EMCOR Group Inc (EME) 2014 Q1 法說會逐字稿

Good morning. My name is Kristen and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group first-quarter 2014 earnings conference call. (Operator Instructions). Mr. Nathan Elwell, you may begin your conference.

Thank you, Kristen, and good morning, everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the Company's 2014 first-quarter results, which were reported this morning.

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

Thank you, Nathan, and good morning, everyone. Welcome to EMCOR Group's earnings conference call for the first quarter of 2014. I can't believe it that we are already this far into the year.

For those of you who are accessing the call via the Internet and our website, welcome, and we hope you have arrived at the beginning of our slide presentation that will accompany our remarks today. Please advance to slide 2. That 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, Marketing and Communications; and our Executive Vice President and General Counsel, Sheldon Cammaker.

For call participants not accessing the conference call via the Internet, this presentation, including its slides, will be archived in the investor relations section of our website under presentations. You can find it at EMCORGroup.com.

Before we begin, I want to remind you that this discussion may contain certain forward-looking statements. Any such statements are based upon information available to EMCOR management'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 changes of economic conditions, changes in the political environment, changes in the specific market 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 2013 Form 10-K and in other reports filed from time to time with the Securities and Exchange Commission.

With that out of the way, please let me turn the call over to Tony. Tony?

Thanks, Kevin. Good morning. To start, you should be on pages 3 through 5, and that's what I'm going to cover in these upfront comments.

We're off to a good start here at EMCOR in the first quarter and we are really fighting through the continued effects of sequestration, weather disruptions for parts of our business, and the nonresidential market in general, whose recovery is still looking for sustained momentum. However, a long time ago here at EMCOR, we decided to focus on what we control and that we could and would perform in this environment.

I'm going to be speaking to pro forma numbers today to account for the effects of the closure of UK construction business, which is nearing completion.

If you look at domestic backlog, it's up from last year's comparable period and year-end 2013. UK backlog is down, as expected, as we near the completion of our exit for the UK construction market.

We earned $0.64 a diluted share here in Q1 versus the comparable number of $0.50 per share in the same period last year. RepconStrickland contributed $0.07 of the $0.64 per share. This is our best Q1 on record in earnings per share.

Our operating margins were 4.5% on a pro forma basis. We are pleased with this start and believe the operating margins show good operating discipline and performance. It is our second best Q1 with respect to operating margin and provides a good foundation as we navigate a choppy and uncertain 2014. That just feels like something you say every year now, since 2009.

The revenue was almost $1.6 billion. We were down 5.6 organically, which really wasn't a big shock to us. It was mostly for expected reasons and one unexpected reason, which was the weather and I will talk about how that offset.

The expected reasons include the continued wind-down of the UK construction business; the completion and near completion of the two problem jobs in our mechanical segment; and the organic decline in our industrial segment, which is the result of exceptional shop performance in Q1 2013, which was not replicated this year. However, we had pretty good performance and we have good backlog that should manifest itself through customer deliveries as the year progresses.

And we had the continued effects of the portfolio reshaping our site-based business that we have discussed over the past 15 months. You think all that stuff works its way out; we should be done talking about that this year in the third quarter.

Weather was a net positive for us on the operating income line, and if you looked at the revenue line, we lost revenue in our construction business, gained revenue in our building services business. They likely offset, and the net impact was we gained on the operating income line because the building services work was a little more profitable.

Some highlights by segment, mechanical and electrical both had good starts to the year with good year-over-year operating margin improvement. We expected to see this improvement in mechanical as we are finished with one of our two problem jobs last year and are nearing completion on the Department of Energy job that we have so thoroughly discussed. Electrical management in our construction team continues to -- its record of strong performance in a very tough market.

With Q1 performance at 5% on a combined basis, we like the start. However, we always caution investors that you really shouldn't look at this business on a quarter-by-quarter basis for operating margin, but look back and see what the trend is, and I think you'll see the trend is good, solid, long-term performance.

We did fight weather in this segment as we had some days where we could not report to the job site, and that work affected revenue, although we expect to catch most of that up as the year goes on.

Building services had a 4.5% operating margin, which is a record Q1 performance for overall operating income and is very strong performance overall.

Look, let's be clear. The weather helped us, and it should have, in our site-based business. We help customers with their snow removal, which is a very complex task when you are managing that over thousands of sites. We also entered the year with more sites this year, which means we sold better, and we've sold over a broader geography. However, you have to execute, and we did in a very demanding winter, and we have happy customers and we would be very happy if that weather pattern replicated itself again in the latter part of this year.

Again, it's a story of more than just advantageous weather. It also has good execution. But the story in building services go beyond site based and snow. We had improved margins in both our mechanical services and government service business, also. This continues a three-quarter trend for the segment of improved operating margin performance when compared to the year-ago period.

Industrial services was at 10.1% operating margins, which was good performance, but we know we could do better if we just saw a little better mix of demand, and we need just a little bit more volume, and we can see those operating margins go up.

We knew we were entering a period a very difficult compares in the third quarter of last year and we talked about that. Q3 2012 through Q1 2013 in our legacy Ohmstede business was exceptional. It was exceptional because we were able to deliver for customers under the most demanding circumstances when they really needed us.

