EMCOR Group Inc (EME) 2013 Q3 法說會逐字稿

Good morning. My name is [Christie] and I will be your conference operator today. At this time I would like to welcome everyone to the EMCOR third quarter earnings conference call. (Operator Instructions) I would like to turn the call over to Mr. Nathan Elwell with FTI Consulting. Please go ahead.

Thank you, Christie and good morning, everyone. Welcome to the EMCOR Group conference call. We are here to discuss the Company's 2013 third quarter results which were reported this morning. I would like to turn the call over to Kevin Matz, Executive Vice President of Shared Services who will introduce management. Kevin, please go ahead.

Thank you, Nathan, and good morning, everyone. Welcome to EMCOR Group'searnings conference call for the third quarter of 2013. For those of you who are accessing the call via the internet and our website welcome to you as well, and we hope you have arrived at the beginning of our slide presentation that will accompany our remarks today.

Please move to slide two. Slide two depicts the executives who are with me to discuss the quarter and nine months results. They are Tony Guzzi, President and Chief Executive Officer; Mark Pompa, our Executive Vice President and Chief Financial Officer; Mava Heffler, Vice President of Marketing and Communications and our Executive Vice President of General Counsel, Sheldon Cammaker.

For call participants not accessing the conference call via the internet, this presentation including the slides will be archived in the Investor Relation section of our website under Presentations. You can find us at emcorgroup.com.

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

These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statement 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 of the risks and factors associated with EMCOR's business are also discussed in the Company's 2012 Form 10-K and in other reports filed from time to time with the Securities and Exchange Commission.

With that out of the way, please let me turn the call over to Tony Guzzi. Tony?

Good morning and thanks to everyone on the call for joining our Q3 2013 call and your interest in EMCOR. This morning I am going to speak to the pro forma numbers and Mark is going to walk you through the reconciliation in his section.

Consistent with last quarter we have two pro forma items, the UK construction closure and the costs associated with that and the deal cost from our acquisition of RepconStrickland, and I amon page three. Also you will see a resegmentation of our business with results from our operating team management realignment post RepconStrickland acquisitionacquisition, and I think, investors you will like that, because it gives you greater transparency and easier comparisons as we go forward here for our businesses.

Really what we did is we took the US facility services segment, we broke it into two segments, the building services segment and the industrial segment. The UK electrical construction, mechanical construction remain the same. Building services is now the mechanical services, government services and site-based services parts of our business. Industrial services would be Ohmstede, Redmond and RepconStrickland.

Let me go through a little on the quarter and how things are shaping up here today. I am going to be on page four and five.

In Q3 we had revenue of $1.629 billion. That was up slightly versus Q3 of 2012.

If you look at the underlying pieces, we had pretty good growth in electrical which has been our most steady business over a long period of time. We have some growth in mechanical. We had okay growth in building services despite really tough headwinds in our government services business, although there is still a nicely profitable and we declined in industrialwhich was really not a surprise to us even with the acquisition of RepconStrickland.

As we discussed last year in Q3 of 2012, we had an exceptional quarter in that quarter. It really can show you what can happen when volume builds in that business in Q3 2012. Typical Q3 for us in that business is not as strong and you will see that on a go forward business unless we have an extraordinary event like we did last year where a customer really needed our help.

We made $0.48 per diluted share on a pro forma basis and had good operating performance in electrical. I would point out that we had record performance in our building services business at 5.1% operating margin. That really was the highest operating profit dollar performance for those businesses. Again, that is despite headwind in the government business.

We had improved performance in mechanical segment as we expected and we had a weaker industrial performance for the reasons I mentioned. We have been talking about that since Q3 2012 that we had a tough compare.

We were a little above break even in the UK despite the continued construction losses and the construction closure costs. If you take those numbers and add them back you will get a better sense of what the ongoing run rate is in the UK business. Cash flow was very strong at $120 million in the quarter.

Before I turn it over to Mark and he gets more in detail on the quarterly numbers. I thought I would provide some context on the year-to-date performance here at EMCOR.

We have had quite a year. Let me go through the positives first because I think the positives really set usup well for the long-term. They provide fuel for long-term success.

First, we are about 80% to 85% of the way through our closure of our UK construction business. For those followed of us who have followed us over a long period of time, know that business has had an erratic and usually disappointing performance, and it will be good for investors that will get behind us; and for us.

Our head count is down 70%. andwe expect to be down 90% in that business by year end.

This has been a very tough restructuring and it needed to be done. We worked on it over a long period to be able to do it. It has a very good return for our shareholders.

We had outstanding performance from electrical business where we continue to perform at industry leading margins. We see that and we are doing that in an environment that has less than robust pricing. We are achieving those margins through just plain old execution.

Quite frankly, if you look at the mechanical segment we have talked about the two jobs we struggled with, it also is performing very well. You can see some that here in the third quarter. I willgo through that two difficult jobs, and Mark will also a little later.

Our building services business are really much improved and are driven by improved performance in not only mechanical service but also commercial site-based. There specifically we are starting to see the benefits of the pull-through work on a broader customer base as we build out that business through organic growth and through acquisition.

Those margins in that business are now almost 4% year-to-date. We clearly want to get on a sustained basis where we are now at 5%. We think we have room to do that here over the median term.

We executed a large and transformative acquisition that we are very excited about in RepconStrickland. We did that to strengthen our position in down stream refining in the petro chemical markets. We built on our already strong performance. If you look at the industrial business performance to date it is up off on an already very good year that we had in 2012.

Third quarter is seasonally weak. You will see that in our numbers on a go forward basis now that it will be broken up.

We love the long-term fundamentals in this business. We talked about it at the time of acquisition. We believe we are set up for success in the future.

