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spk01: Thank you for standing by and welcome to the Q2 2023 Conference Systems USA Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentations, there will be a question and answer session. To ask a question at that time, please press star 11 on your telephone. Please be advised that today's call is being recorded. I would like to turn the call over to Julie Shape, Chief Accounting Officer. Please go ahead. Thanks, Valerie.
spk02: Good morning. Welcome to Comfort Systems USA's second quarter 2023 earnings call. Our comments today, as well as our press releases, contain forward-looking statements within the meaning of the applicable security 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-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.
spk04: All right. Thank you, Julie. Good morning, everyone, and thank you for joining us on the call today. We had another great quarter. Our teams delivered remarkable execution, and we are grateful for their dedication, especially in this very hot weather. We have never had a stronger demand environment, and we are carefully selecting work that has good margins and good working conditions for our valuable people. We earned $1.93 per share this quarter compared to $1.17 a year ago. Current quarter revenue was $1.3 billion, with same-store growth of 24 percent, reflecting strong ongoing demand in our markets. Our mechanical operations continued to perform at high levels, and electrical segment margins increased significantly. This quarter includes continued growth and solid performance in our modular business, and service has maintained its upward trajectory. Additionally, our backlog continues to track at unprecedented levels despite a strong revenue for the quarter. Backlog is $4.2 billion, which is $1.4 billion higher than it was at the same time last year. A strong execution and favorable payment terms on new work helped us achieve $100 million of cash flow in the second quarter. Today, we also increased our quarterly dividend by 2.5 cents to 22.5 cents per share. which 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.
spk03: Bill? Thanks, Brian. We had an amazing quarter with 24% same-store revenue growth, higher margins, SG&A leverage, over $100 million of cash flow, and our EBITDA increased by a remarkable 45% compared to last year. Specifically, revenue for the second quarter of 2023 was $1.3 billion, an increase of 27%, or $278 million compared to last year. Our mechanical segment revenue increased by $199 million, or 26%, and it continues to benefit from growth in our modular business. Our electrical segment increased by an even larger 33% to $321 million. Combined same-store revenue increased by 24%, or $247 million, as we continue to benefit from strong demand and some pass-through effects of inflation. We are facing tougher revenue comparables in the second half of the year, and we currently estimate that revenue growth in the second half will be in the high single to low double digits and currently expect that percentage revenue growth for the full year is likely to be in the high teens. Gross profit was $228 million for the second quarter, a $53 million improvement compared to last year. Our gross profit percentage improved to 17.6% this quarter compared to 17.2% for the second quarter of 2022, driven by improved electrical margins. Quarterly gross profit percentage in our mechanical segment was the same this year and last year at 17.8%. Margins in our electrical segment rose in the quarter to 17.0% as compared to 15.1% in Q2 2022. It's hard to predict how margins will unfold for the remainder of 2023, in light of material cost variability and increasing modular in our mix. However, we remain optimistic that margins in 2023 will continue to trend at or slightly above the margins we achieved in 2022. SG&A expense for the quarter was $136 million or 10.5% of revenue compared to $119 million or 11.7% of revenue for the second quarter in 2022. On the same store basis, SG&A was up approximately $14 million due to inflation and ongoing investments to support our much higher activity levels. But the growth in our SG&A costs was considerably slower than our growth in revenue, resulting in exceptionally good SG&A leverage this quarter as compared to last year. Our operating income increased from last year by 62% to $92 million. Our operating income percentage improved to 7.1% this quarter from 5.6% for the second quarter of 2022 as electrical margins increased and as we had great SG&A leverage. We still expect interest expense in 2023 to increase from 2022. However, so far this year, our higher interest payments were partially and temporarily offset by interest income related to a favorable legal outcome in the first quarter, as well as extremely strong cash flow in the first half of the year. Our year-to-date tax rate of 16.1% included an incremental benefit of 6 million, or 15 cents, from a conforming adjustment for the R&D tax credit, of which 8 cents related to 2022. If Congress restores immediate deductibility of research expenditures and rescind this conforming adjustment, we will have to reverse that 15 cents income statement gain in the period that this occurs. Although many individual items have affected our tax rate lately, we estimate that a normalized tax rate for us is approximately 20 to 22%. After considering all these factors, net income for the second quarter of 2023 was $69 million, or $1.93 per share. And this compares to net income for the second quarter of 2022 of 42 million or $1.17 per share. EBITDA increased from 77 million in the second quarter of last year to 112 million this quarter, an increase of 45%. Free cash flow for the first six months of 2023 