Comfort Systems USA Inc (FIX) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Comfort System USA earnings conference call. My name is Marsha and I will be your coordinator for today's call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward 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 call over to Mr. Bill George, Chief Financial Officer. You may proceed, sir.

Thanks, Marsha. Good morning, everyone. Welcome to Comfort Systems USA's second quarter 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 could read a more detailed listing and commentary concerning our specific risk factors in our Form 10K, 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. Bill Murdy will open our remarks.

Thanks, Bill. Welcome, everyone. We are very pleased to report a quarter of record revenue and earnings. For Q2 '08, we are reporting $0.38 a share versus $0.25 a share for the comparable quarter in '07. That's an increase in excess of 50%. This improvement, we believe, demonstrates the productivity and delivery capability of our outstanding operations around the country. Our revenues in Q2 of 355 million and 318 million on a same-store basis compare to 281 million for the comparable quarter in '07.

Total backlog at 30 June was 780 million. Backlog on a same-store basis was 701 million versus 720 on 30 June 2007. That's a decrease of 19 million. However, if we exclude the purposeful downsizing at Atlas, which resulted in a $37 million decrease in Atlas' backlog, our overall backlog is actually up year-over-year. I'm sure Tom will have some more to say about the backlog, including some remarks on bookings since the end of the second quarter.

Having mentioned Atlas, let me add that it continues on its recovery and improvement plan and that it effectively broke even in the second quarter.

Cash flow also remains very strong. For the six months ended 30 June, it was 19 million versus 4 million for the first six months of 2007.

Our outlook for the rest of 2008 and into 2009 is positive. We have recently added some very strong operations and our overall productivity and continuing ability to get additional new construction, retrofit work and service opportunities, some of which, by the way, is energy-efficiency driven, allows us to be very positive, even in a questionable economy.

I'll have more to say in conclusion before the Q&A, but at this point, I'd like to turn over the mike to Bill George to make a few detailed comments on our financial results. Bill?

Thanks, Bill. Let me just take a minute or two and fill in a couple of additional details on our results. The first item that I want to update is some data relating to our progress in accruals at Atlas. As Bill Murdy has indicated, Atlas is on track with its recovery plan and it approximately broke even in the second quarter as compared to a $3.6 million loss in the second quarter of 2007.

Atlas revenues this quarter were down 1.2 million compared to one year ago and Atlas backlog was approximately $37 million less than it was one year ago. Also, you may recall that at the end of 2007, Atlas had a total of $6.2 million in accruals relating to claims and contingencies on certain of its legacy jobs. As of the end of the second quarter, those accruals stood at 2.7 million and the new team at Atlas has now resolved approximately two-thirds of those projects, including all of the projects in the Mid-Atlantic and in the California markets. The resolutions so far were within expected parameters and based on our substantial progress, we feel encouraged, and it remains our best judgment that these accruals are sufficient in light of the remaining risks, even though we expect to vigorously contest many of these matters.

Positive free cash flow was a remarkable $22.8 million this quarter, which is a historic high-water mark for a second quarter. Cash balances remain strong at 101.5 million despite our continued expenditures on acquisitions, our dividends and regular stock repurchases.

Since year end, our stock repurchase program has continued to return money to our stockholders in a disciplined way and as of today, we have retired 1.9 million of our outstanding shares and returned $23.7 million of cash to our shareholders through this program since we began buying shares 14 months ago.

Our balance sheet remains rock-solid, with strong cash balances and nominal debt. Where it is prudent to do so from a return on investment standpoint, we continue to deploy our balance sheet strength into our operations, for example, by purchasing equipment instead of leasing it and investing in modern or improved physical plant and technological resources. We continue to make even more important investments in training and service growth and we believe that these moves will improve our results and our opportunities for years to come.

Overall, our backlog remained strong and excluding the planned decreases in backlog at our Atlas subsidiary, it has increased from a year ago. We're optimistic about both our short-term and long-term prospects and through continued discipline and selection, execution and financial practices, and thanks to the best technical and project management workforce in the industry, we can be successful in any market condition.

That's what I have on financial, so I'll introduce Tom Tanner, our Chief Operating Officer. Tom?

Thanks, Bill. Good morning, everyone. Our very strong results for the quarter are the direct result of the efforts of all of our talented and dedicated team members.

We would certainly like to thank each of you. A great majority of our companies were very profitable during the quarter. Within our operations, both our construction and service divisions performed very well.

