Comfort Systems USA, Inc. (FIX) Q3 2026 Earnings Call Transcript

Operator: Good day, and thank you for standing by. Welcome to the Comfort Systems USA Third Quarter 26 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press *11 on your telephone. You will then hear an 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 speaker today, Julie S. Shaeff, Chief Accounting Officer. Ma'am, please go ahead.

Julie S. Shaeff: Thanks, Michelle. Good morning. Welcome to Comfort Systems USA's third quarter 26 earnings call. Our comments today as well as our press releases contain forward-looking statements within the meaning of the applicable securities laws and regulations. What we will say today is based upon the current plans and expectations of Comfort Systems USA. Those plans and expectations include risks and uncertainties that might cause actual future activities and results of our operations to be materially different from those set forth in our comments. You can read a detailed listing and commentary concerning our specific risk factors in our most recent Form 10-Ks and Form 10 Q as well as in our press release covering these earnings. A slide presentation is provided as a companion to our remarks and is posted on the Investor Relations section of the company's website found at comfortsystemsusa.com. Joining me on the call today are Brian E. Lane, chief executive officer Trent T. McKenna, president and Bill George, chief financial officer. Brian will open our remarks.

Brian E. Lane: All right. Thanks, Julie. Good morning, and thank you for joining us for the call today. Our amazing teams across the country continue to deliver excellent results. for our customers. They have delivered results that exceed even our recent record results. We earned $13.91 per share this quarter, which is $5.66 more than we earned in the same quarter last year. Our mechanical business had an extraordinary increase in activity levels and profitability. And our Electrical segment once again achieved spectacular organic revenue growth at very high margins. Construction is driving most of our results but service revenue and profit also grew by double digit percentages. Bookings were strong, and our backlog at the end of the quarter grew to a new high of $17.8 billion. As a result of continuing strong demand, we achieved an 8th consecutive sequential backlog increase. We continue to book work with good margins and good working conditions for our valuable people. And we enter the fourth quarter of 26 with $8.4 billion more in backlog than last year at this time. I am happy to announce the acquisition of 2 companies on August 1st, Lewis Electrical located in Melbourne, Florida and Neopod, a module company for the health care industry based in New Braunfels, Texas. We are thrilled to have these 2 companies join the Comfort Systems USA family of companies and expect that they will contribute over $100 million in annual revenue at good margins. Today, we increased our quarterly dividend by $0.10 to $1 per share and we actively purchased shares during the quarter. With solid bookings and great demand, we expect continuing growth and strong results for the remainder of 2026 and into 2027. In a moment, Trent and Bill will discuss our results and outlook, but I want to first discuss another announcement that we made yesterday. Last night, we announced Bill's decision to retire from the company after 30 years of amazing service. Bill helped found the company in 2 thousand and has led the financial strategy of the company since 2005. As importantly, since 2008, Bill has led the extraordinarily successful acquisition efforts of the company. And since 2011, Bill has also worked with many of our companies in an operational role. I am deeply grateful to Bill for his steady leadership thoughtful advice, and the integrity that he has brought to Comfort Systems USA every day. He has been a great partner to me. I, along with the rest of the leadership team, wish Bill the absolute best in his well deserved retirement. Bill will be transitioning from the CFO role shortly after we report our 2026 results and he will then continue with the company for a period to transition his other roles. We also announced that Julie will be promoted to CFO as Bill's successor and I also want to congratulate her. Julie has been an integral member of our finance and accounting team for many years. And I have the utmost confidence that she is the perfect person to lead the organization through Bill's transition. Before Bill discusses our results, I have asked him to also give his thoughts about the upcoming changes. Bill?

