Comfort Systems USA Inc (FIX) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Comfort Systems fourth quarter earnings conference call. My name is Onica and will be the operator for today. (Operator Instructions).

At this time I would now like to turn the call over to Bill George, Chief Financial Officer. Please proceed.

Thanks, Onica. Good morning, everyone. Welcome to Comfort Systems USA's fourth quarter and year-end earnings call.

Our comments this morning, as well as our press release contains 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 which we published last night, as well as in our press release which covers these earnings.

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

Thanks, Bill, and thank all of you for being on the call. We're very pleased to announce a record fourth quarter and full year results for Q4. Our earnings increased by 44% over Q4 of '07 and for the full year, we're reporting almost $50 million of net income, $49.7 million or 3.7% of revenues compared to 2.9% in 2007 and measured on a per share basis we earned $1.24 in '08 versus $0.79 cents in '07, up 57% increase in EPS. Our revenues in Q4 were $329 million versus $293 million in Q4 of '07 and revenues for the full year were$ 1.33 billion versus $1.1 billion in '07. That's an increase of about 20%.

Our project backlog at the close of 2008 stood at $752 million. That is down from the $105 million at the end of Q3 and down from the $787 million at the end of '07. And although our backlog is down with the market -- as the market weakens in the nonresidential construction sector, it remains at high levels compared to our history on any basis.

Cash remains a very, very positive story for us. We had $32 million in free cash flow for Q4 and free cash flow for the year was over $69 million. That cash will provide us with additional cushion and flexibility as we move into 2009. Our year-end cash flow was $117 million and notable in the sense that we used in excess of $50 million cash for dividends, stock buybacks and the cash portions of acquisitions that we made in 2008.

I'll have some remarks to close out, but we'll turn this back to Bill. But before even doing that, I'd like to introduce and welcome Brian Lane,our new COO to the call. Brian has led our large and very successful Region One the last five years and prior to that he has had a long career in the construction sector, including 15 years about Halliburton and Kellogg Brown and Root. After Bill George addresses financial matters further, Brian will have some remarks on operations. But first, Bill George.

Thanks, Bill. As Bill just noted, we posted very strong fourth quarter and full year results in view of challenging economic and industry conditions. Gross profit was very strong in the quarter and for the year. Overall our gross profit improved from 17.8% in 2007 to 19.7% in 2008 and full year operating income margins increased from 4.5% to 6% for the full year in 2008. For the quarter, gross profit percentage was a very strong 22.1%, eclipsing the 18.6% gross margin in the fourth quarter of 2007. These increases result from broad based improvement in execution and results, particularly in our large project companies as they closed out a multitude of very successful projects.

Revenue increased by $36 million in the fourth quarter, as compared to the same quarter in 2007. Coincidentally, acquisitions during 2008 contributed $36 million to the fourth quarter. So same store revenues were approximately equal to the strong fourth quarter we reported in 2007. Acquisitions also affected our backlog comparison. As Bill mentioned, year-over-year backlog decreased by $34 million. However, because we acquired operations during the year that had backlog, the same store backlog comparison reflected a $126 million increase with about a fourth of that decrease arising from our planned downsizing at our Atlas subsidiary. Although our backlog has come down as written on residential construction, market fundamentals have weakened. Backlog remains at very high levels compared to historical trends and totals.

SG&A expense, as a percentage of revenues, increased both in the quarter and for the full year. These increases, however, resulted in large part from incremental incentives that were incurred due to our extraordinary results, additional receivables allowances that we judged to be prudent in light of changes in overall market conditions and also the requirement that we value and amortize intangibles arising from our acquisitions.

Let me also briefly update our progress in accruals at Atlas. Atlas is on track. For the quarter, continuing operations at Atlas were profitable. As previously discussed 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 most recent year-end, this overall accrual stood at $5.8 million. Currently this accrual substantially relates to jobs that are complete, but for which we are negotiating disputed amounts and closeout terms. In light of deteriorating industry conditions that could affect these negotiations, we increased the accrual by about $3 million during the fourth quarter and that $3 million is included in the $5.8 million number that I previously mentioned. We are committed to vigorously pursuing the remaining amounts we are owed and we believe these accruals are sufficient to finally and fully put these matters behind us.

Our stock repurchase program was extremely active in the fourth quarter, as stock market conditions provided us with an opportunity to buy shares at reduced levels. We purchased 1.2 million shares in the fourth quarter and 2.3 million shares for all of 2008. During 2008, we returned $26 million in cash to our shareholders through this program and since we began buying shares a year and a half ago, we have purchased 3.2 million shares and returned a total of $37 million to our shareholders and we've reclaimed more than 7% of our outstanding share base.

