EMCOR Group, Inc. Q4 2008 Earnings Call Transcript

| About: EMCOR Group, (EME)

EMCOR Group, Inc. (NYSE:EME)

Q4 2008 Earnings Call

February 26, 2009; 10:30 am ET

Executives

Kevin Matz - Executive Vice President, Shared Services

Frank MacInnis - Chairman and Chief Executive Officer

Anthony Guzzi - President and Chief Operating Officer

Mark Pompa - Executive Vice President and Chief Financial Officer

Mava Heffler - Vice President of Marketing and Communications

Sheldon Cammaker - Executive Vice President and General Counsel

Eric Boyriven - FD

Analysts

Rich Wesolowski - Sidoti & Company

Min Cho - FBR

John Rogers - DA Davidson

Jeff Beach - Stifel Nicolaus

Tahira Afzal - Keybanc

Operator

Good morning, my name is Christine and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group Fourth Quarter Earnings Conference Call. (Operator Instructions). I would now like to turn the call over to Eric Boyriven of FD. Sir you may begin.

Eric Boyriven

Thank you and good morning everyone. I’d like to welcome you the EMCOR Group Conference Call. We’re here to discuss the company’s 2008 fourth quarter results, which were reported this morning. I’d now like to turn the call over to Kevin Matz, Executive Vice President, Shared Services, who will introduce management. Kevin, please go ahead.

Kevin Matz

Thank you, Eric and good morning, everyone. Welcome to EMCOR Group’s earnings conference call for the fourth quarter of 2008. For those of you who are accessing the call via the Internet in our website, welcome, and we hope you have arrived at the beginning of the slide presentation that will accompany our remarks today.

Currently, everyone accessing the slides should be on slide 1, which is the EMCOR title slide. During the call, instructions will be given for you to advance to the next slide. So let’s do it, please advance to slide two.

Slide two has the executives who are with me to discuss the quarter and full year results. They are Frank MacInnis, Chairman and Chief Executive Officer; Tony Guzzi, President and Chief Operating Officer; Mark Pompa, our Executive Vice President and Chief Financial Officer; Mava Heffler, Vice President of Marketing and Communications; and our Executive Vice President and General Counsel, Sheldon Cammaker.

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

Before we begin, I want to remind you that this discussion may contain certain forward-looking statements. Any such statements are based upon information available to EMCOR 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 materially differ 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 effect of general economic conditions, changes in the political environment, changes in the specific markets for EMCOR services, adverse business conditions, increased competition, mix of business, and risks associated with foreign operations.

Certain other of risks and factors associated with EMCOR’s business are also discussed in the Company’s 2007 Form 10-K and in other reports filed from time-to-time with the Securities and Exchange Commission.

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

Frank MacInnis

Thank you, Kevin. I certainly hope the rest of our presentation is more uplifting than that. Good morning, everyone. And welcome to our 56th regular quarterly conference call for investors, analysts, and other friends of EMCOR Group. This is also the 14th annual year-end earnings call over which many of our senior management team members have presided. A very important aspect of our long-term strategic continuity and the consistency of our operational performance.

Today’s call is being conducted as usual by telephone and by simultaneous webcast. I’ll be referring from time to time to a slide number to identify the relevant slide of webcast participants.

Right now we are still on slide two. The focus of today’s call will be the EMCOR Group fourth quarter and full year 2008 earnings press release and the 2008 Form 10-K that we issued and filed earlier this morning. We’ll conduct this call in our customary format.

First, a presentation and discussion of those operating results, and our year end balance sheet and my comments on the major factors that led to our excellent 2008 financial performance.

Then we’ll discuss the evolution and current status of our contract backlog report, and its significance with respect to future revenues and financial results. At that point, Tony Guzzi, our President and Chief Operating Officer will take over to present and discuss some noteworthy recent contract awards that illustrate the strength and diversity of EMCOR companies and the continued demand for our services across a wide range of markets, and then I’ll be back. I’ll be back to discuss our expectations for EMCOR’s 2009 operational and financial performance amid challenging recessionary trends that are affecting nearly all companies.

Only in my guidance discussions there will be an opportunity for call participants to make comments or to ask us questions. As you can see from slide two, a number of EMCOR Senior Officers are here to help me with the answers. So let’s begin.

Please go to slide three. It’s my pleasure to announce that 2008 was the best year in EMCOR’s history setting all time records for revenues, operating income, operating margin, net income, diluted earnings per common share and operating cash flows.

Revenues in 2008 were $6.79 billion, a 14.5% increase over 2007, our previous highest revenue year. All of our major operating segments, except our UK. .businesses, reported significant revenue growth. US electrical and mechanical construction and facility services revenues grew a collective 10.5% year-over-year.

Canadian revenues rose 11. 1%, and our U.S. facility services segment, along our primary strategic growth target grew 45% over 2007 levels due in part to our recent investments in refinery maintenance and mobile serves.

