EMCOR Group Inc (EME) 2004 Q2 法說會逐字稿

At this time I would like to welcome everyone to the EMCOR Group 2004 second quarter conference call. (OPERATOR INSTRUCTIONS). Thank you Mr. McCoun, you may begin your conference.

Thank you and good morning everyone. Once again this is Gordon McCoun of Financial Dynamics, and I would like to welcome you to the EMCOR Group conference call. We're here to discuss the Company's 2004 second quarter results which were reported this morning. I would now like to turn the call over to Mr. Kevin Matz, Senior Vice President of Shared Services, who will introduce management. Kevin, Please go ahead.

Good morning everyone. Welcome to EMCOR Group's earnings conference call for the second quarter ended 2004. For those of you who are accessing the call via the Internet on our website, welcome. And we hope you have arrived at the beginning of a slide presentation that will accompany Frank MacInnis' remarks. Those of you 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 slides should be on slide 1, which is an EMCOR title slide. During the call instructions will be given for you to advance to the next slide. This is one of those times, so please advance to slide 2.

Slide 2 depicts the executives who are with me to discuss the quarter and 6-month results. They are Frank MacInnis, Chairman and Chief Executive Officer and President, Liecle Chesser, Executive Vice President and Chief Financial Officer, Mark Pompa, Senior Vice President and Chief Accounting Officer and Treasurer, Sheldon Cammaker, our Executive Vice President and General Counsel, Mava Heffler, Vice President, Marketing and Communications.

For call participants who are accessing the conference call via the Internet, this presentation including the slide portion will be archived in the Investor Relations section of our website under Presentations. You can find us at emcorgroup.com.

Before we begin, I remind you that this discussion may contain certain forward-looking statements. Any such statements 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 statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance.

Such risks and uncertainties include but not limited to adverse effects of general economic conditions, changes in the political environment, changes in specific markets for EMCOR services, adverse business conditions, increased competition, labor productivity, mix of business and risks associated with foreign operations.

Certain of the risks and factors associated with EMCOR's business are also discussed in the Company's Form 10-K for 2003, its 10-Q for the second quarter ended June 30, 2004 and in other reports filed from time to time with the Securities and Exchange Commission.

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

Good morning everyone. And welcome to our 38th 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 will 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 second quarter 2004 earnings press release that we issued earlier this morning, with additional comments on a second press release announcing two important facilities service contract awards. We will conduct this call in the customary way. First, a discussion of the second quarter and year to date operating results, with reference to general trends and specific developments in our business and in our markets, followed by a review of the evolution of our project backlog and special mention of some notable contract awards from the recent quarter.

Then we'll spend a few minutes featuring the new Morongo Casino Resort and Spa project, which is an important example of the range of services EMCOR can provide over the life cycle of a sophisticated facility. Finally, after a brief review of earnings expectations for the last half of 2004, 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's senior officers are here to assist me with the answers.

So let's begin. Please move to slide 3. In our initial analysis of EMCOR's prospects for 2004, which we communicated to the market in February, we concluded that this would be a transition year between recessionary 2003 and post-recession 2005 and estimated that the improvement in EMCOR'S performance that we expected for the year would fall primarily in the second half as macroeconomic recovery became widespread and solidly established.

That has proven to be the case, as EMCOR operated at a low level of profitability for the second quarter and year to date, but with improving prospects for future quarters. In the second quarter, EMCOR earned $1.4 million or 9 cents a share fully delayed compared to 8.3 million or 53 cents in the same period last year. Revenues were $1.19 billion versus 1.14 billion a year ago, a 4 percent increase, while selling, general and administrative expenses fell $9.5 million over the same period to 97.1 million, or 8.1 percent of revenues.

The significant reduction in overhead costs is the fruition of a cost reduction program that we began in January. And that has resulted in a nearly $18 million reduction in these costs for the first half of 2004.

Please move to slide 4. EMCOR's 6-month results display similar trends. Revenues of $2.3 billion were 4.3 percent higher than in 2003, while net income fell to 7.2 million or 46 cents a share compared to 11.5 million or 74 cents a year ago.

