EMCOR Group Inc (EME) 2006 Q4 法說會逐字稿

At this time, I'd like to welcome everyone to the EMCOR Group 2006 fourth quarter earnings conference call. [OPERATOR INSTRUCTIONS]

Now I would like to turn the conference over to Eric Boyriven of Financial Dynamics. Please go ahead, sir.

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

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

Currently, everyone accessing the slides 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 with me to discuss the quarter and full-year results. They are Frank MacInnis, EMCOR's Chairman, and Chief Executive Officer; Tony Guzzi, President and Chief Operating Officer; Mark Pompa, our Chief Financial 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 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's 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 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 affects 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 2006 Form 10-K filed this morning and another report filed from time to time with the Securities and Exchange Commission. With that complete, please now let me turn the call over to Frank MacInnis. Frank?

Thank you, Kevin, for that restrained yet forceful presentation. Good morning, everyone. And welcome to our 48th regular quarterly conference call for investors, analysts, and other friends of EMCOR Group. This is also the 12th year-end earnings call over which many of our management team members have presided and our 46th consecutive profitable quarterly report. 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 indicate the relevant slide for webcast participants. Right now we're still on slide 2.

The focus of today's call will be the EMCOR Group fourth quarter and full year 2006 earnings press release and 2006 Form 10-K that we issued and filed earlier this morning. We will conduct this call in our customary format. First, a presentation and discussion of those operating results and our year-end balance sheet and my comments on the major factors that contributed to our very strong 2006 financial performance. Then we will discuss the evolution and current status of our contract backlog portfolio and what we think it means with respect to our future performance. At that point, our President and COO, Tony Guzzi, will take over to present and discuss some notable recent contract awards that illustrate the strength and diversity of EMCOR companies. And he will follow with a feature presentation of an EMCOR company that illustrates some of the major trends in EMCOR today, dealing with mechanical. Then I will be back to comment on our revenue and earnings expectations for 2007 and to discuss the factors that I think will be the drivers of our performance in 2007 and beyond. At that point, there will be an opportunity for you to make comments or to ask us questions and as you can see from slide 2, I have a number of our senior officers on this call to assist me with the answers. So, let's begin.

Please move to slide 3. The fourth quarter was an excellent quarter and capped a great year for EMCOR. In reviewing my notes for my 2005 year-end earnings call a year ago, I see is that I founded an optimistic note about 2006, with earnings expected to start slowly in the first quarter as is our typical pattern. And accelerate toward year-end in response to strong demand for facility services and improved results in U.S. mechanical. In my initial 2006 earnings guidance, I projected double-digit earnings growth at both ends of the guidance range. And that's the way it turned out, except that the digits are much higher than we projected at the start of the year.

EMCOR's fourth quarter revenues were $1.38 billion, 11.9% higher than in the fourth quarter of last year. With notable growth in our U.S. facilities services and U.S. mechanical segments. General and administrative expenses rose slightly year-over-year in dollar terms, but fell from 10.1% to 9.2% as a percentage of revenues. Operating income rose more than 40% to $43.8 million or 3.2% of revenues, significantly better than the 31.2 million and 2.5% of revenues reported a year ago.

Fourth quarter net income was $40.2 million, or $1.22 per diluted share. More than double the net income from the 2005 fourth quarter. As disclosed in the 10-K and discussed in the press release, the fourth quarter results were positively effected by the reversal of certain tax-related items totaling $14.2 million or $0.44 a share. And negatively affected by restructuring costs of $0.02 a share and the adoption of FAS 123R, which was $0.01 a share. Notable quarterly performers from EMCOR's group of companies included F&G Mechanical in New Jersey, Rule and Kent in Miami, Shanba in Indiana, Hanson, Las Vegas, University in Arizona and San Diego, Gibson in Chicago, Contra Costa in California, Dyna Electric Denver and Salt Lake City, And EMCOR Energy Services and Facilities Services.

Please go to slide 4. The year 2006 was the best in EMCORs history in terms of revenues, profits, and cash flows. Organic revenue growth was $224 million or 4.8%. Contributing to an overall 6.9% revenue increase to $5.02 billion. Full year operating income was $118 million, a 45.9% increase over 2005 and 2.4% of revenues compared to 1.7% last year. Net income for the year 2006 was $86.6 million or $2.65 per diluted share. Compared to $60 million or $1.89 per share in 2005. Net income in both years was positively affected by adjustments to various tax-related items as described in the earnings press release.

