EMCOR Group Inc (EME) 2009 Q4 法說會逐字稿

Good morning. I will be your conference Operator today. At this time, I would like to welcome everyone to the EMCOR Group 2009 fourth quarter earnings conference call. (Operator Instructions) After the speakers' remarks there will be a question-and-answer session. (Operator Instructions)

Thank you. I would now like to turn the conference over to Mr. Eric Boyriven of [FD]. Sir, you may begin your conference.

Thank you and good morning everyone. Once again I would like to welcome you to the EMCOR Group conference call. We're here to discuss the Company's 2009 fourth quarter results which were reported earlier 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 EMCORGroup's earnings conference call for the fourth quarter of 2009. For those of you who are accessing the call 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. Please advance to slide two from the title slide.

Slide two depicts the executives who are with me to discuss the quarter and 12 month results. They are Frank MacInnis, Chairman and Chief Executive Officer, Tony Guzzi, President and Chief Operating Officer, Mark Pompa our Executive Vice President and Chief Financial Officer, Mava Heffler, Vice President of Marketing and Communications, and our Executive Vice President and General Counsel, Sheldon Cammaker.

For call participants who are not accessing this 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. Such statements are based upon information available to EMCOR's management's perception as of this date, and EMCOR assumes no obligation to update any such forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance.

Such risks and uncertainties include, but are not limited to, adverse effects of general economic conditions, changes in the political environment, changes in the specific markets for EMCOR services, adverse business conditions, increased competition, mix of business and risks associated with foreign operations. Certain of these risks and factors associated with EMCOR's business are also discussed in the Company's 2009 Form 10-K which was filed early this morning and in other reports filed from time to time with the Securities and Exchange Commission.

With that said please let me turn the call over to Frank. Frank?

Thank you, Kevin. I could listen to you forever and almost did.

Good morning everyone. And welcome to our 60th regular quarterly conference call for investors, analysts and other friends of EMCOR Group. This is also the 15th annual year-end earnings call over which I and many other senior management team members have presided. A very important aspect of our long-term strategic and operational continuity and performance.

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 the EMCOR Group fourth quarter and full year 2009 earnings press release, and SEC Form 10-K that we issued and filed earlier this morning. We'll conduct this call in our customary format. First, a presentation and discussion of our operating results and our year end balance sheet including my comments on the factors that contributed to our excellent 2009 financial performance. Then we'll discuss the evolution and current status of our contract backlog report and its significance with respect to our future revenues and operational performance.

At that point our President and Chief Operating Officer, Tony Guzzi, will present and discuss some noteworthy recent contract awards that illustrate the strength and diversity of EMCOR Companies and the continued demand for our services across a wide range of markets. And he'll follow with his views on our 2010 operational focus, including our strategy for dealing with continued weakness in some of our markets and the possibility of opportunities as the year unfolds. At that point, I'll be back, I'll be back, to discuss our initial expectations for EMCOR's 2010 operational and financial performance, based on our current view of the timing of broad market recovery. Following my guidance discussion, there will be an opportunity for call participants to make comments or to ask us questions, and as you can see from slide two, a number of our senior officers are here to help me with the answers. So let's begin.

Please go to slide three. I'm pleased to announce that EMCOR's financial results in 2009 were the second best in our history, exceeded only by our record-breaking performance in 2008. The fourth quarter whose results are displayed on slide three, was also our 58th consecutive profitable quarter, a strong statement of our strategic continuity and conservatism over a period spanning several market cycles and two recessions.

In the fourth quarter, EMCOR performed well despite a recession related reduction in revenues and a substantial non-cash charge to earnings related to the impairment of certain intangible assets. We continued to focus on effective execution and rigid cost control and the result was operating income of $56 million, or $0.58 per diluted share for the quarter.

On slide four, we show our performance for the year as a whole. Accomplished despite strong economic headwinds and the non-cash charge previously mentioned. Earnings per diluted share for the full year were $2.38, a 12.2% reduction from 2008. Exclusion of the $13.5 million impairment charge would result in 2009 EPS of $2.51, only 7% lower than the preceding year, despite an 18% year-over-year revenue reduction. We are pleased with that performance and in particular with the significant cost variability, a long time characteristic of EMCOR that the numbers reflect.

On slide five, we present some highlights from a year in which we executed very well despite significant weakness in some of our major markets. Overall, revenues declined 18.2% year-over-year to $5.5 billion, primarily the result of declining construction demand in our commercial and gaming and hospitality market sectors. Our US facilities services segment revenues fell 6.1% compared to 2008, reflecting demand declines in small project work and industrial services. While UK and Canadian revenues were lower both because of exchange rate fluctuations and also due to reduced demand in certain market sectors.

Despite the 18% drop in revenues, operating income declined 13.3% compared to the prior year to $262.4 million, including the $13.5 million charge previously discussed. Operating income margin for the year was a record 4.73%, 27 basis points higher than the previous record in 2008. Excluding the impairment charge, operating income for the year would have been $275.9 million, or 4.9% of revenues.

Our operating income percentage improved in every segment of EMCOR except US facility services which sustained the majority of the impairment charge. We are particularly pleased with the results of our US electrical segment whose operating income percentage rose from 6.7% in 2008 to 9.0% in 2009. And our Comstock Canada subsidiary which nearly doubled its operating margin from 2.6% to 4.8% in the same period.

