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Comfort Systems USA Inc. (NYSE:FIX)

Q3 2009 Earnings Call

November 4, 2009; 11:00 am ET

Executives

Bill George - Chief Financial Officer

Bill Murdy - Chief Executive Officer

Brian Lane - Chief Operating Officer

Analysts

Matt Duncan - Stephens Inc.

Richard Wesolowski - Sidoti & Co.

Clint Fendley - Davenport

Matt Tucker - KeyBanc Capital Markets

David Yuschak - SMH Capital

John Rogers - D. A. Davidson

Operator

Good day, ladies and gentlemen and welcome to the Q3, 2009 Comfort Systems USA earnings conference call. My name is Caitlyn and I will be the operator for today. At this time, all participants are in listen only mode. Later we will conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to your host for today’s call, Mr. Bill George, Comfort Systems Chief Financial Officer; please proceed.

Bill George

Thanks, Caitlyn. Good morning everyone. Welcome to Comfort Systems USA third quarter earnings call. Our comments this morning as well as our press release contains forward-looking statements within the meaning of the Private Securities Litigation Act of 1995. What we say is based on the current plans and expectations of Comfort Systems USA. Those plans and expectations involve risks and uncertainties that could cause actual future activities and results of our operations to be materially different from those set forth in our comments.

You can read a more detailed listing and commentary concerning our specific risk factors in our Form 10-Q as well as in our press release covering this earnings. On our call with me this morning are Bill Murdy, Comfort System USA’s CEO; and Brian Lane, our Chief Operating Officer and Bill Murdy will open our remarks.

Bill Murdy

Thanks Bill. Welcome everyone. After the close yesterday, we reported $0.25 of share versus $0.34 of share in our record setting third quarter of ‘08. On a year-to-date basis we’re at $0.69 of share versus $0.92 of share last year and revenues were down 14% quarter-to-quarter and 12% on a year-to-date basis. Our on a percentage of revenue basis we’re still showing of very respectable 5.4% net pre-tax and all of the forgoing, we feel it would be a very good performance let’s say a challenging economy here.

Our backlog on a project side of our business is down about $85 million from last quarters, so backlog were about $554 million here. We voluntarily dropped one large project out of backlog and that will be some further comments on that I think, but most of the reduction is again due do decreased economic activity.

We are seeing a reasonable pipeline of new work, possible work, but in other words much slower in coming to us or anyone then they have been and we should use. We believe going forward that we will get at least of their share of that work, that’s out there, when the triggers are eventually called.

By the way of full 50% of our construction work and backlog is in the healthcare, schools and government sectors and new construction overall is now slightly less than 50% of our revenues for lots of year even trying to grow the service side of our business, which include the retrofit to 50% of our revenues there, as service revenues have declined nearly as much as construction revenues. As a last comment before turning this over to Bill, we continue to close attention to expense control and cost reduction and our diligent and expert workforce around the country has increased productivity in this very challenging period.

Bill, once you take sometime with some financial comments.

Bill George

Thanks, Bill. As Bill noted, we posted solid third quarter results in a challenging environment. Revenue was $292 million during the third quarter and the plan decease in multifamily activities continue to be the single largest contributor to the year-over-year revenue decline. Additionally, we experienced noticeable declines in activity levels in our Phoenix, Virginia subsidiaries. In comparison, our work in the institutional sector remains strong and we continue to see good service and small projects availability virtually all of our markets.

Gross profit remains strong in the quarter improving from 19.2% in the third quarter of 2008 to 19.7% this quarter. Operating income margins, as Bill said, remained a very favorable levels coming in at 5.4% for the third quarter and there above 5% year-to-date. These positive results are thing to solid execution and include very strong results in Maryland, Central Florida and our operation based in Syracuse, New York.

