EMCOR Group Inc (EME) 2008 Q2 法說會逐字稿

Good morning, my name is Dennis and I will be your conference operator today. At this time I would like to welcome everyone to EMCOR Group 2008 second-quarter 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 call over to Mr. Eric Boyriven of FD. Please go ahead sir.

Thank you and good morning everyone. I would like to welcome you to the EMCOR Group conference call. We're here to discuss the Company's 2008 second-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 earnings conference call for the second quarter of 2008. For those of you who are accessing call via the Internet at our website, welcome and we hope you have arrived at the beginning of the slide presentation that will accompany our remarks today.

During the call instructions will be given to you to advance to the next slide. This is one of those times. Please advance to slide two.

With me today to discuss the quarter and six-month results 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 of Marketing and Communications; and our Executive Vice President and General Counsel, Sheldon Cammaker.

For call participants who are not accessing the conference call via the Internet, this presentation will be archived any investor relations section of our website under presentations. You can find us at EMCORGroup.com.

Before we begin, I want to remind you that this discussion may contain certain forward-looking statements. Any such statements are based upon information available to EMCOR management's perception as of this date and EMCOR assumes no obligation to update any such forward-looking statements.

These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance.

Such risks and uncertainties include but are not limited to adverse effects of general economic conditions, changes in the political environment, changes in the specific markets for EMCOR services, adverse business conditions, increased competition, mix of business and risks associated with foreign operations.

Certain of the risks and factors associated with EMCOR's business are also discussed in the Company's 2007 Form 10-K, its 10-Q for the second quarter ended June 30, 2008 which was filed earlier this morning and in other reports filed from time to time with the Securities and Exchange Commission. With that said, please let me turn the call over to Frank. Frank?

Thank you Kevin. I know you sometimes find those announcements humorous but I like it better when you play it straight.

Good morning everyone and welcome to our 54th 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. I will 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 second quarter and year-to-date earnings press release and Form 10-Q that we issued and filed earlier this morning. We will conduct this call in our customary way. First, a discussion of those operating results including highlights of segment performance and my comments on our quarter-end balance sheet and liquidity.

Then I will discuss the recent evolution and current status of our contract backlog portfolio with special emphasis on industry sectors that will be important to EMCOR's future performance. And then I will turn the call over to Tony Guzzi, our President and COO for his comments on some notable recent contract awards from around our broad and diverse group of operating subsidiaries followed by an additional slide illustrating the scope and the importance of our energy management services to facility owners.

Finally, I will review our midyear position and the prospects for second half growth and momentum into 2009 including modified earnings guidance for full year 2008. At that point, there will 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 on hand to help with the answers.

So let's begin. Please move to slide tree. 13 years ago EMCOR began a record of consistent profitable operations that remains unbroken today 52 consecutive profitable quarters later. Recent events have shown how hard it is for even well-capitalized, well-managed companies to achieve such a record of consistent performance. We are proud of and grateful for the dedication, discipline and strict adherence to our business model that have enabled our talented employees to create this sustained performance.

Slide three reflects the best second quarter in our history by a substantial margin in all relative measures of financial and operational performance -- revenues, profits, operating income, and earnings -- while general and administrative spending remained under control. Slide four depicts a similar pattern of performance improvement for the year-to-date period during which revenues increased 27%, operating income more than doubled to $123 million and earnings per share of $1.09 was nearly double the level in the year-ago period.

On slide five, we identified some of the performance highlights from our excellent second quarter. Revenues increased 26% including strong 12% organic growth to a new record $1.72 billion. Strong demand for our broad array of services resulted in revenue growth in every operating segment except the UK which reflected the cessation of its rail construction activities and other right-sizing efforts. Comstock Canada reported revenue growth of 30% all organic while US facility services revenues rose 79%, significantly affected by recent acquisitions of refinery services companies and by mobile services growth.

Second quarter operating income was a record $73.3 million up 77% over 2007 at 4.3% of revenues, another record for the quarter. Dramatic growth took place in our US facility services segment whose operating income as a percentage of revenues doubled to 8.7% making it our highest earnings segment for the second consecutive quarter. Both the Canadian and the UK businesses showed much improved profitability reflecting the success of our UK reorganization while we continued to consider various strategic alternatives for the UK company.

US electrical quarterly operating income rose 17% year-over-year while US mechanical operating income fell about $3.2 million as a result of the $7.9 million substantially non-cash charge arising from an adverse jury verdict in a construction contract case. Please move to slide six.

EMCOR's second quarter earnings from continuing operations rose 73% to a record $44 million or $0.65 per diluted share compared to $0.38 a year ago. Cash flow from operations was $86 million for the quarter and $111 million for the six-month period indicating a very high quality of earnings.

We're very pleased with the performance of all of our businesses so far in 2008 and we are encouraged by the strong demand for our services that they recommend. Please go to slide 7.

Our excellent operating results contributed to a strong and liquid quarter-end balance sheet showing cash of $275 million, improved working capital, debt of $201 million and a debt to total cap ratio of 17%, well within our comfort range. At quarter end, EMCOR companies were net [overbilled] by $528 million, another record and a strong indicator of disciplined contract administration and good customer relationship management.

