Comfort Systems USA, Inc. (FIX) on Q3 2022 Results - Earnings Call Transcript

Operator: Good morning, and welcome to the Comfort Systems Third Quarter 2022 Earnings Conference Call. . Please note, this event is being recorded. I would now like to turn the conference over to Julie Shaeff, Chief Accounting Officer. Please go ahead. Julie Shaeff: Thanks, Anthony. Good morning. Welcome to Comfort Systems USA's Third Quarter 2022 Earnings Call. Our comments today, as well as our press releases contain forward-looking statements within the meaning of the applicable securities laws and regulations. What we will say today is based upon the current plans and expectations of Comfort Systems USA. Those plans and expectations include risks and uncertainties that might cause 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. A slide presentation has been provided as a companion to our remarks. The presentation is posted on the Investor Relations section of the company's website found at comfortsystemsusa.com. Joining me on the call today are Brian Lane, President and Chief Executive Officer; and Bill George, Chief Financial Officer. Brian will open our remarks. Brian Lane: All right. Thanks, Julie. Good morning, everyone. We had another great quarter with continued increases in revenue, earnings and backlog, and we are really grateful for the success created by our employees amid unique challenges. We earned $1.71 per share this quarter compared to $1.27 a year ago. Our results this quarter included a net gain of $0.10 per share related to legal matters and $0.04 related to tax benefits from prior years. This quarter marks the first time that we have achieved $100 million in EBITDA in a single quarter. Strong activity levels and ongoing cost increases in equipment and other inputs have again produced same-store revenue growth of over 20%. Bookings increased this quarter and we continue to experience solid bidding and planning activity. Our strong cash flow also continues and is especially satisfying since we are investing working capital to support our growth. We have also announced an increase in our dividend to $0.15 this quarter. I will discuss our business and outlook shortly. But first, I'll turn this call over to Bill to review our financial performance. Bill? William George: Thanks, Brian, and good morning. Revenue for the third quarter of 2022 was $1.12 billion, an increase of $286 million or 34% compared to last year. Our recent acquisitions contributed a total of $97 million of new quarterly revenue. And so we had same-store revenue growth of $198 million or about 23%. That sharp increase in revenue was broad-based and was driven by strong market conditions. Inflation of equipment and materials also contributed to revenue growth. Our same-store revenue increased by 23% in the third quarter and same-store employee headcount increased by 8% in the same time frame. For the fourth quarter, we currently expect double-digit same-store revenue growth, although there are more variables than usual. Gross profit was $202 million for the third quarter of 2022, a $43 million increase compared to last year and the first time we have ever reported over $200 million of gross profit in a single quarter. Our gross profit percentage was 18.1% this quarter compared to 19.1% for the third quarter of 2021. The decrease in gross profit percentage resulted from the change in project mix, including the pass-through of inflated materials and equipment costs. Gross profit percentage was impacted by a decline in gross profit margins in our Mechanical segment compared to extraordinary performance last year, partially offset by a strong increase in the Electrical segment, which was further enhanced by a job-related litigation gain. SG&A expense for the quarter was $121 million or 10.8% of revenue compared to $95 million or 11.4% of revenue for the third quarter of 2021. Most of the dollar increase is from new companies. Our operating income increased by 27% or $17 million as compared to the third quarter of 2021. Our tax rate for the quarter was 17.4%. During the current quarter, we filed our 2021 federal tax return and we included the R&D tax credit in this original return. And as a result, we increased our estimated tax benefit related to the R&D tax credit for the current year, as well as for the years 2019 to 2021. And that was a gain of $0.04 for the third quarter of 2022 that related to prior years. We continue to view our normalized tax rate to be approximately 22% to 23%. Net income for the third quarter of 2022 was $62 million or $1.71 per share. The $1.71 per share includes the 10% net gain related to legal matters and $0.04 related to the revised estimate for the R&D tax credit related to 2019 to 2021. Net income for the third quarter of 2021 was $46 million or $1.27 per share by comparison. EBITDA increased from $82 million in the third quarter last year to $101 million this quarter, a 23% year-over-year EBITDA increase. As Brian pointed out, this is the first time in our history that we've achieved over $100 million of EBITDA in a single quarter. Free cash flow for the first 9 months of 2022 was $137 million, including the $33 million refund from the IRS tax credit in the first