Comfort Systems USA Inc (FIX) 2007 Q1 法說會逐字稿

Welcome to the first quarter conference call. [Operator Instructions.]

And at this time I'll turn the call over to Bill George, Chief Financial Officer for Comfort Sytems USA. Sir, you may begin.

Thanks Shirley. Good morning everyone. Welcome to Comfort Systems USA's first qurter 2007 earnings call.

As always, we want to remind everyone that our comments this morning, as well as our press releases, 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.

You can read a more detailed listing and commentary concerning our specific risk factors in our Form 10-K that we filed this past March, as well as in our press release covering these earnings.

On our call with me this morning are Bill Murdy, Comfort Systems USA CEO, and Tom Tanner, our Chief Operating Officer. And Bill Murdy's going to open our remarks.

Thanks Bill. Welcome everyone. I have some prepared some remarks and Bill and Tom will have some remarks and then I'll close at the end and we'll have a Q&A as usual.

Q1, which is always our seasonally weakest quarter, has really been a study in contrast for Comfort this quarter. On the one hand we have the disappointing results at Atlas, our large multifamily focused operation. On the other hand we have the robust activities and outstanding results in the majority of our other units along some with some high quality increases in our backlog.

We're reporting net income of $1.8 million for the quarter, versus $4.3 million for last year's first quarter. And that difference is largely due to the disappointments at Atlas, though also there are normal seasonal reasons for that and Bill will address those things in a moment.

Revenues for the quarter almost $250 million showed an increase of about 5.6% from last year. That does include some modest numbers for an acquisition we picked up almost a month I guess-- the Madera acquisition.

Backlog as of March 31 was right at $700 million versus our record backlog of $727 million at March 31, 2006.

Notably, that larger backlog at March 31, 2006, included $172 million of Atlas work, opposed to the $118 million in the current $700 million backlog.

Much of that $118 million at Atlas is more recently booked work in which we have a much higher confidence of profitability based on how it's priced and our improved execution capability. Tom will talk about that.

Suffice to say, the rest of the backlog shows substantial and even increasing activity in schools, hospitals, office and industrial work. Further improvement in growth overall [inaudible] in our maintenance, repair, and retrofit business at good margins continues as well.

I'd like to turn things over Bill at this point who will have some financial oriented remarks.

Thanks Bill. Good morning again everyone. The unique characteristics and dynamics in our industry usually mean that there are a number of financial items to discuss and explain in the first quarter of the year and this year is certainly no exception to that.

First, I want to give you a little more financial detail regarding our challenges in the multifamily sector. And then I plan to comment briefly on a few individual items such as cash flow, some recent events, our tax rate, our backlog, et cetera.

Our multifamily operations continued to struggle in the first quarter. Our largest subsidiary, Atlas Comfort Systems, which is based in Houston and specializes in large project multifamily work, lost $7 million in the first quarter of 2007. These loses arose in the late stages of a number of very large projects, primarily located in our Florida and Washington, D.C. area operations. In a few moments Tom will discuss the operational causes of the losses.

The nature of the events and judgments that led us to the weak results includes the recognition of additional costs, the impairment of certain receivables, and provision for adverse impacts as we interact with other trades and close out this work.

Given the recent weak results at Atlas, many projects are reporting at a zero gross margin and thus do not contribute to covering SG&A expenses. As a result, a substantial amount of the first quarter loss is also uncovered SG&A.

As has been typical for us in the past, cash flow was negative in the first quarter as we reinvested in working capital following very strong year-end cash collections.

We ended the quarter with negative free cash flow of $15 million. We feel that as in past years we will be very successful in achieving strong cash flows for the rest of 2007, and ultimately expect to end the year with cash flows that equal or exceed our recent annual performance.

Our cash balance at quarter end was $69 million and we remain debt free. Our cash balances were decreased somewhat by the acquisition of Madera Mechanical which we announced a few weeks ago.

We purchased Madera for approximately $4.5 million, after subtracting acquired cash.

Madera was a part of Comfort Systems for about 20 days, so they made a small proportionate contribution to our earnings in the first quarter.

As we indicated in our release announcing that transaction, if Madera had been part of Comfort Systems for all of 2006, and based on its results as a private company, we believe it would have contributed EBITDA of approximately $1 to $1.2 million on revenues of approximately $16 million.

