EMCOR Group Inc (EME) 2005 Q3 法說會逐字稿

Good morning, my name is Lee and I will be your conference facilitator. At this time I would like to welcome everyone to the EMCOR Group Third Quarter 2005 Earnings 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. If you would like to ask a question during this time simply press “*” then the number “1” on your telephone keypad. If you would like to withdraw your questions please press “*” then the number “2”. Thank you. I would now like to turn the conference over to Eric Boyriven of Financial Dynamics. You may begin your conference.

Eric are you there? Good morning everyone. I’m Kevin Matz and welcome to EMCOR Group’s earning conference call for the third quarter of 2005. For those of you who are accessing the call via the internet and our website welcome, and we hope you have a right at the beginning of a slide presentation that will accompany Frank MacInnis remarks. Currently everyone accessing the slide should be on the EMCOR title slide. During the call instructions will be given to advance to the next slide. This is one of those times, please advance to slide two.

With me today to discuss the quarter and nine months results are Frank MacInnis, Chairman and Chief Executive Officer; Tony Guzzi President and Chief Operating Officer, Leicle Chesser, Executive Vice President and Chief Financial Officer; Mark Pompa, Senior Vice President, Chief Accounting Officer and Treasurer; 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 presentation. You can find this at emcorgroup.com.

Before we begin I want to remind you that this discussion may contain certain forward-looking statement any such statements are based upon information available to EMCOR management 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 form the forward-looking statements accordingly these statements are no guarantee of future performance such risks and uncertainties include but are not limited to adverse effects of general economic condition, changes in the political environment, changes in the specific markets for EMCOR services adverse business conditions, availability adequate surety bonding increased competition, 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 2004 Form 10-K and 10-Q for the third quarter ended September 30, 2005 and then other reports filed from time-to-time with the Securities and Exchange Commission.

Now with that being said please let me turn the call over to Frank. Frank?

Thanks very much Kevin that Dale Carnegie course you took is really paying dividends. Good morning everyone and welcome to our 43rd 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 webcast and I’ll be referring form time-to-time to a slide number to identify the relevant slide for our webcast participants. Right now we are on slide 2. The focus of today’s call will be on EMCOR’s third quarter 2005 Earnings Press Release and Form 10-Q which were issued and filed earlier this morning we’ll conduct the call in our customary way. First the discussion of our third quarter and year-to-date financial results from operations followed by a review of the continuing evolution of our contract backlog. A special mention of some notable contract to work towards from the recent quarter. Then we’ll spend a few minutes profiling one of our best performing and best managed subsidiary operations, our Penguin air conditioning company in New York, but I will also mention the new EMCOR initiatives within our Touching Lives Corporate Citizenship Program.

Finally I'll update our listeners and viewers on corporate and market trends that will define our prospects for 2005 and 2006, and I will revise our revenue and earnings guidance for the current year. Then there will be an opportunity for you to make comments or ask us questions about the subject matter of the call, and as you can see from slide two, a number of EMCOR’s senior officers are here, to assist me with the answers. So let’s get started. Please go to slide three.

EMCOR had a very strong third quarter, continuing a trend that we have commented upon for the last three quarters. Strengthening of demand and resulting margin improvement opportunities, in a number of our major markets, together with the improved operational execution, as a result of management realignments and restructuring moves in previous periods. It all added up to one of the best operational reports we have made in some time, and led to a very robust and liquid balance sheet at quarter end. It was also our 41st consecutive profitable quarter.

During the quarter we disposed of the industrial division of our Hayes Mechanical subsidiary and a small after tax loss. So the current and prior period financial statements were restated to reflect discontinued operations accounting.

Income from continuing operations for the third quarter rose more than 100%, to a level of $32.1 million or $2.01 per diluted share, compared to 15.9 million or $1.02 per share in 2004. Net income inclusive of a loss from discontinued operations of 1.2 million or 8 cents a share was also approximately twice the level of net income reported a year ago.

Operating income was more than 40% higher than last year’s third quarter at 29.4 million or 2.4% of sales even though revenue at 1.215 billion was about equal with the year ago quarter. General administrative expenses for the current quarter rolls approximately $5 million from the 2004 third quarter primarily due to increased incentive compensation accruals linked to improved corporate performance net of continuing cost control activities. Year-to-date SG&A expense remains below year ago levels indicating the continued success with those cost controlled programs.

