Comfort Systems USA Q4 2024 Earnings Report

Comfort Systems USA EPS Results

• Actual EPS: $4.09
• Consensus EPS: $3.63
• Beat/Miss: Beat by +$0.46
• One Year Ago EPS: N/A

Comfort Systems USA Revenue Results

• Actual Revenue: $1.87 billion
• Expected Revenue: $1.77 billion
• Beat/Miss: Beat by +$101.04 million
• YoY Revenue Growth: N/A

Comfort Systems USA Announcement Details

• Quarter: Q4 2024
• Date: 2/20/2025
• Time: Before Market Opens
• Conference Call Date: Friday, February 21, 2025
• Conference Call Time: 11:00AM ET

Comfort Systems USA (NYSE:FIX), together with its subsidiaries, provides mechanical and electrical installation, renovation, maintenance, repair, and replacement services for the mechanical and electrical services industry in the United States. It operates through two segments, Mechanical and Electrical. The company offers heating, ventilation, and air conditioning systems, as well as plumbing, electrical, piping and controls, off-site construction, monitoring, and fire protection. It also engages in the design, engineering, integration, installation, and start-up of mechanical, electrical, and plumbing (MEP) and related systems in new buildings; and renovation, expansion, maintenance, monitoring, repair, and replacement of MEP systems in existing buildings. In addition, the company provides remote monitoring of power usage, temperature, pressure, humidity and air flow for MEP and other building systems. It serves building owners and developers, general contractors, architects, consulting engineers, and property managers in the commercial, industrial, and institutional MEP markets. Comfort Systems USA, Inc. was founded in 1917 and is headquartered in Houston, Texas.

Comfort Systems USA Q4 2024 Earnings Call Transcript

Key Takeaways

• Comfort Systems USA delivered record fourth-quarter and annual earnings, with Q4 EPS of $4.09 (+60% YoY) and full-year EPS of $14.60, driven by 22% same-store revenue growth and expanded gross margins.
• Backlog climbed to an all-time high of $6 billion, reflecting broad-based strength across industrial, technology (notably data centers), institutional and commercial sectors.
• The company generated $849 million in operating cash flow and $744 million in free cash flow in 2024, outperforming earnings by $327 million over the trailing twelve months.
• Strategic M&A added Century Contractors (projected $90 million in revenue) in January, while a dividend increase to $0.40 per share and $58 million in share repurchases underscore management’s commitment to shareholder returns.
• Looking ahead to 2025, management expects high single-digit same-store revenue growth and sustained strong margins, supported by robust pipelines in modular, advanced technology and reshoring-driven industrial work.

Presentation

[Operator]

Good day, and thank you for standing by. Welcome to the Fourth Quarter twenty twenty four Comfort System USA Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

[Operator]

To ask a question during this session, you will need to press 11 on your telephone. You will then hear automated message advising your hand is raised. To withdraw your question, please press 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Julie Shea, Chief Accounting Officer.

[Operator]

Please go ahead.

[Julie Shaeff, Senior VP & Chief Accounting Officer at Comfort Systems USA]

Thanks, Marvin. Good morning. Welcome to Comfort Systems USA's fourth quarter and full year twenty twenty four 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.

[Julie Shaeff, Senior VP & Chief Accounting Officer at Comfort Systems USA]

Those plans and expectations include risks and uncertainties that might cause actual future activities and results of our operations to be materially different from those in these comments. You can read a detailed listing and commentary concerning our specific risk factors in our most recent Form 10 K 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.

[Brian Lane, CEO, President & Director at Comfort Systems USA]

All right. Thanks, Julie. Good morning and thank you for joining our call today. Last night, we reported record annual and fourth quarter earnings and exceptional cash flow, thanks to excellent execution by our superb teams across The United States. Same store revenue growth for the fourth quarter was 22% and our margins were amazing.

[Brian Lane, CEO, President & Director at Comfort Systems USA]

We earned $4.09 per share this quarter, up 60% from last year and $14.6 per share for the year compared to $9.01 in 2023. Backlog at the end of the year grew to a new all time high of $6,000,000,000 Our backlog is broadly based and we continue to experience strength across virtually all sectors, including persistent strong demand from our technology customers. Thanks to strong fourth quarter bookings, we begin 2025 with same store growth in both sequential and year over year backlog. 2024 operating cash flow was eight forty nine million dollars laying a strong foundation for continued investment and our ongoing cash flow strength is indicative of strong underlying trends in our execution, customer relationships and prospects. Recently acquired companies continue to surpass our expectations and we are pleased to announce that in January, we added Century Contractors as our newest partner company.

[Brian Lane, CEO, President & Director at Comfort Systems USA]

Century is an outstanding well established mechanical contractor based in Charlotte, North Carolina and we expect they will earn about $90,000,000 of revenue this year. We also announced a quarterly dividend increase of $0.05 to $0.4 per share. This increase reflects our strong cash flow and like our share repurchases, it shows our commitment to reward our shareholders. I will discuss our business and outlook in a few minutes, but first, I will turn this call over to Bill to review our financial performance. Bill?

