Comfort Systems USA Inc (FIX) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2018 Comfort Systems USA Earnings Conference Call. My name is Emma, and I will be your operator for today. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Julie Shaeff, Chief Accounting Officer. Please go ahead, ma'am.

Thanks, Emma. 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 might cause actual future activities and results of our operations to be materially different from those set forth in our comments. You could read a more detailed listing and commentary concerning our specific risk factors in our most recent Form 10-K as well as in our press release covering these earnings.

A slide presentation will accompany our remarks. The slides are posted on the Investor Relations section of the company's website found at comfortsystemsusa.com.

Joining me on the call today are Brian Lane, President and Chief Executive Officer; and Bill George, Chief Financial Officer.

Brian will open our remarks.

All right. Thanks, Julie. Good morning, everyone, and thank you for joining us on the call today. 2018 was a record year for Comfort Systems USA. Our fourth quarter results provided a strong finish to a great year. Fourth quarter revenue was $588 million and represented a 19% same-store increase from last year. We had strong earnings for both the quarter and the full year. We reported $0.67 per share for the fourth quarter and $3 per share for all of 2018. Full year free cash flow was fantastic at $122 million. Like our earnings and revenue, that was our best ever cash performance.

Our backlog continues to strengthen. Backlog at the end of 2018 was $1.17 billion. We are entering 2019 with $218 million more backlog than we had at the start of 2018. And most of that increase, $199 million, represents same-store backlog growth. Year-over-year, our same-store backlog is up by just over 20%.

2018 was another year of strong execution by our operating teams. And we are, as ever, deeply grateful to our dedicated employees.

Before I turn over to Bill to talk about our results in more detail, I want to take a minute and say how happy I am to announce our agreement to acquire the Walker Engineering companies, a family-owned business that for decades has provided commercial electrical, network, end user, industrial and related services at the highest levels to its clients at all 4 of the major markets of Texas. As many of you know, we have spent the last few years learning more about the electrical business and getting to know many substantial and fantastic businesses and markets that we serve on the same jobs and for the same customers. Even prior to this transaction, we have had electrical contracting embedded in certain of our operations, and there are many ways in which these businesses are complementary to our own. When completed, our agreement to team up with Walker and its great team will provide us with our first fully independent electrical business. We were attracted to Walker because of its people, including its strong top-level leadership and its bench strength at all levels and because of its capability and reputation in the largest and most complex projects that exist in its markets. We can't wait to welcome Walker's employees to Comfort Systems.

Bill will now review some of the specifics of our quarterly and full year performance, and then I will take a few minutes to discuss our outlook. Bill?

Thanks, Brian. Please refer to Slides 2 through 6 as I provide some additional information regarding our financial results.

Fourth quarter revenue increased to $588 million, an increase of $127 million or 28% compared to the fourth quarter of 2017. From the fourth quarter of 2017 through the fourth quarter of 2018, our same-store revenue grew by 19%. Revenue for all of 2018 was $2.18 billion, which represents an increase of $395 million over last year. On a same-store basis, full year 2018 revenue increased 17% compared to 2017. 2018 marked the first time that our revenue has exceeded $2 billion.

I'm going to review the details of our gross profit and SG&A next, but I want to first point out how they relate to each other and to our revenue jumps. Our gross profit percentages for the quarter and for the year are down just slightly from the prior periods. That slight decline was driven by the sharp increases in revenue as larger projects picked up in 2018. That same growth permitted SG&A leverage that far exceeds the mild profit percentage dilution and that SG&A leverage is an important reason why our fourth quarter and full year 2018 pretax profits increased by 32% and 47%, respectively.

Quarterly gross profit increased by $24 million compared to the same quarter last year as we earned $118 million in gross profit in the fourth quarter of 2018 compared to $94 million in the same quarter of 2017. Our gross profit percentages were very strong and are comparable to our unprecedented levels of 2017 even as we achieved strong revenue growth in 2018. Gross profit was 20.1% for the fourth quarter of 2018 compared to 20.3% in the fourth quarter of 2017. For the full year, gross profit was 20.4% in 2018 compared to 20.5% in 2017.

