Comfort Systems USA Inc (FIX) 2012 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the First Quarter 2012 Comfort Systems USA Earnings Conference Call. My name is Alicia and I will be your operator for today.

(Operators Instructions)

I would now like to introduce Ms. Julie Shaeff, Chief Accounting Officer. Please proceed ma'am.

Thanks Alicia. Good morning, everyone, welcome to Comfort Systems USA's First Quarter Earnings Conference Call. Our comments this morning as well as our press release contain forward-looking statements within the meaning of the Private Securities Litigation act of 1995. What we say today 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 10-Q, as well as in our press release covering these earnings. A slide presentation will accompany the prepared remarks and has been posted on the Investor Relations section of the Company's website found at www.comfortsystemsusa.com.

Joining me today on the call is Brian Lane, our President and Chief Executive Officer and Bill George our Chief Financial Officer. Brian will open our remarks.

Good morning, everyone, and thank you all for joining us. I would like to take just a minute to thank the Comfort Systems employees who are listening for their participation and most importantly for their continued hard work and dedication.

I will start with a quick overview of the quarter, Bill George will take it through the results and finally I will discuss backlog and the outlook for the rest of the year.

We are pleased to report improved results compared to the first quarter of 2011. The first quarter is traditionally the lowest quarter of the year and the results for the quarter came in as expected. We are reporting a loss of $0.03 per diluted share, compared to a loss of $0.14 per diluted share a year ago.

This improvement is partially due to the improved results from our Mobile, Alabama operations. This operation lost approximately $4 million this time last year. We were able to lowly turn this operation around and integrated it into a larger neighboring operation. Additionally, the improved results were due to solid performance from the majority of our operations this quarter.

Revenue was a little higher than expected, partly due to a very large fast paced data center project that should wrap up this summer. Our backlog was down slightly on a sequential basis as we burned through that large data center job. I believe that the majority of our markets, while still tough, are stabilizing. We remain focused on project selection, estimating and execution and we maintained a disciplined cost structure.

We feel good about the rest of the year. But before I get into that, let me turn this over to Bill for some financial comments.

Thank you, Brian. If you are online and have access to our slides, you can refer to slides one through three as I review our financial results. We continue to be broadly impacted by the ongoing weakness in the non-residential construction markets, and as a result we posted a loss of $0.03 for the quarter compared to a loss of $0.14 for the same period a year ago.

Total revenue was $329.4 million, an increase of $47.4 million or 16.8% compared to the first quarter of 2011. The EAS acquisition, which was completed during the fourth quarter of 2011, contributed 8% of this increase. Revenue on a same store basis was $307 million a strong increase of $25 million or 9%.

As Brian mentioned, most but not all of that increase in same store revenue arose from a fast moving data center contract that we classify as manufacturing on our pie chart. That project will continue to contribute significant revenue in the second quarter although less than in the first quarter and it will be largely finished by the end of the second quarter.

Gross profit was 13% for the first quarter of 2012 compared to 12.1% in the first quarter of 2011. The gross profit improvement was in large part due to the challenges that we encountered last year at our Mobile, Alabama operation, where we went from a $4 million loss in the first quarter of 2011 to breakeven this quarter.

Despite the relative improvement, we continue to experience gross profit and operating income results at lower levels due to continued challenging market conditions.

SG&A expense was $46.4 million for the first quarter of 2012, which includes SG&A from the acquisition of EAS and compares to $42.6 million for the first quarter of 2011. As a percentage of revenue SG&A dropped going from 15.1% in 2011 to 14.1% in 2012. The EAS acquisition added revenue of $22 million and its overall effect on the bottom line results at Comfort Systems was approximately breakeven. As you know, we have a 60% interest in EAS, and thus we consolidate their results.

From the field level, during the quarter EAS reported a net loss as the margin on a large hospital job declined significantly from the levels reported on the closing data of that transaction. Within our purchase agreement, we have contractual mechanisms and formulas that specifically adjust for changes in gross margin in jobs as of closing. And as a result of this purchase adjustment, the impact of the loss on that job was not borne by Comfort Systems.