Year-to-date restructuring expenses were $5.3 million, including about 100,000 in the second quarter. The financial statements reflect modest improvement in overall operating results between the first and second quarters despite continued spending caution on the part of many customers and only spotty improvement in many of our markets.

Our U.S. Electrical and Facility Services Division performed to budget levels with strong performance from our Dyne Electric (ph) Denver, Los Angeles, Miami, Washington and Wellsback (ph) operations, offsetting substandard results from Dyne Electric Portland, San Diego, San Francisco, and Forest Electric.

U.S. Mechanical and Facility Services returned to profitability after first-quarter losses, but we're still below budget expectations. Positive mechanical contributors included Debra (ph), FMG, Hanson, and Tucker, while Heritage Sheet Metal, Marelich and Pace delivered disappointing results. Economic sectors that supported positive second quarter results included the transportation infrastructure, financial services, health care and hospitality sectors, while manufacturing, including power generation and some commercial markets, remained depressed.

U.S. Facility Services moved to profitability in the second quarter as well, although somewhat below budget. First quarter trends in this division were reversed in the second quarter as Mobile Services benefited from growing demand, especially during June, while site-based services load due to delays in project implementation.

Comstock Canada results included sharply reduced revenues and modest operating losses associated with market weakness, especially in power generation and in eastern Canada. Our UK business reported a $1 million operating loss in the second quarter, marginally better than the first quarter and much better than a year ago, but still slightly below budget. UK contracting performed above expectations, while UK facility services were negatively affected by the finalization of several contracts.

We are making continued progress in our reorganization and review of EMCOR, Drake and Sckall (ph) and will present our final report and recommendations to the Board at its next meeting.

Please move to slide 5. Cash flow and balance sheet performance during the second quarter was very good, particularly in light of challenging markets and typical second quarter capital requirements. Quarter end debt was $120 million, 20 million less than at 2003 year end, for a very comfortable debt to capital ratio of 18.6 percent.

The Company was net over billed by more than $170 million at midyear. Our balance sheet cash stood at 50 million, and other line items were normal. The Company is very well positioned financially to capitalize on new opportunities and to fund the capital requirements associated with a growing economy.

Please go to slide 6. Second-quarter backlog stood at $3.08 billion, slightly lower than the year ago quarter and lower still with foreign exchange effects removed. As shown on this 7 year contract backlog slide, we have managed a flattening of the backlog growth curve pending the availability of higher margin projects associated with economic recovery. Our second quarter backlog bar on the far right of the graph reflects some interesting movements in individual sectors, perhaps portending future sector developments.

Commercial and health care backlog showed 8 percent growth over year ago levels, while institutional and manufacturing, including power generation, declined more than 20 percent from 2003. Hospitality and gaming led by the buoyant Las Vegas market, increased its backlog by more than 20 percent. But our growth leader was water and wastewater treatment, which grew 62 percent year-over-year. As I said many times in the past, this is a sector which holds great promise for EMCOR for the long-term future.

Despite these generally healthy trends, however, EMCOR's backlog continues to be overbalanced toward the public sector. So we'll continue to exercise restraint in backlog growth until private sector pricing power is more prevalent.

Slide 7 is a schedule of recent contract awards which illustrates some of the trends I've been describing. In Baltimore, Coolant Camp North (ph) will serve as both general and mechanical contractor for the rehabilitation of a major filtration plant to be completed by 2007. While Coolant Camp South (ph) will perform the mechanical package for a major addition to a Miami area water treatment plant, which when completed will approximately double the plant capacity and improve water quality.

Forest Electric was awarded the general power and lighting work for 10 floors of the Lindbergh building, including specialty lighting, radio and TV broadcast studios, fire alarm and security conduit. In Oakland, California, Marelich will provide plumbing and mechanical systems for a new detention center and attached courthouse. While our Boston subsidiary, JC Higgins, will install the complete HVAC system for a new 22 story luxury hotel and residential complex.

Our Las Vegas contract backlog continues to grow, as Dyne Electric received the electrical contract for the first phase of a 1.3 million square foot world market center development, including showrooms and exhibit spaces.

