Comfort Systems USA Inc (FIX) 2004 Q2 法說會逐字稿

Welcome to Comfort Systems' second quarter conference call. At this time ail participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. To ask a question, please press star one. This conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Mr. Gordie Beittenmiller, Chief Financial Officer. You may begin.

Thanks, Mary Ann. And good morning, everyone. And welcome to Comfort Systems USA's second 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 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, our 10-Q, and the press release covering these earnings. On the call this morning are Bill Murdy, Comfort's Chairman and CEO, and Tom Tanner, our Chief Operating Officer. Bill is is going to open up our remarks.

Thank you, Gordie. Q2 was another good quarter for Comfort Systems. Reflecting our improving construction economy and much of the work that we've done on cost containment and productivity and putting greater discipline on estimating and executing. We are reporting increased same store revenues, up 3% from the second quarter of '03, and even more important, increased net income, 4.2 million, versus 2.6 million in last year's corresponding quarter. And I may add, a mild increase in gross profit percentage over our first quarter. In fact we are showing improvement at every line of the P&L on a quarter and six-month to date basis versus last year. Except for gross profit percentage. And as to that gross profit percentage, while as mentioned, it is up from Q1, the modest impact of commodity price increases, coupled with limitations -- pricing power in what is still a recovering economy have held down our gross profit percentages to levels slightly lower than last year's Q2. As we know, the commercial construction sector lags the economy slightly, so we look for that gross profit percentage to increase over ensuing quarters, and in fact, we're carrying gross profit in our record $489 million backlog, at 80 basis points higher than the margin and backlog that we carried in Q1 of '04. And 50 basis points higher than in Q2 of '03. That backlog at 489 million, by the way, is up 21% from the beginning of the year. Lastly, here, free cash flow for the quarter was almost $12 million and our cash balance at June 30 exceeded the small amount of term debt we have, producing thus the strongest balance sheet in Comfort Systems' history. Overall then, a really good quarter of progress for us, and at this point, I would like to turn the Mike back over to Gordie who will put a little more detail on the number, and then we will go to Tom Tanner, with some specifics on our operations, and I will wrap up with a few comments on the outlook. Gordie?

Thanks, Bill. Now, Bill commented on our overall same store revenue and income performance. Looking into our book of business a little further, revenue remains well diversified. Multi-family increased to 15% of our mix, while manufacturing dropped slightly to 13%. The education sector was 12%, followed by office buildings, government, and health care each at 11% of our mix. Retail was 10%. With the rest of our work spread among smaller miscellaneous sectors. Our backlog in quotation pipeline indicate that health care and multi-family will be active sectors for us in coming periods with education steady, and mixed indications in government, manufacturing, and office buildings. As Bill noted, our backlog stood at 489 million at March 31, up sequentially 3% and up 8% year over year, and up over 20% as Bill noted from the beginning of the year. These increases reflect both renewed activity in our market, as well as our operators' effectiveness in winning the business.

Our gross profit percentage decreased in the second quarter primarily resulting in the decreases for prices of certain commodity materials that we could not recover in higher revenues from our customers. We also experienced decreased margins in our San Diego operations, where we are working through project execution challenges associated with combining two operations. And in our Washington, D.C. project operations, which had a particularly strong project mix and execution results in last year's second quarter. These decreases were offset to a lesser degree by improved profitability in our Houston-based multi-family operations.

As we noted last quarter, our markets have experienced significant increases this year in the costs of certain commodities used in our work, including steel, iron, and copper, which comprise on average 10 to 15% of the cost of our projects. We also indicated last quarter that we expected commodity inflation would have a modest effect on our results. This effect during the second quarter was approximately a million dollars before taxes, or one cent per diluted share, which we absorbed while still producing significant income and margin increases this quarter. Based on certain steps we initiated earlier this year in response to this volatility, commodity volatility, including early buying of materials for certain project, and price adjustment provisions in project bids and contracts, we expect the impact of unrecoverable commodity cost inflation to be lower in coming quarters than it was in this quarter.