We're pretty sure that we will have the opportunity to replicate that again, and that's how our business is designed, but can we really respond to those customers? And when it happens, we will be there to respond. But underlying that, we have a good, solid business.

If you look at Q1, we performed well. Our shop volume was a little less this quarter, but it was still okay, just not as strong as last year. Repcon is contributing, like I said at about $0.07 per share, and the integration is on track. We see this market as very strong and we remain prone, though, to surges in demand and last-minute customer decision making, which sometimes can change the scope of what we were going to do.

In the UK, our construction closure is about 95% complete now and we expect to be complete in sometime in Q3 2014, and it has been a well executed program and really is the right thing for us for the long term. Pro forma operating margins on the go-forward UK were in excess of 3.5% this quarter.

Our balance sheet remains liquid and strong, and we had much improved cash flow performance this year, using only $24 million in cash this year versus $95 million last year. And with that, I will turn it over to Mark.

Thank you, Tony, and good morning to everyone participating this morning. For those accessing this presentation via the webcast, we are now on slide 6. And as Tony indicated, I will begin with a detailed discussion of our first-quarter 2014 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 and Exchange Commission earlier this morning.

Consolidated revenues of $1.6 billion in the quarter are up 2% from 2013. Revenues attributable to businesses acquired of $119 million positively impacted our US industrial services and US mechanical construction services segments during the first quarter. Excluding the impact of businesses acquired, first-quarter revenues declined organically $88 million, or 5.6%.

Domestic electrical construction revenues of $308.1 million were slightly increased from Quarter 1 2013. Domestic mechanical construction revenues decreased approximately $28 million, or 5.2%, from last year's quarter as a result of a decline in manufacturing and institutional construction projects, some of which were attributable to the planned reduction in scope of activities within a subsidiary that reported significant project losses in 2013 in the southeastern United States.

US building services revenues of $448.1 million decreased $7.1 million quarter over quarter, due to the lower levels of project activity at certain of our mobile mechanical services and energy services operations, these volume reductions, and the revenue gains within our commercial site-based services division attributable to increased snow removal activities.

US industrial services revenues increased 59.5% to $232 million during our first quarter, which is attributable to the addition of RepconStrickland, which added $110.5 million to revenues. Excluding this incremental revenue, the organic decrease was approximately 16.6% due to 2013's first quarter benefiting from more shop repair activity as a byproduct of last year's complement of turnaround activities.

With regard to EMCOR UK, as Tony mentioned, we continue to advance toward completion of our withdrawal from engineering and construction activities, and consistent with the last 12 months, UK quarterly revenues continued to decline significantly, with this quarter's reduction representing 17.5%. We believe we are still on track with this initiative and are targeting a third-quarter completion.

Please turn to slide 7. Selling, general, and administrative expenses of $144.9 million represent 9.1% of revenues and reflect an increase of $6.4 million from Quarter 1 2013. The quarter just ended is inclusive of $11.7 million of incremental SG&A, including intangible asset amortization expense from those acquisitions completed during 2013.

Therefore, on an organic basis, selling, general, and administrative expenses declined $5.3 million quarter over quarter. As a percentage of revenues, SG&A in our first quarter is 9.1%. Excluding the impact of acquisitions, our SG&A as a percentage of revenues would be 9% or 20 basis points higher than Quarter 1 2013.

Operating income of $69.4 million represents 4.3% of revenues and favorably compares to $51.3 million of operating income and 3.3% of revenues in 2013's first quarter. All reportable segments generated increases in operating income quarter over quarter and, other than US industrial services, are also reporting higher operating margins. Total and tangible asset amortization for the quarter is $9.5 million, which is greater than Quarter 1 2013 by $3.2 million.

Our US electrical construction services segment operating income increased $2.7 million, or 14.3%, over Quarter 1 2013, with an operating margin of 7%, or 80 basis points, greater than last year's 6.2% operating margin. This increase in absolute dollars and the margin percentage is due to gross profit and gross margin improvements within our current portfolio of projects.

2014's first-quarter US mechanical construction services segment operating margin of 3.7% represents an $8 million increase from last year's quarter. This represents a 71.5% improvement year over year. 2013's first quarter was negatively impacted by an $8.2 million project loss located in the southeastern United States, which Tony touched on just a few moments ago.

Our total US construction business is reporting a 5% operating margin for the quarter just ended, as compared to 3.5% in 2013's first quarter. Operating income for US building services increased $7.4 million, or 57.6%, over 2013's first quarter, with a quarterly operating margin of 4.5%. All divisions within this reportable segment generated higher operating income in margin quarter over quarter, with commercial site-based services and mechanical services contributing the largest increases.

Our industrial services segment is reporting a $0.6 million increase to operating income with a 550 basis-point reduction in operating margin. The reduction in operating margin is due to lower volume of shop repair activity, as well as increased overhead levels due to the RSI acquisition. This aforementioned acquisition contributed $7.3 million of operating income during the first quarter, which equates to approximately $0.07 per diluted share.

