Comfort Systems USA Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2024

There are 9 speakers on the call.

Operator

Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker today, Julie Schaeff, Chief Accounting Officer. Please go ahead.

Speaker 1

Thanks, Michelle. Good morning. Welcome to Comfort Systems USA's Q3 2024 Earnings Call. Our comments today as well as our press releases contain forward looking statements within the meaning of the applicable securities laws and regulations. What we will say today is based on the current plans and expectations of Comfort Systems USA.

Speaker 1

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 Lane, President and Chief Executive Officer Trent McKenna, Chief Operating Officer and Bill George, Chief Financial Officer. Brian will open our remarks.

Speaker 2

Okay. Thanks, Julie. Good morning, everyone, and thank you for joining our call. Today, we are reporting record earnings and extraordinary cash flow as our teams continue great execution for our customers. We earned $4.09 per share this quarter, up 40% from last year.

Speaker 2

Our Electrical segment achieved unprecedented margins and mechanical margins continue to be strong. Operating income is 50% higher than even our strong Q3 last year. Backlog continues far above last year as bookings were strong even though we burn through work at a record pace. Same store quarterly revenue was higher by 18% and revenue was up 23% year to date. Entering the Q4, same store backlog is 21% higher

Speaker 3

than

Speaker 2

it was at this time last year and we are experiencing exceptional strength in our pipelines. We are in the fortunate position of being able to choose the work we take. Given these strong conditions and the confidence we have in our unmatched workforce, we expect continued strong results in the Q4 and in 2025. Cash flow surpassed any previous quarter and that extraordinary cash flow is both a great base for continued investment and a clear indicator of strong underlying trends in our execution, customer relationships and prospects. We also increased our quarterly dividend by $0.05 to $0.35 per share.

Speaker 2

This increase reflects our continuing strong cash flow and 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?

Speaker 4

Thanks, Brian. Good morning, everyone. Our 3rd quarter results are remarkable with quarterly EPS exceeding $4 per share for the first time ever. Margins continue to improve and we had further SG and A leverage and we enjoyed over $300,000,000 in operating cash flow. This quarter, we also achieved $238,000,000 in quarterly EBITDA, a 53% increase over this quarter last year.

Speaker 4

Our newest companies continue to exceed expectations. 3rd quarter revenue was $1,800,000,000 an increase of $434,000,000 or 32% compared to last year. Our Mechanical segment revenue increased by 39%, benefiting from recent acquisitions, modular expansion and substantial organic construction and service growth. Electrical segment revenue increased by 8%, and overall same store revenue increased by 18% or $241,000,000 with the remaining $193,000,000 increase resulting from acquisitions. Through 9 months, our same store revenue has grown by 23% from the same period last year.

Speaker 4

We are facing tougher revenue comparables in the next few quarters and currently we estimate that our Q4 of 2024 revenue increase will be comparable to this quarter. We also expect revenue will continue to rise in 2025, most likely by high single or low double digit percentage growth. Gross profit was $382,000,000 for the Q3 of 2024, a $104,000,000 improvement compared to a year ago. Our gross profit percentage grew to 21.1 percent this quarter compared to 20.1 percent for the Q3 of 2023. Quarterly gross profit percentage in our Electrical segment increased to 23.9% this year compared to 19.4% last year and margins in our Mechanical segment were roughly flat at 20.3%.

Speaker 4

EBITDA increased by over 50% to $238,000,000 this quarter from a strong $156,000,000 in the Q3 of 2023. Same store EBITDA increased by over 30% and even without recent acquisitions, our EBITDA exceeded 200,000,000 dollars EBITDA margin for the 1st 9 months is 12.2%, a result of excellent execution by our workforce and strong demand in the markets we serve. Trailing 12 month EBITDA exceeds 770,000,000 dollars Margins are at all time high levels and giving ongoing strong demand, we expect that our EBITDA margins for the remainder of 2024 and into 2025 will continue in the strong ranges we have achieved over the last several quarters. SG and A expense for the quarter was $180,000,000 or 9.9 percent of revenue compared to $143,000,000 or 10.4 percent of revenue in the Q3 of 2023. The investments that we have made, including investments through SG and A are paying off.