Had the 2006 and 2005 income tax benefits been excluded, which we believe provides a better basis for year-over-year comparability, earnings per share from continuing operations would have risen 62.8% from $1.37 per share in 2005 to $2.23 in 2006. The Company's adoption of FAS 123R in 2006 resulted in a charge to earnings of $0.07 per share in the past year. Net cash flow from operations in 2006 was a remarkable $209.3 million, compared to $145.7 million in 2005, reflecting a very high quality of earnings and contributing greatly to the liquidity of our year-end balance sheet.

All EMCOR's major operating segments contributed to the dramatic increase in operating income this year. U.S. mechanical operating profits rose by a factor of 4 from about $20 million to more than $82 million. U.S. Facilities Services operating profit rose about 50%, from $26 million to $39 million. And Comstock Canada turned around from a loss in 2005 to a small operating profit in 2006. U.S. electrical margins and operating income fell, due primarily to operating losses at a Miami subsidiary and the completion of a large Western U.S. project. And U.K. operating profits were slightly lower than in 2005 as a result of certain rail division project writedowns. Significant subsidiary contributors to our excellent operating results in 2006 included all the quarterly performers previously mentioned, plus our mobile services division, site-based services and our new government operations business. We're pleased and proud with the performance of all of our operating units during 2006, a very good year for EMCOR and for the non-residential construction and services industry in general.

Please move to slide 5. Not surprisingly, perhaps, record revenues, profits and operating cash flows contributed to the strongest and most liquid year-end balance sheet in our history. Our year-end cash was $273 million, a $170 million increase over year-end 2005. While working capital increased more than $100 million to $454 million. EMCOR is essentially debt-free and has the cash and unused credit to seize new opportunities as they arise. The consequence of years of senior management attention to the maximization of liquidity. Contract backlog, calculated consistently with past periods and with our usual conservatism rose $737 million or 27%, to a new high of $3.5 billion at the end of 2006.

Please move to slide 6. In mid-2003, EMCOR management announced our intention to initially downsize and thereafter rebalance our contract backlog in order to improve the inherent risk reward ratios of our project portfolio. This meant initially shrinking our backlog through reduction of estimating and bidding activities, especially in certain low margin and higher-risk markets like public institutional work in general and K-12 educational facilities in particular.

As shown on slide 6, this resulted in an initial slowdown in new order bookings as we waited for markets to redevelop in more attractive sectors, like private sector, commercial, and hospitality. This year, our efforts came to full fruition. Overall backlog rose very significantly, reflecting strong and broad market demand for our services. And the commercial and hospitality sectors, which typically provide higher operating margin opportunities, comprised 56% of our record year-end contract portfolio. We think that our 2006 year-end backlog is well balanced and represents an opportunity to profit from a broad spectrum of market opportunities.

Now, here's Tony Guzzi to discuss a group of new and notable contract awards to EMCOR companies that illustrate that broad spectrum of services and market presence. And unusually for an earnings call, this call also includes a sobriety test -- in about 30 seconds, you need to listen carefully and see if Tony can say Potawatomi. Tony?

Thanks, Frank. You already pointed out our unique growth and strength in the hospitality sector. While we are uniquely positioned in Las Vegas, we also have a long and extensive resume working outside Las Vegas with Native American groups building casinos across the country. We currently have a project in Milwaukee, Wisconsin, where our Illingworth company has been awarded the new 500,000 square foot three-story casino addition and plumbing renovation of the 325,000 existing square foot casino expansion at the Potawatomi bingo casino. Our mechanical and plumming scope will include the construction of numerous kitchens, bars, restrooms, an in-house butcher shop, food court, multiple gaming rooms, along with a new 1800 space parking garage.

We continue to see growth in data center construction. At our Dyna Electric Colorado operation, we will be working on the U.S. Department of Agriculture's new data center in Lakewood, Colorado. We like data centers because they're heavy users of mechanical and electrical systems and life safety systems that need to be installed to exact tolerances and typically they are fast track projects. These are truly mission critical facilities with mission critical systems. Our scope for the USDA will include general lighting, power, redundant switch gear, UPS, remote distribution panels, battery backup, a 15 kilowatt generator set, fire alarm, security, and telecommunication systems.