UK revenues declined 7.5%, due in large part to foreign exchange fluctuations. Overall, revenue growth reflected strong demand for EMCOR services in a wide variety of markets.

Operating income also grew dramatically, rising 51% year-over-year to a record $303 million, reflecting a record operating margin of 4.5%. Highlights of operating income growth included a 29% increase in U.S. electrical, a 60% increase in our Canadian company, and a remarkable 133% increase in U.S. facility services. Once again reflecting the excellent performance of some of our recent investments in this sector.

Our UK Company also performed well, reporting operating income of more than $13 million, compared to a loss of roughly the same amount in the previous year.

Please go to slide four. The result of this excellent company-wide operational performance was at 48.1% increase in pre-tax income to a record $299 million and diluted earnings per share from continuing operations of $271 million 46% more than the $1.86 EPS that we reported in 2007.

Our record earnings were also of very high quality as measured by cash generation. Cash flow from operations rose to a record $335 million. As a result of our excellent cash generation and our typical conservative cash management policies, balance sheet cash stood at an all-time year-end high of $406 million, while stockholders equity reached $1.04 billion.

We are proud of our 2008 performance, which was both strong and balanced company-wide. All our divisions performed well, but I think that a special mention must be given to our U.S. facility service segment whose operating income more than doubled to $102 million, more than a third of our company total.

For more than a decade, we have been working to build our facilities services segment with a strategic goal of creating a balance of the inevitable cyclicality of our construction operations. Although we’ll never be completely finished with the construction of this internal revenue and earnings hedge, we have clearly made major progress toward this worthwhile goal.

As a further indication of the achievement of a broad and diverse earnings base and result in consistent performance, the fourth quarter of 2008 was our 54th consecutive profitable quarter. 13.5 years is a long time, including several business cycles. And current events have clearly demonstrated the difficulty that many good companies have experienced in maintaining profitability over such a long period.

We believe that this long-term consistency demonstrates that the EMCOR model works and that it will continue to support profitable operations despite severe macroeconomic challenges.

Slide five depicts those fourth quarter results. The most profitable fourth quarter in our history. Although revenues declined slightly year-over-year to $1.68 billion, operating income increased more than 17% to $101 million and diluted earnings per share from continuing operations grew 20% compared to the last quarter of 2007 to a record $0.90.

Slide six reflects the 2008 full year results whose highlights are reviewed a few minutes ago together with comparisons and variances with 2007. The 14.5 year over year revenue increase was roughly masked by an increase in general administrative expense attributable primarily to acquire businesses together with the incentive compensation plans tied to corporate performance.

Costs of sales during 2008 included a $7.9 million charge announced earlier this year in connection with an adverse jury verdict and a $7 million charge in the fourth quarter with respect to the impairment of the value of our investment in a venture. The diluted earnings per share impact of these two charges were about $0.14.

My final comment on slide 6 is the transformational effect on EMCOR’s operating margins that has resulted from strong operating performance and an absence of badness; if you will, cross our company.

Together with the impact of our investments in the refinery service and mobile service sectors. 4.6% operating margins represent a more than 100 basis point improvement over the year ago percentage and set a new benchmark for EMCOR’s performance capability, as well as some breathing space in the event that the current recession ultimately reduces available operating margins.

Slide seven reflects the strong and liquid balance sheet that results from excellent operating cash flow, strict debt control and conservative cash management. Year-end cash rose more than $150 million to $406 million, while total debt was reduced by $27 million to $200 million.

A ratio of 16.1% of total capitalization and well within our comfort zone. Very recently, we entered into an interest rate swap with respect to the 197 and three quarter million dollar remaining principal amount of the term loan comprising nearly all of our term debt to hedge an interest rate until the term loans maturity in late 2010.

We believe that our financial strength and liquidity are an important aspect of our appeal to current and future customers, and a significant differentiator in challenging times. Our construction of facility services backlog, calculated with our usual conservatism, declined by $495 million at year-end 2008, to a level of $4 billion, compared to $4.5 billion at the 2007 year-end.

Our detailed backlog analysis is at Slide eight. Although our backlog portfolio projects is at the second highest year-end level in our history, 2008 backlog trends included significant reductions in our hospitality and gaming and commercial markets.

Partly offset by growth in our transportation, industrial, institutional and water and waste water sectors. This pattern, reduction of capital investment and private sector facilities offset by growth and sectors financed at least in part with public funds is typical of recessionary effects on the engineering and construction business.

On the negative side, by far our biggest reduction in year-over-year backlog was in the Las Vegas hotel and casino market whose $364 million backlog reduction reflecting our progress on continuing projects, deferral or cancellation of several large jobs and a reduction of new orders constituted $364 million or 74% of our overall backlog reduction.

