EMCOR Group Inc (EME) 2008 Q1 法說會逐字稿

Good morning. My name is Casey, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group First Quarter 2008 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.

(OPERATOR INSTRUCTIONS)

I will now turn the conference 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 2008 first quarter results, which were reported this morning. I'd now like to turn the call over to Kevin Matz, Executive Vice President of Shared Services, who will introduce management. Please go ahead, Kevin.

Thank you, Eric. And good morning, everyone. Welcome to EMCOR Group's earnings conference call for the first quarter of 2008. For those of you who are accessing the call via our Internet and our website, welcome. And we hope you have arrived at the beginning of the slide presentation that will accompany our remarks today. Please advance to slide two.

Slide two depicts the executives who are with me to discuss the quarter. They are Frank MacInnis, our Chairman and Chief Executive Officer; Tony Guzzi, President and Chief Operating Officer; Mark Pompa, our Chief Financial Officer; Mava Heffler, our Vice President Marketing and Communications; and our Executive Vice President and General Counsel, Sheldeon 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 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. 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 uncertainty that could cause actual results to differ materially from the statements. Accordingly, these statements are no guarantee of future performance.

Such risks and uncertainties include, but are not limited to, adverse effect of general economic condition, changes in the political environment, changes in the specific markets for EMCOR services, adverse business condition, 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, its 10-Q filed this morning for the first quarter ended March 31, 2008, and in other reports filed from time to time with the Securities and Exchange Commission. With that said, please let me now turn the call over to Frank MacInnis. Frank?

Thank you, Kevin. Our telephone listeners can't see this, I know. But Kevin actually did that entire performance without moving his lips. Good morning, everyone. And welcome to our 53rd 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 2008 first quarter earnings press release and Form 10-Q that we issued and filed earlier this morning. We'll conduct this call in our customary way. First a discussion of the highlights of those operating results including a breakdown by segment, and my comments on our quarter-end balance sheet. Then I'll discuss the evolution and the current status of our contract backlog portfolio with special emphasis on those factors that we think will be the most important to EMCOR's performance during 2008 and into 2009.

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 broad and diverse Company, followed by some additional comments on EMCOR's role in meeting America's energy challenges. Finally, I'll talk about some of the major factors that are expected to influence EMCOR's performance during the remainder of this year and into the next, including our progress towards some of our growth and performance objectives.

At that point, there'll be an opportunity for our listeners 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 move to slide three.

EMCOR had an excellent first quarter, the best in our history by a significant margin. A year ago, in the first quarter of 2007, we proudly announced then-record first quarter revenues and operating income and commented that 2007 had gotten off to a very good start. Our 2008 first quarter revenues grew 29% over last year's to a new record $1.66 billion. And operating income more than doubled compared to 2007 to $49.7 million -- certainly, another very good start.

On slide four, we discuss some of the highlights of our first quarter performance. Continued strong demand in both our construction and facilities services divisions led to revenue growth completely across our Company. 2007 acquisitions in refinery services and mobile services led to remarkable 63% revenue growth in our U.S. facilities services segment. But EMCOR's organic revenue growth was also very strong at 17% overall. Our Canadian subsidiary stood out with organic year-over-year revenue growth of 78% based on improved demand, especially in the industrial, power, and health care sectors.

Our dramatic revenue growth was more than matched by a 186% increase in operating income for the quarter to a record $49.7 million or 3% of revenues. All of our operating segments improved their profit performance over the prior year. U.S. electrical profits from operations rose 58%, U.S. mechanical increased 32%, and profits in our U.S. facilities services segment rose a remarkable 235%, reflecting the excellent performance of the refinery, petrochemical, and mobile services companies that we acquired in the last year.

For more than 10 years, EMCOR has pursued a strategy of diversification of our revenue and profit sources in order to reduce our vulnerability to individual market cycles. This quarter's results represent an important threshold in this long-term operating strategy. As U.S. facilities services became, for the first time, the largest segment contributor to EMCOR's profits with $25.5 million of first quarter operating income. This is a major achievement for EMCOR and will be an important factor in our future revenue and profit growth and stability.

Our international companies also performed well in the first quarter of 2008. Profiting from a general strengthening of the Canadian economy and its well-established market positions in the power, industrial and health care sectors, Comstock Canada rebounded from a 2007 first quarter loss to a profit of $2.5 million.

Coming off a disappointing year in 2007, our U.K. company reported improved results in the first quarter, contributing operating profits of $2.1 million. And as discussed a quarter ago, EMCOR management is continuing to assess various alternatives with respect to the U.K. subsidiary. The large rail division projects that created the U.K. operating losses during 2007 have been completed and fully accounted for.

We are extremely pleased with these excellent operating results from across our Company and the continuing strong demand for our wide array of services that they reflect. Please go to slide five.

As a result of our operational performance, net income from continuing operations for the 2008 first quarter was a record $29.3 million or $0.44 per diluted share, a 154% increase over the $0.17 per share that we reported a year ago. General and administrative expenses increased to $140 million compared to $112 million in 2007, but were 8.4% of revenues in the current quarter versus 8.7% last year, reflecting continued emphasis on overhead cost control despite substantial acquisition activity.

The quality of our first quarter profits, measured by a comparison with operating cash flow, was also very high. Although EMCOR's first quarter operations generally require substantial working capital investment, especially in new projects, cash flow from operations roughly tripled to $25 million, and stockholders' equity reached $915 million. Please go to slide six.