Sure we have to get through integration which we are well on our way. We have had good reaction to customers, but we are very excited about the prospects for that business over both the near and long-term.

However, we have had head winds this year. Some of them were of our own doing and some of them weren't. Let's start with the ones that really have nothing to do with a EMCOR specific issue.

We have had a no to slow growth recovery this year in the non-residential construction market although there are emerging signs that we finally may be breaking out of that. We had expected at least modest growth in 2013. It really just isn't materializing in the end market.

We knew we had to fight the effects of the sequester. It is beyond the sequester. I would just say it is difficult government decision making. The government has always been a decent customer to work with.

We thought it was going to cost us about $0.05 per share and we thought it would be mainly contained to our Maintenance business. It looks like that number now, when you add on the effects of the shutdown and everything that goes with that and what we talked about in the second quarter that it will be closer to $0.15 to $0.20.

We are seeing it beyond the Maintenance business. We have had delayed awards, we have had a slowdown in schedules on existing jobs, we have had general recalcitrance in processing change orders and requests for equitable adjustments for work the government directed us to do. We know that these issues will be resolved and we know we have clear entitlement towards that direction. We have taken a very conservative view to date of what that will be, butwe are less confident that they will be resolved this year.

When you go to the mechanical segment, we absorbed $20 million in losses on two jobs whichis very unusual for us. We have discussed both in detail before, but let me refresh them now.

One was an industrial job for a private client where we had to replace our subcontractor because they failed to perform, and being EMCOR, we weren't going to fail to perform for our client. It is unusual for this to happen to us for two reasons.

One, we only work with subcontractors we know well in a significant way and we know them in a significant way. The reality is we did know the subcontractor well. We knew them for over 30 years.

Number two, we typically don't subcontract much work on a construction job because we self perform most of it. All of that being said we lost over $9 million on this job on a year-to-date basis. We are substantially complete and expect no more pain on this job.

The systems work, the plant is operational and we did deliver for our client. The only silver lining in that here is we will be the go-to mechanical maintenance contractor for that client on this job site for years to come.

The second job is a DOE job that we've talked about and it has cost us over $12 million year-to-date. We have been very conservative in our view to recovery on this job. This job suffers from some of the same issues around government funding and decision making that we have previously discussed.

Backlog continues to be strong at $3.93 billion. I will talk more about that when we get to that section. We believe we continue to work towards the right mix of backlog.

We have a decent enough pipeline of work that we are very close to winning we think here in the fourth quarter and in the first quarter. And we continue to see opportunities across our businesses. With that I will turn it over to Mark.

Thank you, Tony. Good morning to everyone participating on the call today.

For those participating via the webcast we are now on slide six. As Tony indicated, I will begin with the detailed discussion of our third quarter 2013 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 $1.63 billion in the quarterare up 1.4% from 2012. Revenues attributable to businesses acquired at $47.7 million positively impacted our US industrial services and USmechanical construction services segments during quarter three. Excluding the impact of businesses acquired, third quarter revenues declined organically 1.5% despite the majority of our reporting segments generating organic revenue growth within the quarter.

Domestic electrical construction revenues increased 6.8%. Domestic mechanical construction revenues increased 3.9%. US building services revenues increased 3%. US industrial services revenues declined 11.6% while our UK segment revenues decreased 16.5%.

Revenue growth within the domestic electrical construction segment can be attributed to increased project activity within the quarter in the commercial, institutional and transportation market sectors predominately within the Western and Mid-Atlantic geographies. Revenue growth within the US mechanical construction segment can be attributed to increased project activity within the industrial market sector primarily related to power generation and food processing activities. US building services revenue growth within the quarter was due to increased demand within their mechanical services division offset by revenue declines from both government and commercial site-based services due to both reduced levels of indefinite duration, indefinite quantity project opportunities due to sequestration, as well as the strategic reshaping of our commercial site-based business project portfolio which we have referenced each of the last two quarters.

Consistent with my last three quarterly commentaries, the decrease in revenues from our UK segment is the result of our continuing plan to withdraw from their engineering and construction activities. Please turn to slide seven.

Selling, general and administrative expenses [decreased] $15.2 million within the quarter inclusive of $8.4 million of incremental SG&A, including a tangible asset amortization expense from those acquisitions completed during 2013, as well as $4.7 million of quarter three transaction expenses pertaining to our acquisition of RepconStrickland. As a percentage of revenues, SG&A in quarter three is 9.2% excluding the $4.7 million oftransaction costs incurred during the quarter, our SG&A as a percentage of revenues would be 8.9%.

Operating income of $54.1 million represents 3.3% of revenues and compares to $68.6 million of operating incomeof 4.3% of revenues in 2012's third quarter. Our US electrical and US building services segments reported income growth while US industrial services, US mechanical construction, and to a lesser extent, EMCOR UK are each reporting declines in operating income quarter-over-quarter. Total intangible asset amortization expense for the quarter is $8.6 million which is greater than quarter three 2012 by $1.2 million.

Our US electrical construction services segment operating income increased $1.8 million or 8.2% over quarter three 2012 with an operating margin of 7%, or 10 basis points greater than last year's 6.9% operating margin. The increase in operating income in absolute dollars is due to higher volumes while the increase in margin can be attributed to mix.

2013's third quarter US mechanical construction services segment operating margin of 4.4% represents a$2.9 million decrease from last year's quarter as a result of an additional $4.2 million of losses attributable to the two projects in the southeastern United States that we sited during our second quarter earnings call and that Tony mentioned just a few moments ago. Although not as significant as quarter two, this quarter's negative impact from the referenced projects nonetheless masks that the mechanical segments Q3 operating margins would have exceeded 5% for the quarter.

