Good morning. My name is Lashana, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group Second Quarter 2012 Earnings Call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. I would now like to turn the call over to Mr. Gordon McCoun of FTI Consulting. Sir, please go ahead.

Thank you Lashana, and good morning, everyone, and welcome to the EMCOR Group conference call. We're here to discuss the company's 2012 second quarter results, which we reported this morning. I'd like now to turn the call over to Kevin Matz, Executive Vice President, Shared Services, who will introduce management. Kevin, please go ahead.

Thanks, Gordon, and good morning, everyone. Welcome to EMCOR's earnings conference call for the second quarter of 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 and 6-month results. They are Tony Guzzi, our President and Chief Executive Officer; Mark Pompa, Executive Vice President and Chief Financial Officer; Mava Heffler, Vice President, Marketing and Communications; and our Executive Vice President and General Counsel, Sheldon Cammaker. For call participants 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's management as of this date, and EMCOR assumes no obligation to update any such forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance. Such risks and uncertainties include, but are not limited to, adverse effects of general economic conditions, changes in the political environment, changes in the specific markets for EMCOR services, adverse business conditions, 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 2011 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, and we should turn to Page 3 because that will be the basis for my initial discussion. Our good start continues this year and most of the year is unfolding as we discussed on our earlier earning calls. We earned $0.49 per diluted share from continuing operations versus $0.42 per diluted share from continuing operations in the year-ago quarter. Revenues continue to be very strong as we had $1.59 billion revenues versus $1.35 billion in revenues in last year's second quarter. Growth was 18%, but half of that -- a little over half of that in organic growth. We continue to gain cost leverage as we expected from our SG&A expenses, and we've talked about that repetitively. Our SG&A percentage dropped to 8.7% from 8.9% a year ago after adjusting for the USM deal cost, and continue the trend that we have seen over the last several quarters as our organic growth is leveraged off our existing expense structure. Operating income came in at 3.5% versus 4% a year ago again after adjusting for the USM deal costs. Cash flow was $24 million in the quarter versus $41 million a year ago and again is about where we expected as the business is growing, and our net billings and excess cost continues to reduce. As you look at our individual segments, our electrical mechanical segments continue their strong performance. And all the work we are executing now was won in these recession or near-recessionary times. Our Facilities segment is improving, and our lines of business and facilities are about where we expected them to be except for our site-based and USM businesses, which really make up our commercial site-based business. We had several large start-ups in our legacy business and at USM, and profitability should improve from here.…

Thank you, Tony, and good morning to everyone participating today. For those participating via the webcast, we are now on Slide 4. I will begin with certain highlights of our second quarter 2012 results before moving to year-to-date 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 $1.59 billion in the quarter are up 18% from 2011 second quarter. Organic revenue growth in the quarter is 9.4%, and all reporting segments other than our U.S. Electrical Construction Services segment reported positive revenue growth during the quarter just ended. Revenue distributable to businesses acquired of $115.8 million positively impacted our U.S. Facilities Services and the U.S. Mechanical Construction Services segments during our quarter 2. As previously mentioned, domestic electrical revenues did decrease 3.5%. Domestic mechanical construction quarterly revenues increased 27.5%, and our Facilities Services quarterly revenues increased 23.1%, and our U.K. segment revenues increased 15.7%. Good revenue performance all the way around. Selling, general and administrative expenses increased $13.2 million within the quarter, inclusive of $10.1 million of incremental SG&A from those acquisitions completed June 30 of last year to the current date. As a percentage of revenues, SG&A in quarter 2 is 8.7%, which represents a 50 basis point reduction from last year's quarter 2 percentage of 9.2%. And as Tony previously touched upon, I just like to remind everybody that our quarter 2 2011 SG&A included $4.5 million of transaction costs pertaining to our acquisition of USM. Please turn to Slide 5. Operating income of $56.3 million represents 3.54% of revenues and compares to $50 million of operating income or 3.71% of revenues in 2011 second quarter. All reporting segments other than the U.S. Electrical Construction…