[William George, EVP & CFO at Comfort Systems USA]

Thanks, Brian. Results are fantastic this quarter, capping a great year. Revenue for the fourth quarter of twenty twenty four increased by 38% compared to last year to $1,900,000,000 Full year revenue for 2024 was $7,000,000,000 an increase of 35% compared to 2023. For the full year, our Mechanical segment revenue increased by 40%, helped by acquisitions, modular expansion and substantial organic construction and service growth. Electrical segment revenue increased by 19%.

[William George, EVP & CFO at Comfort Systems USA]

Full year same store revenue increased by 23% or $1,200,000,000 We'll face a tough comparable in 2025 and our best estimate is that same store revenue will continue to rise in 2025 most likely by high single digit percentage growth. Gross profit was $434,000,000 for the fourth quarter of twenty twenty four, a $154,000,000 improvement compared to a year ago. Our gross profit percentage grew to 23.2% this quarter compared to 20.6% for the fourth quarter of twenty twenty three. The quarterly gross profit percentage in our Electrical segment improved to 26.1% this year compared to 22.9% last year. Margins in our Mechanical segment also increased in the quarter to 22.4% compared to 19.8% in the fourth quarter of twenty twenty three.

[William George, EVP & CFO at Comfort Systems USA]

Full year gross profit increased by $486,000,000 and our annual gross profit margin was 21% as compared to 19% in 2023. Our electrical margin was 24.1% for 2024, while mechanical was 20.2. As we look to 2025, we are optimistic that gross profit margins will continue to be in the strong range as we have achieved in comparable quarters last year. SG and A expense in the fourth quarter was $2.00 $8,000,000 or 11.1 percent of revenue compared to $160,000,000 or 11.8% of revenue in the same quarter of 2023. For the full year, SG and A expense as a percentage of revenue was 10.4%, down from 11 in 2023.

[William George, EVP & CFO at Comfort Systems USA]

For the full year and on a same store basis, SG and A was up $117,000,000 due to ongoing investments to support our much higher activity levels. Quarterly operating income increased from $120,000,000 in the fourth quarter of twenty twenty three to $226,000,000 for the fourth quarter of twenty twenty four, an 88% increase. Thanks to the jump in gross profit margins and favorable SG and A leverage, our operating income percentage increased to 12.1% this year from 8.9% in the prior year. For the full year, our operating income was $749,000,000 and we achieved a remarkable operating income percentage of 10.7%. Our 2024 tax rate was 21.6%.

[William George, EVP & CFO at Comfort Systems USA]

We estimate that our tax rate in 2025 will be approximately 22% to 23%. After considering all these factors, net income for the fourth quarter of twenty twenty four was $146,000,000 or $4.09 per share. This is a 60% improvement in quarterly earnings per share from last year. Our full year earnings per share for 2024 were $14.6 compared to $9.01 per share in the prior year, so our annual EPS is up by over 60%. EBITDA increased by 85% to $261,000,000 this quarter from $141,000,000 in the fourth quarter of twenty twenty three.

[William George, EVP & CFO at Comfort Systems USA]

Same store EBITDA increased by over 50%. Full year 2024 EBITDA was $892,000,000 and EBITDA margin was 12.7%, reflecting great execution by our teams and strong demand in our markets. Full year free cash flow for 2024 was a remarkable $744,000,000 We continue to benefit from advanced payments and operating cash flow, again far exceeded our earnings by $327,000,000 on a trailing twelve month basis. So we are again well ahead of earnings in collecting our cash. In addition, our cash flow for the second half of twenty twenty four was lifted by approximately $80,000,000 of tax payments that we were allowed to defer until February of twenty twenty five due to Hurricane Barrow.

[William George, EVP & CFO at Comfort Systems USA]

That catch up payment has now been made and will reduce first quarter cash flow. Capital expenditures in 2024 were $111,000,000 or a little over 1.5% of revenue and we continue to invest in our operations and purchase vehicles to support our service business. We increased our investment in share repurchases this year and returned $58,000,000 to shareholders in 2024 by buying over 177,000 shares at an average price of $329 Since its start, our share purchase program has retired over 10,400,000.0 shares at an average price of $31.41 and paid our shareholders more than $320,000,000 That's all I got, Brandon.

[Brian Lane, CEO, President & Director at Comfort Systems USA]

All right. Thanks, Bill. I am going to discuss our business and outlook. Backlog at the end of the fourth quarter was $6,000,000,000 a same store increase in both sequential and year over year backlog. Fourth quarter bookings were strong, especially in the technology sector and sequential backlog was up $300,000,000 Since last year, our backlog has increased by $800,000,000 or 16%.

[Brian Lane, CEO, President & Director at Comfort Systems USA]

On a same store basis, our backlog is now up by $400,000,000 9 percent higher than at this time last year. Our overall backlog is broadly based and especially robust in our industrial sector. We are carefully selecting work that has good margins with good working conditions for our valuable workforce. Our revenue mix continues to trend towards the industrial sector with this sector accounting for over 60% of our volume in 2024 and continues to be a major driver of pipeline and backlog. Technology, which we include in industrial and which includes data centers and chip fab with 33% of our revenue, a substantial increase from 21% in the prior year and advanced technology is now the largest component of our revenue.