Since last quarter, our backlog is decreased to $554 million. We’ve seen the largest backlog decline that are subsidiaries, that specialist in large projects and the decline in this quarter include the unusual element of a removable of $21 million in backlog as we were replaced under our contractual convenience provision, when we decline to reduce our pricing on a large ongoing project in the Southeast. The largest element in our year-over-year backlog decreased as the intentional decrease in multifamily activities, which accounts for $82 million of the year-over-year decline.

SG&A expenses decreased by $3.4 million or 7.5% as compared to the third quarter of 2008, as a percentage of revenue, the SG&A increased due to our lower revenue base. During the quarter we had higher medical cost of approximately $1 million compared to the third quarter of 2008 that higher medical cost resulted primarily from changes to COBRA loss and resulting increased in our COBRA sensing cost. Overall we are pleased with results of cost control efforts and we feel that these efforts will continue to benefit as we move forward.

Our stock repurchase program continues this quarter and we have now purchase 844,000 shares in 2009. Since our program began a little over two years ago, we’ve repurchased 4.1 million shares and return to total of $46 million to our shareholders and over that period we reclaim shares equal to over 10% of current share base.

Our balance sheet remains rock solid. We continued our long record of producing cash flow for our shareholders with a remarkable $23 million of free cash flow this quarter. We currently have a $140 million in cash with nominal debt. Our end-use credit lines are favorably priced have borrower friendly covenants and do not expire until 2012.

We planned to continue to seek ways that prudently deploy our balance sheet strength into our operations and acquisitions as good opportunities arise. Given our financial strength and the quality of our field professionals, we believe we will continue to improve our position in the mechanical contracting industry, in the coming quarter end years.

That’s all I have on financial. So now I’ll introduce Brian Lane, our Chief Operating Officer. Brian.

Brian Lane

Thanks Bill. Good morning everyone. We have very good results for the quarter, both in the construction and service side of our business. We would like to recognize and thanks each of our talented and dedicated team members for their efforts in this challenging market. In particular, we are very pleased with results of our focus on cash and collecting receivable. Free cash flow improved both sequentially in year-over-year with $23.1 million of cash flow in the quarter and an increase in cash balances to $140 million at the end of Q3.

Everyday, we focus on the basics of our business, which include project selection, estimating, project pricing and project execution. Our construction groups performed very well this quarter and close several projects strongly. Our service operations have also helped to maintain our profitability.

We continue to invest in our service operations. We have improved the management in several of our service organization. We are expanding and improving the training and education for our service technicians and continued to upgrade the quality and training of our sales force.

In the coming months, we will be further blustering of service sales efforts. We continue to see results from our investment and energy services. We have increased our resources and enhanced our knowledge and expertise in the area of energy efficiency and involvement and LEED certified project.

These investments have not only resulted in increased project booking, but have assisted our efforts and securing large multiyear maintenance agreement. Our focus on safety continues to be a key strength of our company and our OSHA recordable rate remains 48% below the industry average and continues to improve. This is outstanding and again the results of a continuing focus in our operations.

The stimulus package has not yet significantly impacted our business. However, we are encouraged by a few recent project awards that funded by the stimulus package and they’re appears to be other work in the pipeline, which is not yet in backlog. Our backlog are still at solid levels by historical standards has been declining. Backlog at the end of Q3 was down 13% sequentially, a decrease in the third quarter that many related to our Arkansas, Wisconsin and Northern Florida operations.

We had a lot of job in Arkansas, which we agreed to leave as the customer tempted to renegotiate the contract in much a lower margin. On an encouraging note, after two years of weakness in California of backlog they have increased significantly this quarter. We continue our efforts to find the more active sectors in the market, government, healthcare, education. For the first time in our history, over the last two quarters more than half of our revenues were from the institutional sectors.

Our pipeline remains very active and we’ve had a number of good bookings in October, especially in the Northeast, Southeast and Arizona. In particular, we were recently awarded multimillion dollar hospital projects in both Arizona and New Hampshire. As we said last quarter, we continue to see softness in the west, despite the early signs of improvement in California market, Northeast and Southeast continue to be stable.

