EMCOR Group Inc (EME) 2011 Q4 法說會逐字稿

Good morning. My name is [Janisha], and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group fourth quarter 2011 earnings call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you, Mr. Gordon McCoun of FTI Consultants, you may begin your call.

Thank you. Good morning, everyone, and welcome to the EMCOR Group conference call. We're here to discuss the Company's 2011 fourth quarter and full year results which were reported this morning.

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

Thank you, Gordon, and good morning, everyone. Welcome to EMCOR Group's earnings conference call for the fourth quarter of 2011 and for the full year. 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 the slide show presentation that will accompany our remarks today.

Please advance to slide two. Slide two depicts the executives who are with me to discuss the quarter and 12-month results. They are Tony Guzzi, our President and Chief Executive Officer; Mark Pompa, our Executive Vice President and Chief Financial Officer; and Mava Heffler, Vice President of Marketing and Communications.

For call participates who are not accessing the call via the internet, this presentation, including the slides, will be archived in the Investor Relations section of our website under presentations. You can find this at emcorgroup.com.

Before we begin, I want to remind you that this discussion may contain certain forward-looking statements. Any such statements are based upon information available to EMCOR'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 other risks and factors associated with EMCOR's business are also discussed in the Company's 2010 Form 10-K 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 Tony. Tony?

Thanks, Kevin. Thanks, everybody, for calling in today and thanks for your interest in EMCOR. EMCOR finished the year at $1.87 per dilute share from continuing operations, and that's exclusive of the impairment charge and the USM transaction cost, and all the numbers I'll go through here in this opening section will be. We had revenues of $5.61 billion and experienced organic growth of 7.3%, of which about 100 basis points was in our mechanical construction segment, with the balance of the organic growth coming from our facilities services segment.

Fourth quarter performance was strong and Mark is going to cover that in detail in a few minutes. Some quarterly highlights included the diluted EPS of $0.57 per share and operating margins, again, exclusive of the impairment charge of 4.4%. Additionally, we generated about $90 million in cash in the quarter and $149 million for the year. I'm now going to go through some of the highlights of the year and I'm going to focus on where we executed well and where we fell short of our expectations.

First, we continue to be good and disciplined at cost management. As a result, our SG&A as a percentage of revenue declined to 9.2% from 9.7% reported in the previous year. We thought we would have leverage in our SG&A as organic growth return and we have. Overall, our project execution on large projects was excellent.

As a result, our operating margin, exclusive of the impairment charge and the USM transaction costs, for the year were at 3.9%. Specifically, our domestic construction segments had strong performance, and we're doing about 90% of our revenues today where projects were rewarded during recessionary times.

2011 domestic construction results benefit from excellent large project execution across the board and we had very good results in finishing out some healthcare and hospitality projects that were won right on the cusp of the recession or shortly thereafter. If you'll look at EMCOR overall, these projects aided us by about 60 basis points in operating margin for the year.

Our domestic construction business has really done a great job with productivity. We've add value engineering, prefabrication, and good old fashion material procurement and labor management, things like crew mix. Prefabrication of specific jobs have really helped us. And that's evidenced by the mechanical segment's operating margin of 6.1% and the electrical segment's operating margin of 7.3%. This represents strong performance for any period, but with the period that we're in right now and the kind of market we've been dealing with for the last two or three years, it's an outstanding result in a challenging market.

As you move to our facility services segment, I view it as four of the six business units we have underlying that business are really doing pretty well and they're firing really in a good way and in sequence. We've had very good performance through this downturn from our government services business and we've had a rebound in our industrial business, specifically the refinery services business.

We've expanded further into the Army and Navy and we've been able to provide assistance across a broad range of their facility services needs. And the addition of Harry Pepper in October 2010, has been a positive contributor to our government business' success.

In the industrial services business, we have seen resurgence in demand from our oil, gas, and petrochemical customer base. Our mechanical service division had mixed results in 2011. Where we have dispatched technicians and plan repair services or react to an emergency or do a service agreement, we've had very good performance despite a lack of weather, both in the summer and winter.

We had no heat this summer and we had a very warm winter. Regardless, they performed well and we had a lot more leverage that we would have been able to take advantage of with any consistent weather pattern. Our small projects business is not where we need it to be yet. Ten of the 14 businesses that participate heavily in the small projects businesses are doing well now and have rebounded from the lows. Four are still under repair and we see ourselves getting much better on a sequential base as the year progresses.

Despite everything, and you look at our mechanical services business and you look at the EFS segment as a whole, we exit the year on a run rate basis of 4% operating margins absent USM.

