Comfort Systems USA Inc (FIX) 2003 Q4 法說會逐字稿

Good morning, and thank you for standing by. (OPERATOR INSTRUCTIONS). Now, I will turn the meeting over to Mr. Gordie Beittenmiller, Chief Financial Officer. Sir, you may begin.

Thanks, Tamara, and good morning everyone. Welcome to Comfort Systems USA's fourth-quarter earnings conference call. At the outset, we want to remind everyone that our comments this morning, as well as what we have issued in our press release, contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. What we say is based on current plans and expectations of Comfort Systems USA. Those plans and expectations involve risks and uncertainties that could cause actual future activities and results of our operations to be materially different from those set forth in our comments. A more extended list of specific risks is detailed in our 10-K, and the expectations in our final paragraph portion of our press release.

With that, I would like to introduce this morning, Bill Murdy, our Chairman and CEO. Norm Chambers, our President and COO is also with us. Bill is going to open our remarks.

Thanks, Gordie. Good morning and thank you all for participating in our fourth-quarter conference call. Norm will follow me here in just a minute.

This quarter was another quarter of real progress for Comfort Systems. We posted improving results in our ongoing operations, even as conditions in our industry remained mixed. And we had an excellent cash flow quarter, ending the year with zero net debt. I might mention, for the full year, our free cash flow was $21.5 million, more than double our 2002 levels. And clearly, we are heading into 2004 in a very solid position.

Excluding divested operations, our same-store revenues increased 4.1 percent in the fourth quarter. Same-store operating income, excluding goodwill impairment, was up 47 percent from the relatively-poor (ph) results we reported in the fourth quarter of '02. And operating margin increased 50 basis points to 1.6 percent, still, by the way, much below our ultimate target and what we believe is sustainable -- achievable and sustainable, but nonetheless, improved.

Breaking the (indiscernible) margins down, we saw same-store gross margins decline 150 basis points from last year's fourth quarter, as we continue to see some tough pricing in our industry. However, our gross profit was also hit with a $1.2 million addition to our workers' comp and general liability reserves, based on updated actuarial projections of how some of our longtail insurance will run -- liabilities will run off over time.

In addition, two of our turnaround operations in '03 continued to produce losses in the fourth quarter, as we consolidated those operations and worked to wrap up some poorly-performing projects. We expect those operations will be profitable in early 2004. Norm will have additional comments on those operations and others, as I said, in a moment.

We more than offset our gross margin decline with a 200 basis point reduction in our SG&A, a 7 percent decline in SG&A from last year's levels. Year-over-year, this decline resulted largely from downsizing of our energy efficiency marketing activities, lower health care costs, and operational consolidation in a couple of our markets.

As we announced earlier this year, we closed the new credit facility at year-end that provides us with more flexible terms and increased capacity. After several years of working against relatively-restrictive credit market conditions, we are very pleased to put in place a more traditional financing that reflects the strength of our balance sheet and confidence in our prospects.

We did recorded a non-cash write-off in the fourth quarter of the deferred arrangement costs and discounts relating to the credit facility that we replaced -- unavoidable. But, we are gratified that, going forward, we will have to devote considerably fewer management and organizational resources to capital structure matters than we have in recent years.

Turning to broader industry measures, we cannot say we are quite out of the woods over the last couple of years in our industry, and in the commercial industrial construction sector, generally. However, we continue to see very promising developments in our markets. Nonresidential building activity has begun to show gains, and after a long period of decline, FW Dodge, who, as most of you know, is the most widely-recognized industry forecaster, recently confirmed its expectation of increased activity in most regions of the country in 2004, and in every major building sector in which we participate, except health care. Dodge also forecasted even stronger growth in 2005 and 2006.

Elsewhere, shipments of HVAC shipment have shown year-over-year increases in the last six of seven months. And the major manufacturers have noted, cautiously, positive order and shipment trends and observed that the deferral of HVAC maintenance and replacement activity over the past couple of years is generating pent-up demand that should contribute positively to industry activity levels over the next couple of years.