Reflecting our cash flow performance and our conservative capital management policies, our quarter-end balance sheet is very liquid with leverage well within our comfort zone. We prepaid about $25 million of acquisition-related debt during the first quarter. But balance sheet cash remained above $200 million. And working capital remained steady. We think that EMCOR's strong, liquid, and conservative balance sheet will be a solid foundation for future growth. Please go to slide seven.

Another good indicator of future performance and growth opportunities is our contract backlog portfolio, whose evolution over the last seven years is shown on this slide. Most of our listeners already know that EMCOR accounts very conservatively for the value of projects in hand, and that at least 25% of our revenues are derived from projects that are not reflected in the backlog schedule.

This slide reflects both the strength and diversity of EMCOR's market presence. Major participation in seven sectors representing significant feature growth opportunities -- office and commercial; hospitality and gaming; industrial, which is predominantly oil and gas; health care; transportation; institutional; and water and wastewater.

Contract backlog at quarter-end was $4.39 billion, a 14.2% increase over a year ago backlog of $3.84 billion. Sequentially, backlog declined very slightly, about 2% from record year-end levels, despite an extremely high rate of backlog burn and revenue growth during the first quarter.

Notably, our private sector office and commercial contract backlog rose slightly, about 3.4% on a sequential basis, despite market concerns about this sector; while all our other sectors reported insignificant declines. At quarter-end, private sector office and commercial and hospitality and gaming comprised 49% of total backlog, up from 47% at year-end.

A glance at the overall evolution of our contract portfolio since the last recession in 2003 shows clearly that we are a much larger, stronger and more diversified Company than we were five years ago, when we remained profitable, despite a major downturn in the construction sector.

Now it's time to invite Tony Guzzi, our President and COO, to comment on some notable recent contract awards that illustrate the continuing market demand for our diverse array of services. Please go to slide eight. Tony?

Thanks, Frank. Let's start with a data center project we are performing for Xilinx in Longmont, Colorado. Dynalectric Colorado is performing this project. And they are serving as the prime contractor for this 5,000 square foot data center, that includes a three-story facility to be connected to an existing office building. In addition to managing all the [trades] on this project, which isn't our usual case, Dyne will perform the insulation of the electrical systems that include a new 3,000-amp service, redundant 750 kPa UPS system, a 2,400 kW generator, and all the electrical distribution, piping and cable.

Our other Denver-based Company, and a leading mechanical contractor in the Denver market, Trautman & Shreve, is also on the project performing the mechanical work. And Trautman's scope includes the installation of the complete mechanical, HVAC and plumbing systems.

As we have stated in our previous calls, we like data centers. They're filled with electrical and mechanical systems that are critical to the functioning of the data center. We like it because the communication infrastructure is robust and it's complicated. And I like the data centers that were built in the early 2000s and late '90s. For the most part these data centers that we're building today at EMCOR are built around existing or contracted tenants or for owners. They're not spec facilities. And that was the hallmark of the previous data center expansion.

It's a different market today. It has more measured growth. It's a good market for us. And the level of sophistication in these data centers today is even markedly increased versus the data centers of the late '90s and the early 2000s.

Our Gibson Company in Chicago also does great data center work. But it also has diversity like all EMCOR companies do. And we're going to show you that with the Barney's of New York project that Gibson's performing. Gibson's going to put in over 2000 recessed lighting fixtures and 5,000 feet of track lighting for fashion designer areas in Barney's of New York. Now, suffice it to say us guys at EMCOR, for the most part, won't be shopping in the designer area, because we are contractors. But a few of us will, right Kevin?

Yes, Mark and I.

Mark and Kevin will. Tony won't. But that's where we'll be.

Switching gears from there, an attractive feature of our fire protection business -- and we'll go through the other ones -- is its ability to successfully travel. And Shambaugh & Son is one of the best. They'll be going form their Fort Wayne home base to Cherokee, Alabama to install the fire sprinkler system for National Alabama Corporation's new $1.8 million square foot railcar manufacturing facility.

Shambaugh will be installing 51 sprinkler systems, which includes 18,000 sprinkler heads, 80 fire hose stations supported by 0.25 million feet of pipe. All the pipe will be fabricated at Shambaugh's terrific Fort Wayne fabrication facility. And it'll be shipped and prepackaged to the jobsite, where it'll be installed by our team of professionals. Prefabrication under conditions creates efficiencies with our field personnel and increases our level of execution. We see this time and again throughout our mechanical operations.

This is one of the reasons we like fire protection. It's design-build. The trades travel well. And for really significant jobs like this National Alabama job, we prefabricate the majority of it and put it together on-site.

Staying with fire protection, and in the health care market, Dyne Michigan will be installing the complete fire alarm system in the new 13-story, state-of-the-art University of Michigan Mott Children and Women's Hospital. And in California, at Chevron's Research and Technology Campus in Richmond, we're doing a major renovation through our Contra Costa Company, installing three new generators, the electrical substation and a new fiber optic backbone for the renovated three buildings for Chevron.

And down in Houston, Gowan will be installing the mechanical systems for the new addition of the Texas Children's Hospital Feigin Center. Gowan's scope of work will include the HVAC and air exhaust systems, which are really important in a hospital, for eight new floors, a laboratory, a medical office space for pediatric research. It builds on our great position in the Texas Medical Center.

Interestingly, the hospital wants to expand, and at the same time reduce its electrical loads, becoming more energy-efficient. And energy efficiency is a theme that we're seeing more and more across our work and across the country through EMCOR companies. We're helping our customers who are struggling with the continued escalation of energy costs, not only how to be more efficient, but to have energy assurity also.

