Q4 2023 Comfort Systems USA Inc Earnings Call

Operator: www.comfortsystems.com Good day, and thank you for standing by, and welcome to the Q4 2023 Comfort Systems USA earnings conference call. At this time, all participants are in a listen-only mode.

Okay.

Speaker Change: Good day, and thank you for standing by and welcome to the Q4 2023 comfort systems USA earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session you'll need to press star one on your telephone you then.

Operator: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised.

Speaker Change: Here, an automated message devices in your hand is raised to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Julie <unk> Chief Accounting Officer. Please go ahead.

Operator: To withdraw your question, please press star 11 again. 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.

Julie S. Shaeff: Thanks, Justin. Good morning. Welcome to Comfort Systems USA's fourth quarter and full year 2023 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, as well as in our press release covering these earnings. A slide presentation has been provided as a companion to our remarks. The presentation is posted on the investor relations section of the company's website, found at ComfortSystemsUSA.com.

Julie: Thanks, Jeff and good morning, welcome to country.

Julie: <unk> fourth quarter and full year 2023 earnings call our comments today as well as our press releases contain forward looking statements within the meaning of the applicable securities laws and regulation.

Julie: What we will say today is based on our current plans and expectations of comfort systems USA. The 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.

You can read a detailed briefing and commentary concerning our specific risk factors in our most recent Form 10-K as well as in our press release covering these earnings.

Julie: Slide presentation has been provided as a companion to our remark.

Tasteless posted on the Investor Relations section of the company's website found at comfort systems USA Dot com.

Julie S. Shaeff: 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. Good morning, everyone, and thank you for joining us on the call today.

Julie: Joining me on the call today are Brian Lane, President and Chief Executive Officer, Brett Mckenna, Chief Operating Officer, and Bill George Chief Financial Officer, Brian will open our remarks alright.

Brian E. Lane: Alright, Thank you Julie.

Morning, everyone and thank you for joining us on the call today.

Brian E. Lane: Our team achieved an amazing finish to 2023 with exceptional results including unprecedented growth, earnings, and cash flow, as well as a surge in new bookings. We earned $2.55 per share this quarter compared to $1.54 a year ago. Current quarter revenue was $1.4 billion, with same school growth of 18%. During the fourth quarter, both our mechanical and electrical businesses grew and increased margins to drive our annual results to new heights. Construction finished an already strong year on an up note, including notable profit and activity increases in our modular business. Service also continued to grow as we continue to benefit from ongoing service investment. Backlog is $5.2 billion, up by more than $1 billion from last year. We had a remarkable sequential increase of $870 million, even with strong revenue.

Brian E. Lane: Our teams achieved an amazing finish to 2023 with exceptional results, including unprecedented growth earnings and cash flow.

Brian E. Lane: As long as a surge in new bookings.

Brian E. Lane: We earned $2 55 per share this quarter compared to <unk> 54, a year ago.

Brian E. Lane: Current quarter revenue was $1 4 billion.

Brian E. Lane: Same store growth of 18%.

Brian E. Lane: During the fourth quarter.

Brian E. Lane: Mechanical and electrical businesses grew and increased margin to drive our annual results to new Heights.

Construction finished an already strong year on an up note.

Including notable profit and activity increases in our modular business.

Brian E. Lane: Service also continues to grow as we continue to benefit from ongoing service investments.

Brian E. Lane: Backlog is $5 $2 billion.

Brian E. Lane: Up by more than $1 billion from last year, we had a remarkable a sequential increase of $870 million, even with strong revenue.

Brian E. Lane: Demand remains supportive and is especially robust in our industrial sector. We are carefully selecting work that has good margins and good working conditions for our valuable workforce. Cash flow for the quarter was superb at $149 million, and we finished 2023 with an extraordinary $550 million in free cash flow. Earlier this month, we closed two acquisitions, Summit Industrial and JNS Mechanical. Summit is a specialty industrial mechanical contractor serving the advanced technology, power, and industrial sectors. Summit performs off-site and site-based construction, including process piping, equipment setting, and large pipe rack trussing.

Brian E. Lane: Demand remains supportive and was especially robust in our industrial sector.

Brian E. Lane: We are carefully selecting work that has good margins and good working conditions for our valuable workforce.

Brian E. Lane: Cash flow for the quarter was superb at a $149 million and we finished 2023 with an extraordinary $550 million of free cash flow.

Brian E. Lane: Earlier this month, we closed two acquisitions some of the industrial and Jane is mechanical.

Brian E. Lane: Summit is a specialty industrial mechanical contractor, serving the advanced technology power and industrial sectors.

Brian E. Lane: Summit performed.

Brian E. Lane: <unk> insight based construction.

Voting process piping equipment setting.

Brian E. Lane: <unk> pipe wreck trussell.

Brian E. Lane: Summit is a trusted supplier to some of the world's largest advanced technology, power, and industrial companies and is currently deployed on several major chip fabrication projects. JNS provides mechanical construction services to commercial and industrial sectors across the Mountain West region of the United States and works on many of the largest and most technical construction projects in its area. We are thrilled to have both of these companies as part of the Comfort Systems USA family. I will discuss our business and outlook in a few minutes, but first, I will turn this call over to Bill to review our financial performance. Bill? Thanks, Brian. Good morning, everyone.

Summit as a trusted supplier seven of the world's largest advanced technology power and industrial companies.

Brian E. Lane: And is currently deployed on several major chip fabrication project.

Brian E. Lane: <unk> provides mechanical construction services to commercial and industrial sectors across the mountain West region of the United States.

Brian E. Lane: Works on many of the largest and most technical construction projects in that area.

Speaker Change: We are thrilled to have both of these companies as part of the comfort systems USA family welcome.

Speaker Change: I will discuss our business and outlook in a few minutes, but first I will turn this call over to Bill to review our financial performance Bill. Thanks, Brian Good morning, everyone.

William George: Revenue for the fourth quarter of 2023 was $1.4 billion, a 22% increase, while same store revenue increased by 18% or $195 million. Full year revenue for 2023 increased by 26% compared to 2022 to $5.2 billion. For the full year, our mechanical segment revenue increased by 24 percent, including a big contribution from our modular business. Our electrical segment increased by an even larger 31%, and we now have a 1.3 billion dollar electrical business. Overall, our same store revenue increased by 23%, or $931 million. We are facing tough comparables.

William George: Revenue for the fourth quarter of 2023 was one 4 billion% to 22% increase.

William George: Same store revenue increased by 18%.

William George: $195 million.

William George: <unk> revenue for 2023 increased by 26% compared to 2020 to $5 2 billion.

For the full year, our mechanical segment revenue increased by 24%, including a big contribution from our modular business.

William George: Our electrical segment increased by an even larger 31% and we now have a $1 $3 billion of electrical business.

William George: Overall, our same store revenue increased by 23% or $931 million.

William George: Our faith in tough Comparables. However, our best estimate is that we will achieve same store revenue growth in 2024 in the mid teens with growth weighted a bit more heavily to the first half of the year.

William George: However, our best estimate is that we will achieve same-store revenue growth in 2024 in the mid-teens, with growth weighted a bit more heavily to the first half of the year. Gross profit was $280 million for the fourth quarter of 2023, a $68 million improvement compared to a year ago. Our gross profit percentage improved to 20.6% this quarter, compared to 18.9% for the fourth quarter of 2022, driven by improved electrical margins. The quarterly gross profit percentage in our electrical segment improved to 22.9% this year, as compared to 18.2% last year. Margins in our mechanical segment also increased in the quarter to 19.8%. That's compared to 19.1% in the fourth quarter of 2022. Our mechanical segment includes our modular bids, which operate at notably lower margins than our remaining business. For the full year 2023, gross profit increased $249 million, and our annual gross profit margin was 19.0% in 2023, as compared to 17.9% in 2022. For the full year, segment margins were similar, with mechanical gross margins of 19.0% for the full year.

William George: Gross profit was $280 million for the fourth quarter of 2023, a $68 million improvement compared to a year ago.

William George: Our gross profit percentage improved to 26% this quarter.

William George: Compared to 18, 9% for the fourth quarter of 2022.

