EMCOR Group Inc (EME) 2002 Q1 法說會逐字稿

Thank you and good morning. This is Eric,

of Morgan Walk Associates, and I would like to welcome you to the EMCOR Group conference call. We're here to discuss the company's 2002 first quarter results, which were reported this morning. I would now like to turn the call over to Kevin Matz, Vice President of EMCOR, who will introduce management. Kevin, please go ahead.

Thank you, Eric, and good morning everyone. Welcome to EMCOR group's Earnings Conference Call for the first quarter of 2002. For those of you who are accessing the call via our website, welcome, and we hope you have navigated the directions to arrive at the first slide of a seven slide presentation that will accompany Frank MacInnis's remarks. The first slide is the Title Slide. During the call, instructions will be given to you to hit the page down key to follow the presentation to the next slide. This is one of those times, please hit the page down key and advance to slide two. Slide Two depicts the executives who are with me to discuss the quarter. They are Frank MacInnis, Chairman of the Board and Chief Executive Officer, Leicle Chesser, Executive Vice President and Chief Financial Officer, Mark Pompa, Vice President and Controller and Bruce [Rogowski], Director of Communications. The call participants who are not accessing the conference call via the internet, this presentation will be archived in the investor overview section of our website. You can find us at EMCORgroup.com. Before we begin, and as you know, this call may include forward looking statements. These statements are based on certain assumptions and perception of historical trends, current conditions, expected future developments and other factors if leads are appropriate. Actual results or development may differ materially from those anticipated in these statements. Now with that out of the way, please let me turn the call over to Frank MacInnis. Frank.

Thank you, Kevin. Those hours of rehearsal are really paying off. Good morning everyone and welcome to EMCOR's Group's 29th quarterly conference call for investors, analysts and other friends of the company. We also welcome those participating on this call by our simultaneous webcast. As Kevin mentioned, I'll be referring to the relevant slide as we go through this morning's call. You'll find that the slides are numbered in the lower left-hand corner, and right now, we're still on slide number 2. We'll conduct today's call in the customary way, beginning with a discussion of the first which we we reported this morning. Followed by a review of our contract back laws, with special mention of some notable