In Houston our Gallan (ph) Company will build the plumbing and HVAC system for a seven story home of the Molecular Medicine institute, including laboratories, viverium (ph) and office space. While our Wellsback in New York will provide railroad signals, communications, catinary (ph) and traction power systems for upgrades to Metro North's New Haven line and Amtrak's Hillsgate line in Westchester.

Please go to slide 8. The second press release that we issued this morning was an important one, since it illustrates the growth opportunities inherent in our facility service business and the broad scope of services that EMCOR companies can provide to sophisticated customers and projects. In Washington, the federal government's continuing mandate to manage their huge building operations more cost efficiently translated into a $57 million 5 year facility service contract for 3.5 million square feet in the DC area, including the Harry S. Truman building and Blair House.

EMCOR will provide building engineers, electricians, plumbers, painters and HVAC professionals performing both scheduled and corrective mechanical, electrical and structural services 24, 7, 365.

The second project award described in our press release is the subject of slides 9 and 10. The Morongo Casino Resort and Spa located 15 miles from Palm Springs is a $250 million, 658,000 square foot hotel and casino complex owned by the Morongo band of mission Indians, and will open in November of 2004.

Last year we announced and discussed the design build and mechanical contracting services that various EMCOR companies provided during the construction phase. Our new announcement concerns a $20 million operation and maintenance contract for the energy cogeneration plant at the hotel complex. The contract for 10 years with two five-year automatic renewal options illustrates our full project life cycle capability and the ability of our EMCOR Energy and Technologies Division to marshal the broad and deep resources of EMCOR companies to assume single source responsibility on a major project.

Slide 9 shows a high aerial view of the new complex with the islanded (ph) 14 megawatt combined heat and power plants in the red circle. This plant will meet all of the power, heating, cooling and water heating needs of the entire facility. On slide 10 a close-up view, the four gas engine generators supplied by Caterpillar are at the top of the picture. On the right three standby diesel generators. At the bottom, the primary switchgear. And on the left, four towers capable of processing 16,000 gallons per minute of condenser water. The central utility plant building is in the lower left corner of the picture. We're very proud of the strong and lasting relationship that we've established with the owners of this first-class facility.

Slide 11 is a simple depiction of the scope of services that we brought to the Morongo Casino project, and that we will bring to many other such projects in the future.

The foundation of our full lifecycle capability, which we bring to customers through EMCOR Energy and Technologies, is our strength in all of these components, design, construction, and operation, maintenance and service. As shown on slide 12, our continued presence at a facility during a long-term facility service relationship can provide us with the opportunity to provide additional construction services to a maturing facility, as expansions, upgrades or other redevelopment decisions provide new lifecycle opportunities.

Finally, if a few words about our expectations for the remainder of 2004. As discussed in our press release and in this presentation, we're saying clear signs of recovery in some of our markets, and our contract backlog sectors are moving in a positive direction.

To those who would comment that other sectors of the construction industry seem to be profiting more quickly from improving economic conditions, I would comment that this is normal for the specialty construction industry. We seem to lag general economic cycles by about two quarters.

I am of course aware that we have substantial ground to make up in order to achieve the earnings range previously discussed with the market. But I'm convinced by virtue of detailed discussions with each of our divisional heads that we will do so.

As mentioned earlier, our half-year revenues were $2.3 billion. And it is very unlikely that our revenue run rate will decline to any significant degree in the second half. Accordingly, I'm increasing my previously stated revenue guidance of 4.3 to $4.4 billion to approximately 4.6 billion. I reiterate my earlier earnings guidance of $2.15 to $2.75 per diluted share, with the additional comment that I would expect earnings to lie in the lower end of that range based on current conditions. I will consider narrowing the range of earnings expectations after our midyear re-forecast is complete in early September. 2005 continues to shape up as a good year for EMCOR.

That does it for today's address. Now the floor is open for your questions or comments. And Oh, Susannah will instruct you on how to queue.

(OPERATOR INSTRUCTIONS). Michael Rosework (ph) CJS Securities.