Further, we continue to see pricing pressure as local and regional competitive respond the challenging condition, but we remain committed to maintain in good margins. We expect that weakness in non-residential activity will continue over then next nine to 12 months. We have been actively addressing these challenges to minimize the negative effects of the continued downturn.

We continue to focus on cost control. Currently, our headcount is down 5% sequentially, and 21% year-on-year. Additionally, SG&A cost at the pure level are down $5 million on a year-on-year basis. We continue to monitor our cost to ensure that we have the appropriate level of SG&A in light of our revenue projection.

We are positioning ourselves to improve our competitive position in or various markets. We are making additional strategic investments and service and training. Our strong financial position and broadening capacity remain a competitive advantage and we have prepared to strong performance when our markets improve.

I am confident that we will continue to acquire more than our base share of up coming work. We remain committed to project execution, cash discipline and cost control. Again, I would like to thank all of our almost 6,000 team members for a great nine months.

I will now turn it back over to Bill, for his wrap up and then questions. Thank you.

Bill Murdy

Thanks, Brian. While we are looking forward, our focus of course remains on current operations and really we’re very well position to take advantage of available work and easily capable of increased activity, when economic activity turns up, Bill mentioned our balance sheet strength, that balance sheet strength and the ability to deploy. It’s a real advantage times like this we can fund initiatives, which we’ll benefit as in the future.

We can bring in new people to step those initiatives etc. and we can also take advantage of discounts from vendors, because of our implacable credit rating. We are also, as mentioned, interested in growth by prudent acquisition and we believe there are some exceptional opportunities in front of us in next month.

At this juncture, I’d like to turn this over to the operator, to start a question-and-answer period.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Matt Duncan - Stephens Inc.

Matt Duncan - Stephens Inc.

The first question I’ve got goes back to your gross margins, you guys have doing a very good job, managing project cost and continue to execute well in this holding up your gross margins. How much longer do you think that continued and are you starting to sort of get into some backlog if that was priced in more difficult time and should we continue to expect your gross margins to go down a little bit going forward because of that?

Bill George

Let me make just a couple of comments and perhaps Brian, will address. I think that in this quarter, we had some very good closeouts on the jobs and we got this mix of situation in our business. As you know Matt, our service business curious with it, generally higher growths in that market than does our construction business. So we have this junction of closing out some very good jobs and also that the mix.

In general work we are booking is at lower gross margins prospectively. We think, we’re grinding in a lot of new productivity here and we may feel to net few basis points with a greater in these new, but clearly there is margin compression ahead of us on new awards. Brian, you want to add to that?

Brian Lane

Yes just a little bit on that Mark, there is margin compression, but we’ve done a lot in the last few years to mitigate some of that in terms of productivity on the labor side, yet that we’ve made in free fab in the training we done. So there is some a plus as well as margin compression too.

Matt Duncan - Stephens Inc.

When you guys look at the competitive environment and the pricing pressures that you are facing. Do they seem to be getting worse or is it kind of stabilizes in terms of the pressure that you’re getting on price as you’re bidding new contracts?

Brian Lane

I would say that, there are two ways to look at that question. Keeping in mind that we’re a late cycle players, so we’re starting to book worth that we’ve been working for a while, I would say, it’s starting to get worse. The immediate work, it certainly worse because like I said, we lag the business cycle, there are signs of improvement, but at the end of the day, we probably too early for us to draw conclusions from them.

Matt Duncan - Stephens Inc.

When you look at your backlog decline from the second quarter to the third quarter, you mentioned one large project that you took out of backlog. Where there any other project cancellations and in specific to that one project it did come out of backlog there was fairly large, talk a little bit about sort of what drove that, it sounds like your customer asked you to rebate and that was it margin that was too low?

Bill Murdy

This is only the second time in 12 years that we’ve taken a large project out of our backlog. The other one it is about eight year ago and because the projects sell through. In this case the underlying contract had across, that allowed a termination for convenience. Now in the event of a termination for convenience, we were to be made whole.

