Comfort Systems USA Inc (FIX) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2007 Comfort Systems USA earnings call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Bill George, Chief Financial Officer of Comfort Systems. Please proceed.

Thanks. Good morning, everyone. Welcome to Comfort Systems USA's year-end earnings call. 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 was just filed, as well as in our press release covering these earnings.

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

Thanks, Bill, and welcome, everyone. We are pleased to announce our Q4 results, including an increase in earnings of about 16% compared to the fourth quarter of '06. For the full year, we are reporting $32.5 million of net income, $0.79 a share as compared to $0.70 a share in 2006, which is about a 13% increase. And all of this in spite of taking substantial accruals against a number of jobs at Atlas, our multi-family high-rise focused operation. Tom and the Bill will both have more to say on Atlas in their remarks.

Revenues in Q4 were $293 million versus $268 million in Q4 of '06, and revenues for the full year were $1.11 billion versus $1.056 billion in 2006; that's up about 5%. Notably, without the purposeful rightsizing of our multi-family operations, revenue growth would have been more on the order of 10% growth '07 versus '06.

Backlog at the end of '07 stood at $787 million, down slightly from September 30, '07 but $130 million higher than at year-end 2006. Notably, our positive free cash flow in Q4 and indeed for 2007 was remarkable at $72 million for the year. Bill will have more to say about that going forward.

In fact, I'm going to turning this over to Bill George at this point.

Thanks, Bill. Let me just take a minute or two and fill in a couple of additional details of our results. The main item that I want to discuss is the nature and purpose of the substantial accruals that we took for Atlas. As Bill mentioned, our overall revenues and earnings improved compared to the prior year, and this was in spite of the setback at Atlas, which reported a loss of $7.5 million in the fourth quarter. The largest component of the fourth quarter loss at Atlas was a $6.2 million accrual, which is a provision for potential back charges and costs to resolve our remaining challenging jobs.

Well over half of the jobs that have caused the Atlas losses over the last few years are completely closed out with outstanding receivables fully collected. However, there are a handful of jobs where we have filed liens and are in the process of pursuing the remaining amounts that we are owed. The $6.2 million accrual that constitutes the bulk of the Atlas fourth quarter loss will provide us with the ability to either settle or fight claims and contingencies on certain of the jobs that struggled in the overheated multi-family market of the last few years, especially in Florida.

With respect to many Atlas jobs over the last few years, we invested significant sums to meet our obligations. And this is true even on jobs that experienced challenges caused by third parties or by facts and circumstances that were not caused by Atlas. As a company, we take our contractual commitment seriously. We generally take the approach of accepting back charges and fairly compensating parties where we feel we may not have met all of our obligations. However, the deep pocket on jobs involving residential developers and contractors, who in many cases are currently experiencing disappointing results, we feel that we are sometimes unfairly targeted. The accruals we took will allow us to fairly resolve or to fight claims where we deem appropriate. It is our best judgment that these accruals are sufficient in light of the remaining risks. And we feel that it was prudent to take account of these risks by recognizing losses that diminish our 2007 results, even though we expect to vigorously contest many of these matters.

Notably, it may be useful to point out that if Atlas had simply broken even in the fourth quarter, our quarterly earnings would have been at least $0.09 higher and we would have reported approximately $0.30 in 4Q EPS.

Outside of the challenges in these legacy jobs, Atlas had results that we feel were consistent with our plans and expectations, and clearly, Tom will talk about Atlas in additional detail in a few moments.

Having spent a few minutes on Atlas, let me just briefly note one or two more items. Cash flow was an extraordinarily positive aspect of our fourth quarter. As Bill mentioned, free cash flow surged to $55 million in the quarter and ended the year at $72 million. Our cash balance was $140 million at year-end, about $50 million higher than a year earlier. And this was despite our increasing dividend, our substantial stock purchases, and our two acquisitions.

Since year-end, our stock repurchase program has continued to return money to our stockholders in a disciplined way and we have now retired more than 1.1 million of our outstanding shares. Our Board of Directors extended that program yesterday with its third stock purchase authorization in just ten months. We feel that disciplined and opportunistic share repurchases will continue to be a good use of our cash, particularly while our enterprise value to EBITDA multiple remains at the very low levels we have been experiencing.