Our balance sheet the remains rock solid. We have strong cash balances and nominal debt and our unused credit lines do not expire until 2012. In light of the recessionary outlook, we have intensified our efforts to maintain disciplined cost structures and to adjust rapidly to changes in our individual markets. We plan to continue to prudently deploy our balance sheet strength into our operations and we'll continue to consider acquisitions as good opportunities arise. Our reputation and balance sheet are remarkable assets as we confront economic challenges and we look forward to opportunities to invest in existing operations, to add new operations and to retire shares of our stock. As great as it is for the CFO to be at a Company that has substantial cash and no meaningful debt, it is the quality and commitment of our workforce that is the real key to the confidence and sense of opportunity that I and all of us feel and we look forward to 2009. That's all I have on financials. So now I'll introduce Brian Lane, Chief Operating Officer.

Thanks, Bill. Good morning, everyone. I am grateful for the opportunity to serve this Company in my new role and I look forward to getting to know many of you. I would like to take a moment to introduce myself. As Bill said, I have spent the past 24 years in the engineering and construction industry and have had the pleasure over the last five years of being with Comfort.

Comfort is its people and I am very proud of the highly talented and skilled members of our team. Though my focus has been on the 17 companies in Northeast and Midwest, my recent experiences with our other companies has reinforced my belief that Comfort has the best people in the business. Their hard work, dedication and commitment will always be the foundation of our ongoing success. I thank all of them for their efforts this quarter and for the entire year that resulted in achieving our strongest annual performance ever. Even as we move potentially into challenging economic conditions, we are confident of our future long term success because of the quality of our team members. The highlights of our full year results with the achievement of an operating income of 6.1% of revenue and the generation of free cash flow of over $69 million, thank you very much to all.

As we go forward, we will continue our focus on safety, productivity and quality. The depth and experience of Comfort Systems' operations provides a real differentiator from our competitors and we will continue to improve our delivery systems and provide solutions to our customers. We are very fortunate to have a large and varied customer base.

As we move into uncertain times, our operations will focus on the basic foundations of our business, including project selection, estimating, project pricing and project execution. We will also focus on the service segment of our business that will certainly help us to maintain our profitability in a downturn. We continue to see that energy prices and green awareness are driving opportunities for larger retrofit projects and for multi-year maintenance agreements to reduce energy costs. We will increase our participation in projects that are related to energy, efficiency, including many projects that will qualify for lead certification. The majority of our companies have lead accredited professionals who are fully qualified to advise our customers on the long term benefits of having a lead certified building.

We are also focused on reducing our costs wherever possible and our companies have contingency plans to minimize the potential negative effects of a future downturn. Our experienced management teams have made the necessary cost reductions in past downturns and will continue to use that experience to effectively manage their operations in the current market.

Our backlog continues to be at solid levels. In spite of the recent declines, our pipeline remains very active and we have had substantial bookings in 2009.

In closing, we will focus more than ever on execution, costs, quality and innovation. Our prime goal is to deliver value to our many important stakeholders including, of course, the people who own our Company. I will now turn it back over to Bill for his wrap up and then questions. Thank you.

Thanks, Brian. Love that thought of -- As mentioned, let's go back to backlog. Our current backlog is reasonably high and most of our locations are seeing a substantial number of opportunities in their pipeline. Competition certainly has increased, but we have belief that our size, our productivity, our operational flexibility, our financial stability that Bill talked about and our ability to provide surety based on that financial statement stability along with our reputation puts us in a very good position here. Certainly much better position than we were in in the last down cycle, 2001, 2003 cycle, where we did reasonably well anyway. Today, as opposed to then we have a much, much stronger balance sheet. Actually we have a balance sheet today, we didn't have one then. And even taking in -- taking out our recent acquisitions, we have 175% of the backlog we had at the end of 2002.

Further, we've got a very diversified base of businesses, as Brian mentioned, and there's substantial revenues now and to come in the healthcare and education and government sectors both state and federal and military. Additionally, we've improved our recurring services business -- recurring service business and we're gaining momentum in our energy efficiency project and service work.

Lastly, we expect to be a beneficiary of the developing federal and state stimulus program. We are not sure of when, where and how precisely at this point, but we believe that we stand in the way of a lot of that, especially on the energy efficiency side. So in summary I think we're well prepared, as well prepared and positioned to deal with the current recession and economic downturn as anyone in the nonresidential construction sector. With that statement I've got to open this back up to questions at this point. Onica, can you -- ?

(Operator Instructions). your first question comes from the line of Matt Duncan with Stevens, Incorporated. Please proceed.

Good morning, guys, and congrats on a good quarter.

Hey, Matt.

So the first question I've got and, Bill, you talked a little bit about this on the gross margins being driven by very good project execution on some projects that were closed in the quarter. Kind of looking forward, what would be your expectation for gross margin? Is this sort an unusually high number and we shouldn't be thinking about using this in our models going forward? Any help you can provide, that would be great.