Our Construction results underscore the very positive effects of our continuing focus on project selection, project pricing and especially our focus on project execution, which has been greatly enhanced by our commitment to improve our prefabrication capabilities. Our goal is to be the most cost-effective mechanical contractor in all of our markets.

Our Service results continued to improve as we focus on the growth of our preventive maintenance agreement base by implementing appropriate process and procedures to increase our technicians' efficiency and by providing training at all levels within our service groups. We believe the increasing and more consistent profitability from our service groups will be a very key factor in our future financial results, especially if there is an economic downturn.

Our Energy Services Group continues to expand its resources to either provide direct project opportunities for our operating companies or to assist those companies with project opportunities that arise from their existing customer base. In the same context, there are increasing opportunities where our knowledge and experience with green building lead certification requirements is definitely enhancing our ability to partner with our customers to provide long-term energy-efficient solutions for their facilities. Our resources and experience at analyzing and providing a range of energy-efficient solutions to our customers allows us to consistently differentiate ourselves from our competitors.

As has been previously mentioned, we continue to see improvement from our Atlas operations as they performed at a break-even level for the second quarter in a row. The new management team has continued to right-size the Company, as is evidenced by the year-over-year backlog reduction of almost 37 million.

All the projects in the Florida Panhandle are now finished, which leaves only two projects in the Tampa area to complete. The larger of those two projects will be completed in the fourth quarter and the last remaining Florida project will be finished in the early part of 2009.

As Bill previously mentioned, we have closed out all the legacy projects in the Los Angeles area and in the Mid-Atlantic region. We believe that we have the appropriate reserves to close out, or successfully litigate, the three Florida Panhandle projects without any additional financial impact.

We believe that Atlas will continue to perform at a break-even level for the remainder of the year and that it will make a positive financial contribution in 2009.

As we move into the second half of the year, our backlog is near-record levels and our same-store backlog year-over-year is actually up slightly when you exclude the plan, almost a $37 million reduction in the Atlas backlog.

Project bookings in July are consistent with prior years and most of our project pipelines are still quite active.

However, as we said at the end of the first quarter, we certainly recognize the potential impact from the weakness in the overall economy. Thus, we are focusing on reducing costs wherever possible. Several of our operating companies are developing contingency plans to minimize the potential negative impact of a downturn in their respective market area.

That being said, we continue to be optimistic about the remainder of 2008 and beyond. We have a near-record backlog, very efficient operations, a growing service business, an effective and growing Energy Services Group and strong momentum from our past and current success. We continue to strengthen our operations as we are able to attract top talent from our industry competitors. Our individual operating leadership teams continue to actively manage their businesses every day. Thus, we continue to believe we will have improved financial performance in 2008 as compared to 2007.

Again, I would like to thank all of our almost 7,000 key members for a great first half of 2008. Now I'll turn it back to Bill for his wrap-up and then questions.

Thanks, Tom. Really, in terms of wrap-up, I just want to anticipate a potential question that relates to acquisitions. We are not announcing any new acquisitions today. We are working on some. We still are very interested in growth via prudent acquisition. Fortunately, there are lots of targets and lots of geography. We though are maintaining our disciplines as to what we are willing to pay, and what terms we are interested in having, recognizing that whatever we decide now has ramifications for the future, and not wanting to replicate some of the early problems that we had when we were very acquisitive.

So we are on a prudent acquisition path, maintaining our disciplines, ready to act, but also ready to cut off negotiations if we can't reach proper terms and conditions. Fortunately, as I said, there are lots of targets and lots of geographies that we are dealing with.

So -- but our focus, as you've heard in Tom's remarks and were echoed by mine, our focus really is productivity, efficiency, bottom-line oriented, principally. So with that, I'd like to throw it open to questions. Marsha, are you --

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Matt Duncan from Stephens, Inc. You may proceed.

Good morning, gentlemen, and congratulations on a great quarter.

Thanks.

Good morning.

The first question I've got is if I look at your new construction and installation sales, it looks like those were up 30%-plus year-over-year kind of based on the revenue breakdown you provide between new construction installation and then service, repair and retrofit, and up 20% from the first quarter. Can you talk a little bit about what's driving that and maybe also address kind of at what percent of capacity you think you're operating right now?