On slide eight, we show the continued evolution of our contract backlog portfolio. Contract backlog rose during second quarter to an all-time record $4.67 billion, 9.7% higher than a year earlier and 6.5% more than the first quarter of 2008. Compared to year-end 2007, private sector commercial and office contract backlog was roughly equal.

Hospitality and gaming backlog fell as we made substantial progress on some major projects that were awarded last year. Industrial contracts rose sharply notably as a result of our investment in refinery service companies. Health care and institutional backlog remained relatively constant and transportation and water and wastewater awards increased significantly.

EMCOR's ability to grow contract backlog during challenging economic times is reflective of our diverse revenue base and the broad demand for our services across both the private and public sectors of the economy. We try to balance our portfolio of contracts between cyclical and noncyclical sectors in order to achieve consistent performance opportunities.

In addition, as our mobile services and mission critical industrial services revenues grow, we are observing an increase in the proportion of our revenues and profits that is derived from projects that are not included in our contract backlog statistics because of their small size or brief duration.

Here to discuss some notable recent contract awards to some of our diverse subsidiaries is Tony Guzzi, our President and Chief Operating Officer. Please go to slide nine. Tony?

Thanks Frank, and as you mentioned backlog is at a record level and demand for our services remain strong and balanced across their construction and facility services companies. Let's begin this quarter with an award that we recently announced that some of you may have seen.

Our government services group will be providing facility operation and maintenance support for NASA's jet propulsion laboratory in Pasadena, California. Interestingly, other EMCOR subsidiaries have worked for the JPL and in fact our government team will use these EMCOR companies to assist with project work that will occur from time to time. By the way, the base contract is for three years with the potential for an additional seven years which is the way we like it, all based on our performance (inaudible) based on our other base operating agreements, we expect success.

In Maryland, our Duffy Mechanical company will be providing mechanical systems for an expansion at Andrews Air Force Base. Important to note in the DC area we have a very strong government business serving the GSA market, the Navy, Air Force, intelligence agencies and a broad array of government agencies.

Our Shambaugh & Son subsidiary; leaders in food process engineering and construction and a leading design build mechanical contractor, will be providing mechanical and electrical systems for the capacity expansion of the Michigan Milk Producers Association. Shambaugh's [scope] will support upgrades and expansion for plantwide automation, utility services, ammonia refrigeration and electrical generator backup. Michigan Milk is a long-term Shambaugh customer, turning to them for their design build, project management and project integration skills.

Switching gears entirely, our Wasatch Electric company is installing the complete electrical systems including fire alarm systems for the entire Montage Resort including the luxury hotel located at Deer Valley ski area. The project is on 16 acres and the building is approximately 1 million square feet with 13 stories consisting of parking, retail, spa, restaurants, condominiums, swimming pools, and hotel and meeting space.

In London, England our UK company has secured a multiyear contract extension with increasing use scope for the National Air Traffic Services or NATS. NATS is a leading UK air traffic control services company. The expanded services scope is in addition to the work (inaudible) EMCOR UK has been providing for NATS over the last four years. And again, we grow with our customers and get extensions when we perform.

We will be providing our facility services to NATS London offices, Hampshire headquarters, control centers in (inaudible) and (inaudible) and its College of Air Traffic Control at Hearn. This is a true case in expanding our services to our customers and creating added value for them and again, based on our performance.

And in London, Canada our Comstock company (inaudible) full mechanical systems package for a new 565,000 square foot addition to the London Health Science Centers Victoria Hospital in London, Ontario, Canada. The addition will consist of a clinic, an inpatient administrative area for the Children's Hospital, a birthing center and a neonatal intensive care unit. An outpatient mental health center will have 90 beds.

And finally our last project is the installation of a 2000 ton [schiller] for the expansion of the central utility plant at Mohegan Sun Resort and Casino in Uncasville, Connecticut. This work will be provided by Tucker and Tucker has a long history of serving the gaming industry in Connecticut going back to the initial construction in 1996. And it's a real testament to the Tucker team and their commitment and when their customer needs an upgrade or energy efficiency work, they turn to EMCOR and Tucker Mechanical.

Now I would like to you to turn to slide 10 so we can talk about a trend that is ongoing and supporting EMCOR's businesses nationwide right now. And (inaudible) should be on a slide that says EMCOR serves all facilities, energy systems.

EMCOR is uniquely positioned to take advantage of our customers' desire to reduce their energy costs and increase their green footprint. We start this process as you just look on the left hand side by executing a building performance assessment. Simple question -- how can we do better and what is the plan and opportunity? That is the question our customer's asking.

We then work to either commission the building so that it meets the specifications that it is designed to or recommission a building to bring it back into the specifications for which it was designed. Along the way we recommend the systems and solutions and we work three major operating levers and this really is what makes up the majority of the building cost -- lighting and electrical, HVAC, water -- and if you are in an industrial setting, compressed air. We also would be willing to offer a cogeneration solution for customers that either need backup power or want to take some part of their power off the grid.

What makes EMCOR unique is really three things. First, we seek the best solutions for customers -- again, solutions. We're not product focused and we're not positioning our product to sell them. Said another way, we are brand agnostic and will seek the best solution to lower our companies' energy cost and reduce their carbon footprint.

