Good day, and thank you for standing by. Welcome to the fourth quarter 2024 Comfort Systems USA earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would like to hand the conference over to your first speaker today, Julie Shaeff, Chief Accounting Officer. Please go ahead.

Thanks, Marvin. Good morning. Welcome to Comfort Systems USA's fourth quarter and full year 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 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 in these comments. You can read a detailed listing and commentary concerning our specific risk factors in our most recent Form 10-Ks as well as in our press release covering these earnings. A slide presentation is provided as a companion to our remarks and 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.

Alright. Thanks, Julie. Good morning, and thank you for joining our call today. Last night, we reported record annual and fourth quarter earnings and exceptional cash flow thanks to excellent execution by our superb teams across the United States. Same store revenue growth for the fourth quarter was 22% and our margins were amazing. We earned $4.09 per share this quarter, up 60% from last year, and $14.60 per share for the year compared to $9.01 in 2023. Backlog at the end of the year grew to a new all-time high of $6 billion. Our backlog is broadly based and we continue to experience strength across virtually all sectors, including persistent strong demand from my technology customers. Thanks to strong fourth quarter bookings, we begin 2025 with same store growth in both sequential and year-over-year backlog. 2024 operating cash flow was $849 million, laying a strong foundation for continued investment. And our ongoing cash flow strength is indicative of strong underlying trends in our execution, customer relationships, and prospects. Recently acquired companies continue to surpass our expectations. And we are pleased to announce that in January, we added Century Contract as our newest partner company. Century is an outstanding, well-established mechanical contractor based in Charlotte, North Carolina, and we expect they will earn about $90 million of revenue this year. We also announced a quarterly dividend increase of five cents to forty cents per share. This increase reflects our strong cash flow and, like our share repurchases, it shows our commitment to reward our shareholders. I will discuss our business outlook in a few minutes. But first, I will turn this call over to Bill to review our financial performance.

Thanks, Brian. Results are fantastic this quarter, capping a great year. Revenue for the fourth quarter of 2024 increased by 38% compared to last year to $1.9 billion. Full year revenue for 2024 was $7 billion, an increase of 35% compared to 2023. For the full year, our mechanical segment revenue increased by 40%, up by acquisitions, modular expansion, and substantial organic construction and service growth. Electrical segment revenue increased by 19%. Full year same store revenue increased by 23% or $1.2 billion. We will face a tough comparable in 2025, and our best estimate is that same store revenue will continue to rise in 2025, most likely by high single-digit percentage growth. Gross profit was $434 million for the fourth quarter of 2024, a $154 million improvement compared to a year ago. Our gross profit percentage grew to 23.2% this quarter compared to 20.6% for the fourth quarter of 2023. The quarterly gross profit percentage in our Electrical segment improved to 26.1% this year, compared to 22.9% last year. Margins in our mechanical segment also increased in the quarter to 22.4% compared to 19.8% in the fourth quarter of 2023. Full year gross profit increased by $486 million, and our annual gross profit margin was 21% as compared to 19% in 2023. Our electrical margin was 24.1% for 2024, while mechanical was 20.2%. As we look to 2025, we are optimistic that gross profit margins will continue to be in the strong range as we have achieved in comparable quarters last year. SG&A expense in the fourth quarter was $208 million or 11.1% of revenue, compared to $160 million or 11.8% of revenue in the same quarter of 2023. For the full year, SG&A expense as a percentage of revenue was 10.4%, down from 11.0% in 2023. For the full year and on a same store basis, SG&A due to ongoing investments to support our much higher activity levels. Quarterly operating income increased from $120 million in the fourth quarter of 2023 to $226 million for the fourth quarter of 2024, an 88% increase. Thanks to the jump in gross profit margins and favorable SG&A leverage, operating income percentage increased to 12.1% this year from 8.9% in the prior year. For the full year, our operating income was $749 million, and we achieved a remarkable operating income percentage of 10.7%. Our 2024 tax rate was 21.6%. We estimate that our tax rate in 2025 will be approximately 22% to 23%. After considering all these factors, net income for the fourth quarter of 2024 was $146 million or $4.09 per share. This is a 60% improvement in quarterly earnings per share from last year. Our full year earnings per share for 2024 were $14.60, compared to $9.01 per share in the prior year, so our annual EPS is up by over 60%. And EBITDA increased by 85% to $261 million this quarter from $141 million in the fourth quarter of 2023. Same store EBITDA increased by over 50%. Full year 2024 EBITDA was $892 million, and EBITDA margin was 12.7%, reflecting great execution by our teams and strong demand in our markets. Full year free cash flow for 2024 was a remarkable $1.176 billion. We continue to benefit from advanced payments, and operating cash flow, again, far exceeded our earnings by $327 million on a trailing twelve-month basis, so we are again well ahead of earnings in collecting our cash. In addition, our cash flow for the second half of 2024 was lifted by approximately $80 million of tax payments that we were allowed to defer until February of 2025 due to Hurricane Barrel. That catch-up payment has now been made and will reduce first quarter cash flow. Capital expenditures in 2024 were $111 million or a little over 1.5% of revenue, and we continue to invest in our operations and purchase vehicles to support our service business. We increased our investment in share repurchases this year and returned $58 million to shareholders in 2024 by buying over 177,000 shares at an average price of $329. Since its start, our share purchase program has retired over 10.4 million shares at an average price of $31.41 and paid our shareholders more than $320 million. That's all I got, Brian.

