EMCOR Group Inc (EME) 2004 Q1 法說會逐字稿

Good morning. My name is Matthew and I will about your conference facilitator today.

At this time I would like to welcome everyone to the EMCOR group 2004 first quarter conference call.

All lines have been placed on mute to prevent any background ground noise. After the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time simply press star then the number 1 on the your telephone keypad. If you would like to withdraw your question press star then the number 2. Thank you. I would now like to turn the call over to Gordon McCune( ph). Sir, you may begin.

Thank you and good morning, everyone.

Once again this is Gordon McCune of Financial Dynamics and I'd like to welcome you to the EMCOR Group conference call. We're here to discuss the company's 2004 first quarter results, which were reported this morning.

I'd like to turn the call over now to Mr. Kevin Matz, Senior Vice President for Shared Services, who will introduce management. Kevin, please go ahead.

Thank you, Gordon, and good morning everyone. Welcome to EMCOR Group's earnings conference call for the first quarter ended 2004.

For those of you who are accessing the call via the internet and our website welcome. And we hope you have arrived at the beginning this slide presentation that will accompany Frank MacInnis' remarks. Those of you who are listening via the telephone, you, too have the opportunity to view the slides by simply accessing the link on the home page of our website, a quick registration, and you'll be at the slide show. Currently everyone accessing the call should be on slide 1, which the EMCOR title 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 2.

Slide 2 depicts the executives who are with me to discuss the quarter and they are: Frank MacInnis, Chairman and Chief Executive Officer and President; Leicle Chesser, Executive Vice President and Chief Financial Officer; Mark Pompa, Senior Vice President, Chief Accounting Officer and Treasurer; Sheldon Cammaker, Executive Vice President and General Council; and Mava Heffler, Vice President -Marketing and Communications.

For 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 can find us at EMCORGroup.com.

Before we begin, I want to remind you that this discussion may contain certain forward-looking statements. Any such comments are based upon information available to EMCOR management's perception as of this date and EMCOR assumes no obligation to update any such forward-looking statement. These forward-looking statements involve risks and uncertainties that could cause actual results to different materially from the forward-looking statements. Accordingly, these statements are not a guarantee of future performance.

Such risks and uncertainties include, but are not limited to, adverse effects of general economic conditions; changes in the political environment; changes in the specific markets for EMCOR services; adverse business conditions; increased competition; unfavorable labor productivity; mix of business; and risks of associated with foreign operations. Certain of the risks and factors associated with EMCOR's business are also discussed in the company's 2003 form 10-K, it's 10-Q for the first quarter ended March 31, 2004, and other reports filed from time to time with the Securities and Exchange Commission.

With that said, please let me turn the call over to Frank.

Thank you, Kevin. There was some difficult words for you in that announcement this morning.

Good morning, everyone, and welcome to our 37th quarterly conference call for investors, analysts and other friends of EMCOR Group. Today's call is being conducted, as usual, by telephone and by simultaneous webcast, and I'll be referring from time to time to a slide number to identify the relevant slide for webcast participants. Right now we're still on slide 2.

The primary subject of today's call is the EMCOR Group's first quarter 2004 earnings press release, which we issued earlier this morning. We'll conduct this call in our customary way. First a discussion of those 1st quarter financial results, followed by a review of the evolution of our project backlog, and special mention of some notable contract awards from the recent quarter. Then I'd like to spend a few minutes describing important customer survey recently completed that will help us guide and grow our facility services business in the coming months and years. Finally, after a brief summary of current trends and events in our company, there will be an opportunity for you to make comments or to ask us questions. And you can see from slide 2 that a number of EMCOR senior managers are here to assist with the answers. So let's begin.

Please move to slide 3. This morning we announced our first quarter results from operations and commented on the salient factors that's influenced earnings during the period. Net income for the first quarter was $5.7 million or 37 cents per diluted share, compared with $3.3 million or 21 cents per share during the first quarter of 2003. Revenues in the first quarter totalled $1.11 billion, a 4.5% organic increase over the year-ago period.

In my comments about our 2004 expectations, which I made to the market in February, I said I expected the first quarter of 2004 to be very slow for internal and external reasons that typically effect our first quarter results. And this quarter turned out pretty much as expected. The company earned a small profit from operations before the deduction of restructuring charges, which resulted in an operating loss of $5 million. The amount and timing of the restructuring charges, which related primarily to various personnel actions, were as anticipated and as discussed in last quarter's call. Although it is possible that the need for additional restructuring and associated charges may arise as the year goes on, the restructuring activities that were contemplated when I estimated their total cost at about $5 million, are substantially complete today.