William George: Thanks, Brian. it is a poignant day for me, and I do want to take just a few minutes and explain why I am utterly confident that Comfort Systems USA will continue to have the best management team in our industry long after I am gone. So, over 30 years, I have done a lot of things at Comfort. Legal, financial, acquisitions, operations, The main 3 things I do today are financial, operational, and acquisitions. Know, the great news is that in the financial area, our depth is extraordinary. it is. frankly, it is amazing. Right down the line starting with Julie, we are stacked with unbelievable talent. In our financial area. And, honestly, the day after I leave this role, Comfort Systems will still have the best CFO in construction and the best finance department in construction. You guys know Julie I have been hearing from people for the last 24 hours how--and relieved, both internal and external, how happy and relieved they are that Julie will be our next CFO. Operations is the part that I will miss the most, but the good news is that our business is not run in Houston. it is not even close to being run in Houston. it is run in the field. And as long as we maintain our culture and stay out of the way of the great companies we have, will always be fine. So I wanted to spend just a little bit more time commenting on acquisitions. Every acquisition we have ever done at Comfort Systems USA was done by a team of people. And every company we have ever bought we pick companies. We certainly qualify but we do not pick companies. They pick us. We give them unlimited time to do--and unlimited access to do due diligence on us. And the reason that we continually win in the acquisition area frequently buying companies at lower prices than other people are offering them. Is because we have worked so hard to make Comfort Systems the best place on planet Earth for somebody who has made their life's work building a great contractor a home for their legacy. And if we continue doing that, we will continue winning because that is why we win in acquisition. And after I leave, we will continue to have a great team. We have a vice president of acquisitions who was carefully selected as a person with the right judgment and temperament to sit in the middle of the team and facilitate things. he is somebody who will not get in the way of Comfort's message, which is all I have ever tried to do. The people who do our acquisitions include Brian E. Lane. They include our CEO, our president, our chief operating officer, our regional leaders, Our head of innovation is very important in acquisitions, guy named Briston Blair. But most important, the thing that we. Makes us win in acquisitions is our field leadership. Always involved in the acquisitions that we do. When we companies where there is overlap, we face that and solve that before we buy a company. We do not have mysteries, and we will figure things out later. I think we will continue to do that. So I think Comfort Systems acquisitions is on a great roll. I think that will continue. I think we will continue to be a trustworthy disciplined company that does acquisitions with conviction. Above all, will be patient. You know, I would say the key to our acquisition program is that we refuse to be hurried We are fast, actually, and we are. When we are ready to go, we go. But we never have to hurry. So I am very, very confident about the future of acquisitions at Comfort Systems. And I just want to say 1 more thing about Comfort. Which is how great comfort is and why I believe it will stay great, and that is our people and our culture. This company is filled from top to bottom with amazing people. And I do not think there is anybody who understands that as well as I do, and there is a lot of people who really understand it. In Houston, every 1 of our crucial functions is led by a great leader, TAC, internal audit, risk management, treasury, insurance, every 1 of them, people you know, most people on this call will never meet the--the great people we have, people with names like Adam and Amy and Anna and Barbara and Byron and Elvira and George, Eli, Jay, Jordan, Julie, Judy, Michael, Wayne, and more. I could not possibly name them all. The unbelievable group of people with very long tenures at the company, very, very dedicated to our company, and very, very dedicated to its culture. And then we have perhaps even surpassing that, at our subsidiaries, at our companies in all of these states. Texas, North Carolina, New York, Florida, South Carolina, Kentucky. Did I mention Texas? We have unbelievable groups of people who have pulled together to create something that is unmatched in their markets. And that culture has led to the staying power that we have in all our markets led to us making money every year of our existence, just having free cash flow every year of our existence, to us being the best positioned when markets became great, to really take advantage of it, it is that everything I have just described is what created the great results that I am gonna review right now. So that is revenue for the third quarter of 26 was $3.8 billion, an increase of $1.3 billion or 54% compared to last year. Electrical segment revenue grew by 85%, and mechanical revenue grew by 43% Through 9 months, our same store revenue increased 47%, and we expect full year same store revenue will also be in the mid-40% range. We estimate that our same store full year 2027 revenue will grow in the mid-20% range. Gross profit was $934 million for the third quarter 26, $327 million higher than 1 year ago. Our gross profit percentage remained consistent, at a strong 24.8% this quarter. Quarterly gross profit percentage in our Mechanical segment increased to 25.1% this quarter, compared to 24.3% last year. Despite electrical segment revenue growth of over 80%, margins in our electrical segment slipped to 24.3% this quarter, as compared to 26.2% in the third quarter of 25. Last year, we noted that our electrical results were positively impacted in the third quarter by discrete gains, including when a customer emerged from bankruptcy. Those gains improved Electrical segment margins last year by approximately 1.8%, and without that effect, electrical margins were roughly flat. We currently expect that 2027 gross profit margins are likely to continue in the strong ranges that we have achieved in average over recent quarters. SG&A expense for the quarter was $314 million or 8.3% of revenue, compared to $230 million or 9.4% of revenue in the third quarter of 25. And we continue to invest to support our extraordinary growth. Our operating income increased by 65% from last year, from $379 million in the third quarter of 25 to $625 million for the third quarter of 26. Our operating income percentage increased to 16.6% this quarter from 15.5% in the prior year. Our year to date tax rate was 23%, and we expect our tax rate to continue to be around 23% for the rest of 2026. And in 2027. After considering all these factors, net income for the third quarter of 26 was $489 million or $0.03 $13.91 per share. As compared to net income for the third quarter of 25 of $292 million or $8.25 per share. Thanks to great execution by our people. EBITDA increased by 61% to $668 million this quarter from a strong $400 million in the third quarter of 25. Our trailing 12 month EBITDA is now approximately $2.3 billion Free cash flow for the third quarter of 26 was $86 million and year to date, our free cash--our cash flow is roughly $2 billion In addition to strong earnings, we benefited from advantageous payment terms, and favorable collections from large technology customers. Our cash flow this quarter was also higher due to $166 million in income tax payments that we were able to defer until the fourth quarter of this year. In addition to the modular expansions that are underway, we invested over $100 million in CapEx to expand prefabrication facilities for our traditional construction business. We estimate that full year CapEx will be 4% to 5% of revenue and we are likely to continue to incur CapEx at elevated levels during the first half of 27. We actively purchased our shares this quarter, and year to date, we have returned $349 million to our shareholders, and we have retired approximately 212 thousand shares. So once again, expressing my gratitude to the people I mentioned earlier and to the people on this call who have supported us for so long, I am going to turn the time over to Trent. Trent?