The other way we are unique is not only can we do this work ourselves but because of our excellent contracting capability in all our companies, specifically our mechanical and mobile service companies, we support other (inaudible) when they are implementing the solution that they design for the customer. The other thing that makes us unique is we follow up with a long-term service agreement across the whole building envelope and across all systems, products; again not just a specific manufacturers products, but all products; again, the strength of seeking the best solution for your customer not just your product solution.

Energy solutions, energy services in this building and facility, the industrial space is a long-term and long-cycle business for us. And with that I'll turn it back to Frank.

Thank you Tony. Energy prices and energy consumption and savings are major concerns for all of our customers, private and public. And we're optimistic about the role EMCOR companies can play in solving our customers' energy problems.

I also want to assure our long-time listeners that as usual it is our plan to make big (inaudible) from our newest big Mohegan Sun project. Please go to slide 11.

About a month ago, after a thorough midyear review of our performance and our prospects for growth, we announced an increase in our revenue and earnings guidance for the full-year to a revenue range of 6.8 to $7 billion and earnings range of $2.22 to $2.42 per diluted share. At that time it appeared to us that the lower half of the increased earnings range was well within reach but that excellent performance in all respects would be needed to achieve the upper part of the range.

As discussed on slide 11, we now feel that the building blocks are in place to enable us to achieve earnings per share of $2.32 or more. During the first half of 2008, we've established revenue momentum at record levels and dramatic margin expansion attributable to our strong growth in our US facility services segment.

Cash flow from operations has also been excellent. At the same time, our record contract backlog and its unprecedented balance across a broad range of economic sectors is a firm foundation for second-half performance and the maintenance of performance momentum into 2009. All of our segments are performing well including revenue and margin growth at Comstock Canada and a very encouraging level of profit performance in the UK. Please go to slide 12.

Accordingly, I am narrowing and slightly raising our earnings estimate for 2008 to a range of $2.32 to $2.47 per diluted share inclusive of the $0.07 charge per share that I discussed earlier while reiterating the previous revenue range. The new EPS range represents EPS growth over 2007 from continuing operations of 25% to 33%, truly remarkable performance in challenging times. While I will not be discussing our 2009 prospects in detail until much closer to year-end 2008, I'm encouraged by the breadth and the depth of our growth prospects and expect our excellent performance to continue next year.

That's it for now. As always, thank you for your interest in and your support of EMCOR Group. Now it's time for your questions or your comments and Dennis is here to tell you how to queue.

(OPERATOR INSTRUCTIONS) Alex Rygiel, FBR.

Thank you very much and congratulations gentlemen on just another outstanding quarter. Two questions. First, New York City is a big market for you and Verizon has recently announced that they're going to get very, very aggressive in deploying FiOS fiber-optic cable to the consumer. Do you anticipate having any kind of involvement in that strategy for Verizon?

As long as it pertains to the built base of US commercial and industrial users, absolutely. I doubt very much that we will be interested in anything that reflects residential work even if it's high-rise condominiums. We just don't do a whole lot of that and don't think it's a strong or consistent market. But we do continue to build on our position of strength in New York City.

I was particularly struck in listening to Tony's comments about our energy savings and energy use planning services during his presentation by the fact that Mayor Bloomberg announced very recently a $2 billion initiative to help New York City public institutions save on energy costs. And that is much more of the kind of large long-term initiative that we would be involved in. But fiber-optic cabling is well within our sweet spot of capability and to the extent that it involves increasing the performance of commercial buildings in a built space like New York City absolutely we will be involved, Alex.

As it relates to alternative energy, I know you do a little bit of construction of electrical transmission lines up in Canada. Do you have any interest in expanding that in the US and do you have any interest in or do you anticipate any opportunities as it relates to the developing wind energy market?

Interesting question. We have been interested in electrical transmission and distribution for some years. In fact it must be five or six years now that we looked at a book that was quite bullish about the development prospects for that market.

But this is to me one of those markets that keeps [receding]. The more you advance toward it, the further away it gets. And even current expectations for expansions in that market seem to me to be fairly modest because they are impaired by mundane problems such as permitting, (inaudible) issues and the like. As you mentioned, we have limited construction capabilities both in Canada and in the Northeast for participation in this area but I think it's unlikely that we will take the necessary significant capital expenditures to get further into this market frankly because our other businesses are so good.

I will say however that we have been involved in some very interesting renewables projects involving landfill gases in particular, installation of photovoltaic cells on a large-scale. We were talking about -- I don't know if we ever performed that fuel cell pilot project for (inaudible) that they were talking about for Long Island; maybe not. But in general we're interested in a broad range of renewable energy projects and have the ability to participate directly. Tony, do you want to talk about that?

Yes, we are very -- if you look at a kind of things we can do, we get involved with solar. Frank talked about some of the work we do with fuel cells. We use it as a solution a lot of times to put in front of customers that want to emphasize more so the green aspect instead of just the strong energy savings aspects of our projects. Biomass boilers, we've done some interesting landfill gas projects to usable pipeline gas.