Gross profits for the quarter at $101 million or 9.1% of revenues, were down $16 million or 1.9% of revenues from the year-ago period reflecting continued recessionary effects on revenues derived from contract backlog booked in earlier periods.

General and administrative costs of $101 million were also lower by some 7.5% than comparable charges a year ago. Due to our aggressive and successful management of variable expenses, including reduced incentive compensation, personnel reductions, and reduced provision for doubtful accounts. Interest expense fell slightly compared to 2003 because of good operating cash performance.

Restructuring charges in the first quarter were $5.2 million and reflected personnel changes at EMCOR Corporate, EMCOR Facility Services, Comstock Canada and Dreyfus Gulf (ph). We moved decisively in the first quarter to structure our company for future growth and we are pleased with the results. The pretax loss for the first quarter was a product of these charges, together with a group of mixed operational results from our reporting segments.

Our U.S. electrical and facilities services companies performed very well in the quarter, profiting from contracts in the hospitality, financial services, and transportation infrastructure sectors. Partially offset by continued weakness in office and commercial work and in the power generation sector. U.S. mechanical and facility services was much less successful, due to various recession factors together with the continued decreased availability of discretionary small task projects. Both American construction segments reported reductions in general and administrative costs.

U.S. facilities services reported an operating loss for the quarter, due to losses on certain construction projects outside of the normal facilities service operations of this segment. These projects were contracted for by subsidiaries in the segment prior to their acquisition by EMCOR in 2002. With the exception of the impact of these construction projects, our EMCOR facilities services operations were profitable for the quarter, even though they suffered from the same shortage of discretionary mobile service work that effected our mechanical businesses. EFS also reported lower SG&A costs.

Comstock Canada contributed a very modest profit while our U.K. construction and facilities services business reported an operating loss, but an improvement in operating results compared to the year early, due to a lack of unfavorable project closeouts in the current period, plus reduced general and administrative expenses arising from their cooperate reorganization in late 2003. I'll return to the topic of our U.K. company towards the end of my presentation.

Net income for the quarter of $5.7 million was significantly affected by an income tax benefit of $12.4 million arising primarily from the reversal of $9.6 million of income tax reserves no longer required based on current analysis of probable exposures. These tax analyses are ongoing on a continuing basis,of course, and from time to time a review of cumulative open year liabilities will disclose an over accrual of reserves, as was the case in the first quarter.

Please move to slide 4. EMCOR's balance sheet remained stong and liquid during the first quarter of 2004, reflecting our continued attention to contract administration and cash management. The first quarter of every year is typically marked by a higher than average number of project startups for which greater working capital is required. Despite this, quarter end balance sheet cash was $53 million, down $25 million from year end 2003. While total debt also fell by $21 million to a comfortable debt to total capitalization ratio of 18.5%, about 3 percentage points lower than at year end. At quarter end, the EMCOR companies were collectively net over billed by about $140 million. Excellent performance in today's contracting environment.

Please go to slide 5. Contract backlog at March 31 was $3.08 billion. Very slightly higher than the previous quarter end, and $100 million less than the year previous. During the last year, facility services contract backlog grew by about $150 million roughly offsetting net reductions in backlog in our remaining operations. For the last three quarters, beginning in July of 2003, we have been intentionally managing down our backlog growth, especially on the construction contracting side of our business on the assumption that the improving economy would provide us with better profit opportunities than those which were available in the last half of 2003.

The graph on slide 5 reflects a flattening of the backlog growth curve. In fact, if the impact of foreign exchange movements was omitted, our contract backlog has been falling gradually over the most recent three quarters. This process will continue until we have right sized certain construction operations, created capacity in other construction operations for new, higher margin projects, and observed the availability of such projects for inclusion in backlog. We continue to aggressively pursue growth in our U.S. facility services backlog.

On slide 6 we mentioned some notable recent contract awards that illustrate the diversity of EMCOR. In services, geography, and economic sectors served. We're still on a roll in Las Vegas where Handsome Mechanical is the preferred mechanical contractor for Wind Resorts new $2 billion hotel and casino complex. Their scope of work includes and aqua theater, high end suites, and the gaming area.

