Comfort Systems USA Inc (FIX) 2004 Q1 法說會逐字稿

Good morning and thank you for attending the Comfort Systems' first-quarter earnings call. At this time all parties are in on listen-only mode until the call is opened up for questions. I would also like to remind all parties that today's conference is being recorded. (Operator Instructions). Now, I would like to turn the call over to Mr. Gordie Beittenmiller, Chief Financial Officer. Sir, you can begin.

Thanks, Jeany (ph), and good morning, everyone. And welcome to Comfort Systems USA's first-quarter earnings conference call.

At the outset, we want to remind everyone that our comments this morning as well as what we issued in our press release contain forward-looking statements within the meaning of the Private Securities Litigation act of 1995. What we say is based on the 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. More extended list of specific risks is detailed in our 10-K, our 10-Q and our press release covering these earnings.

On the call this morning our Bill Murdy, Comforts' Chairman and CEO; and Tom Tanner, our Senior Vice President of Operations. Bill is going to open our remarks.

Thank you, Gordie, and thank you, everyone, for being on the call. It was a fine first quarter for Comfort Systems. Which reflects much of our work on productivity, costs containment and bringing greater discipline to our estimating and execution.

We reported a very solid revenue performance with same-store revenues of 193 million, up 10 percent from the first quarter of '03. And even more important, we reported substantial operating income improvements that was very good -- relatively and in the absolute sense in the first quarter -- which is a seasonally our lowest activity period.

Our gross margin was up both quarter-to-quarter and sequentially. And our SG&A was down 10.8 percent versus the first quarter of last year.

Cash flow low negative at about $6 million, followed a very strong cash flow quarter in the last quarter of '03. And, I might add, it was financed entirely out of existing cash balances.

And our debt at the end of the quarter remained at an all-time low. Today, as we speak, we have no draw on our revolving credit line.

As we noted in our last call, we have been working diligently on turning around a few underperforming operations. We also noted that we projected that one of those operations would have a notable loss in the first quarter. It did. But I can say that the improvement continues there, and indeed, that operation was profitable in the last month of the quarter.

We're also happy to report an increase in our backlog -- in fact, a 17 percent increase from year-end '03 to a record $473 million. Backlog increase is the result of some easing of industry conditions and non-res construction sector. And the effective business developments are done by our operations.

It would be hard in this call not to mention commodity prices -- steel, iron and copper, principally. Certainly, there's been a lot of ink devoted to that subject recently.

First of all steel, iron, copper and other commodity costs really only make up 10 to 15 percent of our construction project costs -- which, as you know, are not all of our revenue -- the remaining, of course, being service which does not demonstrate the same cost in commodities.

We have taken certain anticipatory steps in buying and setting up our contracts. And, in the first quarter, we saw virtually no impact of this. In the second quarter, we foresee only a modest and manageable impact.

I would note that in recent days, steel and copper, especially, the pricing seems to have stabilized. And in terms of copper, the futures are actually substantially down. This is, of course, something we are paying close attention to on a continuing basis.

Before turning the mike over to Gordie, I think a few remarks here about the departure of Norm Chambers, our now just passed President and CEO are appropriate.

As we recently released, Norm resigned entirely of his own volition to take up an extremely handsome offer with the Company, MCI, on whose board he had served for about a year. Speaking for the stockholders and stakeholders of comfort, we very much appreciate Norm's many strategic and operational contributions, and his leadership. And we're sorry to lose him.

However, we have a very strong team at Comfort. And a lot of depth and experience in our management, starting with our seasoned local operators, through our very strong and proven set of regional Vice Presidents, and to our always hard-working and very experienced corporate management -- which now includes, and has since the first of the year, Tom Tanner as Senior Vice President of Operations.

Tom, who has almost 30 years in our industry, and served with great distinction and results in our East region as the regional Vice President, will assume the Principal Operating Role of the Company. And, you'll hear from Tom in a moment, after Gordie has a few financial remarks. Gordie?

Thanks, Bill. Bill commented on our overall same-store revenue and income performance. Looking into our book of business a little further, revenue remains well diversified.

Manufacturing stayed at 15 percent of our mix, while the active multifamily sector inched up 14 -- to 14 percent.

Healthcare and government reached 12 percent and education was 10 percent -- totaling a steady one-third of our business in the broad institutional sector.

