EMCOR Group Inc (EME) 2005 Q4 法說會逐字稿

Good morning, my name is Judy, and I will be your conference operator today.

At this time, I would like to welcome everyone to the EMCOR Group 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 session.

[OPERATOR INSTRUCTIONS]

Mr. Olecki, you may begin your conference.

Thank you, and good morning, everyone. I'd like to welcome you to EMCOR Group conference call. We're here to discuss The Company's 2005 fourth quarter results, which were reported this morning. I'd now like to turn the call over to Mr. Kevin Matz, Senior Vice President of Shared Services who will introduce management.

Thank you, Jim, and good morning, everyone. Welcome to EMCOR Group's earnings conference call for the fourth quarter and full year for 2005.

For those of you who are accessing the call via the Internet and our website, welcome, and we hope you have arrived at the beginning of the slide presentation that will accompany our remarks this morning. Currently everyone accessing the slide should be on slide one, which is the EMCOR title slide. During the call, instructions will be given for you to advance to the next slide.

Please advance to the next slide.

Slide two depicts the executives who are with me to discuss the quarter and full year results. They 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, Mava Heffler, Vice President Marketing and Communications, and Sheldon Cammaker, 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 our 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 reception as of this date and EMCOR assumes no obligations 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 are not limited to adverse effects of general economic conditions, changes in the political environment, changes in the specific markets for EMCOR services, adverse business conditions, increased competition, mix of business, and availability of surety bonding. Certain of the risks and factors associated with EMCOR's business are also discussed in The Company's 2005 Form 10-K filed this morning 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. Frank?

Thank you very much, Messrs. Olecki and Matz, for that stirring presentation reminiscent of Norman Vincent Peale and Dale Carnegie.

Good morning, everyone, and welcome to our 44th 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 from time to time to a slide number to identify the relevant slide for webcast participants. Right now we're still on slide two.

The focus of today's call will be the EMCOR Group fourth quarter and full year 2005 earnings press release and 2005 Form 10-K that we issued and filed earlier this morning. We'll conduct this call in our customary way. First, a discussion of those operating results and our year-end balance sheet, my comments on the major factors that I believe contributed to our 2005 financial performance. Then we'll discuss the evolution and current status of our contract backlog portfolio, including special mention of some notable contract awards from the most recent quarter. Tony Guzzi will talk about a very significant recent project awarded to EMCOR and our joint venture partners by the U.S. Navy, and we'll follow that with a more general discussion of our plans for the growth and development of our government services unit. Finally, I'll comment on EMCOR's revenue and earnings expectations for 2006. And discuss the factors that I believe will influence our performance this year, including the five major strategic objectives that I shared with you last quarter. At that point there'll be an opportunity for to you make comments or to ask us questions. And you can see from slide two that a number of our senior officers are here to assist me with the answers.

So let's begin. Please move to slide three.

In looking over my notes from our earnings guidance call in February a year ago, I see that I expected 2005 to be a year of steady improvement marked by probable reductions in revenues from certain construction operations that we intended to right-size, balanced by growth opportunities in our U.S. facility services division. I'm very pleased to say that that's about the way it turned out. EMCOR had an excellent year in 2005, improving steadily from the start of the year to the end. And concluding the year in a strong position to continue our good performance in 2006.

Slide three identifies some of the salient features of our 2005 performance. Gross and operating margins rose in nearly all our markets during 2005, the exceptions being U.S. electrical and facility services, where margins remained at the very high level experienced in 2004, and Canada, where gross profits increased, but operations reported a net loss. EMCOR's gross-profit margin for 2005 was 10.6% of revenues compared to 9.4% in 2004, while operating profit margin nearly doubled to 1.7% in 2005 compared to 0.9% in the previous year.

On an operating segment basis, U.S. electrical construction and facility services operating income was at 6.5% of revenues, a very good performance compared to 6.6% in 2004. U.S. mechanical construction and facility services continued its recovery, advancing to 1.3% operating income compared to a loss the previous year. U.S. facility services operating margin rose dramatically to 3.3% from 2.0% in 2004. The Canadian company reported a 2005 operating loss, although an improvement over 2004. And the U.K. operation earned a 1.1% operating margin compared to break-even in 2004. Although revenues from our U.S. construction operations fell slightly year-over-year, as a result of our previously announced decision to downsize certain construction operations and to reduce our exposure to certain types of public sector projects, these reductions were largely offset by encouraging growth in our U.S. facility services segment, notably in its mobile services division. This reflects our continuing success in attracting more of the small task discretionary work which we we lost in 2003 and 2004, plus increased sales efforts in the site-based services side of this segment. U.S. facility services operating income was $24.6 million, a record in 2005. As I'll discuss in detail in a moment, we started 2005 with a strong and liquid balance sheet and ended the year even stronger. We had essentially no debt and more than $100 million of balance sheet cash at year end, a great position from which to start the new year.