In Washington. Poole & Kent, will perform the total mechanical package for a six-story, 350,000 square foot laboratory and office complex at John's Hopkins. The equipment includes medical gas piping and reversed osmosis and deionized water systems.

In California, Dialectric (ph) Los Angeles is responsible for the installation of the intelligent transportation system fiber optic network and highway lighting systems for the Route 215 and Route 91 freeway intersections.

In Pompano Beach, Florida, Poole & Kent South was awarded a large mechanical package, including aeration basins, clarifiers, pumps, blowers, and associated piping and duct work for a major water and waste water treatment plant.

University Mechanical was chosen in a qualification based selection process based on their safety record, ISO qualifications and stellar reputation in the sector, to build the entire mechanical system in the Arizona State University Science and Technology building, include 155,000 feet of novariums (ph) (ph) and bio level 3 lab testing areas.

At the new worldwide headquarters of the "New York Times" in midtown Manhattan, our Heritage and Mandell subsidiaries will perform the complete mechanical package, including sophisticated integrated piping and air handling systems for this 55-story building.

835 Market Street in San Francisco is a new nine-story building complex, housing a movie theatre, high end department stores, and office space. Merelich Mechanical is responsible for the plan of spec mechanical work to be completed in 2006.

And EMCOR facility services received a two-year facility services contract for all the properties of 5th Third Bank, encompassing about 9.1 million square feet of commercial property in eight states. The variety of these contract awards, and of many others in the past few months, indicates the broad range of services we can offer to our customers across a wide geographical area, supporting the view that EMCOR is well positioned to take advantage of an improving economy.

Slide 7 introduces a landmark study that EMCOR sponsored in early 2004 examining leading trends in facilities management. The survey, which received responses from more than 450 recipients, sought to understand the major drivers of this fast growing business. The answers are critical to EMCOR since facility service is a major growth initiative, and we need to accurately target our marketing and sales initiatives to make sure that we're aiming at the right customers, in the right industries and that the right decision makers within our perspective customer firms.

On slide 8 we report our findings. Our customers report that choosing a facility service provider is a lot like choosing a partner, since the relationship is long term and involves giving up a degree of control over critical assets. So the most important criteria for a facilities service provider include financial stability, reputation and track record, ability to deliver a quantifiable and verifiable results, 24/7 availability, and technical expertise. Please note that low price wasn't even in the top 5 characteristics chosen by our customers. A clear reason why we find facility services consistently profitable, as long as we do a good job.

Energy efficiency is also a key customer concern. On slide 9, our survey showed that 7 out of 8 customers find room for improvement of their energy efficiency and reliabilities. That 3 out of 4 need to control the delivery and consumption of power, and that more than half are not equipped inside their organizations to control and improve energy and operational efficiency. We're having consistent success in marketing our facility services based on an energy savings approach and the survey shows why. Since the systems that we design, install and maintain are the major consumers of energy in a modern commercial or industrial facility, a firm like EMCOR is perfectly positioned to be a long term partner and participant in broad energy savings programs. We'll be using the survey results to tailor our message to the right executives, in the right industries to maximize our business development opportunities, and to optimize our growth in this exciting sector.

Finally, a few words about three different matters, including our expectations for the remainder of the year. First, with respect to our U.K. operations, EMCOR Drake & Scull. I announced on the February earnings call that, in light of disappointing operating results from that company during 2003, I had concluded that EMCOR would reconsider the appropriateness of its ownership of all or portions of the U.K. operation.

Immediately after the call the review process began. I have visited the U.K. business to gain firsthand knowledge of the opportunities and the problems associated with its operations, and to assess the progress that our new management is making in improving its control of the company and its four business divisions. The review includes an examination of the salability and the likely proceeds from disposition of each division, and the importance of each division to EMCOR's long term strategic plan. I'll deliver an interim report to our Board at our May meeting ,which will take place in London in order to give them a look at the company firsthand. And I expect to have a final decision in place by the end of June.

Secondly, we reported in our form 10-Q, filed this morning, that a Dow Jones news wire has subsequently reported that our Baltimore based company, Poole & Kent, Corporation, had been served with a subpoena, and has subsequently been named as a target of a grand jury investigation into the use of minority and women owned business enterprises. The use of minority or women owned business enterprises by Poole & Kent, and most, if not all, other major contractors is a frequent feature of major construction contracts, especially those involving the use of public funds or the construction of public facilities. The minority and woman owned enterprises to which work is subcontracted under these programs, are small and poorly capitalized, and the maintenance of their independence from the general contractor who is attempting to insure that the work performed is of the highest quality is a difficult task. Based on our knowledge of the facts we don't think Poole& Kent have dune anything wrong. Poole & Kent has cooperated with the subpoenas and is providing information to the investigating authorities.