EMCOR UK was profitable during the first quarter and had a slight improvement in operating margin year over year. Please note that the losses generated within the UK's engineering and construction division are included within this segment's disclosure. Our first quarter includes $900,000 of restructuring expenses, of which approximately $700,000 pertains to the UK strategic reshaping.

We are now on slide 8. As in the last couple quarters, this table lays out those items that are impacting our quarterly results which we believe should be excluded from EMCOR's reported operating income to provide clearer comparability. Each of these items have been addressed in today's earlier commentaries by both myself and Tony and for the sake of completeness are as follows.

Losses generated by EMCOR UK's engineering and construction operations within the first quarter of approximately $2.1 million and $3.9 million, respectively, and restructuring expenses of $685,000 and $1.3 million, respectively, pertaining to reductions in workforce as a result of our strategic change in the UK.

The effect of these -- of the aforementioned adjustments amounts to adjusted operating income of approximately $72.1 million, or 4.5% of revenues, for the quarter ended March 31, 2014, as compared to $56.5 million, or 3.7% of revenues, for the corresponding 2013 period.

Cash used in operations for the first quarter was $24.3 million. That's compared to $95.1 million of cash used during the first three months of 2013.

As during past first-quarter calls, I would like to remind everyone that from a cash flow perspective, our first quarter was historically our weakest, due to payment of prior-year incentive awards, as well as the seasonal increase in working capital utilization within both our US industrial and US building services segments. Additionally, as a reminder, 2013's first-quarter operating cash flow was negatively impacted by the deferral of certain fourth-quarter 2012 income tax payments until February 2013, due to Superstorm Sandy.

Please turn to slide 9. Additional key financial data on the slide not addressed during my highlight summary are as follows. Quarter 1 gross profit of $205.2 million represents 13.5% of revenues, which has improved from the comparable 2013 quarter by $24.1 million and 130 basis points of gross margin.

Total restructuring costs were $900,000, and as previously discussed, approximately $700,000 pertain to our United Kingdom operations.

Diluted earnings per common share is $0.61, as compared to $0.44 per diluted share for the quarters ended March 31, 2014, and 2013, respectively. And on an adjusted basis, reflecting the add-back of losses incurred within our UK construction and engineering operations and associated restructuring costs, diluted earnings per share would be $0.64 for the quarter, as compared to $0.50 per diluted share in 2013's first quarter.

The pro forma impact of our UK engineering and construction losses and associated restructuring expenses is approximately $2.5 million greater for 2013's first quarter as compared to the current quarter, and such detail is disclosed on slide 8.

We are now on slide 10. EMCOR's balance sheet remains sufficiently liquid, as represented by cash in excess of $400 million and modest leverage, as represented by our debt to capitalization ratio of 18.6%. Working capital levels have increased since December 31, due to a reduction in current liabilities as a result of reduced levels of Accounts Payable and accrued payroll and benefits.

Goodwill has reduced slightly during the quarter as a result of the disposition of a subsidiary within our building services segment. Identifiable intangible assets are unchanged between periods, other than amortization expense of $9.5 million in the quarter, and total debt is just under $350 million, with the majority of the reduction due to the mandatory quarterly repayment of approximately $4.4 million under our term loan.

We are happy with where our balance sheet is for this time of year and are well positioned to take advantage of all opportunities in front of us.

With my slides concluded, I would like to wish Tony a happy birthday before I return the presentation to him. Tony, happy birthday.

Thanks, Mark. Yes, it's a good day to be announcing, but thank God, right, we performed at the top.

Let's talk about backlog. Backlog is basically at $3.37 billion. It's virtually unchanged. And if you look at this over the last three quarters and you account for what we have done in the UK, what you see is a slight upward bias in our domestic construction backlog, a planned reduction in our building services backlog, and when you look underneath the building services backlog, you get -- our small projects backlog is coming back with a better mix.

You put that together with our construction backlog, which should be an idea of what's going on in non-res and the shape of it, and what you get a sense is private work is coming back a little stronger. Institutional has come down, and really that mix is good for margin long term, but we do need some of the public work because it helps with absorption, and look, some of the best work we have done at EMCOR has been public infrastructure work for our customers and also large campus-type work they did.

So that's a general shape of backlog. Industrial is up a little bit, and remember, as a segment, that's really our shop volume at Ohmstede. Again, oil and gas business is busy. We serve all the way from almost past upstream to downstream, and it works out pretty good.

As we stated in our year-end call, we like the trajectory of both the construction backlog of building services and industrial, and the UK is doing as planned.

If you go by sector, what you see is this continued trend of commercial up, and really underlying that is good margin mix. What's happening there is we moved out two very large contracts that were just marginally profitable for us, and one was actually a little bit of a loss and we got out of it very quickly as we realized the customer was not aligned to what they needed to do long term to reduce drill costs.

And the other one, it was just too difficult of relationship for us to make money on a sustained basis. And that's what we do at EMCOR. We love to serve our customers and serve them well. We bring a lot to bear. We also expect to be paid accordingly.

But underlying that commercial is really the project work coming back and a lot of singles and doubles in our site-based business that have decent underlying profitability and give us the opportunity for leverage or pullthrough work.