I would absolutely say that this is a very high number. The number that we experienced in the fourth quarter of 2008 is a number I've never seen before and I would like to think we've established a new base line, but I don't know that I'd be comfortable making that conclusion. But seriously, though, we meant what we say in the K and elsewhere. We do expect to have a profitable year coming up. It's just that 2008 was a very special year.

Sure. And then looking at the G&A line, can you quantify for us was there anything sort of unusually high in that line, as a percent of sales, that was quite a bit higher than normal. Talk a little bit about what drove that.

You know, SG&A, the percentages are up but the controllable SG&A expenses that most people think about when they're scratching their heads about SG&A actually were down as a percentage of revenues. The things that led our SG&A percentages to be much higher in the quarter and to be noticeably higher for the year included the normal things that you see in a good year like strong incentive payments at all levels of the organization. We have bonus programs where people get a share of the profit once they break through a threshold and we had a lot of profits.

We also had things like bad debt expense that was much higher than usual and we'll take a minute just to comment on that. We made substantial bad debt accruals. Our bad debt expense for the year was $3.6 million. It was $1.6 million for the quarter and that's much, much higher than the prior year. And quite honestly, a lot of that came from the fact that we made a judgment late in the year that it was not prudent for us to use historical assumptions when we were looking forward and assessing our debt. And so we sharpened our pencil and scratched our heads really hard about all the different ways that we need to collect money from people and we ended up putting up a lot more money. I'll be candid with you. We haven't really seen different -- we have not yet seen different behavior within these classes of assets, but we really felt and frankly our external auditors agreed with us, that it was legitimate to really take into account the underlying conditions. The other things affected bad debt expense, but those were the two big ones. If you were to take those two out, I mean, sorry, other things expected SG&A. If you were to take those two things out, though, we would have been down is. That just gives you an idea.

That's very helpful. Thank you. And kind of looking forward a little bit just to help us understand what you guys are seeing out there in the market right now in terms of bid activity and the margins on the projects that you're bidding on today, are you seeing any meaningful changes from what you might have been seeing six to 12 months ago?

I think my comment about the fact that we're seeing more competition would sort of naturally result in some compression on the margins. There's no doubt about that. Some of that is offset by the fact we've got lower commodity costs, lower commodity materials costs, lower gasoline costs. But we'll see some compression in the margins here based on what's going on in the economy generally.

Bill, would that compression pick up as the year goes on as you sort of start to work off some backlog that was bid in better times?

I think that's logical, absolutely. I think our own strength and capabilities may allow us to get some good jobs at decent margins that other people can't get because they can't produce the surety or there are other concerns about their capabilities. But yes, you're right, that inevitable consequences.

Okay. A couple more things and I'll get back in queue. First on acquisitions, you guys still active there and are you seeing multiples contract any? Are sellers willing to sell at lower multiples, given the more precarious state of the end market right now?

You know, I would say we are certainly seeing getting greater traction in talking to the kind of companies we really want to own. There's a lot of people, there's a little bit of a wait and see feeling out there. But when you say multiples, it's an interesting question because usually you apply a multiple to a historical earnings number.

Right.

We're coming off of peak earnings. So I would say that what we would really hope to see is reasonable multiples of reasonable earnings expectations for the future. There are certainly signs of that and I think other people in this industry have noted that. That should continue to develop.

Okay. And so the thought is you'll still use balance sheet to make acquisitions going forward. But you'll probably be a little bit patient in the near term until people's expectations get more reasonable for their businesses going forward.

Well stated.

Okay. And the last thing and Bill, you guys talked about this a little bit, but if you could maybe expand upon how the push to make government buildings more energy efficient could impact you guys going forward? What sort of impact can that have on Comfort Systems?

Well, we are first of all, we're geared up for that. We some years ago recognized the potential and the necessity for this. To the extent states and federal agencies are serious, we are ready to do the work and we've got the capability to analyze buildings and facilities and show how to make them more efficient. Whether or not we get them all the way to lead qualification is another question really. And we're getting traction, a lot of interest, but it remains to be seen how much of this stimulus money really goes for that. It's all -- I know it's in all the comments about the package and everything else, but we're -- we want to see it. I think it's there, but we're not doing any of it yet.

All right. Thank you very much for the insights and thanks for the answers, guys.

Your next question comes from the line of Rich Weslowski with Sidoti & Company. Please proceed.

Morning.

Hi, Rich.

We've talked previously about contractors formerly busy in other markets such as residential now competing for light commercial work. But we listened to Encore yesterday and they said that's not the case for them. Are there any of the factors, I need to factor to differentiate your two companies. Would any of those translate to a meaningful difference in the barriers to new competitors?