[Brian Lane, CEO, President & Director at Comfort Systems USA]

Institutional markets, including education, healthcare and government are also strong and represent 24% of our revenue. The commercial sector is active as well and now accounts for about 16% of revenue. Most of our service revenue is for commercial customers, so our commercial construction business is now relatively small. Construction accounted for 84% of our revenue, with projects for new buildings representing 56% and existing building construction 28%. Project pipelines remain at unprecedented levels.

[Brian Lane, CEO, President & Director at Comfort Systems USA]

We include modular in new building construction and year to date modular was 17% of our revenue. Service revenue was up 8% this year on an absolute basis, but with faster growth in construction, service is now 16% of total revenue. Our overall service business achieved a record $1,100,000,000 in revenue for 2024 and service continues to be a growing and reliable source of profit and cash flow. With record broad based backlog, healthy pipelines, persistent demand in advanced technology, on shoring and especially our unmatched workforce, we expect continuing strong results in 2025. I want to close by thanking our over 18,000 employees for their hard work and dedication.

[Brian Lane, CEO, President & Director at Comfort Systems USA]

Our success is a direct result of the people that serve our customers every single day. I will now turn it back over to Marvin for questions. Thank you.

[Operator]

Thank you. And our first question comes from the line of Brent Thielman of D. A. Davidson. Your line is now open.

[Brent Thielman, MD & Senior Research Analyst at D.A. Davidson]

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

[Brian Lane, CEO, President & Director at Comfort Systems USA]

Hey, thanks Brent.

[Brent Thielman, MD & Senior Research Analyst at D.A. Davidson]

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

[Brian Lane, CEO, President & Director at Comfort Systems USA]

Yes, for sure, Brent. So as you know, Brent, you've been around this business a long time. It's a host of things and it starts with good project selection, working for good customers, leading on to doing a great job estimating and evaluating the risk of the projects that we're looking at. And right now, there's just a lot of work out there that's in our wheelhouse, our sweet spot. So we're doing a really good job executing it.

[Brian Lane, CEO, President & Director at Comfort Systems USA]

But it all comes down to the folks in the field that are actually doing the work with tools in their hands. We are very fortunate to have the workforce we do and the care they take with our customers. So it's a combination of a lot of things that are going to drive margins and we have to do all of them well, which we're doing right now.

[Brent Thielman, MD & Senior Research Analyst at D.A. Davidson]

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

[Brent Thielman, MD & Senior Research Analyst at D.A. Davidson]

Right.

[William George, EVP & CFO at Comfort Systems USA]

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

[Brent Thielman, MD & Senior Research Analyst at D.A. Davidson]

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

[William George, EVP & CFO at Comfort Systems USA]

I think it's supportive of margins. These guys are getting really good margin and they have big sophisticated customers. So I wouldn't necessarily predict. I think that that space will grow faster than Comfort as a whole. So it will be supportive of those growth projections same store growth projections we just gave.

[William George, EVP & CFO at Comfort Systems USA]

But I think our margin guidance for them would be the same as our margin guidance for the rest of the business, which is overall we can't believe the margins that they achieved in 2024, but we really see every we have every reason to think they'll do it again in 2025.

[Brent Thielman, MD & Senior Research Analyst at D.A. Davidson]

Got it. Last one, if I could. Bill, I mean, the CapEx stepped up here in the fourth quarter, maybe it's associated with modular or something else. Just what that was related to and thoughts on CapEx in 2025?

[William George, EVP & CFO at Comfort Systems USA]

So dollars of CapEx, they're up, they're up. If you look at fourth quarter to fourth quarter, they're still down as a percent of revenue. They're up sequentially, but that's almost always going to happen from the big volumes of the third quarter. So as a percentage, they're up sequentially. I will say our first use of every dollar we get, our very first use is to reinvest it in the business where it can help us be a better company and serve our customers better.

[William George, EVP & CFO at Comfort Systems USA]

We also occasionally nowadays will buy the buildings that are that we run our businesses from opportunistically just because they're often in a medium sized town and they're pretty special buildings. And we need we're really investing in those buildings and frequently the most logical way to do that is to simply buy the building from the landlord. So sometimes you'll see I think we'll probably buy a couple of our buildings this year. We're in some conversations that will probably lead to that. And so I think our backlog I mean, I think our CapEx will stay at about the same percentage next year as this year.

[Brent Thielman, MD & Senior Research Analyst at D.A. Davidson]

Okay. Very good. I'll get back in queue.

[Operator]

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

[Adam Thalhimer, Director of Research at Thompson Davis & Co]

Hey, good morning guys. Congrats on a great Q4.

[Brian Lane, CEO, President & Director at Comfort Systems USA]

All right. Thanks, Adam.

[Adam Thalhimer, Director of Research at Thompson Davis & Co]

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

[Brian Lane, CEO, President & Director at Comfort Systems USA]

Yes. So I'll go first and then Bill can add on to it. But probably a lot of concern a couple of months ago with a release. But right now, we're seeing heavy activity, particularly on the data center front. It's been no let up on demand on what they want us to build.

[Brian Lane, CEO, President & Director at Comfort Systems USA]

In fact, they've let us know that they want to make sure that we're still all in on building, in which we are. So we see no let up at all, Adam, on that front.