So backlog, right direction. No huge momentum, but good mix underlying it, at least positive momentum overall, and we continue to have a better portfolio reshaping going on in businesses that are longer term when we make a customer obligation.

Now we will get to the page that most people care about anyway. Sometimes I think we should just start with this and take questions. We go to page 13 and 14. We are going to bring the bottom end of the range up a little bit, from $2.40 to $2.45. The new range will be $2.45 to $2.70.

And what you see is we're gaining more confidence in the bottom end of the range, obviously, with this good start, but we also see that we hopefully can get the revenue back on track and get to $6.8 billion, because there really wasn't a lot that happened, other than the weather, on the negative side that shocked us in the first quarter. And if you look at -- I just talked about the backlog between small projects and US construction, that's a 5% or 6% increase, so that should portend future revenue growth, as long as the general economy stays on track.

I do have concern about the pace and timing of this nonresidential recovery, and it's really I've been concerned about that since 2009. It's grown in fits and starts and really can't sustain any momentum.

The other thing I would caution as you look at EMCOR as we get into this next quarter, we don't give quarterly guidance, but I would point out is Q2 tends to be a weaker quarter for both industrial and building services on an operating margin basis.

The question really is, how do you get to the top end of the range? And really, nothing has changed, other than we have a couple things under our belt. One of the things we said is we needed an average to better than average winter. Well, we had that. It was better than average, and we need a little bit of good momentum in the back half of the year on that. And some of that we will get with just seasonal contracts, so it's not just waiting for snow.

The second thing we've said is we needed a decent to strong spring and fall turnaround seasons. I would say we had a decent spring season. It wasn't exceptional, but it wasn't bad, either. We had some work get pushed out to fourth and first quarter, and so we will be happy in first quarter of next year with this start that we have it then.

We do expect a decent to strong fall turnaround season, and if our customers just execute what they currently have planned, we should have a pretty good season. But again, I am always cautious because there could be surges up, and [if we] can slow projections down, based on the general market. In some of it, they could be doing very well; they just want to keep the refinery running longer as they look at their fleet of refiners -- refining plants.

We need continued strong execution on our electrical, mechanical, and construction business, and if you really look at it, they've been really performing well in a very difficult period, and really we need to hold the improvements gained and continue the positive momentum in our building services' operating performance and margins.

And the other big things we need to do, and I talked about the UK construction closure, but at 95% complete, we think we are well on track there.

Overall, we like the start. We like where we are in the business. We continue to believe that we exercise very good bidding discipline across our business, and we are well positioned to execute for our customers across all those businesses.

And with that, we will take questions, Kristen. Kristen?

(Operator Instructions). John Rogers, D.A. Davidson.

Congratulations on the quarter. Couple of things, Tony, I understand your caution relative to the whole nonresidential cycle. What are you seeing out, I guess, in the field in terms of just bidding activity? Are there prospects or projects that are out there that could potentially be developed and are waiting, or is it just very, very quiet?

It's not quiet, John. It continues to get busier.

I will tell you decision making is as slow as it's been. It reminds me of my days in the Army sometimes. Our customers have a hurry up and wait mentality. They get us to do all kind of activity. We get ready to go, and then it's wait, and then once they say go, they want instant gratification.

And that's really across all the businesses. And I think that has to do with reticence to commit to capital until the last possible minute. So our prospects we are developing, what it has forced us to do is get a lot more disciplined on what we think is an investable prospect. And again, that's across our four big segments and in the UK.

And so, we spend a lot of time not only in services where you have to do prequalification well, we do a lot of time prequalifying on what we think is the right jobs for us to be committing our resources against in the construction business, especially on the larger jobs. We certainly don't want to be an estimating service.

Okay, and any comment -- the last [peak] cycle, we saw the hospitality markets, and you're positioned differently now, especially with some of the industrial work. What are you positioning yourself for over the next two, three years (multiple speakers)

We have been positioning ourselves for a broad general recovery. We think it's going to be led more by industrial and that's why we made the investments we made over the six or seven years.

But we can participate anywhere the demand comes from. My gut today tells me energy will be a big driver or the driver. I think commercial will be strong. I think there's a lot of indicators that office space needs a lot of rehab and some new stuff needs built, and I think that healthcare, if we ever get settling on this Obama Affordable Care Act, that people will get conviction to maybe spend again, because previous to some of the uncertainty, we know there's a lot of healthcare infrastructure that is not going to meet the demand of the increased number of people, but more importantly the technology they need to use.

And that hasn't changed, and you bring in things like HIPAA and other things, we have a lot of aged healthcare infrastructure that will be rehabilitated, but there's a lot of uncertainty there and we really have seen the opportunities there slow down.

John, the only thing I would add to Tony's commentary is that other than our exit from Canada and our reduction in services in the UK, we haven't lost any of those other capabilities. So if hospitality does recover at some point in time in the future, we will be able to participate as extensively as we did the last time around.

Got it. And Mark, it looks like, and based on the numbers you are giving us, you're going to, I assume, build quite a bit of cash this year. Any sense on priorities there? If the construction cycle starts up, does it take a lot of working capital for you now?