Finally, let me comment on financial aspects relating to the acquisition of a wonderful company that became a partner of ours yesterday, Riddleberger Brothers. As we mentioned in our press release, annual revenues for that company should exceed $65 million, and they have a consistent record of strong earnings, with over $7 million in EBITDA last year. We will own them effective March 1 and they will be a part of our results for 10 months this year. Under the new accounting standards, we will need to amortize a portion of the purchase price against our earnings for the next year or more, particularly as it relates to their existing backlog and customers. They will be accretive this year and we expect them to directly add at least 10 months of EBITDA to our bottom line at rates similar to or better than their last year results.

Unfortunately, GAAP rules requiring amortization of intangibles will reduce to some extent that transaction's accretiveness to earnings per share. Until we have completed our valuation analysis, it's impossible to say for certain what the effect of that acquisition will be on 2008 EPS. However, even in the current year, we expect that this acquisition will be noticeably EPS accretive.

We feel optimistic about 2008 and beyond. Over the past few years, we have been able to demonstrate increasing success at seizing the opportunities that have been afforded to us by good markets. Discipline in work selection, tight execution, solid cash practices, and above all, the best technical and project management workforce in the industry, mean that we can be successful in any market conditions. We believe we will continue to produce strong results.

That's it on financials. So now I will introduce Tom Tanner, our Chief Operating Officer. Tom?

Thanks, Bill. Good morning, everyone. I would like to start by thanking all of our team members for their efforts in this quarter and for the entire year that resulted in achieving of our strongest annual performance since 1999. We truly have a remarkable group of very talented individuals, which were the foundation for a very large percentage of our companies to have outstanding results for both this quarter and the full year.

The highlights of our full year results were the achievement of an operating income of 4.5% of revenue, which would have been 6.2% of revenue without the Atlas losses, and the generation of free cash flow of almost $73 million. These results are directly related to our continuing focus on the key drivers of our business in both our construction and service divisions.

Obviously, our results were seriously diminished by the operating loss from Atlas, our large multi-family housing company. Atlas's continuing business basically broke even for the quarter. However, as several of their large legacy projects -- projects booked in late 2004 and in 2005 -- entered the close-out phase, we entered the year with approximately $6.2 million of accruals to offset potential and asserted back charges for certain projects. The $6.2 million accrued at the end of the year was in addition to certain back charges that were booked in the quarter to allow us to finally close out several projects in our mid-Atlantic market.

Over the last two years, we have replaced the entire Atlas senior management team, including the CEO, the President, and the CFO. We have totally exited the fire protection business. We have exited the Florida market with the exception of two ongoing projects in the Tampa area, and we have sold our operations in Las Vegas and Los Angeles. The Company's backlog at the end of the year was 50% less than its peak backlog, which was at the end of 2005. Project selection and pricing have improved. New processes and procedures have been implemented to better manage the labor productivity on all of their projects.

Today, we have the appropriate manpower resources to profitably execute our backlog. Thus, assuming no further deterioration in any of the remaining legacy projects, we believe that Atlas will operate at breakeven or with a small profit for 2008.

In the current year, our operations will continue to focus on the following areas -- improved margins for our construction projects, primarily from focusing on labor productivity and expanding our prefab capabilities; growth in our service operations in terms of revenue, operating income, and our preventative maintenance agreement base; increased participation of projects that are related to improved energy efficiency, including many projects that will qualify us for lead certification. We will focus on team member education in the areas of leadership, estimating and project management. We will provide craft and technical training for our field superintendents and foremen, our skilled craftworkers and our service technicians. We will continue to focus on safety to maintain and improve our leading position in the industry.

With the economic uncertainty we are currently facing, we will diligently maintain very tight cost control to minimize the impact of any economic downturn. Thus, we continue to be optimistic about our future. We are very pleased with the acquisition of an outstanding company, Riddleberger Brothers, that was announced earlier this morning. Our current backlog, which is at a record level for the fourth quarter of any year, is up 20% from a year ago. Our pipeline continues to be active. Our operating companies are much better managed today and thus they operate much more efficiently than they did in the last economic downturn. We have very strong momentum coming off of our record 2007 performance. Thus, we believe that we will have improved financial performance in 2008 as compared to 2007.

