EMCOR Group Inc (EME) 2007 Q4 法說會逐字稿

Good morning. My name is Kristin, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group fourth quarter '07 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 tern the call over to Mr. Eric Boyriven of FD.

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 fourth quarter results which were reported this morning. I would now like to turn the call over to Kevin Matz, Executive Vice President, Shared Services, who will introduce management. Please go ahead, Kevin.

Thank you, Eric, and good morning, everyone. Welcome to EMCOR Group's fourth quarter earnings conference call. Those of you accessing the call via the internet and our website, welcome. And we hope you arrived at the beginning of the slide presentation that will accompany our remarks today. Currently we are on Slide one. 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.

Please advance to Slide two. Slide two depicts the executives who are with me to discuss the quarter and twelve 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 participates who are not accessing the conference call via, the internet this presentation, including the slides, will be archived in the investor relations section of our website under presentation. You can find 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 statement. 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 market 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 2007 Form 10-K filed this morning, and other reports filed from time to time with the Securities & Exchange Commission. With that said, please let me turn the call over to Frank. Frank?

Thank you, Kevin. Do you have a good singing voice? We might try that in the future.

I tried out for American Idol but I didn't make it through the first round.

I see, it's just as well. Good morning, everyone and welcome to our fifty-second regular quarterly conference call, for investors, analysts, and other friends of EMCOR Group. This is also the thirteenth annual year-end earnings call, over which many of our senior management team members have resided. An important aspect of EMCOR's long term strategic continuity that has lead to remarkably consistent profitability. More on that in a moment. 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 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 the EMCOR Group fourth quarter and full-year 2007 earnings press release, and 2007 Form 10-K that we issued and filed earlier this morning. We'll conduct this call in our customary way First, a presentation and discussion of those results and our year end balance sheet and my comments on the major factors that contributed to our excellent 2007 financial performance. Then we'll 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 CEO, Tony Guzzi, will take over to present and discuss some noteworthy recent contract awards that illustrate the strength and diversity of EMCOR companies and continued demand for our services across a wide range of markets. Then, I'll be back -- "I'll be back" -- to present and discuss the answers to two important questions. The first, which I have been asked numerous times in the last few months by analysts and investors familiar with our history is, in light of economic uncertainties and the possibility of a recession similar to that experienced in 2003, how is EMCOR equipped today to cope with such a downturn. The second is a related but more traditional one, taking into account all factors, internal and external, what are your expectations for EMCOR's revenues and profitability in 2008? Following my guidance discussion, there will be an opportunity for you to make comments or to ask us questions, and as you can see from Slide two, a number of EMCOR's senior officers are on this call to help me with the answers. So let's begin.

First thing is first. Please go to Slide three. More than 10 years ago, EMCOR management, many of whom are on this call today, announced and implemented a fundamental operating strategy that has guided us since then through good times and bad. Diversity equals stability, equals sustained results. In practical terms, we decided long ago that EMCOR could best protect itself against inevitable market cyclicality and volatility by providing the broadest possible range of services consistent with our skill sets to the broadest possible range of economic sectors, both public and private, and to be present in as many geographic markets as possible, all for the purpose of maximizing the stability and predictability of our results. Today, I'm pleased and proud to announce that the disciplined execution of our consistent operating strategy, has provided EMCOR and our shareholders with our fiftieth consecutive profitable quarter. Going back to the third quarter of 1995, and through numerous economic cycles since then. Truly, a noteworthy achievement, especially in these uncertain times, and a credit to the talent and dedication of all EMCOR employees.

Please go to Slide four. The 2007 fourth quarter was the best in our history, and capped an all-time record year for EMCOR. Record fourth quarter revenues of $1.77 billion were 31.2% higher than the year-earlier quarter, including 22% organic growth. Operating income more than doubled in comparison with 2007 to $86.1 million, or 4.9% of revenues, compared to 3.1% a year earlier. Although SG&A expense rose to $154 million from $124 million in 2006, these costs, as a percentage of revenues, actually declined year-over-year from 9.2% to 8.7%, reflecting good cost control during a high-growth year. Earnings per share, from continuing operations for the quarter, were $0.75, a 25% increase over 2006. If nonrecurring income tax benefits were excluded from the 2006 results, which EMCOR believes better reflects year to year comparability, the EPS growth rate would have been 92.3%.