Currently, no, but the question is -- I think your question is when revenue does pop in those segments, they will consume working capital.

And clearly, I think when we have talked about priorities in the past with regards to capital allocation, organic revenue growth was always at the top of the list. So we're hopeful that we're going to -- the market is going to give us that opportunity.

But clearly, the first quarter of last year's cash flow performance was somewhat of an aberration on the down side, but having said that, if you look past the -- if you look at the past first quarters over the last several years, our performance in the first quarter of 2014 on a cash flow basis was much better than we have been. So, that bodes well for the remainder of the year.

And it does tend to pick up as you go -- normal seasonally as you go through the year?

Yes, absolutely.

Okay, okay, okay, I will get back in queue. Thank you.

Adam Thalhimer, BB&T Capital Markets.

Congrats on a good quarter and happy birthday. I wanted to start off with Repcon. You had a good Q1, obviously, with Repcon. What is your expectation now for a full-year accretion?

I think we have said this in different forms. We were back poring through our -- we expect $0.15 to $0.20 yet, maybe one could say we are being a little conservative and let's start there. We don't want to be explaining the other way.

I would say we had an okay to good first quarter at Repcon. We can certainly do better, and I think our team, the Repcon team and the EMCOR team that they are merged now, I think they would say the same thing. They have had some things move out. We lost some opportunities in one part of RepconStrickland that we probably could have won in hindsight. We thought we had a large turnaround ready to go and it didn't happen. And we probably could have reacted quicker to that.

So we're happy, but we are not satisfied is the way I would term how we perform at Repcon. The good news is the underlying original EMCOR Ohmstede business continues to be a good performer.

Okay, and then as we look to Q2 for the industrial business, I would think -- that's where most of the spring turnaround season gets captured, right? So should margins be up in Q2 (multiple speakers)

No, Adam, that's why I talk about that in my remarks. Q1 is the strongest. There could be some spillover into Q2 based on the year. This would probably be an average spillover year, and we do expect margins to come down in Q2 on an operating basis in industrial because of volume.

The only thing that would counteract that is if we had exceptional shipments from the shop side, which we expect normal shipments from the shop side in Q2.

Why is that, right? Because the guys who do that business every day, like a [team] (multiple speakers)

Well, I think (multiple speakers) a little bigger than (multiple speakers)

Their strong months are like April/May, right?

I don't know why that would be with them. Maybe what they do is at the end of a turnaround and they do all the inspection.

Our strongest months typically are February, March, maybe the first week of April, second week of April, and then it picks up again last week of September through the first week of December.

Now, you do have situations where the customer will put parts of the turnaround on in the second quarter or will start early or something happens that's not good, and we have to mobilize and good for that -- not good for them, but where we can help them make it less bad, which means good for our performance, but that will happen in the summer sometimes because of the heat.

Okay, and then just lastly, I wanted to ask about sequestration. Is the expectation still that it's kind of a neutral this year or has it slipped?

Yes, we think it's a neutral. We won a couple contracts that help us here in the first quarter. But we think for the year it's slightly up, slightly down, so let's call it neutral.

Great, thanks.

Alex Rygiel, FBR.

Tony, I know you didn't own RepconStrickland back in the first quarter of 2013, but just could you characterize how their performance was year over year if you had owned them in the first quarter of 2013?

Everybody did exceptional in the first quarter of 2013. I'd say they did pretty good this year. They might have done great last year. And they can do great again.

So, we knew that, and if we would have not had one of the larger turnarounds pushed out, we would be saying we did great this year, too.

Okay. And backlog has been flattish for a little while now, although in the US it has been improving slightly. Can you comment on competition? Are you seeing any easing of competition out there, and can we start to hope that maybe the pricing dynamic or margin in backlog is starting to show some positive trends as well?

The positive I take, Alex, when you strip away those couple jobs that we had last year, is in construction where that is most relevant, we have been managing to navigate this intense competitive environment with pretty good operating margins. And we are doing a lot of that with great productivity.

Pricing, clearly, in my mind, bottomed sometimes late 2009 through three quarters of the year in 2010, and some of that work is being worked on. Others, we didn't take it, if you remember how we shrunk and brought the Company down. And if you strip out the acquisitions out of backlog, you would have seen a more pronounced drop in that backlog.

I think it's better. I think you still have to be really careful. I think some competitors could make a lot more sense if they realize labor is starting to tighten in some of these markets, and they will. But what we tend to do is what I call hang around the hoop. If we didn't win the big job, we will do the other five smaller jobs that came out, if someone took a larger job at a bad number.

Sometimes, that's tough to do is to have that patience, but we don't run the business for revenue, and because of that, especially the construction business, we worry about the right opportunities at the right time to use the capacity that we have, and we have been rewarded.

There was one of our markets -- there was a very, very large job that went into that market. We were part of a team to try to win it. We didn't, and we had two, now three exceptional years in that market doing all the other work that the other two large competitors were now tied up doing the large job that really didn't turn out well for anybody. We think it would had turned out well for us at the number we had, but obviously we didn't win it, because we had it priced appropriately.

