EMCOR Group, Inc.
Q3 2008 Earnings Call Transcript

Published: 23 Oct 2008

[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 third quarter 2008 earnings conference call. (Operator Instructions) Thank you. I would now like turn the conference over to Mr. Gordon McCoun. Sir, you may begin your conference.

[Gordon McCoun:]

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 third 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.

[R. Kevin Matz:]

Thank you, Gordon, and good morning, everyone. Welcome to EMCOR Group’s earnings conference call for the third 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. Please advance to slide 2. Slide 2 depicts the executives who are with me to discuss the quarter and nine months 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 change of 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 number of risks and factors associated with EMCOR’s business are also discussed in the company’s 2007 Form 10-K and 10-Q for the third quarter ended September 30, 2008, 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 T. MacInnis:]

Thank you, Kevin. You always manage to have it end happily. Good morning, everyone, and welcome to our 55th regular quarterly conference call for investors, analysts and other friends of EMCOR Group. Today’s call is being conducted as usual by telephone and by simultaneous webcast. And I’ll be referring from time to time to a slide number to identify the relevant slide for webcast participants. Right now, we’re still on slide 2. The focus of today’s call will be on the 2008 third quarter and year-to-date earnings press release and Form 10-Q that we issued and filed earlier this morning. We’ll conduct this call in our customary way. First, a brief discussion of those operating results including highlights of segment performance, cash flow from operations and overall quality of earnings. After commenting on our quarter-end balance sheet and liquidity, I’ll discuss the recent evolution and current status of our contract backlog portfolio with special emphasis on industry sectors that may experience changes in demand patterns. Then I will turn the call over to Tony Guzzi, our President and COO for his comments on some notable recent contract awards from around our broad and diverse group of operating companies, followed by a new analysis of our fastest growing business segment, US facility services. During our respective presentations, Tony and I will do our best to evaluate EMCOR’s excellent current performance and future prospects in light of the challenging macroeconomic circumstances in which most large companies are operating today. I’ll talk about trends that will define our performance through the fourth quarter and into early 2009. And I’ll provide modified revenue and earnings guidance for the 2008 full-year period. At that point, there will be an opportunity for our listeners to make comments or to ask us questions. And you can see from slide 2 that a number of our senior officers are on hand to provide helpful answers. So let’s begin. Please move to slide 3. In mid-1995, EMCOR began a record of consistent profitable operations that continues unbroken today, 53 consecutive profitable quarters later. Recent events have shown how difficult it is even for well-capitalized, well-managed companies to achieve such a record of consistent performance. It’s worth noting that EMCOR’s 13 and a half year of profit record includes several significant market cycles, an indication that our business model works in a variety of macroeconomic circumstances. Slide 3 represents the best third quarter in our history by a substantial margin in all relevant measures in financial performance, revenues, gross profits, operating income and operating margin and earnings. General and administrative cost rose primarily as a result of newly acquired businesses and incentive compensation accruals linked to the company’s excellent performance. Slide 4 reflects a similar pattern of performance improvement for the year-to-date period. During which revenues increased 23%, operating income rose 77% to more than $201 million, and diluted earnings per share from continued operations of $1.82 was 64% higher than in the year ago period. It’s worth noting that EMCOR’s operating income percentage rose year-over-year from 2.7% to 4% for the nine-month period, an important confirmation of market demand and quality of services. Slide 5 illustrates some of the performance highlights from our excellent third quarter. Revenue growth pointed to a strong demand across our broad range of services in geographic markets and all five of our business segments were profitable. Our US facility services