One can say at EMCOR most of everything we do has some way, shape or form to do with energy. It's a megatrend that Frank's been speaking about, and I've been speaking about, for a long time. And we're well-suited to address it now and the future. We like to say that our energy confidence stems from big E -- and we'll talk about that -- to little E. And if you go to the next slide, slide nine, I'll walk you through that.

EMCOR in general is seeing increased demand for energy services. On the left-hand side, as you're looking at the page, you see we're in the generation business. Generation for EMCOR, for the most part, means combined heat and power. Utility generation, where we help build the gas plant, the combined cycle plants, usually is a subcontractor mechanically and electrically. And a lot of times, that's in California.

We also help with distributor generation. And there we will do that in a turnkey basis, where customers have decided to move off the grid and install their own solution -- either combined heat and power or their own turbine. And we found ourselves to be quite the renewable Company. We do significant renewable work on a turnkey basis, whether it be biomass boilers, fuel cells or landfill gas.

As you move from left to right, with our addition of Ohmstede, it built on our already strong position in the refinery space. Previously we'd been in California. Now we're in California and Texas. And with Ohmstede, we have the ability to travel to support turnarounds nationwide and support equipment cells globally. Ohmstede and our California subsidiaries help the refineries with their capital expansions, their maintenance needs.

And we do more and more fined ourselves managing the heat section of those refineries. As we talked about in Ohmstede, we managed and played a significant role in 12 of the major 14 refineries on the Gulf Coast. And with our acquisition of both Performance Mechanical and Redman, we find ourselves expanding that capability into California.

Little E is where we sit on the right-hand side of the page. And that's energy efficiency. And through our mobile services organizations and our mechanical operations for the most part, we're finding ourselves doing more and more energy-efficient projects -- everything from variable-speed drives, equipment change-out, controls upgrades, lighting efficiency upgrades. And EMCOR has the ability to wrap those packages together and deliver to our customers projects that will save them 30%, 20% and pay back in less than four years. We're also doing that for other performance contracting companies, where they need us to be the arms and legs to execute their projects.

EMCOR also does energy consulting, where we help customers develop energy plans. We just did that for major retailers across 1,000 sites. And we have our EMCOR 360 project that will tell you how to run your central plant in a more cohesive, functional way through remote monitoring and diagnostics. And with that, I've exhausted big E and little E. And I'll turn it back over to Frank.

Thank you, Tony. We're all excited about the major role that EMCOR will play in meeting the ever-increasing demand for energy services, both here and abroad. Please go to slide 10.

The quarter just past was EMCOR's 51st consecutive profitable quarter, a record of consistency that includes several major business and market cycles. And today's report to you, and in our 10-Q and press release, we've cited facts that should be positive indicators of continued success for EMCOR, including revenue and earnings growth momentum from a record first quarter, balance sheet strength and liquidity with modest leverage, and diversified backlog at near-record levels, despite accelerated backlog burn.

Our expectations are conditioned upon a continuation of the diversified demand for our services that the first quarter showed. And, of course, we need to successfully execute the project work contained in backlog.

We see a continued active market for outsourcing-driven facility services. In fact, we've observed in past economic downturns, that this sector is stimulated when our customers concentrate on their core businesses and leave the management of their facilities for maximum efficiency and energy conservation to specialists like EMCOR. All companies have to watch costs closely in challenging times.

And EMCOR will need to continue our tradition of disciplined cost control. And we're well-aware that some interesting investment opportunities sometimes arise during this phase of the macroeconomic cycle. So we'll have our eyes open for additional ways in which we can accomplish our growth objectives. Please turn to slide 11.

In February, we issues revenue and earnings guidance for 2008. Even though 2007's results reflected dramatic growth to record levels, our 2008 guidance indicated fairly aggressive ranges of additional growth, despite gathering economic storm clouds. Revenue growth rate of 7% to 10% to a range of $6.3 billion to $6.5 billion, and earnings growth of 12% to 23% to a range of $2.08 to $2.28 per share from continuing operations was our guidance.

Today, I'm reiterating my previously issued guidance, despite the stronger-than-forecast growth rates we've just reported for quarter one. My comments about our guidance are as follows. Firstly, our first quarter results, especially those from the U.S. facilities services sector, were significantly positively affected by the results from companies acquired during the past year. Since we haven't held them for a year as yet, we're not completely sure about their seasonality. But we have reason to believe that, unlike most of our longer-held companies, our new acquisitions may be at their strongest, in revenue and earnings terms, in the first and second calendar quarters.

Assuming this to be true, our extrapolation models, and presumably those of many of our analysts and investors, may need to change to reflect less overall seasonality in EMCOR's revenues and earnings. We expect our newly acquired subsidiaries to continue to perform very well, but possibly not at the remarkable levels reflected in first quarter.

Secondly, notwithstanding our healthy backlog performance, we will need to acquire and execute a substantial amount of new backlog in order to meet our guidance targets, especially the optimistic upper ends. Although EMCOR is as diverse as any Company in our sector, it's clear that some of the market sectors in which we operate, for example office and commercial and hotel construction, will be affected adversely by a recession or by a prolonged business slowdown short of a recession.

Accordingly, for the time being at least, I think that revenue and earnings growth in the ranges suggested by our current guidance will be good performance for 2008, considering all the uncertainties surrounding the markets.