In addition to the Madera transaction we also previously announced in the first quarter that our board of directors had established authority for management to purchase up to 1 million of our outstanding shares. Since the time that resolution was enacted our Company has been observing its ordinarily scheduled quiet period, and thus we have not yet had any opportunity to purchase shares.

We will be seeking to opportunistically acquire shares as securities laws permit as we move forward in 2007.

SG&A expenses were higher in the first quarter of 2007, as compared to the first quarter of 2006, although they were flat as compared to the immediately preceding quarter.

The increased results from hiring of selling and administration people to support our growth, investment in our service activity expansion, and increased compensation accruals reflecting strong results at many locations, and a net increase in bad debt reserves, a good portion of the increase reflects the investments in growth that Tom will describe in a few minutes.

Our tax rate was somewhat lower than expected coming in at 34.1% for the first quarter. This rate is lower than expected as a result of positive changes and expected tax expense in a certain jurisdiction. Generally Accepted Accounting Principals require us to put these effects through in the quarter they are identified. When you combine even small changes of these reserves with our seasonally low first quarter results, even a very small change can move our tax rate considerably.

As the year progresses our rate will normalize and we believe that for the full year our tax rate will be somewhere in the range of 37% to 40%.

As Bill mentioned, total backlog was up from year-end and continues at very robust levels. A little over $12 million of the $47 million increase in total backlog is backlog that we acquired as part of our Tucson acquisition.

The remaining increase in our backlog reflects strength in virtually all of the end use markets that we serve. After a year of steep decline, multifamily has stabilized and has increased this quarter consistent with our other market strength.

Our multifamily backlog remains at levels far below where it was tracking in 2005 and early 2006, and is proportionately a much smaller part of our backlog than for the last several quarters.

Overall, first quarter earnings were down compared to the same quarter in 2006. As we have indicated publicly on a number of occasions, we operate in an industry that is very hard to predict on a quarterly basis and our first quarter is our most unpredictable.

The first quarter volatility that we experience is due to a number of factors, including seasonally low activity levels and the need to strategically plan for the upcoming busy months. For the last few years, we have had a lot of consistency in our stockholders so most of you will recall that our recent history bears out the volatile patterns I have been mentioning.

In the first quarter of 2005 we were barely profitable, whereas the first quarter of 2006 was very strong. Both 2005 and 2006, despite the very different starts, were years in which we ultimately reported growth and progress and that is why we remain optimistic about 2007.

That's it for financials so Tom Tanner, our Chief Operating Officer.

Thanks Bill; good morning everyone. I would like to start by recognizing that a large majority of our operations achieved very strong financial results during our typically weakest quarter of the year. We want to thank and congratulate all of those key members that contributed to such a great start for their respective companies.

These first quarter successes will provide very positive momentum for these operations as we move into the busiest time of our year.

However, those results were overshadowed by the significant loss occurred by our Houston-based multifamily housing operation, Atlas Comfort Systems. As we have previously discussed, the boom in the high-rise condominium market in all of 2005 that carried into the beginning of 2006, resulted in Atlas acquiring a far greater amount of work than they had resources to perform.

We were certainly overly optimistic about our existing capabilities and our ability to attract and hire sufficient additional resources to properly perform all of the work that had been acquired. Our backlog peaked in late 2005 and early 2006.

In order to perform the work on hand, our workforce needed to grow by almost 75% in what was the tightest labor market since the late 1990s. We were unable to increase our workforce to the necessary level with properly trained and experienced people.

Thus, we simply overwhelmed our existing core of well-trained, experienced and motivated team members.

The typical duration of a high-rise condominium project is 18 to 24 months. This means that the great majority of the work that started in mid to late 2005 and early 2006 will finish in the second qurter of this year.

We became painfully aware in this quarter of the very negative impact that our extreme lack of qualified resources would have on our overall project performance. We spent considerable sums to correct previously installed work, to compensate other trades for our lack of timely performance, to pay for extensive damage from water leaks in finished units, to pay for additional project supervision, and to pay damages for delaying project completions.

Our lack of performance on these projects was also the principal cause for increasing our debt debt expense during this quarter.

