EMCOR Group Inc (EME) 2012 Q1 法說會逐字稿

Good morning. My name is Laura and I will be your conference operator today. At this time I would like to welcome everyone to the EMCOR Group first quarter 2012 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)

I would now like to turn the call over to Mr. Gordon McCoun of FTI Consulting. Sir, please go ahead.

Thank you, Laura, and good morning, everyone, and welcome to the EMCOR Group conference call. We're here to discuss the Company's 2012 first quarter results which were reported this morning.

I'd like to now 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 first quarter of 2012. 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 2.

Slide 2 depicts the executives who are with me to discuss the quarter's results. They are Tony Guzzi, President and Chief Executive 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 those of you who don't know, today is Shelly's birthday so I'd like to offer him a warm, happy birthday. We'll sing but time -- with time constraints we'll do it after the call.

For call participants who are not accessing the conference call via the internet, this presentation including the slides will be archived in the investor relations section of our website under presentations. You can get to us by getting to emcorgroup.com.

Before we begin I want to remind you that this discussion may contain 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 2011 Form 10K and in other reports filed from time to time with the Securities and Exchange Commission.

With that being said, please let me turn the call over to Tony. Tony?

Thanks, Kevin, and we should be on Page 3 and 4 now will be my discussion. Good morning and thanks for calling in. We're off to a good start this year. Actually, it's a little better than we expected.

We earned $0.40 per diluted share on revenues of $1.54 billion, and our results today show that our diversity of markets and expanded construction and service capabilities and product offerings are working for EMCOR. We built these offerings and capabilities through organic investment and acquisitions, and they have helped transform EMCOR to operate well in these uncertain and uneven times.

Revenues were a little better than we expected this quarter. We have gained a little help from the good weather in our construction operations, but we surely gave back more in our mechanical service and site-based, particularly USM operations.

We grew 21.6% in the quarter and 11.1% organically, and it was led by our mechanical construction segment at 20% organic growth. The markets are still far less than robust, and our growth shows we are willing -- winning our share of decent work. Our growth was really in two areas, commercial and industrial. I spoke at the beginning of the year that we were working on some jobs that would be fast-paced and technically complicated. We are executing that work now and still do not have 100% of it in backlog, but we are gaining good growth as we have begun executing this work.

We have had growth across all our reporting segments that show broad support for our products and services. We expected some slowing in the facility services segment as our industrial service work had come from such a low base in 2011 versus 2010, and we had some growth in a significant site-based account last year that was not replicable in the near term in 2012.

We maintained excellent cost discipline -- and we're known for that -- as SG&A as a percent of sales has moved from 9.7% in 2010 to 9.2% in 2011 full year to 8.7% in Q1 2012. We talked about this cost leverage helping us as the market recovers and offsetting some of the lower-margin work that was won during the recession.

Our operating margins are about where we expected for this time of year and are consistent with our past guidance. We have spoke in the past that at EMCOR in a period of strong organic growth, our operating margins are compressed for a time. As most of you know, we have a 20% rule here at EMCOR, and what that means for the first 20% on a fixed-price contract, we don't recognize any margin.

Further, on some of our significant construction activity, the kind of work we were talking about on our February 23rd call, it's binary. Either we want it or we didn't. We are just in the startup phase, and as we do that we are not fully aware -- fully confirmed yet the productivity, the material and the design assist savings and the value engineering that we will be able to develop as the scope fully develops with our customer, and we've talked about this in the past.

As strong organic growth returns to EMCOR, we never see the full margin benefit immediately. Service work has the same phenomenon, especially on significant contracts. As we move into the startup phase, we have expense until we get to full implementation on that contract and also begin to gain the benefit of the add-on small project work. You saw that phenomenon last year in our government business as we started off the significant Navy contract.

Our electrical margins are strong as we are performing well in several operations, but also we hit an important milestone on a large municipal water project that eliminated some contingency and adjusted our cost to complete.

Our mechanical margins are hampered by the strong growth and the low to no margin recognition on several large industrial projects that bear the brunt of the discussion that I gave above. I think if you look at the US construction operations together you'll see that they were 5.4% last year and they're 5.4% this year, and we really discourage people that follow us to looking at construction margins on a quarter-to-quarter basis.

In facility services we are not achieving what we planned for the year, and quite frankly if we had had more ideal weather conditions for us which means less than ideal weather conditions for the rest of the country, we would not even be talking about facility margins right now. They would be where we expect.

We also had a strong shop season in our industrial business, but our field industrial business had good performance on the process and power plant side. We had some headwinds on the refinery side, not because the work wasn't there but we staffed up for some significant turnarounds that didn't fully materialize in the quarter. Some have been elongated and others were pushed out into the back half of the year so we had extra labor versus what we needed, but we still see good operating conditions in the refinery and other industrial service areas.

We were hit pretty hard in the site-based mechanical services business with a lack of cold weather and snow. We estimate that construction got helped a little bit by the better weather, and the better weather which we consider worse weather for facilities, you put the two together and it cost us about $0.05 a share in Q1 when you balance it out as compared to our expectations and what the business performs at with normal weather patterns.

USM was profitable prior to intangible asset amortization, but was significantly impacted by the unseasonably warm weather. However, with USM our backlog has increased since purchase and we're starting to fix the retention issues and we're starting to gain important new customers.

Customers in our site-based operations and our legacy operations like what we're doing right now, so much so in fact they've asked us to accelerate implementation on a couple large industrial contracts we have where they want us to bring more plants online versus our expectations. And like I said before, service work also goes through this phase initially on contract startup where the costs exceed the margin that we're gaining as we go through the startup costs.