We certainly operate at a lower register in terms of size of project and thus might be considered more vulnerable to people coming up from the bottom, if you will. What happened, though, to those people who maybe have been let's say a residential mechanical contractor really at the end of the day don't have the capability to screw things up and -- but we'll see that. We see that. I don't know if we'll see it to any greater extent than Encore or not. I don't know their complete booking business. The -- we have some -- a lot of -- getting into comparing us with Encore is always a little dangerous here. We really don't see them that much because they're doing other kinds of work and they're big and they're -- we're a merit shop and they're union, et cetera. We think we've got some flexibility and nimbleness maybe that a big contractor like Encore doesn't have, but we really don't compete head on head with them, so we don't know everything about them.

Okay. Separately, is there some kind of broad way to characterize how you're tailoring your bidding jobs sheet to the market be it sizes of projects, types of project, holding the line on pricing versus volume, that sort of stuff?

Well, we're clearly more focused on the bottom line than the top line. I mean we will experience -- I don't think we'll experience the growth that -- in 2009 that we did in 2008. Because we're pretty disciplined about what we want to do and we will not be the low bidder to get a project. We come out okay on where there are a lot of bidders but we're not usually the low priced spread, if you will. We are exercising those disciplines and I think they're sticking. And some of it runs all the way back to our incentive remuneration programs. People are not remunerated on things that don't fall into results and net operating income and cash flow.

Okay. And lastly, on the Atlas charges can you give a bit of detail on the Legacy backlog that remains to be negotiated with owners? Do you still have contingency on some of the outstanding jobs?

The kind of jobs we're talking about are jobs where people live in them today or, well, or they could live in them today if they could sell the units. And really that's part of the reason why we thought it would be good to be more prudent. The accruals we just made, frankly were really the entire amount is accounted for by two big jobs that seemed to be headed toward the litigation posture where the owner is just in a lot of pain. And we don't want to have problems in future years from them and so even though we felt reasonably good about the accruals that we've made, we've had a very, very good track record so far on matching up with the accruals that we made in the past. We decided that it was prudent to accrue more money and put ourselves in a position to just really fight for what we think is fair.

Okay. And kind of a follow-on to that, can you detail or summarize what Atlas looks like now versus what it looked like a year ago? I know it's kind of melded into other companies.

Well, financially, I'll tell you financially and then Brian can comment sort of. Financially, Atlas had three big parts. One was in the southeastern United States, one was in the Mid-Atlantic and one was in Texas. What's left inside Comfort and is called Atlas is the part that was in Texas. It's the historical Atlas that's been Atlas for a long, long time and frankly has generally made money consistently, even over the last few years and before. The southeastern part, mainly in Florida, doesn't exist today. We're closing out some projects, but they're really nothing meaningful left of that and some very good crews, some good attributes and a small number of good jobs are melding into one of our most successful operations that's been in force in the Mid-Atlantic for decades. So what's left, I would say probably $20 million to $30 million of revenue under the name Atlas and then a few jobs in other organizations maybe that flow some revenue as well. Brian?

Yes. And our operation here in Texas is strictly focused in Texas and emerging in the Mid-Atlantic area in Washington is going very well and just about concluded, so.

Okay, great. Thanks.

Your next question comes from the line of John Rogers with D.A. Davidson. Please proceed.

Hi. Good morning.

Good morning, John.

I guess for Bill George, missed your -- what you were saying about -- what did you say organic revenue growth was in the quarter in organic backlog growth?

Well, in the quarter it was almost -- it was within a $0.5 million dollars. 4Q, 2007 was within a $0.5 million dollars of 4Q, 2008. I think it was higher in 2008, although I'm not even sure of that because it rounded to the same number. But remember, 2007 was a remarkable fourth quarter. So we feel pretty good about that. So the entire $36 million increase in the quarter happened to be -- add up to the revenues from the companies we bought.

Okay.

On backlog, same store backlog from a year ago is $690 million versus -- it was $126 million difference, same store and so -- but a big chunk of that difference, about quarter of it is the planned reduction at Atlas. So if you were to look at true same store backlog decline, it's about, it's under $100 million but it's pretty much $100 million.

Okay, okay. Good. And then did you say that you took a goodwill provision in the quarter?

No. We just -- I just -- the only two types of provisions that I talked about were stuff related to accounts receivable.

Right.

And other types of assets that we just decided to scrub very, very hard really based on the facts that are developing in the broader economy, not based on the facts that are specific to us or to those assets. And then also we put up the money on Atlas that I mentioned.

Okay. And then sort of a bigger picture question, you're looking at, as is everybody, lower results in 2009 with the contraction. The last time we went through a downturn like this your business suffered for a couple of years. Now part of that I assume was the restructuring that was going on there and I guess I'm just trying to think about how far behind the economy you are both in terms of the downturn and then the upturn, as it's currently structured. Can you help me with that?

