EMCOR Group, Inc. (EME) Q1 2012 Earnings Report, Transcript and Summary

Good morning. My name is Laura, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group First Quarter 2012 Earnings Call. [Operator Instructions] I would now like to turn the call over to Mr. Gordon McCoun of FTI Consulting. Sir, please go ahead.

Thank you, Laura, and good morning, everyone, and welcome to the EMCOR Group conference call. We're here to discuss the company's 2012 first quarter results, which we reported this morning. I'd like to now 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 Earnings Conference Call for the First Quarter 2012. 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's results. They are Tony Guzzi, President and Chief Executive Officer; Mark Pompa, our Executive Vice President and Chief Financial Officer; Mava Heffler, Vice President Marketing and Communication; and our Executive Vice President and General Counsel, Sheldon Cammaker. For those of you who don't know, today is Shelly's birthday, so I'd like to offer him a warm happy birthday. We'll sing but with time constraints, we'll do it after the call. 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 get to it by getting to 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 or EMCOR services, adverse business conditions, increased competition, mix -- I'm sorry -- of business and risks associated with foreign operations. Certain other risks and factors associated with EMCOR's business our also discussed in the company's 2011 Form 10-K and in other reports filed from time to time with the Securities and Exchange Commission. With that being said, please let me turn the call over to Tony. Tony?

Thanks, Kevin, and we should be on Page 3 and 4 will be my discussion. Good morning, and thanks for calling in. We're off to a good start this year. Actually it's a little better than we expected. We earned $0.40 per diluted share on revenues of $1.54 billion, and our results today show that our diversity of markets and expanded construction service capabilities and product offerings are working for EMCOR. We've built these offerings and capabilities through organic investments and acquisitions, and they have helped transform EMCOR to operate well in these uncertain and uneven times. Revenues were a little better than we expected this quarter. We have gained a little help from the good weather and our construction operations but we surely gave back more in our Mechanical Services and site-based particularly USM operations. We grew 21.6% in the quarter and 11.1% organically. It was led by our Mechanical Construction segment at 20% organic growth. The markets are still far less robust, and our growth shows we are willing -- winning our share of decent work. Our growth was really in 2 areas, commercial and industrial. I spoke at the beginning of the year that we were working on some jobs that would be fast-paced and technically complicated. We are executing that work now and still do not have 100% of it in backlog, but we are gaining good growth as we have begun executing this work. We've had growth across all our reporting segments that show broad support for our products and services. We expected some slowing at Facilities Services segment as our industrial service work had come from such a low base in 2011 versus 2010, and we had some growth in a significant site-based account last year that was not reputable in the near term in 2012. We maintain an excellent cost discipline, and we're known for that, as SG&A as a percentage of sales has moved from 9.7% in 2010 to 9.2% in 2011 full year to 8.7% in Q1 2012. We talked about this cost leverage helping us as the market recovers and offsetting some of the lower margin work that was won during the recession. Our operating margins are about where we expect for this time of the year and are consistent with our past guidance. We've spoke in the past that in EMCOR in a period of strong organic growth, our operating margins are compressed for a time. As most of you know, we have a 20% rule here at EMCOR. And what that means for the first 20% on a fixed-price contract, we don't recognize any margin. Further on some of our significant construction activities, the kind of work we were talking about on our February 23 call that is binary right. We wanted or we didn't. We are just in the start-up phase and as we do that, we are not fully aware -- fully confirmed yet the productivity, the material and the design of the savings and the value engineering that we will be able to develop as the scope fully develops with our customer. And we've talked about this in the past. As strong organic growth returns to EMCOR, we never see the full margin benefit immediately. Service work has the same phenomenon especially on significant contracts. As we move into the start-up phase, we have expense until we get to full implementation on that contract and also begin to gain the benefit of the add-on small project work. You saw that phenomenon last year on our government business as we started off the significant Navy contract. Our electrical margins are strong as we are performing well on several operations, but also we hit an important milestone on a large municipal water project that eliminated some contingency and adjusted our cost to complete. Our mechanical margins are hampered by the strong growth and a low to no margin recognition of several large industrial projects that bear the brunt of the discussion that I gave above. I think if you look at that U.S. construction operations together, you'll see that there are 5.4% last year and there are 5.4% this year. And we really discouraged people to follow us looking at construction margins on a quarter-to-quarter basis. In Facilities Services, we are not achieving what we planned for the year. And quite frankly, if we had more ideal weather conditions for us, which means less than ideal weather conditions for the rest of the country, we would not even be talking about facility margins right now. Let it be where we expect. We also had a strong shop season in our industrial business, but our field industrial business had good performance on the processing power plant side. We had some headwinds on the refinery side, not because work wasn't there, but we staff up for some significant turnaround that didn't fully materialize in the quarter, some have been elongated and others were pushed out into back half of the year. So we had extra labor versus what we needed. But we still see good operating conditions in the refinery and other industrial service areas. We were hit pretty hard in the side base Mechanical Services business for the lack of cold weather and snow. We estimate that construction got help a little bit by the better weather and the better weather, which we consider worst weather for facilities, you put the 2 together and it costs us about $0.05 a share in Q1 when you balance it out, as compared to our expectations and what the business performs at with normal weather patterns. USM was profitable prior to the intangible asset amortization before significantly impacted by the unseasonably warm weather. However, with USM, our backlog has increased since purchase, and we're starting to fix the retention issues and we're starting to gain important new customers. The customers in our site-based operations and our legacy operations like what we're doing right now so much so in fact they've asked us to accelerate implementation on a couple of large industrial contracts we have where they want to bring more plants on line versus our expectations and like I said before, service work also goes through this phase initially on contract start-up where the costs exceed the margin that we're gaining as we go through the start-up costs. Mechanical Services is usually weak in Q1 and was a little better this year. We're getting through our small project hangover, and hopefully it's nearing completion. Government had a good quarter and is on track. The U.K. had a nice quarter with very strong performance in our service business and we continue to migrate the business to more of a service business. We are doing some nice small project work across many sites for some significant customers. Despite the strong revenue growth, we had a book-to-bill of over one and organic backlog grew from Q4 by 2%. However, as we do more owner direct work, we find ourselves starting work on a project on a near time and material basis as we develop a project scope further and move to GMP or fixed-price work. It's a little different for us. We're seeing out of the last 3 quarters very strong organic growth first led by service as we saw the rebound in industrial and also some rebound in commercial, and now we are seeing a pick-up in our construction activity. You would expect to see this in second or third quarter last year coming to backlog first. However, as we help transform the business to more industrial manufacturing and owner direct work and user work, we're seeing the phenomenon that we're involved earlier in the decision-making and we're involved earlier in the decision-making, we're going to be involved in scope definition and we work off our purchase orders, short-term purchase orders as we develop the scope. Eventually work will get into the backlog, but because this work is very valuable, much like some of the casino work we've done, our data is in the work, people wanted these up and running quickly, and it may never hit backlog to the full impact it's having on our revenues. So a little different in the past and is something we're learning to adjust in our planning. All in all, a good start to the year. We've got strong revenue growth, okay margins, stable backlog and a book-to-bill of over one and we finished a lot of the quarter with the great balance sheet. And with that, I'll turn it over to Mark. He'll go through the financials in detail and I'll come back to talk about backlog and our outlook for the rest of the year based on our first quarter.

