EMCOR Group Inc (EME) 2004 Q4 法說會逐字稿

Good morning. At this time I would like to welcome everyone to the EMCOR Group 2004 fourth-quarter and year end conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). I will now turn the call over to Mr. Eric Boyriven of Financial Dynamics. Please go ahead, sir.

Good morning everyone. Once again, this is Eric Boyriven of Financial Dynamics and I would like to welcome you to the EMCOR Group conference call. We are here to discuss the Company's 2004 fourth-quarter and four-year results which were reported this morning. Now I would like to turn the call over to Mr. Kevin Matz, Senior Vice President of Shared Services, will introduce management. Kevin, please go ahead.

Thank you, Eric, and good morning everyone. Welcome to EMCOR Group's earnings call for the fourth-quarter and year end 2004. For those of you who are accessing the call via the Internet and our website, welcome. We hope you have arrived at the beginning of our slide presentation that will accompany Frank MacInnis' remarks. We are currently on slide 1 of the presentation. 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 four-year results. They are Frank MacInnis, Chairman and Chief Executive Officer; Leicle Chesser, Executive Vice President and Chief Financial Officer; Mark Pompa, Senior Vice President, Chief Accounting officer and Treasurer; Mava Heffler, Vice President, Marketing and Communications; and Sheldon Cammaker, our Executive Vice President and General Counsel.

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. You can find us at EMCORGroup.com. Before we begin, I want to remind you that this discussion may contain certain forward-looking statements. 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 certainties include, but are 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, mix of business and risks associated with foreign operations. Certain other risks and factors associated with EMCOR's business are also discussed in the Company's Form 10-K 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 very much Kevin. You deserve an academy award for that performance. Good morning, everyone, and welcome to our 40th regular 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 Web cast. I will be referring from time to time to a slight number to identify the relevant slide for Web cast participants. Right now we are still on slide 2.

The focus of today's call is the EMCOR Group fourth-quarter and four-year 2004 earnings press release that we issued earlier this morning. We will conduct this call in our customary way. First, a discussion of our fourth-quarter and four-year operating results and the major factors contributing to our 2004 performance. Then we will discuss the evolution of our contract backlog, including special mention of some notable contract awards from the most recent quarter. Then we will profile one of our most interesting and promising subsidiary operations, our Shambaugh & Son Company in Fort Wayne, Indiana. And finally, I will comment on the Company's revenue and earnings expectations for 2005 and discuss the factors that I believe will influence our performance this year. At that point, 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 our senior officers are here to assist me with the answers.

Let's begin. Please move to slide 3. We have spoken a number of times on previous conference calls about the transitional nature of our 2004 operating expectations, as we moved away from the direct effects of the business recession that badly damaged some of our most important markets. General, we expect accelerating levels of performance in the last half of 2004 and improved prospects for 2005, albeit at a relatively cautious and deliberate pace in step with macroeconomic recovery. And that is the way the past year materialized.

In slide 3 we identified some of the salient features of our 2004 performance. We managed downward through very selective estimating and bidding the backlog portfolio of contracts that forms the base for a portion of our future revenue permitting us to maintain capacity for new higher margin work and to rebalance our backlog toward the private sector commercial work that is our historical core business. Our UK subsidiary exhibited dramatic improvement moving from a $22 million loss in 2003 to a slight profit in 2004. We are very pleased with the improvement of EMCOR Drake & Scull and its management and look for even better performance during 2005.

Our U.S. electrical and facility services segment performed very well again in 2004, but its performance was not matched by our U.S. mechanical or our Canadian operations both of which lost money during the year. U.S. facility services grew its revenue base at a rate within our target range and profitability was below budget due to some early year projects and the delayed startup of others. We achieved excellent results from our administrative cost control program that we introduced in late 2003.

Cash flows from operations were very strong during 2004 leading to significant debt reduction and to a very strong and liquid year end balance sheet, and we recruited Tony Guzzi from the Carrier Division of United Technologies to join us as President and Chief Operating Officer in October of 2004. I'm very pleased with the energy and experience that Tony has brought to EMCOR and all of us in senior management are enjoying having him on the team. In future, Tony will take an active role in these conference calls and in investor and analyst relationships.

