Good day, ladies and gentlemen. And welcome to the Third Quarter 2014 Comfort Systems USA Earnings Conference Call. My name is Sarah, and I'll be your operator for today. At this time, all participants are in listen-only mode. And later, we will conduct a question-and-answer session. (Operator Instructions) And as a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Julie Shaeff, Chief Accounting Officer. Please proceed.

Thanks, Karen. Good morning, everyone. Welcome to Comfort Systems USA's third 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 thank you for joining us. I will start with an update on our results and a few comments, and then Bill will take us through the financials in more detail, and finally, I will discuss factors affecting our results this quarter, our backlog and our outlook. During the third quarter of 2014, we had revenue of $370 million and earnings of $0.20 per share. The results for the quarter reflect solid earnings in a majority of our locations, but unfortunately, they also reflect an additional job breakdown on project at our Southern California operation. Apart from this breakdown and excluding an unusual gain in prior year results, our field operating income showed some improvement as compared to the same time last year. Bill will provide more details about our operating results in a few minutes. Our backlog was $657 million as of September 30th and includes approximately $38 million of backlog from our acquisition of Dyna Ten in May. On a same-store basis, our backlog is up significantly increasing by $48 million as compared to a year ago. Our free cash flow on a year-to-date basis was $23 million, which is much higher than the same period last year. Our Board recently approved an increase to our quarterly dividend of $0.06 per share for distribution in November and also increased the shares available under our share repurchase program to 1 million shares. We are continuing our eight-year track record of consistently paying a dividend and buying back stock to provide a share of our profits directly to our shareholders. Although, this quarter had its challenges, we continue to see encouraging signs in our backlog and in the underlying business environment. We believe that over the next several quarters, demand for non-residential construction is likely to gradually increase in a majority of our markets. I would describe our results and outlook in more detail in a few minutes, but before I get into that, let me turn this call over to Bill to review the details of our financial performance. Bill?

Thanks, Brian. If you are online and have access to our slides, you are welcome to refer to slides two through six, as I provide some additional information regarding our third quarter financial results. Our revenue increased by $20 million, compared to the third quarter of 2013. Of that $20 million increase, $18 resulted from our May 1st acquisition of DynaTen in Dallas, with the balance reflecting a small same-store revenue increase. Net income for the third quarter was $7.6 million or $0.20 per share, down from the third quarter of last year when we earned $11.4 million or $0.30 per share. Our third quarter last year benefited from approximately $0.03 arising from income from prior reporting periods and the $0.02 gain associated with the change in the fair value of an earn-out liability. The two remaining factors that account for the difference are, first, additional disappointing results at our Southern California operation, where job loss reduced our EPS by $0.03 per share, and second, SG&A increases for additional resources relating to our service growth initiative and the investments that we are making in IT. If you set aside the job losses in Southern California this quarter, our aggregate field operating income was higher than in the same quarter of 2013. Our gross profit percentage for the current quarter was 18%, excluding the prior period adjustment that was recorded in the third quarter of 2013. Our gross profit percentage for the third quarter of 2013 would have been 18.6% and the remaining year-over-year decline in our gross profit percentage relates to our Southern California results. A final factor that accounts for the lower earnings per share this year compared to last year was a larger than usual subtraction of minority interest which is a product of remarkably strong earnings at…

All right. Thanks Bill. First, I will comment on results and then I will review our backlog and activity in various sectors and markets. We experienced strong results in many of our markets, including Wisconsin, Virginia and North Carolina. Most of our remaining markets are continuing to achieve solid progress although they are not yet benefiting from gradual economic improvements. Unfortunately we booked another loss this quarter in Southern California. During the third quarter, we successfully finished and met all meaningful benchmarks on the first and larger phase of our financially troubled prudent project. Following that completion, we carefully reassessed phase 2, which will begin this month and is about one-third the size of phase 1. And in light of our disappointing performance on phase 1, we provided for additional expenses to cover phase 2 costs that need additional expense accruals resulting in a $0.03 per share reduction in our quarterly income. Although the majority of phase 2 will be performed during 2015, we believe -- we believe that these are prudent steps to ensure that we have fully provided the money we need to continue to deliver high-quality product at this site. Please turn to slide seven. Backlog at the end of the third quarter was $657 million and includes approximately $38 million of backlog from our acquisition of DynaTen earlier this year. On a same-store basis, backlog was $619 million this quarter, which is a seasonal decrease of $17 million since last quarter and a strong increase of $48 million from a year ago. Pricing while definitely stable, it remains competitive overall. At this point, although underlying activity levels are solid, we do not see an increase in bookings that would support meaningful revenue increases in the first half of 2015. Please turn to slide 8, for a…

Thank you. (Operator Instructions) And our first question comes from Tahira Afzal from KeyBanc Capital Markets. Go ahead.

