EMCOR Group Inc (EME) 2009 Q1 法說會逐字稿

Good morning. My name is Rachael and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group first quarter 2009 conference call. (Operator instructions).

I would now like to turn the call over to Mr. Eric Boyriven of FD. Sir, you may begin.

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 2009 first 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, Eric. And good morning, everyone. Welcome to EMCOR Group's earning conference call for 2009. For those of you who are accessing via the Internet and 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 the slide one, which is the EMCOR title slide. During the call, instructions will be given for you to advance the next slide. Please advance to slide two.

Slide two depicts the executives who are with me to discuss the quarter 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 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 including the slides will be archived in the investor relations section of our website under presentations. You can find this 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 other risks and factors associated with EMCOR's business are also discussed in the Company's 2008, I'm sorry, Form 10-K its 10-Q for the first quarter ended March 31, 2009, and in other reports filed from time-to-time with the Securities and Exchange Commission.

And with all that said, please let me turn the call over to Frank. Frank?

Thank you very much, Kevin. I happen to know that you were up all night practicing that, so that was a good result.

Good morning, everyone. And welcome to our 57th 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 2009 first quarter earnings press release and form 10-K that we issued and filed earlier this morning. We'll conduct this call in our customary way. First, a discussion of the highlights of our first quarter operating results, including a breakdown by segment, and my comments on our quarter end balance sheet.

Then I'll discuss the evolution and the current status of our contract backlog portfolio with special emphasis on those sectors that we believe will be key to our continued success.

Then I'll turn the call over to Tony Guzzi, our President and COO for his views on some notable recent contract awards from our broad and diverse customer base. Followed by some additional comments on a particular Boston project that perfectly illustrates how EMCOR is taking the lead in energy efficient construction.

Finally, I'll talk about some of the major factors that we expect will influence EMCOR's performance during the remainder of 2009 and into 2010 amid challenging recessionary conditions that are affecting nearly all companies.

Following my guidance comments, there will be an opportunity for participants to ask questions or to make a comment. And you can see from slide two that a number of EMCOR's senior officers are here to help me with the answers.

So, let's begin. Please go to slide three. I'm pleased to report that EMCOR had an excellent 2009 first quarter, our best ever from the standpoint of earnings by a wide margin. On slide three, our condensed operating statement for the three months ending March 31, 2009, compared with the year earlier quarter, we report diluted earnings per common share of $0.55, a 25% increase over the $0.44 in diluted earnings per share, our previous all-time record for a first quarter that we reported a year ago.

On slide four, we highlight some of the salient features of our first quarter performance. During the course of our last earnings conference on February 26th, I stated our expectation that our 2009 revenues would decline in comparison to our record revenues in 2008. Revenues in all five of our operating segments declined organically during the first quarter, although our US Facility Services revenues grew 3% year-over-year due to several relatively small acquisitions completed during the preceding 12 months.

Overall, revenues fell 16% from the 2008 first quarter to $1.39 billion, reflecting notably weaker US construction activity in the commercial building and gaming and hospitality segments, partially offset by revenue growth from industrial and healthcare related projects.

Our UK Company's revenues declined due to the previously announced closure of our UK rail construction operations, together with significant impact from foreign exchange rates.

Our Canadian Company's revenues also declined, primarily due to reduced activity in their industrial markets, partially offset by increased revenues from healthcare and commercial work.

Despite reduced revenues at the segment levels and overall, our operating income rose dramatically during the quarter to a record $64.3 million or 4.6% of revenues. A 29.5% increase over 2008 operating income, and 54% growth in operating income percentage.

Four of our five operating segments reported significant operating income growth. Generally as a result of continued strength in operating conditions and advantageous contract closeouts, together with the beneficial effects of reductions in general and administrative costs during the quarter.

Our US electrical segments' operating income rose 51% to $26 million. US mechanical operating income grew 31% to $23 million. And our Canadian, and our UK, and other international companies reported operating income increases of 93% and 43% respectively to $4.8 million in Canada and $2.2 million in the UK.

Our US Facility Services' operating income for the quarter was $21.7 million or 6% of revenues compared to $25.6 million or 7.2% of revenues a year ago. The reduction in comparative income was due in large part to a particularly profitable refinery expansion project performed in 2008 that was not replicated in 2009. Although the 2009 quarter benefited from operating income from recently acquired companies and from increased profits in our site-based government Facility Services operations.