Backlog outside of Las Vegas declined $131 million or 3.4% year-over-year, relatively stable performance. And we saw annual growth of 25% in our industrial sector, 18% in transportation backlog, 13% in institutional and 21% in water and waste water. Our healthcare backlog fell $47 million or about 7%, primarily due to a very large backlog award in late 2007, and the absence of a similar large award in 2008.

However, our healthcare portfolio remains large and we are confident about our future prospects in this important sector. Here to tell us about some recent project awards in sectors that we believe will perform well during the current recession is our President and Chief Operating Officer, Tony Guzzi, please go to slide nine.

Anthony Guzzi

Thanks, Frank. On slide nine, we will highlight a number of industrial and healthcare projects this quarter, as we continue to see increasing demand for our services in those areas across the country and in Canada.

As those of you who know us, EMCOR has broad installation and service capabilities, pretty much across all sectors, all markets and all major geographies. Today, we’ll start with Canada, and then our Comstock subsidiary we’ll see that they have expertise supporting nuclear power generating facilities.

Comstock Canada has a significant ongoing relationship with Bruce Nuclear and they gained this relationship after the successful removal and replacement of the 16 steam generators on units one and two at Bruce Powers nuclear power generating facility on the shores of Lake Huron, about 200 miles north of Toronto.

Since then, they have been involved in continuous activities in support of this facility. Comstock’s current project is for Bruce’s nuclear generating facility in Tiverton, Ontario. Comstock will provide mechanical and electrical construction and installation services supporting the refurbishment of the facility’s four 900 megawatt class can-do-type nuclear reactor units.

As part of the valve replacement program, Comstock’s work consists of replacement and flushing of low pressure service water and high pressure recirculation water piping. In terms of Comstock’s nuclear credentials, and they are broad, to-date they have spent over 1 million man hours on this site, with an outstanding safety record, by the way, and overall, have completed 5 million man hours in the Canadian nuclear power generating industry.

This will be an important credential, not only in Canada, but across North America. Complimenting Canada, our Comstock credentials, we made an acquisition of MOR PPM in November. And what it is, it is an industrial and power plant services provider. It came in November of 2008, and it has been awarded a renewal contract from the Nebraska public power district for outage and maintenance support services for fossil and hydro facilities throughout the state of Nebraska.

MOR PPM has worked with the power authority since 1998 performing outage and maintenance services for its fossil and nuclear generating plants. MOR PPM scope of services include; installation of new equipment, pipefitting, pipe and valve replacement, and structural support and pipe welding.

This contract covers the entire state, as the public power district in Nebraska’s largest electric utility. With a chartered territory, including all or part of Nebraska’s 91 counties. PPM has fossil, nuclear, industrial maintenance and small task construction capability and it pretty much does it’s cross the country.

Our Trautman & Shreve, Denver-based mechanical subsidiary, a long-term EMCOR company is working on an exciting project at the Vestas Wind Turbine Tower Manufacturing Campus. This 600,000 square foot facility will be Vestas’s lead facility. Trautman will be installing 2.4 million pounds of duct work, including 8 miles of spiral and two miles of vacuum dust systems.

Additionally Trautman will be installing miles and miles of industrial gas and plumbing piping, as well as installing 20 rooftop air handling units and they will provide a total HVA solution for this alternative energy facility.

In Baltimore, our Poole & Kent subsidiary will be responsible for the complete mechanical systems installing and supporting the construction of a new air quality scrubber system for Brandon Shores Constellations Energies power plant.

Poole & Kent scope consists of 80 piping installation packages to include the installation of plant air, control air, oxidation air, make up water, hydro piping and missed illuminator systems.

Switching to healthcare, our J.C. Higgins subsidiary is providing the HVAC plumbing and fire protection systems for the new three-level expansion for Sturdy Memorial Hospital at Attleboro, Massachusetts. Higgins has worked in very close consultation with hospital management as modifications are required to the central chilled water plant while maintaining services and keeping the hospital functioning.

Higgins as does most EMCOR companies has a leading local market position in healthcare, biotech, medical lab capabilities and construction. Staying in healthcare, Hyre Electric, which is in Northwest Indiana, is providing the electrical and communications work for a new MRI CT addition to St. Mary’s Medical Center in Hobart, Indiana.

Hyre’s scope installation of new state-of-the-art MRI and CAT Scan and Ultrasound imaging equipment with associated upgrades to the existing high voltage and generator switch gear, as well as providing electrical systems installation for a new family reception area.

And finally, our Welsbach Electric Subsidiary here in the New York City area will be removing and refurnishing and installing 83,000 new 150-watt energy efficient state-of-the-art electronic [inaudible] in New York City’s Four Burrows, Staten Island, The Bronx and the City as it continues to be more and more energy efficient and green. And with that I’ll kick it back to you, Frank.

Frank MacInnis

Thanks, Tony. We are please and proud of these fresh indications of demand for our services from top-notch customers in the promising nuclear conventional and renewable power sectors, healthcare, and transportation.