Please go to slide six. In addition to the excellent execution that led to gains in operational efficiency in four of our five segments, we made significant reductions in general and administrative expenses during the quarter and year, reducing them by more than $39 million when non-cash impairment charges are excluded. Rigid cost control, another long-term feature of EMCOR's administrative model reduces the pressure on our estimating and bidding personnel by lowering the breakeven point and improving the risk reward characteristics of new projects. Our 2009 results reflected not only excellent operational and cost control, but also demonstrated strong contract administration. Cash flow from operations was a record $359 million, $24 million more than in 2008's exceptional results.

Please go to slide seven. The very high earnings quality contributed directly to the strongest and most liquid balance sheet in our history. At year end balance sheet cash was $727 million, an increase of $321 million over the year end of 2008. Working capital increased $142 million, while total debt declined by $5 million to $195 million. Equity rose to $1.23 billion and our ratio of total debt to total capitalization fell during the year to 13.74%, well within our comfort zone.

Since year end, we have announced the establishment of a new $550 million revolving credit agreement and we have retired the $195 million term loan that was outstanding at 2009 year end. EMCOR's balance sheet is in excellent condition, to form a base for recapitalization of our operations as, and when, our markets improve, and to provide the dry powder for opportunistic investments or acquisitions.

Please go to slide eight. Since the end of 2007, which in retrospect was the the high watermark with respect to the size and diversity of our contract backlog, recessionary market pressures have had a major impact on our work in hand, along with a corresponding decline in revenues.

Slide eight is a multi-year chart showing the evolution of our contract portfolio since 2002, and, therefore, reflects the effects of both the 2003 and 2008 recessions. In each case, EMCOR experienced an overall downturn in backlog along with disproportionately large reductions in private sector contracts, partially offset by stability or growth in our public sector markets. Our year end 2009 backlog report reflects the usual recessionary pattern. Although the severity of the recent recession exacerbated the impact on our private sector projects, especially our commercial and our hospitality and gaming sectors. Overall contract backlog fell $850 million year-over-year, to a level of $3.15 billion at year end. In the sequential quarter, backlog fell about $240 million. Most of the quarterly and annual decline was in the private sector markets previously mentioned. Commercial fell 46% year-over-year, while hospitality and gaming dropped a precipitous 56% for reasons well-known to those familiar with the hotel, travel and casino markets.

In contrast, our industrial and transportation sector backlog each fell about 30%, water and waste water was flat year-over-year, and two of our backlog sectors grew despite strong recessionary headwinds. Healthcare was 8% higher and Institutional grew 24%, reflecting enhanced level of public sector spending to stabilize the economy.

Projects directly relate to the Federal Government's stimulus program have not had a major effect on either our financial results or our backlog levels to date. This is very much as expected since our typical project is not even remotely shovel ready but is a sophisticated technical solution to a long-term problem, much different from pothole filling. We believe that various EMCOR companies will benefit from stimulus spending in 2010 and '11. Although the likely size of the benefit is still unclear. Overall, we sense a stabilization process in our backlog evolution.

Without calling a specific bottom, I believe that we have either experienced it already or that it will be soon. One effect of the recession is very clear, however. Public sector projects now comprise 78% of total backlog, up from 66% at the end of 2008. Our public sector work is a stable foundation for future growth. During 2008, while our commercial and hospitality sectors dropped 49.6%, all other backlog sectors declined a modest 6.5%, a strong indication of persistent demand for our services in those areas.

Please go to slide nine. In tough economic times, it's common to assume that there aren't any high quality construction and service contracts being awarded and our strict estimating and bidding discipline ensures that prospective contracts reflect an appropriate risk/reward ratio.

Despite those twin challenges, we continue to receive many project awards from all around our broad and diverse subsidiary group. And here to tell you about them and to discuss our 2010 operational focus is our President and COO Tony Guzzi. Tony?

Thanks Frank. I'm comfortable with our backlog as all our companies continue to stay focused and disciplined in bid and customer selection. That's very critical in a recession and again when markets begin to transition upward we'll have the dry powder to take advantage of the upturn quicker. Backlog has decreased as Frank has described. I agree with him. I t's stabilizing and we may be getting to bump along the bottom. We're not going to get over excited here pand over zealous and extend bidding parameters beyond our risk tolerance, and in our opinion would be unwise, as the potential bad work drains the best resources and can severely limit the ability to bid on more attractive opportunities as the economy recovers.

I'm going to go through some recent project awards that are emblematic of our disciplined bidding and it results in a backlog market mix that is more defined and it goes more toward public and quasi-public work than it has been over the last several years.

Let's start in the United Kingdom where EMCOR UK has won a significant contract to provide integrated facilities services management across a United Kingdom commercial property investment of a leading global property investment manager. While we can't divulge the name, I can tell you that we will be responsible to service more than 200 commercial properties, 2200 tenants, 17 million square feet of space throughout the United Kingdom. This is a large, multi-year contract with a sophisticated real estate manager that does pay for value. And also it serves as a good foundational contract for our EMCOR UK business.

State-side here in New York City, our Welsbach Electrics subsidiary has been awarded two contracts by the City of New York Department of Transportation for the maintenance of traffic signals in the boroughs of the Bronx and Queens.. These two 2-year contracts require 24/7 maintenance of approximately 4800 signalized intersections. Welsbach, one of our oldest companies and one of New York's oldest construction companies has a lineage that dates back to the early 1900s and has been maintaining traffic signals for the City of New York for over 30 years.