contract awards from the last quarter. Then we'll briefly discuss the ongoing integration of our 19 recently acquired subsidiaries, and we'll conclude with a review of our current capitalization and our attitude towards further investment opportunities. Thereafter, there will be a chance for to you ask us questions or to make comments. And three of the members of Senior Management are here to assist with the answers. Let's begin by clicking to slide 3. The first quarter results from operations that we recorded this morning were the best first quarter at EMCOR's history, setting new highs for gross profit, operating income, net income, ebitda, and diluted earnings per share and demonstrating once again our ability to adjust quickly to changing economic conditions. Although revenue for the quarter was $810 million, a 3% decrease, from the year-ago quarter, gross profits increased 11% to 89.3 million dollars or 11% of revenue, as a result of several major factors. Firstly, excellent performance, especially in our New York and Washington, D.C. Markets. Secondly, the closure of previously lost making operations in our -- subsidiaries in our Carolina offices and very lastly very positive contributions from the companies recently acquired from conferences in the USA. Operating income improved for the same reasons, rising 16% from the first quarter of 2001 to a level of 12 1/2 million while net income of 7.3 million, or 47 cents per diluted share was 28% higher than the 5.7 million or 44 cents diluted earnings per share reported a year ago. Ebitda rose 5% year over year to 15.9 million dollars for the quarter. As I mentioned a moment ago, we were gratified by the performance and the accretive contribution of the 19 companies we purchased from [Comfort Systems], USA on March the 1st. Despite being part of the EMCOR family for only one month, our new subsidiaries contributed 49 million dollars of revenue and 1.8 million of Operating Income to our quarterly results. Just as importantly, we have made excellent progress towards the complete integration of the new companies into our EMCOR organization and our management systems. As we are discovering new opportunities for expanding customer relationships and cross-selling our services, based on our new subsidiaries' excellent operating histories. Their strong corporate cultures and past experience as publicly owned companies has significantly eased and speeded the integration process. Please turn to slide 4. Despite using about $114 million of balance sheet cash in the comfort systems transaction, we reported a very liquid balance sheet at quarter end. Cash was over $142 million. And total debt was $73 million, comprised of $50 million, drawn from our revolving loan facility and 22 million of notes assumed in connection with the comfort systems purchase. Since the quarter end, we have repaid $15 million of the $50 million revolver drawdown, and we will probably repay the balance shortly. Goodwill rose about $113 million to about $170 million as a result of the transaction. And shareholder equity rose during the quarter to $432 million dollars. Our backlog of construction of and facilities services contracts rose during the quarter to an all-time high of $2.5 billion, due to a $200 million contribution by the former comfort systems' companies. Please go to slide 5. Our contract backlog of $2.5 billion, a $500 million, or 25% increase over the 2.0 billion level in the year ago quarter, reflected continued strength in a number of economic sectors, which have been key contributors to EMCOR's stability, consistency and growth. Commercial, which declined during 2001 showed signs of a turnaround during first quarter of 2002, while the institutional, transportation infrastructure and health care sectors continued to be sources of strength for our companies. The size and quality of our backlog account is an important factor in our ability to look ahead to future periods to assess our opportunities for revenue and profit growth. On slide 6, we identify a few of the many contract awards received during the first quarter. A number of these awards illustrate our continuing trend towards longer term, slower-burn projects, which are not as positive for revenue growth short term, but which provide a long-term, revenue and profit base, making forward planning much easier and more accurate. In Los Vegas, we have been reawarded the electrical and mechantal work on the new Mandalay Bay convention center It was a project deferred a year ago, but is now ready to proceed. We received two University related awards our new central mechanical subsidiary will be doing HDAC work at the University of Kansas and our [gavel] company will be constructing HDAC plumbing systems at the MD Anderson Cancer Center at the University of Texas in Austin. F&g mechanical, our new subsidiary in New Jersey will be installing plumbing and fire protection systems at the Gateway in Hoboken, while Kemp's southern division was awarded another Miami area water reclamation project, the B ridge facility. Our wells back company in New York City will be installing new lighting and motorists information systems on the various of the bridge. And higgins mechanical in Boston has a new contract from the Massachusetts development authority. Our dinalectric which has performed really well, has won the electrical contract for the american red cross headquarters while the largest of our newly acquired subsidiaries [INAUDIBLE] will be installing the piping and electrical systems at the fuel cell corrosion facility used by the Indiana air national guard's f-16 fighter squadron. These new project awards, drawn from hundreds, awarded to EMCOR's company during the first quarter, typify the remarkable diversity of services, of geography, of economic sectors served, which EMCOR brings to the enormous and varied construction and facility services markets. With the integration of the comfort systems companies proceeding well, the natural question is, now what? I'd like to say first of all that we feel no pressure to make additional investments or acquisitions, and we're certainly not going to chase deals. We never have. Guidance I issued last quarter, that is revenues to 3.9 to 4.1 billion, and earnings per share of $3.90 to $4.25 per diluted share remains applicable. So we're expecting a good year in any event. However, there are numerous investment opportunities out there. Continued divestiture pressure from ratings agencies, lenders, analysts, and investors, is creating purchasing opportunities at reasonable prices. As shown in slide 7, our post-comfort systems balance sheet is still liquid and underleveraged, providing plenty of dry powder in circumstances where there are not too many credible and liquid purchasers, even out of quality assets. So we're hunting carefully with the knowledge that we already have a strong operating group of companies that that we don't have to buy anything, and particularly something that requires a lot of repair. I think I can sum up this quarter by saying that your company performed consistently and well, exceeding analysts' expectations in a challenging environment through continued concentration on the basic rules for success in our business, diversity and liquidity. Thank you as always for your interest and your support. And now we'll open the call for your questions and comments and Melissa will give you instructions.

At this time, I would like to remind everyone, if you would like to ask a question, press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the q&a roster. Your first question comes from Jeff Beech of Stifle Nicholas.

Good morning, Frank.

Hi, jeff.

You kind of surprised me with the balance sheet coming up with something better than I could have expected. And I've been here this morning, trying to reconcile how you generated all that cash and came up with less debt than we expected. Is it all working capital? And if so, how much of it came from comfort? Can you give us a little discussion of that performance?