was a remarkable 213 million. And I want to take a few minutes to discuss four factors that are impacting our cash flow and have helped us achieve much higher cash flow than net income, but which will also create more variability than usual in our cash flow results over the next few quarters. Two of the factors have been helping cash flow and two of the factors are creating cash flow headwinds. The first positive driver is very straightforward. We are achieving profitability that's fantastic and we're able to obtain fair and favorable payment terms across our book of business. The second positive factor helping our cash flow is the fact that we received large advanced payments in the first half of 2023 and in late 2022 for some modular projects as a result of our commitment to add capacity. We also currently have some customer cash relating to large and ongoing equipment purchases. Although we continue to benefit from these advanced payments, This benefit will normalize as project costs are incurred. We estimate that the advance payments received in late 2022 and the first six months of 2023 currently aggregate to $175 million to $200 million. So in other words, we currently have around $200 million of cash that we have not earned. As these early collections normalize, a substantial portion of this money will be reduced from ongoing cash flow because we already have the money. The first negative factor affecting our cash flow is the extra taxes we are paying as a result of the deferral of tax deductions for research expenditures. So far this year, we have dispersed approximately 80 million in tax payments that would not have been made under the prior regulation. Unless Congress acts to restore current deductibility, we expect to make additional tax payments during the last six months of 2023 of 50 to 60 million dollars as the deductible of those business costs is spread over the next five years. The fourth and final factor impacting our cash flow is temporarily heightened capital expenditures as we build out 1 million square feet of new modular capacity and as we purchase more vehicles as a result of reduced vehicle availability during COVID. Year-to-date, we had 39 million of net capital expenditures, double what we spent in the same period the prior year. And we expect this higher expenditure level will continue in the second half of 2023. So during the first half of this year, the two positive factors I just described overwhelm the two negative factors. However, as those advanced payments amortize into a more normal cadence, and as we fund our equipment commitments, free cash flow might be lower than you might otherwise expect over the next few quarters. Our debt was lower at quarter end as our substantial free cash flow allowed us to reduce our debt by 109 million since year end, in addition to funding the purchase of Eldaco in the first quarter. We also continue to purchase our shares, acquiring 53,000 shares at an average price of $126.89 in the first half of the year and adding to the over 10 million shares we've repurchased since 2007. Finally, as Brian noted, We implemented another meaningful dividend increase this quarter. That's all I have, Brad.
spk04: All right. Thanks, Bill. I am going to spend a few minutes discussing our business and outlook. Our backlog at the end of the second quarter was $4.2 billion. Since last year at this time, our same-store backlog has increased $1.4 billion, around 50%. with increases in our traditional mechanical and electrical business and substantial new bookings in our offsite construction operations. Our sequential backlog decreased by 259 million, with most of that reflecting the good progress we are making on the pre-bookings in our modular business. Excluding modular, our backlog was roughly flat despite a heavy mid-year burn rate. Our revenue mix continues to trend towards industrial work, and industrial customers were 52% of our total revenue in the first half of 2023. Data centers, life sciences, food processing, and other manufacturing, such as chip plants and battery, are major drivers of new prospects and backlog. Technology, which is included in industrial, was 20% of our revenue in the first six months of 2023, a substantial increase from 12% in the prior year. Institutional markets, which include education, healthcare, and government, are also strong and represent 28% of our revenue. The commercial sector is active, but with our changing mix It is now a smaller part of our business at about 20% of revenue, and commercial is disproportionately service revenue. Year to date, construction was 80% of our revenue, with projects for new buildings at 53%, while existing building construction was 27%. Service revenue increased by 16% year to date compared to last year. service with 20% of our total revenues, with service projects providing 9% of total revenue, and pure service, including hourly work, providing 11% of revenue. In both service and construction, we are encouraging and supporting our customers as they seek to improve the efficiency and sustainability of their businesses, buildings, and operations. And we are committed to being good members of the diverse communities we serve. Comfort Systems is thriving because of our best-in-class people and their superb execution. Thanks to them, and in light of the enduring need for the unique skills and capabilities, we feel confident in our prospects for continued growth and strong profitability in 2023. Our number one priority remains to preserve and grow the best workforce in our industry. We are grateful for their and your trust. I want to end by thanking our over 15,000 employees for their hard work and dedication. I'll now turn it back over to Valerie for questions. Thank you.
