EMCOR Group Inc (EME) 2004 Q3 法說會逐字稿

Good morning. My name is Denise and I will be your conference the facilitator. At this time, I would like to welcome everyone to the EMCOR Group first third quarter 2004 earnings conference call. (Operator Instructions). I would now like to turn the call over to Mr. Eric Boyriven, Financial Dynamics.

Thank you and good morning everyone. Once again, this is Eric Boyriven of Financial Dynamics and I would like to welcome you to the EMCOR Group conference call. We're here to discuss the Company's 2004 third quarter results which were reported this morning. I would like to turn the call over now to Mr. Kevin Matz, Senior Vice President of Shared Services, who will introduce management. Kevin, please go ahead.

Thank you Eric and good morning everyone. Welcome to EMCOR Group's earnings conference call for the third quarter ended 2004. For those of you who are accessing the call via the Internet and our Website, welcome. We hope you have arrived at the beginning of a slide presentation that will accompany Frank MacInnis' remarks.

Those of you who are listening via the telephone, you too have the opportunity to view the slides by simply accessing the link on the homepage of our Website. A quick registration and you'll be at the slide show. Currently, everyone accessing the slides should be on slide 1, which is the EMCOR title slide. During the call, instructions will be given for you to advance to the next slide. This is one of those times. Please advance to slide 2.

Slide 2 depicts the executives who are with me to discuss the quarter and year-to-date results. They are Frank MacInnis, Chairman and Chief Executive Officer; Leicle Chesser, our Executive Vice President and Chief Financial Officer; Mark Pompa, Senior Vice President, Chief Accounting Officer and Treasurer; Sheldon Cammaker, Executive Vice President and General Counsel; and Mava Heffler, Vice President, Marketing and Communications.

For call participants were 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 Presentation. You can find us at EMCORGroup.com.

Before we begin, I want to remind you that this discussion may contain certain forward-looking statements. Such statements are based upon information available to EMCOR management's perception as of this date. And EMCOR assumes no obligation to update any such forward-looking statements.

These forward-looking statements involve risks and uncertainties that could cause actual results to 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 specific markets for EMCOR services; adverse business conditions; increased competition; mix of business; and risks associated with foreign operations.

Certain of the risks and factors associated with EMCOR's business are also discussed in the Company's 2003 Form 10-K, its 10-Q for the third quarter ended September 30, 2004 and in other reports filed from time to time with the Securities and Exchange Commission.

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

Thank you Kevin. That was extremely well delivered. Good morning everyone. Welcome to our 39th quarterly conference call for investors, analysts, Red Sox nation, and other friends of EMCOR Group. Today's call is being conducted as usual by telephone and by simultaneous Web-cast. I will be referring from time to time to a slide number to identify the relevant slide for Web-cast participants.

Right now we're still on slide 2. The primary subject of today's call is the EMCOR Group third quarter 2004 earnings press release that we issued earlier this morning, with additional comments concerning an earlier press release in which we announced a major senior management appointment.

We will conduct this call in the customary way. First, a discussion of our third quarter and year-to-date operating results followed by a review of general trends and specific developments in our industry, our Company and our markets.

Then we will review with the evolution of our project backlog, including special mention of some notable project awards from the most recent past. Finally, we will discuss the recent appointment and arrival of Tony Guzzi as our new President and COO. And I will say a few words about our current impressions of earnings opportunities in the remainder of 2004 and into next year.

At that point there will be opportunity for you to make comments or to ask us questions. And you can see from slide 2 that a number of EMCOR senior officers are here to assist me with the answers. So, let's begin. Please move to slide 3.

In our initial analysis of EMCOR's prospects for 2004 which we communicated to the market in February, we stated that this would be a transition year between the recessionary 2003 and post-recession 2005. We felt that the anticipated improvement in EMCOR's performance would occur primarily in the second half of 2004 as macroeconomic recovery continued. And we felt that overall 2004 performance would be directly dependent on the pace of that recovery.

Our expectations have proven to be correct. After a slow first-half, EMCOR's operational performance and financial results improved significantly in the third quarter both sequentially and in comparison with the year ago. And there are prospects for continued earnings improvements going forward.

In the third quarter, EMCOR earned $15.5 million or 99 cents per diluted share, compared with net income of $6.5 million or 42 cents per diluted share in the third quarter of 2003, and compared with 1.4 million or 9 cents per share in the second quarter of 2004.

Revenues in the current quarter were $1.22 billion, a 5 percent increase over the year ago level of 1.16 billion.

Third quarter operating income was $19.6 million compared to 13.5 million in 2003, while selling, general administrative expenses were $97.6 million or 8.0 percent of revenues -- a reduction of 6.7 percent from the level of 104.7 million or 9 percent of revenues a year ago.

