EMCOR Group Inc (EME) 2006 Q2 法說會逐字稿

Good morning. My name is Gerald, and I will be your conference operator. At this time, I would like to welcome everyone to the EMCOR Group 2006 Second Quarter 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]. Thank you. It is now pleasure to introduce your host, Eric Boyriven of Financial Dynamics. Sir, please go ahead.

Thank you and good morning everyone. I would like to welcome you to the EMCOR Group conference call. We are here to discuss the Company's 2006 second quarter results, which were reported this morning. I would now like to turn the call over to Kevin Matz, Senior Vice President of Shared Services, who will introduce the management. Kevin, please go ahead.

Thank you, Eric and good morning everyone. Welcome to EMCOR Group's earnings conference call for the second quarter of 2006. 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 a slide presentation that will accompany our remarks today.

Currently, everyone accessing the slide should be on slide 1, which is the EMCOR title slide. During the call, instructions will be given for you to advance to the next slide. This is one of those times, so please advance to slide 2.

Slide 2 depicts the executives who are with me to discuss the quarter and six months results. They are Frank MacInnis, Chairman and Chief Executive Officer; Tony Guzzi, President and Chief Operating Officer; Leicle Chesser, our Vice Chairman; Mark Pompa, our Chief Financial Officer; Mava Heffler, our Vice President and Chief Marketing Officer; and our General Counsel, Sheldon Cammaker.

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 it at emcorgroup.com.

Before we begin, I want to remind you that this discussion may contain certain forward-looking statements. Any such statements are based upon information available to EMCOR management's perception as of this date and EMCOR assumes no obligation to update any such forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance. Such risks and uncertainties include, but 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 risks associated with foreign operations. Certain of the risks and factors associated with EMCOR's business are also discussed in the Company's 2005 Form 10-K, its 10-Q for the second quarter ended June 30, 2006 and other reports filed from time-to-time with the Securities and Exchange Commission.

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

Thank you, Kevin. There must be something about that pink shirt that makes your message so emotive and stirring.

Good morning everyone, and welcome to our 46th 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 are still on slide number 2.

Focus of today's call will be EMCOR's second quarter 2006 earnings press release and Form 10-Q, which were issued and filed earlier this morning. We will conduct this call in our customary way. First, a discussion of those second quarter and year-to-date financial results followed by a review of the evolution of our project backlog with special emphasis on those sectors, which we expect to perform particular well in the next year or so. Then Tony Guzzi will discuss some notable recent contract awards drawn from hundreds of such awards received recently around our diverse company. And he will follow with a review of a topic that is a daily concern from the top to the bottom of EMCOR Group, the health and safety of our employees and those of our customers.

Finally, I will comment on some of the major factors that we expect to impact EMCOR's performance for the remainder of this year, including the upward revision of our 2006 revenue and earnings guidance, which we published earlier today. 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 help me with the answers.

So let's begin. Please move to slide 3. Last year at this time I announced with great pride that EMCOR had passed a significant milestone, 40 consecutive quarters, 10 full years of steady profitable operations, so it's with no less pride that I announce that our financial conservatism and attention to business fundamentals has produced another four quarters of profits for EMCOR and our shareholders since then. The most recent quarter was our 44th consecutive profitable quarter and was also the most profitable second calendar quarter in EMCOR's history.

Net income for the second quarter was $16.9 million or $0.52 per diluted share, more than double the level of the second quarter of 2005. Revenues of 1.22 billion were about $50 million or 4.4% higher than a year ago, while operating income increased 72.6% to $25.3 million from 14.7 million last year.

Selling, general and administrative expenses increased about $11 million year-over-year to 108.2 million or 8.9% of revenues due primarily to compensation related charges associated with increases in the Company size and in its profitability.

As in the case of the first quarter of 2006, all EMCOR divisions contributed profits to the second quarter results. U.S. electrical and facility services operating income was $11.1 million or 3.6% of revenues, those revenues rose by about 2% over 2005 levels. U.S. mechanical continued its dramatic improvement earning $11 million or 2.6% on slightly reduced revenues compared to 2005. U.S. facility services earned $10.1 million or 3.6% on revenues of 232.2 million, a dramatic 24% increase over year-ago levels.