With that, I will turn it back to Bill for his wrap-up and then questions.

Thanks, Tom. I would like to make a few remarks, both in summary and in looking forward. As Tom mentioned, our backlog is at historic highs and beyond that, our indicative pipeline business is very good. In fact, we have booked some very good business already in Q1.

As Tom described, we believe the Atlas situation is well in hand and we are encouraged by what is going on in our Atlas operations. As said in our release, we are not certain what the economy holds for late 2008 or 2009. But what we do know is that Comfort Systems is much better positioned for a non-residential construction downturn, should there be one.

If we compare today, say, five years ago, early 2003, which -- a year which proved to be a recessionary year, especially in non-residential construction -- today, we have twice the backlog and we're [potentially] the same size company, as we've added just a couple of companies, not including -- this conversation doesn't include Riddleberger yet -- but we have twice the backlog. Our recurring service business is 45 to 50% higher than it was; our initiatives in energy efficiency projects are gaining traction, and our efforts to improve productivity by training and instituting processes in our various operations are having great impact.

Our cash balances are more than $120 million greater than they were five years ago. And in addition, we have added four very strong companies to our mix. Most recently, as announced this morning, Riddleberger Brothers in the Shenandoah Valley of Virginia.

Tom mentioned Riddleberger did -- Bill mentioned Riddleberger did $65 million last year, very profitable, and has a backlog at this point of $56 million or so. A number, by the way, which is not included in the backlog numbers that I mentioned before. We are looking for very substantial operating income contribution from Riddleberger in 2008.

In 2008 and beyond, we will be looking to continue to prudently add high quality operations to Comfort, especially in geographic areas where we are not now represented.

And in summary, I guess I'd say going forward, we intend to capitalize on our strength and positioning, and thus believe our results in 2008 will be even further improved versus 2007.

I think that concludes our more or less formal remarks. And [Tanya], if you want to open it to questions, I think we are ready.

(OPERATOR INSTRUCTIONS). Matt Duncan, Stephens.

A couple of things. Let's start with a little more difficult topic and then we'll move on to happier stuff. So let's start with Atlas here real quick. Talk a little bit about this charge you've taken, kind of what the basis for the accruals are. And sort of what the philosophy behind taking all the charge now was. And do you feel like you've captured all of the potential back charges in this accrual so that you won't have to do this again in 2008?

Well, you know, we signed our name that we feel like these are the right numbers. Obviously, you haven't seen accruals like this in prior quarters. We are far closer to the end of these jobs. People live in virtually all of these buildings today. So we do feel like we're much, much closer to knowing what it is we need to do.

The nature of these accruals, some are for back charges that have been asserted. Some are for back charges that we think potentially may be asserted. The standard is pretty high, to go ahead and take losses for that kind of a consideration. And so obviously, we've had to do a lot of work to prepare for this. But we do -- we feel like it's the right number. And as Tom said, we feel like Atlas -- well, what we're saying is we believe Atlas will certainly at least break even next year.

Okay. Fair enough. Do you have in front of you what Atlas revenues were in the fourth quarter of '07 versus the fourth quarter of '06?

They were $19.9 million in the fourth quarter of '07. I don't remember what they were in '06. But they were $163 million for all of '06.

They were probably $40 million.

Yes. They were probably close to $40 million at the end of last year. They were $95.9 million for this year. So you have about a $70 million reduction in annual revenues. And then for the coming year, we expect that the continuing operations of Atlas will be about $70 million. We will have a little bit more revenue from the geographies that we're closing down, so that will add to that a little bit.

Okay. So I guess kind of what I'm driving at there is I want to focus on your business excluding Atlas. Because if you back out Atlas, it looks like you guys had a great quarter here. I'm curious if you know what your sales and profit growth were, excluding Atlas, in this quarter?

Well, I can give you one benchmark. If you eliminate Atlas from both sides of the equation, take out the revenues, take out the losses, our operating income would have been 6.2% versus 4.5%.

And that's for the full year or for the quarter?

That's full year.

For the full year, if you add back the Atlas number, EPS would have been up 66%.

It's a major, major hit.