By mid-June, we'll know a lot more about second quarter backlog replacement and overall market conditions. And I'll make a public comment at that time, if warranted, concerning our year-end expectations and maybe an early look at 2009.

That's it for now. Thanks very much for your interest and your support. Now, it's time for you to ask questions or to give us your comments. And Casey is here to tell you how to queue. Thank you.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Alex Rygiel with FBR Capital.

Morning Alex.

Good morning, Frank. An outstanding quarter, congratulations.

Thanks very much.

Are you surprised at the high level of profit from Ohmstede in the first quarter?

No, we're not. I think that if -- well, in fact I know you did look at the Form 8-KA that we filed in -- what, Mark? December?

December.

That it was possible, and remains possible to derive anticipated Ohmstede margins from that filing. And we're just very pleased with Ohmstede management, with the performance of their markets and their customers. They're fulfilling every hope that we had for them. And we hope and expect that they'll continue to do so.

When you look at your backlog, if you look at your projects that were added to backlog in the first quarter, was there any change that was material that you noticed that would suggest that the profit margins embedded in that new backlog is materially higher and/or lower than what had been in backlog in the past?

No, Alex, there wasn't. Many times before on these quarterly calls, we've talked about EMCOR's nature as a late-phase Company. And I think that, if there were changes taking place in the make-up or the inherent profitability of backlog contracts, you would see it elsewhere first before it visited EMCOR.

So my -- the first part of my answer to your question is no, no indication so far. And I think -- a valid assumption would be that the backlog was acquired during the recent period at more or less rates equal to the prevailing operating margins for construction and facilities services during that period. So that makes us confident and optimistic.

I'd also like to say a word, however, about the front end of our market, if you will. That is the engineering and construction management and front-end project managers who are on construction sites before we get there, because they're involved in the planning and the design phases of such projects. And we're seeing terrific reports out of them. We look at the Jacobs report. And Fluor's talking about a big earnings improvement.

And all in all, I'm just not seeing erosion of profit opportunities on the front end of projects either. So I read all the same papers that analysts and investors do. And I know what's -- or at least I think I know what's going on out there. But we sure aren't seeing it in our margin and backlog opportunities at least so far.

And now for the tough question.

I hate tough questions.

Your first quarter '08 was about $0.25 ahead of your first quarter '07. If we assume that your second, third and fourth quarter in '08 are flat to '07, that gets us to the low end of your range. Sounds like you're being very, very conservative with your guidance.

The first words out of my mouth, Alex, after I began to see preliminary indications of our first quarter results were, "This is going to put some pressure on me to improve guidance." And so thank you for fulfilling my prophecy. I can see very well how good these are. This is truly a breakout quarter that reflects, once again, the transformational nature of our presence in the oil and gas end of the industrial market. We're very pleased with that, with the investment that we made, with the management that we acquired at Ohmstede and other oil and gas sector companies. And we like very much being a higher margin Company than we have been for many years.

You know me. I don't think there's any significant benefit to EMCOR to leap just yet. But we'll be watching this carefully. I will look at backlog replacement very carefully in the next couple of months. And I think that by June, we'll know more, not only about 2008, which looks pretty good, but also about 2009, which I know is high on the list of analysts' and investors' concerns right now.

I do have one last question. The June quarter sometimes can be influenced by the timing of summer weather as it impacts some of your quicker, shorter-term maintenance work. Can you comment on what kind of variable that could create, depending on when summer starts and when it doesn't? Could that add or hurt earnings by 5%, 10%, 15%?

Alex, I think that the potential is less than it was in the past. We used to talk about mobile services at this time of year, for example and the possibility of the cool, wet spring. I've forgotten which spring that was -- '04 or '05? Somewhere in that area -- where a cool, wet spring had the result of significantly impacting the commissioning of HVAC systems, turning them on for the summer months, for example. And we saw significant drag on both revenue and profitability, since those are very high margin operations, those call-out services, in those years.

Any more, we have found that as our mobile services operations have achieved true scale, and especially since our customers call-out service requirements have a great deal to do with energy efficiency, even more so perhaps than the weather, that those offerings have become much less seasonal or cyclical than they used to be in the past. And they've basically become strong all year round. So I'm going to say to you that a cool second quarter will influence earnings and margins a little -- 5%, 10%, if that at that outside.

In that sector only.

In that sector, yes.

I mean, with our base where it is now, it's hard to see an effect in the overall Company by that kind of -- and plus, we've gone into the warm weather states a lot more. You know, with our acquisition of MSI in Florida, our expansion of the operation in California, we're more than doubled the size with air systems. All those together put us in markets that are less dependent; like we used to be just dependent on the northeast. And we're not any more.

Very helpful, thank you.

Very good point. Very good point. Thanks, Tony. Thanks, Alex.

Thank you.

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

Hi, Rich.

Frank, if you look at your backlog chart, the commercial was the best-performing sector, which was surprising at this point in the cycle. Can your reconcile that with your general push towards the more defensive health care, institutional, et cetera?

Well, we -- first of all, we don't go out and get work just for the sake of having it. We would only accept commercial and office construction work that met our profit margin parameters. So we're not hitting hard the commercial and office sector just to have a strong statistical base. Having said that, we try to retain a balance year-round. And we're real happy right now with the proportion of our project work that is represented by non-cyclical sectors, like health care, like our public sector transportation work, certainly our government services division. Water and wastewater looks pretty good.