The former owners actually expect that they will recover most or all of the losses. And when and if the recovery occurs, just as they bore the loss they will receive the benefit of any such recovery. So the net effect of these changes to comfort systems is not large, but I wanted to describe the mechanics to you to help you understand some of the numbers you may have noticed on our income statement.

ColonialWebb, our other large acquisition a little longer ago, also contributed approximately breakeven results during the quarter, as the mid-Atlantic region continue to experience concessionary conditions.

Our tax rate for the quarter was a benefit of 29.3% as discrete items had a larger percentage impact due to the small loss for the quarter. Keep in mind that a lower rate is actually a negative factor in a quarter when you report a loss, as we expect to be profitable as the year progresses, we currently expect the full year tax rate to be in the 38% to 48% range.

Also as expected, first quarter cash flow was negative following very strong year end cash collections. Free cash flow was negative $21.5 million for the first quarter of 2012 and that was approximately equal to the negative $21.2 million cash flow we reported for the same period last year.

Although, we continue to expect overall headwinds in 2012 we have generated positive free cash flow for the past 13 calendar years and we fell good about our cash prospects in 2012. We did not repurchase any shares under our share repurchase program during the quarter, and we plan to be price sensitive and opportunistic in share repurchase as we move forward.

Overall, we remain financially and operationally sound and we believe we are making the right investments to take advantage when strength returns to our markets. That is all I have on financials, so let me turn this back to Brian.

Thanks, Bill. With that as background, I am going to spend a few minutes discussing backlog, market, and geographic performance and revenue mix and then I will comment on our prospects for the rest of the year.

Let's turn to slide four, and start by discussing backlog. Backlog was $622 million at the end of the first quarter of 2012, down $11 million or 1.8% sequentially. The decrease is due to the burn off of the large fast paced data center project mentioned earlier. That project is slightly unusual for us as the majority of our large projects typically take a year or more to work its way through our backlog.

Backlog on the same store basis was down $38 million or 6% compared to first quarter of 2011. The majority of the same store backlog decline is in the mid-Atlantic area including Washington, DC.

As noted in slide five the institutional markets, which are government, health care and education still represent a significant portion of our revenue. These markets are active and make up 46% of our backlog.

The private commercial sectors remain weak, but we continue to win our fair share of smaller and mid-sized projects. Overall, although margins remain tight, we remain cautiously optimistic that activity levels in most market sectors are stable.

We continue to see geographic differences in the business environment. The Northeast region, which includes the companies in the upper-Midwest remains stable and is the most profitable region.

The operations in Maine, Michigan, New York, and northern Maryland continue to report good results. The majority of operating companies in this region have strong backlog and are operating near capacity.

In the Southeast and most notably in the mid-Atlantic region, we continue to experience weak pricing in non-residential construction. The mid-Atlantic region experienced the downturn late in the cycle and we expect this to continue in the near future. Elsewhere in the Southeast we had strong results and good bookings from our Central Florida operations.

The conditions out West are still tough but most of the markets are stable. Please see slide six for a comparison of the revenue mix.

Pure service, which is maintenance and repair, was 14% of revenue for the first quarter of 2012 compared to 17% in 2011. The large data center job led to a temporary increase in the relative proportion of revenue that came from construction. As that large job winds down in the second quarter, revenue percentages will likely shift back to its service and retrofit although that project will continue to impact the year-to-date numbers.

Service revenue on the same store basis is up compared to the last year. Our service maintenance base is steady and we had continued good operating performance from the service side of the business this quarter.

Our safety record continues to be strong. During the first quarter we received an OSHA recordable rate that was 27% below the industry average. Our lost time injury rate in 2011 was 75% below the industry average. These achievements in safety are the result of a continued focus and we benefit from lower insurance costs.

So, finally, what is our business out look? We continue to experience competitive pricing, as the anticipated recovery has taken longer to develop. More of our markets are stable and have a good baseline of work, but owners are still often hesitant to commit and pursue construction and improvements. We believe a recovery is coming, however, since we don't know when it will be meaningful improvement, we are focusing on ways to be successful in any environment.