Office buildings came in at 10 percent, with the rest of our work spread among smaller miscellaneous sectors.

Our backlog and quotation pipeline indicate that multifamily and retail will be growing sectors for us in coming periods, with institutional steady with some possible uptick from healthcare, and mixed indications in manufacturing and office buildings.

Our backlog stood at 473 million at March 31st, up 17 percent sequentially and 2.5 percent year-over-year. These increases reflect both greater activity in our markets, as well as our operators’ effectiveness in winning the business.

Gross margin indications in this backlog are 100 basis points lower than our year-end level, and 40 basis points lower than last year's first-quarter level. This reflects some seasonality, as the first quarter typically sees more bookings on larger projects which tend to have lower margins. We believe these margins also result from ongoing elevated price competition, as many competitors continue to price aggressively until they conclude that improved market conditions are more than temporary.

There's also a mild degree of commodity price effect in these margins.

Overall, the increased level of our backlog -- even at a lower margin -- and our continuing booking activity, suggests we will see good gross profit volume levels over the balance of the year.

Quotation activity has remained steady, and prices are showing signs of firming. Matching these factors with ongoing cost control, we believe our expectations of significantly improved results compared to '03 continues to be well within reach.

I would add that our backlog has always been generally a directional indicator for us -- has only about 50 to 60 percent of our revenues at any given quarter cutoff are reflected in a flowthrough of this number.

Gross margin increased in the first quarter, mainly on the strength of significant improvements in some of last year's underperforming operations. Particularly, our Houston-based Multifamily Operations and our Salt Lake City unit. We also saw reduced insurance costs stemming from our ongoing attention to safety, and our excellent track record in this area.

SG&A was down 10.8 percent on a year-over-year basis -- primarily reflecting our broad-based cost reduction initiatives launched in the second quarter of last year, along with some additional operational consolidations.

As Bill noted, we did post negative cash flow of 5.9 million this quarter. It is not uncommon to have lower cash flow in a quarter that follows a particularly strong cash flow quarter -- as our fourth quarter was. Added to the mix this quarter -- we used cash for some early buying of metal commodities as uncertainty in those markets rose.

Note that the cash we used came out of on hand balances, as Bill mentioned, and our debt remained unchanged at an all-time low -- with an improved debt to EBITDA ratio of 0.4.

Overall, as our emphasis continues to be on margin improvement, more so than revenue growth, we expect to generate positive free cash flow for the year as a whole.

As a follow-up to an item we mentioned in our last call, we did file an accelerated '03 tax return and carryback claim, and have already recovered in the month of April a $4 million refund of taxes paid in 2001. This is a nice addition to our financing for our midyear seasonal ramp up of activity.

With that, I would now like to introduce Tom Tanner, our Senior Vice President of Operations, with an operations perspective.

Thanks, Gordie. This has been another quarter of progress for us -- particularly on our priorities of improving internal execution.

While we certainly posted our respectable revenue performance, our emphasis for 2004 remains -- productivity, execution and margin improvement, more so than revenue growth.

Among our highest priorities has been improving the results of Companies that noticeably underperform in 2003 -- including 11 Companies that posted operating losses for the full year.

In the first quarter, we had only four Companies with operating losses. And of those four losses, three were nominal. As we indicated in last quarter's call, our Northern California operations were expected to incur another loss in the first quarter, and unfortunately they did. However, they posted a profitable March and we expect their turnaround will proceed on track.

Many other operations, including some that had a very difficult first quarter last year, have steadily improved and reported good year-over-year gains in the first quarter. In particular, our largest Multifamily Housing Company, under the leadership of Ken Kilgor (ph), experienced a significant improvement year-over-year.

Getting back to our emphasis on improving productivity in 2004 -- all of our Companies have completed the initial training phases of our program. Twelve our largest Companies are scheduled for a much more intensive year-long productivity improvement program. Six Companies began the process in the first quarter.

The program includes comprehensive training for project managers, field superintendents and project foreman. As our training efforts in the areas of project selection, estimating, pricing and project execution take hold, we expect to see a steadily growing impact beginning later this year.

Within our Service divisions, we have begun to provide several Companies with maintenance agreement sales training. And in Q2, we will begin operations review of our largest underperforming Service divisions, with the goal of achieving significant operating income growth by the end of the year.