All year we worked to reduce risk and improve profit opportunities within our portfolio of contract backlog by restricting bidding in sectors that have been typically challenging, such as K-12 education projects, and by increasing our exposure to higher-margin private sector commercial work. We succeeded, and we'll discuss this in detail when we get to slide seven. In our longtime emphasis on cash and debt control through careful contract administration and aggressive presentation and prosecution of claims and disputes paid off. Operating cash flow for 2005 was a remarkable $143.3 million, more than three times 2004 levels. At year end, EMCOR companies were net over billed in the amount of $145 million, a very good sign of operational success compared to $119 million at the end of 2004.

The fourth quarter 2005 income statement on slide four reflects that success. EMCOR's fourth quarter income from continuing operations was $19.5 million or $0.61 per diluted share, an increase of 89.5% over the preceding year, while 2005 fourth quarter revenues were slightly higher than the year previous. All per share numbers that I use in this discussion, by the way, are reflective of The Company's 2-for-1 stock split, which was effective about two weeks ago. Operating margins improved to 2.5% revenues in the 2005 quarter compared to 1.9% in the year-ago period, reflecting improved conditions, effective cost control, and backlog rebalancing activities.

On slide five, we show our financial results of operations for the year 2005. Although revenues were roughly equal to year-ago levels, income from continuing operations rose sharply, gaining 84% to $61.3 million or $1.93 per diluted share versus $33 million or $1.07 per diluted share in full year 2004. Operating income rose 92% year-over-year to $81.1 million in 2005. As discussed in detail in our earnings press release issued this morning, The Company's 2005 results included a net $17.5 million benefit resulting from income tax reserve adjustments. Without that benefit, 2005 earnings per diluted share would have been $1.37, as we'll also see on slide 11 of this presentation. Exclusion of a group of similar items in 2004, as detailed in the press release, would lead to 2004 earnings per diluted share of $0.69, and a comparison of the two years earnings as adjusted reflects year-over-year improvement of 98.6%. The Company believes that these exclusions provide a better basis for year-over-year comparability, and I'll be using that $1.37 2005 EPS number for comparison purposes with our 2006 guidance a few slides down the line. We are delighted with our 2005 financial performance, reflecting as it does nearly a doubling of our 2004 results.

Slide six shows the essentially debt-free cash-rich balance sheet I mentioned earlier. Working capital grew 31% during the year to $344 million. Cash nearly doubled, while total debt declined $830 million to a nominal amount. Shareholders equity rose 9% to over $615 million, and The Company's market capitalization at year end stood at $1.075 billion, a $372 million advance during 2005. We're very proud of these financial results and the financial strength and success that they portray.

Slide seven is another illustration of a different kind of success. As previously announced, we have been working to improve the risk-reward characteristics of our contract backlog, while conserving capacity for new higher-margin opportunities as prices for our services improve. Our major goals in this area were to reduce our exposure to certain types of low-margin institutional sector work, which have been challenging for us historically, and to enhance our involvement in the higher-margin private sector commercial projects, where we tend to perform much better. As shown on this slide, we succeeded. Our year-end backlog, although roughly equal in overall value to year-end 2004 at about $2.8 billion, reflects a continued reduced level of institutional sector exposure, and our private sector commercial portfolio is at its highest dollar value in our history. This target sector rose from 28% to 35% of overall backlog during the year. Our transportation backlog declined slightly, reflecting progress on several large road and rail projects, while water and wastewater, healthcare, and hospitality sector values remained relatively constant. We believe that EMCOR's backlog balance at year end 2005 is a major advantage going into 2006.