Well, from -- as far as -- from the first quarter, new construction was up roughly the same as -- both sides were up about the same amount. I think it's robust -- there are robust, underlying markets for construction right now. Most people on this call know that we're a late-cycle player, so we really -- we continue to experience very, very robust conditions. Our companies, the vast majority of them, have their largest backlog that their organization's ever had or very near their largest backlog that that particular organization's ever had. And quite frankly, its good times for new construction.

Meanwhile, we're actually pleased that our service operations have been able to track that growth pretty closely from the first to the second quarter, now not quite year-over-year, but service is an area where you continue to grow it over time. And obviously, there's a trend line that continues. Meanwhile, new construction is the more cyclical part of our business and so there's a wave that goes around that trend line.

Matt, we're seeing continuing robustness in schools, hospitals, government, especially military work, that we're accessing, and I think that -- we think that continues. We certainly see that in our -- our pipelines (inaudible) part of our backlog. The capacity question is always an interesting one. We have turned down some work. We have missed some work certainly that we don't regret missing, as it turns out, but it's always a difficult question. We will have a tendency here to probably take on more service opportunities than we can comfortably do because that -- we're very interested in that business.

On the construction side, we will be very careful because of the necessity to have the right management and field supervision, which is always a concern and always a shortage for.

Sure, okay. I appreciate the color. I commend you guys on getting Atlas back to break-even and I'm curious, it sounds like it was break-even again this quarter. I'm looking kind of at your operating margins. If I exclude Atlas year-over-year, it looks like the operating margin would have been down about 30 basis points, barely down, but still down a little bit. Is that really just a mix shift towards construction that's driving that or is there something else maybe at play there?

I think, first of all, it's not much of a difference and we had a really good -- we had really good margins last quarter on the volume that we had. Obviously, volume is up a lot. I would say that this is a quarter where a lot of equipment is delivered. It's a quarter where frankly, our average project size remains very large and your margins are a little lower on average project size -- on larger average project sizes because there are more revenues that are passed through sub-contractors and obviously, equipment. So I'd say those are some of the factors, but we're happy to have our margins remain at these remarkable levels. And through the first six months, our margins are up rather considerably compared to last year.

Sure, okay. Well, I appreciate the color. That's helpful. Looking at pricing on projects that you're booking right now, is pricing holding pretty steady? Are you able to get the same kind of margins in the things that you're putting into your backlog today that you were maybe 6, 12 months ago?

Well, we continue to see most of our operations consistent pricing at past levels and we're focused on maintaining our pricing. And one of the reasons why we're certainly focused on being very cost effective is so that we can maintain our margins in this economy. So we really at this point have not seen any deterioration in margins.

Okay, great. Thanks. And then Bill George, the stock buyback, how much did you guys buy in the quarter, how many shares and what you paid for those?

During the second quarter of 2008, we bought 438,760 shares at an average price. That time range was actually our highest average price. It was above 13. It was at about what our stock is trading today, about 13.50. Overall, over the course of our entire plan, the 1.9 million that we bought it, the average price has been about 12.70.

Okay. And then last thing for you, Bill Murdy, I appreciate the commentary on the acquisitions. Maybe you could remind us a little bit what your acquisition focus is right now and with some of the uncertainty in the economy, are you kind of gearing your focus a little towards the service side, some of the things that kind of stay stable going forward or is it really just all comers right now if they're at the right price? Just address that a bit if you could.

Well, it's certainly not all comers at the right price. We're looking for what we call full-service mechanicals where we have an increment of service, repair, retrofit and also new construction and there's a sort of cycle there that we can bite into. But more than that, and backing up a little bit, we're looking for go-to mechanicals in their jurisdiction. We want to be associated with the best possible non-union mechanical in whatever jurisdiction we're in, and we don't intend to pile on where we already are. So that describes a lot of -- actually, the other qualitative things are management, obviously. We want management that is motivated and wants to stay, wants to be part of Comfort Systems, wants to continue to operate at the level they've been operating or better, and wants to keep its workforce together and continue to pursue what it's been doing.

So it's not just the numbers, although the numbers are very important. We're certainly conscious of potential dilution and that's why we want to be very reasonable, prudent and looking at this in a little more longer term way, both for ourselves and for the targets.

Sure. I appreciate the commentary, and guys, congratulations again on a very nice quarter.

Thank you.

Thank you.

Your next question comes from the line of Rich Wesolowski. You may proceed.