Although our first quarter operating margins clearly benefited from the higher prices that prevailed at the time when some of our backlog projects were booked, I also think that our project execution in the first quarter was exceptionally good. Productivity can be a challenge during recessions. Liquidity frequently suffers as customers conserve cash. And expense control is crucial to continued profitability.

On slide five, we illustrate the positive effects of our disciplined approach to the management of these recession related dangers. We reduced SG&A expense by $12.4 million year-over-year, contributing significantly to segment profits and corporate cost reductions. Cash flow from operations was in the normal range for our first quarter, during which we generally make substantial cash outlays for taxes and incentive compensation.

Pre-tax income rose 31% year-over-year to a record $64.1 million. And we reported our 55th consecutive profitable quarter, a record of consistency that is becoming rarer everyday and that we believe is a direct result of our disciplined approach to project selection and performance.

As shown on slide six, total shareholders' equity rose to $1.1 billion at the end of the first quarter and our balance sheet continued to be strong and liquid, an important differentiator in difficult times.

Not withstanding heavy seasonal cash outlays, total cash remained just under $400 million. Total debt declined slightly to $199 million. Working capital increased to $526 million. And our Companies were net over billed by $510 million, another sign of effective contract administration and strong customer relationships.

Our total debt to total capitalization ratio stood at a comfortable 15.46% at quarter end, once again reflecting our conservative approach to balance sheet management.

On slide seven, we chart the evolution of our contract backlog portfolio, calculated with our usual conservatism over the period from 2002 to the end of the first quarter just announced. As shown on this slide, total contract backlog was $3.67 billion, a reduction of 8.2% from the 2008 year end and 16.3% from the year ago quarter.

But the chart also clearly shows that our backlog has not evolved uniformly across our markets. Over the last 12 months, EMCOR's commercial and hospitality markets have declined 49% in backlog terms and now comprise 30% of total backlog, compared to 49% a year ago.

It's normal of course for private sector construction markets to contract in lock step with the reduction in overall business activity during a recession. However, this recession has been exacerbated by the significant decline in the availability of credit and a resulting lack of confidence by even the best customers, leading to dramatic reductions in business activity in credit-driven sectors like office buildings, hotels, and casinos.

Fortunately for EMCOR, the decline of our commercial and hospitality markets has been partly offset by our other five market sectors, which have performed in much more stable fashion over the last year. Our institutional sector backlog comprising government facilities and educational buildings is up $142 million or 37% year-over-year.

Industrial, notably our refinery maintenance businesses, is $122 million or 35% higher than our first quarter of 2008. Our transportation backlog is up $102 million or 15% and our water and wastewater sector projects rose $51 million or 27% year-over-year.

Although our important healthcare sector declined $72 million or 11%, it continues to perform in a very stable fashion. All told, our four public sector markets and our industrial component have risen 16% in backlog value in the last year and now comprise 70% of total backlog.

An interesting fact that the backlog chart doesn't disclose is the disproportionate impact that the Las Vegas market decline has had on our backlog before. Las Vegas, of course, has been a major victim of the recession since it is reliant on consumers' discretionary spending and its projects tend to be highly leveraged.

During the last year, our Las Vegas related contract backlog has fallen 71% as a result of our progress towards the completion of several large projects and an absence of new awards, while the rest of EMCOR outside of Las Vegas has seen backlog decline by only 7% year-over-year.

We expect Las Vegas backlog to continue to decline, probably back to the low levels we reported in the years prior to the beginning of dramatic growth in 2005. We believe that commercial backlog will bottom during the last half of 2009 and will grow in 2010 for EMCOR. And we expect continued year-over-year growth and steady performance from our public sector markets, especially if the federal stimulus program delivers significant opportunities for EMCOR.

Slide eight lists some of the project contract awards that positively impacted backlog recently. And here to talk about them and about our energy efficiency and green activities in our Boston market is our President and COO Tony Guzzi.

Thanks, Frank. Let's start today in Salt Lake City, Utah where our Wasatch Electric subsidiary and where it has a market-leading position, will be installing the electrical systems for the new 160-watt 1,000 square foot Utah Museum of Natural History. This is an interesting project in that the building is comprised of six levels integrated into the natural landscape, with a series of terraces that follow the contour of the site. This unique design of the building presents many electrical installation challenges, including installing approximately 80% of the conduit system underground versus overhead as we do in most projects.