Staying in New York City, our Heritage Mechanical operation was awarded a contract for multiple floors of Alexander Real Estates new East River Science Park for the installation of the mechanical systems. Heritage will be providing both HVAC and plumbing systems for biology, immunology, cell culture, tissue culture laboratories as well as general office and administrative space. Additionally, Heritage has taken the lead on 3D modeling which is the bin modeling we've talked about several times with you, which is for the entire project and will be assisted by our University Mechanical Company in San Diego for the development of that base architectural model. A little later I'm going to talk about how our subsidiaries continue to leverage resources and cost across the entire Company.

We have two other projects where two EMCOR companies are teaming to provide services to the client. First, our San Diego and Los Angeles Dynalectric subsidiaries are working together to double the power generation capacity for the City of Riverside, California's Energy Resource Center. This original utility built in 2004 house unit one and two, a 96-megawatt power generating plant. This new project will create units three and four, creating another 96 megawatts of power. Our scope includes the installation of the entire electrical package for the new gas turbines as well as plant controls, lighting protection, fire alarms, security and all fiber teledata systems.

The additional opportunity where people leverage costs and scale across EMCOR is our Government Services Group teamed with our Aerocon subsidiary in Atlanta, Georgia. It's an Atlanta based mechanical service Company, part of EMCOR services.

EGS won a multi-year award to provide facilities management services to the navy's space, and Naval Warfare Systems Command Campus located within the Naval Weapons station in Charleston, South Carolina. EMCOR government services will be responsible for a full service HVAC maintenance and operation. With dedicated on-site personnel to perform preventative maintenance, service call reception, and repairs for all HVAC equipment on campus. EMCOR, a little higher up on the Food chain with HVAC, will assist with the transitioning of the contract, purchasing, human resources, water treatment, building controls, preventative maintenance for the majority of the mechanical systems and then there will be additional replacement equipment opportunities on that site.

And in Salem, Oregon, our Dynalectric subsidiary will be installing the electrical systems for the renovation of Oregon State Hospital. Dyna will be responsible for the underground power, security, site-lighting, voice data and all electrical systems for the new central utility plants.

Our Dynalectric Colorado subsidiary will be installing the electrical infrastructure for the Denver Union Stations' FasTracks hub project. This project significantly expands the light rail and commuter rail system connecting the city of Denver with outlying suburbs and the Denver International Airport. Dyna's work includes utility relocations, installation of conduit and cables to electrify the rail systems as well as all temporary power work.

Finally, in Kansas at Fort Riley, the army, will be renovating the mechanical systems at the Volar Barracks complex, comprised of 224,000 square feet and 13 buildings. Our Central Mechanical subsidiary, who has a great position at Fort Riley, will be responsible for the HVAC equipment renovation and change-out, complete air duct replacement and complete pipe replacement in the building. This will be a LEED silver building for the entire 13 buildings and we think that 7 of the 13 buildings were funded through the stimulus program. Later we will discuss the development of stimulus related opportunities later in the call.

As I mentioned earlier in my remarks we continue to stay disciplined at bidding selectivity and are laser focused on operational issues that give us a competitive advantage even as the market either stays flat, gets better or even becomes a little worse.

So go to slide ten. We'll talk a little bit about what we've done in '09 and '10. I think we're big believers in tough markets you need to simplify, focus and look for the opportunities to exploit that make sense.

So what do you do on the direct cost side? Well, here our union relationships have been a plus. Because we can, although not proudly, shed skilled workers at relatively low cost to us as they go back to their union halls. And we spend a lot of time focused on labor, efficiency, productivity and crew mix. That's across all of our operations and that's what you saw in the margins specifically in the construction side. It was a very, very laser-like focus on labor efficiency and productivity and crew mix that allowed us to achieve those kind of margins. You've got to focus on indirect costs. So you've got to balance your cost structure to the work volume that we have.

People have to multi-task. They have to do many tasks. And you've got to leverage resources. And you saw some of that as we leveraged resources across our Company to maintain the core capabilities that we want when the market recovers. And you have to have discipline. You have to have discipline in bidding. You have to have discipline in balancing that risk and reward in the project,, service contract, change-out opportunity, industrial service opportunity. You've got to focus on contractual terms and we have a very skilled legal staff that aids our field personnel in understanding those contractual terms. Because those contractual terms can create long-term problems for EMCOR. And we can say stay in the lane or stay in the box. We don't like to adventure to do things where it would extend our resources or skills beyond what we know how to do.

We also (inaudible) don't travel a lot outside of fire protection or some of our service offerings, and we stay in our local markets. But, you can see how we leverage our skills from those local markets into other local markets, with our local market expertise from that area.

And finally, there are opportunities and have you the to organize and take advantage of it. We are seeing stimulus opportunities. We talked about one the last call, a little bit for the new Homeland Security Campus. We also are seeing some of these energy retrofit projects start to come up. And we will organize to take advantage of our government relationships and our very good mechanical and electrical footprint especially on the service side to do this small task energy efficiency work. Things like HVAC upgrades, lighting upgrades, building controls upgrades.

You've got to think about doing more for your customers. Take the good customers you have, expand your scope. For, where they're hurting for dollars, reduce your scope but hanging on to your margin percentage. It does us no good to keep the same scope at bad margins. And opportunities do come along for acquisitions. We're starting to see it in our core businesses. This (inaudible) acquisition is an example of that where we know fair value and the seller knows fair value. The larger ones are a little more problematic now. Frank will talk -- we have definitely efforts going in that manner as well.

So basically it's about simplification, focus, and really relying on the great people we have in the field to keep us strong through a very, very difficult economic period.

