EMCOR Group Inc (EME) 2009 Q2 法說會逐字稿

Good morning. My name is Michael, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group second quarter 2009 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.) Mr. Eric Boyriven of FD, 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 2009 second 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 earnings conference call for the second quarter of 2009. For those of you who are accessing calls 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 slide 1, which is our title slide. During the call, instructions will be given for you to advance to the next slide. Please advance to the next slight, or slide 2.

Slide 2 depicts the executives who are with me to discuss the quarter and six-month results. They are Frank MacInnis, Chairman and Chief Executive Officer; Tony Guzzi, our President and Chief Operating Officer; Mark Pompa, Executive Vice President and Chief Financial Officer; Mava Heffler, Vice President in 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 us at emcorgroup.com.

Before we begin, I want to remind you that this discussion may contain certain forward-looking statements. Any such statements are based upon information available to EMCOR management 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, availability of adequate surety bonding and risks associated with foreign operations. Seven of the risks and factors associated with EMCOR's business are also discussed in the company's 2008 Form 10-K, its 10-Q for the second quarter ended June 30, 2009, and other reports filed from time to time with the Securities and Exchange Commission.

With that all said, please let me turn this over to Frank. Frank, please begin.

Thank you, Kevin. That was stirring as usual. Good morning, everyone, and welcome to our 58th 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 are still on slide 2.

The focus of today's call will be on the 2009 second quarter and year-to-date earnings press release and Form 10-Q that we issued and filed earlier this morning. We will conduct this call in our customary way. First, a presentation and discussion of those operating results, including highlights of segment performance and my comments on our quarter end balance sheet and liquidity. Then I'll discuss the recent evolution and the current status of our contract backlog portfolio with special emphasis on industry sectors that will be important to EMCOR's future performance. Then I'll turn the call over to Tony Guzzi, our President and Chief Operating Officer, for his comments on some notable recent contract awards from around our broad and diverse group of operating subsidiaries, followed by a slide on a topic that is fundamental to EMCOR's operational performance, the productivity of the trained technical employees who serve EMCOR customers every day. Finally, I'll review our mid-year position and our prospects for second half revenue and profits. And I'll provide modified earnings guidance for full year 2009. At that point, there will be an opportunity for listeners to make comments or to ask us questions. And you can see, from slide 2, that a number of our senior officers are on hand to help with the answers.

So let's begin. Please move to slide 3. 14 years ago, EMCOR began a record of consistent profitable operations that remains unbroken today, 56 consecutive profitable quarters later. Recent times have shown how hard it is, even for well-capitalized, well-managed companies to achieve such a record of consistent performance. We are proud of and grateful for the dedication, discipline and strict adherence to our business model that enabled our talented employees to create this sustained performance. Slide 3 reflects the best second quarter operating results in our history as measured by operating income, both in dollars and as a percentage of revenues and by diluted earnings per common share.

Slide 4 depicts a similar pattern of exceptional performance for the six-month, year-to-date period, with substantial increases in operating income and diluted earnings per share, despite substantially reduced revenues in both the second quarter and the year to date.

In slide 5, we identify some of the performance highlights from an excellent second quarter which was achieved despite daunting macroeconomic challenges. The recession dramatically affected our revenues, notably in the commercial and hospitality sectors of our construction segments, causing an overall 17.4% revenue reduction compared to the year ago quarter. Also contributing to the revenue downtrend was a 9% quarter-over-quarter reduction in our US facilities services revenues. As customers held back on small project work, industrial services projects were deferred, and unusually cool spring and early summer weather in parts of the US impacted our HVAC system commissioning and service business. Canada and UK revenues fell as well, primarily due to foreign exchange movements, together with continued planned downsizing of our UK construction activities. I'll speak a little more about segment revenue prospects a little later in the call.

Despite these headwinds, we reported second quarter net income of $44.8 million, or $0.67 per diluted share, an increase of 2% over last year's record second quarter. For the six-month period, net income was $82.6 million, or $1.22 per diluted share, 11% higher than last year. These remarkable results are the products of two of the hallmarks of EMCOR operations, the same skills that have provided 56 consecutive profitable quarters; excellent execution and disciplined cost control.

As shown in slide 5, our second quarter operating income of $74.9 million, which was net of $3 million of restructuring charges, was a record 5.3% of revenues and included segment operating income improvements of 30% in Comstock, Canada, 28% in US electrical and 16% in US mechanical, partially offset by a 9% decrease in the UK and a 31% decrease in US facility services, for reasons discussed earlier.