Thanks, Mark. Everybody should be on Page 9. So we're talking about backlog. Backlog at the end of the quarter stand at approximately $3.3 billion, relatively flat since year end and down approximately $259 million when compared against June 2011. As Mark mentioned, all of the figures we have now exclude our former Canadian subsidiary and include our USM acquisition. With regards to the $259 million reduction, the largest piece of that reduction is associated with our U.K. subsidiary. We made a decision that we would not try to participate in a large way in the U.K. construction market right now as it's a very difficult market and continues to be weak, and the risks outweigh any rewards we can get for the majority of the market. So we're trying to pick our niches and play in the U.K. construction market, but not grow it. That being said, our U.K. Facilities business continues to grow and they're well positioned in the market. Year-to-date, we've had 10.2% organic growth, and backlog is relatively flat with the end of the year. We've talked about this over the last several calls. Part of the reason for it is the current mix of work we have. It's fast-paced, it's technically complicated, it's large industrial and commercial projects that do not have a full value reflected in backlog. The work tends to be more owner direct. We're involved in decision-making earlier, scope definition process and we provide design/assist and design/build capability on those projects. We're working from task orders, purchase orders and order’s to proceed while protective from a contractual standpoint. We don't have the full value of the project in our backlog and once we get it, we tend to work very quickly, and it works off in between periods. We've got 4 quarters…

[Operator Instructions] Your first question comes from the line of John Rogers with DA Davidson.

One, and I apologize if I missed it. What was the organic backlog growth?

There was no organic backlog growth.

Okay, okay, and then was there anything taken out of backlog because of the dispositions?

No, all numbers that we reported are comparable year-over-year. We took Canada out and you put USM in because we completed it June 30 last year.

Okay, okay. And then Tony, you mentioned acquisitions in your last part of your comments there and is there anything that particularly intrigues you at this point or you're busy with USM or kind of what are your thoughts there now?

I mean, we're not likely to add anything to the management team. I mean we've got our best folks. Luckily we had them, that was always part of the plan that they were going to go into USM. A lot -- some of our best folks, so we wouldn't add anything on top of there. We need to get that right. We like companies like Southern. That size company adds nicely and builds capability and then we can help grow it, led by able management that we can augment. Yes, we like industrial. We like electrical and mechanical construction and services. Government, we like to grow organically right now. So the outlook you have to pay attention to what you've been thinking about doing right there now because of all of the talk around budgets and sequestered. You've got to get a little more clarity there. Our guys have done a great job growing that business organically. We would always look to add to our mechanical service capability in the right geographic markets. And we like industrial across the board. But there's nothing -- deals happen when they happen. I would tell you in general we always have that private market that we're working in and we do fairly well in. The larger market -- it's a very slow market right now. And you've seen all the commentary around that from people that are much more active in the build market than we are.

Okay, and one other minor point if I could. On the electrical side, are you seeing much in activity in either of low voltage or communications projects there because you hear mixed reports about what's happening in that market.

I mean, that's part of our business. There's always an underlying thing with us, we're an IBEW shop and part of that market's been taken over by CWA especially in New York. It's an okay market. So different than the general markets overall. It follows the commercial market a little more than it follows anything else, and the data center market has supported it quite well.

Your next question comes from the line of Alex Rygiel with FBR.

Tony, you mentioned that part of the backlog decline year-over-year was a function of the U.K. -- exiting the U.K. construction market. Should we expect your revenue from the U.K. operations to decline going forward now?

Yes, be careful. I said de-emphasize.

No, I get it. Fair enough.

Alex, I know that's been something you've been asking about for a while, but it's de-emphasized.

It could, Alex, but we had good growth in the services area. We're focused much more on the composition of the revenues there and the composition of the margins over the long term to build that business. And I think you've seen steady improvement over there over a number of years. I think you remember the past, we're probably -- we've been fortunate that we've been able to get that into a much more steady performer, with more of a service focus. It's not likely that the construction business will grow there for us.