Speaker 4

Our operating income increased from $135,000,000 in the Q3 of 2023 to $203,000,000 for the Q3 of 2024, an increase of 50%. With improved gross profit margins and favorable SG and A leverage, our operating income percentage increased to 11.2% this quarter from 9.8% in the prior year. Through 9 months, we achieved a noteworthy operating income percentage of 10.1%. Our year to date tax rate was 21.6%. We estimate that the full year 2024 tax rate will be in the 21% to 22% range.

Speaker 4

After considering all these factors, net income for the Q3 of 2024 was $146,000,000 or $4.09 per share, and that's a 39% improvement from last year. Free cash flow for the 1st 9 months of 2024 was $572,000,000 We continue to benefit from advanced payments as operating cash flow continues to exceed our earnings by about $340,000,000 on a trailing 12 month basis. So we are well ahead of earnings in collecting our cash. We increased the pace of our share repurchases in the Q3 and have now returned $42,000,000 to shareholders in 2024 by retiring over 130,000 shares. As we began the year, our cash balances exceeded our total debt by $161,000,000 With our remarkable cash flow and even after our share repurchases and funding 100 of 1,000,000 of dollars to purchase 2 great new companies, our cash now exceeds debt by $347,000,000 That's what I've got, Brandon.

Speaker 2

All right. Thanks a lot, Bill. I am going to discuss our business and outlook. Backlog at the end of the Q3 was $5,700,000,000 a large year over year increase and a modest sequential decline. Since last year, our backlog has increased by $1,400,000,000 or 32%.

Speaker 2

On a same store basis, our backlog is now 900 $1,000,000 higher than it was this time last year. We are entering the Q4 of 2024 with 21% more same store backlog despite our strong revenue growth. Our revenue mix continues to trend towards data centers, chip fabrication, battery plants, life science and food. Industrial customers accounted for 60% of total revenue in the 9 months of 2024 and they are major drivers of pipeline and backlog. Technology, which is included in industrial was 32% of our revenue, a substantial increase from 21% in the prior year.

Speaker 2

Institutional markets, which include education, healthcare and government are also strong and represent 23% of our revenue. The commercial sector is active, but it is smaller but it is a smaller part of our business at about 17% of revenue. Most of our service revenue is for commercial customers. So the share of our construction revenue that is commercial is now relatively small. Construction accounted for 84% of our revenue with projects for new buildings representing 57% and existing building construction 27%.

Speaker 2

Project pipelines remain at unprecedented high levels. We include modular and new building construction and year to date modular was 17% of our revenue. Service revenue was up 7% this quarter and was 16% of total revenue. Service is a reliable source of profit and cash flow and is on track to exceed $1,000,000,000 in revenue for 2024. As noted earlier, we are entering the 4th quarter with a backlog that is 21% higher on a same store basis than at this time last year.

Speaker 2

And we have a superb team working hard for our customers every single day. Thanks to the dedication and hard work of our employees across the country, we are positive about our ongoing projects. I want to close by thanking our over 18,000 employees for their hard work and dedication. I'll now turn it back over to Michelle for questions. Thank you.

Operator

Thank you. Our first question is going to come from the line of Adam Palmer with Thompson Davis. Your line is open. Please go ahead.

Speaker 5

Hey, good morning, guys. Congrats on another strong quarter.

Speaker 2

All right, Adam. Thanks. Good morning.

Speaker 5

So you guys typically burn backlog in the summer, build it in the winter. I'm curious if you think we could hit a new record backlog over the next couple of quarters?

Speaker 4

I'd be surprised if one of the next two quarters that doesn't happen. There's really the demand we could book so much work if we could if we were willing to and could take it. So the challenge for us right now is having really disciplined project selection.

Speaker 2

Yes. Adam, the follow-up on that, it's coast to coast. So we're seeing a lot of good opportunities still with no let up in sight. So we're pretty confident going forward into 2025.

Speaker 5

Okay. And then Brian wanted to ask you about your comment on electrical margins, which I think you said unprecedented. I'm curious, where you think those shake out long term? Is there like a specific project that's driving the really high margins this year? Or if you think that that group this is just what they can achieve over time?

