EMCOR Group Inc (EME) 2015 Q1 法說會逐字稿

Good morning. My name is Janisha and I will be your conference operator today. At this time I would like to welcome everyone to the EMCOR Group first-quarter 2015 earnings call. (Operator Instructions). Mr. Nathan Elwell, with FTI Consulting, you may begin.

Thank you, Janisha, and good morning, everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the Company's 2015 first-quarter results, which were reported earlier this morning. I would like to turn the call over to Mr. Kevin Matz, Executive Vice President of Shared Services, who will introduce the rest of the team. Kevin, please go ahead.

Thank you, Nathan, and good morning, everyone. Welcome to EMCOR Group's earnings conference call for the first quarter of 2015. I can't believe it's already here. 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.

Slide 2 depicts the executives who are with me to discuss the quarter's results. They are Tony Guzzi, our President and Chief Executive Officer; Mark Pompa, 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 the slides will be archived in the Investor Relations section of our website, under Presentations. You can find us at emcorgroup.com.

Before we begin, I want to remind you that this discussion may contain certain forward-looking statements. Such statements are based upon information available to EMCOR's management as of this date, and EMCOR assumes no obligation to update any such forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance.

Such risks and uncertainties include, but are not limited to, adverse effects of general economic conditions; changes in the political environment; changes in the specific markets for EMCOR's services; adverse business conditions; increased competition; mix of business; and risks associated with foreign operations. Certain of the risks and factors associated with EMCOR's business are also discussed in the Company's 2014 Form 10-K and in other reports filed from time to time with the Securities and Exchange Commission.

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

Thanks, Kevin, and I'm going to be talking to pages 3 through 5. First, good morning and thank you for your interest in EMCOR.

The first quarter proved to be more challenging than we originally anticipated. We had two external factors beyond our control: refinery turnaround deferrals in our industrial services segment as a result of the refinery operator strike, and the extreme cold weather that affected our project execution at our building services and construction segments.

Weather was a net negative for us in Q1 2015 versus Q1 2014, when it was a net positive for us as a result of heavier snowfall in most regions in the country in 2014 versus 2015. 2015's first quarter was colder, but a lot less snowy than first-quarter 2014. We did continue to generate backlog growth, as it is up 11% year-over-year, and most end markets should steadily improve as the year progresses.

We generated revenues of $1.589 billion and earned $0.52 per diluted share from continuing operations in the first quarter.

The reality is, we're not a big fan of excuses at EMCOR, but these quarterly impacts from these external factors are real and had significant bottom-line impact in the quarter. The refining operators' strike cost us at least $25 million in revenues and at least $0.06 to $0.07 in diluted EPS from continuing operations. That $0.06 to $0.07 does not account for any leverage work we gain from increased work scopes, specialized welding services and, just as important, our high-margin shop repair work.

The extreme cold weather cost us $30 million to $40 million in revenues across our construction and building services segments, and at least $0.03 to $0.05 in diluted EPS from continuing operations. The reality is, if the refinery operators' strike does not happen we would be reporting a record or near-record first quarter.

Our building services and mechanical construction segments both had strong quarters. Our building services performance is driven by strong demand and very good execution in our mechanical services business.

Our mechanical construction segment improved operating margins and grew operating profit 9.4%. Although performance was down in our electrical construction segment, we expect performance to improve as the year progresses.

Our SG&A percentage was higher than we like at 10.2%. We would have expected it to be 9.7% to 9.8% in the quarter, but the revenue lost in the quarter identified above, coupled with the lack of absorption in our industrial sector, caused this to be higher. We do expect this to normalize as the year progress and fall back into the mid-9% range. Mark is going to cover this in detail in his remarks.

We had a very good book to bill of 1.06 and grew backlog by 2.8% sequentially at 11% on a year-over-year basis. Most of our end market backlog areas are up, and I will cover that. We now have backlog of $3.736 billion versus $3.366 billion last year. We returned $26.1 million in cash to shareholders through repurchases in dividends.

In summary, with a little less cold weather and no refinery operators' strike, we would have had a very good first quarter.

Our balance sheets remain liquid and strong, and with that I will turn the call over to Mark.

Thank you, Tony, and good morning to everyone participating on the call today. For those accessing this presentation via the webcast, we are now on slide 6. As Tony indicated in his opening commentary, I will begin with a detailed discussion of our first-quarter 2015 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. So let's get started.

Consolidated revenues of $1.59 billion are down 0.1% or essentially flat as compared to quarter 1, 2014. US electrical construction revenues of $319 million increased $10.9 million or 3.5% from quarter 1, 2014. The increased revenue was due to greater project activity within the transportation, manufacturing, and health care market sectors as compared to last year's first quarter. US mechanical construction first-quarter revenues declined $2 million to $511 million, or a modest reduction of 0.4%. The quarterly reduction is due primarily to a decline in manufacturing, water and wastewater, and transportation construction projects.