Great. 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 certain highlights of our first quarter 2012 results before moving to key financial data derived from our consolidated financial statements included in both our earnings release announcement and Form 10-Q filed with the Securities and Exchange Commission earlier this morning. Consolidated revenues of $1.54 billion in the quarter are up 21.6% from 2011. Organic revenue growth in the quarter is 11.1% and all reporting segments reported positive revenue growth during our first quarter. Revenues attributable to businesses acquired of $132.5 million positively impacted our U.S. Mechanical Construction Services and U.S. Facility Services segments during the quarter. Domestic electrical revenues increased 8.2%. Domestic mechanical quarterly revenues increased 30%. Our Facility Services revenues increased 24.1% in the quarter and our U.K. segment revenues increased 12.8%. Selling, general and administrative expenses increased $20.6 million within the quarter, inclusive of $11.2 million of incremental SG&A from those acquisitions completed subsequent to March 31, 2011. As a percentage of revenue, SG&A in quarter one is 8.7%, which represents a 30 basis point reduction from last year's quarter one percentage of 9% as we continue to leverage our overhead structure as Tony commented on just a few moments ago. Please turn to Slide 6. Operating income of $46.2 million represents 3% of revenues and compares to $41.8 million of operating income and 3.3% of revenues in 2011 first quarter. Operating margins by reporting segment are as follows: U.S. electrical generated 8.1% of margins in this quarter compared to 5.4% in the quarter a year ago. The U.S. mechanical produced 3.9% margins in first quarter '12 versus 5.5% in the quarter a year ago, which arrives at total U.S. construction of 5.4% for both periods presented. U.S. facilities operated at 2.2% margins in our first quarter this year as compared to 3.4% for 2011 and a result in our total U.S. operations arriving at 4.1% operating income for quarter one 2012 versus 4.7% in 2011's first quarter. And as Tony also commented on U.K. construction improved their margins to 2.5% in the quarter versus 2.1% in the quarter a year ago. Specific to quarterly performance, our U.S. Electrical Construction Services segments results were favorably impacted by the achievement of a major contract milestone on a municipal project, which was the major reason contributing to the 8.1% performance. Our first quarter U.S. Mechanical Construction Services segment operating margins of 3.9% were down from a year ago quarters 5.5% of revenues as we had a significant amount on the project start ups in the current year quarter with diluted margins due to profit deferrals as we progressed through the early stages of completion. The reduction in Facilities Services operating margins were due to the numerous reasons that Tony touched upon early on the call with the unseasonably warm winter and corresponding lack of snowfall combined with certain customer deferrals and anticipated turnaround activities within our industrial service offerings being the major reasons for operating margin declines. U.K. Construction and Facilities Services operating margins benefited from strong small project activity within their services divisions during the current quarter. Our income tax provision for the quarter is reflected at a tax rate of 38.5% with just slightly less than 2011 quarter 1 rate of 38.8% due to discrete items that occurred in early 2011. We anticipate that our full year 2012 rate will approximate 39%. Cash used in operations for the first quarter was $33.1 million, which represents an improvement over the $35.1 million of cash used in operations during 2011's first quarter. As you know, our first quarter is historically our weakest cash flow quarter due to our funding of previous year's incentive compensation awards, as well as income tax payments. Additionally, we utilize $13.2 million of cash to fund share repurchases within the quarter, which on accumulative basis we have spent approximately $41 million of our authorized program amount. Please turn to Slide 7. Additional key financial data on this slide not addressed during my highlights somewhere as follows. Quarter one gross profit of $180.7 million represents 11.7% of revenues, which is up $24 million from the comparable 2011 quarter. There were no restructuring activities in the period as compared to $1 million of restructuring in last year's first quarter. Diluted income per common share from continuing operations for the quarter is $0.40 compared to $0.35 per diluted share a year ago. Please turn to Slide 8. EMCOR's balance sheet remains strong with sufficient liquidity as represented by $439 million of cash to meet current working capital requirements, as well as for organic and strategic investment opportunities in addition to funding our quarterly dividend and current share repurchase program activity. Changes in goodwill relates to recent acquisition activity while the decrease and identifiable intangible assets is due to amortization expense in the quarter net of addition from our southern industrial acquisition. Total debt is essentially unchanged since December 31, 2011 and our debt to capitalization ratio remains low at 10.97%. EMCOR continues to do a good job in managing its risks within an ever-changing environment and that is clearly reflected in our balance sheet. With my commentary complete, I would like to return the presentation back to Tony. Tony?