Speaker 2

Well, first things first, our electrical companies are just doing a superb job and the work they're finding, the markets are good. But as always, it comes down to execution usually and we're just executing at a really high level. We are really fortunate to have the companies we have and the markets they are in. Those margins, as we said, are unprecedented. But I would think at least for a while, the characteristics are still good for the margins to stay strong, but they're really produced performing at a very high level.

Speaker 2

It is very impressive and it's each one of our electrical companies, Adam. Thanks for noticing.

Speaker 5

Great. Okay. I'll turn it over. Thanks, guys.

Speaker 2

All right. Thanks, Adam.

Operator

Thank you. Our next question is going to come from the line of Alex Breyer with KeyBanc Capital Markets. Your line is open. Please go ahead.

Speaker 6

Good morning, Brian, Bill, Trent and Julie. Thanks for taking my questions.

Speaker 2

Good morning, Alex.

Speaker 6

Good morning. So I guess first question on modular. I know the last expansion kind of came with more automation and higher roofs and I think this is a big focus for the team to drive efficiencies. Can you just kind of expand on what exactly you're working on in these efficiency initiatives next year for modular? Is this mainly happening in Houston or is it in Greensboro or is it kind of spread across both?

Speaker 4

It's 100% both in Texas and North Carolina. We're building up quite a fleet of robots. They are doing a really they're reconfiguring even incremental new space with bigger cranes, really changing the workflows in ways that we think are advantageous that the new space allows us to change. But the new we have a new customer in modular that is starting to get really order quite a bit of product and that's given us an opportunity to sort of both design something and sort of design the way we manufacture it, having learned a lot of lessons. And obviously, we're working with our existing customers to do the same thing.

Speaker 4

So our goal is to just get better and better. And I wouldn't bet against our guys.

Speaker 6

Got it. That's very interesting. And then there's a lot of talk about liquid cooling in the industry, which I guess is going to be needed in addition to air cooling for these new data centers coming up. I know you guys have a lot of experience in installing liquid cooling systems already. But like is there anything that changes going forward when we get to these new AI data center builds as liquid cooling is increasingly implemented in these projects?

Speaker 6

Just any thoughts there would be helpful.

Speaker 4

The density of the new stuff is amazing. Like just the like when you look at the like the big pipe welds in the shop, there are far more connections up and down the pipe because you're putting more chillers per sort of per building per square foot. And it's just it's density. Things are having to be designed really with an eye towards reducing distances because the amount of copper that's going in is just so expensive that things in the past where you'd say, oh, it's okay for this to be 90 feet from that. Now you want it to be 15 feet from that because you're going to have 10 times as much copper in between the two spots.

Speaker 4

So it's really been changing. Liquid cooling is just the heat transfer happening in liquid is primarily what we've always done. We've never really been a source for air cooled, the kind of air cooled rooftop data centers that people build because we have more of a pipe fitting expertise. But it's definitely I don't think any of the new data centers that are being built for the for any hyperscalers or anybody who's interested in AI are air cooled. And then inside of liquid cooling, now it's just how close can you get the heat transfer to where the heat is being shut off of the chip.

Speaker 4

And it's kind of an all of the above strategy, right? I used to think it was exciting when we could bring the liquid up under the racks and then it was exciting when we brought it into the racks and now you bring it into the box and there are they're designing chips for there to be contact, the cool liquid, not direct, but near direct contact. Just about every way of doing it, people are other than immersion, which I think is still a challenge, I think every way of doing it, people are just employing an all of the above strategy. And the good news for us is no matter how you do it, you got to get you got to have the cooling, right? And to do that, you have to have pipes and chillers and electrical switch gear.

Speaker 4

So I don't know, it's a great trend for us. And the demand for data center stuff, I mean, it's really becoming more than talk. Like there's data centers now in states that we never it never occurred to us that there would ever be data centers in. So it's the demand there is really extraordinary.

Speaker 6

Thank you. I'll turn it over here.

Speaker 2

All right. Thanks.

Operator

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

Speaker 4

Hey, Julio. Thanks. Hey, good morning, everyone. Good morning. Good morning.

