EMCOR Group Inc (EME) 2008 Q3 法說會逐字稿

Good morning. My name is Kristin, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group's Third 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) Thank you.

I would now like to turn the conference over to Mr. Gordon McCoun. Sir, you may begin your conference.

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 third quarter results, which were reported this morning.

I'd now like to turn the call over to Kevin Matz, Executive Vice President, Shared Services, who will introduce management. Kevin, please go ahead.

Thank you, Gordon, and good morning, everyone.

Welcome to EMCOR Group's earnings conference call for the third quarter of 2008. For those of you who are accessing the call via the Internet on our website, welcome, and we hope you have arrived at the beginning of a slide presentation that will accompany our remarks today.

Currently, everyone accessing the slides should be on slide one, which is the EMCOR title slide. Please advance to slide two.

Slide two depicts the executives who are with me to discuss the quarter and nine-month results. They are Frank MacInnis, Chairman and Chief Executive Officer; Tony Guzzi, President and Chief Operating Officer; Mark Pompa, our Executive Vice President and Chief Financial Officer; Mava Heffler, Vice President, Marketing and Communication; and our Executive Vice President and General Counsel, Sheldon Cammaker.

For call participants who are not accessing the conference call via the Internet, this presentation, including the slides, will be archived in the Investor Relations section of our website under presentations. You can find us at EMCORGroup.com.

Before we begin, I want to remind you that this discussion may contain certain forward-looking statements. Any such statements are based upon information available to EMCOR's 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 materially differ 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 change of 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 and Form 10-Q for the third quarter ended September 30, 2008 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. You always manage to have it end happily.

Good morning, everyone, and welcome to our 55th 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 third quarter and year-to-date 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 brief discussion of those operating results, including highlights of segment performance, cash flow from operations, and overall quality of earnings. After commenting on our quarter-end balance sheet and liquidity, I'll discuss the recent evolution and current status of our contract backlog portfolio, with special emphasis on industry sectors that may experience changes in demand patterns. Then I'll 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 companies, followed by a new analysis of our fastest growing business segment, U.S. Facility Services.

During our respective presentations, Tony and I will do our best to evaluate EMCOR's excellent current performance and future prospects in light of the challenging macroeconomic circumstances in which most large companies are operating today.

I'll talk about trends that will define our performance through the fourth quarter and into early 2009, and I'll provide modified revenue and earnings guidance for the 2008 full-year period. 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 provide helpful answers.

So let's begin. Please move to slide three.

In mid-1995, EMCOR began a record of consistent profitable operations that continues unbroken today, 53 consecutive profitable quarters later. Recent events have shown how difficult it is, even for well-capitalized, well-managed companies, to achieve such a record of consistent performance. It's worth noting that EMCOR's 13.5-year profit record includes several significant market cycles, an indication that our business model works in a variety of macroeconomic circumstances.

Slide three represents the best third quarter in our history by a substantial margin in all relevant measures of financial performance -- revenues, gross profits, operating income and operating margin, and earnings.

General and administrative costs rose primarily as a result of newly acquired businesses and incentive compensation accruals linked to the Company's excellent performance.

Slide four reflects a similar pattern of performance improvement for the year-to-date period, during which revenues increased 23%, operating income rose 77% to more than $201 million, and diluted earnings per share from continuing operations of $1.82 was 64% higher than in the year-ago period. It's worth noting that EMCOR's operating income percentage rose year over year from 2.7% to 4% for the nine-month period, an important confirmation of market demand and quality of services.

Slide five illustrates some of the performance highlights from our excellent third quarter. Revenue growth pointed to strong demand across our broad range of services and geographic markets, and all five of our business segments were profitable.

Our U.S. Facilities Services segment reported dramatic growth, notably from recent investments in refinery maintenance services, as we continue to balance our specialty construction revenues with less cyclical facilities maintenance work. A record 4.6% operating margin for the quarter led to a 43% increase in operating income to a record $78.6 million, including positive contributions from both our Canadian and U.K. businesses.

Our British business continues to reflect the success of our reorganization efforts, and we're very excited about our Comstock, Canada company and its growing strength in conventional and nuclear power generation.

We continue our quarterly operational highlights on slide six.

Diluted earnings per share from continuing operations rose to $0.72 from $0.55 a year ago, a 31% improvement, and our quality of earnings was extremely high.

Cash flow from operations year to date was just under $200 million, a testament to our disciplined approach to cash management and contract administration. Our record profits and cash flow resulted in balance sheet cash at quarter end of $341 million, and our stockholders' equity surpassed the $1 billion mark for the first time.

