EMCOR Group Inc (EME) 2013 Q1 法說會逐字稿

Good morning. My name is Lee, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2013 Conference Call. (Operator Instructions.)

Thank you. Mr. Elwell, you may begin your conference.

Thank you, Lee. Good morning, everyone, and welcome to the EMCOR Group conference call. We're here to discuss the Company's 2013 first quarter results, which were reported this morning.

I would now like to turn the call over to Kevin Matz, EVP of Shared Services, who will introduce Management. Kevin, please go ahead.

Thank you, Nathan, and good morning, everybody. Welcome to EMCOR Group's earnings conference call for the first quarter of 2013. For those of you who are accessing the call via the Internet and our website, welcome as well, and we hope you have arrived at the beginning of a slide presentation that will accompany our remarks today. Please go to slide two.

Slide two lists the executives with me to discuss the results for the quarter. They are Tony Guzzi, our President and CEO, Mark Pompa, EVP and CFO, Mava Heffler, VP, Marketing and Communications, and Sheldon Cammaker, who hasn't made it into the call room yet. He'll probably join us in a moment.

For call participants who are not accessing the conference call via the Internet, this presentation, including the slides, will be archived in the IR section of our website under Presentations. You can find us at emcorgroup.com.

Before we begin, I want to remind you that this discussion may contain certain forward-looking statements. Any such statements are based upon information available to EMCOR'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 here comes Shelly. Thanks, Shelly -- and 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 2012 Form 10-K and other reports filed from time to time with the Securities & Exchange Commission.

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

Thanks, Kevin, and thank you all for joining our call this morning. I will be on slides three and four.

We started pretty well here. We made $0.44 per diluted share, and that's inclusive of about $0.01 in restructuring costs, and that's in our UK operation. Revenues grew by 1.9% to $1.57 billion, and all that growth's organic. And that is with a planned reduction of $22 million, or 15.5%, in our UK operations as we continue to right-size our UK construction operations.

Our business grew three points -- our US businesses grew 3.7% on a combined basis, about where we expected to start the year, and remember, we have pretty tough comparators against double-digit organic growth in the first quarter of 2012.

SG&A still at 8.8% of sales shows that we're still benefiting from good leverage, and we still have very strong cost discipline. Operating profit for the quarter is $51.2 million, up $5.1 million, or 11.1% versus the prior year. Operating margins are at 3.3%, up 30 basis points versus the prior year.

I'll go into the segment discussion. Our Electrical and Mechanical segments had operating margins on a combined basis of 3.5%, which is a more traditional first quarter for us versus prior year performance of 5.4%. As we noted last year, we benefited from a claims settlement and had several significant contract closeouts in the first quarter of 2012.

Electrical margins were a little stronger than we expected at 6.2%, and Mechanical margins were weaker at 2.1%. In our Mechanical operations, we had some headwind on some large, multi-year institutional work that impacted the quarter, as the schedule has been pushed out and we had to take a tough view of our success in recouping the extra labor that we will expend as a result of this extended time.

As we have cautioned investors in the past, and includes when we're really doing extremely well with Construction margins, you really can't focus quarter to quarter in our Construction business and its margins. Margins can be a little lumpy, and you need to look at the long-term trend, and that long-term trend is very good. And we are blessed to have some of the best leadership in the industry that have a long proven track record of success, and we certainly expect that to continue.

In our EFS segment, we improved to 5.9% operating margin. That'd be two of the last three quarters we've been over 5%, and that's a full 380 basis point improvement from Q1 2012. Revenues grew a strong 12.7%, and profits improved over 200%.

Our performance was broad-based. The performance improvement was broad-based, with Industrial leading the way, but had significant improvement Mechanical Services and site-based operations, and site-based is where our USM acquisition from two years ago almost reside.

On a trailing 12-month basis, we are now in the high 4% in operating margins for EFS, well on our -- well on the road to our march to get to 5%. And we said that 18 months three months ago. Clearly we expect to do that within the next 15 months, or even sooner. And it's all based on acceptable level of demands for our services continuing.

We had substantial improvement in site-based [beyonds] now as our leveraged work with our current customers and our customer retention has improved substantially. Those are both really good markers on the table about what's happening with the underlying business.

Our Industrial and Refining business had a terrific quarter and were really able to mobilize to help customers turn around their facilities in a timely and [safely] manner and some well-timed investments we made when things weren't so good in [wash stands] and [chomp] and welding equipment really paid dividends for us here in the first quarter.

Mechanical Services executed well, with good labor utilizations and improvement in our small project margins. In the UK, we had a quarter about as we expected as we continue to reshape our Construction operations. Our Service business continues to do well, and the restructuring charge we took was, in fact, due to reshaping our Construction operations to get it to a more owner-focused and a business supportive of our EFS business. That business will continue to become even more service-focused. We expect this restructuring to continue the next four quarters.

Backlog has grown about 3% here in the US, and is up about 1.9% overall from year-end. And this now stands at $3.42 billion. Our balance sheet remains liquid and strong, with almost $500 million in cash on hand.

And with that, I'll turn it over to Mark to cover the financials in detail.

