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. During the presentation, your lines will remain on listen only. I'd like to advise all parties this conference is being recorded. And with that, I'd like to hand over to Julie Shey, Chief Accounting Officer.
Julie, please go ahead.
Thanks, Matt. Good morning. Welcome to Comfort Systems USA's Q1 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 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 ks 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 Trent McKenna, Chief Operating Officer and Bill George, Chief Financial Officer.
Brian will open our remarks. 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 Q1 of last year. This quarter we achieved unprecedented 1st quarter cash generation, thanks to strong execution as well as the receipt of large advance payments for certain 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? Thanks, Brian. Good morning, everyone.
As Brian said, our results were again very strong. 1st quarter revenue was $670,000,000 a decrease of $30,000,000 compared to the same quarter last year. Our same store revenue declined by $83,000,000 However, our recent acquisitions added approximately $53,000,000 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 Q2 of 2021, but to a lesser extent than this quarter.
Gross profit was $123,000,000 for the Q1 of 2021, an increase of $6,000,000 And gross profit as a percentage of revenue rose to 18.4% in the Q1 of 2021 compared to 16.7% for the Q1 of 2020. The improvement in gross margin results from stronger margins in Electrical. SG and A expense was $88,000,000 or 13.2 percent of revenue for the Q1 of 2021 Compared to $93,000,000 or 13.3 percent of revenue for the Q1 of 2020. On a same store basis, SG and A declined by $11,000,000 That decrease included a $6,000,000 reduction in bad debt expense As last year's collectability concerns for retail and other customers are trending better than we predicted. The remainder of the decline in SG and A was the result of cost Our 2021 tax rate was 24.8% compared to 27.6% in 2020.
Our current year tax rate benefited from permanent differences related to stock based compensation, and we expect it to trend upwards into our normal range for the full year. Overall net income for the Q1 of 2021 was $26,000,000 or $0.73 per share As compared to $18,000,000 or $0.48 per share in 2020. For our Q1, EBITDA was $51,000,000 a 39% improvement over last year, and our trailing 12 month EBITDA Is a record $264,000,000 Free cash flow in the Q1 was $80,000,000 As compared to $15,000,000 in Q1 2020, this quarter's free cash flow is far higher than we've ever achieved in the Q1 As we received advance payments on large projects that are commencing and our lower same store revenue led to some temporary harvesting of working capital. As we execute these projects over the next few quarters and if organic revenue improves in the second half as expected, We will see some absorption of working capital. Our free cash flow over the trailing 12 month period is $330,000,000 And that strong performance has returned our leverage to well under one time EBITDA despite our many ongoing and recent acquisitions.
That's all I have Brian for financials. 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 Q1 of 2021 was 1 point We believe that the effects of the pandemic are beginning to subside as same store backlog increased sequentially by nearly $150,000,000 or 10%. Although we expect some delays in bookings will continue through the Q2, 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 location.
We are seeing good trends in the underlying activity level, especially in our industrial technology and modular markets. Our industrial revenue was 40% of total revenue in the Q1. 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, healthcare and government, were 35% of our revenue, That is roughly consistent with what we saw in 2020. The commercial sector is now about 25% of our revenue.
For the Q1 of 2021, construction was 77% of our revenue with 45% from construction projects The new building and 32% from construction projects and existing buildings. Service was 23% of our Q1 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. We are seeing good opportunities in indoor air quality, Which has helped many of our service departments return to pre pandemic volumes. The high group interest in IAQ plays to our strength of solving problems for our customers and air quality considerations help us differentiate ourselves in both service and construction.
Our Mechanical segment continues to perform extremely well. Our Electrical gross margins from 5.5% in the Q1 of 2020 to 14.7% this year. Finally, our outlook. Our backlog strengthened this quarter and the effects of the pandemic are fading. We expect some continued organic revenue declines in the Q2 of 2021, but less than we experienced in the current quarter.
We continue to see strong project development and planning activities among our customers, especially in technology Our large operations are in places where companies continue to invest, It was 1 year ago that we reported our Q1 at time when everyone was adjusting to the risk and uncertainty of the pandemic. Looking back at our success over the last year, I am more grateful than ever for how our people overcame unprecedented challenges and for their undaunted courage and perseverance on customer sites across our nation. I really thank them. We will continue to work hard to keep our workforce and our community healthy and Thanks. We look forward to continued strong profitability and good cash flow in 2021 And our strong pipeline makes us optimistic about activity levels in the second half of this year and into 2022.