Our US building services operating income increased $5.6 million or 31.6% over 2012's third quarter with a quarterly operating margin of 5.1%. Their mechanical services operations were able to offset the headwinds experienced within our government and commercial site-based services divisions that comprised the remainder of this segment.

US industrial services is reporting a $10.8 million decrease in operating income quarter-over-quarter with the corresponding margin slightly better than break even. The most significant factor behind this quarter's performance is the tough comparable to 2012's third quarter due to three large nonrecurring turnaround and repair projects not being replicated in 2013, as well as our RepconStrickland acquisition getting a slower start than anticipated and generating a small operating loss inclusive of intangible asset amortization expense.

Our UK segment generated positive income during the third quarter which was an improvement over quarter two, but nonetheless was slightly down from 2012's third quarter. With approximately $2.1 million of lossesgenerated within their engineering construction division for the quarter, the 20 basis point decline in operating margin quarter-over-quarter was not that severe.

Our third quarter operating income included $2.5 million ofrestructuring expenses of which $1.9 million is UK related with the remainder occurring in several domestic subsidiaries. With the third quarter closing of the RepconStricklandacquisition, we incurred an incremental $4.7 millionof transaction costs in addition to the $1.4 million reported during quarter two.

We are now on slide eight. This table lays out those items in passing our third quarter year-to-date results which we believe should be excluded from EMCOR's reported operating income to provide better comparability. Each of these items have been addressed in today's earlier commentaries, and for the sake of completeness are as follows; transaction expenses related to the acquisition of RepconStrickland of $4.689 million, losses generated by EMCOR's UK engineering and construction operations of approximately $2.057 million and restructuring expenses of $1.865 million pertaining to reductions in work force as well as costs associated with [idled] real estate as a result of our strategic change in the UK. The effect of the aforementioned adjustments amounts to adjusted operating income of $62.7 million or 3.9% of revenues for the quarter ended September 30, 2013. That is compared to $71.4 million or 4.6% of revenues for the corresponding 2012 period.

With regard for the year-to-date period ended September 30, adjusted operating income for 2013 is $170.5 million or 3.6% ofrevenues as compared to $175.9 million or 3.8% of revenuesin 2012.

Our income tax provision for the quarter is reflected at a tax rate of 46.4% which includes discreet items that negatively impacted the rate by approximately 560 basis points within the quarter. The most significant discreet tax item is the impact of the corporate tax rate reduction in the UK which results in a revaluation of net deferred tax asset there. This reduction in the UK deferred tax asset is reflected as incremental income tax expense within our third quarter income tax provision, and my expectation is the rate for the full year will be closer to 40% than where we currently are to date.

Cash provided by operations for the third quarter was $120.3 million which represents an improvement of $66.7 million over cash provided by operations during 2012 second quarter. For the nine month period ending (inaudible) cash provided by operations is $68 million compared to $43 million of cash provided by operating activities for the year-to-date 2012 period. Our September 30 cash balance is $444 million.

Please turn to slide nine. Additional key financial data on this slide not addressed during my highlight summary are as follows; quarter three gross profit of $206.3 million represents 12.7% of revenues which is improved from the comparable 2012 quarter despite the impact of those losses disclosed within both our US mechanical and EMCOR UK segments. Our third quarter gross margin represents 100 basis point improvement over quarter two. Total restructuring costs were $2.5 million, and as previously discussed, the majority of this amount pertains to our United Kingdom activities.

Diluted earnings per common share for the quarter is $0.39 compared to $0.59 per diluted share a year ago on an adjusted basis reflecting the add back of transaction costs, the loss incurred within our UK construction and engineering operations and associated restructuring costs our diluted earnings per share would be $0.48 per share for the quarter as compared to $0.62 per diluted sharein 2012's third quarter.

We are now on slide ten. I will now discuss the results for the nine month period ended September 30, 2013.

Revenues were essentially flat at $4.7 billion for both year-to-date periods with strong revenue growth within our domestic electrical construction segment and industrial services segment being muted by revenue declines within both our domestic mechanical construction and EMCOR UK segments. Revenues attributable to businesses acquired a $49.5 million positively impacted our US industrial services and US mechanical construction segments for the year-to-date periods.

Excluding the aforementioned acquisition revenues, year-to-date revenues are down .6organically through September 30, 2013. Year-to-date gross profit of $579 million is higher than representative 2012 period by $1.1 million and flat on a margin basis at 12.2% ofrevenues despite negative project activity within our EMCOR UK construction operations and the US mechanical construction segments previously referenced.

SG&A expenses of $427.9 million represent 9% of revenues compared to 8.6% of revenues for the corresponding 2012 period. Approximately $6.1 million of transaction expenses and $8.7 million of incremental of SG&A frombusinesses acquired are included in EMCOR year-to-date results.

Year-to-date operating income is $141.5 million or 3% of revenues which represents a $29.6 million decrease over 2012's year-to-date performance. As previously disclosed on slide eight, adjusted operating income reflecting the add back of transaction costs, the losses incurred within our UK construction and engineering operations and associated restructuring costs for both year-to-date periods would be $170.5 million for 2013 as compared to $175.9 million for 2012 which represents a 3.1% decrease year-over-year.

Diluted earnings per common share were $1.14 for the nine months ended September 30, 2013 compared to $1.48 per common share on the corresponding 2012 period. And on an adjusted basis reflecting the add back -- and I know I sound like a broken record -- of transaction expenses, losses incurred by EMCOR's UK engineering construction operations as well as the restructuring expenses; year-to-date diluted earnings per share for 2013 would be $1.46 as compared to $1.53 per share in 2012.