Mechanical service is usually weak in Q1, and it was a little better this year. We're getting through our small project hangover, and hopefully it's nearing completion. Government had a good quarter and is on track.

The UK had a nice quarter with very strong performance in our service business and we continue to migrate the business to more of a service business. We are doing some nice small project work across many sites for some significant customers.

Despite the strong revenue growth, we had a book-to-bill of over 1, and organic backlog grew from Q4 by 2%. However, as we do more owner-direct work, we find ourselves starting work on a project on a near-time and material basis as we develop the project scope further and move to either a GMP or fixed-price work.

It's a little different for us. We're seeing over the last three quarters very strong organic growth first led by service as we saw the rebound in industrial, and also some rebound in commercial, and now we're seeing a pickup in our construction activity. You would have expected to see this in the second or third quarter of last year coming to backlog first.

However, as we help transform the business to more industrial, manufacturing, and owner-direct work and user work, we're seeing the phenomenon that we're involved earlier in the decision making. As we're involved earlier in the decision making, we get involved in scope definition and we work off of purchase orders, short-term purchase orders, as we develop the scope. Eventually work will get into backlog, but because this work is very valuable, much like some of the casino work we've done or data center work, people want these up and running quickly and it may never hit backlog to the full impact it's having on our revenues. It's a little different than the past and it's something we're learning to adjust in our planning.

All in all a good start to the year. We got strong revenue growth, okay margins, stable backlog, and a book to bill of over 1, and we finished a lot of the quarter with a great balance sheet.

And with that I'll turn it over to Mark. He'll go through the financials in detail, and I'll come back to talk about backlogs and our outlook for the rest of the year based on our first quarter.

Great. Thank you, Tony, and good morning to everyone on the call. For those participating via the webcast, we are now on Slide 5.

I will begin with certain highlights of our first quarter 2012 results before moving to key financial data derived from our consolidated financial statements included in both our earnings release announcement and Form 10Q filed with the Securities and Exchange Commission earlier this morning.

Consolidated revenues of $1.54 billion in the quarter are up 21.6% from 2011. Organic revenue growth in the quarter is 11.1%, and all reporting segments reported positive revenue growth during our first quarter.

Revenues attributable to businesses acquired of $132.5 million positively impacted our US mechanical construction services and US facility services segments during the quarter. Domestic electrical revenues increased 8.2%. Domestic mechanical quarterly revenues increased 30%. Our facility services revenues increased 24.1% in the quarter and our UK segment revenues increased 12.8%.

Selling, general and administrative expenses increased $20.6 million within the quarter inclusive of $11.2 million of incremental SG&A from those acquisitions completed subsequent to March 31, 2011. As a percentage of revenues, SG&A in Quarter 1 is 8.7% which represents a 30-basis-point reduction from last year's Quarter 1 percentage of 9% as we continue to leverage our overhead structure as Tony commented on just a few moments ago.

US electrical generated 8.1% of margins in the quarter compared to 5.4% in the quarter a year ago.

US mechanical produced 3.9% margins in First Quarter '12 versus 5.5% in the quarter a year ago which arrives at total US construction of 5.4% for both periods presented.

US facilities operated at 2.2% margins in our first quarter this year as compared to 3.4% for 2011, and results in our total US operations arriving at 4.1% operating income for Quarter 1 2012 versus 4.7% in 2011's first quarter.

And as Tony also commented on, UK construction improved their margins to 2.5% in the quarter versus 2.1% in the quarter a year ago.

Specific to quarterly performance our US electrical construction services segments results were favorably impacted by the achievement of a major contract milestone on a municipal project which was the major reason contributing to their 8.1% performance.

Our first quarter US mechanical construction services segment operating margins of 3.9% were down from the year-ago quarter's 5.5% of revenues as we had a significant amount of project startups in the current-year quarter which diluted margins due to profit deferrals as we've progressed through the early stages of completion.

The reduction in facility services operating margins were due to the numerous reasons that Tony touched upon earlier in the call with the unseasonably warm winter and corresponding lack of snowfall combined with certain customer deferrals in anticipated turnaround activities within our industrial service offerings being the major reasons for operating margin declines.

UK construction and facility services operating margins benefited from strong small project activity within their services divisions during the current quarter.

Our income tax provision for the quarter is reflected at a tax rate of 38.5% which is slightly less than the 2011 Quarter 1 rate of 38.8% due to discrete items that occurred in early 2011. We anticipate that our full-year 2012 rate will approximate 39%.

Cash used in operations for the first quarter was $33.1 million which represents an improvement over the $35.1 million of cash used in operations during 2011's first quarter.

As you know our first quarter is historically our weakest cash flow quarter due to our funding of previous years incentive compensation awards as well as income tax payments. Additionally, we utilized $13.2 million of cash to fund share repurchases within the quarter which on a cumulative basis we have expended approximately $41 million of our authorized program amount.

Quarter 1 gross profit of $180.7 million represents 11.7% of revenues which is up $24 million from the comparable 2011 quarter. There were no restructuring activities in the period as compared to $1 million of restructuring in last year's first quarter. Diluted income per common share from continuing operations for the quarter is $0.40 compared to $0.35 per diluted share a year ago.

Please turn to Slide 8. EMCOR's balance sheet remains strong with sufficient liquidity as represented by $439 million of cash to meet current working capital requirements as well as for organic and strategic investment opportunities in addition to funding our quarterly dividend and current share repurchase program activity.