Please go to Slide five. 2007 full-year revenues of $5.9 billion, another EMCOR record, were 20.9% higher than 2006 revenues, 4.9 billion, including organic revenue growth of 14.8%. Operating income for the year rose 78.8% to $199.8 million or 3.37% of revenues, compared with the prior year's 2.28%. After deducting $0.04 earnings per share from discontinued operations, 2007 earnings per diluted share from continuing operations rose 43.1% to $1.86 per share. Applying the same tax benefit exclusion as I mentioned a moment ago to 2006 full year EPS, would result in a year-over-year EPS growth rate of 70.6%.

On Slide six, we highlight some additional features of the remarkable quarter and year just completed. Our record revenue, including a strong organic growth component. Reflected extremely strong demand for our United States construction and facility services, and 28% year-over-year growth in our improving Canadian operations, while UK revenue growth was (slightly lower) (technical difficulties) than the company average. Our operating income margins, 4.9% for the quarter, and 3.4% for the year, were our best margin performance by far, and reflected excellent operating profit growth in all of our U.S. segments. 88% in U.S. electrical and facility services, 65% in U. S. mechanical and facility services, and 3%1 in U.S. facility services, despite a significant asset writedown. Comp stock Canada operating margins rose to 1.8% of revenues from 0.1% in 2006. Reflecting improved management and markets, while EMCOR UK reported a $12.9 million operating loss. Coming on the heels of three years of profitability performance, the UK results are particularly disappointing. Although our UK Facility Services and engineering divisions performed well, including the best year ever for facility services, major losses on completed contracts in the since disbanded Rail Division were severe enough to result in an overall loss. EMCOR management will be presenting and discussing various strategic alternatives with respect to the UK operations at the next meeting of EMCOR's Board of Directors.

Please move to Slide seven. Despite the UK performance, overall EMCOR performance was excellent. Pre-tax earnings up 76% to $201.7 million, another record. And the quality of those earnings was extremely high. Cash flow from operations totaled $259 million, our best ever, and a major contribution to the strength of our balance sheet.

Please go to Slide eight. In late September, we finalized a $300 million syndicated term loan -- by the way nearly two times over subscribed in a difficult financing market -- to fund the acquisition of Ohmstede. The record operating cash flows from 2007 enabled us to retire $75 million of that term loan before year end, and balance sheet cash, nonetheless, reached $251.6 million, exceeding our remaining debt balance. Goodwill rose significantly, due in large part to the Ohmstede purchase, while shareholders equity reached $885 million, and the company was net over billed at year end by $427 million, yet another record. Our debt to total capitalization ratio at year end was 20.4%, well within our comfort range, and year end contract backlog conservatively calculated reached a record $4.49 billion, an increase of 28.4% or just under $1 billion over 2006 including 23.8% organic growth.

Please go to Slide nine. We entered 2008 with the largest, most diverse and best balanced contract backlog in our history. Although office and commercial construction and facilities services contracts declined slightly in value year-over-year, the deficit was more than offset by gains in the hospitality sector, and Ohmstede-related growth in our industrial services portfolio. Cumulative private sector backlog at year end was $2.5 billion, or 56% of the total contract value. During the last year, however, we also add more than $500 million of new projects in reliable long term public market segments, like healthcare, transportation, government services and institutional projects, and water and waste water. A strong foundation for future revenue growth and tangible evidence of market demand for our wide range of services. Here to talk about some noteworthy recent contract awards across a broad range of markets is our President and COO, Tony Guzzi. Please go to Slide 10. Tony?

Thanks, Frank. The awards in the fourth quarter continue to represent the project service and geographic diversity which is present throughout all of 2007 and more importantly, present across EMCOR's long history. We had record levels of revenue, especially in the fourth quarter, but we grew backlog year-over-year, which is testament to the continued demand for the portfolio of our services. I'll walk you through a couple of projects now that we want here in the fourth quarter. Every quarter we see demand from healthcare, and healthcare is a good long-term core market for EMCOR, and it represents 15% of our total backlog. Why is healthcare good for EMCOR? It's a system-rich environment, that only the best contractors can do, that have the requisite design, design fabrication and prefabrication capabilities that EMCOR possesses. An example is the John Moore medical center. Contra Costa, the electrical company we own in Northern California, will provide the full electrical package for the renovation and expansion of John Moore medical center in Walnut Creek, California. Contra's responsibility will include the expansion of the hospital's Phase four, 347,000 square. ft. patient care tower that will feature expanded areas for the critical care unit, neo-natal nursery, emergency rooms, trauma, and surgery departments. We will also relocate the helicopter landing pad and power a new central utility plant and install the electrical service for an 800-stall parking garage.