Thanks, Mark, and we're on Page 9 and I'd pick up on his comments which is reflected our risk management as reflected on our balance sheet and how it has remained strong. I think it's reflected in our backlog also. And it shows that we've able to move between markets, invest in the right places and acquire in the right places to weather what has been a significant downturn in the current nonresidential markets especially in hospitality. So let's talk about backlog. Backlog at the end of the quarter is about $3.4 billion, an increase of almost $100 million over the backlog at the end of March 2011 with in-period acquisitions accounting for all the increase. Organic backlog decreased $200 million year-over-year, but it improved sequentially from year end 2011. With our strong organic growth, we're pleased to see the growth in sequential backlog. We are seeing what we call growth straight through backlog in the sales over the last 3 quarters, as we've had strong organic growth in near flat backlog through that period. That's typically a service dynamic. It's what we see in our service operations, but it's also occurring more our project work as we're getting more to the front end of the decision cycle especially in the industrial work and also happens when you are in the industrial work close to the owner and also happens early in a construction upcycle. Like we said, it's encouraging that the backlog is holding its own despite the strong organic growth over the last 3 quarters and 11% here in the quarter. Though impossible to measure, moderate temperature helped that organic growth and accelerated the revenues, but backlog again kept pace. Now we've spoken about EMCOR being a late cycle company in previous calls. And while it is still very early in any construction cycle to speak of seeing the revenue and backlog moving upward and revenue especially moving upward very strongly, it is a positive sign and must occur to eventually spark a strong recovery. I like our position in this uneven economy and our backlog position dovetails with my earlier comments about our ability to utilize our diversity of service and construction offerings to respond to different market centers and to create stability and growth in a tough market and it's this diversity of demand that drives that. So let's go look at – go through the bars that we always do here on this chart. A year ago March of 2011, commercial backlogs stood at $545 million or 17% of total backlog. At the end of first quarter 2012, commercial backlog is almost $1.1 billion and is 31% of total backlog. That's been doubled, but it's been aided by $260 million of USM, and USM has grown in backlog since we acquired it. But even without USM, commercial backlog has risen $250 million. And for clarification, some high-tech manufacturing work is also in our commercial backlog. It's always been there. And also some of the data center we worked on the private sector would be in our commercial backlog. And you look at what's going on, it's not fully in backlog yet. It is important contract we won at both A&P and Ruby Tuesday's, and Ruby Tuesday, we'll be bringing on 742 sites. We're not there yet. We're going through the phase 1 of implementation but May, we move to phase 2. And it is a type of contact that prior to acquisition of USM, USM couldn't have done it. EMCOR couldn't have done it. And together we can do it. So we're starting to win business development it's revitalizing, and we're winning the right type of work for our backlogs. Industrial backlog remains flat although our revenues have benefited strongly for our industrial efforts. It's up 8% from March of 2011 despite strong activities from all EMCOR companies that perform that work. In our refinery work in our shops where we bring the work into the shops to fix or fabricating some high end heat exchangers. That works up actually 45% as is March 2011 and March 2011 was up versus the trough. So we are seeing demand rebound in the refinery sector and the more seaway pipelines that get reversed and the Keystone pipeline get reversed, we're pretty bullish on the Gulf Coast. We have also had good performance on our California operations supporting the refineries out of Olmstead. Health care is the light green segment. You've heard me talk about it. It's a little more episodic. It's a good long term market. We win our fair share of health care work. We won our fair health care share work and will always be a significant part of our backlog. It's a little bit down right now, but we really good at this work. And like industrial work, we get in at the front end and it takes a while to materialize. Institutional backlog is about 30% of our total backlog, about $1 billion. And it has been constant through '11 into '12. And our work is mainly federal, a little bit of state and local. We're doing the lighting controls at that Saint Elizabeth campus. That's really the Homeland Security campus at the old Saint Elizabeth Hospital. And a lot of the work we do for the government, we do a lot of BRAC work and we do more in the future. We do work that makes government facilities more cost effective. We do work that allows them to consolidate, and we're still bullish that an outsourcing trend may emerge much like that happened prior to the current administration. It only makes too much sense economically. The final 2 sectors, transportation and water remain active and we have some nice large projects in there. Mark talked about one of them. You hit milestones in these projects, they tend to be either/or. Either you're going to make your payment or make your award or not. We do usually hit them. And we had some nice award from the City of Palm Beach to construct a new electrical generator plant, and we'll commence work on that over the next 6 months. [indiscernible] as Mark mentioned, revenue in the first quarter for domestic construction was $843 million. It was 22% above where it was. Despite that increase in revenue, you can see the strength of that operation. Our backlog is flat in U.S. construction. And that says we're in a fledgling recovery probably. I don't know if that's necessarily true. I know right now we are winning our share of good work and the capability our folks have built are really paying dividends for us in this tough market. With that, let's move to Page 10. As we remove into remainder of '12, first, I would caution everybody. We are in the first quarter, which is usually our weakest quarter and we have a long way to go. But we're off to a good start. Revenue is stronger than expected. Operating margins are about where we expect them and we're not satisfied with these margins, but they reflect a couple of things. The start-up of new work and I went through all the dynamics of that, that also reflects the work we won in the recession and some would argue the recession is still going because trade unemployment is still in the high teens and low 20s. But with EMCOR's capabilities, there are a little different than what it's at and we've taken a long time to build those. Over the last 6 years to build the kind of capabilities that allow us to grow in a tough market. Our conditions still remained uneven and it requires a steady handed discipline and our management team has that throughout our operations. So I'm going to go through now what we need to do to get to the top end of the guidance, things we can control to help get us there. But as you know, there's a whole bunch of things that are out of our control. What do we control? Discipline, and it's one of our hallmarks whether it'd be bidding execution or cost. Productivity, we like to think that a lot of people say you can't gain productivity in service and construction. We like to think that we can and we continually prove that we can. We control cash deployment and Mark talked about, we made a little more activity on our buyback about 40% of our way through our initial authorization. We deployed some cash on the dividend over the last 3 quarters, and we deployed cash over the last 18 months rather aggressively reshaping our business, continuing to reshape our business to over $300 million. Areas that we don't control. Well, I know that better than ever good timing on buying a company that has excellence in snow management the way I call it. We don't control the weather. And hopefully, we'll have more normal weather patterns through the remainder of 2012. I really didn't get excited about playing golf in January in Connecticut. I would rather have everybody be miserable with lots of snow especially in the Carolinas and Virginia, in those areas. We don't control customer spending on maintenance and capital. Our customers taught us through this recession that mandatory maintenance means discretionary and discretionary maintenance means sometimes when it breaks. We're seeing a little resumption of more normal maintenance spending, and we're seeing people pay for some of the shortsighted decisions they made in the recession, but it's nowhere near broad-based yet. And we're certainly don't control the general economy with Europe, and I still worry about $4 gasoline. I will always worry about $4 gasoline. It's not a good marker on the table for us. And we don't control those things. However, based on our start, I think we have to raise revenue guidance because with 11% organic growth in the first quarter, our organic growth number didn't make sense where we had it for the rest of the year. And again I remember in February we told you there were 2 or 3 things that had to happen for us to start to get more confident on the air [ph] and most of them had happened in here in the first quarter that we needed to see happen to get to the revenue number that was better than what we initially said so. We see around $6.3 billion right now and consistent with our margin outlook that we had. We raised the bottom end of the range from $1.65 to $1.70. We're not trying to set a new trend here at EMCOR. It's just that our revenue were so much stronger here in the first quarter we felt compelled to do that and we don't see any outlook change in our margins today. Remember, we gave guidance when we had a pretty good view on the negative impact of the mild winter weather. And with that, I'll ask Laura to put you all in queue and we'll take your questions.