Thanks, good morning.

Good morning.

Good morning.

Bill George, on Atlas, and please correct me if I'm wrong, I think you said that revenue is down 1.2 million versus June '07.

Revenue was roughly flat. Last year, they were at about 25 million. They were about a million below that this year. They still -- the continuing operations are probably closer to an 80, low 80s kind of range, but we still have revenue coming through on those projects in Florida, both as we close them out and as we have a couple that we're still working on reasonably actively in Tampa. And so there wasn't -- the revenue declines -- since we have the basic part of the organization down to where we think it will go and we have some -- we just have this small increment that's going to be there for several more weeks or a month or two, a couple more months.

Okay. So maybe expectation for the year is 80, $85 million and is that a basis from which you expect to grow in '09 and beyond?

I would say 80 to $85 million would -- 80 would be sort of the continuing operations. I don't know that we're worried about growth at this point. I think we'd like -- we just want to see them stabilize and make good money. For this year, we probably have a little higher than that from Atlas just because, as I said, we have that legacy revenue.

Okay. Do you have an idea of whether the margins earned on the acquired revenue from all of the companies in aggregate is above or below the margins that you're working off on the Heritage Comfort businesses?

I think it's probably above if you take out amortization. We had a couple of those organizations have fairly remarkable quarters, but I would say that it's fair to say that we expect them -- the four or five acquisitions we've done as a group -- to perform roughly equivalent -- they're pretty representative of a cross-section of our other companies, very similar and just top-quality organizations in good markets. And I would say that they absolutely, taken as a group, are very similar to the rest of Comfort, taken as a group.

Okay. The big real estate agencies reported a noticeable drop in non-residential starts in June. Given that most of your companies were filled up heading into the summer and thus, I imagine, not as aggressively pursuing work as would normally be the case, how firm a handle do you think have on any changes in competition or the market that have occurred in the last couple of months and the potential effect on bid margins?

Right now, we haven't seen a lot of evidence in the markets that we're in and those projects that we're going after a significant impact on margin at this point. And you're certainly correct, this is not one of the more active times of the year when we're adding to our backlog. And that'll begin again towards the end of the third quarter and into the fourth quarter, so we may see a difference at that point, but we're not really seeing it today.

Okay. Tom, you had mentioned that you're reducing costs in response to maybe your economic forecast. What sort of costs are these and are you guys still hiring at the majority of your companies?

We're probably hiring at about half of our companies because as Bill mentioned, we have a record backlog. In the other companies, we're culling out field people and also some office people that have not performed up to expectations. So we're getting some cost reductions there and each business that we have -- I was looking at their org chart on a monthly basis and analyzing the requirements they have going forward. So we're continually looking at that and seeing opportunities where we can cut costs.

And Rich, that's a continuous activity, continuous looking at that productivity and management improvement. Sometimes, that relates to letting persons go; sometimes it relates to combining functions; sometimes it relates to working with other Comfort companies to accomplish things. So we're constantly doing that. That's part of this whole productivity increase that we've sort of tried to inculcate as a culture in the Company.

Okay, that's very helpful. And then finally, Bill Murdy, at your current pace of buybacks, you're going to exhaust the authorization in another quarter, so you've been increasing it little by little. Has there been any discussion of a larger authorization that would send maybe a more definitive message to the market about your ability to repurchase a big slug of equity if you saw fit?

I think our Board representing the stockholders is mindful of that, cognizant of that possibility, is not resistant. We keep reloading our authorization. We, by the way, think that there's a lot of other opportunities for us, growing many of our current platforms, certainly growing our service, which has some front-end cost to it and then prudent acquisitions. So we have uses for cash.

Excellent. Thank you.

And our next question comes from the line of David Yuschak from SMH Capital. You may proceed.

Good morning, gentlemen.

Hi, Dave.

Good morning.

I am no economist, but that doesn't look like you had recession in the second quarter, but one of the things I think I've always appreciated about non-residential construction is the breadth of markets that you can serve and earlier, Bill, you had indicated what markets were looking good for you. is there anything that you see right now where the markets don't look as good, where maybe you're shifting some resources or doing some things internally to take advantage of some of the things that you said you are seeing as a positive, versus maybe are there some things out there that you're already seeing, maybe some signs of recession, but some of the things you're doing can help offset some of that erosion?