Although segment operating income trends varied, depending upon their customers' reactions to recessionary pressures, every EMCOR management team succeeded in sustaining an absence of badness, the avoidance of nasty surprises that are so threatening in difficult times.

Please go to slide 6. Likewise, every EMCOR segment contributed to the major reduction in SG&A expenses that was another contributor to our financial results. Overhead costs declined $14.9 million for the second quarter and $27.3 million for the year to date, reflecting two of EMCOR's underlying strengths; the extreme variability of our costs and the swiftness and nimbleness with which EMCOR management can move to adjust them to fit the circumstances. We believe that these cost reductions are sustainable for ensuing quarters and will continue to contribute to our operational efficiency. The record second quarter operating results were also of very high quality. Cash flow from operations for the first six months was $138.3 million, nearly $28 million higher than the 2008 first half.

Please go to slide 7. The natural result of record profits, excellent cash flows and experienced conservative management is a strong and liquid balance sheet as depicted here. Cash rose $115 million during the six-month period to $521.5 million, while total debt fell as a consequence of the mandatory repayment installments under our term note, leaving an outstanding debt balance of $197.1 million, a total debt to total cap ratio of 14.7%, well within our comfort zone, even for these perilous times. Working capital was at an all-time high of $569 million. Our balance sheet represents the dry powder that will help us manage future challenges and seize future opportunities as these interesting times continue to evolve.

Please go to slide 8. Contract backlog at quarter end was $3.4 billion compared to $4.67 billion a year ago and $3.67 billion at the end of the first quarter of this year. As in the case of our revenues, contract backlog declined under pressure from negative macroeconomic trends and lack of customer confidence, particularly in the private sector commercial and hospitality and gaming sectors. However, EMCOR's diverse and resilient business model enabled us to maintain strong backlog positions in five of our seven major categories.

In a year-over-year comparison, our commercial and hospitality backlog declined more than 56% while our remaining five sectors, that is industrial, healthcare, institutional, transportation, and water and waste water, declined only 5.2% during the same period. During the second quarter, our commercial and hospitality sectors declined sequentially by 20%, while backlog in the other five sectors was down less than 2%.

Perhaps not surprisingly, our institutional backlog grew substantially, both year over year and sequentially, reflecting the growth of government agencies as EMCOR customers and the growing role of government in the general economy.

My opinion of EMCOR's backlog evolution has not changed since our first quarter conference call; no revival in hospitality and gaming for at least 18 months; an end to the commercial sector decline, at least for EMCOR during the second half of 2009, and the beginning of cautious growth by mid 2010; potentially significant growth opportunities in late '09 and into '10 in our industrial sector, as deferred refinery maintenance and repair must be performed; and steady performance in the transportation, healthcare and water and waste water sectors, with continued aggressive growth in institutional work.

I think that EMCOR is in the course of demonstrating that we are not nearly as vulnerable to a downturn in commercial real estate as some investors thought or feared and that our business model will continue to support profitable operations until the private sector begins to invest again.

Now it's time for me to turn things over to Tony Guzzi who is here to discuss some notable recent contract awards that will help to illustrate my views on backlog development, followed by an interesting slide on labor productivity. Please go to slide 9. Tony?

Thanks, Frank. As you mentioned earlier in the call, we remain disciplined and structured in the work we're bidding and continuing to match project risk and reward ratios within acceptable return tolerances. While disciplined bidding has always been part of our strategy, our process was relearned and reemphasized and heightened in 2004 and 2005. It remains a foundational operating practice throughout our company today. And that's both across facilities, construction, industrial services, all of the above.

In the quarter, we won project awards, and I'd like to highlight a few of them. Let's first go to Chicago where our Gibson subsidiary won two projects of note, the first being the electrical systems installation for the Rush University Medical Center. It's about an 800,000-square-foot, 14-story replacement hospital. Gibson will perform the tenant fit-out and electrical installation throughout all phases of construction, including emergency rooms, nonevasive imaging, operating suites, labor and delivery as well as the bed tower. This aggressive two-year project schedule has a completion date of June 2011.

Gibson will also be performing the electrical construction contract for the new Federal Express cargo facility located at Chicago's O'Hare Airport. Gibson's scope for this three-building project includes the installation of site utilities, lighting, medium and low voltage distribution systems as well as cogeneration capability for power and fire alarm.

Also in the Midwest, our [Shambo] & Sons subsidiary will be the design build contractor for a food product line process retrofit for PBM Nutritionals in Covington, Ohio. This fast-track project to renovate an existing food plant to produce nutraceuticals highlights Shambo's industry-leading food-processing capabilities.