Our scope includes complete building electrical with a 1,500 KW generator for emergency power and all building systems, including fire alarm, smoke control, audio visual systems, as well as the very specialized power and lighting for these museum exhibits.

Before I move on to the next project, I'd be remiss if I didn't give congratulations to Tim Homer, Wasatch Electric's President and CEO. Tim was named CEO of the year by Utah Business Magazine. This award is part of an annual competition to recognize the most successful and innovative business leaders in the state. Congratulations, Tim, and well deserved. And I think it's emblematic of the kind of people we have running our local subsidiary operations. They're leaders of their community, and they're leaders at EMCOR, and they're leaders in our industry.

On the East Coast, Welsbach Electric of Long Island won a three-year contract to maintain over 30,000 streetlights within the town of Islip, New York. This contract will also include installation of new energy efficient lighting system packets as the town implements energy conservation throughout its various communities. And this is a trend we're seeing across the country as more cities go to better street lighting and better signaling to be both energy efficient and also more effective.

In Houston, our Gowan mechanical subsidiary, another market leader, is changing our the cooling towers on the Smith International facility as the existing towers have reached their life expectancy and are not performing to standard, and are grossly energy inefficient. Gowan's turnkey project will include installation of two 16,000-ton four cell cooling towers with variable frequency drives, associated pumps, control systems, and piping, as well as a concrete and structural still platform that house the entire assembly.

This is an example of the energy efficiency work that EMCOR does and what a lot of the stimulus package will be about in federal buildings. This is a private example of what will happen in the federal buildings with some of the stimulus work.

Two of our electrical companies will be teaming on a project for the San Jose Airport. Our Dynalectric San Francisco subsidiary is working with our Dynalectric LA subsidiary, which is a leading electrical transportation company, to install the electrical and control systems for a new automated baggage handling system at the airport. Our scope includes all conduit, wiring, and installation of all related devices, such as control panels, photo eyes, start/stop stations, and motors.

In Coronado, California, Dynalectric San Diego will be installing the electrical systems for a new mooring to accommodate additional Nimitz class aircraft carrier at the Naval Air Station, North Island. Our work at Berth LIMA includes repairs and upgrades to existing 480-volt and industrial power systems, utility switchgear, control systems, dockside power connection stations, fiberoptic data transmission systems, digital fire alarm reporting, cable TV, and closed circuit. Basically, when the aircraft carrier comes in, this power will enable to go off station and be repaired, and serviced, and get ready to go again.

And in El Paso, Texas, Border Electrical Mechanical will be installing a Japanese air handling system and it's manufactured in Japan. It's called variable refrigerant. It's very efficient and it's even more efficient than a lot of the central plants. And it's being installed more and more throughout the country, especially down in the Sun Belt.

The potential savings in higher efficiency is the use of several smaller 20-ton chillers with variable frequency jobs that provide air conditioning only to the necessary portions of the facilities. It's an interesting technology. It will have wider applications as the country moves to more and more greater efficiency for non-residential buildings. And the savings for this customer will be fairly significant.

And finally, at Fort Leavenworth, Kansas, our Central Mechanical subsidiary is working on two projects for the Army. First, we are performing the design assistance and installation of all mechanical systems, including HVAC plumbing and piping, and a new 55,000 square foot enlisted personnel housing barracks. And again, this is an example where EMCOR's been available to take advantage of the [barrack] program instituted several years ago.

We'll be providing the same scope of work consistent for new multi-faith chapel, which includes classrooms and office space. All of these buildings will be done up in an energy efficient manner with the latest technology. And we are working on accreditation there so that they can get LEED Silver accreditation on those facilities for the US Army.

If you go to page nine, you'll see a multi-faceted project. And let's start in Boston. EMCOR has a leading mechanic position. J.C Higgins is a terrific mechanical contractor with some design capability and design build capability. And EMCOR Northeast CommAir/BALCO is the leading mechanical service company in the market. So, we have a big footprint in the Boston market, with a lot of capability to bring energy efficient and LEED solutions to our customers.

This particular project is the Center for Life Science in Boston. I've been there. It's a 705,000 square foot research center. And it's sort of a hoteling arrangement for research facilities, where people take space and the developer provides the infrastructure for the customers to do their research.