This is the third consecutive quarter in which we have reported significant reductions in SG&A expense as the result of a cost reduction program that we initiated at the end of last year. The year-to-date reduction in overhead costs derived from this program is more than $25 million, a very important factor in our improved profitability.

The Company also reported restructuring costs of about $600,000 during the third quarter and a $4.3 million net income tax benefit related to tax reserve adjustments after a review of open year liabilities. The effective tax rate fell to 42 percent from 44 percent in the year ago quarter.

The Company also completed 2 disposition transactions during the quarter, both of which reflected our continuing UK restructuring program. Certain assets of our UK Deal Commerce equipment rental division were sold to a local purchaser for a pre-tax gain of $2.8 million. And our interest on a South African facilities management joint venture was sold, again to a local purchaser, at a pre-tax gain of $1.8 million.

Please move to slide 4. Net income for the 2004 9-month period was $22.6 million on revenues of 3.518 billion, compared to net income of $18 million on revenues of 3.363 billion in 2003.

Operating income for the 2004 year-to-date was 18.8 million, compared to 37.8 million last year.

Year-to-date restructuring expenses in 2004 were $5.9 million. No such expenses were incurred or reported during 2003. Earnings per diluted share were $1.46 in the 2004 year-to-date period compared to $1.16 a year ago.

During the third quarter, our financial results reflected significant variation among our operating segments. U.S. electrical and facility services performed very well, generating more than $24 million of operating income. Strong performers in this segment included 9 electric divisions (ph) in San Diego, Washington, Denver and Los Angeles and Gibson Electric in Chicago.

U.S. mechanical and facility services reported an operating loss for the quarter, performing below forecast primarily due to our Marelich Mechanical subsidiary in California, which lost $8 million during the quarter.

We have made senior management changes and have significantly reduced the size and scope of Marelich operations. In the last 9 months, this contract backlog has been reduced by nearly 40 percent. We expect Marelich to return to profitability soon.

With a couple of additional exceptions, the remainder of the division performed in a satisfactory manner, reflecting the positive impact of new management at the divisional level which we installed at the end of last year.

U.S. facility services continued its revenue growth, increasing 12 percent over year ago while reporting slightly lower profits due in part to delayed startup of several major projects.

The Canadian division reported a small operating loss and sharply reduced revenues due to the completion of several major projects.

The UK operations continued to show major improvement over the year ago period, earning an operating profit compared to a loss a year ago and performing well in cash terms as well. We congratulate the management and staff of the UK operation on this encouraging turnaround for the major losses reported last year.

As mentioned on two previous earnings calls, we have completed our review of our UK Company. And we presented and discussed the status of that company after the disposition of its DealCommerce subsidiary at yesterday's regular EMCOR Board meeting. The Board has provided management with its views on the matter. And management will proceed as authorized. We'll make any required future disclosures at the appropriate time.

Overall, the third quarter results reflected the continued impact of cautious customers and restrained capital spending despite an improving economy, although a portion of this effect can be attributed to the fact that EMCOR and other companies like us tend to lag behind economic recovery by 6 to 9 months.

Although gross margins fell as a percentage of revenues from 10.2 percent a year ago to 9.5 percent in the most recent quarter, we also reported an improvement in gross margins on a sequential basis. And we more than made up for the decrease in margins with the SG&A savings program we discussed earlier, resulting in a significant improvement in operating income.

Please move to slide 5.

One of the salient features of EMCOR's 2003 financial reports was a depressed level of cash flow from operations, due in large part to the working capital requirements of the large number of public sector projects then in progress.

This year's cash flow performance has been much better as those projects achieved or approached completion or reached performance milestones that permit collection of progress invoices. This cash flow improvement is reflecting our strong and liquid balance sheet at the end of the third quarter.

Balance sheet cash exceeded $100 million. Working capital increased 40 million to $250 million compared to December 2003. Total debt declined $12 million during the same period to 128 million. Equity increased to 545 million. And our ratio of total debt to total capitalization remained at a comfortable 19 percent.

As disclosed in our Form 10-Q and our earnings press release, EMCOR was net over billed at the end of the third quarter by more than $200 million, a record. We're proud of these result and what they represent -- the fruition of our continued concentration on cash and liquidity management.

On slide 6, we illustrate the evolution of our contract backlog for the past few years. I have the following comments about this chart.

Third quarter 2004 backlog was $2.96 billion compared to 3.11 billion a year ago, a 4.8 percent reduction. This overall reduction reflects our ongoing active management of our contract backlog to restore a healthy balance between our public and private sector contract portfolios. We don't believe that any negative conclusion should be drawn from the slight reduction in overall backlog volume.

