Good day. Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter 2021 Comfort Systems USA Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker host today, Julie Shaeff Chief Accounting Officer. Please go ahead.

Thanks, Olivia. Good morning. Welcome to Comfort Systems USA's third quarter earnings call. Our comments this morning, as well as our press releases contain forward-looking statements, within the meaning of 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 more detailed listing and commentary concerning our specific risk factors in our most recent Form 10-K and Form 10-Q, as well as in our press release, covering these earnings. A slide presentation has been provided as a companion to our remarks. The presentation is posted on the Investor Relations section of the company's website found at comfortsystemsusa.com. Joining me on the call today are Brian Lane, President and Chief Executive Officer; Trent McKenna, Chief Operating Officer; and Bill George, Chief Financial Officer. Brian will open our remarks.

Okay. Thanks Julie. Good morning, everyone, and thank you for joining us on the call today. We are happy to report a fantastic third quarter. We earned $1.27 per share on revenue of $834 million. Same-store revenue grew by 9% compared to the third quarter of 2020, as work and bookings are returning as COVID challenges decrease. Our backlog was over $1.9 billion this quarter, which is a $270 million same-store increase over this time last year. Our free cash flow continues to be strong, and yesterday we increased our dividend by 8%. Our essential workforce continues to perform at an outstanding level, and we are grateful for their strength and perseverance during these challenging times. During the third quarter, we closed our acquisition of Amteck, which focuses on electrical projects and service in Kentucky, Tennessee and the Carolinas. Amteck brings an exceptional set of capabilities and relationships and a strong reputation in industrial markets, such as food processing. We are thrilled to have them as part of Comfort Systems USA. I will discuss our business and outlook in a few minutes, but first, I'll turn this over to Bill to review our financial performance. Bill?

Thanks, Brian, and hello, everyone. This will be pretty brief. Revenue for the third quarter of 2021 was $834 million, an increase of $120 million or 17% compared to last year; same-store revenue increased by a strong 9%, with the remaining increase resulting from our acquisitions of TEC and Amteck. Gross profit this quarter was $159 million, a $12 million improvement compared to a year ago while gross profit percentage was 19.1% this quarter compared to 20.6% for the third quarter of 2020. Our gross profit percentage related to our Mechanical segment was strong at 20.1% and margins in the Electrical segment have increased significantly compared to last year. SG&A expense for the quarter was $95 million or 11.4% of revenue compared to $91 million or 12.7% of revenue for the third quarter in 2020. On a same-store basis, SG&A was down approximately $2 million, primarily due to tax consulting fees that we incurred in the prior year. Our year-to-date 2021 tax rate was in the expected range at 24.1%. Net income for the third quarter of 2021 was $46 million or $1.27 per share. This compares to net income for the third quarter of 2020 of $50 million or $1.36 per share, as last year included a $0.17 benefit that resulted when we settled tax audits from past years. Excluding that discrete item from last year, our earnings per share increased by 7% compared to the record level of a year ago. For our third quarter, EBITDA was up significantly to $82 million, an increase of 15% over the prior year. And through nine months, our EBITDA is $188 million. Free cash flow in the first nine months was $139 million, as compared to $199 million in 2020. The COVID-induced work slowdown and some temporary tax benefit created unprecedented…

All right. Thanks, Bill. I am going to spend a few minutes discussing our backlog and markets. I will also comment on our outlook for the remainder of 2021 and full year 2022. Backlog at the end of the third quarter of 2021 was $1.94 billion. Our sequential same-store backlog was up slightly, which is great by the end of the third quarter due to the heavy backlog burn this time of the year. Year-over-year our backlog is up by over $500 million or 36%. Same-store backlog increased by 19%, a broad base increase. We believe that the impact on activity levels related to COVID-19 have now stabilized and we expect to continue seeing good trends in work availability in the coming quarters. Industrial customers were 43% of total revenue in the first nine months of 2021. We think this sector which includes technology, life sciences and food processing will remain strong for us, as Industrial is heavily represented in new backlog as well as in our recent acquisitions. Institutional markets, which include education health care and government are strong and represented 33% of our revenue. The commercial sector is also doing well but without changing mix it is now a smaller part of our business at about 24% of revenue. Year-to-date, construction was 77% of our revenue with 46% from construction projects for new buildings and 31% from construction projects in existing buildings. Service was very strong this quarter and our increasing service revenue was 23% of our year-to-date revenue with service projects providing 9% of revenue and pure service including hourly work providing 14% of revenue. Year-to-date service revenue was up by 11%. And with our continuing strong margins our service earnings were up by a similar amount. Service has rebounded as buildings are open and profitable small…

Thank you. [Operator Instructions] Our first question is coming from the line of Sean Eastman with KeyBanc. Your line is open.