Excluding the effect of commodities and the individual units we noted, our gross profit percentage would have been essentially unchanged year over year. As Bill observed, this reflects the fact that there remains a significant amount of price competition in our markets. As competitors continue to price aggressively until they conclude that renewed growth is more than temporary. We believe a couple more quarters of steady conditions in the industry may begin to ease the pricing environment.

One potentially positive development for us as Bill noted are the gross margin indications in backlog, having climbed modestly from the first quarter and from last year. While promising, keep in mind, though, that gross profit performance on profit work can change between any given backlog point and actual completion of the work. Additionally, approximately 40% of our revenues, included service work, and quick turn projects, is not captured in any particular quarter end backlog cut-off. So backlog indications, while general directional indicator, do not guarantee future results. We also expect that our increased emphasis on productivity and execution improvement will help our gross profit percentage beginning later this year and going into next year. Tom Tanner will comment on this later in our remarks.

SG&A was down 11% year over year, and 5% sequentially. Primarily reflecting our broad-based cost reduction initiatives launched in the second quarter of last year, along with some operational consolidations. We have posted a consistent record of significant cost containment over the past year. However, we would note that you should not expect SG&A to go much lower than the second quarter's level. We believe the modest growth that has returned to our markets will continue, and in that environment, it is realistic to expect that our cost base will level off and possibly show small increases as we manage that growth. However, we believe our cost base can support significantly higher levels of revenues and gross profit, so we will remain focused on ensuring that any increases in SG&A and overhead are less than corresponding increases in revenues and gross profit.

Netting out gross profit and SG&A, we showed a 43% increase in operating income at ongoing operations. And even greater gains at the pre-tax line as we incurred a lot less interest expense this year than last. Our tax rate decreased by a percentage point to 43% from the first quarter. We should also note for comparison purposes that last year's second quarter had unusually low tax expense. This resulted primarily from the fact that we had taken a fairly conservative position in recognizing less tax benefit than we otherwise could have when we had a loss in last year's first quarter. So less tax expense was necessary in the second quarter to catch up our tax accrual to the proper year to date position at the middle of the year.

A couple of comments on earnings per share or EPS. We have outstanding a warrant to purchase shares. The rules for calculating EPS effectively require that we remove any positive effect this warrant might have in our EPS calculation. This quarter, the value of our warrant obligation went down based on changes in the market price of our shares. And this reduction was recognized in other income. In accordance with EPS rules, this income was excluded from the EPS calculation while the shares relating to the warrant were still included in the calculation. Because this is not apparent when recalculating EPS from the amounts shown in our principal financial statements, we added a table in our press release to show this. On the balance sheet, as Bill noted, we posted a healthy 11.5, 11.6 million of positive free cash flow this quarter. And we're also in a net positive cash position as Bill described. We continue to maintain a strong balance sheet which gives us a good degree of room to maneuver as our markets change. With that, I would like to now introduce Tom Tanner, our Chief Operating Officer.

Thanks, Gordie. Looking at our performance this quarter, we are encouraged to see that market activity continues to increase and that we are participating in these gains. As Bill and Gordie have noted, our same store revenues were up 3% in the second quarter. This was based on solid performances in our south, southeast, and midwest regions. Our backlog also reflected growth with an 8% increase over last year, driven by gains in the south and southeast region, and by strong activity in the multi-family and health care sectors. While we remain more focused on margin improvement than revenue growth in the current year, we are pleased with th steady performance of our top line.

Among our highest priorities for 2004 has been improving the results of units that noticeably underperformed in 2003, including 10 units that posted operating losses. During the first half of 2004, we had three units that experienced operating losses, which for two of those units the losses were nominal. We expect these units to return to profitability in the second half of the year. As noted, our gross margin decrease this quarter resulted primarily from the modest commodity cost inflation we absorbed. Looking ahead to the third and fourth quarters, we still expect to experience some unrecoverable commodity price increases on certain projects, but the impact will be less than we had this quarter. We believe the preventive steps we initiated earlier this year, such as purchasing commodities for some projects in advance, and including escalation clauses in bids and contracts, puts us in a good position to manage our commodity exposure going forward.