[William George, EVP & CFO at Comfort Systems USA]

One of the things people forget is that the amounts that have been announced by the hyperscalers in particular are vastly higher than anything any year that's ever happened in the past and probably not possible to start with. So even if there's a pullback, it's a pullback to a lower amount that's still impossible in the timeframes that they're talking about. And it's definitely the case that with the people we build data centers for that if they're going to slow down, they don't know it yet.

[Adam Thalhimer, Director of Research at Thompson Davis & Co]

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

[William George, EVP & CFO at Comfort Systems USA]

Well, compared to any other time you would have asked that question more than usual, right?

[Brian Lane, CEO, President & Director at Comfort Systems USA]

It's actually we have more book backlog in the 2026 than we've ever had at Comfort Systems.

[William George, EVP & CFO at Comfort Systems USA]

Twenty twenty six is still a year away.

[Brian Lane, CEO, President & Director at Comfort Systems USA]

Yes, still a ways away.

[William George, EVP & CFO at Comfort Systems USA]

But

[William George, EVP & CFO at Comfort Systems USA]

at some point,

[William George, EVP & CFO at Comfort Systems USA]

no, I mean, we've never

[William George, EVP & CFO at Comfort Systems USA]

had

[William George, EVP & CFO at Comfort Systems USA]

as much visibility as we've had. We've never been as fully sold for the coming year and into the next year as we are now. And really, the project sizes are very big, so they can frequently be multi year. The one thing that happens is the starts are lumpy, right? And you've been you followed us for so long, you know that.

[William George, EVP & CFO at Comfort Systems USA]

But as of right now, frequently when a start is delayed, it's like a relief for our subsidiary because they've got so much going on that they're starting to kind of count on some of those starts being delayed.

[Brian Lane, CEO, President & Director at Comfort Systems USA]

But you know, Adam, it's also great for our workforce that they see if there's work coming into 2026 and see how much work there is out there because we have a lot of work to do this year. So it's really a good sign for the folks in the field too.

[Adam Thalhimer, Director of Research at Thompson Davis & Co]

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

[William George, EVP & CFO at Comfort Systems USA]

So we paid $80,000,000 that should have been paid last year. So if your zip code was in the federally declared disaster area, they basically gave you relief so that you didn't need to make your quarterly estimated tax payments for the third and fourth quarter of twenty twenty four with no penalty or interest. And on behalf of our shareholders, we took advantage of that. And so we paid $80,000,000 a week or 2 ago that should have been paid last year. And we'll still be making a tax payment this quarter, our normal estimated tax payment for our very high profits right now.

[William George, EVP & CFO at Comfort Systems USA]

So that's literally a shifting of $80,000,000 of cash flow from this year to last year. And also in the first quarter, we have some acquisition related payments where these acquisitions are doing so well that when we pay out some of their earn outs and stuff, once you're the payouts that you make on earn outs go above the amounts that you estimated when you accrued for the earn outs, they start to go through operating cash flow. It is self funding because by definition, they earned more money, but it does change the characteristics of the cash flow. So we think we'll have great cash flow this year, but especially the first quarter, there is some displacement, some temporal displacement for some of the payments, all of which were really to the benefit of our shareholders, but they were all kind of at the same direction.

[Adam Thalhimer, Director of Research at Thompson Davis & Co]

Perfect. Good luck in Q1.

[Brian Lane, CEO, President & Director at Comfort Systems USA]

Thanks.

[Operator]

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

[Julio Romero, Equity Analyst at Sidoti & Company, LLC]

Thanks. Hey, good morning guys.

[Brian Lane, CEO, President & Director at Comfort Systems USA]

Hey, Olivia. Good

[Julio Romero, Equity Analyst at Sidoti & Company, LLC]

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

[William George, EVP & CFO at Comfort Systems USA]

So historically, our modular business, like when we bought it in 2011 and for the first many years, it was really focused towards pharmaceutical builds. I'd always had the data center component to it. As the data center stuff grew, essentially the data center some really big and good customers came to us and said we want pretty much your whole capacity. And we talked to them about the terms that we would need and the cooperation we would need to give that to them. So we've given they probably have 80%, ninety % if not more of our capacity.

[William George, EVP & CFO at Comfort Systems USA]

We do continue now we're much bigger. So we've continued to reserve 10% a chunk of more than 10% of our capacity for the customers who grew to rely on us in other verticals. And keeping in mind that 10 it's 10% of a number that's grown fivefold, right? So it's still a big number. We think this modular construction would be useful in all kinds of what we know it would be in all kinds of verticals, but it's just such a good match right now for data center and the demand for data center is so big and really the people who are building data centers, people think of people kind of ask is, is this going to be the way people build data centers?

[William George, EVP & CFO at Comfort Systems USA]

The reality is for the foreseeable future, the way that we're going to build data centers is every way it's possible to build a data center. They're really taking all of the above approach. And I don't know, we think there's obviously, we're doing that much work. If something we don't see or expect happens, which is data center slows down or stops, we'd have to replace that work and there would be an adjustment period.