As with our Construction (technical difficulty) improvements that will lead to increases in our operating income and in our technicians' productivity.

An important current operating consideration is exposure to volatile commodity pricing and commodity shortages. As Bill and Gordie noted upfront, one of the factors limiting our exposure is that only 10 to 15 percent of the cost in our construction divisions relate directly to steel and copper products. In our Service divisions, the great majority of our work is sold using the most current pricing of commodities.

We believe we recognized this exposure early -- several months ago -- which allowed us to take some proactive steps to minimize the impact to our projects. Because of our aggressive national purchasing group, our very strong local supplier relationships, and our financial strength, we were able to purchase some commodities in advance of price increases.

To date, our very strong national and local relationships have also allowed us to avoid any shortages of commodities.

We have also addressed our exposure to future commodity price increases by including escalation clauses in all-new bids and contracts.

As noted, we had no negative impact from commodity price increases in the first quarter, and we expect only modest effects going forward. However, we are continuing to monitor the situation very closely.

On the broader business front, we did add a significant amount of backlog in the first quarter heading into the more active part of our year. We have continued to see good booking activity in the second quarter, with both a strong and steady quotation level -- and some indication that pricing may be firming up.

Overall, we believe the commitment and morale of our team members is strong and steadily growing, as we have overcome the challenges of the last few years, we have truly become an improved organization.

Even as we continue to see increased activity levels, we will continue to pay close attention to our cost structure. We believe that the process improvements that we have -- that have been implemented within our Companies will allow us to support increased revenues and gross profits without increasing our cost base.

When you couple a consistent cost base with our continuing emphasis on productivity and execution, we believe we are in a good position to deliver well improved '04 results as compared to '03.

With that, I will hand it back to Bill for wrap up and questions.

Let me just wrap this up with just a quick statement here. And (indiscernible) look forward to your questions.

In Q1, we were gratified that even with a modest increase in economic activity in the Nonresidential Construction sector, that has allowed the work that we have been doing -- work, one, to eliminate a turnaround (ph) poorly performing operations; two, to improve productivity; three, to contain costs; and four, importantly, to continue to aggressively collect and conserve cash. All of these things have converged to allow us to report the best first quarter since the industry boom of the late '90s.

As we continue to see signs of healthier activity in '04, some of which is evidenced in our strengthening backlog, and knowing that we will continue our focus on execution, productivity and cash generation -- we want to reiterate our expectation for significantly better results in '04 than '03. I would like to throw the mike open for questions. Jeany, are you out there?

I most certainly am, sir. (Operator Instructions). Michael Rossler (ph).

Bill, could you go a little more detail in terms of what you're seeing, in terms of the firming up of pricings -- maybe in terms of sequential months? And what you think your ability would be to be a price leader as the business firms up?

It's a good question, Mike. I will let Gordie jump on this too, and Tom, for that matter.

We are -- we sense some ability to price here. One of the things we started doing middle of last year is encouraging our operations in their bidding and pricing to take advantage of upturn -- potential upturn, less competition, more work in the business. It is always difficult to price out of a downturn. You fear you're going to lose jobs so you are (indiscernible).

I think we got that in motion early enough, so that it's taking hold and the market is taking some.

I'm not talking -- this is not massive here. There is some balkiness in the return of the economy. We have just seen some return here. Notably, while part of our work is in the manufacturing and office building sector, we have not seen that there's a lot of promise there -- but we have not seen that turn into new work to the extent that it would change the percentage of that work which is in our backlog and in our activity. What do you want to add to that?

You know, in a downturn, price competition and low price is the order of the day. But a downturn also allows you to differentiate your staying power, your financial strength, your bonding capacity. And as we talk to our guys about working on raising their prices, toward the tail end and as things were beginning to turn in some of our markets, we emphasized using those differentiators.

When you talk about price leadership, I will throw another dynamic in there. In a recovering market, given that we do compete mostly against local and regional competitors who have had a rough time I think in the downturn, there is a lot of thirsty cattle out there still, and they're going to continue to price aggressively until they believe that the turn is more than temporary.

As a result, we have -- in many cases -- the ability to hang back a little bit and be more selective on projects and wait for some capacity to herd into the first projects that are coming in turns.

I will not say that that is a massively choreographed effort, but it is a scene that we're working with our operations. And when you have higher quality, better reputed capacity to bring the projects in a recovery, you're going to have some better pricing leverage as well.