So if the backlog transitioned from construction to service, why was there -- how can revenue stay flat, but yet backlog was down?

We're winning more small patch-order work, Alex and that never really gets reflected in backlog. And we have some very nice contracts where we're implementing large-scale programs on the small project side through our services arms, much like we would here that never its full value is reflected in backlog. So you get the revenue growth without the backlog growth, much of the same phenomenon we have going on in the overall business, just with smaller projects.

Have you seen that trend in any other cycles in the Facilities Services business?

Yes, on the small project side? Yes, absolutely. When -- many years ago when I was at UTC, we absolutely saw it. We're also seeing it in our own mechanical Service business today, and I think it's been EMCOR's history in every cycle the small project work starts to show growth outside of backlog before the backlog growth.

If we were to take a look at a snapshot of implied margins in backlog today versus a year ago, how has that changed?

It probably hasn't changed much, Alex. I wouldn't say it's -- maybe on the low end, the small project work solidifying, but the large, which will drive the sort of $5 million or more project, which drives a lot of our revenue hasn’t changed a lot. It hasn't gotten worse. It has stabilized, and we're forced to just be more efficient and better at it to generate acceptable margins.

And I got a question for Mark. Mark, did you say that for the full year the tax rate in 2012 will be 39% despite the fact that it's tracked at 38% in the first 6 months?

Yes, consistent with last year, you may have remembered, Alex, that the U.K. is legislating some tax decreases, which is obviously favorable. However, we have a deferred tax asset in the U.K. and as a result of that, when it does gets legislated into law, which is contemplated to happen in September, we're going to actually have to record a provision charge because we're going to have to write the value of that asset down. So unfortunately, we can’t reflect that currently because it hasn't been legislated yet, so it'll be discrete out when happens quarter 3 or quarter 4.

And when we think about the tax rate for 2013, does it revert back to 38%?

It'll move in that direction because I can't speak to what the U.K. government's plan on the tax front is, if they're going to continue to drop corporate rates or not, but assuming that, that doesn't happen it would revert back closer to 38% and 39%.

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

Would you mind elaborating a bit on your prepared comments on USM specifically mentioning the underlying factors that you look at to give you a confidence that you can have that outsiders don't see right now that the performance is going to improve in the second half and into '13?

Well, the first thing we look at is are we getting the synergies that we said we get? I think when we made it that we said $5 million to $6 million. We're exceeding that number. So that tells us that the cost base although not fully there now will be in good position to leverage for future growth. The second thing is, are you seeing more opportunities or less opportunities than you were 6 months ago. We're seeing more opportunities and then are you weighing the opportunities that you have targeted and at what rate are you winning, and that number is up substantially. And finally, are you seeing it across not only the total package when you put it all together, but are you seeing it in the individual lines of service and that's happening. And finally, or some of the customers that sat on the sidelines or some of them start to ask you to be engaged in their solution a bit on the work and are you winning some of those customers back and that is starting to happen too. So current performance unacceptable, but there's a path to get to where we need to go, and it's on all of the levers both cost, revenue and then productivity also because we also are able to leverage some of our existing infrastructure to support the combined business of USM in our legacy site base business.

How easy or difficult are you finding it to manage their third-party service model, which is a good deal different from what EMCOR has done historically?

It can be challenging, but we do this anyway, Rich. We don't ever have 100% of labor on the ground on anything. That being said, in some ways it's a lot easier because we can define the scope and hold the supplier to the scope, and we don't have the labor risks, so we can pass on the variability of productivity that we usually have to manage.

Was there any dilution to the facilities margin -- organic facilities margin from the poorly performing mechanical services contracts that were referenced in the past few quarters.

They weren't poorly performing mechanical service contracts. What they were was start-ups on-site based contracts, and a little bit of dilution those contracts did turn to profitability although modest in June. But the legacy site based business as a result of those contracts had a very tough first half. So yes, the answer would be the legacy site based business did dilute the facilities margins in the first half of the year.