[Operator Instructions] And our first question comes from the line of Alex Rygiel of FBR.

First for Mark, can you quantify the favorable resolution of the construction claim that you have on the health care project in the first quarter?

We said that it went up because we saw things do happen quite often. But from a materiality perspective, it's less than 50 basis points for that segment margins.

And then, Tony, in the first quarter, the mechanical revenue was very, very strong exceeding $550 million. Is that a new sort of level that we should think about each quarter for the next couple of quarters or was there some sort of onetime revenue kind of embedded in that number that might tail off in the coming quarters?

It won't tail off in the near term, Alex. We have good momentum in that business. We're doing some nice work in the industrial sector that we have a pretty good line of sight on for the next 2 or 3 quarters.

Helpful. You mentioned the refinery turnaround business. I'm a little confused because it sounds like backlog is good but in the first quarter may be revenue wasn't good but your profit is strong. Can you kind of circle back and help us to reexplain the refinery turnaround market in the first quarter and then your outlook?

Sure. Our business serving refineries is about flat year-over-year, and it came back remember '10 to '11 from a pretty big deficit. And the way I got there was really good shop performance, not so good field performance. And the field performance wasn't that we weren't executing on the contracts we had. We expect to do a rather significant turnaround for our customer. We mobilized all the resources and the turnaround ended up being about quarter of the size. So in our field operations with refinery specifically, we did less volume than we expected and we had more cost than we should have. Now that being said, based on what we did in our shops, it was a pretty good turnaround season because in our shops, it's not only the turnarounds we get to execute for people which we do with our field business is we support a lot of other turn around contractors in their field businesses. So I can't say that it was a market issue. For us, it was a customer issue and if we -- now, that being said, I'm glad we have some of those resources because now here in the second quarter, we're executing pretty well on some of the turnarounds and it looks like a little bit for us in elongated season. Nothing to spike the ball in the end zone about because we're only in April but we will see. Now for the outlook for the year, I have no reason to believe that it won't be at least just a strong as last year was for the back half of the year, which was pretty good. Nothing near what it was in 2007, but it was still pretty good. And we're winning some important new customers. What you see in turnarounds in general used to be able to look at these like I said in the past like clockwork and even though the scope. With the dynamic pricing the dynamic mix they're putting in refineries now. It's a lot more realtime decision and we got caught a little short on that in the first quarter.