William George: Driven by improved electrical margins.

William George: The quarterly gross profit percentage in our electrical segment improved to 22, 9% this year as compared to 18, 2% last year.

William George: Margins in our mechanical segment also increased in the quarter to 19, 8% as compared to 19, 1% in the fourth quarter of 2022.

William George: Our mechanical segment includes our modular business.

William George: To operate that notably lower margins than our remaining businesses.

William George: For the full year 2023, gross profit increased $249 million.

William George: Annual gross profit margin was 19.0% in 2023.

William George: Baird to 17, 9% in 2022.

William George: For the full year segment margins were similar with mechanical gross margins of 19.0% for the full year.

William George: Well, electrical with 19.1, Fourth quarter EMA day increased 42 percent to $141 million. Our full year 2023 EBITDA increased by an even greater 48%, as our full year EBITDA was $499 million. As we look to 2024, we are optimistic that overall EBITDA margins will continue to trend in the strong ranges that we achieved in 2023. Gross margins will also continue to be strong, but gross margin percentage may be more variable in 2024, due to the effect of amortization and certain purchase adjustments arising from our two large acquisitions. SG&A expense for the quarter was $160 million, compared to $132 million in the prior year.

William George: Well electrical was 19, 1%.

William George: Fourth quarter EBITDA increased 42%.

William George: $141 million.

William George: Our full year 2023, EBITDA increased by an even greater 48% as our full year EBITDA was $499 million.

As we look to 2024, we are optimistic that overall EBITDA margins will continue to trend in the strong raises that we achieved in 2023.

William George: Gross margins will also continue to be strong, but gross margin percentage may be more variable in 2024 in light of the effect of amortization and certain purchase adjustments arising from our two large acquisitions.

William George: SG&A expense for the quarter was $160 million compared to $132 million in the prior year.

William George: And as a percentage of revenue, SG&A expense was consistent, again, at 11.8%. On a same-shore basis, SG&A was up approximately $22 million due to inflation and ongoing investments to support much higher activity levels. For the full year, SG&A's expense as a percentage of revenue was 11.0% in 2023.

William George: And as a percentage of revenue SG&A expenses.

William George: This was consistent again at 11, 8%.

William George: On a same store basis, SG&A was up approximately $22 million.

William George: Due to inflation and ongoing investments to support much higher activity levels.

William George: For the full year SG&A expense as a percentage of revenue was 11.0% in 2023, that's down from 11, 8% for 2022.

William George: That's down from 11.8% for 2022. Fourth quarter operating income increased by 50% from last year from $80 million in ForQ 2022 to $120 million for the fourth quarter of 2023. With improved gross profit margins, our operating income percentage increased to 8.9% this quarter. 7.2% for the prior year. Our full-year operating income was $418 million. Remarkable increase at 165. The OI margin increased from 6.1% in 2022 to 8.0%. Our year-to-date tax rate of 16.7% included an incremental benefit of $10 million for $0.27 of tax gains that related to prior years. Although individual items have affected our tax rate lately, we estimate that a normalized tax rate for us is approximately $20 to $22.

William George: Fourth quarter operating income.

William George: Increased by 50% from last year from $80 million in <unk> 2000, $20 million to $120 million for the fourth quarter of 2023.

William George: With improved gross profit margins, our operating income percentage increased to eight 9% this quarter from seven two to seven 2% for the prior year our.

William George: Our full year operating income was $418 million.

William George: The market will increase of $165 million.

William George: <unk> margin increased from six 1% in 2022% to 8.0% in 2023.

William George: Our year to date tax year to date tax rate of 16, 7% included an incremental benefit of $10 million or 27% the tax payments that related to prior years.

William George: Although individual items have affected our tax rate lately, we estimate that our normalized tax rate for us is approximately 20% to 22%.

William George: After considering all these factors, net income for the fourth quarter of 2022 was $92 million, or $2.55 per share. This compares to net income for the fourth quarter of 2022 of $55 million, or $1.54 per share. Our full-year earnings per share for 2023 was $9.01, excluding prior year tax gains in both periods. Earnings per share increased to $8.74 per share.

William George: After considering all these factors net income for the fourth quarter of 2023 with $92 million or $2 55 per share. This compares to net income for the fourth quarter of 2022.

William George: $55 million or $1 54 per share.

William George: Our full year earnings per share for 2023 with nine 1%.

William George: Excluding prior year tax gains in both periods.

William George: Earnings per share increased to $8 74 per share from $5 29 per share in the prior year and that's an increase of 65%.

William George: $5.29 per share in the prior year, and that's an increase of 65%. Full year 2023, free cash flow was a remarkable $551 million. We continue to benefit from advanced payments for work that we will fund and complete in upcoming quarters. In the meantime, we expect pre-bookings and equipment advances will normalize, creating some cash flow headwinds.

William George: Full year 2023 free cash flow was a remarkable $551 million.

William George: We continue to benefit from advanced payments for work that we will provide an incomplete in upcoming quarters.

William George: 2023, operating cash flow exceeded our earnings by an astounding $300 million.

William George: Over the coming quarters, we expect pre bookings and equipment advances were normalized creating some cash flow headwinds in the meantime.

William George: These early collections have allowed us to invest heavily and fund acquisitions from current cash flows, while at the same time significantly lowering our debt and interest. During 2023, we spent $95 million on capital expenditures, almost double the amount we had spent the prior year. The increase includes the build out of three vast new modular production facilities and the purchase of many vehicles to catch up from COVID. In 2024, we estimate that our CapEx bid may be roughly $65 to $75 million, around the midpoint of the spending levels over the past two years. Our substantial cash flow allowed us to pay down our revolving credit facility to zero and to reduce our overall debt by $212 million over the course of 2023, again, while investing in unprecedented levels of capex, buying back shares, increasing our dividends, and fully funding both of our acquisitions, the purchases of Aldeco and Deco, with cash flow. In 2023, we purchased 139 shares of our common stock at an average price of $153.

William George: These early collections have allowed us to invest heavily and fund acquisitions from current cash flows while at the same time significantly lowering our debt and interest costs.

William George: During 2023, we spent $95 million on capital expenditures almost double the amount we had spent the prior year.

The increase includes the build out of three vast new modular production facilities and the purchase of many vehicles the catch up from Covid.

William George: At 2024, we estimate that our capex spend may be roughly 65% to $75 million around.

William George: Around the midpoint of the spending levels over the past two years.

William George: Our substantial cash flow allowed us to pay down our revolving credit facility to zero and to reduce our overall debt by 220 $212 million over the course of 2023 again, while investing an unprecedented levels of capex buying back shares increasing our dividend and fully funding.

William George: Both of our acquisition the purchases of Alico in Deco around cash flow.

William George: In 2023, we purchased 139 shares of our common stock at an average price of $153.

Brian E. Lane: Finally, as Brian mentioned, we acquired Summit Industrial and J&S Mechanical at the beginning of February. Our best estimate is that Summit will contribute annualized revenues of approximately $375 to $400 million and EBITDA of $35-40. We also estimate J&S will have annualized revenues in the range of $145-$160 million and EBITDA of $12 to $15 million. In light of amortization expense, these acquisitions are expected to make a neutral to slightly accretive contribution to earnings per share in 2024 and 2025. Both of these companies will be included in our mechanical segment. That's all I've got.

William George: Finally, as Brian mentioned, we acquired some in industrial and JMS mechanical at the beginning of February.

William George: Our best estimate is that something that will contribute annualized revenues of approximately $375 million to $400 million and EBITDA of $35 million to $40 million.

William George: We also estimate Jay and that we will have annualized revenues in the range of $145 million to $160 million and EBITDA of $12 million to $15 million.

William George: In light of amortization expense. These acquisitions are expected to make a neutral to slightly accretive contribution to earnings per share in 2024 and 2025.

Speaker Change: Both of these companies will be included in our mechanical segment, that's all I've got Brian Alright.

Brian E. Lane: All right. Thanks, Bill. I'm going to discuss our business and outlook. A backlog surge at the end of 2023 to a record $5.2 billion. Since last year at this time, our same store backlog has increased by 913 million, around 23 percent, and the increases were broad-based.