SG&A expense was $80 million for the fourth quarter of 2018 compared to $70 million for the fourth quarter of 2017. The dollar increase in SG&A was a result of our acquisitions and increases in compensation accruals for our growing workforce. We achieved and benefited from significant SG&A leverage in both the quarter and the full year. SG&A as a percentage of revenue was 13.7% in the current quarter compared to 15.2% in the fourth quarter of 2017. For the full year, SG&A as a percentage of revenue was 13.6% compared to 14.9% in 2017.

Our operating income percentage increased from 5.6% in 2017 to 6.9% in 2018.

Our 2018 tax rate was 24.1%. That rate benefited from a discrete tax item in the first quarter of 2018. Excluding this discrete item, our 2018 tax rate would have been 25.9%. Although we substantially benefited from the lower tax rates, it is worth noting that the biggest part of our year-over-year improvements came from improvements in our business.

We earned $25 million in net income in the fourth quarter of 2018, which is $0.67 per share. It's hard to compare those numbers to the fourth quarter of 2017 because that quarter included a $9.5 million noncash expense for the remeasurement of our net deferred tax assets. And as a result, we reported $0.20 per share in the fourth quarter of 2017. Excluding that charge in 2017, we would have earned $0.45 per share. But by any measure, earnings were up substantially. One way to get a sense of that is by looking again at our pretax results. Our pretax income increased by 32% in the fourth quarter of 2018 as compared to the same period in the prior year. For all of 2018, net income was $113 million or $3 per share. The first half of 2018 earnings per share benefited from a discrete tax item of $0.07 and an $0.08 per share gain from a legal settlement. Excluding the tax charges previously discussed and excluding a small goodwill impairment charge, full year adjusted 2017 net income was $65 million or $1.74 per share. However, the comparison was once again complicated by the application of different tax rates to each period. And so in order to understand how the business itself trended, I think it is useful to note that our pretax full year income increased by 47% compared to the prior year, and the vast majority of that increase was same-store improvement.

Cash flow is the most outstanding metric this quarter as we had an amazing free cash flow quarter and a fantastic year. Fourth quarter 2018 free cash flow was $75 million as compared to $30 million in 2017. For the full year, our free cash flow was a remarkable $122 million, and that is our best cash flow ever and it's the first we have ever achieved more than $100 million in free cash flow. We were pleased to also announce another dividend increase this quarter.

During 2018, we purchased 593,000 of our shares at an average price of $48.13, returning 28.5 million to our shareholders this year alone. Since we began our stock repurchase program in 2007, we have bought back 8.2 million shares and returned over 130 million to our shareholders.

Finally, with respect to our Walker acquisition, which we're very excited about, I want to reiterate the information in our press release from last evening. Initially, Walker is expected to contribute annualized revenues of approximately $325 million to $375 million and earnings before interest, taxes, depreciation and amortization of $20 million to $25 million. In light of the required amortization expense related to backlog intangibles and other costs related to the transaction and consistent with other acquisitions in recent years, the acquisition is expected to make a neutral to slightly accretive contribution to earnings per share during the first 18 to 24 months after the acquisition. The primary element that delays earnings accretion once again is amortization of intangibles, especially the fact that we are required to amortize the value of the backlog they are carrying on the date of closing. Although that amortization is a substantial expense, there is no cash outlay since that was already reflected in the purchase price. So although net income is not immediately accretive, other items, such as EBITDA and especially cash flow, are immediately benefited. We currently expect to close Walker on or about April 1, 2019, and it is subject to some customary closing conditions. Anyway, overall, industry conditions and trends remain supportive. Based on our backlog and considering economic conditions, we expect continued strength for our business in 2019.

That's what I've got, Brian.

All right, Bill. Thank you. Let me start with backlog and activity in various sectors and markets. Please refer to Slides 7 to 9.

