Good day, and thank you for standing by. Welcome to the Q2 2024 Comfort Systems USA Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Julie Shaeff, Chief Accounting Officer. Please go ahead.

Thanks, Daniel. Good morning. Welcome to Comfort Systems USA’s second quarter 2024 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 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-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. This 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 had a fantastic quarter as our teams achieved superb execution for our customers. We earned $3.74 per share this quarter, which is an increase of over 90% compared to a year ago. Our Mechanical business exceeded last year, and our Electrical segment achieved unprecedented margins. Both operating income and EBITDA dollars increased by 100% this quarter compared to 2023. Demand remains strong, especially in the industrial sector, including technology and other manufacturing customers. Our backlog continues to track at high levels, despite our strong revenue for the quarter. Backlog is $5.8 billion, far higher on both an absolute and a same-store basis than this time last year, and we continue to select work that has good margins and good working conditions for our valuable people. 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. Bill?

Thanks, Brian. So second quarter results were really remarkable. We had 30% same-store revenue growth, higher margins, good SG&A leverage, and over $165 million in free cash flow. We achieved more than $200 million in quarterly EBITDA for the first time, and our EBITDA doubled compared to the same quarter last year. Revenue for the second quarter of 2024 was $1.8 billion, and that is an increase of $514 million or 40% compared to last year. Our Mechanical segment revenue increased by 49%, benefiting from organic construction and service growth. Recent acquisitions and modular expansion, Electrical segment revenue increased by 12%, and overall, our same-store revenue increased by 30% or $383 million, with the remaining $131 million of increase resulting from acquisitions. We are facing tougher prior year comparable results for the remainder of the year. Through six months, our same-store revenue growth has been 26%, and currently, our best estimate is that for the full year 2024, our same-store revenue growth will be in the low to mid 20% range. Gross profit was $364 million for the second quarter of 2024, a noteworthy $136 million improvement compared to a year ago. Our gross profit percentage grew to 20.1% this quarter compared to 17.6% for the second quarter of 2023. Quarterly gross profit percentage in our Electrical segment jumped to 23.6% this year as compared to 17% last year. Margins in our Mechanical segment also increased significantly to 19.2% as compared to 17.8% in the second quarter of 2023. EBITDA doubled to $223 million this quarter from a strong $112 million in the second quarter of 2023. Same-store EBITDA increased by over 80%, and even without recent acquisitions, our EBITDA exceeded $200 million. Considering the strong ongoing demand, we expect that for 2024, EBITDA margins will continue in the strong ranges that we have achieved over the last several quarters. SG&A expense for the quarter was $180 million or 9.9% of revenue compared to $136 million or 10.5% of revenue in the second quarter of 2023. Our operating income increased by just over 100% from last year, from $92 million in the second quarter of 2023 to $185 million for the second quarter of 2024. With improved gross profit margins and favorable SG&A leverage, our operating income percentage surged to 10.2% this quarter from 7.1% in the prior year. This is the first time that we have achieved 10% OI margins in a quarter. Since I became CFO, Comfort Systems has not used adjusted numbers to make our results look better. However, today I do want to point out a notable factor in our results. Our recent acquisitions have exceeded our high expectations, resulting in larger than usual earn-out expenses. Without the changes in the fair value of our earn-out obligations this quarter, certain earnings would have been notably stronger. We always have purchase-related adjustments in the periods following an acquisition. However, they currently are and likely will continue to be much larger over the next several quarters because of the significant contingent consideration opportunity included in recent transactions. Our year-to-date tax rate was 21.3%. We currently estimate that the full-year 2024 tax rate will likely be in the 21% to 22% range. After considering all of these factors, net income for the second quarter of 2024 was $134 million or $3.74 per share, and this is a 90% improvement from last year. Free cash flow for the first six months of 2024 was $290 million. We continue to benefit from advanced payments for work that we will fund and complete in upcoming quarters, and operating cash flow continues to exceed our earnings by about $300 million on a trailing 12-month basis. So we are well ahead of earnings in collecting our cash. Even with two notable acquisitions earlier this year, we have succeeded in retiring all of our bank debt as of June 30, 2024, and other debt was $91 million with cash balances exceeding our debt. We also spent around $11 million on share repurchases this quarter. That's what I got, Brian.