Brian E. Lane: Alright, Thanks, Bill I am going to discuss our business and outlook.

Brian E. Lane: Our backlog surge at the end of 2023% to a record $5 $2 billion.

Brian E. Lane: Since last year at this time, our same store backlog has increased by $913 million.

Brian E. Lane: Around 23% and the increases were broad based.

Brian E. Lane: During the recently completed fourth quarter, our sequential backlog increased by $870 million, and virtually all of the increase was same store; pipelines remain strong. Our revenue mix continues to trend toward data centers, life science, food, chip fabs, and battery plants. Those industrial customers accounted for 55% of total revenue in 2023, and they are major drivers of pipeline and backlog. Technology, which is included in industrial, was 21% of our revenue, a substantial increase from 13% in the prior year. The technology sector will continue to grow with the recent acquisition of Summit Industrial as they have several ongoing and live semiconductor projects. Institutional markets, which include education, health care, and government, are also strong and represent 26% of our revenue.

During the recently completed fourth quarter.

Brian E. Lane: Sequential backlog increased by $870 million in virtually all of the increase was same store.

Brian E. Lane: Our pipelines remain strong.

Brian E. Lane: Our revenue mix continues to trend towards Datacenters life science, food chip fab and battery plants.

Brian E. Lane: Those industrial customers accounted for 55% of total revenue in 2023.

Brian E. Lane: And they are major drivers of pipeline and backlog.

Brian E. Lane: Technology, which is included in industrial with 21% of our revenue a substantial increase from 13% in the prior year.

Brian E. Lane: The technology sector will continue to grow with the recent acquisition of some of the industrial.

Brian E. Lane: As I have several ongoing and large semiconductor project.

Brian E. Lane: Institutional markets, which include education healthcare and government.

Brian E. Lane: Also strong and represent 26% of our revenue.

Brian E. Lane: The commercial sector remains active, but it is now a small part of our business at about 19% of revenue. The majority of our service revenue is for commercial, so the proportion of our overall construction revenue from commercial has become relatively small. Construction was 80% of our full-year 2023 revenue, projects for new buildings at 55%, while existing building construction with 25%. For the first time in 2023, Comfort Systems USA achieved $1 billion in annual service revenue. Service was 20% of our total revenue, with the service projects providing 9% of total revenue, and pure service, including hourly work, providing 11% of revenue.

Brian E. Lane: The commercial sector remains active.

Brian E. Lane: But it is now a smaller part of our business at about 19% of revenue.

Brian E. Lane: A majority of our service revenue is for commercial customers.

Brian E. Lane: So the proportion of our overall construction revenue from commercial is.

Brian E. Lane: Become relatively small.

Brian E. Lane: Construction was 80% of our full year 2023 revenue.

Brian E. Lane: With projects for new buildings at 55%, while existing building construction was 25%.

Brian E. Lane: For the first time in 2023 capital systems, USA achieved $1 billion of annual service revenue.

Brian E. Lane: Service was 20% of our total revenue with service projects, providing 9% of total revenue and pure service, including hourly work, providing a 11% of revenue.

Brian E. Lane: In 2023, service revenue is up by 11%. And with our continuing strong margins, service is a great source of profit and cash flow for us. At Comfort Systems USA, our core purpose is to build legacies with our people, customers, and the companies who join us.

Brian E. Lane: 2023 service revenue was up by 11%.

Brian E. Lane: And without continuing strong margins service is a great source of profit and cash flow for us.

Brian E. Lane: At comfort systems USA, our core purpose is to build legacies without people customers and the companies join us.

Brian E. Lane: To accomplish this, we strive every day to be the best organization in the world, for a craft worker to build a successful career, for construction, service, and administrative professionals to grow and thrive, for customers to meet their crucial building and service needs, and for any company in our industry to join with the assurance that its people will be respected and nurtured and that their legacy will be perpetuated and built upon. We believe that our commitment to those principles, to our people, and their legacies, has been and continues to be the linchpin of our success. Safety, quality, and innovation remain at the forefront of our operations. We constantly strive to improve and grow our operations, to enable sustainable and efficient building environments, to improve the productivity of our diverse workforce, and to acquire great complementary business.

Brian E. Lane: To accomplish this we strive every day to be the best organization in the world for.

Brian E. Lane: For our craft worker to build a successful Korea, but construction service and administrative professionals to grow and thrive.

Brian E. Lane: Our customers to meet their crucial building and service needs.

Brian E. Lane: And for any company in our industry to join with the assurance that their people will be respected and nurtured the net the legacy will be perpetuated and built upon.

Brian E. Lane: We believe that our commitment to those principles to our people and their legacy has been and continues to be the linchpin of our success.

Brian E. Lane: Safety quality and innovation remain at the forefront of our operations.

Brian E. Lane: We constantly strive to improve and grow our operations to.

Brian E. Lane: To enable sustainable and efficient building environment.

Brian E. Lane: To improve the productivity of our diverse workforce and.

Brian E. Lane: And to acquire great complementary businesses.

Brian E. Lane: Thanks to our careful and relentless investments in existing and newly acquired businesses, we have the crucial skills and capability to help meet our country's surging needs for mechanical and electrical experts, and to build and service buildings, including to grow data capacity for artificial intelligence, to increase our nation's capacity to build its own ships, manufacture its own medicines, supply its batteries, and provide health care resources for our aging population.

Brian E. Lane: Thanks to our careful and relentless investments in existing and newly acquired businesses.

Brian E. Lane: We have the crucial skills and capability to help meet our country surging needs for mechanical and electrical experts.

Brian E. Lane: And to build and service buildings, including.

Brian E. Lane: To grow data capacity for artificial intelligence.

Brian E. Lane: To increase our nation's capacity to build its own chips.

Brian E. Lane: Manufacturers' on Medicine <unk>.

Brian E. Lane: Supply, it's batteries and provide healthcare resources for our aging population.

Operator: As we look ahead, we remain optimistic about the prospects for service in construction across a vast market, with our backlog over 20% higher than even the robust levels of the prior year, and with persistent strength across our markets. We believe that we can continue to grow and invest in 2024. Our number one priority is to preserve and grow the best workforce in our industry. And so, as always, I want to close by thanking our over 15,000 employees for their hard work and dedication. I'll now turn the call back over to Justin for questions. Thank you. And thank you. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.

As we look ahead, we remain optimistic about the prospects of service and construction across our vast markets.

Brian E. Lane: Our backlog of over 20% higher than even the robust levels of the prior year.

Brian E. Lane: And with persistent strength across our markets.

Brian E. Lane: We believe that we can continue to grow and invest in 2024.

Brian E. Lane: Number one.

Speaker Change: Priority is to preserve and grow the best workforce in our industry and so as always I want to close by thanking our over 15000 employees for their hard work and dedication.

Speaker Change: I'll now turn the call back over to Justin for questions. Thank you.

Justin: And thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again please.

Operator: Please stand by while we compile the Q&A roster and one moment for our first question. And our first question comes from Alex Dwyer from KeyBank Capital Markets. Your line is now open.

Justin: Please standby, while we compile the Q&A roster.

Justin: One moment for our first question.

And our first question comes from Alex Dwyer from Keybanc capital markets. Your line is now open.

Justin: Okay.

Alex Dwyer: Hi guys, thanks for taking my question. All right. So I wanted to ask about the backlog increase in the quarter and specifically the modular orders, and was that one order or multiple orders? Was it one customer or multiple customers?

Alex Dwyer: Hi, guys. Thanks for taking my question good morning, Alex.

Alex Dwyer: Hi.

Alex Dwyer: I wanted to ask about the backlog increase in the quarter and specifically the modular orders and with that one order or multiple orders that looked at one customer or multiple customers and do you think there's the opportunity to see more of these larger modular orders as we go into 2024.

Brian E. Lane: And do you think there's the opportunity to see more of these larger modular orders as we go into 2024? You know, Alex, the way that if you look at the sequential backlog increase of about six, a little over 60% of that was an increase in modules. So that was 800 million.

Alex the way that so there is if you look at the sequential backlog increased about 6% little over 60% of that was an increase in modular.

Alex Dwyer: So that was $807 million if you look at the <unk>.

