Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Comfort Systems USA Earnings Conference Call. My name is Alicia, and I'll be your operator for today. [Operator Instructions] I would now like to introduce Ms. Julie Shaeff, Chief Accounting Officer. Please proceed, ma'am.

Thanks, Alicia. Good morning, everyone. Welcome to Comfort Systems USA's first quarter earnings call. Our comments this morning, as well as our press release, contain forward-looking statements within the meaning of the Private Securities Litigation Act of 1995. What we 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 results -- 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-Q as well as in our press release covering these earnings. A slide presentation will accompany the prepared remarks and has been posted on the Investor Relations section of the company's website found at comfortsystemsusa.com. Joining me today on the call 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 all for joining us. I'd like to take just a minute to thank the Comfort Systems employees who are listening for their participation and, most importantly, for their continued hard work and dedication. I will start with a quick overview of the quarter. Bill George will take you through the financial results. And finally, I'll discuss backlog and the outlook for the rest of the year. We are pleased to report improved results compared to the first quarter of 2011. The first quarter is traditionally the lowest quarter of the year, and the results for the quarter came in as expected. We are reporting a loss of $0.03 per diluted share compared to a loss of $0.14 per diluted share a year ago. This improvement is partially due to the improved results from our Mobile, Alabama operations. This operation lost approximately $4 million this time last year. We were able to slowly turn this operation around and integrate it into a large -- larger neighboring operation. Additionally, the improved results were due to solid performance from the majority of our operations this quarter. Revenue was a little higher than expected, partly due to a very large, fast-paced data center project that should wrap up this summer. Our backlog was down slightly on a sequential basis as we burn through that large data center job. I believe that the majority of our markets, while still tough, are stabilizing. We remain focused on project selection, estimating and execution, and we maintained a disciplined cost structure. We feel good about the rest of the year. But before I get into that, let me turn this over to Bill for some financial comments.

Thank you, Brian. If you're online and have access to our slides, you can refer to Slides 1 through 3 as I review our financial results. We continue to be broadly impacted by the ongoing weakness in the nonresidential construction markets. And as a result, we posted a loss of $0.03 for the quarter compared to a loss of $0.14 for the same period a year ago. Total revenue was $329.4 million, an increase of $47.4 million, or 16.8%, compared to the first quarter of 2011. The EAS acquisition, which was completed during the fourth quarter of 2011, contributed 8% of this increase. Revenue on a same-store basis was $307 million, a strong increase of $25 million or 9%. As Brian mentioned, most but not all of that increase in same-store revenue arose from a fast-moving data center contract, which we classify as manufacturing on our pie chart. That project will continue to contribute significant revenue in the second quarter, although less than in the first quarter, and it will be largely finished by the end of the second quarter. Gross profit was 13% for the first quarter of 2012 compared to 12.1% in the first quarter of 2011. The gross profit margin improvement was in large part due to the challenges that we encountered last year at our Mobile, Alabama, operation, where we went from a $4 million loss in the first quarter of 2011 to breakeven this quarter. Despite the relative improvement, we continue to experience gross profit and operating income results at lower levels due to continued challenging market conditions. SG&A expense was $46.4 million for the first quarter of 2012, which include SG&A from the acquisition of EAS, and compares to $42.6 million for the first quarter of 2011. As a percentage of revenue, SG&A dropped,…

Thanks, Bill. With that as background, I'm going to spend a few minutes discussing our backlog, market and geographic performance and revenue mix, and then I will comment on our prospects for the rest of the year. Let's turn to Slide 4 and start by discussing backlog. Backlog was $622 million at the end of the first quarter of 2012, down $11 million or 1.8% sequentially. The decrease is due to the burn-off of the large, fast-paced data center project mentioned earlier. That project is slightly unusual for us as a majority of our large projects typically take a year or more to work its way through our backlog. Backlog on a same-store basis was down $38 million or 6% compared to the first quarter of 2011. The majority of the same-store backlog decline is in the mid-Atlantic area, including Washington, D.C. As noted in Slide 5, the institutional markets, which are government, health care and education, still represent a significant portion of our revenue. These markets are active and make up 46% of our backlog. The private commercial sectors remain weak, but we continue to win our fair share of smaller and midsized projects. Overall, although margins remain tight, we remain cautiously optimistic that activity levels in most market sectors are stable. We continue to see geographic differences in the business environment. The Northeast region, which includes the companies in the upper Midwest, remain stable and is the most profitable region. The operations in Maine, Michigan, New York and Northern Maryland continue to report good results. The majority of the operating companies in this region have strong backlog and are operating near capacity. In the Southeast, and most notably in the mid-Atlantic region, we continue to experience weak pricing in nonresidential construction. The mid-Atlantic region experienced the downturn late…

