Thanks, Valerie. Good morning. Welcome to Comfort Systems USA Third Quarter 2023 Earnings Call. Our comments today as well as our press releases contain forward-looking statements within the meaning of 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; Trent McKenna, Chief Operating Officer; and Bill George, Chief Financial Officer. Brian will open our remarks.

Thanks, Julie. Good morning, everyone, and thank you for joining us on the call today. I am in awe of the discipline and execution that our amazing teams continue to demonstrate and build on. They are the true source of our exceptional results this quarter. Our best ever growth in earnings and cash flow. We earned $2.93 per share this quarter compared to $1.71 a year ago. Current quarter revenue was $1.4 billion, with same-store growth of 20%. Revenue was higher across our operations, and our modular business, in particular, surged while maintaining superb execution for our customers. Service also continues to grow and increase earnings, thanks in large part to past and ongoing investments. Our mechanical and electrical operations performed incredibly well. Our backlog continues to track at unprecedented levels, and our pipeline of additional work is still strong. Backlog is $4.3 billion, $1 billion ahead of last year, and we also booked a sequential increase, even though this is our seasonally most active quarter. Demand is especially robust in our industrial sectors. The unprecedented demand for data, chips, and batteries, along with strong trends in other areas like food, pharma, and health care, continue to give our teams the opportunity to show their expertise and commitment. We are carefully selecting work that has good margins and good working conditions for our valuable workforce. Operating cash flow surged this quarter to over $200 million, as our customers continue to recognize our value and performance, with favorable payment terms and timely payments. Today, we also increased our quarterly dividend by $0.025 to $0.25 per share, or a rate of $1 per share on an annualized basis. This reflects our continuing strong cash flow and our commitment to reward our shareholders. We are also excited to announce that on October 2, we acquired Decco, an extremely capable pipe and mechanical company located in New Hampshire, and we welcome that team to Comfort Systems. I will discuss our business and outlook in a few minutes. But first, I'll turn this call over to Bill to review our financial performance.

Thanks, Brian. We have an amazing third quarter with 20% same-store revenue growth, higher margins, and over $200 million of operating cash flow. In addition, compared to last year, both our EPS and EBITDA increased by over 50%. Revenue for the third quarter of 2023 was $1.4 billion, an increase of 23% or $258 million compared to last year. Our mechanical segment revenue increased by $173 million or 20% and continues to benefit from growth in our modular business. Our electrical segment increased by an even larger 33% to $347 million. Combined same-store revenue increased by 20% or $224 million as we continue to benefit from strong demand and some pass-through effects of inflation. We are facing tougher revenue comparables in the fourth quarter of the year, and we currently estimate that same-store revenue growth in the fourth quarter will be in the mid-teens. Gross profit was $277 million for the third quarter, a $75 million improvement compared to a year ago. Our gross profit percentage improved to 20.1% this quarter compared to 18.1% for the third quarter of 2022, driven by improved mechanical margins. Quarterly gross profit exceeded 20% for the first time in a few years. This quarter, we grew by over 20% on a same-store basis and added 2 full percentage points to our gross profit margin, an extraordinary operational accomplishment. The quarterly gross profit percentage in our mechanical segment improved to 20.4% this year as compared to 17.6% last year. Margins in our electrical segment declined slightly in the quarter to 19.4% as compared to 19.7% in Q3 2022. However, last year, our electrical segment benefited from a litigation win, so core execution and electrical profitability were also notably higher. We are optimistic that for the fourth quarter and next year, margins can trend in the strong ranges that we achieved over the last few quarters. SG&A expense for the quarter was $143 million or 10.4% of revenue compared to $121 million or 10.8% of revenue for the third quarter in 2022. On a same-store basis, SG&A was up approximately $18 million due to inflation and ongoing investments to support our much higher activity levels. But the growth in our SG&A cost was slower than our growth in revenue, resulting in SG&A leverage this quarter as compared to last year. Our operating income increased by 66% from last year to $135 million. With improved mechanical margins and SG&A leverage, our operating income percentage improved to 9.8% this quarter, an all-time high from 7.3% for the third quarter of 2022. Interest expense for the first 9 months in 2023 continues to benefit from our extremely strong cash flow. It is also partially and temporarily offset by interest income related to a favorable legal outcome earlier this year. Our year-to-date tax rate of 16.1% included an incremental benefit of $10 million or $0.27 of tax gains related to prior years. Although individual items have affected our tax rate lately, we estimate that a normalized tax rate for us is approximately 20% to 22%. After considering all these factors, net income for the third quarter of 2023 was $105 million or $2.93 per share. This compares to net income for the third quarter of 2022 of $62 million or $1.71 per share. Excluding prior year tax gains, earnings per share increased to $2.74 per share from $1.67 per share in the prior year, an increase of 64%. EBITDA increased from $101 million in the third quarter of last year to $156 million this quarter, an increase of 54%. Free cash flow for the first 9 months of 2023 was a remarkable $402 million. We continue to benefit from advanced payments for work that we will need to fund and complete in upcoming quarters. Our trailing 12-month operating cash flow exceeds our trailing 12-month earnings by an astounding $300 million. That overcollection must reverse at some point as we pay to perform the work that we have already been paid for. But the timing is unknown, and it is dependent on the timing of future orders and future advanced payments. In the meantime, these collections have allowed us to lower our debt and our interest costs tremendously. So far this year, we have spent $64 million on capital expenditures, which is double the amount we have spent at this time last year. The increase includes the build-out of 2 vast new modular production facilities and the purchase of vehicles as we catch up from COVID. Our substantial cash flow allowed us to pay down our revolving credit facility to $0 this quarter and to reduce our overall debt by $209 million since the year began. And during that time, we also funded the purchase of Eldeco from our current cash flow. We continue to purchase our shares and have acquired 64,000 so far this year at an average price of $134.53. Finally, as Brian mentioned, we acquired Decco at the beginning of October. We expect Decco to initially contribute annualized revenues of approximately $50 million to $65 million at margins that are consistent with our overall business. They will be included in our mechanical segment.