Slide eight contains a group of projects drawn from many recent awards that illustrate the diversity of EMCOR's skills and services and the scope of our market coverage. In San Diego, University Mechanical is the design, build, HVAC, and plumbing contractor on a three-building office complex for Qualcomm, the kind of private-sector commercial project that bolstered our backlog this past year. Hyre Electric is working on a circulating fluidized boiler steam and power plant to support Corn Products' manufacturing operations in Illinois. University Mechanical will also be the HVAC, plumbing, fuel oil supply, and medical gas plumbing contractor for a new 400,000 square-foot medical center on a 60-acre campus in Arizona. In California, University Marelich Mechanical was awarded a contract for the design assist construction services on a new, state-of-the-art, digital electronic teaching library inside a gutted older building at Cal State University.

A group of three recent awards in the water and wastewater sector, involving our Poole & Kent and Shambaugh subsidiaries, reflect the continued strength of this sector with the long-term EMCOR target market. They also illustrate an additional important trend. All three are green projects in the government sector. The increasing frequency of green engineering and construction projects prompted the launch in early 2005 of a green initiative by EMCOR to draw attention to the importance of our services in helping our customers achieve green certification, and we're making good progress. Also in the government sector, but with a strong transportation orientation, our Welsbach Electric company New York received a contract for the boroughs of Queens and the Bronx, performing maintenance of illuminated traffic signals covering 3,000 miles of roadway, 65,000 traffic lights, all of which will be red when I want to go some place, and 4,600 signalized intersections including 24/7 staffing to respond to all signal defects. Welsbach will also be upgrading the taxiway lighting at JFK Airport to accommodate the next generation of widebody aircraft coming into service next year, and on the Triborough Bridge, they'll be installing and renewing high and low voltage cable systems and new roadway and pedestrian lighting.

Now, to talk about another very significant project award in the government services sector, and to follow up with a general commentary on our development efforts in that sector as a whole, here's our President and Chief Operating Officer, Tony Guzzi. Tony?

Thanks, Frank.

The West Sound joint venture adds to our growing and successful government business, and I'llspeak to that following a discussion of the West Sound project. RJV is a three-partner joint venture, with EMCOR as the managing partner with a 40% share. It's a significant venture. We employ about 500 people directly in this venture and we have an eight-year $400 million contract. We started February 1st. The transition was well planned and was well executed, and our customers happy. This contract will also provide the opportunity where we can add technical expertise and enhance our scope and profitability. This project is a natural growth area for already successful government service business, which is part of our EMCOR facility services segment. If you turn to page 9, I'll describe that in further detail.

Our government business has a stellar roster of clients and maintains about 32 million square feet today, from everything from the State Department headquarters to the Naval Academy. The revenues are about $100 million a year, and it's a long-term business built over 60 years of good solid operating performance and expertise. It's a segment where technical expertise is valued and it's a segment that's growing due to the outsourcing trend in the government, and we're well-positioned to take advantage of it, and we also have the long-term relationship with our government agencies, we've established trust and no small task is to have the security and accounting practices necessary to serve this sector.

We're excited about West Sound and we're excited about the growth of government business and with that, I'll take questions at end and turn it back to Frank now.

Thanks very much, Tony. EMCOR is fully committed to the support and expansion of our government services operations.

Turning now to our plans and expectations for 2006, slide ten summarizes the major factors that we think will help to define our performance this year. We will continue to manage our backlog mix and its size to go where the money is, to gain access to the highest margin opportunities within our market scope. If price and margins continue to firm, this could well mean an increase in overall backlog volume as we seek to lock in profit opportunities for the longer term. That means continuing bidding discipline, particularly in those subsidiaries whose access to higher-margin work is currently restricted. We expect to see a continued active market for our facility services, based not only on the continuing strength of business process outsourcing but also because of the significance of our services to our customer's achievement of energy efficiency and green objectives. We'll continue to exercise our historical vigilance over expense control, including raising the bar for incentive compensation, and our financial, operational, and managerial strength enables us to actively consider various investment and acquisition opportunities that will help us to achieve our long-term strategic objectives.

Slide 11 is the adjustment slide I referred to earlier, which shows the effect of the exclusion of the tax accrual reversal from our 2005 income statement, resulting a reduction of diluted earnings per share from continuing operations to $1.37 as adjusted. We think that this figure is a better basis with comparability 2006 guidance since we expect no significant tax accrual adjustment during 2006.