Turning to slide 4, we show the financial results of a very good fourth-quarter, our 38th consecutive profitable quarter. Revenues for the quarter were $1.23 billion, an increase of 5% over 2003, while operating income was sharply improved rising 151% to $23.3 million from 9.3 million a year ago. (indiscernible) of costs continued their year long decline, falling 9.9% to $103.6 million or 8.4% of revenues compared to 114.9 or 9.8% of revenues in 2003. Net income was $10.6 million or 68 cents per diluted share, comparing very favorably to 2003 fourth-quarter net income of $2.6 million or 17 cents per diluted share.

This year's fourth-quarter results included $2.3 million in restructuring charges. There were no such charges in the year ago quarter. On slide 5 we show EMCOR's full-year operating statement. Net income of $33.2 million or $2.13 cents per diluted share was an increase of 61% over 2003 earnings of $1.33 per share. Full year revenues grew 4.7% to $4.75 billion from 4.53 billion in 2003. Operating income was 42.1 million, compared to 47 million a year ago, while the full year effect of our administrative cost reduction program with savings of more than $36 million compared to 2003, an 8.3% drop in dollar terms or 1.2% as a percentage of revenues.

We are extremely pleased with the performance of our cost reduction program and will continue it during 2005. Slide 6 is our year end 2004 balance sheet. As discussed earlier the combination of enhanced cash flows from operations and sharply reduced administrative costs lead to a very good cash year. Balance sheet cash fell slightly but total debt was reduced by nearly $60 million leaving our year end ratio of total debt to total capitalization at a low 12.7%. Shareholders' equity rose to $562 million, and EMCOR was net overbilled at year end by 123 million reflecting continued strong customer relationships and effective contract administration.

On slide 7 we illustrate the evolution of our contract backlog between 1997 and year end 2004 when our total portfolio stood at $2.75 billion compared to 3 billion at the end of 2003. As I discussed on previous earnings calls, our backlog total is a managed number reflecting the estimating and bidding criteria that we imposed on our subsidiaries, together with intentional downsizing as specific companies like our Marelich operation in California, that have grown beyond management capacity and needed to be controlled more rigidly.

The major trends in our 2004 backlog evolution included a slight uptick in our private sector commercial business, the first in several years; a major drop in public sector institutional work, reflecting our efforts to rebalance our portfolio away from such work; continued strong performance in our transportation sector; and continued growth in demand among our water and wastewater customers. These are all positive trends in concert with our overall business strategy. I don't believe that the small reduction in our backlog should be taken as anything more than a consequence of our strategy together with the typical lag which we experienced in the development of our business prospects compared to the engineering and construction sectors, in general. Our facility service business we believe, operates on a different cycle completely.

On slide 8, we mentioned a few of the more interesting or noteworthy contracts that various EMCOR companies were awarded during the last quarter and that help to illustrate the diversity and versatility of our companies. As communications companies continue to expand the fiber-optic links between homes, offices and service providers, our Gibson Electric Company is installing a new fiber optic facility in Illinois for Verizon. Health-care facilities with their emphasis on high-quality complex systems and performance integrity, are among EMCOR's best customers. Our Trautman & Shreve mechanical company in Denver is installing piping, sheet metal and insulation for HVAC and medical gas delivery systems for the Children's Hospital at the University of Colorado Health Science Center.

Water and wastewater treatment is a strong and growing segment of our business. In Manhattan, New York that is, not Kansas, our Welsbach Electric Company is providing upgraded and expanded systems to increase the efficiency and capacity of the largest wastewater pumping plant in the City of New York, while our KDC Systems Company in Los Angeles is working on a revolutionary system, the first of its kind in the United States, to replenish groundwater supplies with reclaimed water which would previously have been pumped into the ocean.