So we are involved in all of it. When you gets to wind, we have been on a few wind projects. But it's an interesting market in that it's really a couple of things. One is the OEMs are heavily involved. A lot of the value is in the turbine. The second part of the job is it's a big civil job for all intents and purposes. Transmission is the other piece that comes into play. There are a couple of places we would do that work.

But so far we don't look at it as a significant construction opportunity per se for our electrical content or even our mechanical content although we do participate in several. But long-term we are starting to think about what might be the maintenance requirements on those wind farms and how we may participate there.

Frank, one last question. As it relates to London over the last week or two it kind of seems like the press now believes that the Europeans might start down the path of a recession following the US. Can you comment on your business in London, how it's positioned today versus maybe a year or two ago and how confident you are in the management team at the cusp of potentially a slowing market?

Sure, I think that it's useful to review very briefly the fact that we discontinued our activities in the rail construction segment of our UK business activities a year ago. These activities were the source of some fairly significant losses from time to time in the past and were large capital intensive projects extending over a lengthy period of time which are the exception for EMCOR as you know.

So today, our business consists of specialty construction concentrating on the UK public sector for the most part with some private sector participation together with a very strong and very profitable UK facility service business which was a pioneer of our facility service activities for EMCOR as a whole. With respect to a recession, I think it's very useful to remember that we have found in past recessionary circumstances that these are actually stimulative for facility service business. Why? Because we find that customers who are challenged by macroeconomic conditions tend to outsource more of their noncore activities to specialists like us.

That was the characteristic of the UK business that attracted me to the idea of facility services in the first place and that led to our strategic decision long ago to emphasize facility services as a way of balancing the inevitable cyclicality of construction activities. Today of course we are deriving more profit from our facility services segment than from any other segment. So I would have to count our strategic decision long ago to select facility services as our growth area as a very significant success and I think that characteristic of facility services, that is to say its ability to prosper in challenging economic times, as the key to the continued success of our UK operation.

Rich Wesolowski, Sidoti & Co.

Frank, the commercial hospitality (inaudible) backlog was down sequentially by a considerable amount in that it was more than replaced by the transportation and waste water. Was that by design or was there a sudden change in any of those markets?

I would say that it was reflective primarily of the change in those markets. We installed a diverse set of capabilities years ago in order to be able to stay constant and thereby to earn 52 consecutive quarters of profit notwithstanding the inevitable changes -- the waxing and waning of demand for services in various areas.

Gaming and hospitality statistically according to the Census Bureau figures has grown by about 65% a year for the last couple of years. That kind of growth rate is of course unsustainable over the long-term and the inevitable downturn in growth took place this year marked by a significant reduction in major new contract awards. This was inevitable. This was going to happen.

As compared to a year ago when we had received a number of major awards that we're now performing, it is true that our backlog levels today are significantly lower. But in fact they are about equal to our level of backlog maybe two years ago which was still a very vibrant business and market for us. So I am not particularly troubled by the fact that our exposure to the gaming and hospitality segment has declined and has been replaced by a very healthy backlog growth in water and wastewater and transportation projects and notably in refinery services within our facility services segment.

Okay, you mentioned the private nonresidential spending in the hotels but in general if we look back at the last cycle, the spending growth turned negative in the summer of '01 and yet even in 2002 you guys were posting organic profit growth. We haven't seen the downturn in the private nonresidential spending yet but the starts say it will happen in two to three quarters. Given that leg, I mean could you even -- do you even think there's a decent chance you see it in your business in 2009 in electrical and mechanical?

Well, we've got a lot of momentum to carry forward. I mentioned that during the body of the call that commercial and office, while it's showing some evolution within that segment, it continues to be strong for us, maybe surprisingly so. But things are not bad all over the country and the amount of energy-related retrofit work that we do especially as Tony highlighted during his presentation this morning, suggests that perhaps the bulk of our business in that segment comes not from major capital expensive and intensive projects, but in fact from retrofit projects and the energy retrofit and related projects whose payback is so much faster than it used to be as a result of the significance of energy costs for facility users.

I think that, Rich, it's not just our backlog performance but our off-backlog performance if you will -- the frequency of customer callout work for mission critical jobs of short duration in our facility service business; the walk-in customers for our general facilities, our mobile services business. That is a significant addition to the strength reflected by our backlog projects themselves.

Great. If I take out the backlog amortization charges listed in the Q from the acquisition contribution, in the first half I get about 18% operating margin from the facilities acquisitions. I know it's not all (inaudible) and I can't imagine that any of the construction or facilities acquisitions that aren't offset are doing a number anywhere in that range. So am I correct in inferring that (inaudible) is running at about a 20% plus operating margin again ex the amortization?

You're probably in the ballpark, yes. That is a fair comment.

Finally, the net [overbilled] position really jumped in Q2. If demand slows and you don't have as much leverage with your customers, is it possible that the free cash flow falls off to what I would barber consider a normal lever for this earning range of -- I'm going to say $2.50 to $3?

I'm going to let Mark Pompa answer that because he is our net [overbilled] guru.

Clearly cash flow performance has been very, very strong. Clearly I think the thing to point out is the fact that in light of the fact that the net [overbilled] position has continued to grow, we are collecting only roughly 15 to 20% of those monies in advance. So you would see some reduction in our operating cash flow but nothing too dramatic assuming that trends change.