In the Bronx, the home of the Yankees, here in the borough of New York, our Welsbach Electric subsidiary will be replacing the existing bridge lighting with more energy-efficient lighting units as part of this New York State Department of Transportation retrofit contract. Additionally, Welsbach will be installing a new intelligent transportation notification and traffic warning system. And you've heard us speak of these in the past. It's a trend we're seeing across the country.

In Canada, our Comstock subsidiary has the prime contract for the HVAC and odor control project at the Ashbridges Bay Waste Treatment Plant for the City of Toronto. In addition to being the prime contractor, Comstock will self-perform mechanical, electrical and structural steel erection for this project. Comstock's work scope includes installing new boilers and ducts throughout the facility, upgrading the scrubber systems, installing new transformers as well as upgrading the gas monitoring systems, switch gear, lighting and heaters.

Here in Connecticut, our New England mechanical subsidiary will be installing new electrical mechanical temperature control fire and security systems for Verizon's renovation of their Windsor, Connecticut, central switching station. This project includes the installation of two rooftop air conditioning units, three computer room air conditioning systems, fire suppression alarm systems, CCTV, censor and direct digital controls. By the way, this site serves as the hub for 320 Verizon cell service towers.

And finally, 3,000 miles to the west in Oceanside, California, Dynalectric San Diego has received a contract for the installation of electrical systems as part of the construction of a new medical outpatient clinic for the Veterans Health Administration. Dyna's scope of work for this 80,000-square-foot medical office building include installation of lighting, power, generator and backup systems as well as teledata, cable, CCTV, intrusion detection, security and motion detection systems. Dyna will be utilizing BIM, which is Building Information Modeling, on this project, which is really just computer-aided design. It helps architects, engineers, general contractors and subcontractors work more efficiently together. Although this is an example of an electrical application of BIM, the real productivity initiatives not only come from our electrical subsidiaries, it also comes in our mechanical subsidiaries where piping collisions can cause major difficulties when you go to the installation phase of the work.

Switch to slide 10. Now we're going to talk about everybody's favorite topic, at least for the last eight months. That has been productivity. And productivity is probably thee major reason that our margins are holding up despite our significant drop in revenue. And we've been on a quest for productivity at EMCOR over a long period of time. And for us, productivity and safety go hand in hand at EMCOR. We believe these are mutually inclusive tasks, not mutually exclusive tasks.

So how do you drive productivity at EMCOR? On the left of the page, you see construction, and on the right, service. Let's first talk about the construction environment. How you gain productivity on a construction job is you take hours out of a construction job through planning, through the application of BIM, Building Information Modeling, and then driving prefabrication into our shops and better work scheduling. Prefabrication, we take work out of the field and put it into the controlled environment of our prefab shops, not only reducing the hours worked, but increasing quality and enhancing our ability to get installation right through preplanning.

Our experience has taught us, with the right jobs, and these are usually more complex jobs, we can take 15% to 20% of the labor hours off the job through the application of all of the above. We can cut mistakes and collisions which then helps reduce the change order process. We get through that at the beginning of the job instead of after the fact. And it significantly improves coordination across all the trades. And it puts us in a very good position to make sure that we get our scheduling right.

Now moving to our services business, there, it's about improving the time on the job for our capable technicians. That is, get the billing time up and the downtime down, cut the travel time, improve the asset velocity by getting quicker and more accurate customer sign-off on the work we've done. And issues that have driven our productivity on the service side, among many, are GPS, which is, understand exactly where we are. We know exactly with GPS. We all have it on our cell phones. You have it. You see the application of it with your navigation systems. We use that to know where our vehicles are, how they're performing and how they're driving. We do it through hand-held devices so we can capture the information on a service call, get customer sign-off and get it into billing as fast as possible. And we also do it through service scope standardization and training so that we can get the pricing right, make sure the technician has what they need when they get out to the job and have the scope defined to the customer, and make sure we're getting paid for it.

How have those manifested themselves in bottom-line numbers? We have cut per-capita gasoline usage by 14% over the past year. We reduced the number of driver alerts. We have a program where we allow people to call in if our drivers are not driving correctly. Those are down almost 35% since the installation of GPS. We took five days, or 20%, out of our billing cycle on the service side. And we have reduced customer discrepancy on our repair service business, our service agreement business by over 50%. And we have improved our service agreement margins by at least 500 basis points. And as a result of that, we have captured more add-on work.