We continue to position EMCOR very well in 2011 through disciplined strategic investment and divestiture process. We divested Comstock in July, and I think achieved a very good result for our share owners. Acquisitions of significance completed during the year included both Bahnson Mechanical and USM. Bahnson is in our mechanical construction segment and allowed us to perform more broadly in the industrial sector and also within the DOE sites, Department of Energy sites. And subsequent to December 31st, we have complimented this investment with the acquisition of Southern Industrial. Bahnson's 2011 performance to date is in line with our expectations.

With regard to USM, this investment provides us great scale and allows us to offer a full range of services to our customers, but let me give you a quick status update on where we are with USM. First, the cost synergies are on track and we expect to see the full impact of those cost synergies in Q3 2012 and will hit the high end of what we thought at $6 million.

Let's be straight, we had no snow and we have had no cold weather to speak of across the majority of the footprint though we expect to make operating income regardless of the weather. We have reinvigorated the business development process and we are winning again and have booked two significant contracts that neither USM nor EMCOR would have won on their own, and they're two of the largest maintenance contracts that we've ever won at EMCOR.

So what's the positive? I mean, we've had some short term pain here. We've had to work harder and faster to build a better business for the long term. Our processes are being fixed faster, the cross are being brought into line faster, and the revenue synergies are being pursued more aggressively. So we've had some short term pain, but we believe it will lead to a better, more sustainable business in the longer term.

We're about nine months off from where we thought and no snow brought the typical EMCOR urgency to an even heightened sense of urgency as we integrate USM into our business. We're still excited about it and we think it's a great move for us. And I'd be remiss if I didn't mention that as we exit 2011, we've hit $2 billion in revenue for the first time in our facility services business and we have scale across all facets of our service offerings.

We finished 2011 with a contract backlog of $3.3 billion, which is down slightly on an organic basis from 2010, about 6%. Some of that had to do with the upside of not having tough weather as we were able to work on the construction work much more productively through the month of December. Our backlog has shown resilience as the Company has weathered a historic downturn in both hospitality and commercial sectors.

We had an increase in new bookings that were about equal to organic growth for the year, about 7%. We burned a little backlog organically and, again, we had good organic growth. So what we're seeing is the midsize project work return to the business in our construction business, and we've been able to secure that work at acceptable margins. I believe our current mix is slightly better and I'll talk more about that as we get to backlog.

Our 2011 operating performance generated approximately $149 million of free cash flows from operations and validates our earnings performance. A portion of this cash flow was utilized in connection with our recently enacted share repurchase, and Mark will go through the details of that and as well as we declared our first dividend.

These were important actions as we have established the return in cash to share owners as part of capital allocation and thought process as we believe that we have reached a level of stability through this downturn that was quite good. And 2011 for us was a record year in safety, and for what we do, that's really important.

Our biggest asset is those skilled tradesmen and the management in field of those skilled tradesmen. Our safety performance has steadily improved for eight consecutive years. Our hours worked in 2011 were significantly greater than the hours worked in 2003, but our level and rate of injuries has decreased by over 66%.

Our performance in this area places us among the leaders in the industry. Our safety record contributes to real financial performance also because there's work we can do for the most demanding customers that others might not qualify. And in hard dollars, our workman's cost per capita is down over 65%. Overall, we had a very good year in a tough market, and we continue to look through our strong record of execution for 2012.

With that, I'll turn it over to Mark who will go through a detailed look at Q4 and full-year performance.

Thank you, Tony, and good morning to everyone on the call. For those participating via the webcast, we are now on slide five.

I will begin with the discussion of EMCOR's fourth quarter results before moving to the annual period based on information derived from our consolidated financial statements included in today's earnings release announcement. Quarterly revenues of $1.52 billion are up 16.7% from 2010's fourth quarter. Consistent with what Tony described, our organic growth in the quarter was 7.3%.

Revenues attributable to businesses acquired of $122.8 million positively impacted our US mechanical construction services and the US facility services segments during quarter four. All reporting segments other than US electrical construction services reported positive revenue growth during the quarter.

Our US facility services segment quarterly revenues increased 38.3%, of which 19.5% was generated organically. SG&A expenses increased $18.8 million within the quarter. $11.4 million of this increase is due to incremental SG&A from those acquisitions completed during 2011, inclusive of amortization expense.

As a percentage of revenue, SG&A in quarter four is 9.7%, compared to 9.9% in 2010's fourth quarter. We are reporting a $3.8 million pre-tax non-cash impairment charge associated with the diminution in value of identifiable intangible assets recorded for certain customer relationships and trade (inaudible).

Please turn to slide six. Operating income of $62.4 million and represents 4.1% of revenues and is approximately 30 basis points higher on a sequential basis than our 2011 quarter three performance. Excluding the $3.8 million pre-tax non-cash impairment charge, our fourth quarter 2011 operating margin would be 4.4%.