I would like to note this segment has several operating companies that are in the Northeastern region, which experienced lost work days during the quarter due to the weather factors Tony previously touched upon. Additionally, this segment reported 4.2% of sequential backlog growth within the quarter, which should favorably impact the next several quarters.

EMCOR's total domestic construction business first-quarter revenues increased $8.9 million, or just over 1%. US building services revenues of $439.5 million decreased $8.5 million quarter over quarter due to lost revenues attributable to two government contracts completed in 2014 that were not renewed pursuant to rebid, as well as the impact of less event snow removal activities in most geographies outside of the New England region. These revenue reductions negated gains within their mobile mechanical services division attributable to both service volumes as well as small project activity.

US industrial revenues increased 0.3% to $232.7 million during our first quarter, despite the impact of the refinery operators' strike briefed by Tony on slide 3. This significant headwind was offset by higher revenues within RepconStrickland, which performed more turnaround services quarter over quarter at non-strike-impacted sites as well as increased revenues from Ohmstede Shop Services. United Kingdom Building Services revenues of $87 million declined $2.4 million, primarily due to unfavorable exchange rate movements within the first quarter, which is masking a favorable period of revenue growth under local currency.

Please turn to slide 7. Selling, general, and his ministry of expenses of $161.6 million represent 10.2% of revenues and reflect an increase of $17.7 million from quarter 1, 2014. The majority of this increase is related to greater employment costs due to both the discrete item that favorably impacted 2014's first quarter, as well as an increase in expenses related to compensation programs. With regard to 2014, we had favorable medical claims experience and as a result reported income versus expense during the prior year's first quarter.

On the compensation front, there were two primary cost drivers. One, the Company's expectation of higher earnings in 2015 versus 2014 at both the consolidated and segment reporting levels, which necessitates both higher annual and long-term incentive compensation of gross and related expenses. The second primary driver, increased salary and benefit costs, pertains to a 3% increase in nonunion headcount and the impact of annual cost-of-living and merit-based wage adjustments.

With regard to the increase in our nonunion headcount, we had hired staff commensurate with our expected revenues that ultimately did not materialize due to the impact of both the refinery operators' strike as well as the productivity impact of lost work days related to localized weather. As a result, our first-quarter SG&A as a percentage of revenues is somewhat distorted due to the incremental incurred costs without the corresponding revenue benefit.

Operating income of $53.5 million represents 3.5% of revenues and compares to $72.1 million and 4.5% of revenues in 2014's first quarter. Our US electrical construction services segment operating income decreased $5 million or 23% over quarter 1, 2014. The corresponding operating margin is down 180 basis points period over period. The decrease in operating income is due to the gross profit contributions on last year's first quarter from larger project activity within the manufacturing, institutional, and transportation market sectors.

Specifically, we had several large projects that were wrapping up in quarter 1, 2014 in the power generation and public market subsectors. We had no such significant large project closeouts during the quarter just ended within this reportable segment.

2015's first-quarter US mechanical construction services segment operating margin of 4.1% represents a $1.8 million increase from last year's quarter. This represents a 9.4% improvement quarter over quarter, primarily due to increased gross profit contributions from projects within the commercial, institutional and manufacturing market sectors. Our total US construction business is reporting a 4.5% operating margin for the quarter just reported.

Operating income for US building services increased $700,000 or 3.4% over 2014's first quarter, with an operating margin of 4.8%. Strong performance within their mobile mechanical services division and the $3 million impact of a claims settlement offset the headwinds experienced due to lower event snow removal revenues which I previously referenced.

Our industrial services segment is reporting a $10.6 million reduction in operating income with a 460 basis point reduction in operating margin. To reiterate, this segment was severely impacted by the nationwide strike of refinery operators, resulting in deferral or potential cancellation of significant turnaround activities at certain oil refineries that we service.

Due to the abrupt nature of this referenced work stoppage, we had increased our headcount in anticipation of executing our previously scheduled turnarounds and incurred such costs without recognizing the commensurate revenues.

Additionally, our shop services operating income and margin were negatively impacted by the change in the mix of orders, which included less repair work that may have been identified if the scheduled turnaround activities occurred.

UK Building Services' operating income of $2.4 million represented a $1 million decrease from quarter 1, 2014 due to reduced gross profit from small project activity in the institutional market, as well as the unfavorable exchange rate effect year-over-year. Lastly on this slide, we used $17.8 million of cash in operations as compared to $24.3 million of cash used in operations during 2014's first quarter. And as most of you on the call know, quarter 1 is historically EMCOR's weakest cash flow quarter due to the funding of our prior year incentive awards.