Speaker 7

So appreciate you guys providing preliminary sales thoughts for 2025 of the high single digit to low double digit percentage growth. Just wanted to get your thoughts on what it would take for margins to continue to expand with the conditions that are allowing you to execute and achieve these high margins have to kind of sustain, would they have to get better? Just any thoughts there.

Speaker 2

Well, if you look at the margins we've got, I probably have said this every quarter for the last few, they were at record levels for us. It's a combination of pricing as always and executing and we're executing really at a high level. But it's a long process to get these margins, right? It starts with developing the workforce we have, applying technology and innovation that works for us and we get a great team that trends leading on those efforts, and using things such as BIM, prefabrication, etcetera, and then managing the risk we have in our projects, which we spend a lot of time training our people on. So the results is one number we talk about here, but it's a lot of work that goes into it.

Speaker 2

And we will probably stay around this ballpark as long I think as the market state is good and we continue to stay focused on our execution.

Speaker 7

Okay. And you mentioned mitigating risk and project selection is a big part of that. You're in a position where you can kind of afford to be picky. Just if you could speak to what factors within projects help them rise to the top of your selection list?

Speaker 2

Well, if you look at any contract, it's we have too much work is when you get in trouble, not too little. So, no, we're really looking at work in locations around the offices that we have. Usually for a customer we worked at for a long time, we know them. It's work we've done for a while and we're good at. As long as you stay in those key metrics, there's others.

Speaker 2

But if you keep yourself in that wheelhouse, usually work out pretty well on a long term basis. Yes.

Speaker 4

I mean, I think an interesting major consideration for a lot of our business development people and really our leadership at the field level right now is what jobs will be good for the people, right? Because does it have is the location good for our people? Does it have a GC that runs a good job? And does it make people's lives miserable? Is there parking?

Speaker 4

Is there a place to get lunch? Are the other contractors on the job people that we work with frequently? Because our people know them and they're it's a better world, better life for them to be around the people that they know. And then of course, hugely important are these existing customers who have been good to us in the past and who we can be good to now and we can succeed with based on a history, a track record? And then finally, what is the amount of gross profit sort of for the amount of labor that we have to commit, right?

Speaker 4

Ultimately, people used to talk about gross profit per hour worked. Sometimes now you think more in terms of gross profit per $100 of labor. But I think that's where we look for profitability. It's not really gross profit percentage because not all jobs have the same amount of the same cost of goods sold, the same mix of material and things that go through them. And so I think it's people first, partners second, profit third, but they're not independent variables, they're highly dependent variables and the ones that are best for any of the 3 are probably best for the other 2.

Speaker 2

And you know, wholly on top of all this, you got to make sure we can do it safely and protect the health and welfare of our folks that are doing the job. So we spend a lot of time focused on obviously projects, acquiring them and executing them.

Speaker 7

Understood. Appreciate the color. I'll pass it on.

Speaker 2

All right. Thanks.

Operator

And one moment. Our next question is going to come from the line of Josh Chan with UBS. Your line is open. Please go ahead.

Speaker 8

Hi, good morning. Brian, Trent and Bill Gillie. Maybe sticking with a question on the field. Hi, good morning. Hi, Brian.

Speaker 8

The last couple of years, you've done a great job kind of driving productivity gains in the field. I know that everybody's been really busy. So could you just talk to your ability to kind of further drive field productivity and how you feel about that going forward?

Speaker 4

I'll say, I think a big source of so we're really being helped by technology. One really salient way that technology helps is as your drawings get better, your performance gets better, your opportunity to prefabricate things even to maybe modularize things and at various levels gets better. But frankly, really good drawings allow you to avoid rework. The other thing that I think is really gratifying and amazing at Comfort is our ability to keep people in a place and at a time when they can continuously work in a productive way. So utilization is really the magic key to outcome to financial outcomes for us and having people on jobs where they can be productive because it's a well run job, but also having the ability to level load the work you do.

Speaker 4

And one of the things that is really helping us with that is our company is working together. So if a job has an air pocket or if a job if there's a good opportunity, our company's ability to share workforce can really help us level load and utilization is and frankly, just when you're busy, your opportunity to have high levels of like utilization effectiveness per hour worked is just it's really good.