Alright. Thanks, Bill. I am going to discuss business and outlook. Backlog at the end of the fourth quarter was $6 billion, a same store increase in both sequential and year-over-year backlog. Fourth quarter bookings were strong, especially in the technology sector. And sequential backlog was up $300 million. Since last year, our backlog has increased by $800 million or 16%. On a same store basis, our backlog is now up by $400 million, 9% higher than at this time last year. Our overall backlog is broadly based and especially robust in our industrial sector. We are carefully selecting work that has good margins with good working conditions for our valuable workforce. Our revenue mix continues to trend towards the industrial sector, with this sector accounting for over 60% of our volume in 2024, and continues to be a major driver of pipeline backlog. Technology, which we include in industrial, and which includes data centers and chip fabs, was 33% of our revenue, a substantial increase from 21% in the prior year, and advanced technology is now the largest component of our revenue. Institutional markets, including education, healthcare, and government, are also strong and represent 24% of our revenue. The commercial sector is active as well and now accounts for about 16% of our revenue. Most of our service revenue is for commercial customers, so our commercial construction business is now relatively small. Construction accounted for 84% of our revenue, with projects for new buildings representing 56% and existing building construction, 28%. Project pipelines remain at unprecedented levels. We include modular new building construction, and year-to-date modular was 17% of our revenue. Service revenue was up 8% this year on an absolute basis, but with faster growth in construction, service is now 16% of total revenue. Our overall service business achieved a record $1.1 billion in revenue for 2024, and service continues to be a growing and reliable source of profit and cash flow. With record broad-based backlog, healthy pipelines, persistent demand in advanced technology, onshoring, and especially our unmatched workforce, we expect continuing strong results in 2025. I want to close by thanking our over 18,000 employees for their hard work and dedication. Our success is a direct result of the people that serve our customers every single day. I will now turn it back over to Marvin for questions. Thank you.

Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star one one. Please standby while I compile the Q&A roster. Our first question comes from the line of Brent Thielman of DA Davidson. Your line is now open.

Hey. Thanks. Good morning. Congrats on a great finish to the year.

Hey. Thanks, Brent.

I guess, Brian or Bill, I mean, I think your comments on your ability to kind of sustain these elevated margin levels in 2025 is pretty notable. I'm just wondering, is that a function of the terms that you continue to see come in on new awards? Is it the schedules you see laid out for 2025 across the different territories? Just wanting to understand what gives you the confidence around that just given such strong margins by historical standards.

Yeah. Yeah. For sure, Brent. So as you know, Brent, you've been around this business a long time. It's a host of things, and it starts with good project selection, working for good customers, leading on to doing a great job estimating and evaluating the risk of the projects that we are looking at. And right now, there's just a lot of work out there that's in our wheelhouse, our sweet spot. So we are doing a really good job executing it. But it all comes down to the folks in the field that are actually doing the work with tools in their hands. We are very fortunate to have the workforce we do and the care they take with our customers. So it's a combination. A lot of things are going to drive margin, and we have to do all of them well, which we are doing right now.

