EMCOR Group Inc

NYSE:EME

Earnings Call Transcript 2020-Q3

[Operator]

Good morning. My name is Lara, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group Third Quarter 2020 Earnings Call. All lines have been placed in mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]

Ms. Jamie Baird with FTI Consulting, you may begin.

[Jamie Baird, FTI Consulting]

Thank you, Lara, and good morning, everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the company’s 2020 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.

[Kevin Matz, Executive Vice President, Shared Services]

Thank you, Jamie, and good morning, everyone. As always, thank you for your interest in EMCOR and welcome to our earnings conference call for the third quarter of 2020. For those of you who are accessing the call via the Internet and our website, welcome, and we hope you have arrived at the beginning of our slide presentation that will accompany our remarks today. We are on slide two.

This presentation and discussion contains certain forward-looking statements and certain non-GAAP information. Page two describes in detail the forward-looking statements and the non-GAAP financial information disclosures. I encourage everyone to review both disclosures in conjunction with our discussion and accompanying slides.

Slide three shows the executives who are with me to discuss the quarter and nine months results. They are Tony Guzzi, our Chairman, President and Chief Executive Officer; Mark Pompa, our Executive Vice President and Chief Financial Officer; and our Senior Vice President and General Counsel, Maxine Mauricio.

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

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

[Tony Guzzi, Chairman, President and CEO]

Yes. Good morning, and thanks, Kevin. I am going to start on pages four through six. We had an exceptional quarter, s reported with respect to operating income at $135.9 million, operating income percentage at 6.2% and with respect to earnings per diluted share at $1.76 on a non-GAAP adjusted basis.

We earned revenues of $2.2 billion in the quarter and had operating cash flow of $270 million. We had excellent operational performance and cost control. Our team executed with focus, discipline and precision. We continue to take steps to keep our skilled trades workforce safe, motivated and productive.

We achieved this performance despite a very difficult operating environment for our EMCOR Industrial Services segment, which you know, focuses on downstream, petrochemical, and oil and gas and refining.

We have structurally reduced our SG&A by about $7 million to $9 million per quarter on a go-forward basis. The exceptional performance of our segments Building, Industrial Services gap thus demonstrating how the diversity and balance at EMCOR can work for our shareholders.

I will cover some of the highlights by segment and I will cover the broad themes and practices that have driven our performance during these challenging times.

Our Electrical and Mechanical Construction segments had outstanding performance in the quarter and on a year-to-date basis. We leveraged our cost structure across a solid mix of projects, returned strong and robust operating income margins of 9.2% in our Electrical Construction segment and 9.0% in our Mechanical Construction segment.

We leveraged a lower cost structure, but more importantly, had exceptional field performance on our projects. We did benefit on some project closeout to resolutions. We always have some of those, something that Mark will cover in more detail. But the underlying performance and productivity in these segments is as good as we have ever had, period, full stop.

Our Building -- U.S. Building Services segment performed exceptionally well, with a record quarterly operating income percentage of 6.9%. Our commercial site-based business had their best third quarter ever and resets their cost base to position us for even more success in the future as we grow the business.

We have a very good customer mix. Our customers are demanding, but by involving us in their maintenance capital spending, they provide us with the opportunity to add value through incremental small projects and service activity.

Our Government business also had a very good quarter. In addition, we had excellent repair service and project performance in our mobile mechanical services division. Our repair services aided by a hot summer coupled with significant demand for our IAQ or indoor air quality products and services.

We also are near flat year-to-date for project bookings on an organic basis, which show significant recovery from the large drop in organic bookings in April and May. We also completed the ninth acquisition in August that will build our project capabilities and allow for long-term service growth in the Washington D.C. market.

Our Industrial Services segment had a tough quarter in line with what we expected and discussed on our second quarter earnings call. Demand has dropped significantly across the industry and that coupled with successive hurricanes made for a very difficult quarter. This is a tough environment for Industrial Services as we focus on petrochemical and refining.

However, we are well-positioned when our customers rebound. We have reset the business through aggressive cost cutting and redeploying personnel to the work that is available. The issue is our field supervision is absorbed and productive. However, they are capable of and what is available today and that is where the leverage is in this segment.

Our U.K. segment continues to a steady performance and continues to build on a strong market position. Our strong customer relationships give us opportunities to not only meet their service needs, but also their maintenance and project retrofit needs.

I want to take this opportunity to share with you how we have succeeded in this challenging operating environment across EMCOR. These actions and themes are why we have had this exceptional year-to-date performance across our business.

Number one, we kept our focus as an organization. As we have moved through this ever-changing environment in 2020, we have stayed focused on accomplishing our mission for our customers. We are already a flat organization and we had direct communication at multiple levels. We became even flatter with even better communication across our company.