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

As in past quarters, I'll begin with certain highlights of our first quarter results before moving to key financial data derived from our consolidated financial statements, included in both our earnings release announcement and Form 10-Q filed with the Securities & Exchange Commission earlier this morning.

Consolidated revenues of $1.57 billion in the quarter are up 1.9% from first quarter 2012. All revenue growth in the quarter is organic. The United States revenues increased 3.7% over quarter one last year. US facility services revenues increased 12.7% year-over-year. Domestic electrical revenues increased 5.9%, while our domestic mechanical quarterly revenues decreased 5.8% and our UK segment revenues decreased 15.5%. Revenue growth within the domestic facility services segment can be attributed to increased activity within the Industrial, Commercial, and Mechanical Services divisions, while the growth within domestic electrical construction is predominantly due to higher revenues from the industrial, institutional and commercial sector activities.

Consistent with last quarter, the decrease in revenues from our UK segment is the result of our continuing plan to de-emphasize their engineering and construction operations, as well as reduce project activity within their facilities services business. Revenue declines within our domestic mechanical construction segment are due to reduced volumes of work within healthcare, industrial, and institutional market sectors.

Please turn to slide six. Selling, general and administrative expenses increased $4 million within the quarter. As a percentage of revenues, SG&A in quarter one is 8.8%, which represents a modest 10 basis point increase from last year's quarter one percentage of 8.7%. Restructuring activity in the quarter was due to a reduction in workforce within our UK segment related to engineering and construction activities.

Operating income of $51.3 million represents 3.27% of revenues and compares to $46.2 million of operating income and 3% of revenues in 2012's first quarter. All reporting segments, other than facilities services, reported decreases in operating income quarter over quarter.

Specifically, our operating margins by each segment are as follows - US electrical, 6.2% versus 8.1%, US mechanical, 2.1% versus 4% in last year's first quarter, deriving total US construction operating margin of 3.5% for the quarter just ended versus 5.4% in the same period last year. US facilities services, 5.9% versus 2.1%. Total US operations, 4.5% versus 4.1%. And EMCOR UK, 1.1% in the quarter just ended versus 2.5% in the corresponding period last year.

Our first quarter US electrical construction services segment operating margins of 6.2% were reduced from the year-ago quarter's 8.1% of revenues, which had benefited from profits recognized in several projects that neared completion within the water and wastewater and transportation market sectors, as well as a claims settlement. 2012's fourth quarter US -- I'm sorry, 2013's first quarter US mechanical construction services segment results were down 190 basis points quarter-over-quarter due to certain project declines related to completion delays, and at this point we are unsure of additional cost recovery.

Facilities services operating margins was up quarter-over-quarter at 5.9% of revenues due to improved performance from industrial service, mechanical services, and commercial site divisions. As Tony previously mentioned, we had exceptional performance from our industrial division, as well as improved contributions from both commercial site and mechanical services divisions. Despite some tepid spending from our government customers, our facilities segment performed exceedingly well during the quarter just ended.

EMCOR's UK construction and facilities services is reporting first quarter operating margin despite several project write-downs within their engineering division, which resulted in that division generating a loss, offsetting operating income generated by their facilities services operations. As previously mentioned, we continue to restructure this segment to arrive at an appropriate business mix to achieve more consistent profitability.

We are now on slide seven. Our income tax provision for the quarter is reflected at a tax rate of 38.7%, which is greater than 2012's quarter one rate of 38.5% due to the timing of discreet items. Diluted income per common share for the quarter is $0.44 compared to $0.40 per diluted share a year ago, and cash used by operations for the first quarter was $95.1 million as compared to the $33.1 million of cash used during the first three months of 2012.

As during past first quarter calls, I need to remind everyone that, from a cash flow perspective, our first quarter is historically our weakest due to payment of prior year incentive awards, as well as specific to this first quarter the deferral of certain fourth quarter 2012 income tax payments due to Hurricane Sandy, as I've previously discussed on this call in February. Additionally, with the strong revenue performance during the quarter within our facilities services segment, there was increased utilization of working capital due to the timing of billings in arrears of certain services provided.

Please turn to slide eight. Additional key financial data on this slide not addressed during my highlight summary are as follows, and, surprisingly, are relatively brief because we cover just about everything here. The only additional thing to note is our quarter one gross profit of $191.1 million represents 12.2% of revenues, which is up $10.5 million, or 50 basis points, from the comparable 2012 quarter.

Please turn to slide nine. EMCOR's balance sheet remains strong, with sufficient liquidity, as represented by the $499 million of cash to meet certain -- to meet current working capital requirements, as well as for organic and strategic investment opportunities. Variations to note on this slide, the decrease in identifiable tangible assets is due to year-to-date amortization expense. As you can see, total debt levels are essentially unchanged since the end of last year, and our debt to capitalization, as in past quarters, remains low at approximately 10%.

I know I sound like a broken record when I say this every quarter, but we continue to do a very good job of managing the risk inherent in our business as market conditions remain challenging. I think our balance sheet clearly reflects good execution in our consistent results.

With that out of the way, I'd like to give the presentation back to Tony. Tony?

Thanks, Mark. And I think your last sentence there encapsulated how we've really run EMCOR for a long period of time. And certainly what has allowed us to perform in really a choppy market over a four-year period. And I think we've been consistent in saying that over a four-year period.