Please go to slide 10. As I look forward to the remainder of 2009 and beyond, the business climate is one of profound uncertainty, especially for the second half of this year. If EMCOR was a pure play single market company, I would be very seriously considering about possible erosion of shareholder value this year.

Fortunately, we are the largest and most diverse company in the specialty construction and facility services sector with the skills, ability, financial strength and customer relationship necessary to compete and perform at the highest level in a multitude of markets. And our long history of profitability, through a number of market cycles, speaks to our ability to adjust to current market conditions.

Slide 10 identifies some of the challenges and opportunities that we believe will affect our performance this year. Firstly, we assume for base case purposes that recessionary pressures will be a factor all year long with credit constraints gradually easing, but nonetheless continuing into 2010. It’s worth noting that EMCOR’s customer base consists primarily of large, well capitalized companies and institutions. That will be among the first to benefit from positive trends and credit availability.

Until then, however, we expect the commercial and the hospitality markets to remain under heavy pressure, especially the casino markets with its highly leveraged projects and reliance on discretionary consumer spending.

On the other hand, as I mentioned early and as Tony Guzzi illustrated in his review of recent awards, we are heavily involved in sectors that tend to perform in a stable fashion despite macroeconomic circumstances and we demonstrated backlog growth in those sectors in the last 12 months.

Additionally, it’s important to keep in mind that EMCOR derives more than 30% of our revenue from service work on existing facilities. Performing essential services like keeping the lights on and the heating and air conditioning working, and being paid from our customer’s operating budgets, not from their discretionary capital expenditures. This is, of course, intentional.

We built our service business to its current $2 billion level precisely to help us weather the effects of inevitable cycles in the construction sector. Combined with a $4 billion backlog portfolio, two-thirds of which is now within the transportation, healthcare industrial, institutional and water and waste water markets, we believe that we have the solid foundation for continued profits in 2009. And our strong and liquid balance sheet will enable us to avoid the pressures associated with excessive debt service requirements, while giving us the opportunity to acquire strategic acquisitions.

Slide 11 is one that you have seen before, but that bears repeating in a conversation about our performance and recession. In addition to a broad range of services to a multitude of markets, our 76 companies have well-deserved reputation for effective contract administration, the result? At year-end EMCOR companies were $496 million net over-billed, a significant safety factor in our cash flow performance and a major factor in the reduction of claims and disputes with our customers.

In past recessions, we have noticed the challenging economic conditions stimulate outsourcing of facility services as our customers concentrate on their core businesses and leave building maintenance and energy efficiency to the experts. We have also earned a reputation for strict cost control.

Including close management of cash and overhead expenses, which were already reducing to help us to protect margins. EMCOR benefits from the fact of more than 74% of our labor costs are completely variable based on our strong relationships with the labor unions in the construction sector.

We are very serious about the pursuit of strategic investments from the small to the very large, whatever makes sense for a company that was built for the long-term, and is devoted to consistent creation of shareholder value.

Finally, we expect our international operations, which have experienced earnings downturns from time-to-time in the past to be stable and profitable in 2009. We are particularly pleased with our Comstock Canada position in that country’s well-developed nuclear power industry, earning valuable credentials for the coming American nuclear renaissance.

Please go to slide 12. I have talked to you today about many of factors that will affect EMCOR’s performance this year and into 2010. Our backlog strength, market diversity, and financial conservatism. Our customer’s access to credit and willingness to commit capital to new projects or upgrades to their facilities, and the possibility of an investment or acquisition in response to market opportunity.

There is one more factor that can’t be ignored as a potential contributor to EMCOR’s growth in 2009 and more likely in 2010. The recently signed America Recovery and Reinvestment Act, providing $787 billion, isn’t it amazing how easily we talk about billions now? In spending and tax cuts to jumpstart the recession damaged economy.

Although it is impossible to know with certainty, the actual value and timing of stimulus spending in sectors where EMCOR is active, it is nonetheless very clear that we stand to benefit from the Acts’ Spending Provisions in a number of target sectors, including the following; Transportation $49.3 billion allocated. EMCOR’s $810 million existing transportation backlog and our historical project credentials include major and very successful highway and associated light rail projections, major airport improvement and maintenance contracts, and port and cargo handling facilities.

Defense and veterans, $7.8 billion allocated, this budget items targets V.A. hospitals, DOD construction and modernization projects, all areas in which EMCOR is currently active as part of our $465 million institutional backlog or has valuable experience.

Energy $30.6 billion allocated. Energy both its generation, transmission and has the efficient consumption is at the core of EMCOR’s business. This budget item targets the electrical grid, energy efficiency retrofits and grants and renewable energy project reports.

Buildings; $13.4 billion allocated, this item targets GSA Federal buildings, energy efficiency upgrades, facilities on federal lands, Homeland Security and courthouse buildings among others. EMCOR is a major market participant in GSA and federal facility construction, maintenance and energy efficient upgrades.