We believe it is very important to recognize the efforts of all of the Atlas core team members who have worked so hard over the last 18 months to try to minimize our losses. They have worked tirelessly to try to overcome the lack of sufficient qualified resources to staff our project. They continue to work diligently every day to complete these projects as cost effectively as possible.

We have taken the following steps to significantly improve performance going forward. Our backlog has been substantially reduced year-over-year, especially in our Florida and Washington D.C. operations where the majority of the losses were incurred.

We have implemented significant improvements in our process and procedures as they relate to estimating, project pricing, purchasing, prefabrication, and project execution. We have added and or replaced employees with much more experienced management personnel throughout the operation. We have eliminated the majority of the inexperienced and unproductive field labor that was hired in 2006 as our backlog has substantially reduced. We are reducing our SG&A cost to match our reduced 2007 revenue as compared to 2006.

We are also very encouraged that the vast majority of these poorly performing projects will be completed by the end of the second quarter.

As Bill previously mentioned, Atlas will improve its second quarter result even though it will still operate at a loss. We believe that beginning in the third and fourth quarters of this year, it will begin to modestly contribute to our overall profitability of our Company and we further believe it will make a solid financial contribution to our overall results in 2008.

As we have previously stated, we continue to believe that Atlas, as several of our operations already do, can achieve margins comparable to the margins generated by other segments of our construction business.

As Bill previously mentioned, our SG&A expenses are off year-over-year, while being consistent with the SG&A expenses incurred in the fourth quarter. A great majority of the increase was at the operations level.

We started operations in Charlotte, Las Vegas and Cincinnati. Our operations have invested heavily in both hiring and training of sales management and our service sales force as we continue to focus on growing the service portion of our business.

Our construction operations continue to invest in training for project mangers, field superintendents, and field foremen. We believe these expenditures are a very sound investment in the future of our Company.

We are very pleased with the level of our backlog, not only because of our sequential increase but also because of the year-over-year significant decrease in our multifamily housing backlog.

As we look forward to the remainder of the year, we are excited about our future. Our backlog is significant and our pipeline remains strong. We continue [technical difficulty] improvements in our construction operations and we continue to grow our service divisions in both revenue and profitability.

We believe Atlas Comfort Systems' operations are significantly improved and we continue to attract the most qualified people in our industry.

Plus we believe, even after our disappointing start, we will have improved financial performance in 2007 as compared to 2006.

I will turn it back to Bill for his wrap-up and then Q&A. Thank you.

Thanks Tom. By virtue of what we've done in improving our Atlas operation, that Tom has well described here, and the robust nature of activities and the results at most of our other operations, and all this on a background of a very positive non-residential construction and service environment, we continue to be optimistic that our revenue and our net income for '07 will exceed that for '06.

That's a long one sentence wrap up but it sort of pulls all this together.

At this time why don't we move into Q&A as there may be questions out there that we can further eliminate.

[Operator Instructions] David Yuschak.

Yes, guys, when you take a look at the Atlas operation, certainly this is something you've been wrestling with for two, three years. As you look at the kind of contracts you're booking today, given the fact the multifamily has picked up in the backlog as well as everything else, what is different today as you look at signing the contracts for multifamily that is different from when a lot of this other problem stuff was booked? Give us a sense as operationally what's different.

I'm going to turn this over to Tom here, Dave, but we've outlined a lot of that. And I think the summary of it is much more careful about the pricing and planning and then we've got essentially now the people assets, both the supervisory and direct, to handle these projects. And Tom you've--

[Inaudible.] Would that be-- when you look back a couple of years ago, you were giving a lot more speculation on multifamily, particularly probably in Florida, with quality of credits and all that kind of stuff probably being problematic in the first [inaudible]. Any of those-- and then just wondering is there any of that kind of thing that created-- there were issues in the past in addition to maybe just being under supervised here as well as, you know, this human resource. I just wonder if there was anything beside the human resource side of it that is different now compared to three years ago.

Well, one, in the Florida market we were negatively impacted by the hurricanes that hit in 2005, which delayed the completion of three projects which pushed that work into 2006 and is being finished in 2007 as we speak. So that really impacted our resources there.

Btu we have substantially-- of all markets we have reduced our backlog in the Florida market because of the nature of the business there, the lack of demand, number one, and number two, because we wanted to better match our resources with the amount of work that we have there.