Changes in goodwill relate to recent acquisition activity while a decrease in identifiable and tangible assets is due to amortization expense in the quarter net of additions from our southern industrial acquisition. Total debt is essentially unchanged since December 31, 2011, and our debt-to-capitalization ratio remains low at 10.97%.

EMCOR continues to do a good job of managing its risks within an ever-changing environment, and that is clearly reflected in our balance sheet. With my commentary complete, I would like to return the presentation back to Tony. Tony?

Thanks, Mark. We're on Page 9, and I'd pick up on his comment where he says it's reflected -- our risk management is reflected in our balance sheet in how it's remained strong. I think it's reflected in our backlog also, and it shows that we've been able to move between markets, invest in the right places and acquire in the right places to weather what has been a significant downturn in the core non-residential markets, especially commercial and hospitality.

So let's talk about backlog. Backlog at the end of the quarter is about $3.4 billion, an increase of almost $100 million over the backlog at the end of March 2011, with in-period acquisitions accounting for all the increase. Organic backlog decreased $200 million year-over-year but it improved sequentially from year-end 2011.

With our strong organic growth, we're pleased to see the growth in sequential backlog. We are seeing what we call growth straight through backlog into sales over the last three quarters as we've had strong organic growth and near flat backlog through that period.

That's typically a service dynamic. It's what we see in our service operations, but it's also occurring more in our project work as we're getting more to the front end of the decision cycle, especially in the industrial work. It also happens when you're in the industrial work and closer to the owner. It also happens early in a construction up-cycle.

Like we said, it's encouraging that the backlog is holding its own despite the strong organic growth over the last three quarters and 11% here in the quarter. While impossible to measure, milder temperatures helped that organic growth and accelerated some revenues, but backlog again kept pace.

We've spoken about EMCOR being a late cycle company in previous calls, and while it is still very early in any construction cycle to speak of, seeing revenue and backlog moving upward, and revenue especially moving upward very strongly, it's a positive sign and must occur to eventually spark a strong recovery.

I like our position in this uneven economy, and our backlog position dovetails with my earlier comments about our ability to utilize our diversity of service and construction offerings to respond to different market sectors and to create stability and growth in a tough market, and it's this diversity of demand that drives that.

So let's go look -- let's go through the bars that we always do here on this chart. A year ago in March of 2011 commercial backlog stood at $545 million or 17% of total backlog. At the end of first quarter of 2012 commercial backlog is almost $1.1 billion and is 31% of total backlog. It's doubled but it's been aided by $260 million of USM, and USM has grown in backlog since we acquired it. But even without USM, commercial backlogs have risen $250 million, and for clarification some high-tech manufacturing work is also in our commercial backlog. It's always been there, and also some of the data center we work on the private sector would be in our commercial backlog.

And you look at what's going on, and it's not fully in backlog yet, is the important contract we won at both A&P and Ruby Tuesdays, and Ruby Tuesdays we'll be bringing on 742 sites. We're not there yet. We're going through phase one of implementation. Mid May we move to phase two, and this is the type of contract that prior to our acquisition of USM, USM couldn't have done it, EMCOR couldn't have done it, and together we can do it. So we're starting to win business development. It's revitalizing and we're winning the right type of work for our backlogs.

Industrial backlog remained flat, although I will tell you our revenues have benefited strongly from industrial efforts. It's up 8% from March of 2011 despite strong activity from all import companies that performed that work. And our refinery work in our shops where we bring the work into the shops to fix or we're fabricating some high-end heat exchangers, that work is up actually 45% since March 2011, and March 2011 was up versus the trough. So we are seeing demand rebound in the refinery sector, and the more seaway pipelines that get reversed and if the Keystone pipeline can get reversed, we're pretty bullish on the Gulf Coast. And we've also had good performance in our California operations supporting the refineries out of Olmstead.

Healthcare is the light green segment. You've heard me talk about it. It's a little more episodic. It's a good long-term market. We'll win our fair share of healthcare work. We've won our fair health share work and it will always be a significant part of our backlog. It's a little bit down right now, but we're really good at this work, and like industrial work we get in at the front end and it takes a while to materialize.

Institutional backlog is about 30% of our total backlog, about $1 billion, and has been constant through '11 into '12. And our work is mainly federal, a little bit of state of local. We're doing the lighting controls at the St. Elizabeth campus. That's really the Homeland Security campus. That's the old St. Elizabeth's Hospital. And a lot of the work we do for the government, we did a lot of [brack] work and we'll do more in the future. We do work that makes government facilities more cost-effective. We do work that allows them to consolidate, and we're still bullish that an outsourcing trend may emerge much like that happened prior to the current administration. It only makes too much sense economically.

The final two sectors, transportation and water, remain active. We have some nice large projects in there, and Mark talked about one of them. You hit milestones in these projects. They tend to be either/or, either you're going to make your payment or make your award or not. We do usually hit them. And we had a nice award from the City of Palm Beach to construct a new electrical generator plant, and we'll commence work on that here over the next six months.

Another backlog fact as Mark mentioned, revenue in the first quarter for domestic construction was $843 million, 22% above where it was. Despite that increase in revenue, you can see the strength of that operation. Our backlog is flat in US construction, and that says we're in a fledgling recovery probably. I don't know if that's necessarily true. I know right now we're winning our share of good work and the capability our folks have built are really paying dividends for us in this tough market.

With that let's move to Page 10. As we move into the remainder of '12, first I would caution everybody we are in the first quarter which is usually our weakest quarter, and we have a long way to go but we're off to a good start. Revenue is stronger than expected. Operating margins are about where we expected them, and we're not satisfied with these margins but they reflect a couple things. The startup of new work, and I went through all the dynamics of that. It also reflects the work we won in the recession, and some would argue the recession is still going because trade unemployment is still in the high teens to low 20s. But it means EMCOR has capabilities that are a little different than what it's had, and we've taken a long time to build those, over the last six years to build the kind of capabilities that allow us to grow in a tough market.