quarter. This is a strong cash flow considering the investments we're making in working capital as we fund our growth. Our debt at the end of September was $381 million and our debt-to-EBITDA ratio at quarter end stands at We are actively repurchasing our shares. And in the first 9 months of 2022, we have repurchased 425,000 shares for approximately $36 million. So go ahead, Brian. Brian Lane: All right. Thanks, Bill. I am going to spend a few minutes discussing our backlog and markets, and I will comment on our outlook for the rest of 2022 and 2023, and on inflation and supply chain considerations. Our backlog at the end of September was $3.25 billion. Year-over-year, our same-store backlog is up $1.1 billion or 57%, with increases across most of our operations. Sequentially, our same-store backlog increased $443 million, which is remarkable for a third quarter as we are also burning backlog at record levels. In addition to strong demand in technology and other industrial sectors, an important factor driving our backlog higher is that our customers are committing orders to lock in our labor so that we can place equipment orders earlier in order to allow for exceptionally long lead times from manufacturers. Industrial revenue was 47% of our revenue in the first 9 months of 2022. This sector, which includes technology, life sciences and food processing remains strong and is very, very heavily represented in new backlog and in our pipeline. Institutional markets, including education, health care and government are solid and represent 32% of our revenue, consistent with last year. Finally, the commercial sector remains active. But without changing mix, it is now a smaller part of our business at about 21% of revenue. Year-to-date, construction was 78% of our revenue, with 48% from construction projects for new buildings and 30% from construction projects in existing buildings. Service was particularly strong during the third quarter. Overall, service is 22% of our year-to-date revenue with service projects providing 9% of our revenue and pure service, including hourly work, providing 13% of revenue. Year-to-date service revenue is $674 million, a 33% increase with same-store service revenue up by 16%. Service continues to be a consistent and growing source of profit and cash flow at Comfort Systems. In all our activities, including both service and construction, we are encouraging and supporting our customers as they seek to improve the efficiency and sustainability of their buildings and operations. And we are raising our own standards in the areas of sustainability, diversity and governance. Inflation is widespread, and we expect continued challenges in the cost and availability of the inputs that we use to serve our customers. Although conditions are hard to predict in the near term, we are recognizing these challenges in our job planning and pricing. And we are working to order materials earlier than usual, while seeking to collaborate with customers to share supply risk and to mitigate these challenges. We have a very good pipeline of opportunities. And so far, we have been able to maintain activity levels and productivity despite supply chain challenges. We are watchful of world events and Fed tightening. However, given ongoing demand, our record backlog and strength in the industrial and institutional sectors, we anticipate continued strong earnings and cash flow in the coming quarters. As we look ahead, our priority is to preserve and grow the best workforce in our industry, so we can continue our legacy of safely constructing, installing, maintaining, repairing and replacing our nation's buildings, while helping our communities achieve sustainable growth. With the highest backlog in the history of Comfort Systems USA, we will continue to invest in our workforce, technology and execution capabilities. Thanks to our amazing workforce, we are optimistic about the remainder of 2022 and 2023. I want to end by thanking our 14,000 employees for their hard work and dedication. I'll now turn it back over to Anthony for questions. Thank you. Operator: . Our first question will come from Julio Romero with Sidoti & Co. Julio Romero: Starting on the revenue, the organic growth, it's the second straight quarter of 20%-plus growth, broke $1 billion in organic sales, in sales, I should say. Just talk about the trend line for organic growth, exit cost pass-throughs. I know you mentioned same-store headcount of up 8%. Is that kind of the baseline for organic growth? William George: Yes. So no, I would not say that's the baseline because, of course, we're charging more for those 8%, right? So there is inflation in that number. And also, our temporary labor is up quite a lot by more than 8%. So I think the best -- our best -- you can't know what would have happened without inflation, but our best estimate continues to be that about half of our same-store growth is caused by inflation and market conditions, and about half of our same-store growth is just us doing more work, true underlying growth. And as far as the first part of your question about sort of the trend line, so we are still -- we had a reasonably soft comparables compared to a year ago, we were still coming out