So that volume and that market will be down probably two thirds in '07 from what it was in 2006.

I think our whole estimating process is significantly improved from when we took on this work in '05 and '06.

A lot of the work was estimated using unit pricing, which was ineffective when we actually got to do the work because a lot of the conditions were not properly taken into effect in that unit pricing. And so today each job is priced individually based on the plans and specifications for the work.

Again, it is simply a fact that we can't overstate how overwhelmed our forces became in terms of doing this work and when we-- with this backlog back down at this reasonable level, we have people that can do this work, our processes and procedures are much better in terms of tracking cost changes, in terms of tracking change orders, in terms of correcting delays on projects, putting people on notice that there'll be additional costs required. We have been much better at making sure that we have escalation in commodity prices in our pricing modules. In the past we would take a job and price it and agree to a contract eight, nine months later with no adjustment in pricing for commodity price increases. We simply don't do that any longer today.

That's why-- and I can't underestimate, again, the improvement in our whole management team. We have a new president; we have a new CFO. We have significantly increased the number of senior level project executives to manage this much reduced workload going forward.

Dave, I am going to try and interpret your question a little bit-- a part of your question a little differently.

I don't think there's anything endemically a problem in the multifamily business. There may have been in the last couple of years some time to market pressures in certain [inaudible] they're is. But remember, we're not in Miami, we're not in Las Vegas doing this.

The hurricane situation that Tom-- we haven't used that as an excuse. I mean we had a problem there with or without the hurricanes. It exacerbated the problem because you get workforces mobilized ready to go and you get interrupted, now what do you do and how do you plan it?

So, yes, it exacerbated and probably cost us but we've never conventionalized what that cost.

But we honestly think-- and we're not getting out of it, we think it's a good-- or we're getting out of the multifamily high rise business, we may mitigate some what we do in the plumbing area but we think it's a good sector and we have got new disciplines in pricing as Tom pointed out and we, very importantly, believe we've got the right people on the bus and we've learned some very valuable lessons here.

So, yes, we're not afraid of the multifamily business. Now, just as a "portfolio matter" we are reducing it as a percentage of the total as there's no doubt about that. But we are not abandoning that market, we think there is some-- a lot of good work to do there.

Yes, going through the idea of the backlog including your early in the year particularly with I see multifamily picking up. Is that just suggesting to investors out there that the markets remain very healthy, that even you can get-- even as though you're conscious of trying to downsize multifamily but even that product market's picking up as well as the rest of the market. Is that something that you just can see stay strong for most of this year then?

yes, we can answer that anecdotally and Bill has a lot of currency with what the econometric and economists, what they're saying. Bill, why don't you tell them.

Well in a word yes. I mean this year it's still going to be an increase after a 17% increase last year where the activity levels are at very high levels. And the service that we give the most currency to, and frankly get the best use out of and respect the most is the McGraw Hill old doge forecasting service, and they show-- they don't show the year-over-year increases in the next couple of years that we saw last year, the last two years have been the largest year-over-year increases in many, many, many years, that is probably measured in tens of years if you take away 1999.

So very good strength. We expect things to stay at a very high level and that's nice for us. We've spent a lot of years with it going the other way and it's a nice change.

I would just make one last comment here. I think when you have a $0.10 charge in a quarter for one segment you're in the E&C space and that's to be expected. I think I've seen many E&C companies deliver losses of $0.10 or greater on contracts far bigger than that so if the worst you can deliver is $0.10 and you can put that behind us, and your underlying business is as profitable as it would suggest you had in the first quarter given that you came in at $0.04 in net, $0.10 back in, that suggests your other businesses are not only producing good revenue but the margins have to be exceptionally good in that kind of slow period. Is that correct or not?

I guess what I'm asking is because-- back out the $0.10 you would have ended up $0.14. I guess the rest of the business is-- Can you give margins?

But we don't want to get out of this that easy. We want-- we've got a huge portfolio of projects. What happened was we got out of balance on the multifamily. We're trying to get back in balance. So we're not-- I don't think we are subject to the same swings that a big E&C is. We have been with this multifamily problem. But in future mitigating that is going to help an awful lot.

Thanks Bill.

Rich Wesolowski.