Frank, when the UK management changed we saw a large sort of I guess housecleaning that went on afterwards in terms of project write-downs and such. Was there anything similar that happened, particularly the mechanical area, in the current quarter or just past quarter?

Very much so. I announced on our February call that we had made a management change with respect to the oversight of our U.S. Mechanical and Facility Services operations in which we placed Mike Perry (ph) and John Wargood (ph), two EMCOR veterans who had previously been in charge of our electrical operations with additional responsibilities for mechanical. That resulted in a very searching and detailed review of our work in progress schedules by Mike and John, and a very conservative look at the progress and the prospect of our mechanical division.

In the first quarter mechanical reflected operating losses as a result of the first stages of that review. They moved to profitability in the second quarter, but their margins are still depressed as a consequence not only of the hangover of public sector work that affected that division in the same way they did mechanical -- excuse me, electrical, but also the write-downs of various projects where progress or profit assumptions were too optimistic under previous management.

So you did have a good deal of the same kind of aggressive review of operations in mechanical that took place in the UK in the last half of last year, also as a consequence of new management. That's correct.

Is or any way to quantify to some extent what the impact of those write-downs were?

I could tell you -- when you see gross margins for a Company like EMCOR reported at 8.5 percent, which was the case in the second quarter, you can always assume that there had been project write-downs affecting those results. Because there is no way that EMCOR would bid a portfolio of work of the type that we carry at 8.5 percent. It was only the fact that we were successful in reducing SG&A expense to close to 8 percent that we were profitable. And this was of course by design, because we knew that margins have fallen. But still the presence of write-downs was an important aspect of the reduction of gross margins in the first and the second quarter.

I will give you an example of the quantification. In the case of power generation projects alone second quarter write-downs depressed electrical gross margins by at least 1 percent. So that is the kind of order of magnitude that can affect gross margins in a division attributable to 2 or 3 seriously bad projects.

You mentioned the overweighting on the second half. What gives you confidence as you look out across your business that the margin improvement implied by that is obtainable?

First of all, because we are a lot better managed today than we were a year ago, and the really searching and detailed look at our operations that has taken place under new management in every single one of our divisions has led to two things. First of all, it has led to a very conservative view of current operational results, which are reflected in the reports that we filed in the first quarter and also this morning.

But it is also led to the clear understanding between me and the proprietors of our individual divisions that I'm reliant upon their careful and reasoned expectations for performance in the latter half of the year. Now I'm not just taking their own words for it in their entirety. My motto, like President Reagan's, is trust but verify. But in addition to the confirmations that I have received from each of our divisional heads, that based upon their current and anticipated views of the market, we can begin the range previously provided for market guidance. The analysis that we have made of our backlog evolution and of available current pricing in our various markets supports this conclusion.

Okay, I found a question for now. When do you anticipate to make some kind of the announcement on what your strategy in the UK is going to be?

We have made good progress with that. The analysis that we have made with respect to the UK pertains to each of the four divisions of the UK together with their international operations. And each of them has different characteristics. I would hope to be making an announcement quite soon with respect to the UK in general and some of their operations in particular. But I'm awaiting Board approval for some of the transactions that might be involved.

Alex Rygiel with Friedman Billings Ramsey.

A couple of quick questions. With regards to SG&A, when I look back at my model from '95 to 2000, SG&A averaged around 8.25 percent. It came pretty close to that in this quarter. Do you think that that is the appropriate long-term run rate for SG&A as a percent of revenues?

I would really like to keep SG&A below 8.5 percent. The wild-card here, Alex, is the bonus payments that are associated with EMCOR's Rona-based (ph) bonus plan. For those of you who are not familiar with what I'm talking about, very briefly we provide incentive payments to our subsidiary managers based upon their individual corporate performance with respect to return on net asset. That is because we want you provoke two types of behavior, profitable behavior and also cash collections. Liquidity is extremely important to our business. And as you saw from the second quarter balance sheet results, we have been very successful in that regard.

And each company has its individual Rona budget. And if as we do we expect improved results in the second half of the year, then we should also assume that we will be paying out additional amounts by way of bonus compensation, which is on a graduated scale. If the companies do well, their proprietors do well.