We continue to see price competition in the broader market. We would expect some improvement in pricing as our competitors become more convinced that improving conditions are sustainable. But it is not clear when that turning point might be reached. With a challenging gross margin environment, we continue -- we continue to carefully watch our SG&A expenses, and our project and service overhead costs. SG&A expenses were down 11% from last year and 5% sequentially. Project and service overhead, which is a component of our cost of revenues, and netted out of gross profit, was down 9% from last year, and 5% sequentially. After weathering a tough downturn like we have for the last couple of years, it would be easy to lose focus on cost containment. While we don't intend to limit organic growth opportunities, we will certainly continue to monitor our overhead costs very closely.

As we reported last quarter, the principal area of our productivity focus is training. The process started last -- late last year, with all of our companies going through an initial training program. In the first quarter of this year, six of our larger companies began a more intense full-year productivity improvement program. We will add another four to six companies to this full-year program in Q4. In addition, during Q3, four to six of our mid-sized companies will begin a more condensed productivity improvement program, tailored specifically to their individual company needs. The productivity improvement program provides comprehensive training for project managers, field superintendents, and project foremen.

We also continued to stress the importance of proper job selection, which is critically important in our continuing competitive market. Relative to the service component of our business, we are focusing on both top line and bottom line growth. Several companies are receiving very focused sales training to increase their volume of annual preventative maintenance agreements. From an operations standpoint, four large service divisions have recently been selected for an extensive review to determine what steps need to be taken to improve their respective operating performance. After the reviews are complete, we will provide continuing guidance and training to ensure they achieve the necessary operational improvement. Our efforts in both the construction and service components of our business should begin to show results in the last quarter of this year, and the first quarter of 2005. As we move into the second half of the year, our Company morale is good. We believe many of our operations are really begin to hit their stride as market conditions improve, but we're also continuing to concentrate on strengthening the operational foundation of the company for the long term. With, that I will hand it back to Bill for wrap-up and questions.

Thanks, Tom. Clearly, this was another good quarter for us, prime credit just for that goes to our operating unit leaders, and our service professional, project managers across the company, as we continue to demonstrate that Comfort Systems is building a premiere commercial HVAC company for the long term. And while growth remains modest in this economy, and price competition is a fact in today's landscape, we remain quite confident in what we have said in recent quarters, that we expect our overall results in 2004 to be significantly better than 2003. And we look forward to 2005. As well. The -- I think at this point, we could take some questions, certainly hope that there are some on what we've said, and other things. So, operator, why don't we open it to questions here.

Thank you. If you would like to ask a question, please press star one. You will be prompted to record your name. To withdraw your request, press star two. Once again, if you would like to ask a question, please press star one on your touch-tone phone. Our first question comes from Michael Rossler, CJS Securities.

Good morning. Gordie, you mentioned some of the gross margin pressure and obviously good cost controls. You can talk a little bit about sustain ability at the EBIT margin line as we go up certainly into next quarter, the second half of the year?

I didn't get all of your questions, Michael. The first part was a little clouded.

Just when you factor in some of the pricing pressures that you're seeing, but obviously the good cost controls at the SG&A line, what can we -- what can we look at in terms of sustain ability of the EBIT margins that we saw in Q2 as this year plays out?

I think -- you know, we're actually going to see, I think, some relief at the gross profit margin line, or some increase. We're carrying gross profit in our backlog at higher rates than we have both quarter to quarter, sequentially, and over last year. There is a sense, and I've been out recently visiting Company operating units in various parts of the country, there is a sense that pricing capability is increasing here. So at the gross profit line, we get that increase, we have very good control on our SG&A, we are working on a continuous basis on the labor productivity side that Tom alluded to some of that, so I would say all in all, we cannot only sustain but potentially increase that.