We are now on slide 8. The additional key financial data on this slide not addressed during my highlight summary are as follows. Quarter 1 gross profit of $216.9 million represents 13.7% of revenues, which is improved from the comparable 2014 quarter by approximately $700,000 and 10 basis points of gross margin. Restructuring activity was negligible in the quarter and does not warrant any additional commentary. Diluted earnings per common share from continuing operations is $0.52 and $0.64 for the quarters ending March 31, 2015 and 2014, respectfully.

Please turn to slide 9. EMCOR's balance sheet remains sufficiently liquid, as represented by cash of approximately $369 million, and modest leverage, as demonstrated by our debt to capitalization ratio of 18.7%. Our cash is reduced from year-end 2014 due to both the $17.8 million of cash used in operations previously referenced, as well as $37.8 million of cash used in financing activities, which included $21.1 million of share repurchases during the quarter as well as $7.5 million of cash distributions to our joint venture partners pertaining to the two government contracts completed in 2014.

Working capital levels have increased since the end of 2014 due to a reduction in current liabilities as a result of reduced levels of accounts payables and accrued payroll and benefits due to the funding of prior year obligations. Identifiable intangible assets have decreased solely due to the quarterly amortization of expense of approximately $9.5 million, and total debt is just under $330 million, with the majority of the reduction due to the mandatory quarterly principal repayments of approximately $4.4 million.

We are very happy with where our balance sheet is for this time of this year and continue to be well-positioned to take advantage of all growth opportunities that may present themselves. With my slides concluded, I would like to ask Tony to re-commandeer the microphone, and thank you for your time this morning.

Thanks, Mark. And I'm on page 10 and then I will be on page 11. I'm going to talk a little bit about backlog and what's going on in the markets. Bidding activity was and continues to remain active, and it translated into a book to bill of 1.06. Total backlog at the end of March is $3.74 billion. That's up $369 million or approximately 11% from March 2014.

As I mentioned earlier, we saw backlog grow sequentially also of $102 million, supporting that strong book to bill. Reality? We should have had a little less sequential growth of backlog because we should have burnt more revenue in the first quarter in our backlog-driven businesses, which is mainly our domestic construction businesses.

In fact, though, but if you look at our $3.7 billion in backlog, you'd have to go all the way back to 2008 to see a comparable period in the time frame that we have outlined on this chart. And you can see that the gold portion, which is commercial, represents 34% of that backlog.

Now, if you take commercial and hospitality together in 2008, and you take that together today, you'll see that we have the same level of mix of that work. And in 2008 we were still working through the last phases of the Las Vegas expansion.

Commercial sector backlog is close to $1.3 billion, an increase of $185 million or 17% from March of 2014. This really now two- to three-year momentum in the commercial market gives us some confidence and conviction in the continued pace of the nonresidential recovery that we will see growth this year, despite a tough first quarter.

As I mentioned earlier, the quarter's booking activity was strong and dispersed among many market sectors from December 2014, in commercial and institutional, and believe it or not, a little bit in hospitality. We also saw in industrial, which for us also includes manufacturing and water and wastewater.

We did burn a little backlog in healthcare, and we think this is a sector that's not going to see a lot of growth, although we have some decent opportunities in front of us in specific markets. But people are still -- our customers are still sorting through the ramifications of the Affordable Care Act.

Transportation backlog decreased a bit, but we still have some very good infrastructure projects that not only are we working on but that we also are bidding on.

From a year-over-year perspective our backlog growth has been fueled by increases in most market sectors, led by substantial increases in both commercial and transportation. We're also seeing increases in industrial/manufacturing, water and wastewater, and yes, that little jump in hospitality.

As you can see, our backlog from a market perspective is anchored in the commercial sector; we do well there. And it's balanced throughout the remaining sectors. A good position to be in, and many people do think we'll have a growing nonresidential market in 2015, and we believe that, too.

Looking at it by segment, mechanical and electrical construction segments both grew backlog year-over-year and from 2014, and together these segments comprise EMCOR Construction Services. EMCOR Construction Services backlog, which represents our mechanical and electrical segments, stands at over $2.7 billion, an increase of $414 million over March of 2014, an increase of $89 million over the December 2014 level.

Again, I wish we would have burned some of that backlog in the first quarter and got the results in earnings from it. But you see the construction of that and you can see that the substantial segment growth year over year of mechanical up 15% and electrical up 22%.

Building services is at $747 million, down $32 million. The entirety of that is the government contracts that Mark referenced and we had referenced earlier in our year end call, but it's up from December, which is the trend we expect to continue as the year goes on.

We continue to see backlog growth in our mechanical services business in building services. In fact, the backlog there is at an all-time high, and again, that lends us to believe that non-res will have growth this year. And this contribution for the first quarter where they had backlog growth starts to see velocity building in that business. And again, it's mainly commercial work. The drop again in building services from the two government JVs.

