Q1 2021 Earnings Call Transcript

Published: 2 May 2021

[Operator:]

Good day, and welcome, everyone, to the Q1 2021 Comfort Systems USA Earnings Conference Call. My name is Matt, and I will be your operator today. . And with that, I'd like to hand over to Julie Shaeff, Chief Accounting Officer. Julie, please go ahead.

[Julie Shaeff:]

Thanks, Matt. Good morning. Welcome to Comfort Systems 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 include risks and uncertainties that might cause these 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.

[Brian Lane:]

Okay. Thanks, Julie. Good morning, everyone, and thank you for joining us on the call today. We are pleased to report a strong start to 2021. Earnings improved substantially with earnings per share of $0.73 compared to $0.48 in the pandemic-impacted first quarter of last year. This quarter, we achieved unprecedented first quarter cash generation, thanks to strong execution as well as the receipt of large advanced payments, served orders and projects. Our backlog has also strengthened sequentially, and we see good trends in underlying activity levels, especially in our industrial, technology and modular markets. Overall, we are optimistic about our prospects for the next several quarters. I will discuss our business and outlook in more detail in a few minutes. But first, let me turn this call over to Bill to review our financial performance. Bill?

[William George:]

Thanks, Brian. Good morning, everyone. As Brian said, our results were again very strong. First quarter revenue was $670 million, a decrease of $30 million compared to the same quarter last year. Our same-store revenue declined by $83 million. However, our recent acquisitions added approximately $53 million in revenue this quarter. You may recall that last year, we had large data center work ongoing in Texas, and that created high revenue in the comparable period. We will continue to face a tough revenue comparison in the second quarter of 2021, but to a lesser extent than this quarter. Gross profit was $123 million for the first quarter of 2021, an increase of $6 million, and gross profit as a percentage of revenue rose to 18.4% in the first quarter of 2021 compared to 16.7% for the first quarter of 2020. The improvement in gross margin results from stronger margins in electrical. SG&A expense was $88 million or 13.2% of revenue for the first quarter of 2021 compared to $93 million or 13.3% of revenue for the first quarter of 2020. On a same-store basis, SG&A declined by $6 million -- $11 million. That decrease included a $6 million reduction in bad debt expense as last year's collectibility concerns for retail and other customers are trending better than we've predicted. The remainder of the decline in SG&A was the result of cost discipline.

[Brian Lane:]

Okay. Thanks, Bill. I'm going to spend a few minutes discussing our backlog and markets. I will also comment on our outlook for the remainder of 2021. Backlog at the end of the first quarter of 2021 was $1.66 billion. We believe that the effects of the pandemic are beginning to subside as same-store backlog increased sequentially by nearly $150 million or 10%. Although we expect some delays in bookings will continue through the second quarter, we remain optimistic about trends for the second half of the year. Overall, we are very comfortable with the backlog we have across our operating locations. We are seeing good trends in the underlying activity levels, especially in our industrial, technology and modular markets. Our industrial revenue was 40% of total revenue in the first quarter. We expect this sector to continue to grow as the majority of the revenues at our newer companies of TAS and TEC are industrial. And industrial is heavily represented in new backlog. Institutional markets, which include education, health care and government were 35% of our revenue, and that is roughly consistent with what we saw in 2020. The commercial sector is now about 25% of our revenue. For the first quarter of 2021, we construction was 77% of our revenue, with 45% from construction projects for new buildings and 32% from construction projects in existing buildings. Service was 23% of our first quarter 2021 revenue, with service projects providing 9% of revenue and pure service, including hourly work, providing 14% of revenue. Year-over-year service revenue is up approximately 4% with improved profitability.

[Operator:]

. And the first question is coming from Adam Thalhimer.

[Adam Thalhimer:]

Great quarter.

[Brian Lane:]

Adam, thanks a lot.

[Adam Thalhimer:]

Bill, how do you see SG&A trending this year?

[William George:]

So I think that there is -- if there's a slight upward pressure, it will be because travel starts to resume and we begin to do more -- we continued our training, but it was online. We'll get back to some more in-person training. But in general, I'm really, really happy with our SG&A. If you have told me we'd have this kind of same-store revenue decline and have -- still get SG&A leverage, I would have been -- I am thrilled. And I actually think we've got good control on our SG&A. Now, we'll stay in that 13%, a little above that level most likely, until revenue starts to pick up later in the year. But yes, no, I -- we feel great about that.