segment reported dramatic growth notably from recent investments in refinery maintenance services as we continue to balance our specialty construction revenues with less cyclical facilities maintenance work. A record 4.6% operating margin for the quarter led to a 43% increase in operating income to a record $78.6 million, including positive contributions from both our Canadian and UK businesses. Our British business continues to reflect the success of our reorganization efforts and we’re very excited about our Comstock Canada Company and its growing strength in conventional and nuclear power generation. We continue our quarterly operational highlights on slide 6. Diluted earnings per share from continuing operations rose to $0.72 from $0.55 a year ago, a 31% improvement; and our quality of earnings was extremely high. Cash flow from operations year-to-date was just under $200 million, a testament to our disciplined approach to cash management and contract administration. Our record profits and cash flow resulted in balance sheet cash at quarter end of $341 million. And our stockholders’ equity surpassed the $1 billion mark for the first time. We’re proud of EMCOR’s performance during this record quarter and grateful for the efforts of the many talented EMCOR employees who made it possible. Slide 7, our balance sheet, illustrates our conservative approach to cash, liquidity, and leverage, a characteristic of our company for many years and a major factor in our long-term profitability. Balance sheet cash exceeds total debt by more than $140 million. Working capital rose to 476 million and our ratio of total debt to total capitalization declined to 16.5%, a modest level of leverage that we believe is well within our safety zone. Our $200 million debt is comprised almost entirely of a term loan from a consortium of banks. The original $300 million proceeds from which were used to pay a proportion of the acquisition cost of our Ohmstede refinery maintenance company. The term loan agreement requires principal payments quarterly in the amount of $750,000 plus interest with a final payment of all remaining principals and interest in October 2010. We have made voluntary pre-payments of almost $100 million, in addition to the mandatory quarterly principal payments to reduce the balance of the term loan to $198.5 million on September 30. We are in compliance with all contractual covenants related to the term loan and expect to remain so. We also have a revolving credit facility in the amount of $375 million, also from a consortium of banks whose agent has recently reaffirmed their credit commitment. We have no borrowings outstanding under the credit facility but have utilized $48 million of letters of credit in connection with normal business operations resulting in an available balance under the credit facility of $327 million. We believe that EMCOR has adequate access to and sources of operating and investment capital for the foreseeable future. Please go to slide 8. Here we show the continued evolution of our contract backlog portfolio, representing the value of unperformed work on hand from construction and facility services contracts. We calculate the values shown on this slide, very conservatively. In particular, we report the value of multi-year facility service contracts at no more than one year of base revenue. In addition, our backlog schedule omits a significant number of small, fast booming projects that in total amount to about 30% of our revenues, a percentage that – amount to about 30% of our revenues, a percentage that continues to increase in conjunction with the growth of the number of our U.S. construction and facility services businesses. Contract backlog as of September 30, 2008 was $4.42 billion compared to $4.48 billion at the end of the 2007 third quarter and $4.67 billion at the end of the 2008 second quarter. A slight year-over-year decline in contract backlog and a roughly $250 million sequential decline were both primarily attributable to the suspension of two large Las Vegas hotel and casino projects with a total value of about $170 million. Together with a modest decline in commercial project awards largely offset by increased construction awards in healthcare, water wastewater, transportation, and industrial contracts. Awards rose both sequentially and year-over-year in our healthcare, transportation, and water wastewater segments illustrating the success of our diversity business model and the stability it creates. Here to discuss some notable recent contract awards to some of our diverse family and EMCOR subsidiaries is Tony Guzzi, our President and Chief Operating Officer. Please go to slide 9. Tony?