And last, as I mention earlier, we published guidance in February indicating expected revenues in 2004 of l 4.3 to $4.4 billion, reflecting about a 5% decrease in construction revenues compared to 2003, offset in part by growth in our facility services businesses. Our revenue expectations have not changed. With respect to earnings per share, our prior guidance was 1.75 to $2.35 per share before restructuring charges of about $5 million.

Today I am revising that guidance upward to conform with our ongoing GAAP presentation of our earnings and specifically to recognize the input -- the impact of both the tax accrual reversals that we recognized in the first quarter, and also actual and anticipated restructuring charges for 2004 of $6 million. Accordingly, our new EPS guidance range for full year 2004 fully diluted is $2.15 to $2.75 per share. It should be noted that our expectations have not changed with respect to the financial results of our specially contracting and facility services operations. It is still too early in the year and in the economic cycle to perceive clear trends that could be the basis for any changes to the guidance range.

That conclude my remarks concerning the first quarter 2004 at EMCOR Group. Now there are time for your questions or comments. And Matthew is on hand to tell you how to queue. Many thanks for your interest in and support of EMCOR Group. Thank you.

At this time would like to remind everyone, in order to ask a question, press star then the number 1 on your telephone key pad. Again that's star then the number 1 if you have a question, and we'll pause for just a moment to compile the Q&A roster . Your first question is from Jeff Beach with Stifle Nicolaus.

Thanks. Frank, I've got two questions. First, just heard earlier this morning impact from Integrated Electric on higher steel and copper costs, you're more diversified by them by this significant runnup in steel, is it going to impact your second quarter profitability?

Jeff, I'll deal with that question first and I know you've got a follow-up.

I can tell you factually that I've heard nothing of consequence with respect to the run up in either steel or other commodity prices from any of our subsidiary operators in the last quarter. I'm aware of course of the trends in those commodity prices, but we price the cost of the steel and the copper and other commodities associated with a particular project when we bid it and are awarded the project and sign the contract. And because most of our contracts are a relatively short duration, our opportunities to reprice are fairly frequent. We do not use derivative instruments to try to hedge our commodity purchasing activities, but we think we have the best purchasing power in the industry and are conservative in our estimates of commodity pricing. So I can tell you, first of all, that I've not seen anything of consequence with respect to past quarters and I do not believe that our profitability will be impacted going forward.

All right.

And second, you mentioned it's a little bit to early for you to make a comment or to forecast the level of construction activity ahead. But at this point you're seeing indications from general contractors and activity out there with key customers. What are you seeing right now for the second quarter?

Yeah. Jeff, while I'm trying to be careful here, in that I am seeing anecdotal indications of the pipeline beginning to fill, particularly in the small task discretionary work areas that we missed out on to a significant extent last year. Our thesis with respect to EMCOR's recovery in conjunction with the overall economy was that , these small task discretionary projects would be the first ones to come back, both in conjunction with the weather, which we hope to be normal this year, and also in conjunction with the improving economy.

Second in line would be medium sized capital projects, such as makeovers of commercial offices, and the like. Perhaps upgrading or expansion of offices for hiring of more personnel, et cetera. The kind of job that's would go with a gradually improving economy. And we expected that those project would be would begin to impact our results late in the second quarter and in the third and fourth.

Last in line would be the major capital expenditure projects, the green field projects and other major capital outlays that reflect a very buoyant economy. Those we think will hit our bag lock beginning in the fourth quarter, perhaps but certainly in 2005, which is looking like a good year. So I've got anecdotal evidence of the improvement of the economy along the lines that we expected, and talked about in our year end earning call, in fact. But nothing clear enough to constitute a trend that I'm prepared to discuss right this minute.

All right. Thanks.

You bet.

Your next question is from Alex Rygiel with Friedman, Billings & Ramsey.

Thank you. How you doin', Frank?

On a year-over-year basis, your SGA was down about $8 million. I think you identified three areas. Can you quantify those three areas or reasons for the decline in SGA? You mentioned incentive comp, reduction of personnel, as well as a reduction in provision for doubtful accounts. Can you quantify each one of those?