Yeah. Okay. And then on modular, I mean, just taking the year-to-date 17% of revenue, I mean, it looks like the business is up roughly 50% in 2024. Could you just talk about your ability to continue to see growth in modular in 2025? I know there's limitations in terms of capacity, but wanted to get a handle around how you're thinking of that in 2025.

Right. So, you know, Brent, we had a big bang increase in 2023 based on some giant orders and reassurances that we got in 2022. We continue to grow that, but now when we add space, we'll add 200,000 square feet, and we will put a lot more focus on productivity and automation. So we really see that continuing to grow just gradually, and our guys are so good at really providing a great product to the customer and really helping not just with building it, but helping them design it. And I think we're just excellent at that, and I really stand in awe of our guys, but I think you'll just continue to see sort of the incremental growth.

Okay. And, Bill, I mean, with that focus on productivity and automation, presumably, that can put some upward pressure on margins in that particular area. Is that fair?

I think it's supportive of margins. These guys are getting really good margins, and they have big sophisticated customers, so I wouldn't necessarily predict. I think that that space will grow faster than Comfort as a whole. It'll be supportive of those growth projections, same store growth projections we just gave. But I think our margin guidance for them would be the same as our margin guidance for the rest of the business, which is overall we can't believe the margins that they achieved in 2024, but we really see every reason to think they'll do it again in 2025.

Got it. Last one, if I could. Bill, I mean, the CapEx stepped up here in the fourth quarter. Maybe it's associated with modular or something else, just what that was related to. And you know, thoughts on CapEx in 2025.

Yeah. So dollars of CapEx, they're up. They're up. You know, if you looked fourth quarter to fourth quarter, they're still down as a percent of revenue. They're up sequentially, but that's almost always going to happen from the big volumes of the third quarter. So as a percentage, they're up sequentially. I will say our first use of every dollar we get, our very first use is to reinvest it in the business where it can help us be a better company and serve our customers better. We also occasionally, nowadays, will buy the buildings that we run our businesses from opportunistically just because they're often in a medium-sized town and they're pretty special buildings. And we need we're really investing in those buildings, and frequently the most logical way to do that is to simply buy the building from the landlord. So sometimes you'll see I think we'll probably buy a couple of our buildings this year. We're in some And, so you I think our backlog I mean, I think our CapEx will stay at about the same percentage next year as this year.

Okay. Thank you. I'll get back in queue.

Thank you. One moment. Our next question. Our next question comes from the line of Adam Thalhimer of Thompson Davis. Your line is now open.

Good morning, guys. Congrats on a great Q4.

Alright. Thanks, Adam.

I wanted to start on the persistent strong demand from technology customers. Can you give us a little more color on that and maybe just some anecdotes about what you're seeing from the current bidding environment?

Yeah. So I'll go first and then Bill can add on to it. But you know, probably a lot of concern a couple of months ago with a release. But right now, we're seeing heavy activity, particularly on the data center front. It's been no let-up on demand on what they want us to build. In fact, they've let us know that they want to make sure that we're still all in on building, which we are. So we see no let-up at all, Adam, on that front. You know, one of the things people forget is that the amounts that have been announced by the hyperscalers in particular are vastly higher than anything any year that's ever happened in the past. And probably not possible to start with. So even if there's a pullback, it's a pullback to a lower amount, that's still impossible in the time frames that they're talking about. And it's definitely the case that with the people we build data centers for, if they're going to slow down, they don't know it yet.

Helpful. And then to what extent are you guys getting or do you have visibility, would you say, into 2026?

Well, compared to any other time you would have asked that question, more than usual. Right? But you know, it's actually we have more booked backlog in 2026 than we've ever had at Comfort Systems. Alright. 2026 is still a year away. Yeah. Still a ways away. Yeah. But at some point now, I mean, we've never had we've never had as much visibility as we've had. We've never been fully sold for the coming year and into the next year as we are now. And really, the project sizes are very big, so they can frequently be multiyear. The one thing that happens is the starts are lumpy. Right. And, you know, you've been you've followed us for so long. You know that. But as of right now, frequently, when a start is delayed, it's like a relief for our much going on that they're starting to kind of count on some of those starts being delayed. But you know, Adam, it's also great for our workforce that they see that there's work coming into 2026 and see how much work there is out there. We have a lot of work to do this year. So it's really a good sign for the folks in the field too.

