Good day, ladies and gentlemen, and welcome to the Q2 2013 Comfort Systems USA Earnings Conference Call. My name is Ian, I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. Now I'd like to hand the call over to Ms. Julie Shaeff, Chief Accounting Officer. Please proceed, ma'am.

Good morning, everyone. Welcome to the Comfort Systems USA's second 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 and 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 www.comfortsystemsusa.com. Joining 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 welcome to our second quarter earnings call. Before we start, I would like to begin by thanking all of our employees for their continued hard work and dedication. This morning, I will review some highlights, and then bill will cover the financial results in more detail. We are pleased to report a strong second quarter, with earnings for the quarter of $0.21 per share as compared to the $0.12 in the second quarter of 2012. Thanks to solid execution by our operations, we realized significant margin improvement as compared to the prior year. Although backlog declined somewhat this quarter in the midst of our busy project performance season, we feel that, compared to recent conditions, we are actually in a good position with available work. I will discuss backlog in more detail later in the call. Although economic conditions remain challenging overall and pricing remains competitive, most of our markets are stable. Service continued to provide solid returns, and many of our construction projects were helped by terrific execution despite tough markets. We remain focused on project selection, estimating and execution, but we are also making prudent investments in our future growth. Overall, we feel encouraged. But before I get into that, let me turn this call over to Bill for some financial comments. Bill?

Thanks, Brian. I'm going to take a few minutes and discuss our quarterly results. If you're online and have access to our slides, you can refer to Slides 2 through 6 as I review our financial results. Revenue this quarter was down slightly compared to a year ago, as we reported $351 million of revenue compared to $353 million in the second quarter of 2012. You may remember that our revenues in the second quarter of 2012 included a large and fast data center project in Central Virginia. Despite the absence of that project, we maintained essentially flat revenue levels on an overall basis. Thanks, in large part, to an increase in project revenues at EAS, our 60%-owned subsidiary located in North Carolina. Gross profit was 17.1% for the second quarter of 2013, and that was a strong increase from 15.3% for the second quarter of 2012. Operating income margin was also up, rising to 4.1% from last year's 2.1%. As Brian mentioned, we had solid performance from most of our operating companies, and we were also helped by improvement at our Maryland operation that underperformed a year ago. Both ColonialWebb and EAS were strong, with each contributing $0.02 to our second quarter. We were also helped this quarter by favorable development on a number of items, including the settlement of an old receivable, positive development on our risk management accruals and positive developments on work in the Northeast. Our improvement was broad-based and stemmed from our operations, although $0.03 to $0.04 came from the specific items that I mentioned above, and that we do not expect to benefit from in the third quarter. SG&A expense was $45.7 million for the second quarter of 2013 compared to $46.9 million for the second quarter of 2012. SG&A as a percentage of…

Okay. Thanks, Bill. Let me walk you through backlog activity in various sectors and markets and also, our outlook for the rest of 2013. Please turn to Slide 7, and I will start with backlog. Our reported backlog number dropped by a little over 6% this quarter, whereas we had expected it to be flat. We believe that drop does not indicate a decline in revenues over the next few quarters. At the end of the second quarter, our backlog was $590 million compared to $631 million at the end of the last quarter. Our most significant backlog decrease of $28 million was at EAS. And as Bill previously mentioned, EAS had a significant increase in project revenues this quarter compared to the prior year. Despite the backlog decrease at EAS, EAS remains busy and we feel good about their pipeline of ongoing work. Specifically, EAS has $35 million of work that it expects, but for which it did not have the paperwork to be included in backlog at the end of the quarter. The rest of the sequential drop in backlog relates to 4 of our large construction companies that each had $5 million to $7 million of net decreases in backlog, as they burned backlog during the higher activity season. We do not believe that the declines at these companies are unusual. Despite the decline, as we survey our companies, our work prospects seem at least as good as we have experienced over the last 2 to 3 years, and there appears to be fewer air pockets than at this time last year or in 2011. Please turn to Slide 8 for the look at our end-user sectors. The institutional markets, which are government, health care and education, make up 45% of our revenue for the 6 months…

[Operator Instructions] Your first question comes from the line of Saagar Parikh at KeyBanc.

So first off, Bill, I know you mentioned -- you touched on this, but in terms of the margin aspect -- and Brian, I think you mentioned it, that the second half margins in '13 are going to be better than the second half margins in '12. But looking at the numbers, you're 4% operating margin that you guys -- the 4.1% operating margin that you guys had, was the best performance since 2Q of '09. Is that the level we should be looking at going forward, the 4%? Is that the new kind of baseline? Or is it something within 2% to 4%, or 3% to 4%? Can you -- just a little bit more color on where you'll fall within the range and then, why we saw the margin improvement this quarter?

