Good day, and welcome to the Quarter Four, 2020 Comfort Systems USA Earnings Conference Call. I would like to advise all parties that this call is being recorded for replay purposes. I’d now like to turn to the host for today, Julie Shaeff, Chief Accounting Officer. Please proceed.

Thanks, Sunny. Good morning. Welcome to Comfort Systems USA’s Fourth Quarter and Full Year 2020 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 more detailed listing and commentary concerning our specific risk factors in our most recent Form 10-K 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.

Okay. Thanks, Julie. Good morning, everyone, and thank you for joining us on the call today. Due to the commitment and resilience of our people, we were able to overcome unprecedented challenges during 2020 to achieve record earnings and cash flow. In addition to the ongoing challenges from the pandemic, our people and organizations also experienced and overcame significant adversity in Texas just last week. In 2020, we earned more than 20% of our revenue in Texas, where we have multiple strong mechanical capabilities in many markets, and Texas is also the home to our largest electrical team. Virtually all of our operations were closed for at least three full days with loss of productivity throughout last week. We are now back to full capacity. I am deeply grateful for the courage and perseverance that our field employees demonstrated last week in Texas and in many other markets that experienced terrible weather. And I am in awe of our field workforce’s grit and perseverance through COVID as every day our essential workers overcame the challenges they faced. We continue to work hard to keep our workforce and our community safe and healthy every day. 2020 was a record year for Comfort Systems USA. We finished the year with strong fourth quarter earnings per share of $1.17, and for the full year, we earned $4.09. This marks the highest annual EPS in the history of our company, even without our tax and valuation gain. Revenue for full year 2020 was also a record at $2.9 billion. Our backlog is up slightly since September, and we have very good ongoing bidding activity as we start 2021. Our 2020 free cash flow was an unprecedented $265 million. And yesterday, we again announced an increase in our dividend. At the end of 2020, we acquired a Tennessee Electric Company headquartered in Kingsport, Tennessee, and we expect they will contribute $90 million to $100 million of revenues in 2021. This acquisition was closed on December 31, 2020, so their balance sheet and backlog are included as of the last day of December. TEC is a strong electrical and mechanical contractor, but TEC also brings unique industrial construction and plant service expertise and relationships with complex industrial clients. Their results will be reported in our electrical segment starting in 2021. In December, we promoted Trent McKenna to Chief Operating Officer. Trent has been with Comfort Systems USA for 16 years, and I believe he will be a valuable leader as we continue to grow and improve our operations. By the way, I am not going anywhere, but this added depth will provide much-needed bandwidth to our senior team. Before I review our operating results and prospects, I want to ask Bill to review our financial performance. Bill?