But, Rich, just to make sure, because I thought I heard the question a little bit differently. With regards to mechanical services projects where we have previously had reported some project write-downs in previous quarters, there was no dilution in this past quarter related to any of that activity. It seems to be all cleaned up at this point.

Great and last one maybe just a personal gut for you the potential strength of the private nonresidential cycle, which hopefully we're beginning on one hand, you still have high vacancy rates for offices and retail, but on the other, it's just been so long since a lot of these big buildings have invested. And I'm wondering whether this can be a strong cycle for EMCOR even if we go through this humdrum economy over the next 2 or 3 years.

This is going to eventually be a strong market end cycle. I would argue we haven't had much of an up cycle at all. We've managed to grind it out through very good execution and smart investment in the right kind of capabilities and moving between different sectors organically. I think your thesis is right. There has been a lack of real investment outside of a couple of niches, whether it be power or industrial. In industrial, you've got to go to regional, then you've got to go regional then you've got to certain markets -- end markets. There's really been a lack of general capital spending to any substantial way. So we've picked our spots. I think when it rebounds, it will rebound strongly. And I think uncertainty drives all of this. I mean when Mark talked about taxes, he said 38%, but he would hope eventually that there would be large tax reforms and customers like a company like EMCOR would benefit a big way from that, not only in our own tax rate, but what it would mean for our customers and the unlocking of capital. So there is a lot of uncertainty that’s keeping capital on the sidelines and you know probably a lot more about all those trends than I do but I do know...

You'd be surprised.

I do know what you're seeing in our customers and why you're not seeing some of these large projects be fully developed and go into backlog is because it's how it works now on some of these industrial work when people make some investment to expand capacity or become more efficient even on building efficiency is they think, think, think, study, study, study and when it's time to execute they say okay, let's do this in pieces and let's refine as we go along because the market may shift and I want to keep maximum options open as I do this. And you know you're going to work with him the whole time, you don’t have the firm fixed price for the whole thing, and that could be a benefit to you, especially in the design assist world that we're working in on these and they’re fast-paced. And once they decide to do it, they want to get it up and running as quick and take advantage of the market window they see. That's different. Maybe that trend will continue. And fortunately, we've built a capability to be able to do that. A lot of smaller contractors could never dream of doing that and -- to be able to move resources and capabilities and learnings between projects like that. So I do think there is pent-up demand. I've never been one to sort of say it's right around the corner. We'll be in the middle of it when we know it. And I can tell we're not in the middle of it right now. My gut tells me we're not in the middle of pent-up demand now being released. We're in the middle of people making smart targeted investments. That is not a groundswell of investment, and it reflected in the end market numbers and that's reflected really in the types of work that we have in our backlog.

Your next question comes from the line of Adam Thalhimer with BB&T Capital Market.

First, I wanted to ask on Ohmstede. You said the shop business was strong, the Service business was a little bit soft. What's the read through there?

Well, shop are very strong. Shops, we service everybody. Not only our own turnarounds that we have, but everybody. So Service business has been okay, it's the turnaround business that hasn't been as strong. I said the field Service business which really means turnarounds. The read-through there is we had a couple of turnarounds pushed out into the back half of the year. There is a natural constrain on labor. So it's not like -- whatever you're going to do plus that in the back half of the year. But the read-through on that is the broader market, we penetrated well, and probably gained share. Our share of the turnaround market, our customer base decided not to do as much work as they thought they were going to do. And they're probably going to do it between fourth and first quarter. Some of it got pushed to second quarter because our second quarter was a little better than it was a year ago.

Okay, and I wanted to ask on cash flow. Seasonally, that tends to pick up in the back half of the year. Is that a reasonable expectation for this year as well?