spk01: Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star 11 on your telephone. Again, to ask a question, please press star 11. One moment for our first question. Our first question comes from Sean Eastman of KeyBank. Your line is open.
spk09: Hi, team. Thanks for taking my questions, and nice quarter. I wanted to just dive into the backlog trend a little bit. It's very helpful to know that excluding modular, which had the big pre-bookings dynamic, the backlog's pretty flat, and that's actually pretty bullish in a heavy burn quarter. I think that's very helpful. But perhaps you could comment on just the overall bid activity, the proposal dialogue, how that's trended maybe since the start of the year. And perhaps give you guys an opportunity to set an expectation on how this modular burn and how optically the backlog might trend over the balance of the year.
spk04: All right, Sean, this is Brian. I'll go first, and I'll let Bill comment a little bit more in modular. As you noted, and we noted in our formal words, that we had big pre-orders, and we are burning through that work right now. The opportunities in the markets are still very robust. And as you know, we're a little bit different now. We do have bigger projects. It's going to be lumpier. So you might have some quarter-to-quarter pluses and minuses. But the overall trend that we're seeing from a demand environment is still very good. We are still making sure we're looking for good work with good margins in it. You know, that's really in our wheelhouse. So, you know, we're still very optimistic and feel very good about the position that we're in.
spk03: Bill? Yeah, so I'll just talk about modular for a second. You know, modular, the difference is – Our entire book of business is doing amazingly well, but at the margin, the interesting things you see in the quarter are heavily driven by modular. So modular booked $800 million of work in a week. In December, they had additional pre-bookings in January, and now they're building that equipment. And keeping in mind the new million square feet of space hasn't even come online yet, so that'll burn quicker. They have a very, very good order flow, and they're They're evaluating how much more of that work they can take. That's also really affected our cash because when we took those big pre-bookings, we had the right to – some of that work's not even until 24, but we had the right to bill a notable portion of it and be paid that immediately. That was part of them inducing us to add that capacity. So it's added some lumpiness, but as Brian said, we've never had stronger demand characteristics in our business than we're experiencing right now.
spk09: I think that's all very helpful. And just as we think through the go-forward growth potential on top line, we have a few different moving parts to consider. We have inflation abating. We've got tight capacity. But then we also have this massive backlog growth trend. I'm just trying to piece all those together. Is there any way you can help us think through those and what a good way to think about next year's organic revenue potential could be, how much visibility you have on what that would look like into next year at this point?
spk03: You sort of nailed the bigger than usual variability in there, especially the price of the revenue that's a pass-through, generally a pass-through for us, like materials and equipment. But if we sort of assume that away and say, we can assume that away and say, listen, we're not going to assume deflation in that area, but we're going to assume much, much less normal inflation, meaning next to no inflation. I still think we would expect to have higher revenues for sure in 24 than in 23, just in light of our backlog and our pipeline and the demand. That is going to, to a certain extent, be held back by our guys. We have a fantastic workforce. They have been working very hard for a few years. Human beings can only do so much. We're growing our workforce, but we play a long game at Comfort. We've had growth and positive cash flow for 20 years. And we're trying to take work that's favorable to our guys, that has favorable locations, that have reasonable GCs who don't run a miserable project. Our focus right now is build and preserve that workforce. And the things we need to do in the long term to do that is what's going to really benefit our shareholders. Having said that, the demand is so great, it's almost irresistible. Yes.
spk09: Okay, and then last one for me is, you know, it's nice to see the revenue outlook being taken up for 2023, but you guys are standing by this gross margin at or near 2022 levels. So I guess that's just curious to me because we're running above 2022 levels in the first half, and I can't really think of a reason why we should be. down year-over-year gross margin in the second half, but maybe you tell me. Perhaps there's a tough comp on margins as well in the second half.
spk03: Well, for one thing, just to correct what you said, we actually said in our prepared remarks that we expected to trend at or above, slightly above the margins.
spk00: At or above?
spk03: Yeah, yeah. And, you know, how far above? That's a lot of work between here and when we know that.