San Diego, our University Mechanical and Engineering Contractors, will perform the piping and equipment installation as well as managing other aspects of the installation of a new 49 MW heat generating plant for San Diego Gas and Electric. This project is one of the very first installations in this country of General Electric's new LA6000 next generation turbine generators. In Boston our BALCO/J.C. Higgins facility service division won the contract for the maintenance of the entire main air-conditioning plant for the John Hancock Tower, the city's tallest building.

The Defense Aviation Repair Agency contract in Wales, UK, is an important example of EMCOR's ability to provide end to end lifecycle services. At the conclusion of the fast-track construction program in late 2004, this entire state-of-the-art aircraft maintenance site was handed over to EMCOR facility services for a 15 year facility services program including the strategy and management of utility services.

And we have two examples this quarter of EMCOR's growing presence in the food processing and manufacturing market, both of them reflecting the skill and experience of our featured EMCOR subsidiary, Shambaugh & Son. In Los Angeles recent unusually heavy rains damaged a portion of Snak King production facility threatening a disruption of their business. Responding on a crisis basis, Shambaugh and two other EMCOR companies coordinated the reconstruction of the facility actually increasing its efficiency. And in Horse Cave, Kentucky, Shambaugh is the prime contractor for the design and construction of a new food production facility for T. Marzetti Company.

As announced in an EMCOR trade press release last week, the new 220,000 square foot facility will feature a number of innovative features designed specifically for Marzetti, that has the efficiency and versatility of its production facility for dressings and sauces for many of the country's major restaurants, food retailers and distributors. Why would a company like T. Marzetti entrust a single service provider with such a critical task? Because Shambaugh & Son is uniquely qualified to handle it. On slide 9, we detail some of the features that make Shambaugh such an obvious choice for a contract like this.

Shambaugh is a great example of the franchise value and history of many EMCOR companies. Founded more than 80 years ago, its headquarters in Fort Wayne, Indiana and branch offices throughout the Midwest, have participated in the growth and evolution of the country's industrial heartland. Because Shambaugh's skills travel well to other markets it's been able to perform in more than 40 states and to achieve annual revenue levels of $200 million. Under the leadership of Mark Shambaugh, the Company today derives about 70% of its revenues from the kind of design build project epitomized by the Marzetti contract, involving a close working partnership with the customer and value engineering at every stage of the project.

The broad scope of Shambaugh services including mechanical, electrical, fire protection, sprinkler system, process and temperature control systems, and maintenance and service, makes them a prime example of EMCOR's diversity of services. And Shambaugh is present in all of EMCOR's major target markets, food processing, commercial, health-care, pharmaceutical, technology manufacturing, and the government sector, again illustrating Shambaugh's and EMCOR's remarkable diversity of markets served and the broad application of our skills and experience.

We are proud of our relationship with Shambaugh & Son and of their receipt of three U.S. Food Plant of the Year awards since 1990. Finally, a few words about our expectations for 2005. On slide 10, we identify a few of the factors that will shape the performance of our markets and of our Company this year. We expect 2005 to be marked by continued steady but not spectacular economic growth with most geographic markets improving, but with some major exceptions.

We begin this year with a mixture of backlog contracts that is not yet optimal strategically. Specifically we still have too many public sector projects and we need to take advantage of the revival of our private sector commercial markets to rebalance our portfolio. We will also be seeking to cross-sell more facility services to our construction customers and vice versa. The scope of services offered by Shambaugh & Son and EMCOR UK, are good examples of the ideal EMCOR service offering.

We think that the spring, if it ever arrives, will provide the opportunity to continue the resumption of small project discretionary work which has suffered long delays and postponements for recessionary reasons. We also see a continued active market for our outsourcing driven facility service business, which we believe can continue to grow at a pace of 10 to 15% a year. And we will pay continuing attention to our administrative cost control program, including a new strategic sourcing plan for indirect costs with a view toward further reducing overhead, both in dollar terms and as a percentage of revenues during 2005.