Nice. And then just quickly, Bill, how big is that Q1 tax payment?

So we paid we paid $80 million that should have been paid last year. So if your ZIP code was in the federally declared disaster area, they basically gave you relief so that you didn't need to make your quarterly estimated tax payments for the third and fourth quarter of 2024. With no penalty or interest. And on behalf of our shareholders, we took advantage of that, and so we paid $80 million a week or two ago that should have been paid last year. And we'll still be making a tax payment this quarter. Our normal estimated tax payment for our very high profits right now. So that's literally a shifting of $80 million of cash flow from this year to last year. And also in the first quarter, we have some, you know, some acquisition-related payments where these acquisitions are doing so well that when we pay out some of their earnouts and stuff, once you once your the payouts that you make on earnouts go above the amounts that you estimated when you accrued for the earnouts, they start to go through operating cash flow. It is self-funding because by definition, they earned more money, but it does change, you know, it does change the characteristics of the cash flow. So we think we'll have great cash flow this year, but especially the first quarter, there's some displacement some, you know, temporal displacement for some of the payments. All of which were really to the benefit of our shareholders, but they were all kind of went the same direction. So

Perfect. Good luck in Q1.

Thanks.

Thank you. One moment for our next question. Our next question comes from the line of Julio Romero of Sidoti and Company. Your line is now open.

Thanks. Okay. Good morning, guys.

Hey, Julio. Good morning.

Yeah. You know, just thinking about the modular offering and obviously a lot of concern about the data center demand that you're seeing. But can you maybe just give us a refresher on the other end markets that currently comprise your modular mix aside from data centers, and maybe if they don't if they're not served modular now, they could be served in the future.

So, historically, our modular business, like, when we bought it in 2011 and for the first many years, it was really focused towards pharmaceutical builds. Always had the data center component to it. As the data center stuff grew, essentially, the data center some really big and good customers came to us and said, we want pretty much your whole capacity, and you know, we talked to them about the terms that we would need and cooperation we would need to give that to them. So we've given they probably have 80, 90% percent, if not more, of our capacity. We do continue now we're much bigger, so we've continued to reserve a chunk of more than 10% of our capacity for the customers who grew who grew to rely on us in other verticals. And keeping in mind, that 10% it's 10% of a number that's grown fivefold. Right? So it's still a big number. We think this modular construction would be useful in all kinds of well, we know it would be in all kinds of verticals. But it's just such a good match right now for data center, and the demand for data center is so big. And really, the people who are building data centers people think of people kind of ask is, you know, is this going to be the way people build data centers? The reality is for the foreseeable future, the way that we're going to build data centers is every way it's possible to build a data center. They are really taking an all-of-the-above approach, and we think there's you know, obviously, we're doing that much work. If something we don't see or expect happens, which is data center slows down or stops, we'd have to replace that work, and there would be an adjustment period.

And, Julio, you know, we've done it for hospitals as well, but we're at the very beginning of modular construction in this country. This will have a long, long runway. It's a great solution, you know, in construction, labor, etcetera, risk. It's a terrific solution.

Yeah. There's amazing applications like Intelicons. Yeah. And there's just, like, a lot of places where it would be, you know, what's the capacities out there. Right? But today, what's done modular is, like, a very, very small fraction of 1% of what could be done modular.

Yeah. No. Agreed. Very helpful color, and we're definitely early stages there. You know, you said this also that, you know, data center is not just a Red Modular, but you also do some stick-built work for data centers as well. Can you maybe just talk about demand trends on that side?

Well, yeah. It's extremely robust. She's talking about Texas alone as one example. We're turning down we're actually turning down work, which will pull up. There's great opportunities in Mississippi, I could go on and on, but there's, you know, plenty of opportunities for, you know, a regular build that we're doing as well.

The work we do in data centers that's non-modular is almost the same amount of revenue as we do modular. So I think about it. It's a big set of opportunities for us.

Really helpful. And then one more for me is just yeah. You talked about this Century Contractors acquisition you made here in the first quarter. The location seems to be pretty close to your EAS facility. Is there any kind of synergy with that facility, any modular component or benefit to Century?