So you always have to be careful, even in a good market. I would say pricing is a little bit better, but I hope we get a little better environment. With the execution we have now and our focus on productivity, that should bode well for us in the future.

One last question. I know you don't provide quarterly guidance, per se, but your seasonality has changed a little bit over the last couple of years, your commentary about buildings and industrial margin possibly being down a little bit in 2Q versus 1Q. Can you help us to think about EPS in 2Q versus 1Q? Is it going to be a stretch to grow earnings sequentially or should we look at flattish kind of earnings?

I would say flattish to slightly up is probably what our expectation would be.

Once again, when we put our models together, as you correctly pointed out, our seasonality has changed quite a bit over the last few years with some of the investments that we made, but clearly the weather dragging the first quarter on construction should not replicate itself in Quarter 2, so we're hopeful that we're going to be able to make some of that up as we progress through the calendar.

And the other thing I think, Alex, it doesn't take much to shift things from one quarter to another in our business right now. So something could go from Q2 to Q3, and it could be as simple as we didn't get -- we have 300 less guys on the job in June that are not coming up in industrial; now they are going to be in July. Or we didn't start -- and so, we are really hesitant to -- and that's why it would be really hard for us to ever have quarterly guidance.

We can get a sense for the year. We can get a sense -- look, we have been building the first quarter here for a while. I think this first quarter was one of the first where we had just about everything doing okay to better than okay. And one day, we will get them all doing great in the first quarter, and then we'll really have a foundation for the rest of the year.

Thank you, and happy birthday, Tony.

Glenn Wortman, Sidoti.

Good morning, guys.

Glenn, welcome back for Sidoti (multiple speakers)

Thank you. Thanks for having me. Just to be clear, so on the industrial services business, you talked about a sequential margin decline, but you are also expecting a pretty significant sequential revenue decline as well. Is that --

Sure, sure.

Okay, okay. And then, it sounds like you are pretty far along in this portfolio reshaping within building services. When would you expect that business to return to year-over-year topline growth?

Likely somewhere third, fourth quarter.

Okay. And then just as I sit looking out over the next several years, if non-res construction comes back in a more meaningful way, the way your construction businesses are structured today, can you give us a sense of what you think the organic topline growth potential is --

We thought for a while that we can grow 8% to 12%, depending on the mix of work, with adding very little cost other than a little bit of incremental project execution and, of course, incentive compensation because we will be doing better for the folks in the field.

So if you think about our domestic construction business, can we add $300 million to $500 million? Yes, we think we can, with the right -- and it depends on how many projects and where they are at. We think we can exceed GDP by a couple points in our construction business, or if non-res construction grows 3, we think we can grow 3.5 to 4.

The merit of that was last year, we hung in there, grew a little bit, and it was a down non-res market last year. So we tend to do a little bit of the market as the market strengthens. It may not start out that way, but as you get into a strengthening market, we tend to do a little better.

So yes, we have capacity that we can bring to bear, and remember, our workforce is flexible, and we usually have -- across all our businesses, we have a very good draw on labor. And that's where people have a problem when they think about organic growth. It's not just the salaried and management infrastructure; it is, where are you going to get the next foreman? Where you going to get the next -- really skilled craftspeople that we have.

We get them because they know three things are going to happen. One, the people that lead them are very strong technically and they are good field leaders. The second thing they know is we create a safe working environment, have, knock on wood, industry-leading safety. We're off to a fantastic start this year on safety and have really had a great nine-year run, but we are vigilant every day.

And the third thing they know -- and they are always going to have the right equipment. We're always going to invest in the right safety equipment and make sure our people are outfitted with the best.

The third thing they know, and this is not trivial, they know they are going to get paid every week. And they know if there is extra hours to be gained, the best performing of them are going to get them. And when you are a skilled tradesperson, that is the kind of contractor you want to work for and that's the kind of contractor EMCOR is across the nation and in the UK, and I think that's what gives us the ability to flex up when demand comes back, more than anything else.

Okay, that was helpful. Thanks for taking my questions.

Nick Coppola, Thompson Research.

If you look at the building services segment broken out the way it is now, there has been over 100 basis point margin improvement over the last three quarters, and apart from weather, it certainly looks like we've turned the corner there in terms of performance. Can you maybe elaborate a little bit on puts and takes there between portfolio reshaping and the US [em] improvement and the government business? What kind of slope are you looking for to get back to that 5% target?

We are trying to get to the 5% target. I am not sure we've ever been there on a sustained basis.

We think we have underlying, we got to get to 4% -- we got to get over 4% sustained, get to 4.5% sustained, and then we will get to 5%.

I will tell you what's going on. It's pretty -- we have guys that are focused every day on operational improvement, and so, how do you do that in a business that has lots of contracts, lots of small projects, and really operates in the commercial, government, light industrial, and then site-based services?

You do it three ways. First thing you do is you look where can technology help me get better productivity? That's for your routing software, that's things like GPS. With the amount of gasoline and diesel we use, you're focused every day on getting an incremental 0.5-mile per gallon. It's 15, 20, 30 ideas that lead to that kind of productivity.