You there Sean?

Please check your mute button. And next question in queue coming from the line of Adam Thalhimer with Thompson Davis. Your line is open.

Hey good morning guys. Congrats on a great quarter.

Hey, thanks Adam. Good morning.

Adam you're not speechless.

And there is no echo anymore.

There you go.

Is it too early to have an outlook on just core non-res growth next year?

Core non-res. Yeah, I mean I would say that we have a good opportunity to achieve better growth than we've achieved in the last several years. I think we would expect mid-single digit growth maybe with a little upside. We just had 9% but that was also -- a year ago we had some COVID effect still even though our third quarter last year was surprisingly good mid-single digits…

Yeah, I'm -- we're optimistic going into next year, if you look at how much our service has grown, the strength of our backlog and still there's a lot of opportunities we are looking at. So 2022 will be in good shape.

What are you seeing on the M&A front?

So we keep saying that we'll probably take a pause, after we do these deals that are big for us. And I think that that's less likely now. There are some people we're talking to. So we're very mindful of changes in the capital gains rate. So I think we have an opportunity, to do some transaction, a transaction or some transactions in the next few months. I will say that we're pretty much only doing relationship deals right now, people we've talked to for a long time, who now have an interest. I think maybe it's a good time to sell with tax changes coming. We're not engaging in processes or bidding for companies. They're very -- it's a very frothy market for people chasing assets that are -- the kind of assets that can be put in an auction and we're not doing that.

Yes. Adam, as you know Bill, does all of our deals. And if we continue on what's happened in the last 10 years, it will be good for us.

Okay. And then lastly, you had a nice uptick in backlog within Electrical. Can you talk a little -- was that, Walker? Can you talk a little bit about the outlook for Walker?

So I'll answer that one. I mean, Walker has done a terrific job this year. Basically, it will double their margins. They are in Texas and there's plenty of opportunities in Texas particularly Dallas, San Antonio and now Houston has picked up pretty steadily. So I think going forward the combination of their backlog and opportunities I think Walker is well poised to have a very good end of this year and a good 2022.

Okay. Thanks, guys. I’ll turn it over.

Thanks, Adam.

Our next question coming from the line of Brent Thielman with D.A. Davidson. Your line is open.

Hey. Thank you. Good morning.

Good morning, Brent.

The service work looks like sort of collectively grew 10% this quarter. Brian, I just want to get your thoughts on whether you think you can sustain the sort of growth rates in that side of the business going forward?

One thing, I would keep in mind remember service was kind of cut -- shut down a bit in the middle of last year. So this is a combination of a little bit of bounce back and really good growth.

Yes. I think Brent is -- you've been with us a long time and we've continued to invest in service both on the sales front and execution. So we will continue to grow that business pretty steadily mid-single digit a little bit more as we go forward. So that is a real source of strength now that we're consistently getting performance from.

Brian any -- or Bill any thoughts on allocating more capital then you typically have to building up that business or continue as is?

I think we're going to continue it as is. So that we make sure that we keep our capability in line with customer expectations. We don't want to disappoint anyone. So we believe slow and steady growth make sure we keep our employees and our customers happy we can deliver a top shelf service to them.

Right. And there's two ways we deploy capital. One is, investments in the existing business. We don't leave any opportunity behind to invest in the existing business. It's a very capital-light business but we do buy capital we've really invested in like handheld various technologies. And we also really invest in training like we have had -- we've been on -- we've just really been into training in all parts of our business and maybe especially service for years now. So we don't really -- there's not a dollar I know if we could invest that we don't invest. When it comes to acquisitions we really just buy the best available company and we love it. It is definitely a plus if they have a nice service business. But if they can also go build complex food plants like Amteck we love that too. We just keep -- try to keep doing what works. And we love, we love great workforces complex capabilities geographies where you're really, people have to drive a long way to find somebody who can do what you can do. Those are the kind of things we love.

Okay. That's great. And I think this is kind of a follow-up to Adam's question, but you talked a lot about the industrial vertical and it's obviously, been fantastic for you. I just want to get a pulse on some of these other markets you're in and I know they're shrinking as a percentage of the pie, but looking at this sector this quarter areas like education were down a couple of other verticals in there that were down. Do you think, we'll be in a place in 2022 where some of these areas see a more material turn?