[Anthony J. Guzzi:]

Thanks Frank. Diverse project demand continues across our markets and on slide 9, I’d like to walk through some representative projects that show our diversity that were obtained in the third quarter. For anyone that has traveled on the congested highways of Long Island, we are hoping to alleviate some of the traffic volume. Our Welsbach Electric Long Island Company is performing the electric work for the modernization of the intelligent transportation system and the lighting upgrade for 13 miles on the Wantagh Parkway. Welsbach's scope includes new variable message signs, all new parkway lighting, fiber optic cabling, CCTV cameras, and the central system software and integration. Across the river in New York City, our Forest Electric Company is installing the electrical systems for (inaudible 00

[Frank T. MacInnis:]

Thank you, Tony. We believe that the growth and profitability of our U.S. facility service segment has had a transformational effect on our revenue balance, on margin characteristics, and our non-cyclical earnings base. These will be important factors in EMCOR’s continued success amid macroeconomic challenges. For EMCOR's outlook for the remainder of 2008 and into 2009, please go to slide 11. In assessing EMCOR’s prospects for the remainder of 2008 and into next year, there is more than the usual number of moving part to keep in mind due to uncertainties in the credit markets. Some principles, however, seem very clear. As discussed a few minutes ago, EMCOR is well-capitalized with substantial cash, no net debt, and well-established credit relationships. We foresee no internally generated constraints on our capital employment and deployment for operational or investment purposes. Our very high quality of earnings based on the relationship of cash flow from operations to net income and our net over bill status of $554 million, an all time high, indicate carefully tended customer relationships and sophisticated contract administration. It’s possible that prolonged uncertainties in the credit markets may ultimately impact the capital expenditure budgets of some of our customers. It’s important to know, however, that between 60% and 65% of EMCOR’s revenues including essentially all of our facility services revenues are derived from work on existing facilities as opposed to new Greenfield projects. As such, we believe that the majority of EMCOR's revenues are funded from our customer’s operational or maintenance CapEx budgets not from major long-term discretionary capital low base. We are exceptionally diverse and well-established in largely non-cyclical end markets like healthcare, water and wastewater, government services, safety and security, transportation infrastructure, electric power generation, and oil and gas facility maintenance. Our financial strength, share rebounding capacity, and technical skills in new fields like building information modeling make EMCOR the safe choice for customers seeking to build, upgrade, or maintain extensive and complex facilities. Our business model works as illustrated by our 53 consecutive profitable quarters. Our management group is one of the most seasoned in the sector and our operating margins are at the best levels in our history. Slide 11 illustrates the balance resulting from our backlog and end market diversity and the flexibility that which EMCOR companies can move from areas of declining demands to those where demand is grown. Please go to slide 12. Accordingly, we look for a continuation of relatively strong revenue and earnings growth for the remainder of 2008 and into the first half of 2009. Specifically, with respect to full year 2008, we reiterate our previous revenue guidance of $6.8 billion to $7 billion and raise our guidance for diluted earnings per share from continuing operations from our previous range of $2.32 to $2.47 for our new estimate of 248 to 258 representing year-over-year earnings growth of between 33% and 39%. With respect to 2009, our budgetary process which is a detailed bottom-up process starting at each subsidiary and flowing up to corporate has just begun and will not be complete until December. However, based on our view of general operating conditions and an assumption in economic stimulus and macroeconomic restructuring efforts will be successful in stabilizing the credit markets by mid-2009. It seems likely to me that we will maintain our revenue and margin momentum through at least the first half of the year and with no material degradation of revenues for the year as a whole subject to the foregoing assumptions. We think that we will maintain margins at our close to currently reported levels and I reiterate that we remain very interested in new investments and acquisitions that will continue to the transformation of our revenue diversity, margin performance, and earning space that has occurred over the last few years. We believe that there will be some very attractive bargains available for well capitalized strategic purchase areas in our sector in the next few months. That's it for now. As always, thank you for your interest in and support of EMCOR Group. I also know that the number of EMCOR employees listen into this call. Special thanks to all of you for an excellent quarter and for EMCOR's long record of financial and operational success. Let's keep it up. Now, it's time for questions or comments, and Christine is here to tell you how to queue.

[Operator:]

Thank you. (Operator instructions) Your first question is from the line of Alex Rygiel with FBR Capital Market.

[Alex Rygiel:]

Thank you. Good morning gentlemen and nice quarter.

[Frank T. MacInnis:]

Thank you Alex.

[Alex Rygiel:]

Frank, two questions. First, if I remember correctly in the 2002 time period where you did have one or two disappointing quarters, a couple of the bigger catalysts were some underperforming contracts in the UK and some unfortunate contracts associated with an acquisition around that period of time as well. Can you discuss what is different with regards to your internal processes today than 2002 that gives you comfort that's surprises like that may not arise over the next coming year or two?

[Frank T. MacInnis:]

Yes, Alex. I think the several changes in EMCOR has influenced the positive point of view that we take concerning our ability to ride out the current crisis however it shapes out. You know of course that we have made significant changes in senior operational management since 2002 and in particular the UK company which was a source of a very significant sharp losses during that period has been significantly changed not only downsized but also focused away from the large sized rail projects that were the source of significant issues in those days. EMCOR today is a much larger, much better balanced, much more sophisticated and much better managed company than we were in 2002. I think in particular the management that has been in place since that time has focused on bidding discipline and importance of maintaining margins even at the expense of backlog as we have striven to create the balance in our revenue bases that was specifically designed to help us ride out a crisis very similar to what is currently transpiring. So in a nutshell, we're better managers, we're larger, we're richer, we're better balanced and we're much more ready for downturn of the cyclical type that we seem to be facing now.