For Comfort, in particular, our year-end backlog was modestly down, year-over-year and sequentially. However, these moves reflect some turning of that backlog into revenues at operations that had been heavily booked in '03, along with our focus on increased selectivity on projects.

Having said that, we ought to note that backlog has increased through January and February, including some notable awards as later as this week. Quotation activity is increasing, and the architect and engineering activity that we see in our markets appears to be up noticeably. The net of these various factors, for us, is an expectation of improving industry conditions and activity levels for 2004. And, while that general increase is very welcome, our primary focus this year is on internal execution and margin improvement.

And, on that note, I would like to turn the floor over to Norm Chambers, our President and Chief Operating Officer.

Thanks, Bill. Good morning, everyone. From an operations standpoint, we continued to our progress this quarter, setting the table for what we believe to be significant improvements in 2004. In the fourth quarter, we increased same-store revenues, operating income and operating margins.

Field level and SG&A and indirect costs were down 3 percent and 9 percent, respectively. This is encouraging, and reflects the efforts made by our regional vice presidents and our company presidents to tackle costs. This is the first year-over-year we've seen in the last couple of years. We are pleased with this improvement, but are still not performing consistently at the levels we expect.

Improved working capital performance returned us solidly to the positive cash flow column this quarter. New business indicators are pointing upward, and we are paying increased attention to pricing and capacity considerations, given the prospects for improving industry conditions.

National accounts results showed gains this quarter, and we further developed our unit level training programs on margin improvements.

During 2003, we steadily improved our underperforming operations. As Bill mentioned, two of these operations still turned in disappointing fourth-quarter results. One in Colorado is being combined with a stronger operation also in Colorado, and this transition is on-track.

The other is in Northern California. We are consolidating activities at this unit, and thoroughly tightening down on its ongoing projects. We expect smaller losses in this unit in the first quarter, and then no further losses, beginning with the second quarter.

Our highest operational priority is to stabilize and rationalize the units that underperformed for us in 2003. We have made significant progress on this front throughout the year -- downsizing, consolidating, and upgrading management teams, and in some cases, closing or selling operations. With forty-plus operating units, we certainly cannot say none of them will underperform in 2004. But, we are determined that we will see greatly improved performance in 2004 from units that did underperform in 2003. And, we are confident that this outcome will be achieved.

Turning to cash flow. We were pleased with our operation's improvement in working capital management this quarter. This encompasses both the speed with which we build and collect for our work, as well as the conservation of cash and the funding of project costs. This remains an ongoing focus for us.

On the new business front, we have seen increased bookings in this first quarter, along with a number of indicators that market activity levels are improving. We are working with our operations to navigate the cautious pricing environment that prevails as the recovery begins to take hold, and to manage our project selection and capacity to best positions ourselves for good work in an improving market.

We took a couple of good steps forward in national accounts group this quarter. Revenues and income were up sequentially and year-over-year. We added more than 800 sites, with accounts such as Blockbuster, AD-4 (ph) Lumber, and Storage USA, as customers continue to find value in our combined preventative maintenance services and monitoring offering. We continued to expect good growth from this initiative in 2004.

From an execution standpoint, we continue to work on job loops, service and productivity improvement initiatives. All of our companies have been through the initial training phases. Twelve of our construction companies have been targeted for a year-long improvement process. Six of these operations have started this intense program, which includes comprehensive training at the project management, superintendent, and foreman levels -- and, testing cycles.

An additional 12 service departments have been scheduled for sales and service training, as well. As these improvements take root in our job selection, our pricing, our job planning, and our labor utilization, we expect to see steadily-growing impact in our results in 2004.

One of the very brightest spots we continue to have is our commitment and our results in safety. Our 2003 OSHA incidence rate is at 3.99, compared to 5.04 in 2002. This is a reduction of almost 21 percent. The industry average, according to the Bureau of Labor Statistics, has also improved, and is now at 8.9. This puts us 55 percent below the new and improved industry average, and we are very pleased with that.