Aggregates, I don't know if aggregates are all that instructive here because we're all over the country and one market will be strong in a certain sector; another market might show a little weakness. And we're a little microcosm anyway, so we're not Dodge here. We don't have all the data either. That's the other -- so I would say that we're not particularly positive about the retail sector, the hotel sector. In certain parts of the country, I certainly wouldn't think we're going to do a whole lot of new high-rise multi-family. So it's a mixed bag, Dave, it really is. We don't see any general downturn anywhere. In certain pockets, there are certain segments that are just not as robust as they have been.

In the data, you don't see -- we've only seen any actual weakness -- well, I guess, for a long time off and on, we've seen actual weakness in the very -- in the upper Midwest. And then we mentioned on our call in the first quarter some weakness in San Diego. We're worried about some of our bigger markets like a Phoenix, just based on statistics, but generally speaking across the country, if a downturn is coming, it's not showing up yet and most of our companies have very high backlogs.

One thing to keep in mind about Comfort Systems is that we are a company -- of our 40, low 40s, 42 or so P&Ls, 35 or more are in smaller markets, in places like Little Rock or Albany or Mobile. They're in these second -- what used to be called "second airplane" cities and they tend not to have the extremes, frankly, that you see in a southern Florida or a southern California. They tend, frankly, not to get as robust during expansions and they tend not to fall off the planet during downturns. There tends to be a very small number of players in those markets who all know each other and if volume happens to go down, pricing tends to still stay at typical levels. Frankly, in an upturn, they don't abuse each other as much. If in an upturn if, say, you've been doing work for somebody for 35 years in those small markets, you don't necessarily take advantage of your pricing power quite as much, but that does pay off in a downturn. So generally speaking, things are pretty good.

Okay. EMCOR commented on their call about how optimistic they're seeing their retrofit market and the energy markets evolving and it just sounds like they were just extremely optimistic in that sector. Where and when would you guys kind of match up with them as far as seeing the same kind of enthusiasm for that market versus where it may be different? And how kind of -- and do you kind of share that same kind of view at this point in time or are you maybe a little bit behind where EMCOR is because of maybe some nature of the projects are bigger there versus what you get?

Let me make a comment on this. EMCOR has two energy-oriented businesses, as we know. One is purely in the refining petrochemical, mechanical market and the heat exchanger retrofit, etc. They certainly are -- they're very busy in that sector. The other is where we are and that's energy-efficiency mostly in existing structures, although we certainly pay a lot of attention to energy-efficiency in design and new construction. But the -- we're of the same mind as they and we're focusing on that; we're getting traction in energy-efficiency for retrofits and service. We're doing work for a number of national end users who have lots of properties that they're very interested in making as energy-efficient as they can. And they recognize that their HVAC mechanical plant is a good portion of the electric usage and they can improve it by retrofitting. So we're positive on that, Dave, and I think that's what EMCOR is saying as well.

Tom, you listened to their call.

Well, I think if you take out the Olmstead business, which was a big part of their increase which we obviously don't have, and we don't have an electrical piece, which often times is the biggest opportunity to get energy-efficiency, when we -- if we were to compete in the HVAC market, I think our group and our people are as talented as anyone in the industry. we continue to add to that group because we see more and more opportunities at all of our operating companies where they have existing clients or new clients, where we're going in and we're providing an energy analysis for them, providing them with several different alternatives as to how they can save costs, and then we're moving ahead with projects.

On the new construction area, we'll take a design, as Bill mentioned, and we'll go through and give them several alternatives from the most efficient, long-term costs to the most efficient first-time costs, and let the customer make a decision on that basis. So we are very active in every one of those markets that we serve in that area and I couldn't be more pleased with the group of people that we've put together.

And then just one last question on Atlas. You mentioned about breaking even. As you look into 2009 for the operation, what kind of revenue capacity do you think they could deliver next year and how much can you get that level of [profitability] on an EBITDA margin in 2009 versus break-even, which you're hearing a lot of places where what sort of the condo market, they're now looking at more and more apartments because of what's happened with the condo market. I'm just kind of curious if you do see enough in 2009 to boost the prospects there, as well as the profitability compared to what you're seeing?

We certainly think that the revenue will run between 60 and 70 million next year, broken up between the Mid-Atlantic region, Washington, D.C., Maryland and northern Virginia, and the Texas market, which is principally Houston, Dallas, San Antonio and Austin. And our expectation is to deliver a reasonable margin on that work in the range of 3 to 5%, operating income on that work. And that is the plan and that's what our management team there is committed to deliver in 2009.