Our backlog is well-balanced and we continue to see solid bidding opportunities in front of us. We are going to remain disciplined like we always are. We are confident in our ability to execute as the non-residential market slowly improves.

Now I will be on page 12 and 13. And it's really what everybody has been waiting for on this whole call: what do we think about the rest of the year?

We're going to leave guidance unchanged at revenues of $6.6 billion, and with the range of diluted EPS from continuing operations of $2.65 to $2.95. Here is what we expect as the year progresses. We expect revenue growth, and that is supported by our strong book to bill and backlog growth. The stronger the revenue growth, the likely -- the higher we are likely to get into our guidance range.

We expect revenue momentum to build in our construction business coincident with our backlog growth. And we expect margins to improve in our construction business overall, and especially in our long time and well performing electrical business. We expect margins to improve throughout the year, and SG&A we expect to moderate. And Mark and I both went through the reasons why.

We don't have a fixed cost issue here. You think about it, our headcount is up, other than what we had in the industrial spike, less than 2%, and our increases in salary and everything are less than 2%. Hardly the image of spendthrifts in our business. We do not know how much of the deferred turnaround work will happen in 2015 or how much of it will be delayed into 2016 at this point.

Some of these facilities are still on strike and not settled. We expect to have some yet unsold opportunities present themselves to us as the refineries are running at near record levels of utilization and that drives demand for our services in not only industrial services broadly, but also our shop services, not only field, but also shop.

We are in a very fluid situation with our customers in the refinery and petrochemical space right now. We are working with our strike customers especially on a daily basis to understand how that work will be scheduled on a go-forward basis. We do expect a strong fall turnaround at the season at this point.

We expect building services performance to continue to improve through year end. Mechanical services is performing well and we expect that to continue. Site-based services had a better quarter absent the snow in the first quarter, and it executed terrific on the snow that we did have. We remain optimistic in our opportunities as we could perform okay in Q1 despite significant external headwinds.

And I will reiterate for the third time on this call: without these headwinds, we would have had a record or near record Q1.

With respect to capital deployment, we look to fund organic growth. Have seen a little better acquisition environment for negotiated transaction versus prior year. And we will continue to return cash to shareholders to dividend and buybacks.

With that, we would love to take your questions and I will turn the call back over to Janisha.

(Operator Instructions). Alex Rygiel, FBR.

Tony, new awards has been about $1.6 billion almost every quarter, give or take, for the last three years or so. It seems like you've managed possibly to that number, given the stagnant market. But the market sounds like it's waking up a little bit.

Is it time now for you possibly to press your team members to be a little bit more aggressive to build new awards a little bit quicker?

Alex, that's a balanced question, because our business is a business based on opportunities within the local market. And we are seeing opportunities end markets to really grow some of our companies. And part of that 2% headcount build you see is a response to not only opportunities that we have in hand, but opportunities we see in front of us.

So, the way I look at it, with 11% backlog growth year-over-year and very minor headcount additions, we do have the ability to take more work.

I don't want to say we're getting more aggressive, because we really have driven disciplined bidding in our business. It's part of our culture. But we have the ability to expand capabilities end markets, and that's what we've done. And now a good example of that is what we've done in the Metro New York area, really building an infrastructure and transportation infrastructure electrical contractor over the eight years.

So I think in one sense the mathematics work out to a managed number. I think with the right market in front of us, that booking rate will continue to expand. What you've seen as it's gotten better, it's just the mix has changed. The construction business is actually up nicely, 15% and 22% year over year.

And are there any larger projects such as Tappan Zee, that from a timing standpoint we could see the revenue burn accelerate over the summer months here to spike your revenue?

Well, I think one of the things that will help our revenue -- if you think of the -- let's just focus on the $30 million to $40 million in delayed revenue in the construction business as a result of the weather. That should come back into the business in Q2 and early Q3, based on scheduling. I would think a lot of it would come into Q2.

And we'll probably work much more productively regardless of whether we would have been able to do it in the winter, because we'll be doing it in better weather now.

I think the backlog velocity that we had, up 11% year-over-year, as you know that stuff has to move through the business now and we're continuing to see good opportunities. And we're also seeing good momentum in our small projects work.

Buried in these numbers is a pretty good story in building services. Backlog grew from year end and revenue would have grown from year end absent these two government contracts. I think Mark would tell you that the government contracts, because of where we were in the execution (technical difficulty) down, we really didn't get much profit contribution in first quarter last year from them. But you know they were successful contracts because now we are distributing the cash.

So, and what's driving that building services revenue growth is really two things. It's leverage work across our site-based portfolios, both government and nongovernment, absent snow. And the other part of it is small project work in the mechanical services business, which is small project construction work somewhat related to energy services. So that tells you the commercial market continues to rehabilitate even outside of our backlog reported numbers. If that makes any sense to you, the way I laid it out.