In 2012 we need to execute, bring compelling value to our customers and generate cash to invest back into our business. Our strong financial position and bonding capacity remain a competitive advantage. We are building for the future and we are confident that we are ready for strong performance when the markets eventually improve.

Again, I would like to thank all our 7000-plus team members for their efforts. I will now turn it back over to Alicia for questions. Thank you.

(Operators Instructions)

The first question comes from the line of Rich Wesolowski with Sidoti and Company. Please proceed.

Thank you, good morning.

Good morning, Rich.

Bill, if I understand it correctly the EAS reimbursement of the lower than expected profit on the job booked before you bought them. That was added back to the minority interest line. Does that mean that a similar amount depleted gross profit?

Yes, so what that means is up above in the numbers before the added back line, their entire results are reflected so the entire loss that came through the line is up there. But, we only recover directly from them 60% because we own 60% of them, so that is reflected up above. The remaining 40% is eliminated in the elimination line.

That means that if you were to completely take EAS out of our results we would have had slightly higher gross profit margin for example.

Okay, that was a concise answer to a complicated question. Thanks. Would you comment on the public and institutional work that is such a much bigger part of Comfort than it typically is during the private recession? Hs that remained steady or have you seen signals that it's either getting stronger or weaker?

Rich, its Brian. I think, right now what we've seen is very steady. Healthcare is still very good for us. Both hospitals and lab facilities. Education, some high school work has come in, it's very good. The government, since we mostly do federal and mostly military, it is still pretty consistent where we have been the last few years. So I think the institutional sector for us this year will be steady in a word, Rich.

That's pretty good news. Would you comment on the project that has closed in the 10-Q, that had been accelerated by the owner? Costing the Company some $3 million or thereabouts?

Yes. So essentially, that is the large data center contract that we were talking about, in the mid-Atlantic region. It is a very, very fast project, a very large project. It is about $42 million of work in about a six-month period. As we have worked on that project we were informed by the owner that they wanted to accelerate the completion date from what was in the contract.

We decided we needed to accommodate that request. We put additional costs in that job to permit us to do that, we have a very, very strong claim for the additional monies, but we decided that we really hadn't met the standards that we try to keep for booking revenue for that. So we went ahead and put the costs in but didn't recognize any revenue for that change.

So when and if we were to recognize revenue, that would be a pick up in the future. For now, we are carrying that project. It is not a loss project by any means, even with those changes, but we are carrying it with the costs in there but without having assumed any revenue in there, just based on the definitions that we use which are pretty strict for recognizing revenue.

Thanks. And then, lastly, has the Company recently adjusted its price parameters for the share repurchase program? Would you remind us how you go about determining that?

Yes, the way that we determine it is that we routinely. I, frankly, talk quite often to a member of our Board of Directors who has been tasked with consulting with me on that. And then obviously we consult the full Board from time to time. We have been aggressive buyers whenever our stock dipped down into single digits. As aggressive as you can be given our small float.

And then we had been buying sort of routine careful amounts in the low double-digit range whenever that came available to us. I would say that it is fair to say that in light of the fact that we deployed so much of our cash in the last couple of years, we have gotten more picky. We haven't seen any dips. Our stock is so thinly traded that from time-to-time, even when things are going reasonably well, much less when we are in the middle of the worst recession in 80 years the stock will have hard dips.

I think that we will continue to buy if the stock goes down on a hard dip for a week or two. We don't get that many shares down there just because our float is so small we don't want to impact the price. I think it is fair to say, however, we are not going to be as aggressive in buying stocks, sort of in the higher ranges, the 11-plus range just because -- we have deployed a lot of our capital, we have bought back 13% to 14% of our stock, if I recollect. We don't know when the recession will end and we want to leave some dry powder for at least incremental acquisitions in the service and controls areas.

So we are just being really, really picky.

Right. I appreciate your time, best of luck.

All right, Rich, thanks.

Your next question comes from the line of Charles Redding of BB&T Capital Markets. Please proceed.

Hello, guys, good morning, thanks for taking my call.

No problem, thank you.

I was wondering if you could just expand a little on your comment in the press release about strong bidding activity. How fast are you seeing these bids turn into awards?