And our improving Canadian operations had a profit of $2.1 million or 2.5% of essentially flat revenues. Our U.K. operations reported operating profits of $3.7 million or 2.1% on slightly increased revenues.

Overall, every division except electrical reported improved operating margins compared to 2005, while revenue growth was concentrated in U.S. facility services, our target growth sector.

Let's go to slide 4. Our six month year-to-date results are equally gratifying. Revenues of $2.37 billion, 5.3% more than last year resulted in operating income of $37.7 million nearly twice last year's levels and net income of 23.9 million or $0.73 per diluted share, an increase of 142.5% over the first half of 2005.

For the quarter and the year-to-date, EMCOR was a net interest earner, reflecting the strength of our growing cash position, while the adoption of FAS 123R resulted in charges equal to $0.04 per share in the first quarter and $0.05 per share for the half year.

Please go to slide 5. Our quarter-end balance sheet shows our continued and growing strength and liquidity, the consequence of consistent profitability and cash flow from operations of $77 million for the year-to-date compared to $28 million last year. Balance sheet cash was $181 million, an increase of 77.2 million over year-end 2005. Both periods showed nominal levels of debt. Balance sheet working capital and shareholders' equity grew to $412 million and $659 million respectively. We are pleased and proud about these financial results and the long history of operating success that they represent.

Turning to the future, with reference to slide 6, contract backlog reflected a value of $3.22 billion at quarter end, an all-time record for EMCOR and an 18.2% increase over year-ago levels.

For the last three years, we have executed on the contract portfolio strategy, designed to reduce our exposure to certain public sector markets and to reserve contracting capacity or anticipated improvements in margin opportunities in high growth, higher margin sectors, such as commercial and hospitality facilities. This quarter saw the fruition of that strategy. Available margins in our target sectors rose to meet our requirements and our total contract portfolio rose nearly 17% on a consecutive quarter basis.

Our commercial project backlog at $1.2 billion is 46% above its year-ago levels, while our hospitality sector contracts rose in value a remarkable 378% to $521 million during the same period. Both sectors reflect the continuing strength of the macro-economic recovery, especially in non-residential, engineering and construction. And these higher margin sectors now represent about 54% of our overall backlog value.

I will be back in a few minutes to discuss what I think all this means in terms of our future performance. But now as we turn to slide 7, Tony Guzzi is going to discuss some recent contract awards that illustrate the demand for the services of our diverse company, following which he will review a topic dear to my heart, EMCOR's remarkably effective health and safety programs, which not only help us to protect our own precious employees, but also enable us to offer life safety solutions to our customers. Tony?

Thanks, Frank. The second quarter showcased a diverse range of project awards. Let's start with higher education. At Yale University in New Haven, Connecticut, our Tucker Mechanical Company will furnish and install full mechanical systems including plumbing, fire protection and HVAC fit-out work for new lab spaces and vivarium.

Down in South Texas, our Gowan Company will be working for the University of Texas in Galveston and the National Institute of Health National Laboratory installing the mechanical, plumbing, sheet metal and process gas piping systems for a new 180,000 square foot, 7-story ultra-secure, high-tech research facility. This laboratory and facility will house the most advanced research equipment and support facilities for investigating dangerous materials, chemicals and substances for the Homeland Security department. In fact, most of the work performed on these substances is done in full space suits or with manipulator arms.

EMCOR Services Northeast, our Boston-based mobile services company will be replacing seven obsolete and inefficient return fans in the main building of the Boston Medical Center as well as upgrading the HVAC equipment. This is a great example of what makes us unique. All of our mobile service companies provide their customers with this type of small project work that augments their scheduled or [call-up] service work that their highly talented technicians perform.

Gibson Electric in Chicago will be installing both high-and-low-voltage electrical systems in the Advocate Good Samaritan Hospital. Gibson's scope will also include nurse call systems, fire alarms and emergency and critical power systems in this new two-story addition to the hospital.

In Miami, our Dynalectric Florida operation will be working with a long-time client, the Miami-Dade Aviation Department, installing lighting, fire alarm and security systems at the Miami International Airport. The work scope also includes the build-out of temporary passenger corridors and automated people movers between terminals B and C.