For the purpose of enabling investors and analysts to easily and directly compare our 2004 results with 2005 guidance, we furnished the schedule as the last page of this morning's press release and as slide 11, illustrating the computation of an adjusted consolidated statement of operations obtained by removing from our 2004 reported and announced results, the effect of four items, restructuring expenses of about $8.3 million, a $2.8 million gain on the previously announced sale of our UK equipment rental assets, a $1.8 million gain from the sale of our British company's equity interest in the South African subsidiary also previously announced, and the benefit of about $15.5 million associated with income tax reserve adjustments.

Excluding these items 2004 operating income would've been about one half million dollars higher than in 2003 and diluted earnings per share would've been $1.37 rather than the 2.13 reported for GAAP purposes. Looking forward, as shown in the next portion of slide 11 on the right column, we see continued steady improvement in many of our markets but probably not the concerted growth in demand that characterized the markets in the late 1990s.

Our revenue expectations are in a range from the low end of 4.4 billion to a high end of 4.6 billion reflecting the downsizing and backlog adjustment strategy described earlier, partially offset by growth in our U.S. facility services business. With respect to earnings per share, we expect to continue our consistent profitability and to improve earnings to a range of $2.00 to $2.40 per diluted share, a significant improvement over the $1.37 pro forma adjusted results of operation from 2004.

The earnings performance range is generally parallel with the anticipated revenue range. If growth in demand for our higher value added services accelerates, we have sufficient capacity to deploy and drive our earnings growth at a faster pace. On slide 12 we reiterate our strategic goals for 2005 which are in fact a recitation of EMCOR Group's historic strengths and sources of stability and performance. Continued growth of our recurring services segment, concentration on the growth of our domestic network of companies, continuation of our successful administrative cost reduction and cash generation program, and long-term commitment to the diversity model that has brought us so far and served us so well.

That's it for my report. We are proud of our 2004 results, and we carry a strong and liquid balance sheet with little debt leverage into a year of improving prospects in 2005. As always, thank you for your support of and interest in EMCOR Group. Now there is time for your comments or questions, and Michael is here to tell you how to queue.

(OPERATOR INSTRUCTIONS) Alex Rygiel with Friedman Billings Ramsey.

Good morning. A couple quick questions. Frank, first you talked about institutional work still being, or a little bit of public sector work, still being a little bit too large in your backlog relative to historical levels. I suspect that you're highlighting the magnitude of the transportation work in that backlog. If that is correct, please confirm. And also if you could talk about transportation as it relates to operating profitability in comparing and contrasting that to the institutional works such as schools and whatnot, which I guess when I look at your backlog institutional and transportation both stepped up a few years ago at the same time. It now appears that you're institutional work is falling off and that's probably a good thing because it sounds like it was coming in at much lower margins than what you would have liked. Is that still the hangover with transportation as well and when can we expect that to fall off?

No, I think that -- let me start from the beginning. First of all, you are certainly correct in pointing out that a couple of years ago in connection with the decimation of the private sector commercial market coincident with the recession, we began to pursue incremental public sector work in order to make up the revenue and profit difference that would otherwise have fallen off dramatically with the disappearance of private sector commercial. And two of these segments in which we significantly build on our presence were transportation, which includes all modes of public transportation; airports; light and heavy rail systems; and motorist information systems associated with modern superhighways.

That work has been very profitable for us. We enjoy a very important position in that market both domestically and also in the United Kingdom. And we look forward to continuing our role in transportation in the future in all of our markets. On the other hand, the institutional market has not been kind to us. This is another of the markets that we pursued in reaction to the recession arising in 2002. And in particular the educational buildings portion of the institutional market, wherein we undertook a lot of rewiring and Internet connection projects for elementary and secondary schools across the country. These are difficult projects. There is very little standardization between school building designs. They are not particularly good customers from the standpoint of making the facilities available to us on an unlimited basis and are not too practical in terms of time management.

We didn't do as well on those institutional projects as we would have liked and in fact, if you look at slide 7 you can see that the institutional segment of our backlog has basically been cut in half over the last year as a result of our concerted effort to significantly reduce that segment and our cost exposures associated with it. And that reduction, in itself, comprises in fact most of the reduction in backlog from year end 2003 to 2004. And that's a direct result of our policy and we will continue that policy in 2005.