Okay. Thanks, Bill. I'm going to discuss our business and outlook. Our backlog at the end of the second quarter was $5.8 billion, a large year-over-year increase and a modest sequential decline. Since last year, our backlog has increased by $1.6 billion or 38%. $1 billion of the increase was same-store and $0.6 billion was new backlog from recent acquisitions. We are entering the second half of 2024 with 25% more same-store backlog than we had at this time last year, despite a roughly 30% surge in organic revenue. Our revenue mix continues to trend towards data centers, chip fabrication, battery plants, life sciences, and food. Industrial customers accounted for 60% of total revenue in the first half of 2024, and they are major drivers of pipeline and backlog. Technology, which is included in industrial, was 31% of our revenue, a substantial increase from 20% the prior year. Institutional markets, which include education, health care, and government, are also strong and represent 23% of our revenue. The commercial sector remains reasonably active in the regions that we serve, but it is now a smaller part of our business at about 17% of revenue. Most of our service revenue is for commercial customers. Of the share of our construction revenue that is commercial, it is relatively small. Construction activities continue to be extraordinarily strong, and our project pipelines continue at unprecedented high levels. Construction accounted for 84% of our revenue, with projects for new buildings representing 59% and existing building construction 25%. We include modular in new building construction, and year-to-date modular accounted for 18% of our revenue. Service revenue was 16% of our total revenue as our service revenue increased by 10%, and service profit grew by 20% this quarter. Service is a reliable source of profit and cash flow and is on track to exceed $1 billion in revenue for 2024. As noted above, we are entering the second half of 2024 with a backlog that is 25% higher on the same-store basis than we had at this time last year, and we have a superb team working hard for our customers every single day. Thanks to the dedication and hard work of our employees across the country, we are optimistic about our future. As always, I want to close by thanking our over 17,000 employees for their hard work and dedication. I'll now turn it back over to Daniel for questions. Thank you.

And our first question comes from Alex Dwyer with KeyBanc Capital Markets. Your line is now open.

Hey, good morning. Thanks for taking my question.

Good morning.

Good morning. So it's nice to see the continued strength in margins, and the guidance calls for this to continue this year. But 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?

I think, Alex, particularly in the upcoming short term, I think we're in pretty good shape to maintain these margins. We're getting good pricing, and we're getting excellent execution in the field. And also, you can't forget, we are growing service by 10% and you see profitability increase there. So I think we're pretty optimistic in the near future that we should maintain these margins.

Yes, I would say every factor that is creating these margins is continuing at least as strong as it has been and in some cases continues to get stronger.

Got it. And then the modular construction performance in the quarter, was most of that project activity for data centers? And then more broadly, how do we think about the growth algorithm in modular going forward, capacity additions, and the ability for the business to gain efficiencies over time?

So modular, like really every single part of our business, did great this quarter. And it's, as you can see, it's growing, up to near 18% of our revenue, and so it's adding a percentage while the revenue is growing very quickly. So that's continued to grow. As far as the future, people have been asking a lot, are we going to make new large commitments to space? I don't think that that is something that we are taking incremental commitments. We have added incremental space within the last few months. We're more likely to do things incrementally, and I do want to say that one of the things that we emphasized when we took the additional million square feet of space recently, we took space that had much higher roots and was much more configured for automation. And so I think a lot of our goal is going to be to improve the production and productivity of the newly deployed space. Ultimately, Comfort is going to take the amount of work we can execute. And with people, there are businesses that you can scale easily. This is a business where you're doing things in the real world. You're delivering things that are three stories tall and 100 yards long and have incredible complexity inside them. You have to respect the difficulty of what you're doing and make sure we will always put our ability to keep our promises to our customers above sort of pushing for growth on the top line.