During the current quarter we also benefited from the reversal of income tax reserves no longer required based on a current analysis of probable exposures. The tax benefit was $17.5 million or about $1.10 per diluted share. The third quarter of 2004 reflected the similar tax accrual reversal and the amount of 4.3 million together with pre-tax gains of 4.6 million associated with two sale transactions and $600,000 in restructuring costs. There were about $260,000 of restructuring cost in the current quarter.

Please go to slide four. Our year-to-date results reflect similar dramatic improvement and income from continuing operations increased 81% to $2.64 per diluted share compared to a $1.48 last year, based on nearly equal revenue levels of $3.48 or $3.49 billion respectively. Operating income more than doubled year-over-year. While net income inclusive of discontinued operations sale transactions, restructuring costs, and tax accrual adjustments as described in the press release increased 80% to $40.7 million or $2.57 per diluted share from a $1.46 in 2004.

Interest expense fell year-over-year for both the three and nine-month periods despite rising interest rates result of strong operating cash flows, a strong net over built division and resulting debt reduction. The impact of this excel of execution of our managed per policies to show them on slide five.

Since 2004 year-end we have reduced debt by $80 million while increasing cash resulting in a third quarter balance sheet with virtually no debt and cash of $68 million. Shareholders equity exceeded $600 million for the first time, while working capital grew to 321 million at quarter end. Our net overbuild position reflecting contract administration efficiency and the strength of customer relationships is due to the $188 million one of our highest levels ever. I mentioned earlier that almost all of our operating segments demonstrated either continued strong operating results or significant improvement during the quarter and year-to-date. Due to both enhanced demand for our services with improved pricing opportunities, and also superior execution.

Improved market conditions and disciplined bidding were reflected in increased gross margins from 9.5% of revenue in third quarter 2004 to 10.8% in the current quarter a 13% increase. A corresponding increase in the year-to-date period was from 9.0% to 9.9% suggesting an accelerating pace of market improvement. For the most part our operating segments performed well when presented with these opportunities. U.S. electrical and facility services had $21.3 million of operating income in the quarter a slight reduction from 2004 but still at 7% of revenues. US mechanical and facility services continued it's impressive turn around. Earning $11.7 million or 2.7% of revenues during the quarter compared to a loss of $1.6 million last year. And US facility services were at $7.8 million or 4.1% of revenues compared to $6.3 million or 3.5% of revenue in 2004. Our UK operations returned $2.7 million or 1.6% of revenues showing continued improvement over 2004 levels of $1.2 million or 0.7%. Only our Canadian subsidiaries failed to record strong performance, due primarily to a troubled power transmission project, Comstock Canada reported a loss of $3 million in the quarter and 5.3 million year-to-date, compared to a year ago losses of $1.7 million and $ 2.3 million respectively. Although we are disappointed with the Canadian results, we think that the restructuring and management realignment decisions that have been implemented there, together with encouraging trends in some major markets will enable Comstock to return to profitability next year. With that exception we are very pleased with our operating results and believe there opportunities are developing for continued and perhaps enhanced profit improvements.

Please go to slide 6. There is nearly universal demand for the kind of services that EMCOR provides, meaning that revenue growth opportunities are nearly everywhere. Revenue growth is not directly linked to profitability however, its the fundamental principle of EMCOR that order intake must reflect corporate objectives and standards to ensure that contract back log reflects optimal risk reward ratios. Slide 6 illustrates the success of our efforts, since 2003, to manage downward our exposure to less profitable public sector work, particularly in the K-through-12 educational portion of the institutional sector, and to simultaneously we build our historical backlog strength in higher margin private sector commercial work.

We have accomplished both objectives; our backlog of institutional wok is less than half as large as it was in 2003. While private sector commercial contracts rose $135 million in the third quarter on a sequential basis, and are now at their highest levels, both in terms of dollar value and as a percentage of overall backlog, since the year 2000. Reminder of our contract backlog remains very diverse, with strong positions in many of the most promising growth sectors, including healthcare, water and waste water and transportation. We believe that this release balancing of our back log portfolio is a significant contributor to our margin improvement. Since a higher proportion of our future revenue will be derived from market sectors that tend to reduce higher margins at lower risk exposures.

On slide seven, we list a representative sample of the contract awards from the recently completed quarter that help to accomplish the rebalancing of our portfolio or backlog projects. At the children's hospital in Waltham Mass, service work was already being performed by an EMCOR company BALCO/JC Higgins, when the hospital needed to transition facility operations and staff to a new location, they turned to EMCOR facility services for on site operations and management services. In New York City and adjacent Long Island, our Welsbach electric company is performing multiple projects that the city and state departments of transportation, painting 160,000 street light poles with a special high insulating paint, rehabilitation of the lighting on an elevated section of the Brooklyn [Cleans] expressway and installing intelligent transportation systems on two park ways.

