Comfort Systems USA Inc (FIX) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the first quarter 2015 Comfort Systems USA earnings conference call.

My name is Tony and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host for today, Ms. Julie Shaeff, Chief Accounting Officer. Please proceed.

Thanks, Tony. Good morning. Welcome to Comfort System USA's first-quarter earnings call. Our comments this morning, as well as our press releases, 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 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 most recent Form 10-K and Form 10-Q, as well as in our press release covering these earnings.

A slide presentation will accompany the prepared remarks and it's been posted on the Investor Relation 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.

All right. Thanks, Julie. And good morning, everyone. Welcome to our first-quarter earnings call. Let me start by thanking our many dedicated team members for the hard work that resulted in a great first quarter. I'm going to keep my opening comments brief and then Bill will detail our financial results.

We are pleased to report a profitable first quarter and a solid start to 2015. Building on solid execution last quarter, we had our strongest first-quarter performance since 2009. Revenues are 15% higher than the first quarter of 2014 and earnings improved substantially.

First-quarter free cashflow was exceptional. And we had our first positive free cashflow quarter since 2003. We are reporting earnings of 13 cents per share for the first quarter of 2015, as compared to the 1 cent per share in the first quarter of 2014.

Our year-over-year improvement reflects solid execution at the majority of our operating companies, combined with improving conditions in many of our markets.

Let me turn this call over to Bill for some financial comments and then I will talk about operations and outlook.

Bill?

Thanks, Brian. If you have access to our slides, you can refer to slides 2 through 4, as I review our results. So first-quarter revenue increased by $48 million or 15%, compared to the first quarter of 2014. Same-store revenue was up by 10% or $33 million, compared to last year, with the remaining increase coming from our Dallas acquisition in the second quarter of last year.

Approximately two-thirds of our revenue increased. It resulted from a high level of profitable project activity at Environmental Air Systems or EAS, which is our partially owned subsidiary located in North Carolina. We also had strong improvement in ColonialWebb and in Arkansas.

Although we expect full-year revenue will increase in 2015, this compared to 2014, the 10% same-store increase in the first quarter is likely larger than we will generally experience in 2015.

First profit was 17.5% for the first quarter of 2015. And this was an improvement from the 16.2% for the first quarter of 2014. The significant increase was driven by a combination of solid performance at many locations, including at EAS and ColonialWebb, combined with stabilized results from our Southern California operation which negative impacted our results in the first quarter of last year.

SG&A expense was $53.7 million for the first quarter of 2015, compared to $50.4 million for the first quarter of 2014. The increase was primarily due to our acquisition of Dyna Ten in Dallas and also reflected expanded service activities at certain locations. This increase was partially offset by a reduction in service training, as we completed the heaviest portion of that investment in 2014.

SG&A as a percentage of revenue was 14.5% in the first quarter of 2015, which compares favorably to 15.7% a year. The percentage improvement is primarily due to the higher new construction revenues in the quarter that did not require significant incremental SG&A expenditure.

Our tax rate for the quarter was 35.5% and benefited from our strong performance at EAS as the 40% minority interest is treated as a partnership for tax purposes. Net income for the first quarter was $5.1 million or 13 cents per share, compared to $0.4 million or 1 cent per share.

Our first quarter is seasonally low and that leads to more variability in our quarterly results. We experienced our usual seasonal patterns at most of our operating locations, especially in the Northeast. And as we mentioned, we have a busy quarter at EAS in North Carolina.

We had outstanding free cashflow in the first quarter of 2015. Our free cashflow was $17 million, as compared to a negative $12.4 million in the prior year. This improvement is largely due to the timing of our project work at a number of our operating companies, as well as some receivables from 2014 that were collected in early 2015. With proportionately more service in small project business, we're realizing cashflow earlier in the year. Like our backlog, cashflow can be lumpy for us, but we feel good about our cashflow prospect and trends.

Overall, we are off to a great start for 2015, with an operating performance and cashflow strength. We are optimistic that the underlying trends for new construction are supportive and we're making good progress in our service business. So that's all I have on financials, Brian.

All right. Thanks, Bill. I am going to spend a few minutes discussing our backlog and activity in various sectors and markets. These are covered in slides 5 through 7. I will then comment on our prospects for the rest of this year.