Across the country, Tucker Mechanical will providing the plumbing, HVAC and fire protection for our 120,000 square. ft., two story casino edition to the East side of the Mohegan Sun casino in Connecticut. This is a fast-track job which fits perfect within EMCOR's well house. This is scheduled to open in the fall of 2008, and will feature 45,000 square. ft. of new gaming space, approximately 900 slots machines, retail outlets, and 16,000 square. ft. Jimmy Buffet's Margaritaville Restaurant. And I guess that is where Kevin will go to have his cheeseburgers. Down South in Jupiter, Florida, our Pool and Kent company will be providing the entire mechanical package including HVAC and plumbing for a nano filtration plant for the town of Jupiter. In a large waist water treatment project we often serve as the prime contractor, and we will here. We will also manage the installation of the electrical, (insrumation) control and emergency generator systems. We like these projects, we believe water and waste water is a long-term market for us, and can only be serviced by the most sophisticated mechanical and electrical contractors. For Unilever in Owens Borough, Kentucky, Shambaugh & Son will be designing building an ammonia refrigeration system, consisting of two stage minus 50 degree compressor system and allow products to be frozen prior to packaging. The project will also include additional mechanical work, including the design and installation of cooling tower, chilled water, and HVAC system. Shambaugh & Son is a terrific contractor, and it focuses it abilities in the refrigeration to bring that design build-skill to bear, and have great success at it. In Texas, at Fort Bliss, we're in the second year of a five-year expansion plan and Boarder Electric and Mechanical will be providing the total mechanical, electrical, and plumbing systems for the first two phases of this work, to include the mechanical, electrical, plumbing fit-op, out of the Battalion headquarter buildings, tactical equipment maintenance facilities and the new dining halls. As the Army continues to reset to places like Fort Bliss, we see this as the beginning of a long-term relationship. EMCOR is benefiting from the brack realignment -- the base realignment closing commission realignment, and we expect to continue to benefit as we're located in key areas across the country.

The next two projects highlight are skill and transportation systems. First in Los Angeles our Dian electric company will be installing traffic signals and street lights for the city of Santa Monica. The project is the construction of a downtown advanced traffic management, communication and traffic signal modification system. This project will allow the city to control automobile traffic flow from and signal timing from a centrally located facility. We're seeing more and more of these types of projects in our major cities across the country, and EMCOR has the ability to design and implement these systems. 3,000 miles away in New York City, our Welsbach electric company, has won a two-year maintenance contract for the traffic signals in the burrows in Manhattan and Queens, these contracts cover almost 6,000 signalize intersections 82,000 traffic signals. Welsbach's maintenance contract includes 24/7 staffing, timed response to all traffic signal defects within both burrows. You know, Welsbach has been performing this work for decades and it is another example of one of our electrical companies with the additional capability to perform long-term service work. The type of service work that will never go away, and all of these projects show the diversity of our backlog and we continue to win these awards.

Thank you, Tony. I hope we continue to make big whompom at the Mohegan casino in particular. As I mentioned at the beginning of this call, I've had a number of investor and analysts, sensitive, of course , to current market uncertainties, who want to know how EMCOR might perform if a recession materializes in 2008 as it last did for EMCOR in 2007. Recall that in 2003, EMCOR remained profitable in all four quarters, part of our 50-quarter run. But net margins declined significantly. The next two slides contrast the EMCOR of early 2003 with EMCOR as it enters 2008.

