EMCOR Group Inc (EME) 2003 Q4 法說會逐字稿

At this time I would like to welcome everyone to the EMCOR Group fourth-quarter 2003 conference call. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to Mr. Gordon McKoon (ph). Sir, you may begin.

Thank you, and good afternoon, everyone. Once again, this is Gordon McKoon of Financial Dynamics, and I'd like to welcome you to the EMCOR Group conference call. We're here to discuss the Company's 2003 fourth quarter results which were reported this afternoon.

I'd like to turn the call over to Kevin Matz, SVP of Administration and Strategic Services, who will introduce management.

Thank you, Gordon. And good evening, everyone. Welcome to EMCOR Group's earnings conference call for the fourth quarter and year-ended 2003. For those of you who are accessing the call via the Internet, at our website, welcome. We hope you have arrived at the beginning of a slide presentation that will accompany Frank MacInnis's remarks. Currently, everyone accessing the slides should be on slide one which is the EMCOR titles slide. During the call, instructions will be given for you to advance to the next slide. This is one of those times. Please advance to slide two.

Slide two depicts the executives who are with me today to discuss the quarter and full year's results. They are -- Frank MacInnis, Chairman and CEO; Leicle Chesser, EVP and CFO; Mark Pompa, SVP and Chief Accounting Officer and Treasurer; Sheldon Cammaker, our EVP and General Counsel; and Mayba Hefler (ph), VP, Marketing and Communication. Call participants who are not accessing the conference call via the Internet -- this presentation including the slides will be archived in the investor relations section of our website, under presentations. You may find us at EMCORGroup.com.

Before we began, this call may include forward-looking statements. These statements are based on certain assumptions and perceptions of historical trends, current conditions, expected future developments, and other factors we believe are appropriate. Actual results or developments may differ materially from those anticipated in these statements. With that said, please let me turn the call over to Frank.

You're getting so good at that. Good afternoon, everyone, and welcome to our 36th quarterly conference call for investors, analysts, and other friends of EMCOR Group.

Today's call as usual, is being conducted with a simultaneous webcast. And I will be referring from time to time to a slide number to identify the relevant slides to webcast participants. Right now, we're still on slide two.

The subjects of today's call are the two press releases which we issued after the market closed this afternoon. The first, containing our fourth quarter and full-year 2003 earnings report, and a discussion of our views of 2004 prospects. And the second describing the senior management realignment.

I will be talking about these subjects in the following order. First, a discussion of the 2003 earnings reports. Second, our management changes and the ongoing structure of our management group. And lastly, a review of our future prospects, including a discussion of our contract backlog, the other drivers of our future financial performance, and special mention of some notable recent project awards, illustrating current market trends and opportunities.

Finally, I will provide commentary on the assumptions underlying the earnings guidance range that we also published today.

Thereafter there will be an opportunity for you to make comments or to ask us questions, and you get see from slide two that a number of EMCOR's senior managers are here to assist me with the answers. So let's begin.

Please move to slide three. This slide is a summary of the salient features of our Company's performance during 2003. EMCOR was profitable in all four quarters and for the year as a whole. But at reduced levels compared to historical results, primarily due to the recessionary economy and its impact on our markets and our customers.

The scope of EMCOR's service offerings, and our broad market sector participation, helped to support both our revenues and our contract backlog. But a disproportionate amount of that backlog was in public sector work, which carries with it not only reduced profit potential, but also increased working capital requirements.

As a consequence of this and other recessionary factors, our margin has declined from a 12.2 percent gross profit percentage in 2002, to 10.6 percent last year.

A significant additional factor in our 2003 performance, and one which had a material and unexpected impact on our fourth quarter results, was the performance of our UK company, EMCOR Drake and Skull (ph). Listeners to this call in passed quarters will recall that I expressed my unhappiness and disappointment with the UK Company, beginning about a year ago. And that we replaced UK's senior management in mid-2003.

Since then, we are pleased with the progress that the new British managers have made, at establishing a more disciplined and structured approach to their markets.

However, we remain concerned about the profit producing potential of portions of the British markets themselves. And accordingly, we announced today that we will be considering various alternatives with respect to all (indiscernible) portions of the UK Company and its operations in the coming months.

EMCOR did not stand still in response to the deteriorating profit opportunities that we observed and reported to the market on a continuing basis during 2003. Although our overall general administrative costs rose substantially during that year, compared with the previous year, more than 100 percent of the increase reflected the acquisition of CES in late 2002.

Excluding acquisitions, SG&A as a percentage of revenues fell to 8.4 percent of revenue in 2003, compared to 8.9 percent a year earlier. A trend which we intend to reinforce in 2004.

We also worked hard on cash collection and debt reduction in preparation for better profit opportunities ahead. And had a very successful fourth quarter in that respect. Leaving the Company's year-end balance sheet with substantial cash, continued net overbillings, and total debt to capital ratio reduced from previous quarters and well within our comfort.

Please move to slide four. As previously mentioned, the fourth quarter of 2003 results reflected revenue growth of 4.7 percent over a year earlier, to $1.17 billion. Net income of 2.6 million, or 17 cents a share, was sharply reduced from 2002, for the recessionary reasons previously mentioned. It was also less than previously discussed quarterly expectations, primarily because of the $11.9 million operating loss, or about 43 cents a share, resulting from our UK fourth quarter operations. Half of the UK operating loss was caused by the write-down of an account receivable of the British subsidiary of a Dutch Company that unexpectedly announced intention to seek bankruptcy protection.

A significant portion of the remainder was the result of ongoing restructuring activities by the new managers, including office closings and severance expenses.

Please move to slide five. Full-year results of EMCOR's 2003 operations reflect the same recession-related impact as the fourth quarter. Together with the large net loss from operations in the UK.