As Bill noted, our primary emphasis in 2004 is on internal execution and margin improvement, not on broad revenue growth. While we expect more favorable industry conditions this year will be supportive at the revenue line, we believe we will get the most leverage and results from sorting out our underperformers and raising the overall level of our own project and service execution. Based on steady progress in these areas, we expect our 2004 results to be significantly better than 2003, and we look forward to a successful year.

Gordie?

Thanks, Norm. Bill and Norm have commented on our overall performance, including same-store revenue and income performance. Looking into our revenue picture a little further, our book of business remains well-diversified. We actually saw a modest increase in office building work this quarter to 12 percent of our revenues. Manufacturing stayed steady at 15 percent. The institutional sectors of health care, government and education increased, or comprised, actually, 33 percent of our business, with some drop-off in schools, which has been among the better sectors in the tough market of the last couple of years.

Multifamily work accounted for 13 percent of our activity and remains active. Retail backed off somewhat to 9 percent, with the rest of our work in smaller miscellaneous sectors and spread out.

Our backlog in quotation pipeline indicate that we should begin to see more activity in office and manufacturing facilities in coming periods, with steady levels in government, health care, and multifamily.

Our backlog stood at 404 million at December 31st, down 6 percent, sequentially and year-over-year. As Bill noted, these declines reflected some revenue burnoff from operations that were at historically-high backlog levels, along with increased project and pricing selectivity, as we head into what we believe are improving market conditions. Consistent our expectations, backlog has increased in January and February. Ninety percent of backlog is scheduled to perform during 2004. And this remains at the higher end of our historical patterns.

We do see signs that pricing may be bottoming out. Margin indications in our backlog are up modestly, and quotation pipeline and sentiment surveys indicate pricing expectations are holding steady.

Let me comment on some particular items in our financials this quarter. Bill mentioned earlier the gross profit impact of increased insurance reserves relating to workers' comp and general liability. These reserves relate to our older periods when we initially made the transition from guaranteed cost insurance to self insurance. More recent periods are reflecting improving insurance and cost performance trends, consistent with our strong safety record.

As Bill noted, with the establishment of our new credit facility, we wrote off deferred arrangement costs and discount associated with our previous credit facility. Our write-off in the fourth quarter was 3.3 million, pre-tax. This amount was less than we previously announced, due to a favorable impact of 1.3 million, pre-tax, that resulted from the modification of a warrant and put obligation that was issued when the terminated credit facility was originally establishment. The holder of this warrant and put, one of the Company's lenders in the previous credit facility, agreed to this modification in connection with the termination of this credit facility.

We recorded a non-cash goodwill impairment charge in the quarter of $2.7 million, pre-tax. This impairment primarily resulted from downsized operating plans that were established in the fourth quarter for certain of our units.

We also recorded a non-cash loss in discontinued operations related to the sale of a small unit in the fourth quarter, and the corresponding write-off of goodwill relating to that unit and that transaction.

Finally, taxes. We reflected a somewhat higher effective tax benefit rate this quarter. This resulted from a comprehensive review of our tax position across all our identities and taxing jurisdictions. Based on this review, we increased our reserves related to realizing state tax operating loss carryforwards at certain of our operations in the future. These reserve additions were more than offset by the reversal of previously-established reserves related to potential audit exposures we believe are greatly diminished.

Another favorable aspect of our current tax position is that we expect to realize approximately $4 million in cash benefit by midyear '04 for the carryback of various '03 items against earlier federal periods.

Going forward, our effective tax rate should improve as pre-tax income levels improve off of what have been historically low levels. We currently expect our overall effective rate will be in the mid-40-percent range in 2004.

I would like to now pitch it back to Bill for wrap up and Q&A.

What we are presenting here is a positive picture, going forward, that we see. I am sure there might be some questions on what I or Norm or Gordie has said. So, I would like to open it up for questions. Do we have our moderator out there? Tamara?

(OPERATOR INSTRUCTIONS). Michael Russler (ph).

Good morning. Just follow up in terms of the pricing, and looking at the improvement in same-store comps in Q4, could you just talk about what the pricing activity versus last year was on that?

