Good day, and thank you for standing by. Welcome to the Q2 2025 Comfort Systems USA Earnings Conference Call. 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 Account Officer.

Thanks, Latonia. Good morning. Welcome to Comfort Systems USA's Second Quarter 2025 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 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 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.

Okay. Thanks, Julie. Good morning, and thank you for joining us on the call today. We had a fantastic quarter with amazing execution by our teams. This is the first time that our quarterly revenue has exceeded $2 billion. We earned an unprecedented $6.53 per share this quarter, which is an increase of 75% compared to a year ago. Our Mechanical business had a sharp increase in profitability, and our Electrical segment was higher as well. Service revenue and profits also increased by double-digit percentages. Our bookings were strong and our backlog at the end of the quarter grew to a new high of $8.1 billion. Demand remains strong especially in technology, and we continue to book work with good margins and good working conditions for our valuable people. We are going into the second half of 2025 with significant same-store growth in both sequential and year-over-year backlog. I'm happy to announce the acquisition and welcome Right Way Plumbing, a great plumbing business based in Florida, that we expect will earn $60 million to $70 million per year in revenue. We also increased our quarterly dividend by $0.05, to $0.50 per share, and we actively purchased shares during the first half of 2025. Despite a backdrop of tariff ambiguity and economic uncertainty, we feel fortunate to have good demand, especially for large and complex projects. Thanks to our amazing people. We expect continuing strong results in 2025 and continuing success into 2026. Trent will discuss our operations and outlook in a few minutes, and I will make a few closing comments after our Q&A. But first, I will turn the call over to Bill to review our financial performance. Bill?

Thanks, Brian. So yes, our second quarter results are remarkable, with 19% same-store revenue growth, sharply higher margins, and over $220 million of free cash flow. We also achieved more than $300 million in quarterly EBITDA for the first time ever, and that's a 50% increase over the same quarter one year ago. Revenue for the second quarter of 2025 was $2.2 billion, an increase of $363 million, or 20% compared to last year. Electric segment revenue grew by 49%, while Mechanical segment revenue increased by 13%. Through six months, same-store revenue has grown by 17%, and currently, our best estimate is that for full year 2025, our same-store revenue increase will remain in that mid-teen range. Gross profit was $510 million for the second quarter of 2025, $146 million higher than one year ago. Our gross profit percentage grew to a remarkable 23.5% this quarter, compared to 20.1% for the second quarter of 2024. Quarterly gross profit percentage in our Mechanical segment jumped to 22.9% this year, compared to 19.2% last year. Margins in our Electrical segment also increased significantly to 25.3%, as compared to 23.6% in the second quarter of 2024. We currently expect that gross profit margins will continue in the strong ranges that we have averaged over recent quarters. SG&A expense for the quarter was $210 million, or 9.7% of revenue, compared to $180 million, or 9.9% of revenue in the second quarter of 2024. SG&A increased mainly from ongoing investments in people to support our higher activity levels. Our operating income increased by just over 60% from last year, from $185 million in the second quarter of 2024 to $300 million for the second quarter of 2025. With improved gross profit margins, our operating income percentage surged to 13.8% this quarter, from 10.2% in the prior year. Our year-to-date tax rate was 20.7%. Our effective tax rate in the first quarter was lower due to interest we received on a delayed refund by the IRS, that was associated with our 2022 federal tax return. We received that $118 million refund in April 2025 which included $11 million of interest. Excluding this item, our effective tax rate would have been approximately 23% year-to-date, and we expect our tax rate for the second half of 2025 to continue to be in that 23% range, with our full year effective rate a bit lower due to the discrete benefit recorded in the first quarter. In July 2025, the federal government enacted major tax reform legislation. However, we currently do not expect that the new and amended provisions will have any significant impact on our operating results or cash flows. After considering all these factors, net income for the second quarter of 2025 was $231 million, or $6.53 per share, and that compares to net income for the second quarter of 2024 of $134 million, or $3.74 per share, and this is an over 70% improvement from last year's already very strong showing. EBITDA increased to $334 million this quarter, from a strong $223 million in the second quarter of 2024. This 50% increase reflects great execution by our workforce and strong demand in our markets. As of June 30, our 12-month trailing EBITDA exceeds $1 billion for the first time ever. Free cash flow for the second quarter of 2025 was $222 million. This quarter's cash flow includes two discrete cash flow items that largely offset each other. As previously discussed, we received a $118 million tax refund in April 2025 that was related to our 2022 federal tax return. In addition, the remaining impact of our long-awaited cash flow turnaround of the advanced customer payments from our modular operations completed this quarter. As expected, the advanced payment position that we enjoyed for several quarters has now roughly normalized, and we expect that starting now, and over time, our cash flow should once again approximate our after-tax earnings, subject to the quarter-to-quarter and seasonal variances that are typical in our industry. We purchased additional shares this quarter, and year-to-date, we have spent $111 million buying approximately 326,000 shares. Even after funding share repurchases and our Right Way acquisition, we are in a net cash position of more than $250 million. And considering our strong cash prospects, we remain in a great position to reward our shareholders and fund additional growth. And that's all I've got on financial information. So Trent?