So in first half of the year with only modest profitability, the bonus accruals would not have been very significant. In the second half they will be higher. So I would not expect to annualize the kind of really significant SG&A savings that we made in the first half, but I certainly intend to try to hold SG&A below 8.5 percent this year.

Great. And when is your next Board meeting?

The next scheduled board meeting in October, but we intend to hold a special meeting before that.

Had that been put on the calendar yet?

Not yet.

Okay. The first question kind of attempted to address the onetime write-downs that you witnessed in the first quarter and in the second quarter. Do you anticipate any of those onetime write-downs for the third quarter?

I do not. That is not to say that they won't happen, because when you are running thousands of contracts at any given time there's always the potential for that. But I have a very high degree of faith in the quality of the operational management that has evolved over the last 6 to 12 months in this Company. And I have seen the impact of the review of the work in progress that has taken place, and I am satisfied that it was comprehensive.

With regards to those write-downs in the mechanical business, is there any common theme of sort, I guess, with regards to those write-downs? I know you identified the power generation marketplace, including some write-downs, but were there any subsidiaries or other end markets that seemed to be a recurring common theme for those write-downs?

Yes, I think so. I did mention power generation on the electrical side. And when I say that I don't mean the kind of modular cogeneration plant that we featured for the Morongo Casino Resort and Spa. That is very good work, in which we play a primary role in both construction and in systems maintenance. And we do that well, and we do well financially on projects like that.

Where we don't do well financially a great deal of the time is in larger central plant, pour and shell power generation work. The big power plants that you see belching steam on the horizon when you drive down the highway. We don't do well on those projects. We took some of those projects during the overbalancing period of our public sector work, and we're sorry that we did.

On the mechanical side, I would say that the Company -- the Company in general and several of our companies in particular have not performed well in the education area. School projects typically involving major retrofits of school ventilation and electrical systems have proven to be substandard projects because of the vast variety of school structures that are involved, the unpredictability of building conditions, the unavailability of schools for consistent work. For example on a daily basis some of the work has to be done after hours or only during the summer months. And it has turned out to be unpredictable work for typically difficult customers. And I would say that on balance that aspect of our institutional work, which has been in a poor sector in total has been particularly bad.

Have you scrubbed your backlog for power generation work and educational area work to adjust your guidance to reflect the potential risk that there is some backlog within those two end markets that could under perform?

Yes. In fact that was why I went into detail that I haven't before on the evolution of individual backlog sectors. And I mentioned that our manufacturing sector, which is where we put power generation, was down sharply year-over-year, as was our institutional work. That is a -- that is what I took to be a very positive sign of overall portfolio risk reduction which was the reason that we started this process in first place.

One last question with regards to backlog. Can you provide us the second quarter backlog for your UK-based businesses as well as your U.S.-based businesses?

I'm not sure if we've got that number in this room. What I can tell you is that the year-over-year evolution of our backlog, if you removed the UK currency fluctuations from that analysis, would lead to an overall year-over-year reduction of 4 percent in global EMCOR backlog. So as opposed to the basically flat backlog performance that we report, if you converted it to constant currency we would actually be off 4 percent or so from year ago levels.

Mark is developing a number. Are you close, Mark? He says he is real close.

Alex, domestic backlog was just under $2.5 million. The UK backlog was just over 0.5 billion. And the differential is Canadian and other.

Just remind to you the UK business consists of roughly equal proportions in revenue terms of facility services and specialty contracting.

Jeff Beach with Stifel Nicolaus.

A couple of things. Just back on the problem projects for one more time. Can you give us a sense as to -- the biggest problems sound like power generation. I heard about an airport, things like that. Roughly when were these projects bid into the backlog? Were these mostly 2003 projects that were bid and maybe subsequently awarded, and you're now biting the bullet on some of them so that we're really looking back quite a bit in time? And then did you hold any of the managers -- are these mistakes that where there's accountability and were there management changes because of these?