I don't know that I've got the numbers directly to hand, Alex, no. But I can tell you that the incentive comp reductions would be a substantial portion of the mix because we compensate our personnel based upon return on net assets. And both our return, that is to say our profitability, and also our net assets performance were not as good as, and are not as good so far this year, as they have been in past years. So variable compensation reduces substantially in those circumstances. We don't compensate people for lack of performance, and that's the rule of EMCOR. So I don't know that we've got a breakdown available for you on that. Sorry.

Okay.

One last question with regards to CES and in the first half of the last year you had commented that you were incurring integration expenses associated with CES. I guess I'm somewhat surprised that in your explanation of SGA being down $8 million you didn't include an commentary about integration expenses for CES. Can you address that? Maybe it's showing up on another line item?

No. I think integration expense for CES is complete now and the CES operation actually reported a reduction in SG&A expense year-over-year in the last quarter. We did have a piece of restructuring cost at CES associated with the- the establishment of our long term senior management structure there in the first quarter.

And actually one more question. There's been a number of management changes at the cooperate level and you went through a couple today at CES and the U.K. You know, over the last year, a year ago in the mid-west operations. Can you address those management changes over the past 12 months and kind of talk about your expectations going forward with regards to future changes?

Sure. Okay. Well, let's start at the top.

The recruitment process with respect to Jeff Levy's successor is ongoing. I think that Spencer Stewart is doing a good job of providing us with some very interesting and stimulating candidates to look over. That process is showing good progress. I'm going to be reporting to the Board on the -- on that process, once again in London at our May meeting.

I'm very happy with the takeover of the mechanical construction operations in the United States that Mike Ferry (ph) and John Warga (ph) have accomplished in the last three months. They've taken a hard look at all of their new operational responsibilities and the result is reflected in the mechanical operating results for the quarter. I have the greatest faith in Mike and John, who are both EMCOR and industry veterans, and I think they're doing a great job.

At EFS, Bill Rogers as has taken over as CEO of our combined EMCOR facility services businesses. Bill is an industry veteran in whom I have great faith. The restructuring charges associated with EFS in the quarter, reflected the departure of Phil Rogers, no relation, who had been with CES prior to its acquisition and who has now left to pursue other interests.

In Canada the retirement of Bill Corp (ph) who had been the President of Comstock Canada for many years, was followed by the appointment of Jeff Hertec (ph), a long time business associate of mine and a veteran of the Canadian construction industry and we're pleased with Jeff's presence.

And in the U.K. Tony Whale and Brian Davies, took over in mid year last year from the previous administrators, who we felt had done a poor job of handling Drake & Sculls four operating divisions. And I personally think that since that time Tony and Brian have moved decisively both to reduce the scope of the British company's operations, for example by closure of their Scottish operations, by merger of (INAUDIBLE) and Southern England operations, and cessation of business in most of London, and have also imposed new discipline upon the British operating companies. I expect a small profit from the U.K. companies this year.

Thank you.

You're welcome, Alex.

Your next question is from Jamie Cook from Credit Suisse First Boston.

Hi, guys. Good morning.

Hi, Jamie.

My first question on the facility services side, even if you back out the, I think the one time 2.3 million charge or whatever. You know you're at you know I think 700,000 in profit. Can you talk about how much of the profit was CES versus the legacy EMCOR facility services business? And when do you expect to achieve normalized margins over all on the facility services side?

Sure.

Actually I'll ask my.

Let me do that one, and then I'll take your follow-up. The facility service business at CES is represented by two basic kinds of business, site based and mobile services. Site based being the stationing of facility service personnel within the customer's facility, generally on a 24/7 basis, with ongoing responsibilities for pretty much everything associated with that business. And the mobile service is what it says it, which is a callout kind of business which represents a person in a mobile van going to a site, either on a scheduled basis or an a discretionary callout kind of basis.

The mobile services business has suffered substantially in the last year and we've spoken a number of times about this on past calls. And that suffering has been reflected on only in the results of the U.S. mechanical business which has services a part of its portfolio, but also the pure play facility services business which is, as I had mentioned earlier, split between site based and mobile. The site based services operations performed well during the quarter. The mobile services were affected by the downturn and discretionary small task work, but there are also one of the sources of the information that I alluded to in answer to a previous question, which is that the pipeline is beginning to refill in the mobile services at the discretionary small task area. So we're seeing improvements beginning to happen there now. With respect to the breakdown between the profitability of legacy EMCOR companies and CES, I don't have that immediately to hand.