[Brian Lane:]

And just to add on to that, Adam, it just goes to show the great job that the operating companies do, do in monitoring the overhead and not bringing it back until we really need it. So they've done a terrific job.

[Adam Thalhimer:]

Okay. And then I kind of hate when people ask companies this question because what are you going to say? But on acquisitions, you guys have done such great job. And you usually don't do big acquisitions during the construction season. So is the best chance for something kind of next winter? What are you seeing out there, I guess, is the question?

[William George:]

So here's what we're seeing. We're seeing really good activity, people who really value what it would mean to be a part of Comfort Systems, the fact that their company is not put up for sale the day after they sell it and that we are going to bring their balance sheet into our balance sheet and make them a part of us and that we're a forever buyer. So that's very attractive to people. At the same time, there are some corners of the market without -- if you're willing to let your company be levered up and endangered, they'll -- you can get really, really good sort of sticker pricing. The structure might not be -- might have some drawbacks, but the sticker that they'll give -- the pricing that they'll give you is pretty high. So to boil that down, I really like our chance of buying some of the kind of companies that really fit with us, that value the same things that we value. And as far as the timing for that, we do tend to do our standalones in the winter, and -- but sometimes they happen in the summer. You have to take them when they're ready to sell. And what -- the biggest variable right now is what people think is happening with tax rates, right? So a lot of that may be dependent on whether they backdate the date. They have good -- when we buy companies, they're usually people we've been talking to for a long time, right? We don't try to work somebody into a frenzy. We buy them when it makes sense for them and for us because it's a long game.

[Adam Thalhimer:]

Okay. And then just a quick one on kind of how you guys see EPS shaken out this year. Because there was some language last quarter about not matching a very strong 2020, and that was removed.

[William George:]

Yes. So this is a hard year to comment on because there were a lot of moving pieces last year, right? So we had the first quarter where, really, we were very conservative when we closed our books because we thought, "Oh, productivity is about to be destroyed by COVID considerations." So we had a very easy comparable in the first quarter.

[Adam Thalhimer:]

Well, it sounds like a tweak better than before. You're not telling us to go nuts, but it's not firmly down the way we might have thought a couple of months ago.

[William George:]

So it turns out we'd have to go put in some pipes, yes.

[Brian Lane:]

No, but in general, we are optimistic about the year, Adam.

[Operator:]

The next question is coming from Brent Thielman.

[Brent Thielman:]

Brian, the industrial bucket as a percentage of the revenue pie is as large as I can remember. Love to just get some flavor of what the bigger drivers of that are in terms of the market that sort of make up that bucket?

[Brian Lane:]

Yes. I'll go first, and I'll see Bill wants to follow-on. But yes, it's the biggest we've ever had it. We've talked a lot about the recent acquisitions, heavy industrial focus. Obviously, data centers right now in technology is a big component of that today. But also including that, we're seeing a lot of good pharma and food processing opportunities as well, Brent. So I think those would be the 3 largest areas that we're looking at the moment. Bill, anything else that you want to add?

[William George:]

Yes. Our strength in the Mid-Atlantic and in the Southeast is very geographically tied with where people are -- companies are investing that money. And they also -- there's another little just structural issue, which is we bought this great company, TEC, in Tennessee at December 31 of last year. That company is 100% industrial. It's a company in the roughly $100 million revenue range. So the full year of those guys will bring in -- will just that's going to add industrial just as they age in, as they storm their way into those numbers.

[Brian Lane:]

And Brent, in terms of that sector going forward, we're still seeing plenty of opportunities. And as I mentioned in the script, it's got a lot of legs to it in the industrial sector going forward.

[William George:]

Commercial is a section that's been shrinking for us, right? But I just want to mention, on an absolute basis, it stayed pretty constant for us. It's just that the other sectors have gotten bigger. I will also say a lot of commercial, especially office building, is built by developers. And they're very sensitive to first cost, right? Like we'll build office space for pharma companies, but it's incorporated into something that has mixed use. But true office building is often built by developers. And they will frequently -- they may not plan to own the asset after they build it, after they develop it. They will frequently really be bid-oriented. And a lot of our guys would much rather negotiate work right now. So there's some natural structural things that are making commercial be a little bit better fit for our competitors maybe than for us.

[Brian Lane:]

But on that front, we're still seeing a lot of good service opportunities, and we'll have some IAQ opportunities on the commercial office building.