Thanks, Brian. Yes. So as Brian said, our results were again very strong. I’m going to just briefly point out some things for most of the line items of our P&L. So fourth quarter revenue was $699 million, a decrease of $21 million compared to the same quarter last year. Our same-store revenue declined by a larger $68 million. However, our recent acquisitions of TAS and Starr offset that decline somewhat as they added $48 million in revenue this quarter. You may recall that last year, at this time, we had large data center work in Texas that created very high revenue in the comparable period. We will continue to face tough revenue comparisons through the first half of this year, especially in electrical, as a result of last year’s big deployments. Revenue for the full year was $2.9 billion, an increase of $241 million or 9% compared to 2019. Full year same-store revenue in 2020 was 2% lower than in 2019 due to the factors I just mentioned. Gross profit was $137 million for the fourth quarter of 2020, an increase of $4 million. And gross profit as a percentage of revenue rose to 19.6% in the fourth quarter of 2020 compared to 18.4% for the fourth quarter of 2019. For the full year, gross profit increased $45 million, and our gross profit margin was approximately flat at 19.1%. SG&A expense was $89 million or 12.7% of revenue for the fourth quarter of 2020 compared to $87 million or 12% of revenue for the fourth quarter of 2019. The prior year fourth quarter benefited from insurance proceeds associated with the cyber incident of approximately $1.6 million, and that reduced SG&A last year. For the full year, SG&A as a percentage of revenue was 12.5% for 2020 compared to 13.0% for 2019. On a same-store basis, for the full year, SG&A declined $6 million, and that decrease was primarily due to austerity relating to COVID, such as reductions in travel-related expenses. During the fourth quarter of 2020, we re-valued estimates relating to our earn-out liabilities, and as a result, we reported an overall gain of $7 million or $0.18 per share. For the full year, the gain associated with acquisition earn-out valuation changes was $0.20 per share. These gains were due to lower-than-forecasted earnings associated with our recent acquisitions, especially at Walker, which was more affected by COVID than our other operations. Our 2020 tax rate was 21.6% compared to 24.7% in 2019. During the third quarter of 2020, we finalized advantageous settlements with the IRS from their examination of our amended federal tax returns for 2014 and 2015. On a go-forward basis, we now expect our normalized effective tax rate to be between 25% and 30%. Although 2014 and 2015 are now settled, we have open audits relating to refunds we are claiming for the 2016, 2017, and 2018 tax years. But we believe that any benefits that arise from those years would most likely be recognized in 2022 or beyond. So after giving effect to all these items, we achieved record net income. Specifically, net income for the fourth quarter of 2020 was $43 million or $1.17 per share as compared to $34 million or $0.92 per share in 2019. Earnings per share for the current quarter included that $0.18 gain associated with earn-out revaluations. Our full year earnings per share was $4.09 per share compared to $3.08 per share in the prior year. The current year also included a tax benefit of $0.17 that we reported in the third quarter of 2020 from a discrete tax item. The gains associated with earn-out revaluations, which for the full year was $0.20. For the fourth quarter, EBITDA was $63 million, which is 6% higher than the fourth quarter of last year. Our annual 2020 EBITDA was a milestone achievement for us, as our full year EBITDA was $250 million. Cash flow for 2020 was extraordinary. Our full year free cash flow was $255 million compared to $112 million in 2019. Our 2020 cash flow includes roughly $32 million of benefit that’s a direct result of the Federal Stimulus Bill, which allowed us to defer payroll tax payments in the last nine months of 2020. These tax deferrals will be repaid in two equal installments in the fourth quarters of 2021 and 2022. Even with our acquisition expenditures, we were able to reduce our debt to less than one turn of trailing 12-month EBITDA. 2020 was our largest year for share repurchases in quite some time, as we reduced our overall shares outstanding by repurchasing 685,000 of our shares at an average price of $43.99. Since we began our repurchase program in 2007, we have bought back over 9.3 million shares at an average price under $20. That’s all I have, Brian.

Okay. Thanks, Bill. I’m going to spend a few minutes discussing our backlog and markets. I will also comment on our outlook for 2021. Our backlog level at the end of the fourth quarter of 2020 was $1.51 billion. Sequentially, our same-store backlog increased by $10 million, with particular strength in our modular backlog. Same-store backlog compared to one year ago has decreased by $375 million, of which approximately one-third related to an expected decline in our electrical segment. We are also experiencing delays in bookings and in project starts at certain of our large private companies. Overall, we are very comfortable with the backlog we have across our operating locations. As our booked work at the end of 2019 included some live beta projects, that comparison represented an unusually high level of backlog. Most of our sectors continued to have strong quotation activity, even the sectors where bookings have been delayed. That is particularly true in our industrial business, which includes technology, manufacturing, pharmaceuticals, and food processing. Our industrial revenue has grown to 39% of total revenue in 2020 compared to 34% a year ago. We expect this sector to continue to be strong, and the majority of TAS and TEC revenues are industrial. Institutional markets, which includes education, healthcare, and government, represented 36% of our revenue, and that is roughly consistent with what we saw in 2019. The commercial sector was 25% of our revenue. For 2020, construction was 79% of our revenue with 47% from construction projects for new buildings and 32% from construction projects in existing buildings. Both of our construction and service businesses achieved record operating income margins. Service was 21% of our 2020 revenue with service projects providing 8% of revenue and pure service, including hourly work, providing 13% of revenue. Beginning in late March, our service business experienced the first and most pronounced negative impacts associated with COVID-19, largely as a result of building closures and decisions by customers to limit facility access. We are seeing good opportunities in internal air quality, which has helped many of our service departments return to pre-pandemic volumes. The most important element of IAQ is this, it is not just the immediate revenue, but also the opportunity to use our unmatched expertise to create new relationships. This really plays to our strength of solving problems for our customers, and it is not just a service story. As air quality considerations really add to our ability to differentiate and add value in construction and at times will increase the size and complexity of even large projects. Overall, our service operations ended the year with improved profitability, and thus, today, they are back to prior volumes. Despite pandemic-related challenges, our mechanical segment performed incredibly well during the quarter. We are grateful for our performance this year, and our prospects are much better than we would have expected this past spring. Our electrical segment had a tougher 2020 than we would have liked, but we currently expect good margin improvement in electrical in 2021. Finally, our outlook. Our backlog strengthened this quarter, but our near-term business continues to reflect some delays in bookings and starts that will result in same-store revenue headwinds in the first half of 2021. At the same time, we have really strong project development and planning activity with our customers. We are increasingly optimistic about 2021 and beyond because of that strong pipeline. We currently expect full year 2021 results that are similar to, but lower than, the record results that we achieved in 2020. We continue to prepare for a wide range of potential circumstances in nonresidential construction in the coming quarters. However, we perceive strong trends, especially in industrial, technology, and manufacturing. We think our geographic markets are favorably positioned with comparatively strong prospects. We look forward to good profits and cash flow in 2021. We have an unmatched workforce and a great and essential business, and we will continue to invest our reliable cash flows to make the most of these advantages and opportunities. Thank you once again to our employees for your hard work and dedication. I will now turn it back over to Sunny for questions. Thank you.