Speaker 2

Josh, one thing I talked about Trent and his team a minute ago. One thing that group is really helping us with is that there's a lot of technologies rolling through construction right now. Their ability to fill the rolling through construction right now. Their ability to filter them and see which ones we can apply in the field to make us more efficient, productive and safe has been a huge help to us. And they've done a just continue to do an outstanding job, helping our folks on job sites and in service calls in particular.

Speaker 2

So I really want to tip my hat to those folks. They're doing a hell of a job for us.

Speaker 8

Thank you. That's really a great color. Bill, you mentioned the balance sheet and obviously you guys have done really good with M and A over time. Could you just talk to the uses of cash from here, especially when free cash flow generation has been stronger than historical? Thank you.

Speaker 4

We did I noted that we picked up our share repurchases in the Q3. That's a combination of really fantastic cash flow and a lot of confidence about our prospects going forward. I think our first use of cash is always going to be great companies, but in a really disciplined way. And so far, whenever we've had cash, we've been able to find great opportunities to bring additional workforce people, businesses, customer relationships into the Comfort Systems, which is a really great place to be a contractor.

Speaker 8

Great. Thank you for the color and good luck for the rest of the year.

Speaker 2

Great. Thank you.

Operator

Thank you. And one moment for our next question. And our next question comes from the line of Brent Thielman with D. A. Davidson.

Operator

Your line is open. Please go ahead.

Speaker 3

Hi. Thanks. Good morning. Brian, Bill, I guess when I go through the different end markets, the manufacturing vertical was sort of the one that I guess of real size and then taking a step back relative to last year and maybe even next to the second quarter. And what are you seeing in that area in particular?

Speaker 3

Is it your view of this is just sort of timing related? Anything to say around the opportunity pipeline in that vertical?

Speaker 4

As far as opportunity goes, the opportunity is very strong, especially in food. And frankly, pharma is very, very strong. I will say the trend you saw this year was really a movement towards a choice being made to move towards some data center work by a couple of our largest industrial subsidiaries because it was the best work available and that was their best opportunity to give their guys good work to work on and make the most money. So that's we could switch to manufacturer. Our guys get to pick and choose right now.

Speaker 4

So when you see movements between those major segments, it's a reflection of choices that are being made and customers that are sort of giving us terms that we find to be attractive.

Speaker 3

Okay. And I think you guys have sort of a level of visibility, especially on some of these larger kind of multi phase projects where maybe you don't have a signed award, but you're sort of in the seat for future phases. Can you talk around that? Is that partially what's given you the confidence to say this demand environment isn't really fading? Is it something else?

Speaker 2

Yes, Brett, absolutely right on the money. And even before that, right, in terms of us assisting general contractors and customers when they're looking at jobs in the early phase down to award. And a lot of these projects get awarded in phases now, right, maybe 5%, 10%, 20% that goes into backlog at that pace. So you're right on the money and that's why we're really upbeat about next year because we know it's in our pipeline, it's in our soft backlog and we're in good shape right now.

Speaker 4

And we're in budget meetings right now, including this week and the percentage of our work that's negotiated is much higher right now. It's always been high and it's higher than ever. And so some of that, there's a lead time. They release you to do a certain amount of work early on because you're it's just that you're just one company working with another company. There aren't other factors involved.

Speaker 4

So there's not necessarily as much of an award moment. There's just moments when the scope gets to where it needs to go and you sign a piece of paper that meets our financial accounting rules definition of backlog. But there is there really is plenty of work to do.

Speaker 3

Yes, that's helpful. I guess just on the cash flow, I mean, obviously extraordinary here. Are the terms that you're getting, I guess, under these new contracts confined to particular group of customers? Or are you really able to negotiate some favorable terms across the board? I'd just be curious around that.

Speaker 4

So without it so there is certainly, for example, we've talked about how in modular there are upfront payments sometimes for work that won't be performed right now until 2026. That's considerable. But I would say in virtually all of our businesses, we because when you have the ability to pick and choose work, you pick and choose based on pricing, based on the things I talked about relating to your people earlier, but payment terms are important, right. Every contract has a schedule of values. And sometimes there are large customers who would rather give you better payment terms if they can then give you even more money in profit.