Brian E. Lane: If you look at the year over year increase in backlog, about 20% of it was modular. So we have a situation where we had some big bookings in the fourth quarter of last year, which was actually last year was more than all of our sequential increase. And then big bookings in the fourth quarter of this year.

Alex Dwyer: Year over year increase in backlog about 20% of it whereas modular so we have a situation where we had some big bookings in the fourth quarter of last year, which was actually last year. It was more than all of our sequential increase and then big bookings in the fourth quarter of this year and of course over the course of the year.

Brian E. Lane: And of course, over the course of the year, you know, we burned down and performed a lot of that modular. We're back to higher than ever levels of modular backlog with these new books. But 80% of our year-over-year backlog increase is broad-based, so honestly, we just couldn't be happier with the breadth, the composition, etc. And as far as additional bookings, you know, absolutely right now, we're taking as many as we can. But the people who are buying these services from us tell us they would like to give us more. I got it.

Alex Dwyer: We burned down we performed a lot of that modular we're back to higher than ever levels of modular backlog with these new bookings.

Alex Dwyer: 80% of our year over year backlog increase is broad based so we just honestly, we just couldnt be happier with.

Alex Dwyer: The breadth the competition et cetera, and as far as additional bookings.

Alex Dwyer: Absolutely right now we're taking we're taking as much as we can but the people who are buying the services from us tell us they would like to give us more.

William George: And then the press release mentions an increase in modular profitability. I don't think we get the disclosures for this, but how was the margin performance this year in modular? And should we expect continued margin expansion in that business this year? So, so modular margins for the pool year were just a little higher than the prior year, but they were at very, very good levels. You may have heard in my script that I mentioned the gross profit for modular is lower than it is for any of our other businesses. And that's a combination of it. It does have a high component of materials and paths that pass through it.

Got it and then the press release mentioned an increase in modular profitability.

Alex Dwyer: We get good disclosures for that but how was the margin performance. This year in modular and should we expect continued margin expansion in that business. This year.

Alex Dwyer: So so modular margins for the full year, we're just a little higher than the prior year, but they're a very very good levels. You may have heard in my script that I mentioned the gross profit for modular is lower than it is for any of our other businesses and that's a combination of it does have a high component of materials.

Alex Dwyer: In past that pass through it's also performed the work we do in the field has performed but licensed electricians and certified medical gas deck.

William George: It's also performed, you know, the work we do in the field is performed by licensed electricians and certified medical gas techs. The work that we perform in our plants is highly skilled, but it isn't as, you know, it isn't as difficult to find that labor. So we're very happy with those margins. As far as margin expansion in modular goes, we'll be thrilled if it stays the same. I, you know, of course, we're always working for modular, for margin expansion. But, man, when you have, after a quarter like this, it's pretty hard to talk about doing better. We're really happy with the modular business, Alan.

Alex Dwyer: The work that we perform in our plant is highly skilled but it isn't.

Alex Dwyer: It isn't as difficult to find that labor. So we're very happy with those margins as far as margin expansion in modular we will be thrilled if it stays the same.

Alex Dwyer: We're always working for modular FERC for margin expansion, but man when you after a quarter like this it's pretty hard to talk about doing better we are really happy with the modular business.

William George: And then just last one on the margin outlook for 2024. I think we're talking EBITDA margins more so this year than gross margin. There's the deal amortization. I think inflation could be a tailwind to margins this year.

Speaker Change: Got it and then just last one on.

The margin outlook for 2024, I think were talking EBITDA margins more so this year than gross margin.

Speaker Change: There is the deal amortization I think inflation could be a tailwind to margins. This year and then maybe like the mix versus the early stage versus the later stage jobs could be like a swing factor.

William George: And then maybe like the mix versus the early stage versus the later stage jobs could be like a swing factor. Can we just talk about like the puts and takes and margins this year? Yeah, so if you look at this overall, I just want to comment on the margin performance we've been getting over really since 2016, we've been pretty consistently having 18 to 20%. Let's put the amortization aside for a minute. So, you know, I am personally thrilled with the level of performance in getting and executing our work. I mean, if I was running this work, I'd be, you know, really happy myself. So I think that we'll keep going. And Phil, do you want to add on?

Speaker Change: Can we just talk about like the puts and takes in margins this year.

Speaker Change: Yes. So if you look at this overall I just wanted to comment on the margin performance, we've been getting over really since 2016.

We've been pretty consistently having 18% to 20%.

Speaker Change: We have any amortization aside for a minute. So I am personally thrilled with the level of performance with getting and executing that work I mean, if I was running this work IV.

Speaker Change: Really happy myself, so I consider that it will keep going if you wanted to add I think you made all the right points. The one thing I'll, just refine a little bit for everyone.

William George: I think you made all the right points. The one thing I'll just refine a little bit for everyone. So if you think about it, amortization is always big at Comfort because we buy companies on a, you know, on a fairly regular basis, and the companies we buy come with a lot of backlog. So, for example, Summit will roll into Comfort with something like 400 million in backlog. And the accounting rules require us to put a value on that backlog and amortize it as an expense. In addition to things like customer lists and trade names that all businesses have, our amortization is higher than most. Obviously, it's non-cash. The money's gone. It's never coming back.

Speaker Change: So if you think about it the amortization is always big at comfort because we buy companies on it on a fairly regular basis and the companies we buy come with a lot of backlog. So for example summit will roll into copper with something like $400 million of backlog and the accounting rules require us to put a value on that backlog and.

Speaker Change: As an expense in addition to things like customer list and trade name that all businesses are our amortization is higher than most obviously, it's non cash the money's gone, it's never coming back so in a way.

William George: So, in a way, it's not sensible to worry about it because you own what you own today, and it's going to earn what it earns. But we're required to reduce the margins we present to you guys for that. And the reason we wanted to call it out is that last year we had fewer acquisitions than we have had over the last three or four years proportionate to the size of Comfort Systems. So amortization was probably the lowest and definitely the lowest proportionate to the size of the company that it's been in a long time.

Speaker Change: Not sensible to worry about it because you own what you own today, and it's going to earn what it earns but were required to reduce the sort of the earnings that we presented.

Speaker Change: Margins, we present to you guys for that and the reason we wanted to call it out as <unk>.

Last year, we had less acquisitions than we have had over the last three or four years proportionate to the size of comfort systems. So amortization was probably the lowest then definitely the lowest proportionate to the size of the company that it has been in a long time, while on February one we did our biggest deal ever we did another top five or six deal ever.

William George: Well, on February 1st, we did our biggest deal ever. We did another top five or six deal ever. And so amortization is going to come back very, you know, in a very notable way over the next 18 months. And so obviously, that pushes down gross margins because it's an expense. It's you put tens of millions of dollars, many tens of millions of dollars of expense through your, you know, through your cost of goods sold, and it's all non-cash.

So amortization is going to come back.

Speaker Change: And a very notable way over the.

Next 18 months.

Speaker Change: And so obviously that pushes down gross margins because its been expenses you put tens of millions of dollars. Many tens of millions of dollars of expense through year three.

Speaker Change: Through your cost of goods sold and it's all noncash series of cash flows Bill does great EBITDA still EBITDA really is what I'd look at it still looks good so we're comfortable with the cadence of our EBIT.

William George: So the cash flow still does great. EBITDA, which really is what I'd look at, still looks good. So we're comfortable with the cadence of our EBITDA margins; we are going to have choppiness in the gross profit margin. So sorry, that's a little bit longer, but it's just I think it's relevant given the size of the deals we just did. And the fact that we were at a low ebb last year. I just wanted to mention all of that. Thank you, and thank you.

Speaker Change: Margins were going to have choppiness in the gross profit margins.

Speaker Change: So sorry, that's a little bit longer, but it's just I think it bears given the size of the deals we just did.

Speaker Change: And the fact that we were at a low AD last year I just wanted to mention all of that.

Speaker Change: Thank you.

And thank you.

Operator: And one moment for our next question. And our next question comes from Julio Romero from Zidodian Company. Your line is now open. Hey, good morning, guys. Good morning.

Speaker Change: And one moment our next question.

Speaker Change: And our next question comes from Julio Romero from Sidoti <unk> Company. Your line is now open.

