EMCOR Group Inc (EME) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen. My name is Brian, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group's First Quarter 2007 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. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. Thank you.

I will now turn the conference over to Mr. Eric Boyriven of FD. Sir, you may begin.

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 2007 First 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 First Quarter of 2007.

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 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.

Slide two lists the executives who are with me to discuss the quarter and three-month results. They are Frank MacInnis, Chairman and Chief Executive Officer; Tony Guzzi, President and Chief Operating Officer; Mark Pompa, our Executive Vice President, Chief Financial Officer, and Treasurer; Mava Heffler, Vice President, Marketing and Communication; and our Executive Vice President and General Counsel, Sheldon Cammaker, who tells us he's celebrating his 39th birthday today. Happy birthday, Shelly.

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. Such statements are based upon information available to EMCOR's [management and its 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 effect[s] of general economic conditions, changes in the political environment, changes in the specific markets for EMCOR services, adverse business conditions, increased competition, availability of adequate surety bonding, and risks associated with foreign operations.

Certain of the risks and factors associated with EMCOR's business are also discussed in the Company's 2006 Form 10-K, its 10-Q for the first quarter ended March 31, 2007, and in 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, Kevin. Like War and Peace, that was overly long, I thought, but it ended happily.

As EMCOR's CEO, I've always prided myself, and, in fact, I believe, established a reputation for our personal integrity and probity, so I expressly disavow the reference to Mr. Cammaker's 39th birthday.

Good morning, everyone, and welcome to our 49th 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 on the 2007 first quarter earnings press release and first quarter Form 10-Q 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 quarter-end balance sheet, including my comments on the performance of some of our regions and subsidiaries during the quarter.

Then, I'll discuss the evolution and the current status of our contract backlog portfolio, with special emphasis on those sectors which we expect to perform best over the next few periods.

Then I'll turn the call over to Tony Guzzi, our President and COO, for his views on some notable recent contract awards from around our large and diverse company, followed by a feature presentation on one of our most interesting and best-performing companies, Shambaugh & Son, from Fort Wayne, Indiana.

Finally, I'll comment on some of the major factors that we expect to influence EMCOR's performance during the remainder of 2007, including our progress towards some of our major objectives.

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 begin. Please move to slide three.

EMCOR had an excellent first quarter, in fact, the best first quarter revenue and earnings in our history and a great start to 2007. It was also our 47th consecutive profitable quarter.

Our first quarter revenues of $1.32 billion were 14.5% higher than a year ago, including 11.3% organic growth, plus the excellent results from our recent S.A. Comunale acquisition.

Gross margins rose 15.1% over first quarter 2006, while income from continuing operations was $12 million, or $0.36 per diluted share, an increase of 57.1% over the year-earlier quarter.

Net income was 71% higher. The 2006 quarter included a $600,000 loss from discontinued operations.

Although general and administrative costs grew in dollar terms as a result of increased business activity and the Comunale acquisition, their cost as a percentage of revenue declined from 8.9% to 8.6% year over year.

Operating income rose nearly 54% to $18.9 million, or 1.4% of revenues, versus 1.1% in 2006. We had increased net interest income in the quarter because of our excellent cash flow performance, and our effective income tax rate for the 2007 quarter was 41%, compared to 38% in 2006.

Our major business segments performed very well in the first quarter. Revenue growth was greatest in our U.S. mechanical division, whose 2007 revenues, inclusive of the Comunale acquisition, rose 36.5% over the previous year. U.S. Facility Services' revenue growth was 15%, entirely organic, as we continued to see strong demand for our services in this strategically important market.

U.S. Electrical revenues rose modestly, while adverse market conditions in Western Canada depressed revenue of the Comstock Canada, and the 9% increase in our U.K. revenues was primarily the result of exchange rate differentials.

Segment operating income for the quarter reflected the healthy balance between our U.S. operational segments. U.S. Mechanical operating income rose 80% year over year to $13.3 million, U.S. Electrical results rose 30% to nearly 11 million, and U.S. Facility Services' operating profits were up 91% to $9.2 million. We had excellent mechanical operational performance during the quarter from Comunale, from F&G Mechanical in New Jersey, Gowan in Houston, Hansen in Las Vegas, Penguin in New York, and our featured company, Shambaugh.

On the electrical side, special mention goes to Dynalectric, Denver, Las Vegas, Salt Lake City; Gibson in Chicago; and Hyre in Indiana.

Of course, most of our operating subsidiaries performed really well in the quarter to create these excellent results.

In Facility Services, site-based earnings rose significantly to balance continued strength in our Mobile Service business.