And through all that, we've integrated our safety program. And safety is integrated with productivity when you look at the chart below. I mean, obviously, with our revenue down like it is, the hours worked were down. So our hours worked are down 10% through the first half of the year. Our injuries are down by 50%, which is a very difficult thing to do in a down market. And so we don't buy that there's a false tradeoff at EMCOR between driving a safety culture and a productivity culture in combination. And that's why our margins are staying up, because our guys are doing a great job getting people off the job. And when we're on the job, we're doing it safer than ever. And with that, I'll turn it over to you, Frank.

Thank you, Tony. I believe that the revolution in labor productivity and safety can be one of the major stories of the next decade in the engineering and construction sector, and it certainly will be for EMCOR.

And now for a few final comments on our future expectations before we turn the call over to you, our listeners. Please go to slide 11. It would be trite to say that we continue to live and work in a time of great uncertainty. But at least for EMCOR, a few things have become clearer than they were a quarter ago. We've had a great first half, marked by excellent execution of high-quality backlog, rigid cost and risk control at $1.22 of diluted EPS.

Our second quarter revenues increased 2% sequentially, operating and net -- income and net income rose 16% and 22% respectively. And we saw signs of stabilization in our contract backlog portfolio. We're displaying margin momentum despite the evolution of our revenues towards public sector work. There are modest signs of economic stabilization and restoration of the credit markets, especially for the blue chip companies and agencies that comprise most of our customer base. We have at least anecdotal indications of the beginnings of stimulus-related project opportunities. And our cash and working capital are at or near historic highs and represent buying power in what could become a very interesting market.

Early this year, we issued revenue guidance of $6.0 billion to $6.3 billion and a highly confident diluted EPS estimate of $1.80 based on very conservative margin assumptions. With the benefit of improved clarity, we can now refine our estimates.

Please go to slide 12. For full year 2009, we now expect revenues of $5.5 billion to $5.7 billion, a reduction from our previous expectations and an approximate replication of our first half revenue run rate. We expect operating margins to decline gradually over the last half of 2009, but not to the levels previously foreseen. Based on second half operating income percentages of 3.6% to 4% of revenues compared to 4.94% in the first half, and assuming no material degradation in business conditions, we now expect 2009 diluted earnings per common share to be in a range of $2 to $2.20.

With respect to 2010, uncertainty prevails with respect to many of the major ingredients in a private sector rebound; the housing market, consumer confidence, the Yankees versus the Red Sox. In the past year, EMCOR has shown that we can perform well in a period of declining demand by concentrating on our strengths, conservative discipline management, cost control and liquidity for opportunistic investments. We will continue to play to those strengths while awaiting macro-developments.

I'll end as I began by thanking our thousands of dedicated, talented and increasingly productive and safe EMCOR employees for making possible 56 quarters, 14 years, of consistent profit. And thanks to you, our listeners, for your interest and for your support of EMCOR. Now it's time for your questions or comments. And Michael is here to tell you how to queue.

(Operator instructions.) Our first question comes from Alex Rygiel with FBR Capital Markets.

Thank you. Good morning, gentlemen. Great quarter.

Thank you, Alex.

Couple questions. First, Frank, when you look at your new awards over the last two or three months, the margin assumption embedded in those new awards, how does it compare to three months ago?

I don't think I could generalize, Alex. When you look at any particular construction estimate, especially for the kind of sophisticated value-added projects in which we participate, there is a combination of assumptions concerning equipment buys as well as labor costs, working conditions, costs of capital and contingencies that we insert in the estimate for the purpose of dealing with risks both known and unknown. We continue to be able to apply adequate and appropriate contingencies to our work.

One of the great dangers of work in recessionary times by unsophisticated or unconservative contractors is that they forget about contingencies and work for cash flow. We're not one of those contractors. This is not our first rodeo, and we think we know how to handle ourselves in a recession. I think it speaks to our general view, however, concerning profit opportunities in this market, that our second half OI percentage assumptions reflect a reduction in OI percentage by somewhere around 100 basis points. And that, I think, is our normally conservative assumption that the quality of construction and facility services opportunities will decline somewhat, but certainly not as dramatically as we first thought when we faced this year back in the beginning of January. Tony has an additional comment.

Yeah. And, Alex, we're being very aggressive on labor productivity. And I think that's what you saw in the first half. And we'll continue to be aggressive. And we shouldn't assume -- and we're finding that our work force is responding well to that because I think they want our companies in the markets to be successful.

And you can't speak about OI percentage without, at the same time, talking about the very significant reduction in both field headcount and in SG&A charges, Alex. And that very significant reduction that we've made in the quarter and for the half year in SG&A charges, totaling nearly $30 million for the half year, is a transformational factor in terms of making projects that might have been marginal a year ago significantly more profitable today. So a lot of things are changing. But they're changing for the better as far as our ability to perform well in a very challenging environment.