of COVID. The comparables get a little tougher in the fourth and first quarter, but there's still really favorable comparables if all you are looking for is same-store revenue growth. By the second quarter of next year, we'll be comping, and for the rest of next year, we'll be comping to these big numbers we're posting right now that are -- our second quarter was up 25%. So a year from now, depending on what inflation is doing, it's much, much harder to prognosticate that you're going to grow from there. Even if we don't -- and by the way, if inflation abates, right, that could create at least some of sort of a turnaround in that effect. But I would say we don't think that would mean we would earn less money. In fact, if anything, it could be slightly favorable if prices were to get better. So what you would see is you'd see lower revenue growth, but of course, the margins would get better because we'd have less of that material pass-through. So long question, but it's a complicated situation as well -- long answer, I'm sorry. Julio Romero: No, totally. And I appreciate the comprehensive answer there. Just on the increase in bookings, it's up almost $500 million sequentially. Just how much of that, are you able to parse out how much of that is driven by the larger industrial projects that are kind of committing earlier? Brian Lane: Yes. Julio, it's Brian. So it's -- we've got broad-based increase in backlog, to be honest. But for sure, we are getting increased bookings, and you'll see that continue into the fourth quarter. But the backlog increase, quite frankly, is broad-based. William George: And coincidentally, service was up by exactly the same percentage year-over-year as construction. So I think it's really -- it's all across the board that gain. But for sure, you'll probably see in the coming quarters, more of that coming from these industrial bookings because they're just so big. And also this third quarters are always strong service quarters. Julio Romero: Understood. And then maybe last one for me is on the segments. This is the first time that electrical gross margins outpaced mechanical. Is that kind of an inflection point for the electrical segment? Have you kind of reached some critical mass where you start to see some better operating leverage there? Brian Lane: Yes. Well, I mean, we've had pretty consistent steady state growth in gross margins. I mean I think we have really terrific electrical companies. We had a challenging job a few years ago, they got helped by litigation pickup for sure, but we have improved significantly better across the board in electrical. And I'm pretty optimistic we'll continue to see improvement in the gross margins as we go forward. Operator: Our next question will come from Sean Eastman with KeyBanc. Sean Eastman: Fantastic quarter. Many complements. So this kind of early project commitments dynamic that is part of the momentum in the bookings we're seeing in the quarter, how would you characterize the duration of the backlog at this point? And does this early commitment on order suggests there's some pull forward in the bookings we're seeing this quarter? Or is the message that, that bookings momentum still continues post quarter end? William George: So definitely, there's more -- there's pull forward, right? I mean, because if they book earlier, they booked earlier than they would have been. Now does that mean they won't continue to book heavily? The question is, at some point, do they stop booking earlier because the lead times for equipment become less or because the market softens? And I think there's certainly no sign of that in what's actually happening in our business. Of course, we don't know that could change in a month or a year. But right now, I don't know, Brian, it's very robust. Brian Lane: Yes. It's very robust. And we're even seeing our backlog extends -- it's for the highest number we've had longer than a year, Sean. So we've seen -- it's been the opposite. I think it's actually picked up, quite frankly. William George: We have companies that aren't selling for 2023, they're full. And as you think about that, that's why people are committing earlier because we understand, oh, these guys are getting full. If we want a building, we better get. Brian Lane: And equipment is one thing, you also got the labor, right? You got to make -- they want to make sure there are people to do it. Sean Eastman: Yes. So kind of fair to say that pretty abnormally high visibility for 2023 at this point? William George: Unprecedented. Brian Lane: Unprecedented. At least since -- in the 20 years I've been here, for sure. Sean Eastman: Okay. Got it. And then just this notion of locking up your labor resources early. You guys are kind of the -- I mean, there's a lot of scarcity in the system, I suppose, but the labor resource is a really kind of core scarce resource in the project life cycle. And I just wonder how you think about monetizing, locking up those resources early, particularly in kind of an uncertain cost environment as well? William George: Well, as you might imagine, if someone in one of the many, many cities we're working at is very busy. If you want them to do work, you're going to have to pay them well for it. So