The bulk of the project that I've alluded to in my comments this morning and that were material to -- I shouldn't say material -- that were important to the write-down schedule for the second quarter, were 2002 projects in fact. Typically I would say in the last half of that year. These are very long-running projects that can -- that are difficult to manage and difficult to track because of the intermittent nature of the services provided. They move slowly. Manpower has peaks and valleys depending upon the stage of construction. They are typically large and multiphased projects involving different specifications and criteria for different parts of the project.

Everything I am describing adds up to complexity and therefore risk. And it is why we don't like them. In retrospect of course it was very unwise for our management to have taken them. But this is in the category of it seemed like a good idea at the time. That was at a time when the commercial market was disintegrating as a consequence of the depth of the recession. And our managers were faced with the need to consider whether or not to very seriously chop estimating bidding and performance capacity or look at taking on projects such as these major electrical generating projects in Manhattan, an airport project in Texas, or these school projects in California, all of which in retrospect turned out to be substandard, but had rationales for their -- for estimating and bidding them at the time.

There are always consequences for EMCOR management. We have, just for the information of the callers, instituted in EMCOR what is called the spec system, which is a means of continually assessing the performance of each of our subsidiaries with relation to 4 financial criteria. The failure of an EMCOR Company to meet either 3 or 4 of these financial criteria results in their inclusion on an action list, the members of which will be obliged to adhere to the old General Electric choices of fix, close or sell.

The spec system is up and running and we are ensuring that there will be consequences for EMCOR management, as there have been in the past, but on a less structured basis when major errors are made in estimating or performing projects.

The other question I had is, can you discuss a little bit about the profit outlook for facility services and what the major variables are there? You have won a couple of new contracts. It sounds -- it seems like there is operating leverage with volume over time on the base business, but yet your business -- you look at the margins in this quarter, you're still suffering maybe from seasonality and exposure of that division to the weather. Can you just talk in general about what we could look for over the next year?

Sure. As usual, there are look a lot of moving parts in this Company, more of them are moving in a positive than a negative direction. And it is my job to understand both the movement and the degree of momentum that these parts have.

In facility services we were waiting and hoping for, and expecting, an improvement in our mobile services business during the second quarter. As a reversion to normal weather and to normal customer demand patterns, we thought would lead to improvement. And we were right.

In June, starting at about the 10th of June, our mobile services operations in facility services began to experience a very significant amount in large part I think due to reversion to normal weather. We haven't seen yet as strong a return to discretionary small task work as we had been looking for. But we feel good about that in the second half of the year.

We'll feel particularly good about mobile services for the remainder of the year as the project pipeline continues to build and demand apparently stays strong. And that is high margin work that will help substantially in bringing the facility services businesses back to budget in the second half of the year.

On the site-based services, which is the other side of the facility service business, and this is the part where we locate personnel on a customer site 24, 7. It is typified by the projects that we announced on the call today. The implementation of those projects has been slower than anticipated. The projects are in hand or coming into hand, but it is all in the timing. And I think that what we are looking at in the site-based business is timing issues, certainly with respect to the second quarter, and perhaps in the second half of the year. But I think that the strength of mobile services and their growth will offset any weakness that is experienced in site-based services in the second half of the year. And there are some major potential customer and alliance developments that will, I believe, help us to improve FS earnings in the second half of the year as well.

So overall I was pleased with the facility services growth in the first half of the year. It looks like we will be well over that $1 billion threshold that we first achieved last year in terms of cumulative facility service revenues, and I'm optimistic about their future.

Jamie Cook with CSFB.

Can you talk a little bit about the small discretionary work that should come back as the economy recovers? And I guess a percentage of sales you're seeing now -- I think historically it has run at 25 to 30 percent when the economy was doing well, and the profitability of that type of work? And I guess what are your expectations for that in the second half of the year? And how much are you banking on that to make your numbers?

Well, first of all, we have a fine line to tread here in terms of definitions because I finished -- as I just finished saying to the previous caller that we had experienced quite a significant run-up in mobile service demand in June that was continuing. And that we were looking to continue throughout the second half of the year.

That was not only in our facility service business, but also in certain of our mechanical companies for whom service is a significant part of their business. A good example of that would be our Penguin Air-conditioning Company in New York City, which had a real good second quarter.