Sure. Fair enough. Let's move on to a couple of other things here, then I'll get back in queue. Talk just a little bit about what bid activity looks like right now. I mean I know there's some concerns about where non-res is headed and no one really knows for sure; but just any feedback you can give us on kind of what you're hearing from your customers and what you're seeing in the marketplace would be helpful.

We actually talked to our companies over the last week or so in anticipation of this call. And we are seeing active pipelines. And we are seeing consistent bidding opportunities in the marketplace. So, today we haven't seen any significant change from a year ago. So we're constantly monitoring it where we're concerned. We've asked questions about project delays or cancellations. And fortunately, we just haven't seen any of that to date.

Okay. And then last thing here and I'll get back in queue. Bill, you talked about the acquisition pipeline a little bit and mentioned that you guys will continue to look at deals. Can you give us a little color on kind of what that pipeline looks like right now? I mean, you guys still have plenty of cash, even after Riddleberger, very little debt, if you count the note as debt there. But just talk about kind of what you're seeing on the acquisition front right now, what we can expect from you guys here going forward.

Well, without frontrunning anything, you could see something fairly soon. The characterization of the pipeline -- we [really] look at -- remember, we're looking for very high quality companies in jurisdictions where we are not currently represented or don't have complete coverage. We have identified a lot of targets. We've had discussions with many. And I think when one is looking for just high quality operations, it's hard to talk about the robustness of the pipeline. We haven't done it in that way. We have targeted some companies that we want to talk to, they want to talk to us. I think that more characterizes it properly.

We have some goals in mind. I think we will achieve those. But we're not going to sacrifice quality for volume of revenue.

Okay, that's helpful. Thanks, guys.

Rich Ozlovsky, Sidoti & Company.

First, just a point of clarification. You guys had previously reported $37 million in Atlas revs for December '06 quarter and a $3 million operating hit. Tom Tanner, I was surprised to hear you say that increasing the margins further in the construction work remained a goal even from the implied margin posted in 2007 ex-Atlas. Are the contracts being added to the backlog expected to be as profitable as those that were in 2007?

The contracts in backlog today have similar margins to the contracts that we did in 2007. And the business is very, very susceptible to improvement in labor productivity. So we couple labor productivity, which is highlighted by increasing our prefab capabilities, and we still believe that our goal is to increase our margins in 2008.

Did you mention the backlog that Riddleberger brought?

I did. They currently have $56 million more or less -- not more or less, $56 million.

So is $70 million a good estimate for the acquired revenue added in '08 with 10 months of Riddleberger and then the rest of Madera and Air System adding full year annual contributions?

No. It's more than that. It will be more than that.

I mean, that's probably a good estimate if you were to take the three months that we didn't have last year of Madera and the nine months that we'd didn't have last year of ASCI. So if you were to -- and to assume we did no more acquisitions, that's a pretty good number. I think the reason you got an immediate no, is because the people in this room don't think we're necessarily done doing acquisitions for the year. But I think just based on what you've seen, that's probably a good number.

Okay. And the volume of new work -- are we entering a situation where absent any acquired backlog it would hover at that, say, $825 million level? Or would you expect a big change organically as we move through '08 in either direction?

You know, backlog I think is not -- I wouldn't expect a big upward change, mostly talking about same-store backlog because most of our companies were very, very fully booked over the last couple of quarters. And so I would expect it to trend at high levels, assuming that what we're experiencing now continues. (multiple speakers) But it moves around a lot quarter-to-quarter, sorry.

I've had some discussions in the last couple of days that allow me to mention that we've booked some significant business in this quarter. We're seeing, especially in the education area, health care area, even the hospitality area, some good potential work. And we are getting a good bit of it. We don't have -- we no longer, especially at Atlas, don't have a 100% hit rate mentality. We are being very selective in what we take, both because what Bill said, we have certain [path] constraints, but also we're just aimed at the bottom line here as much as for revenues.

And we also have a significant amount of business in the -- for work on military bases, which continues to be a strong opportunity going forward.

Okay, thank you. And finally, can you just expand on a little bit of the further than immediate future of Atlas? I mean, the contracts that you're booking now from there represent that, say, $60 million or $70 million of recurring type business. Are those doing well? Are you getting more than breakeven from that work?