You briefly mentioned stimulus at the end of your presentation there. Could you expand upon that a little bit as it relates to opportunities you see developing either in federal buildings, in the water markets or in the private sector?

I will. And I'm sure Tony will have something to say as well. I opined a quarter ago, and I think also on television, that companies like EMCOR would see very little from the stimulus program much before the end of 2009, and that when we did see it in 2009, it would be primarily in backlog terms, with the primary benefits in both revenue and operating income in 2010 and '11. This is because of the sophistication and value added to the projects that we perform and the fact that they require engineering and planning before they can be permitted to proceed. This is as distinct from pothole filling which is a kind of commoditized activity that has been stimulated, no question, so far by the stimulus funds. But it's a kind of simple project with not much planning, not much engineering, and a lot of competition, a lot of capacity in the market that can get done very quickly and easily.

I will say, however, that there is anecdotal evidence of the beginning of opportunities flowing either directly or perhaps indirectly to EMCOR. For example, Tony referred to the VA Hospital project in California. I wouldn't classify that as a stimulus contract. I would, however, suggest that because of the, if memory serves, $4 billion that was allocated to the VA system out of the stimulus package, that that project has, in a sense, been enabled, that the VA has been able to release that project to EMCOR because of their knowledge that they were going to be receiving that $4 billion out of the stimulus program. So the situation is much as we foresaw it a quarter, and a half a year ago. We continue to be believe that EMCOR will be a significant recipient of benefits associated with the stimulus program, approximately on the timing that I just mentioned. But we are beginning to see this and that in terms of either direct stimulus programs or stimulus enabled projects. Tony?

And, Alex, we -- on the smaller projects, we won't know the difference between stimulus and stimulus enabled. I will say on the -- there is a portion of the money, I think it was $5 billion that was put aside for energy efficiency upgrades. That money is starting to flow and is likely to flow through the middle of next year. Again, the way that manifests itself to a company like EMCOR is if we have the contract, we know that the budgets are increased, and then we'll get more IDIQ work. If we don't have the contract, it becomes manifest -- it manifests itself in that, you know, we will bid on the opportunity to do replacement work. And we're starting to see some of those get enabled. And like I said, we don't know the difference because we know the budget is now more healthy and the work will go.

There are several large opportunities that we are tracking. And most of those are what I would call in the design assist phase where we're doing some of the value engineering. We've teamed up with our general contractor partners on several of the larger opportunities. And most of those jobs are either bidding now or will be bidding now and between the middle of the fourth quarter. And we, like Frank said, expect to participate in those jobs like we would as a major player in the market.

That's very helpful. Thank you very much.

Thanks, Alex.

Your next question comes from Rich Wesolowski with Sidoti Company.

Good morning, Rich.

Good morning. How's it going?

Good. Very well, thank you.

I just have one question, then I'll jump back in line. Can you give us a window into the performance and the outlook of your Heritage facility services in the buildings market versus that in the refinery sector?

We've -- if you take our Heritage facility services business, it's had significant margin expansion over the last several years. Margins have tripled over the last four and a half years. And that's been done through a combination of what I would say the big four. We've cut a lot of SG&A. We focused on the areas where we make more money, so we've been focused on mechanical services, government services and higher and site-based service customers that really value technical services. So one has been, cut SG&A; the second's been the market focus and product mix; the next one is best practice and pricing, I would say, and productivity.

A lot of the initiatives that we talked about on the services side for productivity are actually happening in our Heritage facility services business, from the application of hand-helds to the GPS or global positioning systems work, which we took advantage of high gasoline prices to enact across our company and work through technician resistance, to pricing modules to scope standardization.

And then on the government side, we've built a fairly substantial government business by expanding our customer base. We've always been a good GSA contractor. We've become a good Navy contractor. We've now moved into the Department of Homeland Security. And we're starting to work with the Air Force. So that business has grown organically, although the cool summer did not help us this year. That's not a good thing for any HVAC contractor like we are, when it's cold, so that distorts the comparisons. And then we have also added the industrial. So core has done well. Industrial has been a nice add to it. And we have a burgeoning energy business that's where our acquisition of PPM, coupled with our legacy business and doing more and more [cogen] and cogen start-up work in all of the above. So the whole piece together has done very well and built a nice nucleus.

