Comfort Systems USA Inc (FIX) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Q4 2015 Comfort Systems USA Earnings Conference Call. My name is Chris, and I'll be your conference moderator for today. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. And at this time, I would now like to turn the conference over to your host for today, Ms. Julie Shaeff, Chief Accounting Officer. Ma'am, you may proceed.

Thanks, Chris. Good morning. Welcome to Comfort Systems USA's fourth 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 will say today 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 most recent Form 10-K, as well as in our press release covering these earnings. A slide presentation has been posted on the Investor Relations section of the Company's website found at www.comfortsystemsusa.com. Unfortunately, the NASDAQ service we use have been experiencing technical difficulties this morning, so the slides may not be available until later today.

Joining with me on the call today is Brian Lane, our President and Chief Executive Officer; and Bill George, our Chief Financial Officer. Brian will open our remarks.

Thanks, Julie. Good morning, everyone, and thank you for joining us. I would like to start by thanking all of the Comfort Systems USA employees for their continued hard work and commitment.

Today I am pleased to report record fourth quarter and full-year results. Both our full-year and fourth quarter revenue were up in 2015, and for the full-year our revenue was $1.6 billion. 2015 was a fantastic year thanks for great performance from our operating teams. We earned $0.35 per share in the fourth quarter as compared to $0.29 per share in the fourth quarter last year. For the full-year EPS was a $1.30, which is more than doubled with $0.61 we earned a year ago. Backlog at the end of the fourth quarter of 2015 was $712 million, up 7% sequentially.

Full-year free cash flow $78 million - our best ever; and compares to $25 million of free cash flow in 2014. We have now had positive free cash flow for 17 consecutive years.

Since the beginning of 2016, we have closed two important transactions. As you know, Environmental Air Systems, or EAS, has been a great contributor, and effect of January 1, we acquired the remaining 40% interest in EAS. We also recently acquired the ShoffnerKalthoff Family of Companies, a well-established regional mechanical contractor based in Knoxville, Tennessee. Shoffner's strong team will strengthen our market leadership and customer offerings throughout the Southeast and Mid-Atlantic markets. We welcome Shoffner's employees to Comfort Systems, and we look forward to building a strong and successful future together.

This week we also increased and extended our credit facility. This amended agreement strengthens Comfort Systems and provides additional flexibility to reward our shareholders and invest in future growth.

I will describe industry conditions in our outlook in more detail in a few minutes, but before that, let me turn this call over to Bill to review our financial performance.

Thanks, Brian. You can refer to Slide 2 through 6, as I describe our fourth quarter and full-year results.

Revenue this quarter was $384 million, an increase of $27 million, or 8%, compared to the fourth quarter of 2014. Revenue for all of 2015 was $1.58 billion, which represents an increase of $170 million over last year. On a same-store basis, full-year revenue increased an 11% compared to 2014. While approximately 40% of this full-year increase resulted from a high level of profitable project activity in Environmental Air Systems, the impact of this subsidiary was less pronounced in the fourth quarter of this year because they had already started ramping up by the fourth quarter of 2014.

Gross profit was 21.9% for the fourth quarter of 2015, and this was an improvement from the 19.4% we achieved in the fourth quarter of 2014. For the 12 months period, gross profit increase from 17.7% in 2014 to 20.1% in 2015. The increase was driven by broad-based improvement at a majority of our locations, combined with improved results from our Southern California operation, which negatively impacted our results in the first nine months of 2014.

SG&A expense was $60 million for the fourth quarter of 2015, which represented an increase of $5.5 million compared to the fourth quarter of 2014. SG&A as a percentage of revenue was 15.6% in the current quarter, which compares to 15.3% in the fourth quarter of 2014. The increase is a result of increased compensation accruals as a result of vastly improved results and also reflects expanded service activities. For the full-year, SG&A as a percentage of revenue decreased from 14.7% in 2014 to 14.5% in 2015.