Yes. We have substantially been able to raise our prices in the marketplace and we have improved the quality and the performance of our work. So we have some longstanding customers that like doing business with the Atlas group. And they like to -- we still have bonding, which is important in that marketplace, especially on larger projects, which we are now taking advantage of the pricing on the [ability plus] to provide bonds on these large projects.

So we are confident moving forward. Is there a couple of jobs that we started in the middle or early '07 when we were still upside-down with work? We have some concerns about. But the work we're booking and starting today, we feel very confident in our ability to produce very profitable margins on that work.

David Yuschak, SMH Capital.

A quick question on Atlas because you know when you take a look at what this -- that you guys earlier said the valuation on the shares, Atlas has certainly been a big factor on why the valuation is there. Which kind of begs the question, you've been very patient with Atlas to try to get this ship rightsized, to the point where maybe some investors got totally frustrated and said you can't rightsize this thing, why doesn't it jettison and all this.

So I think the question I really have to ask is you do have other multi-family operations. Could we get a sense from you as to how profitable those are internally versus what Atlas is doing? And is it possible at all because of the frustration you guys have had and the frustration investors have had, that somehow that Atlas culture can get transitioned to the kind of profitability that the rest of the businesses in multi-family is doing for you?

Well, we have several operations that successfully perform multi-family work year in and year out. And we believe that we have made a significant change in the culture at Atlas by -- with all the changes we've made and by the new management, they are recognizing that this can be a profitable business. We're holding employees accountable. We will move forward and this will be a profitable piece of business. We've maintained that all along that we believe in this segment of the business. But not when you have poor pricing, poor execution, and overwhelm your resources.

Is one of the problems there is that it's just strictly multi-family where your other operations have other things that complement it that make it -- that a little more manageable for the other operations, to kind of a blend of products versus these guys strictly being multi-family?

I wouldn't characterize it quite that way. You've got to look at Atlas. It just -- it wasn't necessarily the fact that it was in the multi-family business. The biggest problem was that the company just was a bridge too far -- grew -- more than doubled its size in a period of 14 to 16 months. Just ran out of all kinds of capability and then compounded that with problems and then we had hurricanes in North Florida. But in our companies, they approach the business much the same way. I think they are more prudent in their -- have been more prudent in their estimating and more, because they haven't overwhelmed themselves, they have been able to execute better.

Let's go on to another topic, then. Your cash flows that you produced in the quarter, and looks like even cash coming into the Company for new projects, remains pretty strong, suggesting that in your customer base anyway there isn't servicing, other than, as you mentioned, about the multi-family with these accruals taken, that there is any problems with any of your customer bases as far as beginning to see some -- are you beginning to see anywhere in the customer base away from the Atlas that suggests that there are some financial issues beginning to surface within the potential project developers that could lead to that slowdown that everybody is so fearful of at this point in time?

So far, there is no sign at all of that, no. We are what some people refer to as a late cycle player. The buildings we work on have been in the pipeline for awhile. But there really is no sign of that. We're very mindful of people's worries about financing and other items. But we feel pretty good at the moment.

Well, that's what kind of -- just the cash flow you produce in a quarter kind of suggests that there's enough cycling money in and out of this -- out of your operations that get good ongoing project opportunities.

The ability to flow that cash suggests that you are performing well on those jobs. We're $83 million overbilled if you take a look at our income statement. We are collecting that money. And I think that there is very, very good performance on these non-residential building jobs.

Well, that's why it would kind of suggest to me at this point in time there's nothing financially from anybody that's bringing in -- as you collect that cash -- there's nothing out there financially that suggests there is a problem.

Hard to fake cash.

Well, that's exactly kind of the way I look at it, too.

Going forward, we're not sure that all the projects that we have in backlog are fully financed. I mean, some of those projects have not started. Feel very good about most of them. We will start -- if that is a fact, though, we delay in the start of the projects. We have no better gauge on the state of the financial markets than anyone else. We keep up with it. We're interested; haven't seen any broad impact.

Are you seeing any of these projects being delayed materially at all?

I think we have one in San Diego that may get delayed for financing. But that's the only one that I can think of. Tom?