Speaker 4

I don't know. And at some point there are trade offs there, but without a doubt, this is true by the way, this has been true forever in the construction industry. Whenever you have you're in a position to have bargaining power, your cash flows get better because you get better schedules of values, of course, right. Everything's traded. The other thing I'll say is customers and this is in Brian has a quote in the sentence in the press release that alludes to this.

Speaker 4

Customers are just more willing to pay you when they're interested in not just making sure you finish the current job, but that you take the next job from them. And you'd be surprised how much of an effect that can have.

Speaker 3

And Bill, I know you're adamant that this can't continue on forever, but if you looked at the contracts you're signing today, I mean, are those terms as favorable as they were 12 months ago such that you could still continue to see this sort of free cash conversion?

Speaker 4

Yes. So we're not signing any work today that's worse than the work we've signed last year. And as far as how long this goes, there's 2 answers to that question. There's the immediate what do you actually see know about has holes being dug in the ground. That's never been better.

Speaker 4

That's really, really good, right. We have more visibility than we've ever had. There's never been a time when in October of 2024, we would have been talking about having work in 2026. This is new for us. But also, the underlying it is very plausible that the things that are being built like the chip fabrication factories and the data centers and the pharma, which is just starting, it is very, very plausible to me that that has many, many years to run.

Speaker 4

And some of this new business is incremental. It's not as if just because we've decided in the United States even before the Chips Act that we needed to build a bunch of chip fabrication. It's not as if the things Comfort Systems USA was building before stopped. It's not as if people stop putting mayonnaise on their sandwiches and stopped feeding their dogs pet food and stopped needing hospitals. The baby boomers are still aging.

Speaker 4

So these are all incremental sources of demand. And after 15 years of headwind from offshoring, having the United States be such a favorable destination for capital is really helpful if what you do for a living is deploy and form capital.

Speaker 3

Excellent. Sorry, just last question. Again, I know you've wanted to take some time to absorb the Summit transaction. It looks like that's going really well among the others you've done. Obviously, can't time when deals happen, but maybe more a question just around the given the strength of the industry, your own business, the multiples you're seeing out there for potential transactions dramatically change from maybe what you've talked about in the past?

Speaker 2

Multiples

Speaker 4

people talk about multiples, but a far, far more potent variable when you're thinking about what you're paying for something is what you're multiplying by. So what the reliable source of cash flow that you're buying will be, what the earnings of what you're buying will be. I think that multiples are very, very strong when you compare them or there are people who are willing to pay a lot, a high multiple for certain things if you look at a multi year trailing average. But I think ultimately the people who sell to us, the ones that we want to buy, they really understand the nature of our business. And so far, I think so far we've been able to get deals at what we think are the same very, very reasonable multiples of what the future of these businesses look like.

Speaker 4

That's why I think we're good at acquisitions. I think we have a really, really, really, really good insight into the businesses we're buying and what they're really worth. And so certain businesses, it's one of the reasons we've been moving towards these industrial complex companies for a long time. I think we just really believe that they have an embedded advantage that's very valuable right now. So I know that was not a very that didn't answer your question on the basis you wanted it, but it answered your question on the basis that I think is the most important way to think about it.

Speaker 4

I think pricing is very reasonable, especially when you consider a lot of people who look at pricing trends over 10 or 12 years in our industry, they forget that corporate tax rates dropped not that long ago. And so when you buy these companies, you're getting a whole different amount of free cash flow than you were getting. When you bought it used to be if we bought a company, we got to keep $0.60 of every dollar they earned. Today, because they give us tax deductible goodwill, our acquired companies have a lower effective tax rate than our existing business. We're keeping well over $0.80 of every dollar.

Speaker 4

So if you break all of that together, I think pricing is pretty good. And I think you're seeing that in sort of the value accretion that these wonderful companies have been able to accomplish for us.

Speaker 3

All right. I appreciate all the context. Best of luck. Thanks guys.

Speaker 4

See you.

Operator

Thank you. And one moment for our next question. And we have a follow-up question from the line of Adam Thalhimer with Thompson Davis. Your line is open. Please go ahead.

Speaker 5

Thanks guys. I was just curious on the data centers, the total addressable market for Comfort. As these guys can start talking about 1 all the way up to 5 gigawatt data centers, as the data center gets bigger, does that increase your TAM?