Market conditions still remain uneven, and it requires a steady hand and discipline -- and our management team has that -- throughout our operation. So I'm going to go through now what we need to do if we're going to get to the top end of guidance, things we can control to help get us there. But as you know there's a whole bunch of things that are out of our control.

What do we control? Discipline, and it's one of our hallmarks, whether it be bidding, execution or cost. Productivity, we like to think that a lot of people say you can't gain productivity and service in construction. We like to think that we can, and we continually prove that we can. We control cash deployment, and Mark talked about we made -- had a little more activity on our buyback. We're about 40% of the way through on our initial authorization. We've deployed some cash on a dividend over the last three quarters, and we deployed cash over the last 18 months rather aggressively, reshaping our business, continuing to reshape our business, over $300 million.

Areas that we don't control, boy, I know that better than ever. Good timing on buying a company that has excellence in snow management the way I call it. We don't control the weather, and hopefully we'll have more normal weather patterns through the remainder of 2012. I really didn't get excited about playing golf in January in Connecticut. I would rather have everybody be miserable with lots of snow, especially in the Carolinas and Virginia and those areas.

We don't control customer spending on maintenance and capital. Our customers taught us through this recession that mandatory maintenance means discretionary, and discretionary maintenance means sometimes when it breaks. We're seeing a little resumption of more normal maintenance spending, and we're seeing people pay for some of the short-sighted decisions they made in the recession, but it's nowhere near broad-based yet.

And we certainly don't control the general economy. With Europe, and I still worry about $4 gasoline. I will always worry about $4 gasoline. It's not a good marker on the table for us, and we don't control those things. However, based on our start, I think we have to raise revenue guidance because with 11% organic growth in the first quarter, our organic growth number didn't make sense where we had it for the rest of the year.

And again remember in February we told you there were two or three things that had to happen for us to start to get more confident on the year, and most of them have happened here in the first quarter that we needed to see happen to get to the revenue number that was better than we initially said. So we see around $6.3 billion right now, and consistent with our margin outlook that we had, we raised the bottom end of the range from $1.65 to $1.70. We're not trying to set a new trend here at EMCOR. It's just that our revenue was so much stronger here in the first quarter we felt compelled to do that, and we don't see any outlook change in our margins today. Remember, we gave guidance when we had a pretty good view on the negative impact of the mild winter weather.

And with that I'll ask Laura to put you all in queue and we'll take your questions.

(Operator Instructions) We'll pause for just a moment to compile the Q&A roster. And our first question comes from the line of Alex Rygiel of FBR.

Thank you. Good morning, gentlemen.

Good morning, Alex.

First for Mark, can you quantify the favorable resolution of that construction claim that you had on a healthcare project in the first quarter?

We typically will not because those things do happen quite often, but from a materiality perspective it's less than 50 basis points for that segment of the market.

And then, Tony, in the first quarter obviously mechanical revenue was very, very strong, exceeding $550 million. Is that a new sort of level that we should think about each quarter for the next couple of quarters or was there some sort of one-time revenue kind of embedded in that number that might tail off in the coming quarters?

It won't tail off in the near term, Alex. We have good momentum in that business. We're doing some nice work in the industrial sector that we have pretty good line of sight on for the next two or three quarters.

Helpful. You mentioned the refinery turnaround business, and I'm a little confused because it sounds like backlog is good, but in the first quarter maybe revenue wasn't good but yet profit is strong. Can you kind of circle back and help us to re-explain the refinery turnaround market in the first quarter and then your outlook?

Sure. Our business serving refineries is about flat year-over-year, and it came back remember '10 to '11 from a pretty big deficit. And the way it got there was really good shop performance, not so good field performance. And the field performance wasn't that we weren't executing on the contracts we had. We expected to do a rather significant turnaround for our customer. We mobilized, had all the resources, and it turned around and ended up being about a quarter of the size. So in our field operations with refineries specifically we did less volume that we expected and we had more costs than we should've.

Now, that being said, based on what we did in our shops, it was a pretty good turnaround season because in our shops it's not only the turnarounds we get to execute for people, which we do with our field business, as we support a lot of other turnaround contractors in their field businesses. So I can't say that it was a market issue. For us it was a customer issue in that we -- now, that being said, I'm glad we have some of those resources because now here in the second quarter we're executing pretty well on some turnarounds and what looks like a little bit for us an elongated season. Nothing to spike the ball in the end zone about because we're only in April but we'll see.

Now, for the outlook for the year, I have no reason to believe that it won't be at least as strong as last year's was in the back half of the year which was pretty good, nothing near what it was in 2007, but it was still pretty good and we're winning some important new customers.

What you're seeing though in turnarounds in general, you used to be able to look at these like I've said in the past like clockwork and even know the scope. With the dynamic pricing and the dynamic mix they're putting in the refineries now, it's a lot more real-time decision and we got caught a little short on that in the first quarter.

That's all very helpful. Thank you. I'll get back in the queue.

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

Thank you. Good morning.

Good morning, Rich.

Regarding the organic facilities margin, you touched on the refinery piece, but you also cited a couple of contracts that started up. And I'm wondering how large these jobs are where they would materially dent the margin on an organic business doing $450 million a quarter.

Well, again if you think about where our margins are, it doesn't take much, right?

Right.