Yes, Charles it's Brian. Activity levels are very strong and we have had a very good booking month in April, in particular. The time to award is still longer than it was, let's say in the mid-2000's, but not as long as it was in the 2009 and 2010. So it really does depend on where you are and the type of job. It is not as quick as we would like it to be but the activity is good and it still takes a little bit of time to get pen to paper, honestly.

Okay. Then, what are you seeing in the manufacturing sector? Are you seeing demand strengthen there and maybe if you could just remind everyone on the call how you are exposed in terms of manufacturing. I appreciate it? Okay.

I will give you a little bit on that. We class data centers in manufacturing, so you see a big jump in our number this quarter as a percentage of our revenues. We will also, because of that data center project, that piece of the pie chart will be pretty big in the second quarter. It's been growing even without that but it had a big leap up. Later in the year, obviously, when that job goes off, whatever else is happening that will be a factor that would put that back down a little bit as a proportion of our revenues.

However, because we publish that chart on a year to date basis, it is going to affect the pie chart for the rest of the year. That is just something I wanted to the advantage to point out to everybody so they are aware of it. As far as industrial goes, I think industrial has been one of the only really strong, incrementally strong area for us in the last couple years. Brian?

Yes, and I think, just to follow on that, we are seeing the data center, some food processing opportunities out there and hopefully they will stay like it is for the rest of the year. We are still seeing good bid activity in those sectors.

And we are working on one or two large things, that if they were to go.

Okay, great thanks a lot.

Thank you.

Your next question comes from the line of Tahira Afzal with KeyBanc. Please proceed.

Good afternoon, gentlemen.

Tahira, how are you?

I am doing fine, thank you. Could you talk a bit about your pricing and I am sorry if I missed out on this. But, as what point does the competitive landscape and the pricing give you enough comfort where you can. No pun intended there. Where you can go and start hiring again on a sustainable basis?

I think if you look at the numbers for pricing, the sort of gross margins we are seeing, I think what has disappeared from the market is the low, the very, very low or sometimes even mistaken bidder. I think we are deep enough into this recession that people are not bidding work to lose money.

We do think our competitors, their back logs are not very full and it is really going to take what is left of the capacity in the industry to get a little fuller before I think prices start to go up noticeably. Our headcount has been going up some, so I think there are signs of activity.

Brian?

Yes, we are hiring but we are being very prudent to make sure this is sustained. The other thing we are seeing regarding pricing is we are not seeing the large numbers of bidders to here that we saw years ago. We are seeing the more normalized number of bidders on most of the opportunities. Hopefully, we will see some improvement pricing going forward with more sensible competitors.

Got it. And if I was to look at your operating margin in first quarter 2012, versus a year ago, it essentially means you did show a pretty admirable profit 200 basis improvement. Is this something that we should assume will continue into this year, obviously it can be a little lumpy on the quarterly basis. Is that something sustainable?

And if you look at your past peak it was about around 6% in terms of operating margins. So, clearly, you have a nice way to go. But could we -- if you look back even a year or two, you had around 2.5% operating margins in 2010. By the time you are hitting 2013 and these positive inflections continue, do you think you can be past the 2010 point or the 2.5%.

I will answer that and then I will let Brian answer. Because, there were two or three questions and I actually think... So for the rest of this year I think we expect 2012 to unroll in a way very similar to the last three quarters of 2011. A lot of what you look at if you dig into the numbers would lead you to conclude that the rest of this year is going to be a lot like the last three quarters of last year, which means we are going to end up with higher margins, just because of the difference in the first quarter.

Obviously, with slightly more supportive characteristics, maybe we can do, who knows what we can do, we think it will be similar to last year. As far as 2013 goes, for 2013 to be a meaningful increment above what we will do this year, we are going to have to see a little more strengthening.

Now, it is early enough in the year that that could easily happen, but it is hard to predict that at this point, given where we have been last spring and where we were the year before that. There are some good characteristics to the underlying environment relating to where capacity is in the industry, the number of bidders that give you hope for that.

But I think that one of the things that makes you scratch your head a little bit, is that there are parts of the country, in particular, the mid-Atlantic where we are still seeing large projects being deferred or delayed. They own the land, they have picked their team, in some cases, they just aren't starting the projects, and it makes you wonder if there is not a CFO somewhere saying, let's now start to flow that cash just yet. If they are wondering about financing in Europe or how that is going to effect their balance sheet.