Thanks, good morning. Bill Murdy-- I mean excuse me, Tom mentioned that the normal or acceptable margin in multifamily would approximate that in some of your other sectors. Is that to imply that you guys expect that unit to do a mid-single-digit operating margin in '08?

Yes.

We did that in '04.

Many of our other organizations that are achieving those results in this business.

The increase to the profitability you guys expect and hope for in the second half and into 2008, is that simply a function of the mix of work changing, getting the headache jobs off the books, or are you also seeing higher margins in just your commercial portfolio?

Well, just judging from the first quarter, our non-Atlas subsidiaries improved over the prior year. And I would view that kind of improvement in a first quarter as a very positive signal. I feel better about our book of business having seen our first quarter results come in than I felt at year-end and I felt pretty great at year-end. So I think that we certainly feel optimistic that's for sure.

Do you expect backlog to continue expanding in the second quarter?

You know, we would be happy if it would remain flat at the level that it's at. We have had-- as I said, we have a good backlog, a good pipeline; we've booked some good projects in April. And it may be- we're very focused on not taking on too much work in any particular location given our history so I don't see our backlog increasing significantly from this level. But at this level we believe we can-- it performs well if you have very positive financial results.

All of our operations are comfortable with their backlog today. We don't have operations out there scrambling to try to get work. They're comfortable with the construction backlog and focused on growing their service business.

And finally, it looked like your average project size jumped about 10% sequentially, which looking back the past couple of years is a pretty big change and there was no big changes to the number of projects above $10 or $15 million. Can you comment on that?

We've booked a couple of large projects as I said. It's liable to come down here, Rich, again. This may be momentary because as we've moved out of these large Atlas projects. That'd be my comment. I don't have a full feel for all 4000 projects here.

[Inaudible] We are doing a lot of very, very detailed work on our financial processes. If you looked back a year and a half ago you would have seen a much smaller average project size and probably proportionately too much smaller. We've been changing the rules about the way that we take things off of our POC, how quickly we do it. What we-- we've been changing-- finding ways to track jobs out till they close that are more sophisticated than leaving them on our PPOC.

So I'm going to be open with you that some of what you may be seeing there just has to do with us tightening up processes in certain ways quite frankly. I don't think our book of business is really changing in that direction. If anything this year it's probably changing towards smaller. It's changed towards larger for sure last year, but these factors of tightening up certain processes it made it look even bigger.

Okay, thank you.

Hardin Bethea.

Two questions. Can you help me with understanding the magnitude of the headwind from Atlas in prior quarters? I mean you've indicated it was about a $7 million loss in the first quarter. Can you tell me what quarterly results kind of looked like in '06?

For the full year last year they lost money -- far less than they lost in the first quarter. Tom, what would you say they lost last year?

About $1 million of which-- what was the number in the fourth quarter? $3 million in the fourth quarter.

And they modestly made money early in the year last year. They struggled in the third-- fourth quarter pretty seriously and then they had struggled mightily in the first quarter and what you have is you have a lot of giant condos getting up in the 90-plus % level and have us having to do what we have to do to finish them. We're flying people from all over the country, making decisions in many cases to make sure something gets done.

Because we've had some quality control issues we've made investments in going back and redoing work at times where we weren't yet required to do it but we really, really [inaudible] and thought it would be prudent to go redo some work in certain places; made some very hard business decisions to do that in the first quarter.

So it's just a matter of us deciding that we have to get our arms around something and frankly committing a ton of resources to do it. And the marginal resources can be very expensive.

And the second quarter you've indicated would have less of a negative impact? Is that a good way to say it?

Yes, much less. In the second quarter they're going to-- because as I said in my remarks, because they have so many projects that are zero gross margins, we do expect them to be modestly unprofitable in the second quarter simply because they won't be able to cover their SG&A.

This is still a bumpy industry and they're still working on big projects. So there's a band around what they might do but I think everybody in this room would be stunned not to see a very, very significant improvement from either the first quarter or the fourth quarter results.

And then I guess I'm interested in kind of the--

And when I say improvement I mean at Atlas.

Sure, sure, no, no, that's understood.

I realize I might have just said something I didn't want to say. So I was referring to Atlas.

Well, seasonally anyway the second quarter's better than the first.

True.