Let me say a word about water and wastewater, since it's just come to mind. There is some concern that I've read about being expressed by public sector analysts with respect to the availability of funding of public capital projects because of declining tax revenues and/or the inability of municipalities and states to issue bonds.

We find that, in general, our water and wastewater projects are funded out of specifically earmarked funds derived from water distribution and sale revenues, so that there doesn't seem to be any shortage of funding for the urgently required and continuing need for upgrading of the U.S. water distribution system.

We are very fundamentally aware of the importance of maintaining a hedge within EMCOR at all times in terms of our significant involvement in defensive, as you put it -- that is non-cyclical or counter-cyclical segments of the market while trying to derive as much profit as possible from our historically high-margin activities in the private sector, commercial and office and hospitality and gaming segments. I think in the first quarter, we succeeded in maintaining a very nice balance between the two sides of our business. And that's what we'll be striving to do for the next few quarters.

Okay. Secondly, if you take out the aggregate acquisition effect of the first quarter, your gross margin was about flat at 10%. Is that what we should expect going forward? I mean, you're going to get a kick because of Ohmstede, et cetera coming in, while there's still an [amount] of revenue. But is this as high as we're going to get on the organic gross margin?

It's -- to be honest with you, I don't pay as much attention to gross margin as I do to EBIT margins, because gross margin can be so susceptible to fluctuation based upon the location from which the revenue is derived.

As an example, a New York City project will require gross margins 3 or 4 percentage points higher than a Denver or a Las Vegas project, just because of the overhead that it has to cover. So you could artificially inflate gross margin by deriving more project work in any particular calendar quarter from a high gross-margin sector without actually improving your bottom line at all.

I've often said that increased gross margin is always good. Declining gross margin is not always bad. And if you think about it, I think that's the way it is. We think that the margin performance that we exhibit in the first quarter has to be considered in light of our very conservative accounting policies that, for example, require that we recognize no income on newly begun projects until they're at least 20% complete.

This is a unique accounting policy, a uniquely conservative accounting policy, we believe, within our entire sector. It means that we have very few write-downs, because we don't take profits on projects unless and until we've got a pretty good idea, at the 20% level, about the sufficiency of our allowances for costs, for contingencies. We've made the buys with respect to our materials and major components and supplies. And we've got a feel for what the relationship with the customer is like, and what the site problems, if any, are. And so at that 20% point, we can make a decision.

Now, the practical result of that is that, in the first quarter, we just don't book as much income. We match our revenue with cost. And this has the effect of depressing first quarter net margins. So I think that our first quarter performance in light of that policy is even more significant in terms of achieving 3% EBIT for the quarter.

Okay. And finally, looking at the, say, 7.5% of your SG&A costs in the segment, can you discuss the degree to which that's variable in a different business segment? So say if electrical and mechanical turn down some time within the next 18 to 24 months, how effectively you can take those costs down.

We feel that we have done a very effective job of maintaining the variability of our labor costs. We've talked in the past about the discipline with which we control overhead costs. By the same token, we have said -- and this has become -- I typically get a counter-intuitive kind of a reaction from my listeners when I tell them that our union affiliations are very significant benefit to EMCOR, especially in challenging economic times; because a modern union contract results in those union labor costs being completely variable.

In a nutshell, the day that you don't need a union employee any longer, back he or she goes to the union hall with no exposure to severance costs, no exposure to a pension fund or to a health plan or anything of the kind. This is what I call complete variability of cost, and enables EMCOR to be very quick, very nimble and very decisive in reducing costs in response to market and activity downturns.

Thanks, Frank.

You bet.

Your next question comes from the line of Tahira Afzal of Keybanc Capital Markets.

Morning Tee.

Morning, and many congratulations on your quarter.

Thank you. We're very proud of it.

I guess my first question is in regards to you backlog. You know, I went back and looked at first quarter '07. And your bookings for first quarter '07 are trended up by around $200 million sequentially. This year, they're down $200 million sequentially. And I was wondering what has really changed from the first quarter of last year on a sequential basis versus this year.

First of all, I never want to disagree with the thorough way in which you analyze our accounts. But I think we're down $100 million sequentially over the two quarters from the last quarter of '07 to this current quarter. I'm extremely positive about the pace of bookings between the last quarter of '07 and the first quarter of '08.

In order to do a complete and thorough job of understanding the pace at which we've been replacing backlog, you really have to make an assumption concerning the proportion of our revenues that -- in the current quarter, that were derived from backlog jobs as opposed to outside of backlog. And EMCOR's a strange bird in this regard in that, unlike many of the large-project companies in this sector, EMCOR derives at least 25%, I believe closer to 30%, of our revenues from projects that are not in backlog.

But there's some seasonality to that as well to add to the complexity, so that at any -- in any given analysis of whether or not we're accelerating or decelerating our backlog replacement, part of the work of analyzing new work bookings requires that you understand, with some degree of specificity, exactly how much backlog we burned off as opposed to deriving revenue, for example, from projects that were so small that they didn't reach the backlog schedule. Tony comments?

Yes. I mean, our booking of new business was pretty good in the first quarter, because, as Frank said, a lot of it never makes its way into backlog. And example of that is not only are smaller project work that has a lot of this energy efficiency upgrade in the Mobile Service Group, but also at Ohmstede we're learning with a quarter or so of our EBITDA coming out of Ohmstede and it not being tied as much as to backlog other than the equipment side, all of the turnaround work we do, which is substantial especially in March and February never makes it way into backlog. So our profit model is a little different as Frank talked about the seasonality and the extrapolation models we've used in the past, I think so goes the same for backlog.