This represents 100 basis point reduction from 2010's quarter four operating margin of 5.4% due to reduced quarterly operating income within our US mechanical and construction services and EMCOR UK segments. Specifically, 2010's fourth quarter US mechanic construction services results were favorably impacted by the settlement of a multi-year healthcare project claim that we discussed at this time last year.

Additionally, fourth quarter 2011 operating income results that EMCOR UK were negatively impacted by project write downs, primarily related to institutional sector activities. Our income tax provision for the quarter was at an effective rate of 38.5% and consistent with our expectations.

Diluted income per common share from continuing operating for the quarter is $0.53, compared to $0.61 per diluted share a year ago. On an adjusted basis reflecting the add back of 2011's impairment loss, 2011 quarter four diluted earnings per share from continuing operations would be $0.57.

Quarter four represented our strongest operating cash flow period of 2011 with approximately $91 million of operating cash flow generated. Some of this cash flow was deployed during the quarter to fund $27.5 million of share repurchases pursuant to our program recently put in place, as well as the declaration and payment of our first ever dividend.

We are now on slide seven. Additional key financial data on this slide not addressed during the highlight summary I provided are as follows. Quarter four gross profit of $214.3 million represents 14.1% of revenues, which is $12.8 million higher than the comparable 2010 quarter.

On a gross margin basis, our current quarter is 140 basis points lower than 2010 margins due to the favorable impact in 2010 of the aforementioned healthcare project settlement and the US mechanic construction, as well as associated margin dilution due to the impact of acquisitions within our US facilities services segment.

Quarter four 2011 gross profits and gross margins on a sequential basis were improved over third quarter 2011 results. Restructuring activities during our 2011 fourth quarter were not significant when compared to either 2010's fourth quarter or annual activity.

Please turn to slide 8. I will now discuss the results for the 12-month period beginning with some highlights. Revenues increased 15.7% to $5.6 billion with all segments other than US electrical construction services generating revenues above 2010 levels. Consolidated organic revenue growth, as Tony previously mentioned, at 7.3% and is consistent with quarter four.

Our US facility services revenues increased 33% of which 18.5% for the year was organic, with a major contributor being activities within the industrial services division. This segment surpassed $2 billion in annual revenues during 2011.

SG&A expenses of $518.1 million represent 9.2% of revenues compared to 9.7% of revenues for the corresponding 2010 period. Incremental SG&A associated with businesses acquired inclusive of amortization expense is $35.2 million. In 2011, SG&A expense includes $4.7 million of transaction costs associated with the USM acquisition.

Operating income, excluding $3.8 million and $246 million of impairment charges recorded in 2011 and 2010, respectively, was $214.6 million for the current year as compared to $219.6 million in 2010. Operating income as a percentage of revenues on this adjusted basis is 3.82% for 2011, and 4.5% in 2010.

Operating margin declines in US mechanical construction and US facility services operating segments were due to changes in project mix, as well as the margin dilutive impact of certain 2011 acquisitions previously discussed. UK margin degradation year-over-year is due to engineering division project write downs in late 2011, as well as 2010 benefiting from the receipt of a contract termination payment.

Please turn to slide nine. As discussed during our third quarter call, our disposition of Comstock Canada is reflected as a discontinued operation for all periods presented, and for the year reflects income of $9.1 million. The majority of this amount represents a gain from the required elimination of cumulative foreign translation balances of stockholder's equity as a result of our liquidation of this foreign investment.

We are reporting diluted EPS from continuing operation of $1.78 for 2011. Excluding the aforementioned non-cash impairment charges in both annual periods, as well as 2011 transaction costs incurred in connection with the USM acquisition and 2010's gain on the sale of an equity investment, adjusted diluted EPS from continuing operations are $1.87 for 2011, as compared to $1.83 for 2010. Operating cash flow for the year was approximately $150 million and represents a $79.9 million improvement from 2010 levels.

Please turn to slide ten. Additional data on this slide not addressed during my highlights are as follows. Gross profit of $733.9 million represents 13.1% of revenues and are $40.4 million higher than 2010.

On a gross margin basis, 2011's margin is 120 basis points lower than 2010's gross margin of 14.3%. This decrease is attributable to mix change, as well as the selected quarterly items previously mentioned with regard to acquisitions and project settlements. Additionally on this slide, we have included pro forma adjustments to reconcile our GAAP earnings to adjusted earnings for those items that are unusual and non-recurring as previously discussed.

We are now on slide 11. EMCOR's balance sheet remains strong with sufficient liquidity as represented by $511 million of cash to meet current working capital requirements to fund our dividend and current share repurchase programs, as well as for all strategic investment opportunities. Changes in goodwill and identifiable intangible assets are due to 2011's acquisition activity, as well as our intangible asset impairment recorded during the year.