Yeah. I just think, it's down percentage but they're actually growing in real dollars. Education has been pretty consistent for us, particularly at the university level as you know. We got some K-12 work, and I think you'll get some IQ opportunities as we go on. Medical's picked up for us. We got some good growth in our backlog in medical. And in commercial buildings, it's more on the service and tenant fit-out type work. So the other markets a good slight growth with industrial obviously with the most growth opportunity. Bill?

I agree.

Okay. Just the last one I guess is just on the electrical margins, I mean, you've seen some real stability here this year in terms of what you reported there. And any thoughts kind of going forward these are really – sustain level?

Yeah. So this is an opportunity for Comfort Systems, right? So Walker, have very significant improvement. But keep in mind, we've also bought some really good electrical companies, and they are now in that segment, and they bring in very, very good margins. So it's probably – it's unlikely probably that, we will get to overall electrical margins that are as high as our overall mechanical margins on average, over long periods of time in part because of the service component is a little bigger in mechanical. But I really like our opportunity to continue to pull a little bit of the improvement out of electrical. Remember, what Brian said about Walker, Walker has got good opportunities, and that's really true in all of our businesses, and it's true in electrical and they probably – as a segment, it probably has a little more room to get better.

Yeah, Brent. Just – I mean, we're really happy with the electrical business and what we see the future of. I think that's going to be a really strong element for Comfort Systems on a long-term basis.

Okay. Great. Thank you, guys.

All right. Thanks.

[Operator Instructions] Our next question coming from the line of Julio Romero with Sidoti. Your line is open.

Hey, good morning. Thanks for taking the questions.

Hey, good morning.

I wanted to ask about the order trends. They've obviously trended very nicely. We've seen sequential growth for four straight quarters. How do you expect to see orders trend over the next couple of quarters? And are you at this point kind of turning down any projects at all?

Our booking season usually is the winter, and that's not changed. So we have – I think as far as the timing we never – we can't really control when the pieces of the paper gets finalized. But over the next six months, I think we have – the bookings should continue to get better, the next sort of the net bookings and pricing is good in those bookings. We are – when we're busy we're picky. And also right now, there are some places where we're not pursuing work where there might be a vaccine mandate, although you were hearing more about that 30 days ago than you are now. But in part, we're doing that, because we can, right?

Yeah. Julio, just to follow-on that, I think the discipline we're maintaining on no go, go no go what our projects to take. I think the operating folks are really doing a terrific job, about what opportunities to pursue and maybe wants to pass over. So I'm really pleased with how that's going.

Got it. Yeah, being picky is certainly a good thing in this market. And I guess, you mentioned not being as attractive to areas where there may be some vaccine mandates. Are you seeing any other kind of bottlenecks on the labor side vaccines, or any other bottleneck that you may be seeing?

So there are places with certain types of customers we're talking a lot about vaccine mandates, especially 30 or 60 days ago. And we are making good progress in seeing more of our workforce vaccinated, but our workforce is they're in a cohort that has lower vaccination rates than the national average. And so when we look at work that requires a vaccine, we look at what we have in the way of availability and which -- what our workforce looks like and we decide whether that's a good project to pursue and we take that also -- have to take that into account in our pricing. As far as other bottlenecks our bottleneck is always labor right Brian?

Yes, it's always a labor Julio and we -- luckily we have a lot of folks working here and they're managing across companies as best we're constantly in the market looking for good people. So, we're managing it like we've done for 50 years.

By the way just about vaccine mandates this is not a Comfort Systems' issue, right? This is a U.S. United States issue if the federal government when they promulgate those regulations decides to sit down somewhere between 15% and 40% of our blue-collar workforce that's going to have -- that's going to affect the nation. Comfort Systems actually we're well positioned for that. 25% of our revenue is in Texas. Our next biggest state is Florida. So these are -- we think we're actually very well positioned for the worst case of that compared to anybody you could compare it to that we know of. But having said that it does feel like it's trending towards sort of there are more people getting vaccinated and there's customers are sort of looking at different ways of keeping their job sites safe.

Got it. So I guess any industry pain points where everyone's feeling labor tightness might in some way play to your advantage on a competitive balance?

It happened in the past.

Yes, it happened in the past. And Julio we're a good employer. We're good to work. So we're very attractive to folks out there that want to do a mechanical electrical plumbing type work.

Understood. Congrats on a nice quarter and best of luck in 4Q.

Thank you very much.

And our next question coming from the line of Sean Eastman with KeyBanc. Your line is open.

Can you guys hear me this time?

Yes.

Just wanted to keep you on your toes there. So just out of curiosity what -- do you have a sense for the vaccination rate of Comfort Systems workforce?