And it really starts with what we see on page 10. You've got to select the right work, and then you've got to execute it, and that right work comes whether it be construction or service. We went through backlog a little bit, and it's about $3.42 billion. It's up maybe 1% from last year, but the reality is it's up a little stronger here in the US. Construction business is up maybe 5%.

Facilities is down a little bit, but that's mainly due to what we talked about in the fourth quarter where we mutually agreed with some of our service customers that the relationship wasn't as successful as would have liked it to been for us, even though we were performing very well for them, and some of them were going through fairly extensive restructuring on their own. And we thought we'd better just break the relationship. And so, that' really the reduction in the facilities business, and you would call that good reduction. Coupled with the increase in construction, US business up about 3%.

We're down intentionally in the UK business. Mark talked about that. We're getting to the right mix. You all may wonder why we can't get there quicker. But, if you remember the long-term history here, we've done a lot to reshape the UK to make it a lot less volatile to our results, and our goal is sometime in the middle of next year to be there so that it becomes a steady contributor focused mainly on service, with a very service-heavy focus. It's about 75-25 today. What the right mix is we don't entirely know yet, but there is a portion of the construction operation that we'll have that will support our facilities business.

Since December, backlog's increased $45 million, and it's in market sectors that you see on page 10, commercial, industrial, transportation, water and wastewater, and even a slight increase in hospitality. But, let's be clear, we could have a couple condo renovations in Vegas right now and see an increase in hospitality.

We're not up and back, healthcare and institutional. Healthcare is a good long-term market. I think the market's wading through right now how the Affordable Care Act is going to impact everybody. I know we're all certainly doing that inside companies today, and most of it's not great. I mean, we will get through it as a big company, and we've done a lot to prepare ourselves for it. I would not want to be a small business in our business trying to deal with this today.

All right. When you look at institutional, a lot of people ask how much of that has to do with sequestration. I don't know the exact amount. I do know that decision-making is frozen. On the maintenance side, the government's been in a break-fix model since at least 2002. It's hard to go much lower than that, although I believe there'll be some pickup in spending as the year goes on because things need fixed and IDIQ work needs done, although certainly slowed down in the first quarter.

The bigger issue is what we're doing on even the maintenance capital side, or on the capital side. Some of the projects make a lot -- most of the projects make a lot of sense. Some of them we don't make the decision on why they're doing it. But, the ones that make sense, we're even seeing really slow decision-making. And the products are designed. They're ready to go, and the decisions aren't being made.

So, you could say it's showing up in two areas. It's showing up in current results in the maintenance area, and it's showing up in backlog because of the delay in decision-making on projects that we would be well positioned on.

That being said, private markets of industrial and commercial are okay. Commercial's not as strong as we like. But, if you see EMCOR, we're pretty good at moving and adapting. You can see how we've done that and how we've positioned us well in industrial right now. And that industrial is pretty broad-based, from food processing to technology to tires to auto and to paper. So, it's pretty broad-based. Think a lot of it has to do with pent-up demand, and even more of it has to do with I think people believing the US has a chance to be a low-cost producer because of the energy situation.

And remember, a lot of our industrial revenue and results don't flow through backlog as we do the turnaround and maintenance work on heavy process plants, with a lot of it being refinery, but we do it even beyond refinery.

(Inaudible) industrial is $648 million. That's a high water mark for us. And remember what I said, it doesn't include everything we do, because the turnaround work and the maintenance work tends to be unit priced, or time and material.

Commercial backlog's down a little from the first quarter last year. We talked about those commercial site customers. I don't think there's been a big change in the commercial market year-over-year. It might be just up a little. And it's clearly nowhere near going where it was in '9 and '10. We expect a gradual improvement. I would argue the improvement should be much broader-based, and it eventually will be, but it certainly didn't happen in the first quarter.

Book-to-bill was [one] again. That's probably, like, nine out of 11 of the last quarters. We're busy. We're moving in a positive direction. We're gaining more confidence as a company as we continue to operate in these really choppy times. Our customers make decisions as slow as they ever have, and we react as quick as we can, and we perform for them.

With that, I'd like you to switch to page 11 and 12. I'll talk a little bit about what we're doing with guidance and what we see right now sitting here today.

Well, the reality is, we're not changing anything sitting here today. We're going to keep it at $2.05 to $2.35 a share. We still expect revenues around $6.5 billion. And the reality is not much changed since the outlook that we gave you in February. Construction volume and clarity on the fall turnaround season remains the biggest uncertainties out there today. It's not that we're negative on them, but we don't have complete clarity, and that's not unusual over the past four years. We do see a slowly improving market. I like to call it a market of reluctance momentum.

I'd like to focus the discussion on how you get to the better part of the range, the top end of the range. And like I said in February, it's execution coupled with opportunity. You need to have both.

I said there were four items that would take us there, and let me give you an update on them. The first one is commercial site base gets on tracks and contributes, and I said in February we expect this to happen. I think our Q1 performance validates that some of it is happening. A lot of people will ask me in the question and answers, that must have been snow. Remember, it was still below-average snowfall season. We had a couple big storms. Clearly, it was better than the year before, but it's more broad-based than just snow. We had good execution, and we're starting to really gain traction. And the cost reductions that we've done over the past 18 months are really starting to pay dividends for us.