Okay. Thanks so much. Good quarter.

Thanks, Dave.

Your next question comes from the line of Tahira Afzal. You may proceed.

Good morning, gentlemen, and congratulations on a very good quarter.

Good morning.

I just had a couple of questions on your bookings to start with, so if I look at your bookings, net bookings for quarter, year-on-year, they seem to have grown at around 8%. If I look over the last several quarters, that's been a fairly stable rate, around 8%. As we look at the third quarter of the year, you saw a fairly outsized quarter in a sense in the third quarter and I know third quarter tends to be kind of a seasonally big quarter for you. How should we look at the comparisons on a year-on-year basis as we go into the next quarter on the bookings level to start with?

If what you're looking for is what our expectation would be as far as backlogs and bookings is for the third quarter, I would say that -- I think that we will continue at very high levels. We will, as you just pointed out, have very -- we will typically have seasonally very strong revenues, which is, of course -- obviously, that is the burning of backlog.

Right.

As far as -- we have financial calls once a month where we review each of our companies. The signals that we're getting -- the very direct signals that we're getting from the people who run those markets are that they still have -- they still see strength, project pipelines in their markets. Now, we don't want to be like -- we don't want to stick our heads in the sand. We know that there's a lot of things going on out there in the economy, but quite frankly, the conversations that we're having, the data that we're getting, makes it very hard for us to start predicting that it's going to be anything other than pretty good. I mean, Tom, would you agree with that?

Well, and one of the real qualities of Comfort System companies is that other than Atlas, which is in the multi-family business, all of our other companies can provide a broad range of service, whether it be university work, school work, hospital work, military work, prisons, casinos. So we have the great ability in our market to go from one sector to the other as one declines and one increases. And so we're very optimistic that we have that expertise. We also have expertise from one operating company that we can give to another operating company if they're looking to move into a sector that they haven't been there before. So we think that bodes well moving forward with our flexibility that we have in all our operating companies.

Okay. And I mean, just extrapolating then an 8% year-on-year bookings (inaudible), that would imply sort of 400-million-plus in bookings in the third quarter. Would that -- I know you don't provide guidance around that, but would that sound a little aggressive or is that something that you think is achievable?

Tahira, when I talk to you about these things, I always learn things, so I've got to tell you, I don't have any comment whatever on a $400-million number. You look at things in a very nuanced and interesting way. The things that I look at more -- I look a little bit at a concept of book to burn --

Right.

-- and feel pretty good about that. If you had told me that we would have the revenues that we had this quarter and that our backlog would behave the way that it behaved this quarter, I would have felt that that was just really better than I would have frankly hoped for. Typically -- I don't know, I just -- that's just not a way of looking at it and I have a hard time commenting on that.

Okay. But I mean, even if you look at your burn rate then in the second quarter at 40, it seems if I look over your last five quarters, it was definitely higher. And then one thing, is that also because if you look at the bookings profile in the second quarter, would you say that there was a higher mix perhaps of walk-in work and if that is the case, would that be tied to the fact that you're seeing the retrofit piece of the business pick up more than, let's say, some of the other traditional or new construction pieces?

One direct metric that you could look at to see if that was happening is the average project size.

Right.

I'll be honest with you, I expected average project size to start to come down a little. It hasn't yet; it's the same at the end of the second quarter than it was, for example, at year end, but it is something I kind of expect. I expect it from a number of angles. One, we're transitioning out of multi-family, which is one of our largest average project sizes.

Right.

We are getting significant traction because of like energy-efficiency sales on the retrofit area and those project sizes will tend to be smaller. And one of the reasons why it's hard for me to talk about sort of gross booking numbers is -- and you and I have talked about this -- I think you can't look at our backlog sort of the way you would look at a manufacturer's order book. It's so nuanced, what's inside it. We have had many years where our backlog was going down and our revenues were going up.

In fact, most of the time over the course of our history, when our backlog was going down, our revenue was going up because the things that happen in side backlog are so important, such as project size, such as how far in advance are people committing? In other words, what's their feeling about future resource availability? And so, I think it's -- since it's the only forward-looking statistic that we provide, backlog, it does get an extraordinary amount of focus.

That being said, I think that the conversations you get from a guy like Tom Tanner about what's happening are frankly -- they're just -- they're more important.