If you'll now click to advance to the next slide, you'll see our 2006 revenue and earnings per share guidance numbers in the right-hand column. Revenues of $4.9 to $5.1 billion and earnings per share from continuing operations of $1.54 to $1.90. I have the following comments about our initial guidance figures for the new year. The revenue estimate reflects revenue growth in the range of 4 to 8%, entirely from organic sources. No new investments or acquisitions are incorporated in our initial guidance figures. We expect organic growth to be concentrated in North America and particularly in our U.S. facility services segment, at least on a percentage basis. Organic growth in our U.S. electrical and mechanical construction and facility services segments will depend on the continuation of increased demand and improved pricing for our domestic construction services. On comparable to 2005 diluted earnings per share, as adjusted per this slide, the lower, middle, and upper portions of our 2006 earnings per share guidance range represent growth over 2005 earnings of 12%, 26% and 39% respectively, and even higher if you take into account the included $0.6 per share change for adoption of FAS 123R. Keeping in mind the earnings improvement reflected in the 2005 earnings report compared to 2004, this is a healthy and optimistic estimate reflecting the strong position in which we start the year. Notwithstanding our strong starting point, we think that our typical quarterly earnings pattern will probably occur again in 2006, marked by a relatively slow start followed by improving operational results, especially in the last half of the year.

Although our guidance is limited to the year 2006, we definitely have longer-term goals which will guide our current and future management policies as we seek to build value for EMCOR shareholders for many years to come. These long-term strategic objectives are set out on slide 12. We will continue to strive to be in as many markets on a balanced basis as our skill sets and our customer relationships permit. We're aware of the significant impact on shareholder value that relatively small increases and percentage profitability can produce, due to EMCOR's unmatched size and scope. We will strive to continuously improve our return on capital and on equity, while maximizing cash and controlling debt. We will continue to build the EMCOR brand as well as the franchise names of our local subsidiaries. This is key, not only to long-term value creation, but to competitive success in the recruitment of new generations of talented EMCOR employees. We want to provide more services directly to the owners or end-users of facilities, both through growth in our facility services business and through enhancement of the scope of our construction services. We know that this reduces risk and raises profits.

Overall, we want new customers and we want to do more for our precious existing customers. We'll do this through enhanced sales efforts, more marketing and cross-selling of our broad service array. We'll also look at investments that gain us access to adjacencies in our customer service relationships.

That's it for today's call. As always, thanks for listening in on our report about our 42nd consecutive profitable quarter of operations. Thanks always to our faithful employees and friends, and to all those with an interest in EMCOR. Now this time for your questions or comments and Judy is here to tell you how to queue.

Thank you, sir.

[OPERATOR INSTRUCTIONS]

We will pause for just a moment to compile the Q&A roster.

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Gentlemen, do you have any remarks while we compile the roster?

I just like to encourage everyone to take a close look at the press release for the details that we provide concerning 2006 expectations, and to say that the developments on the West Sound project as a kind of a leader of an important area of EMCOR activity in future years, that is to say, our government services division, cannot be overstated. It's extraordinarily important, and when Tony Guzzi, a Marine, says such nice things about the U.S. Navy, you know that it's got to be a great deal.

Our first question comes from the line of Alex Rygiel with Friedman, Billings, Ramsey.

Good morning, gentlemen. Frank, could you--

Hi Alex.

How are you?

Very well, thanks. You're a little faint.

Sorry about that. Quick question. Acquisitions, as it relates to the cash that's building on your balance sheet. Can you expand upon whether you expect to complete an acquisition this year, what type of targets you'd be pursuing, domestic, international, electrical, mechanical, facility services, and again talk about the size that you'd be looking at?

Gee, that was a narrow question, Alex. And first of all, let me apologize personally and publicly to Tony Guzzi for calling him Marine. Everybody knows that he's an Army man.

With respect to acquisitions, as everybody on this call has, I'm sure, appreciated, we are in a position where we can look seriously at investments or acquisitions in a broad range of sizes. We have a fully invoked $375 million line of credit with opportunities for expanding that if we choose. We have a lot of cash and we have strong management with which to incorporate into EMCOR any investments or acquisition that we might make.

We're looking for opportunities to achieve our long-term strategic goals. We can do that in a variety of our organic ways, but we can really help ourselves if we correctly choose investments or acquisitions that help us particularly in locating adjacencies to our current suite of services. You can talk, for example, about improving our design build capabilities through enhancement of our engineering and design activities so as to get closer to customers at the planning stages of their major projects and then following those projects through to completion with our unmatched systems installation capabilities and, of course, establishing long-term facility service relationship with those customers. Talking about facility services, once you're in charge of a customer's facility, there is a huge variety of things that you can do aside from just managing their energy consumption and their systems. As an example, we've had customers express interest in our assumption of responsibility for their procurement budgets for the operation of their facilities. We have huge purchasing power and we can provide a tangible benefit to our customers in that area. So there are all kinds of ajdacencies that I think we can look at.