Kevin, would you like to give a try I'll just give an overview, Jeff. We used 50 million of bank debt, and financial transaction, and 114 million of balance sheet cash off of a very strong balance sheet. We had $189 million of cash at year end. But it is certainly true that the liquidity of the quarter end balance sheet is a little better than even I had anticipated and I think it is in part a matter of the cash contributions by the comfort companies during the month but also a strong cash quarter for us in general. Leicle Chesser, our CFO, has another comment.

I think when you look back to the statement of cash flow, you will see the changes of operating assets that exclude comfort, a $41 million of improvement. And a majority of that was a reduction and the -- what we had refered to as historical companies' accounts receivable. So we did have a very nice quarter in collecting our receivables that were outstanding. [KEVIN MATZ]: Jeff, and I think that this is a useful segue for me to talk a little bit about our view towards acquisitions. This is not an acquisition-oreiented company. And when we make one we want to get back to normal operations as fast as possible. And normal operations for us involve minimizing debt to the greatest possible extent. So we consider our task immediately following laying out the cash for an acquisition to reduce the debt and to increase balance sheet cash as quickly as possible because there's a period of vulnerability for a company in our business when the debt is up immediately post transaction. As I mentioned, we're pretty conservatively capitalized by anybody's standards, but we're still working hard to get the cash up and the debt down.

Okay. One other question regarding comfort systems. We don't have a good history. The operating profit margin was very good in the quarter. Is there less seasonality with comfort systems? It doesn't seem like there because of the location that there should be a fairly good amount of seasonality. But what can we look forward to from a 3.7 percent margin in year and were there any integration expenses that came out in the gna or in one of the lines that really understates the contribution?

I'll deal with the last question first. We have expense to all direct transaction costs that have come in to us. We capitalize fees fees and with that, it's been expensed. The month was good, especially net of transaction expenses. We are looking for increased efficiency from those companies as they are fully integrated into our systems and management controls and duplications are eliminated. We bought these companies because they were strong because they were producing solid margins that would be immediately accretive to us, and they have turned out exactly that way. With respect to seasonality, I don't think that we'll see a lot. We're seeing less seasonality in our business in general on a gradual basis as we go along due to the increasing service and maintenance component of our business, which is less seasonal than new construction. So I don't think that we'll find them to be certainly any more seasonal than the balance of our company.

Thank you.

You bet.

Your next question comes from Michael Roseler of CJS securities.

Hi, mike.

Good morning. Frank, sort of looking at the pro forma numbers on the comfort systems acquisition and if you looked at March of '01, it would have been 72 cents. And would there have been any change in how you guys approach accounting for these companies that might have changed that same type of impact on the current quarter for that basis? [UNKNOWN SPEAKER]: First of all, Mike, we account for the results of our companies extremely conservatively. As an example, we voluntarily defer recognition of income on projects that are less than 20% complete. This is just an example of the aversion that we have to negative surprises both for us and for the market. So we're very careful and conservative about recognizing profit. To the extent that your question asks me to comment on the accounting principals and revenue and income recognition used by comfort systems, I'm not going to do that. But I do think that if anything, that we are significantly more conservative than the comfort systems companies. Another aspect of our management that I think may provide a clue to the differences is that we never press our subsidiaries for revenue. We never ask them to go out and get work, especially in circumstances where their market and business judgment is that work with correct risk reward ratio is not available. We would very much prefer they control their costs and take on only work that they have the management capacity to efficiently administer and whose risk is reasonable. I'm quite happy with the pattern that both the comfort systems companies and our overall company has shown in this quarter and in fact for the last couple of quarters and that is for a moderation of revenue growth, which was certainly recession-related but which was also directly related to the a higher degree, a higher preponderance of long-term slow-burn projects, which don't contribute much to short-term revenue growth, but which give us a real good picture of revenues and profits significantly further into the future than was the case before. So I think that the comfort companies, which are uniformly high quality companies, not only contributed well to us, but showed the same kind of profitability characteristics that we were looking for from all of our companies.

Just following up on your comments in terms of a clear picture now. The previous guidance, you stated that was built upon a budget process that had gone on in the midst of a very recessionary environment sort of in the midst of 9/11 events. Have you sort of looked at that budgetary process now and given and sort of update of where you think that is in terms of current reality?