Okay. What are you seeing on that -- in terms of the small project work that tends no the to flow through backlog but can be pretty profitability, due sort of the emergency type need, you know, maintenance, things like that?

Tom, you want to comment on that?

Well, as we move into the summer period, you know, in various markets, you know, we have seen an increase in that type of quick turn work, which relates to probably several years of things not being maintained as well as they need to be, and finally, there they're in a position where they have to take some swift action to change out units. So we're definitely seeing an increase in that in certain of our markets.

And a final question in terms of the overall commercial construction market, the numbers that you have out there are sort of a mixed bag between particularly manufacturing being weak. How important to that is manufacturing markets to your overall results?

Well, as Gordie said, it is not a big part of what we do. We're diversified across a number of markets, as you know. And the manufacturing sector has not been robust for us. And we're not depending on it for the upturn that we've talked about, but Gordie, you want to --

Well, manufacturing, Mike, is about 13% of our revenues, and it is actually declined as a mix in our backlog, but our backlog has gone up, and that's on the strength of improving activity levels in other sectors. Particularly in multi-family, education, I think, has -- multi-family and health care are the two healthiest sectors for us, education is looking up, I believe that we are looking at steadier conditions, and institutional markets, and manufacturing lagging a little bit, really does not put too much of a chink in our armour.

Okay, thanks.

Our next question comes from Rich Luydsoski of Sidoti and Company.

Good morning, everybody.

Hi, Rich.

Could you guys give us some -- an update on the progress you're making in building the national accounts business?

In -- recently in Q3, we have seen an uptick in the closure of business, including one medium-sized box, specialty retailer that we actually signed an agreement with last week. We have two other commitments from major retailers that we believe we will close by the end of Q3. We believe that the sales effort is finally taking hold. It is a much longer sales cycle than we had previously hoped for, but we believe that we have an extremely strong sales team in place, and that we will begin to see additional results in Q3 and Q4, and beginning early in '05.

Excellent. And do you guys have ballpark estimates for the amount -- the proportion of either revenue or backlog that comes from fixed price contracts?

Well, let me try and answer that this way, Rich. Roughly 80% of our revenues are recognized on a percentage completion basis, or are project-type revenues.

Yup.

And it is reasonable to assume that almost all those are on a fixed price basis. We do do some time and materials work, but it is not a major proportion of our revenues. So a good two-thirds to three-quarters of our work is done on a fixed price basis. Now, let us also add, though, that as you work on projects, conditions often change, those conditions are sometimes beyond your control or are the responsibility of other participants in the project. Other sub, the owner, the GC, so what you often see on projects is the opportunity to recover additional revenues and change orders. We prefer to minimize change orders because that is a better outcome for the customer and for everybody involved. We are -- we do is have fixed price dynamics, in our project book of business, but we are not absolutely straight jacketed, you know, for the life of a project, if conditions do change.

Okay. I just want to make sure there weren't any major changes on that front. That's all I -- that's all I had. Thanks a lot.

Your next question is from Mike Balken of William Blair.

Hi, guys. Congratulations on a great quarter and a tough environment here. I wanted to ask you, looking at the margins both at the gross margin level as well as your SG&A, back in 2001, you were pretty close to a 19% gross margin, and certainly recognizing commodity costs are increasing, what kind of gross margin target do you think we could look at if we look out to '05 and 2006? And then also, you just put up a, you know, a very strong number on the SG&A line, do you think that is a sustainable number going forward? Or even can we see that a little bit lower?