[William George:]

Right? Commercial service is great. If you think -- that's the majority of our service business. It's a good place for us.

[Brent Thielman:]

Okay. That's helpful. Yes. I guess just thinking about some of the hesitation in the market among your customers seems to be abating, from what I take from your comment here. Maybe you could just talk a little bit about what -- where are you seeing continued delays and what are the reasons behind that? Is it access to contractors like yourselves? Is it just the economy? What are you kind of hearing from customers there?

[William George:]

So I wouldn't really call it hesitation. When I talked to our guys, it was more the case that it just wasn't a good time to start stuff, right? In the middle of COVID, you have to go get soil, plans and county approvals and lots of offices were closed. So I would not say it was hesitation in the sense that -- in general, our customers, the kind of customers we're talking about we're all -- wanted to build stuff. And I think it was just more functionally -- some air pockets were created by that. And I would say it's just a matter of this work getting started sort of in an orderly manner. It's not...

[Brian Lane:]

Yes. Brent, the pace has picked up in terms of what we're looking at, in terms of stuff we're reviewing here, decisions being made quicker. So you can see -- at least I can feel a significant change in pace.

[Brent Thielman:]

Okay. And then I guess a question on the electrical segment. I mean, margins has snapped back to -- well, to the levels that you guys have talked about before a lot faster than I thought. And I'm curious, what portion of that comes from the kind of refocus initiatives you've done internally versus some of the acquisitions you've done. And then how we got think about the margins going forward for that segment because it's a big change from last year.

[Brian Lane:]

Yes, yes. So I'll go first and then Bill can comment. But thanks for the question there. First of all, about Walker, which we've talked about over a year now. Walker has always been a really -- an elite electrical contractor in this state of Texas. That has not changed. Their work is tremendous. I just think, over time, they probably refocused themselves on the customer base that they were pursuing and stopped certain sectors add on that. Hopefully, we've been able to help them, a little bit of training some technology, et cetera. But at the end of the day, it comes down to the folks in the field doing the work. They've always done really good work. Probably just a touch of refocusing. They've always been a great company. So I'm really happy for them, that all the work they put in over the last year really did start to come to a fruition for them in the first quarter. And Bill, you want to talk about this one?

[William George:]

Just that one specific question you said about how much of the improvement came from. So TEC is 100% in our electrical segment. Actually, TEC stands for Tennessee Electrical Contractors, and they are -- they have the oldest license to do electrical work in the state of Tennessee. And -- but they do all -- they do a mix of really, really complex industrial service and projects nowadays. They -- believe it or not, their margins were within 100 basis points of Walker's margins. So they're the two main parts of our electrical. And Walker's margins are fully back into the same range as TEC reported this quarter. So it wasn't a mix this year.

[Brian Lane:]

But we are glad to see it.

[Brent Thielman:]

Sure. Well, congrats on a great quarter and best of luck here going forward.

[Brian Lane:]

All right. Thank you.

[Operator:]

And the next one is coming from Julio Romero.

[Julio Romero:]

How do you think your service business progresses throughout the year? Should the growth rate outpace new construction? Or maybe how much of the overall revenue mix does service make up in '21?

[Brian Lane:]

Service has been hovering around 20% to 25%. I think you'll see it outpace construction. We continue to grow it. It's very methodical. We will continue to invest in it, both in hiring people and training. We're seeing some good opportunities come out of indoor air quality front in terms of volume. And I think that will continue to be a great, steady growth and cash flow opportunity for us over a long period of time.

[William George:]

Yes. You know what's interesting about service is that they -- service has -- even though service has been shrinking as a percentage of revenue, it's never gone down. It's got nothing but growth for us. And it's twice as big as it was just a few years ago, but it's 3 or 4x as profitable, which is what we really care about. And at the end of the day, it's got really a good prospect. If you think about it, it's had more organic growth than construction, right? Construction, a lot of that growth has come from acquisitions, although we've grown in construction. Especially in industrial, we've really developed a new sort of level of capability. But service has done great overall. It's just that our acquisitions have been a lot of industrial project companies and things like that.

[Brian Lane:]

But we have a big focus on it, continue to grow it, and we will keep the pedal to the metal on service.

[Julio Romero:]

Got it. And on the IAQ opportunity, I think -- I'm not sure if someone asked about education earlier. But I understand that IAQ is driving more school work activity, but I did see the revenue in education declined in the quarter. So I don't know if you can help us kind of square those two things.