We have a big profit engine outside of our normal backlog view, two of our faster growing businesses, and it really -- don't show up in backlog the same way they did. That being said, I mean we do -- we are for the most part a mid-to-small project company. When we have lumpy jobs like we put in last year in first quarter like Venetian and one or two wastewater treatment plants it's just a matter of timing whether those jobs come in first quarter, second quarter or the beginning of third quarter.

Just in terms of your facility management business I went through your 10-Q briefly and it seems that your facilities management business organically accrue at around -- close to 5%. And I was wondering, you know, if you could comment on the longer term trends of growth in that business going forward?

Yes we saw good growth in our mechanical mobile service business. We saw very good growth in our government business, you know, 20% plus. And we saw very good growth at Ohmstede. Not only -- obviously it's new to us so we get the whole road picture. But we know what they did last year in the first quarter and they had good organic growth.

The area that didn't grow as fast this quarter and there's a couple of reasons for it is our commercial site-based business. One is we, as you know, third quarter of last year, we exited our relationship with CBRE, CB Richard Ellis, on the facilities joint venture we had with them.

Now on a comparison basis they're both out of the numbers. But we had infrastructure and that had been part of our sales channel previously. So we've had to retool our sales channel, refocus our organization, for that segment of the market that we'll attack. And we're now getting the pick up from that as we go into second, third and fourth quarter. So double-digit growth in all sectors except commercial site base and that was actually down and you could say by design as we refocus the organization absent our joint venture with CB Richard Ellis.

So, would it be fair to say that you can see once you -- the retooling is done in totality that you could see growth in facilities management of a higher level than [in certain cases]?

I think we can do double-digit gross on an annual basis for as far as we can see. And I just point out the higher margin sectors are what's growing are the fastest and we've done that by design.

Okay great. That's good to know. Just had a couple of other questions. Number one, in terms of your debt wind down it seems that you've managed to wind out a sufficient amount of your debt.

And I was just wondering what in terms of your net income line in terms of your interest income should we expect something off of differing trend going forward? I know that you've had some expenses still due to the debt from Ohmstede and had commented that you see it winding down by the end of the year. Is that still a doable option for you?

It's Frank, T. We certainly expect operating cash flows to continue to be robust, and to support the planned continued reduction of our acquisition-related debt during the remainder of this year. And that is what we will do, of course, absent major transactional opportunities. But our -- we're open to the possibility of an additional investment that will help to enhance the continued improvement of our margins.

I mentioned earlier that we are -- we really like the opportunity to be a higher margin company. Our long-term success in electrical and mechanical construction has enabled us to do this. We're proud of that and we think that the opportunity to invest additional money in the higher margin businesses that have transformed our operations over the last year or two together with a continued emphasis on the facilities services sector, which I think is going to be a very important help for us in weathering whatever economic storms are going to affect all companies in the next year or so.

I think it's extremely important -- I know I stressed it on the call but I'll do it again right now, I think it's very significant that our facilities service business was our largest single segment contributor to operating profits in the first quarter. That's very important in light of its relative invulnerability to recessionary downturns.

Frank, just on that note then I mean if you look at the [beach] that you've seen versus I know my numbers and if you look at your own internal numbers you've said that it did come on stronger than you expected. Was all that strength concentrated on the Ohmstede side or you did you see the rest of your business also perform a little better than expected?

We -- we had very good performance outside of -- you mean in a facilities segment, T?

Oh no, yes well basically outside of Ohmstede. So I know that Ohmstede.

Yes I mean we had -- from our view we had terrific performance in our core electrical and mechanical construction business. We look at margins year over year, not sequentially. Frank went through the reasons why that's the accurate way. Both electrical and mechanical's margins were up. And we believe we maintained the discipline that we've had.

Mobile Services continued its expansion, air systems integrated in nicely, and that combined with our existing footprint has made us the largest mobile service company in California. We saw a good penetration in our government services business. We just announced the Millington contract.

So across the board right now we're pretty pleased with performance. You know Canada had nice margin enhancement for this time of year for them. That would have been an annual number for them as far as margin. We expect them to continue to perform well, and we're out of the woods on the UK.

You know I think this cost focus coupled with the bidding discipline, coupled with what Frank said our move into different sectors over the last two to four years, five years, ten years, has allowed us to really start to benefit from balance. And we're happy with that balance right now. We're always going to have our hiccups as we take tough projects that's the business we're in. But right now our team is executing extremely well across the board.

Okay, thank you Frank and I actually had this one last question and then I'll pass it on. And that was if you look at your business and you look at your -- as you explained your bookings and your walk-in work in terms of your business that typically or what you foresee will fall or slow down faster going forward if the economy, and the non-residential side continues to slow down, would it be the walk-in work or would it be your backlog?

Well, my own guess, T, is that it will be backlog because that's where the jobs that reflect customers' capital allocation decisions are by and large located. Our walk-in work, as you put it, is typically if it's not in our customers' maintenance CapEx budget it's just in their cost of operations, and as I mentioned earlier an increasing proportion of that work is based on the continued improvements in energy efficiency of customers' facilities the payback for which is extremely short and therefore a very good investment for our customers especially if they're not inclined to lay out the significant capital required for major upgrades or even new facility construction. So I think that the impact is likely to be so called backlog projects.

Okay, thank you very much.

You bet, T.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of John Rogers with D.A. Davidson.

Hi, good morning.

