Comfort Systems USA Inc (FIX) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Comfort Systems USA first-quarter earnings conference call. My name is Chantalay, and I will be your facilitator for today's call. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Bill George, Chief Financial Officer. Please proceed, sir.

Thanks, Chantalay. Good morning, everyone. Welcome to Comfort Systems USA's first-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 can read a more detailed listing and commentary concerning our specific risk factors in our Form 10-K, as well as in our press release, covering these earnings.

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

Thank you, Bill. Welcome, everyone. We are starting a little late this morning to give everybody a chance to wash their hands.

Comfort had a good first quarter in our view, and while our earnings per share declined $0.02 a share from Q1 '08, it represents a very, very good first quarter for us, which is traditionally our weakest quarter because of weather and other conditions. Bill George will cover the comparative decline, and I'm sure he will mention that in some part, that relates to matters other than pure operational results.

Revenues were down slightly, as was backlog, in both Q1-to-Q1 comparisons and in the sequential comparison to the fourth quarter of '08.

Let me mention here that comparisons of revenues, net income, backlog, cash flow are a bit tricky, given the effect of recent acquisitions, our purposeful drawdown in the activities of our Atlas multi-family operation and the effect of stock buybacks.

Without looking at those comparisons, we actually have been mildly and pleasantly surprised by how revenues and backlog have increased in certain markets. And our absolute overall backlog remains high by any historical standard. Brian Lane, our COO, will address backlog again here in a moment.

One thing that we do continue our very intense focus on execution and cost control, and indeed have implemented some fairly substantial cost cutting, especially in our weaker markets. One thing of note here, actually 40% of our operations, representing about 44% of our revenues, actually had better results in the first quarter of '09 than they had in the first quarter of '08.

Lastly, we ended the quarter with $108 million in actual cash, and we expect good cash flow performance going forward here.

At this point, let me turn the mic over to our COO, Brian Lane -- or no, you want to -- back to you, Bill. We will turn it over later to Brian. He is awfully eager to speak here. We will let Bill --.

As Bill said, we posted strong first-quarter results in challenging economic and industry conditions. Revenue decreased by $14 million in the quarter as compared to the same quarter in 2008, as acquisitions contributed an incremental $31 million in revenue. So same-store revenues increased decreased by $45 million, or 15%. We believe that we may be returning to more traditional revenue patterns in which the seasonal effect on the first quarter is more pronounced than it has been over the last two years of strong industry activity.

Gross profit increased in the quarter, improving from 18.1% in the first quarter of 2008 to 19.6% this quarter, and operating income margins remained strong, coming in at 4.2%. These positive results are thanks to solid execution, and our results were augmented by especially strong results in Central Florida.

As Bill mentioned, we earned $0.18 per share in this quarter compared to $0.20 for the first quarter of last year. Because of the current low interest rates, interest expense was $800,000 lower this year. And because most of the interest we earn is tax-free and because we had comparable cash balances, if interest earnings had been the same, we would've actually matched our 2008 first quarter and earned $0.20 per share.

SG&A expense increased on an absolute and percentage basis as compared to the same period a year ago. The dollar increase resulted from the addition of our acquired companies, and the increase as a percentage of revenue stems from a combination of factors, including a lag in the effect of ongoing reductions and strong field level incentive accruals based on strong margins.

Historically, the first quarter has had higher SG&A as a percentage of revenues than the full year, although we have not experienced this trend as much in the last two years because strong industry conditions led to high first-quarter revenue.

As Bill mentioned, since year-end, our backlog has decreased by $36 million, or 4.7%. And that comparison is a valid same-store comparison. The year-over-year decrease in backlog was $94 million. However, the decrease that companies owned for the full year was $146 million, or 18%. Importantly, the year-over-year decline in backlog includes the effect of our intentional reduction in the multi-family sector, which accounts for $50 million of that decline. And although our backlog has declined recently, it still remains at strong levels compared to historical trends and totals.

Our stock repurchase program continued this quarter, as we purchased 200,000 shares in addition to the 2.3 million shares we purchased during 2008. Since our program began less than two years ago, we've repurchased 3.4 million shares and thus retired 8% of our share base.

Our tax rate was up slightly in the quarter, coming in at 40.1%, thanks to a discrete state accrual. We remain comfortable that for the year it will be similar to recent years and should finish in the 38% to 40% range.

First-quarter cash flow was similar to last year, coming in at a negative $6 million. That is good performance for a first quarter and bodes well for the year.

Our balance sheet 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've intensified our efforts to maintain disciplined cost structures and to adjust rapidly to changes in individual markets, and we plan to continue to prudently deploy our balance sheet strength into our operations, and will continue to consider acquisitions as good opportunities arise.