EMCOR has seen growth during the last 9 months in several important sectors of our business activity -- commercial, health care, and water and wastewater. This is the first significant increase in private sector commercial backlog since the collapse of that market in 2001. We consider health care and water and wastewater to be strong long-term market opportunities with (technical difficulty) demographic (ph) support.

Backlog sectors that declined in size during the same 9-month period included institutional; power generation, which we include in manufacturing; and transportation, primarily public sector contracts that we are deemphasizing where appropriate.

Backlog also declined sharply at our Canadian and UK companies, reflecting the completion of several major projects and increased selectivity by local management in estimating and bidding replacement work.

Our facility services contract backlog has risen nearly 20 percent in the year-to-date, indicating continued growth opportunities in this important segment of our business.

On slide 7, we highlight some of the contract awards in the recent past that illustrate the strength and versatility of our companies. Las Vegas continues to be an important and profitable market for EMCOR. Our Hansen Mechanical subsidiary will perform two new projects -- an extension of our contract at the new La Reve Hotel Casino to include casino, restaurants and retail space; and new work at the Venetian Resort, to include 400,000 square feet of high-end meeting rooms and an expansion of their central plant.

At the University of Alberta in Edmonton, Canada, my alma mater, by the way, ComStock Canada will provide major mechanical installations for a state-of-the-art nanotechnology facility funded by the National Research Council in the province of Alberta -- more than 200,000 square feet on six levels.

Continuing a long-standing relationship with the New York City Department of Transportation, Welsbach was awarded 2 contracts for the maintenance of more than 152,000 street lights in the Bronx and Queens for a period of 2 years. Now you know how many street lights there are in the Bronx and Queens.

(technical difficulty) At (ph) Wilmington, Delaware our Forest Electric Company from New York put together a team including F&G Mechanical, Shambaugh, Gibson, Meadowlands Fire Protection, and EMCOR Facility Services, with Forest also acting as trade manager with 12 subcontractors to fast track two 250,000 square foot Tier 4 data centers -- the highest level of stability and reliability for Bank One. This remarkable project combines rigid standards, exacting specifications and speed, and highlights EMCOR Company's remarkable bench strength of experience and expertise.

Our Walker J. Walker Company (ph) will install the HVAC system and ducting for (technical difficulty) an H-building 370,000 square foot retirement community in Germantown, Tennessee. Shambaugh will provide and install sprinkler systems for the new assembly and body shop buildings and fire pump systems and firemains for a 1.2 million square foot General Motors facility in Michigan.

In Westlake Village Hotel and Spa in California, a new 5-star facility including conference center with ballroom, full-service TV studio, California Health and Longevity Institutes and Well-being Center (ph), and a full-service spa -- it really sound like California, doesn't it? -- we'll have its entire electrical system installed by Dynalectric L.A. on a fast track basis with completion scheduled by early 2006.

These remarkable projects, chosen from many hundreds that we have been awarded in many months, illustrate the size and scope of our Company's service offerings and our ability to perform in any market, any time, anywhere.

Earlier this month, we issued a press release announcing that Anthony J. "Tony" Guzzi would soon join us as our new President and Chief Operating Officer, reporting to me. Tony has now joined EMCOR and I would like to express my pride and excitement that an executive of Tony's caliber and experience will be leading EMCOR's operational groups.

Tony is a proven and successful leader with a history of profit improvements. Most recently, he was President of North American Parts and Services, or Carrier Corporation, responsible for a $2.6 billion operation targeting many of EMCOR's major markets. An engineering graduate of West Point, an Army Ranger and a Harvard M.B.A., Tony brings a wealth of energy and ability to EMCOR. We all look forward to working with him as part of our talented and long-standing management team.

It's a little too early to discuss our 2005 expectations, since the initial returns from our annual bottom-up budget process won't arrive until first of November. Although I can say that we sense continuing improvement in a number of our most important markets.

With respect to the remainder of 2004, I expect full year fully diluted earnings per share to be in the range of $2.05 to $2.15, reflecting the second half earnings improvement that we expected when we started the start of the year.

Although the pace of the increase in private sector capital spending has not been a strong as many had hoped, EMCOR is perfectly situated to seize new earnings and growth opportunities in 2005.

Now there is time for your questions or comments. And Denise is on the line to tell you how to queue. Thank you.

(Operator Instructions). Michael Roesler, CJS Securities.

I'm sorry if I missed it. But did you quantify what the impact in the quarter was from the mechanical operation on the West Coast?

I did not, but I will. Marelich lost $8 million in operating income for the quarter and $16.5 million in operating income for the year.

Whether any specific steps that were taken during this year to correct some of these issues?