Our backlog at the end of the first quarter was $718 million. A strong increase from a year ago and a 5% decrease, compared to the fourth quarter of 2014. The sequential decrease in backlog is mainly due to progress on several jobs in our Mid-Atlantic operations. These were the (technical difficulty) that mentioned the last quarter as having significant bookings during the end of last year.

Our backlog continues to experience good underlining trends. Same store backlog increased $58 million nor 9%, compared to March 2014. Our largest year-over-year increases were in Maryland and Virginia. Although our backlog will fluctuate from quarter to quarter due to seasonality and the timing of projects, we now anticipate gradual strengthening in our business activity levels.

Our end-user sectors are shown on slide six. The institutional sectors, which include education, government and healthcare comprise 34% of our revenues. Our manufacturing and technology sector represented 32% of our revenues for the first quarter of 2015. Overall, we are pleased with trends in our mix of work. Please turn to slide seven for our current revenue mix.

New construction made up 52% of our revenue, reflecting incremental strength in non-residential construction markets. Pure service, which is maintenance and repair, was strong at 17% of revenue for 2015. And taken together, service, repair and retrofit was 48% of revenue.

EAS and ColonialWebb, two companies that we acquired during the recession, were the major drivers of our increase in revenue in earnings this quarter. Our service businesses are executing and growing as planned. And as a result, our maintenance base continues to increase with good bookings this quarters. We believe that the investments we've made in our service business are on track.

Let's now discuss our outlook. Pricing remains competitive. But we are optimistic about our prospects in the coming quarters. Although thee are risks, we believe that industry activity levels in many of our core markets have started to strengthen. We will continue to focus our effort in investment to strengthening our existing businesses, add new partners through acquisitions and return capital to our shareholders through our dividends and stock repurchase programs.

With a combination of our strong core businesses, the new team members who came to Comfort during the recession and our productive service investments, we are positioned to benefit as the non-residential construction markets improve.

Before I turn to questions, I would like to thank all of our 7,100 team members for their efforts. I'll now turn it back over to Tony for questions. Thank you.

(Operator Instructions)

Your first question comes from the line of Tahira Afzal. Please proceed.

Hey, folks, congratulations on a good quarter.

Thanks Tahira

Thank you. Good morning.

You know, your strategy has worked out perfectly so far. You've picked up very solid companies at good multiples through the whole down cycle and the softness in the cycle. You know, it seems like you still have a couple of years, at least, before this market peaks.

Do you still find, you know, that there are enough -- well, sort of opportunities out there for you to capitalize on at attractive multiples at this point? Or, you know, are you, Brian, sitting at this point and saying, hey, I need to think about what else I can do with my cash?

So Tahira, we -- I would say that we believe that there are opportunities. We're in good conversations with people that we -- some of which we've known for a long time about their options. It's very hard to predict whether we'll get to arrangements with any sizable companies. You know, we're not going to overpay, just because markets are getting better. You know, we try to price people on their long-term potential.

I do think we'll continue to do tuck-ins. We did a couple this quarter, small businesses that join existing businesses. And that's been a good source of improvement at certain locations for us, so we certainly expect to continue that. We're open-minded.

You know, Tahira, the second half was what to do with the cash in these acquisitions. We'll still get purchase shares and paid dividends as well.

Okay. Thank you.

And my second question was, we've gone through this exercise where we've maybe gotten to see the margins go as the business starts to come back and now it's finally coming back pretty nicely.

As you look out a couple of years, do you think you can cross that 6% margin, given you do have a bigger geographical in a sense and you can -- if you look at the last cycle, you were anyhow had some address issues you don't have more?

So Tahira, if markets continue to strengthen gradually for the next couple years, I think that there's a very good chance we could, in a given year, cross that.

That's awesome. Thanks a lot, guys. I'll jump back in the queue.

All right. Thanks Tahira.

Your next question comes from the line of Mr. Adam Thalhimer. Please proceed.

Hey, good morning, guys. Nice quarter.

Thanks, Adam.

The service [and native] business, I wanted to ask about that. It looks like it grew about 9% year over year in the quarter.

And I'm just curious. What are the margin trends you're seeing on that business, and is that a good growth rate to be thinking about going forward, because it's high single digit?

The margins are up slightly, but it's the first quarter. We like the margin trends underlying our service activities right now. We think we have some opportunities there.

As far as growth and service, it will be lumpy, but we certainly -- I don't want to anchor on something like the percentage you said, but we think we have really good growth prospects and service.