[FRANK MACINNIS]: Yes. I've reiterated my previous guidance just for clarity. I didn't reiterate it in the press release because I thought it wasn't necessary, that it should have been assumed that it stood. But just for clarity, I've reiterated now. We're playing it a little close to the vest for the time being with respect to any modifications, especially upward modifications to guidance. And it's because of the -- my own personal view of the nature of the economic recovery that's taking place. And this was rather effectively discussed in an article from the wall street journal a couple of weeks ago, where the thesis was that whereas companies in the private sector are beginning to spend money again, a lot of money that they are spending is in the name of efficiency to -- to provide themselves with additional protection against the next recession, whenever that is. Now, some of this is good for us. It's good, for example, when companies spend money on energy efficiency. So as to reduce their exposure to fluctuations in energy costs. That's a big market for us. And we love for companies to do that. It's also good news for us when companies decide to outsource activities that they formerly maintained in house. And they do this during troubled times or uncertain times in -- as a matter of protecting themselves against the effects of non-cor activities and the management reform associated with those and the realization that we, as specialists in the business can do the job better. So that's all good. And we like that aspect of the recovery. We're definitely seeing some of that. On the other hand, to the extent that those same companies are not spending money on new manufacturing facilities or new high-grade commercial space, that's bad for us. So the economic upturn is kind of spotty for us. And as a consequence, I'm not yet ready to make a confident modification to the guidance that's currently outstanding.

Okay. Just one more quick question. I think in the last conference call, you mentioned that you expected the service business to be profitable. Any update on that? Sounds like maybe if there is an increase in efficiency that might accelerate a little bit.

I certainly can repeat what I said. I do expect the service business to be profitable for the second half of the year. There are very positive developments in that area, and we are very pleased with our investment.

Okay. Thank you.

Your your next question comes from Alex Rygiel from Friedman Billings, Ramsey and Company.

Couple of questions. First, can you give us a little more detail with regard to the integration plan and process with regard to the comfort systems. What has occurred to date with accounting and HR and IT departments? What will occur in the near term? And standing here today, do you see any longer-term opportunities for office consolidation and future cost reductions? [FRANK MACINNIS]: Okay. The -- as I mentioned on the call, the comfort systems integration process was greatly simplified and expedited by the fact that the -- these are good companies. So there's not a lot to fix. In fact, as I have mentioned on a previous call, some of them are considerably better at certain things than we are. And we are anxious to learn from them those skills and those strengths and export them to the rest of our companies. So it's definitely a two way street. The second factor in easing and expediting the integration is that they have already been part of a public reporting group. So they understand the schedules, the time tables, and the technical requirements associated with effective and efficient and accurate public reporting, which we are very strict and conservative about. So that's been a help. The fact that they have strong corporate management cultures and a high degree of professionalism has been a major positive factor as well. We think that aside from the technical aspects of inclusion in our cash management programs, merger of our insurance and hr activities and the like, that one of the major tasks for us is to acquaint them with the EMCOR model, because I think frankly that the EMCOR model has been working somewhat better than the comfort systems mod telewas. And for that -- model was. And for that purpose, we gathered senior executives from all 19 of the comfort companies about, I guess a couple of weeks after closing of the transaction, and we had a two-day series of seminars at which we had a chance to meet them personally, begin to become familiar with them, and with their strengths, their weaknesses, their interests, their ideas, and most importantly to inform them about EMCOR core values about the principals that we think have assisted us greatly in providing the record of consistency of growth that we've given to our stockholders. So we did that for two days. Down at Westchester and brought a very positive response from the senior officers of the comfort companies who attended. With respect to the technical aspects of integration, anybody Kevin or Leicle have [LEICLE CHESSER]: We continued to visit with them, bring them in on an operational basis As Frank pointed out. All the companies are integrated into our cash management, which we've talked to many of you about. We have interaction on a daily basis now. So We're making great strides toward that.

I think if this was one significant change, Alex, that all of the comfort systems companies had to make it was that none of them realized how seriously and consistently that we take cash collection. At this time cash performance that Jeff Beech was commenting on is a requirement for us. So that the establishment of the two month rolling forward cash collection and disbursement projections that we require from all of our companies. The requirement for daily cash reporting so that we can review the daily cash report every afternoon is an important part of their compliance with our programs. I think perhaps that's the most significant short-term change that they have had to make. But I think they all understand that that's part of our success and that they are going to be judged in large part on their contributions to our liquidity.