Rich, it's Frank. I would also add that you're an old-timer, so you will recall when we were just getting this business started, that is the services business, distinct from our industrial acquisitions. We thought that it was going to be quite a seasonal business, that there would be a big spike in the spring, with HVAC system commissioning and the like, and that it would then kind of decline to a low rumble for the rest of the year. That has been far from the case. We have seen a very steady business grow that is strong year around. Tony is right that we have taken a hit from the cool spring and summer in the Northeast this year. But this is a very strong business and fundamentally active all year around.

Excellent. Thanks.

Thank you.

Your next question comes from Avi Fisher with BMO Capital Markets.

Hi, Avi.

Hi. Good morning. Thanks for taking my questions.

You bet.

I just had a few, and I apologize if they've been asked before. But how long do you think you could sustain the variable cost scaling that you are doing? And if you've already answered them, just -- I'll check the transcript later.

Well, we've been very aggressive. We've front-loaded some of this. And we've been very aggressive on the direct labor management side. And our superintendents, our project managers have done a superb job of getting labor off the job. And that's difficult to do when they don't have anywhere to go as volume ramped down, especially in markets like Las Vegas. And we've been very aggressive on the SG&A side. We still have some momentum there. We expect to replicate our first half performance in the second half. And we're going to adjust to make sure that we keep healthy profit margins in the business.

And just to clarify, when you say replicating the second half and first half, I know you said that about revenue. So you expect the same in the direct -- as a proportion of revenues, cost to --

Yeah, we expect to be able to capture the same SG&A savings in the back half of the year as we did in the first half of the year on a year-over-year basis.

So that would reflect a reduction of another $27 million, $28 million in the second half of the year compared to the year ago.

Okay.

Avi, I should say to other listeners that this is something that we have been talking about for some time, going back to the good times. I'd always get the old fish eye from investors when I'd say, you know, it's a big advantage to EMCOR to have this variable cost structure where we can respond quickly and nimbly and decisively in an emergency and to get our costs down in a big hurry. And, of course, nobody cared back when -- back when everybody was happy, and everything was going up. But it sure makes a difference now. And that is one of the fundamental strengths of our company.

Okay. Well, nobody's giving you the fish eye today.

No.

Also, what would you attribute the "absence of badness" on projects? Is that something that's repeatable? Is it just a function of the luck of construction, weather, all that stuff?

Well, weather certainly isn't helping, but --

I -- that's --

Right. That's the surprising thing. You had a cool Northeast throughout all of June, cool and wet, and yet, you know, still not doing too bad.

When I speak of the essence of badness, I am generally referring to the occurrence of claims and disputes that reflect inadequate or unsophisticated contract administration that result in bad payment terms, that allow the customer to get ahead of us in terms of owing us a lot of money, and therefore, the company having very little leverage to collect our accounts. EMCOR's situation is quite the reverse and has been for many years. The exact amount of our net overbuild account doesn't come to mind, but I'm confident that Mark can give it to me.

629.

$629 million net overbuild at the end of the second quarter, which is astonishing performance, especially in circumstances like the present where customers tend to hold onto their money and tend to be -- to try to be very disciplined about the way in which they manage their side of the construction and services contracts that we perform. So an absence of badness for me means that we don't have projects in which it costs us 20% of our estimate to complete the last 5% of the job, and we can't get things closed out, and we can't get the customer to sign off, and we can't get the customer to pay us.

And what do you attribute that to? Is that just you're on good projects, you're not on bad projects? Is it because you're on fewer construction projects?

We're careful in good times and in bad. We pay attention to details no matter how good the times are. We don't throw money away or margin away. We have a squadron of extraordinarily talented, dedicated and experienced construction managers and lawyers who know what they're looking at in a construction project and take care of business at the beginning, not at the end when the problems can really hurt you. And this has been our practice for many years, Avi.

This is a company that was born out of adversity. The old-timers on this call know that almost everybody in this room is a survivor of the bankruptcy of 1994. And after two quarters of losses following emergence from bankruptcy, we've been profitable every quarter since. That's no accident. And the fact that we're performing well under adversity today is also no accident. We learned a lot of lessons the hard way. And we are hewing to the model that evolved from those hard lessons.

Okay. And just as a followup to that, how are you seeing sort of contract pricing and contract margins either today and going forward, in terms of on the construction side, and also in terms of facility services agreements? Thank you.

I'll comment very generally, and Tony, I know, will have specific comments. No question the -- with declining demand, that the quality of projects available, both -- the quality and quantity, both on the construction and the facility service side, has declined to some degree. And our assumptions with respect to second-half and full-year guidance reflect that. We've shown an anticipated reduction of somewhere around 100 basis points NOI percentage for the second half reflecting just such a decline. However, our position in the market, the fact that our customers have been bruised by current events as well, they're interested in having a contractor or a service provider who is going to be here tomorrow and next week and next month and next year, who can be counted upon to provide reliable, well-financed and well-performed services. So we try in an environment in which our customers are being just as conservative as we are. Tony?