[Alex Rygiel:]

And seconday, as it relates to your activities in Las Vegas, could you I don't know, throw out a number approximately about how big that market is from a revenue standpoint today and maybe in the last trough cycle how small it had gotten at any point in time?

[Frank T. MacInnis:]

Tony, you want to handle that?

[Anthony J. Guzzi:]

I mean it's a sizeable market force today as you can imagine. I won't give you the exact number, but suffice it to say if you look at our backlog and it's about hospitality is about 10% of our backlog number today give or take. That would be a pretty good indicator, a little less than that of what it is of our total construction revenue, so somewhere, $350 to $425 or so million, I mean it all depends on project timing, Alex. Okay, how small it got the last time, it never got quite as big the last time. There's a run rate in there. The companies are capable. They do have a fairly healthy renovation business that runs both of them, but it could be half of that.

[Frank T. MacInnis:]

Alex, I have a couple of additional comments, Slide 8 illustrates the fact that whereas we've been in Las Vegas a long time, and work very consistently but at a relatively low level in Las Vegas in revenue terms. There has been dramatic growth both in Las Vegas and indeed in the nationwide hospitality and gaming businesses in the last few years, a growth rate that we characterized a number of times on this call as being unsustainable. The U.S. Census Bureau for example suggested that the growth rate per annum for the last two and a half years or so is about 65% and of course that is not sustainable, but we took advantage of that growth in that sector in order to do some very profitable and successful work. However, we're used to changing tides in our particular business sectors and we built a company that can be nimble in moving from areas of low demand to our areas of high demand. Our skills are eminently transferable from place to place. I remember the last time the Las Vegas turned down dramatically and EMCOR went to work in Las Vegas building infrastructure projects, jails, and schools and waste water treatment plants because Las Vegas growth of the city had not kept up with the growth of the Strip so there are always things that EMCOR can do subject of course to the maintenance of appropriate bidding and margin discipline.

[Alex Rygiel:]

Great. Thank you very much.

[Frank T. MacInnis:]

Thank you, Alex.

[Operator:]

Your next question is from the line of John Rogers with D.A. Davidson. John Rogers – D.A. Davidson & Co. Hi, good morning.

[Frank T. MacInnis:]

Hi, John. John Rogers – D.A. Davidson & Co. I was wondering, could you talk a little bit more about the variances in margins by end market? I saw that the mechanical, I think it was mechanical group, there was one subsidiary that had a loss in there and I mean the numbers are bouncing around quite a bit sequentially and electrical was way up and maybe just give us a little more color there.

[Anthony J. Guzzi:]

John, it's Tony. John Rogers – D.A. Davidson & Co. Yes.

[Anthony J. Guzzi:]

When we look at our construction business─ John Rogers – D.A. Davidson & Co. Yes.

[Anthony J. Guzzi:]

I mean it is a portfolio, our projects and businesses and projects close out at different times, the mix within individual sectors change, even within the sectors that we have outlined on our backlog chart. John Rogers – D.A. Davidson & Co. Right.

[Anthony J. Guzzi:]

I mean if you remember 15 months ago our electrical margins were down and here they are back up. The mix got in our favor, the productivity came, the mechanical, I think we had one or two projects that maybe did not turn out as great as we thought they would, the others that were quite well. I think on balance, if we could run a north of 5% construction business for a long time, we'd be pretty happy people with 100% return on net assets. John Rogers – D.A. Davidson & Co. Are materials cost, I know they're pass throughs for the most part for you, are they impacting those margins causing some of this?

[Anthony J. Guzzi:]

No. John Rogers – D.A. Davidson & Co. Okay.

[Anthony J. Guzzi:]

No, not in any (inaudible 00

[Anthony J. Guzzi:]

If you look at our capital models pretty well, I think markets, we spent between $30 and $40 million a year on capital. A lot of that is related to maintenance capital, renovation of some of our spaces to make them more productive. Investment in our prefab shops, usually we buy used equipment, it'll will spike up a tiny bit with the addition of Olmstead, one of the reason we liked Olmstead is it has the same capital model as EMCOR for the most part and then of course we go into IT. I mean we are not over investors in IT and we're never on the bleeding (ph 00

[Anthony J. Guzzi:]

I will throw that to Mark.