Trent T. McKenna: Thanks, Bill. And before I start, I just want to thank you for the time I have been able to work with you over the last 22 years. And for taking the taking the chance and hiring me back 22 years ago. I appreciate it. So I am going to discuss our operations and outlook. Our backlog at the end of the third quarter jumped to a record $17.8 billion since last year. At this time, our backlog has increased by $8.4 billion or 90%. On a sequential basis, backlog increased by $3.8 billion or 27%. Third quarter bookings were especially strong in the technology sector both in our traditional construction business as well as the modular part of our business. Industrial customers accounted for 76% of total revenue in the first 9 months of 2026 and they are major drivers of pipeline and backlog. Technology, which is included in industrial, was 59% of our revenue, a strong increase from 42% in the prior year. Our modular operations continue to grow with our established customers and we are building products for new customers, including a frontier lab and colo providers. Although we have not yet entered new arrangements that we would consider programmatic, we continue to explore deeper partnerships with these and other potential strategic partners. Institutional markets, include education, health care, and government, remain strong and represent 16% of our revenue. And the commercial sector provided about 8% of revenue Most of our service revenue is for commercial customers. Overall, our companies continue to execute at high margins. However, this quarter, we experienced a higher proportion of equipment and materials in our cost mix that augmented our sequential revenue growth but dampened sequential margins. Construction accounted for 90% of our revenue, with projects for new buildings representing 75% and existing building construction 15%. We include modular in new building construction and year to date, modular was 17% of our revenue. We remain on track to have over 4 million square feet of space in our modular businesses by the end of 26 and with ongoing orders and investments to meet that demand, we expect to have approximately 6 million square feet of capacity by the end of 27. We also continue to evaluate further investments based on continuing strong demand and customer needs. Service revenue was higher by 13% this quarter but with faster growth in construction, service represents 10% of total revenue. Service profitability was stronger than ever this quarter, and service remains a growing and reliable source of profit and cash flow. I cannot say enough about the amazing team of craft professionals that we have working hard for our customers every single day. Thanks to the teams that are working across the country we are optimistic about our future. I want to close by joining Brian and Bill in thanking our over 25 thousand employees for their hard work and dedication And I will now turn it back over to Michelle for questions.

Operator: Thank you. Thank you. As a reminder, to ask a question at this time, please press *11 on your telephone. Our first question is going to come from the line of Adam Thalhimer with Thompson Davis. Your line is open. Please go ahead.

Adam Thalhimer: Hey, good morning, guys. Congrats on another great quarter. Julie, congrats on your promotion. And, Bill, congrats to you on your retirement. You will be missed, Bill.

Trent T. McKenna: Hey. I want to start with you on the sequential margin decline. Can you give a little bit more color on that? And how should we think about that as we look ahead to margins in the next few quarters? Yeah, I will jump in, and then I am sure Bill will want to add a little bit too. But, you know, sequentially, you know, we just carried a higher, proportion of equipment and materials in our cost mix this quarter. So that is going to add revenue, but equipment does not carry the margin. Our labor does. So the percentage comes down even as the dollars go up. So but, anyway, the way I think about it, I would be careful about focusing on 1 quarter. We have always kind of just--some of this is a little bit depending on what the mix is, and that is what we experienced in the prior quarter.

William George: Yeah. And there are other things that contributed to the slight decline. 1 of the things that happens is we do acquisitions, we have purchase adjustments, and certain of those purchase adjustments relate to the changes in the WIP schedule for jobs that were ongoing at the time we closed. Because of that, those purchase adjustments roll through our costs. And those adjustments were, like, $12 million higher in the third than they were in the second quarter. So that was a straight hit to margins. We also have 1 large company in electrical. it is over half of our electrical segment. That company had gross margins in the thirties. In the second quarter, and their gross margins were still unfathomably high. In the third quarter and above average. For our company, but they were not in the thirties. So we just--there are discrete things that happened. What happened, I think, the business has never been better. The other thing is when you see this kind of a jump in revenue, like, percent organic revenue growth in the electrical, a couple of things. 1, we got a big denominator for your fraction, but you also know that we are early in a lot of jobs. And we do not pull out high margins early in jobs. Right? We just wait and we keep contingency. We wait and see how they go. So I cannot-- I do not think there is anything but good news in this quarter, Adam.

Adam Thalhimer: And then, Bill, just to pull on that thread a little bit. When you say we are early in jobs, when should we think about the portfolio maturing a little bit?