So they have wonderful capability in complex I, and that's a really, really good fit for except we already do, but really a really good fit for where if you were if you were to, like, look at we have five or six businesses sort of within a hundred miles of there that are doing industrial work. If you'd have said, could I if I could have one more of something, a little you know, if I could have more capability in one thing, it would have been on what these guys do. So we're optimistic that this will be a really, really great member of that ecosystem, and they're already off to a great start.

Great. Thanks very much, guys.

Thanks.

Thank you. One moment for our next question. Our next question comes from the line of Joshua Chan of UBS. Your line is now open.

Hi. Good morning, guys. Congrats on the great quarter.

Thanks, Josh.

Yeah. I know that the gross margin is usually fairly strong in Q4, but could you just kind of help us contextualize the magnitude of strength in this Q4's gross margin? You know, was there anything unusual, any closeout benefits, anything like that?

Brian, did you think we have good gross margins in here?

Yeah. You know, it's interesting, Josh. It's a really good question. Because when we saw the number two, we looked twice. Yeah. It comes back to we're getting really good work or really, really getting super execution. I can't really say enough about the quality of work we're getting out in the field, and, you know, we're working for work. We're really good at it, and, you know, it really helps really helps your mind. So and honestly, there really wasn't any, like, particular or small handful of special closeouts that drove a bunch of that. It was really broad-based. You know, it's not we've reached a point now where this this this so first of all, you have modular. Those projects are built in a month or two. Right? And so much of the industrial goes year-round that you know, the closeouts become kind of every quarter, but never, you know, more than usual. I could that could be a that could here and there, there might be a quarter where there's one or two special closeouts. This was just broad-based strength and revenue running through at great margins. You know, the other thing, Josh, you know, our service business continues to grow. Did a big one out last year. If you look at the back end of the was quad, where you get significant temperature change. It got really cold in parts of the country. That really accelerates your service callout work, etcetera. So you know, that helps you buy things as well.

And that's a fair point. Yeah. It's really encouraging. Thank you. And then on the I guess, you're a people-based business. So you talk with about you know, the progress behind hiring people and the training of apprentices. How do you feel that's going relative to your demand outlook?

Well, I mean, our organization's doing a terrific job bringing folks in here, constantly recruiting, got outstanding training programs from skilled trades all the way up to leadership. Training where have training going on every week in this organization. The companies that we brought in here years ago, Kodiak, for example, has access to a lot of, you know, temporary labor that's really helped us manage our peak peaks and valleys, and it giving us outstanding talent. So the recruiting efforts constant, you know, nonstop. We got a lot of recruiters throughout the country, and that that will that will never I've in training, we're totally one hundred percent committed to training. That's something that we'll never slow down on. That's that's right. And maybe I can ask one last one. How does the M&A pipeline look, and how do you expect that to kind of contribute to the year? Thank you.

I would say the everyday pipeline is very healthy. But we are coming off of years where we did really last year, we did our biggest deal ever. We did three two really notable deals and another great deal. So we are optimistic that we can just continue to keep doing what we've been doing in any given year. We'll do more or less based on conviction and availability. The one thing we won't ever do is rush or try to fill a quota, but right now, that's great to hear, and congrats again for the third quarter.

Thanks.

Thank you. One moment for our next question. Our next question comes from the line of Brian Proffi of Stifel. Your line is now open.

Thanks. Good morning, everybody. Congrats on a very nice quarter. Wanted wanted to ask on you're welcome. Thank you. Wanted to ask on some of the comments around same store sales growth for 2025, you mentioned the high single-digit range. Sounds like a little bit of a change from some of your comments last quarter. Could you just give us a sense for what changed versus what you were mentioning?

Yeah. Yeah. And it's it's just math is what it is. We did not expect to roll through quite the revenue that we did in the fourth quarter. You know, when we give guidance on our revenue, it comes up from an organic pros planning process numbers as big as ever. It's just that that same number is not as percentage bigger as much percentage bigger as the bigger number that we did came up with in the fourth quarter, you know, that made the full year bigger the fourth quarter. So it's just a rough. Yeah. It's not from less work. There's plenty of work out there. It's just that we let me check. Such a big revenue number in the fourth quarter.

Understood. Yeah. That's helpful. And then when I look at the implied mechanical orders, those were down a little bit. A versus a year ago. Does that have to do with anything regarding the timing of modular orders, or is there anything else as driving that? Thanks.