Total debt is essentially unchanged year-over-year, and our debt to capitalization ratio remains well at just over 11%. We have done a very good job of managing the risks inherent in our business in a challenging environment and is clearly reflected in our balance sheet.

That completes my review, and I will return the presentation back to Tony.

Thanks, Mark. I'm going to talk about backlog now and we're on page 12. The backlog at the end of December 2011, stands at $3.3 billion and is an increase of 7% from the $3.1 billion at the end of 2010.

Our acquisition of Bahnson and USM account for all of the increase, and organic backlog would decrease slightly about $220 million, all of which occurred in Q4. As I previously noted, revenue was a little better in Q4 than we expected. We burned a little more backlog than expected, probably cause of milder temperatures. And to round out backlog movement between three and four, backlog decreased slightly at both USM and Pepper, mainly timing, and increased slightly in our US construction operations.

As I mentioned last quarter, our companies have been able to secure work that not at pre-recession margins or are levels that are acceptable and also presents some real opportunities, especially on the large project side as the job progresses. Further, we've had an organic booking rate of new business is about equal to our organic growth rate, and that means the mid-market is solidifying and we're winning and executing this mid-market work at acceptable margins. It's always important to remember that EMCOR is a late-cycle company.

In looking at the bar for 2011, two sectors comprise approximately 60% of the backlog, and they are commercial, as depicted in the orange color, and institution, the dark blue block. First commercial. Commercial backlog continues to grow and has increased $479 million from the end of last year. About half of that came from the acquisition of USM, the other -- the rest is organic growth. So on an organic basis, commercial backlogs increased approximately 49%, still nowhere near where we want it to be long-term on an organic basis.

Our growth in commercial backlogs mirrors what is going on in the industry, as you saw on the December US construction report, which said that non-residential construction commercial work was up about 14% year-over-year. Trends seem more positive. We're coming off the bottom and, of course, we are well-positioned and have been and continue to be able to add a lot of value to our customers from small projects all the way up through large projects and in maintenance.

The commercial market is well below its peak, and developers remain cautious and capital constrained. And as unemployment improves and access to capital improves, our business will improve, and we are definitely seeing strength in the high-tech sector, we're seeing it more so in the service sector, and, of course, data centers spread throughout our backlog chart. You look at the hospitality sector, it's a sliver, and you have to have really good eyes to see that purple color on the chart now, and man, we did a great job there.

And we finished great work in Las Vegas, and it's a real credit to our team under real difficult conditions. We'll stay well-positioned to do that hospitality work and the next time it comes back, we'll be ready to help those developers and help those owners to create great projects for us all to stay in. As you go up to industrial, you can see we're up significantly. We're up about 30% from last year and we're just under $400 million. It's our highest level since early 2009. Bahnson accounts for part of that increase, but it's not the only part of the increase.

We saw increases at our California subsidiaries that drew a significant amount of industrial work in northern California, and really across California, and we also saw it in the refinery sector at Ohmstede, especially for their shop work, where bookings are up substantially year-over-year. We like our position in the industrial sector. We like that we continue to grow it. And Southern Industrial is not in these numbers, but it will be a nice add to EMCOR both on plant maintenance work and plant construction work.

The light green, the healthcare, is down. We completed, as it tends to be lumpy, we've said that through the years. We like the long-term trends here. We completed three of our largest healthcare jobs ever to great success in Maryland, California, and Indiana, and we have more on the horizon. This is tough work. It really brings all of EMCOR together on the productivity side from bin to prefabrication to planning to crew mix.

Really, EMCOR plays a critical role in how labor gets scheduled, and that's why we have been able to do what we have been able to do in the healthcare sector. And it extents beyond hospitals and goes to laboratories and outpatient clinics, and we see good long-term growth here. And, again, projects tend to be lumpy, but as new technologies come in and with the HIPAA law and single beds demand, this is a good place for us to be.

And it helps us really across the board in all our business because the healthcare and industrial sectors are really on the cutting edge of what you do on projects, and we can bring that back into the commercial sector and really drive productivity on those fixed-price contracts long-term.

Institutional, the dark blue section, has increased 41% in 2011 to just under $1 billion. And you can that progression; it dovetailed with the recession and really has powered us through the last couple of years. We continue to see good public sector opportunities.

We try to stay away from the education work as much as possible, K through 12. We like the higher education work. We're doing work at the Los Angeles Hall of Justice right now. We continue to grow our government services business.

And the point is we can move between work in Las Vegas to work in this institutional sector, and we really can bring a lot of the skills we learned to drive productivity. And how you make it in the institutional sector, it's a little more competitive and the customers are different, not less demanding, but a different kind of demanding, but you can bring those skills you've learned in the industrial and the healthcare sectors, and even though hospitality sector to bear and earn better margins than we would have in previous cycles.