A couple of things. One, back in those days an enormous part of the pain we felt was going from about 120 P&L down to about 35 or 40. We had companies that were losing a lot of money and frankly, I don't know how you can even -- given what I know and I know a lot, I've been here since the beginning, I can't really make good comparisons that I feel comfortable those days with sort of what we're facing except that I know we don't have the disadvantages we had then and I feel better. I feel a lot better. So I don't know. As far as those comparisons go, they're only positive but they're very, very hard to quantify. What was your other question?

Well, I mean I guess that's it. I mean, if we start to see a recovery, I mean hopefully we do later in '09, the way your business is structured now do you see benefits from that in 2010 or does it take longer? And obviously it depends on the type of recovery and all that, but I'm just trying to get a sense of how much of your business is just new project driven versus sort of service versus small projects and just how sensitive it is to the terms.

Let me try here.

Thanks.

The service repair retrofit business, which is 45% of our revenues, sustains us even in a radical downturn, we believe. If you add to that the energy efficiency push or the green awareness push because not always do projects we do have the kind of economic payout that is compelling, but there's so much awareness people want to do them, that helps. The other part of this that helps is that remember, 40% of our project -- more than 40% of our project work is in the schools, hospitals and government/military sectors. So those things continue a pace here, that money is appropriated a long time ago. There are needs. The projects are on the books. We're booking more of them. So the part that's really exposed to what you're talking about is the commercial industrial piece which is some part of our revenue for sure and we're late cycle in that. We'll cycle off of that and it will take a longer time to come back and I think that's the part and I assume the same thing that you do, that there will be a recovery here, and that's the part that recovers later than sooner and that's probably 2010.

Okay. And is it -- and, Bill, is that the business that is giving you the most pause relative to '09 right now?

I think so, absolutely. Now the condo and high rise apartment business is a strange animal and clearly it's mitigated today based on the available financing, but there is going to be people who are building and renting apartments going forward. So that's some concern, but I think that recovers pretty -- earlier than the commercial office or the industrial plant or the warehouse business does.

Okay.

Which we don't do a lot of, but we have to be cognizant of.

Okay. And just last question, in terms of the energy efficiency portions of it, the maintenance-type work, have you seen that business change at all with the decline in energy prices? Has that had an impact?

Well, some, yes, but I think what people get confused about is that yes, crude oil has fallen precipitously, it's at $40 a barrel. But if you opened your electric bill lately, I don't think you've seen a whole lot of savings and electricity drives these HVAC mechanical systems. So yes, there's that and there is some pause. I think it's more based on economic conditions than anything else. People just don't want to spend any capital regardless of the payout in some instances. But we're getting very substantial traction in a lot of this and there's government -- the stimulus money clearly is going to be spent there.

Yes. Okay. Thanks for your thoughts. I appreciate it very much.

Sure.

Your next question comes from line of Clint Fendley with Davenport. Please proceed.

Thank you. Good morning, gentlemen, and congratulations on the new appointment here, Brian.

Thank you.

I apologize if I missed this. I logged on a bit late, but I wondered, Bill George, if you could just comment on the gross margin here. I mean the 22% seems to me maybe the highest it's been in about a three year time period. Just some of the drivers here and how sustainable you believe that may be in the next few quarters.

The gross margin is very high. Our comments about declining profitability obviously come -- they come with the gross profit line and so that won't repeatable in the near future. In the near future we'll probably -- we'll have developing weakness over the year and that will be reflected in the gross profit line. Okay. Thank you and then any thoughts on how your working capital needs might affect your free cash flow in 2009? Yes. We expect to have good free cash flow. We've had good free cash flow for 10 years and so that goes right through some recessions that were pretty hard and where we had -- we were making big interest payments and had a bunch of other disadvantages for paying off the hundreds of millions of dollars of debt that we paid off, et cetera. There are factors in a downturn that help your free cash flow. There's a disinvestment in working capital, but of course, it's harder to bill and collect. So your cycle slows down a little bit at some point along the way. We think we can cash flow our earnings, probably our earnings plus a little just because our cash tax rate's lower than our, than our GAAP tax rate but we feel -- I think we feel pretty solid about our ability to continue to flow cash and frankly, strengthen our balance sheet or make investments.

Good deal. Thank you.

Sure.

Your next question comes from the line of Tahira Afzal with KeyBanc. Please proceed.

Morning, gentlemen, and a nice quarter.

Good morning.

To start with just wanted to ask you a couple of questions about your margins. If your Company's been through so many good changes structurally over several years, if you try to decipher and build around that, profitability comes down, should we be looking at it going down from 6% plus on the operating level to levels similar to those in 2007 where you had some losses from Atlas and hence the margins didn't look that good? I assume the worst case scenario of 1% to 2% would be overdone based on what you're seeing right now.