With that I'll turn it back to Frank.

Thank you, Tony. I noticed as our callers no doubt did as well that you put the very interesting US Navy Space and Naval Warfare Systems project ahead of the more pedestrian Army project. And properly so, may I say.

Although one's about 10 times more profitable.

EMCOR's traditional strengths should serve us well during an interesting and challenging year.

Please go to slide 11. In thinking about our organic growth potential for 2010 and beyond, I think it's useful to divide our prospects into two parts. Firstly, our public and quasi-public sector operations. And then our private sector markets.

In the same ways that they have performed in very stable fashion during a major economic down trend, I think that our healthcare, institutional, transportation, and water and waste water sectors are likely to perform quite well in the future. The twin drivers of these sectors are strong demographic trends and strategic public spending. Potentially supplemented by projects derived from the federal stimulus program.

We anticipate an uptrend in (inaudible) related projects particularly from the energy department which to date has spent only $2 billion of its $39 billion stimulus program allocation, and we have lobbied publicly for a large scale energy efficient retrofit program for public and private buildings across the country. On the other hand, we expect that the commercial and the gaming and hospitality markets will remain depressed, pending improvements in bank lending volume, unemployment statistics, and consumer spending. Absent large multi-state casino construction projects to supplement falling state revenues, major gaming and hospitality markets like Las Vegas will stay at a low end even longer than commercial.

In the face of such challenges, EMCOR will need to replicate, in 2010, the characteristics of our 2009 success, excellent execution, efficient use of overhead spending and rigid cost controls. We have never been richer or stronger and our liquidity gives us the flexibility to allocate capital aggressively when opportunities emerge, either operational or transactional.

We're very serious about the pursuit of strategic investment from the relatively small, like the recently completed [Scalese] acquisition, to the very large. The over arching Criterion being achievement of our long-term strategic objectives, the establishment of a balanced and stable earnings base, and the broadening of our scope of services to our customers.

Please go to slide 12. In light of all the moving parts previously mentioned and taking into account the bottom-up budget process that we completed in December 2009, we expect 2010 earnings per diluted share to be in a range of $1.45 to $1.85, based on revenues of about $5 billion. Assuming that revenue level, which would represent a decline of about 10% from our actual 2009 results, this translates to anticipated operating margin in a range of 3.5% to 4.25%. Down somewhat from our record 2009 margins, but much better than our historical mid-recession performance.

Our estimates assume the continuation of current business conditions, and do not include any provision for investments or acquisitions. Substantial benefits from the economic stimulus plan and/or improved credit markets could provide opportunities to exceed these estimates.

Now it's time to thank you for your interest and for your support of EMCOR. And thanks to our thousands of talented and dedicated employees who have created 58 consecutive profitable quarters and excellent 2009 results.

Now it's time for your questions or comments. And Julie is here to tell you how to queue. Thank you.

(Operator Instructions) We'll pause for just one moment to compile the Q&A roster. (Operator Instructions) Your first question comes from the line of Rich Wesolowski with Sidoti & Company.

Good morning, Rich.

Focusing on the public sector areas in your backlog, can you discuss the risk of moving too heavily into one sector as we saw last cycle, maybe what you're doing to combat that?

We certainly seek balance in all things, Rich. One of the reasons why we're in such strong position right now is because five or six years ago, notwithstanding the burgeoning strength of the private sector, we made sure that we retained positions in the public sector, such as our healthcare and water and waste water investments and the like, that were probably somewhat dilutive to our margins at the time, but which have nonetheless served us well in terms of creating a long-term balance that enables us to be where we are today. I see pretty significant growth and margin opportunities in each of our public sector areas.

For example, healthcare, driven as it is by strong demographic trends, combined with just increasing demand for all types and sophistications of healthcare service, is a good bet and I should remind you that we regard that as kind of a quasi-public sector, in that the facilities that we build, manage and maintain run the gamut from for-profit clinics and diagnostic facilities to state and federally run hospitals and the like.

Water, waste water, same kind of comment. Strong demographic drivers, a company that can travel pretty significantly to accomplish waste water treatment plant projects pretty much anywhere in the United States. We've got room and capacity under the EMCOR tent to take on some more high quality projects in sectors like that, without feeling that we're getting over-balanced towards any one. And you make a good point, because one of the things that we have to be careful about in our cost reductions that we've been very successful at and very aggressive about in the last 18 months or so, is that we don't restrict our capacity for ongoing growth in future periods when the fundamentals of our economy begin to come together and we want to have the opportunity to grow. That will require a cadre of estimating and bidding and project management personnel that we have to be careful to retain, so that we can grow quickly in areas that are currently suffering but that will not be suffering forever.

Okay. Say just hypothetically the market for your services got no better or no worse during the next 12 months. And we're sitting here next year. Would you expect EMCOR would be able to replicate that 3.5% to 4.25% operating margin range in the year after that? Or does that range still assume some benefit from favorable close-outs that we saw in '09?

No, I think that we hope and believe that what you're looking at it kind of a status quo run rate that we can now replicate year after year, based upon the hard work that we've done towards careful project execution. It all starts of course with the bidding and estimating process that enables us to start on the project with the margin potential that we're talking about. Then we believe that we can replicate with personnel who are in hand the operating income characteristics of that process and also the cash flow characteristics that have been so strong for the last couple of years. I think the contrast between that kind of base rate performance and EMCOR's performance during the 2001 or 2002 recession is quite dramatic and I sense that's where you're going.