I think the builder or really the owner felt that over the course of this very long and very large project. The market it got much, much better for somebody who wanted to build the building and decided go back out every single subsidiary on the job and demand, much lower maximum pricing on the job.

When we looked at the proposal that they had for us, ended our prospects in that market the work we were doing. It was clear that the best outcome for us was, let them bring somebody else into the job and so that’s what we did and we’re absolutely confident that, that was the right decision in that case.

We’ve been paid virtually all of we’ve route on the job and we’re able to lock it in at a good result for the work that we did and we were able to use those resources and we’ve been able to redeploy resources in a way that our superior to what was being proposed to us.

Matt Duncan - Stephens Inc.

In terms of any other cancellations had a backlog; was there anything else of note?

Bill Murdy

No, like I said, this is only the second one in 12 years.

Matt Duncan - Stephens Inc.

Then last thing and then I’ll hop back in queue. You guys are obviously building yourselves a pretty nice cash balance here. Can you talk a little bit on what your plans are for that cash? I know you have the buyback program and then actively seeking acquisition, did you buy any stock this quarter?

Then on the acquisition front, always still on the environment were potential targets are going to be value of one reasonable past result versus sort of what the conditions they were end down and when do you think the acquisition market made off?

Bill Murdy

To address this, Bill may do you want to add to this.

Bill George

First of all, we have anther use of cash in that thing dividend, which we intent to continue. We did buy stock in the quarter, now we can give those numbers. On the acquisition front, that the kind of companies we want to bring into Comfort Systems are companies that currently are doing well, because they’re well positioned in the market. They got good work, they can do that.

In many cases the owners, simply want to they won’t sell now, because they like to enjoy 100% of what they’ve got. As that runs off and they move into work that where the margins perhaps not as great, where there’s greater uncertainty, where their backlog is down in absolute sense.

They get more reasonable and also get more reasonable about evaluation going forward. They’re also driven concerns about the potential new increase in taxes, maybe it’s time to take some monetize the future. Here at these rates as opposed to waiting, when you’re going to pay a higher rates both probably ordinary income and capital gains.

So there are some things coming together here that at least indicate that the market for the private company and it is not a perfect market without other things and none of things happened I know someone does it want sale for some other reason will happen, but I think there are some positive signs that we can get to more reasonable multiples on future acquisitions. We targeted a lot of things we know, where we want to go.

Our generalized strategy in this area remains that we want to move into new geographies, we don’t want to bring a company in on top of one of our current operations. Secondly, we want to buy companies that have balance of business both the new construction and service and we want companies, where the managements are ready willing and able to continue to replace.

So that’s a long answer to your question Matt, but I think it answer you anywhere talk about other uses of the cash.

Brian Lane

Just of the data, we bought it about a quarter of a million shares in the quarter and as Bill said, we’re committed acquisitions, we will do acquisitions, but a little bit of patients right now probably as we’re confident that will pay off.

Operator

Your next question comes from Richard Wesolowski - Sidoti & Co.

Richard Wesolowski - Sidoti & Co.

Bill, can you talk about the performance the stability of your service business, relative to what you would expect in heading into the recession?

Bill George

On the service and small project side, it’s been relatively stable. It has deteriorated in some places a little bit, but our maintenance base is holding it all. So we are very confident going forward that will perform and continue to grow.

Richard Wesolowski - Sidoti & Co.

It sounds from your previous answer to the last caller that, uranium by companies with similar construction mix to those that you now operate. I’ve heard you guys say, several times that the services, the better part of the business, it’s more stable, can be more profitable. Is there a push to increase the service mix of the business through acquisitions?

Bill George

I would say, what we want do is buy the best companies in best markets and we have many companies that don’t do a lot of service that really do unbelievable results for us. I think that overtime there are certainly as a goal via company made up full service mechanicals or it to be able to offer a full range of services in the markets that we’re in, and I think we’re making great progress towards doing that.