Revenues grew 14.3 percent to 4.53 billion, due primarily to the acquisition of CES. Organic revenue growth was about 1.5 percent over 2002 levels.

Operating income fell to $45.1 million, net of the UK operating loss of 22.4 million, and net income was $20.6 million, or $1.33 per share, compared to $4.07 per share in the year earlier. Overall, UK operations effected earnings per share by about 81 cents during 2003.

The 2003 results reflect very good performance in the Company's US Electrical Construction and Facilities Services segment, and the former CES Companies contributed $13.5 million of operating income to the US Facilities Services segment in 2003. Despite recessionary impacts on their maintenance and repair businesses.

We're very pleased with the CES acquisition, and with the evolution of EMCOR Facilities Services into an integrated subsidiary. Our US Mechanical Construction and Facilities Services segment was the most severely affected of our American operations by market conditions.

Canadian operations were below budget expectations, but profitable.

Please move to slide six. One of the many dangers of a recessionary economy is the working capital demands and liquidity pressure that it creates for many Companies.

I'm pleased to report that EMCOR's cash management expertise and debt avoidance discipline had significant positive effects on our year-end balance sheet -- positioning us well to take advantage of 2004 opportunities.

Year-end cash was $78 million, and total debt of $140 million was just slightly above year ago levels. Keep in mind that the Company financed revenue growth of nearly 15 percent, or $560 million, during the year -- including a large number of public sector projects, whose working capital characteristics are far more demanding than comparable private sector work.

Despite recessionary pressures on our customers, our net overbuilt position, one of EMCOR's historic strengths, stood at just under $100 million at year-end. A remarkable contract management achievement in the circumstances.

Our ratio of total debt to total capitalization at year-end was a comfortable 21 percent. A significant reduction from midyear levels. We are continuing our aggressive cash collection activities in the current year, so that working capital is always available for new opportunities.

Please move to slide 7. Contract backlog at year-end was $3.03 billion. 5 percent higher than the year before, but 3.5 percent lower then midyear 2003. I've spoken on previous calls about our decision in mid-2003 to begin managing down our contract backlog -- both for the purpose of rightsizing certain underperforming subsidiaries, and also to conserve capacity for new, higher margin, private sector work as it becomes available.

This slide illustrates the evolution of our contract portfolio and some of the major trends that have shaped our operational results in the past year. You can see, for example, that our private sector commercial portfolio did not grow year-over-year, reflecting the absence of any significant impact of an improving economy on our 2003 project acquisitions.

Our institutional backlog -- mostly public sector in nature -- grew slightly, as did our private sector hospitality and gaming business. Our other major backlog segments -- transportation, health care, water and wastewater, and manufacturing -- stayed relatively constant year-over-year, and several of those sectors reflected actual reductions during the last half of 2003, as we reduced our portfolio of public sector work in anticipation of new and better opportunities in 2004.

Turning to our prospects for 2004, and before talking about those expectations in some detail, we issued a second press release after the close today -- reflecting the resignation and eventual departure of a senior officer, and a series of additional management opportunities -- appointments, designed to make us more focused and better equipped to take advantage of anticipated economic growth.

Effective today, Jeff Levy has resigned as President and COO, and I have been elected by the board to assume those titles and duties until the recruitment of Jeff's successor has been accomplished. Incidentally, some of the old-timers on this call will recall that I held that position as president until 1997.

Jeff has been a key member of our senior management group for more than ten years, and played an important part in the growth of EMCOR into a world-class organization in our field. I'm grateful for his contributions, and pleased that he will continue to be employed in an advisory capacity during a transition period before leaving EMCOR to pursue other interests.

I mentioned earlier that despite recessionary pressures, our US Electrical and Facilities services segment performed well in 2003, and indeed in preceding years as well. This sustained success was managed by the two officers whose promotions we also announced today. As Mike Parry and John Warga increased the scope of their responsibilities to include US Mechanical Facilities Service Operations as well. I congratulate these two EMCOR and industry veterans on their well-deserved promotions, and look forward to the same kind of sustained success from our Mechanical sector that we have enjoyed from electrical.

This substantially completes the management restructuring process that began last summer with the appointment of Anthony Wales as UK CEO, the appointment of Jeff Burkbeck (ph) as CEO of Comstock Canada in December, and the recent promotion of Bill Rodgers to CEO of EMCOR Facilities Services.

Our major divisions have never been managed by a more talented and experienced group of officers, and I know they will do their best to enable EMCOR to maximize our profitability in 2004.

The drivers of our anticipated earnings improvement this year are shown on slide 8. I've commented earlier on the size and scope of our contract backlog portfolio, which provides a strong foundation for our 2004 revenue expectations.

As and when higher margin projects become available, however, lower margins in some of our backlog may actually dilute or delay the positive impact of higher margin work.

We also expect the resumption of normal, if not better than normal, demand for small project discretionary work, like HVAC service and repair calls and upgrades. The deferral of many such projects last year for recessionary and weather-related reasons should result in improved demand, larger average price of projects, and a reasonably fast return to pre-recession pricing overall.

I've also commented already about our UK operation. For the purpose of developing our earnings guidance, we've assumed that the entire UK operation will remain within EMCOR, although in fact, that will almost certainly not be the case. I reconfirm my faith in and support for our UK management team, and their ability to produce a profit this year despite continuing weakness in some of their markets.

We expect continued outsourcing-driven growth from our EMCOR Facilities Services division, under the leadership of Bill Rodgers. Last year, DFS Companies were important contributors to EMCOR's profitability, reflecting the relative strength of the Facilities Services market even in a recession. And we reached a major milestone, by surpassing $1 billion in annual revenues from Facilities Service relationships.

This year, we expect growth to be derived from the continuing difference of US and British owners of physical assets to render those assets as efficient and as predictable as possible in cost terms.