I think you're smarter about that than I am. We I mean, I would say that we don't what we are not seeing we're seeing we got really good modular orders in the fourth quarter. We did not get the gigantic modular orders we got in particular into December of 2022 and also in December of 2023. But we had net bookings and the plant's full, and it's booked full longer than it's ever been. It's a bigger plant, there doesn't seem to be a slowdown, but there's not a step change sort of increase like we had. And, you know, hey, Brian, I know you're relatively new to us, but what's really important here is that whenever we look at work we're gonna take, is our manpower loading curves. Make sure we do not take too much work that we can't execute at a high level. Because margins, profit, and cash flow are really important. So we spend a lot of time about what work we can handle and when the work is coming.

Right. There is no consideration or element in our backlog number there not being work to do. There is we double our backlog the next hundred and hundred and five days if we just started taking saying yes to more work. We could we could take a lot of work we couldn't do if if our goal was simply to increase our backlog.

Understood. Yeah. That's really helpful. And then I guess one other one. We've been getting a lot of questions on inferencing data centers versus training data centers. What that potentially needs for power, cooling needs, you talk about some of the differences in terms of electrical, mechanical intensity between some of these different types of data centers. And then just broadly, you're looking at your data center activity builds to date, how much is more cloud-based data centers versus AI data centers today. Thanks.

So I'll give a little bit of color about that, but I'm not you know, really not an expert. Right? There's no data center so here's some really clear things. There's no data center we're building today that's not more dense than if we were building that same footprint one, three, or five years ago. They are bringing in way more copper, way more electricity. They're trying to put more compute power into all data centers. The true AI data centers are barely even starting. They will probably have a smaller footprint based on just what smart people at Converge tell me. They will have unbelievable power draws. But, you know, the black well chips only started actually being delivered a few months ago. The first ones have gotten into servers, most of them are scheduled to be delivered in next year and the year after. Right? So that is really in its infancy. The true build for so so everything that was on the block, everything that was being built redesign work was done to increase the density of it. You know, if you talk to our guys. As much as they could, but I don't think we've really started to to a material extent. I don't think we've started building the true AI data centers. I think that's yet to come. And I think because of that, it's still being figured out.

Understood. Then I last last one from for me here. Have you guys seen any changes in terms of contract terms today versus a year ago? I would assume they're essentially the same or better. How should we think about that impacting margins and free cash flow conversion this year?

So we are we are getting great payment terms, but we were already getting great payment terms a year and two years ago. And, honestly, that's that's a constant trade-off. Right? We don't really need money sooner. If you if you you know, if you're somebody that has all the money in the world and you there's a right wide range of payment terms, we'll accept. Generally speaking, they're just very generous payment terms right now. As far as the underlying contractual provisions, as you can imagine at a time when we're this busy, that affords us the opportunity to say no to things. So at the margin, we're doing some of that. There are GCs who have very unreasonable forms. I think that's affecting their ability to get subcontract. I mean, actually, I know it's a they may not know it, but I know it's affecting their ability to get subcontractors. But, you know, ultimately, the forms that are used in this business have been around for a long time. Almost more important than the words that that are in them are is, like, there's a standard of and if you do work over and over with the same people, that you trust, that's the most important thing. I would rather have average terms with a great long-term partner than, you know, better a better contract with people I don't know.

Understood. Yeah. Very helpful. I'll pass it on.

Thanks. Thank you. One moment for our next question. Our next question comes from the line of Alex Dwyer of KeyBanc Capital Markets. Your line is now open.

Hey, guys. Good morning. Thanks for taking my questions.

Hi.

So I wanted to come back to the margin guidance and the flat in 2025 versus 2024 and just kind of walk through the biggest risks to this and what could drive to the upside here. Whether it's, like, a pricing, execution, closeouts, cost inflation, or is there anything different about the project environment that could make it harder to execute this year and share resources. It just seems like there's just such a great gross margin story with modular improving efficiencies and the supply-demand imbalance. And I think there is a good amount of this acquisition amortization that rolls off. Just any thoughts on why why margins couldn't actually expand this year versus last year?