Our 2015 tax rate was 35.2% with a continued benefit from the strong performance at EAS, as the 40% minority interest is treated as a partnership for tax purposes. As a reminder, our full-year tax rate for 2014 was 28.9%, and that even lower rate within large part due to a combination of proportionally tie profitability at EAS, plus important reductions in our valuation allowances.

Since we purchased the remaining 40% interest in EAS at the beginning of 2016, and we will now pay taxes on all of EAS's earnings, we expect our full-year tax rates to return to their long-term average range of 38% to 40%.

Net income for the fourth quarter was $13.2 million, or $0.35 per share, compared to $10.7 million, or $0.29 per share last year. As mentioned, we had an unusually low tax rate in 2014 and if you remove the impact of these reductions in our valuation allowance, we are $0.21 in the fourth quarter of the prior year. For the full-year, earnings per share increased from $0.61 per share in 2014 to a $1.30 per share in 2015.

We once again had very strong free cash flow during the quarter. For the quarter, our free cash flow was $18.1 million, and for the full-year our free cash flow was remarkable and unprecedented $78.4 million, which compares to $24.7 million for 2014. We're continuing to deploy our discretionary cash flow and ways that add value for our shareholders. Acquisitions are an important component of our strategy, and the acquisitions that we made during the recession have been strong contributors to our performance in 2015.

As we previously announced, we acquired the remaining 40% interest in EAS on January 1 of 2016. EAS was our most profitable subsidiary in 2015. EAS' 2016 earnings are also expected to be very strong, although not as exceptional as 2015 earnings. However, despite the expected lower profit contribution in 2016 from EAS, the result of this transaction will allow Comfort Systems to see relatively consist earnings per share contribution from this operation as a result of eliminating the minority position.

We also recently acquired the ShoffnerKalthoff Family of Companies. These companies are expected to contribute annualized revenues of approximately $70 million, at a profitability levels that are generally comparable to our other companies. The acquisition closed on the 1 February, so we will own Shoffner for 11 months in 2016. In light of the required amortization expense related due intangible backlog and other costs that are associated with the transaction, the acquisition is expected to make a neutral to slightly accretive contribution to earnings per share during the first 12 to 18 months after acquisition.

During 2015 we purchased 300,000 of our shares in an average price of $26.36. Since we began our stock repurchase program in 2007, we have bought back 6.9 million shares.

These repurchases were a major contributor to per share results in 2015.

Finally, earlier this week we amended our credit agreement to increase it from $250 million to $325 million. And to extend the maturity to five years with the facility now set to expire in February 2021. The terms and conditions are substantially similar to, or improved from the prior agreement, with the continuation of great pricing to very reasonable covenants, additional acquisition flexibility and improvement in our ability to return money to our shareholders with dividends and buybacks.

As a result of the acquisitions I mentioned, we currently have around $60 million of borrowings under this agreement, and as of today, the interest rate we are paying on our borrowings is approximately 1.7%. Our interest expense also includes the amortization of fees and costs and fees relating to unused capacity and fees providers of credit that support our insurance arrangements.

Overall, our earnings in cash flow in 2015 were remarkable. Industry conditions improved in 2015, and ongoing conditions appear stable to positive. Our emphasis for 2016 will be on execution in growth; based on our backlog and in light of economic conditions for our industry, we expect that revenue and profitability in 2016 will be similar to or above the levels that we experience in 2015.

That's all I have on financials.

Okay, thanks Bill. Let me start with backlog and activity in various sectors in markets. Please refer to slide 7 to 9.

Backlog at yearend was $712 million, an increase of $45 million, or 7%, compared to the third quarter of 2015. This increase was due to our North Carolina, Michigan and Florida operations. Backlog decreased by $46 million compared to the end of 2014. We had a heavier booking season in the fourth quarter of 2014, so the fluctuation in our backlog level was expected. Overall, backlog is solid, pricing is stable with improvement in some markets, and underlying activity levels are solid.