For 10 years, including during the deep recession after September 11, 2001, we've had positive free cash flow every year. In our industry, there is only one reliable source of cash, satisfied customers. We are convinced that we have the best team of professionals in our industry, and combined with our strong balance sheet, we look forward to improving our position in the mechanical contracting industry during 2009.

That is all I have on financials, so now I will introduce Brian Lane, our recently-elected Chief Operating Officer, who will review with us the accomplishments of his first 100 days. Brian?

Thanks, Bill, and hopefully, my part of it will go quicker than 100 days. Good morning, everyone. Let me start by saying how much we appreciate the effort and results achieved by our team members this quarter. We were very pleased with the financial results for most of our operating locations. And I believe that the effective partnership between our operating company presidents and our regional management teams is the foundation of our success.

Our presidents are committed to the continuous improvement of their respective operations. They are the individuals who have recruited, trained and empowered the team members that produce our strong results every day. They are the drivers that foster our ability to effectively share special expertise, manpower resources and project opportunities throughout Comfort Systems.

Our regional vice presidents continually collaborate with our presidents to assist them in achieving their goals. They help our presidents in evaluating the resources with an objective perspective, and they often provide help and guidance in recruiting the best talent available. We are fortunate, indeed, to have such experienced, strong leaders, both at the president and regional vice president level. I thank them for their efforts this quarter and for the entire year. Even as we face challenging economic conditions, we are confident of our future long-term success because of the quality of our leadership.

In our construction operations, we continue to focus on the basics of our business, which include project selection, estimating, project pricing and project execution. Our construction groups performed very well this quarter and closed several projects strongly.

We have increased the percentage of service work or work in existing buildings from prior periods. We are doing this by continuing to focus on profitably growing our maintenance agreement base and improving operational efficiencies to increase our overall profitability. We provide our customers with solutions based on energy savings, we have added a service offering in certain geographic areas and we are developing satellite service operations in geographic areas close to our incumbent operations.

We will continue to increase our participation in projects that are related to improved energy efficiency, including many projects that will qualify for LEED certification. Our focus on safety continues to be a key strength of our company, and our OSHA recordable rate remains 50% below the industry average. This is outstanding.

As we go forward, we have a number of challenges that we are addressing in a proactive way. We have developed and implemented contingency plans to minimize the potential negative effects of a continued downturn. Currently, our headcount is down 13% on a year-on-year basis and 4% sequentially. Backlog is at $717 million, which is down 5% from the end of the year. However, more than half of the reduction is from two of our large project companies.

Our pipeline remains very active, and we have had a number of good bookings in April, especially in the Northeast and the Southeast. We are seeing softness in the West, although our Denver-based operation is strong and bookings are at record levels. I am confident that we will continue to acquire more than our fair share of upcoming work.

In closing, we will continue our focus on execution, cost, 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 wrapup and then questions. Thank you.

Thanks, Brian. We do expect some weakness in many of our markets to continue through 2009. But as we've stated before and here today again, our balance sheet, our operational strength, our disciplines, our ability and willingness to respond to current conditions, combined with our exceptional work force, gives us the confidence that we can face these challenges and indeed deal with them.

Ultimately, I think we will be able to employ our strengths and capabilities to continue to grow and prosper in this industry sector.

Finally, we continue to expect solid profitability and positive cash flow in 2009.

That concludes our prepared remarks, and I guess we ought to open it up to questions. Chantalay, can you handle that?

(Operator Instructions) Matt Duncan, Stephens, Inc.

The first question I've got is kind of going back to the gross margin. I know last quarter you guys had a big benefit from closing out some jobs where you had performed very well. It looks like maybe you got a little bit of a benefit from that this quarter as well. Would that be accurate?

Absolutely.

Okay. And I don't know if you really want to give this kind of guidance, but maybe if you can help us understand what your gross margins would look like going forward. As you look at sort of the margins implied in your backlog and the pricing environment that you are in today, talk little bit about, maybe just directionally, what you think could happen to margins here.

Well, we don't give much in the way of specific guidance in that area. However, I think we've been pretty clear that we expect developing weakness in profitability. Pricing is not as good as it has been. I think we feel comfortable that we will continue to get respectable gross margins.

There are a lot of factors that could push different directions. Our service mix is moving up. We were 46% work in existing buildings in the first quarter compared to 43% last year, so there are signs of the usual sort of mix happening. That kind of work has much higher gross margins. It also has higher SG&A. So that is one factor that would actually push margins upward, but meanwhile, you've got pricing, which will probably overcome that and push them downward. I don't really think we have any specific numerical guidance we could possibly give on that.

Okay. And then Bill, maybe if you could help us just looking at the operating margins that you guys have seen in past down cycles -- you had a 6% operating margin last year. Is something in sort of the 3% to 4% range reasonable for where it could bottom out at if construction stays difficult for the whole year?

