Good morning. My name is Tanisha, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group Fourth Quarter 2011 Earnings Call. [Operator Instructions] Mr. Gordon McCoun of FTI Consulting, you may begin your call.

Thank you. Good morning, everyone, and welcome to the EMCOR Group conference call. We're here to discuss the company's 2011 fourth quarter and full year 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.

Thank you, Gordon, and good morning, everyone. Welcome to EMCOR Group's earnings conference call for the fourth quarter of 2011 and for the full year. For those of you who are accessing the call via the Internet on our website, welcome, and we hope you have arrived at the beginning of the slide presentation that will accompany our remarks today. Please advance to Slide 2. Slide 2 depicts the executives who are with me to discuss the quarter and 12 months results. They are Tony Guzzi, our President and Chief Executive Officer; Mark Pompa, our Executive Vice President and Chief Financial Officer; and Mava Heffler, Vice President, Marketing and Communications. For call participants who are not accessing the call via the Internet, this presentation including the slides will be archived in the Investor Relations section of our website under Presentation. You can find this at emcorgroup.com. Before we begin, I want to remind you that this discussion may contain certain forward-looking statements. Any such statements are based upon information available to EMCOR's management's perception as of this date, and EMCOR assumes no obligation to update any such forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance. Such risks and uncertainties include, but are not limited to, adverse effects of general economic conditions, changes in the political environment, changes in the specific markets for EMCOR services, adverse business condition, increased competition, mix of business and risks associated with foreign operations. Certain other risks and factors associated with EMCOR's business are also discussed in the company's 2010 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 Tony. Tony?

Thanks, Kevin. Thanks, everybody, for calling in today and thanks for your interest in EMCOR. EMCOR finished the year at $1.87 per diluted share from continuing operations. And that's exclusive of the impairment charge and the USM transaction cost, and all the numbers I'll go through here in this opening section will be. We have revenues of $5.61 billion and experienced organic growth of 7.3%, of which about 100 basis points was in our Mechanical Construction segment, with the balance of the organic growth coming out of our Facilities Services segment. Fourth quarter performance was strong, and Mark is going to cover that in detail in a few minutes. Some quarterly highlights include diluted EPS up $0.57 per share and operating margins, again, exclusive of the impairment charge, of 4.4%. Additionally, we generated about $90 million in cash in the quarter and $149 million for the year. I'm now going to go through some of the highlights of the year, and I'm going to focus on where we executed well and where we fell short of our expectations. First, we continue to be good and disciplined at cost management. As a result, our SG&A as a percentage of revenues declined to 9.2% from 9.7% reported in the previous year. We thought we would have leverage in our SG&A as organic growth returned, and we have. Overall, our project execution on large progress -- projects was excellent. And as a result, our operating margin, exclusive of those of the impairment charge and the USM transaction cost for the year, were 3.9%. Specifically, our domestic constructions segments had strong performance, and we're doing about 90% of our revenues today were projects that were awarded during recessionary times. 2011 domestic construction results benefit from excellent large project execution across the board, and we…

Thank you, Tony, and good morning to everyone on the call. For those participating by the webcast, we are now on Slide 5. I will begin with a discussion of EMCOR's fourth quarter results before moving to the annual period based on information derived from our consolidated financial statements included in today's earnings release announcement. Quarterly revenues of $1.52 billion are up 16.7% from 2010's fourth quarter. Consistent with what Tony described, the organic growth in the quarter was 7.3%. Revenues attributable to businesses acquired of $122.8 million positively impacted our U.S. Mechanical Construction Services and U.S. Facilities Services segments during quarter 4. All reporting segments other than U.S. Electrical Construction Services reported positive revenue growth during the quarter. Our U.S. Facility Services segment quarterly revenues increased 38.3%, of which 19.5% was generated organically. SG&A expenses increased $18.8 million within the quarter. $11.4 million of this increase is due to incremental SG&A from those acquisitions completed during 2011 inclusive of amortization expense. As a percentage of revenues, the SG&A in quarter 4 was 9.7% compared to 9.9% in 2010's fourth quarter. We are reporting a $3.8 million pretax noncash impairment charge associated with the diminution in value of identifiable intangible assets recorded for certain customer relationships and trade names. Please turn to Slide 6. Operating income of $62.4 million represents 4.1% of revenues and is approximately 30 basis points higher on a sequential basis than our 2011 quarter 3 performance. Excluding the $3.8 million pretax noncash impairment charge, our fourth quarter 2011 operating margin would be 4.4%. This represents 100 basis point reduction from 2010's quarter 4 operating margin of 5.4% due to reduced quarterly operating income within our U.S. Mechanical Construction Services and EMCOR U.K. segments. Specifically, 2010's fourth quarter U.S. Mechanical Construction Services results were favorably impacted by…