Liecle or Mark do you have that?

I'm sorry, Jamie, we'll have to come back to you.

Okay.

So Frank, I guess my question is then if you look at the facility services, when you do sort of have - I guess when mobile comes back, is it is it okay to assume that you could get your 4 to 5% margin? And then you know when that as that or if that continues to be weak we would probably expect more of a 2.5 - 3% margin on the facility services side?

No there's not much impact of legacy cost, if you will, or overhead.

I'm not talking about the costs. I'm talking about the difference the site and the mobile business that you were talking about. How the mobile has been deteriorating.

Right. After mobile comes back after a brief period for absorption perhaps of some excess contractor overhead in the mobile services area, we should be a pretty prompt reversion to form on that side. So I don't think there's going to be a big lag.

Okay.

And then my next question is, if you read through the 10-Q, you talk a little bit about cost recoveries. You know, increased cost recoveries on completion of projects. So it looks like that ,you know, you're - you're - you're not able to recover costs from change orders or something like that. Is that true? And has has that been decreasing over time? I know it was more of an issue in 2003? And can you talk about the expectations for that going forward?

Okay. Well, let me see if I talk generally about it and see this Leicle or Mark have specific comments.

The company's cash performance in 2003 was not as good as we would have liked. It was -- it was good under the circumstances, and in fact we reduced the the ratio of debt to total cap significantly towards year end, and we're basically flat in that number for the year. But the nature of the backlog and of the work that we performed, with a preponderance of public sector projects, led to an increasing number of claims and disputes and delays associated with those projects. That's just the way those projects are. And the result of that was more money hung up on problem projects or projects that were moving slowly because of their intrinsic nature.

The company this year expects to recover those costs with the gradual burning off of those problem projects from recessionary years. And I personally have no reason to think that we will not collect everything that we've booked with respect to those projects. It is certainly true, however, that going forward as the the mix of our backlog work moves back towards a more normal balance of public and private sector work, that we would expect fewer claims and disputes, and smaller amounts requiring collection. It's still insignificant, by the way, however, that we were able to so significantly increase our net over build position during the last quarter by some $40 million.

Leicle, any comments?

No, Jamie. What we were trying to do with that wording, usually we'd use the words job close out, so we just kind of expanded the definition there to make that a little bit more clear, as we do that. As you saw electrical had some positives, mechanical, as you're closing our some of those had some of the negative impact.

Alright. Sorry, Frank, one last question. Can you talk about, now that CES it looks like the integration is complete. Can you talk about acquisitions going forward? Whether we can expect any '04?

I don't have any particular acquisitions in mind, Jamie. There are a couple of opportunities around we can -- we can still look at it an investment in the electrical distribution - transmission distribution line business if we want to. But I'm much more interested in the possibility of utilizing some capital, and we expect that to be a good cash year, by the way, for the purpose of expanding our role in various strategic alliances that we have established with Siemens, with CSFB, and the like. And those might, in my chair those look a lot like the functional equivalent of acquisitions, if for example, we are asked by an alliance partner to expand our capabilities to serve as their partner in certain jurisdictions. So we're looking at that. But nothing of material consequence on the actual acquisition front at the present time.

Great. Thank you very much.

You're welcome.

Your next is from Arnold Ursaner with CJS Securities.

Hello, Arnie.

Hi, Frank. How are you? I'm backing up for Mike.

A couple of quick questions. You mentioned facility losses on the service contracts, you would have been profitable if it were not for that. Can you give a sense of how big that loss was?

Actually, no. You must have misheard me. The reference was to losses on two construction contracts. These were electrical construction jobs that were taken on by one of the CES subsidiaries prior to our acquisition of those companies in late 2002.

Right.

They are projects that are outside of the normal scope of that company and outside of the normal scope of CES we certainly won't be allowing them to do anymore of them. And what my comment was, that without - that absent those construction contracts, that CES facilities service operations were profitable.

Second question I have is, can you give us a break down as you look at your revenue guidance for the come upcoming year with (audio difficulties) working down backlog and (audio difficulties) to come from small task discretionary?

Arnie. I'm very sorry. You broke up while were you asking the question.