We're proud of EMCOR's performance during this record quarter and grateful for the efforts of the many talented EMCOR employees who made it possible.

Slide seven, our balance sheet, illustrates our conservative approach to cash, liquidity, and leverage, characteristic of our Company for many years and a major factor in our long-term profitability.

Balance sheet cash exceeds total debt by more than $140 million, working capital rose to $476 million, and our ratio of total debt to total capitalization declined to 16.5%, a modest level of leverage that we believe is well within our safety zone.

Our $200 million debt is comprised almost entirely of a term loan from a consortium of banks, the original $300 million proceeds from which were used to pay a proportion of the acquisition costs of our Ohmstede refinery maintenance company. The term loan agreement requires principal payments quarterly in the amount of $750,000 plus interest, with a final payment of all remaining principal and interest in October of 2010. We have made voluntary prepayments of almost $100 million in addition to the mandatory and quarterly principal payments to reduce the balance of the term loan to $198.5 million on September 30. We're in compliance with all contractual covenants related to the term loan and expect to remain so.

We also have a revolving credit facility in the amount of $375 million, also from a consortium of banks whose agent has recently reaffirmed their credit commitments. We have no borrowings outstanding under the credit facility but have utilized $48 million of letters of credit in connection with normal business operations, resulting in an available balance under the credit facility of $327 million.

We believe that EMCOR has adequate access to and sources of operating and investment capital for the foreseeable future.

Please go to slide eight. Here, we show the continued evolution of our contract backlog portfolio, representing the value of unperformed work on hand from Construction and Facilities Services contracts.

We calculate the values shown on this slide very conservatively. In particular, we report the value of multi-year Facilities Services contracts of no more than one year of base revenue.

In addition, our backlog schedule omits a significant number of small, fast-moving projects that, in total, amount to about 30% of our revenues, a percentage that continues to increase in conjunction with the growth of a number of our U.S. Construction and Facilities Services businesses.

Contract backlog as of September 30, 2008 was $4.42 billion, compared to 4.48 billion at the end of end of 2007 third quarter and 4.67 billion at the end of the 2008 second quarter. The slight year-over-year decline in contract backlog and the roughly $250 million sequential decline were both primarily attributable to the suspension of two large Las Vegas hotel and casino projects with a total value of about $170 million. Together with a modest decline in commercial project awards, largely offset by increased Construction awards in healthcare, water/wastewater, transportation, and industrial contracts. Awards rose both sequentially and year over year in our healthcare, transportation, and water/wastewater segments, illustrating the success of our diversity business model and the stability it creates.

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

Thanks, Frank.

Diverse project demand continues across our markets, and on slide nine, I'd like to walk through some representative projects that show our diversity that were obtained in the third quarter.

For anyone that has traveled on the congested highways of Long Island, we are hoping to alleviate some of the traffic bottlenecks. Our Welsbach Electric Long Island Company is performing the electric work for the modernization of the intelligent transportation system and the lighting upgrade for 13 miles on the Wantagh Parkway. Welsbach's scope includes new variable message signs, all new parkway lighting, fiber optic cabling, [CCP video] cameras, and the central systems software integration.

Across the river in New York City, our [Forest] Electric Company is installing the electrical systems for Ogilvy and Mather's 290,000-square-foot retrofit. Our work includes installation of the electrical panels, feeders, complete lighting, fire alarm, and telephone and data cabling.

I should also mention that this is a green project and that we continue to see more and more green projects in the marketplace.

For example, at the University of Wisconsin School of Medicine, they're building a 135,000-square-foot faculty administration building on the Madison campus. Our [Kilgas] Mechanical Company will be installing the HVAC air-handling units and air chillers-- [Airco] chillers for this green, lead-certified building, and we're seeing more and more of that across our portfolio.

In [Jenn], Kentucky, our [Debraw Kempo] Company is providing and installing the industrial mechanical systems for North American stainless steel companies' new steel pickling line. The [Debraw] team is performing the second phase of this project and is now fabricating and installing all the process piping and supporting process utilities, such as steam, condensate, compressed air, instrument, and industrial water. This fast-track project requires a great deal of subsystems assembly, and we're going to do that in our shop at Debraw Kempo.

Prefab has been a major, major improvement in EMCOR's operation and helps drive a lot of the margin expansion that you see in our mechanical business over the last three years, and it's productivity we can keep.

In Las Vegas, our [Dyne] Electric Company has been awarded in three phases for the Hard Rock Hotel remodel and expansion. Phase One is a new eight-floor parking garage, Phase Two is a casino remodel and expansion, and the third phase is the South Tower addition, which will add 376 rooms. Dyne's scope of work includes the installation of complete electrical distribution, lighting, power, telephone, and data and fire safety systems for this new project.