Due to the depressed Canadian market conditions I mentioned earlier, Comstock Canada sustained a $1.2 million operating loss for the quarter, compared to an $800,000 profit in the year earlier. Despite this loss, improved market conditions and recent contract backlog additions make us optimistic about Canadian operations for the remainder of the year.

The U.K. company continued to be profitable although at a lower level than a year ago due primarily to reduced profit expectations on a pair of contracts. Once again, we expect the British company to be profitable for this year.

We are gratified by the increased operating profits and the improved operating profit margins at our three largest operating segments, representing some 82% of our revenues.

Please turn to slide four.

Although EMCOR is typically a net investor in our portfolio of projects during the first calendar quarter due to normal working capital requirements, cash flow from operations in the first quarter was, in fact, $8.3 million positive, a $20.5 million improvement over 2006, which was a good year in itself. This was an important factor in the strength and liquidity of our quarter-end balance sheet, continuing the positive trends indicated at the 2006 year-end.

Cash improved slightly over the preceding quarter to $277 million, working capital improved, and the balance sheet remained essentially debt-free. Shareholders' equity was at a record $725 million.

We set another record during the quarter, reflected on slide five. Despite the dramatic increase in our first quarter revenues, contract backlog rose 9.9% on a sequential basis and 37% year over year to an all-time high of $3.84 billion, representing continued strong demand for our services in nearly every market sector.

Just as important as the size of the contract backlog portfolio is this balance between sectors, and our quarter-end report reflects the designed balance between private sector commercial and hospitality contracts on the one hand and continued strong positions in long-term growth markets, like healthcare, water and wastewater, and transportation. The strength and diversity of our backlog growth reflects the major differences between our markets and those of the homebuilders, a much different segment of the economy.

Every quarter, EMCOR companies are awarded numerous new contracts that reflect the diversity of our services and our market presence. Here to discuss some noteworthy awards from the recent quarter is Tony Guzzi. Please go to slide 6.

Thanks, Frank.

As you discussed, backlog growth in the first quarter has been distributed among our market sectors. This balanced growth is epitomized by the projects identified on the recent project award slide.

Let's start out West in Antioch, California, where our Marelich Mechanical Company is building the new 540-megawatt gateway generating station for Pacific Gas and Electric. Marelich will be installing two heat recovery generators and structural steel pipe racks for this new facility.

Staying on the West Coast, our Dynalectric Los Angeles Company is installing an automated traffic surveillance and control system around the immediate boundary of Los Angeles International Airport, or LAX. This project, combining intersection traffic lights, cameras, and control systems, will allow the airport to manage traffic in a more efficient and effective manner.

Our Poole and Kent South Company in Miami will be providing the general construction and full mechanical construction for a reverse osmosis water treatment plant for the City of Cape Coral, Florida. Reverse osmosis technology is best known for its use in desalination projects, turning seawater into drinking water. However, it is also very effective in treating water quality by the removal of organics -- inorganics, bacteria, and other particles found in the contaminated drinking water. Pool & Kent has a very successful relationship with the City of Cape Coral, as this is the third project awarded to us in the last eight months.

In Denver, Colorado, at the University of Denver, our Trautman & Shreve Company will be installing the mechanical systems for Nagle Hall, a new mixed-use residential and educational facility. Nagle Hall is noteworthy as it is a green project and will provide 250 beds for residential use, as well as offices for counseling, teaching, and will also have a storage facility.

The [SORO] is expanding its refining plant in Martinez, California, and our Contra Costa company will be helping to build two 230-kilovolt KV substations supporting the new coker modification project. Contra will be responsible for providing all electrical work, including the installation of two 45-megawatt transformers, all conduit, [bus doc], bypass, which is grounding grid, and closed circuit TV.

In Salt Lake, Dynalectric will be providing the electrical work for the new Northsoft light rail project for the Utah transit authority. Our work on this light-rail expansion project will consist of the electrical substation upgrade, all overhead work, traction power, and the electrification of three passenger stations.

And in Baltimore, Maryland, at Johns Hopkins Hospital, our Poole & Kent North Company has been awarded the mechanical contract for the construction of two 15-story clinical buildings and the new main entry for the hospital. We believe this 1.5 million-square-foot medical facility is the largest healthcare construction project in the nation, and our work includes the installation of medical gas outlets, customer HVAC units, all piping, plumbing, and the installation of 3.5 million pounds of sheet metal ductwork.

Also noteworthy, the fire protection scope will be done by our Comunale fire protection and mechanical services company, our latest acquisition, and they're involved in design, fabrication, and installation of over 15,000 sprinkler heads and 34 miles of pipe.

We have two of our very best on this important project.

And at General Motors in Pontiac, Michigan, Shambaugh & Son will be providing the fire protection work for a new 527,000-square-foot powertrain, research, and development facility.