Where do you start? I think all of what you bring up Tahira is logical. It starts at the gross margin line and pushes down. We are doing -- we have done substantial cost cutting and as Brian mentioned, have contingency plans to do that further. We are in a variable cost business but there's going to be an effect on the net operating income, no doubt here, and I mentioned the competition, depression. I think what we're saying is, I think we're positioned well and we've got productivity that we didn't have in the last downturn and we've got a lot of flexibility and nimbleness and a -- and some disciplines that will mitigate the decline for us and I don't know what that is. We don't give guidance, but I think it's logical to assume that we might not end 2009 with a 6.1% operating income margin.

I mean 4%, 4.5% and again, you don't give guidance but I assume you're not going to see a material extreme fall from where you stand right now given you're a much more integrated company in a sense and given that you are a different company in a sense. I assume as you said, you're more nimble and assuming the worst case scenario doesn't make sense as you see it today.

Tahira, I think what you're saying is perfectly logical, that the reason the Company has a hard time answering that is there is one variable we don't know yet and that is right now the world's still turning, right? We're still seeing opportunities. We still have good backlog. In a sense your real question I think, is almost about 2010 and there's just things that are going to happen over the next year that are completely independent of us that affect how long this recession lasts and how deep it turns. I'm a reasonably optimistic -- I'm feeling reasonably optimistic, not necessarily about the economy. But we have one good thing going for us, a couple good things going for us. One, that we haven't had in any past down turn which is at least going into the downturn we weren't particularly overbuilt, so we didn't have an existing -- because we missed a lot of the upturn in the '04 , '05 range, we don't have that big overhang that sometimes we have in these recessions. The counter point to that is, it's a financing led recession and obviously that affects development, but we're also a bit of an interesting and important factor about our Company is of our 40 or so P&Ls about five of them are in big cities and about 35 of them are in local communities, the Little Rocks and the Manchesters of the world and those guys didn't get the highs. We're hopeful they won't get the lows, but there's to answer your question I'd have to -- I could answer your question better with assumptions about what's going to happen for the rest of this year to the nonconsumer economy, which is where we

Now that's fair enough. I was trying to see how far I could push it. The other thing I guess I wanted to ask you was timing off your COO, is there anything we should read off that?

I'm sorry, I'm not clear.

The timing of your COO, why you've added a COO at this point? Are you worried about are you going into a down cycle, as a roll-up? Is there something associated with you announcing a COO at the moment?

Well, as we probably didn't do a very good job of explaining this in the prior news releases. We've always had a COO and our former COO, Tom Tanner, happens to be sitting here in the room, he's working very hard. He is now focused on our business development activities, acquisitions, you can read there and focused on a whole lot of internal continuous improvement activities to include business information management systems and that sort of thing. So he's got a big book of responsibilities. So we've always had a COO and the COO changing positioning is very little, nothing to do with the current state of the economy. We planned before we knew anything about this at current economy. It has more to do with the fact that there's a potential succession plan in place, et cetera that we're working on here.

Got it, okay. That kind of makes sense. I apologize about that.

No. No problem.

And I guess the last question I had was -- actually two questions. Number one, if you look at your mix, you're more on the nonunionized side. Does that that make you more nimble in terms of the [goss] as the market goes into a down cycle, was it a unionized shop, or is there very little difference?

I would say that one important thing to think about, we have some union employees, very few. We've had union employees in the past and we had wonderful relationships with them. A big part of the reason that we're nonunion today is because years ago when we needed to strengthen our balance sheet, there was a buyer that was only willing to buy union shops. At the moment, we're nonunion because of geography. We're in nonunion markets. We're in markets -- and as far as what that means about us, I guess you could attribute who we are and what we are to that, but I think you could just as readily attribute our nimbleness, our smaller project size, our focus on the midmarket to the fact that we are geographically in the midmarket. We're geographically in the Sunbelt. We're geographically, just who the Company is. So I hate to sort of focus on that because really that's just one factor and the factor almost is a result of where we are as opposed to who we are.

Got it, okay. So it doesn't make a difference as you look throughout your unionized portions of your business and the nonunionized portions, you would see the cost structure in a down cycle is limited difference?

I'd say there's advantages and disadvantages to each structure. I think our big advantage is the same in either type of business. This is as Bill mentioned earlier, it's a variable cost business. Every morning our employees show up at some site that we don't own. The vast majority of our employees show up at some job site. The vast majority of our cost of sales is human beings who, when there's work for them, they show up and when we don't have work for them, we simply just don't have work for them. So I guess I would attribute it more simply to the 100 year history of the construction business and the fact that that's just what we do.

Got it. And I guess last question has to do with the early cycle indications that I thought were interesting that you mentioned. On the sort of condo apartment side of the story, do you feel that are there some early signs you're seeing or is this just based on sort of the macroenvironment that you're anticipating?