It's a Gold LEED certification building. And what this project shows is EMCOR has a leadership position in helping customers meet their LEED accreditation, and we've talked about that before, how the stuff we do can be 60% to 70% of the LEEDs points on a building, whether existing or new construction. But also our leading position in doing biomed, and biotech, and bioresearch facilities.

And what they're doing here is just focused on human environmental health. We did sustainable site development and that has to do when we built the building. Water savings, and of course, energy efficiency.

We did all the HVAC systems, which is a big part of the solution for LEED. So, we did the original scope, we did the core and shell. And now we're building out the site for these leading names -- Dana-Farber Institute, they took the first floor, Beth Israel Deaconess took the next seven floors, Children's Hospital has the next floors, and the remaining five floors are still remaining to be fit out.

Now, within this medical center, we have many service contracts in the Longwood Medical Center in Boston. And you can bet we will chase this down when we get through the warranty period on this facility.

And with that, Frank, I'll turn it back over to you.

Thank you, Tony. We're pleased that prominent customers in a wide variety of markets are continuing to choose EMCOR for our broad range of high quality services, our reputation for integrity, and our financial strength and liquidity, including our ability to provide payment and performance bonds to customers who request them.

We also believe that the Obama administration's support for energy efficient and green construction or retrofit projects will stimulate new spending by customers who regard green and efficient facility performance as a necessity, not a luxury.

On slide 10, we reiterate the baseline guidance that we issued at the end of the 2008 earnings call two months ago. Base revenues in a range of $6.0 billion to $6.3 billion, base operating income margin of 3.0% to 3.5%, and base diluted EPS of $1.80 per share.

During the last earnings call, I alluded to the high levels of uncertainty and lack of confidence that prevailed in some of our major markets, especially with respect to the last half of 2009. That uncertainty continues, particularly with respect to the pace of restoration of normal credit relationships, together with the amount and timing of EMCOR's participation in the federal stimulus program.

Although we are seeing signs of improvement on both fronts, with recent news concerning renewed activity in the commercial paper market, several large M&A transactions, and successful IPOs, and the beginnings of project announcements in areas that are targeted by the stimulus program, it's still too early to speak with confidence about specific third and fourth quarter trends. Nonetheless, we remain highly confident of our ability to generate diluted EPS of $1.80, assuming, as in our previous guidance comments, that there is no material improvement or degradation in overall business conditions during the remainder of the year.

Our first quarter results suggest that our operating income margin assumptions are sufficiently conservative, even if our 2009 revenues are closer to the lower-end of the range, as we now expect.

We derive confidence from our leading position in the domestic and international facility service markets, which now represent more than 35% of EMCOR's total revenues and which are frequently stimulated by recessionary pressure on our customers to outsource their facility management to experts like EMCOR.

I also reiterate my previous promise to return to the market with more detailed guidance as soon as second half profit opportunities become clear. And in any event, no later than our second quarter earnings call.

That's it for now. We're pleased and proud of our great start to a challenging and difficult year. And grateful to the thousands of dedicated, intelligent EMCOR employees who make it all possible.

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

(Operator instructions) Your first question comes from the line of Alex Rygiel with FBR Capital Markets.

Morning, Frank.

Good morning, Alex.

Congratulations to you and the team. Another great quarter.

Thank you very much.

A couple of questions. First, as it relates to backlog, if you were to think about profit margins within backlog today, on a relative basis from peak of maybe a year ago to where we're at today, what do you think the magnitude of change is?

Oh, I think that probably there's been at least a 100 basis to 200 basis point reduction in gross margin potential overall. It varies of course, between geographic markets and lines of business to some extent. And indeed, as I mentioned earlier, there are sectors, like hospitality and gaming, where there are very few of any -- if any projects being awarded.

But I think that there is pressure on almost all segments of our business and all companies' businesses as a consequence of the recessionary trends, exacerbated by credit issues that I discussed earlier.

As it relates to the Facility Services business, that's been growing for a decade now very nicely, and there is the belief or hope that in a recessionary environment, customers seek to outsource more, which gives you great opportunity.

With that said, do you also expect more competition to move in onto this market and create some pricing pressure of that new business opportunity?

I'll speak for a moment and then I think Tony will probably have something to add. There is more to being in the Facility Services business than just saying that you're in it. You really need to have the special skills and system design management and maintenance that is unique to companies with strong labor relationships, the ability to deploy large numbers of trained technicians on a very timely basis, frequently in response to customers' emergency requests or call outs, and to perform literally tens of thousands of small tasks for customers on a very organized and timely basis.