Hey thanks, Mark. I'm going to talk about backlog now and we're on Page 12. Backlog at the end of December 2011 stands at $3.3 billion and has increased to 7% from the $3.1 billion at the end of 2010. Our acquisition of Bahnson and USM account for all the increase, and organic backlog would decrease slightly, about $220 million, all of which occurred in Q4. As I previously noted, revenue was a little better in Q4 than we expected. We burned a little more backlog than expected, probably because of moderate temperatures. And to round our backlog moving between 3 and 4, backlog decreased slightly above USM and Pepper, mainly timing, and increased slightly in our U.S. construction operations. As I mentioned last quarter, our companies have been able to secure work, but not at prerecession margins or at levels that are acceptable and also presents some real opportunity, especially on a large project site as the job progresses. Further, we had organic booking rate of new business that's about equal to our organic growth rate. And that means the midmarket is solidifying, and we are winning and executing this midmarket work at acceptable margins. It's always important to remember that EMCOR is a late cycle company. And looking at the bar for 2011, 2 sectors comprised approximately 60% of the backlog. And they are commercial, as depicted in the orange color, and institutional, the dark blue block. First, commercial. Commercial backlog continues to grow and has increased $479 million from the end of last year. About half of that came from the acquisition of USM, the other -- the rest is organic growth. So on an organic basis, commercial backlogs increased approximately 49%, still nowhere near where we want it to be long term on an organic basis.…

[Operator Instructions] Your first question comes from the line of Rich Wesolowski of Sidoti & Company.

Tony, you suggested that you are about 9 months behind on USM. If you could set aside the weather, which you know is a negative, and give us an idea of the stumbling blocks you've had in the integration and when you expect USM to earn what was set out when the acquisition was made.

Well, the biggest stumbling block on integration has been really the revitalization of the revenue. We've won a couple of nice contracts, so we stabilized the revenue base. It's by no means a downer, I mean. But it's not what we expected. Customers -- this was a difficult sell process, a lot more difficult than we thought, I guess, from the customer's perspective, starting last February. Customers don't have to make a decision to do business with you through that process. It was, overall, really favorable to receive that EMCOR bought USM. And customers are happy that USM's owned by EMCOR now, and that we're seeing a rejuvenation of that. But there was a 5- to 6-month lag there, Rich, that wasn't evident right before we bought the company and right after. Other than that, the snow has been an issue. Actually, the synergies have worked better. We've had a couple of opportunities we wouldn't have had. I think that would probably be what [indiscernible]. And we had to revitalize the business development process a lot quicker than we thought we were going to have to.

So it sounds like less of than integration issue and more just business was as good right out of the bat as what you thought.

Yes, I think that's probably a fair characterization. And they've been unbelievably upbeat about being part of the EMCOR team.

Okay. As I look at your combined Electrical and Mechanical divisions, the construction portion, and I strip out that 60 basis points in company-wide margin that accrued from projects that were long-dated and you completed, and you got some extra margin there, does the guidance assume an improvement from the adjusted figure if I had taken net profit out as the modest improvement in the economy translated into better earnings from that underlying piece of backlog?

Yes. I think what it assumes is the opportunities we see today are a little better than we saw 12 months ago.

Okay. Lastly, I was surprised your backlog was down given the recent stable trend. Is it accurate to say that the direction of your backlog in '12 will depend on weather or probably the economy improves by a fast enough pace to offset the slowdown in government work?