Marelich mechanical in California will play an important role of a critical expansion of a Genentech production facility to enable the customer to begin production of a promising new cancer drug. We are continuing to seize new opportunities in the active and growing water and waster treatment sector. In the Fort Lauderdale, cool and camp Florida is on it's third facility upgrading project at the Lohmeyer Pumping station.

Atlanta is a busy commercial market and Dynalectric Georgia is providing a complete electrical construction services including lighting, power distribution, emergency power generation, fire alarms, lighting controls and security systems for a new 27 storey office tower and head quarters for customs properties. University of mechanical and engineering in Phoenix has full responsibility for the total mechanical plumbing, fire protection and electrical installation space coordination for a 135,000 square foot four storey data center for eBay. While our Dynaelectic subsidiary in San Diego is installing electrical systems, video surveillance, voice and data communications, paging, fire alarm and life safety and security systems in a new commissary of San Diego Mabel station.

In Toronto Comstock Canada is in charge of removing and decommission two separate compressor stations for TransCanada pipelines. And this quarter has featured them core company, Penguin air-conditioning of Brooklyn, New York is performing three high profile retrofit projects for Tiffany, Disney and UBS, all in Mid Town Manhattan. The remarkable diversity in size, scope and market sector represented by these new contracts is a key factor in EMCOR's consistent long-term profitability.

Please go to slide 8, our featured company Penguin Air Conditioning has played a major role in EMCOR's success. For more than 50 years, Penguin has served the New York metro area with the full range of mechanical construction, operation and services to the commercial, financial services, hi-tech manufacturing and hospitality and every government sectors. With earned revenue exceeding $80 million annually, Penguin's professional engineers and highly trained technicians serviced more than 500 maintenance and support contracts including mobile and site-based service personnel. They provide sophisticated state-of-art services and support over the full life cycle of the modern facility, design, installation operational maintenance plus energy management, diagnostic, back up and repair services and emergency response.

Customer across the New York area with high performance mission critical facilities know that Penguin under the energetic capable and experienced management of [Don Ruben] and his talented team will always be there to meet customer needs. Penguin's customer focus and long-term success are public reflection EMCOR's core values and we appreciate the role they have played in EMCOR's growth.

On slide 9, we illustrate a new program that expresses another of EMCOR's core values corporate citizenship. EMCOR is one of the country's largest service organizations and our thousands of service fans and other vehicles are on the road daily in all major markets. As such they make natural rolling billboards for about their cause. That's why we held the press conference in September with Connecticut governor, Jodi Rell and Ernie Allen, the CEO of The National Center for Missing and Exploited Children, to now to new nationwide program to help find missing kids.

We divided the country in the six geographical areas and each month and in each of those areas will display a new poster photo of the missing child, together with call in information for anyone who has information that could help locate that child. Our relationship with the National Center for Missing and Exploited Children is one of those natural partnerships that just make sense. And I am pleased to report that it's already working since we did inform that the recovery before our featured missing children since the inception of this program. We're at EMCOR touching lives corporate citizenship program. We are also training more than 200 of our facility and services personnel and echo at them security protocols that are used to lock down a building in which a child was then reported missing sending the arrival of law enforcements. And we have also inserted the kid safety link on our corporate web site.

We are pleased to be part of this valuable and effective program and grateful for the opportunity to give back to the communities that have contributed to EMCOR success. I am speaking about success. On slide 10, I am updating and revising our revenue and earning of guidance for 1005 I mentioned earlier that we have seen improvements in our markets and in our execution of the opportunities those markets give us. We've generated nearly a $100 million of cash flow from operations in first three quarter of this year and are balance sheet and back log are structured to support continued growth. Accordingly I am raising our 2005 revenue guidance from the previous range of $4.4 to $4.6 billion to approximately $4.7 billion. And I am raising aim narrowing, our anticipated diluted earnings per share from continuing operations from a previous range of $2 to $2.40 per share to a new range of $3.45 to $3.60 per share. The new earnings estimate is inclusive of the $17.5 million tax accrual adjustment that we reported in the current quarter and that had a $1.10 positive impact on diluted earnings per share from continuing operations during this quarter. These guidance revisions reflect our generally positive views of our markets and that the ability of the Company to profit from them. We continue to believe that 2006 will offer us numerous opportunities for additional growth.