Speaking of security, in Concord, California, Contra Costa will be installing 35 surveillance cameras, light poles and fixtures over a two square mile -- a two-mile square campus for the Concord Naval Weapons Station. Contra's work will also include installation and hook-up of the backup generation system.

In Las Vegas, our Dyna Electric company will be installing a Life Safety systems for the new City Center Sinatra garage. We will be providing and installing the security, sound, fire alarm, and telecommunications systems. By the way, this is a green project. And as you know, green is something we've discussed previously. We don't see green as a trend. We think it's here to stay in both construction of facilities and the maintenance of the facilities. Green is tied to energy efficiency and we think it just makes sense for our customers. EMCOR is uniquely positioned to capitalize on this growing trend in our industry.

Our University Mechanical operation in San Diego has been contracted to do the plumbing, HVAC and process piping associated with the 16,000 square foot Farville manufacturing plant expansion. Our work will also include the building of a new R&D facility. Our work will include the installation of three air handling units, exhaust fans, two 225-ton air core chillers, two steam bores and associated pumps. In Chicago, Gibson Electric will be working on the new Illinois State tool highway, extending route 355 South from route 155 to route 180. This new route will provide the southwestern suburbs of Chicago their first north-south expressway. Gibson will be providing the electric and communication work for the new mainline open road tool collection plaza and four exit/entrance toll collection ramps.

The ING financial services company is constructing a new office building in our New England mechanical services territory here in Connecticut. We will be performing the complete eating, ventilation, air conditioning, piping, and plumbing, and installation of all digital control systems for this new 550,000 square foot facility. When completed, this will be the single largest office building constructed in Hartford in over 20 years. Please turn to the next slide.

We will now feature New England Mechanical. New England Mechanical is a unique company and is part of our mobile services group. It's headquartered in Vernon, Connecticut with branches in Connecticut, Massachusetts, and Rhode Island. It has over 40 years in operation and annual revenues approaching $62 million. Its services include single source, mobile, and sight-based services, projects and retro fits. Its workforce had 312 licensed technicians, 234 vehicles servicing high-performance, mission critical environments. We design, install, operate, maintain, and service facilities through New England Mechanical and we also provide energy management and building automation. This portfolio of business includes 1500 maintenance and service contracts to over 1,000 clients and we include 24/7 emergency response, which we do across the board in our facility's operation. Our primary markets demand good service. It's biotech, healthcare, commercial, higher education, financial services, manufacturing, and industrial and we take care of both public and government facilities. With that, I will turn it back to Frank, although I butchered the name, I did okay. And if you could turn to slide 9.

Thank you, Tony. We're very proud of our association with [Nemsy] and with Potawatomi, and with the talented professionals across EMCOR Group. On slide 9, I'd like to speak for just a few more minutes about our expectations for 2007. This slide illustrates four of the major factors that we think will affect our 2007 performance. Firstly, backlog execution.

As discussed earlier, our contract portfolio is balanced and broad. Labor availability continues to be satisfactory and we are optimistic about our chances of deriving substantial profit from our backlog in the coming year. Second, outsourcing driven markets. Our facility services revenues grew 22% year-over-year, meeting our ambitious growth targets. We think the market will continue to strengthen for providers of specialized services like EMCOR, especially those services that are associated with major current customer concerns like energy efficiency, asset management, and sustainability.

Third, as shown by our year end balance sheet, EMCOR hasn't relaxed our legendary focus on liquidity. We will continue to find new ways to control costs and use our economies of scale to bring optimal services to our customers and value to our stockholders. And fourth, investments and acquisitions. We are cash and credit rich and we know that this gives us the opportunity and, I believe, the obligation to put our balance sheet to work for our owners. This means a continued search for investments that are priced right to produce short- and long-term profits and value for EMCOR. We think there are good companies out there who want to be owned by EMCOR and we're going to find them. We think that the successful use of these four economic drivers in 2007 will benefit EMCOR this year and thereafter.