The second thing you do is you say, look, we do something that's valuable every day for people. We should get paid for it, so let's apply the same discipline that we've used in construction over nine or 10 years to fix that. Let's use that in the services part of our business before we get into a long-term relationship with somebody. And when it's not working, let's make sure we have the out so that we can get out effectively.

And then, let's focus on what the customer wants to buy and not try to sell them initially more than they want, so we can get in and then improve ourselves and gain leverage work where now we have a trusted relationship with a customer, instead of just doing bid work.

The third thing is it comes down to project selection, right? We are as good as anybody or better than anybody at small project execution. I think folks at EMCOR would tell you sometimes small project execution is more difficult than doing an $80 million construction job.

Why? You don't always have full-time dedicated project management on small projects. You are doing an existing building or an existing structure. You have to work around other people who need to still be productive. That is a skill set.

And what happened at the first part of this downturn is larger contractors moved down and thought they could do it. They failed. And we competed there or moved into adjacent sectors, maybe government in the small project work, without -- not ID/IQ, but government buildings or municipal, and it's a different environment.

We're back to sticking to our knitting. And all that work, all that small project work, you better understand how to tell the energy efficiency story and show people the gain they are going to get, and we can do that better than anybody.

And we have been doing that in the face of government headwind, which really at the first part of this downturn was the best performing business we had in that segment. The government guys have held in there. They are executing well. There is nothing there that a little bit of volume couldn't help. We think that we will also benefit there as that business will consolidate and we will participate in that.

So, if we showed you the task list that our people work on every day to improve margins and bring discipline into that business now that we're at scale, I think you would be impressed.

Okay, that's very helpful.

And then a follow-up question that's shifting gears a bit, what kind of acquisition opportunities are you seeing in the marketplace? Are you finding deals at the right price? And maybe give us a refresher on industries and geographies that you think could make sense.

Look, take our four big segments, even take UK for niche products, we would be acquirers in all of it, right? We like to add on products or services or geographies in anywhere we are, and that's really been the history of how we've built the Company.

Right now, I would tell you the acquisition market in our industries is very slow. And that could be a number of reasons. One is it was pretty busy last year, and we were fortunate enough to be able to realize a combination of a long-term strategy in buying RepconStrickland and adding it to our outstanding team at Ohmstede.

Deals happen when they happen. I will tell you we aren't -- unless it's a niche product line we can get or we can operate it as a branch operation from one of our larger companies, we are probably out of the small deal game. So if you see us doing one, it usually means we have consolidated it into one of our larger businesses and either gained a customer set, a capability, or geography we don't have today.

We would love to still expand our electrical footprint. Haven't had the right opportunities in either the Pacific Northwest or New England, or even more industrial electrical capability.

We would love -- there is a couple of mechanical markets we would still like to be in, although we are pretty well covered there. On the building services side, I think there is still a couple mechanical service geographies we would like to be in. We're not big enough in Texas. We are not big enough in the Rocky Mountain region and we still don't have much of a presence in the Pacific Northwest.

We have proven adept at opening a couple branches that have an infinite return once we get up and get them running. You get the site-based services, there is a couple niche services we would still like to be able to perform that could enhance our margins, or we would like to be able to get into a geography where we could get a bigger vendor base to even perform better through our site-based services business.

Government, it's all about capability there. It doesn't make sense to buy somebody's big portfolio as we will have the opportunity to bid on those contracts in the future. In the government space, there is a couple large contractors that are struggling that were private equity owned. They had levered against Afghanistan and Iraq and their debt structure was built on that, and if they fail, that should be good news for EMCOR because we will be there to pick up the pieces.

And in industrial, there are still some capabilities we would like to have, and there is a geography we would like to have either on the job shop manufacturer and repair side to support our field business or either on the field side. So we still have opportunities, but they happen when they happen.

Okay, that makes a lot of sense. Thanks for taking my questions.

Noelle Dilts, Stifel.

First, I don't think you commented on this, but I apologize if I missed it. But could you comment on the pace of activity you are seeing in April? If you have seen a bit of a catch-up on the pickup in small to medium project activity as a catch-up related to the harsh weather early in the year?

We don't really look at the numbers week to week, so we don't have much of a view on April yet. We really didn't see, as far as go back to an earlier question on bidding activity, we didn't really see a slowdown on bidding activity because of weather. And small project work, I think it's been improving. I would also say our view on project work is improving because we're back to our knitting on what we do the best.

Okay, and then, could you comment a bit on what you are seeing in terms of activity by geography on the non-res side, if there are areas of relative strength and softness?

New York, relatively strong. There is some both private and public infrastructure work we are well positioned to take advantage of. We won some. Hopefully, we will win some more.

Boston, on the mechanical side and the service side, is strong -- inside 128. New England overall is much better than it has been. I think some of that is just the release of pent-up demand happening.

Washington is a little slower than it has been. There is some good non-res activity in commercial office buildings and even high-rise residential, but the government is spending less than it was, and it's become an increasingly difficult business to do better with.

Texas, I would love to see that debate of Texas someday, because Texas is doing terrific. And we find a great market down there and we have great operators in that market. I think the only thing we're sad about here at EMCOR is we don't have more capability in Texas on the construction side. It would allow us to participate even broader.