So, that's another observation about where we think we can go. It's still a competitive environment out there, though.

Tom, you have commented on one of the operations being -- turning from a loss and becoming profitable in March. Is that a trend sort of consistently in the other operating businesses? In terms of the sequential monthly improvements?

Yes. We're certainly seeing improvement across-the-boards as these initiatives in both Construction and Service take effect within the Companies.

A final question for now -- was there anything unusually positive in the second and third quarter of last year from a profit perspective that you might not be having this year?

I do not recall anything specific, Mike. I will doublecheck. But I don't recall any unusual gains.

One observation that I do what to make, that your question reminds me, that should have been in my prepared remarks is that -- in this quarter, we did have in other expense a $700,000 item which was a mark-to-market adjustment on the warrant that we have outstanding from our previous financing. When we changed financing, we renegotiated this warrant such that, in simple terms, its value now moves almost in direct concert with our share price. And since our share price increased during the first quarter, we took a mark-to-market charge -- non-cash, of course -- of about $700,000 in other expense.

That exposure to movement in the stock price -- non-cash earnings hits -- will stay out there so long as that warrant is out there. We have indications that that warrant may not be out there much longer. But we don't know that for sure. But that's one other somewhat unusual item in the first quarter.

Previously, that mark-to-market has been calculated under different terms, before we renegotiated it. And it was part of interest expense in the past -- because it directly related to our previous financing. So, that's one thing I wanted to add.

Okay. A final question, if I can. Do you recall offhand the number of units that were at a loss in the second quarter of last year?

In the second quarter of last year? No, I don't. We will have to reconfirm that for you.

Okay. Thanks.

Mike, one thing you might want to bear in mind is (technical difficulty) answer that question is (technical difficulty) have consolidated some of our units since that time. We will have to sort it out that way for you, whether it is comparable or not is going (technical difficulty) question.

But, I (technical difficulty) get back to you on that, Mike.

All right, thanks.

David Yuschak, Sanders Morris Harris.

As far as your comments about focus more on internal operating improvements versus the revenue gains and comp store gains of 10 percent backlog improving -- sounds like you're booking activity is developing nicely in the second quarter as well. Could you maybe clarify for me -- because you're doing 10 percent plus here, and maybe some revenue gains that look like they would be very impressive. Are we going back to quality of the bookings in the backlog as a reinforcement of that operating efficiency? Or is the business is picking up nice enough in some of the sectors of the marketplace that are giving you the ability to do 10 percent plus on the comp stores as well as just having some nice bookings so far in the second quarter? Can we just get a little bit of clarification on those two differentiators?

Well, Dave, we're certainly keeping our eye on quality of project. We're not -- we have a real discipline in place there. We're not taking revenues to take revenues.

As to the backlog, it is -- part of that increase is advantaged by a couple of big fish that have been netted there. We have inquiries, quotes, work going on in more 10 -- will the increase in backlog be as great each sequential quarter? It's difficult to project that.

All we have is sort of a feel. It's palpably positive, but it's difficult there to do that. We're going to keep our eye on the gross margin piece at the core of your question.

We have had some very good success in booking Health-care activity. And some of the Health-care projects -- because what's involved -- and they tend to be a little larger. So, as Bill mentioned, some big fish. Several those were Health-care. And the multifamily market continues to be very active.

But the backlog increase and the margins in it are -- the margins in particular have a number of external factors in them. You know, the seasonality of large project bookings, continuing price competition and a little bit of commodity effect.

Our emphasis internally is, again, on productivity and margin improvement, and on job selectivity. But we are -- if the business is out there, at respectable margins, we think we can perform and further enhance as it has been in Health-care. And we're going to books those.

But I would be cautious about expecting this degree of either backlog gain or revenue gain going forward. So we want to remain prudent in that regard.

As far as the backlog, you had indicated -- backlog -- the general direction of your overall other kind of just what -- just call it general revenue, so to speak.

Two questions on the backlog and general revenues. What is your six-month backlog as it looks right now? Because you usually mention that as a number. Are you saying because of the trend in the backlog a general improvement, some of your general revenues -- the quickturn (indiscernible)? Or is that kind of keeping pace? Or is there some issues there that could maybe prompt it to get better or worse than if the trends in backlog?

Our six-month backlog is up somewhat from where it was at year-end. At year-end it was 259 and right now it's 277.