I like the top end of your low range there. One thing that maybe Brian can speak to, are some of the other disciplines that we bring to the table here in times like this. I don't say it's a preference, but there is less work. There are more bidders. We enjoy the fortunate position of being the go-to mechanical in a lot of our markets. We have lots of good customers, lots of good GCs that work with us.

We are not a credit risk. It often happens the biggest problem on a construction project is some subcontractor going belly up in the middle of it. That is not going to happen to us. So we can get business that way.

We have almost unlimited bonding capability, based on our balance sheet. So you combine those with some of our execution disciplines, and we think that we can get the -- as Brian said, more than our fair share. And we can get the -- I think we can get the good business. Brian, do you want to embroider on that at all?

Yes, Matt. We have a job loop process that we utilize here, and a key part of that is job selection. And we've maintained our discipline on that front. But we also have a lot of knowledge that we can bring to the table. So we will hold our own this year.

Brian, I don't know if you maybe want to expand upon some of the cost cuts that you've alluded to in some of the contingency plans. I guess you said headcount is down 13% year-over-year, 4% sequentially. What kind of folks are you guys letting go right now? And maybe if you could tell us a little bit more about what some of these contingency plans are and what sort of costs you are trying to cut out of the business.

Yes. The type of people that are getting let go, it's both the field and the office staff, looking at all our activities, basically. If you look at what costs we are looking at, I'll be honest with you, Matt, we are looking at everything top to bottom, from what processes we are applying administratively and out in the field, and eliminating those that we don't need to do anymore. And we're cutting steps out of the process. But we're looking at all costs, top to bottom, in our organizations.

Okay. And two more things, guys, and I'll jump back in queue. First, are you seeing any delays in deferrals or cancellations of projects that have been in your backlog?

No cancellations. There are certainly delays and talk of delays, some of that based on financing. Not as -- I don't want to sound like Pollyanna here, but not as much as I had expected, candidly.

Okay. And then last thing here, I know you've talked about acquisitions. Obviously, you guys are maintaining a very solid balance sheet. Should be a cash flow generator. Obviously, last time we talked about this, it sounded like potential targets were still wanting to get paid multiples on trailing EBITDA. Obviously, that is not what you guys are going to want to do. Are you seeing targets be more willing to talk about acquisitions, based on expectations for '09 yet?

I think so. I guess the witness to that is that we have told them we are not going to pay big multiples based on past results, and they continue to engage with us in conversations and negotiations. So we are not going to close everything we are looking at. That's for sure. Not only because of price considerations, but potentially due diligence considerations. I mean, we are being very careful about what we acquire where.

And I think there is a general sense that people -- that companies are not going to get the big multiples that once were available, and that they need to be part of -- and it's beneficial to be part of something like Comfort Systems.

Okay, guys. Thanks for the answers. I appreciate it.

Rich Wesolowski, Sidoti & Company.

(Technical difficulty) the composition of your backlog begun to change within the market sectors?

I think the first part of your question was cut off. But as far as the composition of backlog, it is skewing towards -- absolutely skewing towards institutionals. Certainly seeing more health, education and government as a proportion of that backlog, because new bookings are much weaker in the commercial/industrial side.

I saw the average project size was up considerably from the last couple of quarters, which runs counter to what you have been forecasting. Is there anything to be gleaned from that?

I think it is what Bill said about these institutional projects. We've picked up some fairly substantial military work, for instance, work on military posts, bases. Those tend to be large. And we've executed well on those in the past, and I think we will continue to. Schools, hospitals tend to be larger projects than a lot of our -- a lot of the commercial projects.

Some of that may also be this thing we've talked about, which is there is more of a return to traditional seasonal patterns. There are less ongoing projects in the first quarter. But the big ones, obviously, since they are multiyear, are always with us. So --

But I agree with Bill. I do think that is going to be -- we -- for a while, our project size was coming down as we were getting out of multi-family projects. Because they tend to be large, so we had this trend. Now, the question is, as we move more into a higher proportion of institutional work, will that also -- will that create a counter trend towards larger project size. And I think there is a chance that it will.

Makes sense. Setting aside the operational, financial improvements Comfort has made during the last few years, would you say the industry downturn is going to be more or less severe than the one earlier this decade?

I would go with Dodge on that. And if you were to go with Dodge -- literally, if you were to set Dodge next to each other, you would say the amplitude -- the difference between the top, the preceding top and where you get, may be similar. But it is dropping in a much more compressed period of time. Whereas you had three consecutive years after 2001 of double-digit teens decreases, right now you have a high teens decrease this year, protected by Dodge.