[Brian Lane, CEO, President & Director at Comfort Systems USA]

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

[William George, EVP & CFO at Comfort Systems USA]

There's amazing applications like in telecoms and there's just like a lot of places where it would be what's the capacities out there, right? But today what's done modular is like a very, very small fraction of 1% of what could be done modular.

[Julio Romero, Equity Analyst at Sidoti & Company, LLC]

Yes. No, agreed. Very helpful color and we're definitely in early stages there. You said this also that data center is not just sort of modular, but you also do some stick built work for data center as well. Can you maybe just talk about demand trends on that side?

[Brian Lane, CEO, President & Director at Comfort Systems USA]

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

[William George, EVP & CFO at Comfort Systems USA]

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

[Julio Romero, Equity Analyst at Sidoti & Company, LLC]

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

[William George, EVP & CFO at Comfort Systems USA]

They have wonderful capability and complex pipe and that's a really, really good fit for stuff we already do, but really it's a really good fit for where if you were to like look at we have five or six businesses sort of within 100 miles of there that are doing industrial work. If you'd have said, if I could have one more of something a little if I could have more capability and one thing it would have been in what these guys do. So we're optimistic that this will be a really, really great member of that ecosystem and they're already off to a great start.

[Julio Romero, Equity Analyst at Sidoti & Company, LLC]

Yes. Great. Thanks very much guys.

[William George, EVP & CFO at Comfort Systems USA]

Thanks.

[Operator]

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

[Josh Chan, Executive Director - Equity Research Analyst at UBS Group]

Hi, good morning guys. Congrats on a great quarter.

[Brian Lane, CEO, President & Director at Comfort Systems USA]

Thanks Josh.

[Josh Chan, Executive Director - Equity Research Analyst at UBS Group]

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

[William George, EVP & CFO at Comfort Systems USA]

Brian, did you think we had good gross margins?

[Brian Lane, CEO, President & Director at Comfort Systems USA]

Yes. It's interesting, Josh. It's a really good question because when we saw the number two, we took We Look twice. It comes back to we're getting really good work and we're really, really getting superb execution. I can't really say enough the quality of work we're getting out in the field.

[Brian Lane, CEO, President & Director at Comfort Systems USA]

And we're working for work we're really good at and it really helps your margin.

[William George, EVP & CFO at Comfort Systems USA]

And honestly, there really wasn't any like particular or small handful of special closeouts that drove a bunch of that. It was really broad based. It's not we've reached a point now where this so first of all, you have modular, those projects are built in a month or two, right? And so much of the industrial goes year round that the closeouts become kind of every quarter, but never more than usual. That could be that could here and there, there might be a quarter where there's one or two special closeouts.

[William George, EVP & CFO at Comfort Systems USA]

This was just broad based strength and revenue running through at great margins.

[Brian Lane, CEO, President & Director at Comfort Systems USA]

The other thing, Josh, our service business continues to grow. Did a B and one off last year. If you look at the back end of the fourth quarter where you get significant temper change, got really cold in parts of the country, that really accelerates your service call out work, etcetera. So that helps your margins as well.

[Josh Chan, Executive Director - Equity Research Analyst at UBS Group]

And that's a fair point. Yes, that's really encouraging. Thank you. And then on the I guess your people based business, so could you talk a little bit about kind of the progress behind hiring people and the training of apprentices? How do you feel that's going relative to your demand outlook?

[Brian Lane, CEO, President & Director at Comfort Systems USA]

Well, I mean, the organization is doing a terrific job bringing folks in here, constantly recruiting. We got outstanding training programs from skilled trades all the way up to leadership training, where We had training going on every week in this organization. The companies that we brought in here years ago, Kodiak, for example, has access to a lot of temporary labor that's really helped us manage our peaks and valleys and it's given us outstanding talent. So the recruiting efforts constant nonstop. We've got a lot of recruiters throughout the country and that will never stop and training, we're totally 100% committed to training.

[Brian Lane, CEO, President & Director at Comfort Systems USA]

That's something that we'll never slow down on.

[Josh Chan, Executive Director - Equity Research Analyst at UBS Group]

That's great. And maybe I can ask one last one. How does the M and A pipeline look and how do you expect that to kind of contribute to the year? Thank you.

[William George, EVP & CFO at Comfort Systems USA]

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

[William George, EVP & CFO at Comfort Systems USA]

But right now, things are good.

[Josh Chan, Executive Director - Equity Research Analyst at UBS Group]

That's great to hear and congrats again for the quarter.

[William George, EVP & CFO at Comfort Systems USA]

Thanks.

[Operator]

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

[Brian Brophy, Associate Vice President at Stifel Financial]

Thanks. Good morning, everybody. Thanks for taking the question. Congrats on a very nice quarter. Wanted to ask on

[William George, EVP & CFO at Comfort Systems USA]

You're welcome.

[Brian Brophy, Associate Vice President at Stifel Financial]

Thank you. Wanted to ask on some of the comments around same store sales growth for 2025. You mentioned the high single digit range. It sounds like a little bit of a change from some of your comments last quarter.

[Brian Brophy, Associate Vice President at Stifel Financial]

So can you just give us

[Brian Brophy, Associate Vice President at Stifel Financial]

a sense for what changed versus what you're mentioning?