We will continue to invest in our workforce and to improve our formidable mechanical and electrical businesses in existing and new geographies. Thank you once again to all our employees for their hard work and dedication. I will now turn it back over to Matt for questions. Thank you.
Thank you. And the first question is coming from Adam Thalhimer. Adam, please go ahead.
Hey, good morning guys. Great quarter. Hey, good
morning Adam. Thanks a lot.
Bill, how do you
So I think that there is a if there is 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 and A. If you had told me we'd have this kind of same store revenue decline and have still Good SG and A leverage, I would have been I am thrilled.
And I actually think we've got good control on our SG and 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. Yes. No, we feel great about that.
Just to
add on to that, Adam, it just goes to show you the great job that the operating companies do do in monitoring the overhead and not Bringing you back until we really need it. So they've done a terrific job. 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 a great 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?
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 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 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 in danger, 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, the value, the same things that we value. And as far as the timing for that, we do tend to do our stand alones in the winter, 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 They backed it.
Jeff, we gave it to you. 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.
Okay. And then just a quick one on kind of how you guys see EPS shaking out this year. There was some language last quarter about not matching the very strong 2020 and that was removed.
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 Q1 We're really we were very conservative when we closed our books because we thought productivity is about to be destroyed by COVID considerations. So we had a very easy comparable in the Q1. By the end of the second quarter, it was clear that the productivity loss was less than we had feared And we have room in a lot of our guaranteed maximum jobs.
So we had a really strong we earned $1.08 last year in the second quarter. That's a tough comparable, if you're being honest. And then in the second half, how you would view that would depend on We had 2 discrete items, 1 in each of the last two quarters. Everybody knows that they're in last year's press releases there. You can pick them up all over the place.
So we got $0.17 in the Q3 of last year when we settled our R and D tax Audit from the 2014 2015 calendar years. So that was $0.17 That's just really, really discrete. And then in the Q4, in part because of COVID had affected the results of some of our bigger recent acquisitions, We had hiccups from our earn outs where when it became clear we might not be paying out quite as much as we had expected and that was $0.18 So I know the analysts took those off. We think we have a good chance of being in the range of sort of those the numbers we earned last year not counting those extraordinary In some cases, in one case non cash item, but obviously really tough comparables if you add in those extraordinary pickups. Is that clear?
I know there's a lot.
Well, it sounds like a tweak better than before. You're not telling us to go nuts, It's not firmly down the way you might have thought a couple of months ago.
So it turns out we still have to go put in some pipe.
Yes. No, but in general, We are optimistic about the year, Matt.
Got it. Okay.
Thanks, guys. Thanks, guys.
All right.
Take care.
The next question is coming from Brent Thielman. Brent, please go ahead.
Hey, thanks. Good morning.
Good morning, Brent.
Brian, the industrial bucket as a percentage of the revenue pie is large as I can remember, love to just get some flavor what the bigger drivers of that are in terms of the market to sort of make up that bucket.
Yes, I'll go first and I'll see if 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 Obviously data centers right now and technology is a big component of that today. But also included in that, we're seeing a lot of good farmer 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 to add on that?
Yes. Our strength in the Mid Atlantic and in the Southeast It's very geographically tied with where people are companies are investing that money. And then also there's another little just Structural issue, which is we bought this great company, TEC, in Tennessee, in December 31 last year. That company is 100 percent industrial. It's a company in the roughly $100,000,000 revenue range.
So the full year of those guys will bring in, we'll just That's going to add industrial just as they age in, as they same store their way into those numbers.
And Brent, in terms of that sector going forward, we're still seeing plenty of opportunities. And as I mentioned in the script, Scott, I think it's got a lot of legs to it in the industrial sector going forward.
Commercial is the section that's been shrinking for us, right? But on a 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 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, As 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 There's some natural structural things that are making commercial be a little bit better fit for our competitors maybe than for us.
But on that front, we're still seeing a lot of good service opportunities and we'll have some IAQ opportunities. And on
the commercial office building. Commercial service is great. If you think about the majority of our service business is a good point, Brent.