spk04: But, you know, Sean, thanks for helping us correct that. Also, we're performing at a very high level right now in the field. We couldn't ask for more than we're getting from these folks right now.
spk09: Okay, great. So, I mean, everything's going great. Execution's good. And we're, you know, we're looking... at least a little bit better than we would have thought before on margins in addition to the stronger revenue outlook. So thanks for clarifying. And I'll turn it over there. Thanks a lot, team.
spk01: All right. Thanks, Sean. Thank you. One moment, please. Our next question comes from the line of Julio Romero of Sedoti. Your line is open.
spk07: Thanks. Hey, good morning, guys.
spk04: Good morning, Julio.
spk07: I wanted to talk about the SG&A leverage you're seeing in the model. It's really impressive. You know, how do you, what's going on there and how do you expect SG&A to, as a percentage of sales, to trend for the remainder of the year?
spk03: So we're optimistic that we can hold it at the levels that we had at the first half, which of course are unprecedented for us. As a percent of revenue, our SG&A has never been lower. Part of what's driving that is service. Even though service has grown every single quarter, since long before you were an analyst, and our service profits have grown, they just aren't growing as fast as construction. And construction has lower SG&A. It's really impressive. If you think about that SG&A leverage, people think, oh, you controlled your costs. But in reality, all we really did was held our gross margins as we grew and didn't add as much cost and that we certainly hope to continue to do that but we're at the level where our goal is to just hold these levels we're at now the risk to gross to the SG&A as a percent of revenue would be that revenue let's say there's some deflation in some of the big equipment which is selling for a lot more today than it sold for one two three five and ten years ago in any way you want to look at it here's the thing though if that happens our gross margins should go up, right? Because, you know, our materials as a percent of cost of goods sold are like in the 40% mid-low, low-mid 40-digit range, you know, 43%, 42%, 44%. And historically, they're about a third of our costs. So if they go down even a little bit, you'd see our SG&A tick up a little, but you ought to see our gross margins make up for or possibly more than make up for that. So just it's a hard moment to predict that because there's that big elephant in the room of costs that pass through us.
spk07: Yeah, no, that totally makes sense about the service business, you know, not growing to the extent of the construction business and that affects the SG&A. I really appreciate that explanation there. Maybe you could talk about the service business, the trends you're seeing there. And I guess could service maybe outgrow construction in 2024, just given the tough comps that construction would have?
spk04: So, this is Brian Julio. If you look at service in general, you know, we've tripled it over the last 10 years, doubled it over the last five. We'll continue to get good, solid growth. But, you know, it's slow incremental growth that's very consistent in service. For it to outpace construction 2023, 2024, I don't believe that'll happen. I think it'll still grow. But these construction markets are still very strong this year and next year. So we will get more growth out of construction than we will out of service.
spk07: Okay, great. And then just last one for me is just maybe talk about if artificial intelligence is kind of driving any newer activity within data centers lately? And is it just the hyperscalers or are there others out there at the moment?
spk03: So, you know, there was an already big demand for data centers has gone up a lot. So the answer is, of course, yeah, it's absolutely it's not just driving the number of projects, it's driving the value of the projects. These these new servers can burn you know, two, three, four times hotter. And guess what? We're in the cooling business. So it's really, you know, it's really advantageous for us.
spk04: You know, and also the electrical demand is in the same range, two to four times more requirements. So is this more work for us to do in each of these buildings, Julio?
spk03: The other thing that happens is the buildings become even more technically complex and hard to execute. which pushes people towards us, right? Because we have the big workforces, the very, very capable, you know, but people are much less likely to think cheap and cheerful right now.
spk07: Got it. Well, thanks so much for taking the questions, and I'll hop back into queue. All right.
spk04: Thanks, Julio.
spk01: Thank you. One moment, please. Our next question comes from the line of Joshua Chan of UBS. Your line is open.
spk06: Hi, good morning, Brian, Bill, and Julie. Congrats on the great quarter. All right, thanks, Josh. Good morning. Good morning. I wanted to ask about the project outlook, I guess. Basically, projects that are even beyond your backlog, what you're seeing across the different end markets of work that you're possibly preparing to bid on.