Rich, we have always thought -- and you know this. This is for the benefit of the other listeners. We've always thought that our net [overbilled] number was as much an indication of the quality of our relationships with customers and the strength of those relationships that enables us to write contracts that permit us to bill in advance of sustaining the cost. It's an extremely important aspect of our liquidity and the maintenance of those customer relationships and we have focused on that for many years. It's a mystery to me why more companies especially those in our sector don't do that.

John Rogers, DA Davidson.

As we look at the second half of the year particularly, could you talk a little bit about what your experiences or expectations are for the facility services seasonality especially the acquired businesses? You've obviously a great contribution in the second quarter and as I kind of think about the margins here and what you are implying would suggest that some of the margins there as a percentage are going to decline in the second half if I'm doing this right. Is that a seasonal factor? Maybe you could just explain that a little bit?

Sure, well first of all we don't know these companies well enough yet to be certain about the extent of their seasonality. Frequently for example, refinery turnaround activity is typified as a winter activity or early spring activity at the latest associated with reformulation for summer gasoline formulas and the like.

So our original expectations for Ohmstede and the refinery services operations as a whole suggested that we would see a fairly significant tapering off of their revenue and profit performance even as early as the end of the first quarter or so. That has obviously not taken place and it's appropriate for me to say that we're delighted with the performance of our Ohmstede acquisition and our other acquisitions that we've made in the last 12 months.

And we think that they're going to continue to perform much better than we even had calculated. But how seasonal they're going to be and what kind of drop-off we will experience in the second half of the year before they pick up again seasonally towards year-end remains to be seen. We just don't have enough practical experience with the ownership of that company and knowledge of that market to be absolutely certain about the six months or so.

The market is shifting; right, Frank? As we see more and more of the heavy crudes coming into some of our customer base, it's changing the characteristic of these turnarounds, it's extending these turnarounds. It's providing the need for more ongoing maintenance.

So like us, the Ohmstede folks are working through that. But it's also -- part of what you're seeing is going back to what I was talking about. We're continuing to see strong demand in our mechanical services segment which is also helping margins right now especially with respect to retrofit work, energy retrofit work that we're able to do quick and get the customers the savings as fast as we can. The speed of the project is determining really our ability to generate more margin.

Is it fair to say that you haven't seen that expected decline show up yet?

That is right. The acquired companies in general are operating at higher levels than we had expected them to and we have not seen leveling off yet of their performance.

And as you look at your various market segments, I know that it's a lot of smaller projects, but have you seen any cancellations, any notable cancellations of any work?

We have seen in fact no cancellations, John, period. That is of course characteristic of EMCOR. On large projects we tend to participate in those projects at a time when the [sunk] costs in those projects are so significant that they have inexorable momentum towards completion. So we just don't find those kinds of projects being cancelled because until we add the systems to those buildings or facilities, they're worthless literally. The value added by EMCOR companies is comprises the bulk of the finished value of these large project. So cancellations just don't occur for us.

And then just lastly your debt level has come down and obviously you're generating a lot of cash. It's not zero but priorities there still acquisition, anything else that you would look at in terms of your balance sheet or what the Board is thinking?

Well for myself, I can't speak for the Board because we haven't discussed our current balance sheet with them recently. I will say that my own views would be that future allocations of cash would be in balance between further debt reduction which I think is always appropriate in challenging economic times together with continued outlook for interesting acquisitions and investment opportunities.

There's some interesting things happening. We see, I believe, somewhat overstretched private equity firms who are perhaps interested in divesting of assets acquired earlier at interesting prices. I believe that this is one of those situations where the strong are going to get stronger as economic circumstances continue to be challenging and EMCOR is one of the strong ones.

Great, thank you and congratulations.

(OPERATOR INSTRUCTIONS) Jeff Beach, Stifel Nicolaus.

Good morning Frank, Tony and all. Congratulations on another good quarter. A couple of questions, three. If I missed it I apologize. Can you give me an estimate of the organic growth in your backlog?

Roughly 5% Jeff, 5 or 6%.

All right, thanks. And second, in the acquisitions you have made particularly in the refinery area, are you still taking actions there? Is there any integration among the acquisitions or actions you're taking to cut cost, improve operations, factors like that that will drive the margins higher because of internal actions?

I wouldn't say specific cost cutting initiatives, Jeff. They have leveraged our purchasing scale. We have done all the back office things from information technology, our Lotus Notes platform. We brought our purchasing programs -- and that will modestly improve things.

The biggest thing I think has been on a number of fronts. One is I think the team down there, we have been able to give them just a little bit more capital which has allowed them to improve the efficiency in the shop so we may see a little more improvement in the margins. They're pretty good now.

We look at this more as a growth play -- what kind of capital can we put (inaudible) to expand our capacity, expand our field capacity and continue to get the best best folks in the business to work for us. One of the things I think that's happened is a great team there and we have been able to attract even increased talent to the organization and add to the depth of that organization because now that asset has a long-term owner.

And then with the acquisition that we added to Ohmstede and Redmond; Ohmstede's discipline, estimating models, pricing models and ability to understand the demand patterns of their customers has really helped Redmond improve their operations and we continue to build out that market both on a [field] side and a shop side on the West Coast. And that's really the Ohmstede model -- the great (inaudible) operations coupled with great shop operations to offer the customer total integrated package.