Yes. We've been operating it in the same way that we attacked the -- in fact, very successfully the problems at the UK Company last year. Listeners will recall, and I know that you know Mike, that the UK company lost $22 million last year and is back to break even, essentially, for the year-to-date. And I think we'll be profitable for 2005.

When we recognize the problems at Marelich early this year, we stationed a Norwalk operations officer out there essentially, full-time, and he has been spending most of his time at Marelich for the last 3 quarters. The actions we have taken in the year-to-date include senior management changes; the reduction in size and scope of that company's operations; including a reduction in its backlog levels from about $250 million at the beginning of the year to about $140 million today; and significant additional restrictions on its freedom to estimate and bid projects going forward.

We think that Marelich will return to probability soon. But it will return to profitability as a significant smaller company than it was a year or 2 years ago.

I know earlier in the year, you had taken some write-offs on a number of projects, particularly in the public sector. Could you comment on where we are in terms of burning those projects off and what that might imply heading into next year?

Whenever a loss is identified for a project, the project is of course written down to a level that reflects a loss. As a consequence of that policy, which is mandatory for us and all companies like us, projects that are not complete but that have been written down to recognize anticipated losses are carried at a zero margin level going forward. This has the effect of depressing reported gross margins in future periods.

And our margins that we are reporting always reflect at least some project that has been written down in previous periods to reflect anticipated losses and to recognize those losses.

The burn off, if you will, of those projects that are being carried at a zero margin will continue for another few quarters. But considering that were burning off backlog at about $1 billion a quarter, I don't think it will take too long to significantly reduce the number of projects in that category of zero gross margin. And I do expect our gross margins overall will improve sequentially over time, as they did between the second and the third quarter of this year.

Frank, final question. In terms of the manufacturing backlog, you mentioned that power generation was down. Could you comment on any other changes going on in that sector of your backlog?

Well, the reduction in power generation is really a reduction attributable to 3 major projects in the power generation sector, which are central plant projects. We don't particularly like central plants, which might surprise you since we're the world's largest electrical contractor. But they are very large, very long-term, multi-trade, complicated projects that don't show up EMCOR's abilities nearly as well as private sector projects.

We very much like -- just to avoid leaving you with the impression that we don't like power generation at all -- we love cogeneration projects and dedicated generating plants like the Morongo Casino plant in California that we announced a couple of months ago, the UNH project for the University of New Hampshire in which we can be the primary designer, installer and maintainer of these modular generating plants.

But we don't like central plants. And the reduction in power generation that I referred to there reflects the fact that those projects are substantially complete.

There was a comment by the Chairman of another company, a major participant in the power generation business, reflecting his view. And this was in an earnings release yesterday that power generation in the United States has pretty much hit bottom. And he was anticipating an increase in that market in the future.

We would participate in such an increase, in my view, only in the end of that market that is associated with dedicated co-gen projects and the like. We're not very interested in participating in new central plant work.

Jeff Beach, Stifel, Nicolaus.

I have 2 questions. First, typically your fourth quarter is better than your third quarter. You just took a 30 cent a share loss off of this one mechanical subsidiary that might be break even in the fourth quarter. And your guidance seems to suggest, then, that everything in the Company is going to be down in the fourth quarter. Could you comment on that?

I don't agree with that conclusion. I think that the 2.05 to 2.15 guidance reflects a 60 to 70 cents fourth quarter, which reflects a continued improvement albeit a -- I won't call it slow. Let's call it a gradual improvement in our operating results and in our markets.

I think that the new Dodge Report that will be published shortly is going to reflect a macro view of the engineering and construction market, that it began to improve in the third quarter of this year, is expected to improve through the fourth and into '05.

But I remind you that we lag that market. If you look at Fluor results that were published yesterday, for example, you'll see that they show relatively flat earnings put tremendous improvement in backlog -- up, as I recall, in the mid-teens in terms of growth percentage. We will see that kind of growth opportunity in backlog, but later than Fluor because they're in the front end of major projects.

I'm not sure that I come to the same conclusions as you do about the fourth quarter reflecting any kind of interruption in what we anticipated to be continued earnings improvement. But the pace of improvement is always, in everything we've said to the market, then based upon the pace of the improvement of the overall business of our customers, notably in private sector.

And in the last few weeks we have seen good news out of New York, for example, the reports concerning the leasing up of the Bloomberg Building and One Bryant Park (ph), which are new midtown New York buildings. There were good statistics released earlier this morning from Boston in connection with positive absorption of real estate in Boston. Vacancies are still at a high-level. They are in the high teens. But they are coming down monthly now, rather than going up.