Can you give us in the revenue guidance that you're giving us 4.3 to 4.4 billion, can you give us the percentage from backlog and the percentage from small task discretionary?

We think that the percentage derived from burn off of year end backlog during 2004 is right in the 50% range. Perhaps a little higher. But roundabout 50/50 between backlog that is - that exists at the end of the year and projects that are acquired going forward.

With respect to small task discretionary. We don't break out projects exactly that way, but I can tell you that, from year to year, the percentage of our business that is represented by projects under $250,000, which are typically the home of those small task discretionary projects, is between 25 and 30%. And those are never in backlog for all practical purposes, so one could say that the overcall breakdown of our revenues in 2004 would be roughly 50% from pre-existing backlog, 25 to 30% from small task projects of various kinds, and the reminder from other work acquired and performed during 2004.

A final question. I know you spent a lot of time reviewing data from each of your branches, on pretty regular basis. (audio cut out) Mentioned anecdotally you're seeing of a pickup. Can you perhaps expand a little bit on what it is your seeing in the monthly reports how the trend of that has been shifting?

Yes. For example, I would receive a report from from one of our major city mechanical and service companies, that they are seeing the kind of projects that they hadn't seen for a couple of years, involving commercial customers asking for $100,000 or $200,000 or $400,000 upgrade, or a deferred repair of a of a mechanical or electrical system. We've also seen some positive absorption of commercial real estate, and the broad national statistics, by the way, support that. That there is now a positive absorption taking place nationwide of previously vacant space as customers begin to make more confident decisions about acquiring and upgrading or restacking space in order to make room for a new employees and new operations. And if it's these kinds of small, and perhaps medium-sized projects that we thought would be the first phase of EMCOR's recovery in its construction operations that are giving rise to these anecdotal reports.

Okay. Thank you very much.

You bet.

You have a follow-up question from Alex Rygiel with Friedman, Billings, Ramsey.

Thanks. Frank, with regards to the new business that you added to backlog this quarter, can you comment directionally on the margins that you anticipate in that business relative to the base of backlog that you had?

Yes. The we're seeing a different definite firming of prices. We anticipated that this would be a gradual process because, in any post-recessionary economy there is a period during which sophisticated customers are trying to lock in recessionary pricing. And we've had to resist that process. And as I mentioned earlier we have been in fact maintaining capacity within our construction group in particular by turning down projects that didn't meet our expectations for long-term profitability. We can afford to wait.

However, there is a period while labor is still in theoretically infinite supply, where other contractors are taking on work that we wouldn't want to have, so we're not building our backlog very fast at all in the construction area. And we're still right-sizing certain of our companies to the point where they're not taking on new work at all. So it's it's kind of a mixed bag. But those companies that are adding backlog are adding it at significantly improved margins compared to the - the year and two years previous.

In aggregate, Frank, was the new work that you added to backlog in the first quarter higher margin work than what you had previously in your backlog?

The answer you get when you do that kind of analysis is not very statistically helpful, because gross margins, which are the only margins that we know about when we bid for and - and are awarded a project before its actually performed, are significantly dependent upon the area of the country or of the world, in which those those projects are awarded.

For example, the same contract, and I've used this example a number of times before. The same contract in terms of net margins will require a 12% gross margin in New York City, but only a 7 or 7.5% gross margin in Las Vegas. So we don't want to go too far down the path of relying on gross margin statistics for indications of trends. I've often said that - that rising gross margin is always good, but a falling gross margin is not always bad. And that's seems to be the case currently as well.

Thank you.

You're welcome.

Next question is from Rich Wesolowski with Sidoti & Company.

Good morning, Rich.

Just want to make sure, Frank, that I'm clear on the guidance. The previous guidance of $1.75 to to $2.35, that did not include either the tax issue or the restructuring charges is that true?

That is true.

And now they're both in there.

That is true.

Okay. Good.

The exact nature of what that $9.6 million is, I just - flipping through rapidly on the queue here, and I noticed your valuation allowance, which is what we usually seen the tax line was stable at $2 million and I was wondering what exactly the reversal was?

Rich, this is Mark. The reversal is from reserves that were sitting in income taxes payable. They were not sitting in valuation allowance. They had nothing to do with deferred taxes.

Okay. That's all. Thank you very much.

Okay. Thank you, Rich.

You're next question is from Scott Sherer (ph) with Clovis Capital.