Well, as Gordie went into some detail on my comments, I don't think we will see the absolute numbers in SG&A go down much, if at all. As revenue -- as the revenue base increases, which we project it will, clearly it will go down as a percentage because we believe we've got the base of SG&A in place to take on and profitably manage more work. In other words, we have some capacity, based on the fixed costs that we've got. As to the gross profit percentage, you know, this -- we lag the economy. Decision makers have got to get absolutely secure in the notion that things have turned around, so that's why we like the construction and services sector lags the economy. And we feel that happening. There is a lot of anecdotal evidence out there. You know, I have seen a major market yesterday, which is very sensitive to what happens at a couple of major institutions in that market, and if those major institutions decide to do -- to put on stream the construction projects that they have, that will absorb a whole lot of chat, and you know, where we focus is on the medium-sized smaller projects. They will move away from that market. We're ready to fill it. And we can do some, you know, implement some pricing there. So it is an improving situation. We don't have a perfect crystal ball on how soon and how much, but clearly, we're headed towards the same gross margin percentages and perhaps higher than we have achieved in the last couple of years.

All right. So you think that if we look out to '05, that at least we can be looking at a gross margin that is maybe north of 17, which was, you know, kind of where you've been in the last few year, and an SG&A starting to move down towards the low 12 or maybe below?

Mike, this is Gordie. I think you're -- you know, this is the the point where we always probably say that we don't provide specific guidance, or point estimate guidance, whether it is EPS or margin levels. I think your directional comments about gross margin are appropriate. Our SG&A will probably begin to tick up a little bit here as we get back into a growth environment. If you net those two numbers out, obviously you're at EBIT, or operating margin. And what we have consistently said is that we believe we can get back to at least a 4% operating margin on a sustainable basis. We have not said that we expect that to occur this year. But we have said we expect that to occur relatively soon thereafter. So I think that view of the future on what we can do remains unchanged.

Okay. Thanks, guys.

Thank you.

Your next question comes is from David Yuschack, Sanders Morris Harris.

Congratulations you guys, you have done a great job and you guys have demonstrated you can crank up the profitability, even in a slow environment. A couple of things. On the backlog growth that you had in the quarter, could you give us an idea of -- was that stronger at the end compared to the beginning? How did that maybe build as the quarter progressed?

Backlog increased each month of the quarter. And we believe it increased a little bit more, I would have to double check, in the third month than it did in the first two, and that's not unusual. But it is interesting for it to have increased in every month of the quarter, and to have done so in the second quarter when you're beginning to get into your busier season and you are having backlog burn off a little bit more. Historically, we have seen backlog go in either direction in a second quarter. So that would seem to indicate that activity levels in the industry, in our markets, are coming back to some degree.

Now, there wasn't anything in the way of some delays or stretch out there that helped get the backlog up every month, was there? So the revenue on expectations and projects were where you thought they would be, it is just the backlog with new business coming in and nothing stretched.

That is a good observation, Dave. Certainly, a couple years ago, when we were in the depths of the trough, sometimes backlog levels would be sustained by delays, as you said. We did not see that to any appreciable degree at all this quarter.

So the objective is really to try to -- for your customers is to try to get a lot of these projects done sooner than later then? That would suggest between -- what did you in revenue and as well as no stretch-out and good backlog addition, when as you said you would normally see some kind of slower pace with the backlog just because you would be learning a little bit better.

Well, one observation is that we are certainly not back to the late '90s when people, customers were interested in getting projects done the day after tomorrow. And cost was almost no object. But we are seeing more customers say we need to get going now. Or we -- there seems to be a little uptick in the tempo with our customers out there, in terms of schedules and getting on the jobs. It is not a frothy environment. We don't pick that up from our operations. But it is one that is picking up the pace a little. Because we are usually able to add more value and earn more money in that kind of an environment.

Okay. Then, let's ask about the service revenue versus kind of event work. Are you seeing -- what's -- you know, you guys still think long term service revenue can really do well for you, as far as maintenance and so forth, so on. How is that trending? And, you know, particularly I think with some of your international contracts, your service component should get -- get higher, shouldn't it, over the long term?