Thanks, Bill. I'm going to discuss our operations and outlook. Our backlog at the end of the second quarter was a record $8.1 billion, a large sequential and year-over-year increase. Since last year, our backlog has increased by $2.4 billion, or 41%, and $2.2 billion of the increase was same-store. On a sequential basis, backlog increased by $1.2 billion, or 18%, of which $1.1 billion was same-store. Second quarter bookings were especially strong in the technology sector, both in our traditional construction business, as well as the modular part of our business. We are entering the second half of 2025 with same-store backlog 37% higher than at this time last year, and our project pipelines remain at historically high levels. Industrial customers accounted for 63% of total revenue in the first half of 2025, and they are major drivers of pipeline and backlog. Technology, which is included in industrial, was 40% of our revenue, a substantial increase from 31% in the prior year. Manufacturing revenues were strong but declined modestly as our businesses chose to book a higher proportion of technology-related projects, particularly data center construction. Institutional markets which include education, health care and government remain strong and represent 24% of our revenue. The commercial sector which is a smaller part of our business provided about 13% of revenue. Most of our service revenue is for commercial customers. Construction accounted for 85% of our revenue with projects for new buildings representing 58%, and existing building construction, 27%. We include modular and new building construction and year-to-date, modular was 18% of our revenue. We currently have over 2.7 million square feet of building capacity dedicated to our modular business, and we expect to have around 3 million square feet by early next year. Service revenue was up 10%, and is 15% of total revenue. Service profitability was strong this quarter, and service continues to be a growing and reliable source of profit and cash flow. As mentioned before, we are entering the second half of 2025 with a backlog that is 37% higher on a same-store basis than we had at this time last year, and we have superb teams 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. I want to close by joining Brian and Bill in thanking our over 20,000 employees for their hard work and dedication. I will now turn it back over to Latonia for questions.

And our first question will be coming from Sangita Jain of KeyBanc Capital Markets.

So appreciate the update on the modular square footage. Can you tell us how you're thinking about the extent of expansion in your modular capabilities, and your thoughts on possibly adding a third location?

Sangita, I would say that we like what we've been doing, which is adding incremental capacity in a way that's measured and really spending an even bigger focus, or at least as much focus, on improving productivity and automation in our existing spaces. So I think the kind of growth you've seen, as long as the market supports it and as long as the amazing people who run these two businesses for us are convinced they have the bandwidth to implement it, as long as that holds true, we'll probably continue the same kind of incremental build out. It feels as if that demand is there, to say the least, actually. And so I don't know. I hope that answers your question. As far as the third location, that's something we think about on a long-term basis. We have two pretty great locations, right? We're right in the middle of the Mid-Atlantic. Houston is pretty well located especially for the markets that these things need to go to. And even considering the states you have to drive through, because that's a consideration, because different states have different load requirements. So I'm not sure that's a high priority for us right now, but we're very open-minded to it.

Got it. And if I can follow up, I know you mentioned that the reconciliation bill may not directly apply to your operations. However, the bonus depreciation does provide assistance to many of your customers, potentially similar to the Trump's executive order on AI. Can you discuss if you have had any initial discussions with your customers regarding that?

The bonus depreciation helps them and us some. I would say that I would not view that as an important driver for us at a time when we're already experiencing demand that far outstrips what we could possibly do. But anything that makes people a little hungrier is good, right? But I wouldn't consider that an important consideration.

Our next question will be coming from Akash Singh.

Moving forward, our next question will be coming from Julio Romero of Sidoti & Company.

This is Alex on for Julio. Congrats on the quarter. My first question, maybe we could start with just some color on growth for the remainder of '25. I know backlog and revenues have grown meaningfully even over the historical comps that you've mentioned that are a little tougher. So how is your confidence as this sort of continues positively into '25 and '26? And maybe some of the conversations that have led to that?