In transportation and water and waste water, there's really not much change there. They tend to be lumpy, we're well-positioned, and we'll continue to do great work there. I'm pretty pleased with the composite of our backlog. I'd like it to be a little higher organically. We're a later-cycle company. Business is better today. Having more commercial and industrial work is a good thing.

Our mix of institutional work is pretty good. And to put it metaphorically, I guess there are less storm clouds out there on the horizon, we are feel better from a backlog positioning standpoint where we are today than where we have been, and with 17% or so trade unemployment, we're not all the way back yet, but we're certainly moving in the right direction.

And with that, I would like you to turn to page 13, and now we'll talk about what the 2012 outlook will look like. And this will be a combination of page 13 and 14. Let's talk about guidance. We think we're going to do around $6 billion. We could do a little better than that, but we're going to do around $6 billion and we're going to peg it there at this point in the year. We're setting that guidance with balanced view of caution and optimism.

And our EPS of $1.65 to $1.95, if you think about that, we have been $1.45 to $1.85 EPS for the last couple of years as we've navigated this recession, so we're bringing the bottom end of that up about $0.20 and we're taking the top end up about $0.10. So we're a little more optimistic than we were at this time last year. Let me walk you through what would give us reasons for optimism and some of the headwinds that we're facing so we can frame this for you.

Positives - we exit the year with 7% organic growth and we had pretty good bookings through the year, and we've seen a resumption and pricing stability return to the mid-market, the $2 million to $10 million job and we also see that in the small project work. We exited the year core (inaudible) USM at 4%. Not nearly where we want to be, but we're headed in the right direction.

General market prognosticators and hard data around our sector from the census to less hard data like the ABI show that things are moving up in the right direction, not in a (inaudible) kind of way, but a gradual up in the market. Our backlog mix is moving in the right direction. We've weathered this backlog pretty well, working on some institutional work, little commercial work was out there, some industrial work and healthcare, but it's moving more towards industrial and commercial, and as that replaces public sector work, it fits more to where we can really add value.

We expect to continue our excellence in large project management, and we have some interesting opportunities both in our backlog and we're looking in the near-term that we should be able to really have opportunity. But at EMCOR, we tend to be pretty cautious as we move through those projects because they are difficult and we're always cautious not to declare victory too early.

Let's talk about some of the headwinds. Well, one of them was self created. We did so well finishing out those tough healthcare and hospitality jobs that there was about 60 basis points of margin overall that we earned in 2011 that we've got to go out and earn in 2012.

And we have some opportunities to do that, but sitting here today, we know we need to get through that headwind. I'm not a big fan of $4 gasoline in general for EMCOR or our customers. I replay back to 2008. It's maybe a different set of circumstances today.

We certainly weren't going to pass on that cost to our customers, but it's not clear what impact that will have on the fall turnaround season if it hangs in there, what it means for the refiners because there's a couple of different outcomes it could mean for them, and what it means for our customers in general, and as they started to resume maintenance capital spending and overall capital spending what will that continue.

Just in general if you look, we didn't have a very good summer last year, degree cooling days were lower than they had been in a while, and, of course, we've had no winter in most of the country. We don't make excuses for weather, but the weather can sure help us at EMCOR, as when it's really, really cold things break, and when it snows, we need to remove that, and it becomes an urgent task, and when it's really, really warm, people don't spend a lot of time negotiating the price of their air conditioning technician. So balancing all that together, that's how we got to the guidance range of $1.65 to $1.95 and about $6 billion in revenue.

With that, I'll turn it over to Janisha and we'll be happy to take your questions. And thank you very much for listening.

(Operator Instructions). Your first question comes from the line Rick Wesolowski of Sidoti & Company.

Morning, Rich.

Tony, you suggested you are about nine months behind on USM. If you could, set aside the weather, which we know is a negative, and give us an idea of the stumbling blocks you've had in integration and what you expect USM to earn what was set out when the acquisition was made.

Well, the biggest stumbling block on integration has been really the revitalization of the revenue. We have won a couple of nice contracts and we stabilized the revenue base. It's by no means a downer, I mean -- but it's not what we expected. You know, customers -- this was a difficult sell process, a lot more difficult than we thought I guess from the customer's perspective starting last February.

Customers don't have to make a decision to do business with you through that process. It was overall really favorably received that EMCOR bought USM, and customers are happy that USM is owned by EMCOR now, and that we're seeing rejuvenation of that, but there was a five to six month lag there, Rich, that wasn't evident right before we bought the company and right after.