You can say you're in that business, but until you've spent years developing the infrastructure to provide those services on a uniformly high quality and timely basis, I really don't think you can get there quickly. And you remarked very precisely at the beginning of your question that we've been at this for 10 years now, and only now are we starting to see the real economy of scale benefits that we sought when we first began this business.

Yes, Alex. When we think about it, we think about it in different pieces too. We have our Facility Services, but you think about it, it started as a commercial business serving commercial customers. And we have that capability today. And we really prefer to serve customers there that focus on people that value highly skilled technical labor. And so, we have our business there, it's a broad based niche. We continue to refine our offering there. That was the starting point.

You think about, we've built a mechanical service business in that space that rivals the scale of the big OEMs, whether they be Trane, Johnson Controls, or Carrier. And we sort of like the pricing umbrella they provide us and the opportunities they provide us in a recession.

And our ability to self-perform the small project task work and the energy efficiency design bill work is a big deal, especially as we move into the next phase of this with the stimulus package and also just with private industry, given a lot more -- and you think about cap and trade and all the things that will come along with that. The energy efficiency, and there's been some neat work done there that talks about how buildings create 60% of the -- up to 60% of the demand and 60% of the pollutants.

So, we expect that to continue to gain momentum and the mechanical services and the energy services folks we have in that segment to do that work. That's another part of the portfolio. And the competition for nationwide in that technical resource, you're not just going to get into that space quickly.

And then, you think about what we've done on the industrial side over the last couple of years with the acquisition of Ohmstede and PPM, and some of our existing capability, we have a nice in the refinery space, in the power plant maintenance space. And there again, it -- there's not a lot of technical labor that could do what we do. And of course, in government services, where we've expanded the operation pretty aggressively.

So, we're a multi-faceted Facility Service provider. Of course there's competition, but some of the outsourcing trends continue to favor us. We're careful; you can get bad contracts in the facility space also, even in good times. And we feel good about another good 10 years of growth there, I guess is the best way to say it.

Great.

Alex, there's one other comment, it's Frank again, that I'd like to make. And that is that I may have sounded bold earlier in the body of my presentation in calling a bottom to the decline in the private sector commercial markets, but it's very important for listeners to know that a significant amount of our commercial work consists of keeping the lights on and the air conditioning running in our customers' existing facilities. And we're very different from a pure play construction contractor in that regard.

So, I see our commercial business in reverting to a kind of a mean, somewhere within in the range suggested by the charts that we put up earlier on in the slide presentation. And then building from there as investment in the private sector, commercial sector resumes in conjunction with the recovery of the economy.

Yes, as Frank's point, we continue to grow not only the absolute number of our service agreements, so more site services through this downturn, but the absolute dollar volume continues to go up and the repair service in the break/fix business that we do remain pretty steady through the first quarter.

And lastly, as it relates to the stimulus, can you touch upon a number of the different customers that you expect to see stimulus opportunities from? And comment on whether or not you've won any theoretical stimulus awards yet and/or when you would anticipate winning those?

Alex, as recently as an hour ago, I was looking at the federal government's website, aptly named Recovery.com, which reports that less than 2% of the proposed federal stimulus program money has actually been spent. And less than 10% of it is available. So, as expected, or feared, depending upon the way you look at it, it is starting very slowly. And a lot of what you -- of what we hear from the field is anecdotal in nature.

But we are beginning to hear about projects that are going to be let that were previously being held by customers because of existing gaps in their budgets that are now being filled by the imminent arrival of stimulus money. With that, I'll let Tony talk about the GSA in some other areas that we expect to hear from.

I mean first Alex, we think most of this work will go through the normal channels. And then we'll participate in that, whether it be the alternative energy part of it, whether it be the GSA part of it. Whether it be the retrofit of other federal buildings like the VA and some of the DoD money.

So, that being said, you have to have a position to be able to either service the general contractors that will get that work that do the IDIQ work on the base, or working under a larger purchase agreements with the government. Or you have to be able to do it yourself, which we do with a number of GSA and DoD facilities.

So, what are we hearing today? We have people asking us for all kind of good ideas. We think a couple of projects have been enabled by stimulus money. We're pretty sure that it's going to be very difficult to break out, which has been stimulus money versus actual budget money when you get down to the operating level where we'll be executing. But we do expect an up tick in our business at both DoD, GSA, and other projects like transportation and alternative energy that will -- would probably not have happened had the stimulus money not made -- been made available.