So, that is the hesitation, I think, you have.

Yes, here is Brian, if I could just add on. As I said on my script, we are really focused on being successful in this environment and really working to get our margins up. Every one of us here, obviously, wants better margins than we have right now. But we are also focused on what work we are selecting and heavy focus on execution this year and keeping our costs down. So there is a number of things we can do to control to make our margins better.

And so, Brian, if you were looking to hire looking at your time line and your schedule and the uncertainty. Putting it all together, where do you see yourselves hiring people as of right now?

I would anticipate hiring some people this summer.

Got it. Okay. Thank you very much.

Tahira, if you need a job, though, we will take you.

You never know with these stock markets.

I hear you. Come on down.

Congratulations, given the circumstances, on a descent quarter.

Thanks, Tahira.

Your next question comes from the line of Terry McMahon with the BCS Partners. Please proceed.

Mr. George, you mentioned controls as a possible area of acquisitions. Do you have any estimate of how important are controls and closely associated services to Comfort Systems it [say] in terms of your total revenues?

Revenue from control work is very small. A couple percent. So actual billings where the installation of control systems if 5% or less, it is in the other category. I think it was 3% for the first three months of this year, although it can range a little bit higher than that and a little bit lower than that. It is actually, though, more important than the revenue suggests, because when you do the controls it typically has a strong likelihood of leading to the service and can frequently give you project opportunities, especially on the small project end.

So one of the things we are interest in doing in the acquisition area is hiring companies with good control capability but frankly, also, with good relationships with an installed base. Where they had put the controls in 100 or 200 buildings and therefore have -- that leads to good relationships with those buildings and can lead to a wide range of opportunities.

So two parts to that answer; one, very small mathematically but two, more swings heavier than its weight as far as how it affects us, and that is why we are interested in incremental investments there.

Thank you, you mentioned on other thing in passing. You said the worst recession area environment in 80 years. That is pretty strong. That takes us back into the early 1930's.

Yes, I think is unambiguous. I don't think there is any question. If you were to look at -- there were two possible recessions that could be this bad. One was in 1979 and one was after 911. The one after 911, as an example, which some people thought was the worst recession at that time in 80 years, there were three consecutive double digit, sort of, mid-teen drops in a row. That is what that recession boiled down to for non-residential construction.

The first year drop in this recession was mid-30% drop and it was followed by a mid-teens drop and then followed by a double-digit drop. So, I think, you go pull out census bureau or you go pull out McGraw-Hill -- there were two industries that were most racked this recession, one is financing and the other is construction. And if you think about it, if you were going to build a building, you need two things. You need financing and confidence and that has not been a good picture for the last few years.

I agree with you totally. Thank you very much for your comment.

Thank you.

We have a follow up question from the line of Rich Wesolowski with Sidoti and Company. Please proceed.

I was just curious if you would offer some qualitative comments on ColonialWebb's performance over the last couple of quarters.

Hello, Rich, it is Brian. I love ColonialWebb, they have outstanding people in there. We talked a lot about this job, this is a terrific job, they are really doing, it is going to work out in the end. They have been great citizens for us, doing a good job. They have helped us out in a number of places. Really, their results will get better here over time. As Bill George has said a number of times, we bought these folks for the long term, not for the short term, and I have every confidence and belief that that will happen.

Great, thanks again.

Okay.

Those are the questions we have at this time. I would like to hand the call back over to Mr. Brian Lane. Please proceed sir.

Okay. Thank you, Alicia. Everybody thanks a lot for listening on this call. We really appreciate your interest in the Company. We are where we expected we are going to be at the end of the first quarter the good news is that there is a lot of activity out there and we are cautiously optimistic going forward. We really expect the last three quarters of this year to look like the last three quarters of 2011.

So with that we will say, goodbye. Thank you, and we will see you all on the road. Thanks.

Thanks, everybody.

Ladies and gentlemen, this concludes today's presentation, you may now disconnect and have a great day. Thank you.