William George: You know, we have reached a point today where it is really hard to answer that question because some of these jobs are multiyear. But I will say, you begin to see profit changes when you are 40, 60, 70% complete. These big jobs. You know, the way that you recognize revenue in our industry is you estimate the remaining cost. it is going to take you to finish a contractual obligation. Early in a job, you do not know what is gonna happen. You do not know how much it is gonna rain. You do not know what the people who are working next to you as other subcontractors are gonna do. So companies that stay in business they keep money in the for the things they do not know. As you get deeper and deeper into those jobs, you begin to you begin to get a better view. And for us, historically, we have had gain on jobs every year of our existence, and they have been bigger than ever lately. So I would say this quarter, definitely early in jobs. I would say next quarter will be on average early in jobs, although there is always closeouts in fourth quarters to some extent just because of the nature of years ending and what customers want you to do. So I guess it is hard to say. I think we will get back to average first half of next year.

Adam Thalhimer: Okay. And then, obviously, unbelievable awards in the quarter. In terms of which driving that, would you say that is your traditional data center customers, or there is some new customers starting to creep in?

Trent T. McKenna: You know, I mean, they are definitely new customers. creeping in, and demand is just very strong. I mean, our customers. I think part of it is our customers are committing earlier. And for larger scopes because they know that capacity like ours is scarce. right now. And we continue to be really selective what we are looking at So, yeah, it is a. You know, it is kind of all of the above. it is a market right now where the governor is not the man. the governor's really just labor. The ability to be able to get the labor to the work. And, you know, our customers realize that so they are wanting to lock up our capacity. that is why you see what the backlog's doing.

Brian E. Lane: And you know what, Adam? it is a real tribute to the folks out there and the quality of work they are doing that we are getting this much repeat business from very sophisticated customers. Really tip your hat to the folks on what they are producing.

Adam Thalhimer: Thanks, guys.

Trent T. McKenna: Alright. See you.

Operator: Thank you. And our next question is going to come from the line of Adam Bubes with Goldman Sachs. Your line is open. Please go ahead.

Adam Bubes: Hi, good morning. You talked about building some modular products for new customers, including frontier lab and colo providers. You just the 6 million square feet of capacity you expect by 2027, is the incremental 1 million square feet versus what you targeted by midyear. Is that related to Frontier Labs or new colos? Or is that primarily your 2 hyperscaler customers? And then can you just expand on the engagement, those conversations with the frontier lab and colos, what are they asking you in terms of scope of work, potential output?

Trent T. McKenna: Yeah. So the so the answer to this, the build out that we just talked about to $6 million is based on our current programmatic build outs with the customers that we already have. And, you know, on the new customer front, yes, we are building products right, for frontier lab and colocation providers. And that is real work, and we are proud of it. But we have not yet entered agreements with them that we would call programmatic, and we are not gonna call them that until we believe they are programmatic. Right? So the build out that we have announced is all for existing capacity that is, with our current customer base in Modular.

William George: I might--and you might you might--if you were. If you are living in the paradigm over the last 30 years, like I sometimes do, you might say, oh, they have not yet sold. Business to these people. The reality is we have not yet reached terms where we are willing to accept business from these people. Right now, you know, 1 of the things that is front and center for us is the ability to pay. Right? So if we do something programmatic--typically, our programmatic people have made 5 year volume commitments to us, and then we have gone out and spent large amounts of CapEx to build space that is going to primarily build their product. And I think not just in not just in Modular, but across our business. We have a long history and a long set of experience that really, really takes into account the financial strength of our counterparties. And not that these people do not have financial strength because they do. But we do not. We think there are various considerations as you compare the customers that we do work for.

Trent T. McKenna: 1 other thing too, and I am sure I am not telling you anything you have not already, you know, realized but module is 17% of our revenue. it is growing staying 17% because the rest of our business is also seeing really great demand as well.

Adam Bubes: Got it. All super clear. And then, Bill, you referenced the projects in sort of earlier stages of completion if you look at catch up adjustments, the impact on revenues this quarter, I think it stepped down to 4.5% from closer to 8% of revenues in the first half of the year. Am I thinking about this right? Because if you kind of strip those impacts out, it looks like underlying gross margins actually continue to increase sequentially. Is that the right way to think about core execution? And does that give you confidence based baseline margins can continue to expand as new projects mature?

William George: Well, I was with you all the way to the last sentence because we do not. We do not we do not represent that margins will go up in the future. We do say. We do know that things that are have been driving them up are still apparent for us. And if anything, they are at least as strong as ever. I will say, every. What you said plus things I can see that nobody could see unless they were sitting in Julie's or I's. Or Michael's seat, such as this point about the mix in our cost that. Trent mentioned of a higher part of our cost by a couple percentage points, our cost of goods sold has more material and equipment passing through it. there is nobody who runs a business for us. Who worries about their return on wire. They worry about their return on electricians and plumbers. And our gross profit per hour worked is continues to get better. So I agree And more. Trent.

Adam Bubes: Thanks so much, and congrats, Bill and Julie.

Operator: Thanks. Thank you. And 1 moment for our next question. Our next question will come from the line of Sangeetha Jain with KeyBanc. Your line is open. Please go ahead.