I think it's the macro comment. We are building some high rise apartments or working on some projects that are high rise apartments and condos, as we speak. Certainly we've cut back that area on purpose in Atlas, but I think there's a business there going forward and projects will be taken on. I mean we do have -- there is a financing problem in that sector today.

Okay. Thank you very much.

Your next question comes from the line of Barry Haimes with Sage Asset Management. Please proceed.

Good morning. I had a question in term of characterizing the backlog a little bit for us. One is if you could, is the backlog spread across the quarters of the year or is it concentrated in one half or the other half and how much of it, if any, extends into next year? And then secondly, are you seeing any either cancellations out of backlog or deferrals where things get pushed to the right? Thank you.

Well, let me take a shot at this and Bill will follow up. The vast majority of what we count as backlog is work in progress, things that have commenced and then there is backlog which is -- or jobs that are not on the POC that will commence. We have not seen many, if any, cancellations. There have been some deferrals understandably, most based on finance. And our backlog, there are projects in there that will continue for another 18 months, two years. I mean these are big prisons. I was on our Company's largest project last week that is a spectacular project and a very large project for any of our companies and for us. And it's being well run and well done and it won't complete until the end of 2010, in my view. They have a little faster ideas in mind, but I think it will run through a good part of 2010 or into 2010, excuse me.

Statistically on average it's always something like about half of our measured backlog at any given moment performs in the next six months and then the rest of it trails out over a long period of time. Very, very tricky, though, to try to model with any of that because there's a very substantial portion of our revenues that never run through backlog or are deeply underrepresented in backlog because of project size and duration and obviously the 15% or so of our work that's callout service, dispatch service has nothing to do with that. So I give you that caveat as well.

Thank you.

Your next question comes from the line of David Yuschak with SMH Capital. Please proceed.

Good morning, gentlemen, and certainly you don't have any recession in your numbers yet, but the question I have to ask you is, as you look at your 2009 book of business today, it would appear to me that you got a good deal of visibility on what you can produce in a way of an income statement the first half of the year. It's really the second half that's your problem.

Yes. Although, Dave, that would probably be true every year and call we've ever had, but I'm thinking about it more this time.

So the confidence -- I guess we go back to the confidence level then, is what is lacking here since like you said ,it's always pretty good visibility. But right now that visibility, given what you've seen happening in the marketplace today, has to be pretty good relative to what's happened in the marketplace, I guess. I think that's a better way to phrase it.

What you're saying is relative to sort of the atmosphere --

All events we've had around us, yes.

I mean what we're seeing certainly isn't as bad as the atmosphere that you get if you watch tv all day, but nevertheless we're certainly seeing measurable weakness.

Not implying, David, you watch tv all day.

Program starting in a few minutes.

Right. Then second as you look, everybody knows where we regionally have had a lot of weakness and you guys expressed earlier being in the smaller markets. That has helped insulate you somewhat from that versus the big markets. What I'm kind of interested, as you look and everybody knows where all the problems have been and it certainly shows up in the nonresidential construction data that constantly gets published. Commercial's very weak. Retail's very weak in the nonresidential area. As you look at your various market verticals, where have you seen in 2008 that you've already had a pretty good hit in those areas? And how much more of a hit can that be potentially in the way of new business opportunities in 2009 versus where you've been very strong, because I think where you've been particularly strong would probably worry me more than where you've been particularly weak because than maybe that creates the second half problem more than where we already know where the weakness is. I just kind of want to get some sense because you said in your earlier comments, first quarter bookings have been pretty darn impressive given what's happening. So something is working right here right now. Can you give us some more little more transparency on that?

Well, I would say that what you said is generally right. Maybe, Brian, I don't know. What are some positive hits we've had so far this year I mean just generally?

We've had if you're talking regionally, some recent success in the southeast part of the country, healthcare and as Bill talked about before, military. We are still seeing some strength and a lot of opportunities in that part of the country.

Military you really haven't had much presence in the past, have you?

We've had some. It's growing, especially --

What comes from your military background, Bill? You ought to be able to --

Well, I wish but mostly the hard work of a lot of people in the field, but we have some substantial projects on military camps, posts, stations and we're looking at more.

When we do our pie chart that we published now for many, many years, we put military under government.

Okay. But do you feel like the strength you've had in those other markets away from where the problems have been have been relatively solid markets but nothing excessive at all to speak of that would suggest that I got a bubble in healthcare or I got a bubble in education? Just give me a sense as those numbers haven't been that extreme to the upside have they, that could create kind of a problem in the second half?

I would say healthcare and education are simply the continuation of a very, very long term secular trend relating to the number. The demographics of students and in healthcare, the demographics of an aging population where whatever happens next year or the next year between now and 10 or 15 years from now, if you're a major hospital healthcare system, you want to have the product positioned to deal with the aging baby boomers. If you don't, somebody else will.

