EMCOR Group Inc (EME) 2006 Q3 法說會逐字稿

Good morning. My name is Thea, and I will be the conference operator today. At this time, I'd like to welcome everyone to the EMCOR Group quarter-earnings conference call. All lines have been placed on mute to prevent any background. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

At this time, I would like to turn the conference over to [Bob Joyce]. 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 third-quarter results, which were reported this morning.

I would like to now turn the call ever to Kevin Matz, Senior Vice President Shared Services, who will introduce management. Kevin, please go ahead.

Thanks, Bob, and good morning, everyone. Welcome to EMCOR Group's earnings conference call for the third quarter of 2006. For those of you who are accessing the call via the Internet and our website, welcome. We hope you have arrived at the beginning of the slide presentation that will accompany our remarks today.

Currently, everyone accessing the slides 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. This is one of those times, so please advance to slide two.

Slight two depicts the executives who are with me to discuss the quarter and nine-month results. They are Frank MacInnis, Chairman and Chief Executive Officer; Tony Guzzi, President and Chief Operating Officer; Leicle Chesser, our Vice Chairman; Mark Pompa, Executive Vice President, Chief Financial Officer and Treasurer; and our Executive Vice President and 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 Presentations. You can find us 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, so 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.

Other risks and factors associated with EMCOR's business are also discussed in the Company's 2005 Form 10-K, its 10-Q for the third quarter ended September 30, and in other reports filed from time to time with the Securities & Exchange Commission.

With that said, mercifully, please let me turn this call ever to Frank.

Thank you, Kevin. We are all better people for having heard from you this morning.

Good morning, everyone, and welcome to our 47th 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 will 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 two.

The focus of today's call will be on EMCOR's third-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 our third-quarter and year year-to-date financial results from operations, followed by a review of the continuing evolution of our project backlog, a special mention of some notable project awards from the recently ended quarter. Our President, Tony Guzzi, will discuss many contracts, which illustrate both our Company's diversity and services, and also our strength in hot markets like wastewater treatment, hospitality and gaming.

Then, Tony will talk about our recently announced acquisition of S.A. Comunale Co. and what we think it means to our fire protection and building security sector strategy.

Finally, I will comment on some of the major factors that we think will define EMCOR's operational and financial performance for the remainder of 2006 and into 2007, including the upper revision of our 2006 earnings guidance that 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 two that a number of our senior officers are here to help me with the answers.

So let's get started. Please go to slide three, the third-quarter income statement. EMCOR enjoyed a very strong and profitable third quarter, our 45th consecutive profitable quarter and the third consecutive quarter in which all of our business segments showed positive results. The quarter exhibited continued strong demand for our services across the broad spectrum of our market participation, especially in our U.S. markets, leading to sharply increased profits over year ago levels, significantly higher cash flow from operations and balance sheet liquidity, and record levels of well-balanced and diversified contract backlog.

Overall, our current performance is a validation of the strategic steps we have taken in the past and a source of optimism about the future. In my comments about year-to-year comparisons, our prior year financial results have been adjusted to reflect our February 2006 2-for-1 stock split.

EMCOR's operating income for the 2006 third quarter was $36.6 million, a 24.7% increase over the third quarter of 2005 and an increase in operating income as a percentage of revenue from 2.4 to 2.9% during the same period. Revenues rose 4.9% to $1.27 billion, while general and administrative expenses were $110.7 million or 8.7% of revenues, compared to $101.5 million or 8.4% of revenues in the year ago quarter. The increase was comprised largely of compensation-related expenses, including stock-based compensation that reflected the strong performance of the Company securities during the period.

Net income in the third quarter of 2006 was $22.6 million or $0.69 per diluted share, including restructuring charges of $600,000 or $0.01 a share and costs related to the adoption of FAS 123(R) of $400,000 or another $0.01 per diluted share. In the year earlier quarter, net income was $30.9 million or $0.97 per diluted share, but it included an income tax benefit of $17.5 million or $0.55 per share, a loss from discontinued operations of $1.2 million or $0.03 a share, and a restructuring charge of $300,000.