Construction continues its excellent track record. And let's be clear, right, we have to find the right opportunities and match them with great execution. We've taken long cycle projects and have turned them into short cycle projects. We will execute.

We still do not have complete visibility on the level of demand we'd like for the year. That's not unusual. We're well positioned, especially in the industrial markets, on several opportunities. We're off to a more traditional start in the business. And as the year progresses, we'll see increased visibility, obviously. We feel good about how we can execute and make returns in our construction business.

We said the refinery market needed to be strong all year. Well, clearly, we had a great first quarter in the refinery business. As I pointed out to my colleagues, others are saying, well, maybe it wasn't as good as spring turnaround season. Well, other people were saying last year was strong, and we were saying it wasn't as strong. A lot of it has to do with customer mix and your ability to respond to them. We were in the right place this year to make that happen. The overall market continues to be very good. We expect that to continue for the year. We will firm that up as the summer goes on, and it could be as strong, but again, you really have no complete visibility on what you'll do until you actually get in there and start doing it.

Another one, we said about sequester not hurting us too bad, and it's really coming in two areas. You heard me talk about how it's affected backlog. You know, to be honest with you, I have no clue how this thing will play out long-term. I do know that it's probably, at a minimum, going to cost us $0.03 to $0.05 of headwind.

We knew that when we gave guidance. It's led to less optimal decision making, I think what concerns us more than anything. We can deal with uncertainty. We can deal with reduced levels of demand. We can't deal with less optimal decision-making, and that's part of what happened to us in the mechanical segment in the first quarter. We need people to make decisions so we understand where we're doing, and I guess we don't have the confidence that people will make those decisions in a timely manner for us.

Now, as you go to a longer-term view of building the business through acquisition, we've tended to be pretty good at this over a long period of time. We believe that there will be some opportunities to expand our business here over the next 12 to 18 months. We've talked in the past to where we like it.

We will always invest in our traditional mechanical and electrical construction businesses. We still have places we'd like to fill out our mechanical services footprint, and we still, in a consolidated government market, would like to build capabilities in some areas. We know how to win the work. There's some areas we'd like to round out our capabilities. And we really do like the industrial business. We've made a real focus there over the past five years, and looks like we made the right call as we continue to perform in that market.

We think all those will have opportunities over the next 12 to 18 months, and we'll make sure we allocate capital to the best opportunities as they become available. We don't control the bidding. There will be other bidders on some of these properties, and others there won't be, but we don't know that sitting here today. But, we do know that we will be competitive when we can be, and we'll make deals that make sense for us, like we always have.

So, in summary, we're off to a good start for the year. We've performed about where we expected, consistent with where we expected, a little better than we expected, probably consistent with where you expected. We still have three quarters in front of us. I (inaudible) we'll be back to update you at the end of the second quarter.

So, thank you, and I look forward to taking your questions. Lee, open the line to questions.

(Operator Instructions.) Alex Rygiel with FBR.

Morning, Alex.

Hey, Tony, how are you? Sorry about that. Couple quick questions. First, as it relates to capital allocation, which it seems like you ended on, I notice that you haven't bought back too many shares in the last six to nine months. Where is the Company's position on the buyback program?

We have very limited windows that you can buy back, or we control a decision and we do the 10-B-5-1s. We have a $100 million authorization. It's there for a reason. And I think we will continue to be active.

And then, in the US mechanical business, there were some completion delays. Is there any way you could either quantify that negative impact in the quarter, or somehow address the potential negative drag it could have in future quarters?

Well, I'll start at the high level. I mean, we think we obviously reflected what future quarters would be in this quarter, because we have to do that in our accounting to get things right for the quarter. That being said, the quantification of it, we were not going to get specific. We didn't perform where we could have in mechanical as a result of it, and really no close-offs. At the highest level, what we're concerned about on those type of jobs right now is less what we control and more what others control, and it's really the pace and timing of completion.

And if you refer back to my earlier comments on how decision makers are, especially in the federal government area, are making decisions right now, it's hard to have a partner on the other side that you can get clarity from.

Mark?

Yes. And Alex, the only thing I would add is obviously, if we wanted to share that information, we would have disclosed the actual amount in the Q. We know -- you know from our history we try not to isolate every contract movement, because otherwise we'd use every tree for paper that's in the country.

But nonetheless, 2.1% from a margin contribution perspective for the mechanical segment is exceedingly low. We typically would expect to see something around 3, or slightly north in 3, this time of year. So, if you want to imply that that's the drag, I would say that's probably a good place to start. We like to think that we've captured everything, but it's a fluid process. But, from an order of magnitude perspective, I would be surprised if you'd see anything as dramatic in future quarters this year unless something drastic changes from the client side.

And it would be client-driven.

That's helpful. And one last question. Obviously there's some seasonality in your business these days, and every single year as we come out of this recession, it's probably going to look a little bit different. Can you sort of help us to better understand sort of 1Q into 2Q? The refinery business is big in 1Q. It softens in 2Q. The weather has an impact. USM is helpful sometimes in 1Q but maybe not so in 2Q. So, can you sort of talk about that seasonality trend that you are anticipating and how the month of April sort of looked as it relates to that?

