EMCOR Group Inc (EME) 2007 Q3 法說會逐字稿

Good morning. My name is Michael and I will be your conference operator today. At this time I would like to welcome everyone to the EMCOR Group Third Quarter 2007 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. I would now like to turn the call over to Mr. Bob Joyce with FD.

Good morning, everyone. I would like to welcome you to the EMCOR Group Conference Call. We're here to discuss the company's 2007 third 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. Please go ahead, Kevin.

Thank you, Bob. And good morning, everyone. Welcome to EMCOR Group's earnings conference call for the third quarter of 2007. For those of you who are accessing the call via the Internet at our website, welcome as well, 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 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, Mark Pompa, our Executive Vice President and Chief Financial Officer, Mava Heffler, Vice President, Marketing and Communication, and our Executive Vice President and General Counsel, Sheldon Cammaker.

For call participants who are 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. 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 2006 Form 10-K, its 10-Q for the third quarter ended September 30, 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 MacInnis.

Thank you, Kevin. Your dramatic presentation never fails to move me and I'm sure the rest of your audience.

Good morning, everyone. And welcome to our 51st regular quarterly conference call for investors, analysts, and other friends of EMCOR Group. We're conducting today's call, 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 number two.

The focus of today's call will be on EMCOR's third quarter 2007 earnings press release and Form 10-Q, which were issued and filed earlier this morning. We'll conduct this call in our customary way. First, a discussion of our third quarter and year-to-date financial results from operations, followed by a review of the continuing evolution of our project backlog and special mention of some notable project awards from the recently ended quarter.

Tony Guzzi, our President and COO, will discuss these new contracts, which illustrate both our company's diversity and services, and also our strength in growing market segments like ethanol production, healthcare facilities, and water treatment plants. Then Tony will profile one of our most interesting and technically sophisticated subsidiaries, Gibson Electric and Technology Solutions in Chicago.

Finally, I'll come back to comment on some of the major factors that we think will drive EMCOR's operational and financial performance for the remainder of 2007 and into 2008, including the upward revisions to our 2007 revenue and 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 with the answers.

So let's begin. Please go to slide three. The third quarter income statement.

EMCOR enjoyed a very strong and profitable third quarter. Our 49th consecutive profitable quarter and the best third quarter in our history by all relevant measures of corporate performance. The quarter reflected strong demand for our services across the broad spectrum of our market participation. Especially in our U.S. Construction and Facilities Services segments, leading to sharply increased, overall profits compared to last year. We also reported continued excellent cash flow from operations and balance sheet management, and record levels of balanced and diverse contract backlog.

In my comments involving year-to-year comparisons, prior year financial results have been adjusted to reflect a two-for-one stock split that we completed on July 9th of this year. Net income for the third quarter from continuing operations, was a record $37.1 million or $0.55 per diluted share, an increase of 68.3% over the year earlier quarter.

Revenues of $1.501 billion, another record, were about $261 million or 21.1% higher than the third quarter of 2006, including organic revenue growth of 13.8% year over year.

Operating income was also exceptional, rising 58% to $54.9 million dollars or 3.7% of revenues, compared to $34.8 million and 2.8% in the previous year.

Selling, general and administrative expenses rose 5% to $114 million or 7.6% of revenues compared to 8.8% in the 2006 third quarter, reflecting the success of our past restructuring initiatives, and our cost control efforts.

Net income for the quarter, inclusive of discontinued operations was $38.3 million or $0.57 per diluted share. During the quarter, the company's effective tax rate was 34% due to operating losses in EMCOR's U.K. subsidiary.

Cash flow from operations was $70.5 million. Excellent performance that contributed materially to the strong and liquid balance sheet that we'll be discussing in a few minutes.

Please go to slide four.

Our year-to-date financial results reflect similar dramatic growth in our operations. Revenues for the nine-month period were $4.16 billion, 17% higher than the year ago period, including 12.2% organic growth. Operating income rose 63.3% to $113.7 million or 2.7% of revenues compared to 2% in 2006.

Net income from continuing operations in 2007, year-to-date, was $74 million, a 62% increase over the year earlier, and $1.11 per diluted share.

Discontinued operations represented an additional $0.04 of net income per diluted share for a total of $1.15 year-to-date.

Selling, general administrative expenses were 8.4% of revenues for the 2007 year-to-date period, compared to 8.9% in 2006. And cash flow from operations for the nine-month period was $132.7 million, reflecting the very high quality of our reported earnings.