Please go to slide four, the year-to-date income statement. Our year-to-date results reflect similar dramatic improvement in our operational results. Revenues for the nine-month period were $3.64 billion, 5.1% higher than in 2005. While operating income rose 49.3% to $74.2 million or 2% of revenues from $49.7 million or 1.4% in 2005.

Net income for the year-to-date 2006 was $46.4 million or $1.42 per diluted share, including the restructuring charges previously mentioned. FAS 123(R) charges of $2.1 million or $0.06 per diluted share and a loss from discontinued operations of $600,000 or $0.02 a share.

In 2005, nine-month net income was $40.7 million or $1.28 per diluted share, including the $0.55 per share income tax benefit referred to earlier, together with restructuring expenses of $1.7 million or $0.03 a share, had a loss from discontinued operations of $1 million or $0.03 per share.

Cash flow from operations, a remarkable success story for the year-to-date 2006, was $148.7 million, a 59% increase over 2005 operational cash flows of $93.3 million, reflecting the very high quality of our reported earnings.

Our improved operational results were reflective of the continued profitability of all of our major business segments and of significant margin improvements in two of those segments. Although U.S. Electrical operating profits for the quarter fell to $11.6 million or 3.7% of revenues compared to $21.3 million or 7% of revenues in 2005, due to the substantial completion of a profitable project and poor performance on a couple of construction jobs in Miami and Atlanta, U.S. Mechanical continued its dramatic improvement in performance as operating income nearly doubled to $21.8 million or 4.6% of revenues compared to $11.2 million or 2.6% of revenues last year. We are extremely proud of the success of our efforts to maximize the profitability of the Mechanical operations, a very important sector of our business.

For several years, we have been describing our efforts to establish and to develop a broad-based Facilities Services businesses as a balancing factor to the innate cyclicality of our construction operations. These efforts continued to bear fruit during the recent quarter. EFS revenues of $244.5 million were 22.5% higher than than 2005 third-quarter revenues of $199.6 million, while operating income of $14.5 million or 6% of revenues increased by 79% from $8.1 million or 4.1% of revenues last year.

We are very pleased with the revenue growth rate, including 12% organic growth, the balanced performance between our mobile and site-based services divisions, and the record operating profits in our Facilities Services segment this quarter.

Canadian operations improved significantly over the loss they reported a year ago, while the UK company reported a $1.3 million operating profit, about half the level of profitability in 2005 due to write-downs taken on a pair of rail construction projects during the 2006 quarter.

Overall, the third-quarter 2006 operating results, the best third-quarter financial profits in EMCOR's history, illustrated the beneficial effects of our Company's diversity and broad market presence.

Let's go to slide five, our balance sheet comparison. A moment ago, I mentioned our excellent operational cash flow performance for the year to date. This translated into an exceptionally strong and liquid balance sheet at quarter-end. Balance sheet cash of $245 million was $141 million greater than at the 2005 year-end. We are essentially debt free, with only about $2 million of capitalized leases. Balance sheet working capital increased nearly $100 million during the nine-month period to $444 million, while shareholders equity rose $70 million to $685 million. And contract backlog, one of the indicators of EMCOR's future performance opportunities, rose dramatically during the third quarter to a record $3.4 billion.

Please go to slide six, our six-year contract backlog bar graph. This graph illustrates the evolution in size and content of our contract backlog over a period that included a major recession for EMCOR in 2003 and 2004. By the end of 2004, EMCOR management had managed to down our exposure to certain marginally profitable sectors, notably the K-12 educational institutional market, and we awaited the resurgence of construction and Facilities Services contract opportunities at gross and net margin levels that will enable us to confidently book increased levels of backlog.

As you can see on slide six, calendar year 2005 and the 2006 year-to-date have been marked by very strong growth in traditionally higher margins sectors for EMCOR operations, especially private sector commercial work, the yellow bar segments, and the fast-growing hospitality and gaining sector, shown in magenta.

Together, these high-priority sectors accounted for 54% of EMCOR's $3.4 million backlog at quarter-end, their highest values in our history and a good balance with our continued strength in other promising sectors like health care, transportation and water and wastewater treatment. I believe that EMCOR's broad and balanced backlog portfolio, the product of years of disciplined estimating, bidding and project management, is a promising indicator of future growth and performance.