[Mark A. Pompa:]

Yes, I mean as you could here today we are at about 35 million of amortization expense. That level of volume will continue in the fourth quarter. Actually, it will start to come down (inaudible 00

[Frank T. MacInnis:]

Thank you, John.

[Operator:]

Your next question is from the line of Tahira Afzal with KeyBanc.

[Tahira Afzal:]

Good afternoon, gentlemen.

[Frank T. MacInnis:]

Good morning, T.

[Tahira Afzal:]

Just a couple of questions, number one, if I look at your organic revenue growth rate, it seems mechanical construction is now sort of declining and then if I look at the implied fourth quarter guidance for revenue, it seems it is going to be flattish. Just in perspective of the near-term outlook for fourth quarter and then looking into 2009, I'm not sure, did you say that your revenue momentum is going to continue and does that in essence then imply revenue growth or do you think you can maintain the same level of revenues and I wasn't clear on that, if you could help me out, please?

[Frank T. MacInnis:]

Well, we'll help you out as much as we can. As I mentioned we are just beginning our budget cycle and revenue expectations at least of a detailed nature are still in the hands of our subsidiaries waiting to be completed and forwarded to us. I think that it's quite clear from the levels of our revenues that at all time records and our margins at record setting levels as well that we are carrying momentum through the fourth quarter hence our significant increase in our estimated range of earnings representing between 33% and 39% improvement in earnings per share year-over-year, so I think that's very good performance. The picture is more difficult to see once you get past the middle of 2009 and therefore it's hard to first of all make an estimate about full year 2009 without trying to guess at when sanity will return to the credit markets. My guess is that all of the federal stimulus packages and, by the way, EMCOR in past recessions has been a direct beneficiary of various types of federal stimulus packages that are for the purpose of maintaining levels of employment particularly in union areas, financing large federal projects in areas like transportation, infrastructure, like health care, like water and waste water system, so we think that there are aspects of the stimulus program that will be directly aimed at markets in which EMCOR is a significant player. Overall and particularly from the standpoint of the resumption of normal credit relationships on the part of our customers since EMCOR has no credit issues of our own, we think that by the middle of '09 for the purposes of our planning that our customers will once again be able to assume normal financing of their projects both in the private and in the public sector, I'm talking about possible current weakness with respect to the issuance of municipal bonds, better use for the financing of some types of public facilities. Having said all of that, we think that, yes, we are carrying momentum still through the fourth quarter and into the first part of 2009. We are working on projects that are derived between 60% and 65% from existing facilities, not from new green field facilities. We have a level of contract backlog of $4.2 billion that is one of the largest in our history. And we accomplished a margin transformation over the last few years that enables us to work from a much higher level of status quo margins than was the case ever in the past and especially on the eve of the last recession. So yes, my guess is and it's an educated guess, but it's still only a guess because it's early in our budgetary process that we'll do fine with no significant or material degradation of our revenues or margins through the first part of '09 and we'll count on the success of the government in restoring normalcy to the credit markets in order to let normal business cycles resume in the last half of next year.

[Tahira Afzal:]

Thank you, Frank. I guess then to sum it, what you're saying is that assuming you see a fiscal stimulus package and assuming that credit markets resume, that you think that you will be able to replicate revenues and margins of the same level as what you've seen in '08, would that be correct?

[Frank T. MacInnis:]

Yes, I think that's our baseline. We plan on making some continuing investments, but there are no material investments included in that assumption.

[Tahira Afzal:]

Got it. So I mean assuming on an organic basis, not assuming any acquisitions that you obviously have a lot of cash to make, would you view the year-on-year growth that is implied in consensus growth estimate for EPS right now for 2009 as being aggressive?

[Frank T. MacInnis:]

The consensus estimates are changing all the time. I think that within the doable range assuming as I do that the solution to the nation's credit problems is arrived at within the next six to nine months, yes, I think that a position of status quo to modest growth for 2009 is achievable at this point.

[Tahira Afzal:]

Thanks a lot, Frank.

[Frank T. MacInnis:]

Okay.