Good morning, folks.

Hi Tahira.

Hey. So, I guess that was pretty helpful first of all and congratulations. In spite of the California work, everything looks pretty good. I guess the first question is when you do look at 2015 and if we are looking at sort of a 3% to 5%, sort of non-res growth type of environment, could you kind of give, frame for us what you think the revenue growth could be in comparisons if we do see a non-res growth cycle in the 3% to 5% range?

Yeah. So, I think that we -- I’d take the Oberon revenue in the first half of next year compared to this year. But I think I don’t see any signs of sort of the significant kind of revenue that we hope for and expect as markets improve. So, I think we’ll get the kind of modest revenue you are talking about in the first half of the year. We are still hopeful that we start to get lift. We got a little bit of backlog building and signs of improvement, real improvement in couple of markets and good signs of gradual improvement in other markets. So we are hoping to get something incremental to that in the second half of next year. It's just -- unfortunately, there have been a number of times during this recession when we sensed that. The difference now is we are getting at least some help, so we feel pretty good about it.

Got it. And second question is on free cash flow, clearly, a very strong quarter again. Could you folks talk a bit about the opportunities at and cash allocation going forward? Clearly you’ve issued another repurchase program, but would love to get a sense of opportunities outside of that, as we continue to hear about opportunities for M&A in this space?

So we are actually going to consult very closely with our Board. We do that every November, the next few weeks. But the fact that they went ahead and increased -- when we reported our earnings to them, they went ahead and increased the share repurchase program, at the same time as they increased the dividend I think indicates that I expect them to continue to be supportive of us being willing to go buy our shares when they are good price. If you look at what we think the reasonable ranges of EBITDA should be for us in the next couple years and you sort of combine that with our market cap, share repurchase is a good use of our funds we think. As far as acquisitions go, we continue to actively work with acquisitions. If you look at this quarter, we got an awful lot of our earnings from companies we bought in the last couple of years. And we want to continue to provide that incremental lift to developments over time. We think we have good availability. We are prudent. We think about opportunity costs, but we think we have good availability of funds, good capacity to make some more investments.

Thank you very much, folks.

Thank you.

Our next question comes from Adam Thalhimer from BB&T. Adam Thalhimer - BB&T: Good morning, guys.

Good morning, Adam. Adam Thalhimer - BB&T: In terms of activity levels, can you -- bidding activity, can you talk a little bit about what you -- I mean what you saw how that trended throughout Q3 and then what you’re seeing thus far in Q4?

It’s Brian, Adam. Yes, we are -- bidding activity has been pretty strong, this is probably a spring, very good throughout the summer and has continued even deep into August. And we are seeing good activity looking our backlog over half of it’s in that manufacturing and no government space. So we are still optimistic with these activity levels that will continue into 2015, Adam.

Yeah, I would agree with that. I would say that if you look inside backlog trends and areas that we consider pre-backlog sort of steps that we don’t have the paperwork for, it’s good as I have seen it really in years. So nothing popping off the page, but definite work that’s supportive of backlog continuing to at least trend upward.

Gradual and slow improvement continues. Adam Thalhimer - BB&T: And then what -- I mean, Bill, in the past you talked about you’re bidding a lot of work or it just feels like clients won’t really pull the trigger, the general lack of confidence and the hope is that confidence improves and maybe that slightly it’s open and a lot of stuff that you already bid, people say okay let’s go on this now. I mean, where are we, why you’re still waiting for the floodgates to open, but are you seeing any pockets that clients who are waiting to move forward on projects are moving forward now?