North American manufacturers are looking to drive every dime of unnecessary costs out of their operations in order to compete effectively in the world economy. And outsource facilities services are an important part of that process.

And we look to our major alliance partnerships -- especially C. B. Richard Ellis (ph) and Siemens Building Technologies -- to provide new opportunities to bundle our respective skills and services as we aggressively pursue this important market.

Finally, we know that EMCOR's traditional concentration on cash management and expense control will be a major factor in our success this year. In 2003, we managed down organic SG&A costs as a percentage of revenues by about half a percentage point. We will continue those same efforts this year (technical difficulty) balance sheet that is liquid and moderately leveraged.

On slide 9, we illustrate the manner in which EMCOR will profit from anticipated improvements in the economy and increased demand for our services at better prices.

First all, remember that EMCOR in 2003 derived about 70 percent of its revenues from projects under $10 million. And that our backlog figures consistently omit in their entirety small projects under $250,000 which typically represent about 25 to 30 percent of overall revenue.

As shown on slide 9, different types of projects will materialize at different points in an economic recovery. The first to return will be the discretionary small projects that I referred to earlier. These we expect to see with the advent of spring, extending through the summer cooling season and then extending onward in structural -- structured system maintenance relationships -- especially in our Facilities Service sector.

Next to emerge will be mid-sized commercial and industrial upgrades, and retrofits of existing facilities -- reflective of capital spending decisions by our corporate customers. We expect these to positively affect third and fourth quarter results.

The last type of project to emerge from the improving economy with benefits for EMCOR will be large, capital intensive, new construction, or major retrofit work. Such jobs are in the development stage today. However, by the time they completed the financing (technical difficulty) permitting and general construction of phases of their development and are available to EMCOR's Specialty Construction Companies, we will be near the end of 2004.

The good news is that the diversity of our services means that EMCOR will benefit earlier from economic improvements than those Companies who are primarily reliant on capital intensive big-ticket projects. The upper end of our expected earnings range this year will primarily be defined by the speed with which attractively priced new projects of various sizes become available to us.

What kind of projects are we currently seeing as the economy improves? Let's take a look at slide 10.

Although EMCOR Companies are being increasingly selective in the projects they bid for and acquire, there are encouraging conclusions to be drawn from the nature of the current contract awards to our group, of which slide 10 is a representative example.

USCD Pharmaceutical Sciences Building in San Diego, being performed by University Mechanical and Dielectric (ph), is a sophisticated project including a research lab, avarium (ph), and classroom space. Central Mechanical will provide the complete mechanical package for a state-of-the-art joint Armed Services Reserves Center in Topeka, Kansas, in which new government procurement processes to identify the most suitable contractor, rather than merely the least expensive, led to our selection.

The New York University Research Building, like the one at UCSD, is a sophisticated facility in which our heritage (indiscernible) Company's ability to construct high integrity stainless-steel exhaust systems was a deciding factor.

The Pico Powerplant contract, being performed by Merrill Lynch Mechanical, will help to meet the electrical power demands of the city of Santa Clara. On a fast-track basis with completion in the fall of this year.

Wells back electric will upgrade the bridge lighting system and will install a new GPS synchronized aviation warning light system on the Queensborough Bridge in New York. Greenvalley Ranch is erecting a new 300 room tower, a ballroom and meeting rooms, with completion this year. Hanson Mechanical (ph) of Las Vegas will perform the entire mechanical package.

Dialectic Ohio has been awarded the first phase of a fast-track datacenter project for LexusNexis, and was chosen on the basis of its past performance on such fast moving complex projects.

And in Ontario Canada, Comstock Canada will replace 102 miles of high tension electrical transmission lines, including 900 new towers, completing in about one year.

These projects not only reflect the diversity of skills and experience among EMCOR's operating Companies, but also the reemergence of fast-moving projects in interesting areas of the economy -- high-tech research facilities, merchant power, hospitality and gaming, high-speed data centers, and electrical power distribution. Which are signals to us of better opportunities to come.

Taking into account all of the foregoing comments, including certain very basic assumptions about the pace of economic recovery, we offer our initial earnings guidance for 2004 on slide 11. We expect the rightsizing process, involving a number of underperforming construction subsidiaries, to result in construction revenue reductions of more than $200 million (ph) compared to 2003 -- partially offset by 10 to 15 percent growth in revenues at EMCOR facilities services.

We look for baseline earnings performance of about $1.75 per share in 2004, with a most likely earnings range of $1.75 to $2.35, prior restructuring charges of about $5 million.

The upper end of this earnings range is dependent primarily on the pace of continued economic recovery. It is not difficult to visualize circumstances in which earnings could exceed the most likely range, but I am not prepared to do that today.

For reasons previously discussed, I expect the first quarter 2004 to be very slow. This is typical for this Company, and this quarter will also be affected by backlog impacts, our 20 percent income recognition rule, some of the restructuring charges, and the lack of impact of economic recovery on many of our markets.

The second quarter looks better, and the third and fourth quarters should reflect accelerating earnings into 2005, which looks from here like a very good year.

Slide 12 recapitulates our strategies for 2004. The same strategies and services model that have created eight consecutive years and 34 consecutive quarters of profitable operations -- EMCOR's position strategically, financially, and administratively to profit from the economic improvements that we all see developing. And we look forward to the opportunities that 2004 and 2005 will bring for well-managed Companies like us.

On behalf of everyone at EMCOR, I thank you for your interest and your support. And now we have time for some questions. Derrick will tell you how to queue.

Alex Rygiel, Friedman Billings Ramsey.

Could you do me a favor? Similar to the way you quantified the 81 cent loss in the UK for the year, can you quantify the negative impact for the de-integration expenses from CES had on your 2003 results?