With regards to -- maybe this is a two-part question, but you highlighted a new strategic sourcing initiative. Can you quantify the cost associated with that in either '04 or '05? And then the timing of the same -- savings? And secondly, can you quantify the cost of Sarbanes-Oxley into '04 and your expectation in '05?

Some of that I can do and some of that I can't do. First of all, in connection with the strategic sourcing program, this is in fact not a centralized purchasing program of the type that would be associated with our construction and facility services operations. We have been doing centralized purchasing to pretty much the greatest extent possible, perhaps to a nearly optimal level for many years, and taking advantage of the local, regional and national purchasing power that a company of our size has, keeping in mind that there are various code and also inventory and warehousing restrictions on our inclination to buy in bulk nationally.

One area, however, that we have done a suboptimal job of managing is our indirect cost, notably those associated with our overhead expenses. And under Tony Guzzi, we are instituting this year -- have just instituted in fact, a new strategic sourcing program in connection with that aspect of our cost, which I believe will net us savings of at least a couple million dollars in 2005, while we continue to try to optimize the other aspects of our costs as well.

Any comments on Sarbanes-Oxley?

We have had a very, I much say an extraordinarily well managed Sarbanes-Oxley 404 audit process. I'm unaware today of any aspect of the Sarbanes-Oxley audit that will give rise to material deficiencies or weaknesses for the purpose of our Sarbanes-Oxley audit report. With respect to the cost, I don't know if we can quantify that for you today but I will say that we made a conscious decision at the outset of the Sarbanes-Oxley audit process, to manage as many aspects of it in-house using our own personnel as possible and to outsource to consultants or otherwise, a bare minimum of Sarbanes-Oxley responsibility. The result of that I believe, has been an extraordinarily well managed and economical Sarbanes-Oxley process especially taking into account the diversity, size and complexity of our Company.

Thank you.

Arnold Ursaner with CJS Securities.

Good morning. You obviously are focused a little bit on, I think, the positive volatility at your small task work. Can you give us a sense of the average margin, if there is such a thing, on that work versus your longer-term contract work? How much more profitable is it typically?

The segment that Arnie is talking about is one that rises seasonally for us, or at least predominately so, in late March and April and runs through June or July, having to do with the activation of the HVAC and other air handling systems at many of our large and small commercial customers. This is work that is, in some respects, discretionary in nature and that was significantly negatively affected by the recession in the last couple of years but which we hope and expect to come back this year. It has performed at significantly higher gross margins, frequently in the 20% range, as compared to the 10% nominal range of most of our gross margin work.

How negatively were you impacted last year from that?

We took a real beating in 2003 in that connection, the work almost disappear. 2004 came back, to a degree, but not nearly to the extent that we wanted it to. We look for improvement this year.

Second question if I could, you obviously are dealing with raw material cost increases as are many other companies and while I know you're pretty well insulated against them, could you comment on longer-term contracts and how you're trying to be certain as best you can that you don't have a problem with dramatically higher raw material costs on existing contracts?

Yes, well first of all we have a relatively small number of very long-term contracts. So the hedging requirements associated with those types of projects typically do not arise for us. Because of the purchasing power that we have in our markets, we can generally speaking, negotiate some protection from major, especially abrupt, cost increases or price increases by our major suppliers.

There is no question, however, that many of our companies were impacted in the past year or two by fluctuations in the price of steel, copper and also gasoline with respect to our mobile service operations. Fortunately many of our projects are either short-term or cost reimbursable in nature and we are able to pass those increases along to our customers reasonably efficiently.

Thank you.

Jeff Beach with Stifel Nicolaus.

Good morning, Frank. The last time I looked you hadn't filed your 10-K today. When do you intend to file that?

It will be in the next few days. The volume of work associated with the combined 404 audit and the financial audit for a company of our size has been significantly greater in the past. It will be out in the next few days.

Can you give us a breakdown -- we usually have the 10-Q when you have your conference call. Can you give us a breakdown of revenues and operating profit by your different segments to help us today understand the fourth quarter a little better?