And Rich, the other thing is, we make a very good assumption I think that we have fixed both Canada and the UK by changing the mix. Of course, we changed management, but changing the mix, changing the focus and reducing the potential from shock losses from those companies. And if you look at the performance earlier when we hit the Nader, our international operations were a big drag on us. And that will help keep them there and then just the overall shift in mix in general with some of the acquisitions we've made.

Those are encouraging answers. Thanks.

Thank you, Rich.

Our next question comes from the line of with Min Cho with FBR Capital Markets.

Good morning, gentlemen.

Hi Min.

Congratulations on the very strong quarter and year. I actually just have a question about your -- the opportunities that you're seeing in the solar market. Obviously activity's starting to increase there. I just wanted to know how EMCOR could benefit from that opportunity and how you could benefit?

I'm going to give you a general question and I'm quite sure that Tony will have something specific. EMCOR, as usual, in a growing market like solar, is interested in projects that have real margin potential and that have sophisticated systematic requirements that fit well with our high end system installation and management capables. We are not, for example, going to be very interested in a solar array project that involves a -- the receipt of a kit, that requires just basic assembly that almost anybody can do. There's not much value added there and I don't think that we would be very interested in that kind of activity. But a large, highly engineered and sophisticated project involving both electrical and mechanical functions would be very interesting for us. And this is kind of the nature of the beast as far as almost everything we do. We always look for opportunities to apply sophisticated solutions to create true answers to long-term problems. Tony?

We're looking at a couple of the ones in California and Arizona and one corner of Nevada and we'll see where they go. The kind of work we'd be doing on them, the larger scale ones where they eventually get it back to steam generation, would be on the piping, or the electrical infrastructure side. They could be opportunities, again, let's make sure the projects go. We think the Mojave desert one may go. We'll see what we have on there. They typically bid as teams.

The second part about that is any project that gets done in any of the markets we're in is a good thing for us because it starts to absorb contractor capacity and allows us to bid on other jobs. One thing we're pretty cautious of, though, we typically don't assemble special teams to chase work that may, for lack of a better word be faddish. We'll do it within our normal capables with our local subsidiaries and execute the work as part of the team.

Great. All right. Thank you very much.

Thanks, Min.

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

Hi, T. Hi. Frank, how are you doing?

Good, thank you.

Congratulations. This was a super quarter as usual. You've been beating throughout 2009 unlike a lot of your peers, so congrats.

Couple of questions. Number one, just going to the Mojave Desert project, I guess you're talking about Ivanpah from BrightSource ,and it seems like the EPC for that was given to Bechtel. Would you be sort of subcontracting in a capacity there?

We have subcontracting capacity that could do that. I'm not sure exactly how that will be let yet, T.

Okay. And then if I look at your facilities services side, I just roughly went through your K and it seems like organically that's still a little weak. Could you give some color on when you think that business is going to start ramping up and as we go into the refinery turnaround season, which seems like it's going to be very strong, what your outlook is in terms of what you bake in for [Olmstead]?

Yes, T, there's a couple things that have been weak within that segment. The first one is we have done a very good job of hanging on to our service contract base in both the mechanical service part of our business and even the site base, we shed a couple less profitable contracts last year on the site base side.

What we saw last year is really pretty stark deferral on our HVAC business, compared to anything we've experienced over a long period of time, even the last recession. I guess we've got a new definition of what discretionary could be when the market is like it was in the start-up season last year. And then we had the coupling factor, and so people benefited then, we had a cold summer, that their equipment didn't suffer quite the strain that it would have in a typical summer. And then coupling that, the small project work that is owner-driven, really started, really, really dried up. So that's what happened to the HVAC sector.

Now, what do we see going forward? Well we see eventually those change-outs need to happen because some of the repairs we made didn't make a lot of sense economically.

Right.

We do believe that there will be some hope -- I don't predict the weather, but even a normal summer means a lot to us and we would hope for a normal summer this year. And so that -- and the small project work, we are starting to see signs either out of the stimulus or out of owners now saying, okay it's time to do a roof top replacement program for a major retailer. It's time to update some of these telecommunication facilities and take advantage of the energy efficiency that we can go get or that the equipment's just old.

Got it. Okay.

Moving to the refinery sector, the challenge there, is it going to be a strong turnaround season? We're in the middle of it. It's neither good nor bad right now. It's not great. What we're seeing people do right now, T, is versus a planned level of turnaround, they really are still trying to see if they can reduce scope and defer that to maybe the later summer or the fall. And what's driving that more than anything else is refinery utilization.

Got it. Okay.

Refinery utilization needs to come back and there will be further consolidation as the marginal refiners step out. And we're with the bigger refiners and as refinery utilization comes back, we think there's quite a bit of pent-up demand. And some of the pending legislation, the refiners on the capital side, even the mid-sized capital side are sitting on their hands waiting for some clarity from the government on what's going to happen with respect to like cap and trade and things like that. So the relative period of uncertainty and low utilization that's creating headwind for the refining sector. We're lucky in the sense, or we planned it that way, in that we have a niche product that continues to perform, and maintenance service that continues to perform, better than what other people in the turnaround or maintenance based refineries would be although at reduced profit.

Got it.

I think that the logical consequence of one of the things that Tony just said, is that contrary to past years and to traditional seasonal patterns, that we might see refinery turnaround work in two or even three seasons of the year this year as refinery owners take half measures during the current period, which is of course the traditional turnaround period, and then wait and see about summer gasoline -- summer driving gasoline requirements and the like to determine if they can afford to or need to do additional turnaround or modification work in the fall and towards the end of the year.