Here to talk to us about some notable contract awards and the new acquisition from the recent quarter that illustrate our strength and diversity is our President and Chief Operating Officer, Tony Guzzi. I will be back in a few minutes to talk about earnings expectations and to wrap up. Let's go to slide seven. Tony?

Thanks, Frank. As Frank mentioned in his earlier backlog discussion, water and wastewater treatment backlog is up 18% from the third quarter of 2005. Water is a finite resource, and many are aware of the issues surrounding the handling process and treatment of water, and it will remain with us for generations to come.

Additionally, the water and wastewater treatment market has a national footprint, and our operations have the expertise and capability to design and install these projects in many locations.

A case in point are the first two projects shown on slide seven. On the East Coast of Florida in Vero Beach, our Poole & Kent Florida subsidiary will be providing the mechanical systems of the expansion of the Indian River County reverse osmosis membrane plant, taking the water treatment capacity from 3 million gallons per day to 12 million gallons per day, while on the West Coast, in San Marcos, California, our University Mechanical subsidiary will be providing the design build services, including process piping, HVAC and plumbing, for the new 100 million gallon per day Twin Oaks Valley water treatment plant. As these projects show, we expect to continue to see water and wastewater treatment projects as a significant segment of our backlog.

Switching to another important market, which is health care, and another one of our long-term markets, our Gowan operation in Houston, Texas, will be providing all the plumbing, HVAC design and systems installation for a new 806,000 square foot tower for the new Memorial Hermann Hospital in Houston.

By the way, when completed, this 33-story tower will be the tallest high-rise building built in Houston in 20 years.

EMCOR Facilities Services has been awarded a six-year facility service contract for the California court system in the San Francisco Bay area. Our scope of work encompasses all operation and maintenance for over 100 facilities in the portfolio and a number of our sisters' companies will participate with us in this contract. For example, [Dyna Electric] San Francisco had performed and will continue to perform relamping and elector retrofit projects -- electrical retrofit projects, and EMCOR Services Mesa will provide controls and boiler upgrades in these buildings.

It is interesting to note this opportunity came as a direct result of our successful brand awareness and marketing program, coupled with good on the ground selling and execution. We can pay dividends. We will pay dividends. Our contract for the U.S. Army Corps of Engineers at Fort Riley, Kansas will have our essential mechanical operation, providing the entire mechanical package for the construction of three new buildings -- barracks buildings -- and each barrack is designed to house 156 soldiers.

In West Memphis, Arkansas, [Laure Electric] will be making electrical renovations to the existing first floor of the (indiscernible) Greyhound Park. Laure's scope of work will include new upgraded lighting and electrical systems for 900 gaming machines, plus a new restaurant.

Going back to our backlog, we have seen tremendous demand in hospitality and gaining. Everyone on the call is familiar with the growth in Las Vegas, and we have talked about our participation there. We have a leading position for both Mechanical and Electrical construction.

However, that is not the whole story. We are also seeing demand in the hotel lodging sector across the country, and the following three products are illustrative of our position in this sector of the industry.

Our Gibson Electric operations Chicago is performing design build services for the new Staybridge Suites Hotel. This new 190,000 square-foot hotel, 16 stories, will house 208 suites, including a two-story parking garage and over 6000 square feet of retail space. Gibson's scope will include electrical generator insulation, power execution systems, lighting and fire alarm systems.

In San Diego, Hilton is constructing a new convention hotel adjacent to the existing downtown convention center. Our (indiscernible) San Diego operation will provide the entire electrical package, including AV, Telecom and data, CATV, fire alarm and security systems.

In summary, we are providing the entire electrical life safety systems for this new 1 million square-foot, 30 story, 1200 room hotel.

And finally, our (indiscernible) George operations is providing all the lighting, control systems and power distribution for the new Aquarium Hilton Garden Inn.

These last three projects all feature fire alarm systems as part of their scope of services. Fire alarm systems are part of our fire protection and alarm detection services. They run across the network of our subsidiaries under the umbrella of EMCOR Life Safety Solutions.