If you look at it, you captured it pretty well there. I mean, the refinery business is not as strong in 2Q as it was in 1Q. We should start seeing, if the weather gets a little better here, our mechanical service could come up. USM, somewhere between second and third quarter's its weakest quarter depending on what startups look like on the landscaping side and how much leverage work people have to do to get their operations presentable to their customers. So, I mean, typically, [you go] facilities, Q1, if refining's going well and mechanical services gets off to a decent start, and we get just a little bit of help from the weather, Q1's one of the stronger quarters.

That being said, we had very strong back half of the year last year starting in Q3. We tend to look at these things -- as you know, we're not quarterly-driven. It's hard to do our business that way. And in construction, typically, in a typical year it starts a little slow and builds momentum through the year. A lot of that has to do with customer budget cycles. so, that's not so much the large projects that will do that. That's the typical $2 million to $10 million project that will do that, because, as much as we don't think it is, it is tied to our customer's budgeting process. and the large projects are what will cause margin ups and downs in any given quarter.

Mark?

Yes, I agree with what Tony said. I think, when you look at the facilities service business, clearly Q1 and Q4, as Tony indicated from the industrial side, tends to be strong. Our focus tends to, on the commercial site base side, tends to focus more outside as we go into quarter two and quarter three. And you clearly saw that last year, that there was some seasonal weakness certainly in quarter two. Quarter three, because of some timing on the industrial side, kind of masked the seasonality somewhat there because we had some work that shifted from quarter one to quarter three in that space.

And somebody said, our construction operation's clearly in 2012 and 2011 got off to very strong starts at the beginning of the year. You've been around long enough, Alex, to remember the more dramatic seasonality our business had. Clearly, the portfolio of companies was much different back then but, nonetheless, the construction business is the construction business. So, we're anticipating that you're going to see improved results from both those two segments as we move through the year.

And in the UK, we're obviously trying to manage that situation to the best that we can. But, as we try to reposition their focus, we're hopeful that it's going to be a more consistent contributor throughout the 12 months of the year.

And really, if you look back, Alex, over the past 12 months in our services business, I think you start to get an idea of maybe what it's capable of. We're not all the way there yet. We're starting to get an idea of what it's capable of.

Sure, very helpful. Thank you.

John Rogers with D.A. Davidson.

Hi, good morning.

Morning, John.

Just a couple of follow-ups on Alex's questions. In terms of the restructuring charges that you had in the quarter, Mark, you referred to -- do you think you have it all now?

No. I think Tony indicated that you're going to continue to see restructuring activity over the next three to four quarters. We're doing it over phases, and obviously the accounting rules are the rules. So, we can't recognize the cost until certain actions happen, and not all actions have been affected at this point.

But, can you give us a sense? I mean, is it dramatically different than what we saw in this most recent quarter?

No. I think the activity that you saw in the quarter just ended is going to be pretty consistent what you're going to see. You might have a quarter or two that we could be slightly higher, and then the subsequent quarter will be slightly lower. So, I would say a realistic number per quarter is around that $1.2 million to $1.8 million or $2 million per quarter.

Okay. and that's included in your guidance.

That's correct.

Yes.

Okay. And then, in terms of the -- especially on the construction work that you're now bidding on, have you seen a change in margins there, or is it -- I mean, because, Tony, you're talking about margins, looking at them over multiple quarters, but they have come down over the last certainly number of quarters, and I'm just trying to get an understanding of how much is project issues versus pricing in the market.

Yes. You know, not a whole lot is really project issues, John. We can isolate those to really a handful. And it's really no more than typical, and it is a handful. I mean, what you're seeing, right, versus where we were in '9 and '10 and the first part of '11, we were finishing work that was taken when times were better. And they were large projects and we finished them, and we did very well on them.

What you're seeing now is we grind it out over the last year and a half, two years. The margins are coming down a little bit, but the volume's coming up a little bit. So, I think that if we could operate our construction business at the levels we did last year and what we plan on this year in the kind of markets we've been dealing with, with a little bit of volume growth, we're pretty happy.

You mean happy in terms of holding margins, or--?

--Holding margins. And I don't see this as a market. Again, I'm taking a 12-month rolling average, right? I'm not talking about first quarter margins. Clearly, I don't want to make 2% in mechanical. I'll take 6% in electrical tomorrow morning, right? But, if you look back over 12 -- four or five quarters, you could hold them there. If you get a little bit of growth on top of it, you'd be in a pretty good place. And then, as the market gets busier and you absorb labor, the margins will go up, you'll be in an even better place.

But, you know, we haven't had a lot of growth in non-res construction now for four years. We've had pockets of it. I mean, the Gulf Coast is busy. Parts of the country are busy. It got busy up in New York area with Sandy. I'm not sure -- there's still fairly high trade unemployment in New York. It's still -- we're executing very well in a tough market.

Okay. And you seemed to imply, Tony, that you'd be more open to acquisitions or looking at them. Can you talk a little -- are they available out there?