Now, turn the page, and I'll tell you a little more about Shambaugh.

We featured Shambaugh previously, and Shambaugh & Son is one of our best companies in Fort Wayne, Indiana. And the project we're going to outline now is a $44 million project that we did for T. Marzetti Company. It's a state-of-the-art primary food processing manufacturing facility in Horse Cave, Kentucky.

Noteworthy, it has just the 2007 Food Plan of the Year Award by Food Engineering Magazine. Shambaugh is the only four-time winner of this award in 1990, 1992, 1998, and now this year.

What's unique about this is it's a process plant, and most of the scope are the things EMCOR does every day, from mechanical and electrical work. We did this in a design/build manner. It was direct to the owner, which allowed us greater control and allowed us to maximize the efficiencies on both cost and design, and it minimized the number of modifications that we have to undertake as a specialty contractor. We self-performed on this project the mechanical scope, the electrical scope, we did the process controls, we brought the site utilities on, we put the telecom and teledata in, we installed the security system, the temperature control, plan automation, and the fire protection.

Having been to this job, it's quite a job, and our customer's happy, we're happy with the result, and it serves as a great referral for us for the future.

With that, I'll turn it over to Frank.

Thank you, Tony.

We're proud of our relationship with Shambaugh & Son, their loyal and intelligent employees, and their seasoned management. The broad scope of Shambaugh's technical abilities and their role as trusted advisors to their customers are strategic objectives for EMCOR as a whole.

On slide eight, we set out four factors that we think will directly affect EMCOR's operational financial performance for the rest of 2007 and into 2008.

Backlog execution will be crucial to the achievement of our revenue and profit growth objectives. We consider our contract portfolio to be well balanced and advantageously priced. Now, we need to perform it with our usual discipline and attention to quality.

Outsourcing-driven facility services are expected to continue to grow at a double-digit organic pace, reflecting both public and private sector demand for the kind of services that promote energy efficiency and facility performance. The recent award to EMCOR of a major contract from the U.S. Navy for several important and high-profile facilities, including Bethesda Naval Hospital and the Naval Observatory, is an example of the growth opportunities in this area.

Expense control, especially labor costs and general administrative charges, must be maintained if profits are to be maximized during periods of healthy demand. EMCOR management has the experience and discipline to avoid the dangers of overheated markets if they occur.

And acquisitions and investments are part of our ongoing strategic plan. We sense that the pricing impact of private equity purchasers may be abating somewhat, restoring some order to a previously disorderly acquisition market. We intend to use our cash position and our debt capacity, together with our valuable stock, as and when appropriate, for the maximum long-term benefit of our stockholders.

We continue to be optimistic about 2007 performance, and current economic indicators, together with the duration of our backlog, suggest that solid performance will continue into 2008. Although it is still too early to revise our previously issued 2007 revenue guidance of 5.3 to $5.5 billion and earnings guidance of 2.45 to $2.80 per share, we expect to review these expectations in conjunction with our normal reforecast cycle and to communicate, if appropriate, any changes to the market in the next six to eight weeks. In the meantime, we confidently reiterate our previous guidance estimates.

That's it for now. Thanks again for your interest and support. Now, it's time for your questions or comments, and Brian is here to tell you how to queue. Thank you.

Thank you, sir. [OPERATOR INSTRUCTIONS]

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

Good morning, gentlemen. A great quarter.

Thank you, Alex.

Frank, I am very excited about the year-over-year growth and your backlog being up 36%. Can you talk a little bit about how that look and feel of backlog has changed today versus maybe two or three years ago? Besides the mix, has the size of the project changed? Has the risk level of the type of project in there changed?

Well, that's a somewhat broad but also very fundamental question in terms of our success, Alex. You know, and many participants in the call will recall, that about three years ago, we became very concerned about an imbalance in our project backlog portfolio and moved to significantly restrain estimating and bidding activity, especially in segments of our business where we have not had long-term success. That is to say we actually held back on contracting capacity in anticipation of the resurgence of higher-margin markets that we like, notably private sector commercial and hospitality projects.

That strategy paid off dramatically in 2006 and in 2007 as we had opportunities created by the much stronger private sector of the economy to acquire projects, many of which are complex and/or large and long-term projects that will provide us with revenue and profit opportunities for a significantly longer duration than was the case in the past. We've seen our opportunity, and we've taken it, and the current backlogged portfolio that we're showing to the market is not only much larger but also much better balanced in terms of the scope of services and the inherent profit opportunities than the backlog that we were showing to the market some three years ago.