Please turn to slide 11. EMCOR's balance sheet remains sufficiently liquid as represented by cash in excess of $400 million which is available to meet current working capital requirements as well as for organic and strategic investment opportunities. The reduction in working capital from year end 2012 levels is driven by our lower cash balance as a result of moneys used to fund our acquisition of RepconStrickland in late July. Changes in goodwill and identifiable and intangibles assets between periods is due to the preliminary purchase price allocation of the aforementioned acquisition with identifiable and tangible assets also impacted by the amortization expense recorded in 2013.

Total debt has increased due to borrowing to facilitate the RepconStrickland closing, however our debt to capitalization ratio remains modest at approximately 22%. With those details out of the way, I would like to return the presentation to Tony. Tony?

Thanks, Mark. I am on page 12. We have enhanced our backlog disclosure and now report by segment as we started with the Q2 2013 reporting.

Total backlog at the end of third quarter stands at $3.39 billion, virtually flat with backlog as of September 2012. Our US backlog is up $60 million year-over-year and our UK backlog is down $46 million and all that is [planned] or 21% for the same time period. As already mentioned in the call, backlog in the UK continues to climb as we complete the planned withdrawal from the UK construction operations which I am sure everybody will be happy when we quit talking about that after nine months of talking about it.

Here in the States, US basedconstruction backlog increased $208 million. That's what starts give us a little excitement that maybe, maybe nonresidential construction might show early signs of coming back.

We are close to 10% over the year ago quarter with the electrical segment up $298 million or 42% on the back of industrial and transportation projects as well as a nice couple commercial projects in the New York City area. As we know, electrical is our most consistent performer over a long period of time.

The mechanical segment was down a little year-over-year and this is nothing other than the normal ebb and flow of project work and contract awards. And you note that might be an okay thing considering the two aforementioned projects we discussed were both in backlog at this time last year. So that's basically why it is down year-over-year.

Please note that 70% of our total backlog is really made up of these two segments, and these are the two segments when you really look at backlog their earnings are driven from backlog in the future. There is some work that happens outside of backlog where it is quick term work or more time and material, but our construction business is very much our backlog driven businesses as you would expect. Most of that work is on a fixed price basis. Backlog in our building services segment that as previously stated is made up in the mobile mechanical services, site-based services, government service group -- and that is 22% -- is down $140 million.

Let's be clear. We have gone through a pretty successful effort -- you can see it in the margins -- of calling work from backlog that doesn't make sense for us, or that the customers have shifted on their expectations of what they want done and our cost to serve became too high to make it economically feasible for us. That took about $100 million of backlog out.

You can argue the other $40 million is just the ebb and flow of the business as small project work comes in and out, or government IDIQ work comes in and out, or a slowness in the rewarding of contracts as we move to month-to-month on some of these contracts, no longer have a full year visibility on it. It has been a good outcome to margins for the long-term.

As we discussed, the newly broken out US industrial services segment is comprised of Ohmstede, Redmond and the newly acquired RepconStrickland. The only backlog that is really in this business is the shops business. That part had to be a significant major repair or complete rebuild with all new alloys and everything. But for the most part that is the OEM part of the business which if you remember is about 25% of what the original Ohmstede did.

The rest of the work is done on repairs or turnarounds that is either done on a timeand material basis or a quoted basis for repairs and it turns around so quick it never is in backlog. RepconStrickland carry no backlog as we define it at EMCOR.

I should note here that much of the work building services and industrial perform are really time and material work, small task work and backlog sometimes isn't the best representation of how that unit will perform in the current or ongoing period.

With that I would ask you to move to page 13. We are going to talk about the sectors. Since December backlog is up slightly. Institutional backlog ticked down for the quarter which is really offset by transportation work which we look at as real positive on a go forward basis.

A lot of that work requires highly skilled people especially on the electrical side. There are not a whole lot of contractors that can do that. We talked about this before. A lot of times you are competing on a budget. We have to get within the budget and make it all work. That is good for us.

In commercial despite what we did year-over-year or even quarter-to-quarter in the commercial accounts business or site-based business. We are still up slightly. We are starting to see is a little sliver of hope in commercial as it has a steady pattern of moving up over the last three or four quarters and really over the last year.

You can almost see the little purple sliver in hospitality. Really that is bid out work happening in the some of the gaming sectors. It is starting to get more 50/50 what I would call private work, commercial, industrial, hospitalityand gaming and about 50% non private which would be healthcare, institutional, water, wastewater and transportation.

Institutional is down for all of the reasons we discussed, not to mention the most of which is also the government really processing change orders and requests for echo adjustments in a really slow way. I am sure we are not the only people talking about that. It is a very difficult environment. Certainly the shutdown didn't add to the speed of resolution on those issues.

Now page 14 and 15. Let me talk about what everybody is probably been waiting for anyway and you already know because we put out the press release. We are going to narrow our guidance down and bring the top and low end down. On a pro forma basis that is $2.10 to $2.25. On a pro forma share basis we expect about $6.45 billion in revenues.

We stated at the beginning of the year that achieving the top end of the range would be probably based on the pace and timing of recovery in the non residential sector. For the most part, although we did see some US backlog growth here year-over-year and quarter-to-quarter -- but for the most part we have had a muted to even declining non residential market this year. We have fought through that.

But let's be clear, we have not met or exceeded our top line growth expectations for the year. When adjusting for the UK closure which is the way I like to look at it because that is an intended consequence now. Our organic growth rate year-to-date is up 2% versus the 2.5% in our initial guidance.

So we didn't get the acceleration of growth. Then let's be clear, the sequester hurt us more than we thought it was going to. To the tune of $0.10 to $0.15.