And we continue to see strong demand across the country for healthcare facilities of all types and sizes. For example, in Atchison, Kansas, our Central Mechanical Company will be installing the HVAC, sheet metal, and plumbing systems for a replacement critical access hospital for the city of Atchison. This 90,000-square-foot state-of-the-art facility will house 25 patient rooms, three surgery suites, three intensive care trauma suites, and approximately 30,000 square feet reserved for private clinical use.

And at Harvard in Cambridge, Massachusetts, one of our mechanical services companies, EMCOR Services Northeast, has been awarded the replacement of two indoor 30-year-old main air handlers in Robinson Hall, again, showing that EMCOR does the majority of its work in existing facilities. This original facility was built in 1900. The units arrived in September, and after the start of the school year, necessitating a flexible two-phase plan to allow the building to continue to be used by the history department and its classrooms and to remain cold and have good ventilation throughout the project.

EMCOR Services Northeast is part of our Mechanical Mobile Services Group, which is part of our Facility Services segment.

I thought I'd spend a little bit of time talking about EMCOR Facility Services, how it operates, and how it's improved over the last five years. And if you go to slide 10, you can see that.

EMCOR Facility Services operate as four key business units or platforms. We have site-based services, both in the government and commercial spaces, we have our mechanical mobile services business, and we have our industrial services business, of which Ohmstede was a major addition to it. And it's important that not only within EMCOR Facility Services, we perform both industrial services and mechanical mobile and electrical services in our electrical and mechanical business at EMCOR Construction Services.

We've been building these businesses for a long time, but its' instructive to look at the last six years. You have a chart of revenue, operating income, and operating income percentage, and what you see is in 2002 full-year, which is the first bar, we were doing $186 million of revenue for the full year, $2.9 million of operating income, and an operating income percentage of 1.6%. Would not be material to EMCOR's results today.

Through acquisitions, organic growth, and focused selling, we've been able to grow the business just through three quarters, to 1.1 billion, making 83.3 million with a 7.4% operating margin. This is behind a lot of the margin transformation that Frank talked about in his earlier comments.

It will serve as the necessary balance and base to continue to propel EMCOR in the future and serve as a major investment opportunity as we go forward.

Back to you, Frank.

Thank you, Tony.

We believe that the growth and profitability of our U.S. Facilities Service segment has had a transformational effect on our revenue balance, our margin characteristics, and our non-cyclical earnings base. These will be important factors in EMCOR's continued success amid macroeconomic challenges.

For EMCOR's outlook for the remainder of 2008 and into 2009, please go to slide 11. In assessing EMCOR's prospects for the remainder of 2008 and into next year, there is more than the usual number of moving parts to keep in mind due to uncertainties in the credit markets. Some principles, however, seem very clear.

As discussed a few minutes ago, EMCOR is well capitalized with substantial cash, no net debt, and well-established credit relationships. We foresee no internally generated constraints on our capital employment and deployment for operational or investment purposes.

Our very high quality of earnings, based on the relationship of cash flow from operations to net income and our net overbuild status of $554 million, an all-time high, indicate carefully tended customer relationships and sophisticated contract administration.

It's possible that prolonged uncertainties in the credit markets may ultimately impact the capital expenditure budgets of some of our customers. It's important to note, however, that between 60 and 65% of EMCOR's revenues, including essentially all of our Facilities Services revenues, are derived from work on existing facilities, as opposed to new green field projects. As such, we believe that the majority of EMCOR's revenues are funded from our customers' operational or maintenance CapEx budgets, not from major long-term discretionary capital outlays.

We are exceptionally diverse and well established in largely noncyclical end markets, like healthcare, water and wastewater, government services, safety and security, transportation infrastructure, electric power generation, and oil and gas facility maintenance.

Our financial strength, surety bond and capacity, and technical skills in new fields like building information modeling, make EMCOR the safe choice for customers seeking to build, upgrade, or maintain expensive and complex facilities.

Our business model works, as illustrated by our 53 consecutive profitable quarters, our management group is one of the most seasoned in the sector, and our operating margins are at the best levels in our history.

Slide 11 illustrates the balance resulting form our backlog and end market diversity and the flexibility with which EMCOR companies can move from areas of declining demand to those where demand is growing.