Other than that, the snow has been an issue. Actually, the synergies have worked better. We've had a couple of opportunities we wouldn't have had. I think that would probably be what -- yeah, we had to revitalize the business development process a lot quicker than we thought we were going to have to.

So it sounds like less of an integration issue and more just business wasn't as good right out of the bat as what you thought.

Yeah, I think that's probably a fair characterization.

Okay.

The team's been unbelievably upbeat about being part of the EMCOR team.

As I look at your combined electrical and mechanical divisions, the construction portion, and I strip out that 60 basis points in Company-wide margin that accrued from projects that were long dated and you completed and you got extra margin there, does the guidance assume an improvement from the adjusted figure if I had taken that profit out? Has the modest improvement in the economy translated into better earnings from that underlying piece of backlog?

I think what it assumes is the opportunities we see today are a little better than we saw 12 months ago.

Lastly, I was surprised your backlog was down given the recent stable trend. It is accurate to say that the direction of your backlog in 2012 will depend on whether the (inaudible) economy improves by a fast enough pace to offset the slowdown in government work?

Yeah, I think there's a couple of things. We're well-positioned on some really nice trends. I think we, by building both our industrial service business and our industrial project business, I think we're doing that at the right time. We have seen a return of the $2 million to $10 million contract, but we have also become excellent at the sort of $40 million plus contract, and they come in a little more lumpy.

So I think some of the things we're looking at, Rich, will -- the larger stuff is going to be built regardless, it's just matter of when it comes into backlog. I think it's the $2 million to $10 million that's dependent on more confidence in the economy, and so far so good. We actually saw a resurgence of that in 2011, but, again, I'm just always a little cautious when I see something like gasoline which is a major factor in how people view the US economy, what impact that might have and your guess is as good as mine right now.

Appreciate it. Best of luck.

Thank you.

The next question comes from the line of Alex Rygiel of FBR.

Good morning, Alex.

Thank you. Good morning, gentlemen. Tony, you mentioned that you are feeling more optimistic now than maybe a year ago, but your 2012 revenue guidance seems to suggest almost no organic growth coming off of a year where you just printed 7% organic growth. So how do I rationalize your guidance versus your commentary about being more optimistic?

Well, I mean, the $6 billion, as we said around $6 billion, what we're probably a little hesitant about, Alex, is the 6% down in organic backlog out of the quarter, and so that's part of it. And I think the other part of it is, I guess, we are waiting to see how the macro economy responds.

A lot of the reasons for our organic growth in 2011 was a real snapback in the industrial business, and whether that can grow from this base, the same kind of rate that it did, I don't probably think so, but it could. That would get it back to almost -- revenue-wise back to 2008 levels, and I think that's the reason. We had such strong growth in some of the underlying components that made up that strong organic growth on whether it can keep going.

I would say that we are cautiously optimistic that we'll see organic growth continue, but, again, understanding the underlying pieces, we've got to see that validate through the first quarter.

And implied in your guidance, if one were to assume that rewind six months ago, you had a certain assumption for USM profitability, whether or not it was $0.10 or $0.30, as we stand here today and we look at USM's contribution in 2012, included in your guidance, are you assuming it's 25% of what you thought a year ago or 75% on what you thought it was a year ago?

We're assuming at least 60% to 75% of what we thought a year ago.

And was USM -- was it profitable in the fourth quarter?

No.

Okay. That's perfect. Thank you very much.

Your next question comes from the line of Adam Thalhimer of BB&T Capital Markets.

Hey, good morning, guys.

Good morning, Adam.

How much do you have left under your buyback?

We have -- we had $100 million approved and we spent $27, so we have $73 million.

And then can you talk a little bit about, I mean, how do you -- your use of cash, how do you balance buybacks and acquisitions?

Well, I mean, we think we have the capital to do what we need to do. We went out and got a better credit agreement last year. We have good underlying cash flow characteristics in our business. I think we can do what we need to do, and I think we have the fire power to do all three - the dividend, the buyback, and continuing to grow our business through acquisition. And finally, we have the money to support our organic growth.

And there's nothing in terms of the great cash flow last year? There's nothing that would suggest you wouldn't be able to generate that type of free cash flow this year?

No, I mean -- Adam, this is Mark. The only issue we would have is if we do start to see some project growth later in the year. Depending on the contractual terms, we might find ourselves utilizing more working capital as revenues start to ramp up. Other than that, though, we should have relatively consistent.

We would hope to have a better late November/early December, in both our turn around businesses and at USM. A lot of times, that's all timing on the turnaround side, but USM, clearly, if we get any kind of winter at all, we should build working capital in the month of December, when this year we built none in that business.

And, Tony, you mentioned that your late cycle, and you also -- I'm just curious, you mentioned you track the census bureau data and the ABI, how much of a lag do you feel like your business is?