So, margins are important. We bought a company with great margins. We're going to continue to try to drive that and maintain our margins. But we're really continuing to look for the topline growth and customer penetration.

Thanks, the last question. Back on the UK, a couple of good quarters now. The UK market I believe is -- or the economy is slowing down maybe the most in Europe and maybe more than in the US. Can you talk about the outlook in the UK and whether you think you can maintain this profitability in the UK, say, next year?

I don't know (inaudible) next year Jeff. I'm going to talk more in detail about it as we get close to the year-end although I'm certainly optimistic about it based upon the excellent performance in all our operations and the backlog and earnings momentum that I believe we will sustain into next year. Specifically with respect to the UK, I draw comfort from two major factors.

Firstly, the relatively large proportion of public sector work that we perform in the UK including the NATS project that Tony alluded to in his presentation this morning, a big air traffic control organization that we perform mission critical work for on a continuous basis, typical of the high value added contributions that EMCOR companies make to long-term customers. In addition to that and as I was mentioning to an earlier caller, the significant proportion of our UK business that is attributable to facility services is the kind of business that survives a recessionary downturn and that in fact may be stimulated by it for reasons that you and I have in fact discussed and observed many times in the past. That is that trying times motivate our customers in many cases to outsource non-core activities so that they can concentrate on their core businesses.

We saw that with our flagship facility services relationship with British Airways 15 years ago when they initially decided that they were in the transportation business and weren't in the business of owning and operating facilities. And they outsourced facilities management to us at that time and it has been a strong and long and mutually profitable relationship ever since. So that is typical of the kind of relationship that lasts through cycles and continues to be a profit earner for EMCOR for the very long-term. I think that Tony has a comment for you as well, Jeff.

Jeff, if you look at our pain over the last couple of years, our pain in the UK especially last year was in the rail sector. And you know we sounded like we were making excuses when we kept saying that our underlying facilities management business and our construction business were performing well. What you're starting to see in the numbers is the absence of badness in the rail sector coupled with continued right-sizing of our operations at the headquarters level and also within those businesses.

One of the things building on what Frank said that we noticed in the past six months especially if we're starting to take customer share in some of our flagship customers in the UK. So where the facilities [by] especially had been split 50-50 between us and somebody else, people like NATS and other commercial customers that we really aren't privy to talk about, have now rewarded us with more of the business because of our ability to drive cost.

And we have also grown our specialist service business over there at a much higher rate than we are our core construction business. So all those things bode well -- putting a base under the business. And I think we all sleep better at night knowing that we're not building big public infrastructure rail projects in the UK anymore.

Tahira Afzal, KeyBanc.

Hi guys. Many congratulations on an outstanding quarter. I guess you already beat the socks off everyone (multiple speakers) I had a couple of questions. Number one, in terms of your facility service business on an organic basis, how much did revenue grow by?

High single digits, mid to high single digits on an organic basis and there's a lot of ins and outs.

It seems like it has picked up versus the first quarter, would you say?

Big-time. We continue to grow the government sector nicely. We had to get through the whole CBRE acquisition divestiture last year and had to reset our commercial site-based business and we continue to see okay growth in our mechanical service. Okay, what I mean by that is it continues its steady performance. Our acquisitive growth has been very good there.

So we are growing. Again there it's hard to make the big organic leaps in that kind of business because it is a sold service. You've got to add technicians, you've got to do all the other things. The good news is it's a lot more sticky on the way out right? So it is sustained base to grow from.

Okay, and then if I look at your backlog and your organic backlog growth rate, I mean if you look back a couple of quarters, where is the slowdown essentially coming from?

The slowdown in our backlog growth?

Yes.

It's grown (multiple speakers) trying to understand (multiple speakers)

Well, I mean organic. Sorry -- your organic backlog.

Organically, it is up also.

Well I mean in terms of the rate of growth I guess.

Well, we're coming from such a higher base now is one. And as Frank talked about, hospitality and gaming specifically Las Vegas has grown terrific over the last couple of years and we're basically back to where we were 18 to 24 months ago. And that's a good position the that's really the story of how we do things.

We see a good market, we take advantage of it. And what you're seeing is a shift to other markets that are a little more robust right now although Vegas will continue to be a good performer for us for at least the balance of '08 and '09.

This is the model (inaudible) this is how we've made money 52 quarters in a row by being in a multiplicity of markets and being able to move nimbly from markets that are declining to markets that are growing and there are always some of those. And we are elated by the fact that we are well positioned in the oil and gas sector and in a position to take advantage of refinery and pet chem maintenance requirements that are being driven by as Tony mentioned earlier, feedstock changes, by regulatory requirements and safety issues and also by demand for refined products. So we're glad to be there.

So we're glad we made the right decision regarding a major investment in that segment almost a year ago now. And although we are watching a decline in new awards in Las Vegas, we're not particularly sorry about that because a nicely balanced portfolio that includes a strong position in the public sector matched by continuing significant profit opportunities in the private -- as long as we can maintain that sort of balance we will avoid the dangers associated with imbalances of the type that are particularly dangerous for narrower companies, companies with only one line of business. So we're very happy with the balances that we're showing right now.