our -- you can see it in our numbers, right? Brian Lane: Yes. You can see it in the results, Sean. We are very fortunate here. At the operating company level, these folks have a really good handle on the markets they are playing in, in terms of all facets of the business. And we're very fortunate with the companies we have today. Sean Eastman: Yes, we can see that. And maybe one last quick one for Bil on M&A., obviously, the last couple of years has been quite active. It's been quite a good story for you guys. Any message on, say, the next 1 to 2 years in terms of what's in the pipeline and what we could expect to see? William George: It's certainly -- so we have 2 things going on in M&A. One is there are people we've just talked to for years, we're friends. And when they're ready to sell, we are there. We've worked on it for years, and we may -- you may see some M&A for sure. But in general, we do think that the market is changing, that the cost of capital has an effect on what people are willing to -- people are willing to invest capital, and that there are a lot of companies for sale right now. And I don't mean the company we usually buy. I mean, companies owned by private investors. There are -- I'd say there's 3x as many pitched booked on the street that I've ever seen. So I think it's a moment of inflection, and I think we're going to be very, very careful. We've said forever, we don't have to do a deal in any given year, right? We just want to create value over a -- we play a very, very long game for this. So I know it's a bit of a mixed answer, but there's really 2 parts. And I would say we're going to be very, very, very watchful right now. Brian Lane: Sean, Bill keeps his track that he's had for the last 10 years, we'll be in good shape. Sean Eastman: Yes.Yes. No doubt about that. Operator: Our next question will come from Adam Thalhimer with Thompson, Davis. Adam Thalhimer: Just out of curiosity, can you just follow-up on that, Bill, on the 3x the amount of book floating around? Why do you think that is? William George: I think it's because if you were somebody -- you were an investment firm for whom a business really is inventory, right? If you have a lot of inventory, you might not want to hold that inventory over the next year. So you might want to at least test the market. So I think that it's really astounding, quite honestly. Maybe I'm speaking out of school. But in general, everything is for sale. It's everything that it's owned by people who trade businesses seems to be for everything I know of is there at least testing the market. Now do I think they're succeeding in selling these businesses? I wouldn't rule it out, but I don't know because we're not super active. We take a hard look at some of the really best stuff, not -- but in general, we don't participate in any of that. We like to get to know people over years, right? And that's not really how that works. things that other people have been assembling, right? We were very, very careful. We don't -- we really understand how hard that is and that how hard it is to put stuff together in ways that will last for decades, right? So we're very -- so far, we've never bought a company. We've never bought a contractor from anybody, but a human being who owned it and lives in it and loves it. Never done it. Adam Thalhimer: What would be the appetite? I mean you added electrical and you're doing well there. What would be the appetite to add something else to the portfolio? William George: Well, there's not much need to for the foreseeable future. So it would have to be something we really felt like we had a reason to expect synergy from, right? And by the way, we did. We added a labor company. But in a way that matters to you that creates a new segment, I just, I think, we're just barely getting started with a... Brian Lane: I think we see a lot of opportunity, Adam, and just continuing to improve the mechanical electrical businesses that we're in. I think there's constant improvement, and it's pretty exciting. So we'll keep it that, I think. Adam Thalhimer: Okay. And then I guess I got to ask one nitpicky one. Just on the margin outlook. What are your thoughts on margins Q4 and next year? And some of that relates to like the -- where we were in these jobs when you start to finish up some large jobs that got started over the last year, 1.5 years? Brian Lane: Well, I'm really happy with the margins that we're cranking out right now. We are 18.1%, as I said, probably a trillion times, you're 17.5%, 18%, above that, I think you're really performing well in the field. I think we're getting terrific productivity. I think we can maintain that level. You might get a little improvement as service continues to grow, right? We're getting some good margin help from there. But if we continue to perform in the field, that 18% range is definitely doable. And I think that's a really good number for us to be around. Adam Thalhimer: Q4 and next year? Or it might dip down in Q4, right? William George: So Adam, there's a variable here that we don't know, which is, right now, our volumes are lower because of the pass-through are very -- in our cost of goods sold, materials and equipment are 3 points higher of that