Please go to Slide 11. In response to performance issues during 2003, notably in our U.S. mechanical segment, we changed our senior management structure and formed EMCOR Construction Services in 2004. Since then we have dramatically reformed our corporate subsidiary senior management group. Today we're better managed than ever before. At the same time, as discussed on the backlog slide, we've made major changes in the size, scope, diversity and risk component of our business sector backlog breakdown. Overall, backlog value is 80% higher today than in 2003. While commercial and office work has remained at a constant level of 25% of backlog for both periods, we have eliminated a major 2003 backlog problem in K through 12 education, and we have transformed our institutional sector in to a profitable and promising .government services organization. Healthcare and hospitality have grown dramatically, both in size and in significance in terms of market reliability and margin availability.

On Slide 12, we continue to contrast 2003 and 2008. Since 2003, we've fulfilled a long-time strategic goal to increase the proportion of our revenues that is derived from service work. Despite strong growth in our construction revenues during the same period, we expect service work to be about 35% of total revenue in 2008, versus 25% in 2003. In terms of actual service revenues, five-year overall -- overall growth has been 75%, including 84% growth in mobile services. And our recent Ohmstede acquisition is expected to be a major contributor to service revenue and margin growth in 2008 and especially beyond. Finally, we're a much stronger financially than in the last recession. Cash is sharply up, debt is down, and shareholders equity has nearly doubled, all signs of a company that's prepared to weather a storm if that's what happens in 2008 or thereafter.

Please go to Slide 13. What do we see as the primary factors driving our business this year and next? Frankly, much more of the same drivers of our last 50 quarters of profit. As our backlog and Tony's presentation attest, market demand remains strong across a broad range of business sectors and geographies. Subsidiary management is well established and able to cope with execution challenges. We found in the past, that challenging economic conditions are stimulants to outsourcing, as customers try to concentrate on their core business and leave facility services to specialists like EMCOR. We'll continue to exert disciplined control over variable costs and overheads. And, we expect to be both liquid and credit worthy throughout the year, and ready to move opportunistically to take advantage of investment or acquisition opportunities in what could be a very interesting market.

On Slide 14, we outlined some of the positive and negative factors that we took in to account in establishing revenue and earnings guidance for 2008. This is a complex and difficult task in normal circumstances. Made more so this year by macro economic uncertainties, and the challenges of maintaining growth after a breakout year in 2007. Offsetting likely market head wins, especially in the latter part of 2008, we expect improved margin contributions from Ohmstede, EFS Mobile Services and improved performance in the UK. The size and scope of our contract backlog and its balance between reliable non-cyclical sectors like healthcare and transportation, and established margin contributors like commercial office, and hospitality give us confidence about our revenue base, and our Canadian company appears poised for a good year, continuing the positive momentum established in 2007.

On Slide 15, you'll see the product of the opportunities and challenges that we see arising in 2008. Maintaining growth momentum after a record year can be difficult, and no one can predict with absolute confidence the consequences of financial market turmoil, but we believe by taking everything in to account, 2008 EMCOR revenues will fall in a range of $6.3 to $6.5 billion, a 7% to 10% growth rate over 2007's record pace, while diluted earnings per share from continuing operations will be in the range of $2.08 to $2.28, a 12% to 23% increase over last year. We're proud of our company's performance in 2007, and grateful for the opportunity to create even more growth and value for our beloved stockholders in 2008 and thereafter. Thanks for your attention and for your support of EMCOR. Now it's time for your questions or comments, and Kristin is here to tell you how to queue. Thank

(OPERATOR INSTRUCTIONS)

We'll pause for just a moment to compile the Q&A roster. Your first question is from Rich Wesolowski with Sidoti.

Good morning, Rich.

Thanks, good morning. Frank, the bid margins on the work that you're putting in backlog, do you think those match what you are recognizing on income statement?

The backlog for the most part was booked during 2007, a year that saw a dramatic improvement in our overall margins, both for the quarter and for the year; and my answer is, yes, I believe that the project and backlog by and large represent the same kind of enhanced margin opportunities that we reported from our completed operations in '07.

Okay. I would like to try to reconcile that confirmation with the backlog mix. You know, the share of your backlog in what is normally considered the high margin and more cyclical categories, commercial, hospitality, (inaudible) is going down from '06, and if the backlog margins are holding up, does that translate to a higher margin on the more stable institution, healthcare, et cetera than you have seen in the past.