I think -- I think you're right, Dave. You know, back on -- as to the national accounts, all of us recognize that the long sales cycle involved in that and for a while, that won't move the meter all that much. What will move the meter is what we're doing in individual, full service mechanical companies, where through implementation of what Tom alluded to, the sales -- the service sales training, and increased emphasis on the that area, along with working to operate these service operations more efficiently, that is where the real increase is going to come there. I think that one other thing that is both a macro and a micro kind of thing here is energy costs. I think -- I'm seeing the first true indications where people make decisions based on energy cost increases for the long term, in terms of big capital spending, and then in the shorter term, on making sure that what they have is running efficiently. And we can show them that. We emphasize that. And I think it is sinking in that these -- the energy prices that we are experiencing right now, may be what we're going to live with for a long time.

So at this point, the revenue in the quarter -- in the service kind of revenue in the quarter, what did that look like then, as part of the total mix?

The total mix was still roughly split, as it has been here historically been. I think we're at 54% on new construction, and 46 on work done in existing facilities, service an replacement, and retrofit work.

Okay. And now let's just talk a little bit about the SG&A because again, I think that has continued to impress us as far as the ability to ratchet that down, and particularly in a quarter that has, you know, seasonally, you get the pickup, you got the revenue pickup, you got the seasonal pickup, can you give aus little more depth as to where, you know, that is happening? Because you heard me ask this question in the past. I get a little concerned when you maybe do some underspending that maybe you're not taking advantage of some of the opportunities, also.

Well, let me give you some more background on the number, and Bill and Tom can talk about spending for opportunities. But last year, we -- you recall, we initiated a broad cost reduction initiative when early in the year, it became apparent that the market and the industry were not going to come back like everybody thought they would on the same calendar. And that initiative is continuing to pay dividends for us, to show up in our results. If you were to look into our detailed results, you would see cost reductions, you know, wide number of our operations. So that's why when we described it, both here on this call and in the press release, and in our filings, the first thing we say is broad-based cost reduction initiative. Because it reached almost every corner of the Company. Following that, there are -- some of the larger factors have been cost savings realized where we have combined some operations. San Diego is going through a very challenging process of combining two relatively medium to large-sized operations. We felt it a little bit on the gross profit line, as we noted but we've also benefited significantly at the cost reduction and SG&A line. Our Salt Lake City operations have also experienced some cost savings by combining activities. We've reduced corporate costs to a certain degree, as well. So that's where it is. I would say before Bill and Tom talk about, you know, opportunities going forward, we do want to note that as we turn into what appears to be growth here, don't look for that SG&A to go much lower. You know, we -- it should start leveling out here and you will begin to see us support the growth a little bit more, but at a lesser pace of increase.

Dave, I think, you know, the training we are doing, both on project managing, and on sales operations -- service operations, and the sales certainly is a way of looking at spending money on potential opportunity. Additionally, we have gotten into a mode and a number of operations and area was the country, what we call stepping out, where we are putting techs in adjacent or near markets to take advantage of business there, utilizing the same overhead, if you will, of the base company. So we are -- I think we are taking advantage of the operations. We -- I think we have properly not pushed hard at the top line here. Had we, I think we might have taken some low margin business that we don't really need. Tom, I don't know if you want to add to that.

Well, I mean we really have hopefully develop a very cost consider culture. I we monitor head count every month. And we look at people who hire or are terminated by technicians salesman, administrator management, so there is a focus that every president, every regional vice president and everybody in senior management continues to monitor these SG&A costs because we know how critical they are to our future performance so I just think that is a culture that has developed over the three rough years that we have come out of, and people are not anxious to -- to add back to these costs because of, you know, nobody is sure how robust the economy is going to get.

Okay. Then let's just talk one last thing on the cash flow. Was there anything, Gordie in those numbers, extraordinary that -- looking at your balance sheet items, I didn't see anything in the way of extra working capital and I know you guys have been working hard to get the [INAUDIBLE--AUDIO DIFFICULTIES] to pay the bill versus -- gives you upfront money instead of working on your own. Was there any peculiar in the numbers that helped you drive that cash flow from operations?