There is certainly a degree of seasonality in that increase -- because next to two quarters, or the next six months, are our peak project activity. So I'm not sure I would draw too much conclusion from that.

One observation I will make about revenue direction as well is that -- in the last couple of quarters -- and what backlog might be indicating -- in the last couple of quarters, we have indicated that the proportion of our backlog that was scheduled to turn in the next twelve months was at all-time highs of 90 percent and a tad over. The schedule of our backlog has retreated a little bit to about 84 percent is scheduled to turn in the next twelve months. So, that also implies a little bit of improvement on the revenue outlook.

Okay. And then, one other question for now is -- the SG&A expense in the quarter, can we begin to use -- maybe use that as a benchmark going forward as to do -- to grow that from this level? Maybe it kind of reflects fully what you have been able to achieve in light of productivity cost cuts and so forth and so on?

And what kind of percent of revenue could we be looking for longer-term to boost the productivity of that expense as well?

Well, I think we are seeing, in SG&A in the fourth quarter and now in the first quarter, the benefits of the cost reduction efforts and campaign that we initiated in the second quarter of last year. And I think we are pretty well to the full realization of that in SG&A as well as up in indirect overhead -- which is not as visible in our numbers.

So this is, as you say, some degree of benchmark.

Going forward, as activity levels should be rising, it is a strong emphasis of ours to realize some operating leverage. And what I mean that by that, what we said, is that -- as revenues and gross profits go up any increases that you see in SG&A and indirects should be less in proportion. That we should be able to take this cost base and realize and perform higher revenues and gross margins off of it.

It is almost impossible, in our experience, to completely freeze SG&A and overhead and fix it at a certain level as revenues tend to come back and as backlog tends to come back.

But, it is our strong emphasis to hold things in that range.

As to a percentage of what you might expect to see in SG&A, we saw something in the high 13s in the fourth quarter. You see 14 1 in this quarter. We would like to certainly be able to keep it around this area. And, if not, maybe try and push it below 14 as we see how this year unfolds.

Then one real quick question on the tax rate, its 44 percent, is that a good number to use for the year?

Yes, it is. Given where we are in our tax environment, and in our various contingency exposures, and those sorts of things and when they cycle off -- given statutes of limitations and those sorts of things -- we do not expect our tax rate to go any higher than 44 percent this year.

Thanks. Good quarter, guys. Thanks a lot.

Rich Luydsoski (ph).

If you forgive me, I'm going to beat the dead gross margin horse a little bit more.

That is a function of both the pricing pressure and you said the seasonality effect of the long-term lower margin contracts. But, on the year-over-year basis, if I heard correctly, Gordie, you said that it was down 40 basis points for last March? Is that correct?

That's correct. (multiple speakers) margin and backlog at March 31 last year versus margin and backlog at this quarter-end is down 40 basis points.

Okay. Then are those longer-term contracts being booked at, say, 40 basis points lower margins?

I don't know that I can automatically say that.

Or just directionally?

Larger projects -- I know of some of the big fish, so to speak, that we have netted, that we have looked at respectable, pretty good margins. I think there are, undoubtedly, some bigger projects that we may have taken at a somewhat lower margin, or that we may be reflecting at a fairly conservative margin going in. I know certain of our operations that have booked large projects tend to book on a conservative basis as they go in.

But, they -- the margin in backlog also reflects a lot of activity other than large project work. And continuing pricing pressure competition -- if that work was won, probably has something to do with the margin that was in the backlog.

Okay. And I guess this question would be for Tom. The twelve subsidiaries that are now going through -- or, plan to go through the retraining this year, are those focused on, say, the largest revenue drivers -- are those focused on the Companies -- I think it was 11 Companies that were unprofitable in '03.

(indiscernible) currently focused on the twelve largest revenue providers, where we believe the greatest benefit from this training can take place.

And, there were, I think -- was it four Companies that had already gone through this before this year?

No. In late '03, we put all of the Presidents and other people in the organizations through some process improvement training of a limited nature, and then we started with -- we have earmarked 12 Companies this year, of which six have started that productivity improvement process that will take about a year in each Company.

Okay, so these are the initial six?

Yes.