I thing not a lot of our services investment, you’ll find will come through internal investment overtime. We have been investing really mostly through SG&A through the expenses line and improving our services and the fact is that’s an area that is a very, very good focus for us as far as internal investment. Bill.

Bill Murdy

I think its right. First of all, there are any large fewer service companies. There are any large companies that are predominately service. So George’s statement just a moment ago, that we want to do this organically, internally, is it very good and we can grow our own service activities.

Candidly, we’re going to spend some money doing that internally, it’s not capital money, its expenses money. We are in a vanish position, we’ve got the cash resources to do some things and that’s aimed at a little longer term then next month or next quarter, i.e. building up service capability bringing Rainmaker’s if you will and we’re on that program and we can afford that.

Richard Wesolowski - Sidoti & Co.

That was surprise to hear that backlog increased in California, was that a wildcard project that hit this quarter? Does that reflected or would be a pretty surprising general pickup in that bidding activity?

Bill George

It’s a combination of both pickup and bidding activity and also a couple of good size jobs on the military front.

Richard Wesolowski - Sidoti & Co.

Do you would still say the west is generally you’re weaker region among the markets?

Bill George

Absolutely.

Richard Wesolowski - Sidoti & Co.

Then lastly, Bill George, you net over bill position, shrunk a good bid in a quarter, would you expect that to continue to move through the immune recession?

Bill George

I would, it’s especially shrunk on a dollar basis because their other lines on the financial statements that are shrinking. I still think, we have that extraordinarily good collection statistics in the quarter. We feel great about our ability to have a very, very disciplined balance sheet, but it’s certainly the case that, we’ll become less overbuild as we move deeper and deeper into a work mix that reflects a more recent bid activity.

Operator

Your next question comes from Clint Fendley - Davenport.

Clint Fendley - Davenport

You’ve indicated in the past, I believe that you would be able to sustain your 4% operating margins throughout the downturn. I wondered if you still felt that this was possible, given the decrease that we’ve seen in the backlog this quarter.

Bill George

I agree that we’ve said, before and I stand by I think the combination of our business mix or revenue mix which includes service and our ability to adjust to circumstances i.e. we are in some great part a variable cost business. Our willingness to discipline the cost side of things, will allow us to do that and I should say that will differently, we can push to get greater productivity here. Even greater than we’ve got, it gets more difficult as you do more and more here, but I’m confident at this point that we can. Some of that candidly relies on things not getting too much worse than they are and that I am confident.

Clint Fendley - Davenport

If I heard you correctly, 50% of your backlog is in healthcare and government. I know healthcare is one area, where historically you’ve had a bit higher margin more. Is that still the case and if so, would that possibly allow you to sustain your margins may better than expected?

Brian Lane

Just to give you a little color on that, actually well over 50% is an institutional, which we considered to be health education and government of our backlog and actually over the last two quarters, more than 50% of our revenues for the first time have come through those lines. Now, year-to-date we acquired 50% if you combine those two lines. That’s very encouraging; it’s been an evolution of this company the whole time I’ve been here, which is 12 years and that we done more and more of that work, it’s nothing new, but certainly it’s coming it’s really bearing fruit at the moment.

Bill Murdy

On the margin, I think you get behind why are there greater margins in hospital it’s more difficult area to work in and you get paid for your expertise and we’ve got the assembled expertise and we’ve got a track record doing that. We do some fair amount of work for biopharmaceuticals, when they look at all their facilities costs rounding here relative all their cost of signs and experimentation of people in that sort of thing and they want their facilities up and done right away, so there’s margin there. It’s a good sector for us and something we’ve got a demonstrated record.

Clint Fendley - Davenport

Last question here, a lot of talk obviously this morning on the services side of your business, how is the pricing holding up in that area?