Rich, this is Tony. There are a couple of things that underlie our view on that. Correct commercial is down as a percentage of backlog, '07 to '08 versus '06 to '07. But there's a couple important factors when we think about mix. First of all in our industrial sector, Ohmstede is now part of the mix, in our back log in the industrial sector. That was non-existent for the most part -- that part of it -- it was non existent in '06 to '07, and today it's a substantial part. And if you remember on December 3, we released the 8A-K that talked about Ohmstede and the mix of business from Ohmstede and what the profitability looks like. So, we think that's a major contributor. We do think that the healthcare work that we're booking today, versus the work we were booking two years ago, though very difficult jobs, the contractual terms and mix of that business tend to be a little better than they were a couple of years ago, when the work would have been booked the effect of 2007 results. And the final thing is we're seeing continued demand for our small project and task work. Especially driven by energy retro fit projects, work that never makes it in to the backlog. That has nice margins because of the savings opportunities that are available to our customers.

Okay, thank you. And secondly, we just saw a slight unwinding of the net over bill position from the third quarter. Is that a blip, or is that the start of a longer trend?

No, it's customary that our net over bill position actually does move downward as we get later in the year. If you've got -- a relative comparison as you to look at 12/31, versus 12/31which was a significant increase.

Yes, we see this varying seasonably in fairly are predictable pattern, Rich, but-- this is Frank again by the way -- but the number over all is a huge one. And I think the best fourth quarter ending number in our history by a wide margin and I challenge you to find another company that has this kind of balance sheet strength and contract administration results. This is truly a dramatic part of what the -- the benefit that we bring to our stockholders.

Great. Thank you.

Thank you, Rich.

Your next question is from Alex Rygiel with FBR.

Good morning, Alex.

(Inaudible) and everybody else great quarter, congratulations.

Thank you.

One of the concerns that popped up a couple of months ago was a project that was canceled. Could you comment on -- but then restarted or never really canceled -- but never really restarted, but long story short, if you could comment on the risk in backlog of project cancellations, and maybe even highlight the one in Las Vegas that was one of the projects in question a few months ago?

Sure. I have commented periodically that EMCOR tends to have a very, very low rate of project cancellations once they appear in backlog. That is because of a number of factors. First of all, talking about a typical construction contract, the value-added of EMCOR's services is so great that the progress of construction up until EMCOR arrives to begin the system's installation has really resulted in a hulk of -- of a facility that is useless for any purpose whatever until the systems begin to be installed. If you think about building performance, including the facility in which you are sitting listening to this call this morning, without the systems it would be useless. So, we find that the value-added of the work that we do is so important and critical to the ultimate value of the facility that is very rarely canceled once the momentum of project construction has started. In addition the sunk costs in a typical project associated with -- to be trite, the digging of the hole, the filling of the hole with concrete, the erection of the steel, application of the glass, and all of the other things necessary to create the building shell is expensive, but ultimately useless unless and until our systems are installed. So -- the result -- and this is over many years -- there there are a minuscule percentage of EMCOR projects that are canceled or significantly deferred because of that very large value added component that we bring to the performance of a new building or even to a retro fitted building. The project that Alex was was talking about is a major Las Vegas project, in which there were some financing problems being encountered by the initial developer of the project. And some rumors circulating concerning his inability to obtain financing to complete the project. This was a perfect example of one of those projects in which the sunk costs were so dramatically high, that it was clear that the project had to be taken to completion because we hadn't even significantly begun to install the systems that we provide that are so important to the performance of a modern building. As Alex mentioned in his question, a solution was found between the initial developer, some possible replacements for that developer as owners of the project, and the financing entities that are supporting construction, and we believe today that that project will succeed to a successful completion.

Frank, and I appreciate all of these extra slides that you had in your presentation, outstanding. Especially the comparison of '08 versus '03, but I still think you're doing yourself somewhat of a disservice, and I would ask you that in your next call you include a bullet that identifies service work is expected to be what percent of total EBIT in '08 versus what percent in '03. Because I think your profitability of your facilities services business today, number one, is two "X" what it was four years ago, and number two, now also includes the Ohmstede acquisition, which is even much higher margins. So, I would love to see those two data points on your next call.