And lastly, as it relates to SG&A, SG&A has been rising a little bit over the last couple of years, but it is sort of at a level that seems like it might be at a top as a percent of revenue. Do you think that we're going to continue to see maybe going forward greater leverage over that SG&A fixed overhead?

Yes, Alex, this is Mark. Obviously one of the things we talked about in connection with 2014 is that we were expecting, and we tried to articulate to all of you, that we were going to see creep in the percentage, just because the industrial portion of our revenues is much more significant now than it's ever been. Certainly with the addition of RSI in late 2013. And we talked a little bit about how their fixed cost structure was higher than our other reporting segment businesses. But clearly that percentage of revenues in the quarter just reported.

I hope it's a high watermark because once again, as Tony said, structurally when you look at our costs, one of the biggest drivers in quarter 1 was really compensation-related. And the fact that we're still looking at the same targets, despite the fact that we got out of the gates a little bit slower this year than we would have liked, is driving a disproportionate amount of comp expense in the quarter, relative to the actual reported performance. And we're obligated to accrue based on the estimates, not true it up to actual certainly at the end of quarter 1.

So, we're clearly looking to be sub 10%. I think Tony and I would be much happier if we were in the mid-9s, but I think getting back to some of those periods where we were in the low 9s or the high 8s just with the composite business that we have today is probably unrealistic.

Okay. Thank you very much.

John Rogers, D.A. Davidson.

Just following up on Alex's question, just so I'm clear. Tony, did you say that you expected 9% SG&A for the rest of the year?

No, no. I said it would fall into the mid-9s.

Okay.

If you ask us what the range is likely to be when you take -- when the year is done at 2015, depending on the revenue growth, especially in our construction business and the rebound from some of these deferrals, and some of the -- what we think of yet unsold opportunities that should materialize in the industrial space -- we would be shooting for a number between 9.5% and 9.8%, John.

Okay. Thanks, I appreciate that. And then just in terms of the construction work that is starting to come through. Pricing on that? Are you starting to see the market tighten up at all? Or is it just better utilization? And are we going to see margin improvement, I guess?

Yes, we are going to see margin improvement in electrical and mechanical as the year progresses, surely. We think today that we're doing more midsized project work. We think that today that were doing more midsized projects work, the $0.5 million to $8 million project. And the smaller end of that, the pricing has gotten better.

The higher end of it, it's still not as good as it was in 2007 and 2008; but it certainly is improved from 2009 and 2010, John. And what we know of productivity has made that better. So we like how we're running our construction business, and we like how the backlog is building, and the activity is strong.

That's 17% up again in commercial year-over-year, off of a pretty good up from 2014 to 2013. And the $1.3 billion, coupled with the growth we're seeing in mechanical services that I went through earlier, portend to us that it's a good market, because our guys have a lot of discipline on the kind of work they're taking. So, in the small project is where we're definitely seeing the uptick in the margin.

Okay. And then lastly if I could be -- I know it's a seasonally low cash quarter, but not significant buybacks this quarter. What's your thoughts on buyback opportunities or plans this year versus are you seeing more acquisition opportunities?

Well, we are seeing the potential for more acquisitions on a negotiated transaction basis. We don't anticipate that we'll be big participants in the auction process, because the private equity prices are still crazy. But on a negotiated basis for things that are really close to what we do, we're starting to see some opportunities in those kind of deals. So we would like to balance it more towards acquisition this year. If they're the right opportunities that can add to any one of our segments and are things that we already do. And we absolutely are committed to buybacks.

Is it likely to be as heavy as it was last year? I think it depends on the pace and timing of the recovery this year and the cash needs on organic growth, coupled with the acquisition environment.

The one thing we did accomplish in the first quarter, we said we would make sure that we bought back our overhang and that would be part of our mantra going forward. And that's what we did in the first quarter.

Okay. Great, thank you.

Adam Thalhimer, BB&T Capital Markets.

Tony, the active bidding market you cited, is that broad-based geographically?

There are certain markets that haven't been broad-based for 20 years now, collectively. But if you take the major markets, it's pretty broad-based. I would say the Northeast is fairly strong, especially Boston. New York continues to be strong. The Mid-Atlantic, although it was probably a little more robust in 2012, it's still pretty strong today. The South, especially some of the industrial work, continues to be strong for us. We have some interesting opportunities in Florida on the water side, both in South Florida -- both in our [Pool and Kent] subsidiary and [Pepper]. Water restoration and water and wastewater work.

Texas is a mixed bag. Some of the institutional and healthcare work continues to be strong. Some of the quick turn commercial work has turned down a little bit on the [tentative fit] outside. California is okay. We would like to see more large projects move through California right now. We had very good success on power generation work. We think that's going to continue, especially with their aggressive carbon reduction goals.

And the tech sector is a tale of two worlds. The data center part of tech, which shows up wherever the segment happens for us -- if it's institutional, it shows up in institutional; if it's commercial, it shows up in commercial. The data center work continues to be very strong.