2018 was a year of outstanding and unprecedented results for Comfort Systems USA. I want to reinforce what Bill said about the effect of the tax law changes. Although the newer tax -- although the new lower tax rates did increase our after-tax earnings, the majority of our improvement was accomplished by the great results achieved by our field workforce and their local leaders. Business levels are good, and our backlog continues to strengthen. Backlog increased by $218 million from 1 year ago from $948 million to $1.17 billion. The year-over-year increase includes $27 million from a stand-alone acquisition, so we are reporting a same-store year-over-year increase of $191 million as I mentioned earlier. That is a little more than 20% same-store growth. Our backlog strength is broad based, and we remain optimistic given the year-over-year increase in bookings.

All of our end-use sectors have good activity. Institutional markets, which include government, health care and education, made up 39% of our revenue for 2018. The commercial sector was 34% of our revenue, and industrial achieved a new peak for us as it represented 27% of our 2018 activity.

Please turn to Slide 9 for our current revenue mix. For 2018, 38% of revenue was from construction projects for new buildings, and 37% of our revenue was construction projects in existing buildings. Our construction business is benefiting from good fundamentals and trends in the nonresidential construction market. We continue to win projects, and most of our locations are reporting strong ongoing prospects. We remain committed to deploy our discretionary cash flow in ways that add value to our shareholders. Our large acquisition announced today is evidence of that commitment. Our latest dividend increase also demonstrates that commitment and opportunistic share repurchases remain important to our strategy. Our carefully paced acquisitions have been a major contributor to our performance in 2018.

We have made, and continue to make, investments in our service business. Service revenue is up over 6% on a year-over-year basis. Our maintenance base continues to grow, and our service business is more profitable than it has ever been.

Finally, our outlook. Our backlog and pricing environment are strong and our ongoing prospects remain strong. We currently expect mid-single-digit full company revenue growth in 2019, excluding our recently announced acquisition. With continued strength in most of our markets and especially as we continue to benefit from our ongoing investments, we are optimistic that 2019 will be another great year.

In closing, I want to again thank our 9,900 employees for their hard work and dedication. I'll now turn it back over to Emma for questions. Thank you.

(Operator Instructions) The first question comes from the line of Tahira Afzal of KeyBanc.

So congrats on Walker, by the way. Seems like a nice acquisition. So first, just speaking to the organic part of the business. Obviously, all the indications that are coming out fully support, Brian, what you've been saying of a very resilient cycle visibility, which is more far-reaching than you've seen in the past. Is it conceivable at this point that as we exit this year and are sitting at this point next year, that you're still seeing a year of organic growth for your business?

Tahira, who knows what's going to happen next year? But as we sit right here, there is still a lot of activity. If you look at the API and you look at Dodge, all very positive. So I think we're pretty optimistic that we're going to get as we -- mid-single-digit growth, we think we're going to get this year, excluding the acquisitions. So we feel good about this year, Tahira. Bill, do you want to?

As far as beyond that goes, there's really nothing indicating weakness. There's really good underlying dynamics for capital investment in the United States where we are, right? There was a long, long period of underinvestment. Projects just came back in that last year. That's after many, many, many years of people not building. So I think it's always hard to predict, but I think you have to be pretty brave to say the United States doesn't need to at least keep investing in its building stock.

Got it. Okay, Bill. And then folks, just on Walker. Brian, you've talked in the past about becoming bigger in electric. Is this the first step? And if you look in the past, when you bought a big company, it served as fundamental source of market intelligence (inaudible) further. So could we see a spate of electric add-ons for you? And is that going to present some countercyclical momentum for you all?