We don't have, but we indicated in the past -- problem with CES is your building a platform, you're not just integrating and consolidating. You're actually building the platform and there's a lot of growth in there. So what we're trying to do is determine that we actually come out with a base there to go forward with, rather than trying to look at how much SG&A you're really trying to squeeze out. You're trying to come up with a new position from which to go forward, and not trying to meld together three different entities.

I think however, Alex, that I can say that the integration costs at CES, and by the way, we are still in the process of integration of the back office activities of the facilities service and mobile service parts of that operation, but that is one of our targets for SG&A savings this year, not for expense.

I think that we felt in the past and I continue to feel today that CES integration overall, both the integration of CES into EMCOR and also the integration of certain previously owned EMCOR facilities service operations into CES, probably costs us between three-quarters of a percent and 1 percent of revenues during 2003.

And another question, with regards to helping me to reconcile your guidance. You reported $1.33 for the year. If we add back a loss of 81 cent in the UK, that kind of gets you to an adjusted $2.14 number. You reconcile that with your baseline guidance of $1.75?

Yes. As I mentioned on the call, the assumption here is that -- it is all in the timing. The $1.75 is a baseline number that I have a high degree of confidence in based upon current circumstances.

There is really no art or science to the size of the range -- except that it represents about $10 million of net income -- keeping in mind the relatively small number of shares that we have outstanding -- over the baseline.

The reconciliation involves the application of some very conservative assumptions, with respect to the continued impact of low margin backlog that will affect us, predominantly in the first half of 2004, the occurrence of a normal spring, enabling us to enhance the amount of small task discretionary work that we perform in 2004, compared to last year. And the acceleration of earnings in the second half of the year. It's really all in the timing, Alex.

I'm getting anecdotal reports from a number of our Companies about the availability today, and the closure today, of the kind of work that we haven't seen for several years. Small task, well-priced discretionary work that is some of our highest margin work, or has been in the past, substantial development projects in segments of the economy that we haven't seen active for some time.

You probably noticed a couple of references in my project sheet comments to fast-track work. That's the kind of work that we have seen very little of in the last couple of years, and is indicative of an improving economy.

I'm of a view that I would like to be in a position to guide up the market as we get a better handle on the pace of economic recovery, and the pace with which EMCOR will benefit from that recovery, but I'm not prepared to be bullish today.

One last question. You mentioned the first quarter would be very slow. Can you help us to understand what you mean by very slow? Will you make money in the first quarter, or will you lose a little bit of money in the first quarter?

I think it will be right around that range. It seems to be a matter of the restructuring costs, the impact of the earnings hangover, if you will, from existing backlog. But, net of improvements that we expect to make in SG&A costs, which we're working hard on, net of improvements that we are already beginning to hear about and which may impact the first quarter, with respect to small task discretionary works, and various other events that we're hoping will occur in the first quarter.

But listeners -- Alex, you know this -- but other listeners should know that we've always experienced a slow first quarter, in part because of weather-related, startup costs associated with new projects, and the general reduced efficiency of our activities during the first quarter, together with a conservative income recognition policy that requires that we not recognize income on most projects until they are at least 20 percent complete.

One last question. Do you have any restrictions -- could you buy back stock in the market today, or tomorrow? Under your bank credit facilities?

We could, and we have authorization from the board for a small amount of stock buyback, but I continue to take the position that I always have with respect to stock buybacks. We're looking at significantly improving operations, and we have a very good use for our cash and credit resources, which are substantial, but which we would like to have on hand for the performance of profitable work.

Thank you.

Michael Roesler, CJS Securities.

What's different or what would be better in 2004, given the -- certain cases (indiscernible) surprises, particularly in the UK in '03, in terms of investors having confidence in the numbers that the guidance we have for '04?

Well the underlying situation -- macroeconomic situation in '03 was a continued decline in operating fundamentals in most of our markets. And the delay in the tangible impact of any macroeconomic improvement that was taking place statistically. But otherwise, without discernible impact on our operations.

We did not, for example, see any kind of significant increase in capital spending by our corporate customers. You will recall that the end of 2003 was characterized by the so-called jobless recovery, and that was certainly -- its appearance from where I sat.

We've seen a couple of months now of positive absorption of vacant real estate, and this is an important statistic for our future, but for most of 2003, there was negative absorption -- that is to say, more real estate was going vacant month after month.

And we were in a scenario of reducing expectations, reducing costs, and trying to keep pace with plummeting prospects.

The reverse situation exists today. We see opportunities that we haven't seen for a couple of years in various types of projects -- several of those projects that I just alluded to on the call, I haven't been able to talk about (technical difficulty) fast-track data centers for example, which are indicative of the kind of economy that I think we're dealing with.

And I think that the management changes that we've made, the capitalization situation that I announced, and the strength of our operations in numerous markets, reflect a solid basis for optimism about '04 and '05.

I'm thinking perhaps more about internal changes, particularly in terms of the management changes and what we might read or not read into that in terms of what might be going on internally in terms of improving financial forecasting, and not being surprised.

The veterans of these calls, and (indiscernible) perusal our 10-Ks, will know that one of the most consistent parts of our operations on the construction side, for many years, has been the US Electrical and Facilities Services segment. And that performance was affected significantly by the role played by Mike Parry and John Warga in the establishment of solid, predictable, disciplined operations within the electrical segment.

We're looking for Mike and John to extend their management principles and disciplines to the Mechanical operations, which were the most severely effected of all of our operations -- by not only the macroeconomic situation, but also by management errors that I've alluded to on previous calls, that resulted in undermanaged Companies in some cases taking on too much work, or taking on work whose characteristics was outside of their capacity to manage.

We've identified some of those Companies, many of which were in the Midwest, and in small markets in the Midwest, on previous calls. And we know that the kind of management discipline that Mike and John have presided over in the Electrical operations in past years will do the Mechanical operations a lot of good, and ought to improve our construction performance overall.