One thing that we won't do, I think, Alex, is substantially broaden our geographic scope that is, beyond North America and the U.K. I've always regarded continental Europe, which would be the logical extension of our current scope, as being very risky from a labor mobility standpoint. I think that European restrictions on payment and transferability of labor and employment of labor in general are a significant risk factor for a company with the labor management responsibilities and costs that we have. So I think that we'll be looking primarily in North America for new investment and acquisition opportunities. I hope that answers your question.

It does so. And there's obviously a lot of talk about the residential marketplace softening, slowing down as we look at it into 2006. And I've seen one or two press articles about larger apartment buildings or condominium complexes in Las Vegas and other markets being pulled and being cancelled or postponed. Have you seen any evidence of that as of yet and can you attempt to quantify that type of multi-dwelling unit backlog that you're carrying right now?

I'll just answer very briefly and then turn it to Tony Guzzi who I think has a comment, Alex. Most-- You certainly and many listeners know that EMCOR is almost entirely a nonresidential builder and manager of facility systems. But we have in recent years participated in parts of the condominium conversion market. With that, I'll turn it over to Tony.

And along those lines, it's not a large part of what we do. And the projects we're working on we know are going ahead in each of our subsidiaries. Specifically about Las Vegas, we feel real good about our position there for at least the next three years. The projects we're working on or going to work on we know are going ahead. So we don't see that having a big impact on what we do. It's not a major part of what we do outside of Vegas, and within Vegas specifically, we feel good about how both our Dyne operation and Hansen are positioned.

Great, thank you.

You're welcome, Alex.

Your next question comes from Jeff Beach with Stifel Nicolaus.

Hi, Jeff.

Yes, hello, great quarter again, Frank.

Thank you.

I'd like you to talk a couple minutes about the facility services. Ever since you formed it, it's been -- it showed very good strong growth. You just won -- had announced last week another nice large contract. Looking ahead at '06, and then maybe over the next two or three years, what kind of growth rate do you see in that business organically? And then on the profit margins, they are improving, but I think there's still running well below a target that you have in mind. Can you talk about what is maybe dragging the results, you had about a little over 3% margin in '05, and I think your target is much higher margins, what needs to happen to see that -- those higher margins in that business?

I'll be happy to talk about that, EMCOR facility services is one of my favorite topics.

Organic growth in 2005, Jeff, as you mentioned, was very good. My staff will correct me if I'm mistaken, but I think that our organic growth rate for the two divisions, that is the mobile services and the site-based services divisions of facility services were 6% and 9% respectively. So this is good growth and I think that that kind of growth rate is replicable in future years. How? Well, the demand for services that help customers to achieve both energy efficiency and green objectives is only going to grow. And mobile services are one of the major and most cost-effective ways of accomplishing those goals. But as indicated by some of the project awards that we have announced recently, and because of an invisible change, at least invisible to the market, with respect to the enhancement of our sales and marketing activities on the site-based side of our business, I'm very enthusiastic about the opportunity for sales and marketing-driven increases in our site-based services in 2006 and thereafter. So I'm looking for an organic growth rate on the revenue side in facility services of a nominal 10%. And we could do better in certain circumstances.

Turning now to your question about the margins -- I'm certainly happy about the expansion in our margins that was reflected in 2005. $24.5 million of operating income is great performance, and we're very happy with the performance of the division. Having said that, you are right in pointing out that we can do better in margin terms, especially by absorbing overhead on a more effective basis, especially on the site-based side of our business than we have done in the past, and that's why we have worked so hard to reinvigorate and increase the professionalism of our sales personnel on the site-based side of that business. Every bit of growth that we achieve on site-based will help to absorb that overhead and render the operation more profitable.