Well, I think part of it is understanding assets we like. We watch assets over a long period of time, John. Some of them are things we've looked at now over eight or 10 years. We know who bought them the first time. They may be getting towards the end of their ownership period, and maybe that'll happen in the next 12 to 18 months and are things that we like. They're in the industrial space. They're in the mechanical services space, and there's a couple construction businesses that we'd like to own.

And so, we know the people. They know we're here. I don't think all of them will be just a negotiated deal between EMCOR and them, and some of them will go through a process, and some of them won't. And we've always been open to acquisitions. I've always had the idea deals happen when they happen. But, we never force acquisitions, either, because that doesn't end up in a productive play.

Okay. But, are there -- I mean, I guess there's still -- sounds like there's plenty opportunities out there.

Yes. There'll be plenty of opportunities if you take a couple-year view of it.

Okay. And just last housekeeping item, the little acquisition that you had in January, did that add any revenue, or -- I mean, is that revenue growth all organic?

No, it's all organic. That acquisition actually closed on January 1 of last year, so it was in for the full quarter of '12, and obviously full quarter of '13, first full quarter of '13.

Okay, perfect. Thank you very much.

You're welcome.

Adam Thalhimer with BB&T Capital Markets.

Hi, good morning, guys?

How are you?

Great. Tony, you said that Q1 results were a little bit better than you were expecting, in line with the Street. Where was the upside versus your expectations?

Well, I mean, we hadn't performed in our site-based business to the places that we -- and the mechanical service business in the first quarter for two years. And so, that they could come in and do as well as they expected, better than we expected, was a good place to be.

And industrial, we did expect to be good. We expected that, and it was just a little bit better than that. And you know what? Hats off to the industrial guys. They also did it with a great safety record through the period. And that really is a competitive advantage, and we'll knock on wood, because we know every day that has to be earned.

Clearly, on the electrical construction, that's probably okay to a little stronger, and mechanical, for all the reasons we've talked about, didn't do what we expected in the quarter. We run a mix of businesses. We've always hoped to get them all firing on the same cylinders, on all cylinders, and one of these quarters, that's going to happen.

Okay. And then, the transportation market seems to be improving a little bit here, not just for you but for others. It seems like there's some big projects moving forward in spite of sequestration. Is that--?

--Yes, I think you're accurate with that, yes.

And that can continue, or do you think sequestration--?

--Well, I think that's going to continue, because some of them are -- they have to be done. We're not playing in high-speed rail between Las Vegas and Southern California or stuff like that. Maybe we'll build a station somewhere. For stuff we're doing, or likely to do, are infrastructure plays that should lead to productivity and have long-long-term views of it.

So, I don't think -- sequestration may slow it down a little bit, but it's not going to change the shape of the project. Where sequestration hurts, and whether it be transportation or whether it be on a DOE site, or whether it be in a DOD base, or whether it be in a NASA facility, where it hurts is I need to build this next building. I need to put this new water treatment facility. I need to upgrade the one I have. I need to change the substations up to bring them out of 1968 technology. I need to do those things, and I've had a plan to do that over a number of years. And where sequestration hurts is they say, "Well, that $5 million, that $10 million, that $15 million project, we're not going to do this year. We're going to put that off to next year."

So, what they're really doing is compounding the problem that they're going to have, because now they're probably putting maintenance risk (inaudible). So, where I really see sequestration hitting is the maintenance capital. I don't see it on these long lead capital projects as much.

Got it. And then, is there anything that would give the decision-makers more clarity, I don't know, if they pass a budget, or--?

--Nothing I'm going to comment on on this call. That ship's sailed.

Just looking at your slide 10, the backlog, the institutional is such a bigger piece than it was back in '6, '7 and '8. But, is some of that businesses that you've purchased? Is it a--?

--Yes. Yes. I mean, you go to the purchase of [Bonston], you go to some of the contracts we won on the government side, that's what really drove that, a little bit of the acquisition of [Pepper], that's what drove that.

Okay. and then, finally, hoping maybe you could just comment on non-res construction broadly, US backlog up almost 3%. Seems like other people--.

--I think we're probably moving a little better than the market right now, based on some other people I've heard in this first quarter. But, the market's slow, and it's still a big market, but let's -- especially the commercial part, or the buildings part of non-res should be 20% or 30% bigger than it is right now.

Got it. Okay, thanks, guys.

Thank you.

Rich Wesolowski with Sidoti.

Morning, Rich.

Good morning, how are you?

Good.

Is all the seasonal strength in [Omstead's] turnaround business fall into the March quarter, or is there a slug in June, as well?

It's hard to tell right now because it was so good in the first part, but we continue to be reacting to our customers. You don't know because, at this part of the year, they can turn it off at the [filled] side whenever they need to. So, it'd be too quick to say because there was some things that came into the business last year that we didn't expect. And there's some other things that didn't happen in the first quarter. Would rather let it happen than tell you about it.

Okay. So, do you view 1Q facilities margin as an exceptionally strong seasonal result, or rather as something that can be even approached later in 2013?