But the other question is maybe qualitatively towards the backlog as it exists today versus the record of a year ago. It seems you're much more confident in the quality that given the trimming you're kind of working off this bad business in multifamily but the balance of the backlog also seems to be-- you have confidence in the quality of that. So, again, I know you talked about this a little bit but are margin expectations accurate when you kind of look at current expectations that analysts have given your confidence in the quality of those backlogs.

Well, I guess just the quality of the backlog I'll let Tom comment on that and then I'll talk about your second part of that question.

Well, our best performing companies have the largest share of our backlog. And so that's why we're encouraged by not only their ability to estimate it and price it, but then their ability to execute it when they receive the work.

So, that's why we're very pleased with the backlog as it lays today. And it certainly-- we think it's priced appropriately for the markets that our companies operate.

We believe that there are good margins in this backlog of business we have.

And Tom and I spend a lot of time together and I'm certain he likes his backlog today better than he liked his backlog a year ago.

As far as the margins that our analysts are expecting for us, we don't really comment or give guidance in that way. I think we are at a point-- and since we're on a publicly available call, I think we are at a point where what they're saying is particularly well tied to what's happening. So the prediction that we're making that this year will still be an improvement over last year, given the losses that just hurt our first quarter, that's a pretty robust prediction. And I think we feel very good about the rest of this year.

So I think we're willing to say, again, what we've said which is we expect our profitability for this year to exceed our profitability for last year. That means we're going to have to make up for some of what happened in the first quarter.

And then I guess the service versus new construction mix of business as you look at future acquisitions, can you derive your order of priority in that regard?

Well, clearly we have a desire to add operations to Comfort Systems and the kind of operations we're looking to add are balanced -- i.e., do have a component of service, maintenance, repair, retrofit, et cetera. And in fact, it's not likely that we would be acquiring or bringing into Comfort Sytems anything that was all construction.

In our own operations where we have an effort to grow the service side, we're seeing at least early results of both what we've done to help grow that -- hiring sales people, training, working with our various entities on the operations side.

So there's clearly not only a proclivity to push hard on the service side but also a real action to get them.

Related to that investment in the operations and training, would you be willing to quantify how much of an impact that had on SG&A over the last quarter or two?

I don't think we have a reportable number on that. I would say that the addition to bad debt reserves-- we had a $4.5 million increase, if you looked a year earlier, versus the end of this quarter, total SG&A dollars, which is-- actually we had a very slight decrease from the year-- from the fourth quarter's SG&A dollars.

In my opinion-- now, we've already mentioned that a good chunk of that, probably 20% of it, came from just the addition of some bad debt expense, which runs through that line based on there's not a better place for it to run through, which really isn't relevant to this. That's more of a individual event. So if you take that out, you're somewhere a little bit above $3.5 million.

I think it's certainly more than half of that related to investment, in my opinion, having sort of looked at it on a company by company variance analysis of the SG&A and where it came from. I'm very comfortable that more than half of it was investment.

And a lot of the rest of it frankly was just additional compensation accruals for commissions and bonuses, as the vast majority of our companies did even better in the first quarter of this year than they did in what we thought was a very singular first quarter of last year.

And when you view that and just call it an investment, what's the return expectation on that kind of investment? [Inaudible] produce results.

Yes, I mean we think it's the key to us becoming a better and better company. The additional training obviously is very hard to quantify. The return on new service departments, the return on our new operations in places like Charlotte or Cincinnati, that's a return that we will be able to track internally but those companies when you first start them it's very common for them to lose money. You make a net investment not just at the SG&A line, but you make a net investment obviously from your earnings even outside of the SG&A that you incur.

But we absolutely believe that, frankly, those investments-- and even if they don't all turn out, if as many turn out as we project will in our business plans, those are better investments than acquisitions. I mean those are very, very potent. As Bill said, the return on investment should be very, very high.

Now it'll be embedded in our ordinary results and also the timeframe for that is a lot less hard to predict but you really-- if there's a source of our optimism, that's it more than any other factor.

Okay. Great, thanks for the answers.

Justin Maurer.

Morning guys. Just to beat the multifamily horse here. Just in terms of the backlog, I think you guys have indicated in the past on the multifamily piece that you wanted to work that down to more historic levels, maybe in the mid teens, and it looks like we're generally there, correct?