Bill Murdy

The pricing is challenging in the service side of the business, it has not dropped anywhere they would has a construction. Some of the small projects I’ve been deferred, but we’re very confident going forward that the service margins will hold where we have right now. That the big box guys in the retailers etc. are very cost conscious at this point here and there is some deferrals delays and some pressure on some things that make that a challenging area.

Operator

Your next question comes from Matt Tucker - KeyBanc Capital Markets.

Matt Tucker - KeyBanc Capital Markets

Are guys able to provide anymore detailed kind of commentary on the current activity in outlook on a sector by sector basis? Obviously, institutional is holding up better than to anything else, but I guess what kind of activity are you seen there and expecting going forward?

Bill Murdy

I would say that, most of that is driven, not a lot of what we know about that some of it comes anecdotally, some of it simply comes from doing spinning of lot of times study industry sources. The areas of weakness are very, very predictable retail probably the weakest luckily we don’t do a lot of retail.

Office building is very weak and then you’ve got the remaining commercial sectors that falls somewhere between there an institutional and then all three areas of institutional. I would say, some of them for flat, which makes them strong and a few of them, there’s actually find the growth in them maybe hopefully stimulus related growth. So, Brian anything else jump let you anything you would say difference in that.

Brian Lane

No, I agreed what Bill said.

Matt Tucker - KeyBanc Capital Markets

We’re just hoping you could provide a little more detail on those stimulus related opportunities that seen. I think you mentioned a couple of awards and then other opportunities, I think just further more detail on what you seen there?

Bill Murdy

I would say one of the interesting things when you starch in your head about what stimulus is doing? There are two things that they can do. One, it can create a project. So for example, it does a transportation project, we have in Delaware, that really as ambiguously stimulus related, but in certain States the main effective stimulus is to keep something that was needed to happen was already about to happen to keep it on track.

So I just say that the remaining step would be the continuation of certain education work that start it stands to reason, some of it might have fall in a way of the States and have access to that money. Something that was going to be funded by property taxes for example, we’ve come to the conclusion that some of that work continued because of other source of the funds in certain circumstances.

Matt Tucker - KeyBanc Capital Markets

So if nothing kind of a remarkable about the nature of those projects just maybe some incremental activity supported by this stimulus?

Bill Murdy

Nothing remarkable.

Matt Tucker - KeyBanc Capital Markets

Then I just was hoping you could provide a little more detail on the kind of productivity gains that you would mentioned and what’s behind that?

Bill Murdy

On the productivity front, over the last several years, we’ve actually done a lot of things here in Comfort Systems. One of them is we do a lot of training at our project management, superintendent level, that’s really pay enough paying for us in the labor management side.

Our focus on prevarication over the last number of years has really reads a lot of benefits and it’s right now part of our culture throughout the organization, which is terrific and that we’ve really state cost cautious even in good times and we’ve kept our focus here, so right that are the three big drivers on that side, Matt.

Bill George

Matt, on this prepaid side what we’re really talking about there is, we having a building in our shops or on our shop floors. Sheet metal structures, plumbing structures etc. rather than doing that on site, it clearly you can imagine how much more efficient it is to do that in shop then crowding yourself into the 14 floor of a building to do it.

Operator

Your next question comes from David Yuschak - SMH Capital.

David Yuschak - SMH Capital

As once affordable with this military business, which you’re doing. I know if you use, you had a breakout the other category because of the success you’re having with institutional, healthcare, education and the rest. You have not historically done much with military, is that a market that could evolve much like we’ve seen in institutional area, particularly given some of the initiative by the government for updating the military infrastructure?

Bill Murdy

On an exception, I would take your premise, Dave, is that we have done over a long period of time work with the military not and overwhelming now, but we’ve done work at Fortran, New York, we’ve done different neighbor facility. Most of it is, housing or near housing sort of the bachelor invested quarters in military housing.

There’s not only that to continue, certainly in the military construction budget, but there’s also the renovation of a lot of military. So it’s not going to do it all the new construction. We’re going to take some of those constructions and renovate and we’re not doing a great deal that.

