Comfort Systems USA Inc (FIX) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2013 Comfort Systems USA earnings conference call. My name is Regina and I will be your conference operator for today. At this time all participants on the phone lines are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder today's event is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Julie Shaeff, Chief Accounting Officer. Please, go ahead.

Thanks, Regina, good morning, everyone. Welcome to Comfort Systems USA's fourth-quarter earnings 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 will say today is based on the current plans and expectations of Comfort Systems USA. Those plans and expectations and involve risks and uncertainties that could cause actual future activities and results of our operations to be materially different than those set forth in our comments.

You can read a more detailed listing and commentary concerning our specific risk factors in our most recent Form 10-K as well 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 on the call today is Brian Lane, our President and Chief Executive Officer, and Bill George, our Chief Financial Officer. Brian will open our remarks.

Okay, thanks, Julie. Good morning, everyone, and welcome to our fourth-quarter earnings call. I would like to start by thanking all of the Comfort Systems USA employees who are on the call today for their continued hard work and dedication. Also I would like to extend a special thanks to all of the finance and accounting folks for doing their usual terrific job, especially over the last few months.

2013 was a year of good progress and improvement and we were pleased with the strong finish to 2013 in the fourth quarter. Both our full-year and fourth-quarter revenues were up in 2013. For the full year revenue coming in at $1.4 billion, a 2% increase compared to 2012. Our operating teams continue to deliver solid execution and good cash flow.

We reported earnings for the quarter from our continuing operations of $0.15 per share as compared to $0.10 per share in the fourth quarter of 2012. As of year-end our backlog had also strengthened noticeably for the first time in several quarters and I will discuss this in more detail later in the call.

We believe that nonresidential construction is showing signs of gradual recovery. Although over the nonresidential building continues to track well below its long-term trend following the weaknesses of the past few years. Most of our markets are stable, but pricing remains competitive. We continue to be focused on private selection and execution and we are actively investing for future growth.

Our investment in service will hit full stride during 2014 as we fully implement our plan to increase service. Although this investment will increase our SG&A in 2014, as Bill will detail in a few minutes, we feel this investment will drive long-term value for our stakeholders.

I will describe our outlook in detail in a few minutes, but before I get into that, let me turn the call over to Bill to review the details of our performance.

Thanks, Brian. If you are online and have access to our slides please refer to slides 2 through 6 while I review our financial results.

Revenue this quarter was up 5% compared to a year ago as we reported $330 million of revenue compared to $316 million in the fourth quarter of 2012. During the first and second quarters of this year we reported flat to slightly down revenues influenced by the fact that the first two quarters of 2012 included a fast and large data center project in Central Virginia.

The second half of 2012 was a more normal comparable and our increased revenues in the third and fourth quarters of 2013 were large enough to overcome the declines earlier in the year and overall our largest increases for the year resulted from projects in North Carolina and Arizona.

Gross profit was 18.6% for the fourth quarter of 2013 and that was an improvement from the 17.4% for the fourth quarter of 2012. Gross profit was 17.7% for full-year 2013, a strong increase from the 15.6% gross profit that we reported in 2012.

We had meaningful margin improvement at the majority of our operating companies with the companies located in the Northeast and upper Midwest continuing to make strong contributions to our earnings. Our gross margin also benefits from the mix of business between service and construction as low activity in project work and the ongoing relative strength of service work has led to a higher proportion of service work than usual. Because service has significantly higher gross margins, when service is a greater proportion of our revenues that benefits overall margins.

SG&A expense was $52.6 million for the fourth quarter of 2013 compared to $47.0 million for the fourth quarter of 2012. SG&A as a percentage of revenue increased from 14.9% during the fourth quarter of 2012 to 15.9% from the fourth quarter of 2013. SG&A as a percentage of revenues increased from 14.0% in 2012 to 15.3% in 2013.

The increase in SG&A as a percentage of revenues is also influenced by the higher service mix as service includes additional selling, billing and other management costs. In addition, as we mentioned in previous calls and as Brian said a few minutes ago, we are continuing to make net incremental investments in service growth.

In 2013 we made an incremental investment in service growth through our SG&A line of approximately $1.0 million. During 2014 our strategic investment in service will peak as we will invest an incremental $3.0 million in training alone plus an additional $1 million to $1.5 million in people and systems.

This $4 million to $4.5 million addition to SG&A for 2014 as compared to 2013 will subsequently decline in 2015 and thereafter to approximately $2 million above our 2013 SG&A run rate. This is a significant investment for our Company and we believe it will generate a strong return.

Our tax rate for the year was 38.8%. Net income from continuing operations for the fourth quarter was $5.6 million or $0.15 per share compared to $3.8 million or $0.10 per share for the fourth quarter of 2012. On a full-year basis net income from continued operations was $27.3 million or $0.73 per share compared to $13.1 million or $0.35 per share in 2012.