Great. And actually, two questions coming out of your 10-k, if you could just address them on this conference call, if you could give us an update on the comcast canada lawsuit, as well as explain to everyone the baltimore gas and electric venture that you have.

Sure. Are you just showing off to everybody that you've read the 10-k, Alex? [ laughter ]

First of all, with respect to baltimore gas and electric, Leicle, you want to give it a try?

That is a joint venture where we're in the inner city providing chilled water. We actually do some of the construction of the chilled water facilities, sell that through Baltimore gas and electric, where they don't have to have their own heavy mechanical and support systems there. Still in the development stage of that joint venture, an interesting one for us, and we'll see how it plays out as we go forward.

The -- you okay with that, Alex?

Yes.

Okay. I presume that in connection with comcast you're referring to the ACL, the atomic energy of Canada?

Correct.

That is a lawsuit associated with a claim and counterclaim on a construction-related project that we had on one of the atomic energy of Canada facilities in Ontario. We have a construction claim outstanding in connection with changes in design and process associated with the chalk river facility. The discussions with respect to the prosecution of our claim kind of ground to a halt. We had frankly anticipated a settlement that would have oviated all of this nonsense. Acl declined to settle and as kind of a offense -- is the best defense tactic, I believe, filed a lawsuit alleging shortcomings in our work. We don't think that there's any merit to the allegations at all. Our council have advised us that we have a meritorious defense and whereas there are numerous technical details that I could supplementary provide, I am confident in the outcome of this dispute. And it is at bottom a dispute with respect to changed orders and design changes on a nuclear facility.

That's helpful. Thank you, frank.

Okay.

Your next question comes from Jamie Cook of CSFB.

Hi, guys. Can you hear me okay?

Yes, Jamie.

Hi. How are you? Quick question. In terms of the trends you're seeing in backlog, you commented on some of the sectors. Can you comment on what you're seeing in manufacturing and water and waste water. And also, if you're seeing any changes in terms of the different sizes of projects, large versus small? And my second question, if you could comment -- you commented a little on your acquisition strategy, but going forward, are you looking more into getting into certain geographic areas or different types of services, if you could comment a little more on your acquisition strategy. And last, it looks like your receivables went up 100 million. -- about 100 million since December and was that due to comfort systems?

I'm going to let Mark and Leicle deal with the receivables questions first and then I'll go through the remainder of the list.

Thank you. [LEICLE CHESSER]: On the accounts receivable approximately 37 million decrease was from our historic companies. The rest was an increase due to comfort.

Okay. Great. Thank you.

Okay. Kind of a list -- long list of questions here. First of all, experience with manufacturing, we acquired the comfort systems companies in part because we desired a better foothold in the midwestern manufacturing sector. And I think that we're very pleased with the fact that we now have that base. Industries notably like the pharmaceutical and biotechnology and food processing businesses are areas that we want to get access to through the comfort systems acquisition. They were niches that we hadn't been very strong in in the past. And I'm happy with the impact of the transaction in that area. We'd like to be -- we'd like to continue to grow in the manufacturing sector. As I mentioned a moment ago, we've seen less encouraging economic recovery in the -- in increases in the manufacturing space and facilities than we have in efficiency-related expenditures, but I am confident that increased expenditures on manufacturing capability will come in the next phase of the economic expansion. You asked about water and waste water, we announced in the course of the call of the award to our pool and kent company, which is the largest company specializing in water and waste water projects in the country. The award of the water reclamation project in Miami called B ridge. This is supplementing a significant group of reverse osmosis desalivation plants which we have been installing in Miami in order to enhance the protection of the aquifer underlying Miami against salt water incursion. As I mentioned previously in the call, once you start holding back the ocean, you can't stop. So we have very high expectations not only for water and waste water work in the Miami area and other areas where aquifer depletion is a major concern. But in general, I think all of us have grown up with the expectation that cheap,pure water water will be instantly available and I think that belief is unfounded. I think that short, immediate, and long-term water and waste water systems will be a major growth area for us, and I think we're well-position said with pool and kent and other investments to take advantage of what I regard as the inevitable market as major and mechanical and electrical and the outsource and operation and maintenance of those plants. We're very positive about water and waste water. In terms of geography, I think it's likely that any future investments that we make will be in North America. I'm not very confident about the likelihood of advantageous investments. For example, in Western Europe, there are spots, niches where there might be some interesting things to do. But in general, I think we're going to be looking at North America. And rather than geographically, I think that we're going to be looking for demographically driven market sectors where demand is going to inevitably increase in the future. And I think that one of those areas is energy generation, transmission and consumption. I think that there's a lot more to do, for example, in connection with the reconstruction of an efficient electrical distribution grid throughout North America. Energy consumption, on the other side of the coin, revamping, redesigning, and maintaining new energy-efficient facilities, with all of that implies. So not so much of a geographic orientation to our investments as an identification of economic sectors in which we we think that growth, especially long-it term growth, is going to be inevitable.