In San Diego, the Diegan Hotel is planned to be adjacent and directly above the House of Blues, a project that we built a year ago. This new project is a 21-story, 215,000 5-star condo hotel in the downtown Gaslamp district. Diegan's work scope will include full electrical fire alarm, telecom, close circuit TV and security systems. This hotel project is one of many such projects that we are seeing that have contributed to the growth in the hospitality segment of our backlog, which Frank discussed previously.

In international, our EMCOR U.K. Rail, has secured a project with the Department for Transport for major rail depot redevelopment in the U.K. city of Kent. The Ramsgate Depot maintains the fleet of rolling stock for the local Kent train operating company. Our scope is to design, to build and it will consist of both mechanical and electrical system upgrades for five heavy car maintenance sheds, the wash facility and 12 other support facilities.

The final two projects highlighted are from our EMCOR facility services' site-based business. We have been awarded a three-year contract with the Bureau of State Office Buildings for the Commonwealth of Massachusetts. The scope for this work includes 24/7 mechanical and electrical operations and maintenance services including remote monitoring to the Boston Government Center, a 4-building complex totaling over 1.8 million square feet.

Also in the Northeast, we have been awarded a 38-month contract to provide general maintenance services to 280 Stop and Shop Supermarkets in Massachusetts, Rhode Island and Connecticut. We will be transitioning about 50 employees from Stop and Shop including full-time engineers, mobile service personnel and management. Stop and Shop is looking for a partner they can grow with, that's flexible across their footprint of stores, and EMCOR is a great partner for them because we can design, construct and service.

Let's go to slide 8 now. We are going to highlight EMCOR safety both inside and outside our company. First let's turn to inside. The safety of our workforce is job one for us. We do dangerous work with highly skilled technicians. EMCOR has 27,000 men and women, providing technical services, border-to-border and coast-to-coast in the U.S., Canada and the United Kingdom. Our people are our most important asset. Their continued safety and well being is a paramount concern to us and we are proud to have one of the most innovative and effective safety programs in our industry. Our leading approach ties together productivity and quality into a safety program.

Our approach has three pieces. The first is our zero accident program. Our goal is to have zero accidents, and it focuses on each company having zero accidents -- each work site having zero accidents each day.

Surrounding the zero accident or ZAP program, we have what we called the Productivity Plus Roadshow in which we take safety directly to our 70 locations in conjunction with our insurance carrier. This program educates and challenges our employees to find new and creative ways to work smarter and safer, and it provides greater safety each day. You can imagine the physical exertion our highly skilled construction and technical workers undertake each day. For example, the average electrician bends 750 to 900 times a day and we look for ways to remove the bending -- the physical strain on them everyday. We are looking to work smart.

Finally, we share our best practices by distributing timely and pertinent safety publications, reinforcing work habits, tools and processes that foster a safe and productive work environment.

Our program’s yielding sensational results as evidenced by the graph highlighting the amount of the decrease in accidents balanced against the number of hours worked. These results have also been noticed by our insurance carrier, which just recently presented us with the Distinguished Service Safety Award, an award we accepted with great pride and honor.

But that's not the whole story. From an outside perceptive, that's with our customers, we are just as focused on their safety and offering them a full array of life safety solutions to ensure a secure and safe work environments from the most complex to the simplest systems, from extensive networks to a single site, to protect the two most important aspects of any business, its people and its physical assets. EMCOR Life Safety Solutions provide the integration, installation and service of fire detection and fixed suppression systems and the monitoring and service of intruder alarms, access control, video surveillance and air quality systems. We can monitor mission critical systems and if emergency situation calls for it, we can shut them down remotely with a touch of a button.

Additionally, today's facilities depend on more than integrated systems to be secure. Standalone, backup and emergency power systems are crucial for smooth, uninterrupted operations. Reliable 24/7 power is as much a life safety issue for today's business as are security and fire protection systems, and again we design, build, install and service these systems for any type of business. We protect our customers' work force, we protect our own work force and it matters to both us and our customers. Thank you, Frank.