No, we have not. We closely monitor that and ask people to report any instances of that. We've seen a couple of delays for typical reasons -- a project starts and they find that there is rock on the site that nobody anticipated. But as far as delays due to financing -- and we've tried to maintain a very stringent discipline about putting work in backlog so that if there is any concerns about whether the financing is fully in place, we've tried to develop a discipline that we'd don't put it in backlog so we don't have to take it out of backlog.

And one last question. Because with the revenue production in this fourth quarter versus the third, it still suggests business remains strong. I'm just kind of curious, as you look -- and Bill George, you made some adjustments mid-year on the markets you serve that you had to breakout other into other categories, which in your 10-K, you break out nicely in your 2007 results. Is there anything there compared to a year ago that really kind of stands out as opportunities? Or is it the continued breadth of results across all non-residential construction markets that's helping the results like this? That's kind of what has been impressive about the non-residential construction market to date, is the breadth of market categories has been, with very few exceptions, pretty strong.

One fortunate thing for us is we're not proportionately as exposed to some of the most vulnerable categories as our industry in general is; in part because of the nature of our workforce. We're sort of at the high value-add end of the spectrum. And therefore, we're more likely to be working in hospitals. Schools are strong, that's for sure; all the institutional work is strong.

The most exposed at the moment is retail, which isn't that important for us. The retail that we do tends not to be big box retail out on the periphery of a city. It tends to be pretty sophisticated stuff in the downtown area or something where you're going to have central chiller plans or things that we work on. So we think we -- I don't know, there are a lot of strong areas -- schools, a lot of reasons to think some of those areas will stay strong. But obviously, we're keeping our eye on it.

Well, I think you know that's what kind of -- when you look at what you put in the 10-K, it does suggest that some of the markets that have been strong, you get pretty good representation at this point.

Would you say that that has really helped -- that those areas have really for you in the last few years blossomed then? Because you're just getting more penetration and visibility in those market spaces where there's more stability?

I think in part, one of the things that happened is the Comfort companies have helped each other to move up the food chain. If you -- 10 years ago, when we started buying these companies, there were just a few companies that were real expert hospital constructors; real expert sophisticated systems constructors. Now, you can't count that 10 -- 15, 20 of our companies do hospitals regularly. And a lot of that I think they've helped each other to achieve that expertise. And I think that's another big difference between what we're looking at if we do happen to be going into a downturn compared to several years ago. I think our companies generally have really fundamentally and in meaningful ways improved their capabilities.

Well, just judging from your gross margins, you're producing -- and I remember even, Bill, you said if you can get to 5 to 6 sustained, and you're over 6 in the quarter to make the adjustments. So you guys are doing a good job on existing businesses. I think investors just like to get from Comfort that Atlas is no longer going to be the drag. So, appreciate your comments and answers.

Terry McMahon, BCS Partners.

Gentlemen, just a quick question. Riddleberger Brothers, the new acquisition, is their business primarily non-residential or residential? What is the mix?

Well, it is all non-residential, as is Comfort Systems. We have a little bit of very high-end residential, but we are essentially 98%, 98.5% non-residential construction and service.

Our residential, that means single-family residential.

Yes, single. We consider these large multi-family projects as a commercial project.

Okay. So the Riddleberger Brothers does do multi-family residential projects?

No, not typically. And by the way, interestingly enough, just a comment on Riddleberger, that company, taken as a whole, is very, very similar to Comfort Systems taken as a whole. If you got out our pie charts in our investor presentation, those pie charts would look very much like if you did the same pie charts for Riddleberger. Obviously without the multi-family, but I'm talking about the [purest man and its stand pure service]. Very interesting; it's sort of just an interesting thing to note.

Tahira Afzal, KeyBanc.

Congratulations on an underlying strong quarter. I just had a couple of questions to go over. Number one, I remember, Bill George, you mentioned awhile back if you look at your business, it typically lacks the [dodge] construction focus. And I would like to get a little more color on what you're seeing in regards to those focus numbers, because unfortunately, my budget doesn't allow me to get them.

And number two, how you think if they are showing a trend, let's say in '08, which is declining which would translate into a lag trend for you, how you think your Company differs?