Okay. Great. That is actually very helpful. Last question, and that's on free cash. Your cash balances continue to look good and build up. As you transition and start burning some of this, more of the public sector work, how do you see your cash balances really playing out through the year and your free cash flow? And building on that, how much dry powder in essence do you have outside of what you need for working capital needs and what you're comfortable with to really go out and make some more acquisitions?

T, I think that I'll answer first and Tony may have some comments as well. I think that the administrative efficiency that we've exhibited not just in 2009, but for many years, and are traditionally net overbuild position reflects our capacity to earn significant cash, even in the circumstances that we've described. That is, with preponderance of quasi-public sector projects within the mix. Your question is a sophisticated one. It also bears on what kind of provision we need to make at least in our minds with respect to the need for recapitalization of our portfolio of projects as it begins to grow again. It is of course currently capitalized with working capital proportionate to its size. But as some of our weaker market sectors begin to come back, we will of course have to apply working capital to those sectors in order to ensure that they have the appropriate breakeven opportunities and we certainly don't want to do that predominantly with debt. That's not a good idea in this kind of a business.

So, we have certainly in our own minds agreed upon a level of cash that we need to keep on the balance sheet in order to be available for the recapitalization of growing backlog and contracting markets and we have done so. Notwithstanding that, it's quite clear from our substantial net cash balance of, say, $500 million, together with our new $550 million revolver, of which about $400 million remains available, that we have lots of money and credit with which to accomplish investments and acquisitions without getting into danger with respect to our ability to capitalize and finance growing operational areas in the second half of this year. I think that it's fair to say that the amount of money that is basically available to us for investment and acquisition purposes is somewhere above $500 million, maybe more.

Okay. Great. And Frank, would you think about -- and I know we talked about this before. Would there be any chance that you would consider doing any special dividends or starting a regular dividend, given that you have really gone through as per your estimate through the worst of this economic cycle and you have a lot of this cash, would you think it's more opportunistic for EMCOR to really plow that back into growth?

I think that as long as EMCOR management have good ideas for the creation of long-term value for our stockholders, that that is where we should elect to place our development funds. There are really only three things you can do with the amount of money that we have. You can buy back stock. You can declare either a special or a continuing dividend. Or you can invest in growth opportunities for our investors.

I think it's no accident that in the last publications, the Fortune 500 publications pertaining to the best companies in America, that EMCOR Group ranked number 20 among the entire Fortune 500 in 10 year total shareholder return. That is because consistently over that 10-year period, and this is a very strong challenge to be able to provide shareholder return at a high level consistently for that period, EMCOR has constantly decided to use our ideas that are the product of our operational and construction and facility services experience, to understand what our customers want and find ways to give them more of them for more profit for us and more value for our stockholders.

So I think that, although we will always consider all three possibilities for utilization of cash, that it's very likely that EMCOR will continue to use the investment and acquisition ideas that is a result of our long and successful experience in these markets to create more value for stockholders.

Thank you very much, gentlemen. Nice quarter, again.

Thanks, T.

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

Good morning, Rich.

Hi, guys. This is Jim Moore in for Richard Paget.

Hi, Jim.

Now that we're into the down cycle -- well, we're all into the down cycle, can you compare it to the last one and particularly in the commercial and hospitality segments?

It's worse. I mean, it's --

Okay.

Hospitality is going to pretty near zero and there's very few prospects on the horizon for 2010. Commercial, if you look back, which really for us '03 and '04 is where we hit the downturn hard, we maintained a level that's twice what it's at today. And we have good penetration in the biggest commercial markets. Because when you look at what's happening, the unemployment rate being where it's at at 10%, and we would have said three years ago or two years ago that we didn't overbuild this time. And that was based on an assumption of unemployment probably that sat at 6% or 7% at the peak. With unemployment at 10% and the sectors that have been affected like financial services and some the mortgage offices and some of the industrial space and then what's happened with retail, and there's very little re-stacking going because landlords don't have a lot of money to bring tenants into the building to give them the tenant fit-out money. The commercial market is very difficult right now. What speaks well to us is the balance we have, we've been able to overcome that commercial, severe commercial downturn, and continue to book work and build.

Now, we do think that eventually the buildings will be re-stacked and which has always been a big part of our commercial business has been the tenant fit-out and re-stacking work and we do believe the replacement work for some of these buildings as they change hands, which is always part of it ,and they go to energy efficient lighting will be a net benefit to us.

Yes, I think that's a good point, Jim. We don't need to rely upon the recommencement of large capital expenditures on greenfield commercial projects in order to begin to profit significantly. EMCOR has always derived significant proportion of our commercial revenues from the small task to medium sized retrofit for energy efficiency or tenant improvement or comfort or whatever of existing buildings. And of course together with the long-term facility management thereof. So we don't need people to be starting to put big money back into new buildings in order to profit. But so far, there is a significant lack of confidence as we see it in the market to do even that.

I'd like to point out though, that certainly as we ride out this definite downdraft for these two private sector categories, that we are very fortunate to have installed some years ago a very strong market position, notably in healthcare, which I think everyone agrees, good news or not, is one of the strong growth areas for spending in the entire economy. And it is also our biggest backlog sector at the moment with strong performance from both the transportation and institutional or government services sectors as well. So we achieved the kind of balance that is serving us well as we ride out this private sector storm.