Saagar, I wouldn't set 4% as a minimum, but I think that's a range that's achievable for us right now. A number of things are helping us. Year-over-year comparisons, a lot of the things that are helping us are obvious, including changes in our mix of work and the things that have happened at ColonialWebb and EAS, who are now contributing. It has also helped us that we're at 56% work in existing buildings. Our new construction is at historically low levels and service has higher margins, so that's helping us currently as well. So we feel -- I think we feel good about our ability to deliver good margins for the rest of the year, similar to what you saw in the second quarter. And then, we would -- similar in the range, but I do think we -- keep in mind, we would return, probably, to a first quarter seasonality pattern by next year. So...

Okay. And then, going into '14, same thing in terms of margins. Where would you say the benefit's coming from? Is it just really improved pricing? Because I think in the past, you've said that you're seeing pricing upticks, but they're just 10, 20, 30 basis points at most. But it seems like we're getting more of a push than what you guys have said in the past?

Truthfully, most of the benefit is coming from execution by our operations. Really, we have a couple of companies that didn't do well a year ago that are now big contributors. And our guys are in the field, they're not getting better pricing in projects. We're just having less negative development and they're performing -- they're bringing them in better. So there is -- there might be some help in pricing but so far, really, the story is just stability and strength on the operating side.

Saagar, it's Brian. Just to add on one thing. We've talked about service and this replacement business a long time. Abundant amount of our work is in that range, a little higher margin and we're just executing it very well.

Okay. And then, last comment/question for me. Bill, as you mentioned, it seems like your EAS and your ColonialWebb acquisitions are starting to deliver, and you guys have done a great job of adding on acquisitions during the downturn for the upturn that we could potentially be getting by the end of this year and into '14. So looking at your current cash balance and your capital plan, where do you see yourself putting that more? Is there going to be additional acquisitions, niche acquisitions here and there, or is it going to be really this organic growth opportunity that you guys are talking about, investing in resources and labor?

Obviously, we consult closely with our board on that. We think cash will begin to build again, as our margins have improved. Our #1 use of cash is acquisitions. Right now -- we've said for a year or 2 now that we probably wouldn't do any more large construction acquisitions until we became convinced about a recovery in the construction markets. I'd say we're at a point of inflection on that where we're really scratching our heads. And then, on the stock buyback side, we still believe our stock is a good value for Comfort to buy. We're doing a lot of analysis right now about how much stock we expect to buy, but I think we'll certainly be buying back stock, and so that we consider that a good use of our capital. And finally, you saw that our board decided to at least make a small increase in our dividend. So I think that shows their awareness of the need to provide a return to our shareholders.

We have another question for you, and this one is from the line of Adam Thalhimer from BB&T Capital Markets. Adam R. Thalhimer - BB&T Capital Markets, Research Division: Bill, you've provided some good outlook for margins in the back half. Can you talk a little bit about the $350 million in revenue that you did in Q2. I mean, is that a good run rate for the back half?

Revenue is an interesting developing thing for us. We had a big drop in revenue for the first half out of ColonialWebb. That arose from -- some of that arose from that big data center project that we've talked about quite a bit with you and others over the last year or so. They also have less work, currently, in their industrial refrigeration market. Their largest customer is on the sidelines temporarily, we think. And then, meanwhile, we have significant increases at EAS. I think we have good prospects for solid revenue delivery in the second half of the year, simply because of the negative comparable from the bank -- the Bank of America job in Virginia will go away. EAS still has a really good workflow, and generally speaking, most of our companies' revenues are stable. So I would expect us to continue the revenue in the second and third quarter at levels similar to the second quarter.

And Adam, if I could just add on to that. We're looking at pipelines that are still pretty full about opportunities we're looking at. So I would agree with Bill. I think, that's -- we can do that the rest of the year. Adam R. Thalhimer - BB&T Capital Markets, Research Division: Okay. And some of it's just a seasonality issue because in the past, you have seen Q3 revenue below Q2. I'm not sure why, but it's happened in the past.

It has happened. Now last year was a special year because we had extra revenues in the first 2 quarters. I think this year, we'll have more of the normal seasonality pattern, although probably flatter than usual.

And we've also had a little boost in service here, particularly post the end of the quarter, with the heat finally generating itself throughout the country. It was pretty cool there the first half of the year. Adam R. Thalhimer - BB&T Capital Markets, Research Division: Okay. And then, what -- are there any discernible trends in the service market? I mean, is that market getting better?