Lastly, water in the environment, $20.1 billion allocated. EMCOR’s $286 million water and waste water backlog currently includes construction and upgrading of major water treatment and distribution infrastructure projects.

In the case of many government funded projects, a significant differentiator between contractors is their ability to provide surety bonds assuring the owner of the completion of the project. EMCOR’s access to surety bonding, long one of the best in the industry, remains completely unimpaired and available to support its participation in stimulus related projects, especially large or long-term ones, on an advantageous basis.

We don’t know where or when the opportunity will arise, but it seems clear that EMCOR’s contract opportunities in late 2009 and 2010 will include projects enabled by the stimulus program. I should stress however; that not a single dollar our base case revenue and profit expectations depend on the receipt of benefits from the recovery and reinvestment act.

So with this much uncertainty and all these moving parts, what do we expect to see in revenue and profit terms in 2009? Please go to slide 13. Each year, our bottom-up budget process enables us to ultimately arrive at an earnings number, which depends only on the continuation of current business conditions with no material degradation of markets or our customers’ access to capital and likewise no significant improvement in our business opportunities.

This base case number also excludes the impact of purchase and sale transactions of material size. Typically, we designate this highly confident number at or near the lower end of our estimated earnings range for the year. As shown on Slide 13, for base case earnings estimation purposes, we assume a decline in 2009 revenues from our 2008 revenues of $6.785 billion to a range of $6.0 billion to $6.3 billion, a reduction of 72 about 11.5%.

We similarly assume a reduction in our operating margins from our record 2008 performance 4.5%, to a range of 3.0% to ‘3.5%, reductions of 25 to 29% respectively. The very conservative result is a base case 2009 estimate of $1.80 per diluted share from continuing operations. We are highly confident in this number, as a reflection of our 2009 earnings capacity with the foregoing assumptions. And believe that those assumptions are extremely conservative.

Customarily, we would then assign, as the upper end of our estimated earnings range, a number that reflected the positive impact of improvements in various relatively predictable business conditions. Interest rates, employment, energy prices and the like that could raise your earnings above the base case.

In the last few years, we have been able to report earnings that have frequently exceeded the upper end of the range as we did again in 2008. Today I’m unable to designate an earnings number representing the upper end of the range. Today’s market contains the usual number of variables, together with two major market factors that are completely outside of our control and impossible to predict.

The impact of the stimulus spending package just discussed and the pace of restoration of normal credit and lending conditions. As previously discussed, each would be positive in terms of EMCOR’s opportunity to exceed our base case earnings number, but I cannot adequately quantify our upside potential to arrive at a number I could defend as a logical result.

Accordingly, we’ll estimate only our base case results at this time with an assurance that we will return to you with revised estimates, including an earnings range, as soon as the second half of the year becomes predictable and in any case not later than our report for the second quarter. That’s it for now, except to congratulate and thank our thousands of loyal, dedicated and talented EMCOR employees for the efforts that led to record results in 2008 and a 54th consecutive profitable quarter and a strong and liquid company sailing in stormy seas.

Now it’s time for your questions and comments. And Christine is here to tell you how to queue.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Rich Wesolowski – Sidoti & Company.

Rich Wesolowski – Sidoti & Company

I was trying to unearth a 4Q revenue and profit number for the 2007 facilities acquisitions including Ohmstede from the 10-K. And I came up with $100 million in 4Q sales and $2 million in operating profit, is that accurate?

Frank MacInnis

That’s close enough.

Rich Wesolowski – Sidoti & Company

How much help will you get in ‘09 from at least a lower backlog amortization expense?

Frank MacInnis

We discussed when we closed the Ohmstede transaction on late ‘07 that there was going to be a tremendous amount of amortization that was going to burn early on related to the contract backlog. That obviously has happened. However; as you know, we did close additional transactions in 2008. So, we are going to be looking at an annual savings of amortization expense ‘09 versus ‘08 anywhere between the lower 3’s up to $4 million year-over-year.

Rich Wesolowski – Sidoti & Company

Three to four million. Frank can you talk about any even anecdotal differences you see in competition between today and what you would expect for the next year and what you had seen last downturn, given that there is a broad weakness in almost all construction markets, including those that you don’t play in?

Frank MacInnis

First of all, Rich and listeners, we have said it before and we’ll say it again. We do not experience meaningful competition from housing contractors who attempt to move over to non-residential construction or infrastructure construction during downturns in housing. They have different kind of skills, different balance sheets, different labor relationships and we don’t see them as a factor.

The differentiating process that takes place in a recession tends to benefit companies like EMCOR because of our customer’s tendency to gravitate towards companies like EMCOR who are financially strong, capable of providing essentially unlimited surety bonds, and therefore, a source of certainty insofar as both the timely and the budgetary compliance with contract requirements.