Okay. Thanks, Bill. I'm going to spend a few minutes discussing our business and outlook. Our backlog at the end of the third quarter was $4.3 billion. Since last year at this time, our same-store backlog has increased by $0.9 billion, around 27%, with increases in our traditional mechanical and electrical businesses and substantial new bookings in our offsite construction operations. Our sequential backlog increased by $102 million despite the heavy revenue volume over the past 3 months. Our pipeline of future work remains strong. Our revenue mix continues to trend towards data centers, life science, food, and other manufacturing such as chip plants and batteries. Those industrial customers accounted for 54% of total revenue in the first 9 months of 2023, and they are major drivers of pipeline and backlog. Technology, which is included in industrial, was 21% of our revenue in the first 9 months of 2023, a substantial increase from 13% in the prior year. Institutional markets, which include education, health care, and government, are also strong and represent 27% of our revenue. The commercial sector is active, but with our changing mix, it is now a smaller part of our business at about 19% of revenue, and most of that commercial revenue is service. Year-to-date, construction was 80% of our revenue with projects for new buildings at 55%, while existing building construction was 25%. Service revenue increased by 14% year-to-date compared to last year. Service was 20% of our total revenues, with service projects providing 9% of total revenue and pure service, including hourly work, providing 11% of revenue. Service revenue continues to be about 20% of our total revenue, and our service business is on track to be $1 billion of revenue for full year 2023. In 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 committed to being good members of the diverse communities we serve. Comfort Systems is fortunate to have the right capabilities to help meet the surging need for mechanical and electrical experts to grow data capacity for artificial intelligence and to help increase our country's ability to build its own chips, manufacture its own medicines, supply its batteries, and provide health care resources as our population ages. We are thriving because of our people's commitment, excellence, and hard work, and because of our field leaders' discernment in choosing projects and managing risk. Thanks to them, we feel confident in our prospects for continued growth and strong profitability into 2024. Our number one priority remains to preserve and grow the best workforce in our industry. We are grateful for their and your trust. I want to end by thanking our over 15,000 employees for their hard work and dedication. I'll now turn it back over to Valerie for questions. Thank you.

Our first question comes from Brent Thielman of D.A. Davidson.

Great quarter. Brian or Bill, I heard your comments that you anticipated margins sort of hanging around the range you spoke of the last few quarters. Any reason to think the margins would be down next year given this year's really strong performance?