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 comments here. Maybe you could just talk a little bit about 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?
So I wouldn't really call it hesitation. When I talk to our guys, it was more the case that it just wasn't a good time to start stuff, right? In the middle of You had 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 we wanted to build stuff and I I think it was just more functionally create 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. Yes, Brent, the pace has picked up in terms of what we're looking at, in terms of Stop. We're reviewing here decisions being made quicker. So you can see at least I can feel a significant change in pace.
Okay. And then I guess a question on the Electrical segment. I mean margins have Snap back to the level that you guys 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 for some of the acquisitions you've done and then how we ought to think about the margins going forward for that segment? That's actually, it's a big change from last year.
Yes, yes. So I'll go first and then Bill can comment. But thanks First of all, the Walker, which we've talked about in over a year now. Walker has always been a really An elite electrical contractor in the 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. And on that, hopefully, we've been able to help them with a bit of training, Some technology, etcetera. 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 It's not to come to fruition for them in the Q1. And Bill, you
want to Just 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. 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 2 main parts of our Electrical and Walker's margins are fully back into the same range TEC reported this quarter. So it wasn't a mix issue. But we are glad to see you.
Sure. Well, congrats on a great quarter. Best of luck here going forward.
All right. Thank you.
And the next one is coming from Julien Romero. Please go ahead.
Hey,
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 'twenty one?
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, holding hiring people and training.
We're seeing some good opportunities come out of the 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. Yes. 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 done nothing but grow for us. And it's twice as big as it was just a few years ago, but it's 3 or 4 times as profitable, Which is what we really care about.
And at the end of the day, it's got really good prospects. 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.
But we We have a big focus on it, continue to grow it, and we will keep the pedal to the metal on service.
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 schoolwork activity, but I did see the revenue in education declined in the quarter. So I don't know if you can help us
Yes. I think we're in the early days of the allocation of the funds to school. We've done a lot of Research and 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.
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.
By the way, a little structural factor. If you're comparing the Q1 to the full year, ton of school work happens in the summer. Yes. So you're So that's not that wouldn't be surprising.
Yes. No, 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 just a matter Those funds being allocated and just kind of translating the revenue over time.
Yes, determine what they want to do.
Right.
Okay. And I guess just the last question for me, it's a minor one, but there was a mention of a Utah acquisition within the quarter in the queue. So I don't know if you could talk about that acquisition and how it fits within the broader mechanical segment.
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 just wanted to get stronger in Utah. And we've never we have never regretted buying A truly good plumbing company. And so they it's really along the lines of we love fantastic people and workforces.
But I think the size of that was $20,000,000 or $30,000,000 of revenue. So just not something we break out.
Happy to have them though.
Great. Thanks for
taking the questions.
All right. Thank you.
And the next one is coming from Sean Eastman. Sean, please go ahead.
Hi, fellas. Thanks for taking my questions. I guess just continuing on the discussion around the funky comparables on earnings, Maybe we could 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?
Yes. So I'm glad you asked actually. So same store, we were down 11.8% Q1 2021 over Q1 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 4th Q1 of last year. So although we will face Same store revenue headwind in the second quarter will not be near the left.
If it was let's say it was 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 So much delay, it is one of the reasons we are positive about 2022, which is not like us this early in the year, We have so much work starting in the second half of this year that, 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, there are fair comparables in the second half of the year.
I have a hard time telling you we'd be up much, but we shouldn't be down. Yes, I agree. Okay.
And 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 I mean, are those elements you guys are monitoring anything to point out in terms of what we should
Kind of
track as it relates to flow through to fixed?
Yes. It's a good question. Obviously, we're monitoring 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's all been good, You don't steal and copy, you 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 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.
Okay, terrific. Well, I'll leave it there. Thanks so much for the help.
All right, John. Take care.
Thank you, everyone. There are no further questions. So I'd like to turn it back to Brian for closing remarks.
Okay, Matt. In closing, I want to once again thank all our wonderful employees and for everyone for joining us on the call this morning. We're looking forward to seeing you again in person soon hopefully. But in the meanwhile, please stay safe and healthy. Thank you very much.
Have a good rest of your day.
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.