The tech manufacturing market, which was a very robust for us in 2013 and 2014, has definitely turned down here in 2015. Some of the big work we do for the semiconductor and other manufacturing companies has definitely slowed down out West.

Okay.

So I would say you could generally say broad-based with the caveat on tech.

Got it. And then, trying to get a sense for where things stand with USM. Because you had a very good margin, that [hoarder] there. You getting close to revenue being flat year-over-year. I know there's some moving pieces with contracts rolling on and off. But when do we start seeing revenue growth again in that segment? Where can margins go? And what are your thoughts on that acquisition a few years on?

Well, I'll tell you what. What it did for us is we now have a real commercial site-based business. It's broad-based and it's performing okay. Not nearly as much as we would like. It performed very well on the snow side in the first quarter. Just didn't have as much -- we just didn't have as much snow.

The underlying business outside of snow actually performed better in Q1 2015 versus Q1 2014. We also are starting to book some work now, and the right kinds of work.

So, I would say the arrow is pointed up. It's not at a 65 degree angle yet, Adam, but it's certainly better than 25 or 30.

So we're starting to see all the hard work that we've done getting the cost structure right, combining the businesses, we've retooled the sales force. We feel pretty good at where we are. We have hired some really key people on the sell side and put some of our more senior people with their shoulder against that from our mechanical services business on the sell side. We're making progress, so I could say is -- if you look at it as the whole business, we've made good progress. If you look at it just USM, we didn't make as much as we wanted. We wouldn't have fixed the whole business if we didn't have USM.

It's hard to separate some of the things now because we now have a national account mechanical services business we didn't have to do, which is part of the reason you're seeing the strong bookings on the mechanical service side, because it's coming from customers that now believe we have the ability to serve them nationwide on the delivery of that service.

So, I think overall we're not at an A. I wouldn't even say we're at a good B, but we are trending from a C plus to a B minus on that acquisition, hopefully.

Okay. Good, thank you very much.

(Operator Instructions). Steven Folse, Stifel.

First question. I know that the majority of your direct exposure to the oil and gas market is on the downstream side, but was any of the weakness in the industrials services business due to maybe some weakness on that capital project side? And then I guess probably more relevantly, are you continuing to see some let's call it contagion effects in like the -- sort of like the office and commercial markets in areas like Houston?

Yes, we've talked about Houston for us. The way I termed I think on our year-end call was this. We have a very well-performing mechanical company in Houston. That's the only exposure we would have to the spillover effects from upstream in the commercial segment. They perform very well. They had a pretty good 2014. They were poised to have a great 2015. And just order of magnitude. This isn't $0.15 a share improvement. This is $0.02 to $0.04 a share more, they could have helped make us. They were positioned to have a great 2015. Now they've moved back to a good to very good 2015.

We think that impact from the spillover effects on oil and gas for us today is less than 5%.

Now, as to the capital side, we're not seeing it yet. Where would we see it at EMCOR? I think we'd see it in two places. You could see it in some of our construction businesses in California that service those [refiers]. And the reason you would see if there is in some ways those are marginal refiners for some of these refinery operators, and there's all kind of issues involved with operating a refinery in California. The other place you're likely to see it with us is in new build heat exchangers. Only in some of the midstream projects or the LNG projects, which so far has been fine. But you could see it there.

Now, overall what the new build heat exchanger business does for us is it loads our plants and allows us to earn better margins on the repair work. It's not one of the higher profit things we do, but it keeps our engineers sharp and again it loads our plants with more predictable load down on the Gulf Coast. Sizing that for us in the industrial segment, it's less than 10% to 12% of what we do in the industrial segment, would be new build heat exchanger servicing midstream or any type of upstream application.

Great, thanks. And then a little bit of a follow-on to that. With the refinery strike that you saw on the quarter, it sounds like you are expecting to get most of that back in the third quarter or the fall turnaround season. Do you think that there's going to be anything else abnormal this year with seasonality there because of the strike? I thought maybe the second quarter would be a little bit stronger. Are you expecting that?

Here's what we've said, and I'm sorry if -- we said we don't know how much of that work will come back into 2015 or 2016. We do expect a percentage to come back. Right now what's been identified as coming back is less than 25% that they've actually scheduled here today.

Now, is that number likely to go up? Yes. Is it likely to come in forms of other work as we try to keep these refineries operating in this environment? Yes. That's the yet unsold opportunities we expect to happen as they operate at really high utilization. The other thing we think sitting here today, based on what we know our customers have asked us to do, is we expect a very strong fall turnaround season.

As far as what happens in Q2 or Q3 or in Q4, it's a very fluid situation. We did rightsize our workforce as quickly as we could in response to this, and it was painful.