[Operator Instructions] The first question comes from the line of Rich Wesolowski with Sidoti & Co.

Bill, if the -- if I understand it correctly, the EAS reimbursement of the lower-than-expected profit on the job booked before you bought them, if that was added back to the minority interest line, does that mean that a similar amount depleted gross profit?

Yes, so what that means is up above in the numbers before the added-back line, their entire results are reflected, so the entire loss that came through that line is up there. But we only add -- we only recovered directly from them 60% of that because we own 60% of them. So that is reflected up above. The remaining 40% is eliminated in the elimination line. That means that if you were to completely take EAS out of our results, we would have had a slightly higher gross profit margin, for example.

Okay. That was a concise answer to a complicated question. Would you comment on the public and institutional work that's such a much bigger part of Comfort than it typically is during the private recession? Has that remained steady? Or have you seen signals that it's either getting stronger or weaker?

Rich, it's Brian. I think right now, what we're seeing is very steady. Health care's still very good for us, both hospitals and lab facilities. Education, some high school work has come in. It's very good. In the government, since we mostly do federal and mostly military, it's still pretty consistent where we've been the last few years. So I think the institutional sector for us this year will be steady in a word, Rich.

That's pretty good news. Would you comment on the project disclosed in the 10-Q that had been accelerated by the owner, cost the company some $3 million or thereabouts?

Yes. So essentially, that's the large data center contract that we were talking about in the mid-Atlantic region. And that's -- it's a very, very fast project. It's a very large project. It's about $42 million of work in about a 6-month period. As we -- as we've worked on that project, we were informed by the owner that they wanted to accelerate that completion date from what was in the contract. We took a look at the -- we decided we needed to accommodate that request. We put additional costs in the job to permit us to do that. We have a very, very strong claim for the additional monies, but we decided that we did -- really hadn't met the standards that we try to keep for booking revenue for that. And so we went ahead and put the costs in, but didn't recognize any revenue for that change. So when and if we were to recognize additional revenue, that would be a pickup in the future. For now, we're carrying that project. It's not a lost project, by any means, even with those changes. But we're carrying it with the costs in there but without having assumed any revenue in there just based on the definitions that we use. We're pretty strict for recognizing revenue.

And then lastly, has the company recently adjusted its price parameters for the share repurchase program? Would you remind us how you go about determining this?

The way that we determine it is we routinely -- I frankly talk quite often to a member of our Board of Directors who's been tasked with consulting with me on that. And then, obviously, we consult the full board from time to time. We have been aggressive buyers whenever our stock dipped down into single digits, as aggressive as you can be given our small float. And then we had been buying sort of routine, careful amounts in the double-digit -- low double-digit range whenever that came available to us. I would say that it's fair to say that in light of the fact that we've deployed so much of our cash in the last couple of years, we've gotten more picky. We haven't seen any dips. The -- our stock is so thinly traded that from time to time, even when things are going reasonably well, much less when we're in the middle of the worst recession in 80 years, the stock would -- will have hard dips. So I think we will continue to buy if the stock goes down on a hard dip for a week or 2. We don't normally get that many shares down there just because our float is so small. We don't want to impact the price. I think it's fair to say, however, we're not going to be as aggressive buying stocks sort of in the higher range as the 11-plus range, just because we've deployed a lot of our capital. We bought back 13%, 14% of our stock, if I recollect. We don't know when the recession will end, and we want to leave some dry powder for at least incremental acquisitions in the service and controls areas. So we're just being really, really picky.

Your next question comes from the line of Charles Redding with BB&T Capital Markets.

I was wondering if you could just expand a little on your comment in the press release about strong bidding activity. How fast are you seeing these bids turn into awards?