I think you may not see -- I don't know whether it will be as steep a drop-off. I think it might be. But it seems to be more compressed, in a more compressed period of time, as far as -- at least if you look at sort of what the industry sources are showing right now.

It is a very tough question, Rich, as you know. And I'd love to hear your answer about that. But we were at hyper levels back in the late '90s and 2000. And there is a stimulus program in place that -- as well, right now.

Well, that was the next question. How do you weigh the positive effect of the stimulus against the macro backdrop that is going the other way?

I think the safest thing that you can say is it is certainly not hurt -- it certainly won't hurt. I can't make a mathematical calculation, especially as it might come down to us. But I think we are starting to see some real things.

The GSA's got $5.5 billion to spend on US government facilities. The states have got allocations of $145 billion. That money has to be -- the spending of it has to be identified in fairly -- half the spending of it has to be identified within the next hundred days or so. And a lot of it is going horizontal construction, roads, bridges and tunnels. I will agree. But we are seeing some of that already. But it is not a silver bullet that solves everybody's problems. The economy is weaker than it was.

Lastly, as I look at the early indications from the road building and the pricing is exceptionally tight for the new stimulus money, the volume of work is up and the margins look like they are down. Can you weigh in on what aspects of their business maybe offer some barriers or keep competitors out, and which ones, conversely, you expect to see a lot more bidders than you have in the past?

Well, we like to think our business is a little more sophisticated than slip-paving I-95. So that is one aspect of it. And we are, as you well know, don't compete down at the very low end in the commercial and institutional and industrial sector, nor do we do the mega projects. So we are focused on projects that take a certain degree of sophistication, design engineering, technical expertise etc. And I think insulates us. You combine that with our capability to bond things, and we could come off -- could come off -- we will get more than our fair share.

Excellent. Thanks.

Clint Fendley, Davenport.

Good morning, guys. I wondered -- you commented briefly on your expectations for a normalized seasonal pattern that you are expecting for this year. I wondered if you could provide a bit more color on that.

Historically, our seasonality was as follows. We had, by a noticeable margin, the lowest revenues of the year in the first quarter. And profitability, historically, has been really half of other quarters on average, historically. Not that I expect that to be this year, because we have developing weakness. But if you were to go back past the last two years and look at the eight prior years, you would see considerable earnings weakness in the first quarter, as well. And then you would see also decent earnings as margins in the fourth quarter, but noticeably lower revenues in the fourth quarter. The two strongest quarters of the year being the second and third quarter, the third being slightly stronger than the second. So sort of your typical sort of seasonality that you see and work that is done -- that is subject to weather sometimes.

Okay. Thanks. That's helpful. And then also, I know Brian mentioned a bit earlier on some of the workforce reductions. Are there any other additional levers on SG&A that we could think about moving forward here?

One obvious one is incentive compensation. In this industry, the people who work in this industry have for decades -- they understand that over a period of decades, they make less money in downturns and they make more money in upturns. That is part of the culture.

A lot of our compensation for some very, very highly paid people over a long period of time, a lot of that compensation is incentive-driven. It's driven off mathematical calculations relating to profitability above certain thresholds. And so that scales pretty readily with profits. So that is an obvious one.

Okay, great. Thank you, guys.

Tahira Afzal, KeyBanc.

Good afternoon or morning, gentlemen. Just a couple of questions. Number one, can you provide some color on how your maintenance services side of the business is holding out versus the construction side?

Yes, we have had really good results in the maintenance side of the business. As you know, over the last few years, we have spent a significant amount of investment in shoring up that side of the business. I think the quarter 1, as I stated, we had the largest percentage of our business on the maintenance side of the business.

The key to the service business is growing the maintenance base, and we've been doing that every quarter. So we still are full throttle on the service side of the business, and that should continue to progress throughout the rest of the year.

And if you look at the margins in that business, would that also be holding out better, I assume? And should I assume that could even be flat in that area?

Margins, particularly during downturns, are better on the maintenance side of the business. There is price effect on the maintenance side, but it is much, much less than you will see in construction project work.

Got it. Okay. And the replacement side of the business, how is that compared to the services and new construction in terms of what you are seeing?

I would love to jump in here, because it gives me a chance to talk about my favorite subject, and that is energy efficiency. I think people have got the word, Tahira, that they can improve their HVAC mechanical systems in order to save electric energy, and they are, indeed doing that. So that drives a lot of our replacement effort. And as you know, we have a substantial effort in that area. It works best, I will say, where there is a heavy load, both heating and air-conditioning, and where there are high electric rates. So that is the northeast, for instance, and I think we are making good progress.

Got it. And do you think this current administration's push towards getting -- on the public side, obviously, there is money flowing in to make everything more energy efficient. But do you think there will be sort of a trickle-in effect, greater awareness on the private side going forward?