Well, the way I look at it is I look backwards 12 months, and I take a trailing 12 month number and I say how are we doing against getting to the 5%? And we are closing on it very closely now. We're within 10 to 30 bps, depending on how you look at it. And after this -- after June, we'll be even closer, probably, and then we can say, okay, where do we go from there, because now -- we've now clocked a trailing 12 months really through a whole cycle of seasons that we do at or near 5%. And for us to get over that on a sustained basis, it means the industrial business is doing really well, and it means we're improving faster than we expected in the site-based side. And it means we've -- have exceptional performance in the project side of our mechanical services business. Those three things happened. In 2008, we printed at a 6.7. All three of those things happened, or two of those three things happened in a big way in 2008 when we made that happen. And government doesn't hurt us. Government's been our steadiest performer. We can't do worse than we're thinking right now in government to make that happen. And look, our guys have done a great job with productivity in the face of really tough customer sentiment.

Okay. And last one, I recognize that March is a seasonally low period for your cash flow, but your outflow in this March quarter was surprising. I'm wondering if you call out anything there, if you did in the prepared remarks, then I had missed it.

Yes. Now, Rich, specifically with the very strong revenue growth in facilities, partly driven by industrial, just the nature of that business is that you're always billing in arrears. And you're obviously -- you're paying your labor and your subcontractors real-time. So, that's a big part -- that is a big part of it. So, if you look at their performance quarter-over-quarter, there was a significant improvement in quarter one '13. So, that's really the additional use of cash between the two periods.

Great. Thanks a lot. Best of luck with the rest of the year.

Thank you.

Thank you.

Saagar Parikh with Keybanc Capital.

Morning, Saagar.

Good morning, Tony, team. First off, congrats on the solid improvement in EFS.

Thank you.

A lot of the questions have been answered, but one I wanted to touch on was I know Adam asked about the transportation's backlog. Could you go a little bit into what you guys do for -- in that transportation end market?

Sure. I mean, we do the same thing in that end market that we do in other places. We just do it either on transportation facilities or on roadways. So, we cover the waterfront, literally, with (inaudible) work. We'll do tunnel work on the electrical side and the mechanical side, whether it be tunnel ventilation, whether it be electrical, the lighting and the signaling on roadways, in ports.

We'll do airports. We do the full mechanical and electrical infrastructure. We will do -- if they're relighting a bridge, we will do the bridge relighting. We've done that work. We'll do on a -- people remember the T-Rex out in Denver. We did not only the lighting on the roadway, I-25 there, we also did the light rail infrastructure. We'll do also that work design/build on a team, some of the bigger work. We'll be -- join the team, and we'll be part of the design-build team. We'll do a design-assist, and we'll do it fixed price. And some of it ends up time and material also, a small portion of it.

And so, have you guys seen a positive bump up just because of the [turbulence] from MAP-21? (Inaudible) is going to be leading the more larger projects, larger bridges, maybe tunnels, light rail, high-speed rail, that kind of stuff?

Yes, it might. I mean, we think that helps a little bit. For us, it's just getting -- picking the right team to be on for the projects that are coming out. We're not as wired in as other people are to what's happening with the highway bills and everything, because in the end, for some of the -- especially on the electrical side, for some of the capability we have, there's not a whole lot of people that do what we do successfully on these large projects.

And you have to have a lot of wherewithal to do it, right? You have to be able to fund it. You have to be able to bond it. And you have to be able to mobilize the manpower. And, look, these outside guys, the transportation guys, when they're doing the outside work, they're different than the people that do the inside work. And you have to have tentacles into that market, into those union holes, to get the right labor and the right supervision to make that happen.

Okay, great. And then, last question related to your government related business, or government -- tied to government clients, what percentage of maybe 2012 or trailing 12-month revenue would you say is related to public spending, federal spending?

Somewhere between 15% and 18%.

All right, great. Thank you, and congrats on a solid quarter.

Nick Coppola with Thompson Research.

Hey, good morning.

Morning.

So, apart from the seasonal spring turnaround, it sounds like site based was a big delta relative to your expectations in facilities. What were the key drivers to that? Why did site based do as well as it did?

You could say that it really was very good execution from our leadership team, and in spite of a really tough year last year. They did the things they needed to do to position the business to start performing better.

They did a lot of productivity measures, a lot of tough cost takeout. They reinvigorated customer relationships so that customers have faith in us again to give us the [pull-through] work and the leverage work. They knew that we needed to satisfy the customers we had today, drive our retention up before we could go out and find new customers, and they did that. And they really worked hard on getting beyond the transition issues and getting BEOX and USM to work together.

And getting beyond the transition issues, you remember, in the first part of last year, we were starting up too many contracts. And we started them up, and we made them happen, and we're benefiting from that today.

Okay, that's helpful. And then, a second question, if you think about the rest of '13 and going forward, I mean, apart from guidance, just -- if you think about which end markets and geographies you're kind of most bullish on, where do you think work's going to be coming available, going forward?

We think we've built a pretty great industrial offering, and we'd like to add to that. We've been doing it organically. It's not always a popular thing to invest in a downturn, but we're certainly seeing the fruits of the real smart guys we have across the industrial space, from food processing to refining, that made the investments we needed to make maybe when times weren't as good because they could see that, hey, that wasn't going to be forever.

So, if you take it on the food processing side, we have -- we kept the right engineers and added to it. We built more prefabrication capability. And as a result of that, we were able to do work like we did last year for that great company, Chobani Yogurt. And had we been short-sighted in the downturn, we wouldn't have been able to do that.