Okay. Great. Thanks a lot. FRANK MACINNIS You're welcome, Jamie.

At this time, I would like to remind everyone to please press star 1 if you would like to ask a question. Next question comes from Toby Summer.

Just wanted to ask a question about your backlog, what it looked like sequentially from the fourth quarter both with and without the comfort systems business and then if you may comment on what the margin associated with that backlog looks like.

Okay. Backlog at the end of the fourth quarter was just a shade under $2.4 billion. Backlog at the end of our first quarter was $2.5 billion. The contribution in backlog in the first quarter was about $200 million. So sequentially, backlog from the remainder of the EMCOR companies declined slightly, about $100 million or so between the fourth and the first quarter. It should be said, however, that the fourth quarter -- and I know you're not looking at the webcast live, but the fourth quarter of 2001 represented a very significant increase of backlog to a major new record. So I don't regard the 100 million burnoff of 2.4 billion of revenue as being statistically or operationally significant. [KEVIN MATZ]: With respect to ingredients, gross margins, it's -- it's really -- and we get variations on this question from time to time. It's really not possible to comment on that because of the complexity of the question. We -- the backlog probably comprises about 3,000 individual projects or contracts at any given time. And the analysis of those projects or contracts individually for the purpose of accumulating gross margin is unlikely to be very time or cost-efficient. However, we do keep a very close and current watch on our work in progress, derived from that backlog, of course, if it's performed in accordance with its contractual terms, it ought to be positive. And it's worth noting that we have shown since 1995 a consistent increase in margins associated with our business, and we continued to show that increase in this last quarter, despite at least challenging economic circumstances. So I know it's not a direct answer to your question, an answer, which we don't think is possible. But the next best thing is to look at how the profits that we're deriving from that backlog are performing. I should mention, perhaps, just in passing that we calculate backlog very conservatively, ask that some of the work, some of the revenue that we are reporting in this current quarter, of course, never saw the backlog summaries at all. We don't include in backlog most of the projects that we perform that are under $250,000, even though those small projects typically represent a quarter and a third of our overall revenue. So the calculations are even a little bit more complex than I've already described.

Thank you. One sort of -- or couple of sort of follow-up questions. What percentage of the backlog do you typically -- typically flows through to your income statement, within say, 12 months. And then, if I look at the gross margin associated with backlog from a different angle, you commented that you prefer your local operating companies to really look at the business at hand and then take on business that they can turn a profit on, and there's a reasonable risk. It is -- was there increased bidding competition in the quarter that may have affected the revenue growth?

No. The -- the award scenario for work during the quarter was quite robust, especially in the areas that I mentioned, in health care of water and waste water and communications infrastructure, where we are very well established. The -- the major impact on revenue in my view was the fact that over the last year or so, our backlog has come to be composed of a larger than usual proportion or larger than historical proportion at least of long-term, slower-burn projects that produce less revenue per unit of time than was the case a year ago, for example, and if we're talking about the comparison of this quarter and year-ago quarter, believe it or not, we were still wrapping up major telecom work during that first quarter of 2001. I know it seems like ages ago, but it wasn't. And that was a very strong quarter for us, involving a lot of flash track work that has now completely gone away. And has been replaced with slower burning projects in areas like transportation infrastructure. And I mentioned the lighting of [INAUDIBLE] significant projects for us, but relatively long term. The institutional work that I mentioned on the call. The university projects and the like and that waste water plant, those are relatively slow moving projects. Nicely profitable. But extending further into the future and providing less revenue per unit of time than would have been the case obviously with a portfolio of flash track that -- like the facilities. That's the major, the macro difference between the difference between the periods, and I don't think it's a negative difference. Because in answer to your first question, I think that probably -- and this is just kind of an informed guess, once again because of the 3,000 or so contracts make up the backlog, but I'm guessing about 40% of that backlog that we're reporting currently will flow through revenue in the next 12 months. Supplemented, of course, by new jobs obtained by that period of time. We get hundreds of awards per quarter that go into backlog. And we get hundreds of awards per quarter that never see backlog, for reasons that I previously mentioned. But all in all, those are some of the macro trends that I see influencing revenue.