Hey, good morning, guys.

Operator: Hey, morning, so stay on gross margins for a second. You mentioned the same store revenue for the year should be looking like first half weighted. How about the gross margin cadence? Should that also be first half weighted?

Julio Romero: Good morning.

Julio Romero: Hey, good morning, so staying on gross margins for a second.

Julio Romero: You mentioned the same store revenue for the year.

Julio Romero: Should we be looking like first half weighted how about the gross margin cadence should that also be first half weighted or how would you have to think about that.

William George: Or how would you have us think about that? No, I mean, if I'm, you know, excluding what Bill just went through, just in terms of purely operational, I think we'll be pretty consistent at the gross margin level that we've been at. You know, they'll fluctuate up and down quarter to quarter, but I think we'll be in that 18 to 20% range for sure. I mean, the effects on gross margin from, like, backlog amortization will be immediate. And then there's also a chance of purchase adjustments later in the year that could make, you know, could be a little lumpy in a quarter here or there, but if you just the business is going to earn a lot, it's going to do well. Yeah, but there would just be a little more noise, and that is gross margin. Okay, got it. Um... What does your capacity look like? The noise can go either way

Speaker Change: I mean, if I am.

Speaker Change: Excluding the way Bill just wanted to just in terms of purely operational I think will be pretty consistent at the gross margin level that we've been at.

Speaker Change: That will fluctuate up and down quarter to quarter, but I think it will be a net 18% to 20% range for sure.

Speaker Change: I mean, the effect on gross margin from like backlog amortization will be it will be immediate.

Speaker Change: And then there is also a chance of purchase adjustments later in the year that could make it could be a little.

Speaker Change: Lumpy in a quarter here or there, but if you just the business is going to earn it.

We're going to do well, but there will just be a little more noise in that gross margin line.

Okay got it.

What is your capacity it looks like.

William George: Just for the record, that noise can go either way. You shouldn't just hear it's all bad. Now, amortization will always be an expense.

Speaker Change: Does either direction just for the record that noise can go either direction you Shouldnt. This year. It's all bad now the amortization will always be an expense, but anyway go ahead I'm sorry.

William George: But anyway, go ahead. I'm sorry. No, no, you make a great point. I'm just thinking about, you know, there are also a lot of calls passed through in modular too, and how that could, you know, depending on whether you do it first half waited or second half waited, it would affect kind of the cadence of things. Um, maybe just turning it up to capacity. How does that look for you guys? Can you continue to take orders? Um, uh, and how far out are you?

No no.

Speaker Change: Great point I'm, just thinking about there's also a lot of cost pass through and modular too and how that could.

Speaker Change: Depending on whether you do it first half weighted or second half weighted it would affect kind of the cadence of things yes.

Speaker Change: Maybe just turning to capacity how does that look for you guys can you continue to take on orders.

Speaker Change: And how far out are you booked these days as well.

Brian E. Lane: Are you busy these days? Well, you know, in terms of our capacity, we're in good shape right now. I know the backlog, the project's still a bit bigger, so we're in good shape for this year for sure. You know, winning a fair amount of work.

Speaker Change: In terms of our capacity we're in good shape right now.

Speaker Change: The backlog of projects.

Speaker Change: So we're in good shape for this year for sure.

Winning a fair amount of work.

Brian E. Lane: Um, about 30% of our backlogs into 2025. So in terms of the work we have, obviously, we're spending a lot of time, you know, making sure we can execute properly, selecting the right work, etc. But in terms of capacity, the workload we have, the workload we see, we're in good shape right now. Okay, that's helpful. And the last one for me is a little bit of a broader question

About 30% of our backlogs into 2025.

Speaker Change: So in terms of the work we have obviously you're spending a lot of time.

Speaker Change: Making sure we can execute properly selecting the right work et cetera.

Speaker Change: In terms of capacity the workload, we have the workload, we see we're in good shape right now.

Speaker Change: Okay. That's helpful. And then last one from me is a little bit of a broader question, but.

Brian E. Lane: But, you know, industrial and institutional are making up a bigger portion of new construction, as you said earlier, Brian, and I would imagine a good majority of those are owner-occupied buildings, not necessarily spec buildings. So what are you hearing from those customers in regards to the cost? Are these kinds of owner-occupied projects just having to swallow a higher cost of capital and tougher project economics just to get the comfort to take on the project?

Speaker Change: Industrial and institutional are making up a bigger portion of the new construction as you said earlier Brian.

Speaker Change: I would imagine a good majority of those are owner occupied buildings.

Speaker Change: Necessarily spec building. So what are you hearing from those customers in regards to the cost are these kind of owner occupied projects, just having to swallow a higher cost of capital and tougher project economics, just to get comfort to take on the project.

Brian E. Lane: So, I don't think they're worried about the cost of capital; our... you know, we're talking about the big tech companies, right, the big pharma companies, they have capital; they, frankly, want to deploy capital. As far as pricing is concerned, pricing is up. It is. And it's not it's not a it's a we have to charge people more because we pay our guys, we need to pay our workers very, very well right now. They deserve it. They've worked for us, many of them for generations, in some cases, but for decades.

So I don't think theyre worried about the cost of capital our.

Speaker Change: We're talking the big Tech companies right, the big pharma companies they have capital.

Speaker Change: Frankly, they want to deploy capital as far as pricing pricing is up.

Speaker Change: Is.

Speaker Change: And it's not it's not.

Speaker Change: We have to charge people more because we we pay our guys we need to pay our workers very very well right now they deserve it they've worked for US many of them for generations in case, some cases, but for decades.

Brian E. Lane: And that's what it takes to get the work done. So I would say prices are definitely up. We're making sure that we get, We're taking more in a sense, we're taking more risk, right, because we're promising to do something at a time when we're already full. We have to make sure that we get pricing that compensates us for that risk and allows us to do a good job for our customers. So, but for sure, if you thought that if you started planning and building two years ago and you' By the way, that's true in a lot of parts of the economy, but I think it's especially true in anything that's using skilled labor. Very helpful. Thanks very much.

Speaker Change: And that's what it takes to get the work done so I would say pricing is definitely up we're making sure that we get.

Speaker Change: We're taking more in a sense, we're taking more risk right because we're promising to do something at a time when we're already full we have to make sure that we get pricing that compensates us for that risk and allows us to do a good job for our customers.

Speaker Change: But for sure if you thought if you started.

Speaker Change: Planning and building two years ago, and Youre building. It today. It is costing you a lot more than you were budgeting two years ago and Thats.

Speaker Change: By the way that's true in a lot of parts of the economy, but I think it's especially true in anything that's using skilled labor.

Speaker Change: Helpful. Thanks, very much.

Brian E. Lane: Thanks, and thank you. And one moment for our next question. And our next question comes from... Adam Thalhimer from Thompson Davis. Your line is now open. Hey, good morning guys.

Speaker Change: Thanks.

Speaker Change: And thank you.

And one moment our next question.

Speaker Change: And our next question comes from.

Speaker Change: Adam <unk> from Thompson Davis Your line is now open.

Speaker Change: Hey, good morning, guys great quarter. Thanks, Adam.

Operator: Great quarter. Just since there's so much interest, do you mind just talking high level about data center demand? Well, yeah, I'll go first and make a comment. But, you know, data center demand is still strong. Everything you read or hear, Adam, it still has a lot of legs.

Just since Theres. So much interest do you mind, just talking high level about data center demand.

Speaker Change: Well I'll go first and then build a comment but.

Speaker Change: Data center demand is still strong everything you read on here Adam its still have a lot of legs to it.

Adam Robert Thalhimer: So, right now, we see no let up, and the stuff we're looking at are opportunities presenting themselves. I think it's going to be good for a number of years. So you look at TechWip from 13% to 21% of our revenue. The really we do, we're doing a lot of chip and some other stuff. But that is overwhelmingly data centers. We're seeing data centers, not just in our modular business, right? They're very big in Texas and in our electrical business. They're very big in, like, sort of the Mid-Atlantic, Virginia.

So right now we see no letup in the stuff, we're looking at other opportunities.

Setting themselves.