With respect to specific expectations for 2007 financial performance, slides 10 and 11 are reconciliation sheets to explain and illustrate our suggested adjustment of EMCOR's 2005 and 2006 results. To exclude the impact of tax-related item reversals that positively affected net income in each period. We think that such adjustments provide a better basis for the comparison of our 2005 yearly results with 2006 and with our expected 2007 performance, which does not include any such tax-related adjustments. As shown on slide 10, exclusion of tax-related items in 2005 yields adjusted EPS of $1.37 per share. On slide 11, the same exclusion process yields diluted EPS from continuing operations of $2.23.

On slide 12, we provide our initial revenue and profit guidance for 2007 and compare it with the preceding years. With respect to revenues, we expect the 2007 growth rate, excluding any investments or acquisitions, of 6 to 10%, yielding a revenue range of 5.3 to $5.5 billion. With respect to earnings per share, we currently estimate that the revenue growth expected from our markets, combined with the effective management of major economic drivers will yield earnings growth, compared to adjusted 2006 in a range of 10% to 26% or an EPS range of $2.45 to $2.80 in 2007. Listeners should be aware that our 2007 profit estimates also assume an effective tax rate of 41%. I expect that our quarterly earnings pattern this year will roughly replicate that of recent years, with quarterly earnings significantly higher in the second half of the year than in the first six months. We're positive and optimistic about EMCOR's opportunity to perform well in 2007 and thereafter and to deliver additional value to our beloved stockholders. Thank you for your attention, and for your interest and support of EMCOR. Now it's time for your questions or comments and Janice is here to tell you how to queue. Thank you.

Thank you. [ OPERATOR INSTRUCTIONS ] Your first question comes from the line of Alex Rygiel with Friedman Billings and Ramsey.

Good morning, Alex.

Good morning, Frank. Great quarter.

Thank you.

A couple of quick questions. First, you have a tremendous amount of cash on your balance sheet. What are you going to do with it all?

Well, there are only about three things that one can do with a cash balance like that -- I think they are the possible payment of dividends, purchasing -- repurchasing of stock or investing them for future value for stockholders. I've never been a fan of shrinking the balance sheet by buying back stock, but I think that there is a time at which a company with a multi-billion dollar portfolio of projects in the Facilities Services arena, combined with a world class position in specialty construction can at least consider the payment of a dividend and we intend to consider it. As far as investments and acquisitions are concerned, it's not for lack of trying that we continue to have a lot of cash and not a very significant record of acquisitions in the last couple of years. Private equity purchasers have driven prices up to the point where EMCOR management, which is on the conservative side, as you know, has been reluctant to spring for the kind of prices that have prevailed in recent years. But I think that the market is cooling and I also think that there's a category of company or operation out there that would be suitable for EMCOR ownership and not suitable for private equity ownership. And we're looking for those.

Great. With regards to the electrical margins, can you comment on the project losses in Florida and whether or not those are full -- if that project is totally complete now? And what we should think about as it relates to margin expansion in '07 for your electrical segment?

Sure, Tony is going to comment specifically -- I would remind listeners that with respect to project losses, accounting requirements oblige us to identify and report the entirety of project losses, once they are identified, even if the project is not yet complete. Tony, with respect to Miami?

Yes, we had a very poor year in Miami. Mainly driven by labor productivity. We had projects get delayed. We're typically a 150 to 250-person shop in Miami. Our peak labor peaked out at about 450 people, that's projects that should have been completed ahead of time, through delays and everything else completed all at once. Therefore, we were managing more electricians, electricians that weren't familiar with us and electricians that performed poorly, quite frankly, on the jobs. We expect that situation to reverse and Frank talked about it, it doesn't matter whether the job is done or not, once we know what the loss is, we estimate the loss, we take the full provision at that time.

As far as margins and electrical. We finished a good western project, but historically our electrical margins are better than our mechanical. We're benefiting from some good trends in mechanical right now, but we should expect margin expansion in electrical off of this 2006 base.

Great. And any chance you have your mix of backlog within Electrical, Mechanical, and Facilities Services?

Gosh, no. We've never broken that down, Alex, but you can assume that the strength of our commercial and hospitality market position is reflected in all three sides of the business.

So, help me to reconcile your backlog strengths of 27% up year-over-year, versus your what appears to be very conservative revenue guidance in '07?