Here's real numbers, folks. We were up in January midteens [hours] year-over-year going out of the year. So our performance in Q4 was strong. Our performance coming into Q1 was very strong. As Mark intimated, the RepconStrickland part of the business did very well, and that's just -- they had the right mix of customers that weren't as affected by the strike. Our legacy business, which is a very good performer and had a very good fourth quarter and a pretty good first quarter of -- a record first quarter of 2014, had a couple of very large turnarounds.

Now, usually we celebrate when we have large turnarounds because large turnarounds drive shop work, drive the need for specialty welding services, usually expand in scope. What happened here was we were mobilizing for those large turnarounds that started in one case and was getting scheduled to start in another, and it abruptly got halted at the second week in February. And we were hoping that would get moving; while the strike didn't settle until late March, early April, and it was only in one of those facilities the strike settled, and they haven't made a decision on how that work is going to be done now because it's part of their network of plants.

The other plant where the large turnaround was scheduled is still on strike. There is no settlement. And just so everybody -- I think most people understand this. This is pattern bargaining. So, just because one operator did it doesn't mean everybody else is going to do it, and this is the refinery operators.

And as they moved to Texas and Louisiana, there was less enthusiasm for the strike. And so, it's a very fluid situation how this work is going to get done. Our experience suggests to us when refineries are operating at this high a level of utilization, that they need our services and maintenance and repair services more. And sometimes we have an opportunity to do more work for them in the fall turnaround season than we had originally anticipated.

So, strong fall turnaround; not sure on what will come back as a result of the strike in 2015 and 2016 overall. And finally, we do expect increased demand for our services if this high utilization continues.

Okay, great. Thanks.

Tahira Afzel, KeyBanc.

Good job given all the weather nuances and all in the quarter. I know there were a lot of moving parts.

Thank you.

First question is around some of the heat exchanger opportunities, and I know it doesn't get back much faster, Tony, but these could be pretty interesting in terms of margin opportunities for you. Maybe late this year into next year. And we are seeing more LNG projects in the US going through and progressing in construction. We have seen petrochem projects also doing the same. So would love to get your part from that opportunity [scope] and [damming] versus what you've indicated in the past.

We like the heat exchanger business. We like the new build heat exchanger business. We like the heat exchanger extraction business out of refineries. We like the heat exchanger cleaning business, and we like the heat exchanger repair business in our shops. We like all facets of the heat exchanger business.

Like you, T, we think the opportunities are going to continue because of LNG and petrochem. We think that we are well-positioned. We would look to grow that business. We did it successfully right after we bought Ohmstede with the acquisition of Redman, which has been a terrific opportunity for us to get more exposure to the West Coast. It happened within five months.

We look to grow that organically. The real issue for us in the heat exchanger business -- and what you're talking about is more specialized applications, which we tend to be very good at -- is engineering resources. We have a very good engineering resources in our Ohmstede business in Houston and in our shops on the repair side. We need more of it.

Our constraint to growth is engineering. As you know, most of these things are custom engineered. Now, it's 70% sometimes custom and sometimes it's 30% customer versus something we built before. But these are very specialized engineers. We train them well. We're always hiring them. We lose some.

The one silver lining of the slowdown in some of the CapEx upstream is less people are competing for engineers that are, quote, broadly in oil and gas. We think that gives us an opportunity to grow our engineering force.

And finally, we're always looking for the right acquisitions, whether there's small niche acquisitions or larger ones in the space. And sometimes these companies, as part of something else and sometimes they are standalone.

But in general, we like heat exchangers. The model looks very much like our five vacation shops on the pipe side, how you think about it and how you price it. The shop repair work is very similar to the way we think about repairs overall at EMCOR and how they are priced.

And so, we do like the business and we're going to continue to look to grow it organically first, always. And if the right transaction came up, we would jump on it, but that's a hard thing to do. It's been a stalagmite's pace for a long time on the acquisition side.

Got it, Tony. And Tony, if you look at the last peak of the cycle -- and I assume it was around 2007, 2008 for Ohmstede -- where would the margins of the overall heat exchanger business be directionally today versus where they were at that point? And do you think you can get them up there again, just based on the activity levels you're seeing?

They're down from there. They are still very healthy, but they're down. Mark, maybe you can add to that. I don't think they will be get back to where they were there, but we think they can improve.

T, you may recollect shortly after we made our initial investment in this space, that we were looking at operating margins that were approaching 20%. Clearly, pricing has not recovered in the current market to those levels. I like to think as we move forward we're going to see improvement from our recently reported margins. I just think with some of the things that have changed structurally in that market sector that pricing is just not going to get back to those older, historical levels. But I'd like to be proven wrong on that front.

And Mark's number is on the shop side when he talked about the 20% (multiple speakers).