Speaker Change: It's going to be good.

Speaker Change: A number of years.

So you look at <unk> from 13% to 21% of our revenue.

Speaker Change: The really we do it we're doing a lot of chip and some other stuff.

Speaker Change: That is overwhelmingly data centers, we're seeing data centers not just in our modular business right, they're very big in Texas in our electrical business.

Speaker Change: They are very big and like sort of the mid Atlantic Virginia.

Brian E. Lane: And we're turning, we're not saying, we're disappointing people, right? We're favoring people who've given us, been partners with us for a long time. But we just, the Demand for Data Center is going to force the build to be pushed out over time. And that's one of the great things about modular.

Speaker Change: And we're hurting we're not paid were disappointing people right.

Speaker Change: Our favorite people who've given us been partners with us for a long time, but we just.

Speaker Change: The demand for data centers.

Speaker Change: It's going to force the build to be pushed out over time and that's one of the great things about modular modular if youre, if youre, a big data Hyperscale, especially data center provider.

Brian E. Lane: Modular is, if you're a big data, hyperscale, especially data center provider, you really people say, well, which modality of building data centers is going to work? We're going to win. And the answer is, it's an all of the above world right now; they want to do it modular, they want to do it stick built, they want to do third parties, they want to do repurposing, they want to do, you know, adding tape, reconfiguring buildings to support more. Every way that they can do it is how they're doing it.

Speaker Change: You really people stable, which modality of building data centers is going to work, we're going to win and the answer is it's an all of the above world right now they want to do it modular they want to do it stick built they want to do third party they want to do Repurposing and want to do up.

Speaker Change: Adding to it.

Speaker Change: Re configuring ability to support more every way that they can do it is how they are doing it reminds me of the way we people say how do you hire people and the answer is we hired people every possible way, we can think of there.

Brian E. Lane: It reminds me of the way we people say, how do you hire people? And the answer is, we hire people in every possible way we can think of. They're building data centers in every possible way they can think of, and for the foreseeable future, if you can help them meet those needs, and especially if you can do a really good job on demand, there just seems to be no end to that. The demand was big even before artificial intelligence, right?

Speaker Change: They are building data centers every possible way that I can think of it for the foreseeable future.

Speaker Change: If you can help them meet those needs and especially if you can do a really good job demand.

Brian E. Lane: Is this artificial intelligence isn't data center demand, it's incremental. Right. Um, And then you said three new modular facilities last year. That was higher than I didn't realize. I thought it was one.

Speaker Change: We know into that demand.

Speaker Change: The demand was big even before artificial intelligence right.

Original intelligence isn't data center demand is incremental data center.

Brian E. Lane: But what... What would be your thoughts about expanding modular capacity further? Today, I'm on a $5,000,000 trip to Miami for the Hart City International Sports Day parade. TheNY.com will have a chance to win $5,000,000 to aid you. Today you must sign the $5,000,000 to enter the program and win our $500,000. We would love to find out who is in that $500,000 program and go after them and learn what the big deals are out there. You have to see what the demand is and see what kind of commitments we get from our customers. We've got the three up and running now. So, I mean, we'll see how I think it plays out, you know, which customers would want us to do it. Yeah, so round numbers, we did about a 400,000 square foot facility in North Carolina, and we did a 400,000 and a 200,000 square foot facility here in Houston. And it's even, those sizes are great, but these are also buildings that are much bigger, have much bigger volumes. They're taller, so you can build, you have the option sometimes of building at different levels, because remember, this is volumetric; you're building buildings that get stacked on top of each other.

Speaker Change: Right.

Speaker Change: And then you said three new modular facilities last year that was higher than I didn't realize that I thought it was one but what.

Speaker Change: What would be your thoughts about expanding modular capacity further.

Hey.

Speaker Change: You can see what the demand is and see what kind of commitments, we get from our customers. We've got the three up and running now.

Speaker Change: And we will see I think it plays out.

Speaker Change: <unk> customers would want us to do it yes. So round numbers, we did about 400000 square foot facility in North Carolina, and we did a 400000 ended 200000 square foot facility.

Speaker Change: Here in Houston, and it's even those sizes are great. But these are also buildings that are much bigger much bigger volume there. They're taller. He can build you have the option, sometimes a building at levels because.

Speaker Change: Remember these are this is volumetric youre building buildings that get stacked on top of each other.

William George: So this new space is really, really great for our guys. We had an opportunity when we came into this space to really take the lessons we had learned in deploying robots and, um, robotic arms and the kind of equipment that can make robotic arms more efficient and faster. So far, it's going very, very well. As far as increasing the space, I think we certainly have conversations with them, existing and new customers, about what would get us to do that. I think we're probably not going to make serious decisions about that before the middle of the year. But the opportunity is for certain; it's out there. But, you know, one of the things about Comfort.

Speaker Change: This new space is really really great for our guys. We had an opportunity when we came into this space.

Speaker Change: Really take the lessons, we have learned and deploying robots and.

Speaker Change: Robotic arms and.

Speaker Change: The kind of equipment that can make robotic arms more efficient and faster.

Speaker Change: So far it.

Speaker Change: Doing it's going very very well as far as increasing the space I think we certainly have conversations with.

Speaker Change: Existing and new customers about what what would get us to do that I think we're probably not going to make serious decisions about that before the middle of the year.

Speaker Change: But the opportunity is for certain that it's out there right now.

Speaker Change: One of the things about comfort.

William George: We really want to do a good job for people, and one thing we never want to do is promise more than that, really deliver, at an absolutely industry-standard level. So, our number one consideration in taking on work is whether we can do it and do it right. Our number, an almost similar, almost the same level of consideration is, is this work that will be good for our workforce? Is it with people who will treat them fairly and work with them where there will be good efficiency so that they can be successful? You know, is the geography onerous for them or good for them?

Speaker Change: We really want to do a good job for people and the one thing we never want to do is promise more than we can really deliver.

Speaker Change: At an absolutely industry standard level.

Speaker Change: So our number our number one consideration and taking work is can we do it and do it right our number.

Speaker Change: Similar almost the same level of consideration is is this work that will be good for our workforce.

Speaker Change: With people, who will treat them fairly and work with them, where they'll be good efficiency. So that they can be successful.

Speaker Change: The geography onerous for them or are good for them.

William George: I mean, in construction right now, a huge consideration is retaining your workforce, and you retain your workforce by considering the things that are going to be important to your workforce. So that's actually a very important consideration right now with our best operators. Okay. Very helpful. Last one.

Speaker Change: Construction right now a huge consideration.

Speaker Change: As retaining your workforce and you retain your workforce by considering the things that are going to be important to your workforce. So that's actually a very important consideration right now.

Speaker Change: With our best operators.

Okay.

Speaker Change: Super helpful last one.

Brian E. Lane: Backlog expectations. I'm just curious if the backlog could continue to build in Q1, or are you basically, I would imagine you're kind of full for the 2024 construction. Wow.

Backlog expectations I'm, just curious if could backlog continuing to build in Q1 or are you basically I would imagine youre kind of full for the 2024 construction season.

Brian E. Lane: Yeah, we're, we're, we're in really good shape for backlog this year for sure. You know, you can still grow it because projects are getting let longer. But back to what Bill just said, if it works well with our good customers. We're going to see what we can do to fill it in, but there's still plenty of stuff to look at. Adam, no shortage of opportunities. Great update.

Yes.

We're in really good shape in backlog this year for sure.

Speaker Change: We'll grow it because projects are getting let longer.

Speaker Change: But back to what Bill just said if it works good with our good customers.

Speaker Change: We're going to see what we can do to to fill it in but there is still plenty of stuff to look at Adam no shortage of opportunities great.

Operator: Thanks, guys, and thank you. And one moment for our next question. And our next question comes from Josh Chan from UBS. Your line is now open.

Speaker Change: Great. Thanks, guys.

Speaker Change: And thank you.

Speaker Change: And one moment our next question.

Speaker Change: Okay.

Speaker Change: And our next question comes from Josh Chan from UBS. Your line is now open.