Our next question comes from the line of Rich Wesolowski of Sidoti & Company.

Regarding the organic facilities margin you touched on the refinery piece, but you also cited a couple of contracts that started up. I'm wondering how large these jobs are where they would materially get the margin on organic business doing $450 million a quarter?

Well, again, think about where margins. Are it doesn't take much. $4 million of expense where you didn't want it between industrial and the startups that's a point of margin, right? They're going to be significant. I mean, they're not there yet, but full run rate, they can be some of the largest contracts we have north of $20 million. It takes a lot to get there and we're going through the expense to get there. What we're doing, Rich, is we're starting up plants, individual plants. And so we expect them to be starting 2 plants. We're starting 4 plants for each of these customers because the first 3 plants we did on the performance of the savings were so significantly accelerated, and it cost a lot of expense do that.

Okay. Last quarter -- in speaking about USM, you spoke a greater difficulty in the initial sales process with USM's customers than you first envisioned and now the backlog seems to have turned around. From an outsiders perspective it makes sense to consolidate the trades and USM's service lines. What are the common objections that you have heard and what turned around the business development?

Well, I think first thing is we took some of our trusted people that had fantastic reputations in that sector and put them in charge and that paid dividends immediately and they were able to leverage their relationship to get things done. And we quickly stopped listening to the nonsense that the last people leading business development had to say to us. The second thing is EMCOR has a great reputation of servicing its customers. USM had damaged its reputation through its sales process as it became less focused on serving its customers and more focused on selling its company. It was a big distraction to management and customers voted not to participate in that sale. And when it got bought by EMCOR, we got off to tell the story. And the objection was well just go off and perform. I was at the trade show last week. Our booth was full. And last year they had to trade show, their booth was empty. And you can just see by the signing sheets added and the kind of information people took from us. We're a long way from home yet. These things don't turn overnight, but if there's a tunnel we've been moving through here and we're about 9 or 12 months off. It looks like there's light on the other end of it and we're pretty sure we're not in a railroad tunnel. We're actually seeing the other side.

Okay. Then lastly I've always viewed 5% as maybe the bottom of a good range for EFS and now you've layered in a business USM that historically has performed even above that. Over what time period is it reasonable to expect the company to raise EFS operating margin about 5%.

We're getting impatient with it. So we got to get there sooner than later and better start get the run rate basis, and we need a little help from normal operating conditions to do that. But certainly I don't want to be having this discussion 12 months from now and tell you that I'm still hoping to get 4%.

Our next question comes from the line of Adam Thalhimer of BB&T.

First question I wanted to ask about pricing. What does the pricing environment look like today and how long will the recessionary pricing environment continue to impact results?

Well, I mean, we're working through some works so that usually take us 9 to 12 months. And you see that reflected in our margin guidance. And you've seen it reflected in our margin guidance throughout this recession if you think about it. We've been giving guidance the margins have come down and the actual margins have come down over the last 3 years. And we've been offsetting that with cost reductions and productivity, and we kept pace with it a little bit behind it because you can't possibly make up the good operating conditions we had in 2007 and early '08 versus what we faced in '09 '10 and early '11. I think pricing has stabilized. I think the real issue is decision-making takes longer and ends quicker. And it's a weird phenomenon. I mean, examples of what we're doing in industrial, some of these we have talked about for 3 to 6 months, 9 months with our customers. And when they start the starting gate, okay let's get this done and let's get it done now. Let's continue to work on the scope. The contractual terms are okay. They make sure they protect as they do that. But once we make the decision we wanted go to private owners because now we got approval and we see the opportunity because they're trying to compress the uncertainty period as much as they can. And you're also seeing people I think on the small project side, we still have a bit of a hangover there. And look, we caused some of the hangover ourselves. I've talked about this. We probably went a little too broader with some of our capability and try to bring fast-paced resolution like we do in the commercial and private world to some municipalities and other people that don't value it. So we'll get through that hangover. But I'd say a little better and I think it's a little better in the midsized market, which is encouraging to see because you see that in our backlog and you see that in our gross margins we reported.

Great. And the 45% organic growth in your commercial backlog, does -- are we seeing the benefits from that organic commercial backlog growth in your result to date? And if not, when do we see that?

No, you're not seeing it yet. It's hard for me to call when that's going to happen because some of the service work they start up over time. They clearly go back to the earlier question, that's how you start to see EFS margins expand and construction margins stay where they are.

Let me throw this out. So one of the large HVAC OEMs noted that orders for commercial HVAC equipment were up 20% in Q1. They were forecasting 5%. What's your reaction to that?

Well, I'll have to know where they were talking about, what parts of the product line. I listen to the same calls.