Great, that's very helpful. Thank you very much.

You bet, Alex.

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

Good morning. How's it going?

Hi, Rich. Good, thank you.

Frank, I understand you made a lot of -- or you all have made a lot of improvements to your Company that would make this recession less severe than the one earlier this decade. But just looking at the market for construction, you have a troubling financial aspect to this recession, but on the other hand, you have some stimulus. Given all that, do you think the market for construction will prove more or less severe than that of say '01-'03?

Well, the '01 through '03 recession, which was really '03 for us. We were in the -- we were hit hardest in the latter part of it -- was very sharp and severe itself. The number that I recall discussing at the time was something like a 27% reduction in construction activity over a very short period and (inaudible) was very abrupt. And there was no soft landing of course that time. And there was no stimulus program in order to soften the impact.

This time around feels different to me. Perhaps it's because EMCOR is so much more diverse and so much broader in our services. And we don't have -- at that time we didn't have the very significant facilities management capability to soften the blow of the cyclical downturn in construction.

So, I think that whether or not the -- this downturn is more severe or not, and I think probably it is, absent the stimulus program, it's not being felt that way by EMCOR because of the significant broadening that we've provided to our customer service scope.

The impact of the stimulus program we just discussed. I think that in large part to the extent that EMCOR participates significantly in the program, and I believe we will, I think we'll see backlog impact probably in the fourth quarter of this year because of the conservatism of our revenue and income recognition policies, we'll probably roughly break even any stimulus projects received in the fourth quarter and only begin to show positive income impact in the first and second quarters of 2010.

Okay, that's helpful. We've heard several of the downstream oil and gas service companies talk about how tough their market is. Can you discuss the degree to which your outlook has changed for your energy business, broadly speaking, within the last couple of quarters?

We continue to be really pleased with the positive impact on EMCOR margins that continues to be exerted by our investments in the downstream energy sector, notably in refinery maintenance. It should be recalled that the companies that we bought in that sector were highly concentrated in refinery maintenance as opposed to refinery construction. And for that reason, I believe that they are performing in much more stable fashion to -- as compared to the pure play contractors once again.

That is not to say that everyone's margins and prices are not under some pressure, but I think that our managers within the refinery maintenance operations are being very resourceful in finding new customers and new ways of making money. And their margins continue to be very attractive as a function of EMCOR's overall profit margins.

So, when you put that business together with the traditional heritage Facility Service, would you expect that the total facility's pie, the profit, will grow in 2009, 2010, and however long the recession lasts?

I think that it's going to be a very stable kind of performance. I don't see much new capital being allocated to that segment for the time being, so I think that we'll probably see our efforts concentrated in the maintenance side of the business. And probably a, if I had to guess, a little bit of abatement of the profit margins compared to the tremendous performance that that sector represented in 2008, where there was still a lot of development capital flowing into the sector. Until we see a renewed fossil fuel demand, probably in late '09 and in to '10, I don't think we'll see a resumption of heavy capital spending in that area.

Okay. And then lastly, the Canada construction margin was way above anything that I have in my model going back a good ways. If you could just explain why that was so good. That's my last one, thank you.

They've just done a plain great job in reorganizing that Company and refocusing it around heavy industrial and nuclear power. They have a very promising short and long-term position in the Canadian nuclear power industry, which many people know is vastly better organized than the American. It's much more along the French model in terms of the standardization of nuclear reactor design and therefore efficient maintenance.

We really like our position in that industry for the inevitable time when the American nuclear renaissance arrives. The Canadian Company's prospects are very good for the remainder of this year and in to 2010 as a consequence of its positioning in those important growth industries.

Thanks.

You bet.

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

Good morning, guys.

Good morning, Rich.

Over the last couple of years, there's typically been seasonality to your business where earnings in the second quarter has been better than the first quarter. Now, given recent backlog trends, should we anticipate a suspension of that seasonality?

We're -- at the -- what an interesting question. We see it too. It used to be -- well, I -- let me speak for myself. I made a fundamental mistake in expecting that our Facility Service business, no matter how big it got, would be significantly seasonal.

That is to say with -- last weekend in New York, with temperatures in the 90s was great news for EMCOR. Would have been fantastic news a few years ago when the hot season was marked by the commissioning of thousands of HVAC systems and we got a really nice spike in revenue and profitability associated with that.

