Julie Shaeff - Chief Accounting Officer Brian Lane - Chief Executive Officer, President and Director Bill George - Chief Financial Officer.

Tahira Afzal - KeyBanc Capital Markets Adam Thalhimer - BB&T Capital Markets John Rogers - D.A. Davidson.

Good day, ladies and gentlemen, and welcome to the First Quarter 2015 Comfort Systems USA Earnings Conference Call. My name is Tony and I'll be your operator for today at this time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host for today. Mrs.

Julie Shaeff, Chief Accounting Officer. Please proceed..

Thanks, Tony. Good morning. Welcome to Comfort Systems USA's first 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 and good morning, everyone. Welcome to our first quarter earnings call. Let me start by thanking our many dedicated team members for the hard work that resulted in a great first quarter. I'm going to keep my opening comments brief and then Bill will detail our financial results.

We are pleased to report a profitable first quarter and a solid start to 2015. Building a solid execution last quarter, we had our strongest first quarter performance since 2009. Revenues are 15% higher than the first quarter of 2014 and earnings improved substantially.

First quarter free cash flow was exceptional and we had our first positive free cash flow quarter since 2003. We are reporting earnings of $0.13 per share for the first quarter of 2015 as compared to the $0.01 per share in the first quarter of 2014.

Our year-over-year improvement reflects solid execution at the majority of our operating companies combined with improving conditions in many of our markets. Let me turn this call over to Bill for some financial comments and then I'll talk about operations and outlook.

Bill?.

Thanks, Brian. If you have access to slides. You can refer to Slides 2 through 4 as I review our results. So first quarter revenue increased by $48 million or 14% compared to the first quarter 2014.

Same store revenue was up by 10% or $33 million compared to last year with remaining increase coming from our Dallas acquisition in the second quarter of last year.

Approximately two-thirds of our revenue increase, they resulted from a high level of profitable project activity at Environmental Air Systems or EAS, which is our partially owned subsidiary located in North Carolina. We also had strong improvement at ColonialWebb and in Arkansas.

Although, we expect full year revenue will increase in 2015 as compared to 2014, the 10% same store increase in the first quarter is likely larger than we will generally experience in 2013. Gross profit was 17.5% for the first quarter of 2015 and this was an improvement from the 16.2% for the first quarter of 2014.

The significant increase was driven by a combination of solid performance in many locations including at EAS and ColonialWebb combined with stabilized results from our Southern California operation which negatively impacted our results in the first quarter of last year.

SG&A expense was $53.7 million for the first quarter, 2015 compared to $50.4 million for the first quarter of 2014. The increase was primarily due to our acquisition of Dyna Ten in Dallas and also reflects expanded service activity at certain locations.

This increase was partially offset by a reduction in service training as we completed the heaviest portion of that investment in 2014. SG&A as a percentage of revenue was 14.5% in the first quarter of 2015 which compares favourably to 15.7% a year ago.

The percentage improvement is primarily due to the higher new construction revenues in the quarter that did not require a significant incremental SG&A expenditure. Our tax rate for the quarter was 35.5% and benefited from our strong performance at EAS as the 40% minority interest is treated as a partnership for tax purposes.

Net income for the first quarter was $5.1 million or $0.13 per share compared to $400,000 or $0.01 per share. Our first quarter is seasonally low and that leads to more variability in our quarterly results.

We experienced our usual seasonal patterns at most of our operating locations especially in the Northeast and as we mentioned we had a very busy quarter at EAS in North Carolina. We had outstanding free cash flow in the first quarter of 2015. Our free cash flow was $17 million as compared to a negative $12.4 million the prior year.

This improvement is largely due to the timing of our project work in a number of our operating companies as well as some receivables from 2014 that were collected in early 2015. With proportionately more service in small project business. We are realizing cash flow earlier in the year. Like our backlog, cash flow can be lumpy for us.

Though, we feel good about cash flow prospects and trends. Overall, we're off to a great start for 2015 with an operating performance in the cash flow stream. We're optimistic that the underlying trends for new construction are supportive and we're making good progress in our service business, so that's all I have on financials front..