It is a good point, Alex, we frankly as you saw did a lot of extra analytical work in comparing the two possible recessionary periods, and we just didn't have time to get our analysis complete with expect to EBIT contribution from service work. But your point quite correct, and we'll see what we can do next time.

Thank you, great quarter.

Thank you.

Your next question from Richard (inaudible) with Morgan Joseph

Morning, Rich.

Wondered if you could comment about current bid activity. I know everyone sees the headlines out there, and the chance of a slowdown, I think its greater than it was a couple of months ago, and ABI recently came out and that took a big dip. What are you guys seeing on the street level these days?

Thanks for the question, just to acquaint other listeners/customers, what Rich is referring to is the architect's billing index, which is a monthly publication of the American Institute of Architects, said to provide a nine to 12-month advanced look at various categories of construction. My interpretation of the index is that it pertains primarily to greenfield non-residential construction. Certainly doesn't affect or purport to analyze, at least for the most part, any of the kind of retrofit of reconstruction or service work that we do, and because it's poll conducted among a group of architectural firms, in my mind there are some questions about it's statistical reliability, at least in a specific monthly period. However, it's interesting and useful and it's one of the things that we look at in connection with long-term trend analysis. And Rich is right that in the most recent report issued the day before yesterday, that it showed a down turn in architectural billings pertaining to future work from a -- a -- an index of about 55 to an index of 50.4 with anything over 50 reflecting growth. So, you could say that the ABI declined in the month over month, about a period from an indicator of strong growth for the next nine to 12 months, to a period of expectation of slow growth. That may be so, we look at the ABI as one of our criteria for future planning. But we also look at the reports and the financial results of large companies, publicly-traded companies in what I would call the front end of our business, the design and project engineering, and project management and development areas. Companies like Floor and Jacobs, and companies that are closer to the front end of the business, and we see them continuing to perform well. So, it's just one of many criteria that we look for an assessment of what our opportunities will be like nine to twelve months down the line and frankly my conclusion and one of the assumptions on which we based our backlog -- excuse me -- our guidance for the year, was that our diversity and our backlog presence in a number of sectors that nobody expects to cyclically decline, water and waste water, transportation, healthcare, will be sufficient to support our assumptions even if there's a further downturn in greenfield office and commercial work, which is a relatively small percentage of our overall backlog. Tony?

Yes, I mean the bidding activity is pretty decent yet. And on of the things we are seeing as Frank said is, what we take advantage of the diversity. And because we have the ability to work on the most sophisticated, most complicated projects, what we are seeing is a move towards, you know, projects $10 million and above, and we're still seeing healthy activity in the $2 million and below project. And it's going pretty well. We do keep an eye on what is happening with -- with our customers, and -- and on the commercial side, but luckily that's not the only place we're anchored. So I guess what I would say, we see good opportunity on the larger projects. We see good opportunity on the more complicated projects like healthcare and water and weather water, and we still see relatively healthy activity even in the commercial sector. Luckily we're expanded in to the industrial and other sectors and so we can take advantage of (inaudible) markets.

There's one other competitive factor that I would like to mention, and that is that our surety bonding capacity, which is the -- I believe the strongest in the industry is the significant competitive advantage, especially on projects in the public sector where the law requires the issuance of assurity bond in support of a contractor's or service providers obligations. The strength of our balance sheet, at its all-time high in this period, is additional reinforcement to that competitive strength, and our ability to obtain the award of contracts in preference to other service providers.

Okay. Great. And then how are you guys seeing the acquisition market? You know, I know a lot of owners out there had some pretty high expectations. But with things potentially slowing down, I mean, have you seen that standpoint change at all?

I'm not sure that we see -- we're seeing more books today than we saw last year. There was a huge flurry of activity associated with -- with the private equity perditions of the last two years or so. We were very fortunate to be able to bid effectively against private equity purchasers when we acquired Ohmstede and we're pleased and proud about that. I think it is going to be a really interesting year. We're hearing about the possibility that private equity may need to divest of some previously acquired assets, and we would be interested in looking at those. There are also a category of service companies in our business who don't want to be owned by private equity, who think that the best place for them is with a true operating company like us, run by people who understand and appreciate operations, and place the appropriate value on their personnel. So, I think that there may be some divestitures, and/or some privately owned companies who come this year, looking for a place to build their careers and their companies within the EMCOR group, and we're going to be able to do that both in cash and in credit terms.