Sangita Jain: Thank you. Good morning. Congratulations, Bill, and congratulations, Julie. So I just wanna ask on the mechanical backlog. Which saw a more meaningful jump than the electrical backlog. And I was wondering if you could break down the makeup of that, whether it may be modular and traditional business.

William George: You know, backlog's really lumpy. I do not think there is any different trend between the 2. I just think in any given quarter, 1 might book more. 1 might book less. Well, 1 might book vastly more and the other might book even more vastly more the way things are going. But at some point, I do not think there is any differential there. I think all of any of our. Of our 40 of. Let's say we have 40 businesses, 20 or highly exposed. To the super cycle. Those people have more work than they can do. They are they are choosing how much they take. You know, it is really astonishing that our backlog went up this much in summer months.

Brian E. Lane: Yeah.

William George: I think about the burn. Look at our revenue. This is a really, really special. that is a really, really crazy amount of bookings.

Brian E. Lane: And I will say what is also crazy about it is that Brian E. Lane let. Approved it. Brian E. Lane Brian E. Lane gets, you know, Brian E. Lane, Trent get on calls for the biggest jobs, and they talk through you know, what are we doing to make sure we are safe. We have a whole program for large projects we monitor them even more closely. By the way, we are not kidding ourselves that anybody in Houston is performing anything, but we did really try to stay on top of it.

William George: I do not think we. I. Our backlog's the best it is ever been, Brian.

Brian E. Lane: Best I have ever seen to fill, and the activity level out there is as strong as I have ever seen it.

William George: Yeah.

Sangita Jain: Alright. So then can I ask a follow-up on this? On backlog? Given that you are booking, it seems larger projects, how should we think about the duration of that backlog I know historically, it is been under a year, but can you tell us how that has changed in recent quarters?

Brian E. Lane: Yeah. I mean, I think if you look at the backlog, we are winning now. We are obviously winning larger projects, and I think the time frame is probably pushed out to 18 to 24 months. As opposed to 10 years ago, 9 months, was the best look see we had for sure. But the size of these jobs, the duration of them, where they are, has extended the backlog. To roughly 18 to 24 months. I think Sangeeta would be a good framework.

Sangita Jain: Got it. Thank you, Brian.

William George: Yeah. I want. And. Go ahead.

Trent T. McKenna: No. I was just gonna say, Sangeetha, 1 way to look at is just that when I look at the backlog right now, what it did in the quarter, right, is demand is just you know, for what our people do remains well. In excess of what the industry can actually deliver, and we are being able and we are being able to do and we are being asked to do and deliver more of it, than ever before. So that is that is what I really take away from how strong the backlog was in this quarter.

Sangita Jain: Got it. Thank you, Trent.

Operator: Thank you. And 1 moment for our next question. Our next question will come from the line of Brent Edward Thielman with Oppenheimer and Co. Your line is open. Please go ahead.

Brent Thielman: Hey. Thank you, Bill, Julie. Course, congrats to both. Trent career here, Bill. I guess, you want to pick up maybe, Bill, where you were talking a little bit on comfort focused on you know, quality of customers, so to speak. Obviously, data center, balance sheets, financing is a big topic. In the market. Maybe if you could talk us through how you are how you look at that, your operations look at that, how corporate looks at and scrutinizes those customers. And I guess, especially with regard to the pipeline of new potential projects, it sounds very healthy. I am assuming that includes companies with you know, available financing to push this through. If you could just talk to that.

William George: that is very textured. So you have the ultimate customer, but outside of modular. And I know we are. You. This came up in the context of modular. But outside of Modular, the payment obligation is actually typically coming from a large national GC. Right? And then in Modular, you have you know, we do get mobilization payments, and then we have payments upon delivery. We are typically. At this point, we are vastly ahead with our programmatic customers. And, you know, based on very open with each other, negotiations. The other thing that you look at is what is the labor that you are doing, whatever you are building, are you building something that other people would want? Right? Because we have lien rights in our business where we get to. You know, they go back to the English common law. Right? A thousand years ago, where we have the right to seize the building if we do not get paid. So 1 of the things that we learned to look at over the years is this a building there would be many, many people who would want? Or is this a building like. We. We are involved in a way for construction, a construction of a plant that made wafer using a certain technology where we knew that large and very expensive building would be pretty useless to anybody but the person building it. And so we in that case, asked for very special terms where we were paid every 2 weeks and we had the right to leave on very short notice. So it is it is very. There are many, things that you take into account when you try to figure this out. So. And, you know, by the way, there are people rolling into modular now who are taking large books of business who we think are agreeing to payment terms where they are banking some people. And so you know, if we lose work on that basis, we do not mind it.

Brent Thielman: Okay. Maybe another sort of point of concern out there. Just with the technology or data center project opportunities that are out there that you are looking at that are not reflected in huge backlog today, presumably over the next few years, I guess any sense for how many of those you are looking at already have power connections figured out?

Trent T. McKenna: It pretty much. it is the things we are looking at as prospects. The power connection is usually already solved.

William George: Right.