Second question, Tony. If I look back, you had -- you've done the right thing, I assume, by diversifying the business to make the troughs and peaks less pronounced and so the earnings become more consistent. But if I look back in 2009, because you were more concentrated and you were seeing the lag benefit of a construction cycle on the non-res side, your operating margins touched and went slightly above 5%.

Do you need all your businesses right now to work together in tandem to really deliver 5% plus operating margins over the next year or two? Or do you think that the momentum you're seeing on the non-res side will be sufficient on its own?

We're getting closer when you look at where we did last year. Clearly, as it mixes more towards a construction improvement, especially in mechanical, we think our electrical margins will get back to what they are. The way I think about the business, T, is if our electrical guys can operate 6, 6.5, 7, 7.5 -- somewhere in there on a sustained basis -- once in a while they will bump a little bit above that, sometimes they will be a little bit below that. I'm talking on an annual basis or a six-quarter look back.

Right.

If our mechanical guys can operate 5.3 to 6; if we can get building services into the mid-4s, and if we can get industrial -- last year we finished at close to 8. If we can get that a little bit above 8, we can get to 5. So they don't have to be at optimal levels. They can be in that range and we can get there and it depends on the mix. We do think we're in an environment now where -- I think the untold story on SG&A in the first quarter was actually a positive one. We got all this stuff going on with insurance year-over-year, and some of that had to do with actuarial changes last year and then -- a whole bunch of things that go on to that.

The biggest thing when you look at the positive story on SG&A, we had 11% backlog built. And in our fixed cost structure, which is not the unabsorbed part in industrial, we had 2% headcount build.

So we think we can do a lot more work with not adding a whole lot of people. And so we expect and we've said that for a while we expect to get leverage on our SG&A. And our hiring patterns would suggest we're going to get that. We haven't added a lot to the fixed cost structure.

And the second thing I think that helps with our margins is, with commercial being $1.3 billion, that's some of the better work that we do. Very rarely do we have at EMCOR a commercial job that does sideways in a big way. When we have a job that goes sideways in a big way it's usually a large institutional job, sometimes an energy or power job, or a water and wastewater job. And once in a blue moon, it will be a transportation job. They tend to be very good for us.

So, I look at the mix right now that we have as being pretty favorable for good performance. What you're seeing right now and some of the margins is, and I think Mark cover this a little bit in his comments, we had some very good power generation work finished in the first quarter of last year. We're in different part of the cycle on some of the larger work that we have. Now it has a little bit of a different risk profile. Our guys are appropriately cautious at the beginning of a job, as they really try to figure out, are we getting the productivity we expected? Are we going to be able to have the kind of prefabrication opportunities we thought we were going to have? Does the construction or project manager from the GC really know what they're doing and the flow of this job going to work? Do we not going to think we're going to have the trade stacking problems that can sometimes happen in a large shop?

So we are appropriately cautious upfront. We're actually employing labor, versus other people in our space that are employing people that employ labor. And so, we are not at all bothered by that because it's how we trained our folks to think.

Okay.

All right?

Yes, no, that's helpful, Tony. End of the day, it seems to imply margins right now on the operating side based on your guidance, let's say, around 4.5% or so. I guess my question is, let's take out USM and snow, let's take out refining, getting much better than wherever it ends up this year.

Can you still, on the commercial side, see enough of a pop into next year to really see margins coming close to that 5% mark?

I'd say it depends on how much SG&A leverage we get in the mix of work we have.

Got it, okay.

Mark, what would you contribute on it?

Yes, and I think clearly, T, when you look back at some of those historical results, we had a lot of other noise in the system. I think one of the things that we've done a very good job over the last two or three years is just eliminated a lot of the other earnings distractions, being the internal earnings distractions or lack thereof.

So we certainly don't need to have to hit a homerun or a grand slam to get to those levels. But to re-echo what Tony said, I think we have to be within a reasonable range of the midpoint of historical earnings by segment. And as Tony said, mix is a big driver. So, for whatever reason, if industrial becomes a larger percentage of the total, you are going to see a much more significant move in overall operating margins of the Company.

Conversely, if the UK ends up pushing through some more volume at higher levels, because it's been such a drag in the past, I think it's going to make a significant difference as well.

We've done a good job of stabilizing things. Clearly the discipline that we've executed or demonstrated with regards to project selection and customer selection has paid off over the long term. And we're optimistic that you're going to see that in our results as we go forward, and hopefully we get some sustained period of broader economic favorability that we haven't experienced now for a number of years.

Got it, okay. Thanks a lot, folks.

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

No. Thank you very much for your interest in EMCOR today. Like I said, we're not big excuse-makers here, but we thought it was really important that you understand how some of these external factors impacted us here in the quarter. They were unusual. We certainly look to build on very good underlying fundamentals in our business and look forward to talking to you in July with our second-quarter call. Thank you very much.

Thank you. That does conclude today's conference call. You may now disconnect.