Let me turn to our end-user sectors. The industrial and commercial sectors comprised 64% of our revenues for 2015. Manufacturing represents a third of our 2015 activity, and includes projects and industrial plants, food production facilities, data centers and pharmaceutical projects.

Institutional offers, which include government, healthcare and education, made up 36% of our revenue for 2015. We continue to win of fair share of projects, and overall, we are happy with trends for our work in the various sectors.

Geographically we experienced strong results in most of our markets, with especially notable strength in Wisconsin and North Carolina. The Northeast region, which includes our company's in the upper Midwest remains very strong and continues to be our most profitable region. We've seen improvement in the South and in the Mid-Atlantic. Our operations in the west relatively stable and help our year-over-year improvement. Most of our remaining markets are achieving solid profits and we see signs of strengthening demand in many areas.

Please turn to slide 9 for our current revenue mix. We feel good about our current mix of new construction as 44% of revenue and service, repair and retrofit at 56% of revenue. Our service business have achieved continued strong profitability and growth, and our service maintenance base increased by approximately 10% in 2015. The investments we've made in growing our sales force and building service capabilities over the past few years are our major contributor to improve earnings and growth in 2015, and we believe these investments have positioned us for continued success.

We remain a 100% committed to continuously improving our culture of safety. Our OSHA recordable rate has improved compared to last year and is 26% below the industry average. The most important thing we can do is to get our people home safely at the end of each day.

Our outlook is positive. We have seen industry conditions improve during 2015 and we currently expect these positive trends to continue. As our markets get busier, our challenges shift towards execution and staffing. Fortunately, we have been preparing for these challenges over the past several years by making significant investments in productivity and growth initiatives and especially in training and expanding our workforce.

Our investments have positioned us to take advantage of strengthening demand. Our emphasis for 2016 will continue to be on growth, execution and labor force development. Despite the risk facing and the modestly improving US economy, we are optimistic about our prospects in 2016 and beyond. Before I turn to questions, I want to thank all of our 7,300 team members for their efforts.

I will now turn it back over to Chris for questions. Thank you.

Thank you. (Operator Instructions) Our first question comes from the line of Adam Thalhimer with BB&T Capital Markets. You may proceed.

Brian, you said you're seeing signs of strengthening demand in most areas. I know you don't give guidance, but you did say, Bill, as it relates to 2016, you should be at least equal to revenue and profitability from 2015. It just feels like a conservative statement to make with the acquisitions you've made and then given your kind of end market out commentary.

Right. So, Adam, we're an amazingly tough comparable. At the beginning of this year, our analyst's expectation for the year was $0.78 and we came in at a $1.30. And we had just a fantastic contribution out of Environmental Air Systems. The reason we feel confident we can match or beat, we feel comfortable that that's where we're headed is because we bought the rest of Environmental Air Systems, so even if they go back to just outperforming, as opposed to smashing the ball over the fence, we'll get the same or a better contribution from them because we own the other 40%.

And the problem with the other acquisition, well, it's not a problem but factually, because we have to amortize the backlog, we're not allowed to make money on their backlog the day we buy them, it's just the account rules. So although they don't give much revenue, they can't really make much of a contribution to our earnings per share. You bake all of that together, we're optimistic coming off a great year that we can do that well and better, but I'd say that's where we sit right now, Brian.

I think the peak is a few years away, so I am very optimistic about 2016 both in construction and we're just seeing continued solid growth from the service investments we made and what we're doing there. So, I know you view it as conservative; I think we'll beat it but it'll be incremental.

And then the confident acquisition, do they have service or is part of these acquisitions, you can do these tucks ins and then add the service component to a good existing construction operation?

No, they do have a good solid service department and we're looking forward to working with them to grow out there as well, Adam. But they do have a good service offering.

And then lastly, Brian, when you say that peak is a few years away, I feel like a lot of the non-res companies we follow have been saying the same thing this earnings season, but investors just kind of skeptical given macro concerns. I mean, what end markets do you think will drive growth over the next couple of years, or what kind of customers are you talking to about projects that are still moving forward?