That will resolve itself whether it is $0.10 or $0.15 as we move through the year. Really you could say that dealt is why we thought we needed to bring the bottom end of the range down, but sitting here today we don't know if everything will be resolved by the end of the year.

Also RepconStrickland, we didn't plan on making a lot of money in the third quarter, but we thought we would make a couple pennies a share. Third quarter is always difficult. It is important to look at the year-to-date performance in that business.

You'll see that the industrial sector is up nice. But the bottom line is we did expected a couple pennies that didn't happen. The fourth quarter outlook changed a little bit. Some things got pushed to first quarter which outlook there looks good.

These are customer specific things. The customers shift work around here by 30 to 60 to 90 days at times. Sometimes they move from one turnaround season to the other. We have talked about that before. All the fundamentals are still in place for the refining and downstream market to be a very good market for us for the long-term.

Outlook for industrial remains strong going into 2014. We expect our backlog to continue to grow. It is going to be in a saw tooth pattern.

We do feel good about certain markets right now. We think commercial has got some rebound to it. Health care a little bit and maybe some transportation work that we have been negotiating for a while.

The bottom line is absent a significant external shock, what we tried to do is say let's not depends on the market after we got to this level of earnings, let's take the actions here in 2013 to position us well for 2014 and beyond. We believe we have done that. We believe there are glimmers in the non residential market that tells it will get better.

Part of when you are seeing in building services segment is really leveraged work, we call it, or repair work coming back, small task work. We hope that is a sign of a trend that there is pent-up demand, and those that know me know I don't speak a lot about that. Maybe pent up demand is starting to break free.

So we are fairly upbeat about where we can be. Like you, we knew we had a tough compare in this quarter, but we could have done a little better than we did. We talked about the reasons both some of our own doing and some externally driven. With that, Christie, I will take questions.

(Operator Instructions) Your first question comes from the line of Adam Thalhimer BB&T Capital Markets.

Hi, Adam.

Yes, Tony, what would be your early thoughts on 2014? I mean very broad strokes? Is it a growth year for you?

I think you have got to put it in two piles. We have done enough here in 2013 that it should be a growth in earnings, right? We have made a significant acquisition. We are starting to see the improvement in our building services segment. We feel good about some of the long-term projects we have been working on to get to the contract stage in construction. So unless the non res market completely rolls negative, 2014 should be a growth year for us.

If you take the UK closure behind us and what that can mean in the underlying numbers even if you do all these add backs. We have a pretty good services business over there. We will get the leverage on SG&A then with just a little bit of growth.

We are certainly aren't adding a lot of costs outside of the acquisition in the deal cost. It would be hard for us to say right now that we don't expect a growth year. Some top line and probably more pronounced on the bottom line.

That is encouraging. Haven't followed you guys for a while now. You in particular -- maybe I am reading something into it that is not there -- but you are more positive than you ever have been on a private non res recovery.

I am positive for a couple reasons. I don't know where the non res recovery is going to be, but I certainly know it is not going to be at 0% to 1% much longer. I get to see that from a number of different sources from distribution through OEMs and other places.

The second thing is I really like the capability we have in the Company. Adding our capability to serve the petro chemical refining market is good for our Company long-term. Starting to see the merits of the building this building services sector over eight to ten years and starting to get to the performance levels that we starting to expect is good.

And really as upset as I am about those two projects in mechanical I could bifurcate those projects for you. One of them is just a tough nasty job with a tough nasty client on a DOE site. That is what it is. We have been conservative in recovery. I am guessing we are going to do a little better someday than we are currently projecting. We thought it was in our best interest to be conservative because of the slowness in government decision making right now.

On the other job we don't lose $9 million a job on EMCOR, typically. In my nine years as of today, I think we have done it two or three times since I have been here. One of them or two of them were overseas.

So when I think about that, our construction business underlying is performing very well. Seeing the backlog growth in electrical is a good thing. I hope I am known as a fairly pragmatic person, but I like the things we have done in 2013 to position ourselves for 2014 and beyond.

Okay. And then last one for me. I think when we thought about Repcon last quarter we were thinking $0.10 in the back half of the year, $0.30 nextyear. What is the thought process today? I mean the turnaround season looks good for next spring.

We never gave guidance on 2014. We thought $0.10. Quite frankly, the difference between $0.05 and $0.10 is a littlemore costs as we integrate things on the ground. That might be $0.01, $0.015.

And quite frankly, if you have a turnaround because of a plant changing hands, it gets pushed into 2014. It doesn't take a lot of revenue to go from expecting to make $2 million in a quarter to being a little below break even on RepconStrickland.

I will tell you some of the fundamentals look very good. Our welding services looks very strong and the underlying RepconStrickland businesses look good going into 2014.

Okay. Thanks, Tony.

Of course, Ohmstede continues to be strong. Don't want to forget those guys. That is the foundation of building our presence there.

Got it. Thanks.

Next question is from the line of Nick Coppola with Thompson Research Group.

Hey, Nick. How are you?

The facility segments splits certainly shows a real improvement in building services from a margin perspective. Can you talk a little bit more about the contributors there, and obviously the government services with the headwinds, sothe mobile mechanical and site-based really overcame that. You were talking about pent up demands. Can you expand on that a little bit for us?

Sure and I will ask Mark or Kevin to come in as they so please. Big picture if you look year-to-date which I would like to start there. There was a substantial performance there year-to-date as we get close to 4% margins.

We are starting to see our site-based business really start to come together. We had a mid-size to small legacy business and when we added USM to it the integration was rough at the beginning. We are starting to see how that all works together.