Please go to slide 12. Accordingly, we look for a continuation of relatively strong revenue and earnings growth for the remainder of 2008 and into the first half of 2009. Specifically with respect to full-year 2008, we reiterate our previous revenue guidance of 6.8 to $7 billion and raise our guidance for diluted earnings per share from continuing operations from our previous range of $2.32 to $2.47 to our new estimate of $2.48 to $2.58, representing year-over-year earnings growth of between 33% and 39%.

With respect to 2009, our budgetary process, which is a detailed bottom-up process starting at each subsidiary and flowing up to corporate, has just begun and will not be complete until December. However, based on our view of general operating conditions and an assumption that an economic stimulus and macroeconomic restructuring effort will be successful in stabilizing the credit markets by mid-2009, it seems likely to me that we will maintain our revenue and margin momentum through at least the first half of the year and with no material degradation of revenues for the year as a whole, subject to the foregoing assumptions.

We think that we will maintain margins at or close to currently reported levels, and I reiterate that we remain very interested in new investments and acquisitions that will continue the transformation of our revenue diversity, margin performance, and earnings base that has occurred over the last few years. We believe that there will be some very attractive bargains available for well-capitalized strategic purchasers in our sector in the next few months.

That's it for now. As always, thank you for your interest in and support of EMCOR Group. I also know that a number of EMCOR employees listen in to this call. Special thanks to all of you for an excellent quarter and for EMCOR's long record of financial and operational success. Let's keep it up.

Now, it's time for questions or comments, and Kristin is here to tell you how to queue.

Thank you. (OPERATOR INSTRUCTIONS)

Your first question is from the line of Alex Rygiel with FBR Capital Markets.

Thank you. Good morning, gentlemen. A nice quarter.

Thank you, Alex.

Frank, two questions. First, if I remember correctly, in the 2002 time period, where you did have one or two disappointing quarters, a couple of the bigger catalysts were some under-performing contracts in the U.K. and some unfortunate contracts associated with an acquisition around that period of time, as well. Could you discuss what is different with regards to your internal process today than 2002 that gives you comfort that surprises like that may not arise over the next coming year or two?

Yes, Alex. I think several changes in EMCOR have influenced the positive point of view that we take concerning our ability to ride out the current crisis however it shakes out. You know, of course, that we have made significant changes in senior operational management since 2002, and in particular, the U.K. company, which was the source of very significant shock losses during that period, has been significantly changed, not only downsized but also focused away from the large-sized rail projects that were the source of significant issues in those days.

EMCOR today is a much larger, much better balanced, much more sophisticated and much better managed company than we were in 2002. I think, in particular, the management that has been in place since that time has focused on bidding discipline and the importance of maintaining margins even at the expense of backlog as we have striven to create the kind of balance in our revenue basis that was specifically designed to help us ride out a crisis very similar to what is currently transpiring.

So in a nutshell, we're better managers. We're larger, we're richer, we're better balanced, and we're much more ready for a downturn of the cyclical type that we seem to be facing now.

And, secondly, as it relates to your activities in Las Vegas, could you, I don't know, throw out a number approximately about how big that market is from a revenue standpoint today, and maybe in the last trough cycle, how small it had gotten at any point in time?

Tony, want to handle that one?

I mean it's a sizable market for us today, as you can imagine. I won't give you the exact number, but suffice it to say it's-- if you look at our backlog and it's about-- hospitality is about 10% of our backlog number today, give or take, that would be a pretty good indicator, a little less than that, of what it is of our total Construction revenue. So somewhere, 350 to 425 or so million dollars. I mean it all depends on project timing, Alex.

Okay.

How small it got the last time, it never got quite as big the last time. There's a run rate in there. The companies are capable. They do have a fairly healthy renovation business that runs both of them, but it could be half of that.

Alex, I have a couple of additional comments [inaudible]. Slide eight illustrates the fact that whereas we've been in Las Vegas a long time and worked very consistently but at a relatively low level in Las Vegas in revenue terms, there has been dramatic growth, both in Las Vegas and indeed in the nationwide hospitality and gaming businesses in the last few years, a growth rate that we characterized a number of times on this call as being sustainable. The U.S. Census Bureau, for example, suggested that the growth rate per annum for the last two-and-a-half years or so was about 65%, and of course, that's not sustainable. But we took advantage of that growth in that sector in order to do some very profitable and successful work.

However, we're used to changing tides in our particular business sectors, and we've built a company that can be nimble in moving from areas of low demand to areas of high demand. Our skills are eminently transferable from place to place. I remember the last time the Las Vegas turned down dramatically, and EMCOR went to work in Las Vegas building infrastructure projects, jails and schools and wastewater treatment plants, because Las Vegas growth as a city had not kept up with the growth of the Strip.