So, in past recessions, we have seen EMCOR perform well, relative to its smaller competition and all of our competition is smaller, because we are the largest in the business. As I mentioned before, we have also seen significantly less recessionary impact on our facility services business than we have on construction, which has always been more cyclical. And that is the reason why we established our multi-billion dollar facility serves business in the first place some ten years ago.

We see, in times of recession, customers looking to concentrate on their core businesses, and outsourcing to EMCOR and similar experts, responsibilities for non-core activities like facility management. So, that has been our experience in past recessions and early anecdotal experience would suggest that facility services seems to be performing in a stable fashion with relatively predictable results for the current year.

We have also noted during my commentary, the tendency for contract backlog to gravitate towards publicly funded either in whole or in part sectors like healthcare, like transportation systems, like water and waste water during recessionary times. The difference between EMCOR’s position during this recession and the last one is that we are a whole lot larger, nearly twice as large, in many respects, a lot richer, a lot more diverse and a lot better managed than we were during the last recession. I’m therefore quite optimistic about our performance this time around.

Rich Wesolowski – Sidoti & Company

Lastly, in a discussion of your gross profit in your 10-K here, you added in 4Q, a mention of significant losses at a U.S. mechanical company. Can you give us a built of detail on the existing backlog of this company?

Frank MacInnis

That was one of our California mechanical construction companies, if memory serves, the losses were about $11 million.

Rich Wesolowski – Sidoti & Company

And is this, are the losses taking on jobs that are close to complete, already complete? Can you give us a little detail there?

Frank MacInnis

As is customary and indeed required in our business, we recognize the entirety of all losses once they become visible. That company, just for your information, has been in the downsizing process for the last couple of years and our downsizing process is complete on that company at this time, which has reverted to its long time historical size after a period of unwarranted growth.

Operator

Your next question comes from Min Cho – FBR.

Min Cho – FBR

Frank, I missed some of your commentary about the backlog increases by segment. Do you mind going over that again real quick?

Frank MacInnis

Let me see if I have got them to hand. Kevin, do you have them quickly?

Kevin Matz

Yeah I do have them, although you could always call me back, if you want.

Min Cho – FBR

Okay, that’s fine.

Frank MacInnis

No, I’ve got it here. 25% in industrial, 18% in transportation, 13% in institutional and 21% in water, waste water. Healthcare was off about 7%, but that was due to a particularly large booking in the fourth quarter of 2007. So, we didn’t expect to be able to replicate healthcare in 2008 and in fact that portfolio still remains large and healthy, if you will.

Min Cho – FBR

Also, Frank I think you touched on this a little bit in your commentary. But in terms of your cash and potential acquisitions, can you talk about which sector kind of what markets geography that you are looking at acquisitions?

Frank MacInnis

Sure. First of all, it is all but certain that any significant incremental investments or acquisitions that we would make would be in the United States. Number two; they would almost certainly be based in the expansion of our facilities services segment. With special emphasis on government services, on fire protection, and perhaps in the oil and gas sector. The mid stream and downstream aspects thereof.

Min Cho – FBR

Also, in terms of your margin expectation for your base case 2009, are those margins coming from what your margins currently look like in the backlog? Or is it anticipation almost a worst case scenario of what margins could look like in your new awards?

Frank MacInnis

This is a highly confident number, Min. So, we have really cut these dramatically. We performed 4.5% during 2008 and most of the backlog we carry into 2009 was booked during periods when prices were at or around that level. So you can see the conservatism of an OI percentage estimate in which we dropped from an actual performance level of 4.5 to a range of 3.0 to 3.5 for estimating purposes. Tony, you have a comment?

Anthony Guzzi

Yeah. We know what is in our backlog we have good work in our backlog. We have said it a number of times, we have decent visibility through the first half of the year and why the conservatism around the number as we replace at the back half of the year and the mixed shifts to more public sector work and the margin shift with it.

Min Cho – FBR

And then finally, I noticed that your U.S. electrical margin was extremely high this quarter, relative to the last several years. Was there anything that was kind of one-time in nature? Or a big increase in mobile service revenue or anything that led to that strong margin?

Frank MacInnis

The mobile service margins would be in our, U.S. facility services segment, the margins there were very good, and nothing abnormal other than just great execution. I would make the same comment about our electrical margins. There is nothing particularly a one-time of nature. It is just good execution towards the end of projects and we are benefiting from that.

Mark Pompa

Min, this is Mark Pompa. Looking back to 2006, I think you mentioned we had some project difficulties with our Southern Florida operations. So when you look at the margins back in ‘06, relative to ‘07 and ‘08, that’s what was driving that performance.

Operator

Your next question is from John Rogers - DA Davidson.

John Rogers - DA Davidson

In this downturn that we are looking at for 2009, and given that you have expanded this facility services business, in the event of the downturn, does this business decline meaningfully, the way the rest of the sectors will that are new construction oriented? Do you expect it to grow?