I prefer to wait a couple of days until the auditors permit that release. And I don't mean to say that there is any uncertainty about it, but I just hate to step on their toes in terms of talking about numbers that they haven't improved yet, Jeff.

Can you then just give us the operating profit margin or a rough estimate of that for U.S. Electrical and Mechanical, at least. That would help a little?

I can tell you in general, as I just mentioned in the body of my call, that U.S. Electrical had an excellent year. Without going into the details, they comprised the entirety of our U.S. construction profit in the course of the year, U.S. mechanical specifically, because of the problems at our Marelich Company on the West Coast, that I alluded to on a couple of earlier calls, actually lost a small amount of money for the year. The profitability of our operations in '04 for construction purposes, was entirely within our U.S. electrical component. We expect that 2005 will reflect significantly improved performance from our U.S. Mechanical operations.

Just a couple of follow-ups. Was U.S. Mechanical profitable in the fourth quarter?

Yes it was.

And I didn't see, or maybe you could just comment, on any large wins that you've had in facility management in the last several months? Or maybe since the year is over, you seem to be comfortable or confident you can grow your revenues 10 to 15%. Is this primarily coming from more work with existing customers or have you added some new large customers?

We're always in the process of adding business development projects to the pipeline and we are positive enough about the anticipated level of performance of both our site-based and our mobile service business in EFS, to be positive about their growth prospects for the year, notably in the area of mobile service which had a substandard year last year for the same reason that our small task discretionary work in our construction companies suffered. And we look forward to the significant improvement in those markets this coming year. But I should point out that the defense aviation project that I just alluded to in the body of my call was a pretty significant facility services win just in the last quarter. And the State Department, University of New Hampshire and Morongo project that we talked about in the middle of 2004, were of the same type.

Thank you.

John Davidson with D.A. Davidson.

This is John Rogers. I was just wondering, I guess following up a little on Jeff's question, in terms of the revenues that we're looking at for '05, can you give us a sense of exactly which markets you're expecting to come down to get the revenue decline that you're looking at?

Yes, I'm a little less enthusiastic about this revenue reduction indication than perhaps I sound. I'm not sure that revenue is going to come down as far as 4.4, but I think that is probably a good baseline based upon the fact, for example, that we've reduced institutional backlogs going into the year by about $300 million. And we've reduced the run rate -- revenue run rate of our Marelich subsidiary on the West Coast by more than $100 million just by itself. If you just apply the math and if you're overarching assumption is that the market is going to develop steadily in most cases, but not in a spectacular fashion especially with some exceptions like your own hometown, San Francisco, we don't think much of the San Francisco market for this year.

I think that Chicago is going to be a poor market for at least another year, and I don't think much of the Canadian market. I think that we're going to see slow or maybe no growth in some of those markets. On the other side of coin, we see New York improving, Miami looks good, Los Angeles is good, Las Vegas remained strong and UK looks pretty good. It's a mixed bag. And translating all those moving parts and varying assumptions into a revenue fluctuation assumption led me to a low-end of the range of about 4.4. That might be a little bit pessimistic. But those were the factors that I took into account in any case.

Okay, because you talked about some of these markets and it sounds pretty good, and then I was trying to correlate it with the revenue guidance.

I know. It's a difficult call, it is a conservative call, it's the right thing for me to say at this stage of the year, especially in advance of the kind of seasonal impacts that we always look for from the small (indiscernible) discretionary work in the spring and early summer.

If I could, in terms of growing the recurring services business and I know it's a little difficult to define that exactly but what portion of your business would you put into that category now?

It represents about a third to a half of the revenues from our facility services business, and it comprises probably 10% of the revenues from our construction companies. And it reflects the mobile services provided on a small contract basis to customers, typically commercial customers, in urban centers and environment. Our mobile service area is one that we would like to have managed better than it was in the last couple of years. We inserted new management there just recently and we have high hopes for that business in the coming year.

So it's about 25% of your total business now?

Our facility service business in total is about 30% of our entire business. You can call all that recurrent services in a way, in that both are site based, and our mobile service business comprise typically long-term contractual relationships with customers. But mobile services are more often performed on a one-off basis by both our facility services and our construction companies.

