20 million increase in our backlog represents virtually all of the primary end use markets that we serve, with the exception of multifamily backlog, which we have chosen to constrain and which is currently tracking well below the highest levels it achieved in past years. All of the indications that we monitor suggest to us that activity levels and opportunities remain favorable.

Finally, I want to note that our tax rate was about as we expected, coming in at 38%, and we continue to believe that for the full year our tax rate will be in the range of 37% to 40%. That's it on financials, so I'll now introduce Tom Tanner, our Chief Operating Officer. Tom?

Thanks Bill. Good morning everyone. The great majority of our companies achieved outstanding results for the quarter. We would certainly like to recognize and thank each of our team members for their continuing efforts and commitments that were the foundation for the very strong results that we reported yesterday.

Our results are also a reflection of all of our efforts and focus over the past two plus years on certain key components of our business. In our construction operations we have, and are continuing to focus on, project selection and pricing, project management, project supervision, especially as it relates to the management of our field labor, prefabrication, and assuring of best practices in our human resources.

In our service operations we have, and are continuing to focus on profitably growing our preventative maintenance agreement base, improving our operational efficiencies to increase our overall profitability, providing both our existing and new customers with solutions based on energy savings, adding service divisions to certain of our construction based operations, and developing satellite service operations in contiguous geographic areas of certain existing service operations.

In both segments of our business the safety of all of our team members has, and always will be, a key focus. In general we are providing education and training for our existing team members while we continually seek to attract the best talent from our industry to join Comfort Systems.

Fortunately, and unlike in the first quarter this year, our very strong financial results from the great majority of our operations overshadowed the Q2 loss at Atlas Comfort Systems. As we indicated last quarter, we expected the Atlas Q2 loss to be substantially lower than in Q1, which it was. However, any loss was certainly unacceptable. We have completed the most challenging projects in the Washington D.C./Northern Virginia market, the challenging projects in the Florida panhandle were 90% or better complete at the end of Q2, and these projects will be fully completed by the end of Q3.

Again, as we indicated last quarter, overall backlog has been reduced by approximately 40% from its peak level, with much greater percentage reductions in backlog in the D.C. and Florida markets. All of the core employees of the company are fully committed to returning the company to profitability. In addition there have been several additions and changes to the management team of Atlas, all of whom are excited and confident about the future of the company. Thus, as I have previously stated, I believe the company will operate at a break even level in Q3, be slightly profitable in Q4 and then make a solid financial contribution to our overall results in 2008.

Relative to the increases in our SG&A expenses, it is significant to note that we have had several opportunities to add senior level service executives to many of our operations, especially in the southeast part of the country. Initially the cost of these new team members increases our SG&A without either an immediate increase in revenues or operating income. However, we are very confident that we will receive a substantial return on our investment over the next 12 months.

Cash flow was very strong for the quarter, and we expect to continue to generate cash for the remainder of the year. As Bill previously mentioned, cash collections at Atlas have greatly improved, and we fully expect to recover during the second half of the year a great deal of the working capital that Atlas consumed when its revenues almost tripled from 2004 through 2006.

As we move into the second half of the year our backlog is at a near record level, with a much better distribution of the backlog among our companies than in our recent past. Our pipeline remains very strong. We are seeing improvements in our service division results as our ongoing focus on that segment of the business is beginning to exhibit real traction. We believe that increased energy costs will continue to generate higher margin retrofit projects in existing facilities. We are excited about our future, as all of our operations continue to make incremental improvements in our businesses that will improve future profitability.

Plus, we believe we will have improved financial performance in 2007 as compared to 2006. With that I'll turn it back to Bill for his wrap up and then to questions. Thank you.

Tom thanks, and Bill as well. Clearly we are pleased with the results of Q2 and I want again to thank and congratulate our management and workforce on a job very, very well done. I think what we're seeing is reflective of all the work we've done over the last couple of years in working to make sure our operations operate at the highest possible productivity. We are, yes, benefited by a good strong market, which we believe continues, and I think our emphasis on increasing our service and looking to that business that derives out of the desire for energy efficiency is going to stand us in very good stead going forward.

At this point I'll throw the call open to questions from the participants. Jen, can you handle that?

Yes sir.