We think so. It comes -- it is coming more slowly than I would have hoped. There is certainly a lot of momentum on the public side. You don't look at a schools project or a military project or a GSA project without some increment of energy savings being talked about and being focused on.

And I think that the private sector comes along here. We've got a current dip in overall energy prices, which does affect electric power rates some, for sure, especially natural gas prices. But the underlying cost of electric power is not going to go down.

Right. So it seems like even though energy costs might be dissipating as in oil and gas, yet the electrical rates that utilities and public commissions seem to be suggesting going forward seem like they are going to continue to tick up. I guess that would help in terms of a secular trend on the retrofit side.

Yes.

Got it. And last question, and I guess a little more tricky one. If you are looking at the credit market stabilizing, and you look at your business, how far behind do you see your business lagging the credit market stabilizing?

I would say, first of all, I don't believe the credit markets have stabilized, so I just --. But I think that if they were to stabilize between now and late summer, I think that could be very good for us. Because a lot of people are continuing to work on projects. Our estimating activity and our work preparation activity is actually as busy or busier than usual. A lot of people aren't pulling the trigger, but I think there are people who understand this is a really good time to build.

Even on the commercial side, setting aside companies that got involved with private equity and leveraged buyouts, which is a small percentage, balance sheets are very strong. So if you have any construction needs in the near-term, there are a lot of people who are scratching their heads and realizing this is a special opportunity. And some of that interest was pent up over the last couple of years as costs just went through the roof for various commodities, labor, etc.

So I actually don't think there will be -- I think we will recover more quickly than the length of the lag, simply because we are late in the process. And the planning processes get gummed up immediately. But to some extent, that can be made up. And frankly, people seem to be continuing to invest in planning processes related to construction. They just seem to be not quite as ready to pull the trigger and dig holes.

So it seems pretty interesting then, because it seems that perhaps going into the downcycle, there was pent-up demand, which might not have been there in the last cycle. So maybe we should not be necessarily looking at the last cycle, do you think?

I think we are in a much, much better place, for the simple reason that we sort of missed the recovery. After 9/11, on the residential and consumer side of markets, there were three or four unbelievably good years, and we didn't join that party until near the end. And so going into the current recession, we actually started -- at the outset of the recession, we started with office vacancy rates below their ten-year average, with hotel occupancy the highest it has ever been.

With a lot of the traditional measures, which normally are overbuilt at the outset of a recession -- in fact, that is often the cause of the recession -- a lot of those markers were actually pointing the other direction. I think we might have missed this recession if it hadn't been a financing-led recession. The fact that it is this special kind of unprecedented kind of recession means we are in the soup with everybody else. But I really do believe that the recovery -- there are factors that could make the recovery much, much better than usual when it comes.

That's very helpful. Thank you very much.

David Yuschak, SMH Capital.

Bill, George, amen to your comments, because I think 9/11 did a heck of a lot more damage to the industry and gave the housing industry a chance for a bubble. But that's my say on it.

But looking at the quarter, pleased that you guys beat our estimates. Also pleased, because the EBIT margin continues to perform exceptionally well, despite the severity of the decline. Which leads me to, when, Bill, you said 4% at the low end of that range. When you've executed so well into this recovery and were also well deep into the recession, how could we get to a level that is that low when you've executed so well, unless you are saying the business you are booking has margins less than what you've been achieving, when in fact you've said you don't go after low-margin business. Is that a lot to be said for -- or did I say too much?

You put all the positive assumptions in the same sentence, and unfortunately, the world doesn't work that way. We do have operations in certain markets that are stretching for business. It just isn't -- being specific, Phoenix is a very difficult market. It was way overheated. It has fallen off rapidly. And as you know, Phoenix is one of our largest operations.

And there are some others, like the upper Midwest is the dog's breakfast here. Let's admit it. Although we are doing very well in certain parts of the Midwest, mostly by virtue of institutional work.

So where you have that and you want to hold yourself together so that you can participate in a return to normalcy, you are going to suffer some lower margins. It's just [inelectable]. You can just make so many cuts. The next step is closing the door. And we are not going to do that.

No, but I'm just kind of curious though. With -- are you saying the competition for business is that intense right now, the margins at the gross? Because, again, this is your second best gross margin quarter in the last -- what -- eight years. How long have I known you? This is the second best compared to what you produced in the fourth quarter. Gross margins are still holding up. Is there going to be that much weakness in the gross margin because of what you are bidding?

As Bill George alluded -- not alluded, he mentioned -- some of that is skewed by some very high margins that were realized on some projects that closed out in the first quarter, especially in our spectacularly performing Florida operation, Central Florida operation. So it is a bit skewed by that. I think the net is what is important, too. The gross margins are interesting, of course.