I'll just say a final word about the overall profitability model that we have for facility services. We don't think that facility services will ever be as profitable in percentage terms as specialty construction when construction is at the height of its performance. It is truly a great business when things are all going well. The trouble is that construction is a cyclical kind of business, and we consciously decided to establish and to grow our facility services businesses, starting seven or eight years ago now, for the purpose of helping ourselves to just say no to construction opportunities at the bottom of the cycle when the risks far outweigh the available rewards and if we can just say no, we ought to. So facility services has more to grow in terms of both revenue and profitability. But the real worth of facility services to EMCOR and to its stockholders on a long-term basis is to provide us with a stable earnings base that doesn't vary nearly as much from cycle top to cycle bottom as comparable constructions operations do. Did that do it for up Jeff?

That's pretty good, thank you. Just one other question about the electrical business. I stripped out some one-time items so I'm just looking at my model, but I'm showing the margin in '05 being good but a little bit lower than '04. And I wondered what were the dynamics involved in that? Was that just a very profitable projects in '04? Because it looks like the marketplace is getting a lot better.

Well, I certainly agree with you that the marketplace is better. I don't think that there's too much to be read into very small variations in profitability. My figures, for example, for segment operating income for '05 and '04 in electrical are 6.5 and 6.6% of revenue, both of which are very good performance. And I think that this is a well-managed and well-performing unit. And you are right. It is certainly possible that a project or two that closes out before or after year end can influence year-over-year results a little bit. But I tend to think that electrical is in a good market and is going to stay there for the next year or two at least.

All right. Thanks, Frank.

You bet, Jeff.

The next question comes from Rich Wesolowski with Sidoti.

Hi, Rich.

Thank you, good morning.

Frank, as you look at this business versus how it was structured during the last cycle, your margins topped out somewhere around 12% of the gross line, and I was wondering if there's anything different to suggest that what you would expect to be a peak margin for EMCOR would be something other than right around 12.

Good and interesting question. In the past we have cautioned analysts and listeners against looking at gross margins because they can be affected so much by the location of the revenue that corresponds to the margin. I'll give you an example that I used to use years ago, that is, that we could have projects in New York City earning a 14% gross margin and the project in Las Vegas earning a 7% gross margin and both of them would have the same operating income percentage because of the costs -- the relative disparity in the cost of doing business in those markets. So whereas we look at gross margins to a degree as an indication of overall market health and buoyancy, we are careful not to read too much into them because of the danger that can be presented by changing focuses of our operations. For example, we are in this cycle much less dependent upon certain types of New York City revenue than we were the last time around. And yet we're making good profits on a net basis. And that's an indication of the fact that EMCOR this time around is much more diverse, much better balanced than the last time around, and my philosophy here is that we are building a company for the next recession. I don't know when it's going to happen, but we're a day closer to it today than we were yesterday and although we performed pretty well last time, we'll do even better this time around.

Okay, so it appears that the risk is reduced, but even when you look at it, say on an operating margin perspective, which I believe would correct for what you had cited earlier, is there -- is there any indication that EMCOR could get up to and well above 3% the operating margin, which is right about where you were in '02?

Yeah, you're correct in pointing out that, I think our best historical performance in OI terms was 2.9%. Yes, I think it's implicit in my last statement that we are a better company, better balanced, better managed, better financed than we were at that time and that we do have an opportunity to exceed historical levels of performance if the markets give us that opportunity.

Great, thank you.

You bet.

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Your next question comes from John Rogers with DA Davidson.

Hi, John.

Hi, good morning.

I'm just wondering, Frank, what are you seeing in terms of acquisition opportunities, more or less than where we were six or 12 months ago?

I'm going to say less. I think that-- I think that a lot of companies are doing pretty well. This is purely anecdotal and impressionistic on my part, because I don't camp out with investment bankers every day, but my impression is that more companies in the areas of the economy that we are interested in are doing better, interest rates are reasonable, profits are reasonably good, our sector as a whole I think is performing quite well and that's a time when management seems not to be thinking about sale. So we are -- when I say that -- and I did say on my -- in the body of my call that we are actively looking, we are using our imaginations to think about ways in which we can identify and pursue adjacencies or development areas that would require us to acquire new customers, new channels to market, or ways of providing more services for our existing customers, particularly in a way that enables us to have direct relationships to those customers without the presence of middlemen.

Okay. And one other specific question. You gave us private sector backlog of 35% of total backlog. Do you know what the breakdown in revenue was for the quarter?

Anybody have that number in terms of private versus public sector revenue for the quarter? I don't have that immediately at hand, John, I thought I was going to get through this question-and-answer period without being stumped, but you got me. Mark Pompa --- doesn't have it in here, I'm sorry. We'll have to come back to you on that.