So there are always things that EMCOR can do subject, of course, to the maintenance of appropriate bidding and margin discipline.

Great. Thank you very much.

Thank you, Alex.

Your next question is from the line of John Rogers with D.A. Davidson.

Hi. Good morning.

Hi, John.

I was just wondering, could you talk a little bit more about the variances in margins by end market? I saw that the mechanical-- I think it was the mechanical group, there was one subsidiary that had a loss in there, and just-- I mean the numbers are bouncing around quite a bit sequentially, and electrical was way up, and maybe just give us a little more color there.

John, it's Tony.

Yes?

When we look at our Construction business, I mean it is a portfolio of projects and businesses, and projects close out at different times. The mix within individual sectors change even within the sectors that we have outlined on our backlog chart.

Right.

I mean if you remember, 15 months ago, our electrical margins were down, and here they are back up. That's-- the mix got in our favor. The productivity came. The mechanical-- I think we have one or two projects that maybe didn't turn out as great as we thought they would. We had others that were quite well. I think, on balance, if we could run a north-of-5% construction business for a long time, we'd be pretty happy people with 100% return on net assets.

And is there-- are materials costs-- I know they're pass-throughs, for the most part, for you-- are they impacting those margins, causing some of this?

No.

Okay.

No, not in any substantive way.

Okay. And then, secondly, in terms of your just cash flows, could you give us a sense of at this point, barring any additional acquisitions, kind of what maintenance capital spending is? And I assume the amortization cost is going to drop down next year in depreciation [inaudible] some safe level. Could you give us a sense of those?

I mean if you look at our capital model, it's pretty low. I think markets we spend between 30 and $40 million a year on capital. A lot of that is related to maintenance capital, renovation of some of our spaces to make them more productive, investment in our prefab shops. Usually we buy used equipment. It will spike up a tiny bit with the addition of Ohmstede, but one of the reasons we liked Ohmstede is it has the same capital model as EMCOR, for the most part.

And then, of course, we go into IT. I mean we're not over-investors in IT, and we're never on the bleeding edge, but we're deploying handheld devices to our mechanical service technicians, which will drive productivity. We're doing GPS systems, which will cut fuel use. We just did a test to that in one of our markets, and suffice it to say we had 200 folks' vehicles used and $4 gasoline got our attention, and we were able to cut back 15% on our fuel consumption, not only from routing better but just sort of making sure the vehicles were only used for EMCOR uses. And that will now be spread across most of our fleet now that has high volume on it. So those are the kinds of investments we make -- prefab shops, office space, IT, GPS, and then productivity at Ohmstede in our [inaudible - technical difficulty] operations.

Okay. And on the amortization schedule?

I'll throw that to Mark.

Yes, I mean as you can see year today, we're at about 35 million of amortization expense. That level of volume will continue in the fourth quarter or actually will start to come down.

As you may remember, when we discussed the Ohmstede acquisition transaction, a year ago at this time, a significant portion of the amortization associated with the acquired contract backlog was front-loaded. That started to peter off as we get to the end of the year, and we're looking at next year's total amortization expense to be down roughly 6 to $7 million from what the annual level's going to be this year.

Okay. Great. Thank you, and congratulations on the quarter.

Thank you, John.

Your next question is from the line of Tahira Afzal with KeyBanc.

Good afternoon, gentlemen.

Good morning, [T].

Just a couple of questions. Number one, if I look at your [inaudible] revenue growth rate, it seems mechanical construction is now sort of declining. And then if I look at the implied fourth quarter guidance for revenue, it seems it's going to be flattish. Just some perspective, you know, the [inaudible] outlook for fourth quarter. And then looking into 2009-- I'm not sure; did you say that your revenue momentum is going to continue? And does that, in essence, then imply revenue growth, or do you think you can maintain the same level of revenue? I wasn't pretty-- I wasn't clear on that, if you could help me out, please.

Well, we'll help you out as much as we can. As I mentioned, we are just beginning our budget cycle, and revenue expectations, at least of a detailed nature, are still in the hands of our subsidiaries waiting to be completed and forwarded to us.

I think that it's quite clear from the levels of our revenues at all-time records and our margins at record-setting levels, as well, that we are carrying momentum through the fourth quarter, hence, our significant increase in our estimated range of earnings, representing between 33 and 39% improvement in earnings per share year over year. So I think that's very good performance.