Yes, and then if you look at our history, Frank, those private companies are something that get fostered over a long period of time. and they look at EMCOR as a great place to continue to build their business, have the capital to do it. You look at acquisitions like (inaudible) Fluidics or even ir Systems there was no public market for those companies. That was a place where we wanted them to be part of our team, and they wanted to be part of our team. And the same people who were managing it then are managing it now. And we bring significant advantage to those companies and we allow them the capital and the bonding and the things they need to grow, coupled with they can now focus on the business while we worry about things like insurance bonding, health care, and banking relationships, and then they take advantage of our national account opportunities and our purchasing synergies, and we bring real value when we can execute those kinds of transaction and we love them.

You know, hi, this is Kevin. I think that leverage deals are very much in decline. So, I think for us a strategic buyer, there will be better opportunities with less competition, so we'll be able to stay strategic and discerning with regard to the opportunities that come to us, and I think they will be this year.

I think that the reality is for people that bought high and expect to sell high to people like us, they are going to be disappointed like they have always been.

I think that's right. EMCOR is well known as a disciplined purchaser. Unwilling to slavishly follow trends. I would also like to reiterate the three areas of our primary strategic interest and in investments and acquisitions. We're determined to continue building our government services division, particularly with respect to military and related work in anticipation of the continued civilianization of the military and the increasing role that service experts like EMCOR will provide in that area of government services. We really like the fire protection business. We think we perform it well. We have assumed a very prominent roll in the national market for fire protection, which is an essential service with strong follow-up characteristics, and we really like it. And lastly, we're delighted with the performance of our Ohmstede acquisition. Tony has gotten the disease. He now thinks that everything associated with oil and gas is wonderful and I'm having to hold him down from throwing money at it. But seriously, we do think it's a great sector. It's one that I'm very comfortable with personally and we want to support it's continued growth.

And of course mobile services.

All right. Thanks, I'll get back in queue.

Your next question is from John Rogers with DA Davidson.

Hi, John.

Couple of things, first of all the amortization schedule for Ohmstede, what does that look like in to 2008 and then '09?

I'm going to give you a rough overview. I'm not sure if Mark will go pale when he hears me start talking about amortization or not, so he can chip in at the conclusion. Listeners will probably know that the acquisition of a major asset like Ohmstede necessitates the allocation of the purchase price between various categories of assets, and the allocation of estimated useful lives to each of those asset categories, followed by the amortization of the asset value of each of those categories over varying periods of time, reflecting their useful lives. One of the categories of assets acquired in the Ohmstede acquisition was contract backlog, and that is one of the fastest amortized segments of the assets acquired. When we acquired Ohmstede back in September of last year, I told the market that we expected Ohmstede's net contributions to earnings for 2007 and at least the first part of 2008, to be relatively modest because of the very significant non-cash amortization charges associated with our ownership, but that -- once some of the faster-burning, if you will, asset categories were fully or nearly completely amortize, that Ohmstede's contributions to -- to EMCOR earnings would be accelerated, not only in the latter part of 2008, but certainly in 2009, and I continue to feel that way. We were substantially correct in our expectations for Ohmstede earnings and for amortization. You can get detailed information about this from the 8-KA filing that we made in December, and from a footnote to the financial information in the Form 10-K just filed. Mark?

That's correct, Frank. John, if you -- when you get the opportunity to go through the 10-K we filed this morning in detail, EMCOR is scheduled to have total amortization of intangibles in 2008 of just under $21 million. The piece of that that is attributable to Ohmstede is roughly 60%.

Okay. And that must be running -- what $9 million a quarter right now?

9 million a quarter?

Yes, is it that high?

No. Well it was high in the fourth quarter, once again as Frank had indicated, the backlog component that needs to be amortized.

Yes.

Which is reflected as an increase in cost of sales.

Uh-huh.

Substantially will be burned through by the third quarter of next year.

Okay thats fine --.

And then the remaining intangible assets, which traditionally you would see going through SG&A expense, but we'll continue to amortize over an extended period of time and those (inaudible) are disclosed in the filing.