As you have probably already concluded from the consolidated results, most of our operating segments reflected strong revenue and profit growth during the third quarter. U.S. Mechanical Construction and Facility Services revenues rose 28%, and operating income increased 53% over the prior year.

U.S. Electrical Construction and Facility Services revenues were 12% higher, while operating income nearly doubled, up 84%.

U.S. Facility Services Revenues and operating income increased 26% and 19% respectively, compared to 2006.

Canada Construction and Facility Services reported sharp improvement. Revenues rose 65% and operating income rose from a nominal amount in 2006 to $3 million in 2007.

U.K. Construction and Facility Services was the only exception to the profit growth pattern in the third quarter. Revenues declined about 5% and continuing problems at a single project in the former Rail division, since merged into the U.K. Construction operations, led to a quarterly operating loss of $3.2 million compared to a $1.3 million profit in 2006.

Unfortunately, the Rail Division loss, which we believe is fully provided for in our operating statements, more than offset a good quarterly profit report from our U.K. Facility Services operation.

We are very pleased with the revenue and profit growth reflected in our third quarter and year-to-date results and their validation of our growth strategies.

Please go to slide five.

As previously reported and discussed, we closed the Ohmstede, Ltd. purchase during the third quarter using $300 million of new term debt and about $155 million of cash on hand. Despite this major cash outlay, our balance sheet remains strong and liquid at quarter-end due in large part to the excellent cash flow performance discussed earlier.

Balance sheet cash was $223 million, down about $10 -- excuse me, about $50 million from year-end 2006. And we have only nominal debt, aside from that associated with the Ohmstede purchase.

Shareholders' equity rose to $824 million while the goodwill account rose substantially, once again primarily due to the Ohmstede purchase.

Our ratio of total debt to total capitalization was 27% at quarter end, well within our comfort range. However, we intend to aggressively reduce debt, primarily through continued strong cash flow from operations, to normalize our balance sheet at a lower leverage ratio in preparation for new opportunities.

Please move to slide six.

Contract backlog increased $1.08 billion or 32% year-over-year to an all time EMCOR high of $4.48 billion. Our backlog continues to be diverse and balanced, reflecting our presence in a number of reliable growth markets. At quarter end, 59% of the $4.48 billion total backlog was represented by our private sector commercial, hospitality and gaming, and industrial services segments where Ohmstede and our other industrial services firms reside.

Healthcare projects showed strong growth in the year-to-date period, as did transportation work, while institutional was relatively flat, and water and wastewater actually declined slightly during the period. We think that this record backlog report represents a basis for an optimistic view about the remainder of 2007 and into 2008.

Every day EMCOR companies receive contract awards that illustrate the scope and depth of our service offerings. Here to discuss some interesting and significant project awards from the third quarter is our President and COO, Tony Guzzi.

Please go to slide seven.

Tony?

Thank you. Thanks, Frank. As our backlog attests, we continue to see solid bidding activity across all sectors. Across all business sectors and both in the private sector and the good public work that we seek. I'm going to go through a few representative projects that we started in the third quarter.

As we've discussed many times, healthcare is a long-term core market for us, comprising 16% of our total backlog. And we have mentioned many times that healthcare facilities are full of sophisticated electrical and mechanical systems, just the kind of jobs we like.

In this quarter, our Marelich Mechanical Company is providing the heating, ventilation, air conditioning, and plumbing systems for the new 80,000 square foot complete healthcare facility for the San Quentin State Prison. This project is a LEED-certified green project, something EMCOR takes leadership on in our sector.

Staying in the healthcare sector, our Shambaugh & Son subsidiary, as part of its scope is working on the St. Joseph Regional Medical Center in Mishawaka, Indiana. Shambaugh will install six chillers, three steam boilers, and 11 air handlers as part of its scope for this seven-story 630,000 square foot regional medical facility.

In Richmond, California -- and it serves as a great example of EMCOR support of downstream refining operations, which has only been strengthened with our Ohmstede acquisition -- our Contra Costa company will be providing the Chevron Company the electrical needs, the feeds for their electrical system in a 15KV power center. Contra will be installing the feeders, transformers, and switchgear to power and balance all existing loads in the refining plant hydro tracking area.

Interestingly, as these refiner plants -- as these refineries continue to run flat out in something we see going on for a long-term, all loads will be cut over while the plant is running. No downtime.