Yes, Adam, I think -- obviously one of the things that's come in the first half performance as I mentioned just a little while ago is that our net build and advance position has dropped significantly from the end of 2011 and that was not unexpected because we were successful in negotiating and getting billed and paid some advance payments on some significant work that's flowing through revenue right now. But you're correct, we do generate the majority of our -- and obviously in this year, all of it in the back half of the year. Our forecasting is not showing us the trends are going to be any different in the back half of 2012, and so we're still anticipating to hit our internal targets with regards to that.

Okay, and then last question, I just wanted to ask about -- and you kind of touched on this before, but just the kind of quoting activity you're seeing, and I know there's a lot of caution out there and people don't want to move forward on projects, but are you bidding on a lot of projects?

It depends on the market. There's always things to bid right because even if it's downtime, it's a huge market. Are the opportunities -- the way I would think about it is, are the opportunities any better now than they were year ago? My read on it is we're getting more selective. It's more about how we bid every day because we've had to now. We're in the fourth year of this event, called the great recession. Is it up marginally? Yes. Is there a groundswell? No, it's not like there's all kind of stuff coming over the trends and then we get to pick anything we want and just do that work and that's sort of what it started to look like at the end of 2007 and we're clearly not there right now.

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

From reading in the 10-Q, it looks like USM lost money in the second quarter. Is that accurate?

Yes.

And are you expecting profitability in the second half?

Yes.

All right, and excluding commercial and industrial markets, do you see right now bidding activity picking up in any other end markets that you serve?

No. There's just really no -- it's about the same as it's been, Jeff.

All right, and I'm seeing a lot of energy capital projects, particularly chemical, petrochemical plants, industry is trying to get new LNG export facilities. This kind of energy capital projects, is this an area of strength for you that would be an opportunity over the next couple of years?

We will do piece of that and parts of support. We're going to be an EPC, a big chemical or LNG plant, but the answer to that is no. Would we in the right markets do balanced plant work? Yes. Will it use capability that we have to support the people that will supply those equipment? The answer to that is yes, especially with some of the new capability we build to have an expanded service offering. Will some of those plans require work from Ohmstede and other industrial projects we have? The answer to that is yes, too. So we won't be the primary beneficiary, except maybe in some of our industrial companies on Ohmseted, but the secondary and tertiary effects of that, we should be beneficiaries of, and of course, anything that absorbs highly skilled technical labor is a benefit to us.

Your next question comes from the line of Richard Paget with Imperial Capital.

Well I guess I'd be remiss if I didn't ask a question about USM. Maybe just now that you've had it under your belt a couple more months, and I know the integration isn't going as quickly as you thought, but could you just update us on the quantification of what your expectations for more normalized margins should be once this business is up and running and working together.

I don't think we backed out. We're not ready to declare victory and defeat here. I think we've adjusted much yet. I think we still believe it can operate at margins about where EMCOR was in our peak so that's north of 5%. The underlying market should support that. We've in a lot of ways hit by the perfect storm or a lack thereof. We've had no snow. We've lost some key customers. We've lost some right before or right after our acquisition, and we had a less than robust business development pipeline. Put all those together, we're clearly not performing where we should. The cost structure's coming online, and I would actually -- lot of ways the integration's going better than we thought. We're just not seeing it in the performance because we've had to move faster on integration than what we thought. The way I would argue is on the cost base elements and in the structural elements of integration, we're probably 6 to 12 months ahead of schedule. And on the financial performance, we're at least 12 months behind schedule and that's -- the economy that ought to intersect to create much better performance when we start to get alignment in new business.

Okay, and then it looks like the share buyback program was a little bit slower in the second quarter than the first quarter. Maybe if you could elaborate on how you're thinking about it.

Yes, I mean I'll speak to the numbers. You saw the information in the Q. We repurchased just south of 300,000 shares within the quarter and year-to-date 2012 or roughly 773,000 shares and for the program, calendar 2012. So I don't think there's been any motivation for us to slow down. It's just how the stock is traded and obviously there's a significant portion of time where we're blacked out from participating above [indiscernible] designated program in place. I'll let Tony pick it up from there.