Trent T. McKenna: If anybody stroked a check for us to do design work, to make our engineers Because of where we sit in the cycle. Right? We are pretty late cycle player in the design of a building. And so, you know, for our for our traditional construction business, you know, there are not a lot of. I am I am not aware of a lot of things in. That we are looking at prospect pipeline wise where the power has not already been solved.

Brian E. Lane: And I gotta tell you, it really has not delayed anything we are seeing at. Trent. And a lot of these data centers is generating their own power anyway. So folks are gonna solve their problem 1 way or another.

Brent Thielman: Okay. Just a quick technical question. The operating margins in the Mechanical segment have come up a lot. This year, including the third quarter. Is that primarily due to better profit margins in Modular compared to last year, at least on an operating basis?

William George: Essentially, are you getting better fixed cost leverage there? And that is that is a big In the mix, that is that is the large. that is the single largest driver in the mix. There is actually higher margins out for the 9 months. For sure, in pretty much all parts of that work, but modular has really closed the gap with the rest of the business to come really up to parity with our average margins and, of course, mathematically, that changes the mix I am just gonna throw props to 1 company that is doing an unbelievable job on piping.

Brian E. Lane: Really throughout the country, and their margins have been improved significantly. Is doing a heck of a job. Yeah. Very good.

Brent Thielman: Okay. Thanks, all. Appreciate it.

Operator: Thank you. And 1 moment for our next question. Our next question will come from the line of Joshua Chan with UBS. Your line is open. Please go ahead.

Joshua Chan: Hi. Good morning, and congrats Bill and Julie. Both, truly very well deserved. Congrats. My first question, could you talk about the magnitude of the orders that you took in, in the quarter? I mean, it. it is sort of billions of dollars more than you taking in any other quarter and so maybe. I know that the demand is obviously really strong, but just kind of you know, what drove that decision, the confidence around being able to phase it out and things of that nature?

Brian E. Lane: Yeah. Well, you know, the first. Joshua. So the first part of that is that the timing of the work, we can handle. We have the personnel to do it. The locations are working in our in our favor. And in the most, you know, the most important thing is your slash. You know, your labor availability over when it is gonna go. So as Bill said earlier, when we were with our operating companies looking at these opportunities, where they are, We are very confident we can handle all the work we have right now with the forces we have. And we are also very fortunate the company of this size, that the companies collaborate, work together, add that on to have a good traveling workforce. So when you add all that up, we are very confident in executing the level of backlog we have today.

Joshua Chan: that is great to hear, and, obviously, great backlog. I guess my follow-up, could I ask about the margin comment about the mix of materials? Because I obviously understand the mathematical reason for that, but it over the years, it is very rare for you to call out that mix as a driver. And so I was wondering if anything large specifically happened this quarter where that mix was more impactful than usual.

William George: So material and equipment was about 2% higher than it had averaged in the first 6 months. The only other time we brought that up was during COVID because there was so much inflation in materials and equipment. I think that they just met the dollars of them just became such a bigger part of our cost mix. I think in this case, a big part of it is the earliness of the job. So a lot of stuff Mhmm. Gets delivered. They are. Earlier in a job, there is. You know, you are doing very, very long pipe runs and things like that. Think some of that actually comes back to the earliness of the job.

Joshua Chan: Some of it is just it is lumpy, and that is just the way it is.

Trent T. McKenna: To print.

William George: I mean, what do you.

Trent T. McKenna: I mean, Yeah. Everything you said, Bill, is correct. You know? So it is really. You know, where are those large projects are in their life cycle and where we are in, you know, in ordering that equipment.

Joshua Chan: Okay. Trent. Yeah. Thanks for the color, and, congrats on the quarter.

Operator: Thanks. And 1 moment for our next question. Our next question will come from the line of Timothy Mulrooney with William Blair. Your line is open. Please go ahead.

Timothy Mulrooney: Yeah. Thanks for taking my questions. Good morning. The first question I wanted to ask about is on the on the backlog, obviously, very strong result. But we do not see. You know, we do not have insight into the individual conversations that you are having. So I am wondering with all the political rhetoric around data center moratoriums heading into the election, other regulations that governors are proposing around data center construction, Just curious if you have seen any change in any project schedules or push out in the pipeline in any of the states.

William George: So I would say. And having talked to 1 of our biggest companies in the last day or 2, the answer is generally no. Like, have not. Literally, I do not know of a project where 1 of these considerations has changed its trajectory. I will say, I think on a big more macro level, I have a sense, and I have talked with people who. You have given me this sense. This may push more of the work nationally into more sort of friendly jurisdictions. So if you were if you were if you were a large hyperscaler and you were laying your bed on which states you wanted to do work in, I think you sort of wear your future. Where you place your bets where you go do your work and make your commitments is going to be influenced by your perception of whether the governor in that state wants people in that state to have jobs. Right? And, so I do think it. I do think. I am not saying it has no effect, but I do not know. Like, I do not think it a micro level we have seen any effect whatsoever.

Brian E. Lane: Timothy, I can tell you, for the work we have today, what we are seeing here at Comfort Systems we have not been delayed by any moratorium.