proportion, not 3% higher in total, but 3 points of the 100% higher of our cost, and that has that materials and equipment passes through at a lower margin. So I think what one of the things you could -- one way to look at it is we think the margins we're getting on our labor right now are stupendous and we would be very happy with them to stay the same forever. Behind that, there's some mix issues where if you made me pick, I'd expect our margins to be higher next year, but that's the assumption in that. The unknowable assumption is I'm assuming inflation gets under control. Operator: Our next question will come from Brent Thielman with D.A. Davidson. Brent Thielman: Just sort of tailed with Adam's question, I think Julio's as well in that. I guess, more around the electrical business. If you just take away the inflationary element, have your longer-term expectations for margins in that business change just given the performance years of late? And of course, what would those be if they have? Brian Lane: Well, absolutely, right? The goal of everything we do operationally is to improve, right, to improve our margins, to improve our productivity, improve our efficiency, quality, safety. So we're continuing to work on the electrical business. The companies are. We've had nice steady state improvement. We'll see -- you've got to do it, right? It's easy to talk about it. But I think you will see continued improvement where we get to? I really don't know. But I'm pretty optimistic about the Electrical business margin improvement. William George: And I want to say, it's not that we're now expecting higher margins. We expected higher margins last year and the year before. We had a little bit of softness. But one of the interesting things you saw this quarter was we had a gain on a job-related -- a big job-related litigation in electrical. Well, essentially, what that was, was I was an arbitrator saying, oh, yes, they didn't barely compensate you for work you did in 2 years starting last year, really starting the year before. We actually did better in electrical. That money should be pushed back to them. And I think they're new -- so I think the margins they're at now are their normal margins. And I think there is some upside in electrical margins. Now having said that, keep in mind, the margin you're seeing, that 19%, has that gain from that -- so the margins, if you back out the gain from that litigation win, they're still a little below mechanical, but they're really, right, they're all kind of bunched together. And I think... Brian Lane: But I think they can get there to be the same. William George: Yes. I think there -- on the construction side, I think electrical is every bit as -- if not -- it's every bit as profitable. Brian Lane: I'm very optimistic about our electrical companies, Brent. Brent Thielman: Yes. Really helpful. Just a follow-up. I wanted to get your thoughts, the 179D energy efficiency deduction, I think, got revised with the IRA, Inflation Reduction Act. Any thoughts on the potential implications here for the industry? William George: Yes. So we get -- if you look back at our last several years, we don't call it out separately, although you could find it in some places if you look carefully. We've gotten a few pennies from that, right? Here's what happens. With the 179D, the customer gets that unless it's like a public company, where it's a public -- I mean, sorry, a public entity. When it's a public entity, we can get take that deduction and give them some benefit for it. So we've had direct few cents of EPS for 179D for a while. In addition, it encourages people to do more work, especially more renovation work. And now they've, I think, more than doubled it. So one of the things we think might happen is at the margin that will create more renovation work, which will be helpful to us. It may or may not increase. We may -- the direct benefit we get may or may not go up just because it was small to start with, and also it's easier for somebody to pass the benefit along when it's smaller, it's possible they'll demand more for it if it gets bigger because they're kind of -- it's not big enough now for them to pay much attention to. But in general, it can only be a positive. But let me tell you something. That's just one of many positives, and the bigger positive is like reshoring, you know what I mean. But it's -- a lot of things are pointing in the same direction, that's for sure. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Brian Lane for any closing remarks. Brian Lane: All right. Thank you. In closing, I really want to thank again our tremendous workforce, and it's throughout the organization. We're getting tremendous performance from everybody, and I really appreciate it. We also really thank everybody for your interest in Comfort Systems and your time today. We are grateful for the questions and the interest for sure. So everybody be safe out there and hope you enjoy the upcoming holiday season. Thanks, and have a great day. William George: Thanks. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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Comfort Systems USA, Inc. (NYSE:FIX) Sees Positive Analyst Outlook and Stock Price Movement