That's why I'm just kind of curious there. What seems to be happening in your firm, there is a balance where maybe a Phoenix was performing well, another part wasn't. This time around, Florida's performing well; another one --. It speaks to, I think, maybe what you see as a non-residential construction market business is that while one area may be weak, another area may be soft or strong, the net is there's good balance in the overall non-residential construction market. That while pockets may move around, they generally are net-net favorable to a company like you.

It's sort of -- it's like a tale of two cities for us for the next quarter or two. We are just deep, deep into and finishing some work that was priced at just really the best time to price work in the last five years. And so we certainly get a benefit from that.

But when we say that we expect weakness to develop over the course of the year, but we still expect to be solidly profitable, I think there is a recognition in that that across-the-board pricing is just -- you can't sustain what you were able to accomplish over the last couple of years. And we do -- when we say we have bid -- we are being careful what we take, we mean we are not trying to lose money, but what we don't mean is we can continue to do exactly what we were doing in the best of times.

Okay. Then let's go back to just some of the overall views of the market, because you said you have been seeing some pleasant surprises someplace maybe to offset some of --. Give us a view as to, both geographically what things you are seeing happening as far as positives versus negatives. Vertical markets, I think you touched a little bit on, how the institutional markets seem to be dominating, as well as maybe any sense as to what is happening in market share because of the balance sheet. Could you just kind of give us a quick review there?

Well, and anybody can jump in on this. But a lot of it is -- I would compare it with what Brian said in his remarks. We are seeing very, very noticeable weakness out west, with the exception of Denver. A lot of those markets, they are really facing difficult conditions as far as filling their project books.

If you get into the Southeast, many of our companies in the Southeast are doing pretty well. We have a surprising number of companies that are at or near record backlog, and there are specific examples of bookings that are pretty good across the Southeast. Not as good as six months or a year ago, though.

And then in the Northeast, we have a lot of really, really good -- I guess I would almost use the word franchises in the Northeast. We are in cities where we have a very, very strong position. There are markets that -- they are mature in some sense, so there is always replacement work. And we seem to do be doing pretty well up there.

And in a few particular instances, for example, in Syracuse, we have some people who are just getting some amazing traction on some institutional work, where they can use not only their resources, but sometimes the resources of other companies nearby, and that is a great advantage.

Still, when we talk about that, I end up on the positive, but I do want to just reiterate, we are -- we will see developing weakness through this year. We will be solidly profitable. We are very -- we were solidly profitable in 2007. It was our best year ever at the time. If we did that today, it would be considered a horrible drop-off. But we are pretty happy with what we are seeing, experiencing.

You guys are a totally different company than the one you were during the 9/11 recession, though, too.

I'm just going back as far as 2007, though. That is not --.

Yes, but I'm just saying --

We've come into this thing much, much stronger, much more productive, etc.

Listen, I've spent too much time on here already. Let me turn it over to somebody else.

Let me just say one thing. I don't believe we are going back to the levels we saw after 9/11. We were shutting companies down at the time. We were -- actually, our ongoing operations, many of them, were just as good then as they are now or just about as good, but we had a lot of very serious problems we were dealing with. So I agree with that last premise.

[Josh Rosen], (inaudible).

Hi, guys. I got on late. I'm not sure if you mentioned this. But how much incremental operating cost savings are coming out of the business that weren't apparent in this quarter?

I'm not sure -- do you understand the question?

Well, if you are talking about SG&A, you know an awful lot -- we are an interesting business. We don't have premises, and we don't have -- our workers show up at somebody else's premises to do the work. Almost all of our materials are directly delivered to the job site. So an enormous proportion of our variable costs, even more than almost any other kind of business, are human beings.

We have certainly taken a hard look at our costs top to bottom. We are reducing SG&A. It is frequently the case that in a place where the size of the company is declining and people are leaving, they actually cost more in the quarter they leave the company than they would have cost if you had kept them, because there are severance costs and other things.

So there is some lag -- I alluded to some lag in SG&A reduction. So on that side, to some extent, I think you're seeing that, and you will see some of that become more apparent as the year goes on.

And did you say how many people are leaving, or did you give any indication of what that could be?

I think Brian mentioned that our headcount year-over-year is down 13%, and quarter-over-quarter down 4%. Of course, we don't have a breakout between field and office for that.

Okay, and can you talk a bit about the surety market and how it is -- how much of a head wind it is for you guys?

The surety market is an enormous advantage for us, because whenever it gets tough for everybody else, since we have no debt and we have $100 million and we have many, many years of proving to our surety -- even in our worst times, our sureties never got very worried. So that is actually a net benefit to us. Hard surety markets are when we have a relative advantage.