Our solutions are designed to protect the business' two most important aspects -- its people and its assets. To increase our scope and presence in this market, in October we announced the acquisition of S.A. Comunale, a leading provider of fire protection solutions. So go to the next page, page eight -- page nine, we will -- page eight and we will talk about Comunale.

S.A. Comunale is a $150 million provider of fire protection and mechanical services, which also includes $20 million of sprinkler system services and inspection. Their services are provided in many locations across the country as fire protection systems services and installation travel (technical difficulty) heavy pre-certification and the installation processes result in Comunale working (technical difficulty) of the 48 states -- 48 of the 50 states.

Headquartered in Akron, Ohio, it is a large company with over 800 technical and field personnel working out of major branches in Columbus, Ohio, Philadelphia and Reading, Pennsylvania, and nine other smaller branches in Ohio, Pennsylvania, New Jersey, Michigan and West Virginia. Their services fit well into EMCOR's portfolio.

Comunale offers a full array of fire protection and mechanical services, including design, installation and maintenance for fire protection, alarm detection and special hazard systems, as well as mechanical services for HVAC, plumbing, process piping and design build applications. They have leading positions in commercial, health care, government, hospitality and higher education, and they have a long-standing reputation as a premier fire protection, construction and services company. Their skilled and experienced management had developed a full-service culture, and we welcome them to the EMCOR family.

With the addition of Comunale, we have built on our already extensive fire protection platform, and it gives us -- it allows us to bring this capability to a greater extent to our customers and also to leverage our Facilities Services platform to grow more (technical difficulty). With that, Frank?

Thanks a lot, Tony. As I mentioned a few minutes ago, our revenue and margin performance during the year-to-date and our project backlog development, together with numerous external indicators of market strength and demand for our services, have led us to an optimistic view regarding our financial results for the remainder of 2006 and into 2007. As a result, I have today revised our financial performance guidance for calendar year 2006 to a revenue range of between $5 billion and $5.2 billion and to a range of earnings per diluted share of $2.05 to $2.15.

As I do so, it is worth remembering that I started this year with earnings guidance of $1.54 to $1.90 per diluted share, which in itself represented net income growth adjusted for the 2005 tax benefits I discussed earlier of between 12% and 35% year over year. In other words, we started this year optimistically. We have seen optimism become reality, and we have continued to raise our estimates of profitability as the year has proceeded.

We also feel hopeful about 2007, particularly if our backlog and organic growth opportunities can be supplemented by a creative utilization of our cash, stock and credit to reduce transactional growth.

That is it for now. Thanks for your interest and support. It is now time for your questions or comments, and Thea is here to tell you how to queue. Thank you.

(OPERATOR INSTRUCTIONS). Alex Rygiel, Friedman, Billings, Ramsey.

A quick question with regards to your guidance in the fourth quarter or your full-year guidance. Your full-year guidance is suggesting revenues of $5 billion to $5.2 billion. For you to get to $5.2 billion, that would be a huge revenue figure in the fourth quarter. Is that realistic?

I think that a realistic -- well, first of all, I think the range is realistic, certainly, or I would not have said so. But I think that where we sit right now, we are not looking for a huge revenue increase in the fourth quarter.

But if you were to get to $5.2 billion, that would imply that you would have to do $1.550 billion in revenue in the fourth quarter. With that said, I would have thought that your EPS guidance might have been a little bit higher.

I think that is right, Alex. I think that a very significant increase in the fourth quarter in revenue terms is unlikely over the third, but it remains within the realm of possibility as a consequence of some of the volatility that we see in fourth quarters, together with a modest contribution from the Comunale acquisition and the like.

Great. That does it for me for right now. Thank you, Frank.

(OPERATOR INSTRUCTIONS). At this time, I am showing no further questions. I would like to turn the call back over to the management team for any closing remarks.

Terrific. Thank you, Thea, and thank you all for your interest in and support of EMCOR Group. Watch this space for additional interesting news as we go along through the fourth quarter. Thanks, again.

Thank you for participating in today's EMCOR Group third-quarter 2006 earnings conference call. You may now disconnect.