I'll take a first cut at that, Adam. So, industrial is great, and Comfort really changed during the course of the recession; the companies that we bought were more focused on a lot of industrial markets, we think that's going to be just a good area going forward for us. The area that could really create a whole new peak is the area that drove the last expansion, and that's healthcare. Healthcare is the lowest - in 17 years that I've been at Comfort, 18 I guess, I've never seen healthcare is dead stopped as it is now.

And so, we see some signs of life there for the first time. The baby boomers are still getting older, ever growing percentage of the US GDP is being pushed into that area. The private companies in that area that are the most profitable they've ever been. So, we think that's that could be a ripe source, not necessarily in 2016, although maybe beginning in 2016, but really that is what drove the 2008, 2009 expansion, and it's been completely missing this time.

I'll just add, Adam, to that; as you have sharpness in a great industrial area on Knoxville, Tennessee, I think that will be continue strength for us and our healthcare backlog was actually up in the fourth quarter for the first time in a long time. I think healthcare will gradually improve for us.

Next question comes from the line of Joe Mandel with Sidoti & Company. You may proceed.

So the EAS, the acquisition in the minor interest, you are expecting that to be sort of neutral to earnings essentially, is that correct?

I think what it does is it makes it extremely likely that they contribute as much or more earnings as they've done in the past. Now, I will say they were 40% of our same-store revenue increase. They had two gigantic data center jobs going at the same time over the summer last summer; that will not be the case this coming summer. So they will be, actually, they will have lower revenue this year. They'll still be very profitable but they will create a same-store revenue headwind. We think the rest of our company can overcome that but we won't see the same kind of same-store revenue that we got last year.

Having said all that, we think they'll be solidly profitable and the amount that'll make it into our operating income, our net income, our earnings per share from what they do will be as much or greater as we got last year, in light of the fact that we own the whole thing.

And by the way, in this coming year, in the past year and in the year before, in all three of those years they're substantially outperforming what we hoped they would do when we bought them in 2011.

So, in 2011 I think they were doing a little over a $100 million of revenue a year with comparable margins, accounting for - I am assuming that increase substantially since 2011, and even with the pull back from the tough comp and maybe a slight pull back from 2015 accounting for all of that. And then on top of that I don't know how much the amortization regarding the backlog is accounting for all of that. So, are you saying we're not going to see any accretion from that acquisition?

I am saying, compared to the year they had last year, we're confident that we'll get as much or more from them this year. But the only reason we're confident about is we now own a 100% and not 60%. Every now and then a company has a year - and by the way, we're a portfolio of company just like mutual funds are portfolio of stocks. The nice thing for us is, really what was our largest company this past year was also our outlier and we were able by buying the rest of them to take out insurance against the fact that repeating that kind of performance is very, very hard.

I think the answer is, we'll get as much or more from them this year as we got last year, but I want to stress it's because we bought the rest of them you can't add it back twice.

Joe, just let me add on. We have no issues here, this is an outstanding company, it's just that they - 2015 was extraordinary.

Right, I understand. So you're essentially saying the 60% of the portion that you owned last year that will be pulling back from where they were last year to the extent the size of that pull back will be the size of the gain of the 40% that you bought out at the beginning of this year, that's essentially what you're saying?

We're saying it'll at least cover that difference.

In addition to that, in your prepared commentary you mentioned that the backlog in orders were quite strong and you mentioned North Carolina and South Carolina are places of areas of strength. EAS is based in North Carolina and does a lot of the work in that region. So, aside from maybe these couple projects, I imagine EAS is still doing quite well regardless, is that a fair analysis?

Plus we have other companies net area that have strengthened as well, just not EAS.

Right, no I understand that, but I am assuming EAS is still doing quite well.

Absolutely. So, EAS is far out. In 2016 EAS will far outperform what we expected to get from them when we bought them. It's just that they won't do as well as they did last year. And by the way, I hope they proved me wrong on that, but I would say if they do, it'll be pretty remarkable.