They said it was energy -- largely energy retrofits and replacement work.

I mean, again, you'd have to know what product lines. So some of that would be applied products, some of it maybe just rooftops. The other side is some of is just stock product. And distributing inventory is low as a get to the larger rooftop equipment, that could be an anomaly that they have caused. We are seeing customers return to the market for energy savings projects and that is a true statement. We'll see how sustained that is, and we'll see as we get through the summer months, if we just get a little bit of heat, customers should not be rewarded like they were last year for their consistent and continual deferrals of their maintenance.

Okay. Great. And last question for me. I wanted to ask you about the buyback, so the absolute dollar amount spent was about half of what you spent in Q4. And I'm just wondering why you tapped on the brakes a little bit there?

Well, I mean, the stock has performed reasonably well during the quarter. So I mean price is obviously a function of it. The window of time that we actually could be in the market was also limited between the ending of 2011, and then obviously when we got into a restricted period for the first quarter. The window wasn't as open pursuant to us being able to make open market purchases as opposed to us being restricted by a pre-file plan.

But not -- for instance, I mean, no changes in your philosophy on cash management?

No.

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

Tony, I wanted -- you seem to indicate -- I mean, we've got better market activity in the industrial market as opposed to the commercial markets in the hospitality which grew last cycle. Are the projects larger for you now and does that imply greater lumpiness in margin potential especially with your 80-20 rule just the nature of large construction?

Yes, John, and they are also more where we're part of the decision. We're further upstream. So the answer is yes. The answer is yes and no. The margins will be lumpier. That happens on any large work, right, as you get into it? Especially with the 20% rule as you know. And I think it happens as you go through scope definition. It's a little bit of same phenomenon in the service side. I mean, we first start up the service customer you have a lot to learn and especially on the industrial side, right. Safety is paramount. You go through all the training cost. You go through all the crew cost. You get through all the testing in your crew. You learn the rhythm of the customer and then the margins start to come. So yes, I think in both places that is a different phenomenon than what you experience in typical commercial customer because once you do the equipment inspection and understand your task, it goes relatively quickly on the commercial side.

So I mean, should we be concerned about the lack of organic backlog growth at this point?

If I were sitting here with no organic growth in revenue, no organic growth in backlog, I'd be a little more concerned. But now with really 4 strong quarters in a row of decent organic growth at least for this period of time with the capabilities we've built, we're in a different phase that we've been in before. I would have expected, look, I said this in the discussion piece. We typically expect 2 or 3 quarters before, we see at least one quarter before revenue growth we see backlog growth. I think as we move closer to the owner and the end-user in this industrial work, we're seeing it a lot earlier. And we're seeing revenue growth and backlog growth. We see revenue growth things passing straight through backlog for lack of a better word. Everything goes in to backlog. It passes straight through.

Right. And is that just the function of just excess capacity in the industry that the owners don't have to order as far as…

No. I think it's less I do with excess capacity and more to do with wanting to compress the time of uncertainty as much as you can.

Okay. And lastly, any comments on acquisition markets, what it looks like, thoughts there?

Yes, we've been fairly active over the last 18 months. And we've done both kind of deals for EMCOR. For us to do something where private equity is playing or it's a broad option. You look at the 4 major things we've done over 12 years, they were all special circumstances. They were either something that happened in the capital market or something that happened to our property that created the opportunity for us to be able to buy versus someone that wanted to play a crazy value. You go back to more of the private market, tight deals we do. We did, what, 5 deals here in the last 18 months. Four of them were EMCOR sourced, EMCOR negotiated, EMCOR done. And the other one was an auction we started to bust down and you really have to understand how things are going to fit together and that was USM and what was causing the issues. We thought we understood them all. Like we said, we were about 9 months off. It doesn't change our long-term outlook. The acquisition market is okay. You're seeing a little more activity. We're seeing a little more activity on our private side, and I don't expect we're going to run out tomorrow morning and do something that would occupy unless it's just a tuck-in deal in our Mechanical Services or site-based team. They're fully engaged between contract start-up and integration of USM and repairing the small projects work they were doing. Look at the industrial side, you look to just our core mechanical and electrical business and you look to the government side. I mean, there are other areas that we would consider. I mean, we would get into government typically we look at an acquisition it becomes hard to pull off either because of a small business rules or the lack of visibility beyond the current contract sort of each time we've done that we went out and build our own capability. That's why we've grown so strong organically there.

Our next question comes from the line of Avram Fisher from BMO Capital Markets.

You mentioned that weather was about $0.05 that comes out to about, by my estimate, about $5 million or $6 million of EBITDA which gets to about 5% margin that made USM attractive. And I just want to clarify that. Some have already asked about how long it would take to get to the 5% margin that as you said you would hope to ramp there. But even with the growth of the turnaround work and the improvements there, you're still running at EBIT margins below 4%, maybe in the 3% range. Is that a function of pricing, as well as underutilization?

I think for us in the first quarter, it was cost. Some of it good cost, right, starting up contracts that are going to pay dividends in the long term. Some of the cost in a place like USM as you staff up. After the winter and a bit of materialized the good news is we have a different way we're going to handle that next year so we don't have to build up the fixed cost. Necessity is the mother of all invention. And so it got this cost. I don't want to blame pricing from this cost. I think the second thing is small project handover carried a little bit in the quarter. I mean, never big quarter for Mechanical Service anyway. So I think it's those 2 major factors we would have been where we wanted to be in USM had we had a normal winter in the quarter.