The picture is more difficult to see once you get past the middle of 2009, and therefore, it's hard to, first of all, make an estimate about full-year 2009 without trying to guess at when sanity will return to the credit market. My guess is that all of the federal stimulus packages-- and, by the way, EMCOR in past recessions has been a direct beneficiary of various types of federal stimulus packages that are for the purpose of maintaining levels of employment, particularly in union areas, financing large federal projects in areas like transportation infrastructure, like healthcare, like water and wastewater systems. So we think that there are aspects of the stimulus program that will be directly aimed at markets in which EMCOR is a significant player.

But, overall, and particularly from the standpoint of the resumption of normal credit relationships on the part of our customers, since EMCOR has no credit issues of our own, we think that by the middle of '09, for the purposes of our planning, that our customers will once again be able to assume normal financing of their projects, both in the private and in the public sector. I'm talking about possible current weakness with respect to the issuance of municipal bonds that are used for the financing of some types of public facilities.

Having said all of that, we think that, yes, we are carrying momentum still through the fourth quarter and into the first part of 2009. We are working on projects that are derived between 60 and 65% from existing facilities, not from new green field facilities. We have a level of contract backlog of $4.2 billion; that is one of the largest in our history. And we've accomplished a margin transformation over the last few years that enables us to work from a much higher level of status quo margins than what the case ever in the past and especially on the eve of the last recession.

So, yes, my guess is, and it's an educated guess, but it's still only a guess because it's early in our budgetary process, that we'll do fine with no significant or material degradation of our revenues or margins through the first part of '09, and we'll count on the success of the government in restoring normality-- or is it normalcy, I forget-- to the credit market in order to let normal business cycles resume in the last half of next year.

Thank you, Frank.

I guess then to [inaudible] what you're saying is that assuming you see a fiscal stimulus package and assuming that credit markets resume, that you think that you will be able to replicate revenues and margins of the same level as what you've seen in '08. Would that be correct?

Yes, I think that's our baseline. We plan on making some continuing investments, but there are no material investments included in that assumption.

Got it. So if you-- assuming on an organic basis and not assuming any acquisitions, which you obviously have a lot of cash to make, would you view the year-on-year growth that is implied in consensus growth estimate for EPS right now for 2009 as being aggressive?

The consensus estimates are changing all the time. I think that they're within the doable range, assuming, as I do, that the solution to the nation's credit problems is arrived at within the next six to nine months. Yes, I think that a position of status quo to modest growth for 2009 is achievable at this point.

Thanks a lot, Frank.

Okay.

(OPERATOR INSTRUCTIONS)

Your next question is from the line of Richard Paget with Morgan Joseph.

Morning, Richard.

Good morning. You talked about being nimble and kind of moving from end markets that were having slower demand going to higher demand. Could you talk about maybe geographies in terms of that? You know, if someone were to take a pessimistic view of things in the U.S., I mean do you have the ability to maybe go to the Middle East or some other markets where construction still is in a growth phase?

Specifically with reference to the Middle East-- I'm going to answer your question specifically and then generally, Richard. With respect to the Middle East, we have had opportunities to move there for years, and we have steadfastly resisted those opportunities because of our view that the risk/reward ratio associated with working in most of the foreign jurisdictions where we could work do not warrant the investment that would be required in executive time and treasure in order to establish ourselves there.

EMCOR is in the business of charging a premium for sophisticated technical services, and most of the customers who will pay us for those services in a way that would enable us to gain a profit on our major product, which is trained technical labor, exist in the developed Western countries; that is to say the North American countries and the U.K. Even Western Europe represents incremental issues for us because of the relative inflexibility of labor in those areas.

So I've lived and worked in the Middle East, the Far East, and Europe. I'm not afraid of it, but I'm very familiar with the risks and the available rewards associated with it, and I believe that for the period of the next year or two at least, I think it's likely that EMCOR's incremental investments will probably be in this country and in Canada.

I mentioned earlier-- and I want to talk about both Canada and also our changes in our geographic presence and reliance upon certain markets in the United States for just a moment.

First of all, with respect to Canada, our Canadian company is one of the best and longest established heavy industrial specialty construction companies in the land. It has a wonderful reputation, and very recently, after a very successful wholesale reorganization about four years ago, has been very successful in establishing an important position in conventional and nuclear power generation projects, as well as long-time presence in industrial segments like oil and gas, like steel-making, and the like. We're very optimistic about the beachhead that Comstock has created, notably in nuclear power, and we think that those credentials will be transferable to the United States and, indeed, to the whole North American power segment as the American nuclear renaissance ensues.

Secondly, with respect to our concentration of activities and reliance upon certain U.S. markets, I'm going to open this to Tony but suggest that he talk about our 2002 reliance upon New York City and the difference between EMCOR today and EMCOR then in terms of spreading our best around, if you know what I mean.