As we mentioned in our press release, earnings per share for the current year includes $0.03 arising from income from prior reporting periods that was recorded in the third quarter of this year and $0.04 overall from changes in the fair value of earn out liabilities.

Free cash flow for the quarter was $10 million which aggregates to $22 million for the full year as compared to $20 million in 2012. We've generated positive free cash flow for the past 15 calendar years, although the increase in service in our mix has smoothed our cash flow somewhat throughout the year and as a result we did not experience a large spike at year-end as we often do.

We purchased 126,000 of our shares in 2013 at an average price of $14.59, we remain open to opportunistic and price-sensitive stock repurchases. Since we began our program we have purchased over 6 million of our shares at an average price of $11, returning $66 million to our shareholders.

As our financial performance improves we are seeing the per share benefit of those repurchases. With the shrinkage in our share base and with the numerous acquisitions we completed over the course of the recession, we believe that we are well positioned to benefit when markets improve. It has been a long recession but we like our positioning.

We are prudently investing to grow our existing business, we are opening to adding new businesses and we are committed to dividends and stock repurchases to return capital to our shareholders.

As Brian mentioned we are seeing signs of gradual improvement in activity levels in many of our markets while other markets remain slow and price competitive. Based on our backlog, and as a late cycle business and apart from acquisitions that we might make, we expect that any improvement in 2014 will be gradual. And at this point we expect that profitability will be comparable to the improved levels in 2013. That is all I have on financials, Brian.

Okay, thanks, Bill. Let me start with backlog and activity in various sectors and markets. Please turn to slide 7, I will start with backlog.

Backlog at the end of the fourth quarter was $604 million, an increase of $33 million or 6% compared to the third quarter of 2013. This increase is largely due to our operations in North Carolina where we own 60% of the Company. Pricing, while relatively stable, is still competitive overall.

We feel optimistic that some recovery in project activity is starting to develop. However, as most of you on this call are aware, given the timing of our activities in a building project, we tend to participate in increases on a somewhat delayed basis in construction recoveries.

At this point, although underlying activity levels are solid, we do not see an increase in bookings that would support meaningful revenue increases over the next few quarters.

Please turn to slide 8 for a look at our end-user sector. The institutional markets which are government, healthcare and education, made up 45% of our revenue for 2013. Our industrial and commercial sectors comprised 55% of our backlog as of the end of the year compared to 30% to 40% levels back in the 2010-2011 periods.

Overall we continue to win our fair share of small to midsize projects. However, larger projects continue to be less prevalent than they are in normal conditions. Let's look at what we are seeing across the country.

Overall we are seeing stability in most of our markets. Our operations in the West were the first to be impacted by the recession and they are relatively stable at this point. The Northeast region, which includes our Companies in the upper Midwest, remains relatively strong and continues to be our most profitable region. We've seen some improvement in the South, the Southeast and in the mid-Atlantic but at generally modest levels.

If you turn to slide nine you can see our current revenue mix. Pure service, which is maintenance and repair, was strong at 17% of revenue for 2013 and service, repair and retrofit again well exceeded 50% of revenue. Overall we had the best maintenance base new booking performance than we have had in many years as our maintenance base has increased approximately 12% during 2013.

For the quarter and for the year our service businesses provided solid returns. We have invested in our business throughout the recession. As Bill detailed, in 2014 we will be making an unprecedented investment in our service business through training, investing in systems and growing our service workforce and leadership.

These investments are significant for Comfort Systems and we believe that they will benefit us for many years to come. However, they will result in higher SG&A in 2014.

As I mentioned on last quarter's call James Mylett, a seasoned service leader in our industry, joined Comfort Systems as Senior Vice President of Service in November. In the first couple of months since his arrival I am already excited about the progress he has made.

We expect to continue incremental investments for the next several years, but we believe they will be providing a net return on investment by the end of 2015 and we believe these investments will provide valuable benefit to Comfort Systems for many years to come.

Overall I am very pleased with our performance in 2013; we are financially sound and solidly profitable. Our outlook for 2014 is positive but realistic. Although we are hopeful that new construction activity levels will improve, we expect that even as markets improve 2014 will be a transitional and investment year.

And we currently expect that near-term improvement will be gradual. And Comfort Systems 2014 revenues and earnings will be similar to our improved results in 2013.

Although underlying pricing for our services is more reliable than it was in the depths of the recession, we do not yet see significant incremental demand in most of our markets. To achieve our goals we will need to continue to improve our execution and invest in growing our existing businesses and direct [positioning].

Finally and again, I would like to thank all of our 6,700 plus team members for their efforts. I will now turn it back over to Regina for questions. Thank you.