We have a question on the audio from Sean Eastman at KeyBanc Capital Markets.

So I just wanted to start on the bookings. I mean, is it fair to say the bookings were better than expected in the fourth quarter? And the commentary is that you’re still seeing some delays in the near term, but if I’m hearing you right, the bid pipeline is quite strong. So maybe you could expand on that, maybe comment on what’s improved, maybe where the bid pipeline is relative to, say, this time last year. And do you think we’re going to see some larger projects get awarded in 2021?

Sean, that’s a great question. The fourth quarter trend, our book-to-burn was probably over one for the first time in 1.5 years. So we’re seeing plenty of good opportunities. A lot of it’s timing. You get the right paid work to put into backlog, but we’re relatively optimistic throughout the country with the opportunities we’re seeing in the sectors we talked about. There’s a lot of stuff we’re working on, getting good feedback from customers that they’re ready to go. It’s more of a timing issue. I think the first half, you’ll see us booking this stuff. But I was really pleasantly surprised in the fourth quarter, particularly in the modular sector, where we received a lot of really strong opportunities. And I’m really confident that’s going to continue as we go through 2021.

And I’m just trying to think through the puts and takes on margins. I guess the question really is where are margins trending directionally in 2021? Service is back at 2019 volumes entering ‘21. Electrical should be contributing at higher margins. Is there anything else we need to think about there?

This is Bill. I think that the margins we achieved in mechanical are pretty sustainable. It might be hard to quite match the way they just did, but especially as we get to the second half of the year, I like our margins there. I think we have improvement in electrical. One, we have a manageable comparable in electrical. And by the way, electrical did pretty well for us. It had our best cash flow for the year. It was a nice EPS contributor. So it’s not that electrical did bad, but they have definitely room for improvement in the coming year. And then I do think SG&A may creep back just a little, maybe a couple of basis points because of travel will wake up a little bit, and people really got after their costs in the middle of this past year. So we’ll start training, even though we kept training, but we’ll probably do more of that. And so there’ll be a little bit more of that, but it looks good.

And Sean, just to add on the margins, I mean, the execution was just stellar, in my opinion, and we’re still the same folks out there that are still going to do good work for us. So I agree with everything Bill said.

Okay. Great. And last one for me. I mean you guys talked about the indoor air quality. It sounds like it’s a developing opportunity set there. But if you read through this new administration’s platform, I mean there’s a lot of talk on retrofitting buildings and reducing building emissions. I mean is that something that you’re seeing develop in the pipeline? Do you think that’s interesting, a potential positive for Comfort Systems?

Yes, Sean, it’s Brian again. We’re seeing numerous opportunities already. A substantial amount of work has been booked and completed, covering a broad array of solutions for buildings. Currently, the focus is primarily on the service side, working on small projects to help people return to buildings. However, looking ahead to the next 12 to 24 months, a significantly larger share of new construction will emerge, with expectations already integrating into engineering, including chillers and other systems. This presents a great opportunity for Comfort Systems for the foreseeable future.