The rightsizing process that I've alluded to affects primarily those Midwestern Mechanical operations, together with some New York electrical, but Mike and John are definitely the right people to preside over that kind of a process.

And just in terms of that rightsizing process -- that did include some operations in the US, not just in the UK?

In fact, it concentrated in the US. I've spoken on previous calls about several of our midwestern operations in particular being present in small markets, where the loss, perhaps, of a major customer that was dominant in that market led those Companies to pursue other alternative projects that they, certainly in retrospect, should not should not have pursued. Or to mistakenly assume that we at EMCOR are interested in revenue as opposed to profit.

We're not interested in revenue, we are interested in the bottom line. There is no pride of place in being a $4.5 billion Company if we're in inadequately profitable, and that is my opinion of 2003. We will do better in 2004.

Just a final question. If possible, quantify, if it was a negative drag on profitability, the operations that had been rightsized?

No, I couldn't guess at that. It would comprise, probably, eight or ten Companies within the EMCOR Group. Predominantly mechanical, but with a couple of electrical -- no, I'm sorry, I can't help you with that.

Would you say in the aggregate they were unprofitable in the year?

Yes.

Thank you.

Jeff Beach, Stifle Nicholas.

I had a few questions, but I will go fast. It looks like your backlog is up 4 percent plus, your revenues are up 4 percent plus, you're looking at double-digit growth in facilities services in '04. When I look at all this and look at your revenue projection, it looks like your rightsizing or downsizing is going to reduce revenues 3 or 400 million, if you look at a growing market.

And if the 3 or 400 million is right, and you're saying a majority of this is in the US, most of this is concentrated in these eight to ten Companies in the Midwest?

In the East -- in the Northeast and the Midwest, that's right, Jeff.

And my assessment of the 3 or 400 million, is that sound fair?

Well, our internal comparison, compared to 2003, is about $220 million -- for the downsizing of those operations. Offset by growth in the EMCOR Facilities Services area.

Consummate, by the way, with our regularly announced strategy of increasing year-over-year the proportion of our revenues that are derived from long-term facilities service relationship.

UK loss -- half was from the receivable write-off, the other half was a pretty sizable operating loss. Can you talk about the nature, how you continued to have a pretty sizable loss, even greater, probably, than the second and third quarters?

And it doesn't sound like those moves are corrected, (indiscernible) and that you're going to see some operating losses in the first half. Can you describe a little bit more what's happening there?

Of the 12 million or so of operating losses in the fourth quarter in the UK, about half, as I mentioned previously, was attributable to that bankruptcy on the part of a general contractor, for whom we were performing services on a large project.

Of the remaining 6 million of operating losses, about 2 million were directly attributable to continuing restructuring of that operation, notably, office closures in Scotland and elsewhere. And also personnel reductions.

The remaining operating losses were attributable in part to additional losses on some projects previously identified as problems, (indiscernible) on which the losses have not been currently quantified, but they were also attributable to delays in the startup of the Eurostar (ph) high-speed rail project that we (indiscernible) countered on in the third and fourth quarters for significant contributions to both revenue and profit, and which, for technical reasons outside of our control, were delayed into the current year. They have begun now.

Then -- it sounds like you're looking at modest profitability as there is ongoing restructuring that's going to empress results, and maybe cause losses in the first half of this year?

Yes. I think that the UK operations will be weak in the first half, and stronger in the second half.

As I mentioned during the call, I'm assuming the chairmanship of the Company, and will know a lot more about the details of its operations and its prospects, including the possibility of disposition, of portions of the operation or all of the operation, by the time we speak next.

Last, can you give us just a sense -- you're talking about some very good results out of the electrical division. Can you give us roughly where the margins in US Electrical and US Mechanical were in the fourth quarter?

Yes, Leicle is looking at the K. I know you got the annual numbers before you, Leicle, you want to share those --

For the electrical for the year, it made 57.8 million, and about 4.7 percent. (indiscernible) for the quarter, it's about a 4.3 percent, a little bit slightly less, but still a very good performance there, probably around 13 or 14 million (indiscernible) operating income out of the electrical.

Real good performance, Jeff, particularly in all the economic circumstances I described during the call.

Can you run through the same thing for the mechanical? That would be a great help.

Mechanical (indiscernible) for the year, was 25.1 (ph), 1.5 percent. Operating income for the year, and for the quarter, it was around 9 million and around 2 percent.

Rich Wesolowski, Sidoti & Co.

Is that $12 million in the UK, is that booked in SG&A?

A good bit would've been booked in SG&A, yes.

How much of it?

The write-down of the receivable went through SG&A and the reorganization costs that Frank had mentioned a few minutes ago also went (indiscernible) SG&A.

So that's about just under 8 million dollars?

Right in that area.

Are there any restructuring costs that -- I mean, how much of the restructuring costs do you forecast you still have in the UK going forward?

And is that amount factored into the $5 million that's given in the release?

About $1 million, I would say, in the UK and ongoing restructuring costs, and they're part of that roughly $5 million that we alluded to in the press release.

Who was the contractor that went bankrupt?

It was the British subsidiary of a Dutch contractor (multiple speakers) called Ballast.

Now, the right size Companies -- the mechanical contractors in the Midwest -- were those made up primarily of that Companies that you purchased I think in the first quarter of '02?

That is right. Many of the Companies, and we've alluded to this on previous calls, as you know. Those are the so-called comfort systems Companies, consistent in many respects of small market Companies in the US Midwest.

The acquisition of those Companies fulfilled the long held strategic goal for us, of strengthening our Midwestern Mechanical operations to match the traditional strength of our Midwestern Electrical operations. But the -- and we acquired those Companies at very advantageous earnings multiples, so that we are not taking a tremendous risk in their acquisition.

But, as I previously mentioned, they were (technical difficulty) small market Companies whose markets did not include sufficient resources for them to tap as alternatives when major customers seized capital spending, for example.