And the -- so mobile services looks like a good bet, both with respect to facility services and U.S. mechanical in the second half of the year. The small test discretionary work pertains to in large part to small upgrading, reconstruction and/or repair jobs that we thought would be driven by a lot of deferred maintenance decisions in recession affected 2003.

We haven't seen as strong a growth in those areas and as a strong a demand as we anticipated, particularly since we have been watching the inventory buildup of the HVAC parts suppliers and distributors who all expected a good year this year as a result of the deferred maintenance and repairs from 2002. And I know that Kevin has been following them. Maybe I could ask Kevin to say a couple of words about what he has been seeing in that sector.

I think it would be fair to say that what I'm seeing is a sort of a mixed bag. There are a number of major suppliers of parts to the industry and the tangentially industries that surround construction, whether they be laboratory testing and other industries. They are seeing some pickup generally. They are seeing some expansion generally.

But when you drill down and look at the reasons for it, a number of them have had increased revenue and profitability due to increase in commodity prices, or the ability to raise prices. So it is not so much volume driven as it is price sensitive driven. A number of companies have started to just now start to see some improvement in the commercial side of their business. And in fact a couple of quarters ago or a quarter ago they talked about having -- not seeing any kind of increase in the commercial side of their business.

So I think it is fair to say that it is a mixed bag. There a lot of points out there. They are starting to lean in the right direction though. I am starting to see a little bit more leaning toward positive movement of the commercial on the construction side, but it is just not there yet.

And, Jamie, Kevin raised an important point that I had neglected to raise earlier, and that is -- and callers should be aware that there is lots of work out there. There's plenty of opportunity for revenue. What we're waiting for is pricing power. What we are waiting for is the presence of sufficient demand and sufficient employment of our competitors and of labor in general so that labor shortages and the ability to deploy large quantities of labor on a particular project attract a premium. We can get all the revenue we like. It is really pricing power that we're holding on for here. That is the major reason for our restraint in the development of our backlog curve.

In order to make your guidance, do you assume that you get that pricing power back , or do you assume it stays at today's levels?

I assume that current trends continue. That is all.

So you're not expecting an improvement to make your numbers?

I think that there will be an improvement, but I don't need one in order to make my numbers.

And then just to be clear, and I think you mentioned this in the fall, but I missed it. You talked more about you will probably make more of the lower end of the guidance. I guess my question is, is it a function of -- was the first half in line with what you expected, or was it slightly below, and that is why we're going more towards the lower end?

No, I think this year was always all about timing, all about pacing. We thought that we were -- we thought that we were going to have a mediocre first half and said so. We thought that we were going to have a strong last half, and we said so, and we still say so. To try to cut it any finer than that, Jamie, would be to be putting too fine an edge on what was really a timing issue.

Okay, and then my last question. Can you talk a little bit about -- the backlog you're booking now, can you talk about -- are the margins any better than what is currently -- than what has been in the backlog? Are you seeing an improvement at all in the longer-term projects?

Yes. And once again it is spotty. As I mentioned earlier when I talk about spotty improvement in our market, I mean that we're achieving pricing power in some of our markets. We have some very attractive buoyant markets. A single example is our Las Vegas market which is really gang busters once again. And God bless them. They just keep blowing things up and building them again.

And that is an example of an area where we and the other service providers in that area have pricing power in our relationships with our customers. They don't pay us a great deal more than they do elsewhere, but they are so trustworthy and so willing to pay for quality and for on-time performance that we have a very predictable kind of operation there.

So I would say that whereas there is no very broad trend in terms of reoccurrence of pricing power that we're starting to hear about shortages of labor in certain markets, even in New York City, and that will be the signal that prices will begin to rise.

Alex Rygiel.

Built into your guidance for the second half of this year have you forecasted any large projects to be completed that could have a material impact on your profitability?

Certainly we have large projects that we will be completing, and that could have a material impact on our profitability, yes. I can't quantify that for you, but I can say it with certainty because we have so many projects that are in progress at any given time, that I would not say that we have an inordinate or unusual number of projects completing in the second half, Alex. But we always manage our projects with a view towards holding back some degree of flexibility to ensure that the project close out, which is where many risks are finally quantified, do not result in adverse surprises for us.