Now we intend to and we’re also looking at and potentially bringing in some other companies that focus specifically on that. As far as, we can tell from our work that the money is there, in the military we’ll continue to do that to improve the quality you like and then to up grade their facilities.

In addition, we actually have a new job in Guam and the U.S. military, air force, navy, marine, army as moving out of Okinawa and moving all of that into Guam and we’ve got fairly large contract there with a potential follow on of another one and the total construction budget out there in few years, its going to be $16 billion.

So there’s work there and while we won’t move people from the Continental U.S., out there, but do it we will have supervisor forces and we will design and construct and work that business.

David Yuschak - SMH Capital

The point I was trying get those, I know you had done business, but this never been as visible potentially as it could be in the course of next couple of years just like healthcare and education one as visible. Is it that kind of what you maybe suggesting, is it could become more visible revenue strength totally on that.

Bill Murdy

Yes, I think so. I’m not sure we break it out on our charts for everything out of that the government sector, but may not be that visible.

David Yuschak - SMH Capital

One other question, as far as resources into this downturn, could you give us some sense how much your headcount has contracted from its peak to maybe even from a device quarter as you prepared for this recession and looking at the recovery. What’s your thought as headcount, because as you guys at earlier you spent a lot of money on a lot people getting them trained?

Or you going to miss of that coming back or as your strategy on the existing headcount comfortable enough to where you feel good about what’s you have right now that is not much fairly going to happen or we can use down like before you maybe begin to address our headcount?

Brian Lane

I’ll take a shot at this one. Peak headcount on David was around 7,200, we’re about at 5,700 Mark right now and peaked mid-2008. In terms of the quality of personnel, right now we’ve got our A and B players no question about it. The people that, you let go with the lower producing players right now we’re down to the people that we really want to hang on to.

So hopefully we’re not going to have to reduce much further. Right now, we’re really in good strong shape going forward with the talent that we have. The other thing we’re looking at is a lot of good talent that is still available on the market and we are talking a high look that and if need to upgrade in certain places, so it’s a great opportunity for us to improve even what we have already so.

David Yuschak - SMH Capital

When you mention upgrade, what’s your speaking there as far as just some geographic areas to upgrade or extensions of capabilities services, could you give us some idea?

Brian Lane

Think me as a product management, Superintendent level in our current operations looking here not so much geographically at the moment, but just in our incumbent operations.

Bill Murdy

We’re pretty happy with our existing analysts.

Operator

Your next question comes from John Rogers - D. A. Davidson.

John Rogers - D. A. Davidson

Just a couple of quick in terms of organic backlog growth and I apologize if you said this, the decline was that all same store? Sometimes you’ve given the same store backlog growth?

Bill George

Since, we haven’t acquired anything it is same store, yes.

John Rogers - D. A. Davidson

Then secondly, what we saw earlier this year, especially the decline in power cost and in some cases lower electrical rate and now as you seem to be going the other way are potentially, maybe go in the other way. Does that have any impact on your business?

Bill George

I’d say yes, it does. I think in times like this, people will put on whole energy efficiency projects and if they see also a dip in energy prices, which result in lower electrical costs. They will have a tenancy to. They don’t believe, I don’t think anybody believes that electric costs are going to go down and further nor stay down where they are.

So that will comeback with available capital. This takes some new capital to capture the energy efficiency that we can help people capture and we’re looking to that sector to be a real driver that business energy efficiency going forward.

They’re real driver for us, because as you, John, 40% of the energy consumed like air conditioned structure is by virtue of HVAC. So we can save money by making those systems more efficient and some of that through just maintaining some through retrofit on the new construction side. We will be working with end users and general contracts design in the latest energy efficiency.

John Rogers - D. A. Davidson

Your perception that outlook from your customers is changing it all. I mean especially as we go into…?