Yeah, I think, Avi, you know, the idea of the bidding discipline, just backtracking a little bit, that applies to construction, it applies to service. You can take a bad multi-year agreement and live with it for three or four years, and that's a bad outcome also. And so those disciplines have been put [aside] on both sides. And I think one of the things that gets lost because the market was so good over the last three or four years is we invested pretty strong and heavily into what I would say very disciplined operating practices, and we strengthened the operating group in general that works with our field organizations so that our best practice sharing could happen, so that our productivity initiatives could be driven, which gives us a little advantage when we bid, and that our financial and legal management became integrated throughout the company. And when you're doing that in good times, people sometimes wonder, why are you doing this? There's plenty of work. You're seeing the benefits of all that now as times get tougher.

And the other thing I think that we do pretty well, especially for our construction side of our business, and Frank won't let us do this, we never set a revenue target. And so our guys aren't working to a revenue target. What they're working to is a return on that [assess] target, and they're working to a cash flow target, and they're working to an SG&A percentage target that is much more important to us than achieving revenue in a down market.

Now, when you look at the work out there, we're clearly -- it's not as vibrant as it was 18 months ago. But that would be both on the service side, although a little less -- a little more vibrant there, I think, over a longer -- we'll be -- we'll see that start to pick back up, but on the construction side. So it forces us to be get more creative. It forces us to continue to look in new ways to draw in productivity. It forces us to look at the way we work with our union partners in the market on project labor agreements, on the mix of apprentices to journeymen on a job, on a scale that we can use and all those things. Because all things being equal, I think our union partners and our operators know how to drive to get the efficiencies we need to so that when there's a significant project, that EMCOR should win. We have enough people in the market that want us to win it because they know we're financially stable. They know we're going to bring the technical veracity to the job that needs to be brought. And then union guys know that we're going to be there to make sure that all the bills are paid and all the commitments are honored. So you can't underestimate all that.

I appreciate the color. Thank you.

You bet.

And our final question will come from Tahira Afzal with KeyBanc.

Morning, gentlemen.

Good morning, T. Hello.

Hi. Congratulations on a super quarter.

Thank you very much.

Just had a couple of questions. A lot of the other questions have been answered. Number one, if I look at your 2009 guidance, where have you been the most cautious in terms of end markets and margin assumptions?

Well, we develop our estimates via a matrix calculation where we construct various revenue scenarios. If anything, I would say that the more conservative of our assumptions have to do with the margins that we have reflected in our second-half assumptions. Since -- looking at a range of values and coming off a first half in which we ran at 4.94% net of some restructuring costs, assuming that we are going to abruptly reduce OI percentage by 100 basis points or more is a pretty conservative assumption, I would say. And I think that that's where the primary conservatism lies, but appropriately so. I don't mean to say that, with a wink and a nudge, that, oh, gosh, we're saying 100 basis points here, but probably, it will be a lot less than that in terms of a reduction.

I think that this assumption is warranted in circumstances. There's a greet deal of uncertainty. We certainly will not see material benefits from the stimulus package before year end. And bad things can happen. So I think that we've achieved a balanced point of view with respect to our guidance. I'm very, very confident of the $2 number in the range, and less confident, but think that the $2.20 is achievable. And that's exactly, in my view, the way a guidance range ought to be constructed.

I think you guys have done a very good job in how you framed everything over the last couple of quarters. If I look at your maintenance side of the business, it seems like your refinery maintenance side is holding up much better than some of your publicly traded builds. And I know they're not direct comparisons over there. What do you think EMCOR is doing differently that's helping you out so far?

I think it's a couple things, T. One is part of our product offering is fairly unique. The offering we have around the heat exchanger and our market leading position there, you know, makes us a partner of choice to many of the larger refiners. Secondarily, we really had good penetration, specifically in places like the ship channel and others because we've been able to hire some really good people over the last couple years from some of our competitors to continue to build our field services business which then allows us to build our shop business.

So I'd say our offering's a little bit differentiated and a lot differentiated around the heat section of the refinery, coupled with really good execution on the field services side and good talent addition on the field services side. And that's a real opportunity for us right now. You know, our management team in that business, our reputation as EMCOR overall, with the management and technical labor and our position with the heat exchangers, and the work we've done helps us attract capital in a very difficult -- capital from the refiners, I think, versus other people. But it helps us attract people from other organizations that aren't doing as well. And in that business, we're having a real opportunity to upgrade the talent. And the team was already pretty talented. So, you know, that's what that business comes down to on the engineering and execution side. And we feel real good about where we are for the next five years, I think.