[William George, EVP & CFO at Comfort Systems USA]

Yes. And it's just math is what it is. We did not expect to roll through quite the revenue that we did in the fourth quarter. When we give guidance on our revenue, it comes from an organic planning process we do where we get. So the number is as big as ever.

[William George, EVP & CFO at Comfort Systems USA]

It's just that that same number is not as percentage bigger as much percentage bigger as the bigger number that we came up with in the fourth quarter that made the full year bigger in the fourth quarter. So it's just a rough Yes,

[Brian Lane, CEO, President & Director at Comfort Systems USA]

it's not from less work. There's plenty of work

[William George, EVP & CFO at Comfort Systems USA]

out there.

[William George, EVP & CFO at Comfort Systems USA]

It's just that

[William George, EVP & CFO at Comfort Systems USA]

we left out such a big revenue number in the fourth quarter.

[Brian Brophy, Associate Vice President at Stifel Financial]

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

[William George, EVP & CFO at Comfort Systems USA]

Sounds like you're smarter about that than I am. We I mean, I would say that we don't what we are not seeing we're seeing we got really good modular orders in the fourth quarter, but we did not get the gigantic modular orders we got in particular in December of twenty twenty two and also in December of twenty twenty three. But we had net bookings and the plants full and it's booked full longer than it's ever been. It's a bigger plant. There doesn't seem to be a slowdown, but there's not a step change sort of increase like we had.

[Brian Lane, CEO, President & Director at Comfort Systems USA]

And Brian, I know you're relatively new to us, but what's really important here is that whenever we look at work we're going to take is our manpower loading curves, make sure we do not take too much work that we can execute at a high level because margins, profit and cash flow are really important. So we spend a lot of time about what work we can handle and when the work is coming.

[William George, EVP & CFO at Comfort Systems USA]

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

[Brian Brophy, Associate Vice President at Stifel Financial]

Understood. Yes, that's really helpful. And then I guess one other one, we've been getting a lot of questions on inferencing data centers versus training data centers, what that potentially needs for power cooling needs.

[Brian Brophy, Associate Vice President at Stifel Financial]

Can you talk about some

[Brian Brophy, Associate Vice President at Stifel Financial]

of the differences in terms of electrical and mechanical intensity between some of these different types of data centers? And then just broadly, when you're looking at your data center activity builds to date, how much is more cloud based data centers versus AI data centers today? Thanks.

[William George, EVP & CFO at Comfort Systems USA]

So I'll give a little bit of color about that, but I'm not really not an expert, right? There's no data center so here's some really clear things. There's no data center we're building today that's not more dense than if we were building that same footprint one, three or five years ago. They are bringing in way more copper, way more electricity. They're trying to put more compute power into all data centers.

[William George, EVP & CFO at Comfort Systems USA]

The true AI data centers are barely even starting. They will probably have a smaller footprint based on just what smart people at Comfort tell me. They will have unbelievable power draws. But the black belt chips only started actually being delivered a few months ago. The first ones have gotten into servers.

[William George, EVP & CFO at Comfort Systems USA]

Most of them are scheduled to be delivered in next year and the year after, right? So that is really in its infancy. The true build for so everything that was on the block, everything that was being built, redesign work was done to increase the density of it if you talk to our guys as much as they could. But I don't think we've really started to a material extent, I don't think we've started building the true AI data centers. I think that's yet to come.

[William George, EVP & CFO at Comfort Systems USA]

And I think because of that, it's still being figured out.

[Brian Brophy, Associate Vice President at Stifel Financial]

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

[William George, EVP & CFO at Comfort Systems USA]

So we are getting great payment terms, but we were already getting great payment terms a year and two years ago. And honestly, that's a constant trade off, right? We don't really need money sooner. If you need if you're somebody that has all the money in the world and you there's a wide range of payment terms we'll accept. Generally speaking, they're just very generous payment terms right now.

[William George, EVP & CFO at Comfort Systems USA]

As far as the underlying contractual provisions, as you can imagine at a time when we're this busy, that affords us the opportunity to say no to things. So at the margin, we're doing some of that. There are GCs who have very unreasonable forms. I think that's affecting their ability to get subcontractor. Actually, I know it's they may not know it, but I know it's affecting their ability to get subcontractors and not just with us.

[William George, EVP & CFO at Comfort Systems USA]

But ultimately, the forms that are used in this business have been around for a long time. And almost more important than the words that are in them is like there's a standard of practice. And if you do work over and over with the same people that you trust, that's the most important thing. I would rather have average terms with a great long term partner than a better contract with people I don't know.

[Operator]

Our next question comes from the line of Alex Dwyer of KeyBanc Capital Markets. Your line is now open.

[Alex Dwyer, AVP - Equity Research at KeyBanc Capital Markets]

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

[Brian Lane, CEO, President & Director at Comfort Systems USA]

Alex. Good morning.

[Alex Dwyer, AVP - Equity Research at KeyBanc Capital Markets]

Hi.

[Alex Dwyer, AVP - Equity Research at KeyBanc Capital Markets]

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

[William George, EVP & CFO at Comfort Systems USA]

We would never say that they couldn't. I think our hesitation to predict that they would is we just printed margins that were a couple of hundred basis points higher than we would have thought were possible a year ago. This stuff happens in the real world and we literally we don't know how much it's going to rain, right? We don't know how other people around us you can't put wires in a wall that hasn't been built yet. So we think that the environment is really good.