I'm thinking of one Company in particular whose revenues have been made up about 40 percent from year to year to year, work done for a major pharmaceutical manufacturer, which abruptly announced that it was making no more capital expenditures for the foreseeable future. And in such circumstances, the construction subsidiary was cast into a situation where they had to either make immediate and very draconian (ph) cuts in estimating and project performance capability, or they had to look elsewhere for some opportunities to produce revenues and income.

In choosing the latter course, in retrospect, and hindsight is always very clear, of course, they made some bad choices in terms of the risk reward characteristics of projects that were acquired. They were projects acquired in a recessionary atmosphere, in which there was a lot of excess contractor capacity around, everything was low, contractual risks were high, they paid the price.

Where are you guys with respect to your debt covenants?

We're in great shape. No problems.

Finally, there's a lot being bounced around here, I might have missed it, I was writing a little bit. What is your guidance of $1.75 to I think $2.30 incorporate for the UK in '04?

We contemplate the UK losing money in the first half and making a small amount in the second half. Assuming for discussion purposes that the entirety of the UK operations stays within EMCOR for the entire course of the year, which I personally consider to be unlikely.

Highly unlikely?

Well, I think -- certainly with respect to a portion of portions of it, yes.

Thank you very much.

Jamie Cook, Credit Suisse First Boston.

Quick question. Not to beat a dead horse, besides the UK in the eight to ten operating Companies you talked about predominantly in the Midwest, and then I guess a couple in the Northeast -- are your other subsidiaries -- are they performing in line with what you had forecast?

Yes, they are. We consider our operations to be very well-managed. And the electrical operations in particular performed remarkably well in all the circumstances.

The nature of the mechanical work, particularly its vulnerability to capital spending downturns and weather-related activities, that as you know severely affected 2003, our explanations for their underperformance in significant part. And they were also proportionally more of the small market Companies than were the electrical.

But the straight answer your question is -- yes. With the exception of those underperforming Companies that I've identified earlier, the rest of our Companies performed according to forecast.

And then my next question -- if you look at the Facilities Services business, and you back out CES for the past couple quarters, the Legacy EMCOR Facilities Services business, the profits have been deteriorating, and they're actually quite cyclical. If I -- for the year they're at about 1 percent, or maybe a little above that. And I guess that surprises me based on -- you know, the reason you're getting into this business is because the margins are supposed to be less cyclical. So -- is there a reason why the Legacy Facilities Services businesses are below margin, and what can we expect in 2004?

Well, just to review -- first of all, of the Facilities Services business, it's exactly as you describe. We consider it to be a predictable business, in which it is unlikely that it will lose money. But it also doesn't have the upperend profitability potential of the construction business when construction times are good.

And the MacroModel for the combination of specialty construction and facilities services, is that Facilities Services provides the consistent baseline of revenue and profitability, on which we can build appropriately selected construction projects.

One of the problems with '03 was that the facilities service business was just achieving critical mass, experiencing cost impact associated with both integration and weather during that period of time, which had a depressive effect on the Mobile Service and Facilities Service operations of our Facilities Service business, as well as our construction Companies. And at the same time, there were some poorly chosen construction projects in terms of their risk reward ratio.

So we didn't get the kind of buffering impact from facilities services that we had hoped for.

Although, Facilities Services overall, and Leicle will correct me if I'm wrong, I think earned 2.6 percent EBITDA of the year. We think it can do better than that, Jamie, but we don't look for Facilities Services ever to provide the kind of almost windfall profits that specialty construction can in certain circumstances.

And it was 2.6, I was just pointing out if you back out what CES contributed, the legacy was lower.

But -- my second question -- has there been any exercise within the organization, I guess, given the new management changes? And it seems like you guys are adding layers within the organization. Has there been an exercise to go through and look at the projects, and to see if there are anymore potential -- if there are any potential problem projects that could impact 2004 results? Backing out, I understand there will be lower margin just because of the environment that we're in when you were booking them, but has there been any exercise like that to avoid any surprises?

Let me say a word about the audit process. And the performance of audits at every Company that I know anything about -- that includes a couple Companies not related to EMCOR.

The audit process and the impact of regulatory changes -- either that have been completed or that in process, has resulted in exhaustive and exhausting assessment processes, with respect to the past and future profitability of all of the projects that we're describing here.

I was frankly astonished by the detail that was gone into by auditors -- not just at EMCOR, but at other Companies (indiscernible) with respect to the 2003 calendar year. And the successful conclusion of our audit process, and that of the number of other well-managed Companies that I know about -- has been a remarkable achievement in all the circumstances, particularly given the uncertainty on the part of auditors and Companies alike as to which direction the new regulations and their enforcement will take.

So that was a long way of saying an emphatic -- yes -- to your question. The 2003 results reflect significant write-downs of a significant number of projects that were identified, both by our project management personnel, by our financial personnel, and subsequently -- and confirmed by our auditors, as being suitable for write-down in 2003.

Lastly, if we look at 2004, for EMCOR, will it be a sort of year of internal focus, or will you be looking again acquisition?

I doubt very much that there will be material acquisitions in 2004. If we saw opportunities to invest in relationships -- like the expansion of the Siemens Building Technologies relationship, or the CB Richard Ellis one, or the expansion of a major relationship or opportunity with a facilities service customer -- we would certainly do that. That looks the same to me as an acquisition, except at significantly lower risk, and reflects the kind of opportunity to leverage our customer relationships that goes hand-in-hand with a growing economy.

Sorry. Lastly, can you just comment on Bank One, whether the potential to lose that contract based on the merger?

No, I have no idea. What's going on with respect --

Or with more business, I didn't mean to be negative. (indiscernible) even bigger portion, but I guess it's probably too early in the game?