To our considerable surprise, or at least to my surprise, the Facility Service business overall has become a real year-around business, with not too much seasonal variation at all. So, I think that from that reason alone, we're coming away from the significant seasonality that EMCOR used to project.

In addition, we have learned from the period of time that we have held the companies that we invested in in the downstream energy business, that they are counter seasonal, if you will, with the first quarter -- well, fourth quarter and the first quarter frequently their best operating quarters. And then the remainder of the year impacted by customer turn around projects. But generally speaking not as good as the fourth and first.

So, we've made some recent transactional and organic changes that have resulted in significantly less seasonality I believe than in the past.

Tony, got anything about that?

Yes, and I think, Rich, this year calendarization becomes particularly problematic in that we're -- as evidenced by slide seven, we're undergoing a pretty substantial backlog mix shift.

Yes.

And you take away sort of the duration of the hospitality projects and you couple that with commercial projects, which in our case a big chunk of them are quick turn projects. And so, those two segments are down. When the other segments grow outside of industrial, they tend to be longer projects. The profit recognition on those projects tend to be conservative. We've got the 20% rule playing into that mix shifts. We don't recognize profit on the first 20% of our projects.

And so, you put all that together and plus what's going on with the credit markets, plus what's going on with customers' access to capital and their desire to hold onto cash, we typically, our first half okay, second half great Company. Obviously we're straining to say is that the trend this year.

And so, as you go out in the second quarter, we've said all year that we though we had pretty good visibility through second quarter, we thought we were going to do pretty good there. And as you get to third and fourth quarter, because of the mix shift, coupled with the things Frank was talking about, it gets a little more problematic this year than the other years we've had.

Okay, and then just getting back to some prior questions. In terms of the stimulus package, where do you guys see more opportunity? I mean we've seen a list coming out of the GSA that they're going to spend over $4 billion converting their federal buildings to be more efficient. But then there's a lot of transportation and water work. I mean when we see these projects, I guess coming more to fruition, where's the sweet spot for EMCOR that we can see you guys really targeting?

In fact, the last earnings call that we held, we had a -- we put up a slide that identified five major sectors, designated by the government. Defense and veterans, water, buildings, transportation, and energy. And the collective sums allocated to those five segments were $130 billion. We think that EMCOR is a major player in all five of those areas. Various customers of course. You've got the DoD, DoE, GSA, and then all other acronyms. But the -- those five sectors are areas in which we are big players.

And I don't have the -- any particular mathematical formula to suggest to you, except perhaps the following. EMCOR in 2008 was about a $7 billion Company. The total value of non-residential construction put in place in the United States last year was $700 billion.

So, let's give us 1% of all -- of the entire market. Then, take those five segments that I just discussed and give us whatever market share you like of that segment, 3%, whatever. Multiply that by $130 billion and you get to a pretty large number. So, I think that that in a nutshell is all we know about the way that EMCOR is -- has the potential to play it. But I think it adds up to a pretty large number, just based upon our strong track record in those five major sectors.

Right, so compared to last quarter when you put that initial slide and the way that we have seen some of the numbers coming out. I mean has anything generally changed? Or it's still that --?

No, our point of view is exactly the same. I did mention on a previous -- to a previous caller that the funds really have not started to flow significantly yet. Some funds have been allocated to state and local governments. They haven't decided very much so far. I mentioned earlier that the federal government's website says that only 2% of the money has been spent. So, it's natural and normal that we would be hearing only anecdotal comments and reports from the field. But nothing concentrated yet.

Okay, thanks. I'll get back in queue.

Okay, you bet.

(Operator instructions) Your next question comes from the line of Matt Tucker with KeyBanc.

Good morning, gentlemen.

Good morning, Matt.

Just got a few questions on behalf of Tahira Afzal. Similar to the question earlier about the margins up in Canada, I also notice that in the electrical segment, the margins held up relatively pretty well and are still pretty high from a historical perspective. I was wondering if you could talk a little bit about what happened there in the quarter to get those good margins?

Yes, Matt. I want to turn this -- this is Frank. I'm going to turn it over to Tony in a second. I would like to make a general comment that hasn't been asked about by any caller so far. And that is that all of our segments profited significantly from the management down by corporate and by our subsidiary managers of our SG&A costs during the quarter. These are replicable costs; they were very significant contributors to the profit margins of our segments as well as the reduction in corporate profit. The number was $12.4 million reduction year-over-year, which in percentage terms I believe was in the 9% range. Is that correct, Mark?