Trent T. McKenna: You know, 1 thing more to think about too is that modular is even less exposed because it ships to wherever the customer site is. So it is it is also something keep in mind for that 17% of our business.

Timothy Mulrooney: Okay. that is really helpful color. And just on the modular business, by the way, my just my last question here. I am curious why you have not why you have not added any more programmatic customers in your modular business. I know you touched on this earlier, but the demand is clearly there. Could you just walk me through that decision metrics around that a little bit more? Thank you.

William George: I will start. I will start. So this happens in the real world. Right? We are talking about 250 thousand 600 thousand 700 thousand-square-foot buildings that are being built out with rows of robots and automated paint booths and turntables and have to be staffed with you know, thousands ultimately of people. And so we think we have grown unbelievably fast. We do not. This is not scalable the way you can just print another copy of software. And honestly, we have tended to stick with our 2 big customers who have kept us you know, kept us happy together for so in 1 case, for 20 years, because we know them. It works. They want more than we can buy. They are. They cannot buy enough from us. To the point where they are looking at other sources of supply. So another way of asking it, the other side of that question is, why would we divert from a sure thing to sort of a mystery? Right?

Trent T. McKenna: Yeah.

William George: Yep.

Timothy Mulrooney: Makes total sense. Thanks for the color, guys. Bye. Take care. You.

Operator: And 1 moment for our next question. Our next question is going to come from the line of Julio Romero with Sidoti and Company. Your line is open. Please go ahead.

Julio Romero: Thanks. Hey, good morning and again, Bill, congrats on your retirement. And Julie, congrats on the CFO role. Well deserved. Hey, Trent. You mentioned earlier that, your customers understand that labor is the governor. I guess, if that is the case, know, what lever would expand that fastest, would it be training? Would it be yeah, modular automation or digital field tools? And what kind of growth in your headcount does mid twenties growth in 2027 require?

Trent T. McKenna: it is going to require growth. I mean, we are over 25 thousand. Today. Right? And we have done. We have grown that kind of the way we have always done it. Right? Where our company's strive to be the best place for craft professionals to work. We pay well. We train relentlessly. And we are always trying to keep people busy on good projects with good conditions. that is what that is what a craft professional is interested in. Obviously, our traveling workforce has helped a lot. In this, and our contract craft operations at Kodiak and Pivot have helped as well. And acquisitions like Hunt and Voice have already let us put people where the work is. Right? So there is a lot of ways we are doing it. And, you know, our companies, we have. You know, we have planned. You know, the 1 key thing about us is that, if we have taken work it means we have labor planned against every planned against every dollar in that backlog. So that is 1 thing about us. When we look at something, you know, to Bill's point earlier where you talked about Trent and Brian looking at work, it is always the question's always, well, do we have the labor to do it? And then it is labor planned before we ever agree to it. So you know, as we look into the future in that mid twenties, we will have to add people, but we will just do it the way we have always done it. And, you know, and that is really. The easiest way to kinda sum that up is we wanna be the best place for a craft professional to build their career. We will continue to try to be that place. that is a lot of. there is a lot of things that go into that, but that is the easiest way to understand it.

Brian E. Lane: Oh, I have been doing construction a long time, probably more than I wanna remember. But we really do treat people with respect and feeling here, and I think that really matters when you bring people in. And they stay with us. I think it is really important what the culture of this company is and how we get people to go work where they go work.

Trent T. McKenna: Yeah. And I wanna I wanna. If it is okay, Brian, I wanna add to that because, you know, if you look at what our people. The 25 thousand plus just did over the last 3 months, know, they were working in the hottest months of the year. Yeah. Many of them many of them were on the road away from their families. And they still delivered safely on schedule with great quality for our customers that is. You know, I just wanna take my hat off to them and commend them on the on the work that they performed and how grateful I am for what they have done.

Julio Romero: Thanks. Really helpful there. And then maybe just asking again about what you mentioned earlier about programmatic relationships. Typically involving multiyear volume commitments and enough visibility to support CapEx. Earlier, know, to another question you stated, why would you divert from those the 2 large programmatic customers? But I guess what would you need to see from 1 of the newer customers before they could kind of graduate to programmatic, and how important is the financial strength of the customer in those considerations?

William George: Yeah. So I would say that the 2 things that you would look for are the nature of the commitment and the payment timing. Right? Payment timing And, also, you actually take into account many of these newer customers are really they are new to building modular you know, hot aisle containment or modular chiller plants. And so 1 great thing about them is they are willing to really listen to our experience and build stuff. And if we build stuff that is constructible, and versatile, that gives us a lot of comfort as well that you know, it is valuable to them or to someone else or. And maybe more importantly that the capacity that we set up to build for them you know, has a lot of outlets. So you know, none of it is mysterious. You could sit and think of it. Nobody here is a genius who is thought something new. it is exactly what you would think.

Julio Romero: Very helpful. I will pass it on, and congratulations again.

Trent T. McKenna: Thanks.

William George: Thanks.