Okay. In regard to the gross margin overall, the 20% that you saw in 2015, what are your sort of feelings on that level or that bar going in the 2016; do you think there is a possibility of hitting that level, or do you think 2015 was so good that it's going to be tough to hit that?

No. I am very confident in our gross margins today, Joe. I think that 20%, I think, will be around that, [we'll be on the putting green] for that number. I think a lot of it has to do, we're having good execution and the service component continues to grow as part of our business, which as a higher margin of business as you know, higher margins in construction, as you know. So I think a combination of those, I think both Bill and I are very confident that we'll be around that 20% number.

In the past, that number seen unattainable for us, but that was in a world where we were 55% or 60% of our work was in new construction. And then this world 55% of our work is an existing building. So, it has a little higher SG&A, but definitely higher gross margin. The one thing that could drive our gross margins lower would actually be good news; it would be new construction wakes up, which had, I think we get great pricing in that, but we wouldn't get gross margins like we get on our blended book of business today.

Particularly if you get bigger jobs, right? (Inaudible).

More than the revenues to pass through. So, it's going to be that good or if it's not, you should be happy it's not because the bottom-line will get even better.

But, Joe, we feel good about the 20% right now.

And in regard to pricing, Brian, how does the pricing environment feel for the industry; it seems like as we got towards the end of 2015, it seemed like you were maybe starting to get maybe a little optimistic that we were going to get some pricing in 2016. What are your thoughts on pricing for the industry overall?

So far so good. I mean, this year the stuff that we're bidding, margins are - as I said in our remarks are either stable or improving. So we can see in that trend and it's pretty broad based.

And just to go back to the EAS, I just wanted to clarify; was there a part of 2015 that was stronger for EAS than other parts of the year? Was it the first half or the back half?

Listen carefully to this answer just because it's a little bit - they were very, very, very steady throughout the entire year. However, they had already gotten good in the fourth quarter of 2014. So the answer is, no, there wasn't a part that was better, but they drove much more of the incremental change in the first nine months than in the fourth quarter because they had a great fourth quarter in 2014.

If you took the backlog of EAS and Shoffner, added it to the yearend backlog, what would that number look like?

Well, our EAS's backlog is already all the way in there and I don't have Shoffner's backlog at my fingertips, but it's in the tens of millions, I just don't - but it's not some crazy thing. Typically a company of $70 million revenue is going to have backlog that ranges from $20 million to $45 million, and I just don't have that at my fingertips.

But they are in the range of what we consider normal.

So, there will be some non-same-store backlog accretion at the end of the first quarter from buying Shoffner. There won't be any from EAS because they've been consolidated in our numbers already.

And the amortization regarding the backlog, how much is that going to be for 2016?

I don't have that in my fingertips, but pretty close to what they're going to earn on those particular jobs. Frankly, we won't even know that; we'll be giving all sorts of projections to Deloitte and Touche and they'll be -- I'll know the answer to that in the summer. And even then I won't tell you, Joe.

Lastly, the cash flow was tremendous in 2015 and it seems like it's going to be strong again this year. You have a strong balance sheet; can you talk about the acquisition pipeline and how you're thinking about capital allocation all around for 2016?

For us with acquisitions, nothing really changes; we're always talking to companies that we think ultimately would be a great part of Comfort, and we just don't know when we can get them done. It's a process where we are recruiting people. So, I would say we have companies we'd love to affiliate ourselves with that we're talking to. It is really good times these guys are making a lot of money, and so whether we can get to the right number this year, I don't know.

I would say that we've had prospects for doing more acquisitions this year, we wouldn't hesitate, we think we're well within the range we're still willing to borrow and we'll be paying down the little bit of debt we have pretty quickly. But you know us, we're not going to force acquisitions, we still think overtime we can average the growth that we have in the past through acquisitions.