Yes, I will try, Mike. We certainly have been going through a period of increased opportunities in our sales pipeline. Those opportunities are reflecting a slightly-improved design and build portion of our work. The design and build portion of our work historically gives us the opportunity to do value-added engineering and to price accordingly. We are seeing some improvement of that, but I would think it is still going to be a quarter or two before we will be convinced that the pricing environment has truly improved.

Okay, what is your mix between public and private sector right now. I guess the thrust of the question would then be, what is your ability to move resources as the private sector comes back?

Mike, this is Gordie. We estimate that our public sector work is about a quarter of our book of business. Now, you probably have heard me say that institutional work is a third of our book of business, and that encompasses health care, government and schools. But, some of the work in schools and in health care is not pure public sector, although it tends to move in similar patterns.

We have been able, over the last couple of years, to move our efforts out of the manufacturing and office building sector, to some degree, since those have been utterly devastated over the last couple of years, and into the public sector that has been steadier. It appears, now, that there are stirrings of life, finally, in the office building and manufacturing sector. Government work remained surprisingly steady, and health care -- Dodge expects to be off, but we are seeing, in our particular operations, we are seeing activity there. So, we have the ability to move between sectors, not on a dime, but that is one of our strengths.

Mike, this as Bill. I think we keep these numbers a little differently than some. When we say public sector, as Gordie just said, we include health care and schools, which -- there are different dynamics in that sector than there is, for instance, in the federal, state and municipal bonded bid work, where there are a whole different dynamics on nets, margins, and especially the way those projects have to be financed. So, we don't have a lot of that kind of work. We are focusing health care, schools, some municipal work, some federal courthouse, and that sort of thing. But, we don't have the big longtail of public projects as a big part of our activity.

Okay, we have seen a lot of talk recently about steel pricing and how that may be affecting some industries. What would your potential exposure be to steel pricing?

We think our exposure is fairly limited from the standpoint of the amount of sheet metal work we do. But, you know, we are cognizant of the fact that prices have gone up. We have instituted a policy of qualifying any lump sum bids to reflect that we will have to pass on cost increases and surcharges. We are monitoring it very carefully. We are in a position, in most cases, to pass on increases that our suppliers and vendors add to -- have on us. But we will have to continue to watch it very carefully, indeed.

Okay, and a final question our housekeeping, Gordie. Can you just take us from the 3 million, or 3.1 million, operating income on the pro forma basis, down to the 5-cent number for continuing operations?

Here is how I will go at that, Mike. When we get down to that 5-cent number in the table that was attached to our press release, we take out goodwill impairments, on an after-tax basis, of 2.5 million. We take out the write-off of our debt and discount, which is 1.7 million on an after-tax basis. We add those back, if you will, to our income from continuing operations on this basis.

The one item that ends up being somewhat unusual in that fourth-quarter reconciliation is the effect of our tax benefit reversal in the fourth quarter. We ended up with a fairly-high benefit rate that probably added 2 cents to that number, as you are analyzing it. But those benefits were realized and recognized in the fourth quarter. If you were to use a mid-40 percent tax rate on adjusted pre-tax, done this same way in our ongoing operations and excluding goodwill and excluding a write-off of the debt arrangement costs, you would have a pre-tax of about a million eight-and-a-half. And you would have after-tax of about a million. That corresponds to about 3 cents. So, the tax benefit is one of the things that we have to take note of in the fourth quarter.

Given what is on our press release table, that is as good a reconciliation as I can provide you at this point. I can go in a different direction from operating income down to pre-tax off-line, once I nail down the other things in between interest expense and other income and expense on these operations.

Okay. That's fine. Thanks.

Pat Hillenmeyer (ph).

Bill, you had mentioned the long-term margins -- that you are well-below that. Where do you think those can be? I know you've said that probably '98 was (indiscernible) that you wouldn't return to those levels. But, what do you think is a normalized level?

Well, we think that the normalized and sustainable margins, given any kind of reasonable economy, are at about 4 percent. You don't get there in this kind of a business overnight. We are working through projects that we have taken in a period of margin depression by virtue of less work and more competition, that is a result from less work (indiscernible). But, I think, as a business model matter, we would be at the 4 percent operating margin.