Yes, I think there's couple of things. We're well positioned on some really nice trends. I think we -- by building out both our Industrial Service business and our industrial project business, I think we're doing that at the right time. We've seen a return of the $2 million to $10 million contract, but we've also become excellent at the sort of $40 million-plus contract. And they come in a little more lumpy. So I think some of the things we're looking at, Rich, will, the largest stuff is going to be built regardless. It's just a matter of when it comes in the backlog. I think as the $2 million to $10 million is dependent on more confidence in the economy and so far, so good. We actually saw a resurgence of that in 2011. But again, I'm just -- we're always a little cautious when I see something like gasoline, which is a major factor on how people view the U.S. economy, what impact that might have, and your guess is as good as mine right now.

The next question comes from the line of Alex Rygiel of FBR.

Tony, you mentioned that you're feeling a little bit more optimistic now than maybe a year ago, but your 2012 revenue guidance seems to suggest almost no organic growth coming off of a year where you just printed 7% organic growth. So how do I kind of rationalize your guidance versus your commentary about being more optimistic?

Well, I mean, the $6 billion, as we said, around $6 billion, I mean we -- what we're probably a little hesitant about, Alex, is the 6% down in organic backlog out of the quarter. And so that's part of it. And I think the other part of it is, I guess, we are waiting to see how the macro economy responds. A lot of the reasons for our organic growth in 2011 was a real snap back in the industrial business. And whether that can grow from this base at the same kind of rate that it did, I don't probably think so, but it could. That would get it back to almost, revenue-wise, back to 2008 levels. And I think that's the reason we had such strong growth in some of the underlying components that made up that strong organic growth or whether it can keep going. I would say that we are cautiously optimistic that we'll see organic growth continue. But again, understanding the underlying pieces, we got to see that validate through the first quarter.

And implied in your guidance, if one were to assume that rewind 6 months ago, you add a certain assumption for USM profitability, whether or not it was $0.10 or $0.30, as we stand here today and we look at USM's contribution in 2012, included in your guidance, are you assuming it's 25% of what you thought a year ago? Or 75% of what you thought it was a year ago?

We're assuming at least 60% to 75% of what we thought a year ago.

And was USM -- was it profitable in the fourth quarter?

No.

The next question comes from the line of Adam Thalhimer of BB&T Capital Markets.

How much do you have left under your buyback?

We have...

We had $100 million approved.

We spent $27.5 million, so we have $73 million.

And then can you talk a little bit about, I mean, how do you -- your use of cash, how do you balance buybacks and acquisitions?

Well, I mean, we think we have the capital to do what we need to do. We went out and got a better credit agreement last year. We have good underlying cash flow characteristics in our business. I think we can do what we need to do, and I think we have the firepower to do all 3; the dividend, the buyback and continue to grow our business through acquisition, and finally, we have the money to support organic growth.

And there's nothing in terms of the great cash flow last year. There's nothing that would suggest you wouldn't be able to generate that type of free cash flow this year.

No, I mean -- Adam, this is Mark. The only issue we'd have is if we do start to see some project growth later in the year. Depending on the contractual terms, we might find ourselves utilizing more working capital as revenue starts to ramp up. Other than that though, we should be relatively consistent.

We really hope to have a better late November, early December, in both our turnaround businesses and in USM. A lot of times, that's all timing on the turnaround side. The USM, clearly, if we get any kind of winter at all, we should build working capital in the month of December when this year, we built none in that business.

And, Tony, you mentioned that you're late cycle, and you also -- I'm just curious, you mentioned you track the Census Bureau data and the ABI. How much of a lag do you feel like your business is?

So usually, at least 9 to 15 months, somewhere in there. I mean from when it goes to design, to when it gets to bid, to when it finally gets to us and to get to where we're really billing the project, it could be as long as 18 to 24 months to where we get to where we're really billing and recognizing significant profit on the job.

So the fact that we're -- the fact that ABI has been above 50 now for 3 months and Census Bureau data has been positive for 7 months...

Yes.

That really doesn't get you that excited yet. I mean, it's coming, but...

Yes. No, I'm excited for -- when I think about our mix of business, I think we have a better mix of business that we've had. And we've done that independent of any help from the market really.

Your next question comes from the line of Nick Coppola of Thompson Research.

I have a question for you about your backlogs. Do you have any thoughts on the direction of margins as you burn out backlog throughout the year and then afterwards? I mean, I appreciate what you said earlier on awards being won throughout the downturn, but does it get worse before it gets better? Or do you see new awards being won in a higher spot than what you currently have in backlog?