So we would never say that they couldn't. I think our hesitation to predict that they would is we just printed margins that were a couple of hundred basis points higher than we would have thought were possible a year ago. You know, this stuff it happens in the real world, and we literally we don't know how much it's gonna rain. Right? We don't know how other people around us you can't put you can't put wires in a wall that has been built yet. So you know, we think that the environment is really good. We think that the people we work with are doing a great job of taking the right amount of work really, I I don't know. We honestly, it's hard for us to say we can maintain a margin as high as we've had, but we looked each other all looked each other in the eye and said, really, I wouldn't bet against our guys. They're gonna keep doing this. But it's not there's not a lot of science to it. We'll go for it.

Okay. Got it. That's helpful. And then I just wanted to ask about how you think the trend in backlog could play out this year? Like, quarterly? And, like, should we expect a similar cadence to 2025 where like, one Q and four Q are easier to achieve net bookings in the quarter, and then it could be tough again this year to sequentially grow the backlog through those heavy heavy summer quarters.

Yeah. So Brian and I were looking at a schedule this morning where, you know, our backlog jumped up two years ago in 2022. The burn was half two years ago in the fourth quarter what it was in this quarter. So part of what you have going on is we have attained such a high level and we're so busy. And, you know, there's a finite amount of sort of human capital. Right? Hours that can be worked and not kill people. And so our backlog you know, it's it's I would take the over on it. On in general over time on average, but I just think the doubling kind of the the crazy ups are there. Far as the seasonality, if you ran Comfort or a company like us, ten for over ten years, eight of the ten years, you're gonna see more back net backlog bookings in the first and fourth quarter. In eight of the ten years, you're gonna see proportionally less, you know, more burn. It's just the way it is because of what you know, time, space, mass, weather, you know? So I think it's nothing's really changed. I think anybody who is watching our backlog and looking for signs of a slowdown would be better off listening to us because as I as we said, there's so much work we're turning away that there really is no people look at our backlog and they worry about whether we'll have work. And that if you were if you're us, looking at what we when we talk to somebody who does the backlog for a big electrical in Texas, that is so far from the world they're living in. The way they're thinking that you wouldn't believe it.

You know, it's like yeah. Okay. Got it. Next billing then. I guess my last question, I just wanted to kinda ask about your your mix of business within the manufacturing portion of your revenue and like, as we think about that mix last year versus what's in the backlog and planned for 2025, is there any is there any shift in those, like, sub end markets between life sciences, chips, and food beverage, and then, like, if we get tariffs, in addition to the reshoring, theme and the chip stack funding, like, how do you think that changes your your your slate of opportunities going forward at all. Like, could it change the mix of new construction versus retrofit projects? Or does it not really change that much?

Yeah. No. In terms of the the at least for the first part of it, the mix is is pretty consistent where we were last year with pharma, healthcare. We got a few solar in there. We have you know, a lot of we consume product usage in there, like, you get a LEGOLAND job going. So there's a lot of mix of manufacturing that I think is gonna increase. Still, if these tabs stick around, that that will be done.

I mean, it feels like onshoring is real. Yeah. At the beginning. I mean, it's really at the beginning. So there's there is a push. There's there's there's definitely a way, you know, sort of a current towards industrial. But then people didn't quit putting mayonnaise on their sandwiches, and people still wanna feed their dogs dog food, and they still you know and, you know, even in the data center world, people sit here and they they look at the new compute stuff, but people are still taking pictures and streaming. Right? It's not as if there there are new incremental sources of demand but to I can't think of one that displaced an already existing source of demand. And that's why you know, that's why you're seeing some of the extraordinary outcomes that you're seeing is you know and then you you put that on top of the fact that over the course of the financial crisis and the all the way back to nine eleven and then, of course, COVID, there was a lot of supply destruction. Right? So you have unprecedented demand after twenty years of underinvestment and supply. We're all scrambling to catch up.

Thanks, guys. I'll turn it over there.

Alright. Thanks.

Thank you. One moment for our next question. Our next question comes from the line of Kadeer Ritchie of Ritchie Capital Group. Your line is now open.

Good morning. Thanks for taking my question. And I hope you can stomach another pipeline question. But with the recent volatility around the AI space, with the introduction of deep seek and other headlines, it's clear that the market seems to think that or view Comfort Systems almost as like an AI type stock. And I'm wondering if you feel like that characterization is fair. You know, I understand that the comment about impossible demand in the data center space, but how do you make decisions about taking on more work in that sector versus other opportunities? Is it simply, you know, the highest margin per man hour and so you take all you can, or is there an approach to balancing the backlog portfolio?