And to get to the 4 percent, what would the gross margin need to be?

With our current SG&A setup, we would need to get back to sort of our traditional gross margins of 17. We are below that, as I indicated, and we have had this onetime -- what we believe is a onetime actuarial adjustment -- in our longtail insurance liabilities that affected our gross margins this time. But, we see that, with anything coming back to the economy, we believe we can get back to the pricing -- get back to pricing pretty quickly.

And, as a percentage, can you keep SG&A at these levels? Or, as the economy comes back, do you also have to put a certain level back into SG&A?

I think we can keep these SG&A levels.

Where are your top performing units? Where are the margins for them now?

Norman, why don't you talk about that at the operating level?

Our top performing units are certainly in the range that Bill described. And, we have a number of companies that do perform that way -- in that 17 percent gross margin level. From just an overview, our East region performed very well, and we expect it to continue. Our Southeast region, our South region -- those three regions did very good. Midwest region probably, as we all know, has been the most affected after the downturn in the economy, but it is improving. We've got good companies there, good people. In the West, as you have heard us speak about, we are probably working through some of the more challenging situations. But, we have real optimism that we will see the improvement that we expect there as well.

So, my point is that we are, both in terms of negating our loss-making companies, improving our margins through the training on our service side and construction side. We are doing things and have our hands on, we believe, the drivers to drive the kind of bottom-line results that we have should have. And that's what we are working on.

And then, what percentage of your business is now design and build? Or, what percentage of the backlog is design and build?

Let me confirm something on that. And, if you have another question to ask while I'm doing that --

Yeah, and related to that, to get back to those margins, is it primarily just laying revenue over the fixed infrastructure? Or, is part of this a mix including more the design and build, or --?

Yeah, it definitely is not a revenue-driven deal. I will tell you, we will benefit from that if it occurs, but it is really the selection of work. It is the planning, the execution; it is really blocking and tackling on both the construction and service side. We have companies that do that very well. We have companies that do that less well. And, we're going to bring the less-well up to the well.

To answer your question about design and build, I think you've heard us say before that, in a tough environment, it is harder to get a design and build beachhead in many markets, and to sustain it. We got as low as 30 percent of our project work being done on a design-and-build basis. That has now rebounded up to 40 percent as of the fourth quarter, and that reflects, I think, three consecutive quarters of improvement. So, that is another positive indicator for our traction going into next year.

And, is that 40 percent of the total? Or 40 percent of the backlog that is out there?

That is 40 percent of the revenues that we recognized on a project basis in the fourth quarter.

Any sense on the backlog if it is around that rate or higher or lower?

We don't measure that precisely in cutoff backlog as of a quarter or month-end. But, I would say we are very confident that the design/build mix is at least that in the backlog, given the trends we are seeing.

Okay. Thanks, guys.

(OPERATOR INSTRUCTIONS). At this time, we have no further questions.

Thank you all for being on the call with us here. Oh -- we see a question coming in.

Yes sir, we do have one further question. Did you want to go ahead and take that?

Oh yeah!

Mike Burke (ph).

Thanks a lot. Do you guys have a forecast for cash flow and capital expense for the year -- capital expenditures?

We do not, Mike, provide specific guidance for forecast, including on cash flow. What I will say is that our historical patterns on CapEx have been fairly low, at roughly what our depreciation has been, which has in the last couple of years, run 5 or $6 million. And our CapEx, for example, in '03 was actually a little less than that. So, not a particularly capital-intensive environment for us.

Our free cash flow of 21.5 million in '03 was a pretty strong level. And, I don't know that we would endorse being able to do that again, but we have performed consistently well on cash flows. So, I would generally expect a range of free cash flow between 10 and 20 million. That is sufficiently wide to, I think, be somewhat responsive to your question.

Okay. Thanks.

Evan Marwell.

Good morning. Can you comment at all about the average job size that you guys are seeing in your backlog? I believe last quarter you said it was decreasing, and that was a good thing. What you seeing now?