One market we haven't talked about today is -- it looks pretty good -- is the data center market over the the next two years. It continues to be fairly robust. It's not -- it could be 5% to 10% of our construction revenue at any given time. But it's strong. It's stable. It's growing. And it speaks right -- it goes right to the core of what we do, because 70%, 80% of the value of that data is work that EMCOR does, either electrically or mechanically. We have good, long-term customers that we work with in the data center market that we move around the country with. The government is spending more money on data centers. Large shipping companies are spending more money on data centers. The capacity to store, use, and measure data is going to continue to grow and we like our position there. And when that shows up in our backlog is all across our backlog in those bottom four sectors because we put it in the end market that it actually goes into.

And they're frequently strong power generation, and power supply aspects to a large data center project as well.

Okay. Thanks for the color on that. Turning to the stimulus, do you guys have a sense that there's already been considerable dollar amounts put out on the (inaudible), like changing light bulbs, upgrading equipment, versus the more technically sophisticated projects at, that's your sweet spot?

We don't think either has happened to a large scale. The figures in The Wall Street Journal last week suggested that the construction sector as a whole had received to date about $20 billion of stimulus funding, almost entirely for pothole filling and other highway work. And this is frankly what we expected, Jim. A year ago, I believe on this call, I said that with respect to the recently announced ERA legislation that the kind of projects that EMCOR does will not be shovel ready early in the process. They take time to design, to permit, to specify equipment and the like and they are sophisticated enough that it just takes some time to get them ready. So I stipulated that we might see some backlog effect in late '09 or early '10 and that is what we are seeing. And I said that we might see some revenue and income impact from early '10 onward into '11 and that I think is what is happening as well.

The real question on the table for us is not whether or not we will participate in the era of funding. We already are. It's the scale and the timing thereof and for the purposes of the guidance that I gave this morning, we assume a fairly modest rate of participation in ERA funding. If, for example, the flood gates open at the energy department and they spend the other $37 billion that they've got burning a hole in their pocket, we would expect to have some of that because we're the biggest energy contractor in the country. That makes some sense to me and if it makes sense to them, then I hope to be back to tell you that we're doing much better, for example, with respect to a large scale energy efficient retrofit of public and private and commercial buildings, based upon the government's desire for the country to become more energy efficient and more competitive worldwide and incidentally create thousands of jobs in the process. We think that makes sense. But we will see.

Okay. Great. Last question from me. Maybe I missed it but why the lower tax rate in the quarter and what should we expect for tax rate next year?

As every year goes by, we have discrete items that provoke adjustments to the basic tax rate with which we start the year. We think that the 39% tax rate which we are going to plan for in 2010 is a conservative tax rate but does not rule out the possibility of discrete items resulting in the necessity for adjustments to the tax rate as they year goes on. It is nonetheless impossible to budget for these discrete items at this time.

Okay. Thanks very much and good luck going forward.

Thanks very much.

Your final question comes from the line of Avram Fisher with BMO Capital Markets.

Hi Avi.

Hi, guys. Thanks for taking my questions. Most have been answered, but if I repeat any that have already been answered I apologize. You can just let me know, I'll check the transcript.s

But you talked about earlier in answering one of the questions you're hanging onto contracts. Does that imply you're renewing contracts at lower pricing?

No. Not necessarily, Avi. It implies that we've had to get creating with scope so we may reduce scope so people can have the budget savings that they're looking for. It means that we had to look at crew mix on those contracts. So we may have less dollar value on the contract but we're working very, very hard to keep the margin mix where it is on those contracts as far as margin percentage. The other thing that we're having some success with is we picked up some nice new customers, especially in the HVAC service business and that's good for us. Sometimes economic dislocation's not bad for a Company and in our case that's it. The way that market works is the OEMs on the repair service and contract side provide pricing umbrella that we come underneath. And so those contracts get put out to bid. We bid them. We can put a different kind of crew mix. We do more self-performance. Therefore, we can become more competitive at margins that are as good or better than what we achieve in our base business.

I'm trying to reconcile them. I appreciate that. I'm just trying to reconcile -- if you back out changes year-over-year, facility services margins, 4Q '08. 4Q '09, 3.5% this year, 6.4% last year so roughly half the distance, half of last year. What's driving that? I mean --

Well, a big chunk of it is the impairment.

I backed out the impairment.

I mean, and it's the diminished profitability in our industrial business.

And is that a function of pricing? Is that a function of unabsorbed overhead? Is that a function of both?

It's a function of scope and mix. You could say it's pricing. It's a little bit of pricing in our shop environment, in our industrial business. It's some pricing on the labor markup that we can achieve on our turnaround business, and it's a little bit of absorption, overhead absorption.

So there's -- as the downstream markets slow and maintenance is deferred, there's -- sounds like there's a lot of significant pricing pressure there, like really pretty dramatic.

It's -- There is pricing pressure and in parts of the market., I wouldn't say dramatic, it's less than ideal.

Has it bottomed? Has the pricing pressure bottomed, or is it too soon to say?

We think so, but I never speculate on that.

Okay. And then two other quick questions. Can you comment, again if you already commented I'll check the transcript, on margin and backlog for the construction services business? Has that been -- have you seen much pricing degradation there?

We have so many project, Avi, and so many differing contracting situations that margin in backlog is really not comparable period to period unless you undertake simultaneously a very sophisticated and time consuming assessment of risk versus reward. This is a decentralized Company in which we put a lot of faith in the skills and talents and experience of our field personnel to correctly estimate and bid projects at acceptable bid margins. I think in -- rather than trying to find an answer specifically to your question, I would say that in answer to an earlier question, we expressed confidence that EMCOR is able to replicate in future periods, assuming the continuation of current business circumstances, the range of OI percentage performance that is fundamentally represented by this year's guidance. I think that gets you to the same place.