I think our current guidance with the EPS ties with what we think about margins somewhere around last year. But you have to adjust for the 60 basis points, and we've got to hope the better mix can get us a chunk of that back. If you go from '10 to '11 in the guidance we gave, implied in that was a drop of anywhere from 50 to 90 basis points, and we did drop about 50 basis points year-over-year, give or take. So you put it all together, I don't think it gets worse, what's in backlog. I think we're in a better position as long as you pull out what we've already told you to pull out, which are the jobs won in better times. There's a couple of big ones.

Okay. That makes sense. And then I also just want to ask you about you built organic commercial backlog growth. I think it's interesting you're seeing organic commercial increase and a decline in health care. It seems commercial has been doing relatively better just as an end market. Do you think that's sustainable? Do you have any comments around what you're seeing in commercial construction or R&R? And maybe some of the jobs you're winning, is it more new construction or is it R&R? Is it projects maybe that were deferred throughout the downturn or any...

It's balanced. Some of it's new investment to take advantage of new markets. Some of it is deferred. And I'd say it's pretty well balanced, the increase between retrofit and new construction.

Okay. And then what are you seeing in terms of health care?

Well, health care will be lumpy. I mean, we see opportunities out there. They have a gestation period that's different. You may stop -- start working on the design assist and development of it 6 to 9 months before it ever goes into backlog, and we have several of those we're working on right now. And that's as they line up the funding and line up how they're going to do it and get the certificate they need from -- and get that all confirmed from the states that they're in. So there's plenty of opportunities out there, and it's wading through them and waiting and being on the right team that wins it.

Your next question comes from the line of John Rogers of Davidson.

This is actually Tristan in for John. Just as you're looking at the first half of 2012, you've talked about modest, relatively modest winter weather and sort of in terms of maintaining growth on the -- in 2011, growth on the industrial side is sort of a wait-and-see approach. What do you see as the biggest market driving your business in sort of the first half or given your 3 to 9 months of visibility for 2012?

I mean, you're going to see in commercial because of the backlog increase and it tends to be quicker-burning. Industrial will be one of the drivers. And then just general service business across the board, across all the sectors. I mean, that's what will drive it in the short term.

Okay. And so commercial would be -- would still be growing, partly offset just by the bad -- the modest weather we're seeing currently in the winter months.

Yes.

Your next question comes from the line of Tahira Afzal of KeyBanc.

I guess the first question I have is as I look back to your last cycle, peak to trough, you saw operating margins fall off close to 200 basis points. And even in this cycle, it seems that even though you have made acquisitions to offset what was obviously a much worse recession, you still might see operating margins down 200 basis points. Then -- and if I look at your Facilities Services margins from the '08 peak of close to 7% there in 2011 going down to the 3.5% mark. So has Facilities Services in essence turned out to be a little more cyclical than you thought as well? And could we see a surprise jump up, which you might not be envisioning right now, that seems to be fast cycle work, short cycle work that you might not have visibility on? And, Tony, maybe along the lines of the small government projects you referred to in your commentary, is that a potential upside driver that you cannot see right now, but could be better if the U.S. economy continues to improve into the second half of the year?

Yes, I think the answer to that is yes. Just to walk through the margins, I think it's important, right? We peaked at -- we peaked below where we're troughing now. And we say 200, we went from -- we went to less than 1% the last time. And now, we're well north of 3% this time at the trough. So I mean, I don't want anybody that's new to the story here to think it's the same story because it's not. It's very different, and we have a much different margin base in the business than we did in the last trough. Yes, I think if you look at the peak to trough in Facility, I think 2 things make it up. It's really round about 4%. We sold District Chilled Water last year, and so now it's running about 4%. Our goal is to get that above 5%. Hopefully, we're exiting the year this year at a run-rate basis of at least that, which brought it down. As you know, the refining sector was incredibly strong in '08 and we've been rebuilding from the depths of that in '09 and '10. That's about 2/3 of the drop, and about 1/3 of the drop's been what's going on with our small projects business. So yes, if you say what are the things that could snap back and build those margins again, they're clearly the 2 things that could because the reality is once we fix it, the commercial site base business doesn't have the kind of margin upside those business have been -- but once we fix this, it's been relatively steady. And as we fix USM as the year progresses and then going into '13, long term, that will lead margin lift into the segment. So I think you have it pretty accurate about where the lift could come from.