And thank you, Tony. In my many years as a CEO at EMCOR and elsewhere, the most upsetting incidents with which I have had to cope, have been the occurrence of serious accidents and injuries at our work sites. Our commitment to employee health and safety begins at the top and it's an EMCOR core value that we provide to our customers in the form of effective life safety solutions.

With respect to our expectations for the rest of 2006, we are optimistic about the continued strength of our target markets, the solutions that we have reached to some of our past problems and challenges, and the liquidity that should help us to take advantage of investment opportunities. Of course, our excellent first half performance is a great platform from which to plan future growth. Accordingly, we have adjusted our anticipated revenue guidance upward by $100 million to a range of 5.0 to 5.2 billion for 2006. The record size and excellent balance of our backlog also enables us to revise upward our anticipated earnings from a previous range of $1.54 to $1.90 per share to a new estimate of $1.90 to $2.10 per share. This new range represents remarkable performance and a continuation of our long record of consistent profitable operations.

That's it from this end for now. As always, thanks for your interest and your support. And now there is time for your questions or comments and Gerald is here to tell you how to queue. Thank you.

[OPERATOR INSTRUCTIONS]. Your first question comes from Alex Rygiel with Friedman, Billings.

It has been a great quarter.

Thank you, Alex.

Couple of questions. First, can you talk about what's holding back the U.S. electrical margins this year? And directionally, how quickly you think they can catch up to maybe the last few years?

I am going to let -- that's a question of -- in the past, I would have taken directly, Alex, but now that Tony is fully established here as our President and COO, I am going to let him take it.

Thanks, Alex. Electrical had the only segment decline year-over-year for the quarter. We are not concerned about the electrical operations. It's more a mix and timing issue. We added a couple -- one significant project last year in the second quarter. We have good backlog with the mix of work we have now with our record high in commercial. So, we execute electrical work as well or better than anybody and we continue to anticipate doing that for a long time in the future.

And to follow-up on that question; four or five years ago in that business line, you were doing a lot of work for data centers, telecom like customers and obviously that business dried up pretty quickly, but it would appear as if very large technical telecom/data type work is starting to come back. Can you comment on that?

Alex, this is Frank. We certainly do see that coming back. My view of that market in that five-year time frame is that huge amounts of money were spent on very high-end, fully redundant systems supporting those data centers back in the late 90s, and those systems ran for quite a while and ran quite well. But the bursting of the telecom bubble early this century resulted in; number one, not very much new construction; and number two, not a whole lot of maintenance on some of those data centers and now technological advances in data handling and transmission together with new data handling demands are leading to a second wave, if you will, of design and construction and maintenance of those data centers.

So, yeah, we are seeing what you are seeing, which is a resurgence of demand for high-end facilities of that kind and of course, this accrues directly to EMCOR because of the predominance of the systems that we install and maintain, not just electronic systems, but also major electricity supply systems and HVAC systems to control the substantial heat that is generated from large data center operations. So, we are seeing the same thing you are seeing in that regard.

And one last question. Up in Canada, I know you do a little bit of work for electric utilities, we are starting to see capital spending by electric utilities pickup in both Canada and the U.S., would you be interested in using some of your cash to expand to that end-market?

We think it's an interesting market in Canada, including the nuclear end, and I think that we are developing some pretty significant experience and expertise in the nuclear plant maintenance that may just help us in the U.S. in the future. Direct major plant power generation activity has not been a part of -- or major part of our mix in the past and I frankly don't think it will be in the future, except for the possibility of a possible resurgent U.S. nuclear program, which is certainly a few years down the line, but which I would expect EMCOR to be directly involved in. We remain interested at all times, of course, in smaller Cogen and distributor power programs.

Great. Thank you again.

You are welcome, Alex.

[OPERATOR INSTRUCTIONS]. Gentlemen, there are no additional questions. I would like to now turn it back over to management for any additional remarks.

Terrific. Thank you, Gerald and thank you all for your interest in EMCOR and your support. Watch this space, there are some interesting things to come and meanwhile were pleased and proud of our results today. Thank you all.

Ladies and gentleman, thank you for attending the EMCOR Group 2006 second quarter conference call. You may now all disconnect.