Operator: Thank you. 1 moment for our next question. Our next question will come from the line of Kurt Yinger with D. A. Davidson. Your line is open. Please go ahead.

Analyst: Trent. Thank you, and good morning, everyone. I just wanted to go back to the point on capacity. I guess, for those operating companies that are doing larger data center work, much capacity, so to speak, is just left looking at the projects and backlog and how that carries you through next year and guess what I am ultimately trying to get at is thinking about bookings the next couple quarters and whether the outsized performance this quarter maybe takes away from what we might expect looking forward. I think that first of all, that question does not have, like, a mathematical answer.

William George: there is no gauge. Right? And Right. Your willingness to stretch to accept work has to do with work you know, the nature of that work, the flexibility that you are given, the timing, I would say, our guys it. it is certainly the case that if we book more in 1 quarter, we might not. We might book not as much in a future quarter. My sense is our guys have. You know, they are gonna continue to book the work probably continue to book farther out. At this moment, the conditions are extremely supportive with no sign of that changing. I do not know. it is. But I cannot you know, cannot change the fact that you do not collect a dollar twice You do not book the same job twice. Right?

Brian E. Lane: And, you know, Kurt, we will remain. We do remain in what we are gonna take. We are we are. The big driver for us we are not gonna take work that we cannot do. At a very high level. So know, that to me is the overriding factor when we look at these things. And. But we have world class people out there looking to work, doing the work. So handle what we can handle, and we will see how it goes. But I we will keep booking work. I do not know. As we go farther and farther out.

Analyst: K. That makes sense. And then just second on capital deployment. I mean, given the level of cash generation guess I am just curious looking at historically, as a percentage of that, what you have deployed towards M&A? How does kind of the current landscape look? And in terms of the ability to continue to do that? And how does that maybe impact the thinking or aggressiveness that we might expect from kind of a share repurchase perspective going forward?

William George: So we look at these decisions over years, not months or quarters. We have a very, very good acquisition pipeline, but, of course, pricing for acquisitions is has been high. I think it might be. That might be rolling over right now with interest rates and with you know, the continued lack of exits for certain private people, but we will see. Of. We have always bought our shares more aggressively when they dip. Right? Over a long period of time, we typically use. We have used 15 to 20% of our free cash flow to buy shares. But if you look over the time we bought them since 2007, we buy a lot more during deep seek in 2 week. In a 2 week period. We brought. We spent $200 million. Right? And the $200 million by the way, more than a year ago was more to us than it is today. We spent $200 million this last quarter. So I guess all of those things are. We are do exactly what you would do. We have a lot of confidence in our future. We have a lot of confidence in stock buybacks, especially when the price is softer. We have a really good acquisition pipeline, but we will not we will not do a deal just because we have money and that you. By the way, 1 turn of EBITDA in cash we have had that many, many times in the past. This is not. it is a big a dollar amount, but it is not it is not a big dollar amount. On the scale of what comfort is yet.

Analyst: Okay. That makes sense. Thank you for the color.

Operator: Thank you. And in the interest of time, our last question is going come from the line of Brian Brophy with Stifel. Your line is open. Please go ahead.

Brian Brophy: Yes, thanks. Good morning. Appreciate taking the question. Bill, Julie, congrats to you both. Bill, quite an incredible career. And truly very well deserved. I guess just 1 for me, Curious if there is any area geographic exposure that kind of stand out this quarter in terms of relative strength or weakness that is worth calling out? Obviously, it sounds like Texas remains quite strong, but curious if there is other regions that are notable. Thanks.

Brian E. Lane: Yeah. I will just. I will go. You hit it right on the head. Texas, really strong. Georgia, strong and getting stronger. We have seen a lot in, you know, Mississippi, Louisiana. We do not do much work in, but Louisiana is strong. And then, of course, you got North and South Carolina in the Southeast areas, but you know, Texas right now is really strong. Utah is very strong.

William George: Bill, any other Iowa.

Brian E. Lane: Oh, yeah. Iowa.

William George: Okay. I was woken up. there is a new Yeah. there is a new 1, sir. Yeah. Yeah.

Brian E. Lane: If you are talking about the areas of what we consider above normal strength, those would probably be the territories You know, by the way, we. I am not saying we will play there because we may choose other but Arizona is the semi. The next phases of some of the big semiconductor work is about is about to hit. We have opportunities there. I do not know that we will take very much of that because we are so busy in Texas. But if you are just asking about geographies, there is some monster work in Arizona.

Brian Brophy: Very helpful. I appreciate it. I will pass it on. Congrats again.

Operator: Thank you. I would now like to hand the conference back over to Brian E. Lane for closing remarks.

Brian E. Lane: All right. In closing, I want to thank our teams across the country for their dedication, skill, and excellence they bring to serving our customers every day. Demand remains strong, and our people continue to rise to the challenge of meeting an unprecedented need for their expertise. Conditions remain favorable for continued strong performance, And we have the resources and commitment to build on that momentum. Thank you for your confidence, and I hope you all have a great weekend.

Operator: Thank you. This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.