Bill George

People who’ve just they’re not focusing or they’re not spending new capital to capture those savings right now, because their capital constrained or they decided they want to be capital constrained. One of the encouraging things here is the amount of cash that is out there, both in public companies and private companies. I think, they’re going to return to utilizing some of that cash to capture savings.

Bill Murdy

John is an interesting case in point we’re talking to you right now from new premises from new corporate headquarters…

John Rogers - D. A. Davidson

Yes, I noticed that on the queue in address.

Bill Murdy

We moved into these new headquarters to save money. We actually lowered our cost of occupancy by moving, but obviously we had to build out the safe, which created work for bunch of contractors and we build our space to a lead standard with some focus on energy efficiency and what was interesting about that process was now you’re able to do that as without paying much the premium one of the interesting things that’s happing is, some of these efficiency things are simply becoming part of the business.

They become a very, very good tailwind, because they give you additional reasons to do things, without happing to spent crazy amounts of money. So, I’m actually encouraged by some of the cost effective ways that are being developed that saved energy, I think that’s going to be good for us.

John Rogers - D. A. Davidson

One other thing is, in the past some of these cycles we’ve seen the OEMs get into the service business and get out of the service business or at least deemphasize it a little. What’s your sense of that their temperature know are they interest in getting back into this business now, are they pulling away from it letting independent contractors handle it?

Bill George

They’re still in it. They’ve never said, we compete with them, sometimes we work for them, and sometimes we partner with them. It’s the full gamic they’ve going to be out there and we just need to keep ourselves competitive, because we’re not kind go away.

Bill Murdy

Today we have a number of advantages, first of all, we are equipment diagnostic and we range across all the equipment and secondly we are non-unique and there are different cost structure and even if we do have to pay in certain markets what union levels are and we have flexibility beyond what some of them have. So we feel fine here on that. In a lot of cases there only in a bigger work anyway and we’re market middle sized project oriented as you know.

John Rogers - D. A. Davidson

Then just last thing, so I have final question, as you look at the acquisition opportunities are out there. I mean my perception is that some of these smaller private companies and once that maybe potential target. Not only does on mechanical systems, but they went throughout that a little bit more. So I mean in the piping or electrical work, are you looking at any of those adjacent service opportunities or market?

Bill George

We’re not look at them in a broad way that would not preclude us, however, from bringing in our company that to say for instances did electrical work, or controls work, or in plumbing, certainly something 15% of our revenues come from plumbing and piping right now. So we’re certainly there, but we’re not in the grand scope, we’re not thinking corporately about being also an electrical contractor and also a roofing contractor for instance.

We think there’s a very rich business here, rich strain business here. We’re in $1.23 billion in a $40 billion sector and while nationwide we are geographically deprived in many respects we’re not in whole lot of place. There’s a lot of growth for us and we don’t and we honestly consider the HVAC mechanical area, a better part of the specialty construction business than most of the other specialty construction trades.

Operator

Your final question comes from Rich Wesolowski - Sidoti & Co.

Rich Wesolowski - Sidoti & Co.

I was hoping to, you could clarify the discussion on the 4% operating margin. You discussed in facet, your operating company managers are incentivized on maintaining 4% plus, but I assumed that number didn’t include about say 1% corporate overhead that include in your income statement?

Bill George

That is correct. So to achieve 4% overall, the operating entities, the operating have to do substantially more than that and I do and they are.

Rich Wesolowski - Sidoti & Co.

So to be clear, you were withstanding by an income statement margin of 4%?

Bill George

Pre-tax.

Operator

There are no further questions at this time. I would now like to turn the call back over to Mr. Bill Murdy for closing remarks.

Bill Murdy

So my only remarks is thank you very much and as Bill said, why we’re having to let some people go internally, we’re not letting any of our analyst to go. They’ve been us too long. So thank you very much.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation and you may now disconnect. Have a great day.

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Source: Comfort Systems USA Inc. Q3 2009 Earnings Call Transcript
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