This is the kind of news that we wait for and act upon, because commercial real estate absorption rates are one of the significant drivers of our business ongoing. So I think that what you're seeing in EMCOR is everything -- all the fundamentals moving in the right direction, especially sequentially.

And although our recovery is more gradual than certainly anybody who is interested in us and the economy in general would have hoped for, there are kind of steady indicators of improving prospects across the board.

All right. The other question I have regards the sale of these UK assets. It was nice to see a gain. I guess I would like to ask -- I'm a little surprised there was a gain on the sale. But are there more potential sales of UK assets that you are working on? And if so, would they entail -- your best guess -- gains or losses?

Let's remind listeners -- Jeff, I know that you are right up-to-date on this. But I will just answer it a little bit more general fashion, first of all, by reminding listeners that the UK Company was a major disappointment for us last year, losing $22 million and significantly impairing EMCOR's overall operating results for 2003.

And in early 2004, I informed the market that we would be reviewing the overall concept of ownership of the UK Company. And its various divisions would be reporting on our analysis to the Board of Directors of EMCOR at its regular October meeting and would be looking for some conclusions and directions from the Board concerning the future of the UK Company, at least under EMCOR ownership.

The -- excuse me -- the 2 transactions that you're asking about were the sale of our interest in the company -- in the UK company's South African joint venture operations and the sale of its -- of the assets in its UK equipment rental business. Those were steps that were taken in order to produce incremental reductions in the size and scope of the UK operation and to focus its operations more directly on its 3 remaining divisions.

Those are -- first of all, the EMCOR Drake and Skull Construction operations; secondly EMCOR Drake and Skull Facility Services, which is the template for the facility service business that we have built so successfully in the United States; and thirdly, EMCOR Rail, which is a division somewhat separate from the other 2 divisions and which has a significant portfolio of large public sector rail transportation construction projects.

Those are the 3 remaining divisions in EMCOR Drake and Skull. And those were the topic of the report delivered to the Board yesterday. We won't be announcing any significant transactions concerning any of those divisions unless and until one of them occurs -- at the appropriate time.

But I didn't surprise me that we reported gains from the two transactions that were completed because the UK Company, like every other EMCOR company, has valuable assets and frequently has very strong market positions that are translated into value for purchasers.

The UK plants hirer, as it's called in the UK, operation in particular had a long and positive operating history, but was determined to be extraneous to our needs. And hence, it was sold. And the South African operation -- or the agreement for its sale was actually completed last year but only closed recently.

So we will be following the Board's advice with -- and authority with respect to ongoing review of the UK operations. And we will report to the market at the appropriate time with respect to any transactions that might result from that.

Alex Rygiel, Friedman, Billings Ramsey & Co.

Couple of questions. First, with regards to the U.S. electrical margins, they were obviously very high in the quarter. That was very nice. Were there any large project closeouts that happened to be very profitable in the quarter that might have skewed that number?

No there were not, Alex. We have the usual assortment of projects. But nothing comes to mind as a closeout that would've had any significant impact on the quarter's results at all. We just think that U.S. electrical is a very well-managed division. Now don't get me wrong, it's not all cold beer. The division is a large one and contains some companies that are not performing as well as others.

But the overall level of bidding and estimating discipline in U.S. electrical is very strong as a consequence of its long stewardship by two very talented and experienced managers who we have told you about on previous calls. At the end of last year, we extended their responsibilities -- that is the responsibilities of those two managers who had so much success with the electrical group -- to include the mechanical group, which previously had been under the direct control of Jeff Levy.

And the management -- the mechanical group has not performed as well as the electrical group, but has improved over time the discipline and the control of the estimating and bidding process that was characteristic of and has been characteristic of the electrical group for long time. And I look for further improvements in mechanical as time goes along.

I hesitated, frankly, to include specific references to Marelich Mechanical as part of our press release and as part of my earnings call commentary. But I have decided to do so in order to dispel the possible interpretation of the mechanical division's operating loss for the quarter as being indicative of an endemic problem of some kind in the mechanical segment, because that is not the case.

With regards to Bank One data centers, when did construction activity start? When do you anticipate it to be completed?

Those two data centers that I discussed are complete or essentially so at this time. But we have a continuing relationship with Bank One, as you know, in connection with the long-term facility service relationship that we announced last year. And we anticipate having additional data center construction opportunities with Bank One as a consequence of this very strong and very warm and long-term relationship.

One last question. Maybe 2 years ago or so, one of your mechanical contracting peers looked to sell a number of subsidiaries. And you stepped in and purchased a number of them from Comfort Systems. Today it looks like one of your electrical contracting peers is having challenges. Would you ever consider purchasing a large portfolio of subsidiaries from another consolidator again?