(Operator Instructions). Charles Redding, BB&T Capital Markets.

What are the margins on your service business right now?

So at the field level we expect our service business to make at least 15%, that is without giving effect to corporate overhead. And the vast majority now of our businesses are achieving that. So having said that, we also -- in addition to growing our service business we have a very, very strong initiative to try to improve margins. So we hope to see that improve over time.

If you think about where the percentage of revenue could be for the service business after the completion of the build out what are your thoughts there? Do you have a ballpark there that maybe we could kind of think about going forward?

You have to look at how we define service and for the purposes of the service initiative it would not be the larger definition of service that includes all retrofit. It would really be the pure service that you see in that pie chart that we published plus small projects.

So the small projects that are sold really by service technicians and performed in the main by service technicians, an important characteristic of those is they're owner direct. So a retrofit will often involve a general contractor. And that is probably -- today that is something like 25% of our revenues if you put the pure service with the very small projects that is the focus of this.

And I think that what we would like to see is our companies achieve 5% to 8% growth. Having said that, when you ask the question what percentage of revenues it will be, that is extremely sensitive to what is going on in new construction. In the United States today we are building half as many buildings, nonresidential buildings as we were building in 2008.

Even though that is not changing quickly that is starting to change and there should be a time when we regress back towards the mean. So one scenario you might see -- one scenario I would love to see is new construction starts to take off but service doesn't decline as a percentage because we are selling a bunch more service. And that would be a very, very virtuous cycle for Comfort and its shareholders.

Hey, Charles, this is Brian; I just want to add on. We talked a lot about service on this call, but construction is still a very, very important part of this business. We are still working on it and we still intend to grow it. So the percentages might change but we expect construction to grow as well.

Sure. And then one more if I could. In terms of weather, I mean do you guys feel that -- view this more as a potential drag or a potential catalyst?

It is Brian again, Charles. The weather has been pretty interesting particularly if you live in the northern part of this country this winter. In general if you get extreme of cold and heat that is going to help your service business for obvious reasons.

It can be a negative drag in construction and we've seen some of that in the first quarter. When you have heavy snow it is difficult to get to job sites. So when the temperatures fall to what they have fallen your productivity levels almost remain too poor to work in. So it has been -- due to the excessive temperatures that we have seen it has been a slight drag on construction particularly in the North.

Thank you for your time.

(Operator Instructions). Saagar Parikh, KeyBanc.

Congratulations on a very solid 2013.

Thank you, we appreciate it.

First off, your bookings in the fourth quarter were up around 6% quarter over quarter. But then your initial commentary -- prepared commentary suggested that you don't expect bookings to continue at a level where you will see material top-line growth.

Could you kind of just tie the knot for us and explain maybe -- if you are still going to be able to see nice bookings and backlog growth through the year, but just not maybe 10% to 15%, or what you're thinking with those comments?

So one thing I would point out, Saagar, is even though we are up sequentially, our backlog is up sequentially, against a year ago it is actually very similar.

I think that we think that there is a more supportive booking environment today, but I would say at this point I think we would expect -- everything we are seeing today would suggest that our backlog growth would the gradual and you might have a quarter when it is down and a quarter when it is up.

I think the trend will be in an upward direction. That could change quickly, it has in the past. But when we say that it is not going up fast you have to remember when we came out of the last couple of recessions our backlog doubled in a several quarter period.

So this is -- it is nice to see an increase, but this is a relatively measured increase, still is a lot better than the last step we have been experiencing forever now. But it is still -- it is not a pop.

Sounds good. And then looking at the last cycle and looking at this cycle and the fact that you guys have added $450 million or $500 million or so in acquisition-related revenue. Where do you guys think the top-line could go this time around? And I will go a step further, where do you think the top-line can go in this cycle and where do you think peak margins could go -- again, in 2016 and 2017, not now?

So if you want to put an assumption in that question that we get back to 90% of the demand we had in 2008 or let's say 80% or 85% of the demand in 2008. If you take all of our existing buildings if they could get back -- all of our existing companies if they could get back to that level -- and we still hope to do some acquisitions, we are still actively looking at acquisitions -- I think we would hope to get to the $2 billion range.

Margins are harder to discuss, but we think that everything we are doing suggests that margins should be improving for us over time. And obviously the most potent thing that could happen is pricing can come off of just very, very, very bad levels.

And we have got around -- this is Brian, if we get to around 75%, 80% of those margins I think we would be pretty happy.

Yes, it was in the last cycle, excluding Atlas-related issues, you guys did close to 7% operating margins. So maybe something like 6% is achievable in the peak this time around?

We will see where it goes. In my opinion we are doing everything we need to do in this Company to achieve that level.