Alex, you know how our backlog is always very lumpy, right? So we don't spend a lot of time thinking about that and when jobs land kind of on a time scale. What we're really looking at is kind of our future pipelines. And what we see right now is very robust pipelines, may continue to be robust even with all the bookings we had in the second quarter. So yes, things are still very bullish with regard to future work.

Alex, this is Brian. I'm just going to jump in. Also service, right is, Bill and Trent mentioned, we're getting good growth in service. It's about a $1.2 billion business for us now, growing above 10% this last quarter. So that's been nice consistent growth, both from a revenue and profitability standpoint and on to the construction growth.

Very helpful color. I think kind of rising above consistent growth, you had very nice earnings performance and I think you wrote about anticipating solid earnings for the remainder of '25 and into '26. So could we get a little color there? Is solid sort of a statement of continuing where we are now? Or is that a little bit more from historicals? Just a little color would be helpful.

Well, we have a lot of work to do. We think our guys are the best in the world at doing it. Our customers want it, they're willing to pay for it. So I think we just feel pretty great about, at least the foreseeable demand and our ability to profitably meet it. We don't really have additional guidance on margins and stuff. These margins are pretty eye-popping. And we're still digesting them. But we feel pretty darn bullish about our prospects going forward.

Yes, Alex, our gross margin is 23.5%, which is strong. We're achieving a good combination of pricing and excellent execution. We're quite optimistic about our results towards the end of this year and into next year.

And our next question will be coming from Brent Thielman of D.A. Davidson & Company.

Great quarter, guys. I guess the first question, just, Trent you commented on the manufacturing kind of customer side and that you ultimately were focusing maybe a bit more on the data center tech customers, or you may get the best opportunity out of it. I guess the question is, has that market or pipeline of opportunities on that side subsided? Or are your workers fungible and you're going to best opportunities?

No, it hasn't subsided, it's still strong. So what really is happening is the best opportunities right now are presenting themselves more often than not on the technology side and so companies are choosing to put their skilled workforce in the best possible circumstances to be successful and that's what the technology customers right now.

Brent, just to follow on. I mean our operating companies, I think, are doing a superb job with project selection. Stuff that we're really good at doing in places where we're strong. So you got to really tip your hat to them about the work they're bringing in here and how they're doing it.

I heard you mention that modular represents 18% of revenue year-to-date. Can you provide insight into how much of the backlog is made up of modular? Additionally, from a customer perspective, is there a chance to include another hyperscaler with the additional capacity you are creating, or is this capacity mainly intended to support your existing customers?

In response to your second question, the opportunity exists. There are potential buyers for our product. Our two primary customers are currently the best prospects for sales. Throughout our businesses, there is a consistent inclination among our leaders and those who engage with our customers to collaborate with clients who recognize that we are working together rather than in conflict. Therefore, we are selectively allocating our valuable and limited resources to those who are committed to developing a quality project quickly, collaborating effectively, and acknowledging the need for fair compensation for the risks involved. Ultimately, this is the experience we are having with these customers, which is highly beneficial to us.

Okay. And sorry, just the question around modular proportion of backlog. Is that something you could comment on? Or how we might think about what's in the book of business?

I believe modular will continue to grow as we are investing in new spaces and enhancing our productivity. The growth rate could vary, but I would estimate that the overall business will grow in the mid-teens, and I expect modular to be close to that rate as well. I recognize that it has previously grown significantly, but we have strong demand and opportunities across all our businesses. However, it is challenging to increase its proportion within our company at this time.

Could you provide an update on the funnel or pipeline and what it looks like currently? As you look ahead to 2026 and potentially 2027, are you noticing more active discussions with customers regarding opportunities for 2027?

Yes, Brent. Absolutely. I mean, 2025 is fully booked, right? We're definitely looking at opportunities for 2026 and 2027. Longer-term projects take more time to finalize and complete, but customers are already considering those years. It's a great time to be in the construction business, buddy.

Our next question will be coming from Adam Thalhimer of Thompson Davis.

Congrats on the record quarter. Basically, I wanted to pick up with where Brent left off and rephrase the question. Within the current backlog, how much of that work would be scheduled for 2027 plus?

A lot. I don't think we have a precise number. Yes, a lot.

Yes, the statement we made, Adam, about what we're feeling good going out is because we're seeing both in backlog and what we're looking at is healthy.

If you do a little math, you have to realize that if we're telling you we're going to grow mid-teens, the backlog's pushing further out or maybe higher percentage than that.

Understood. The growth that you've seen at Walker Electrical, how much of that is occurring in their traditional North Texas market versus work in other areas of Texas or even outside of Texas?