[William George, EVP & CFO at Comfort Systems USA]

We think that the people we work with are doing a great job of taking the right amount of work. Really, I don't know. Honestly, it's hard for us to say we can maintain a margin as high as we've had, but we looked each other we all looked each other in the eye and said, really, I wouldn't bet against our guys. They're going to keep doing this. But it's not there's not a lot of science to it.

[Brian Lane, CEO, President & Director at Comfort Systems USA]

We'll go for it.

[Alex Dwyer, AVP - Equity Research at KeyBanc Capital Markets]

Okay. Got it. That's helpful. And then I just wanted to ask about how you think the trend in backlog could play out this year like quarterly and like should we expect a similar cadence to 2025 where like 1Q and 4Q are easier to achieve net bookings in the quarter and then it could be tough again this year to sequentially grow the backlog through those heavy summer quarters?

[William George, EVP & CFO at Comfort Systems USA]

Yes. So Brian and I were looking at a schedule this morning where our backlog jumped up two years ago in 2022. The burn was half two years ago in the fourth quarter, what it was in this quarter. So part of what you have going on is we have attained such a high level and we're so busy. And there's a finite amount of sort of human capital, right, hours that can be worked and not kill people.

[William George, EVP & CFO at Comfort Systems USA]

And so our backlog, it's I would take the over on it in general over time on average, but I just think the doubling kind of the crazy ups are there. As far as the seasonality, if you ran Comfort or a company like us for over ten years, eight of the ten years, you're going to see more back net backlog bookings in the first and fourth quarter. In eight of the ten years, you're going to see proportionally less, more burn. It's just the way it is because of what time, space, mass, weather. So I think it's nothing's really changed.

[William George, EVP & CFO at Comfort Systems USA]

I think anybody who is watching our backlog and looking for signs of a slowdown should would be better off listening to us because as we said, there's so much work we're turning away that there really is no people will look at our backlog and they worry about whether we'll have work. And that if you're us looking at what we when we talk to somebody who does the backlog for a big electrical in Texas, that is so far from the world they're living in and the way they're thinking that you wouldn't believe it. It's like, yes.

[Alex Dwyer, AVP - Equity Research at KeyBanc Capital Markets]

Okay, got it. Thanks Bill. And then I guess my last question, I just wanted to kind of ask about your mix of business within the manufacturing portion of your revenue and like as we think about that mix last year versus what's in the backlog and plan for 2025, is there any shift in those like sub end markets between life sciences, chips and food beverage? And then like if we get tariffs in addition to the reshoring theme and the CHIPS Act funding, like how do you think that changes your slate of opportunities going forward at all? Like could it change the mix of new construction versus retrofit projects?

[Alex Dwyer, AVP - Equity Research at KeyBanc Capital Markets]

Or does it not really change that much?

[Brian Lane, CEO, President & Director at Comfort Systems USA]

Yes. No, in terms of the I'll answer the first part of it. The mix is pretty consistent where we were last year with pharma healthcare. We've got a few solar in there, but we have a lot of consumer product usage in there like you got a LEGOLAND job going. So there's a lot of mix of manufacturing that I think is going to increase.

[Brian Lane, CEO, President & Director at Comfort Systems USA]

Steve, these tariffs stick around that we'll be doing. Yes, I

[William George, EVP & CFO at Comfort Systems USA]

mean, it feels like on shoring is really at the beginning.

[William George, EVP & CFO at Comfort Systems USA]

I mean,

[William George, EVP & CFO at Comfort Systems USA]

it's really at the beginning. So there is a push. There's definitely a way sort of a current towards industrial. But then people didn't quit putting mayonnaise on their sandwiches and people still want to feed their dogs dog food and they still and even in the data center world, people sit here and they look at the new compute stuff, but people are still taking pictures and streaming, right? It's not as if there are new incremental sources of demand, but I can't think of one that displaced an already existing source of demand.

[William George, EVP & CFO at Comfort Systems USA]

And that's why you're seeing some of the extraordinary outcomes that you're seeing is and then you put that on top of the fact that over the course of the financial crisis and all the way back to nineeleven and then of course COVID, there was a lot of supply disruption, right? So you have unprecedented demand after twenty years of underinvestment in supply and we're all scrambling to catch up.

[Alex Dwyer, AVP - Equity Research at KeyBanc Capital Markets]

Thanks guys. I'll turn it over there.

[Brian Lane, CEO, President & Director at Comfort Systems USA]

All right. Thanks.

[Operator]

Thank you. We'll wait for our next question. Our next question comes from the line of Kadir Ritchie of Ritchie Capital Group. Your line is now open.

[Khadir Richie, Founder & CIO at Richie Capital Group]

Good morning. Thanks for taking my question. And I hope you can stomach another pipeline question. But with the recent volatility around the AI space with the introduction of DeepSeek and other headlines, It's clear that the market seems to think that or view comfort systems almost is like an AI type stock. And I'm wondering if you feel like that characterization is fair.