Our goal is to build a much bigger service business, so it would take performance like that to do what we were trying to accomplish.

On top of that is, we want to make sure we're taking on good maintenance, customers and taking on good work. So we're growing, but we don't want to grow at the absence of getting good margins.

Okay. And then what are your -- 15% topline growth in the quarter. What are your expectations for what that looks like later in the year?

So keep in mind, 5% of those 15% points came from an acquisition that we did in the second quarter last year, so that will -- we have a month or two of that this quarter I believe but that will end.

So if you look at same-store growth of 10%, two-thirds of our revenue growth came through some big projects that were heavily manned this quarter at our North Carolina facility. And I think they're very busy in the second quarter as well, but I don't think that that lift will go into the third and fourth quarters.

Meanwhile, we've got other parts of our business that are picking up right in the Northeast, which slows down some in the winter, always picks up, and they have good backlogs up there.

So I would say even you saw a new construction growing sort, even as a high as double -- high singles to low doubles, that's going to average in with our service and give us growth in the three, four, five. The first quarter may be averaged at six, but later in the year, I think you're looking at three, four, five same-store, probably.

Okay. Great. Congrats again.

Thanks.

(Operator Instructions).

Your next question comes from the line of Mr. John Rogers. Please proceed.

Hi. Good morning.

Morning John

Brian or Bill, in terms of the acquisitions that you're looking at or thinking about now, any new skill sets? You mentioned refrigeration and some other areas that you see Comfort Systems should be positioning for in terms of the market that you're seeing developing.

I would say that we are -- we have other skill sets besides mechanical, and we make, really, without exception, where we have other skill sets, we do well in them. So I think we would be open-minded above acquisitions and very closely adjacent skill sets.

You said refrigeration is really. We do have it in a lot places.

But we certain - one of the [seconds] we did this quarter added some refrigeration expertise, and then there are related specialty subcontract areas that we're attracted to. But that could be the next downturn we may -- we try to do something significant in one of those areas.

I think sometimes we look at some better companies you look at that have more heft, have more than one business. So certainly, there are people we would talk to that could give us a little more exposure to some of those areas and maybe prepare us for success in those areas of the future.

As far as this year, some major foray into an adjacent service like that doesn't seem evident at the moment.

Okay.

And then the other thing is just in terms of the pricing that you're seeing in the market, you noted the strength, especially on the East Coast. Are you seeing better pricing in those markets, and how broad is that.

John, pricing's a funny thing. I think we've said for a couple years, the recovery was going to be slowing gradual. I think that's what we're seeing. I think pricing's doing the same thing. It's incrementally increasing, getting a little bit better. But it's not a spike; it's slow and steady.

Okay. Thank you.

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

Hi, folks. So I just wanted to get one little update.

If you look at your whole span in terms of geography, there were some that took off a little on their own maybe perhaps. They were more at the trough level a little and sort of went down a little faster. And I believe that was more, maybe, perhaps, in California, maybe in Arizona, et cetera.

So I would love to get a sense of the market that started to recover the soonest for you because perhaps they saw a steeper and earlier decline. How are those doing today relative to when they first started to recover?

Are you still seeing the same momentum in those?

Yeah. Tahira it's Brian, we take a look across the country, the Northeast maintain good stability, it's grown a little bit.

The Southeast I'm seeing, including the mid-Atlantic, some improved growth. Washington, that area was sort of slow to get into the recession, and I think they're finally coming out of it. We're seeing great bidding opportunities in the Southeast, much stronger than we saw even two or three years.

And finally, the West was the first sort of in the recession, have been the slowest to come out. But I think over the last five to six months, I'm seeing a lot more activity out West, improving conditions and a lot more opportunities and bidding activity for us in the West, finally.

Okay, great. Okay, good.

Thanks a lot, folks. That's all I had.

Thank you.

Thank you so much for your participation in the question-and-answer session.

We will now hear from Mr. Brian Lane for closing remarks.

All right, thanks, Tony.

Thanks to everyone for listening to the call. Listen we have a group of people doing project-management training I want to welcome to the call, and wish them luck finishing off their course.

I think we're very optimistic, both Bill and I, that our markets are strengthening, and we're looking forward to the remainder of 2015.

Hope to see y'all on the road soon. Have a great day. Thank you.

Thanks.

That concludes today's presentation. Thank you so much for your participation. You may now disconnect, and everyone, have a great day.