It is working. You are seeing that both through customer retention, some new awards and you are seeing that through gaining greater share with the customer, and that is really through leverage work. That is where you start to see the pent up demand.

Either customers are trusting us more now to do that leverage work, or they are doing more leverage work. We think it is a combination of both.

You go to the mechanical business and this is an interesting thing. Degree cooling days which are how many hot days you have had that call for air conditioning and that is a combination of humidity and ambient versus temperature are actually down this year. So it has not been a weather driven event, because that is what you always have to ask.

It has been a repair driven event. It has been an improvement in our underlying small project work margins on less volume, and it has been an improvement in our service agreements. You put the three together and you get to a good place.

On the government services side even thought they have less volume, these guys in a lot of ways are running a good option offense, right? They grind it off for three yards and they bust a big 16 or 20-yard play. They are still grinding out the three to five yards because of the lack of project work and IDIQ work. They can't bust the long play this year. So their profitability is down, but they continue to be profitable. Mark?

Yes, Nick, the only thing I would add to Tony's commentary is with regards to the commercial business. We've spent a number of quarters talking about how we've reshaped our project portfolio or our customer portfolio. You are really starting to see the benefit of that in the margin in 2013.

Certainly, we like to provide solutions to all of our customers, but to be quite honest with you, sometimes the economic arrangements just aren't where they needed to be. We've made sure that we have got ourselves out of those arrangements where it made sense. You are starting to see the benefit of that in the underlying margins reported in the current year.

Okay. That is helpful. Then switching gears to the industrial side of the business. Qualitatively what are you hearing from customers about fall turnaround through October? What are your expectations for the Spring?

The way I look at the business is I start with what does labor availability look like and can you get the skilled craftsmen you need to be successful? Labor is clearly getting tighter in the Gulf Coast. For a company like EMCOR, US industrial services that is a good thing. The reason that is good is because we are an employer of choice for a number of reasons.

Primarily, they are pretty sure they are going to get paid. They are going to be trained and they are going to be safe. They are going to be run by people that know what they are doing. That is a big deal when you are a skilled tradesman.

That availability is compressing, so it means the better contractor is going to get the work. When the better contractor gets the work that should be good because wage rates will go up. We will benefit from that through the markups.

Leverage goes both ways here. That is a positive thing. Our customers are smart enough to know they want the best craft on the job to do the toughest jobs. We will have that and we will have the most skilled project managers.

What is interesting when you think about the folks now approach a turnaround season, they are not on a quarterly basis for the most part, right? They will shift dollars. They look at the turnaround season now between October and April and late September to April. They think about how they need to mix crews and what they are going to take units down. What becomes an increased [scope], what becomes a reduced scope.

If you take that [total] time horizon, the season looks very strong. It is difficult to get clarity on what gets done in fourth quarter versus what gets done in first quarter. What gets done in first quarter, what may slip to April now.

Because everybody is aware there are only so many guys who can do this work and so many engineers that can help design this work. People are really starting to think about how you get the best crews out there. Does that make sense to you?

Yes absolutely. That is very helpful. Thank you.

Any other questions, Nick?

No. That is it for me.

Your next question is from the line of Noelle Dilts with Stifel Nicolaus.

Hi, Noelle. Good morning.

Thank you. Good morning. My first question you alluded to seeing a little bit more costs associated with the integration of Repcon. So I was hoping you could go into a bit more detail how the integration is progressing, where you are seeing a few more challenges than you originally anticipated. Can you just touch on who is running the Company, if there have been any changes there and give us an update.

No, we feel as good about the management today as we did through due diligence as we did over the 70 days or so we've owned it. When I talk about costs it has to do with getting the productivity labor and not having unabsorbed time.

We have had very little costs associated with moving people out of the business or restructuring. It has to do with EMCOR and Repcon. We had to get a little clearer on how much labor we want to hold [powder] for in the off season.

It is not a big number. We are productive with labor, as they were. We might be just a little more productive with that labor.

As far as management they are there for the long-term. The team that runs the overall business was the team that we are very happy to have as our teammates. They ran Ohmstede, originally. That is now the group in charge of the whole segments for EMCOR.

Great. Then going back to your comments on the length of the turnaround season going now from October to April. Can you just remind us of how you are thinking about the seasonality of the Repcon business, and then also if you can touch on when you start getting some visibility into orders translating into work, how far ahead you start to get that visibility on that.

I will cover the orders part of it then I will let Mark go to seasonality.

With regards to seasonality and obviously we saw this during the ownership period of Ohmstede which we acquired in 2007. Unfortunately, the majority of their revenues and profits are generated in quarter four and quarter one of each year. As Tony just indicated, sometimes things slide between those two quarters.

If you look at that six month window for sake of discussion is where the majority of the turnaround activity is happening. We were fortunate in 2012 that we had a significant amount of work that actually came back into quarter three -- really late quarter two, early quarter three -- that did not replicate itself this year. I will let Tony speak to the visibility of those arrangements.

The way it works, Noelle, for a significant turnaround -- more than $2 million or more than having 100 or so folks on the job -- is you will start planning with those customers -- although they wont promise you the work -- you will start planning with them anywhere from 12 to 18 months ahead of time. You will have planners on the ground and they are paying for those planners really on a cost plus basis. You are not making much on them.

The hope is if you get your planners on the ground that you are the one going to be doing a turnaround. In most cases that is true. Not 100% true. Then somewhere 60 to 90 days out things start to firm up and what scope may look like or not look like.

Then they start to try to figure out what kind of crew you are going to be able to marshal to get on the site. It really firms up somewhere between 30 and 60 days for a formal contractual, although at about 90 to 120 we have a pretty good idea we are going to do it.