Four million of expense where you didn't want it between industrial and these startups, that's a point of margin, right? Look, they're going to be significant. I mean, they're not there yet, but at full run rate they could be some of the largest contracts we have, north of $20 million. It takes a while to get there and we're going through the expense to get there, and what we're doing, Rich, is we're starting up plants, individual plants. And so we expected to be starting two plants. We're starting four plants for each of these customers because the first three plants we did, the performance and the savings were so significant they accelerated and it cost a lot of expense to do that.

Okay. Last quarter in speaking about USM you spoke of a greater difficulty in the initial sales process with USM's customers in your first envision and now the backlog seems to have turned around. From an outsider's perspective it makes sense to consolidate the trades and USM's service lines. What are the common objections that you had heard and what turned around the business development?

Well, I think the first thing is we took some of our trusted people that had fantastic reputations in that sector and put them in charge, and that paid dividends immediately and they were able to leverage their relationships and get things done. And we stopped -- we quickly stopped listening to the nonsense that the last people leading business development had to say to us.

The second thing is EMCOR has a great reputation of servicing its customers. USM had damaged its reputation through its sales process as it became less focused on serving its customers and more focused on selling its company. It was a big distraction to management and customers voted not to participate in that sale. And when it got bought by EMCOR we got out to tell the story, and the objection was well just go out and perform.

I will tell you we had a trade show last week. Our booth was full. And last year they had the trade show; their booth was empty. And you can just see by the sign-in sheets at it and the kind of information people took from us. We're a long way from home yet. These things don't turn overnight, but there's a tunnel we've been moving through here and we're about 9 or 12 months off. It looks like there's light on the other end of it, and we're pretty sure we're not in a railroad tunnel. We're actually seeing the other side.

Okay. Then lastly I've always viewed 5% as maybe the bottom of a good range for EFS, and now you've layered in a business, USM, that historically has performed even above that. Over what time period is it reasonable to expect the Company to raise UFS operating margin above 5%?

We're getting impatient with it so we've got to get there sooner than we'd better, and we'd better start getting there at a run rate basis. And we're going to need a little help from the normal operating conditions to do that. But certainly I don't want to be having this discussion 12 months from now and tell you that I'm still hoping to get to 4%.

Right. Best of luck. Thank you.

Our next question comes from the line of Adam Thalhimer of BB&T.

Good morning, guys. Nice quarter.

Good morning, Adam.

First question I wanted to ask about pricing, what does the pricing environment look like today and how long will the recessionary pricing environment continue to impact results?

Well, I mean we're working through some work, so that would usually take us 9 to 12 months, and you see that reflected in our margin guidance. And you've seen it reflected in our margin guidance throughout this recession. If you think about it, we've been given guidance that the margins have come down and the actual margins have come down over the last three years. And we've been offsetting that with cost reductions and productivity, and we've kept pace with it -- a little bit behind it because you can't possibly make up the operating conditions we had in 2007 and early '08 versus what we faced in '09, '10 and early '11.

I think pricing has stabilized. I think the real issue is decision making takes longer and then it's quicker, and it's a weird phenomenon. But I mean examples of what we're doing in the industrial, some of this we've talked about for three to six months, nine months with our customers. And when they start at the starting gate, okay, let's get this done and let's get it done now and let's continue to work on the scope, and the contractual terms are okay. They make sure they protect us as we do that, but it's sort of once we make the decision we want to go to the private owners because now we've got approval and we see the opportunity because they're trying to compress the uncertainty period as much as they can.

And you're also seeing people -- I think on the small project side we still have a bit of a hangover there. And look, we caused some of the hangover ourselves. I've talked about this. We probably went a little too broader with some of our capability and tried to bring fast-paced resolution like we do in the commercial and private world to some municipalities and other people that don't value it. And so we'll get through that hangover, but I'd say a little better, and I think it's a little better in the midsized marked which is encouraging to see because you see that in our backlog and you see that in our gross margins we're reporting.

Great. Thanks for that. And the 45% organic growth in your commercial backlog, are we seeing the benefit from that organic commercial backlog growth in your results today? And if not when do we see that?

No, you're not seeing it yet. It's hard for me to call when that's going to happen because some of it's service work that is started up over time. But clearly go back to the earlier question and that's how you start to see EFS margins expand and construction margins stay where they are.

Well, let me throw this out. So one of the large HVAC OEMs noted that orders for commercial HVAC equipment were up 20% in Q1. They were forecasting 5%.

Yeah.

What's your reaction to that?

Well, I'd have to know where they were talking about, what parts of the product line. I listened to the same calls.

They said it was energy -- it was largely energy retrofits and replacement work.

Yeah, I mean but again you'd have to know what product line, so some of that would be applied product, some of it maybe just rooftops. The other side is some of it's just stock product, and if distributor inventories were low, as you get into the larger rooftop equipment that could be an anomaly that they helped cause.

We are seeing customers return to the market for energy savings projects. That is at true statement. We'll see how sustained that is, and we'll see as we get through the summer months, if we get just a little bit of heat, customers should not be rewarded like they were last year for their consistent and continual deferral of their maintenance.

Okay, great. And last question from me, I wanted to ask about the buyback. So the absolute dollar amount spent was about half of what you spent in Q4, and I'm just wondering why you touched on the -- you tapped on the brakes a little bit there.

Well, I mean the stock has performed reasonably well during the quarter, so I mean price is obviously a function of it. The window of time that we actually could be in the market was also limited between the ending of 2011 and obviously when we got into the restricted period for the first quarter. So the window wasn't as open pursuant to us being able to make open-market purchases as opposed to us being restricted by a prefiled plan so --

But no -- for instance, I mean no change in your philosophy on cash management?