I don't know about the word spate. We don't think of our acquisitions as spates. But we think Walker is fantastic. We've been getting to know electricals for a few years now. There are a lot of really great companies out there that we -- if the time is right for them, we would continue to be -- invest in electrical. Now I will say, we just did a big deal and we're spending a significant amount of money on it. So we're never -- we're not going to go race off and try to consolidate something at high speed. We're just going to get to know people, get conviction that they'd be great members of the team, find out if we can get to a fair price with them. And if they have a logical reason for sell -- to sell, and we're going to make those investments when all of those conditions are met. And the other thing I really want to say is this doesn't mean that we're not still buying mechanical contractors. We still love that business, so.

Tahira, you and I have talked a lot about this. But we like good companies with good people, good customers. And we'll keep looking for those companies, but we'll continue to pursue electricals as we go forward.

Your next question comes from the line of Adam Thalhimer from Thompson Davis.

First, I wanted to dig in on margins. Just get your sense for the trends that we saw in 2018 with gross margins brought down; operating margins, up, good SG&A leverage. Do you think that's roughly how '19 plays out?

So I would say maybe even more so on some of those. The acquisition of Walker, once -- that will not -- they will not start to give revenues to Comfort until second quarter. But they do have lower average margins than Comfort as a whole. So that's going to pull the gross margin down. They do big projects and they have very disciplined SG&A, so I think that gives us an opportunity for our numbers to show SG&A leverage. I took a minute during my script to point out, there's a lot of focus sometimes on gross margin, and it is very important, but it's really the other side of the coin of SG&A leverage. And it's also highly related to what's trending in our revenues. So we had unbelievable gross margins in the 20s for -- and really got well into the 20s for a year or 2, a year or 2 ago. But keep in mind we had no organic growth at that time, right? And so our service was bigger as a percentage. At the end of the day, we just want to make as much money as we can for the amount of risk we take. If we can install a chiller that's 90% of the cost of a project, but the small markup we put on that chiller is risk-free cash for our shareholders, we just want to make as much money as we can. So I think you'll see those trends continue, but it's kind of a high-class problem. It's very easy to pick 1 metric and concentrate on that. And it's very dangerous to do that, either getting too negative or too positive because of it. I think the metrics that include all of -- the metrics that, for me, that I look at and include all of the relevant considerations, the #1 metric by far is cash. The #2 really is earnings per share, although with that, you do have to pay attention to intangibles, amortization because frankly, they hide. They can hide a little bit of what -- well, they can hide a lot of what's going on, frankly.

And then Adam, I just want to jump on one thing. You see -- you look at gross margin, it's really how we execute out in the field. And I got to tell you, we're executing right now at an extremely high level in the field. So we do not have problem work. It's all good work and doing a great job executing it.

Okay, understood. And then, I wanted to get your sense of the Q4 revenue, kind of how that trended versus your expectations. And then as we look out to Q1, over the last 5 years, revenues kind of been flat between Q4 and Q1. But my sense is that you probably would expect a decline between Q4 and Q1?

So I'll comment on the first part of that. We never expect a 19% same-store revenue increase, and that's what we got in the fourth quarter. And for the full year, 17%. You guys know that last year, at this time, we were talking about mid- to high-single digits. We did have a company in North Carolina that had, had -- there was a slow down in North Carolina the year before so they had a really, really favorable comparable. So I don't think you'll -- that they were a very significant part of that outsized revenue performance. I don't think you'll see that again this year at the levels we saw it last year. But our backlog is up 20% year-over-year. Some of that's longer-term backlog, so it won't translate into 20% growth. But we got a lot of work to do.

Yes, and we're very busy right now even in January and February.

Yes. As far as quarter-over-quarter, I don't know. I think yes. I think that with the backlog, it would be logical to expect at least that it wouldn't be flat. But I wouldn't fall off my chair if it was. All we really care about is cash flow and net earnings.

We're fully utilized, Adam.

Your next question comes from the line of Joe Mondillo of Sidoti & Co.

So first, on the Walker deal, congrats on landing that deal. But just in terms of the general guidance that you gave in terms of neutral to slightly accretive, I was wondering if -- are you baking in any sort of debt pay down regarding that guidance?