From industrial to commercial, our Forest Electric company will be providing a complete tenant fit out and electrical renovation for 220,000 square foot interior fit out for a limited branch. Forest is a leading New York City electrical contractor and leads the market in complex data solutions, data centers, and tenant fit out work.

Also in New York, our Welsbach Electric company will be furnishing, installing, and repairing the traffic signal equipment in the five boroughs of New York City through March '09. While I don't know the exact figure, that's a lot of traffic lights.

Similarly and 3,000 miles away on the west coast, our Dynalectric Los Angeles company will be working with the City of Los Angeles providing traffic signal upgrades at 51 intersections with the installation of new fiber optic cable to connect these intersections back to the city's traffic management center. This project is part of L.A.'s automated traffic surveillance and control system that monitors traffic in real time and selects the appropriate signal timing to optimize vehicle flow. Not an easy job, it's something EMCOR does very well and has done numerous times.

By the way, we see this as a real growth market across our company.

In Arizona, our University Mechanical company is providing the mechanical systems for a new 24 million gallon water treatment plant. University scopes includes the installation of all process equipment and all piping for the water and chemical piping system branches as well as the HVAC and plumbing for the entire facility.

And in Chicago, and it will be our future company today, Gibson has recently started two projects that shows the diversity of Gibson. The first one is a complete design, build, construct of the electrical systems for a commercial project at 155 North Wacker Drive. This 48-story, high-rise commercial office building has over 1.1 million square feet of usable tenant space. It includes two levels of subgrade parking. The planning process for this project was extremely challenging to the project size, complexity, and location in the center of the city.

Gibson has also just stared a segment of the modernization of O'Hare's North Airfield. The project consists of construction of two remote transmitter receiver sites for the FAA. Construction of a new North Airfield -- Airport surveillance radar system, construction of new duct banks at various locations for routing of 220,000 feet of fiber optic transmission line.

These projects represent the wide expertise of Gibson and its ability to take advantage of a broad market opportunity.

Let's talk a little bit on page eight about Gibson, and so if you could turn to page eight.

Gibson is the leading electrical mecha- service and construction company in the Chicagoland area. It had 95 years of operation. It's the largest full-service provider of technology and electrical solutions. And its revenues average about $100 million. It has about 400 electricians, 100 telecom technicians, and has a service fleet of over 30 trucks.

Its services include a comprehensive array of electrical, telecommunication services, AC/DC power systems, CCTV, security fire alarm, network design, temperature control, energy management, and traffic. Also specialized, they can do design bill work, maintain mission critical solutions, build the most sophisticated data centers, build the most sophisticated and maintain the most difficult trading floors, and they have great telecom experience. And Gibson is a company that EMCOR will use to support its other companies around the country, especially in the datacom and data center work.

It's a technology leader utilizing CAD and 3-D design, something that EMCOR's electrical mechanical companies have taken a leadership position in the industry on. And it serves all markets that represent our backlog -- healthcare, biotech, commercial, education, entertainment, hospitality, financial services, manufacturing, transportation, government, and high tech. Gibson's a winner -- has been a winner for a long time, and its led by a terrific team in the Chicagoland area.

And Frank, back to you.

Thanks, Tony. We're very proud of Gibson, one of our most progressive companies.

Now let's move to slide nine.

Clearly EMCOR's had a great year-to-date, our best ever in terms of both revenue and profitability. And our project backlog is not only of record value but is also of high quality with continued growth in the proportion of larger and/or more complex projects for sophisticated, time conscious customers.

We are aware, of course, of the problems associated with the sub prime debt markets and with the home building sector, and the cooling of overall growth in the U.S. economy seems likely. However, demand for EMCOR's services remains very strong as evidenced by our earnings growth and backlog. And we are a very diverse company with many opportunities for continued growth.

Accordingly, we've adjusted upward and refined our revenue and earnings guidance for full-year 2007 operations. We now expect 2007 revenues to be about $5.8 billion, a $100 million increase over the high end of our previous revenue range. And we estimate the 2007 earnings from continuing operations will be in the range of $1.75 to $1.80 per share, compared to our previous estimate of $1.48 to $1.60.

We have a high-level of confidence in our ability to achieve the low-end of the revised earnings range, and believe that continued market demand and good execution will put the upper-end well within reach.

That's it for now. As always, thank you for your interest and your support. Now there's time for your comments and questions. And Michael is here to tell you how to queue. Thank you.