That's it for now. As always thank for your support and for your interest in EMCOR group. Now it's time for your questions or comments, and Lee is here to tell you how to queue.

At this time I would like to remind everyone, if you would like to ask to a question please press "*", then the number "1" on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Alex Rygiel with Friedman, Billings, Ramsey.

Yeah thank you very much.

Hi Alex.

Frank, can you discuss a little more with regards to the Canadian operations, this quarter obviously revenues were up sequentially year-over-year is very strong, but profitability was weak. Was there one or two projects that underperformed there that were flushed through, where do you expect that profitability to go in the next quarter, and so on?

Sure. First of all, the Canadian company's business differs significantly from our business and the rest of our Company, in that it is predominantly industrial and composed of a higher proportion of large long-term projects than is the case elsewhere in EMCOR, where the mean duration of our project is quite short. Accordingly, the Canadian company is more vulnerable than most EMCOR companies to the impact of a single bad job. And I view our current results in Canada as being primarily impacted by a single very poorly performed power transmission project in Montréal that has affected our results for the quarter and for the year. Not withstanding that impact however we can see that absence the impact of that project that the fundamentals of comp store Canada's underlying markets are improving perhaps not to the same extent that we see some improvements in some of our American and U.K. markets but certainly on the upswing. And it is for that reasons combined with our positive view of the various management changes realignments and cost control efforts that we have made in Canada over the last 18 months that we think that the Canadian company will return to profitability probably not in the fourth quarter but we believe next year.

Great and with regards to both the electrical segment and the mechanical segment, can you talk a little bit about operating margins in those two lines and which one you believe has more upside going forward in improving operating profitability?

Sure I am going to invite Tony Guzzi, our President and Chief Operating Officer to comment on that Alex.

Electrical continues excellent performance and if you look over the last four quarter it's been excellent performance. Mechanical is where the opportunity is. This quarter is more indicative of the kind of performance we expect from our mechanical operation but we still have room to grow. And So, I will say electrical is operating pretty well, very well. Mechanical although substantially improved is a great comparison quarter to move from.

Very helpful. And circling back to the Canadian operation, Frank you mentioned something that real time here with regards to power transmission projects of Canada. Do you currently view the U.S. market as having the attractive dynamics that might suggest that you will pull down that expertise into the U.S. market versus transmission projects in US?

Alex, we do think that capabilities that are based in the specialized construction equipment that are used in that business that together with the experience of our personnel is the fact that we will take into account in our approach to the U.S. business. I must say however that I’m not quite as bullish on the U.S. power line construction market as I have been in the past. It's a market that continues to seeing immanent but it doesn’t seem to have arrived yet. And some of the estimates that I have read even from optimist some of the area suggest that the peal of that market is still two or three years away. So, yes we have capacity in Canada along with capacity in the United States to participate in the power line construction market whether or not we are going to pursue that market aggressively will be a function of a our view of the efficacy of our construction teams on both sides of the border but also be a clear eye view of what the actual market growth opportunities are.

Very helpful. Thank you very much.

You bet.

Your next question comes from line of Jeff Beach with Stifel, Nicolaus.

Yes, good morning, so, you're still morning.

Still morning, Jeff.

I had two questions. The first, on this improvement in the mechanical division, can you--was it a normal weather, normal summer, where is the margin improvement coming from better pricing, more volume, better execution or a lot of hard weather?

Jeff, once again I am going to invite Tony to comment on the improvements in mechanical.

A lot of hard weather wouldn’t give us the kind of turnaround we had in our mechanical segment. It helps predominantly what it resulted from is a more disciplined bidding approach across the board in our mechanical operations in really bringing a lot of the practices that has been indicative in our electrical operations to bear in our mechanical operations over the past 18 to 24 months. It takes a long time to turn it but I think the third quarter is indicative the turnaround is underway. The second quarter was better and we continue to expect margin opportunity I our mechanical operations. We are focused on what we do best. We are focused on work where people value high-end contractors in mechanical space, doing high end institutional work for hospitals, medical facilities, commercial sector work or evaluate the design engineering and design build capability we have in value engineering we have and staying away from work where those things aren’t valued. And you are seeing it in our backlog and you are seeing it in our numbers with sustained performance opportunities, we believe in the mechanical sector.

Is pricing and profit opportunities improving in mechanical and some of the markets like the Midwest that has been where you have struggled?

Our focus is better in the Midwest. So pricing and it's always hard to say whether it's general market conditions or you are doing the things you should be to create those market conditions. But yes across the board, we're seeing opportunities to bring our skills the bare and enhance margins and profit. And also we have a substantial mobile footprint smaller task mechanical work and mobile repairs, the weather helped us there or we're just going to go in better execution to take advantage of the opportunities. And we are seeing small task in discretionary work after years and then we'll get started to come back into the market.