It stayed about the same in the fourth quarter as it was last quarter. I think it only moved a small amount. Our average project size, I think, is $218,000. We've got almost 4,200 projects ongoing in backlog right now. And, a fairly-diversified book of business at that average project size. A little bit more than 85 percent of our work is done in projects that are $5 million of less, and half of that is under a million. So, there some comment from that -- it stayed pretty stable this quarter.

Okay. Great. And the other question is, you mentioned previously that the job loop productivity activities that you guys have been undertaking are starting to take some hold. Can you give us an update on that? And specifically, how do you see that taking hold? How is that manifesting itself?

The bottom-line is, we will see our gross margin on projects and on service work increase. That is the only measure -- that is the only reason why we are doing any of this, because we believe we can improve our productivity by performing the training. We would expect -- we put -- every one of our companies has gone through the construction, introductory phase in the fourth quarter of 2003. We have 12 companies, as I said, earmarked on the construction side. Six of those are already in intense work. We have targeted the companies that, frankly, embraced this and we believe can have a beneficial impact on the overall performance of the company.

We have 12 companies identified in the service department side. I sat through some of the training myself this last week; it is excellent. It is real-time stuff, stuff that people can take to field. The encouraging thing, as we said before, is the size of our projects and the duration of our projects gives us the opportunity to make improvements and see those improvements in this calendar year. So, I am holding myself and others accountable to, in fact, do that. And, we will see -- we would expect to see some improvement by the second half of the year.

Okay. Thank you.

Bob Sullivan.

Thank you. Good morning. Could you -- I missed that number on the design and build part as a percentage in the backlog. And also, you had mentioned the deferral of maintenance has created some kind of pent-up demand. I would like to kind of flush that out a little bit better. Can you take a moment to describe what you are seeing in terms of the pick-up of that? And, how that's going to affect your business and your margins?

This is Bill, Bob. First of all, a little history here on your last question. Going into 2002, we expected that our customer base and our potential customer base, even though they would be an economic -- there was clearly going to be an economic downturn, they would maintain their equipment services, repair and retrofits. The downturn in the commercial, industrial, nonresidential sector proved to be so severe that what we saw was that our customer base did not even service, maintain, repair and retrofit what it had. And, all of the major end-item manufacturers -- Trane, Carrier, York, Lennox, Goodman (ph), Amana, etc. -- saw the same thing. Their equipment sales went down as people did not replace. The parts sales went down as people did not repair, etc. So, we did not think it would be that severe; it was. I mean, we are talking about the last couple of years as the worst two years in the commercial, industrial, nonresidential construction sector as the worst two years in the last 30. So, with his huge installed base of mechanical equipment out there that needs to be serviced, repaired, and retrofit eventually, it's just a logical conclusion that people are going to do that.

Now, we are starting to see that. And what comes back first is the smaller, discretionary projects, if you will. And, we are starting to see that. That is where our book of business is building a bit. It's not in the big project; there's not as many big commitments to projects. So, we are seeing it -- some of that stuff doesn't even run through our backlog. We rigorously measure backlog at the end of each quarter. We have projects of four or five or six weeks duration that start in mid-January and end in February that don't even hit the backlog. So, that is the kind of thing we are seeing. It is just a matter of logical almost that this mechanical equipment is going to have to be kept up with. And that is why we are noticing the OEMs indicating greater shipments, and all their projections are that that will continue.

Anecdotally, another place that we see it is in our sales opportunities pipeline. And we can look anecdotally at jobs that were on the books to be bid, or potentially, you know, a couple of years ago, that never materialized. And now find that they are coming back at -- resurrected. And we see that pretty consistently. It is not a tidal wave of activity, but we are seeing work that had been deferred -- that was identified and deferred -- come back on the books and give us an opportunity to win that work.

Great. And did you give out that design and build percentage number?

In the fourth quarter, 40 percent of our project revenues were done on a design/build basis. We do not have a precise measure of design/build mix in our backlog as cut off at 12/31, although, given three-quarters of increasing mix in our revenues in design and build activity, we are pretty confident that that indicates it would be at least 40 percent, if not more.

Perfect. Thank you very much.