Hi John.

Some of the projects that you went through Tony were talking about on recent awards and I think frankly you've been referring to, it's a lot of upgrades or retrofits of existing facilities and maybe that's just by design. But I'm curious if you were to look at your business right now how much of it is -- could you classify as new construction, retrofits and then I guess maintenance type work?

Well, I think at any given time about half of what we're doing is new construction or major upgrade.

And has that changed?

45% or 50%, yes it's down so that's down from 60%, 65% probably going into the last cycle with the addition of Ohmstede. So anywhere from 45% 50% new construction and major retrofit, major retrofit where you're basically shutting down the building and restacking it and those type of things. Maintenance, I mean service is going to be about 35% of our revenues and when we think of service these are places where we have long-term customer relationships. As Frank talked about we're part of the maintenance planning for the year and the capital.

It's not all service contracts, but we basically know what we're going to do for the year and we've been doing it for a long number of years. Our service contracts are in there and as you know in our backlog we only put one year of the service contracts in there, even if it might be a three- to five-year contract. And we don't assume any extras off of those service contracts when we think about backlog.

So 45%, 50%, maybe a little less than 45% new construction or major retrofit, 35% service, and the balance is what we would call is retrofit projects that we're in and out on. We may have a relationship with a customer but we don't have a steady presence.

Okay.

I think John -- that it's important to note that given the choice between a greenfield construction project involving numerous trades like the excavators and the foundation guys and gals, and the steel people and the glass people and the like as opposed to a retrofit project involving a much more significant portion of the cost being expended on the systems that we install and maintain, we would generally speaking prefer the latter.

It's a simpler job for us. The work that we do is generally speaking on the critical path. And it's just another risk removed for us if we're in a position where the retrofit or restacking project revolves around our systems. It has the same attraction that Tony mentioned earlier in connection with our data center work. Data centers are just really simple boxes crammed with stuff, and the stuff is pretty much what we install and maintain.

So the significance of that is that our services typically comprise between 60% and 80% of the overall cost of the data center, and we're in a position of real authority and responsibility on those projects, and that's one of the reasons why they tend to pay us pretty well.

Yes I think when we like new construction is when we're in a mission-critical environment where people value time. That's why we like hotel gaming and why we like Las Vegas and Native American gaming.

And Ohmstede.

And that's why we like Ohmstede. It matters.

Relative to the last, I mean a lot of your segments or divisions have been around a lot longer. But in the previous downturn, the economic downturn, I mean it showed up in your numbers I mean fairly quickly, and we're not seeing the impact now, and I guess I'm trying to figure out and I don't know whether you have it in the [interim], I mean what's really different this time? It's just the commercial industrial markets don't have the excess capacity that they did previously or any sense there?

Well, John I think that the period leading up to the last recession was one of -- the creation of a large bubble of non-residential facilities. We saw major projects being driven by financing availability rather than by demand. And so we had a lot further to fall the last time, and the 2002 and 2003 recession was extremely abrupt. We saw reductions in construction activity of 30% to 40% in many of our markets, a huge -- very damaging, very difficult downturn, in which by the way we remain profitable. But it was a tough one.

This time around I just don't see anything like the excesses of the dot.com era, for example, or the construction of the so-called see-through buildings that had been put up because the money was there and not because there was any demonstrable demand. So I think that spending in the non-residential construction sector has been very restrained and responsible, and incremental in the post-recessionary period that followed upon the last recession.

I think some lessons were learned, and I assure you that there is no non-residential bubble out there that would correspond to the obvious residential bubble that exists. For the same reason that the non-residential one existed last time, and that's on the residential side there were lots of finance-driven projects that were not in response to demonstrable demand.

And you know you said our operations have been around for a long time, and as we do reviews around the country and we talk about the differences one of the -- to a company, especially our major subsidiaries we became very enamored like most people did with tech from 1999 to 2002. And we were probably drawing too much of our earnings from that sector. And that sector went down hard and quick like Frank said.

We've done a much job this time of keeping diversity in our customer base. And our acquisition program has really added to the diversity in our customer base by getting into oil and gas in a bigger way with Ohmstede, our service acquisitions like Fluidics and Air Systems notably and now MSI down in Florida. And then also expanding our footprint into fire protection, which we like for a whole lot of reasons that are different than just traditional mechanical contracting.

So I think we learned those lessons of over-reliance on one sector although the margins were terrific and life was good. I think it's sort of one those cases where not only at group level but more importantly at our subsidiary level people said, you know, I'm going to do X amount of work for this type of customer, and I'm going to make sure I keep all the irons in the fire across this expansion.

John, I had one other comment about your reference to our historical performance and if I'm correct in the year that I believe you're looking at we had a very significant loss in our UK operation that year. And that was a project loss that happened very quickly and that significantly impacted our overall performance that year.

Okay, Frank, the UK operation you're comfortable with the structure of those now and any other further restructurings there that you were talking about?

We need to reduce costs some more, but there is an absence of badness reflected in the first quarter UK results. We consider both remaining divisions, now that the rail division is finished, the construction division on the one hand, and the facilities management business on the other, which by the way was one of the pioneers in that business back in the early '80s are both well-managed and operated well in the first quarter.

So it's been a long and arduous process, but I think we do have an absence of badness there. Although to be far the results are still now what we would like. The profit, the operating profit for the quarter was 1.1%, which is not enough. But it's certainly better than previously and we're pleased with that.

Thank you very much and congratulations.