There was one factor this quarter that we mentioned in our last quarterly call, which we were into the quarter a little bit at that point, and that is we recovered a tax refund from last year, and also I guess this is a good thing, we started paying taxes again this quarter, and the net of those two was a $3 million net of a refund with resumed tax payments, the net inflow to us, or cash flow, was $3 million for the quarter, so if you take that into account, you're still looking at an $8.5 million positive free cash flow in a period where we're doing proportionately a little bit more commodity buying, and in a period where we are typically ramping up a little bit more coming into the summer season. And you start mobilizing more on projects and putting equipment and labor out into projects, and in the earlier stages of project work, it is harder to get ahead on the billing than it is in the middle stages. So even if you exclude that tax -- net tax benefit, or refund, this quarter, we still think it is very respectable cash flow for this period of the year.

You know, that's why I thought, you know, generally speaking, you shouldn't, you know, your cycle should be toward the end of the year for producing excess cash and all. That so on balance then, it was just a pretty balanced quarter from a cash cycle point of view, because I didn't see anything extraordinary in the working capital, issues that would suggest that you got boosted by one thing or another, but it just looked like maybe it was a good cash cycle quarter then.

I think it was. And one detail I will add with, you know, our operators, and folks in the field deserve credit for reducing days and billings and receivables by three day this quarter. That certainly helped with our cash flow, so --

All right. Thanks.

Thanks, Dave.

Our next question is from Evan Marlow of Criterion.

Hi, guys. Great job on the quarter. Two questions. On the multi-family business, are you -- where are you seeing the strength for that? Is that sort of broadly around the country? And is it new construction? Or is it more in the service and retrofit side of the business?

It is principally new construction, some markets that are really taken off are the Atlanta market, the Florida panhandle, San Diego, Phoenix, and clearly our company based in Houston, which works nationally, has seen a tremendous increase in their backlog. On the East Coast and California. So it has been -- there's been some areas like in Atlanta, that were extremely increased volume, but it is pretty broad-based around the country.

A lot of this is -- highrise, multi-family residential, sort of in-fill building, downtown inside the associated city loop building, and we're seeing that happen a lot of places.

Okay. So it is urban, it is more urban as opposed to to --

Not in all cases urban, certainly Virginia is not urban, and Florida is not, but San Diego, Houston, Atlanta.

Okay. And any perspective on why that is happening, given that, you know, there is a lot of softness in rental markets and things like that around the country?

I think, you know, I think a large part of it can be explained by the fact that the product in the multi-family residential sector is old and tired in a lot of markets. So there is a lot of tear down and rebuild. There is a general -- you know, the Atlanta and Houston phenomenon are based on frankly young professionals not wanting to commute. I mean it is almost that simple. So L.A., I mean we have reliable projections that in L.A., within the next five year, there may be as many as 70,000 apartment units built and started. That's huge.

Right.

That's a space consideration.

Right.

So it varies. The reasons vary market to market. The cheap money will keep single family and free-standing residential housing building, although you're seeing some downturn in that, that same money is in many cases available to high rise and multi-family garden apartment builders as well.

And do you expect that if interest rates start to go up again, that this will slow in the multi-family area or are these projects sort of committed and moving forward?

Well, we believe there is a lot of commitment. I think we have to put interest rates in perspective, again. I mean they are very low, relative to the past, having been in this business before, you know, we were blindly constructing new apartment complexes around the country when interest rates were 8, 9, 10%. So I don't know how that -- you know, there is a lot of dynamics in there, and interest rate is just one of them.

Great. Thank you very much.

Okay.

Once again, to ask a question, please press star one on your touch-tone phone.

All questioned out.

There are no further questions.

I want to thank all of you for joining us on the call. We will be here three months hence with, we believe, a report in the same vein and what we're talking about today. Thank you very much .

This concludes today's conference call.