Before we take our next question, Tamara, I want to come back to something that someone asked earlier -- Mike Russler asked to go from our operating income on our ongoing operations down to the 5-cent number that we reported in one of our supplemental tables in the release. From that $3.1 million number we have, Mike, if you're listening out there, 1.2 are actually the precise face (ph) number from the GAAP income statement of interest expense, and a million 155 comes off of that.

And in other expense number, also from the face of the GAAP income statement of 73,000 -- and that gets a pretax number at ongoing operations of a million 843. Because of our tax benefit realizations and reversal of reserves in the fourth quarter that I mentioned earlier, we actually, against that number, would have a tax benefit of $283,000, which would get us the number that is at the bottom of that supplemental table, an after-tax number of ongoing operations of 2 million 126, or 5 cents a share.

It is important to recognize in that number, though, the effect of the tax benefits that we realized in the fourth quarter. If we had seen a more normal tax rate on that of, let's say, in the mid-40 percent range, then our after-tax number would have been around a million dollars, net 3 cents. But, of course, we put in the table what we actually realized on taxes. As I indicated, going forward, we should see in '04 a tax rate that is more in the mid-40 percent range.

Tamara, if you can go to the next question?

Jeff Beach.

Good morning. Can you discuss the competitive landscape a little bit? Whether you've seen a lot of competitors go bankrupt? Whether that matters, and there's still a lot of competitors out there? The surety situation, and whether that is going to impact you in '04 or benefit you? And then, looking ahead, as the first wave of business begins to pick up, do you think it will be -- that the industry will embrace better pricing across the board, which I think has happened in the past?

Sure, I will give it a shot first. It's Norm Chambers. It is really clear to me that our companies benefit tremendously by their local knowledge and reputation in markets they serve. We complement that by virtue of the fact that our balance sheet and our financial strength is without question. We have, largely with Gordie's great skill, navigated a surety piece during it's most difficult time, and have not had any problems with bonding. That is not the case with a number of our competitors. We have definitely won work where our competitors were unable to bond.

So we have the advantage of small companies being focused and being strong in their markets, but having the strength to draw on from the benefit of being part of Comfort Systems.

On the pricing side, I've said before that is past lives, I found it most difficult to come out of a downturn and to increase our prices. I have to tell you that I have been very impressed with the discipline that our men and women show in terms of choosing jobs, waiting, not taking the first job along, pricing more competitively. And I think, in part, that is because they have the entrepreneurial power and sense, and we incentivized the presidents on cash flow and on OI, not on revenue. And, I think that combination of things will hold us in good stead. But, every market is different. There will be some people who will want to take jobs at low prices, and hopefully we will not fall victim to that.

Just as a follow-up. How long do you think it will take before you see what you would call broad-based pricing improvement that you can look around at everybody and say things are getting better on the pricing front?

We are seeing it. We are seeing some impact in the Southeast. We are seeing some improvement in the South. We are seeing a little less, but some brightness, in the West. The Midwest, as I said, we've got great people there, great companies, great leadership. They are smart people. And it is a little slower there. The Northeast has remained strong for us, but that is led by a couple of areas that have been unusually strong. We may see a little bit more difficult marketplace there. So, you know, on balance, we would expect to see the South, Southeast, the West improving; the Midwest maybe coming along towards the end of the year, and the East being pretty stable for us.

(indiscernible) I think, if you want a time frame, I think (technical difficulty) more generally the pricing that we would like to see is more a second half of '04 phenomenon. What is missing from the market is the sort of time-to-market projects -- somebody wants a data center next week, somebody needs a hotel to open a month earlier. That is not in the economy. And, that would push it, but we're not expecting that either. I think I will stick with the second half of the year as the time when I believe we will see a general upsurge in pricing capabilities.

All right. Thanks.

Sir, at this time, we have no further questions.

Well, thank you all for being on the call with us here. I hope we have answered your questions adequately and have, either in the call or in the release, done a good job of describing where we have been, where we are, and where we are going, all of which we believe to be a very positive picture.

So, thank you again, and we will see your next time, if not before. Thanks.