Right. But I mean, I guess that would sort of be captured in your bookings number, what is your backlog number, right? So what it seems you're saying is that as you go and do a cycle where your backlog is seeing a decline, that your bookings number, in essence, or the walk-in work in the quarter sort of supports your top line. Would that be fair to say?

Yes, I think if I'm understanding what you're saying, another way to put that is at some point if -- as activity levels weaken and as we start to put this terrific backlog sort of that we've had built up -- as we start to burn through that, we're going to have to make a choice at some point between price and revenue. And our plan is to choose price, so --

Fair enough. So I mean --

I think that's a fair way of -- I think that's another way I think of getting at that.

Okay. Now, that's helpful. So essentially what you're saying is that you might lose a bit of visibility with backlog, but in terms of actually your retrofit business, from what I understand, it has high margins and that's going to help you and that's going to remain a --

I definitely think that that will be a positive factor that will offset some of any weakness, and the question is, does it offset some, a lot or all of it, or --

That's the million-dollar-question.

-- more than offset it, yes.

Okay. And just one last question and that's to do with your operating margins. Again, if I look at the third quarter, the fact that you do have a strong seasonal quarter means that the margins tend to sequentially go up in the third quarter. Given that you've seen very strong margins in the second quarter, but you do expect seasonal trends to continue to be similar as in several past years, should we expect the same kind of phenomena to happen in the third quarter?

A few comments. One important thing is our margins do tend to go up as the year goes on. They will typically go up from the second -- the third quarter to the second quarter and from the third quarter to the fourth quarter, as we close our projects. That said, if you looked at our Company over the last 11 quarters, we have -- if you look at consensus estimates, which are typically -- they sort of build in a logical progression. We've beat them now three times by $0.05 or more and we've missed them twice by $0.05 or more which, I think, points out that there is just enough just variability in a small a measurement as a quarter's results in our industry that it's very -- that's almost going to always going to be a more important factor, just how things break in the quarter.

However, I do think that generally speaking, the underlying trends that you're talking about, they're still there; they're still valid. We just had a really great quarter though, so that's going to create obviously, a tough comparable.

Okay. Thank you, gentlemen. That is very helpful and many congratulations again.

Thanks.

Thank you.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of Josh [Rossen] from RLR Capital. You may proceed.

Hi, guys. Congratulations on a great quarter. Just a quick question, wanted to make sure I'm understanding backlog in the right way. If I back off the Atlas decrease and look at non-same-store backlog, there was a decrease there. What -- am I looking at it the right way and is that acquired businesses that had a backlog decrease or what's that related to?

If you saw that, that would be acquired businesses that had a backlog decrease, probably driven by the one or two of the companies that we bought that had very, very big backlogs on the day that we bought them. So it wouldn't surprise me if you get down to that small of a sample size, just a couple of companies, the day that they book a $10 million job -- if you've got a $40 million backlog or a 50 or $60 million backlog and you book things in increments of 10 million, not surprising at all to see one or two companies -- if you looked at -- I have a schedule where I have every one of our subsidiaries and I will do side-by-side month-over-month and quarter-over-quarter backlogs. And there's -- if you went down that column, you'd see a ton of variability within a company because it's just so lumpy.

Okay. So --

So you're probably just absolutely right, quite frankly, and it's probably just lumpiness.

Okay. That's helpful. And second question, do you have any evidence, anecdotal or otherwise, that in this environment where construction -- forward looking may be slowing down, albeit off of high base projects or getting completed more quickly right now and therefore, the later stage HVAC stuff is coming more quickly, or the pace of project completion is going at the rate you guys would normally expect?

I don't see any acceleration of projects at the pace we expect or frankly, a little slower. We've had some projects that because of permitting issues, some financing issues have actually been pushed back a little bit, but we're not seeing -- most schedules that are put together today are pretty aggressive construction schedules to start with because they want the project complete. So we're not seeing acceleration in work in general.

Okay. Thanks very much, guys.

This concludes the Q&A for today. I would now like to turn the call back over to Mr. Bill Murdy. You may proceed.

Thank you, Marsha, and thank you, everyone, for being with us on the call. Some good questions and I hope we had some good answers. We, as I mentioned, are very happy with our results and it's the result of a lot of internal work relating to productivity that we're very proud of. So thank you all for being on the call. Thanks. Bye.

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