Currently, all our activities are focused in Texas, particularly in what I consider the four key markets: Dallas, Houston, Austin, and San Antonio. While North Texas, especially Dallas, is performing well, the other three markets are also robust. It's likely that if you speak with them, they would tell you that all four major markets have consistently shown strength.

Walker is performing exceptionally well. It's impressive what they are achieving. Additionally, all of our other electrical divisions are also excelling. This is important to note. One advantage for us is that we acquired all of our electrical companies in the last five to six years, during which we already had a strong belief in investing in companies aligned with the super cycle and those with specific regional and complex capabilities. When you look at Comfort Systems USA, our electrical divisions have a greater share of companies that are well-positioned to benefit from current positive trends, and they are doing an outstanding job capitalizing on this, as are our mechanical companies and our service divisions. Everyone, except corporate, is performing excellently.

But we do want to be on this call to help out.

Lastly, anything more you can say high level on pricing. Just as your technology customers are taking up more and more of your capacity, to what extent are they paying up for that?

Well, if you look at our gross margins, our pricing is obviously very good, right? You can read them in the income statement, but pricing is good, and we're getting paid for the risk and services that we're delivering.

And then Adam, our project teams are really delivering efficiency effectively. And we've really pushed a lot of innovations out that are helping them manage projects even more efficiently than they had previously. So that's also driving that margin. To some extent, our technology customers are very good partners with regard to those endeavors when it comes to innovation.

It's been a long time since we've cried about a bad job. So great work.

Yes, I'm knocking on wood on that, Adam.

And our next question will be coming from Josh Chan of UBS.

Congratulations on a really good quarter. It's evident that your demand environment is strong. Could you talk about your workforce, their willingness to continue working hard and making more, and what you're seeing in terms of recruiting?

It's a great question, Josh, and the key to Comfort Systems' long-term success lies in ensuring it remains the best place for craft professionals to work. Our companies excel in being the preferred employer in their markets. Additionally, our internal staffing company has significantly improved our ability to adjust our workforce as needed, especially for larger projects. We also see a lot of collaboration among jobs, with multiple operating companies sharing labor effectively. However, recruiting talent is challenging for everyone right now, but I believe we are attracting our fair share, if not more, of skilled craft professionals in the U.S.

That makes sense. Thank you, Trent. And then I guess like in terms of project selection, how do you think about the approach to choose projects between the different verticals? Because obviously, your technology is chosen more and more frequently. So are you okay with that? How are you talking to your operations about choosing types of projects that you want exposure to?

Yes. That's a good question. I think they're doing a great job selecting what's available in the markets were still pretty diverse, as you can tell by the pie chart of the different industries we serve. So we've kept good balance. Obviously, tech is red hot right now. So we're trying to service those customers the best we can. But we are keeping our fingers in all the pies, everything but commercial, right, office buildings is slow. Everything else has got good activity. And I think they are selecting, I think, as Bill said in the script, we have the best working conditions for our people, and are paid for the risk and the service that we provide.

I mean one of the best operators in the world who works for us made the point recently that we don't decide what needs to be built. We just make sure we're the best people to build it. So this guy also said, I'll take any job you have as long as it rhymes with data center. The second part was kidding, first part he was definitely.

That's right, absolutely.

We have to just do the work that's there for us and be the best people to do it.

And that's why, Josh, if you think about the bigger picture, training is crucial in here at all levels of this organization, in the field up through project management leadership. Make sure our folks throughout the organization well prepared to address the market.

Our next question will be coming from Brian Brophy of Stifel.

Congrats on the nice quarter. Appreciate the update on the modular capacity expansion plans. Can you provide an update on what you're seeing on modular from a competitive standpoint? Are you seeing any new entrants in the space? Curious your latest thoughts on how you're feeling about your leadership position there? And I guess to what extent are any changes in the competitive environment driving, I guess, some of this leaning into more capacity?

Our customers are actively encouraging the development of competitive capacity for us. They've collaborated with some of the best companies globally, with varied outcomes. We don't believe what we do is impossible for others to replicate. Our aim is to excel to such a degree that it would be unthinkable for you to purchase from anyone else. I hope that clarifies your question.

Okay, that's helpful. Is there anything to mention regarding the health care end market? It seems like that was the only other end market that experienced significant growth outside of tech this quarter.

Yes. We mentioned in the last few quarters that new hospitals are being built, particularly in the southern region, especially Florida. We're observing several opportunities for expanding existing hospitals and constructing new ones, as well as developing smaller outpatient facilities like surgical centers. There has been consistent strength in the healthcare sector for a little over a year now.