Perfect, thank you, and congratulations again on the solid execution this year.

Thank you very much.

John Rogers, D.A. Davidson.

A couple of things, first of all, Brian or Bill, in terms of the cycle the way it is developing here, I know it has been a lot slower than probably all have expected since the recession. But as you think about the market over the next couple of years for mechanical services, do you see a dramatic change in who your target customers are, especially versus what we saw in 2008-2009? I know you are out of the multi-family but is there other shifts I mean towards industrial or necessarily noncommercial projects?

So I think we will both answer this question. Mathematically there is definitely a shift for us towards industrial. We -- historically if you look back over 10 or 15 years we were always 11% to 15% and now we are at 25%. That comes from three factors I would say.

One is we bought some companies that do more industrial than our historical mix. Two, industrial is doing very well in the United States and has very good underlying fundamentals. And three, our footprint is across the Southeast and a lot of the new industrial work, some of the pharma, foodservice, auto plants -- a lot of that is going towards the geographies that we are strong in.

And really we go to market -- you mentioned the market for mechanical services. And the way that we acquire customers for mechanical services is through our service route and through our sales of construction, but really it is not two businesses, it is a continuum.

And that is -- we think that there is Dutch that the investment that we're making in service will benefit us up and down the continuum of the single business that we serve which is the mechanical services thing you mentioned.

Sorry, Bill, the margins on that work -- I assume it is a little more sophisticated work, are they notably different?

I think that it is better -- it is got a bunch of really good things about it. One is you work in facilities where you have access to do the work like so a large project is constructed over a shorter period of time typically and that to gives you a much better chance of hitting your budget.

One of the hard things in a construction project is managing all of the factors that like when you are holding a hospital there are a lot of people coming through every room you want to come through and you have less of that.

Sure.

Typically the industrial customer is more interested in getting their work done, getting it done well and so that plays to our strengths. If you think about it, their costs as a percentage of their cost of goods sold, their cost for the building is much lower.

If you are putting in a pharmaceutical line speed is much more important to you than saving a few bucks here and there as compared to somebody who has a big building program. So I think there are a lot of things. I don't know, Brian, what do you --?

You know, John, that is a good question. And I think the margins will be a little bit better. But at the end of the day, as you and I both know, this comes out to execution in the field and how good you are with the teams you got out doing the work and serving the customer.

And I'm really optimistic about this sector because we've got a terrific workforce, world-class and as good as it gets. So I think based on what Bill said maybe a little bit more speed to where it just fits right into what we are good at.

Okay. And just to follow up I guess on, Bill, your comments relative to SG&A spend in 2014, I appreciate the comments on investment and service. But your SG&A tends to move with your revenue regardless. I mean I assume you are not implying that your absolute SG&A only changes by $4 million this year.

No, so if we -- if construction picks up and we start making more money we will start paying more bonuses to project managers and things like that. So this is incremental, that is -- it is a sterile year over year look at the amount of money we spend on training and the amount of money to add some people that we are adding and some systems like CRM that we are adding.

But the number is big enough and it will probably make our SG&A as a percentage of revenues, it will affect them unless we get some good revenue -- unless demand really does start to come in and the revenue starts to move more it will affect that in a way that we really feel like our shareholders deserve to be apprised of.

Even though we've been talking about it for a year and a half to two years. Given that we're peaking this year we thought we owed it to everyone to be very specific. And really we want to be accountable for the investment, we need to be accountable for the fact that next year and the hereafter something comes of it.

And then just lastly if I could, the acquisition activity has been fairly quiet of late. Are there just not opportunities out there or nothing that fits or prices too high? Any thoughts there?

I'm going to go first and Bill can give you some details. But we were quiet last year, but I think the acquisition template out there is actually pretty active. We are looking at a lot of opportunities right now.

John, as you know we are very selective, we are very prudent, it takes us a long time to get comfortable and for companies to get comfortable with us. And try to be very diligent with that. And we are doing that right now. Bill, do you want to add onto that?

I think the people that I report to expect me to get some acquisitions done this year.

That is why I went first, John.

Okay. Thank you, guys.

Ladies and gentlemen, this concludes the question-and-answer portion of today's event. I would like to turn the call back over to Brian Lane for any closing remarks you would like to make.

Okay, Regina. Everyone, thank you very much for listening to the call and your interest in Comfort. We appreciate it. This was a very good quarter and a very good year for Comfort. And I am very proud of the work done by all of the employees of this Company.

We are poised for growth, we are investing in our service and we are ready for construction growth to finally improve. With that we hope you all have a very safe and happy weekend and we will see you on the road soon. Thank you.

Thanks.

Ladies and gentlemen, thank you so much for your participation. You may disconnect. Have a great day.