For the quarter, our percent of revenues that were generated from multifamily projects was 17%. And if you looked back at a 10 year average, we were probably-- every pie chart you've ever seen in an investor presentation for many, many years was somewhere between 13 and 17 until it started to divulge over the last 15 months or so.

So we're back at the high end. We're probably just breaking into the high end of an ordinary range.

So just to understand that a little bit. I mean you guys obviously have been talking the last few quarters about driving that down because of the problems at Atlas. And now that you've tightened up the mechanisms, if you will, to hopefully ensure that those issues don't happen going forward, I just want to get a sense as to how much of it's chicken or egg, if you will, in the sense that, like you said, you brought in new management there, you've been tightening up processes. So, based on that confidence, is that where you then started to build business back in or did you guys actually see anything tangible in more recent activity that gave you the confidence that, yes, we can go ahead and start growing that? So, does that make sense but--

Tom's the best person to answer that. Let me, just for the record, indicate that all of our multifamily is not in Atlas. We have some multifamily activities in other companies, that's just for the record here. So, Atlas is not the 17-plus percent. Tom, why don't you--

Well, a couple of things. The increase in backlog in the first quarter versus the end of the year was basically seasonal, where oftentimes you pick up work at the beginning of the year. Part of the cycle here is that a lot of projects were completed in late '06 and will be completing in '07 and now they're staring another two year cycle of building these high rise condominium projects.

So the work-- the increase in our backlog was simply two projects that we booked in our D.C. market that will take two years to perform. They were acquired at higher margins and better estimates than the previous work that we have there, and we have significantly improved the management operation in our D.C. office.

So we expect that backlog to actually start to go back down during the balance of the year because we have gotten the levels of backlog in our various markets where we want them to be. We see that backlog going back down Q2 and Q3.

And just so we know too, Atlas, what's the rough guess of Atlas as to the total percentage of multifamily. Is it 80% of multifamily backlog or business or--? Help us frame that up.

Yes, I can figure it out here. It's about 80%. Very good.

Good guess.

Right at 80%.

And to that point, on the backlog overall, I know you guys have said in the past as well that the multifamily stuff is longer tail, so to the extent that that-- to your points now that that should continue to run down a bit, your overall backlog should potentially be shrinking as well right because the stuff that's in there, the commercial oriented business, is shorter tail so it's going to be faster turning. Is that right?

Well, the average project life in backlog will come down so there will be a dynamic that's shrinking backlog. We also have the fact that there is-- Comfort is on a long-term growth line trend, we have been forever. Frankly, if you take our continuing operations, we've always grown faster than the underlying industry by at least a few hundred basis points and often more. So you've got two or three counter-- two or three things and they're not all going in the same direction.

The dynamic of smaller project size will shrink backlog because of its content but then the underlying growth of our Company is going the other way and there still are strong markets. So that's why we sort-- we're answering that question, we like our backlog level, we think it will remain robust.

If you ask me over the next few years will it get bigger? My answer is yes. But that's more of a trend line and over the next few quarters it could go either way.

And another interesting thing is, we report at a moment in time and the booking of a $15 million project-- and we don't put anything in our backlog until something's signed. The signature coming across on March 28 or April 2, can be the differences between-- for one project can be the difference of $15 million on it. So really lumpy.

And then just lastly on the-- appreciate the color on the Atlas profitability, it helps us frame it up. What was it second quarter a year ago just so we know comparatively? You said that maybe you break even or lose a little bit of money there in the second quarter this year. What does that compare to last year just so we appreciate it--?

$1 million in the second quarter last year.

So maybe you're hoping it'll be flat.

No, we're expecting to lose money in the second quarter this year.

Right. Meaning if they lose $1 million this year it'll be flat to last year.

No, no, they made $1 million last year.

They reported earnings in the second quarter of last year; they lost the money later in the year.

Got it, got it. Okay. Perfect, thanks a lot.

[Operator Instructions] At this time I'm showing no further questions.

Okay, shall we wrap up? And thank everybody for being on the call. We remain optimistic. I think you see that coming through in our comments and the questions. Thank you very much. Bye.

Thank you. And this does conclude today's conference. We thank you for your participation. At this time you may disconnect your line.