Your next question comes from the line of Adam Thalhimer from Thompson Davis.

Brian, can you walk us around the country a little bit, just geographically what you’re seeing?

Yes. Absolutely, Adam. Up in the Northeast, we’ll see a lot of outstanding, really outstanding opportunities. Maine, New Hampshire, New York, Central New York, we’re almost sold out, really. As you come down the coast, the Mid-Atlantic, we’ve got exceptional companies there. Whether you’re in Richmond, Virginia, that’s showing the valley, those folks have a lot of opportunities. So in the pharmaceutical business in that neck of the woods with our folks. In Greensboro and that area, I think there’s plenty of opportunities. I mean, where you live, Adam, you know when you see it. There’s a lot of stuff going on down there. The Southeast, you’ll probably hear this from everyone, it’s really strong. Florida is very strong. Healthcare is very good in Florida. So we see a significant amount of opportunities. Georgia, where you have industrial battery plants or whatever going through. Texas probably had a little bit of a lull, but I believe that’s going to pick up. There’s still a lot of companies moving here. Dallas is very strong. San Antonio is extremely strong. And Austin is very good. Houston is probably the slowest in the markets, but Texas is Texas. Out in the West, we’re not as big out West as we are East of the Mississippi. Denver is very good. Phoenix is good, but not California. And up North, we’re relatively small. We added our capabilities in the Utah market with a very good company there that has a lot of strength. So we’re really optimistic about Utah. And then, of course, up in the middle of the country is we have some of our strongest companies that we had. I think you’ll see them maybe a little soft in the first quarter, but their opportunities are good. So we see pretty good balance throughout the country and opportunities, Southeast and Mid-Atlantic probably being the strongest, if I had to give you my view right now.

And the upper Midwest is going to keep.

Yes, the upper Midwest is going to, yes.

We’ve got a couple of companies there that have multi-decade histories of performance.

Yes. Does that help, Adam?

That helps. And then do you see aggressive bidding anywhere, or is that pretty much just unchanged?

I think we are experiencing some margin pressure, likely influenced by the PPE funding associated with certain projects. However, the situation is not comparable to the downturns of 2008, 2009, or 2010, when the market was significantly declining. Our approach to this is quite cautious; we have very careful risk management regarding our choice of projects and are selective about the work we take on. Therefore, we won't be aggressively pursuing any projects. Bill, would you like to add anything?

Yes. I think on jobs, 10 million and below, there’s a handful of markets where there are contractors giving away the labor they got paid for by the federal government with the PPP loans. The good news is that’s not really the work we want. And really, part of our little bit of delay here is what Brian just alluded to, it’s, our guys are very demanding and disciplined. We’re going to be good.

And then I hear you loud and clear on the modular. And my assumption would be on modular, I don’t know if you face any competitive issues.

We had some impressive technology bookings in the fourth quarter for programs we've been developing for a while. It's encouraging to see those programs finally receiving purchase orders and moving forward. I believe the modular solutions we provide are excellent, but our main challenge lies in convincing people how beneficial they are; however, more individuals are starting to recognize this.

I don’t think we could be happier with the performance of the companies that do modular in Comfort Systems.

Our next question comes from the line of Brent Thielman from D.A. Davidson.

I want to come back to Texas. Just wondering if some of the disruptions down there and the commentary around that, whether that’s a net headwind in the first quarter?

In Texas during the first quarter, we lost 3 to 5 days of work, but much of that was compensated for on the weekends in our modular plants. We have around 600,000 square feet of modular space. Although we lost three production days, we managed to make up at least two of them over the weekend. Therefore, I believe it is not a significant issue and may just be a rounding error, with only a slight potential decrease in revenue. Additionally, our service business has seen a substantial rise in activity over the past two weeks, particularly in plumbing services, which are still ongoing throughout the state.

It’s not a terrible time to be good at fixing any kind of pipe...

Our electrical company managed to effectively support some of their customers in maintaining their generators. Although this generated a small amount of revenue, we believe it has helped us establish positive momentum with those customers.

So I think in the aggregate, it’s not going to be a big issue between the weekend work and the service work.