Yes. Charles, this is Brian. Yes, we're -- activity levels are very, very strong, and we've had a very good booking month in April, in particular. The time to award is still longer than it was, let's say, in the mid-2000s but not as long as it was in the '09 and the '10. So it really does depend on where you are and the type of job. It's not as quick as we'd like it to be, but the activity is good and it still takes a little bit of time to get pen to paper, honestly.

Okay. And then what are you seeing in the manufacturing sector? I mean, are you seeing demand strengthen there? And maybe if you could just remind everyone on the call how you're exposed in terms of manufacturing? I appreciate it.

I'll give you a little bit on that. We class data centers in manufacturing. So do you see a big jump in our number this quarter as a percentage of our revenues? Well, also, because of that data center project, that piece of the pie chart will be pretty big in the second quarter. Even -- it's been growing even without that, but it had a big leap up. Later in the year, obviously, when that job goes off, whatever else is happening, that would be a factor that would push that pie -- that back down a little bit as a proportion of our revenues. However, because we publish that chart on a year-to-date basis, it's going to affect the pie chart for the rest of the year. That's just something I wanted to take advantage of the opportunity to point out to everybody so they're aware of it. As far as industrial goes, I think that industrial has been one of our -- it's been the only really strong -- incrementally strong area for us in the last couple of years, Brian.

Yes, and I think just to follow on that, we are seeing the data center, some food processing opportunities out there. And hopefully, it'll stay like it is for the rest of the year. We're still seeing good bid activity in those sectors.

And working on 1 or 2 large things that if they were to go. But...

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

So could you talk a bit about your pricing? And I'm sorry if I missed out on this, but as you -- at what point does the competitive landscape and the pricing give you enough comfort where you can -- and no pun intended there -- where you could -- can start maybe hiring again on a sustainable basis?

I think that if you look at the numbers for pricing, sort of the gross margins we're seeing, I think you're -- what has disappeared from the market is the low, the very, very low or hot, sometimes even mistaken bidder. I think we're deep enough into this recession that people are not bidding work to lose money. We do think our competitors, their backlogs are not very full. And it's really going to take some of what's left of the capacity in the industry to get a little fuller before I think prices start to go up noticeably. Our headcount has been going up some, so I think there are signs of activity. Brian?

Yes, we're hiring, but we're being very prudent to make sure this is sustained. The other thing I think we're seeing regarding pricing is we're not seeing the large number of bidders, Tahira, that we saw a couple of years ago. We're seeing a more normalized number of bidders on most of the opportunities. So hopefully, we'll see some improvement in pricing going forward with more sensible competitors.

Got it. And if I was to look at your operating margin in first quarter '12 versus a year ago, essentially means you did show a pretty admirable "Closer to 100 basis points improvement." Is this something that we should assume will continue into this year? Obviously, it can be a little lumpy on a quarterly basis. But is that something sustainable? And then if you look at your past peak, it was around 6% in terms of operating margins. So clearly, you have a nice way to go. But could we -- if you look back even 1 year or 2, so you had around 2.5% operating margins in 2010. By the time you're hitting 2013 and these positive inflections continue, do you think you can be past the 2010 point of the 2.5%?

I'll answer that and then I'll let Brian answer because there were 2 or 3 questions, and I actually think for -- so for the rest of this year, I think we expect 2012 to unroll in a way very similar to the last 3 quarters of 2011. A lot of what you look at, if you dig into the numbers, would lead you to conclude that the rest of this year is going to be a lot like the last 3 quarters of last year, which means we're going to end up with higher margins just because of the difference in the first quarter. And obviously, it's slightly more supportive characteristics. Maybe we can do -- who knows what we can do? But we think it'll be similar to last year. As far as '13 goes, for '13 to be a meaningful increment above what we're going to do this year, we're going to have to see a little more strengthening. Now, it's early enough in the year that that could easily happen, but it's hard to predict that at this point, given sort of where we've been last spring and where we were the year before that. There are some good characteristics to the underlying environment relating to where capacity is in the industry, the number of bidders that give you hope for that. But I think that one of the things that makes you scratch your head a little bit is there are parts of the country, and in particular the mid-Atlantic, where we're still seeing large projects being deferred or delayed. They own the land. They've picked their team in some cases. They just aren't starting the projects. And it makes you wonder if there's not a CFO somewhere saying, "Let's not start to flow that cash just yet" if they're wondering about financing in Europe or how that's going to affect their balance sheet. So that's the hesitation I think you have.