Well, I think that we would look at it the same way we did in the past, which is if it fulfills a strategic purpose for us and can be acquired at a reasonable price, yes, we would consider it. But I think that we all learn lessons from everything we do.

If we had not acquired the Comfort Systems subsidiaries at a very low price, we would be very unhappy about the situation. If, for example, we had paid as much for those companies as Comfort Systems, did we would be extremely disappointed in those operations.

We continue to believe that the Comfort Systems companies that we acquired for a multiple right around 4 were a very good buy for the long-term. And we expect them to live up to the potential that -- the recognition of which has been interrupted by not only the recession but also the recession's exaggerated impact on the small market that some of those Comfort Systems companies are located in.

But you make a good point. And that is -- and at least I think this is the point you're making, and that is that you have to be very careful of the bad habits and/or the relatively lax levels of management and discipline that it might be fair to say characterizes some of the rollup operations. And we will be very careful of that in the future.

Having said all of that, I think the likelihood of buying a large portfolio of anything is probably off the table for EMCOR unless it will contribute to the substantial growth of our facility service business, because we pretty much cover the waterfront in construction terms at this time.

Frank, actually one last question. A number of the larger telecommunications companies like Verizon and SBC are increasing their spending on fiber in the last mile. A number of years ago when fiber deployment was a big deal from city to city, you were very active in telecom-like facilities, carrier hotels, call it whatever you may. Have you seen any increased opportunities with the Verizons and SBCs of the world with regards to inside (technical difficulty) plant like data telecom work?

We haven't seen tangible projects yet. But we read the same announcements that you do. I noted the FCC ruling that spurred the announcements that we're both talking about. You are quite right that -- let me see, 4 years ago we were doing $300 million a year of that kind of work. And we would certainly look forward to expanding our role in that area again.

That's the kind of work that EMCOR companies can provide on the standardized basis right across the country. We are unique in that ability to do so. And I think we would welcome the opportunity to work in that way for solid customers like Verizon.

Jon Rogers, D. A. Davidson.

I just wanted to check -- in terms of your guidance for earnings for the rest of this year, are you including any additional restructuring charges or any other tax benefits?

No. I think that were -- right at the beginning of the year I (technical difficulty) positive that restructuring for costs for the year would be $5 or $6 million (multiple speakers) and anticipated that the vast majority of that would be in the first quarter. That is exactly the way it has turned out. I think that -- Q (ph) a little restructuring charges for the year are slightly in excess of $6 million. I don't think there's going to be anything -- certainly nothing material in the fourth quarter, nor do we expect any additional tax adjustments in the fourth quarter.

And in terms of you mentioned earlier about hopefully -- or at least I took from its some improvement in margins, probably later in '05 as you (technical difficulty) what's left of low margin work in your backlog. Can you give us a sense of where the market is -- the margins on work that you’re booking now? Is it in line with your historical levels? Or is it still depressed? What are you seeing out there?

The decline in margins has certainly stopped. Let me put it that way. There are selected areas that I could talk about anecdotally -- I wouldn't on the call, but I could in my office -- that reflect improving margin opportunities in some segments that really didn't offer those opportunities for the last several years.

I mentioned earlier on in the call the commercial real estate absorption rates. And these are clear precursors of margin growth opportunities in the major cities where most of our companies reside. I think that the time will be relatively short before the volume of commercial real estate restacking, refurbishment and upgrading opportunities begin to flow for us. And that is some of the most profitable work that we do -- that is, the tenant improvements that are precursors to moving in of new employees in the scenario of a growing economy.

And that's fairly short term in nature -- in other words, when you get the orders to move or to begin work on tenant improvements.

It's relatively simple and straightforward work that is performed at breakneck speed, because once the commitment is made to take this space then both landlord and tenant want it refurbished as fast as possible.

And based on your comments on that six-month lag -- I don't know how much you want to be pinned down. Is this something you expect to see early in '05 or is it more later half?

No, I think that this is beginning now. I was talking earlier about the Bloomberg Building and One Bryant Park, New York City. These are new buildings which occur -- which according to published reports are now fully leased up at rates that significantly exceed rates that pertained in midtown New York for the past few years.

And Boston, which has had a terrible commercial real estate market the last 4 years, is finally beginning to see incremental downturns in vacancy rates -- so 1 percent for part of Central Boston, according to a report published this morning down from 19 to 18. So it's beginning to roll. And when it does, our companies are situated in the urban centers of all of these cities and will be direct and prompt beneficiaries of that kind of commercial real estate refurbishment or upgrading work.

Sid Nedcorney (ph), Royal Capital.

I just had a couple of questions for you. The first is with the backlog. You had mentioned you're moving away from the government work and starting to free up some ability to take on more higher-margin private work.