I think that it's too early. As far as we know, JV Diamond and his management personnel are happy with the current state of the relationship, and impressed with the value that's being delivered to Bank One by EMCOR Facilities Services. And I would hope that they would impress J.P. Morgan Chase with that fact, when the merger takes effect.

Thanks, I appreciate your time.

Misha Majid (ph), Basswood Partners (ph).

A few questions. In the Facilities Service business, can you explain what expenses made that a higher fixed cost business? And why historically those build out costs were expensed rather than capitalized?

The characteristics of the facility service business attracts a higher general administrative cost than construction, in large part because facilities services are a marketed and sold business, instead of a reactive business in which a customer issues, in some way or another, a request for a proposal, either to EMCOR per se, or to a group of Companies, and then assesses the results and the customer, having previously made its own decision concerning the need for a capital project.

So a facilities service business carries with it ongoing expenses for marketing of its services and sales of those services to customers over a fairly significant gestation period.

Once the sale has been completed, what materializes from that is a long-term relationship that provides annuity-like returns for a significant period of time. Unlike a construction business, in which relationships must be renewed again and again and again as projects are brought to a completion on a much sort shorter schedule than in Facilities Services.

The Facilities Services business also attracts more working capital requirements than commensurate construction operations, because of the fact that many Facilities Services are provided on a cost plus basis or reimbursable basis, in which the cost must be sustained before it can be reimbursed.

So we find that interest expense and working capital utilization are also higher in the Facilities Services business.

Lastly, there is an on-call nature of facilities services in which sometimes our personnel are required, under the terms of our contract, merely to be there and to wait for a service call request from the customer. And there is an overhead aspect to that as well.

And then just the second part of the question, it seems like in 2002 a lot of the kind of infrastructure build out costs ran through the P&L rather than being capitalized. Can you just give me some color on that?

I think when you're looking at that, we do tend not to capitalize an awful lot. Obviously, it's something that meets the requirement that you can capitalize it. Normally, when you're doing your market and your infrastructure to get your software in place and being able to track customers, much of that is a particular job directed cost, and it should be expensed as we've done.

And secondly, in a more normalized environment, what kind of operating margins will each -- the Construction Services business and Facilities Services businesses -- generate?

I think, as I was mentioning in response to Jamie's question, that we regard the typical EBIT range of a successful, steady Facilities Services business to be in the range of 3 to 6 percent EBIT. Whereas ongoing construction operations, absent macroeconomic recessionary trends, ought to perform between 2 and 10 percent. So that the construction is significantly more volatile with upside potential that generally exceeds facilities services considerably.

But the problem is that you can't get that work all the time. And that is why our MacroModel for EMCOR -- our model that has worked very well for a long time -- is to obtain an appropriate balance between those two sources of revenue and profit.

And then just lastly, can you comment on the impact from rising steel prices, either directly on EMCOR's business, or via just another variable that would delay an increase in new construction spending?

I don't think that rising steel prices will impact us directly, although it's quite clear that they will effect the cost of the metal enclosures, for example, in which HVAC equipment is supplied. These costs are typically a pass-through from us to the customer in the event that we are required by the terms of our contract to supply -- to acquire and supply them. So it's unlikely to represent any kind of a potential profit erosion for us.

I think that US customers in general -- particularly in the big-ticket Greenfield Construction projects that involve a lot of reinforcing VAR and other steel components -- may have to think twice about the development costs of such projects.

But, thankfully, the scope of EMCOR services is typically limited to smaller projects. On the call I mentioned the fact that we get 70 percent of our revenue from projects under $10 million. And we just aren't using much steel. We really ought to be considered as a systems installer and maintainer. The electrical and mechanical and electronic and other systems that render a building efficient and functional.

Thank you.

Jamie Cook, Credit Suisse First Boston.

I promise this is it. Unless I missed it, when you guys issued your earnings release, you said you would talk about 2005. And besides what -- the half a sentence I saw in the press release, you guys really -- you didn't talk much about it. Is that it?

Well, I think that 2005 looks really good. I think by the end of 2004, all three categories of major revenue producing projects should be moving well for us.

We will have experienced the bulk of the benefit that we will get from small task discretionary projects, that I think are beginning right now, and that will impact at least our second quarter results, certainly the third and fourth.

We will have seen the resumption of the midrange retrofits and small construction projects, those in the say 2 to $10 million range, that are the lifeblood of our construction operations.

And, by late in the year, we should be seeing the resumption of the larger, longer-term commercial and industrial development projects that represent projects for us in the 10 to $50 million range, and which provide substantial long-term revenue support, around which we can build smaller projects.

So, my thesis is that by 2005, we will be showing substantially improved earnings over earnings that I expect will be improved for 2004.

Then, do you think you could probably, by then, you should be back to 2002 profit levels?

There's no reason why not.

Thank you.

(OPERATOR INSTRUCTIONS) David Berlander (ph), Basswood Partners.

Has the discussion of your UK business changed, the facilities services? Because it seemed like last quarter you spent more time talking about Company missteps on a few projects. And this time, I think it was even in the release, you were talking about the competitiveness of the market and whether it's even worth while being there. So, am I reading something that's not there, or are you trying to say something -- and then I've got follow-up.

No, --

I know the business has always been a competitive business, but it seems like in the past there were Company issues that can be fixed. But now the tone has changed. It almost seems as though you're not convinced that it's worth being there at all.

I am not convinced that it is worth being in certain markets in the UK, unless I am persuaded otherwise in the next several months via direct experience in my new role as Chairman of the British Company.

I'm prepared to be persuaded, but I doubt that I will be, particularly with reference to some general construction operations, with the plant-hire (ph) operations and the like.