T, it's Frank. I think -- I would expand on that by commenting that our refinery service business is just like EMCOR in microcosm in that we are doing a lot of work that is way under the radar. In the same way that there doesn't need to be construction cranes on the horizon in order for EMCOR to be participating in major capital projects because we do so much maintenance and we do so much retrofit that arise from company's maintenance CapEx budgets or from their operating budgets. We're working on the bread and butter parts of refinery operations. The heat exchangers are low tech but integral and critical parts of the successful and safe operation of a refinery. They're not a low -- they're not a high-cost part of the refinery, but they are essential to its operation. And they must be maintained no matter what. So I think that's typical of EMCOR as a whole. When nothing else is going on, the lights still have to be kept on, and the air conditioning has to be kept running. And that's what we are doing. And that's one of the reasons why we are successful in circumstances where some others are not.

Got it. And would it be fair to say that, given the environment at hand, you are currently, again, being very cautious in terms of your -- what you built into your guidance in terms of that business?

I think we've got it about right, T. I mean, it's been very hard to predict what the turnaround schedule is going to be, what's going to be in first quarter or what's going to be in fourth quarter. We know we saw things flip out of first half of this year that should have been done. We don't know how they're looking at the world at fourth quarter. Typically, we'll see those releases between the third week of August and the second week of October. And there's no indication that they're not going to do what they said they were going to do. But our operators there in that business have a pretty strong belief that some guys may accelerate. But with this environment we're operating in right now, you just don't know that. So I think we're appropriately hedged in our guidance right now.

All right. Okay. That's helpful. If I look at July, the weather from your perspective has been good, bad for mine because I live in the New York City humidity. But if you look at the Northeast, the weather has been fairly hot. And then, of course, if you look at the Pacific Northwest, those temperature have been record. Can you comment, to the extent you can, on how July has been shaping up on the facility maintenance side versus June and maybe the latter half of May?

It's too early to tell. But suffice it to say that Frank wishes you were really uncomfortable in May versus July because --

Fair enough.

-- early heat, good heat, late heat really doesn't mean much of anything. So we're through to do that.

T, at the same time, I wouldn't overstate the -- it is certainly the case that the weather has been a factor this year. But I'm going back five years now. It always used to upset me when some of our former competitors -- they're not around any more, come to think of it. But they always used to allude to the weather as being the reason for their short-term lack of performance. And I'm not going to rely on that crutch. It's a factor, but it's not a big deal. It's -- and it would be a mistake, I think, on our part to try to read too much into weather patterns. We're a great big company, the biggest in this business. We ought to be able to get business no matter what. And in fact, we are. So the weather's a factor, but not a big one.

Got it. Okay. And I'll quickly slip in one last question if I may. You know, if I break down and go through all the accounting outlays laid out from the government, it seems clearly that the additive spending from stimulus is really going to be with DOE, GSA and with the Army Corps. Could you talk about your positioning there in those three agencies and the competitive landscape in terms of how you are positioned and the ability for maybe the lower end bidders who really haven't participated so, or have relationships there to really creep in?

Yeah, I mean, GSA, we have a very good relationship. And, you know, we're on the schedules. We are probably one of the largest GSA facilities contractors. Our guys know everybody in the big cities where this work is going to be done. And we'll participate either as a direct contractor or as a sub doing the replacement work on the energy efficiency work. So we feel pretty good about our positioning with the GSA. And lower-end guys are going to have a real difficult time because it's a -- most times, it's not just low price. They go for best value when they're doing replacement work.

On the Corps of Engineers, we've done Corps of Engineer work. We're positioned there, especially if it's a watertight project, where the watertight projects get done. So I would say GSA is stronger, Corps of Engineer, okay, and DOE, we're fairly well positioned there because some of this alternative energy work and others, we'll work as a subcontractor mechanically and electrically. And on some of the renewable work, we can do that prime through EMCOR Energy. Or we'll do parts of that through our maintenance arm there. So we're fairly well positioned across the major elements of it. The money is just very slow in being released.

Okay. Thank you very much.

It's a pleasure, T.

And at this time, I would like to turn the call back over to management for closing remarks.

Thank you, Michael. And thank you, all. We appreciate your interest in EMCOR. We're doing great things here and intend to continue doing them for another 56 consecutive quarters. Thank you all for your support.

Thank you, ladies and gentlemen, this will conclude today's conference call. You may now disconnect.