So that does include -- first of all, that's very general guidance, right? It's not very specific. But it does include a consideration of the interest we'll pay on debt for a little while. We just think -- so the deals we've done in the past, some quarters they've given us -- in the first few quarters after we get them, we have massive amortization of backlog. Essentially, the accounting rules kind of make you hide the money you're making on the backlog that was existing the day you bought them, even though it really still happens in the real world and we still own them while it's happening. But at the end -- and by the way, that amortization runs through the cost of goods sold line. So just FYI. The rest of the amortization, by the way, runs through SG&A, the longer-lived amortization. So those are very important. And there's a table, once you're in the 10-K, that you can look at that gives that, the forward amortization. Obviously, it doesn't include Walker. So I don't know. Those are just the important things I'd point out.

Right. But just to clarify, in terms of that sort of general accretion guidance, you're not baking in any sort of debt pay -- paying back the debt that you're going to use to make this deal? Because you're going to have a good amount of cash flow, and I imagine you're going to be quite aggressive...

You mean reductions in interest because of pay down of debt?

Right, right.

Because we pay it down maybe faster? No. I mean, that's -- it's 4%. We're paying 3% or 4% interest on our revolver. So those numbers don't become very important compared to what they earn and how it compares to what we had to amortize. But no.

Okay. And generally, how long does the backlog amortization, just the amortization related to backlog, last? Is that, like, 18 months or so?

So for most of our deals, it's 12 to 18 months, and it's a sinking pool. So it's a bigger -- actually, for some odd reason, it gets a little bigger like for the first quarter or 2, and then it goes down. So it's not a straight line. But it's usually about 18 months. For Walker, we haven't -- obviously, we're not even closing that deal until April 1, so we haven't even begun to get our valuation firm involved the way we're required to. But I would predict it's more like a 24 event right now. Their projects are bigger, longer. They do a lot of mission-critical, a lot of heavier stuff. So I suspect it will stretch out a little longer in this case, that's why we said 18 to 24. We usually say 12 to 18.

Okay. And just lastly, on the Walker deal, regarding sort of the first quarter or 2. Given your comments that you just made on the amortization, is there any risk that the deal is dilutive to EPS, maybe given some -- the large backlog amortization in the first quarter or 2? Just wondering if there's any risk there and...

I think that's highly unlikely. But I'll say, even with the deals we've done the last few years, there might have been a quarter where one of them was $0.01 dilutive based on the matching and timing and because they're just like us. Their earnings are a little lumpy. We're talking about one subsidiary. But I don't think it will be meaningful. I think that, ultimately, they will be neutral to slightly accretive. If you made me guess, there will be 1 quarter of the first 4 where they cost us $0.01 and some quarters where they give us $0.02 or $0.03. But it's just not -- especially the size we're at now, it's pretty much neutral to slightly accretive is the -- really, neutral's the way to think about it.

Okay. On the organic business, your backlog, obviously, strong on a year-over-year perspective, but it declined from the third quarter. In the last few years, it actually increased from the third quarter to the fourth quarter. Looks like your orders were sort of flat year-over-year. Just wondering if you could comment on that.

Yes. Joe, I think it's just pure seasonality. Maybe some awards got pushed out into January. But not a concern of ours. Still plenty of opportunities and backlog will be good this year. I think it's more of a timing issue than it was anything else.

A lot of our guys are pretty full.

Yes. And we're pretty full, too. So we'll take in work that we like, and that's in our wheelhouse, so.

All right. And then in terms of that, it seems like utilization rates are really high. You've talked about how pricing on a net-net basis, obviously, you're having to pay wages a little more. But on a net-net basis, it seems like pricing has been positive over the last year or 2. Does that -- given sort of the capacity issues and utilization rates, does that become more of a positive in 2019 in terms of pricing?

It's really hard to say. We've been giving raises since 2015 in different parts of the country, sort of at different times, it would spike up. It started for us in the Mid-Atlantic in 2015. We're still happily giving raises to guide our strong workers, and we are raising our prices to cover them. And so far, it's worked out well for us. It seems like the trends are the same, but...