I like to chime in here for a minute, Joe, on acquisitions; our [philosophy] is the recession, and Bill does all our acquisitions. They've all worked really well, he has done a heck of a job bringing some really quality companies in here that have really helped us today. It's been a real win for us.

And then the rest of sort of capital allocation; last couple of quarters you've been running at $2 million to $3 million a quarter on repurchases. You think given the balance sheet and the cash position, are you going to continue to maintain them or you're going to accelerate that or how you're looking at, I guess, the rest of capital distribution?

So, this past year we bought more than we needed to offset stock issuance, but not buy a lot. I think you'll see - well, at least by this coming year in the ranges that we bought this year. If the price is favorable, and for example, our plan filled itself completely over this last open closed window period. So, we obviously consider the $25 million, $26 million - if the price is favorable we'll buy more. And our new credit agreement gives us a big basket of I think it's published documents, you can look it up, but I think it's $25 million that we can spend on that and on stock buybacks without any ramifications at all in our credit lines and in our future covenant calculations, etcetera.

So, we got a bright future; we think our stock is one of the many compelling opportunities we have for our capital.

And CapEx for 2016, lastly?

I think it will be almost the same as last year.

About $20 million?

About $20 million, that's right.

Well, you may be picking over or under, I'd pick that number.

Yeah, that's a good number to use, Joe.

(Operator Instructions) Our next question comes from the line of Tahira Afzal with KeyBanc. You may proceed.

So, I do have a couple of questions and I'll keep them very macro. If I look at your, you know, how much revenue generated roughly, or how much of backlog is contributed of revenue on average; it's between 45% to 50% for the upcoming year, should we assume something similar you have around $700 million or so in backlog, is anything different about the profile of this particular backlog entry into 2016?

The work has been very similar, the size of jobs has been very typical of what we looked at for the last few years. So, I think you can use the same profile for us that you've used.

And the second question is really in regards to, we've talked about this in the past, Brian; you worked fairly successfully with maybe a couple of large high profile companies on data centers, etcetera. And you are looking to really take that experience and leverage it. Any sort of update over there?

I'll answer that. It's still a fertile area for us. These are big buyers, and so there are - I would say in the past year our companies that did a lot of data centers, in some cases found that the opportunities in places like pharmaceutical were just as good or better, maybe better, right? So I don't know, I would say that's still a great area for us, but it's one of many good areas, so it's very hard to predict - we're going to take the best work we can get. One of the interest things that could happen in the next couple of years is if demand ever started like trending back towards where it was in the 2008 timeframe or the 1999 timeframe, I don't think the capacity exists to do that much work. And so, I think we'd have to go to the highest bidder.

Tahira, if I could just add one to that; I am really happy with our mix of institutional, the industrial that we have right now. It's probably been as good as we've had since I've been here.

Last question, folks, I mean, it looks like the cycle still has trend, but let's suppose it turns the other way tomorrow; how would you spend your money, you've got a lot of bids, you'd see a lot of free cash flow being unwound, positively I hope, where would that money go strategically speaking?

I think it would depend on a lot of things, but if our stock got punished, like if a recession hit hard, which to me doesn't really appear that likely for our positioning, right, with no energy, being a company that does no energy and having sort of the type of industrial work we do. But I think we'd buyback our stock; we're going to be here for a long time, and I will say, the 7 million shares we bought, we bought seven figure amounts in years like the ones you're describing. That's when it makes a lot of sense.

Our last question comes from the line of John Rogers with DA Davidson. You may proceed.

Couple of things. First of all, just on EAS with the transition there; did you retain everybody you wanted to?

Absolutely, and they're committed and they're the best people on the planet. They're just wonderful people - when I go to our national meeting, I've been here since the beginning, what I love is the people that I get to spend time with from all over the country, and these guys fit right in. And they're really (inaudible) we're all, it's a family and we do sometimes work hard to get things done with each other, but at the end of the day we pull together, that's the best thing about this company.