Sure. In 2002-- and I guess this goes back to Alex's question even. In 2002, about 35% of our profits came from New York City. And if you took the broader Northeast, it probably did approach 40 to 45%. Today, although still very important to us, New York City is less than 10% of our profits. One is our base has grown, and the characteristics of our New York City business has changed, especially it was very [Datacom] and focused on the telecom part of that very, very extensively back then.

If you look, in general, our diversity is pretty widespread. I mean we still think of markets as long-term markets and not intermediate hiccups. We like our position in the major cities in the U.S. and what we can do there.

We like our position in California, in general, and specifically, we have a well-positioned electrical company there.

We have a very well positioned industrial company in PMI, which we bought last year and has been a very good acquisition and has brought us more exposure to all the industrial work.

We like our position in the electrical business in general. Our San Diego/San Francisco [Contracost] is a good industrial electrical contractor, and in Los Angeles, there's an outstanding full-service contractor with a lot of focus on transportation.

We like our position in Washington, the federal government in Washington. We like Texas. With Houston, we have a very good operation, mechanical operation in Houston. It's very broad based from healthcare to industrial to the general office renovation and mechanical service.

And, of course, our acquisition of Ohmstede puts us square into the refining sector.

We like our position at end markets like fire protection. We like that it's design/build, that it has a service element, and there are no surplus people in fire protection to be had, and that is a market that will serve us well. It's in our mechanical segment, but it will serve us well through any downturn.

And we like what we can do with companies like [Shamba] that have full-service design/build capability, not only on fire protection but also on food process plants.

So EMCOR's a well diversified company. We always play the geography game. We've played that very well. We talked about Las Vegas. But we also play the sector game, and as transportation builds and we repair this infrastructure, we're well positioned to team with some very nice general contractors and construction managers as partners to build out the infrastructure again.

I hope that helps answer the question.

Okay. And then in the past, we've kind of talked about you guys being somewhat of a green play when energy was as high as it was and you could retrofit the systems. I mean how have you seen your customers thinking about that now that energy has come down significantly from its peaks? I mean is there any kind of change in demand there, or people are still taking a longer-term view on how to handle lead building and their whole green philosophy?

Richard, it's Frank. Three years ago, green was not a business. We were performing green projects at that time, and indeed, our marketing department had already fastened on the importance of green as a long-term societal change and a trend worth taking advantage of. But in those days-- seems a long time ago now, three years-- we were doing green projects primarily for academia and for various levels of government, notably the federal government of some states.

Today, most of our lead activities are for the private sector, and it's not just altruism that I believe has moved companies like General Electric and Johnson Controls to declare themselves green companies. We find that green customers are electing to spend money on green because it has tangible benefits for them in terms of improved attraction and retention of personnel, reduced downtime, and increased productivity in areas where green principles are observed in buildings.

So it's not just a luxury. I've seen it in very recent days. I've seen it suggested that investments in alternative energy and certainly in green are likely to be reduced if the current chaotic situation continues and because customers won't be willing to pay for luxuries any longer. I don't believe that. I think that green performance is not a luxury and that it's an important part of the personnel management and human resources strategies and policies of many of our customers.

Okay, thanks. That's it for me.

Thanks, Rich.

Your next question comes from Rich Wesolowoski with Sidoti and Company.

Thanks. Good morning.

Good morning, Rich.

If you look at the acquired Facilities Services margins ex the amortization write-off, you get to a high teens for the first nine months. That's with the hurricane. Is there any reason to suspect that's not sustainable? Is there room for improvement, or do you see that as something that inevitably goes down in the years ahead?

Oh, no, I certainly don't expect a significant downturn. Let me tell you what we've learned about refinery and petrochemical maintenance and management so far, and keep in mind that we acquired Ohmstede in October-- September 17, Mark tells me, a year ago. We acquired a couple of other companies in the sector even more recently than that, so we're still learning.

But what we expected at the outset was a somewhat cyclical business on a seasonal basis with its slowest quarter being the third calendar quarter of each year, and that seems to be the way it's turning out.

On the other hand, we also expected it to be significantly more profitable in terms of margin contributions than the remainder or most of the remainder of our companies, and that has certainly turned out to be the case, as well.

And, lastly, with respect to hurricane damage, we think that, on balance, whereas there may have been an immaterial deferral of certain revenues and margins from the third quarter into the fourth as a result of hurricane-related damage to our facilities or our customers, we think that on balance that was not a big story for us. I will say that our personnel in our hurricane-affected companies did a marvelous job of getting back up to speed and back to work and into our customers' facilities very quickly, and that's why they have the loyalty of those customers when the customers are trying to decide from whom to obtain their maintenance services.