Well, we looked at our revenue -- our organic revenue growth in '06 of 4.8% and basically doubled it and put that in the middle of our anticipated revenue range. It is certainly possible that our record backlog at the beginning of '07 will burn faster than our $2.7 billion or so of year-beginning backlog in '06 did. If that's the case, we might see another percentage point or two of organic revenue growth. I do think that the top end of our revenue growth range is a pretty good estimate of good performance in that area in '07.

Thank you, nice quarter.

Thanks a lot, Alex.

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

Hello, Jeff.

Good morning. And again, a nice quarter.

Thank you.

When you were mentioning '06 comparisons with '05, there's been some nicks that you just talked a little bit about. Miami, there was some rail project writedowns in U.K., some things like that. As this market strengthens and it seems as though you're not only bidding is going to -- or bidding on projects or -- for -- or profit margin bids into projects is going to get better, that maybe you will see better terms. And it -- have you experienced in the later part of past cycles where bad projects and problems tend to dwindle, versus the early part of the cycle, where maybe the bidding is more competitive?

Absolutely. I think that there are a number of mid- to late cycle effects on the quality as well as the quantity of contracts. The -- one of the major changes is in the payment terms and the liquidity terms associated with contracts. We haven't discussed it in general but one of the measures that we keep internally of EMCOR's success in effectively administering our projects is our net over billed position, which accountants in the listening group will understand to be the difference between billings in excess of costs on the liability side and costs in excess of billings on the asset side. That number has consistently been higher in EMCOR than I believe any other construction or services company that you could name and we hit an all time high in our net over billed position at the end of 2006, as well. Significantly greater than $200 million. That, I think, is an indication of our relative strength with respect to the negotiation of effective and profitable and cash positive contract terms with our customers and all of that is reflected not only in our profits for '06, but in that remarkable cash flow, that I think is one of the major stories of last year.

All right. Thank you. And just one other question. Some other companies that I follow have indicated that they -- they kind of mark the beginning of the project phase of this non-residential construction cycle, about mid year last year and typically this lasts several years. I just wondered if you would comment on the accelerating projects, within your market and where you would mark this turning point in past cycles. Do you think we've still got long legs left in this current non-res cycle?

I do think that this cycle has legs, Jeff. Some of the significant forward indicators that I watch and try to assess, forward market strength, include the employment statistics, notably in the service industries, which continue to be indicative of significant growth and the need for new facilities to house those personnel. Interest rates remain reasonable and have not been a far to new corporate spending on facilities, as far as we can tell. The architect order book index continues to show very dramatic growth. Some of the most historically significant growth ever indicated by that index. Construction put in place looks positive. Everything that I'm looking at suggests that this rally in our non-residential construction business has legs and if you look at our annual backlog chart that we used as an exhibit in our talk this morning, that suggests that we're in early to mid-cycle, as for the industry as a whole. And on top of that, I think that EMCOR is generally classified as a late cycle participant in markets like this because of the nature of the services that we perform. So, in a nutshell, I think that EMCOR's participation in this market has some time to run, as yet.

Thanks a lot, Frank.

Pleasure, Jeff.

Your next question comes from the line of Rich Wesolowski with Sidoti Company.

Good morning, Rich.

Good morning. Frank, I apologize, I got kicked off the call for a second for the pronunciation of my name. I just want to confirm that the difference between last years and this years electrical margin was due solely -- or at least the overwhelming cause was the situation down in Miami?

It was a big part of it.

Were there any other big parts of it, Tony?

We had some fairly favorable jobs that were part of it. Most of it was Miami and then as we disclosed last year, we had an insurance settlement in first quarter that aided electrical margins. So, those two things would probably be two of the biggest reasons why the electrical margins are different year-over-year.

Okay. Shifting to mechanical, how much of the improvement in the profitability, which seems to be ongoing as you look through the year, how much of that is an improving market, and pricing versus improved execution on the job?

It's hard to apportion the -- the contributions of those two with precision because after all we're talking about probably more than 1,000 jobs. But I think that each can be deemed to have contributed materially to that improvement. On the one hand, there is definite impetus to market demand for energy-efficiency-related services and the mechanical systems that we design, install, and maintain are not only the biggest contributors to building performance, but they are also the biggest users of power within a modern building and the obvious place to introduce energy-efficient retrofits or maintenance policies. So we've seen a resurgence in demand in that area for energy efficiency, asset management, and green-related projects. And that has been combined with significantly improved management. We announced a management change, Rich, you might recall in U.S. mechanical in 2004. And since then, we've had dramatically improved results, hand in hand with dramatically improved management and administration of those projects. So, they're both significant contributors.