Not really. As you know, Brent, you're going to have margins move up and down quarter-to-quarter a little bit. But in the aggregate, if you look over the whole year, I think we'll continue to perform at a very high level into 2024. Over 20%, as you know, is extraordinary, right? But the high teens that we've been hitting, I would anticipate continuing to hit that.

Okay. Okay. And then when you refer to a cash flow sort of headwind in the coming quarters, do you anticipate cash flow sort of getting back to that historic conversion rate? Or how are you thinking about that?

If you look at the time period, it's straightforward; we will generate cash flow from our after-tax earnings. We are currently in a unique position where we've received hundreds of millions of dollars before actually completing the work for it. There may be future quarters, possibly in the middle of next year, where we will need to pay those who completed the work we've already received payment for. As a result, we could experience some cash flow quarters that will need to be reflected in our cash flow. At the same time, we will continue to profit from the work we are doing. It’s difficult to predict how this will unfold. However, we do know we won’t keep doubling our earnings in cash flow. Over a multi-year period, we will cash flow our earnings consistently. It's great news to be in a position where customers are paying us substantial amounts upfront. Although we anticipated some of that to decline this quarter, we secured new orders, and our team is actually ahead with their billing. Honestly, I can’t confidently predict which quarter we might see that turnaround because our team keeps exceeding our expectations.

Hopefully, that keeps happening, Bill, but understood. I guess just on modular, could you talk about maybe the dialogue you're having with key customers or new customers now that you've got some additional square footage in place? It still seems there are some folks that wonder if data center customer spending continues at the rate it has. I'm just curious about any anecdotes you could offer there.

We are doing everything possible to meet the needs of our large and loyal customer, with whom we have built a great relationship. Additionally, we have another large hyperscale data center customer who has given us significant work, exceeding $100 million, as they explore our capabilities. We are already looking at more work with them collaboratively. Currently, we are unable to sell as much as we can produce. As you know, we are in the process of doubling our capacity and we will not consider doubling it again until we have successfully completed that. So far, the results have been positive. We are engaged in substantial work in one area while just beginning to build in another. Once we are fully deployed in the new spaces and implement robotics, we will transfer staff from other facilities to work during the day. Currently, we are operating some locations on 2.5 shifts, which is not sustainable. It is important to note that simply doubling our square footage does not mean we will double our revenue. A significant portion of that increase has already occurred as we worked to meet our customers' needs through those extra shifts. However, we aim to continuously improve and find new ways to automate. We believe the future is bright, but we will remain cautious and not rush ahead.

I want to explore what is driving the increase in margins within the mechanical segment, as both sequentially and year-over-year, the improvements are impressive. Could you provide insights into operating leverage and pricing execution, and if there is a particular factor that is primarily influencing the mechanical segment?

Yes. With margins over 20%, it's a combination of factors. We have a strong mix of projects that we excel in, maintaining good margins and effective planning and execution. Ultimately, our success depends on our performance in the field, and our team is currently delivering excellent results. Historically, we have had minimal negative news, which has a positive impact. Additionally, we experienced a significant 40% increase in service revenue during a strong third quarter. The demand was high, and our team was dedicated, working around the clock to meet customer needs for both emergency calls and smaller projects. Higher margins in service also contribute positively. Overall, we have a balanced approach, effective execution, and a strong project mix aligned with our strengths.

Another interesting factor. You may recall a year ago, we were saying we're very early in a lot of our work because we were coming out of COVID, so there was more work starting. Now we really have a nice cadence of business. If we look at our top 100 or 200 jobs out of our 10,000 or so that currently live on our POC, the big ones, there's lots of 80% complete in there and 65 and 90 whereas a year ago, you were seeing a lot of sub-50 and really low completion levels at the jobs beginning. When you get up to 70, 80, 90, if you're really performing well, you start to get comfortable in releasing contingency. And so part of it is just we're getting to a more normalized book of work, which is exactly what we were hoping for.

Really helpful. And then my second question is just on the revenue. You mentioned the same same-store sales growth for the fourth quarter expected in the mid-teens. So I guess that implies like a full year same-store sales around 22% or so. Considering that, how should we think about revenue comps for 2024, considering the backlog and growth momentum, but also some of the pass-through costs that may moderate?