Also, two things I'd say. One, so Comfort is thirty so we're we're sixty-three percent industrial of that thirty-three percent is advanced technology, and of that, a little over two-thirds is data center. So Comfort is not a data center company. Right? And twenty you know, low twenty percent of our revenue is data center, and but having said that, you know, the reality is how we how we we pick jobs. Gross profit per hour worked or really per hundred dollars of labor. Right? Because not all labor is the same, is the ultimate measure of how attractive a project is from the point of view of sort of profitability and spreadsheet considerations. But today, for most of our people, there's a prequalification process they go through where they say, will this be a good job for my workers? Is there is there good parking? Does this GC run a good job and keep the field from being muddy? I mean, because it ultimately, our workers we've had them for decades. Some of them for multi are multigenerational. But they can get they can leave us and get a job instantly. And so our number one consideration, honestly, is are the is this a good job for our people? Are the people they know gonna be on it that they like to go to lunch with? Is it with people we know treat people well? Number two consideration is who are we doing the work for? The owner and especially the intermediaries like the GC, the other people on the job, are they good people that we can trust? Because we can afford to be picky right now. And then the third consideration is what's the gross profit sort of per hour worked or for the labor that we're that we're we're limited by and that we're giving up for them. And the good news is those three considerations are not independent. Almost always, the best answer to number one and two will be the best answer to three. So the world we're living in is so different than what somebody sitting, buying, and selling stocks based on their guesses about AI. That it's very hard for us to really even answer that question.

You know, the other part that Kirby, is we're, you know, we're mechanical electrical contractors. So our skills, whether they're pipe, finish, sheet metal guys, plumbers, electricians, so it's easily transferable. It's not we can work in any type of building that you wanna build. Some specialist skill that can only work in one industry. Well, at the end of the day, work and what the market dictates is available.

Yeah. I was I was actually surprised by it as well. But it it it really made me take a step back and think, okay. Well, you know, if there was something like a deep sea, can it, you know, change the fundamentals of the the fundamental equation for AI and data centers. And so I was just I was it made me curious. You know, how insulated you are about the shift in spending patterns related to the hyperscalers and, you know, trees don't go to the sky and, you know, maybe this time it's really is different. But, you know, just is the demand that would replace that, is it already there, or would you have to, you know, go out and do some work if if there was a big shift.

Well, before before the words artificial intelligence had been mentioned on any conference call for any public company in America, there was not an electrician in America that was scrounging around for something to do. Yeah. Correct. Right? So the demand's there. Obviously, if if the demand becomes frenzied, the pricing gets better. There is so Mhmm. So, of course, addition if you if you you know, anybody who took economics ten, right, basic economics, supply and demand affect the outcomes. And if demand wanes, we don't really have a problem. We've been cash flow positive every single year we've ever existed. Right? We've earned money every single year we've ever existed. Some of those years, were really bad years. Right? They were after the year after nine eleven, they were the worst year of COVID. The financial crisis devastated nonresidential building. Right? And and at some point, it's really not a question that we can be a good company and earn money. But obviously, we're we should be worth more if you think you know, if you think reshoring is real, onshoring is real, we are worth more. If you think people actually, you know, are gonna need data centers, we're worth more. I the last I wanna say about the data center stuff is, our whole experience has been and we've been building data centers since, you know, o five, o six. Our experience is when they find a way to do with less or when they find a way to to to make more, they just want more. They don't say, okay. Well, we have enough compute. Let's draw a line under that and move on to staring at our logo. You know what I mean? They don't the the thing is they want more. And if they find a way to to get more, guess what they want after that? More. It's a land grab. Right?

Yeah. That's great. Thank you. Thank you for that. My my last comment is is is I really appreciate your loyalty to your employees. It's something that we've always admired about Comfort Systems and just how you fight for your employees. So congratulations on that, and congratulations on the quarter.

Thank you. Be good here.

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

Alright. In closing, I really want to thank our amazing employees again. We're very grateful to you. Thank you, everyone, for joining the call today. We are very excited about the opportunities we're facing in 2025 and look forward to the year. Hope everyone has a great weekend, and thanks once again.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.