spk03: So it's still never been better. Right now, there's more work. We're turning away work. That's why we're able to be picky about trying to find work that's good for our people. And, you know, it's never been better. The amount of demand, you know, so you have, we're over 50% industrial, right? So on the technology side, you have data center demand that's really taken another leg up from already a strong positioning. And then you've got totally new sources of demand. We're deployed very heavily on two of the largest silicon manufacturer projects in the United States. Battery is starting to roll revenue through more. And then you've got really good manufacturing. You've got really good pharma. It's just extraordinary. Offshoring hurt us for 15 or 20 years, and reshoring feels like it's got legs right now.
spk06: That's good to hear. Thanks for the call there. And then on the modular part, business, could you remind us when the million square foot capacity comes online and kind of your timeline of completing the large order and when you might be able to assume newer orders in the modular side? Thank you.
spk03: So we may have some production in that space by the end of the third quarter, but if so, in one of the two new phases, if so, it won't even be detectable. By the middle of the fourth quarter, we should have at least some production in both of the new big buildings. Our prospects for additional bookings in modular, like every other part of our business, they've never been better. Right now, we have orders we could take that we are waiting to make sure we can execute on what we have, quite honestly.
spk04: You know, Josh, in the lives of projects, it's all about the time. You could have won one in the middle of June, right? That's going to come into July. So on the lives of work, timing's different than it is on the smaller work, which is quickly awarded. The bigger ones just take a little bit longer.
spk06: That makes a lot of sense. Thank you for the color, and good luck in the second half. All right. Thank you.
spk01: Thank you. One moment, please. Our next question comes from the line of Brent Billman of DA Davidson. Your line is open.
spk05: Hey, thanks. Good morning. I guess Brian or Bill, can you just maybe talk about some of the discussions you're having with customers on the modular side? Are there similar order opportunities out there like you saw kind of late in 2022 that might be added over the course of the next 12 plus months?
spk03: So we can only talk a certain amount about that rate, but our single largest customer that we've done work with since really before we bought really either of the two companies that do modular for us, so it's one case more than 10 years, we're looking at ways to adapt their scope so that we can do more for them and also leave good work for contractors. We have new orders that We're in design on for a new major customer. And quite honestly, we're in conversations. We've been visited by others. But frankly, we're capacity constrained for the foreseeable future, right? And we're going to, you know, the people who've been good to us forever, we have to take care of them and make sure we give them what they need because they treat us well. But, you know, we're absolutely out there developing Really, for all of these, especially on the data center side, for all of these people, it's an all of the above strategy. They want to build modular. They want to build stick built. They're doing it all. They're doing for that what we're doing for hiring people, and that is everything we can think of.
spk04: It's amazing how many opportunities are out there just in the state of Texas, Brent.
spk05: Got it. Maybe just sticking with modular, how much of an impact is that? It sounds like it's ramped up a lot here, maybe in the quarter, first half. How much of an impact is that having on your margins and mechanical?
spk03: Their margins are slightly lower than the average of our mechanical margins. Their margins per dollar spent on labor are as good or better. They use a less skilled on average less, you know, very skilled but not as skilled as, you know, journeymen out in the field. Labor force, but no, I mean, they average our margins down as far as how much. It's in the tens of basis points because they're still, as big as they are, the rest of Comfort's still four-fifths of the business, right?
spk05: Okay. I guess lastly, Bill, I mean, I you know, $6 in free cash flows through the first half caught all the comments about the moving pieces attached to that. I think you're telling us don't expect a repeat of that, but is it feasible that you could still do it? Because second half of the year tends to be pretty strong cash generation for you, historically speaking.
spk03: So it would take a new pre-booking to maintain this. It would take, and most likely... If that were to come, it would not come in time for us to collect the money. You know, we literally have $200 million we haven't earned. That is a lot of money. And it's only good news, right? The fact that we have those relationships with our customers and they understand the kind of risks we take for them, but you can't earn the same money twice. So, you know, we just, you know us, like we just want to be perfectly clear with people about what's happening, right? We made it clear to people. When we got the pre-bookings, that was going to be lumpy and there'd be a quarter or two where there'd be some normalization of that. And we want to make it clear that all this advanced cash we're getting has to normalize over time. You can collect money early, but you can't collect it twice.
spk05: Right. Just last one. Maybe just you could talk about the implications. the heat waves you all experienced where you're at. That seems like it's hit a lot of the markets that you have operations in. What's that mean for the company?