All right, thanks Bill. I'm going to spend a few minutes discussing our backlog in activity in various sectors and markets. These are covered in Slides 5 through 7. I'll then comment on our prospects for the rest of this year. Our backlog at the end of the first quarter $718 million.

A strong increase from a year ago and a 5% decrease compared to the fourth quarter of 2014. The sequential decrease in backlog is mainly due to progress on several jobs at our Mid-Atlantic operations. These were the - bookings, that we mentioned last quarter is having significant bookings during end of last year.

Our backlog continues to experience good underlying trends. Same store backlog increased $58 million or 9% compared to March, 2014. Our largest year-over-year increases were in Maryland in Virginia. Although, our backlog will fluctuate from quarter-to-quarter due to seasonality and the timing of projects.

We now anticipate gradual strengthening in our business activity levels. Our end user sectors are showing on Slide 6. The institutional sectors which include education, government and healthcare comprised 34% of our revenues. Our manufacturing and technology sector represented 32% of our revenues for the first quarter of 2015.

Overall, we're pleased with trends in our mix of work. Please turn to Slide 7 for our current revenue mix. New construction made up 52% of our revenue reflecting incremental strength in non-residential construction markets. Pure service, which is maintenance and repair was strong at 17% of revenue for 2014.

And taking together service, repair and retrofit was 48% of revenue. EAS in ColonialWebb two companies that we acquired during the recession with a major drivers of our increase in revenue in earnings this quarter.

Our service businesses are executing and growing as planned and as a result our maintenance base continues to increase liquid bookings this quarter. We believe that the investments we've made in our service business are on track. Let's now discuss our outlook.

Pricing remains competitive, but we are optimistic about our prospects in the coming quarters. Although, there are risk we believe that industry activity levels in many of our core markets have started to strengthen. We will continue to focus our effort in investment to strengthening our existing businesses.

Add new partners through acquisitions and return capital to our shareholders through our dividend and stock repurchase programs.

With a combination of our strong core businesses, the new team members [indiscernible] Comfort during the recession and our product service investments, we are positioned to benefit as a non-residential construction markets improve. Before I turn to questions, I like to thank all of our 7,100 team members for their efforts.

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

[Operator Instructions] your first question comes from the line of Tahira Afzal.

Your strategy has worked out perfectly so far, you've picked up very solid companies at good multiples through the whole down cycle and the softness in the cycle. You know it seems like you still have a couple of years at least before this market peaks.

Do you still find that there are enough sort of opportunities out there for you to capitalize on add attractive multiples at this point? Are you, Brian sitting at this point and saying, hey I need to think about what else I can do with my cash?.

So Tahira, I would say that we believe that there are opportunities, we are in good conversations with people that we, something which we've done for a long time about their options. It's very hard to predict whether we'll get to arrangement with any sizable companies. We're not going to overpay, just because markets are getting better.

We try to price people on their long-term potential. I do think, we'll continue to do tuck-ins, we did a couple this quarter. Small business that join existing businesses and that's been a good source of improvement at certain locations for us. So we certainly expect to continue that, we're open-minded..

You know, Tahira. The second half was a lot to do with cash and it isn't acquisition, we'll still repurchase shares and pay dividends as well..

Perfect. Thank you and my second question was, we've gone through this exercise where we try to see the margins go, as the business starts to come back and now it's finally coming back pretty nicely.

As you looked out a couple of years, do you think you can cross that 6% margin given you do have a bigger geographical footprint in a sense you can, if you look at the last cycle you were anyhow had some Atlas issues you don't have anymore?.

So Tahira, if markets continue to strengthen gradually for the next couple of years. I think there's very good chance we could in a given year, cross that..

Awesome, thanks a lot guys. I'll jump back in the queue..

Your next question comes from the line of Adam Thalhimer. Please proceed..

The service in maintenance business, I wanted to ask about that. It likes it grew about 9% year-over-year in the quarter.

I'm just curious, what are the margin trends you're seeing on that business and is that, a good growth rate to be thinking about going forward because it's high single digit?.

The margins are up slightly, but you know it's the first quarter, we like the margin trends underlying our service activities right now. We think we have some opportunities there. As far as growth and service it will be lumpy, but we certainly.

I don't want to bank around in something like the percentage you said, but we think we have really good growth prospects and service, our goal is to build a much bigger service business. So it would take performance like that to do, what we're trying to accomplish..

