Release Date: July 26, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Comfort Systems USA Inc (FIX, Financial) reported a 40% increase in revenue for Q2 2024, reaching $1.8 billion.
- The company's mechanical segment revenue increased by 49%, driven by organic growth, acquisitions, and modular expansion.
- EBITDA doubled to $223 million compared to the same quarter last year, with same-store EBITDA increasing by over 80%.
- The backlog remains strong at $5.8 billion, a 38% year-over-year increase, indicating sustained demand.
- Free cash flow for the first six months of 2024 was $290 million, and the company retired all bank debt as of June 30, 2024.
Negative Points
- Comfort Systems USA Inc (FIX) faces tougher prior year comparable results for the remainder of the year, which may impact growth rates.
- The company acknowledged that the significant contingent consideration opportunity from recent acquisitions could lead to larger purchase-related adjustments in future quarters.
- Despite strong performance, the company noted that maintaining current margins in the long term could be challenging.
- The electrical segment, while performing well, may face sustainability issues in maintaining over 22% margins consistently.
- SG&A expenses increased to $180 million, and while the percentage of revenue decreased, further SG&A leverage may be difficult to achieve.
Q & A Highlights
Q: How sustainable do you think these margins are as we think about the business on a longer-term basis? Is there any reason to think these margins would ultimately revert back more towards the historical averages over time?
A: Julie Shaeff, Chief Accounting Officer: We are optimistic in the near future that we should maintain these margins due to good pricing, excellent execution in the field, and growing service profitability. William George, Chief Financial Officer: Every factor creating these margins is continuing at least as strong as it has been and in some cases continues to get stronger.
Q: Was most of the modular construction performance in the quarter for data centers? How do we think about the growth algorithm in modular going forward?
A: William George, Chief Financial Officer: Modular construction did great this quarter, growing to near 18% of our revenue. We are taking incremental commitments and focusing on improving production and productivity of newly deployed space. Comfort Systems will take the amount of work we can execute, prioritizing our ability to keep promises to customers over pushing for topline growth.
Q: Do you see the potential for more program awards for modular going forward, or will future awards be more one-off?
A: William George, Chief Financial Officer: Awards come in as programs are completed. We have kept backlog levels consistent and have seen more modular bookings in winter months. Our prospects are good, but it depends on continued demand for data and computing power.
Q: Can you comment on Texas electrical margins and the outlook for that business?
A: Brian Lane, President and CEO: Our Texas electrical company is superb, operating in four big markets with a lot of mission-critical work. William George, Chief Financial Officer: The electrical segment includes strong results in Kentucky and North Carolina. The demand for electrical services is high, and our businesses are performing exceptionally well.
Q: How do you keep your employees happy in this current environment, and are there concerns about sustainability with everyone working hard for a long time?
A: Brian Lane, President and CEO: We take great pride in protecting our employees' health and safety, treating them fairly and with respect. We ensure they have plenty of work, which is beneficial for them and their families. We are extremely grateful for their hard work and commitment.
Q: What percentage of your business do you think is exposed to AI?
A: William George, Chief Financial Officer: The demand for data, including AI, has been an incremental add to an already solid pipeline. AI and chips are driven by hyperscalers' decisions to protect their core businesses and prepare for future opportunities.
Q: How should we think about same-store sales growth percentages in Q3 and Q4?
A: William George, Chief Financial Officer: Through 11 months, same-store sales growth was 26%. We believe we will have strong growth for the full year, estimating low to mid-20% range. There is a range around that estimate, and we have been surprised to the upside lately.
Q: How crucial is project selection in creating these margins, and can you continue to be more selective on projects?
A: Brian Lane, President and CEO: We are very careful in selecting projects, ensuring we allocate valuable resources to good customers and work. Project selection is crucial, especially in a market with a lot of work available.
Q: Can you touch on SG&A leverage and how we should think about it going forward?
A: William George, Chief Financial Officer: It will be hard to get much more SG&A leverage mathematically, but the current range should continue as revenue grows. We had notable dollar increases in SG&A this quarter, and it takes money to do this work. The leverage we've achieved so far is solid unless revenue trends change.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