And what I'm hearing you say is that pricing really isn't the issue. It's just the start-up costs on new projects, some management turnover cost at USM?

Pricing has recovered a little bit in the industrial market and that's the major lever. We've still got some more way to go and we could use some volume there. As you know we can get more industrial work it will have an outsized impact on the margins in that segment.

Okay. Got you. And then historically, there's been a pretty strong correlation between changes in backlog and changes in U.S. construction revenues. I'm not sure if you've discussed this already, but you're getting 15% construction revenue, organic construction revenue and kind of down organic backlog. I'm just trying to understand that disconnect and what's changed.

Well, it's starting to look more like service work. As we're working alongside the owner to develop scope on these larger projects, we're burning it, building it. We're contracting it, executing and burning in a relatively short compressed time cycle from anything we've done in the past.

And are there certain projects or types of projects you are engaged on that?

Sure. I think some of the projects at the DOE site can have those characteristics. They can be smaller projects but they add up to a lot that have that characteristic. Food processing work that we're working on and some sectors that are pretty robust right now and fast paced projects have that characteristic. Data center projects can have that characteristic at times especially as you take this an existing structure and modified into a data center. High-tech projects in general always have that characteristics, because they wait forever and then say okay you guys get this done yesterday and then you mobilize quickly and get it out.

And the DOE site work, is that Harry Pepper or [indiscernible] or...

That's [indiscernible].

And just remind me when acquisitions in Mechanical anniversary, is this the best acquired revenue?

Yes, anniversaried within the first quarter. Southern obviously we just closed in the current quarter.

Pepper is already done.

Yes, Pepper has already anniversaried and...

So it's primarily organic going forward?

Yes. Other than [indiscernible], everything is organic going forward after this quarter.

Our next question comes from the line of Nicholas Coppola of Thompson Research.

I wanted to ask a little bit about small projects business doing better throughout the year. I guess when do you expect to drive the improvement? Are there any signs in the marketplace that you can point to that can get the confidence that should occur?

Well, one area it's going to better is in our control is we finished the work that wasn't so good to begin with and we get it out of our backlog and we stop kidding ourselves on what we can sell [indiscernible] our mechanical service that is in our control and we're well on the path of doing that. The second area is you need to see the energy service work return and it is and you need to see people starting to understand paybacks. And if you get a little bit of warmer weather, again, I don't want to declare victory here on first quarter on anything. But if you get a little warmer weather, I think it would be nice for customers not to be rewarded anymore for making terrible maintenance decisions over the last 3 years unless summer they have got rewarded and never got hot enough for them to stress their equipment. And so they don't need to be rewarded another season like that.

Do we see -- have you seen more products out there? Have we seen last bidding pressure from your competitors? Are there -- is there...

One of the things you're starting to see is some of our customers when we have long-term service agreements with which where all of this work comes from here either on a construction site or about 15% of our construction volume is a small project work too. That sort of job is $2 million or $3 million or less, is you're seeing people realize that testing the market is not so good when you need people to be able to come in and retrofit and renovate and work around your day-to-day operations. None of this is done in new buildings, right? None of these is done on new construction. So they're realizing the people that really know their operations and how to get it done are the best people to do that. So we are seeing a little bit of return to sanity in our long-term relationship customers are coming back to us to do this kind of work.

Okay. And then I have another question for you about, I guess, a shift from maybe public work to private work. Are we seeing that and do you project that shift I guess continue to occur?

Well, they have seen some of that shift with commercial backlog doubling and half of that being organic. We are seeing that shift. We have big gap to make up there with hospitality on the private side, and we're filling some of that gap with industrial and we're finding that out with different characteristic. We've done industrial work for a long time. It's just we're much closer to the decision-maker now with some of the capabilities and acquisitions we've made and organic investments we've made. So yes, the shift to private work is always more positive we think. We've done okay through this downturn on the institutional and public sector work and some of the best work we've ever done on EMCOR has been public sector work. It's just different.

Our next question comes from the line of [indiscernible].

I had 2 questions. I think a lot of my other questions have been answered. When you talked a bit about the strange season and clearly it's gotten off to a hot start. When I walk around the city, there are definitely more trucks out on the maintenance side. So relative to last year which as you said was tepid what do you guys assume in your guidance about sort of spring and summer in terms of weather?

We assume normal weather. Good weather [indiscernible] looks like this. In May, people are really, really uncomfortable in New York, in Chicago, and Boston, Connecticut and D.C. And they're uncomfortable to the point of being irritable. And the weather is in the high 80s, low 90s and they're saying, I can't survive this summer without making sure my system works really well. In that way 3 to 5 days that May and then in June, it stays above 85 degrees. You don't have anything that cold June weather where your young son or daughter is either playing soccer or baseball wearing a knit stocking cap versus their baseball hat because it's 55 degrees the first week of June and raining. So we don't need any of that. So we didn't assume either end of that spectrum, but we would certainly take we would deal with irritable people in New York not allowing us to park our vans correct in Chicago and Boston and all those places to pick up better margins. I see it's all going to happen on the technician side. Systems will break and we'll install more equipment and will install more equipment in the fall because people will say I mandated it to get through the summer I am not doing this again. Obviously, I made some really very bad decisions in this downturn about the care and maintenance of my critical HVAC equipment.