No, not at all. Not at all.

Okay. Thanks very much.

You're welcome.

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

Hi, and good morning, and congratulations as well. Tony, one of -- you've seemed to indicate that, I mean, we've got better market activity in the industrial markets as opposed to the commercial markets and the hospitality which drove the last cycle. Are the projects larger for you now and does that imply greater lumpiness in margins potentially, especially with your 80/20 rule in the [center] of large construction?

Yeah, John, and they're also more where we're part of the decision. We're further upstream so the answer is yes. The answer is yes and no. The margins will be lumpier. That happens on any large work, right, as you get into it, especially with the 20% rule as you know. And I think it happens as you go through scope definition.

It's a little bit of the same phenomenon in the service side. I mean, when you first start off a service customer, you've got a lot to learn, especially on an industrial site, right? Safety is paramount. You go through all the training costs. You go through all the crew costs. You get through all the testing of your crew. You learn the rhythm of the customer and then the margins start to come. So yeah, I think in both places that is a different phenomenon than what you experience in a typical commercial customer, because once you do the equipment inspection and understand your task, it goes relatively quickly on a commercial site.

So I mean should we be concerned about the lack of organic backlog growth at this point?

If I were sitting here with no organic growth in revenues and no organic growth in backlog, I'd be a little more concerned. But now with really four strong quarters in a row of decent organic growth, at least for this period of time with the capabilities we've built, we're in a different phase than we've been in before. I would've expected -- look, I said this in the discussion piece. We typically would expect two of the quarters before we see -- or at least one quarter before revenue growth we see backlog growth. I think as we move closer to the owner and the end user in this industrial work, we're seeing it a lot earlier and we're seeing revenue growth and backlog growth. We see revenue growth, things passing straight through backlog for lack of a better word. Everything goes into backlog.

Right.

It passes straight through.

And is that just a function of just excess capacity in the industry, that the owners don't have to order as far in advance?

No. I think it less has to do with excess capacity and more to do with wanting to compress the time of uncertainty as much as you can.

Okay. And lastly any comments on acquisition markets, what it looks like, thoughts there?

Yeah, we've been fairly active over the last 18 months, and we've done both kinds of deals for EMCOR. For us to do something where private equity is playing or it's a broad auction, and you look at the four major things we've done over 12 years, they were all special circumstances. There was either something that happened in the capital market or something that happened in our property that created an opportunity for us to be able to buy versus someone that wanted to pay a crazy value.

But you go back more to the private market type deals we do. We did, what, five deals here in the last 18 months. Four of them were EMCOR sourced, EMCOR negotiated, EMCOR done, and the other one was an auction that started to bust down and you really had to understand how things were going to fit together, and that was USM and what were causing the issues. We thought we understood them all. Like I said, we were about nine months off, but it doesn't change our long-term outlook.

The acquisition market is okay. You're seeing a little more activity. We're seeing a little more activity on our private side, and I don't expect we're going to run out tomorrow morning and do something that would occupy our -- unless it's just a tuck-in deal, our mechanical service or site-based team. They're fully engaged between contract startup and integration of USM and repairing the small project work they were doing. But you look through the industrial side, you look to just our core mechanical and electrical business, and you look to the government side, I mean, they're areas that we would consider. I mean, when we get into the government thing, other than Pepper, typically we look at an acquisition and it becomes hard to pull off either because of the small business rules or the lack of visibility beyond our current contract and you sort of -- each time we've done that we went out and built our own capability and that's why we've grown so strong organically there.

Okay. Thank you.

All right. Thanks, John.

Our next question comes from the line of Avi Fisher of BMO Capital Markets.

Good morning and happy birthday also.

That's to Shelly and not me.

You mentioned that weather was about $0.05. That comes out to about -- by my estimate about $5 million to $6 million in EBITDA which --

Yeah.

-- gets to about the 5% margin that you -- that made USM attractive and I just wanted to clarify that. Somebody had already asked about how long it would take to get to the 5% margin as you said you hoped to ramp there. But even with the growth of the turnaround work and the improvements there, you're still running at EBIT margins below 4%, maybe in the 3% range. Is that a function of pricing as well as underutilization?

I think for us in the first quarter it was cost. Some of it good costs, right, starting up contracts that are going to pay dividends in the long term. Some of it cost in a place like USM as you're staffed up for the winter and it didn't materialize. Now, the good news is we have a different way we're going to handle that next year so we don't build so much fixed cost. Necessity is the mother of all invention, and so if it's cost I don't want to blame pricing. I think some is cost.

I think the second thing is small project hangover carried on a little bit in the quarter. I mean, never a big quarter for mechanical service anyway. So I don't -- I think it's those two major factors, Avi. Yeah, we would've been where we wanted to be in USM had we had a normal winter in the quarter.

And what I'm hearing you say is that pricing really isn't the issue. It's just startup costs on new projects, some management turnover costs at USM.

Pricing has recovered a little bit in the industrial market and that's the major lever. It's still got some more way to go, and we could use more volume there. As you know, if we can get more industrial work it will have an outsized impact on the margins in that segment.

Okay. Gotcha. And then historically there's been a pretty strong correlation between changes in backlog and changes in US construction revenues. I'm not sure if you've discussed this already, but you're getting 15% construction revenue, organic construction revenue and a kind of down organic backlog. I'm just trying to understand that disconnect and what's changed.

Well, it's starting to look more like service work. As we're working alongside the owners to develop scope on these larger projects, we're burning it and building it. We're contracting it, executing and burning in a relatively short compressed time cycle from anything we've done in the past.