On those after tax numbers is that $9.6 million and then subtract $6 million so the net number is $3.6 million after tax?

The $9.6 is already an after tax number because it's in the income tax line.

And is the $6 million after tax?

No. The $6 million is pretax. You'd have to tax it.

What's the tax effected number can you tell me because I'm not smart?

Oh, yes you are.

I can't figure it out. I can't figure did out. The $9.6 million is after tax, that's on 15 million shares so that's 64 cents that you're - that you're sort of adding back. And then the $6 million we're going to use a 40% tax rate.

3.5.

3.5 divided by 15, so that's 24 cents. So you really added, sort of, 40 cents to the old number? So basically the guidance essentially stayed the same.

That is precisely correct.

Okay.

All right.

You could have just said that.

Well -

We're keeping guidance the same but sort of changing on the GAAP basis.

I think that's what we say in the last paragraph our press release.

I must have missed I apologize then.

It's right there. That's exactly what we had said.

Remained unchanged, maybe I should learn how to read. Thank you. I told you, I wasn't that smart. Thanks, guys.

Your welcome, Scott.

Once again, if you have a question, press star 1 on your telephone key pad. And your next question is from David Furlander with Bes Woods Partners.

Hi, David.

Hi. Good morning. I'm just trying to get a little more insight into your facility services business and the 5th Third contract was a good win, obviously. But with similar type contracts, when you - who do you typically go up against in - for contracts like that? And when you do lose a particular bid, what are the reasons, you know, that you may lose out an big contract like that?

Sure. Good questions. Okay.

When we are bidding to perform an outsourcing driven facilities service contract ,we are either bidding against a property company like a Trammel Crowe, Jones Lange or the like, which is offering facility services as an adjunct to its brokerage and other services. Or we might be bidding against a controls company like Johnson Controls or Honeywell or the like, that is offering facility services as an adjunct to it's building controlled manufacturing distribution business. Or we might be completing against the internal staff of the customer. In circumstances where the customer has decided to investigate the possibility of reducing costs by outsourcing the facilities services to professionals.

We find that those outsourcing decisions when the change contemplated is from internal staff to a specialist like EMCOR, are done for about three basis reasons. Number one, the company is in trouble, wants to concentrate on its core business, and that concentration is assisted by the outsourcing of nonessential activities, like building maintenance, to a specialist like EMCOR. Second reason, the company's assets are absolutely mission critical, a data center would be a good example. It's got to be up all the time. Nanoseconds of downtime are not permitted. And it's so critical that ongoing and day to day 24 / 7 maintenance must be in the hands of the professional who understand all the systems and can make them run all the time.

And the third reason is primarily energy related . As I mentioned earlier on the call, many companies, perhaps a significant majority, feel that they are not in control of their energy consumption, and it's one of these major variable costs. And we're having great success in that kind of value proposition to customers.

When we don't lose -- excuse me - we do not succeed in marketing or selling a facility service proposal, it is either because, the customer lacks the will to overcome natural resistance within its - its - its employees to change, and decides to keep the operation in-house. Or we are straight underbid by another service provider of the type that I've mentioned earlier. We do not pretend to be the lowest cost service provided. And as I mentioned earlier, our survey results suggest that that's not a very attractive proposition for our customers most of the time, anyway. We find that our customers, generally speaking, concentrate on our - our professional and technical expertise, that is why we win such a high proportion of the projects that we propose to perform.

But even the costs warrant you know within the top five you know attributes that companies are looking for in a facility services company, you're still losing business on price?

Oh, yes. We lose it from time to time on price. And frankly, the kind of customer that we lose based on price -- that we lose based on price, is probably the kind of customer that would have been a troublesome one ongoing anyway. So I'm not sure that we're terribly sorry when we lose one based on price.

But we really regret and we are somewhat resentful about losing opportunities based upon inertia, that is upon the customer's determination that they're afraid to outsource, because the kind of outsourcing that we do is the good outsourcing, that not only keeps jobs in the United States, up but also helps American companies to complete much more effectively with global companies that they've never heard of before.

Right. And who was doing the 5th Third work before you signed up, before you were engaged?

They were doing it internally.

They were doing it internally. Okay. Thanks for your help.

You're welcome.

At this time there are no further questions. I would now like to turn the call over to management for closing remarks.

Once again thank you all for your interest in EMCOR and we'll talk to you in the quarter. Thank you.

This concludes today's teleconference you may now disconnect