Thank you. I'll turn it over.

Thanks.

Thank you. Our next question comes from Adam Thalhimer with Thompson Davis. Your line is now open.

Hey, good morning, guys. Great quarter.

Hey, Adam.

Thanks, Adam. How are you doing?

Good. All right. So regarding modular, I believe you received a program award for modular in December 2022. I'm interested in whether you see the possibility for more of those in the future or if upcoming modular awards will be more occasional.

So I don't know about one-off; they are just constant. So in December 2021, there was a big commitment that was part of a really more than a year's negotiation with a large customer that induced us to make a really big investment in a million square feet of additional space. Since then, we've been able to keep the backlog at at least the levels that we achieved in that time frame. But the awards sort of come in as programs are completed, right? There are redesigns that happen in the products that we sell. I don't know if it will continue, but I will say in the last three years, we tended to get more of the modular bookings in the winter months, sort of December, January, February, and we've had sort of a net burn in the middle of the year. We certainly had a net burn in modular this quarter, but it's because we had really big bookings over the winter. I think our prospects are good for that, but obviously it depends if people are still planning on having data and computing power, right, which we think they are.

All right, well, that was my next question, backlog seasonality, because for a couple of years now, it's been burn over the summer and build over the winter. Can that happen again?

Yes, so if you look at last year, we sort of went through the same cycle. I mean, the thing you look at, we look at, Adam, is, what's the demand? What's our pipeline look like? They're robust. It's in all the markets we served. It's probably as strong. I've been doing this for 40-some years. It's probably the best market I've ever been in. So we're pretty optimistic. There's going to be plenty of work for a while.

And then lastly, can you just comment on Texas electrical? The margin's over 22% again for the third straight quarter. What's the outlook for that business?

Yes. Well, first of all, the electrical company we have here is really a superb company that Bill found, for sure. They're in the four big markets that we like in Texas. We have more electricians than anyone else, and Texas is booming. We got a lot of mission-critical work, which is really in the sweet spot. So we're really humming along in that business right now, and I think it'll go on for a while.

It's also important to know the electrical segment is not just Texas. We have unbelievable results right now in Kentucky and North Carolina. We have just fantastic electrical businesses. People need what they do. They do a great job for their customers, and they make sure that they get paid for the capacity that they can bring to bear for the risks that they take. So it's really to hit those kinds of numbers; pretty much everybody had to be having an amazing outcome. It's good to have electricians right now, Adam.

Good to hear. All right. Thank you, guys.

All right. Take care.

Thanks.

Thank you. Our next question comes from Josh Chan with UBS. Your line is now open.

Hi. Good morning, guys. Congrats on a really good quarter.

Thanks, Josh.

I guess, Brian, if you really look at the bidding pipeline, do you see kind of new projects popping up for bid at similar or stronger rates? And where are those verticals, any difference versus sort of the recent past?

I think, if you look at the pipelines in the backlog, it's probably been pretty consistent for the last 18 months to 2 years. We're still seeing, as we mentioned in the script, similar opportunities: data centers, pharma, life sciences, food, etc. So we're seeing the mix pretty consistent in the markets that we serve, and there's been no let up, Josh.

I would like to address the topic of data centers. Currently, some individuals are expressing concerns regarding the data center build. However, feedback from our customers and observations in the market indicate that there is still strong confidence in deploying data centers. They have invested in high-cost computer chips and are regularly receiving deliveries of these components. Our understanding is that these chips will be integrated into servers, which will need to be housed in buildings that require heating and cooling. Furthermore, we are witnessing the emergence of data center projects in regions where we have not previously seen such developments. While there may be speculation about a slowdown, I want to emphasize that we are not witnessing any signs of that in our perspectives, market experiences, or discussions with customers.