We're usually nine to 15 months, somewhere in there, fromwhen it goes to design, to when it gets to bid, to when it finally gets to us. And to get to where we're really billing the project, it could be as long as 18 to 24 months to where we get to where we're really billing and recognizing significant profit on a job.

So the fact that we're -- the fact that ABI has been above 50 now for three months and census bureau data has been positive for seven months doesn't get you that excited yet? I mean, it's coming, but --

Yeah, when I think about our mix of business, I think we have a better mix of business than we have had, and we have done that independent of any help from the market, really.

Okay. Great. Thanks so much.

Your next question comes from the line of Nick Coppola of Thompson Research.

Good morning.

Good morning, Nick.

I have question for you about your backlogs. Do you any thoughts on the direction of margins as you burn off backlog throughout the year and then afterwards? I appreciate what you said earlier on awards being won throughout the downturn. But does it get worse before it gets better, or do you see new awards being won at a higher spot than what we currently have in backlog?

I think our current guidance with the EPS tells you what we think about margins somewhere around last year, but you have got to adjust for the 60 basis points, and we have got to hope the better mix can get us a chunk of that back. If you go from 10 to 11 in the guidance we gave, implied in that was a drop of anywhere from 50 to 90 basis points, and we did drop about 50 basis points year-over-year, give or take. So you put it all together, you know, I don't think it gets worse what's in backlog. I think we're in a better position as long as you pull out what we have already told you to pull out, which are the jobs won in better times, there's a couple of big ones.

That makes sense. Thank you. And then I also just wanted to ask you about the organic commercial backlog growth. I think it's interesting you are seeing organic commercial increase and a decline in healthcare. It seems commercial has been doing relatively better just as an end market. Do you think that's sustainable? Do you have any comments around what you are seeing in commercial construction or R&R? And maybe some of the jobs you're winning, is it more new construction or is it R&R? Is it projects maybe that were deferred throughout the downturn?

It's balanced. Some of it is new investment to take advantage of new markets. Some of it is deferred, and I would say it's pretty well-balanced the increase between retrofit and new construction.

Got it. And then what are you seeing in terms of healthcare?

Healthcare will be lumpy. We see opportunities out there. They have a gestation period that's different. You may start working on the design, assist, and development of it six to nine months before it ever goes into backlog, and we have several of those we are working on right now. And that's as they line up funding and line up how they're going to do it and get the certificate of need from -- and get that all confirmed from the states that they are in. So there are plenty of opportunities out there, it's wading through them and waiting and being on the right team that wins it.

All right. Thank you.

Thank you.

Your next question comes from the line of John Rogers of Davidson.

Morning, guys this is actually Tristan in for John.

Hi, Tristan. How are you?

Good. As you're looking at the first half of 2012, you've talked about modest, relatively modest winter weather and sort of in terms of maintaining growth on the industrial -- 2011 growth on the industrial side is sort of a wait and see approach, what do you see as the biggest market driving your business in sort of the first half, given your three to nine months of visibility for 2012?

I mean, you are going to see in commercial because of the backlog increase and it tends to be quicker burning. Industrial will be one of the drivers. And then just general service business across the board, across all of the sectors. That's what will drive it in the short term.

Okay. And so commercial would still be growing, partly offset just by the modest weather we're seeing currently in the winter months?

Yes.

Okay. Thank you guys very much. That's all I had.

Thanks, Tristan.

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

Morning (inaudible), folks hope all is well.

Morning, T.

Hi, T.

I guess the first question I have is if I look back to your last cycle (inaudible) operating margins fall off close to 200 basis points, and even in this cycle it seems that even though you have made acquisitions to offset which was obviously a much worse recession. You know, you still might see operating margins down 200 basis points, and if I look at your facility services margins from the 2008 peak of close to 7%, you know, they are, in 2011 going down to the 3.5% mark. So has specifically services in essence turned out to be a little bit cyclical than you thought as well?

And could we see a surprise jump up which you might not be envisioning right now? That seems to be fast-cycle work, short-cycle work that you might not have visibility on. And, Tony, maybe along the line of the small type of projects you referred to in your commentary, is that a potential upside driver that you cannot see right now, but could be there if the US economy continues to improve into the second half of the year?

I think the answer to that is yes, T. Just to walk through the margins, I think it's important, we peaked below where we're troughing now. And when you say 200, we went to less than 1% the last time and now we're well north of 3% this time at the trough. I don't want anybody that is new to the story here to think it's the same story because it's not.

It's very different and we have a much different margin base in the business than we did in the last trough. Yes, I think if you look at the peak to trough in facility, I think two things make it up. It's really running around 4%. We sold District Chilled Water last year, and so now it's running about 4%.