I think last year will be similar to this year in terms of that, Joe.

Okay. Last question for me. The projects that you have in backlog, could you talk about the mix there? Because I know some projects are more profitable than others. Just wondering how that backlog mix looks like compared to maybe the work that you already did in 2018.

That's a really good question. In fact, the backlog mix and our revenue mix going into 2019 are almost identical. So we're seeing good strength in education, and health care is around 20% now of our backlog, which has been very good for us. And its -- the strength we have in industrial today is a lot stronger than we've ever had, over 20% of the backlog there. So the mix is very similar to the revenue we saw last year. And I think it'll hold that way through the rest of this year.

It's really balanced.

It's really balanced, yes. It's good -- it's -- and it's broad-based. So it's good geographically, technically, yes.

(Operator Instructions) The next question we have is from the line of Bill Newby of D.A. Davidson.

So I guess just a couple more on Walker. Bill, you mentioned the lower margin and the larger project mix. Is that really the only driver for that difference? Or is there anything else going on there? And I guess, the follow-up would be is there an opportunity for you guys to bring them closer to what you guys are currently doing at the core business?

Yes. This is a very innovative company that have just an extraordinarily good workforce. They've begun to invest in things like prefab. We certainly hope and plan to support that in every way we can. But I will say, those kind of changes at Comfort, they had pulled over a long period of time. So we don't put synergies in deals. So I would say, yes -- no, we think they got a lot of potential to continue to get better and better.

I mean, we're really optimistic, Bill, that we're going to learn from them. And hopefully, they can learn from us, and we'll move forward. They're very good people and I'm very confident. And their work in the field is exceptional.

Okay. Is there any service aspect of their business at all?

So proportionately, much smaller than Comfort as a whole. We think that is an opportunity. It's a place where they've invested. They had a service business in Dallas for a while. They very recently pushed into service in their other 3 markets. So that's -- that they had a lot of vision on. Service is different for electrical. Service is more reacting, getting the power back on, disaster recovery. It's a little less break fix and a much less preventive maintenance. But it's a really good business, really good skilled labor force that has a nice moat around it. Really, customer relationships are valuable. So I would say the answer is proportionately less, like if we started to do more electrical, you might see the percentage of our revenue, that service averaged down a little bit. But it's still -- it's much -- a lot of people doesn't -- don't think their service and electrical, and we disagree with that. We think it's a good opportunity.

Yes. Particularly, Bill, in the stuff you see that goes 24/7 mission-critical data centers, hospitals, stuff like that. So I think there's an opportunity there for them to grow it.

Okay, that's good to hear. And then I guess, this will be my last one. Any revenue synergies with this business? I mean, are there opportunities that open up for you now that you have both mechanical and electrical contracting services. Or you can, like, I guess, do 1 project with both of those capabilities? Or bid 1 project with both of those capabilities?

I wouldn't emphasize that. We take work based on its -- we don't really -- we want -- just want good work. We take what the market gives us. We -- it's going to be very different superintendents. I would say that's not something. Certainly, there may be times when we help each other, our businesses help each other. But in general, these businesses stand alone in most markets.

Yes. I agree.

Next question comes from the line of Joe Mondillo of Sidoti & Co.

Just a couple of follow-up questions. Looks like your service revenue was up for the year, but it looks like it might have been down in the fourth quarter. Am I reading that correctly? And if so, any insight on what was going on there?

So I don't believe it was down, but let me just look here for a second. All right. So services, of course, service revenue increased by $9 million in the fourth -- barely up, not that much. It increased by $9 million in the fourth quarter of 2018. It was $140 million versus $131 million. But our Y percentage was up notably between the fourth quarter of 2017 and the fourth quarter of 2018? In fact that strength in the fourth quarter really made the year-over-year comparison for service look much better to our guys who run service, let's say. So.