And are there certain projects or types of projects where you're engaged in that or is it --?

Sure. I think some of the projects at the DOE sites can have those characteristics. They can be smaller projects but they add up to a lot that have that characteristic. [Proof] processing work that we're working on in some sectors that are fairly robust right now, and their fast-paced projects have that characteristic. Data center projects can have that characteristic at times, especially as you take an existing structure and modify it into a data center. High-tech projects in general always have that characteristics because they wait forever and then they say, okay, did you guys get this done yesterday? And then you mobilize quickly and get it up.

And the DOE site work, is that Harry Pepper or [Bonson] or --?

That's Bonson.

And just to remind me, when do all the acquisitions in mechanical anniversary? Is this the last quarter we have acquired revenue?

Yeah. I mean, Bonson anniversaried within the first quarter. Southern obviously we just closed in the current quarter.

Pepper is already done.

Yeah, Pepper has already anniversaried, and --

So it's primarily organic going forward?

Yes.

Yes. Other than southern, everything is organic for the construction site going forward after this quarter.

Gotcha. All right. Well, thanks for taking my questions, and nice work on the quarter.

All right, Avi. Thanks.

Our next question comes from the line of Nicholas Coppola of Thompson Research.

Hi, I wanted to ask you a little bit about small projects, the small project business doing better I guess throughout the year. I guess what do you expect to drive the improvement or are there any signs in the marketplace that you can point to that I guess could give us confidence that that should occur?

Well, one area that's going to do better is in our control. It's we finish the work that wasn't so good to begin with and we get it out of our backlog and we stop kidding ourselves on what we can self-perform or not self-perform in our mechanical service companies. That's in our control and we're well on the path of doing that.

The second area is you need to see the energy service work return, and it is, and you need to see people start to understand payback. And you need -- if you get a little bit of warmer weather -- again I don't want to declare victory here in the first quarter on anything, but you get a little warmer weather, I think it would be nice for customers not to be rewarded anymore for making terrible maintenance decisions over the last three years, and last summer they got rewarded because it never got hot enough for them to stress their equipment, and they don't need to be rewarded another season like that.

Do we see -- have you seen more projects out there or are you seeing less bidding pressure from your competitors or is there any point of --?

One of the things you're starting to see is some of our customers who we have long-term service agreements with, which is where all this work comes from, either on the construction side or about 15% of our construction volumes is small project work, too, and that's sort of jobs $2 million or $3 million and less.

As you're seeing people realize that testing the market is not so good when you need people to be able to come in and retrofit and renovate and work around your day-to-day operations. None of this is done in new buildings, right? None of this is done on new construction. So they're realizing the people that really know their operations and how to get it done are the best people to do that, so we are seeing a little bit of return to sanity and our long-term relationship customers are coming back to us to do this kind of work.

Okay. And then I had another question for you about I guess a shift from maybe public work to private work. Are you seeing that and do you project that shift I guess continuing to occur?

Well, we have seen some of that shift. With commercial backlog up doubling and half of that being organic --

Sure.

-- we are seeing that shift. We have a big gap to make up there with hospitality on the private side, and we're filling some of that gap with industrial and we're finding out that has a little different characteristic. We've done industrial work for a long time. It's just we're much closer to the decision maker now with some of the capabilities and acquisitions we've made and organic investments we've made. So yeah, the shift to private work is always more positive we think.

Right.

But we've done okay through this downturn on the institutional and public sector work, and some of the best work we've ever done at EMCOR has been public sector work. It's just different.

Yeah, okay. Well, that's helpful. Thank you.

Our next question comes from the line of Tahira Afzal of KeyBanc Capital.

Good morning, gentlemen.

Good morning, T.

And congratulations on a good quarter. How are you doing?

We're doing okay.

Okay, great. I had two questions. I think a lot of my other questions have been answered. Tony, you talked a bit about the spring season, and clearly it's gotten off to a hot start. When I walk around the city, there are definitely more trucks out on the maintenance side. So relative to last year, which as you said was tepid, what have you guys assumed in your guidance about sort of spring and summer in terms of weather?

We assume normal weather. Good weather, T, looks like this -- in May people are really, really uncomfortable, in New York and Chicago and Boston, Connecticut and DC, and they're uncomfortable to the point of being irritable. And the weather is in the high 80s, the low 90s, and they're saying I can't survive this summer without making sure my system works really well. And that weather, you have three to five days of that in May, and then in June it stays above 85 degrees. You don't have any of that cold June weather where your young son or daughter is either playing soccer or baseball wearing a knit stocking cap versus their baseball hat because it's 55 degrees the first week of June and raining, so we don't need any of that.

So we didn't assume either end of that spectrum, but we would certainly take the -- we would deal with irritable people in New York not allowing us to park our vans correct in Chicago and Boston and all those places to pick up better margins. Now see, it's not only going to happen on the technician side. Systems will break and we'll install more equipment, and we'll install more equipment in the fall because people will say I band-aided it to get through the summer. I'm not doing this again. Obviously I made some really bad decisions in this downturn about the care and maintenance of my critical HVAC equipment.

Got it. And given that it was fairly irritable in April on some days, has there been enough to kickstart --

Don't know yet.

-- the season?

All we know is we had to send our technicians out earlier to start up systems in late March that we typically wouldn't do.

Got it. Okay. But you've assumed that it's just a spurt. Was it putting that in your guidance from what I can tell?

We assumed it looks a lot more like 2010 summer and a lot less like 2011 summer.