Oh, thank you, John.

Your final question comes from the line of Richard Paget with Morgan Joseph.

Thanks.

Hi, Richard.

I just want to get back to the sequential backlog. And just looking at the bar chart without having the numbers in front of me, it seems sequentially the declines happened in waterways, water and transportation. And I know Frank already addressed there are some concerns about those markets but you're not necessarily seeing anything. So should we attribute the sequential downturn to lumpiness or seasonality or how should we think about it?

I'm going to let Kevin give you some details concerning the performance of individual sectors in just a second. But you can certainly, and I've characterized it as such many times in the past, you can certainly assume that water, waste water, for example, will continue to be lumpy. It's just the nature of the beast. It tends to have a higher proportion of larger individual projects than is the case elsewhere in our company.

I think that the -- aside from the rather surprising and encouraging news that our office and commercial segment grew 3.5% sequentially during the quarter the rest of the sector performance that I'm looking at is completely unsurprising to me. You know $100 million of backlog reduction spread among six large economic sectors is $10 million or $15 million per sector, which represents one or two good-sized projects out of more than 1,000. So I'm really not inclined to overact to this as indicative of a trend or anything of the kind. Kevin, you've got some numbers?

Yes, Richard I'll just give you a few numbers again. Frank mentioned that commercial was up about 3.4%, healthcare is about flat. Institutional, which is down a little bit about 5% or so. But that's $30 million which could be one, really one project as Frank talked about.

Hospitality and our gaming sector -- flat. The industrial side down about 5%, $25 million. Transportation down about $25 million of that large sector. And waterways, water treatment as Frank talked about, in terms of some of the lumpiness that was down about $40 million. So really fairly good distributed backlog still.

I've got to say, Richard, that given the headlines that you read every day in the national press about the reticence of American businesses towards this spending capital on anything these days that the replacement of backlog at the pace we've done it especially in a quarter of record revenue burn is pretty good performance. And I reiterate that I don't think that the trends, the mildly negative trends, you know, 2% downturn just not very significant for me, is anything to hang your hat on as far as a continuing trend to extrapolate the business there.

But I mean looking out though a lot of these projects that I guess are hitting your backlog now were probably financed last year, and now that the credit crunch is really hitting in the first quarter maybe going forward that's when you expect to see it, is that fair to say?

Yes, I think that it is certainly fair to say that EMCOR is a late-phase company and that, for example, you should be able to look -- if there's trouble coming for EMCOR down the road, then you should be able to look at companies right now that are on the front end of these projects, and say, "Oh, my goodness. Look at that, Jacobs is down 12% in terms of revenues from North American projects."

But as I mentioned earlier in the problem is that that's not the case and that revenue and earnings report from the guys who are on the front end of those projects that we finish when we install and complete and begin to manage the systems, their results are real good. And they're talking about growth prospects and analysts are upgrading into buys and projecting significant earnings growth.

So everything you say is right except that it doesn't seem to be translated into trends within our industry so far. And I think that -- I think that that may be attributable in part at least to what I mentioned to you earlier, and that is that there hasn't been any huge build up of a bubble that has led to gross over-capacity in any of the sectors in which we are operating even the office and commercial, which I believe is the most vulnerable to an early downturn in response to recessionary trends.

Okay so with Jacob's backlog being up 50% year-over-year that would mean a pretty good '09 for you guys.

That's what I'm talking about and, you know, on the other side of the coin you get a report like the architects' Billings Index which came out yesterday which was very negative. But there's a disconnect for me between reading that report, which I have to take into account. It's one of the things that we looked at in connection with how cautious a note that we should sound as far as a future revenue and earnings. So we read that and it's a very negative report. But it seems to be oddly out of synch with what we see in terms of actual results from the good companies in our space.

Okay and then just finally in the Canadian business, I mean it seems like you guys have thrown together a couple of pretty soft quarters. I mean what should our margin expectations be for that business now that it's going at a good pace?

Well, I think it's a much better business than it was. They've done a lot of work in terms of recasting of management, restructuring of the company's operating structure, concentrating on the eastern market in the Greater Toronto area and the western market centered on the Alberta oil and gas market, and related markets. And that was the right thing to do.

As I mentioned during the text, the body of my call, it doesn't hurt that the Canadian economy, which as you well know is largely commodities-based has profited from the worldwide demand for commodities. And so we're seeing well-heeled customers spending money aggressively in large chunks, in order to substantially increase capacity and that's what our Canadian company does.

It's primarily an industrial construction company with a strong presence in power, in automotive, in steel making and now in healthcare as well. And we liked our position very much and think that they're well-managed and would expect them to continue to show better margins as time goes along.

So, I mean ideally is this or could margins get to be similar to the U.S. or is there just a different structure that this will be a 3% margin business versus --?

Well, it's hard to tell. It's a lumpy business like water and waste water. It's comprises -- it's comprised of larger projects, smaller in overall number, so that one or two projects can significantly impact the company's results for a year or even for a couple of years. The -- that's a difficult call. I'd be hard-pressed to speculate that they could dramatically increase their margin, certainly not up to Ohmstede levels or anything of the kind. But I think they can do better than they have been doing, which in the current quarter was I think 2.5% EBIT. Canada can do better than that.

Okay, thanks.

I will now turn the conference back over to management for closing remarks.

Terrific, well thank you all for your attention, for your interest and for you support of EMCOR and watch this space for interesting future developments. Thanks very much.

Thank you for participating in today's conference. You may now disconnect.