We are currently in our budgeting season and gathering insights from the field. The comparable figures are becoming increasingly challenging. Until this quarter, a significant portion of our growth was driven by inflation. While we don't anticipate net inflation growth moving forward, we also don't expect it to drop significantly. Therefore, I find it difficult to envision maintaining a same-store revenue growth of 20% next year. Interestingly, we did not expect the growth we experienced this quarter, but our backlog has increased by $1 billion compared to last year. This positions us to likely achieve at least double-digit growth. To be honest, we are still working through these details. This business requires consistent effort and performance throughout each quarter and every day.

Yes, that makes sense. And what was the inflation portion of the third quarter sales growth?

Almost none. 3%, 4%. I would say. That's our best estimate about what it was for the U.S. economy, but a lot less than it had been recently.

Congrats on a really good quarter. Yes. I was thinking about the organic growth. And if only 3 or 4 points of that was due to price. Could you just kind of talk about how much of the remaining growth is from you successfully hiring more workers or kind of improving productivity within your construction process, and how that breaks down to contribute to the really strong growth.

Yes. It is a combination of both. We did hire more folks. I mean, we're a good place to work. People want to come and work here. So we had good luck with that. But we also had productivity improvements. The use of prefabrication continues to accelerate. BIM modeling is really accelerating at a rapid rate; all this stuff is really helping us out in the field, automation on the welding front, etc. So it's a combination of hiring more folks and clearly improving productivity and just really trying to support the folks in the field to make the work as easy as we can for them on the job site.

That's impressive. We put in a lot of overtime in service due to the heat, which contributed to our results. We saw a change of two percentage points, increasing our gross profit from 18.1% to 20.1%. This difference represents recognized revenue. Overall, this was an exceptional quarter, and we owe it all to the team.

Right. Yes, it was definitely a really good quarter. I was wondering if you can talk about the bid environment for new projects. I guess for a while now, there's been more work than you and the industry can handle. Is it still the case now? What verticals are you seeing the new projects start to get bid out here?

The opportunities remain very strong and are broad-based across the country. We previously mentioned that sectors like data, pharmaceuticals, food, and batteries continue to show robust potential. We have not observed any decline in opportunities. As noted, we need to remain cautious and focus on the work we excel at, avoiding overextension while ensuring we deliver quality service to our customers. Currently, we are in a very favorable position.

Congrats on the great quarter. Can you talk about modular for a little bit longer? I'm curious about the contract you signed in December, like are you shipping on that now? And if so, what has been the early experience with margins and productivity? Because I think that was supposed to start with kind of low productivity and ramp up.

Yes. In December, we received numerous purchase orders booked over a 10-day period, with individual orders ranging from $20 million to $40 million. These orders were sent in a batch to give us confidence in signing the leases. Some of these orders are already on track, and while only a small portion is progressing as planned, a significant amount is currently under construction, operating at 2.5 shifts. We've also received some new orders, and things are going better than we expected. So far, everything looks promising.

Wait until some new orders versus the ones in December?

We've received more orders, which is why you didn't see our backlog increase significantly in the second quarter. It has gone up in the third quarter, indicating that we couldn't have zero orders in modular and still expect sequential growth. It's important to note that these orders come in unevenly. There's no need to worry about changes in the backlog unless we indicate otherwise. If we didn't experience some quarters with sequential declines, it could lead to unsustainable growth or potential business failure. While it's common for people to desire consistent growth, currently we're turning away work. I believe that within the next year or two, the overall construction market might see a slowdown in new projects compared to what many are forecasting. This decline will be due to capacity limitations rather than a decrease in demand for products like AI, chips, or food, or due to demographic changes. Right now, the main constraint is our ability to meet demand, which positions us favorably as we encompass a significant portion of the productive capacity.

Okay. Perfect. I have a couple of questions about cash flow. I'm really confused about the R&D tax credit. I had a negative figure in my model for the next five quarters due to that, which is quite significant. Should I still be including that in my calculations?