My question is -- are you capacity-constrained that would require you to do that? Or wouldn't it be better to just take whatever growth dollars are out there if you have the available capacity and then shift your resources as more private projects come available?

That's a good question. It's a basic question concerning the deployment of resources in a Company like ours. We were beset by the recession like everybody else in America. And a notable impact of the recession on us was the collapse of the commercial real estate market, which was the flywheel of our business as recently as 2000.

In 2000, if you look at that backlog chart, which I think was a slide 6, you can see that in that year, commercial real estate comprised about 50 percent of our overall contract backlog. And that is the kind of work that we would prefer to be doing much more of. Unfortunately, the market didn't give that to us for the last several years.

And as a consequence of that, taking advantage of EMCOR's diversity and our ability to move quickly from sector to sector as ebbs and flows take place in various segment profitability levels, we took on in 2001 and 2002 significant amounts of public and institutional work in an effort to take advantage of revenue and profit opportunities in those areas, even though those areas are notably inferior to the private sector in terms of overall risk/reward ratios and profit opportunities.

In 2002 and 2003 and in early 2004 our results illustrated the effects of that policy, which was to maintain revenue at a very high rate but to reflect reduced gross and net margins as a consequence of the reduced profit opportunities reflected by those kinds of work. In addition, by virtue of the (technical difficulty) working capital requirements associated with the financing of the construction of typical public sector projects, we saw our operating cash-flow significantly deteriorate.

And we decided in mid-2003 that it was time to stem the growth of our backlog and wait for the opportunity to establish a better and more healthy balance between public and private sector work. We don't reject public sector work as a policy. In fact, some of our most profitable and steadiest-performing subsidiaries perform a preponderance of public sector work and do it very well. But we find overall that its characteristics are inferior in both profit potential and in terms of cash-flow characteristics to commensurate private sector work. And in any case, we find there's a balance necessary in order to give us the right kind of combination of revenue, cash-flow, and profit.

So in 2003 in mid-year, we began to reduce the proportion of public sector work that we took in on an ongoing basis and decided to wait for the resurgence of private sector opportunities and profit making opportunities in that sector. The result has been a gradual decline in contract backlog until the present.

And as I mentioned on the call, the current quarter's backlog report is marked by the first significant increase in commercial private sector backlog that we've been able to report in 3 years. It's very good news. And I think that what we feel is wise is to stay the course in this regard, to continue to be very selective in public sector project choices and instead to concentrate on growing the commercial, the water and wastewater and the health care portions of our portfolio, together of course with the hotel and hospitality segments that has been so profitable for so long.

Okay. That's very helpful. Could you in rough terms kind of breakdown of your current backlog in Q2 -- what percentage is private versus government and how that has shifted over the past year or so since you embarked on this program?

(multiple speakers) I believe it's about 40 percent -- sort of a 60/40 split -- 60 percent on the public side and 40 percent on the -- no, I'm sorry. I have it reversed. 40 percent on the public side, 60 percent on the -- what I would call nonpublic side, that takes into account the other aspects of manufacturing as well as some commercial work.

And I think that that's on the high side, Sid. I would like to see that public sector proportion of our backlog reduced to probably 25 percent.

Okay. And is that's comparable to where it was back in like in '01 -- '00, '01?

Yes. That's right. That would be a healthier balance.

Okay great. And then the last question I had was with regards to your EPS number of 99 cents. Could you just provide me sort of an EPS number adjusted for -- excluding both the restructuring charges but also the gains on those somewhat onetime items via asset sales and -- the two asset sales, I guess?

My accountants don't like me talking in non-GAAP terms about operating results. But we have published the pre-tax impact of each of those transactions and also the applicable tax rate. So it's math that you should be able to do pretty quickly.

Okay. Well great thanks very much and I look forward to continuing to see more of the private sector work showing up.

(Operator Instructions). Misha Najid (ph), Basswood Partners.

If you look at the nonresidential private construction spend, it looks like it's trended kind of up 7 to 8 percent in the first couple of months of the quarter. I would've thought that would imply some of the kind of smaller discretionary work coming back a little faster than otherwise was indicated, you know, after reading the 10-Q. Can you just comment on that?

I'm sorry 17 percent in?

I'm sorry, 7 to 8 percent in -- it looks like that July and August of this year year-over-year.

Where are you pulling that from Misha? I'm very sorry. I've lost you. Could you start again and just give me the source of your numbers and I will (multiple speakers)

No problem. I'm just looking at the construction spend numbers that the Census puts out (multiple speakers) -- specifically nonresidential private sector work.

I'm sorry, I didn't understand where you were coming from in terms of the source of the numbers.

I apologize.