That's really -- the thing about Comfort is there isn't a workforce for Comfort Systems. There's workforces in Massachusetts and there's workforces in Florida. And so I would say that overall I'd say, we're definitely above our -- people think our industry is about 50% vaccinated. In my opinion we're above the industry average for that. We've done a lot to try to make that happen. And also sometimes people don't necessarily -- they can be vaccinated and not reported, right? There are times when you're in a melee where you don't want to admit that you're vaccinated. So It's hard to measure.

But in terms of that, Sean we're making it really easy for folks to get vaccinated that are working here.

Okay. Interesting. And then a higher level one for me this -- over this past quarter we saw a few of the big OEMs highlight these huge addressable market opportunities surrounding energy efficiency that it seems to be in addition to the IAQ solutions demand. And just considering all these net zero pledges coming out of both the private sector and the public sector, I wondered if that's something Comfort Systems is positioning around?

I actually -- we don't usually sort of talk about huge activities. But our guys -- we're in a lot of geographies that with the right expertise and capabilities to benefit from some of the trends that this is driving for example, electric vehicles. Historically Comfort is not involved in the automobile industry. But if you need to build batteries, if you need sort of sophisticated electronics, an awful lot of that is right in our wheelhouse and it's right in the geographies that we're in. And we're actually -- like I've been in planning meetings lately just at the subsidiaries where they are starting to the opportunities like that with code names on their boards. And so, I do think anything they give the United States a reason to reconfigure things and to redeploy things we're the guys who can help you do that.

And Sean, this is in theory. We are actually working on a project right now for the maker of electric batteries so.

It's real life. We got real work with revenue and profit. So you put that on top of life sciences which are good. And then, various other types of technology -- we're in technology and a lot of this is technology-driven. So we think, we're actually pretty -- we think they are good. In addition to internal air quality we think there are other good things right in the heart of our complex, sort of industrial expertise, that are being that have good prospects because of these changes.

And what's great about our workforce is we're very adaptable to work on multi-type facility, Sean. It's a real strength of ours.

Okay. That's really interesting. And I wanted to check in on the modular business as well. I mean, I felt like the longer-term play there was helping to address the sort of structural labor shortage. Obviously, that seems to be quite an acute situation right now. How is that playing out for you guys? I just wondered, maybe on the flip side of that, that business could be a little more susceptible to some of the capacity constraints just around shipping and things like that, but wanted to check back in on that business.

Yeah. I would say we definitely have had to put more money in just shipping and quotes for shipping.

Yeah.

A lot of what we sell is -- some of the biggest stuff is, sort of the buyer ships it. Also, it's an opportunity to improve your labor, utilization on certain types of projects. It's 10% of revenue. It was a nice. It was very profitable this quarter. It was you'd like -- I might have highlighted how well it did this quarter, but pretty much the whole business did well. You have been highlighting everything but we had a really nice quarter in off-site construction and modular. And we feel like we're doing a good job beginning to find new customers and help them understand how this can help them. But this is the kind of -- this is a strategic thing that you do with five-year plans not two quarter plans. And we've got some really, really good people working together between our two big off-site construction things. And they've got a good plan for the coming years. But I mean, we're excited about it.

Yeah. And that into the business Sean, we got great leadership locally terrific workforce, they're applying technology, advancements in welding, what they're doing is tremendously exciting to me. I love going there. And I think they'll just keep getting better and better.

Okay. Good update there. And then, you guys are clearly boasting about the success of the acquisition program here on this call, I think rightfully so. We kind of touched on how the program has sort of helped position you guys in these growth end markets where you've got these secular drivers, but to the extent you can comment if you just look back over the last five years or even 10 years, I mean, what kind of cash returns have you seen from the acquisition program?

I'm going to let Bill, answer that one.

That's embarrassing answer. No. The -- it's been fantastic. Like these companies -- so we haven't bought a company of any size since 2008 that hasn't met on average the projections we have today, we bought it. And some of them have exceeded those projections by multiples of what we planned on getting when we bought them. They all they actually do better they also -- they help our cash flow much more than they help our earnings, because there's so much amortization in the first few years from these companies. And that's one of the reasons why…

Have we loose Sean?

I don't know.

Now, I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Brian Lane, for any closing remarks.

All right. Thank you very much. And in closing, I want to again, thank our hard working employees. They're doing just a terrific job. We are glad we'll be seeing many of you again in person soon. But in the meanwhile, please be safe. Enjoy the rest of your day. And thank you very much.

Thanks everyone.

Ladies and gentlemen, that ends our conference for today. Thank you for your participation. You may now disconnect.