And Adam on top of that, we want to make sure we are taking on good maintenance customers and take on good work. So we're growing, but we don't want to grow at the absence of getting good margins..

Okay and then what are you 15% top line growth in the quarter, what are your expectations for what that looks like later in the year?.

So keeping mind five of those 15 points came from an acquisition that we did in the second quarter last year. So that will, we have a multitude of that this quarter I believe, but that will end.

So if you look at same store growth of 10%, two-thirds of our revenue growth came through some big project that we're heavily manned this quarter at our North Carolina facility and I think they're very busy in the second quarter as well and I don't think that lift will go into the third and fourth quarters.

Meanwhile we've got other parts of our business that are picking up right in the Northeast which slows down some in the winter always picks up and they good backlogs up there.

So I would say, even if you saw our new construction growing sort of even as high as, high singles, to low doubles that's going to average in with our service and give us growth in the three, four, five maybe with the first quarter maybe average to six. But later in the year, I think you're looking at three, four, five, same store probably..

Okay, great. Congrats, again..

[Operator Instructions] your next question comes from the line of John Rogers. Please proceed.

Brian or Bill, in terms of the acquisitions that you're looking at or thinking about now. Any new skill sets I mean you mentioned refrigeration and some other areas.

I mean that you see, the Comfort Systems should be positioning for in terms of the market that you're seeing developing?.

I would say, that we have other skill sets besides mechanical and we make really without exception where we have those other skills sets we do well in them.

So I think we would be open minded about acquisitions and very closely adjacent skill sets like you said, refrigeration is really close like we do in a lot of places, but we're certain one of the tuck-ins we did this quarter added some refrigeration expertise and then there are related especially sub contracts periods that we are attracted to, but whether that could be a next the downturn, we try to do something significant in one of those areas.

I think sometimes we look at some of the better companies you look at, they have more heft have more than one business line, so they are people we would talk to, that could give us a little more exposure to some of those areas and maybe prepare us for success in those areas in the future.

As far as this year, some major foray into an adjacent service line that doesn't seem evident at the moment..

Okay and the other thing just in terms of the pricing that you're seeing the market.

You know you noted the strength especially on the east coast are you seeing better pricing in those markets and how broad is that?.

John, pricing is a funny thing. I think when you said for a couple years. The recovery was going to be slowing gradual I think that's what we're seeing, I think pricing is doing the same thing. It's incrementally increasing getting a little bit better, but it's not a spike, it's slow and steady..

Okay. Thank you..

Your next question comes from the line of Ms. Tahira Afzal. Please proceed..

So I just wanted to get one little update, if you look at your whole span in terms of geographies there were some that took off a little a year on, maybe perhaps there were more at the trough level, so little and sort of went down a little softer and I believe that was more maybe perhaps in California and maybe in Arizona etc.

So would love to get sense of the market that started to recovery as soon for you because perhaps they saw a steeper in earlier decline, how are those doing today in relative to when they first started to recover.

Are you still saying the same momentum in those?.

Hi, Tahira. It's Brian. We take a look across the country. The northeast maintains this stability it's going on a little bit, the southeast seeing including a Mid-Atlantic some accrued growth, Washington in that area was sort of slowly get into the recession and I think they're finally coming out of it.

We're seeing great bidding opportunities in the southeast much stronger that we saw in even two or three years ago. And finally the west was the first sort of in the recession, it have been the slowest to come out, but I think over the last five to six months.

I'm seeing a lot more activity out west improving conditions and lot more opportunities in bidding activity for us in the west. Finally..

Okay, great. Okay, good. Thanks a lot folks. That's all I had..

Thank you..

Thank you so much for your participation in the question-and-answer session. We will now hear from Mr. Brian Lane for closing remarks..

All right, thanks Tony. Thanks to everyone for listening to the call. Especially, we have a group of people doing project management training. We want to welcome to the call and wish them luck, finishing off the quarters [ph].

I think we're very optimistic both Bill and I, that our markets are strengthening and we're looking forward to the remainder of 2015. Hope to see you all in the road soon. Have a great day. Thank you..

Thanks..

That concludes today's presentation. You may now disconnect..