  • Joshua Chan from UBS sets a price target of $525 for NYSE:FIX, indicating a potential increase of approximately 67.42%.
  • Current trading price of $459.11 reflects a 1.80% increase, showcasing positive investor sentiment.
  • Annual price fluctuation between $474.62 and $185.83, with a market capitalization of approximately $16.34 billion, underscores the company's significant industry presence.

Comfort Systems USA, Inc. (NYSE:FIX) is a prominent player in the mechanical services industry, providing heating, ventilation, and air conditioning (HVAC) installation, maintenance, and repair services. The company serves a diverse range of clients, including commercial, industrial, and institutional sectors. As a key competitor in the HVAC market, Comfort Systems USA faces competition from other major firms like EMCOR Group and Johnson Controls.

On November 19, 2024, Joshua Chan from UBS set a price target of $525 for FIX, currently, FIX is trading at $459.11, marking an increase of 1.80% or $8.11. This rise indicates positive investor sentiment and aligns with the optimistic outlook from Wall Street analysts. The stock's price has fluctuated between $451.07 and $460.15 during the trading day, showcasing its volatility. Despite this, the upward trend suggests growing investor confidence in the company's future performance.

Over the past year, FIX has experienced a high of $474.62 and a low of $185.83, highlighting its dynamic price range. The company's market capitalization stands at approximately $16.34 billion, reflecting its significant presence in the industry. With a trading volume of 55,374 shares today, investor interest in FIX remains robust, further supported by positive analyst ratings and price targets.

Comfort Systems USA Expands Stock Repurchase Program

  • Comfort Systems USA, Inc. (NYSE:FIX) increases its stock repurchase authorization to 1,000,000 shares, signaling strong financial health and confidence in future growth.
  • The company reported a net cash inflow from operating activities of approximately $189.86 million, underlining its operational efficiency and robust cash generation capabilities.
  • With a free cash flow of approximately $166.47 million and a healthy cash position, Comfort Systems USA is well-equipped to fund its stock repurchase program while continuing to invest in its operational infrastructure.

Comfort Systems USA, Inc. (NYSE:FIX) is making headlines with its recent announcement to expand its stock repurchase program. As a leading provider in the HVAC and electrical contracting services sector, Comfort Systems USA is demonstrating its confidence in the company's financial health and future prospects. The decision to increase the total shares authorized for repurchase to 1,000,000, up from the previous amount, underscores the company's commitment to enhancing shareholder value. This move is particularly noteworthy considering the company's extensive national presence, with operations spanning 177 locations across 136 cities.

The financial underpinnings supporting this decision are robust, as evidenced by the company's recent quarterly report. Comfort Systems USA reported a net cash inflow from operating activities of approximately $189.86 million, a figure that highlights the company's operational efficiency and its ability to generate significant cash from its core business activities. This strong cash flow is critical for the company as it seeks to fund its stock repurchase program without compromising its financial stability or operational capabilities.

Moreover, the company's strategic financial management is further illustrated by its handling of cash flows related to investing and financing activities. Despite a net cash outflow of about $60.79 million for investing activities and roughly $30.45 million from financing activities, Comfort Systems USA has maintained a healthy cash position. The capital expenditures of nearly $23.38 million during the period reflect the company's ongoing investments in its operational infrastructure, essential for sustaining long-term growth.

The repurchase program's funding is facilitated by the company's impressive free cash flow of approximately $166.47 million. This metric, which deducts capital expenditures from net cash provided by operating activities, provides a clear picture of the cash available for discretionary purposes, such as stock repurchases. Additionally, the company's prudent debt management, with a repayment of about $3.83 million during the quarter, and the increase in cash balance to $199.42 million by the period's end, further solidify its financial position.

Comfort Systems USA's strategic decision to expand its stock repurchase program is backed by a solid financial performance, characterized by strong cash flow generation, careful investment, and financing activities management. This approach not only supports the company's immediate goal of enhancing shareholder value through stock repurchases but also positions it well for sustained growth and profitability in the competitive HVAC and electrical contracting services market.