A year or two ago, it was a much smaller portion of your business.

It was closer to 20 percentage a few years ago. It's in the growing part of our business, John. Our long-term overarching strategy at EMCOR has been to grow that recurring services business relative to the overall revenue of our Company, and we are succeeding in doing that.

Thank you.

(OPERATOR INSTRUCTIONS) Richard Wesolowski with Sidoti & Co.

Good morning. Frank, could you give us the ballpark estimate of the number of significant jobs you've taken on as a prime contractor like the one you announced late last week? And maybe give us an idea of how the risk and the margins on that were different from some jobs where you would be just be a mechanical or electrical contractor?

It's relatively rare for us to be a prime contractor although it is a frequent feature of design build projects of the type that I've featured in our Shambaugh discussion this morning, and it's something we'd like to do a lot more of. The primary opportunity for EMCOR or an EMCOR company to be a prime contractor, is in circumstances where our service offerings are very wide as they typically are at Shambaugh or at certain other EMCOR companies, EMCOR UK being a good example. Or in circumstances where the scope of the project is significantly limited and concentrated in either electrical or mechanical systems. And a real good example of that would be data centers which are basically big boxes stuffed with electrical and mechanical systems and electronics, all of which we do. In those circumstances we would take on responsibility for the entirety of the project, subcontract the civil and structural work and take prime contractor responsibility because of the fact that the bulk of the cost and the bulk of the activity has to do with electrical and mechanical systems. But those situations are relatively rare. I would -- I don't have the number before me but I would say that prime contract situations vis-a-vis our revenues, do not represent more than 5% of our overall operations.

You mentioned the UK in there as something you might have significant prime contracting opportunities. Does that mean we move pass the (indiscernible) there and more toward the restructuring or rehabilitation of that operation?

I think you could tell from the change in my tone with respect to the UK that I am very pleased with the management that we installed there in mid 2003. Their work in not only turning around the company financially but also instilling a major change of attitude and a focus and a discipline in that Company has been very impressive to us. During 2004 we did trim the UK company's operations by selling the equipment rental assets of their Delcommerce operation and also selling, and hope these transactions have a gain, by the way, their South African equity investment. But we are pleased with the progress that Tony Whale and his team have created in the UK and we're willing to watch them work during 2005 to continue their improvement.

Can you quantify the public, private sector split now in your backlog? I think previous call you had it about 40 present public.

I would say it's about the same as previously reported. As you can see from the backlog schedule there has been a reduction, a significant reduction, in the institutional segment of the business but there's been just a small uptick in the private sector commercial still. The ratio is probably roughly the same as previously reported.

Finally, in the last four, maybe six quarters, your CapEx has trailed depreciation. Do you expect with the cash coming in from some of these public sector jobs, that would reverse itself in '05?

I do not. I think that CapEx is likely to continue to be in the 17 to $20 million annual area and I don't expect major changes in either depreciation or amortization.

Thanks much.

Jamie Cook with CSFB.

Good morning, guys. I had to hop off for a second, I hope you didn't answer -- someone didn't ask this question. Frank, I know you don't give quarterly earnings guidance, but as we look at your earnings estimates for the full year, should we expect earnings to take on a normal seasonal pattern or would we expect -- are you expecting more of a backend loaded second half of the year earnings just because of the pickup in the nonresidential construction you should expect in the summertime/fall area?

Jamie, I think that our normal pattern will pertain again this year. That is to say, a relatively slow beginning to the year with improving performance as we go along. And that's for a couple of reasons. We carry into the year, as I mentioned during the body of my call, a backlog portfolio that is still not optimally balanced from our point of view. And then we have our usual seasonal impacts on both revenue and profitability in the first and part of the second quarter.

One of the big variables in the second quarter of course will be the recurrence of that small discretionary work that we spoke of just a few minutes ago on another question. And that will be one of the major factors that we will be looking to in May and June that will have a major effect on our second, and no doubt our third quarter. I think it looks like pretty much like a normal year with gradual, seasonal improvement in our revenues and profits, as we go through the year.