So 30 to 60 days goes to form a contractual; contractual here means for this scope of work here is what you are going to [charge] me either on a task or on a dollars per hour. Here is what you are going to charge me for tools and all the overhead associated with it, and here is what the markup on that will be.

The reality of doing this kind of work, an it is not a lot different from the smaller mechanical work we do or the work we do in the process plants. You don't know exactly what you are going to find until you open it up. So scope will either expand or contract.

A lot of times it expand, and sometimes it contracts based on what happens when you open the unit. You may find that the heat exchanger in fact wasn't that plugged. You can clean it and get it back in operation and put it back together with minimal repairs and it goes and everybody is good. You may find the Shell inside the unit was in pretty good shape, so you don't have to do the extensive welding to rebuild it or you may find the opposite.

You have to be able to flex your work force up and down. Think about some of the strategic rationale for the acquisition is to have a greater pool of labor available to you to be able to flex up and down and to move in between turnarounds. So much of this is customer specific.

You will hear a lot of people say it must be the market. You go back to when we struggled, we were back in early 2011. Some other folks were doing really well in the first quarter. We didn't.

We fundamentally didn't think anything was wrong with our business. We know there were a couple turnarounds that were pushed out, a couple of scopes were reduced, a couple of assets changed hands, other work got delayed. Other people were reporting dynamite numbers in that quarter and they were talking about how great the market was.

We never said the market was bad. We said for the set of customers we had for that turnaround season things didn't quite go as we thought they were going to.

Conversely, you look at our first quarter this year and you look at Repcon's first quarter this year which you can't see but we saw. It worked the other way.

Other people were saying woe is me the market is terrible. The market wasn't terrible. The market was basically the same or better than it was in 2011. We were on the right turnarounds and had the right mix of customers for that season.

On balance the market is pretty good. The long-term fundamentals of the market are pretty good. Some people would say they are great as far as refining utilization over a long period of time. Which is actually what will drive maintenance.

What we have been forced to do over this last three or four years is to learn how to be a lot more flexible as a contractor. And we have. Owning RepconStrickland only makes us more flexible. Does that make sense to you?

It does. Thanks.

Next question is from the line of Saagar Parikh with KeyBanc Capital Markets.

Good morning, Saagar.

Hi. Good morning. My apologies, actually my call dropped earlier. If I ask something asked already, again my apologies.

First off, we have been hearing from a lot of peers in the refinery space that turnaround projects -- and I think you mentioned this to some degree also -- turnaround projects are not large any more and come in one big size, but rather they are broken up in smaller pieces and are being done over a wider time period. Does that take any competitive advantage that EMCOR as being a larger company? Does that give an additional advantage offset to small mom and pop shops? If it does, how does EMCOR counter that?

I am not sure they've become that much smaller. Again, I go back to the mix of work. We see some fairly significant turnaround work coming in large ones and some small ones. We see small ones that go into large ones.

I think the reality is for a mom and pop the barriers for entry continue to be quite substantial. You start with just the safety requirements and the insurance requirements to do this work. They are pretty significant. Then you go with the working capital requirements to do this work.

For the most part the way you do turnaround work is you don't get big mobilization like you would on a construction project or some other big time and material jobs you may do in the nuclear world. In the turnaround world you pay the guys. Then you wait for your money.

For a mom and pop you take the combination of liquidity couple with safety and insurance and not to mention technical resources and technical ability. They are always going to be around pieces of it. Are they going to do the higher end work like LPLP work, the heat exchanger extraction which can be very difficult or the cat cracker lift or the highly skilled turnaround welding guys on the [hal-alloys].

They may have five or six guys while we will have 200 or 300 guys sometimes. That is not the issue.

What refiners have learned to do in the last three to five years is they've learned to buy options. They want to keep their units up as much as they can. You have more refining only focused companies.

They understand the business and you are seeing assets change hands that way. I think long-term that plays into the ability of larger contractors with great local execution that have the ability to get things back into a shop and get it fixed. That is EMCOR.

Thank you. A follow up. Looking at your guidance and the midpoint what you have now to what you guys had originally projected at the beginning of the year and taking into account the $0.10 in additional EPS contribution from the Repcon, and then take into account the $0.20-plus in potential losses in your mechanical business from those two projects; the mid point is looking pretty good when you take all of that into account.

With that I know we have gone over a lot of negatives on the call in terms of what has gone wrong. In terms of positives in your operations what has happened positively? Looking at it now versus what you thought at the beginning of the year.

I think the margin execution underlying in our business year-to-date, broad-based, is better than we thought it was going to be. Even in the construction business you take out the $20 million in losses. One of them absolutely like I said I think we beat ourselves up pretty good on the industrial. We do the right thing by our clients at EMCOR.

We don't sit there and debate things, we got it done. It was a private client. We got it done. We had the resources to bear to get it done. Very few people could have done that.

We will see what happens on that chapter. We are conservative on how we viewed it because we had to be. We will see where that turns out.

Reality is we are not entirely being treated fair on that job site. That will have a different outcome someday, hopefully.

So if I correct for that back $15 million or so in the mechanical, margins are pretty good there. All of the work we won there were won in this slow growth recession environment that proceeded the slow growth environment.

In electrical, these guys are doing phenomenal in a very tough market across all sectors. That is the benefit of long-term discipline and scale. It doesn't mean you are never going to have another hiccup. It means that we haven't had any. When we do we get after it right away.

In building services we are doing better than we thought. We thought we would do well and put the right planks in place and the team on the ground and site-based that enough. We are getting this in the right direction. Mechanical service guys really called their portfolio.