Operator: Good morning, Brian, Bill, and Julie. Thanks for taking my questions. Maybe, could we contextualize your margin strength in the quarter for a quick minute here? I appreciate the guidance you gave into next year, but what are some of the factors that drove kind of the margins this quarter and can those factors pretty much continue into 2024? So, the factors were remarkably broad-based, remarkably, you know, The Pew.

Joshua K. Chan: Hi, Good morning, Brian Julie Thanks for taking my questions.

Joshua K. Chan: Maybe can we contextualize.

Joshua K. Chan: Margin strength in the quarter for a quick minute here I appreciate the guidance that you gave into next year.

What are some of the factors that drove kind of the margin this quarter and can those factors.

Joshua K. Chan: Pretty much continue into 2024.

Joshua K. Chan: Okay.

Speaker Change: So the factors were.

Speaker Change: Remarkably broad base markedly.

William George: It's really just good execution, good work at fair prices, and our guy's doing a great job. Thank you for joining us. Sometimes, historically, when you see stuff like, two or three drivers, right?

Speaker Change: Diffuse, it's really just good execution good work at fair prices and our guys are doing a great job.

Speaker Change: Farming.

Speaker Change: There is very good.

Speaker Change: Not like.

Speaker Change: Sometimes it historically when you see stuff like that.

Two or three drivers right.

William George: And certainly every month and every quarter, there are companies that have an especially good month or quarter, but it's really remarkable right now how broad, I'm sorry. That makes you more optimistic that it can continue. You know, and also right out service businesses, you know, up to a billion dollars. So we continue to grow that with higher minds, too, which is helping our minds as well. Okay, yeah, that's helpful. Thank you for the color there.

Speaker Change: Certainly every month and every quarter there are companies that have an especially good quarter, but it's really remarkable right now how broad base.

Speaker Change: Alrighty.

That makes you more optimistic that it can continue.

Speaker Change: And also write offs service businesses.

Speaker Change: Up to $1 billion. So we continue to grow that with higher margins too, which is helping our margins as well to us.

Speaker Change: Okay.

Speaker Change: It's helpful. Thank you for the color there and then and then on the on the growth same store growth that you are projecting for next year.

William George: And then and then on the growth, same store growth that you're projecting for next year. I guess if it's mid-teens for the full year and stronger in the first half, could your growth kind of accelerate in Q1 beyond what you achieved in Q4? Just kind of wanted to get the shape right versus what you're thinking in terms of how you get to that full year of mid-teens.

Speaker Change: I guess, if it's mid teens for the full year and stronger than the first half.

<unk> growth kind of accelerate in Q1 beyond what you achieved in Q4, just kind of wanted.

Speaker Change: They get the shape right versus what Youre thinking in terms of how you get to that full year of mid teens.

William George: So, it's lumpier than you think, so it's harder to answer that question than you think because the range... You know, the range we might think we're within, we can narrow it to a percent or two, but it's really, to get to, 1.5 standard deviations, you might go from, you know, 14 to 23 or something. So I would say it is certainly the case that if you made me, if you said Comfort was going to grow 15%, if you made me quarterize that, I'd put a percent or two more in the first two quarters than I did in the last two quarters. But I will also say that all of the factors that drove us to do better are still present. Our guys are really killing it, so you know. Honestly, one of the reasons we say it's weighted more heavily towards the first half is that we just have more visibility on the first half, right?

Speaker Change: So it's lumpier than you think so its harder to answer that question than you think because of the range.

Speaker Change: The range you might think we're within that we can narrow it to a percentage of it is really there.

Speaker Change: To get to.

Speaker Change: One five standard deviations.

Speaker Change: You might go from.

Speaker Change: 14% to 23 years of them. So I would say it is certainly the case that if you made me. If you say copper was going to grow 15% you may be quarter, I'd thought I'd put a percent or two more in the first two quarters that I put in the last two quarters, but I will also say all.

Speaker Change: All of the factors that drove us to do better are still evident our guys are really killing it so.

Speaker Change: <unk>.

Speaker Change: And honestly one of the reasons, we say it's weighted more heavily towards the first half as we just have more visibility on the first half.

William George: So we can promise something. Okay, yeah, that's really helpful. Thank you for that. And maybe last one for me, beyond what's in the backlog now, could you kind of talk about what opportunities you see in terms of things that you're bidding on, you're working on trying to get to the backlog, like the early part of the bidding process. What are you seeing on that front?

Speaker Change: Thank you promised.

Speaker Change: No.

Speaker Change: Okay, Yes.

Speaker Change: Thank you for that.

And maybe last one for me.

Speaker Change: Beyond what's in the backlog now could you kind of talk about what opportunities you see in terms of things that you're bidding on working on trying to get to the backlog.

Speaker Change: Early.

Speaker Change: Part of the bidding.

Speaker Change: Process, what are you seeing.

Brian E. Lane: Thank you. Well, we're still seeing a tremendous amount of activity. We're being very selective, you know, as we've spoken about, and it's heavy and a lot of manufacturing, a lot of industrial, a lot of technology. We're also seeing, you know, an education backlog, and that is the highest it's been in years, particularly university work, some K through 12. And also, you know, health care. Medical, Newville Hospitals.

Speaker Change: That front. Thank you.

Speaker Change: We're seeing.

Speaker Change: Still a tremendous amount of activity, we're being very selective as we've spoken about and it's and it's having a lot of manufacturing a lot of industrial a lot of technology. We're also seeing education.

Speaker Change: Backlog and that is the highest it's been in years, particularly University work some K through 12 and also healthcare.

Speaker Change: Medical.

Speaker Change: Newbuild hospitals.

Brian E. Lane: We're seeing come up, so this is a wide range of opportunities in addition to the food, life sciences, farmer, etc. that we've talked about. So pretty broad range, Josh.

Speaker Change: We're seeing come up so.

Speaker Change: So this is.

Speaker Change: A wide range of opportunities. In addition to the food life Sciences pharma et cetera that we've talked about so pretty broad great Josh.

Operator: That's great to hear, congratulations on a great quarter and a great year, and thank you. And one moment for our next question. And our next question comes from Jane Ramirez from D.A. Davidson.

Joshua K. Chan: That's great to hear congrats on a great quarter and great year.

Speaker Change: And thank you.

Speaker Change: And one moment our next question.

Speaker Change: And our next question comes from Jim Ramirez from D. A Davidson your line is now open.

Operator: Your line is now open. Hi, this is John Amiris from Brent Thielman. Congratulations on the quarter, by the way. Alright, thank you, Ron. As a percentage of revenue, what was Modular's contribution for the year? 20%? Of course, there's 18.

Jim Ramirez: Hi, This is Jeremy is for Brent Thielman, congrats on the quarter by the way alright. Thank you Don.

Jim Ramirez: Yeah.

As a percentage of revenue was modular contribution for the year.

Jim Ramirez: 20%.

Jim Ramirez: <unk>.

John Amiris: 18%? Is that correct? 18%, yeah. There's a pie chart; that's a perfect match.

Jim Ramirez: <unk> I believe.

Jim Ramirez: Okay.

Jim Ramirez: 18% of our 15% yes.

There's a pie chart in our Investor presentation.

Jim Ramirez: Perfect.

William George: Perfect. Yeah, sorry if I missed that. And just continuing on the conversation around backlog. Are there any concerns or any major concerns around your market? near-term or perhaps maybe just taking a look at your capacity or labor or any other inputs. Is there anything to share there?

Jim Ramirez: Sorry, if I missed that.

Jim Ramirez: And just continuing on that conversation around backlog.

Jim Ramirez: Okay.

Jim Ramirez: Is there any concerns or any major concerns around your markets.

Jim Ramirez: Near term or perhaps.

Jim Ramirez: Maybe just taking a look at your capacity or labor or any other inputs.

Jim Ramirez: And is there anything you can share there.

Brian E. Lane: Yeah, in terms of backlog in the markets, you know, I don't have any concerns. Of course, commercial real estate in terms of office buildings, you're obviously not seeing a lot of new office buildings. We still have a lot of service, small project worth, with the exception of Dallas, in the Wall Street Journal earlier this week. Dallas is still pretty busy with office buildings. But in terms of the sectors themselves, I don't have any real concern at all. Just about labor, you know, capacity. We're hiring all the time.