I will say that with respect to the market position that we are looking at these days, EMCOR companies are in a very strong position to compete favorably for the kind of projects that we like best, and those are projects that are notably complex, such as the big hospital project that Tony alluded to in his comments. We like those kind of projects. They are system-rich projects. Performance and quality is an absolute requirement, and that's where EMCOR companies do some of their best work.

We also are seeing dramatic growth in our position in the Las Vegas hospitality market, along with other gaming and hospitality markets in the country. Those are projects in which timeliness and top-notch quality are absolute requirements, and there are premiums available for performance of projects on time and to top-notch quality, and that's where we do best.

So we're finding that EMCOR, because of our financial strength and our ability to bond projects as and when required is putting us in a class by ourselves in terms of competition for the projects that continue to be created by a strong demand essentially across all our market segments.

That's helpful. And then as it relates to your acquisition strategy, could you please prioritize the characteristics that you find most important in a target?

Well, I think that number-one for me, I've said before that I think one of my major jobs as CEO of EMCOR is to get us ready for the next recession. There is plenty of demand for our services currently within this very strong economy. I'm just not able to see any indication of a slackening of demand so far, and believe me, I'm looking for it. But I think that going into the next recession, which I don't -- I don't know when it's going to happen, but I know it is going to happen, I want EMCOR to be as strong as possible in the kind of recurrent business activities that tend not to be weakened by a recessionary impact, and therefore, I'd like to see acquisitions that enhance our position in the services business, particularly maintenance, including perhaps some expansion of our position in both commercial and industrial maintenance activities.

I'd like to see a better presence for EMCOR in the oil and gas and the energy business, and I'd also like to see a continued expansion of our presence in the government business, typified by those U.S. Navy projects that we talked about in a press release and earlier in my address.

So we're looking for continued stability, Alex. We've performed very well for a very long time, and I intend for that stream to continue through the next recession.

Very helpful. Thank you very much, Frank.

You're welcome.

Our next question comes from the line of John Rogers with D.A. Davidson. Please go ahead.

Hi. Good morning.

Morning, John.

I just wanted to follow up on your comments relative to the cash generation in the quarter, and I'm curious if either the terms of the projects have changed that you don't have to fund as much working capital, or is something else going on because it was obviously a very strong quarter [inaudible] proportionally should we see also very strong cash flow from the backlog that you have now?

John, I think that -- and I thought for a long time that the cash flow characteristics of a services company like EMCOR are, in large part, attributable to the effectiveness of their contract administration. In a nutshell, if you can -- if you have a sufficiently strong and positive relationship with customers that you can write the payment terms of contracts in a way that allows you to bill earlier and collect earlier rather than later, that means that you've got a healthy overall services backlog.

Sure.

And that's been our policy. We've trained and incentivized our operating personnel for many years to perform this way.

A number that I didn't allude to in my address -- in the body of my address but that I'll mention now is that our net overbuild position at the end of the first quarter was also a record. We're net overbilled by $315 million. This is critical to ongoing cash flow performance and was a major factor in the advantageous cash flow from operations that we earned during the first quarter.

I think that in a nutshell, we've got a group of businesses in which we are such a strong participant, an important participant, in the relevant projects that we've been able to write advantageous payment terms, we've been able to collect early -- to bill early and collect early on those projects, and the very strong cash flow performance is a result.

And I also think that when you've got highly motivated customers who are in the strong economy, they've decided to make an investment in new or upgraded facilities, they want those facilities now, and they're willing to pay for them. So I think for all those reasons, both good contracting policies on our part and highly motivated customers, we're getting the best of both worlds here.

Okay. And with that better cash position, you mentioned the acquisitions, but would you consider share repurchases, dividends? I mean what's sort of the Board position on that now?

We have considered and will continue to consider the possibility of dividends. I personally am opposed to share repurchases, and I'll tell you why. I think that although we have been priced out of the market for the last year or so by private equity, I think that may be turning. We emphatically will not pay too much for acquisitions, but we emphatically do want to make acquisitions at the right price, and I think those acquisitions will be more advantageous for our stockholders, short and long term, than the short-term effects of the share buyback program.

I'm also a builder of balance sheets, John. I'm philosophically opposed to shrinking the balance sheet and reducing the Company's defenses against unusual pressures or threats. So dividend, maybe; share buyback, not in my personal opinion.

Okay, great. Thank you.

Thanks, John.

[OPERATOR INSTRUCTIONS]

At this time, there are no further questions. I'll turn the conference back over to management.

Okay. Thank you all for your interest and support of EMCOR. We're expecting great things this year. I'll be back to you as and when appropriate with, I expect, some good news. Thank you. Bye.

Ladies and gentlemen, this concludes today's EMCOR Group First Quarter 2007 Earnings Conference Call. You may now disconnect.