spk04: Well, as you can imagine, it is hot in a lot of places. From a work perspective, right, 100% utilization, if not more. If anybody's living in these places, try to get someone to come to your house. If we don't, it's just very difficult. But the implication for us really is the health and safety of our workers. You know, making sure they're staying hydrated, regulating their work, because it is, you know, down here in the south, it is really hot, Brent. So we can really, there's plenty of work for them to do. We just want to make sure that we take care of them for the long term. That's the bigger implication. There's plenty of work out there. That's not the problem.
spk05: Gotcha. Brian, is that driving outside contributions from service as well?
spk04: Yeah, services, you know, fully utilized, fully capacity. You know, they're working weekends. You just got to make sure you take care of them so you don't run them into the ground, you know, in this heat. Because some of these folks who are on roofs down in Texas, they're probably jogging 120, 130 degrees on those roofs. Same in Arizona. So you just got to be careful how much you're working them and what the conditions are. But it is driving a lot of work. A lot of repair work, et cetera, as you would imagine. Yeah, understood. Okay, thanks, guys.
spk01: Thanks. Thank you. One moment, please. Our next question comes from the line of Adam Thalmer of Thompson Davis. Your line is open.
spk08: Hey, guys. Great quarter.
spk01: Hey, Bill. Thanks, Adam.
spk08: I just wanted to confirm the revenue targets that you gave. Those were organic, right? They did not include LDCO? One.
spk03: Yeah, they're organic. You know, Ellicott's not. Ellicott's a fantastic company, but percentage-wise, what did they give us? $30 million in the quarter. But no, those are organic. But it's a rounding error in difference.
spk08: And then, well, I was hoping you could comment on 2024 revenue. Well, you guys kind of brought it up in terms of having some visibility. And just playing around with the model last night, I don't really know where to set that as a start.
spk03: So I expect 2024 revenue will be larger than 2023 revenue. I think if you keep the margins close to the same, you can count on some growth. If you don't show growth, you should expect our margins to get higher. So the problem is it's not an independent variable, right, because it changes. Really, the operative part of it is mixed.
spk04: Yeah, I mean, we already have a significant amount of work for 2024 already, Adam. So we're We're looking at 2025 in some cases. We're feeling good about 2024 for July, for sure.
spk08: Bill, I guess if you have the opinion that the revenue growth is going to decelerate, then you get a little bit more optimistic about margins. What do we do with CapEx going forward? When does this And I thought it was one modular facility. You said two. But when do they stop constructing?
spk03: So it's 400,000 plus square feet in North Carolina and 600,000 plus square feet in Texas. The money for those build-outs should be substantially fully funded by the end of the year. I think vehicle catch-up actually has really got a long way to go. So if we were, you know, we're bigger now. But I would say we're two years from getting back to our traditional level of CapEx that you know, and we'll probably get halfway back there next year. We'll be down sort of halfway back to normal. So it's doubled now maybe from its long-term trends. It's 150% of its long-term trends next year, and it's back to normal by the following year. That's obviously just a guess, but keep in mind CapEx is so small for us, right? We're such an asset-light business that it's not going to drive your model on the cash side.
spk08: Perfect. And then just lastly, does the margin profile of the business change at all as the revenue shifts more to modular? I'm just thinking over multiple years.
spk03: So the gross margin, yeah, I would say if you were just to freeze everything and say, hey, freeze everything but double modular, what you would see is materials as a percent of cost of goods sold would be higher, and you would see Gross margins would be lower and SG&A would be lower. And we'd make a lot of money. One way to look at the productivity of modular, people get concerned that it has slightly lower gross margin. And the reality is the margin per dollar of labor is as good or better than anything we have, and think about that because it's pretty damn good in the rest of our business, right? So you just have to, you know, these are not the same businesses. They have different characteristics, cost characteristics. There is a lot of material, steel, chillers, generators, you know, going into those things we're building in those plants.
spk08: Okay. Good color. Thanks, guys. All right. Take care, Adam.
spk01: Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Brian Lane for any closing remarks.
spk04: Okay. Thank you, Valerie. You know, in closing, I want once again to thank all our amazing employees. Hope everybody takes care of themselves out there. And everybody else, I hope you have a great rest of your summer, and we look forward to seeing you soon. Thank you.
spk01: Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.
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