California is okay. Again, the energy efficiency side and some of the alternative energy work has helped us. As prevailing wage work, the tech sectors help us. We are well positioned on the mechanical service side in Silicon Valley. So that's doing okay.

The Midwest is a status quo market. We have some unique capability on the fire protection side, coupled with there was a lot of carnage in the Midwest with contractors going out of business through the recession. So we have stayed busy, really, because of a consolidating market.

Great, thank you. I appreciate it.

I left out the Southeast. The Southeast continues, I think, to be a net winner as some industrial work comes back to the states. We've been involved in some plant rehabs and refurbs, and we have some capability down there that we didn't have before and we're looking to take advantage of it here in the future.

Thank you.

Tahira Afzal, KeyBanc.

Congratulations on a great quarter and, Tony, happy birthday. Most of my questions have been answered. I guess the only one I did have is, could you give me an idea of Ohmstede as you have gone on to bid and an idea about the competitive landscape you are seeing on the heat exchanger side? Is it the same players? Are you seeing any foreign competition?

And then, any updates you can provide on Repcon and cross-selling between Ohmstede, Repcon, and your industrial business.

Yes, let's start with the heat exchanger. I don't think there has been any noticeable change.

Here's how the market typically works. The repair side is a local business, and you have to have good capability to not only get the exchanger to shop. Now we have cleaning capability down in La Porte, which helps free up the bottleneck that you would have on a lot of refinery watch stands. And you have to have the ability to work hand in hand with the turnaround managers and the refinery engineers to get that repaired heat exchanger back up and running.

I would say we have the same share or increased our share, actually, because of our cleaning stand and some other things over the last few years. And look, that quarter to quarter, you can't see that, but over our two-year period, you can see that.

As you go to the new heat exchanger build, I would say we pretty much have held where we were. There is clearly some expansion coming and there is -- quite frankly, if we had more engineers, we would be able to do more new heat exchangers.

Where we compete best is whether it's either a short-term heat exchanger or a special alloy or a special capability or it's one we've done before. There is foreign competition. There has been foreign competition, even before we bought Ohmstede. It's something we study carefully.

Most of the foreign heat exchangers really come from Korea, and that would be longer lead time. They can have something of 26 to 40-some week lead times, and we are typically not out that far.

And then, again, so I would say repair, we are probably doing a little better and will do better as we add more capabilities. Of course, we got more feet on the street, you would argue, with the Repcon acquisition now to bring things back to our shops. And the local guys are the same as they have always been. A couple have gone out of business, but I don't think that's necessarily different that what happens in the heat exchanger business.

Newbuilds, I think really the same as it has been. Longer lead times, they will look for foreign competition. If you look at RSI and Ohmstede, first, let's go where I think is most important is, how do the customers and the employees view the transaction and what do they think?

So, let's go to the customers. Some of the bigger refiners say they like it. They like that RSI, like Ohmstede, found a home with a strong, successful, financially stable company.

Second thing is how do the employees react to it. I thought one of the most telling comments I had, the top guys are on board and they are very good managers. And they're very good leaders. I always like to use the word leader more than manager. And we have very good leaders at Ohmstede. And they are working together and they are driving synergy every day.

But when I heard it from a superintendent that when we bought RepconStrickland, he felt like they finally had a home. That's where the rubber hits the road.

And then you talk about cross-selling, we are seeing opportunities. You got to draw the line between cross-selling and cross-mobilization of resources, which might be even more important.

Labor is at a premium. So by having these entities that we have, we can now make sure we can meet customer demand and bring the right resources, the right mix of labor, to bear as our folks work together. That, to me, is even worth more to us sometimes than an expanded cross-selling opportunity because we can deliver for our customers.

I think the thing we have to be careful of every day is, and this is something you relearn, unfortunately, we get into specific opportunities and we think we have a lock, so therefore we don't bid on the next two or three opportunities because you can't be manpower short. And sometimes, the other one's scope reduces and you could have taken those other opportunities.

I think by having the seasoned management team we have across the businesses now, the reality is we will be better at figuring out how to respond to those other opportunities so we don't have to let those pass when we think we have a big opportunity, if that makes any sense to you.

Yes, it does. And this was a great update. Thank you very much.

There are no further questions. Management, do you have any closing remarks?

No, thank you, everybody, for your interest in EMCOR. Mark, thanks for letting everybody know it was my birthday. For anybody that needs to know, you'll find out tomorrow morning, I am 50 today. I know it's hard to believe. (multiple speakers). For those who have seen me, I know it's hard to believe. It was at least 40.

And thank you to my EMCOR colleagues and leaders for a great quarter. And not only a great quarter financially, it shows this is where our power went. Most everything is firing on at least six of the eight cylinders.

But also, we had a very safe quarter under really challenging circumstances. We put more man-hours to work as a result of having the enhanced industrial presence that we have under the most demanding circumstances we have ever had. When you consider who we work for and the weather we had to do it in here, especially in the upper Midwest and Northeast, I would say it was an outstanding job operationally.

So thanks to them, and everybody, let's hope we have a nice, hot, terrible summer for everybody so EMCOR can have a great summer. Thank you.

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