Now, surety markets right now, I would say that surety continues to price itself to make money, which they've done now for a couple of years there. But surety is generally available to anyone who has an established track record and has a decent balance sheet. Probably the biggest advantage to surety at a time like this is it is severely constrains new entry, guys who get very hungry in the sectors they are in and would like to come into our sector.

They are in particular blocked from heading into, like, institutional work, because a lot of that work is bonded, and by golly, bonding companies, they've been burned before. They've been burned very, very badly in the last several years. And that is probably another way it is a net advantage for us.

Okay. Thank you very much.

John Rogers, D.A. Davidson.

Good morning. A couple of things just to follow up on. In terms of ex acquisitions, capital spending this year continuing at the first-quarter rates or does it drop off or does it move with the top line?

Capital spending this year will be much less than it has been the last few years. We've gotten as low as just a couple million dollars a year at times. Because an awful lot of what we spend our capital on is sort of intermediate type equipment that, frankly, some of it is sitting in storage during a recession. You buy a lot of it when you are taking on incremental business, and a lot of it is sitting in storage.

The other big thing that we spend money is vehicles. Our vehicle spend has exaggerated our CapEx for the last few years. Historically, our CapEx is about $8 million, $8 million to $10 million in good years, and maybe $2 million to $5 million in slow years. It has been higher because a couple years ago we switched from leasing all of our vehicles to buying all of them, simply because we had a balance sheet that suggested that the return on doing that would be good and we could always lease -- do a sale-leaseback if ever we decided we wanted to change that. So our CapEx is higher than it has been. It's in the process of re-normalizing, based on purchasing vehicles.

Okay. So the current run rate -- or the quarter is probably not a good run rate? First quarter?

You know, it is too soon to tell. I think you will see very, very low CapEx for the full year. Certainly, I would be very surprised to see it over $5 million. I would be very surprised. And I could imagine it being much less.

Okay. And a couple of other things. Bill, you talked about lower commodity prices and what you're seeing there. Tell me, how does that run -- are you seeing -- when are you seeing those prices stabilize from your point of view?

The answer is yes. The unfortunate thing about commodity prices is that the decreases are enjoyed by everyone.

Right.

So it doesn't give us a competitive advantage. It does cause developers to go ahead with things sometimes when they otherwise might not.

Especially -- I guess I'm thinking if they don't expect them to drop further.

Yes, and I was -- copper is a very important commodity material to us, and it is at $2 versus $4 a pound. It was $4 six, eight months ago. I would have a hard time thinking it could go much lower. But you're right -- people want to see the -- get to the very bottom before they are really encouraged.

I -- but I don't think that is the driver in decisions. I don't think hoping commodity prices will go lower is necessarily the driver in many decisions to go ahead on projects right now. It is so much more overwhelmingly financial.

Okay. Then just in terms of the market and what you're seeing out there, one, the OEMs, how are they reacting, especially on the maintenance side of this? Are they pushing into the market, pulling back?

They are -- I don't know if they are pushing any harder into the market than we've noticed before. They service their own equipment. They tend to get very well paid for that, or they attempt to get well paid. And we can come in under them many times, and we still remain very agnostic about what kind of equipment we design in, install and service. So we can do anything.

I don't -- it is always a concern that they cream off the best of the maintenance business, for instance. But we are not seeing that much. And they are not everywhere. And we fill in all the cracks, and we indeed work for them. They hire us.

But I know some times in past downturns in various areas, you've seen some of the OEMs try to stabilize their business by talking about expanding their service side.

Yes, they have, and they expand it through their distributorships and dealerships and that sort of thing. And they don't have -- not real good control and that sort of thing.

So it is always there, Jon. You're absolutely right. But we are not seeing a big impact.

Okay, no acquisitions or anything like that?

Not that we've noticed.

Okay. And then lastly, you guys gave (inaudible) useful comments in terms of geography what you were seeing. But -- and you mentioned the institutional market, I know. But can you say anything about the types of customers or more the specific end markets that are either up or down particularly? Just curious what your sense of it is.

Schools, both public and private, but certainly public is the real, more rapidly growing area. The military work, hospitals. We continue to tear down and/or renovate the old hospital structures into more modern, technology-centric kinds of hospitals, and we're involved in that. I mean, we're doing a spectacular project right now at Walter Reed in Washington. We are basically redoing the ICUs with -- because they are technologically or technically so far out of whack with what is available and what can be done. So we'll see that continue.

And on the private side?

Well, that's a different story. There's not a lot of hotel building. I happen to think that multi-family comes back here. Our population is increasing. There are people being added to the cohort of people who live outside their parents' homes. And they are going to live somewhere. And buying and paying for, which as you know from past experience here in the residential area, is a different thing -- is not possible for a lot of people. They are concerned about whether they have jobs, etc. So they rent. And I think that the apartment developers catch on -- not catch on, hell, they know about it. I think they start doing something about it. Again --.