I don't know if it's getting better, I think some of the replacement market is. I think people are freeing up. What they were repairing before, they're replacing now. But also, we're being a lot more aggressive with salespeople, et cetera. We're putting a lot of effort in that. So I think we're going to get some growth from that.

And one thing I do want to point out, we're making SG&A investments, even though SG&A was down slightly in the second quarter, and some of that is just based on some improvement in bad debt experience and some changes to our amortization of some intangibles. We're hiring people to help us grow service, and that's going to show up a little bit in our SG&A as the year progresses, and even so more in '14. So people who are looking at -- people who are modeling Comfort Systems, I don't think the drop in SG&A this quarter is likely to be a trend, because we're consciously making some investments that will cost us money at first.

Adam, we're putting our money where our mouth is. We're very optimistic and bullish on the service business. Adam R. Thalhimer - BB&T Capital Markets, Research Division: And then, you said that was a higher-margin business for you?

Yes, it is.

Over the course of a -- well, certainly right now, right? It's hard to even breakeven in the new construction markets. Over the course of a business cycle, service margins are 1.5x as high, in my opinion, as the average of construction margins. Now when demand for construction is high, there can be a year where construction -- well, there have been at last 2 in the last 5 years, years where construction margins were higher than service margins. But over a 10-year period, service margins are higher. That's one of the reasons why it's a great area to invest. It's somewhat less cyclical and it has higher margins. Adam R. Thalhimer - BB&T Capital Markets, Research Division: Okay. That's good color. And then, last question for me. I just wanted to ask, do you guys have any government exposure, and if so, what are the trends in that business?

Government has come down some for us. The majority of our government exposure -- the single biggest part of our government exposure is military, and that's continued to do pretty well for us. We have a disproportionately low exposure to schools and to local governments and state governments. Generally speaking, I would say government is not an area we would look for growth from. We have a lot of revenues in Virginia, where the government influences a lot of the work that's done. So I guess government, I think, will probably recede some for us. But I think our strength is in the commercial side of the business. Historically, we've gotten 70% of our revenues there, and that hasn't been the case over the last couple of years based on the markets. And if we have to pick, we would prefer the private side to be strong. That's our strength.

Yes, Adam, it's about 10% of our business. And the place we're hit the most of right now is the Virginia area.

There's no further questions at this moment. [Operator Instructions] And we have a follow-up question from the line of Saagar Parikh at KeyBanc.

One more quick follow-up. It seems like in the first quarter and the second quarter, a lot of the beat has come from strong execution from your workforce. Brian, can you just talk about what you guys have done differently and what needs to continue happening for that strong execution to happen? Because it was -- it is something that you guys have mentioned in the first half of '12. You did see some issues in some of your operations, and you've seen pretty good improvement in the first half. And then, a lot of where your margins end up going is based on that execution continuing.

Right. Yes, so as we've talked about in the past, we've had a heavy focus on project selection in the last few years. We're really trying to get work that we're good at, that has some money in it, and just not taking work to keep people busy, at least, not knowingly. Plus, we've done a lot of training over the years. It's one thing the board has supported us on throughout this recession. It's constant training for people out in the field, and I think it's really paying off for us right now. In addition to that, this whole notion of prefabrication, we build more of the job in the shop, where we get higher quality. It's lower cost. Work, to us, is now utilized throughout our company, and I think a combination of those 3 things has really paid off. In addition to that, the quality of the workforce we have is just doing a terrific job.

And then, last one on my end. The housing market has been trending upwards. There's been a lot of positive commentary coming out. And I know you guys don't do direct work in the housing market, but what indirect impact have you guys seen and what are certain things that you guys look for in terms of the housing numbers to make you feel better on your -- on the nonres side?

The most important aspect of the housing market for us is that it's probably, right now, the single most important macro indicator. And hopefully, confidence on the housing side will allow businesses to pull the trigger on buildings. We have had -- for about 3 years, we have had very busy budgeting and estimating departments. And the fact is, project starts, projects planning has been very active. Project starts, buildings actually being built has been disappointing. So hopefully, life on that side of business will give -- allow some businesses to pull the trigger. I think that's the #1 issue.

That concludes your Q&A session. I'll now pass it back to Brian Lane for closing remarks.

Okay, and thank you. Hey, everybody, on the call, thank you very much for listening, and your interest in our company. We are very excited for the future. We have great people, a truly top-notch workforce, both in our construction and service operations and the people that support them. We're poised for growth, and are very excited about the opportunity in service and the replacement business. We hope you enjoy the rest of the summer, and Bill and I look forward to seeing you out on the road. Thank you, and have a great day.

Thank you.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a good day.