No. I mean, I think we've been executing. We're halfway through. We announced it in September. We think it's a good use of capital at this point, and we think that coupled with the dividend we've shown willingness to return cash to shareholders through those programs.

Okay, and then finally, I know there's been at least in the Northeast and other parts of the U.S. record heat, and that's continued in, in July. Is that business still going pretty strong for you guys?

Yes, and we should see whatever impact will be here in the third quarter, and we're certainly hoping that we're able to do more project work and not just break fixed business and customers will release some capital. We'll know more about that as we move through the quarter.

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

A lot of my questions have been already answered, but talking about the improvement in small projects, can you provide any color there? I mean, why are they coming back, and what are the drivers really behind the improvement there?

Well, I think the driver is really a little more maintenance spending. A little more worn out equipment and a drive for energy efficiency. I mean that's always the underlying factors. You heard me speak earlier, do I think this is a groundswell of pent-up demand being released? My answer to that would be no. What I think is, the repair versus replace decision is getting more unadvantageous for our customers, so they're having to do the replace and also you have buildings being repurposed. A lot of times you upgrade the system then when they get repurposed.

Okay, and one more question for you. Talking about USM's business development and how maybe wins are getting a little better. What does that look like? What are you doing to improve business development at USM?

Well, first thing is we got better sales people, and that sounds like a simple answer, but we had people that we've known and trusted for a while put them in their to reinvigorate, they know those end markets very well. And we did that about 5 months ago, 6 months ago. The second thing is get back out in front of customers. We had very good receptions at things like specs and prism where you get in front of people and you tell them what your offering actually is. And you buy the prime real estate at those places and you also get your people on all of the key boards so that they can now be part of the decision-making process of how standards are set, how people do best practice sharing and everything else. Then you actually go back and call on customers. I mean, you do it the old-fashioned way. You win business proposal by a proposal, customer by customer. And what had happened and we knew some of this, but we didn't know it to the depth that it was. They had basically got out of the market for about 6 months as they were selling the company. They had bids on the table, but the bids weren't being -- and proposals on the table, but they weren't being as aggressively followed up on or certainly responded to as an EMCOR person would typically do.

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

I guess most of my questions have been answered. The one question I would love to get a bit of color on it is national elections. How do they typically impact activity levels for your company, and how has that changed given really the mix of end markets you have going into these elections versus the last? And it seems like some of your sponsors have talked about holding back on capital spending pretty very much along the lines, Tony, of what you were saying earlier on in your prepared commentary. So it seems you've amply reflected some cautious spending in the near term, but I just wanted to get a sense of that.

I've got no clue on the elections. None. All I know is we'll wake up whatever date that is and we'll be doing mechanical and electrical construction. We'll still be nimble between markets and we're still going to serve our customers anyway we can.

Your final question comes from the line of Alex Rygiel with FBR.

One follow-up. Tony, are you guys involved at all with the Olympics? And how do you view the Olympics? Is that a distraction to the U.K. operations or are you going to benefit from that?

No real benefit. Yes on the distraction because just sort of have to step back from the market here for a couple of weeks around London, and so project work will slow down. We actually expect that business to have some real, not big productivity, but productivity won't be great here for a couple of weeks. So that would be the impact on the Olympics for us. Kevin didn’t qualify, so that -- it really won't be a net positive for us. The only net positive would be as you may see why we're being so successful on some of the small project work potentially is other labor is being absorbed. But a lot of this work's being done by very large contractors. And we really didn't do I don't think we did any Olympic work in our business. Many years ago, we were involved in the O2 Arena but that's as a venue, but didn't have anything to do with the Olympics.

At this time, there are no more questions. Management, do you have any closing remarks?

I'll just tell everybody thanks. We continue to take advantage of whatever markets are available to us, and our folks continue to execute very well. And I hope everybody has a safe remainder of the summer, and we'll see you all in October if we don't see you earlier out on the road. Thank you. Bye.

Ladies and gentlemen, this does conclude today's conference. You may now disconnect.