Frank MacInnis

This is clearly our design. It seems like a long time ago now, but I remember meeting with you and other analysts during good times and saying that EMCOR is of the view that we are now one day closer to the next recession, whenever it might be. Well, here we are. But EMCOR entered into this recession prepared. And in one particularly important way, that is the balance between our facility service prospects and our more cyclical construction prospects.

The facility services were always intended to be a hedge against the cyclicality of construction. And in fact, our experience in the two previous recessions I presided over is that the facility service revenues are actually stimulated by recessionary circumstances as our customers, in response to their challenges, outsource non-essential or non-core activities like facility administration to experts like EMCOR, so that they can downsize their personnel base and concentrate on their core businesses.

We certainly do not expect anything like the downward pressure on facility services that some parts of the construction sector are experiencing. And growth is entirely possible in these circumstances, as it has been in the last two recessions.

John Rogers - DA Davidson

And then secondly, I would assume in this kind of an environment, any sort of an acquisition that you would be looking at, would be substantially accretive immediately, given the valuation levels. Is that fair?

Frank MacInnis

Yes, that has always been our intention. Any transaction that I can think of that EMCOR has ever participated in has been immediately accretive and we would certainly expect acquisitions, especially with the kind of bargains that I see emerging in this market to be immediately potentially significantly accretive as well.

John Rogers - DA Davidson

And is it your sense there is more willing sellers out there?

Frank MacInnis

Getting that way by the minute, John.

John Rogers - DA Davidson

Okay. And lastly, this maybe in the case, so I apologize, organic growth in the quarter?

Frank MacInnis

In the quarter, Mark do you have that?

Mark Pompa

Organic revenue growth in the quarter, well actually it was an organic decrease of about 8.5%. Revenues of quarter-over-quarter are down 4.9%. And then for the year, organic growth was 6% of the total 14.5% increase in revenues.

Operator

Your next question is from Jeff Beach - Stifel Nicolaus.

Jeff Beach - Stifel Nicolaus

Looking back at the last recession, I was looking at my models, you were particularly hard hit in U.S. mechanical, but it happened in 2003 and 2004 after the non-res construction market was into an up-turn. Can you describe that market then? And if there is changes what’s different now?

Frank MacInnis

The U.S. mechanical and electrical, for that matter sectors were extremely hard hit by the previous recession. My recollection is that our revenues were down something like 37%. The sector revenues were down by that percentage during that period. That was an extremely severe and sharp recession. This one definitely doesn’t feel like that one, to me.

However, specifically, with respect to mechanical construction and facility services, we had a couple of very significant specific losses associated with that period. And mechanical operation and in fact, directly as a result of that, we not only reorganized the management of our mechanical services division, bringing it under the control of the talented individuals who have previously been managing electrical, but you may recall, I changed senior management shortly after that as well with respect to the operational control of the company.

Tony made a very good point during his commentary this morning as did I, that our current operations have been characterized by the absence of the badness, the shock losses that led to or perhaps exacerbated the downward trend of our ratings during the last recession. It’s worth pointing out, while I’m at it that unlike a number of our competitors or either declined really dramatically into losses or even disappeared, that EMCOR remained profitable through the last recession albeit at significantly reduced levels. This time around, we are in much better shape in all respects, therefore I expect us to do much better.

Anthony Guzzi

When you go to that mechanical discussion, Jeff, this is Tony, Frank highlighted it, what specifically happened is we had three subsidiaries that tried to grow in a bad market. You’d say, we should have been on top of it. I think that is one of the reasons I’m here is because we took some really tough work, really we have been working our way out of three or four-year period since.

We feel good about the backlog position across both our mechanical and electrical businesses today. A lot of credit goes to the folks tat are running those business. We have changed out a number of subsidiary managers both on the operational side, the CEOs and the CFOs of some of the problem companies. We have seen the benefits of that.

Finally when you look at the drag that had on us as we came out in ‘05 or ‘06, we are clearly trying to prevent that from happening again with the mix of work that we are taking today.

Frank MacInnis

Jeff, there is one other comment that I would like to make and it is not precisely an answer to your question, but it bears on both of your question and John Rogers previous comment. We made two significant acquisitions in 2002 right at the beginning of the recession that ensued thereafter. Now they didn’t help us much during the recession, but we bought them, at recession affected multiples that were so cheap that they enabled us to hold on to those companies and they are among the best performers in our company and contributing materially to EMCOR’s record performance.

So I see the same kind of bargains arising now the opportunity to buy good companies at low multiples that will enable us not only to get through there recession well, but to perform even better and create even more shareholder value on the far-end.

Jeff Beach - Stifel Nicolaus

All right and just as a follow-up, if we see deteriorating conditions through there entire year, with maybe a recovery beginning sometime next year and you have your typical mixed shift going from high margin commercial and other work into lower margin institutional work, is it likely that we are going to see lower margins in 2010?