Our goal is to get that above 5%. Hopefully, we're exiting the year this year at a run rate basis of at least that, whichbrought it down. The refining sector was incredibly strong in 2008 and we have been rebuilding from the depths of that in 2009 and 2010. And that's about two-third of the drop and about a third of the drop has been going on with our small projects business.

So, yes, so if you say what are the things that could snap and build those margins again, they're clearly the two things that could because the reality is once we fix the commercial site because business doesn't have the kind of margin upside, but once we fix it has been relatively steady. As we fix USM as the year progresses and going into 2013, long term that will lead margin lift into the segment. So I think you have it pretty accurate about where the lift could come from.

Great. And second question, and I promise to make this less long-winded as a question. If you look at the chemicals industry, we have a whole slew of (inaudible) companies reporting and commenting that are more on the industrial and energy side, it seems like there's a fairly big cycle coming. Your folks have built up your industrial exposure very notably over the past two years. Could you comment on your potential exposure and leverage through that cycle?

We definitely in part of our industry business have exposure there, and we have seen growth there, not only in the repair side for the heat exchangers but also in the plant services side. So, yes, and I think process plants in general, T, we obviously believe that that's going to be a good place to be long term. And I think it stems beyond that.

Big capital assets - tire plants, paper plants, we're seeing money start to come back into those businesses, and we really can offer the broad range of services that a lot of those customers like and they liked how we put the pieces together.

Okay. Thank you very much, Tony.

Thank you.

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

If I'm the final, I can take all the time I want.

Shoot, Rich.

If I take the $80 million of USM out of though facilities, it leads to about 4% operating margin. I think you might have even stated that.

Yes I did.

What would you consider a good margin for the business.

We have to be first at 5%, but we're starting to put the pieces together; we need to be north of there.

As I recall, USM was higher than the Heritage wasn't it?

Yes, it's higher. The operating (inaudible) higher and the small project business will come back. If you go with what I just said to T, we peeked at 6.7%, we lost about two-thirds of that to the 4% through the industrial decline and it's starting to rebuild, and lost a third of it in the mechanical services business, mainly small project work. The brake fix business stayed good the whole time. So I think that's a fair representation.

On Ohmstede, as we hope to enter what looks to be improved market for the refinery services, I understand there have been a few management changes since you bought it in 2007. Does the Company's market position match what it was the last time the market was good? And what can you do to ensure that or improve upon it in the future?

I don't know where you heard we had management changes, but we have the same terrific managers we had when we bought the business as we do today. They're great guys and they did a great job in the down cycle of keeping the thing almost at double digit EBITDA margin, and they positioned us well with some customers on the upturn. So that hasn't changed.

We've built management below it and made some hires and we've added new product lines, and my view is we gain share. We're doing work in refineries today that we weren't, and we're also doing more chemical work today and we weren't doing that when we bought it. I think our issues right now are just end-market demand for the service, and there has been a general increase.

I'm a little gun shy right now on what could happen in the back half of the year, and that's what you see in the guidance with $4 gasoline because there could be four different outcomes here. One is the refiners can pass on the cost and capital investment and turnarounds continue as they do.

Second one is they don't pass it on effectively, which they didn't do in 2008, and crack spreads come down. I don't think that's the likely outcome, but it could happen. The third outcome is they are doing so great that they start doing these mini turnarounds through the fall because they want to keep the things running as long as they could.

And the fourth outcome is where they do business as usual, which is the one we're hoping for and spend the capital that they have planned. But you know these guys have changed.

Pre-2007, the way they did planning is you could take a schedule and you could lay it down on a piece of paper, and you could say, "The next three years, here's what the turnarounds look like."About the size, they lock in their resources, do all of that. Now, they try to adjust on the fly, they try to make them as flexible as they can, and they are working with more variables today - what kind of crew they are going to put in, what is the mix of heavy going to be, what is the mix of light.

And so these refiners have become much more flexible. The good news for us is we're positioned with all of the ones across the spectrum, and we have a heavy concentration in the Gulf Coast. And I think they are the long-term winners, and anything you can do to be a big fan of the keystone pipeline would be good for EMCOR long-term, no t so much in necessarily building the pipeline, but in the kind of crude that will come down to the gulf coast refineries long-term is good for the EMCOR business.

Excuse me for the management statement. I must have been misinformed on that.

Yeah.

And then lastly, would you remind us of what Southern Industrial will add to 1Q backlog?

1Q, we haven't commented on it yet and it will be out. It's funny, Rich, we normally put that -- this is Kevin -- we normally put that in the press release. I don't have it right in front of me; we may not have put that in there --

It's $30 million to $40 million is what it will be.

Thanks again. I appreciate it.

That's it, guys. Thank you for your interest in EMCOR. And we'll see you out on the road.

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