We certainly haven't published anything like that. I'm sorry repeat your question and I will respond.

Okay no problem. So basically those numbers show growth of 7 to 8 percent year-over-year? And just -- I would've thought that level of growth would imply some of the smaller discretionary work coming back a little bit faster than -- basically after reading the 10-Q it looks like that wasn't the case as of yet. And I just wanted to know what the lag there was.

Those figures for construction spending that are reported by the Census Bureau and all government entities typically are associated with major capital expenditures by large developers of property assets. They typically don't take in the small past discretionary work that is typically referred to as either maintenance or non-capital market spending. So I don't think that the two statements are necessarily contradictory.

In addition, the market lagging characteristics of EMCOR that I referred to earlier would pertain there. And that is that the capital expenditures referred to in governmental reports on construction spending tend to refer to either permits being issued or construction projects begun.

And EMCOR and companies like us tend to participate in the latter portions of major capital projects like that. That's what I mean by the lag between the beginning of economic recovery, or the beginning of economic recovery translated into capital spending by profitable companies and the period of time when we began to see the proceeds.

And so the report of increased capital spending in the government report, which would have been the operating cause of the much of the improvement in Fluor's backlog, for example, is a trend that we will see, but a few months later.

Okay. Traditionally, though, does the small work trend in line with the larger construction projects?

No, not necessarily. We think that it's on a different cycle. We did see an improvement in the small cap discretionary work available to us as a consequence of somewhat better weather this summer that was the case a year ago when we really didn't have much of a summer at all, at least in the Northeastern United States. But it was not yet up to expectations.

We think that the cautious attitude that many of our customers are taking with respect to capital spending is also being reflected in the -- in their reticence to spend money on major refurbishment or even upgrades of existing systems.

It's improving but it's not improving, nearly as fast as all of us thought that the economy would improve. And I'm sure you see this trend in other businesses you look at as well, that there is a general strengthening of the of the economy but accompanied by a high degree of caution on the part of companies and individuals who are in charge of spending capital on property improvements.

Okay. And just one other question. In the facilities services business, if you add back the 2.3 million incremental expense, you get to a margin I believe in the high 3s. How does that compare to your long-term expectations for the margin in that business?

The margin in facilities services typically ranges between 3 and 5 percent even on a long-term basis. The EMCOR model, for those of the call who have not heard me describe it before, is to combine a steadily performing facilities service business with any inevitably more cyclical construction business in a manner that enables us to take advantage of additional profitability of construction during positive portions of the economic cycle, to enable us to reject lower margin construction work during negative portions of the economic cycle, and still provide a stable return to investors in EMCOR.

I appreciate that.

Brad Pursell (ph), Goodnell Gray (ph).

Just trying to look at out into '05 and build a model on '05. I assume you're going to get back somewhere (multiple speakers) from Marelich as your attention is focused there. But in terms of sort of understanding the base number from which we are building, your guidance suggests -- help me with this.

As I run through the gains from the income tax benefit and the restructuring expense, and I back that out of this year's guidance, I come up with a number of roughly around $1.20 to $1.30 core base earnings that you will be growing from into '05. Is that about right if I viewed the 2.05 to 2.50 and then I back out the 93 cents from income tax benefit and 18 cents from gain on sale and add back the roughly 24 cents, just give or take a few pennies on the restructuring expense?

So in other words, is the base case $1.20 to $1.30? Then layer back in the improvements you'll get from Marelich and build from there in terms of thinking about an '05 number?

I'm not going to quibble with you about nickels and dimes, Brad. The Dealcommerce transaction is categorized as in the operations segment because it reflects a restructuring of our relationship with the purchaser and lessor of a good deal of the equipment that was involved in the transaction on a continuing forward basis. But I think that's a fair comment that we're talking about a base in that range.

Okay. And just remind me, last year in '03 -- I don't have the numbers in front of me. Was there any noise in your '03 number? Any charges for -- full year?

Well, we had major in the Q3 of '03 (multiple speakers)

No, in the full year '03 number, your earnings for '03 (multiple speakers)

Well we had a $22 million loss in the UK operations. We did not have any significant tax adjustments of any kind. We had no transactional impact of any kind that I can recall.

So one way to view it is the UK business -- what that impacted you by in '03 is almost similar to -- it looks like what Marelich will impact you this year?

Yes, that's about right.

At this time, there are no further questions. Management, are there any closing remarks?

As usual, I would like to thank everyone for your support of and interest in EMCOR. We think that the fundamentals of the business and of the market are on the right track. We look forward to talking to you again in the quarter. Thank you.

Ladies and gentlemen, this includes EMCOR Group's third quarter 2004 earnings conference call. You may now disconnect.