So when you put all that together, Saagar, yes, there are more positives. You know what? The numbers are what they are when they print.

We are disappointed to bring in the low end of the range. We just can't overcome the increased impact of sequester.

Finally, last question for me. ECS you mentioned backlog is up 10% year-over-year domestically. I apologize if you talked about this already, but in terms of pricing are we seeing any improvement environment there? 100 basis points, anything?

I don't know if it is that large. It is definitely better than 9% or 10%. We actually think end of 11% to mid-12% is a step back for the market, so we were real careful with the kind of work we too. It is a little bit better from there and we continue to work on productivity, so we can do what you are seeing in electrical and mechanical outside of that job or two to go over the margins we need to and use prices up side.

Thank you.

Thank you.

Next question comes from the line of John Rogers with D.A. Davidson.

Good morning, John.

Thanks for fitting me in. Couple of things. First of all, in terms of just timing of the non res recovery, Tony. I know we are all hopeful that 2014 will be better. If it starts to get better early in the year, when do you really expect to see any benefits from that? Late next year?

I think in certain sectors that are less dependent on a non res recovery we may see it a little earlier. As you get to transportation and some of the healthcare work it is a little lumpier. That may be less recovery. Commercial, I don't know.

We have had a steady march upwards underlying if you correct for the $80 million to $100 million we have taken out of long-term contracts that were just not working for us. It has been this gradual grind. Guys, what do you think? I think it is a lot less lag than the other ones. It could be the other ones the big infrastructure project maybe a lag of eight to 12 months, a commercial lag is more like three to six months.

You just don't have the same lumpiness as you do with some of the others.

Yes. It is more gradual. What we are seeing, John, and it is a positive. You can't quantify this yet. Eventually you will see it in more awards and maybe better pricing. A lot of mid-size guys aren't really around any more. There is plenty of competition.

We hired some folks that had their own companies. They are working for us as pretty significant project managers or division heads. We have seen a lot of [deal foe] there. Of course, we haven't done any of them. We have no reason to do that.

When you talk to the bonding guys there are a lot less people they are bonding in the mid market and plan on bonding than they did in the future. You put that altogether, a company like EMCOR can benefit on the more complex work whether it be commercial or institutional.

If we do get an up turn early in 2014, you could see the benefits?

Absolutely.

You mentioned in your earlier comments about targeting 5% margins in that building services. As you look at the mix of what you have now, Tony, what is reasonable margins for some of the other segments?

Which parts, John?

I mean most important I guess the industrial services.

What are we year-to-date, Mark?

7.9%

7.9%? We clearly think that is between 7.5% and 10%. We would like to be closer to 10% on an operating income. We got some early amortization, some of it will wear off.

We are high single digit, low double digit Company. Parts of it our much more profitable or a little less profitable. That would be the most profitable thing we would do on a sustained basis.

Building services we are well on the way there. We certainly hope to jump over 4% here soon on a trailing 12 months. Then we hope to jump over 4.2%, then 4.4%, then 4.5% and continue to get the mix right to get to 5% on a sustained basis.

Construction for us to cry poor mouth at more and say we are at 3% to 4% contractor that doesn't have any credibility because we have done it so well for so long. You know it is lumpy, but depending on the year and depending on the quarter anywhere from 5% to 7% depending on what we are doing.

Some years we will do a little better. We really don't see it unless we have an extraordinary event like we had this year on those couple jobs. We don't plan on running our construction businesses below 5%.

If you look at the assets what you can do is see that you know you can earn good returns on those businesses when you get to those levels across the board. Of course with a construction business run well, we really get a high return on net assets.

Okay. Last thing from Mark. It looks like there was a portion of the facility services that got shifted up to mechanical services segments. How big a business was that just as I think about modeling out into 2014?

Our annual run rate is probably $70 million. Sometimes it can flex up a little bigger. I would say in the near term $70 million is a good number to use.

On an annualized basis?

Yes.

Mark, you mentioned 40% tax rate this year. Is that good?

Yes, I am hopeful we will get there. We are at 41.5% year-to-date. I think 40% is going to be the highest number it is going to be for the year.

That is pretty big decline in the fourth quarter.

Absolutely.

That is important for folks that follow us. That beat us up in the third quarter. We don't control the government agencies on taxes. It was positive what they did in the UK, but if they ever did that in the US we would be thrilled, and you guys could start writing about that. That would be terrific.

Okay. Thanks, guys.

Next question is from the line of Min Cho with FBR Capital Markets.

Thank you. Most of my questions have been answered. Two quick ones here. Tony, in your commentary here you suggested head count might by down in the fourth quarter. I was checking to see if that is mostly tied to the UK construction business, or if there is another segment you are looking at to pare that down?

Yes. No, the other ones go based on work we have. In fact it is starting to tick up as the business continues to grow. In the fourth quarter it will go up because of the turnaround business. My head count comments were specifically towards the UK. We expect to be at the 90% reduction mark or thereabouts by the end of the year.

Okay, Finally, I know you still have about $3.3 million in restructuring costs that are left for the rest of this year, maybe into 2014. Can you tell me how much of that is assumed in your EPS GAAP guidance for 2013?

The majority of it is assumed in the GAAP guidance for the year.

Perfect. Thank you.

Thank you.

At this time there are no further questions. Are there any closing remarks.

Thank you all very much for listening. I hope we answered the questions as it pertained to this quarter. I think on of you all had it right. There is a lot of underlying good things happening here.

There is always a tough compare. We really look forward to talking to you all again on a collective basis in February when we give our 2014 guidance. Let's go out and perform. Thank you.

Ladies and gentlemen this does conclude today's EMCOR third quarter earnings conference call. You may disconnect at this time.