If I could just ask one last question, turning to your comment on the outsourcing trend, if you could comment among the different businesses that you're in, where that trend is sort of strongest and what you see that looking like going through 2002.

Yeah. We find that outsourcing to our facilities services business is frequently decided upon by customers who are for one reason or other another stressed or threatened. And who are rationalizing their business, making a decision to concentrate on their core business, which they do the best, and leaving the extraneous activities to the others. A very good example of that, which I frequently use and mention to others is the acquisition of British Airways to give up the management of Heath Row Airport some 12 years ago. We have been managing it successfully with them since. British Air ways decided they were in the passenger service business of providing transportation and not in the business of recruiting and training or employing the 450 or so people who managed the 72 buildings of Heath row airport. So they retained us for the purpose. That is the typical kind of outsourcing division that we see. A company realizes that they don't a very good job or very effective or efficient job of managing their facilities or they just don't want to be putting talented people into it. They just want somebody else doing it better and the specialty skills that EMCOR can provide. We're seeing those kinds of decisions across the board. But especially in -- on the part of companies that have multidivisional structures where they have the servicing component that their just not doing very well, they want somebody else. We're also seeing it with facility-rich companies like financial institutions and the like. That, where economy is to scale by a specialist and efficient employment of labor can result in lower and more predictable prices for facility management. Those are the kind of decisions that we're seeing being made. We're very bullish about our predictions for that reason.

Thank you.

You bet.

Your next question comes from Jeff Allen of Silvercrest Management.

Hi. Can you please just comment on how you are approaching any head count reductions for the comfort systems businesses?

We are not contemplating any specific head count reductions for comfort systems businesses. We are always looking for ways to economize and become more efficient. But the model for comfort systems operations will be the same for EMCOR companies, that is to say we will continue to have an extremely small headquarters staff. We have about 60 people here at EMCOR headquarters. Responsible for the activities of some 25,000. Around the country and in other parts of the world. That is because the model is to render each of our subsidiaries essentially self-sufficient in terms of their management and staffing with appropriate incentives to them in order to ensure that they pursue the utmost in efficiency. So from the administrative staff standpoint, we think that the individual comfort systems companies are well managed and can make their own decisions dually and appropriately incentivized, with respect to sg&a and resulting profitability. With respect to the craft side of our business, I don't know if your question specifically pertained to that, but we always see fluctuations in our union craft personal based upon demand for our services. One of the interesting in useful things to know about EMCOR is that our costs in that area, as a union employer are 100% variable. That if we need to send a person back to the union hall because there's no work for him, we do so without any exposure whatsoever in terms of severance costs, pension, or anything of the kind. And that is one of the major advantages for EMCOR during economic fluctuations. We can reduce staff and increase staff much more easily, in my view, than a nonunion employer can.

So I was not asking about the craft side, but in terms of the local operation presidency, would you think that the managers of those operations would be -- is there any reason to think that they would staff their businesses differently under EMCOR than they did under comfort systems?

I'm -- you know, in general, no. I'm going to let -- Leicle and Kevin weigh in with respect to centralized activitys that we cover here at EMCOR. [KEVIN MATZ]: Jeff, one of the things you must remember with regard to the acquisition of these companies, we purchased 19 operating companies without a common organization that sat on top of them. So there was not a dual treasurer or a dual controller or a dullal vice president of operations. So these are 19 specific that we are tucking into the EMCOR operating policies and procedures, if you will. So there was not a lot of redundancy at a management level. Now, going into the companies themselves, these guys are running operations in their local markets, and we are certainly looking at all of them. But we have not gone in there and said that you need to reduce your staff because pretty much they have been mitigating or sort of rationalizing their staff to the market that they have in addition, we do need to add some support costs to those companies in that we are a more mature company than their former parent with regard to insurance programs, human resource programs, eeoc, sexual harassment training, those kinds of things that a much more developed company would have. We're bringing those into our policies and procedures.