After acquisitions.

After acquisitions, exactly. So, we responded to the pending recession with the things that you have to do. And one of the things you have to do is protect yourself in terms of variable costs. And we have demonstrated, I believe, in this quarter, that what we've been saying about the variability of our costs is in fact true that we can nimbly, and quickly, and decisively reduce costs when we need to. So, that was a significant benefit to what were already good operating results from our various segments. Here's Tony.

Matt, I think it comes from really three things. I think it starts at the highest level, the work we were closing out or coming to a significant percentage of completion in the first quarter was work that was won in pretty good times. And we priced it appropriately, and we had a great productivity plan in place. And we executed on that productivity plan, which becomes much more difficult when your workforce really doesn't have the horizon of the kind of projects ahead of them.

So, we were very tough on labor productivity in the quarter, and we came in better than we thought we were going to in the first quarter with respect to labor productivity.

We had favorable closeouts on a number of jobs. We had some very tense negotiations that went from fourth quarter into first quarter. And we came out in the winning end of those. And we had a few small contract settlements that helped on where we came in a little bit above our book position.

And then, you couple that with aggressively managing down our SG&A and you got to the electrical margins we had. And I think that was really the story across our Company in the first quarter. Better labor productivity, paying close attention to costs and close out on the jobs, and we came out on the winning end of a number of settlements.

And I guess if you look at, sticking with the electrical segment, if you look at what's in the backlog and the new awards you've recently received, how do you say the margins on that where it compares with what you saw in the first --?

Well, I'll go with Frank's original comment. He said there's anywhere from 100 to 200 basis point degradation over a period of time.

In gross margins.

In gross margins. That's going to take a lot of work out. We're trying to blend at least half of that with SG&A cuts and other cost control, even on the direct labor side. We're getting better material pricing right now. We're buying out jobs better than we initially thought. So, we try to cut half of that gross margin degradation in half with the things we control ourselves.

So, margins are less. There's no question. And part of that's just the nature of the mix shift underway.

Well, I should point out that after a 4.6% OI first quarter, that it would appear that our operating income percentage assumptions for the year as a whole are sufficiently conservative. And so, the assumptions are a range of 3.0% to 3.5% OI.

Okay, and then to touch on labor costs, given that you're largely unionized labor force, what ability -- I guess what have you seen in past cycles? What ability do you have to bring labor costs down?

Well, that's apropos my previous comment concerning our demonstration of the fact that our costs are predominantly variable. I've been greeted with incredulity many times over the last 15 years when I've commented that the -- being a party to a modern union labor agreement can be a tremendous advantage from time to time, specifically right now. That is because modern labor relationships are significantly variable in terms of their costs, with great freedom on the part of the employer to return extraneous personnel to the union hall and to the union payroll until new demand surfaces for those personnel.

We have made it a point of pride for many years to retain as many personnel as we can for as long as we can. And we will continue to do that. But it's a great benefit to us to be able to reduce personnel, and therefore costs, on a very quick, nimble, decisive basis like we demonstrated in the first quarter and will continue to demonstrate in this -- until this recession is over.

Great. And I just wanted to ask, think about kind of your maintenance type revenue Facility Services and thinking outside of Ohmstede, I was hoping you could give a sense of how much of that work comes from big cities, New York, Boston, Chicago, versus federal buildings, GSA?

It's -- there's a lot of mix because even in the big cities of New York, Boston, and Chicago, we're doing a lot of work for the federal, state, and local governments. There are lots of federal buildings in places other than DC. And we -- those were in fact one of our targets of our Facility Service growth in the last few years. We've been quite successful in that regard. So, it's a very difficult distinction to make I would say.

Okay, understandable.

Tony, can you --?

No, I think you get in to so many variations because within the mechanical service segment, even within some of the industrial work we do. We're doing a multi -- if you maintain a water plant for a base, what kind of work is that? It's a lot of different things.

Yes.

Sure, I see. Well, thanks, guys. That was very helpful.

Okay, you're welcome.

We have now reached the allotted time for questions. I would now like to turn the call back over to management for concluding remarks.

Thank you all for your interest in EMCOR. We're pleased and proud of our record first quarter. Watch this space for additional interesting news as we go forward. Thanks again, and good afternoon.

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