Okay, great. And now that we have -- I mean, you are focusing on the unprofitable subsidiaries -- you have these 12 that are going through the retraining -- with Norms departure, is there a kind of lack of focus or -- on putting -- growing the national accounts business -- is that now on the back burner for a couple of quarters?

How do you want us to answer that question, Rich? (laughter) Absolutely not. As a matter-of-fact, that's going to be a major focus of mine. Has been recently. And we have Chuck Dilts (ph) (technical difficulty) operation at its head. And that is definitely not on the back burner in any way, shape, or form -- actually, we have some real momentum there. (indiscernible) building some -- we've got potential for landing some really large fish or dogs or cats.

(laughter). Okay, I was just making sure. There's a lot of things in the air. Most of them are going the right way. But, I just wanted to make sure that that was as it was. Thanks a lot, guys. I'm all set.

Great. Could I mention one other thing, Rich? Gordie and you were having the discussion there about gross margin and backlog.

On an as reported basis, our gross margin Q to Q was up. And our gross margin in this quarter did not demonstrate very much fade -- no fade, actually -- from what was in backlog. So, we're doing pretty good -- actually, we're doing better than what -- sometimes what's in the backlog.

I agree. It was better than my model.

Min Cho, Friedman, Billings Ramsey & Co.

I was wondering if you could talk about the different demand trends you are seeing in the various geographies? Specifically, if the Midwest continues to be weak? Or if you're starting to see some signs of improvement there?

Also, if you can talk about the demand for your faster track services and maintenance work? And kind of what you're seeing so far in the second quarter?

And, if you could give a breakout of your new build installed versus retrofit work?

This Tom. Let me tackle the first question. We're seeing strength in project bookings in the South, the Southeast and in the West. We're seeing the Midwest is still being a challenged area for projects. And the East will have -- is not as strong, presently, as it was in 2003.

So, we're looking for upside from the South, Southeast the West and the Midwest and the East to hold their own in 2004.

Okay.

As far as -- we're starting to see a slight uptick in some of this faster turn projects -- especially as we head into the startup of -- the cooling season in a good part of the country. And we will be able to get a better take on that towards the end of May and in June, when the upper part of the country has a lot warmer weather -- which typically drives a lot of these fast turn projects, as this equipment needs to be replaced, because it no longer is -- makes sense to fix it any longer.

Min, on the mix of new construction versus work in existing buildings, our new construction ticked up to 57 percent of our revenues this quarter -- which is somewhat of an unusual high for us. We don't usually get to that level. And I think that is somewhat of an anomaly -- just as in previous quarters we have ticked down on new construction as low as in the mid to upper 40s.

So, we generally have been holding around a half and a half mix on an aggregate or ongoing basis between new construction and service and replacements.

Okay. And can you talk about what -- maybe what sectors and what industries led to the new construction being a little bit higher this quarter?

I don't think I can. That -- we do not keep new construction versus replacement by our industry sectors. Although, I think Bill has an observation here

Well, clearly the Health-care sector is one of the strongest sectors in both that we have. As I mentioned, we have not seen an uptick, necessarily, in office buildings or manufacturing. But we have indications that that may be there as well.

Multi-family housing -- as Gordie mentioned is the -- doing quite well. And, actually, our largest operation now is the Company that focuses on Multi-family housing.

That work is substantially new construction. And by inference, we might be able to say that that has something to do with the higher mix of our new construction.

Okay. Great. Thank you very much.

David Yuschak, Sanders Morris Harris.

As far as that national marketing effort is concerned, Bill, Norm had given us a matrix in prior quarters about the growth and the number of operations -- number of accounts and facilities that you do have currently in existence.

Could you maybe just give us a profile of what happened in the quarter as far as new accounts, so forth, (indiscernible)? And the number of facilities you are managing under that arrangement?

Yeah, I think Gordie can give you those numbers. Let me talk to you about -- before he does that -- the remarks I just made were directional in nature, and related to some big accounts that we're working on.

We continue to see progress. So in the number of facilities we're covering -- and what typically happens here is that a national account, that may have 2,000 locations, says -- well, we've been handling these ourselves, we've been doing this with our facilities manager here and there. We will give you -- why don't you take 175 of these for six months. And then we prove ourselves, and it grows. So that's -- we can grow this without landing any new names, but we are also landing some new names. So it is a dual growth path. Gordie, want to throw some numbers?