That of course is what prompts write-downs in mid project is to reflect the fact that based upon current assumptions with respect to productivity and other costs that we don't think that the original revenue or profit assumptions are accurate. We take mid contract write-downs for that purpose, as we did in the first and second quarters.

So without question there will be major projects closing in the third and fourth quarters. But the experts who are respective division heads who have given me their estimates with respect to the third and fourth quarters, know this very well. And know that they have either taken sufficient provisions against those projects in the first and second quarters or otherwise realistic in their expectations concerning closeout criteria.

Earlier in the call you mentioned that year-over-year SG&A was down about $18 million, but you didn't anticipate a similar magnitude in the second half of this year. Is that what you said?

That's what I said, Alex. Yes.

Would you expect half of that in the second half of this year?

It is really hard to say. I said I would like to keep SG&A below the the 8.5 percent level. And I think -- I think we can do that. The wild card is the location of the profits that we will book in the second half.

As I mentioned, our companies are on individual rona budgets with graduated scales of bonus fund calculation. So that if our profits are concentrated in a few companies, we can end up paying a higher proportion of profitability overall to the bonus accruals than we otherwise would. So I'm assuming for the purpose of this discussion that we have a more general profitability pattern across the Company. And that is the basis for my 8.5.

One last question, probably for Mark. Can you quantify the unapproved change orders in claims carried on your balance sheet at the end of the second quarter?

I don't have that in the room, Alex, but we can speak afterwards. That disclosure is a year-end disclosure only requirement. We don't provide that in the actual financial statements.

Right. I wasn't sure if you had it handy or not. We will follow-up afterwards. Thank you.

Your final question comes from Misha McGee (ph).

When you guys won these large service contracts like the State Department, do you have a good understanding of what the margins are going to be, or is it dependent on the mobile work that is won off of that relationship?

No, we have a good idea of what the margins are going to be in general. Sometimes we have projects that are for an indeterminate period and an indeterminate quantity, and those are projects in which there is a significant degree of variability in profitability based upon the follow-on work that is provided.

But the jobs -- the job in question, the ones that I described this morning is a very straightforward clearly priced specific term project -- a large one, but for a specific term. And you noticed that we mention the numbers, so that is an indication of the fact that it is for a defined scope.

So can you provide color on that margin for that contract?

No, we don't discuss margins on individual contracts. But we have typically commented with respect to facilities service margins that they tend over time to be marginally more profitable than construction margins which are more volatile. Facilities service margins have in our experience have been more steady, but -- and higher than construction margins in poor economic conditions, lower than construction margins in good economic conditions. In general slightly larger on a multiyear basis.

And then one last question. If you took the U.S. facility services line, what percentage of that is site-based or recurring revenue base versus the mobile component?

Let's see if we have got that number to hand. Hold on just a moment.

Misha, this is Kevin Matz. Oftentimes some mobile service contracts can be recurring in nature as well in terms of having continuous preventive maintenance on customers. So it is not a fair representation to think that only site-based work is recurrent work.

I was just trying to get a feel for it. From my understanding mobile, what you call corrective work, would be higher margin in nature. I just wanted to get a feel for what your current mix is now and then in a normalized period what you guys thought it should be.

It looks like the revenue breakdown between mobile and site-based for the quarter would had been about 40 to 60 percent.

And then the more healthy environment, would that shift (ph) a little, would the contribution change?

Those are moving parts that are really independent of one another. Site-based reflects long-term relationships that are typified by that State Department, or in fact the Morongo job that we -- the jobs that we described this morning. But mobile services, as Kevin mentioned, are not typically one off projects. They are typically recurrent calls.

For example, our Penguin Air-conditioning Company rarely takes a new customer. They concentrate on responding to service calls from established customers who have had long-term relationships. So that is really a tough one because they're really independent of one another.

At this time I would like to turn the call back to management for any closing remarks.

Once again thank you very much for your interest in and support of EMCOR Group. Look for perhaps some interesting comments and announcements in the next clock (ph). Thank you again.

This concludes today's conference call. You may now disconnect.