And, John, not only did retain the people we wanted to retain, they brought in some exceptional people as well. This is really a terrific company.

And then, Brian or Bill, you guys have talked about the improvement in the service business and the impact on margins, shifting higher gross, but higher SG&A. But when I look at the year-to-date or full-year revenue activity, I mean the mix hasn't changed; so could you sort of explain that?

So your point is, why did it not trend up over the course of the year?

Why did the margins shift the way they did, and yet the service and maintenance is still 38% same as it was in 2014. I am thinking about as you go forward, and if that service side continues to grow, I mean, what's sort of the margin impact and if we do get an acceleration or if we get an acceleration in new construction growth?

I don't know if you're asking an SG&A question or a margin question, but I will say, let me answer both. SG&A, we're still net investing, we're still spending real money to do things like improve our mobile and really implement and role out - we're not doing as much training, but we're still rolling out heavy CRM. We're still investing in people. And so, I will say in all areas we're heavy on the SG&A for a guy like Brian Lane, but having said that, right now we feel great about it because it's proven that it has a payoff. And I would say that SG&A also this year was affected by really good results; we are paying some higher bonuses, but we expect to have really good results next year, which is why we're not guiding people down.

As far as overall margins go, the reality is margins are better. It's a combination of three things; it's a combination of demand is getting better, the markets are better and that's huge for us. Two, our execution was fantastic this year, it was fantastic the year before except with one exception, but we really think we've been improving this - we, frankly, our companies been improving over the years because of people out in the field being committed. And then three; service issies, with the help of our James Mylett and people all over the Company getting committed to service, it's growing, we made a big investment. You can see it in the maintenance-base numbers, and that's great margin business.

And John, with service, right, it's not only construction where you win a big one and you're off to the races. Strong and steady long-term growth, that's why we love it. Margins are continuing to improve, we're seeing it every quarter, and our productivity and efficiency just keeps getting better, but its nice gradual and it'll continue to do that.

Somebody yesterday asked us, there is other people in your space now talking service, what do you think about? And my answer is, when those people tell you it's going to get worse first and then it's going to get better, that's when you should take them seriously, because it was an investment and we're still net investment it. The nice thing now is it's paying for itself, but you're still going to see dollars in the SG&A line as we invest and trying to do things our competitors can't do.

And I'll tell you, John, without hesitation we do that service investment in New York minute; the quality of people that have come into this organization over the last three years in that sector is extremely impressive.

So the margin improvement that we've seen in 2015, and I know there is a lot of factors there, but how much of that is service versus leverage across the entire organization?

The reason that's a fault dichotomy is even service is helped by demand. The reality is better markets - service has a lot of projects and stuff in it, so it's not like it's, oh, it's the market on the construction side. The reality is, service is also helped by good markets, and those are numbers I couldn't even begin to breakout.

And then, just in terms as you look at the overall backlog and the decline year-over-year, and you've talked about some of the mix issues in projects. How would you assess the margin that's embedded in that backlog?

First of all, John, I am really comfortable with our backlog level at 712, we had three large jobs [you win in] December, I think right now we're in the range, we can execute it well, staff them properly; I am really happy. And the margins - it's a little mixed across the country, but in general it's either stable or improving. We haven't seen it going on at all, so 2016 I am very optimistic if we execute the work, we have to execute it. If we do that we should be fine.

And, Brian, I mean, not to bring up a sore subject, but I mean no prison-type jobs that you had a couple of years ago, I mean, you're comfortable with everything that's there now?

That is all behind us, and I am knocking on wood, John; right now we don't have any significant issues out in the field on projects. And we didn't in 2015, which really helped our performance. I tip my hat to the folks out in the field; they just did an outstanding job of executing the work we have.

We did have a follow-up question, the question comes from the line of Joe Mandel with Sidoti & Company. You may proceed.