Okay. Can you talk about the competition both in the projects business and also in the facility service -- how it's changed in the past year, if that's dramatic, and what is your outlook for 2007?

I would say that there's been no dramatic change in either the competition for our Construction Services, which although very large are predominantly local in character, as in the past, our local specialty construction companies continue to compete against local competitors. We are, I believe, unique in the size and scope of our network of construction companies, but those operations remain primarily local. On the facility services side, we continue to have no direct comparable companies in terms of the size and scope and nature of the services that we provide in the facility services arena. Sometimes we find ourselves in competition with the control companies. Sometimes with real estate companies, but I know of no specific nationwide facility service provider that is in a position to provide the range of services that we do on a daily basis to thousands of customers.

Okay. And finally, how quickly is the labor market tightening? And when do you see the availability of labor actually constraining the growth in your backlog?

I don't see it. I mentioned earlier this morning, Rich, that on the call -- that labor availability appears to be continuing to be satisfactory. We, of course, in the last few years, we've seen fairly significant increases in productivity in our business, associated with the user friendliness of various systems and products that are used in our electrical mechanical business, but even during the height of the last boom, in the late '90s through '02, EMCOR was well-served by our Union relationships, which tend to ensure that we get access to the best-trained and most productive personnel, even when labor is tight. This time around, and these are very good times for the industry in general, as well as EMCOR in particular, we still haven't seen any significant tightening or inappropriate increases in labor costs. So, I'm pretty optimistic about getting through '07 in good shape and probably into '08.

Excellent, thanks a lot.

You bet.

Your next question comes from the line of Alex Rygiel with Friedman Billings and Ramsey.

Thank you. I did have a follow-up question. Frank, when you think about the movement in copper prices through 2006, I've got to assume that that did hurt your margins in your electrical segment. Is there any way to quantify that in 2006? Or better yet think about how that can help you in 2007 now that copper prices have come in a little bit?

That's an interesting question. Anybody who buys copper wire by the mile has to think about how much copper is costing. And if we were the kind of service provider that was contractually obliged to provide copper wire at a certain price for, I don't know, four or five years at a time, as is typical of some of the big, lumpy, general construction companies and the like, I would say yes, we'd probably have to not only price our exposure to commodity price changes, like copper and gasoline, for that matter, in connection with running 6,000 service vans, and other commodities that we use in large quantities. However, I want to invite you to consider the likelihood that EMCOR has a built-in hedge against vulnerability to commodity prices in that unlike most large companies in our business, our revenues derive from literally thousands of relatively small projects and they're not only relatively small, but they are of reasonably short duration. Meaning we get an opportunity to reprice constantly our exposure to both commodity changes and, for that matter, labor productivity changes and costs per hour. And we have -- it's not that we haven't considered hedging or otherwise trying to protect ourselves against the evolution of various important commodity prices, copper and gasoline being the most important ones, but we've shied away from that because we have concluded that EMCOR has that kind of built-in hedge, courtesy of the relatively short duration of our projects. That in the long run renders us capable of transferring to the customer with pretty significant efficiency, most price changes in the commodities that are most important to us, like labor and copper and the like.

Thank you.

It's a pleasure.

[ OPERATOR INSTRUCTIONS ] Your next question is a follow-up question from Rich Wesolowski with Sidoti Company.

Thank you. SG&A dollars grew very slightly in the fourth quarter versus the increases of quarterly 9 or $10 million that we have seen in the first nine months of 2006. Was there any big change there? And what's the outlook for '07?

I think that the -- the outlook is for continued close control of SG&A. Most of the significant changes that you've seen in '06 are associated with variable compensation, reflecting the profitability of the -- of our individual subsidiaries and divisions as well as the Company overall. So, the variation in SG&A for '07 will be more or less variable in lock-step with profitability.

Okay, thanks.

You bet.

At this time, there are no further questions, I would like to turn the conference back over to management for any closing remarks.

Thank you, Janice. Thank you all for your interest in and support of EMCOR. Watch this space for interesting developments to come. Thanks again.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.