Frank MacInnis

Boy, I wish I had the answer. I think not. Here’s why I think not. I think that thinking back to the five segments of our construction market that I talked about as likely recipients of benefits from the stimulus package, the total value of those five segment allocations is $100 billion. Let’s just pause for a second to think about how much money that is. What that is, is 15% of the total value of non-residential construction put in place in the entire country all of last year. It is a huge number.

And the likelihood of EMCOR, even if you want to do some basic math and say okay, so there was $700 billion of non-residential construction put in place and EMCOR is a $7 billion. So our market share is 1%. Let’s take that as a mathematical basis. That means if my math is correct and is it sometimes is, our market share of $100 billion is $1 billion. Now, don’t quote me on that, but it seems to me very likely, that in 2010 if not before, there is likely to be significant impact on our sector and on our company with respect to an up-turn in pricing and in profit opportunities.

Anthony Guzzi

And typically Frank on transportation and water and waste water, the margin characteristics aren’t as bad as some of the institutional work and other work when you think of public sector. We have a much more design, it is just design-built relationship in those jobs.

Operator

(Operator instructions) Your next question is from Tahira Afzal - Keybanc .

Tahira Afzal - Keybanc

I just wanted to get some clarification on the maintenance side of the business. It seems like what you are saying is that even if maintenance slows down, which you don’t think it will, but you still think that outsourcing will continue to drive it. Is that the correct way to look at it?

Frank MacInnis

Outsourcing decisions large and small drive most of our facility services business, I would say. The customer is typically making a choice between retaining specialized maintenance personnel in-house, or outsourcing the service to a trusted service provider, either on a long-term contractual basis or on a callout basis or a scheduled service basis or something of the kind. What we see during recessionary times is more customers with in-house maintenance personnel outsourcing that function, and laying off those personnel as part of the typical economization process that takes place when companies concentrate on their core businesses during recessions.

Tahira Afzal - Keybanc

And have you started seeing any of that yet? Or is this something you expect?

Frank MacInnis

It’s too soon. Let me say it would be typical of the recessionary process for us to see that.

Tahira Afzal - Keybanc

Okay. And then if I look at your base case assumption of $1.80, what would you have assumed in regards to the maintenance side? Are you assuming the business is flattish? Are you assuming the margins are flattish? I would love any color you can provide. I know it’s a bit difficult.

Frank MacInnis

I think flattish is a great way to describe both revenues and margins in that area. I think that these circumstances are so difficult to quantify, particularly on a full-year basis, that in being as helpful as we can be to the market, we can only say that we expect our profits to be at least the third best in our history, which is saying quite a lot in connection with what everybody believes is a prolonged and severe recession. And that our construction revenues and margins are likely in current circumstances to be more negatively affected than our facility services business.

Tahira Afzal - Keybanc

Then I have got one last question. And that is again just following up on Harry’s question earlier on. If I looked back to the last cycle, and Tony elaborated on this, you go into a lot of public sector work, when you saw the opportunity for the market picking up, you switched back, but there was an interim hiccup, because you held up on your business, so there was this one element as you switched from one to the other. And that impacted your business if I remember correctly. Depending on whenever the market comes back, what are you trying to do differently this time in terms of switching back?

Frank MacInnis

Well, first of all, we have entered this recession with much more backlog, much more money and much more diversification than in the past, including a dramatically larger facility services business, which we believe will perform in stable fashion. Secondly, a previously unmentioned but nonetheless important number in our last recession performance was unstable performance in our international operations, which contributed losses at the worst possible time.

I expect and believe that this time around in 2009, both our UK and our Canadian businesses will perform in stable and profitable fashion, and that takes one big potential problem off of our plate. As I mentioned, a few minutes ago, I think that the recovery of our markets, will pertain in large part to the improved access by our customers to credit availability that enables them to make discretionary capital expenditure investments.

Until then, many of our revenues will be funded from our customers’ operating budgets or from their maintenance CapEx budgets and we won’t see as much discretionary capital spending until our customers get braver in response to the restoration of predictable lending and credit circumstances. And I think that will be a gradual process fee. So we’ll see the stimulus package impacting our business and our sector in late ‘09 and into ‘10. That will beef-up prevailing prices on both sides that is on the public and on the private sector side of the construction business.

Gradually, our customers will regain our courage as they regain access to the credit markets, so we’ll just see the profits improving in the private sector during that process, and we’ll be exercising our usual selectivity in choosing those profits. I can’t help repeating what we said all along. That is that EMCOR, if we wished, could have six or eight billion dollars in backlog. We choose to have $4 billion because that is what is available at the kind of pricing levels we will accept.

Operator

And there are no further questions at this time. I would like to turn the call back to management for any closing remarks.

Frank MacInnis

Thank you all for your interest and support in EMCOR. Watch this space for interesting developments and we’ll see you in the quarter. Thanks a lot.

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