So, just to hop on the sort of gross margin question of the backlog, just to ask it a little differently; in terms of the mix of your backlog right now, in terms of sort of profitability into the markets that you're selling into, how does that compare to the strength of the mix that you've seen in the past? I know healthcare is a very strong margin, and that's quite low compared to past backlogs over the last 5 to 10 years. So, are we - in terms of mix, in terms of markets, are we sort of at the bottom in terms of gross margin strength, and if that mix transfers more to sort of healthcare and maybe education, we actually see expansion just on mix alone, or how can you sort of answer that aspect to it?

One thing I do want to say; in the last expansion, healthcare was at the top of the margin food chain because we weren't doing very much industrial. Now that we bought all these industrial companies, I think industrial may [fizz out] or tie probably at the top of that food chain. So, there is kind of mix now versus a year ago, I'd say it's a clone of a year ago, I would say right now if you really look inside our backlog and you'd say okay, what's the sectors, who is got it, where is it, what type of work is it, it's almost a clone of a year ago. But a year ago it was the best it had ever been, I mean, it was fantastic.

And I think healthcare, which it picked up in the fourth quarter, I think it was beginning of a long slow cycle of recovery.

So, in terms of mix, maybe there's not maybe that much upside in terms of mix, but maybe a little bit of healthcare starts to come back?

Right.

Okay. And then in terms of SG&A, I think if we're seeing sort of modest top-line growth, I am guessing your organic SG&A should be somewhat comparable to what we saw in 2015. So, on top of that you have the 40% of EAS and then the acquisition that you just bought, and then on top of that the amortization of intangibles or any amortization of backlog or whatnot; do you have any idea of what that additional SG&A would total for the year?

So the SG&A for the new acquisition will be in the low millions, or mid millions, but I will say, well, it depends if you're talking about quarter for a full-year, right? It's going to be - we run 15% of the company, you could take 15% of [that million] and you'd be pretty close. But I will say, as far as the dollar SG&A for the year I think it'll be very similar next year. The percentage SG&A, that's going to wrap a lot around the revenue for next year, how the revenue trends.

In terms of SG&A being similar to last year, are you talking about even including the 40% EAS and the Shoffner acquisition?

No, EAS is fully baked in, they're already in the 15 number because it's a consolidated entity. Shoffner will be incremental.

So it should be maybe 15% of $70 million, is that ballpark?

Plus the run rate you have for us already.

Like $60 million for last year, and that's way more than guidance than we usually give. But right now it really looks like it's more predictable than usual. As far as SG&A as a percentage, that's less predictable because you got to predict -

But if you use those numbers, Joe, you should be okay.

And then just lastly; so EAS, I was just curious just in terms of growth from, say, the 2012 to 2014 time period, Comfort, as a whole, really didn't seem much organic growth at all in that time period.

Did EAS outperform the Company? I know it has outperformed over the last year or so, was it outperforming the three years before 2015, too?

So, let me answer that with two parts. On revenue, they did about what we expected them to do when we bought them; they were little over a $100 million company, and until the last two years they ticked along at that level. The first two years we owned them - keeping in mind they were the worst two years of the recession and people thought the recession was getting better when we bought them - they had disappointing earnings compared to what we had projected, bought them on. Now, they were profitable, they were a contributor; they gave us cash, we were happy to own them.

By the way, what they did was very similar to what the reset of Comfort Systems did those two years, right, is they performed the way those companies perform in a recession. And they really - after we owned them for two years, so starting the third year back, they started to ramp up. In the last two years they were fantastic and far above what we originally valued them on.

And we have no further questions at this time. I would now like to turn the call over to Mr. Brian Lane for any closing remarks.

All right. Thank you, Chris. Thank you, everyone, for joining the call and your interest in Comfort Systems. 2015 was a phenomenal year and I am very proud of this organization and our terrific people. I am very optimistic that 2016 will deliver very good results as well.

As Bill said, we'll be on the road shortly, we look forward to seeing everyone. Thanks again, I hope you all have a great day.

Ladies and gentlemen, that concludes today's conference. Thank you so much for your participation.