I'm happy to comment on that. Dodge has done some things for its market recently that have made them an even better resource. They've started putting out a monthly release. They've started pre-releasing their data tables. And they've started giving commentary on a monthly basis.

As of right now, when I read it all and I synthesize it, what I think Dodge is saying is that there will be a discount, that non-residential building will remain at high levels, high absolute levels, compared to, say, the five year average, but there will be some downturn, particularly in the '08, '09, which would lag for us.

They do have multi-family, interestingly enough, coming back in '09. But the downturn is not -- is nothing like the upturn of the last two years. '06 was up 16% on a nominal basis; '07 was up 5% or 6%. Because the downs that they're projecting are in the mid and low single digits, really in the low single digit, you still stay at pretty high absolute levels. So, I'm happy to go over that with you in more detail, Tahira, one-on-one, but I would say that -- and we do have some commentary, by the way, on that in the 10-K where we sort of say we expect things to continue at fairly high levels as far as activity levels for the industry goes. But they do show some trending down.

One other comment I'll make is, a lot of people in our industry have a pretty big backlog, like we do, which I think means that some of that downtrend was almost inevitable. In some ways people need to catch up a little bit.

Right, okay. And I mean, if you look at your acquisitions pipeline and even the one you have right now, it seems that you have enough cash just doing some quick math, to at least come out flat, if not grow topline then. If that made single digit decline translate for the lag decline for you guys over the next -- not in '08, but going out further?

Well, actually, we have a lot more acquisition capability than our cash would indicate because we're not paying all cash. The owners of the operations are taking back some paper and there are contingent payments out there, contingent to earnout payments. And then we have the ability to lever if we want; we don't have that currently in mind. So there's a lot more acquisition capability.

I think what you're saying is if things slowed down and we didn't see any organic growth, we could make it up with acquisitions -- we could more than make it up with acquisitions. But we think there's also organic growth, i.e., growth on the current platforms.

Historically, our same-store companies have done better than Dodge. Every year that I've -- I've been here since the beginning, and every year that I've been here, when the industry is up, it helps us and we're up more. And when the industry is down, we're still up or we're down less. But we have consistently done better than what Dodge would report. And we certainly feel accountable to continue to do that.

It seems like you have enough levers to pull assuming a soft recession, even.

Well, we sure hope so.

Okay. And just another question. In terms of the -- when you go back and you experience and look at several of the past cycles, are there specific areas in your end markets that are more susceptible? And the ones that you typically watch for us turning first, if there is a downturn?

I think retail, which as Bill mentioned, is not that big of a piece for us, but that's certainly more volatile with its ups and downs. The schools, steady; hospitals, increasing -- schools, steady; hospitals increasing. Manufacturing -- we're doing slightly more work in manufacturing and with good results. The overall Dodge non-res building indexes, et cetera, have a higher percentage of retail in them than in our mix. I think we probably have a -- they have a slightly higher percentage of multi-family residential currently in our mix than the Dodge does. I haven't monetized that; maybe you have, Bill.

But you know what's interesting -- yes, we do, actually. But what's interesting is for years, I talked to a lot of people who are on this call and talked about the fact that you know, office buildings haven't come back as quickly as a lot of the other sectors we have or retail hasn't come back. I think one of the things I was missing was -- and this has been proven in the recent upturn -- is our Company was changing. As a Company, the companies that make up Comfort Systems now do a higher proportion of medical, of education. And I think in part there were things going on with activity levels in those areas, but I really think our companies, many, many of our companies were changing and were migrating to that, frankly, better work. More companies were improving. That will be great for us in a downturn, I believe.

It should be. And I guess one last question. And that's you know you had that Energy Act that got passed in the last month of 2007. I assume it's pretty still early for any real material positives to flow through. But there seems to be a lot of energy efficiency mandates in there. And I was wondering if any of your customers, whether you've heard any buzz so far on that?

Yes. We have -- we're working in analyzing and exploiting that. The big driver here, though, is not necessarily that energy legislation or energy efficiency legislation; it's more that the people have recognized energy costs are high and we need to do something about it. One way is to do something is to make the HVAC mechanical plant a lot more efficient; use less electricity and save costs. It's not -- most people still replace their systems based on the fact that they don't work as well. But we're out educating and working with end users on the basis that you can get a lot out of efficiency if you retrofit now and get the savings on the electrical costs and that has a big payoff. So yes, we're seeing a lot of that there. We are greening ourselves, if you will.