I would say we definitely are seeing some bigger projects in a few markets and that we’ve seen bigger projects in some of the mid-Atlantic and obviously Brian mentioned that Wisconsin has good stuff going on. So I would say it’s better, it’s more than it was, but the reality is, most of our companies are not leaving off big projects right now, they are leaving off the work that they have been leaving off throughout the recession. So I am hopeful the areas, the industrial is good and the parts of our geographies that have industrial, more and more of our companies are getting involved in it and that’s -- I love that trend. The one thing that I think could make a big difference is medical. If you look at that sort of the healthcare industry, those guys have year-over-year revenue increases that are really virtually unprecedented. They are not building a lot of healthcare facilities. I think that’s a temporary pause. I don’t know when it picks up again, but I think if that were to pick up, it would drive everything because until over the last couple years as industrial became better, healthcare has kind of stopped a little bit on a relative basis. And I think, I don't know that -- I’m optimistic that that will pickup at some point just as the baby boomers continue to age. And at least, right now the trends are that a lot more money is going into -- a lot big percentage of our economy is going into healthcare. So I think that would be the driver when it comes. Adam Thalhimer - BB&T: Okay. And just a couple of model question on what tax rate would you use going forward? And then how should we think about SG&A as a percentage of revenue? What’s the right number there once the service initiatives start to wane?

As far as tax rate goes, I don't think we’ll stay as low as 35 because that is driven down. What happens is when EAS makes money, their entire revenues are in the denominator of our tax rate but only the amount of tax we’re going to pay, which is on 60% of what they makes in the numerator that creates that percentage. And I think, they’ll continue to do well in the next year, but I just -- I think some other company -- that the proportionality of how well they are doing, they’ll start to be a more standard part of the mix. So I think we’ll have a similar tax rate of what you're seeing in the fourth quarter. Probably a little higher, just because other companies I think, mix will change a little bit. We’ll standardize a little bit. I think next year we’ll head back towards the more normal tax rate of 38 or 39 because I think, EAS will continue to do well. I just think that that will become -- there will be other companies doing well. All that to guess, I mean, we paid 38% to 39% on domestic wholly owned income and we pay 60% of that on EAS and really the changes you see in our tax rate drive out of those two factors, except for discrete items in a given quarter. Adam Thalhimer - BB&T: Got it.

Maybe more information than you wanted. Adam Thalhimer - BB&T: No, that’s really helpful. And then what about SG&A percent?

SG&A, I think, if our revenues go up, I think our SG&A as a percent will come down some. I think if you could see greater -- the biggest single variable for next year, we will spend less money in service. There will be less trading, there will be 100 plus plane tickets bought as people, they will just be less than that training. So that will help SG&A by $1 million or $2 million. But something that moves the percentage for the entire company is going to be -- really its going to come from revenues coming up and getting a little bit of leverage. We’ll pay some more bonuses, hopefully because we’ll make more money. But usually that's when our SG&A percentage goes down as when we start to get increases later, hopefully in the second half of next year.

And I think the range you’ve seen is the range we’ll probably be in next year.

No. Revenues that will grow on that. Adam Thalhimer - BB&T: Okay. Great. Thanks guys.

Our next question comes from John Rogers from D.A. Davidson.

Hi. Can you hear me?

Yes. John.

Hi. Good morning.

Good morning.

Couple of things. First of all, I guess, Bill, what’s fuel -- What are fuel costs right now as a portion of your business?

They’re not -- they’re actually moving up slightly because as service get bigger, we’ve had -- we’ve bought more vehicles. You’ll see a little bit of that in our SG&A, but it’s just not -- it’s not an important variable. The monthly bill could be $600,000 or can be a million but its not -- we have a single fuel coordination wide. When it’s a $1 million, it’s going at the middle of the summer and gas prices are high over the last couple of years. It will be lower in debts of winter and gas prices are little lower. But it’s not an overall important driver. The other thing is when gas prices are above a certain amount, we charge a fuel surcharge on better than 80% of our trips, so that kind of takes away the variability. Most customers let you charge the fuel surcharge if they see prices higher if they thought so.

Okay. And the service investment that you’ve talked about the $1 million a quarter, hopefully, I mean the cost will come down that you’ll get a return presumably on that investment too in 2015. Is that $1 million incremental swing in cost or how should we think about that. I mean, it is off -- I mean, it should be even more than that if you’re getting a profit on the service businesses. Is that right?

Yes, John. We should have a cost benefit of about $2 million in ‘15. So we have…

For the year or for the quarter?

For the year.

For the full year. So what we’ve said for the last couple and it’s attracted about what we expected to all those, sometimes it’s different quarters than we expected. We begin -- we begin just on the service part we had a $1 million, little over $1 million back in ‘12 -- back in ‘13 and ‘14, we had an incremental $4 million in service investment to the year before and then that will come down by about $2 million this year. Big part of that and that’s driven mainly by training. Almost everything, we were doing, we’re doing for service. We’re going to keep doing it, except obviously when you go train 300 people over this brief period of time. We will start some training, but it will be nothing like that scale. So that gives you about a $2 million improvement for next year. Having said that, then, we absolutely expect, although we [Technical Difficulty]. We’re going to wait a minute or so. If we don’t get back online, call back into this number.