Thanks. Fair enough.

Your next question comes from Mike Warner of Canadian capital.

First, I want to congratulate you on a great quarter.

Thanks, mike.

I want to get your stance on possibly splitting your stock here.

[laughter] That's an interesting question. We are, of course, aware not only of the -- what I think is excellent performance of our stock, but of the fact that the -- our comparables, the companies that we think we look a lot like, that is to say, Jacobs engineering and the like, are trading in the 30s and 40s, Jacobs, as a result of a split that they have just successfully executed. I think they're probably pretty happy with the post split performance. I've looked at this actually quite seriously in preparation for discussions with our board at this point. There is a surprising lack of material, of research on this point, and I think that whereas there is some unusual theories around, the -- the most that can be said for stock splits, as I understand, is that they are typically taken to the positive and optimist statements by management concerning the future attractiveness of the stock. Now, management at EMCOR certainly feels positive and confident about the future and attractiveness about EMCOR's stocks and if that's going to be the defining factor, then I think I know what we're going to do. We have also been on a continuous program to try to expand the diversity of the holdings of our stocks, to get it into more people's hands. We have been quite successful of that. We get a monthly report that helps us to understand that. And if we conclude that a split would help with that, and it seems to make some sense that it would, then I think that we would probably consider that an appropriate reason as well. We made no decision. But I do hope that it gives you comfort to know that we have been studying it, are studying it, and will be discussing it at our board meeting this week.

Very good. And congratulations again. Good luck to you.

Thank you.

You have a follow-up question from Jeff Beech of stifle nicholas.

Hi, Jeff.

Yes. Could you comment on your first-quarter performance in both the UK and Canada? And comment on the outlook for both of these markets?

Sure. The canadian business is quite different from the rest of the company. It is heavily involved in manufacturing and heavy industry. It has a much-larger proportion of large, long-term projects than the rest of the company. A typical project for the Canadian company would be a I don't know. A fiber board plant. Or a -- well, they're involved in the hot restart of a -- of the largest power plant of the world. The nuclear plant in Southern Ontario for Ontario power generation. As a consequence the Canadian company is vulnerable to deferals of specific projects which, because they're larger than usual, result in larger-than-usual impacts and larger-than-usual vulnerability -- or excuse me, volatility for revenues and earnings. What we're seeing in canada, along with the exacerbated seasonality, which is typical of Canadian operation necessary in the winter, is the impact of deferral of a couple of projects that will now come on stream in the second and third quarter. It's just something that we have to put up with in Canada, but we have a very well-established, long-time and major player in the electrical and mechanical markets and we're well represented. We think it's worth continuing in that market. But it is certainly very volatile. And we're fortunate to have the consistancy in the remainder of the company that we can absorb that volatility. I don't have any long-term concerns about the profitability or the quality of the investment. In the case of the UK, we've got a kind of split going on. Long-time listeners to this call will recall that the UK company is approximately equally split between construction -- specialty construction and facility service. It was there infact that, I got the idea, back in in 1995 to establish the facilities and service maintenance as a major aspect of our North American operations the at the time when our business didn't really exist in North America. And we have been following that ever since. The pattern for the British company in the quarter, we budgeted a loss -- an operating loss as a whole for the first quarter, u-2, seasonal and customer related, year-after-year trends in the UK. They exceeded that budget loss as a result of poor availability of work for bid in the construction sector, which is somewhat depressed. On the other hand, the facility service sector performed well and slightly exceeded budget. So we've got the usual situation there, I think, where the facilities service business, with its steady, long-term relationships with customers is showing much less volatility than the construction business, and that, in a nutshell, is why we want to enhance on a continuous basis our facilities service business in order to ensure that it's available as a kind of buffer against the otherwise inevitable volatility derived from a pure construction operation. Once again, I'm not worried about the profitability of the British company for the year, but I do think we're ging to see weak performance in construction for at least another quarter or two.

Alright. Thanks.

There are no further questions at this time. Gentlemen, do you have any closing remarks?

Only as usual to thank all of those on the call for their interest and support of EMCOR. Watch this base for interesting developments. Thank you.

This concludes today's first quarter 2002 EMCOR earnings conference call.