Alright. My other question is probably back to you Frank or Kelvin on the tax rate. Can you explain again, I know you did this morning but about the 45% tax rate and the fact that going forward it will be 42%. Essentially what's happening is your first two quarters of the year are significantly overstated by low tax rate and now the last half is overstated by a high tax rate, and can we expect more significant revisions of your tax rate say going into ‘06, that will kind of skew all the numbers?

Jeff, it's Frank. I find the discussions of tax rate so exciting that I’m not sure if my blood pressure can take it. So I’m going to ask Mark Pompa to respond.

Thank you Frank. Jeff, just to go back to the beginning of the year when we were calculating what we believed our effective tax rates for fiscal 2005, we were assuming that our Canadian operations that was going to be break even or so profitable, in turn, as you can see from the results that has not happened. So after the first six months of this year, the losses that were recognized by the Canadian operations we were recognizing it a benefit which at this point we are no longer allowed to under the accounting rules. So in order for us to get the effective rate caught up to where it should be for the year, 42% we had to accelerate the provision in the third quarter to a rate of approximately 45%.On a going forward basis, if comp stock does in fact turn the corner and returns to profitability next year the effective rate commensurably will come back down to where it was for the first six months of this year. unfortunately the accounting rules are such that when you're looking at your inter period packed allocation you have to make a determination of what you think its going to be for the year, and then apply that to the your income financial statements however when there is a change in circumstances you do need to make a revision currently and then adjust as you go prospectively for the end of the year. So we do not foresee anything significant between now and the end of the year and I assume that we are going to be moving back to the direction that we were for the first six months of this year with projections for fiscal 2006.

So it sounds like your best guess at this point for 2006 tax rate is going to be back down around the 37% level?

Yeah I would say 37 to 40, 40 on the outside.

Okay.

But not 45 and definitely less than 47.

Alright thank you.

Hey Jeff you're welcome.

At this time I would like to again remind everyone, if you would like to ask a question please press “*” then the number “1” on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your next question comes from the line of Alex Rygiel with Friedman Billings Ramsey.

Mark I’ve got a follow-up question on the tax rate what has changed at EMCOR in the last two years to cause the effect of tax rate to go from 44% which was basically 1999 through 2003. to something below 42%?

Our distribution and linked analysis changed dramatically when you look at your foreign operations primarily the U.K. where you have a lower statutory rate and you have on a combined basis in the states, we were not generating any taxable income there so hence the majority of the income that was – or the entire to the income was generated by the entity back and earlier years was domestic based. A lot of income that was being generated in U.S. was in very-very high state taxed jurisdictions primarily in New York State in New York City where you get double tax we actually do file a unitary tax return in the number of States in United States you know, a deluxe problem or high performing entities unfortunately are in the highest taxed jurisdictions in the U.S. without getting any of the benefit of income flow through from a foreign subsidiaries at lower statutory rates. I had to do entirely what the distribution of income amongst the entity.

You could say in a nutshell Alex that we’ve done a real good job over the last couple of years spreading the sources of our income much more broadly across the company and as a result taking advantage of a income tax rate that is near the average for the Company –companies as a whole instead of having it's queue towards the high taxed jurisdictions.

You know as I look back over the last couple of years, you know in 2001, 2002, 2003 it really make that much in U.K. and Canada that doesn’t like you’re going to make that much money in 2005 and expectation are I think probably that you at leasdt make a little bit in '06 I guess by back in mind is still little bit confused because it seems like your income from international operations the mix has shifted dramatically here maybe I’ll have to just go back and look at that --

No – the second point that – I made and I like to reemphasize and I apologies by working that clear when you look at the domestic distribution and income a lot of your income domestically was coming from a small number of companies that were in the highest tax state jurisdictions.

Okay.

Now you are getting solid performance amongst the portfolio of domestic companies and were able to take advantage of the lower statutory rates in the municipality, as those other companies operate in. So there is two pieces of the puzzle.

Fair enough, thank you very much.

Welcome, welcome Alex

This concludes today’s questions and answer session. I will now turn the conference over to management for closing remarks.

Thank you Lee, and thank you all for your interest in and support of EMCOR Group, we really appreciate it, watch this space for new and interesting developments. Thank you.

Ladies and gentlemen this concludes today’s EMCOR Group conference call; you may now disconnect