Speaker Change: Yeah in terms of backlog in our markets.

Speaker Change: I don't I don't have any concerns of course commercial in terms of office buildings.

Speaker Change: So you're not seeing a new lot of office buildings, we sell a lot of service small project, where it's the exception in Dallas and the Wall Street Journal earlier, this week down still pretty busy on office buildings, but in terms of the sectors themselves I don't have any real concern at all.

Speaker Change: While labor.

Speaker Change: <unk>.

Speaker Change: We're hiring all the time, we increased our workforce in the fourth quarter as well.

Brian E. Lane: We increased our workforce in the fourth quarter as well. We brought in a couple of new companies that bring us more resources. And then we have a temporary labor organization that we have.

We bought a couple of new companies on that brings us more resources to.

Speaker Change: So and then we have a temporary labor organization that we have so in terms of capacity in the backlog.

Brian E. Lane: So in terms of capacity and the backlog, you know, we feel pretty confident about doing the work and doing the work that we like and that we can do well. So, just one correction: modular for the full year was 15%, getting a quarterly number mixed up. Fifty percent of our total revenue came through our two modules.

Speaker Change: We feel pretty confident about us doing the work and doing the work that we like and that we can do well.

Speaker Change: So just one correction modular was for the full year was 15% getting.

Speaker Change: Getting a quarterly number so far.

Speaker Change: 15% of our total revenue came through our two modular.

William George: Oh. Perfect. Thank you. Appreciate that. And just one more question for me. Could you discuss, based on the latest acquisition, Summit Industrial Construction, what are the opportunities the company sees to grow this business beyond the revenue ranges discussed? Well...

Operation.

Speaker Change: Perfect. Thank you I appreciate that and just one more for me for me.

Speaker Change: Could you discuss from the latest acquisition the industrial construction what are the opportunities accompanying seats to grow expenses beyond the revenues maintenance discussed.

Speaker Change: Well.

William George: It's productive capacity. Both of those two companies have more work available if they can take it. You know, the revenue ranges we put in are the amount that's supported by their current backlog. It wouldn't be surprising if they did a little more. But they can't do orders of magnitude more because, you know, there's a time-space mass problem with the number of people.

Speaker Change: Its productive capacity both of those two companies have more work available if they can take it.

Speaker Change:

Speaker Change: The revenue range as we put in is the amount that supported by their current backlog.

Speaker Change: It wouldn't be surprising if they did a little more.

Speaker Change: Do orders of magnitude more because there is a time space mass problem with the number of people.

William George: But, you know, certainly. Virtually every acquisition we've done within the past couple years was bigger, so we're hoping that happens again. But they're really good companies.

Speaker Change: No.

Speaker Change: Certainly.

Speaker Change: Virtually every acquisition we've done within a couple of years with vigor.

Speaker Change: We're hoping that happens again.

Speaker Change: But they're really good companies.

William George: I understand. Thank you. You know, one of the things is we don't push people's revenue, right? We push them for what they could do, frankly, close to half the time. As of a year or two ago, I took a look, companies shrunk the first full year we owned them, close to half the time they were smaller the first full year we owned them. But without, with almost, I don't think, with any exception, the third full year we owned them, they're noticeably bigger.

Speaker Change: Understood. Thank you know one of the things we don't postpaid revenue, Greg we have a simpler they can do frankly.

Speaker Change: Close to half the time as of a year or two ago I took a look companies shrunk. The first full year, we owned them close to half the time they were smaller the first full year, we own them, but without with almost I don't think with any exception. The third full year, we owned them theyre noticeably better so hopefully that can.

William George: So hopefully that can keep happening. Guys, thank you so much for the additional comments. I appreciate it, and thank you.

Speaker Change: That could keep happening.

Speaker Change: Okay.

Speaker Change: Got it. Thank you so much for the additional comments there I appreciate it thank you.

And thank you.

Operator: In one moment, we have a follow-up question, and our follow-up question comes from Alex Wyer from KeyBank Capital Markets. Your line is now open. Hi guys, just one more if I can squeeze one in.

Speaker Change: And one moment, we have a follow up question.

Speaker Change: And a follow up question comes from Alex <unk> from Keybanc capital markets. Your line is now open.

Alex Dwyer: Hi, guys, just one more if I can squeeze one in.

Operator: So the free cash flow conversion in 2023, I'm just doing the math, it was 175% to net income. Do you have any sense of where this could shake out in 2024? Like, should we be expecting something lower than 100%? Or just any thoughts on visibility and cash flow conversion this year? So that's a really hard question because you have to predict the timing.

Alex Dwyer: So the free cash flow conversion in 2023, Im just doing the math there was 175% to net income.

Alex Dwyer: Do you have any sense of like where that could shake out in 2020 for like should we be expecting something lower than 100% or just any thoughts on visibility and cash flow conversion this year.

Speaker Change: So that's a really hard question because you have to predict the timing.

William George: So, we have two things going on. One, we have really, really good payment terms on almost all of our work. And that is, we're overbilled at unprecedented levels, etc, etc. But the big different thing that's going on right now is this: when we take these modular orders, we have the right to receive advanced payments when we accept the order. So we have significant amounts of money that are being paid to us, sometimes a year in advance of when the work will be done.

Speaker Change: So we have two things going on one we have.

Speaker Change: Really really good payment terms on.

Speaker Change: Almost all of our work and that is wherever billed at unprecedented levels et cetera, et cetera, but the big different thing Thats going on right. Now is this when we take these modular orders we have the right to receive advance payments when we accept the order so we have cigna.

Speaker Change: Significant amounts of money that are being paid to us sometimes a year in advance of when the work will be done.

William George: So it's very, very hard to predict when those orders will come in. I will say we just had big orders in the fourth quarter, so some of that money was collected in the fourth quarter. Some of that money will still be collected in the first quarter, so we'll start the year off in a good position. And then, I believe, sometime later this year in the third, fourth, or first quarter next year, we'll have a quarter or two where our cash flows are less than our earnings. But I will say this time last year I thought the same thing, and the orders kept coming, and we stayed ahead. So that's why it's so hard to predict, because my board asks me that.

Speaker Change: So it's very very hard to predict when those orders will come in I will say, we just had big orders in the fourth quarter. So some of that money was collected in the fourth quarter. Some of that money will be there'll be collected in the first quarter. So we will start the year off in a good position.

Speaker Change: And then I believe.

Speaker Change: Some time, maybe maybe later this year in the third fourth or first quarter next year, we'll have a quarter or two where our cash flows are less than our earnings.

Speaker Change: But I will say this time last year I thought the same thing on the orders kept coming and we stayed ahead. So that's why it's so hard to predict because whereby board asks me that.

William George: I just tell them, let's just enjoy this. Go ahead, go ahead, and thank you. And I am not asking any further questions.

I just tell them, let's just enjoy this.

Speaker Change: Yeah.

Speaker Change: <unk>.

Speaker Change: Go ahead.

Speaker Change: And thank you.

Speaker Change: Alrighty, Thanks, and I am showing no further questions I would now like to turn the call over to Brian Lane for closing remarks alright.

Brian E. Lane: I would now like to turn the call over to Brian Lane for closing remarks. All right, thanks Justin. I really want to once again thank all our amazing employees. It's a great industry, and we really appreciate everything everybody does in this organization. Thank you all for your interest in Comfort Systems. I hope everyone has a terrific weekend and look forward to seeing everyone soon. See everybody soon. Thank you. Thanks, everybody. This concludes today's conference call. Thank you for participating. You may now disconnect. www.comfortsystems.com, Free Music

Brian E. Lane: Alright, Thanks, Jess I really want to once again, thanks, all of our amazing employees, it's a great industry and we really appreciate everything everybody doesn't this organization.

Brian E. Lane: Thank you all for your interest in comfort systems I hope everyone has a terrific weekend and look forward to everybody soon seeing everybody. Soon thank you. Thanks everybody.

Speaker Change: This concludes today's conference call. Thank you for participating you may now disconnect.

Speaker Change: Okay.

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Okay.

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Speaker Change: Yes.

Speaker Change: Okay.

Speaker Change: Thanks.

Speaker Change: Okay.

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