There's no question that the Drake and Skull Facilities Services business is one of the best established of its kind in the UK. It is a market sector that we strongly believe in, and in fact, we utilized lessons learned from the UK and experience acquired there, to build our US Facilities Service business -- which is going to be one of the major drivers of our growth and profitability at EMCOR in the future.

There are operations of real value in the UK, but I'm worried about how well even the best management -- and we have very good management there now -- can do in some of the British markets that I'm hearing about in future years.

And I'm here to benefit our stockholders to the greatest extent possible. And I don't think I'm going to get any credit from our stockholders for stubbornly persisting and banging my head against the British wall there's nothing to be gained from it.

I got you. With regards to the US Facilities Service business, I know it's -- the market here is much different than the UK, it's younger and more fragmented. But are there other differences that would make you or investors cautious about the US Facilities Services business a few years down the road? Should we expect the US Facilities Services business over time to track what has happened in the UK? To get as competitive as it has over there, and I'm not talking about next year or the year after. But 5 years, 7,8 years down the road? Or are there structural differences in the industries that would cause that not to happen?

Number one, we're talking about a much bigger market than exists, or ever will exist, in the United Kingdom.

Secondly, we think that in order to be a real facilities service provider, you've got to have expertise in the systems that make facilities run. That means that you've got to have the kind of specially construction capability that EMCOR and very few Companies like it possess. You've got to be able to show a customer how you can make the ongoing operational cost of its facility behave in accordance with a predictable pattern. And that means -- energy efficiency, that means responsiveness to immediate service requirements, and equipment break-down for better than maintenance and the like -- all of which are aspects of the certainty of operating costs that US owners of large asset portfolios, and especially US manufacturers, have to have.

We all have seen the comments about the necessity for many US manufacturers to compete on a world stage. With Companies from China, Companies from Southeast Asia -- and if they're going to be able to do that, and export effectively long-term, especially when the era of the weak dollar is past, they're going to have to do that based upon extraordinarily efficient operating assets in the United States. Otherwise they're going to price themselves out of existence.

And one of the major answers to the ongoing cost of asset ownership and the ongoing cost of manufacturing asset ownership in particular, is large-scale Facilities Services. And when you talk about the ability to install and maintain the facilities systems in an effective way, you're talking about systems Companies, and there isn't anybody larger or better established than EMCOR in that regard, and nobody is catching up to us.

Lastly, I was always under the impression that the Facilities Services business was -- and I know it is not fully mature -- but it's over time it's a more profitable business than -- and steadier as well. But, I thought it's been described in the past as a more profitable business than a mechanical and electrical combined. Electrical I thought was normalized 3 percent margins, mechanical maybe 4 percent -- but, Facilities Services, I thought in the past that you have described it as a 5 percent margin business, which would not be consistent with statements that you made earlier. So did I just mishear that?

No, I think it is consistent with what I said earlier. We think that from year-to-year, successfully operating Facilities Services business will range from 3 to 6 percent. We think that construction businesses can range from 2 to 10 percent, but the aim is going to be significantly less than (multiple speakers) of those two areas.

That make sense. And can you give me a sense for what kind of time period you expect -- how long it will take Facilities Services to mature, get the economies to scale that you want, and get the sort of margins that you expect longer-term?

We think we're well on our way towards -- we know that we're at critical mass.

So you're already there, it's just an issue of the economy right now. Is that?

That is right. If you look at the K, you'll see that US Facilities Services revenues for the year were $660 million, or there abouts, reflecting substantial growth -- about $250 million than the year previous.

This is a Company that has been managing growth, and managing costs associated with that growth, but we're approaching the normalization period now, and a mature, fully integrated and consolidated Company combined with an improving economy should perform very well.

With regards to the US facilities services, you said you're distancing yourself from the competition. Is there one or two names, though, that come up that you compete with more than others, who may have one business from you on potential new contracts?

There are two categories of Company that we're frequently referred to in connection with. One of them -- or, one group of Companies are the control Companies -- Johnson Control, Honeywell and the like. Although they're a Facilities Services businesses has primarily to do with their installed base. Of manufactured products.

The other group of Companies are the property Companies, who, from time to time, offer facilities services as an adjunct to their property management and brokerage and appraisal activities. Trammel Crow and the like.

The fact that they don't do it very successfully, in the majority of cases, is indicated by the fact that CB Richard Ellis and EMCOR have had a very productive partnership for the last six years. As a consequence of CB Richard Ellis' desire to see their facilities service business in the hands of professionals who are always up-to-date with the most modern equipment, who have the labor relationships, and the ability to deploy standardized service across the country.

That's a big help. Thanks.

Jeff Beach, Stifle Nicholas.

It's getting late at night for all of us except you.

I have one question. Once you have rightsized your operations this year, and we see general construction rebound across all the segments that you described, do you see yourself growing faster than overall construction next year, with your ability to shift more into commercial?

I'm going to make your modeling job really difficult. The rightsizing process is, of course, primarily a risk reduction process designed to reduce the impact of operations that have historically underperformed on our overall performance.

If the economy busts out of its shell, starting soon, and extending into the third and fourth quarters, there's every possibility that we will not reflect a revenue reduction for calendar year 2004.

But my current assumption is that -- in my mind -- a conservative in all respects. That is to say with respect to revenues as well as with profitability, based on the assumption that the economy will roll out on a regular basis, and that the rightsizing activities that I have described will therefore have a net negative effect on construction revenues for the year.

But, with respect to ongoing operations, yes. The impact of late '04 and full-year '05 capital spending increases on large ticket capital intensive projects should create growth patterns that exceed the general construction market.

Thanks.

At this time, I would now like to turn the conference back over to management for any closing remarks.

Ladies and gentlemen, thank you very much for your interest and your support in EMCOR Group. Watch this space for new and interesting developments as we all participate in an improving economy. Thank you very much.

This concludes today's EMCOR Group's fourth-quarter 2003 conference call. You may now disconnect.