So, no, we think that Ohmstede and the other companies in this new sector for us have made a terrific start, and we expect to be able to enhance both the scope and the size of our services in that sector in years to come.

Thank you. How much of the refinery work in the Gulf Coast comes from large capital expansion or upgrade projects rather than day-to-day maintenance?

For us, it's less than 20% of what we do.

Less than 20%?

Yes.

Okay. And then, finally, it seems odd that with the stock getting cut in half during the last few months, we haven't spoken about the potential for share repurchases. Can you talk about the relative appeal of buying an equity in a known backlog in a known management team at a mid-teens earnings yield versus one in unknown companies during the year ahead?

Well, let me, first of all, say that I think that EMCOR is a wonderful buy at this point, and I recommend it heartily to anybody interested in making a lot of money in the equity markets. I'm a major investor myself.

We all are!

As are we all. However, as I mentioned, I think, in the last paragraph of my presentation this morning, there are some amazing bargains that are going to be available for us in order to build value for EMCOR stockholders for the very long term. They include opportunities to invest in strategically important areas for us, like the oil and gas maintenance market that Tony has previous mentioned, our government services that we're very interested in enhancing, our fire protection business. That is a major contributor to our long-term success, relatively uncyclical and very much in line with our technical skills and our ability to travel from place to place.

So there's lots to buy out there. It's only going to get better for companies with lots of money and lots of credit and with seasoned management who know how to identify and evaluate and integrate new businesses. And for the time being at least, I think that EMCOR stockholders would be much better served by letting us continue to find a bargain that we can use to create continued transformation of our revenue diversity and our margin characteristics, building a very strong revenue and earnings base for our Company [to] run for the very long term.

Great. Thanks a lot.

Okay, Rich.

Your final question is a follow-up from Tahira Afzal with KeyBanc.

Hi, [T].

Frank, just had one question. The last time there was a downturn, and you know I think you did a great job of successfully switching from private sector to public sector spending, but all the revenues seemed-- did hold out, the margins on that work were fairly low. If you look at the opportunities on the public spending side right now and those that could potentially develop with a fiscal stimulus plan, how would you compare those margins to some of your larger hospitality projects?

That's a very difficult comparison to make because we don't know the nature of the stimulus projects. There are, for example, projects in which EMCOR, by virtue of our large size, our financial strength, and our technical skills in areas like building information modeling, is really the only choice that a customer can make, and that has been our experience in connection with a number of healthcare-related projects in the last year, for example. So that it's no longer the case that you can make a sweeping statement about the significant premium available for services in the private sector as compared to certain parts of the public sector. Tony?

Yes, I mean, T, if we do more transportation work and more healthcare work, when you go back and look what happened in '03 and '04, we were doing a lot of K-12 schoolwork. That's emphatically what we're not doing today. The only time we venture there is when we know we have an advantage, it's fire protection, or finishing for someone that couldn't.

If you look at the kind of work that we would take advantage of in this kind of environment, infrastructure related, we tend to do very well on infrastructure-related projects.

And the mix of that, coupled with what we have growing in our industrial business today, should allow us to continue to keep a good margin base under the Company.

I have another comment, T. It's Frank again. And that is about bidding discipline. I think that, in retrospect, and-- well, and we knew it at the time-- that we were inadequately disciplined in 2003 with respect to the activities of some of our companies in segments in which they had no relevant experience.

I'm recalling, for example, a couple of fairly large central plant generating projects that one of our companies became involved in and probably in retrospect should not have done so.

We're managed differently at the operating level in electrical and mechanical today. We're much better managed. We're a disciplined organization, and every one of our subsidiary presidents knows how we make our money and when to stop bidding, when to start pulling back from projects that don't have the risk/reward characteristics that we insist upon.

Okay. And if you look at the transportation sector, that itself has come under material pressure in the past. So it seems like, in essence, the fiscal stimulus might be needed to make that an exciting market. But who, in general, would you be competing with, and who do you generally come across in that segment?

Local companies, but our main-- we either work with [Keywit], companies like [Mass Electric], the big guys that can put lots of feet on the ground, do significant design/build or design/assists. So it's either going to be well established, local, multi-state companies, or it's going to be people like Keywit that may have something like Mass Electric that they can use.

Got it, and thank you very much, gentlemen.

You're welcome, T. Thank you.

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

Thank you, Kristin, and thank you all for your support of and interest in EMCOR Group. Watch this space for interesting developments. Thanks a lot.

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