Okay, I'd appreciate it. Thanks, and congratulations.

You bet, thank you, John.

Your question is a follow-up from the line of Jeff Beach from Stifel Nicolaus.

Hi, again, Jeff.

Hi. Can you talk about the current construction environment in the U.K., much better results, but I'm guessing it's early in the cycle there just like it is here. And talk about some of the changes you've made over the last year and how much better can it get in the U.K.?

I can. But here's what I'm going to do. I'm going to talk historically for a moment and then I'm going to turn it over to Tony Guzzi for comments. He's just back from the U.K. and he has a good feel for what has happened there.

Very briefly, the U.K. company has been an EMCOR subsidiary for a long time, going back to before reorganization days, and has never been a consistent performer, and we've made a series of management changes and focus changes in the U.K. because we think that it's basic structure, which is an essentially equal balance between specialty construction on the one hand and facility services on the other, is very good from the standpoint of creating an opportunity for consistent long-term earnings. So we've been trying to foster that. Unfortunately we've had some management errors and weaknesses over the years, together with an extraordinarily difficult and challenging overall business environment for construction subcontractors in the U.K., the legal structure of that market has been difficult for companies in our position, up until recently at least. So there were a number of problems to overcome on the part of the management that we installed in 2003. I cannot overstate how pleased we are with the changes that Tony Whale and his management team have made in the U.K. The bad habits that they have eradicated and the improvements, both in structure and in systems that they have produced. We think that they are as disciplined a bidding organization, notably on the construction side of the business, as we have anywhere, and we're very confident that they can handle the continuing issues associated with the U.K. market.

And there are plenty of opportunities. Just to cite a couple, Alex Rygiel mentioned to me earlier the fact that there is a huge Olympics- related construction coming up in the U.K. Also, there is a total, I believe, of 15 nuclear plants scheduled for decommissioning in the next 10 years or so. This is a huge amount of business. We continue to be a major service suppliers to most of the top 100 corporations in the U.K., including our long-term relationship with British Airways. So we're well established in the U.K. corporate spectrum, but with fresh news on that, here's Tony.

Because of the erratic performance of the past, I think the most important thing that we've had accomplished is to build a stable base and build a base we can build from, and I think we've done that now. Are we happy with the performance? No, and neither is the U.K. team. When you look at the U.K., you basically have three significant businesses, you have a rail business, a infrastructure business, you have a traditional mechanical contracting business, and a facility services. We're not really focused on a lot of top-line growth right now, albeit we would grow with our facilities customers in the U.K. What we're focused on is remixing the backlog and continue to do that, keep the [inaudible], and we're working on margin expansion at this time. And so they're not where they need to be. Can we get them to our better performing operations that we have in North America? That's the goal, and it's a margin expansion focus, disciplined bidding, continue to grow with the right customers on the facility side. The good news about the U.K. is we have a base to improve from and there's an improvement opportunity there.

Okay. Jeff?

Yeah, thank you. And one other thing, a minute's worth on the mechanical market here in the U.S. Margins still look like they could go a lot higher. What's the competitive environment right now going into '06, as it looks like we're going to see more larger projects hit the market? Is this going to tighten up capacity and lead to better pricing?

Yes, I think -- I'm quite sure that it is. The -- I reported in the body of my address, 1.3% operating income performance for mechanical in '05. And I don't want to you say that this is one of those, other than that Mrs. Lincoln, how is the play, but you will recall that we announced a writedown during the year in the mechanical segment related to a jury verdict on a large claim that we had booked. It's very difficult for me to reconcile the fact that we actually won this case with the fact that we had to writedown this so-called UOSA asset by a dramatic amount However, having said that, the mechanical segment actually performed at about 3.2% operating margin for 2005 prior to that UOSA writedown. So, I think the recovery in mechanical was more dramatic than it appears from the numbers published in the 10-K, and I think that they are well on the way to additional performance improvements in 2006, in what you correctly describe as a strong market with a lot of major project opportunities.

All right, thanks.

You're welcome Jeff.

This concludes the question-and-answer session of today's call. I will now turn it back over to management for any closing remarks.

Once again, thank you all for being with us this morning and for your interest in EMCOR. Watch this space for interesting future developments. So long.

This concludes today's conference call. You may disconnect at this time.