But you haven't seen that yet?

Not yet, no. It is a financing situation. Even very good potential projects don't get financed, because it just isn't financed.

Okay, thank you. I appreciate the help.

Rich Wesolowski, Sidoti & Company.

Just looking for a quick update on the backlog of completed Atlas jobs that you were negotiating with the owners, if there was any progress on that or if there is anything left.

No, I would say that because the first quarter comes so soon after the year-end, it has only been a few weeks, and nothing has changed. We feel very comfortable with the level of our accruals. We think we are in the right place, but nothing has changed.

Great. Thank you.

David Yuschak, SMH Capital.

Bill, you traditionally have never had much of an exposure in the military work, have you, in the past?

Not as much as we have today. But I don't want to be -- I don't want to emphasize this too much. We have work on military post camp (inaudible), but it is not a huge chunk of our business. I honestly don't have a pure -- because we lump it together with other government's work, and I don't exactly -- I don't have a number for you, Dave, as to what is --.

Would you expect, given some of the comments coming out of the administration, that retrofitting government will at least maybe grow that business?

Oh, yes. Absolutely, and the appropriations for transformation of the military forces, Army, Navy, Air Force, have been made in the past, and that money -- it is there to be spent, and we are seeing a lot of that roll out.

Well, one of the things you've done here in the last several years is take an other category and see it grow nicely. That's why I was just kind of curious how large military was, because I didn't think it was that big a deal.

As far as the service business is concerned, you've always talked about wanting to grow that more meaningfully, and particularly in a slowdown like this, it gives you some opportunities to focus on service. Are you guys doing anything specifically now to try to growth that in both absolute terms, as well as relative? And what particular things do you see as maybe opportunities to get you on your goals to be able to grow that as a percentage of sales on a sustained basis?

David, Brian Lane here. What we have in place, we have a structure throughout the country where we have a Senior Vice President of Service -- her name is Kim Carter -- and we have two vice presidents working with her that are working with each of our organizations. We are heavily focused on allowing them to improve their processes operationally and do an extensive amount of work on the sales and training side.

We have really amped up over the last few years our service sales force and our ability to penetrate more of the market. And we are continuing to do that. We are also opening satellite offices, etc., in various parts of the country.

So our service push is still very robust at the moment.

You mean as far as the investment or some of the successes you are seeing from it?

I think both.

Okay.

I'd add to that, Dave, we've put tools in the hands of our people, such as energy analysis tools. We can go into a customer and show them, with a tool, plug in these factors, these parameters, and we can show you what savings might come out of a retrofit, which we classify, as you know, as part of our service activity.

Additionally, we have a leasing program going on with a bank who has nationwide capability to help us lease, where an end-user can, in effect, finance a retrofit or a large -- or a project where he is replacing equipment. And those are tools which help time to time, help a lot. And we are going to continue them and trying to get nationwide usage of them.

And then one last question. With the backlog generally burning within about a year or so, your ability to manage costs and revenues are pretty good. As you look at the current bidding environment, what things do you take a look at as far as accepting the competitive nature of the business? Where do you kind of draw the line on a go or no go on a project in the competitive environment?

You know, I've heard people answer that by saying, well, at this percent projected gross or net. That is not the right answer. Because different -- projects represent different degrees of risk. If there is a lot of equipment, for instance, that is less risk than something where there is a huge increment of labor. If it is a well, hard-designed project and the conditions for working are reasonable, that is a hell of a lot less risky than something that is, well, we'll just move along through this, and working conditions might change, etc.

So we are selective in our projects. But it is done in an intelligent way. We know of a company that -- not one of our companies, but another company, that said, no more schools work. Too low margin. Well, we've done very, very, very well in the schools business, even to the extent of getting involved with school districts on a design build basis, where it is not hard bid spec stuff. We are actually value adding value engineering for that school district.

So it is a complex answer. I think we do have the disciplines in place, and we are sophisticated and smart about doing that. Because if we just said, okay, here is the X margin, you can't do anything, it just would limit our activities beyond the necessary.

So are you saying that some of the success you've had in EBIT margin is really risk management then?

Yes, I guess that is the new management term.

Absolutely.

Or put another way, contracting.

Is that what you guys do, contracting?

Just started.

Okay, that's all I've got for now.

Okay, thank you. Good questions.

I would now like to turn the call back over to Mr. Bill Murdy for closing remarks. Please proceed, sir.

Okay. My closing remarks are simply to thank everybody who is on the call, and that Comfort Systems is in good shape. And we, as I mentioned before, continue to expect solid profitability and good cash flow going forward through 2009. Thanks very much.

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