Yes, I think, Tahira -- it's Brian. If I could just add on. I mean, as I said on my script, we're really focused on being successful in this environment and really working to get our margins up. Every one of us here obviously wants better margins than we have right now. But we're also focused on what work we're selecting and how -- heavy focus on execution this year and keeping our costs down. So there's a number of things we can do that we can control to make our margins better.

And Brian, if you were looking to hire, looking at the timeline and your schedule and the uncertainty, putting it all together, where do you see yourselves hiring people as of right now?

I mean, I would anticipate hiring some people this summer. Tahira, if you need a job, then we'll take you.

Oh, yes? You'll never know with the stock market.

Your next question comes from the line of Terry McMahon with BCS Partners.

Mr. George, you mentioned controls as a possible area of acquisitions. Do you have any estimate of how important are controls and closely associated services to Comfort Systems, let's say, in terms of your total revenues?

Controls -- revenues from control work is very small, a couple percent. So actual billings for the installation of control systems is 5% or less. I think it's in the Other category. If I had the -- I think it was 3% for the first 3 months of this year, although it can range a little bit higher than that and a little bit lower than that. It is actually, though, more important than the revenues suggest because when you do the controls, it typically has a strong likelihood of leading to the service and can frequently give you project opportunities, especially sort of on the small project end. So one of the things we're interested in doing in the acquisition area is hiring companies with good control capability but frankly, also, with good relationships with an installed base, where they've put the controls in 100 or 200 buildings and, therefore, have -- that leads to good relationships with those buildings and can lead to a wide range of opportunities. So 2 parts to that answer: one, very small mathematically; but two, more sort of swings heavier than its weight as far as how it affects us, and that's why we're interested in incremental investments there.

Do you -- you had -- you mentioned one other thing in passing. You said the worst recessionary environment in 80 years. That's pretty strong. That takes us back into the early 1930s.

Yes, I think it's unambiguous. I don't think there's any question. If you were to look -- there were 2 possible recessions that could be this bad. One was in '79, and one was the one right after 9/11. The one after 9/11, as an example, which some people thought was the worst recession in -- at that time in 80 years, there were 3 consecutive double-digit sort of mid-teen drops in a row. That's what that recession boiled down to for nonresidential construction. The first year drop in this recession was mid-30% drop, and it was followed by a mid-teens drop and then followed again by a double-digit drop. So I think you go pull out Census Bureau or you pull out McGraw-Hill, there were 2 -- there are 2 industries that were most wrecked by this recession. One is financing, the other is construction. And if you think about it, if you were going to build a building, you need 2 things. You need financing and confidence. And that was not -- that has not been a good picture for the last few years.

We have a follow-up question from the line of Rich Wesolowski with Sidoti & Company.

I was just curious if you'd could offer some qualitative comments on ColonialWebb's performance over the last couple of quarters.

Rich, it's Brian. I love ColonialWebb. They got outstanding people in there. We talked a lot about this job. I think this is a terrific job. They're really doing -- it's got to work out okay in the end. They've been great citizens for us, doing a good job. They've helped us out in a number of places. So really, their results will get better here over time. As Bill George had said a number of things, we bought these folks for the long term, not for the short term. And I have every confidence and belief that that will happen.

Those are the questions we have at this time. I would like to go ahead and hand the call back to Mr. Brian Lane. Please proceed, sir.

Okay. Thanks, Alicia. Everybody, thanks a lot for listening in this call. We really appreciate your interest in the company. We are where we expected we're going to be at the end of the first quarter. The good news is is that there's a lot of activity out there, and we're cautiously optimistic going forward. We really expect the last 3 quarters of this year to look a lot like the last 3 quarters of 2011. So with that, we'll say goodbye. Thank you, and we'll see you all on the road. Thanks.

Thanks, everybody.

Ladies and gentlemen, this concludes today's presentation. You may now disconnect, and have a great day. Thank you.