Okay. And then circling back to mix, your comments have talked about mix shift towards public and quasi-public projects and the impact on margins. Can you talk about the contract types for private and public clients, how the public mix impacts margins and also how it impacts cash flow?

Well, historically, it wasn't always a given that private sector projects were more profitable than public, but it was certainly a given that private sector projects provided more profit opportunities than public and by that I mean that there were limited opportunities for what I would call value engineering or premiums for early completion associated with a public sector project. The old saying was, you bring in a Las Vegas casino two weeks early and on budget and you're going to get a nice check because the owner knows exactly what the time value of ownership of that facility is. You bring in the Brooklyn courthouse two weeks early and you get a nice hand shake but no big check. That's kind of the way it was. In both cases you'll get paid for your basic contract and whatever your profit margin was, but there's opportunity for extra money in many private sector construction projects and as a top notch service Provider we were able to take advantage of those premiums from time to time.

Are both considered -- I'm sorry. Go ahead.

There was also historically a differential between the amount and quality of design and engineering that was associated with many public sector projects, compared to private sector. In past years, as public sector customers were less well-financed, their engineering departments were not as good as those in the private sector or serving the private sector. The quantity and quality of engineering drawings provided to us in connection with the public sector project represented an incremental risk in that we had to guess at what the desires were of the owner. Most of the time we guessed right but occasionally we guessed wrong. And so the amount of money spent on detailed design by the customer varied between the public and the private sector. That's no longer the case. There is -- with the ubiquity of BIM and other sophisticated project design and execution systems, we can say that in the last three or four years a couple of our most profitable large projects in EMCOR have been in the public sector or the quasi-public sector in healthcare and transportation. We've done really, really well in those areas and those were projects of the type I described, with sophisticated systems being used to design and pursue and perform such projects. We've done really well.

So a lot of our old bias against public sector projects because they just weren't as well-designed or administered and with limited premium opportunities, a lot of that has gone away with the new availability of very effective and relatively low cost project management systems that have kind of brought everybody up onto the same page.

Right. And does -- their both fixed cost, I mean private and public in general fixed cost, fixed cost projects?

Generally speaking we like to work for hard dollar projects because that's how to make money, if you know what your costs are.

Right.

We take a proportion of cost plus project, of course. Tony, you want to have a word about that?

Yes. We'll do that in a number of cases. We always pay attention to that because of the cash flow implications of that. It varies. One is, we'll do a maximum guaranteed price which looks like a cost plus contract on a sophisticated fast track project. And typically when we're doing plant maintenance work or even turnaround work where the scope is not fully defined, we get in the mode of cost plus contract. By and large if we're doing any type of project, we prefer to do those projects fixed price.

Right. So, so you may not get anything more than a handshake from the owner, but if you finish early relative to your expectations you get to keep the --

We get to keep the productivity.

You still get to keep that productivity. Okay. But with pricing and low bid work, that productivity may be a little bit lower, the contingencies may be a little bit lower.

The productivity allows us to maintain our bid margins.

Okay. I see. And then on the cash flow side, you know, they say government clients pay later. Is that an impact on cash flow?

Typically on a construction project, the contracts can be very similar. They don't expect you to work big dollars out of pocket. On the maintenance work, it's very similar and you just have to -- when you're working with the government, it depends on what government entity you're working with. We typically work with the general contractor on a construction project so, therefore, a lot of times our relationship is very similar to what it would be in a private sector as far as some of those things. It's not as easy to get billed ahead as it could be in a private sector job. But those guaranteed maximum price jobs, which most of Las Vegas is built on, we're never cash positive until we get to the middle of the job or late in the job. The government jobs would typically stay cash neutral at the worst. On the maintenance work, they're very similar whether it be government or private. As long as you understand how to deal with the agency that you're dealing with and the paperwork that goes with that, you can get paid within terms.

Got you. Okay. And then finally, on the healthcare side, I've been reading some of the industry rags about healthcare markets really, really slipping. Sounds like you saw some of that in the 4Q. What is the outlook for 2010?

We have several opportunities we're looking at. We'll bid them. We're on the right teams. We've got some nice work we're working on right now. We tend to be -- we've been spending a lot of time in replacement hospitals and hospital upgrades and imaging centers. So so far, so good.

I mean, it seems like -- the reason I ask is in general, specifically healthcare but in general seems like your revenue guidance implies sort of a backlog burn of about 150% which is below historical norms. Obviously above '09. Seems fairly conservative, that seems like a conservative outlook on what you're going to book this year. Is that accurate?

No, I think it's a balanced outlook, Avi. That's what we came to determine. We're looking at our booking trends. We're looking at our book-to-bill trends. We know what's in the pipeline. We're certainly seeing no general strength in the economy and the trajectory of commercial and hospitality is so bad that it's hard to say that you're going to see an upturn in that any time soon.

Right. Well, you know, even if that goes to zero you're closer to there than you were before, so much less of a decline.

We feel good about our revenue guidance.

Okay. I appreciate the color. Thanks very much. Talk to you again.

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

Thank you all once again for your interest in and support of EMCOR Group. We appreciate it. EMCOR employees now get back to work and thanks very much. Watch this space for new news. So long.

This concludes today's conference call.

Thank you for your participation. You may now disconnect.