Okay, great. In essence you're moving more towards like a Jacobs type of model would you say?

Well I don't know who was there first. Frankly, we have been talking about balance and particularly a balance between noncyclical facility services, in fact countercyclical facility services and specialty construction for -- oh, I don't know -- 13 years now. It wasn't always the case that we could fulfill those strategic goals.

We started striving for this kind of balance back when we didn't have much or any money and we were a lot smaller and weaker than we are now. But our principles have stayed the same. We've stuck to our model, stuck to our guns and I believe we were right. And today we have a model that is as good as anybody's. There aren't very many companies anymore who can say they have been profitable for 52 quarters and so we are in select company.

(inaudible) people assume our construction business doesn't have customer loyalty to it but the Mohegan Sun award and we have thousands of awards like that every year at EMCOR where customers whether they be owners and even our general contractor customers and developers will pick EMCOR to continue to do work for them because we do it right the first time. We know how to get the building commissioned and now with the worry about energy and energy security and all of those things, they know we have the wherewithal to come in and solve that problem also.

Fair enough. You know as I look at that backlog breakdown, obviously indicates that you have seen a ramp up on your industrial side and you mentioned earlier that some of that is tied to the momentum you have seen on the downstream on the refinery side. And you know if I look at Ohmstede from what I understood, most of that momentum has been in your facility services business or more I assume walk-in related to a great extent. So you know if I look at the strength that you have seen in industrial backlog, would it be fair to say that you have been able to leverage some of Ohmstede's relationship beyond the walk-in work that you typically see?

Ohmstede has been able to continue to build their customer relationships. We also have had industrial growth outside of Ohmstede. EMCOR has been positioned in the industrial market for a while and in the refinery market for a good while. That's what led us down the path to acquire Ohmstede was our success and the demand we saw in our other subsidiaries and downstream. We're also seeing it in other areas.

We acquired a company last year called Performance Mechanical to add to our industrial capabilities on the West Coast, specifically California. That's gone exceedingly well. Our Contra Costa Electric company is a very good industrial contractor and they're seeing demand not only just for refinery downstream power generation, alternative energy, processing plants.

And then you add what we just announced with Shambaugh. Shambaugh is a very significant industrial contractor is the specifically in food processing but also in fire protection to industrial plants. So this is a market that we would watch for a while. Our companies had performed better than our average company over the last four or five years and it's why we decided to build the position we built with Ohmstede and with PMI and other industrial assets.

And if you look at the margins within this industrial business that you're getting into versus the ones in the hospitality lodging side which you know might be sort of weakening, would you say they're similar or better?

I think the margins are better and if you ask the question what do we think of the margins and backlog today versus a year ago, we have no reason to believe that our margin mix and our backlog today is any worse than it was a year ago.

Okay, fair enough.

Make no mistake. We like casino work. We like performing projects for customers who want only the best for whom the epitome of quality and timeliness is a requirement. And we really enjoy working for our casino customers who are very clever about the time value of money and who want the best there is and that is why we have been successful in Las Vegas and with Mohegan Sun and other top-notch customers for so long.

But when their growth characteristics decline for reasons attributable to their markets or their business, we're glad to say that we can provide similar services to mission critical refinery processes for example where the same principles apply. So we like both businesses and its a basic virtue of our business model that we can be in both places.

Fair enough. I guess the last thing I wanted to just get some comfort around, if you can help me understand -- if I look back in the fourth quarter '07 and you had losses coming in from the UK et cetera and yet you were able to do 5% in operating margins; in fact if I look at it on a claim basis, maybe closer to 6%.

Now you have told me that the backlog margin are intact and Ohmstede seems to be in tact. Why would I not see margins improve (inaudible) 6% in the fourth quarter versus what seems to be implied in your guidance?

You're talking about the fourth quarter of '08 and our expectations for the last half of the year and basically you think we're being too conservative?

Well materially conservative, from what I can tell. Would that be correct or --?

Well we can only talk about what we can see. And what we can see right now particularly with reference to an earlier caller who asked us about our opinion of the performance of Ohmstede and our refinery services sector which is an important source of second half revenue and earnings, is that we don't have experience with the ownership of such an asset in the second half of the year and therefore we're not prepared to talk confidently about it until we see how it goes.

We understand that we have a reputation in the market for our conservativism in terms of our explanation of our profit expectations and we're not ashamed of that. I think that's the right thing to do especially in economic times like the present.

So we have reasons associated with our innate conservativism. We're taking a conservative line as far as our second-half expectations are concerned. Notwithstanding which, we're still protecting earnings increases of 25 to 33% which I think is nicely robust for current circumstances.

Fair enough and I lied. I actually have one last question. In regards to what you said earlier about what you plan on doing with your cash, obviously the free cash flow is phenomenal and if you do see a bit of a slowing down given the quality of your receivables et cetera I assume you would see a lot of cash flowing in.

Incrementally it seemed that you were more aligned towards doing acquisitions and paying down debt but then again I remember earlier on last year you had mentioned something along the lines of perhaps starting a dividend at some point especially as you get more comfortable with your recurring revenue stream. Is that still on the cards or would you say that you've stepped away slightly from that?