Then if we don't have as much visibility in the second half because of all their concerns out there, you guys have already said that you've cut some costs in a lot of discretionary spending for 2009 and I think this is one of the problems a lot of construction companies have. How much do I hold on to my resources right now knowing maybe I'm taking a short term margin squeeze but I got to be positioned for the second half, for the recovery. The question is we don't know when that's going to come. Is there any internal look at what you need to do to say adopt for better or worse the term plan B where you really would have to start looking at resources, that you have to start reining in those costs because things aren't developing?

We're looking at plans A, B and C looking out through the rest of the year and aligning our resources with our revenue projections and acting accordingly but we're doing this on a pretty frequent basis now.

And I might add it's on an operation by operation basis. We are simply not going to say, okay, everybody cut 10%. It's an operation by operation basis and it's not all letting people go. We've got companies that have already, because of local conditions, except this time with Michigan, have gone to seven hour workdays. And not letting people go, trying to retain people because as things come back, we'll need those people. There are things that we can do short of just disbanding our workforce.

At least it's encouraging that you're saying you're looking -- if operation's have done well we're going to leave it alone so to speak, I guess on any kind of plan you have out there. One last kind of view and maybe you can share with me what you think of it but it would seem that because of the problems in the residential marketplace, residential isn't going to come back anywhere near anybody hoped for in the way of this recovery as it shapes out when it does start to happen. With the government stimulus plan, nonresidential has traditionally been a late cycle with the problems in residential and the stimulus plan. Isn't it not possible the nonresidential could be, in fact, an early cycle recovery business this time around and if that would be the case, where do you think that would happen?

You heard it here first, right? I hope you're right. I can certainly -- I can make an argument really based on not being overbuilt that when the recovery finally comes, we'll recover more quickly than we historically have and when I say we, I'm talking about the industry, not Comfort Systems, but we're part of the industry. It's an interesting thesis. I think a lot of construction is going to return to more like historical trendlines, but that could be a good thing on the nonresidential side. We didn't get to experience the bubble in the same way as almost any other part of the economy.

Yes. I quite frankly, Bill, would agree with you on that one. Thanks.

Your next question comes from the line of Terry McMahon with McMahon Technology Associates. Please proceed.

Yes. Gentlemen, I just wanted to validate some numbers I've of hearing here. The way I understand it, 55% of your business is in the construction new projects area,of which 60% of that could be classified as commercial industrial. Now if I do the math, that yields about a third of your total business is new projects, commercial industrial. Now this is the area that's obviously soft now and you're not looking for any recovery in this until maybe 2010. Is that correct?

Well, there's one big disconnect there which is there's plenty of commercial industrial in the other 45% of our revenues. You know, retrofit also happens in commercial buildings. But at the end of the day I think it's fair to say that -- I think the best thing to do is to take our pie chart which we publish, sounds like you've been looking at, and apply that to all of our revenues because that's actually derived from all of our revenues and I think the best way to look at it is to look at all the different subsets. Some like retail, although small are very affected. Lodging can be very affected. Office buildings are very affected and then there's a continuum up to government and education that people will tell you isn't as heavily affected, although there's nuances even within that.

Some of this is definitional, I think. 40% of our project -- in excess of 40% of our project revenue comes from schools, hospitals and government. That doesn't mean the rest is all commercial industrial. There's lodging. There's big business in building prisons and churches, which I guess you're classifying as commercial industrial here. Commercial industrial I was talking about was plant facilities and office basically, where there just isn't much going on.

And you're saying that's less than 60% of your new project construction business?

Right. And -- How much is it roughly? Is it half? I think it's 25%. Commercial and industrial that we talked about is --

If you look on page six of the Form 10-K we just published, you can see percentage by percentage everything and really that number is going to be -- it's really going to depend how you define commercial industrial. If you define it to be everything except for institutional, then it's up near 60%, if that's the definition you choose.

Okay. Yes. The main point here being though, that it is a significant chunk of the total business and this is going to be a drag on the total Company because of this one soft sector.

That is right and -- but we have the ability in our operations to transform ourselves and just because someone has been dependent for revenues upon commercial office projects in the past doesn't mean you will be in the future. He can move his business toward the hospital, healthcare sector and that describes some of the our flexible actually. But we are concerned about commercial office.

That's why we're projecting less profitability for next year for sure.

Exactly.

Thank you very much.

Sure.

Thank you.

At this time there are no additional questions. I would now like to turn the call back over to Bill Murdy for closing remarks.

Thank all of you for being on the call. We can just stress our positioning at this point and we'll see you as the year unfolds here. Thank you.

Thanks.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you and have a good day.