And if I recall correctly, your retrofit business is one of the more profitable segments?

It is, because we control a lot more of the projects. In new construction projects there are a lot of unknowns. And we're someone who will work with them on a retrofit project, we are usually in charge. And we can thus control a lot of things. And that turns out to be even better for us.

Thank you very much, gentlemen, and thanks for being very straightforward.

Barry Haimes, Sage Asset Management.

Had one fair quick question. You talked about your longer leadtime. I wonder if you could just kind of refresh our memories. And understanding that each project is somewhat different, but kind of what the on-average timeline might be between when a project gets kind of financed, approved, when they break ground and then when you would get the order for your type of equipment and service? Thanks.

It's a big question with a long answer, unfortunately. We're doing projects from $50,000 value to $20 million. And each of them would have a different profile. And then you break it up into the type of kind of things where there's a large project with a heavy permit front end and lots of financing; that's a long [hanging] and the project is large.

And what's important to understand is that once we go on a project, even to start the work, and we're not there continuously -- they do the underground piping -- when we come off a little bit and then we go into the parking structure. We come off of that and then go into -- if it's an office building, up the floors, et cetera. And then ultimately -- so we're on and off.

I'm talking about when you would get the order, when you would see the order, sort of where in the continuum?

Well, we would -- a fair amount of big construction projects, we're a sub to a general contractor, usually he would get that project fairly early, he would be selected fairly early. We could be early -- since we're doing underground. And then [things were there] first thing. And the equipment order -- chillers -- would come a little later in terms of the order, if we have it all set up, we know the prices, et cetera, but delivery would be later in that project.

It's just a -- you have to go through each individual projects. And if you averaged out all of those times, it really wouldn't mean anything, because we have such a diversity of size and type of projects.

Another way to look at it from an analytical point of view is when did it come into our backlog? It's not uncommon on a project where we're design-building the project for us to have been budgeting it when it was a gleam in somebody's eye. But we may not sign the contract until we've already started working. We may have gotten a notice to proceed. We may be an integrated part of the team. It may not show up in our backlog until we've already begun to run substantial revenues through. Whereas, meanwhile on bid work, there may be a bid opening where it comes into our backlog; certainly has to be financed because nobody is going to sign a binding contractual commitment to pay somebody tens of millions of dollars without financing, but that might be earlier.

Let me just boil all that down. Because it's so complicated, just -- I'm going to tell you what I do. For internal purposes, for budgeting, for modeling, we lag Dodge a year. But I have to be honest with you, that is a sort of a shake and bake of a lot of different things that are going on. And it is really a continuum of phasing in of changes in the market. So sorry to -- that it's just -- the question you ask is an extraordinarily complicated question, so.

No, I think that actually helps. Appreciate the insight. Thanks.

(OPERATOR INSTRUCTIONS). Rich Ozlovsky, Sidoti & Company.

Thanks. Just wanted to follow up on your capital allocation. If you look at 2007 and assume a breakeven, you're out about a $75 million run rate and your stock is less than five times. How do go about determining the size of your acquisition budget versus how much you're now spending on buying back stock?

I don't think we do it that way. We look further than just the acquisition; a mistake that a lot of consolidators made early on. We need to bring in companies on a schedule that we can assimilate and they have to fit. So we don't really do that kind of very sophisticated capital resource allocation. There's some of that and we're certainly going to stay within various lines. And there might be the occasional thing that comes that we've got to look at -- re-look at whether the stock purchase continue that we're not anywhere near that kind of constraints at this point. So, it's more -- it's not quite as sophisticated in terms of capital resource allocation as you perhaps alluded to.

If you see a good company, you buy it at a good multiple and buy back a little bit of stock when it's below 12?

Right. And we're not buying too many of them so that we have any problems integrating and assimilating [them].

Great. Thanks again.

There are no further questions at this time. I would now like to turn the call over to Bill Murdy for closing remarks.

My only closing remarks is to thank everyone for being on the call. And we will see you in 90 days or so. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.