And our next question will be coming from Sam Snyder of Northcoast Research.

Great job, obviously. I have a question about modular like everyone else. I'm curious about what has changed or what could change in the future that has made modular a larger part of the business. Is there anything you anticipate down the road that might change? Ten percent seems good, but I find it surprising that it's not more. What are your thoughts on why it's at ten percent? Can you foresee anything that might change that in the future?

One thing people misunderstand about modular is that it's easy to perceive it as a standalone product line. While it represents a different approach, anything we do modularly has been applied beyond just technology; we also used it in pharmaceuticals, which was our primary customer for many years. Modular construction is being implemented daily in numerous sites using traditional methods. It offers unique advantages related to speed and flexibility. Looking ahead, we believe modular construction will become increasingly vital for delivering complex projects in the United States. Regarding its current percentage in tech, it acts as a tool that enhances capabilities beyond what could be achieved by overlooking this opportunity. While some may question which method will prevail long-term, I think that decision is far off. Modular construction is a highly effective way to achieve results, especially for projects with specific characteristics that make it exceptionally advantageous. It’s crucial for people to grasp that it’s just a different approach to building, as fundamentally, a building remains a building.

That's really helpful. I have a question about pricing. Are you noticing suppliers attempting to pass on costs that may not actually exist? As a larger contractor, you might not be experiencing this, but I am curious if you are able to negotiate any concessions from customers regarding current tariff concerns. Or is it simply a matter of passing through costs as they are? If there are adjustments, do they balance out in the end?

What kind of people do you think we are? This is the real world. People want to be compensated for their work. They use arguments to justify getting the best price possible. I believe there are definitely people using these discussions to support price increases. I also think many are simply taking in information. When things happened during COVID, people would ask if we were seeing delays because of it. That’s a tough question to answer because delays are always present. I don’t think I’ve ever seen a building completed on the original target date from the initial conversation. Delays and price negotiations are always part of the process. It's a complicated situation with many contributing factors. So, the answer is both yes and no.

That's okay. I think it's just the gross margins are so good. Just looking for any reason why that might not continue...

We don't have any clever tricks to generate extra revenue. Our team is truly valuable and hardworking. They can offer something that is difficult to find, and great customers are willing to pay for it.

And Sam, if we had a clever trick, we wouldn't tell you.

And our next question will be a follow-up from Brent Thielman of D.A. Davidson & Company.

I have a quick question about the semiconductor fabrication market and any developments that might be on the horizon. Additionally, could you share your thoughts on the pharmaceutical sector? There have been several announcements, and I'd like to know how significant of an opportunity you see that becoming in the future.

Yes. Those are all very strong in pipeline right now. We've got a lot of prospects that are out there. I mean nothing that is that I'd comment on, but that's all larger stuff, and it's very lumpy, like you get it or you don't. Sometimes you get it at a small contract and then the remainder of the value of the contract is done in change orders over time. So it's one of those things it's hard to see it going through in and out of backlog, but at the same time, our pipeline is showing very strong opportunities in both pharma and fab and chip fab.

Okay. And then maybe just more of a nuanced question. But when I look about revenue by activity type, existing building constructions actually been outgrowing new construction for the past four quarters. And I guess I think about data centers being largely greenfield. I just was curious why that is in the results?

A significant portion of our work is now focused on industrial projects. In the United States, much of the industrial activity involves expanding existing capacity rather than starting new projects, even in the technology sector. This has been a long-standing trend as we continue to emphasize industrial work. The reality is that if we are working on Phase 3 of a project, it is building upon something that already exists. Some of this is a matter of definitions and also reflects the nature of the industrial sector.

Okay. In that regard, the margins wouldn't really be different. I've always viewed existing as having higher margins. However, if you're doing Phase 3 of something, it’s still somewhat like starting from scratch.

The key factor here is the percentage of the project that consists of materials and subcontracts, which would function similarly to a traditional new building if it's an extension. I can agree with that perspective. Currently, margins are quite favorable overall, making it difficult to distinguish between these categories.

And I would now like to turn the conference back to Brian Lane for closing remarks.

Thank you. In closing, I want to reiterate my gratitude for the amazing dedication and excellence of the teams we have across our nation, serving our customers every day. Demand is strong and our people are rising to the challenges of addressing the robust need for their unique skills. As Trent mentioned, we feel that conditions are good for us to continue to perform. And as Bill indicated, we have the resources and the commitment to lean into delivering for our employees, our customers and you, our shareholders. Thank you for your confidence, and have a great rest of the summer. Thank you.

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