On the industrial side in the refining space, we added to our shop productivity with some welding machines, some drilling machines, so that we could turn around the customer's work faster with better labor productivity. And then, we also added a washstand, which de-bottlenecks one of the critical things when you're taking the heat exchangers out, and a lot of people have to stand and wait on the customers. Our guys designed some trucks and other things to allow us to get it back to our washstand down on the port that looks like really a state-of-the-art facility, and we did that in the downturn. We planned it, and we launched it right before things got a little better.

So industrial we're bullish on. I think commercial, we're bullish on because we've always been good at commercial. And we did nothing to atrophy that muscle. We just need to exercise it a little bit right now so that we can get better leverage out of our commercial assets on the ground in places like New York, Boston, Southern California, Chicago, big cities where we have great capability to really turn a building fast for commercial customers.

And look, I happen to believe that -- we talk about transportation. I think that'll start to get pretty good again. And I happen to believe that healthcare, once all the dust settles here, it's probably more of a '14 and -- late '14 and beyond issue. There's no way that hospitals can make money with some of the facilities they have. They're antiquated.

And that's really -- if you look at this Affordable Care Act, they're the people that have to perform for the thing to make happen, and some of them, they can't make happen with the facilities they have.

And you compare that to the new facilities we built. I'd invite you to go see the difference between the two, and you'll wonder why they -- how they cannot invest in new facilities to make it more productive.

So, that's how I see it. I mean, we'll probably keep our institutional presence where it's been. I don't think it's going to subtract a lot. And we have people that are very adept at navigating difficult customer decision-making in that sector.

Okay. Well, yes, that makes a lot of sense. That's very helpful. Thank you.

Noelle Dilts with Stifel.

Morning, Noelle.

Hey. Good morning, how are you?

Terrific.

Good. Again, most of the questions have been asked at this point, but I was wondering if you could comment on the non-res market, if you could talk about, geographically within the U.S., if you're seeing any regions that are relatively stronger than average?

Again, we're going to go to the commercial part of non-res because we talked a lot about industrial. I think New York has a chance here to get strong. I think it's better than it was, obviously, two years ago. We're talking about they have Hudson yards going on. They have recouped from Sandy. You have people moving to different spaces. You have data center and data infrastructure requirements. I think New York could get strong.

Of course, we have great assets on the ground, and EMCOR has terrific operators in that market. I think as you go D.C., a lot of people think it will get weaker. I think some of this dislocation with government will create opportunity on the private side.

As you go down into Texas, I think Houston will continue to be strong. I love doing business in Texas, and they're some of the best people to work with.

You get out to California. We do well because of the energy conservation work. We do well because some of the big infrastructure work that happens out there and some of the tech work. And so, California for us, just because of our presence there, will be okay.

Chicago will be fits and starts, depends on where you're lined up and what jobs you're getting. I don't see just heady growth there. And the sort of Ohio, Pennsylvania region will be okay.

Okay, and then I think I could guess some of them, but how about markets that are pretty dead and looking like they'll remain so?

Well, we're not much in Detroit anymore. And we're not real bullish on some of the mid-Midwest parts of the country. And I don't think anybody's going to be spending a lot of money in Connecticut, New Hampshire, Vermont and New York outside of New York City.

Okay.

And for us, Atlantic commercially will be okay even if it gets strong. We just don't have a huge present there on the electrical side or mechanical. We do okay, but we're more of the midsize project replacement market there.

Are you starting to see any sort of activity in Vegas?

Look, it's trying to show signs of life. I saw the same article you probably did in the LA Times. If it comes, we're ready to go. We got a couple folks that are chomping at the bit to get going again, and they're really good at what they do.

Okay. And then, one last question on the mechanical projects write-down. I think you alluded to the potential that you might be able to recover some of those costs. Could you just comment on that a little bit further?

Mark?

I mean, clearly, we're going to try to recover the incremental cost, but at this point we just -- we're not far enough along to really speak to it. So, if something happens, you'll hear here.

All right. Thanks a lot.

You're welcome.

Alex Rygiel with FBR.

Morning again, Alex.

Good morning. Tony, just to follow up, given your experience at United Technologies, not sure if you saw some of their comments with regards to sort of their order flow for commercial HVAC and fire systems. Do you have any thoughts or comments on that as it relates to your business over the next couple of quarters?

Maybe you could refresh to me what they said, Alex, and then I can tie it together.

Yes, it looks their order flow was somewhat soft, and so double-digit declines in North America in the commercial HVAC side and high single-digit decline on the fire system side. Obviously, your business is a little bit different, but I wasn't too sure if you could maybe connect the dots for us.

I mean, we're different, first of all. When you're in the business they're in, it could be because a lot of it gears towards sometimes weather or specific replacement. I think their fire and security issues are very different from what the HVAC would be.

On the HVAC, I think it's just -- it could be just a blip here in the season. And it also could be they're losing share. We certainly don't see a market that's down those kind of order rates here in the first quarter.

That's very helpful. Thank you.

Thank you all very much. With that, Lee, I think we'll turn it off. And I hope everybody has a very good second quarter and a safe second quarter. Thank you for your interest in EMCOR.

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