In the quarter, Dave, we added 2,800 sites in our national account mix. Now, breaking that down, a number of those sites were for somewhat limited either pilot or limited service arrangements. But we did land one fairly significant account this quarter in terms of site volume and revenue volume -- and we're not at liberty to disclose the name of that account. And that accounts does hold prospect for growing for us based on performance. And as recently as this week, we have gone indication that our performance is meeting acceptable standards, if not a little bit better. So that is a good prospect for us going forward in addition to having landed a nice chunk of work this quarter.

That puts us at over 10,000 sites in our national account business. Of varying degrees of service. And, as Bill mentioned, we have got some interesting ones in the pipeline.

Now to expand just a little bit more on that -- as you've gotten into this thing and it's been basically about 1.5 years maybe that you've been really focused on trying to grow this thing.

Is there anything particularly that is showing up as important variables that are going to help drive this thing? As you'd indicated we got maybe a couple other major ones that could join here in the second quarter.

Is there anything that is meeting with some of the success or is it just (indiscernible) on these customers parts to just continue to lower the cost of operations and outsource this business?

I think it's a lot of that, Dave, answering the question a little differently. This is a sale cycle kind of thing. We've found. We knew going in. We've found.

We had a lot of success with the big box -- not the super big box guys -- Wal-Marts -- and other people. You pay them to work for them. But some of the big box, larger box chains we're working with them -- a lot of retail work.

We are still working on REITs for their properties. They tend to be managed, individual buildings or small regions, and so it's hard to get a broad contract with them. But we're still trying to crack that.

I (indiscernible) seen any change in the intention to outsource, either pro or con here or -- it's a little frustrating the speed at which people actually decide to do it versus the spent amount of time and lip service they pay to it. Sounds like it relates to their own internal employment situations where they are attriting people. Some in relation to contracts they have currently. Some of it relates, frankly, to the fact that there is a lot of deferred maintenance out there and people have not been doing anything.

So, we think those are positive. Though, it's not -- like I said, a long sales cycle business, and a business we have to prove ourselves in. That's the positive side of our story. Once we get something we are keeping it and we're getting high marks from with the people we're working for.

And one other question. As far as that deferred maintenance cycle that everyone has been talking about from the OEMs and others involved in this space, is there any indications -- because you know there was some talk about some of those that (indiscernible) could reach up to 70 percent of the business over the next few years. Are you seeing any of that beginning to show some opportunities? Even though maybe early in this recovery. Because of cash flows improving in this space.

And is maybe some of that showing up in your national accounts? Is it initiative to lay that off on you to get it done?

I think that's right. And the OEMs -- Train, Carrier, York, Lennox, etc., say that they are shipping into that retrofit and replacement market. And they're building for it. I think what we've said in the past is beginning to happen. Tom, you have any comments on that?

No. I think you've covered it (indiscernible).

As far as the retrofit -- would the OEMs tend to benefit more from the -- doing that service work than maybe you guys could? Maybe -- would they get more, maybe, than what you guys would?

Well, the OEMs are not set up to service everything that we and/or they install. They are focused on the high-end. We're middle market, small and vary, in many cases, very local (indiscernible) markets that they don't play in as readily.

We have cooperative kinds of arrangements, informal, with a couple of those large OEMs, and we're strengthening those. In fact (indiscernible) in the last couple days a conversation about a substantial strength (indiscernible). So, the -- they don't appear interested in bringing it on, or putting the other big contracting work force to go out there and do all this work.

Okay. That's all I got. Thanks.

Bob Sullivan (ph).

Great quarter, guys. I had a question about -- as you break out the different, I guess, service activities -- HVAC -- plumbing, building -- and then also you mentioned Manufacturing, Multifamily, Healthcare. Do you happen to provide or breakout those different areas by the operating margins? Or have you ever or would you ever?

Well, we do not break that data out or disclose it that way right now. That is not something that is under immediate consideration.

So I -- we will see how things go in terms of disclosure quality, and disclosure demand, as we consider that going forward.

Okay, great, thank you.

Matthew Spotswood (ph).

I had a quick question. You guys mentioned some of your metrics getting back to those levels of 99, I guess, pre-bust. And I was just kind of curious -- can you remind me of what you were running as far as operating margins when your Company was running, I guess -- when you guys were doing quite well? And can you get back to those levels?

Well, the peak operating margin in 1999 for this apples-to-apples group of operations that we had today -- recall that we had a significant sale of operations in between '99 and now.