Thanks a lot, guys.

Jeff Beach with Stifel Nicolaus.

Your UK performance has improved a lot but you spend a lot of time in 2004 looking at and considering selling some additional operations. At this point are you still considering the sale of any additional UK operations or are those basically operations you are going to keep at this point?

We are always looking at operations and considering each of our subsidiaries from a standpoint of the old General Electric victim of fix it, close it or sell it. We have a system called SPEC, which stands for subsidiary performance evaluation criteria, which is a continuing review of each of the 70 odd subsidiaries in EMCOR Group, from the standpoint of its performance related to certain objective financial and operational criteria. And we are always analyzing our subsidiaries from that standpoint. Notwithstanding its significant improvement, EMCOR Drake & Scull is still on that list because it was profitable during 2004 but just barely. However, the EMCOR Drake & Scull didn't just experience a financial turnaround, it had had an attitude turnaround. And the degree of professionalism and discipline and focus exhibited by its staff during 2004, and we believe this year under Tony Whale, renders it very likely that we will watch and wait to see EMCOR Drake & Scull continue to improve its operational performance and earn its way back into the good graces of EMCOR Group.

My second question is, on average realizing there are some better and some weaker markets, is pricing in the market and profit margins you're bidding on projects improving in the marketplace as we go into 2005 versus where we were 6 months ago?

Let me put it this way, I think there are more positive than negative things happening to us in net net terms. But as I mentioned in the body of my call there are major exceptions. There are major markets in which there is no improvement at all and Chicago would be a good example, San Francisco, Canada. But there are other areas in which there is clear progress being made and progress in segments of the markets that are very important to us, specifically the private sector commercial market. That includes New York City where there has been major news concerning the lease up of new midtown buildings at very advantageous rates. This is the kind of news that gives rise to the tenet bid-out work that is one of our core businesses in New York City and that is extremely positive for us in profitability terms.

Thank you.

Alex Riegel with Friedman Billings Ramsey.

Thank you. Frank, specifically with regards to the first quarter, do you anticipate the first quarter to be profitable?

I do.

As we think about your revenue guidance for the full year to be down a little, yet in the fourth quarter you were up 5% year over year, how should we think about modeling that over the next couple of quarters? Is revenues in the first quarter going to be up, flat or down? When do you think that transition period throughout the year would be, when revenues could potentially turn negative year-over-year?

Alex, all budgets, at least every budget I have ever looked at, suffer from impaired vision when you get to the out-quarters. Managers in our business are notoriously difficult to nail down with respect to the third and fourth quarters of any forthcoming year. We're trying to improve that this year through the installation of another system called FAST (ph) which is a continuous rebudgeting process that is going to give us four quarter roll forward budgetary capability and consolidation capability or reconciliation capability with our work-in-progress schedule.

We think that this will improve our ability to look forward in the very near future. Looking at your question though, I think we will probably see a continuation of revenue at roughly current level through the first quarter, and that the downturn, if it occurs, and I think caused a tone in my answer to a question a few minutes ago, that I'm not completely convinced personally that that revenue can or will turn down as far as the lower end of our revenue range suggests. But I can see the evidence here and there.

I tried to derive the number mathematically for the questioner and it could be, but I just don't think on a balance of probability that it will be. If it does it will be in the third quarter when the improvement in pricing, which we hope will occur in some of our major markets hasn't occurred, and as a consequence the strict criteria that we impose on our estimating and bidding personnel, have resulted in continued erosion of our backlog to the point where we are not replacing backlog that has burned off. I think probably the revenue falloff is not likely to turn up in the first or the second quarter and it will be mid year before we see where it's actually going.

Very helpful, thank you.

I will now turn the call back over to management for any closing remarks.

Thank you, again, all of you for your attention to our call and for your interest in EMCOR. We are proud of our results, looking forward to another good year and we will see you here soon. So long.

This concludes the EMCOR Group 2004 fourth quarter and year end conference call. You may now disconnect.