This quarter has been even more complicated. The IRS released a new interpretation stating that we don't have to recognize certain expenses. I can connect you with our tax expert for more details. They clarified that we don't need to recognize the corresponding revenue for those expenses this year; it's a temporary change for a long-standing issue. As a result, we didn't have to make a tax payment in the third quarter. It's quite complex, and we need Congress to pass that extender, or many small businesses could face difficulties. Currently, based on the experts' interpretations, we believe we won't have to make a tax payment in the fourth quarter either. However, if the extender isn’t fixed, we will face substantial tax payments next year because this interpretation is only for this year. If you're confused, believe me, it's even more complicated than it sounds.

That $30 million to $40 million payment, would that have been for a full year? Are you expecting that every quarter if...?

That would have been a third-quarter payment. The payments occur throughout the year, and when you make them, they're typically about 45 days behind. So, it would have been a large payment, but that's not the amount we would pay each quarter based on our current earnings. That is what a third-quarter payment would have looked like if it were necessary. It might have been 20 or 30 million; honestly, I'm not sure.

Okay. All right. Well, that's fine. And then lastly, what does the CapEx drop to once the new facility builds roll off?

I would estimate it decreases by one-third. It won't drop back to half. We were in the $30 million range, and now we're moving up to the $60 million range. I think we'll settle around $40 million if I had to make a guess. We signed a lease for additional space, which makes sense. We're developing one of the facilities in North Carolina where we are installing 24 overhead track cranes that cost $7 million; we need them and they are worthwhile. The robots we have also cost a lot and are large, taking up a significant amount of space. We are investing in these, but the paybacks on these investments are around one year. So hopefully…

How much do you pay attention to the core data center demand? Or like what's going on in that market? I mean, I know you're getting orders hand over fist, but are you also paying attention to what the market is doing?

We are actively monitoring the situation. Our team members are participating in planning meetings in California with some major players in the industry. We have strong connections with our electrical teams in Texas as well. If you are involved in hyperscale data centers, there is a significant motivation to engage with us while making decisions about future developments. We maintain regular communication with these stakeholders. While they may not have a definitive understanding of future events, their belief is that there will be continuous construction and expansion.

I have one question. Could you share your thoughts on the quality of the backlog in its current state during a potential economic slowdown? To elaborate on that, given the current mix of customers and projects you have, how should we view the likelihood of canceled orders or slowdowns compared to the historical patterns of the company during downturns?

At any given time, between 80% and 90% of our backlog is work that's already in progress. We do not add something to the backlog until we have a price, a scope, and a commitment, which usually occurs after the building has already started. Over the last 25 years, we have experienced very few cancellations, with only one over $20 million prior to COVID. During the pandemic, we removed $60 million to $70 million from the backlog due to projects being put on hold without a recommencement date, but all that work has now returned and been completed. Our definition of backlog is very strict, leading to rare cancellations. Generally, people do not start building without securing a commitment, and in most places in the U.S., it's even illegal to do so. Historically, our backlog has been firmly committed. While it is possible for clients to request a pause on projects, if they don't have a recommencement date, we will remove them from the backlog because we maintain our strict definition. The quality of our backlog has never been better; it's truly outstanding.

That's extremely helpful. And yes, I guess that makes a lot of sense. It's less of a concern of cancellations or postponements or anything more just a slowdown things being brought into the backlog? And I guess from that aspect, are there any kind of customer types that you flag maybe on the top of the list, if there was a slowdown, maybe work from their end would slow down a little bit as well?

Commercial should definitely be the main concern right now, particularly in office buildings. Currently, less than 20% of our revenue comes from commercial, and almost all of it is service-related. So we don't really operate in that market. For the sectors that matter to us, I believe there is no significant risk in the backlog. In terms of our high-potential pipeline, a potential issue could be if people realize AI isn't effective or if there are delays in chip production. However, looking back over the last 20 years, the major disruptions we've faced were during 9/11 and the financial crisis, which did lead to some serious delays in projects. Despite those challenges, we remained profitable throughout.

Okay. Thanks, everyone, for your interest in Comfort Systems. I really want to once again thank our amazing employees, fantastic, fantastic job. I hope everyone has a wonderful upcoming holiday season. Stay safe. We look forward to seeing everyone and have a great weekend. Thank you.

Thanks.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.