Got it. Okay. Second question is on the institutional side, and you just talked a bit about that, Tony, you guys have done a great job of managing into the down cycle with your diversity. Now when we look at the ABI index and restarting the commercial side pick up but we've seen the institutional side contract, and on the healthcare side we have -- there might be some delays as people mull over the healthcare bill. Can you talk about what you're assuming for 2012 really on the institutional side? Does it stay stable? Have you built a bit of push in it to --?

We're assuming a stable market.

Got it. Okay. And your bidding list over there remains fairly strong?

Yeah. I mean, we're seeing opportunities. Yeah, sure.

Okay, great. And I'll sneak in a last question, and that's on the petrochemical industrial side. All your peers on the energy side have indicated that they're getting very, very bullish on the petrochem cycle. Given the strength that you've built on the industrial side over the last several years, where could that business go for you? Have you done any internal forecasts or qualitatively can you talk a bit about it, too?

Well, surely nothing -- almost nothing would be better for EMCOR, and surely nothing would be better for our facility services segment than to see a return to even 85% of what we had in 2007 and 2008. Now, is there a path to get there? There may be a little different way you get there. We've diversified our customer base some. We've invested in some new capabilities that we didn't have, both on the custom fabrication side and on the service side. We are well positioned, especially on the refinery side but even broader the pet-chem side, even broader supporting some of this development on the pipeline side of people trying to get the wet gas and dry gas mix. You need heat exchangers to do that because it runs hot.

Right.

So we're seeing all kinds of different opportunities and we clearly have a backlog that's up right now. We've seen [better pin] nowhere near what it should be for the value we add. So yeah, I mean we've looked at it. It's been a tough couple years, and I think you know us well enough that we don't declare victory until we almost go out by three touchdowns so we're a long way from that yet.

Well, congratulations on a good quarter and thank you for taking my questions.

Thank you.

Our next question comes from the line of Jeff Beech of Stifel Nicolaus.

Can you give us an idea of where the split is between private and public right now, either in revenues or in backlog?

We can get you that exact number. Let's think about this a little bit.

Jeff, it all depends. Jeff, this is Kevin. How are you?

Good.

Some of it depends on the definition of what you think private sector work is. Let me define it as one way right now. If you take commercial, hospitality and industrial together, in 2010 in the first quarter that was 30% of our backlog. It's currently 44% of our backlog now with the biggest growth driver being the commercial work. And as Tony mentioned, USM is in there for about $260 million or so.

The hospitality is down between those two times, although it's a very small number, and industrial as Tony also mentioned was up about 8%. But again sometimes in the healthcare side there's some private sector money in healthcare as well, but these numbers are probably your biggest lumps in numbers. If you want to call me later I can talk you through them.

And if you think about the industrial work, that's where we're seeing the more robust revenue growth. We're at least 50/50 now, Jeff, probably a little more leaning on the revenue side towards private sector versus public sector, maybe even as high as 55% private, 45% public, which is at least a swing of 10% to 15% of where it was two years ago so it's moving in the right direction.

Okay. And then my follow-up regarding that, I think in the last cycle your private got to be higher than where it is so it sounds like that still has some momentum and a way to go. But can you discuss specifically some of the trends within the key public sector markets and whether this is giving you at this point stable opportunities of growth or whether that's shrinking attractive opportunities partly on a relative basis?

I don't think we've seen much change over the past 12 to 18 months. I would say it's stable. It's not a growth market, but that being said if we win a significant opportunity, even in a declining market, for us it becomes a growth market, right? So when I think institutional, federal government for some of the things we're doing. There's some pretty attractive maintenance contracts and they become binary, right, where you're going to win them or not win them. And if we win them it makes us look pretty attractive in the intuitional space because there will be project work where we'll fall on and off of that. We're bidding them. We expect to be done and selected. We'll be one of three and we'll see how it happens, and there's a couple significant ones.

I think on transportation I think for us it's been pretty steady and we're looking at a couple jobs right now that may take it up a little bit, but they'll move pretty -- these jobs will move pretty quick through backlog. And water and wastewater, we've been doing about the same level of stuff plus or minus 15% to 20% for a long time, and we see that continuing because there's a lot of old plants out there and there are some projects that have to be done just from safety and also to keep water supply where it should be like in South Florida and other things.

So for us stable, I would not want to be a small projects guy counting on that in the government space or someone that couldn't really offer broad capabilities and couldn't do the significant projects and think you were going to do well in maintenance or construction.

All right. Thank you.

Yeah, thanks Jeff.

Our last question comes from the line of Rich Wesolowski of Sidoti & Company.

Thank you. I had two. One of them was answered. Mark, would you mind reminding us how much [of your] related amortization is expected for 2012 and whether that number drops in '13?

Rich, give me one second on that. Believe it or not, I don't have it committed to memory.

I'm surprised.

Yeah, I know. I know you're disappointed. Sorry, just kidding. Of course I'm not going to quickly put my hands on it.

I just wanted to extend the call.

Yeah, you've done a nice job.

I don't want to say that we set a record, but --

I've got nothing else to do, man.

Expectations for full 2012 are just under $30 million, and it will tail off to $25 million in 2013.

Appreciate it. Best of luck.

You're welcome.

Thanks, Rich. I guess that's it, guys.

I would like to turn the call back over to management for closing remark.

Look, thank you all for calling in and thanks for what I thought was a pretty good question and answer session today. Look, good first quarter. We've got a lot of work to do this year. One quarter does not make a trend. We've had a couple of good quarters of organic growth here. We've got to go out and execute and let's hope for some normal weather patterns and let's hope that everybody in the EMCOR world and all you stay safe. We've got a lot of tough work to do. Thanks. Bye.

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