[Brian Lane:]

Yes. I think we're in the early days of reallocation of the funds to school. We've done a lot of work, researching very specifically where the money is going. We have a lot of very good relationships with school systems. So I think you'll see that continue to grow here as people get a better understanding and schools have a better understanding of what they actually want to do. But we can do anything they need us to do. And I anticipate that will be picking up, I think, pretty soon now that they've allocated the money to it.

[William George:]

By the way, a little structural factor. If you're comparing the first quarter to the full year, ton of school work happens in the summer.

[Brian Lane:]

Yes.

[William George:]

So you're -- so that's not -- that wouldn't be surprising.

[Julio Romero:]

Yes. That makes a lot of sense. So I mean, I guess, quotation is going off in education and kind of overall activity levels, as you see it. And it's just a matter of those funds being allocated and just kind of translating to revenue over time.

[Brian Lane:]

Yes. They're sharing what they want to do.

[Julio Romero:]

Right. Okay. And I guess just the last question for me is -- it's a minor one, but there was a mention of a Utah acquisition within the quarter in the Q. So I don't know if you could talk about that acquisition and how it fits within the broader mechanical segment.

[William George:]

Yes. So that was a plumbing company. Fantastic little company with unbelievable relationships. And it was just an addition to our already very attractive business in Utah. We wanted to get stronger in Utah, and we have never regretted buying a truly good plumbing company.

[Brian Lane:]

That's for sure.

[William George:]

And so they -- and it's really along the lines of we love fantastic people and workforces. But I think the range -- the size of that was $20 million or $30 million of revenue, so just not something we'd break out.

[Brian Lane:]

Happy to have them, though.

[Operator:]

And the next one is coming from Sean Eastman.

[Sean Eastman:]

I guess just continuing on the discussion around the funky comparables on earnings. Maybe we can have the same discussion just on same-store growth. Anything you can point out on the cadence of same-store growth trends as we move through the balance of the year?

[William George:]

Yes. So I'm glad you asked, actually. So same-store, we were down 11.8% first quarter 2021 over first quarter 2020. A big part of that was very, very heavy data center, like hundreds and hundreds and hundreds of people on some data center jobs in the fourth and first quarter of last year. So although we will face same-store revenue headwind in the second quarter, we'll not be near the last -- if there was, let's say, a 12% in the first quarter, we'll be low to mid-single digits most likely, best guess, in the second quarter. And then for the rest of the year, we think we have manageable revenue comparables. Having said that, I would say, work is starting. And that can -- a month's delay. It is -- one of the reasons we are positive about 2022, which is not like us this early in the year, is we have so much work starting in the second half of this year, but of course, it has to go into 2022. But there is -- like some of that timing could matter a little bit, right? So having said that, they're fair comparables in the second half of the year. I have hard time telling you we'd be up much, but we shouldn't be down.

[Brian Lane:]

Yes. I agree.

[Sean Eastman:]

Okay. That's helpful. And there's just a lot of discussion across the kind of industrial world these days about supply chain disruption, cost inflation. I mean, are those elements you guys are monitoring? Anything to point out in terms of what we should kind of kind of track as it relates to flow through to fix?

[Brian Lane:]

Yes. It's a good question. Obviously, we monitor it. We have long-term great relationships with all our vendors. We work closely with them. We'll continue to do so. It's really up and down depending on where it is. So far, equipment has all been good, no problems. Steel and copper, you've probably heard it, I'm sure, 20 times now, pricing up but there is availability. But nothing that's really impacting us at the moment. We're functioning, our job sites are going and nothing has been delayed so far. So we'll continue to monitor it, but it's healthier. But thank God, we have the relationships that we do have.

[Operator:]

Thank you, everyone. There are no further questions. So I'd like to turn it back to Brian for closing remarks.

[Brian Lane:]

Okay, Matt. In closing, I want to once again thank all our wonderful employees and everyone for joining us on the call this morning. We're looking forward to seeing you again, of course, and soon, hopefully. But in the meanwhile, please stay safe and healthy. Thank you very much. Have a good rest of your day.

[Operator:]

Thank you very much, Brian. Thank you, everyone. Ladies and gentlemen, that concludes the call for today. You may now disconnect. Thank you for joining, and enjoy the rest of your day.