This is the Operator. Can you hear me?

Yes, we can.

Okay, perfect. Sorry, there is technical difficulty there. All right. We do have our question here. It comes from John Rogers here.

John, I don’t know how much of that you heard, but it was going to change everything you think about Comfort Systems.

Yes, I assume that I was right. I heard I asked the wrong question.

Yes.

I lost you Bill right when you said, when you’re talking about the service business and the $2 million cost savings. And then you said, we absolutely think we will get -- and I think you’re going to say some earnings benefit but that’s when it cut off.

Yeah. I would like to tell you that what I was about to say was that we’re going to have an earnings bonanza. But I think we said we’re just hoping to be a source of good news next year and obviously deeper in the years when you most likely to see it as it. It’s a building thing.

Okay. And then just to the share buyback, at the rate you’re generating cash and I mean the less there is another acquisition out there. I mean you should be able to fund the incremental million shares fairly quickly, I mean, it looks like. So I guess my question is, how does your pipeline for acquisitions look like? And, I mean, you assume you will get some overtime, but is that reasonable to think we’ll see more in 2015 or increased share repurchases?

I would say that our pipeline is actually really pretty good. We have some good opportunities whether we’ll get to a deal in six months or year and half with these companies. We have some companies we’re talking to that we think are destined to be a part of Comfort Systems. So I think there is good opportunities for acquisitions. And I think for a less pricing levels given our future expectations, we also think repurchasing shares is a really, really good use of funds. So I think it’s sort of subject to what Comfort Systems stock price does, what feedback I get from my Board of Directors in about three weeks, because we’ve got some really, really sharp people who advise us on that on our Board who have a lot of experience and whether some of these acquisitions ripe in quickly or ripe in over a little longer period of time. I do agree, we will flow cash and we’ll have some money to invest and it’s one of the reasons we raised our dividend a little bit. That does have a big cash cost but we feel like we owe our shareholders a return.

Okay. But there is no change in the cash flow dynamics. In other words, as the construction business hopefully picks up, maybe by the second half of 2015. It won’t consume an undo amount of working capital.

It would have to surge the way it surged in sort of 2007. If it did, we would have a big investment in working capital. But we have a good credit line and I don’t know…

We don’t see that surge, John.

Yeah. With gradual increase, I think we -- we have a little CapEx going on because we’ve got service starting to grow. And we have an old fleet but that’s doesn’t really move the meter, neither does, I mean, as far as being able to invest it doesn’t make the difference and same thing unless we really start to see an increase on the construction side. It’s just not an important variable as far as cash planning.

Okay. Great. I’ll get back in queue. Thank you.

Thanks, John.

All right. Great. Well, there are no further questions in queue. So, I'll turn it back over to Brian for closing remarks.

So we’ll give, John a minute. He said he was getting back in the queue.

We’ll wait for John if he wants to ask another question. All right. Go ahead. John.

Okay. Thanks. Good. The other thing -- I gave you a message, Brian on, not a strong rebound in terms of construction activity. But if you look out over the next couple of years and with the service business and presumably, I don’t know what normal is but a better construction market. Remind me, again, where you see the balance of the business now as service may look and…?

John, our goal is to drive revenue to be and have a less balance, 50-50, that’s been our goal over the last few years and that’s what we are driving to. That we get a mix of construction services that both have grown like the percentages don't change because construction went down or service did this but they both. They both have increased to contribute equally.

And that’s still a high-teens gross margin mid single-digit operating margin?

Yes.

Okay.

We haven’t changed what we’ve talked about in the last few years. That’s our goal, that we think that’s achievable.

Okay. Okay. Great. Thank you.

Thanks.

Thanks.

All right. Great. So there are no further questions. So, I’ll turn it back to you, Brian for closing remarks.

All right. Sarah, thank you. Thanks for listening to our call everybody. We really appreciate it. We are poised for growth by investing in service and we are ready for construction markets for growth as those markets improves. We are very optimistic about the future of Comfort. I think we are doing all the right things for this to be a long and prosperous company. Hope everyone has a safe and Happy Halloween and we’ll see you on the road soon. Thank you.

Thanks everybody.

Ladies and gentlemen, that concludes today’s presentation. You can disconnect and have a great day.