[Operator:]

(Operator Instructions) Your next question is from the line of Richard Paget with Morgan Joseph.

[Frank T. MacInnis:]

Good morning, Richard. Richard Paget – Morgan Joseph & Co., Inc. Good morning. You talked about being nimble and kind of moving from end markets that we're having slower demand going to higher demand, could you talk about maybe geographies in terms of that? If someone were to take a pessimistic view of things in the U.S., I mean do you have the ability to maybe go to the Middle East or some other markets where construction still is in a growth phase?

[Frank T. MacInnis:]

I want to answer your questions specifically and then generally, Richard. With respect to the Middle East, we have had opportunities to move there for years and we have steadfastly resisted those opportunities because of our view that the risk-reward ratio associated with working in most of the foreign jurisdictions where we could work do not warrant the investment that will be required in executive time and treasure in order to establish ourselves there. EMCOR is in the business of charging a premium for sophisticated technical services and most of the customers who will pay us for those services in a way that would enable us to gain a profit on our major product, which is trained technical labor, exist in the developed Western countries, that is to say, the North American countries and the UK. Even Western Europe represent incremental issues for us because of the relative inflexibility of labor in those areas. So I have lived and worked in the Middle East, the Far East, Europe, I'm not afraid of it, but I'm very familiar with the risks and the available rewards associated with it and I believe for the period of the next year or two at least, I think it's likely that EMCOR's incremental investments will probably be in this country and in Canada. I mentioned earlier and I want to talk about both Canada and also our changes in our geographic presence and reliance upon certain markets in the United States for just a moment. First of all with respect to Canada, our Canadian company is one of the best and longest established heavy industrial specialty construction companies in the land. It has a wonderful reputation and very recently after a very successful wholesale (ph 00

[Anthony J. Guzzi:]

Sure. I guess this goes back to Alex's question even, in 2002 about 35% of our profits came from New York City and if you took the broader north east, it did approach 40, 45%. Today, although still very important to us, New York City is less than 10% of our profits. Now, one is our base has grown and the characteristics of our New York City business has changed, especially it was very data com and focused on the telecom part of that very extensively back then. If you look in general, our diversity is pretty widespread. I mean we still think of markets as long-term markets and not intermediate hiccups. We like our position in the major cities in the U.S. and what we can do there. We like our position in California in general and specifically, we have well-positioned electrical companies there. We have a very well positioned industrial company in PMI which we bought last year and has been a very good acquisition and has brought us more exposure to all the industrial work. We like our position in the electrical business in general. Our San Diego, San Francisco (inaudible 00

[Frank T. MacInnis:]

Richard, it's Frank. Three years ago, green was not a business. We were performing green projects at that time and indeed our marketing department had already fastened on the importance of green as a long-term societal change and a trend worth taking advantage of, but in those days, seems long time ago now, three years, we were doing green projects primarily for academia and for various levels of government, notably the federal government of some states. Today most of our lead activities are for the private sector and it's not just altruism that I believe has moved companies like General Electric and (inaudible 00

[Frank T. MacInnis:]

Thanks, Rich.

[Operator:]

Your next question comes from Rich Wesolowski with Sidoti & Company. Rich Wesolowski – Sidoti & Company Thanks. Good morning.

[Frank T. MacInnis:]

Good morning, Rich. Rich Wesolowski – Sidoti & Company If you look at the acquired facility service margins ex the amortization write off, you get to a high teens for the first nine months that's with the hurricane. Is there any reason to suspect that's not sustainable? Is there room for improvement or do you see that as something that inevitably goes down in the years ahead?

[Frank T. MacInnis:]