That's encouraging. And thanks for the color there. I guess in this current environment, how do you keep your employees happy? And I know no one is relaxed working this hard, but any concerns about the sustainability of everybody working this hard for a long time?

Yes, Josh, that's a great question. Thanks for bringing it up. We take immense pride in ensuring the health and safety of our employees, treating them fairly and with respect. There's a lot of work available for them, which is beneficial for them and their families. Ultimately, we are very thankful for their hard work and dedication. We make a concerted effort to prioritize their well-being, and I am proud of how focused we are on this aspect. They appreciate having plenty of work to do, and right now is a good time for them. So, thank you for the question.

That's good. And maybe I can sneak one more in. If people were to ask you what percentage of your business do you think is exposed to AI, how would you address that? Is that the data center portion, or how would you kind of think about that?

Well, I think AI, let's say the demand for data, right, because even the AI build really only started last year, 15 months, right? There's been heavy data center construction because people were getting ready for streaming. Everybody's forgotten about that. Compute power, the AI thing is an incremental add to what was already a very, very solid pipeline. I would say that it's both AI and chips that are affected by, driven by decisions by hyperscalers to protect their core businesses by making sure they're not left behind and to prepare for opportunities of the future by building out this capacity. I don't know if that helps, but ...

Yes, thank you both for the response and for your time.

Thank you.

Thank you. Our next question comes from Julio Romero with Sidoti & Company. Your line is now open.

Thanks. Hey, good morning, guys.

Good morning.

You mentioned same-store sales growth in the low to mid 20% range for the full year. That suggests at least around 15% growth in the second half. Can you share your thoughts on same-store sales growth percentages for the third and fourth quarters?

Through the first 11 months, we saw a growth of 26%. It indicates that we might settle in the low to mid-20% range. While it seems likely that it could decrease, it probably won’t drop as low as 15%. If the second half registers at 15%, that would average below 20%, and it appears to be a bit stronger than that. Although the future is uncertain, as of July 1, we had 25% more booked work on a same-store basis compared to last year. This gives us confidence in strong growth for the full year, with our best estimate falling within the low to mid-20% range. However, it's important to acknowledge that there is variability in these projections, and we have recently experienced some positive surprises.

Got it. That's helpful. And then you guys talked about factors that are creating these margins. One of them I would think would be project selection. Can you maybe just talk about that and how crucial a factor that is in creating these margins? And is that kind of like a rising tide of sorts where you can just continue to see a greater quantity of opportunities than you're able to do? And therefore you're able to become more and more selective on these projects?

Yes, I think we have a process like most people do, go, no-go, but we're very careful to select. We're putting our valuable resources with good customers and doing good work. So it's really important that you go through your factors and selecting what work you're going to take in a market like this when there's a lot of work out there, Julio.

Okay. And then my last question is about the 10% operating margin milestone you achieved this quarter. I believe this might also be the first time in a while that your SG&A margin is in the nines. Could you discuss SG&A leverage and how we should view that moving forward?

That's a great question. It's going to be hard to get much more SG&A leverage just mathematically, right? But I do think this range we should continue in because we're continuing to get the revenue growth. We did have notable dollar increases in SG&A this quarter. It does take money to do this work. So I guess I would say, if that were a modeling question, I wouldn't count on a whole lot more leverage. But I don't think, I think the leverage we've gotten so far is pretty solid until revenue trends were to change here.

Got it. I'll pass it along. Thanks very much, guys.

Thanks.

Thanks.

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Brian Lane for closing remarks.

All right. Thanks, everyone, for listening in today. I really want to thank our amazing employees again. We're really grateful for the work that they do. I hope everyone enjoyed this summer and the weekend, and we look forward to seeing everybody on the road soon. Thank you.

Thanks, everyone.

This concludes today's conference call. Thank you for participating. You may now disconnect.