[Khadir Richie, Founder & CIO at Richie Capital Group]

I understand the comment about impossible demand in the data center space, but how do you make decisions about taking on more work in that sector versus other opportunities? Is it simply the highest margin per man hour and so you take all you can or is there an approach to balancing the backlog portfolio?

[William George, EVP & CFO at Comfort Systems USA]

So two things I'd say. One, so Comfort is 30 so we're 63% industrial of that 33% is advanced technology and of that a little over two thirds is data center. So Comfort is not a data center company, right? And low 20% of our revenue is data center. But having said that, the reality is how we pick jobs, gross profit per hour worked or really per $100 of labor, right, because not all labor is the same, is the ultimate measure of how attractive a project is from the point of view of sort of profitability and spreadsheet considerations.

[William George, EVP & CFO at Comfort Systems USA]

But today for most of our people, there's a pre qualification process they go through where they say, will this be a good job for my workers? Is there good parking? Does this GC run a good job and keep the field from being muddy? And I mean, because ultimately our workers, we've had them for decades, some of them for multi generational, but they can get they can leave us and get a job instantly. And so our number one consideration honestly is, is this a good job for our people?

[William George, EVP & CFO at Comfort Systems USA]

Are the people they know going to be on it that they like to go to lunch with? Is it with people we know treat people well? The number two consideration is, who are we doing the work for? The owner and especially the intermediaries like the GC and the other people on the job, are they good people that we can trust because we can afford to be picky right now? And then the third consideration is what's the gross profit sort of per hour worked or for the labor that we're limited by and that we're giving up for them.

[William George, EVP & CFO at Comfort Systems USA]

And the good news is those three considerations are not independent. Almost always the best answer to number one and two will be the best answer to three. So the world we're living in is so different than what somebody sitting buying and selling stocks based on their guesses about AI that it's very hard for us to really even answer that question.

[Brian Lane, CEO, President & Director at Comfort Systems USA]

The other part of that curve is we're mechanical and electrical contractors. So our skills whether they're pipefitters, sheet metal guys, plumbers, electricians, we can work in any type of building that you want to build. So it's really transferable. It's not some specialist skill that can only work in one industry. Will, at the end of the day, work in what the market dictates is available?

[Brian Lane, CEO, President & Director at Comfort Systems USA]

Yes,

[Khadir Richie, Founder & CIO at Richie Capital Group]

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

[William George, EVP & CFO at Comfort Systems USA]

Well, before

[William George, EVP & CFO at Comfort Systems USA]

the words artificial intelligence had been mentioned on any conference call on any for any public company in America, there was not an electrician in America that was scrounging around for something to do, right? So the demand's there. Obviously, if the demand becomes frenzied, the pricing gets better. There is so of course, addition, if you have the view anybody who took economics ten, right, basic economics, supply and demand affect the outcomes and if demand wanes, we don't really have a problem. We've been cash flow positive every single year we've ever existed, right.

[William George, EVP & CFO at Comfort Systems USA]

We We've earned money every single year we've ever existed. Some of those years were really bad years, right? They were the year after nineeleven, they were the worst year of COVID. The financial crisis devastated nonresidential building, right? And at some point, it's really not a question that we can be a good company and earn money.

[William George, EVP & CFO at Comfort Systems USA]

But obviously, we should be worth more. If you think reshoring is real, on shoring is real, we are worth more. If you think people actually are going to need data centers, we're worth more. The last thing I want to say about the data center stuff is, our whole experience has been and we've been building data centers since 02/2005, '2 thousand and '6. Our experience is when they find a way to do with less or when they find a way to make more, they just want more.

[William George, EVP & CFO at Comfort Systems USA]

They don't say, okay, well, we have enough compute. Let's draw a line under that and move on to staring at our logo. You know what I mean? They don't the thing is, they want more. And if they find a way to get more, guess what they want after that, more.

[William George, EVP & CFO at Comfort Systems USA]

It's a land grab, right? Yes, that's great. Thank

[Khadir Richie, Founder & CIO at Richie Capital Group]

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

[Brian Lane, CEO, President & Director at Comfort Systems USA]

Thank you. Thank you.

[Operator]

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

[Brian Lane, CEO, President & Director at Comfort Systems USA]

All right. In closing, I really want to thank our amazing employees again. We're very grateful to you. Thank you everyone for joining the call today. We are very excited about the opportunities we're facing in 2025 and look forward to the year.

[Brian Lane, CEO, President & Director at Comfort Systems USA]

Hope everyone has a great weekend and thanks once again.

[Operator]

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

Participants

Executives

• Julie Shaeff, Senior VP & Chief Accounting Officer
• Brian Lane, CEO, President & Director
• William George, EVP & CFO

Analysts

• Brent Thielman, MD & Senior Research Analyst at D.A. Davidson
• Adam Thalhimer, Director of Research at Thompson Davis & Co
• Julio Romero, Equity Analyst at Sidoti & Company, LLC
• Josh Chan, Executive Director - Equity Research Analyst at UBS Group
• Brian Brophy, Associate Vice President at Stifel Financial
• Alex Dwyer, AVP - Equity Research at KeyBanc Capital Markets
• Khadir Richie, Founder & CIO at Richie Capital Group