Okay. Okay. And then Brian or Bill, some of the first half holes that you talked about can those still potentially be filled with short-duration related work, just depending on how the next few months go. I just want to get your thoughts around that.

Yes. The first thing I want to point out is that it’s not really empty; it’s just not performing as well as last year. Our team has plenty of work to do, and I don’t know of any shortened work weeks anywhere. Last year was exceptional, so this is more of a relative slowdown. It's important to remember that when we mention a bit of relative slowness in the first half, we’re comparing it to a typical pattern, not necessarily to last year. Last year, the first quarter was heavily affected by COVID, and we were well below what a normalized quarter would have been, despite exceeding expectations. The second quarter will be a challenging comparison for us because we saw a significant influx of business in that quarter last year, making it an outlier. Additionally, we faced tough comparisons in the third and fourth quarters. This isn’t a signal from Comfort that we foresee a problem next year.

No.

We expect to generate significant profit and cash flow. The challenge we face is that we are coming off difficult comparisons.

No. We still have $1.5 billion worth of construction work to do. So we’ve got to do that well.

A year ago, we had over 100 million jobs, which was unprecedented for us. That's a rare occurrence. Additionally, even if we face a revenue headwind, our margins will improve. Much of that previous work was low-margin fee work with significant material pass-through. This year, our mix of work in terms of margins is much more favorable.

Okay. And then the latest acquisition, the margins attached to that, how do they compare to the core electrical business for Comfort?

They will average up the margins of our overall electrical business because they’re so heavily industrial. And so they do a ton of, like, stainless steel and stuff like that. So they...

They have nearly every type of welding capability you can imagine, Brent.

And they’re in there doing it for the hardest customers in the world.

Yes, and they’re doing it well.

Their margins are similar to our mechanical margins, which will be beneficial.

There are some things they’re doing that you think you can take away to your own business there?

Over a long period of time, you don’t just cross the street and start doing what they’re doing.

But what’s interesting, Brent, they hardly worked with a bunch of our sister companies around them. The sheet metal haul for some of the fabrication, and we think that is just going to be enhanced, that they can do more work in the area they’re in, in Kingsport, Tennessee.

And then lastly, with Trent moving into the COO role, and Brian, glad to hear you’re still sticking around. But just wondering if that we can take from that, that you’re going to be even more focused on business development, M&A opportunities going forward. Just curious about that transition.

Well, Bill George is unique and as good as they get on M&A that I’ve ever seen. I’ll probably do a lot more work on development and probably on the electrical side of the business and some of these other businesses, but it’s going to be, Trent will be rolling into day-to-day operations. So we’ll see how that goes, Brian.

Let’s just say we haven’t been overstaffed in the past.

We haven’t been overstaffed, yes. It’s exciting for him, and it’s exciting for the company in the long term.

Okay, well congrats on a strong year. Thanks for taking the questions.

All right, thanks, Brent.

Thank you. Your next question comes from Julio Romero from Sidoti Company. Julio, you are live on the call.

So you spoke to the margins of the Tennessee Electrical acquisition. Could you speak to the cadence of revenue and earnings? Is that going to be kind of in line with the electrical?

So don’t make, we expect them to contribute about $100 million of revenue for this year margins, really equivalent to Comfort overall, really, which are very good, obviously, more like the average margins of Comfort than the average margins you’ve seen in electrical.

Okay. And I wanted to peel back your commentary about IAQ in creating new relationships. Can you give us a little more color on that? Are you alluding to some share gains there?

We’re in multiple markets throughout the country. So we’re picking up more school work than we probably have done in the past, a little bit more industrial work. So it’s just that we have a pretty developed capability in pretty much all the aspects of IAQ solution options. And we’ve just been presenting to a lot of customers and customers maybe we hadn’t called on typically before in the construction sector. So it’s a really good opportunity for us with something that we’re very good at.

Thank you. There are no current questions, and I’ll hand back over to Brian Lane for closing remarks.

All right. Thank you. In closing, I want to again thank our wonderful employees. The results our teams accomplished this year were truly amazing. I have never felt better about the company and its future. We are looking forward to seeing you again in person soon. But in the meanwhile, please be safe. Thank you.

Thank you to all speakers. That concludes your conference call for today. You may now disconnect. Thank you for joining and enjoy the rest of your day.