From me, it's always a matter of what's best for the stockholders. I think that it's not debatable that we have been extraordinarily successful in putting the shareholders' assets to work to create to significantly increased earnings over the last year.

We think that if we can continue to make advantageous investments like Ohmstede and other recent investments that have dramatically improved shareholder value, that we will continue to do that. I think that would be our priority. But we do have two additional alternatives.

I would like to reduce debt a little bit more in the absence of major investment opportunities. And of course you can't time investment opportunities. They come to you when they come to you. You can't go out and manufacture them. And with respect to the dividend, we have considered a dividend from time to time. We will probably consider it again. But as I say, the guiding principle for me and I believe for our Board will be whatever is best for the stockholders in current circumstances.

Thank you very much gentlemen and congratulations again.

(OPERATOR INSTRUCTIONS) Joe Ritchie, Goldman Sachs.

Just a quick question on visibility. What are you guys seeing from some of your leading indicators, some of the engineers you work with like a Jacobs or someone like that? Is the workflow staying pretty good in there? You've seen the ABI index look pretty weak here.

I have my own relatively negative views about the accuracy or the reliability of the ABI index. Frankly I think that anything that purports to provide a future look at a sector that is such a large part of the GDP ought to be a little less volatile and a little less anecdotal than the ABI. So there; I have said it.

With respect to the project pipeline, you know yourself that the pipeline is full at the Jacobs and Floor and the front-end of the engineering and project management market. And that is just one of the factors that we take into consideration in believing that there is a continued reason for optimism as far as performance in the nonresidential construction and the facility management maintenance business for the foreseeable future.

Now the foreseeable future for EMCOR is perhaps shorter than for some other companies because we don't take on many large lumpy long-term projects. That happens to be a benefit just now. But I'm positive about the prospects and you point out one important source of that optimism and that is the fat bulging portfolios of major projects still in the hands of companies like Jacobs and Floor.

Great, and then finally on staffing, you seeing any customers go union that didn't have to go union?

Tony?

Chris, I think the more complicated the project -- it all depends on location. That is one of the variables, not the only variable. I think we're seeing customers opt for a union solution when they may not have in the past because of the skilled workforce and the speed (inaudible) get done. And there's some other things going on with respect to productivity enhancements that have undertaken especially on the mechanical side and (inaudible) on the electrical side around 3-D modeling where really the mechanical trade is becoming more and more involved in the product coordination and we can get a big productivity benefits and our use of prefabrication. And those two have really helped us offset some of the perceived (inaudible) advantage we have versus a nonunion competitor.

Tony, I don't know if you've got the statistics quickly to hand and I shouldn't buttonhole you like this. But I recall commenting on an earlier call about the major disparity between a very nominal increase on our part in labor hours as compared to revenue.

I mean we have -- our labor hours are up one-third of what our revenue is or less and our fixed cost in especially our construction operations, number of people absence bonuses is up very nominally. So we really have been able to leverage technology, project planning and prefabrication to a great extent to really drive productivity and I think you see it in our margins because the majority of our work is either GMP, guaranteed maximum price, or fixed-price work and that's how we prefer it.

Avi Fisher, BMO Capital Markets.

Nice work on the quarter. There has been some decelerating growth rates at the US mechanical segment albeit off of difficult comps. But concurrently there has been accelerating growth in durable goods orders for HVAC and (inaudible) equipment. Now I'm not sure about the valence of that but is there enough to suggest a re-acceleration exhilaration of growth looking forward in US mechanical?

No, I think your first point is probably right on point and we're coming from some pretty tough compares on the mechanical growth rates. I would tell you on the HVACR one of the things they are benefiting from [or] the same thing we're benefiting from on the small project side.

A lot of equipment replacement is being driven right now by energy savings projects and I think we're in the first quarter of a four-quarter game there with the amount of fleet that's out there for all of us to replace. Other than the OEMs, EMCOR runs the largest HVAC service and retrofit operation there is and so I don't know if you'll see it necessarily in just our mechanical operation but we certainly are seeing it in our mechanical service operation and our booking trends and a hot summer always helps people realize that not only their equipment is old but it's inefficient.

If I could just squeeze one more question in and thanks for the color on that. You mentioned you're seeing a decline in new awards in Las Vegas. Is that a new outlook versus how you expected it earlier in the quarter or earlier in the year? Did you expect to see more bookings than you are now?

No, I can't say that we did. I alluded earlier to the Census Bureau growth statistics for that segment and the unsustainability of the dramatic growth that it has experienced over the last 18 to 24 months. I am quite satisfied with the evolution of this market.

I like the balance that we have achieved currently. I love Las Vegas customers and the margins that we are able to derive from that business. But we have never been a one-basket kind of company. We always seek balance in everything we do and I'm frankly happier with our balance today than I was six months or a year ago.

Definitely a diversified portfolio. Thanks very much.

At this time there are no further questions. I will now turn the conference back over to management for closing remarks.

As always, thank you all for your interest in and support of our Company. I appreciate it and we will talk to you soon. Thank you.

Ladies and gentlemen, this does conclude the EMCOR Group 2008 second-quarter conference call. You may now disconnect.