Oh, no. I certainly don't expect a significant downturn. Let me tell you what we've learned about refinery and petrochemical maintenance and management so far and keep in mind that we acquired Olmstead in September 17, Mark tells me, a year ago. We acquired a couple of other companies in the sector even more recently than that, so we're still learning, but what we expected at the outset was a somewhat cyclical business on a seasonal basis with its lowest quarter being the third calendar quarter of each year and that seems to be the way it's turning out. On the other hand, we also expected it to be significantly more profitable in terms of margin contributions than most of the remainder of our companies and that has certainly turned out to be the case as well. And lastly with respect to hurricane damage, we think that on balance, whereas there may have been an immaterial deferral of certain revenues and margins from the third quarter into the fourth as a result of hurricane related damage to our facilities or our customers, we think that on balance that was not a big story for us. I will say that our personnel in our hurricane affected companies did a marvelous job at getting back up to speed and back to work and into our customers' facilities very quickly. And that's why they have the loyalty of those customers when the customers are trying to decide from whom to obtain their maintenance services. So no, we think that Olmstead and the other companies in this new sector for us have made a terrific start and we expect to be able to enhance both the scope and the size of our services in that sector in years to come. Rich Wesolowski – Sidoti & Company Thank you. How much of the refinery work in the Gulf Coast comes from large capital expenditure upgrade projects rather than day-to-day maintenance.

[Frank T. MacInnis:]

For us it's less than 20% of what we do. Rich Wesolowski – Sidoti & Company Less than 20%?

[Frank T. MacInnis:]

Yes. Rich Wesolowski – Sidoti & Company Okay. And then finally, it seems odd that with the stock getting cut in half during the last few months, we have not spoken about the potential for share repurchases. Can you talk about the relative appeal of buying an equity in a known backlog, in a known management team at a mid team's earnings yield versus one in unknown companies during the year ahead?

[Frank T. MacInnis:]

Well, let me first of all say that EMCOR is a wonderful buy at this point and I recommend it heartily to anybody interested in making a lot of money in the equity markets. I'm a major investor myself as are we all. However, as I mentioned I think in the last paragraph of my presentation this morning, there are some amazing bargains that are going to be available for us in order to build value for EMCOR stockholders for the very long term. They include opportunities to invest in strategically important areas for us like the oil and gas maintenance market that Tony has previously mentioned, our government services that we're very interested in enhancing, our fire protection business that is a major contributor to our long-term success, relatively (inaudible 00

[Frank T. MacInnis:]

Okay, Rich.

[Operator:]

Your final question is a follow-up from Tahira Afzal with KeyBanc.

[Frank T. MacInnis:]

Hi, T. Tahira Afzal – KeyBanc Capital Markets Frank, just had one question. The last time there was a downturn and I think you did a great job of successfully switching from private sector to public sector spending, but all the revenues did hold out, the margins on that work were fairly low. If you look at the opportunities on the public spending side right now and those that could potentially develop with a fiscal stimulus plan, how would you compare those margins to some of your larger hospitality projects?

[Frank T. MacInnis:]

That's a very difficult comparison to make because we don't know the nature of stimulus projects. There are for example projects in which EMCOR by virtue of our large size, our financial strength and our technical skills in areas like building information modeling is really the only choice that a customer can make and that has been our experience in connection with a number of health care related projects in the last year for example. So that it's no longer the case that you can make a sweeping statement about the significant premium available for services in the private sector as compared to certain parts of the public sector. Tony?

[Anthony J. Guzzi:]

Yes, I mean T, if we do more transportation work and more health care work, when you go back and look what happened in '03 and '04, we were doing a lot of K through 12 school work. That's emphatically (ph 00

[Frank T. MacInnis:]

I have another comment, T, it's Frank again, and that is about getting discipline. I think that in retrospect and, well, we knew it at the time that we were inadequately disciplined in 2003 with respect to the activities of some of our companies in segments in which they had no relevant experience. I'm recalling for example a couple of fairly large central plant generating projects that one of our companies became involved in and probably in retrospect should not have done so. We're managed differently at the operating level in electrical and mechanical today. We're much better managed. We're a disciplined organization and every one of our subsidiary presidents knows how we make our money and when to stop bidding, when to start pulling back from projects that don't have the risk-reward characteristics that we insist upon. Tahira Afzal – KeyBanc Capital Markets And if you look at the transportation sector, that itself has come under material pressure in the past, so it seems like in essence a fiscal stimulus might be needed to make that an exciting market, but who in general would you be competing with and who do you generally come across in that segment.

[Frank T. MacInnis:]

I mean local companies, we work with Kiewit (00

[Frank T. MacInnis:]

You're welcome, T. Thank you.

[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 T. MacInnis:]

Thank you, Kristin. And thank you all for your support of and interest in EMCOR Group. Watch this space for interesting developments. Thanks a lot.

[Operator:]

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