Speaker 4

So every data center that we build today has way more content for us. The dollars for the same sort of piece of land are much, much higher. As far as the addressable market, I don't really think there is an addressable market in the sense that, oh, there's X out there to be done. I think that what is out there to be done in the area of data centers is what can be done. And what can be done will be less than they're hoping to do, but they'll size they're going to build as much as they can.

Speaker 4

It's sort of think about it like chip speed. There is not an amount of compute they want and then they'd be done. There's not a size of a data lake that they want and then they'll just be happy and done. There's 2 things they want. They want as much compute and as much data as they can get and they want to make very certain that the other people that they compete with don't have more than they do.

Speaker 5

Okay. The other question I've been getting is on I'm still getting a question on uses of cash, if

Speaker 6

you because you guys are at a

Speaker 5

record amount of net cash.

Speaker 4

So am I.

Speaker 5

Just curious if that makes buybacks more attractive.

Speaker 4

We are definitely prepared to buy shares on dips. We always have been, and then we buy it we buy pretty we started for the first time ever like this quarter, we increased our share buyback in the Q3 without a dip. Now it then went up by more, so we ended up getting a ton of shares in the low 300s and it looked like a good deal. But when we were buying them, we were buying them at all time highs. So we have a lot of confidence that we have an ability to run a good business for some years to come.

Speaker 2

We have to dividend a little bit this quarter too, dollars 0.05 so.

Speaker 4

But it's not going to use the free cash flow now.

Speaker 2

No. But I'm just trying to help you out, Adam, where you know.

Speaker 5

I appreciate that. I think I'm all set. I'm going to get

Speaker 6

it out quickly.

Speaker 4

Have a good weekend. Every year, we yes.

Speaker 2

Take care, bro.

Speaker 5

No, go ahead, Bill. I don't want to interrupt you.

Speaker 2

Yes. We thought you had to have a foot out the door. Yes.

Speaker 4

So every year we know that we have cash and we have the goal to deploy it in the companies that we have conviction have fantastic workforces. So far we've succeeded. I think our pipeline is very good, mainly because Comfort's reputation as a place to be is very good. So I like our chances of deploying that cash, but I will say like some of our competitors or some of our comparables, if we don't find stuff that we have conviction around, we won't do deals. We will not be hurried.

Speaker 4

We won't do deals that we don't have belief in. So I'm optimistic, but I will say discipline first.

Speaker 5

I look forward to seeing what you do this winter. Thanks guys.

Speaker 2

All right. See you.

Operator

Thank you. One moment for our next question. Our next question is a follow-up question from the line of Josh Chan with UBS. Your line is open. Please go ahead.

Speaker 8

Hey, guys. Just a quick clarifying question. When you guys say margins stay around current levels, it's still within the context that there's seasonality to your margins in Q3 and possibly Q2 is usually the high quarter and Q1, Q4 are lower. Is that a fair characterization at least on the EBITDA level?

Speaker 4

Yes. And it's especially true for Q1s. Our Q1s are notably lower than our other three quarters. The other three, it is absolutely the case. 18 out of 20 years, Q4 is going to go down from Q3, not but 20 out of 20 years Q1 margins are going to be lower because of just the volumes, the opportunity for that utilization I was talking about.

Speaker 4

We don't in the summer, we have more service and service pushes up your gross profit margins. It adds the highest gross profit margins in our business. So there's a bunch of things that keep it being less than you less seasonal than it used to be, but for sure still seasonal.

Speaker 8

Right. That makes a lot of sense. Thanks for clarifying that Bill. Have a good weekend guys. Thanks.

Speaker 8

You too.

Operator

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

Speaker 2

Okay. In closing, I really want to thank all our employees again. Our folks continue to deliver for our customers with a good quality product that we do safely and efficiently. As you can tell, we're very excited closing out the year and optimistic about 2025. Thanks everyone for joining our call.

Speaker 2

Hope you all have a wonderful weekend and look forward to seeing you soon. Thank you.

Speaker 4

Thanks.

Operator

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

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Earnings Conference Call
Comfort Systems USA Q3 2024
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