And John, I would supplement Mark's comments by saying that the anticipated growth in the net contribution of Ohmstede and related companies, you saw, for example, our recent -- recently announced acquisition of a California company -- actually two California companies, that will supplement Ohmstede's well-established position in the oil and gas market along the Gulf Coast. One of the reasons why we are guardedly optimistic going in to 2009 with our operational growth and improving results is because of the -- the enhanced contribution available from Ohmstede once that fast-burning part of it's a amortization charges has been exhausted in mid-to late 2008.

Okay. Okay. And then second question, if I could, and I did this fairly quickly, looking at the K but it looks like margins -- especially in the mechanical and electrical segments both jumped quite a bit in the fourth quarter, and could you talk about -- just specifically is it pricing or is it -- is there something else that is happening there?

Well, I allude to Tony's earlier comments about some sectors in which we saw an erosion of competition.

Uh-huh.

At the bidding stage in -- in 2007. I guess, actually in late 2006 and in to 2007, arising from some of the factors that we mentioned earlier. That is to say the increasing complexity and sophistication of some large projects in which, frankly EMCOR was considered by the owners to be the only company capable of delivering a project at the quality levels on the timeliness, and with the value required. And a very good example of that would be some of the very large health care projects in which we are currently involved. And very sophisticated, complicated, difficult projects that are on a strict time schedule. Same comment with respect to the casinos. The utmost in quality required at all times. Timeliness is key, and the customers in those cases are willing and able to pay a premium for the kind of quality delivery on a timely basis that EMCOR is renowned for.

And is there anything as you look in to 2008 that would cause those margins to fluctuate substantially quarter-to-quarter? Or should they stay at these levels? I know you tend to have a better margin in the latter half of the year, but -- .

If you look at our operating income percentages for the year as a whole, in 2007, they were 3.4%. This is very good relative to EMCOR's performance in the past, but it's significantly less than the 4.9% in the fourth quarter. And that is typical of EMCOR's seasonal fluctuation in operating margins. There is no question that we take substantial momentum in to the new year from the performance in the fourth quarter. But it is typical of our project accounting criteria, and the nature of the beast in this business; that we'll see a seasonal fluctuation in operating income percentages that will be more like for the entire year, the 2007 full year, percentage that we reported, rather than the very high fourth quarter number.

Okay. Great. Thank you.

Thanks, John.

(OPERATOR INSTRUCTIONS) And your next question is from the line of Rich Wesolowski with Sidoti.

Hi, Rich.

Hi. Can you discuss the plans for the UK division a little further specifically. Why you would sell the division after dis banding UK Rail? Which I gather has been the main culprit in the losses so far in '07 -- or sustained in '07.

Well, it's a good question, Rich, and certainly I'm not going to presuppose any particular reaction from the EMCOR Board, but I think it's important to them that management express, first of all, our disappointment with the UK results, which as I mentioned is particularly disappointing in light of what we thought was good progress three years of annual profits from the UK, not huge profits by any means, but an indication of improving management, and perhaps improving markets, and then -- and then this. And our UK operation has not been a solid performer for us over time. It has not delivered substantial value for us, and the Board asks management, fairly so, to make difficult calls and estimates with respect to all assets at any given time. I don't know what the Board is going to decide. It is possible that they'll want us to continue to management the UK with appropriate cost reduction associated with the simplification of its operations; that is the dis banding of the Rail Division, in order to maximize profits for a while longer, and see if it could be brought in to full EMCOR performance in a non-dilutive kind of way. But they may also decide that -- that given this investment enough time; that it's unlikely to perform for us in the near future and that we should seek avenues for obtaining value for it. I can't speak for the board, but we're going to give them a fair evaluation of what we see as the various strategic alternatives associated with the UK, and we'll see what they say.

And, secondly, how much revenue would you just ballpark estimate came from UK Rail?

In 2007?

Is that mean (inaudible) quarter?

I think it's about $140 million for the year.

$140 million for the year.

Great thanks.

Okay. You are welcome, Rich.

There are no further questions at this time. I would like to turn the call back to management for closing remarks.

Okay, thank you Kristin, thank you all for your interest in and support of EMCOR Group. Watch this space for interesting future developments. Thanks again.

This concludes today's conference. You may now disconnect.