Great. And second question, and I promise to make this less long-winded as a question, if you look at the chemicals industry and that we've had a whole slew of MC [ph] companies reporting and commenting that are more on the industrial and the energy side, seems like there's a fairly big cycle coming. I know you folks have built up your industrial exposure fairly notably over the past few years. Could you comment on your potential exposure and leverage through that cycle?

Well, we definitely -- and a part of our industrial business have exposure there, and we've seen growth there, not only in the repairs side for the heat exchangers, but also on the plant services side. So yes, I think the process plants, in general, T, we obviously believe that, that's going to be a good place to be long term. And I think it stems beyond the big capital assets, tire plants, paper plants, we're seeing money start to come back into those businesses. And we really can offer the broad range of services that a lot of those customers like. And they liked how we put the pieces together.

Your final question comes from the line of Rich Wesolowski of Sidoti & Company.

If I take the $80 million out of USM, out of facilities, that leaves me about 4% operating margin. I think you might have even stated that.

Yes, I did.

What would you consider a good margin for the business?

We have to be first at 5%. When we're starting to put the pieces together, we need to be north of there.

Right. Because on the call, USM was higher than the...

Yes, it's higher. The operating characters are also higher, and the small project business will come back, to go what I just said to T. We peaked at 6.7%. We lost about 2/3 of that to the 4% through the industrial decline, and that's starting to rebuild, and will also 1/3 of it in the Mechanical Services business, mainly small project work. The break-fix business stayed good the whole time. So I think that's a fair representation.

On Ohmstede, as we hope to enter what looks to be improved market for the refinery services, I understand there have been a few management changes since you bought it in '07. Does the company's market position match what it was the last time the market was good? And what can you do to ensure that or improve upon it in the future?

I don't know where you heard we had management changes, but we have the same terrific managers we had when we bought the business as we do today. They're great guys and they did a great job in the down cycle of keeping the thing almost at double-digit EBITDA margins. And they've positioned us well with some customers on the upturn. So that hasn't changed. We built management below it and made some hires, and we've added new product lines. And my view is we gained share. We're doing work in refineries today that we weren't, and we also are doing more chemical work today and we weren't doing that when we bought it. I think our issues right now are just end market demand for the service, and there has been a general increase. I'm a little gun-shy right now what could happen in the back half of the year, and that's what you see in the guidance with $4 gasoline, right? Because there could be 4 different outcomes here; one is the refiners can pass on the cost and capital investment and turnarounds continue as they do. The second one is they don't pass it on effectively, which they didn't do in 2008, and cracks [ph] price come down. I don't think that's the likely outcome, but it could happen. The third outcome is they're doing so great that they start doing these mini turnarounds through the fall because they want to keep the things running as long as they could. And the fourth outcome is where they do business as usual, which is the one we're hoping for, and spend the capital what they have planned. But these guys have changed, right? Pre-2007, the way they did planning is you could take a schedule and you could lay it down on a piece of paper and you could say, the next 3 years, here is what the turnarounds look like, about the size, the locking the resources to do all that. Now, they try to adjust on the fly. They try to make them as flexible as they can, and they're working with more variables today, what kind of crude they're going to put in and how much was the mix a heavy going to be, what's the mix of light. And so these refiners have become much more flexible. The good news for us is we're positioned with all the ones across the spectrum and we have a heavy concentration in the Gulf Coast. And I think they're the long-term winners, and anything you can do to be a big fan of the Keystone pipeline would be good for EMCOR long term. Not so much in necessarily building the pipeline, but in the kind of crude that will come down to the Gulf Coast refineries long-term is good for the EMCOR business.

Right. Excuse me for the management statement. I must have been misinformed on that. And then lastly, would you remind us of what Southern Industrial will add to 1Q backlog?

1Q, we haven't commented on that yet, and it will be out.

It's funny, Rich. I mean, we normally put back -- this is Kevin. We normally put back on the press release. I now -- I don't have it right in front of me. We may not have put that in there...

It's $30 million to $40 million, is where it'll be. That's it, guys. Thank you for your interest in EMCOR, and we'll see you out on the road.

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