Got it. And then given those fairly irritable in April on some dates, has that been enough to peak start the season?

Not yet. All we know is we had to send our technicians out earlier to start up systems in late March that than we typically would do.

But you assumed that it's just a part was outing that in your guidance?

We assume that it looks a lot more like 2010 summer and a lot less like 2011 summer.

Second question is on the institution side. Can you talk just a bit about that, Tony? You guys did a great job of managing into down cycle with your diversity. Now when we look at the ABI index and restocking the commercial side picked up, but we see the institution side contract. And on the health care side, we have -- there might be some delays as people as people mull over the health care bill. Can you talk about what you're assuming for 2012 really on the institutional side, it doesn't stay stable…

We're assuming a stable market.

Got it. Okay. And you're bidding just over there remains fairly strong.

Yes. I mean we're seeing opportunities there. Sure.

Okay, great. Last question and that's on the petrochemical industrial side. All your peers on the energy side have indicated that they're getting very, very bullish on the petrochem cycle. Given the strength that you've built on the industrial side over the last several years, where could that business go for you? Have you done any internal forecast? Or qualitatively, can you talk a bit about it too?

Well, surely. Nothing -- almost nothing would be better for EMCOR. Surely, nothing would be better for Facilities Services segment than to see a return to even 85% of what we had in 2007 and 2008. Now is there a path to get there? There may be a little different way together? We've diversified our customer base some. We've invested in some new capabilities that we didn't have, both on the custom fabrication side and on the service side. We are well positioned especially on the refinery side, but even broader on the petchem side even broader supporting some of the development on the pipeline side people trying to get the wet gas and dry gas mix and you need heat exchangers to do that because it runs hot. And so we're seeing all kinds of different kind of opportunities and we clearly have a backlog that's up right now. We're seeing better pricing nowhere near what it should be for the value we add. So yes, I mean, we look at it. We know it's been a tough couple of years and I think you know us well enough to know that we don't declare a victory until we almost go up by 3 touchdowns. So we're a long way from that yet.

Our next question comes from the line of Jeff Beach of Stifel, Nicolaus.

Can you give us an idea of where the split is between private and public right now either in revenues or in backlog?

We can get you that exact number. Let's think about this a little bit.

Yes, it all depends -- Jeff, this is Kevin. Some of it depends on definition of what you think private sector work is. Let me define it as one way right now. If you take commercial hospitality and industrial together. In 2010 in the first quarter, that was 30% of our backlog. It's currently 44% of our backlog now with the biggest growth driver being the commercial work. And as Tony mentioned, USM is in there for about $260 million or so. The hospitality is down between those 2 between those 2x although it's a very small number and industrial as Tony mentioned we have about 85%. But again, sometimes in the health care side, there's some private sector money in health care as well but these numbers are sort of probably your biggest lump sum number. If you want to call me later, I can talk you through them.

If you think about the industrial work, that's what we're seeing the more robust revenue growth. We're at least 50-50, Jeff, probably leaning more on the revenue side towards private sector versus public sector maybe even as high as 55% for either 45% of public which is at least a swing of 10% to 15% of where it was 2 years ago. So it's moving in the right direction.

Okay. And then my follow-up regarding that I think in the last cycle, your private got to be higher than where it is. So it sounds like that still has some momentum and the way to go. But can you discuss specifically some of the trends within the key public-sector markets and whether this is giving you at this point stable opportunities, growth or whether that's shrinking our attractive opportunities partly on a relative basis?

I don't think we have seen much change over the past 12 to 18 months. I would say it's stable. It's not a growth market, but that being said, if we win a significant opportunity even in a declining market for us It becomes a growth market, right. So when I think institutional federal government for some of the things we're doing, there are pretty attractive maintenance contracts and they become binary, right, we are either going to win them or not win them, if we win them it makes is look pretty attractive in the institutional space because there will be project work that will have fallen off that. We're bidding them. We expect to be down selected. We're be 1 of 3 and will see how it happens there's couple of significant ones. I think in transportation. I think for us it's been pretty steady, and we're looking at a couple of jobs right now that may take up a little bit these jobs will move pretty quick in the backlog. And water and wastewater we have been doing about the same levels of stuff plus or minus 15% to 20% for long time. And we see that continuing because there's a lot of old plants out there and some projects that have to be done just from safety and also to keep water supply where it should be like other things. So for us it's stable. I would not want to be a small projects guy counting on that in the government space or someone that could really offer broad capabilities and couldn't do significant projects I think you're going to do well maintenance or construction.

Our last question comes from the line of Rich Wesolowski of Sidoti & Company.

Mark, would you mind reminding us how much the related amortization is expected for 2012 and whether that number drops in '13?

Sure, give me one second on that. Believe it or not, I don't have that number. The expectations for fall 2012 are just under $30 million, and it will tail off to $25 million in 2013.

I would like to turn the call back over to management for closing remarks.

Look, thank you all for calling in and thanks for what I thought was a pretty good question-and-answer session today. Look, good first quarter. We got a lot of work to do this year. One quarter does not make a trend. We got a couple of good quarters of organic growth here. We got to go out and execute and let's hope for some normal weather patterns. And let's hope that everybody in the EMCOR world and all of you stay safe. We got a lot of tough work to do. Thanks. Bye.

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