But if you look at these operations that we operate today, as to what they did during the peak operating margin was in 6 percent range.

What we have consistent -- in 2003, we were about 1.5 percent for the full year. What we have consistently said is that we expect that we will increase margins and that we can get back to at least 4 percent on a sustainable basis. Now, 6 percent in '99 was the 500 year flood (ph), almost, everything was going right in that particular year of the boom.

So, it's difficult to envision that we will get back to that all-time high and sustain it.

But, when we look at things that we can do to improve operations, productivity, project selection, risk management and the overall effectiveness of our operations -- mix of our work etc. -- we believe we can get back to 4 percent on a sustainable basis. We have not said when we believe that that can be achieved, other than to say we're not sure you should expect that during the year 2004, but that you ought to expect it not very long thereafter. If current industry trends hold.

Thanks a lot.

David Yuschak, Sanders Morris Harris.

On your BIE in the quarter -- it was down about $3 million or so from the end of the year. And I'm sure some of that ended up going over to the CIE column on your asset side of the balance sheet. As you guys had done very well in trying to collect upfront for projects, is that something that was just kind of a temporary situation here based off of maybe more shorter term projects versus bigger projects?

Or what can we anticipate as what you guys focused on? Because you have been focused on trying to collect more upfront on the jobs? And I'm just curious as to is there some issues in the quarter here that again kind of burdens your cash flow in the quarter, which to me is a big deal because it's working capital but it would be nice to see more of that money coming upfront in project (indiscernible) work that you do pick up. So I just wanted to get a sense as to what may have happened there.

As you know, Dave, billings in excess and costs in excess are linked. They are two sides of the same POC coin. And, there were two factors, really, that drove what you saw in net overbillings this quarter.

We have some larger projects that had gotten started, that began to roll further into the timeline on the projects. When you're early in a project is when you typically become the most overbilled on it. And as you proceed into the project that overbilling GAAP tends to begin to constrict. And in three of our operations, the average timeline position in their projects had advanced. And so they're overbillings came down as a result.

What you also saw, more on the cost side -- the CIE account versus billing side -- but a little bit on both -- is that we did some earlier buying of commodities. In certain contracts you -- in all contracts, you have schedules and values (ph). And if we see a situation where we fear a commodity price or availability exposure, we may make the decision to buy in a lot of commodity, so that we lock in the price for a project and the availability. So that the project is not disrupted. That may not be immediately billable under our schedule of values on that contract, but we protected the client and we protected our performance on the project by doing so.

I am aware of two situations, one, where we put $0.5 million of metal into a project that was not billable to protect against that exposure. So cost went up, CIE went up, in large part, due to some early buying of commodities that was reflected to some degree in the inability to build on the other side.

As we go forward, rest assured that our attention to our net overbilling position is one of our highest priorities. We talk about it, and review it and monitor it in all of our financial review interactions.

So, unless the commodity situation destabilizes a little further, which is not generally expected right now -- it's generally expected that it will probably ease a little bit. You should expect us to report improving overbilling positions going forward.

Okay. So the metal impact comes in on the -- in the CIE and DIE (ph) then?

It's comes in more there than it does in inventory. Inventory was up 800,000 this quarter, which was -- we've had continuing sequential decreases in inventory, and a little bit of that is metal. But you see it much more in the POC accounts.

And as far as some of that metal impact, is it your expectation that you could maybe recoup some of that margin squeeze that you -- even though it may be modest -- recoup some of that from your contracts?

Well, it's possible. When we say that we expect a modest effect going forward, that really is modest. And some of that effect is not locked in yet. In other words, some of that negative impact reflects where we think we might be buying steel when the projects in question are actually proceeding.

If the markets improve and we can buy steel at lower levels, then we may have less effect than we are advising. So, that is one observation.

And as top Tom mentioned, we do have protective escalation clauses in all current bids and contracts. So, that is not going to completely inoculate us against exposure, but it's going to go an awful long way on the new business coming onto the books.

I appreciate your perspectives. Thanks.

At this time I show no further questions.

Okay. We thank you all for your being on the call and your participation. And we look forward to having more calls of this nature in subsequent quarters here. Thank you.

Thanks.

Thank you for your participation in today's conference. You may now disconnect -- please disconnect at this time. Thank you