Yes. I'll tell you, Joe, if there's one sector that we can be really proud of it's what's happening in the services business. The size of it and the execution improvement that we get and the margin improvement that we're getting is really helping us. So we better continue to grow that business, continue to invest in it. And I'm very optimistic going forward what we're going to do there.

And with all this new construction that you've been working on, that you've been realizing in your revenue and still in the backlog, do you anticipate servicing as a percentage of the business to take another leg up in 2019 or 2020 as a result of maybe building relationships with all these buildings that you've been working on in terms of the new construction?

As a percentage of the business, the next time service is likely to go up is the next time construction goes down. The reality is the construction wave is just bigger than the service wave. So you have service, it's been constantly growing for us, really, the whole time I've been here, right, which is the whole time we've been here, it just constantly grows on an absolute level. But during a time the construction's on an upswing, as a percentage of revenue, it will go down even at the absolute levels, have always continued to grow for us. And then suddenly, it will be super important in the next recession and it will make all the difference. We have -- our goal years ago, that we did our service 2x-'17, we called it, was to build a $500 million service business. We're happy to say we're way past that now. It's going to be great. That's going to be very helpful in the next recession.

Great. But in terms of the new construction projects, you try to contract relationships after sort of working on that new construction. You try to contract relationships for the servicing going forward, correct?

Yes. Absolutely. That's -- we developed a relationship with the owner through the construction phase and, obviously, give them a proposal and build a relationship with them to get that service work. Absolutely, Joe.

Okay. And then in the fourth quarter, your nonorganic growth, the growth contributed from acquisitions, it seemed -- it was higher than I was anticipating. Did that Indiana acquisition or any of...

That's a good pickup. Yes, they had $8 million or $9 million more than we said they were going to annualize. That's a nice revenue quarter. So you're right.

Yes, that Dilling company is performing at a very high level for us.

By the way, they're like virtually 100% industrial.

And is that sort of a 1 quarter off type of thing? Or is their backlog still very strong and that should sort of be sustainable?

I got to tell you, their backlog's very strong and their opportunities are very strong up and down the East Coast. Yes, I think -- so the last quarter where they will be revenue-ing for the first time, right, they're -- we've had them for 9 months as of year-end, this is the first quarter. Certainly, I think that will give us a little more revenue in the first quarter than if you wouldn't annualize what was in our press release last year. Now we're talking single digit millions, right? It's not -- it matters, I know, in your model. But it's not changing the trajectory of Comfort Systems. But it's great. It's awesome.

Right. Okay. And then last question for me. It seems like the mix of larger projects versus smaller is increasing. Could you just talk about what you're seeing if that's -- if you're meaning to do that? Or is that just what's taking place in the market? Or just talk about that and sort of the profitability aspect of that.

Yes. So you're actually right, Joe. We -- there has been an uptick, and let's call it work over $10 million in value to us. If you look in the data centers and work like that, it's just larger work. We see many new opportunities, particularly in the Southeast here in Texas. I think that trend will continue through this year. We like bigger work at certain of our subsidiaries and we're going to continue to pursue them and we're executing very well on them at the moment. So.

It wasn't in the market, now it is. But by the way, we're still only 1% different. Working existing buildings' fantastic, too. like virtually, that's kept pace with our new construction work. Some of that's because we're getting to be more industrial, an awful lot of industrial is addition retrofit. In the United States, an awful lot of industrial investment is addition to existing capacity. Great builds rarely happen. And when they happen, it's to go get some state to give them a lot of money, usually, right? They almost always buy thousands of acres next to whatever they build and then they just add to it when they need it.

I would now like to turn the call over to Brian Lane, Chief Executive Officer, for closing remarks.

Okay. Thanks, Emma. Thanks, everyone, for calling in and participating in the call. We had a great year in 2018, and we look forward to 2019 and doing the same thing all over again. So once again, thank you, and we hope to see you on the road soon. Have a great weekend. Thank you.

Thanks, everybody.

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