Number two, employee safety is and has been our number one priority throughout this pandemic. Our people were able to keep this priority paramount as it is one of our core values. We just had to implement these practices in a different way.

Our team knows we avoid shortcuts and we always emphasize worker safety. This unrelenting focus and commitment to safety is not new to us. It is one of the main reasons we can fill the best team in the industry.

Number three, we work together across this large decentralized organization by focusing on the task at hand and we have sought to comply at all times with a multitude of regulations, programs and procedures in this constantly changing environment.

Our staff has made sure that our subsidiaries had the best available information to implement the practices needed to keep progress moving on a project or a service demand. Again, teamwork and mutual respect for each other are core values of EMCOR.

Number four, we stayed focused not only on safety but also productivity. Our people took ownership of job sites, brought solutions forward that allowed us to at least maintain the productivity we bid in the jobs through better scheduling, adjusted work practices, more prefabrication and better job site logistics.

In many ways, we were uniquely trained to perform in this constantly changing environment. We are a team of very successful trade contractors, who know how to react and adapt to changing markets and job site conditions.

Number five, we have positioned ourselves into some good term -- long-term markets, which I will talk about later, such as healthcare manufacturing, high-tech manufacturing, data centers, commercial and food processing.

We offer valuable services in these markets through our electrical trades, our HVAC technicians, our pipefitters, welders, millwrights, sprinkler fitters and plumbers. We are able to move between markets with skill and agility that can handle the most complex construction and service opportunities within these markets.

Number six, we were prepared and trained to serve our customers with new products when the pandemic hit. We bundled together our services and products related to IAQ/indoor air quality and building wellness, and had these solutions ready to present to our customers when we were able to reenter buildings, campuses and industrial facilities. We have helped and continue to help our customers reopen with more peace of mind, by improving the airflow and air quality in their workplaces.

Number seven, we became leaner and more productive. We cut costs early and deep in some of our businesses. We did not wait to react. We found new ways to work through technology.

And finally number eight, we leveraged our scale, our suppliers worked with us to make sure we had the necessary personal protective equipment necessary for our people to do their jobs. We had the job materials we needed to be successful, despite supply disruptions that may have impacted others. We shared ideas on how to keep safe but also stay productive.

For me, it’s been humbling to see this high level of execution during these difficult times. It speaks to the leadership of our segment and subsidiary leaders who look for solution when obstacles are in front of them.

And our highly skilled and dedicated workforce who continued to work and serve our customers throughout these difficult times driven by this pandemic. I cannot thank them enough for all that they do for EMCOR every day, our customers and our shareholders.

And with that, Mark, I will turn it to you.

[Mark Pompa, Executive Vice President and CFO]

Thank you, Tony, and good morning to everyone participating on today’s call. For those accessing this presentation via the webcast we are now on slide seven. Over the next several slides, I will augment Tony’s opening commentary and EMCOR’s third quarter performance, as well as provide an update on our year-to-date results through September 30.

All financial information referenced is derived from a consolidated financial statements, included in both our earnings release announcement and Form 10-Q filed with the Securities and Exchange Commission earlier this morning. So let’s revisit and expand our review of EMCOR’s third quarter performance.

Consolidated revenues of $2.2 billion, are down $86 million or 3.8% from quarter three 2019. Our third quarter results include $81.4 million of revenues attributable to businesses acquired, pertaining to the time that such businesses were not owned by EMCOR in last year’s third quarter.

Acquisition revenues positively impacted both our United States Mechanical Construction and United States Building Services segments. Excluding the impacted businesses acquired, third quarter consolidated revenues decreased approximately $167.5 million or 7.3%.

Unlike our results for the second quarter of 2020 where each of our reportable segments had quarter-over-quarter revenue declines, we did see revenue gains in three of our five segments during the third quarter of this year.

However, when you remove the impact of businesses acquired, all of our U.S. reportable segments experienced organic revenue declines period-over-period, as the effects of the COVID-19 pandemic, as well as the disruption within the oil and gas markets are still impacting a number of our businesses.

United States Electrical Construction revenues of $508.9 million decreased $45.8 million or 8.3% from 2019’s third quarter. Revenue declined across multiple market sectors due to the continuing impact of the pandemic, including the associated containment and mitigation measures, as well as the curtailment of certain capital spending by some of our customers.

This segment additionally experienced a significant reduction in revenues within the manufacturing or industrial market sector, where certain of our electrical businesses perform services for both midstream and upstream oil and gas customers.

Not dissimilar to our Industrial Services segment, the Electrical Construction segment has experienced numerous project deferrals, specifically in the manufacturing and industrial market sector resulting from cost control actions initiated by many of their customers within the broader oil and gas industry.

United States Mechanical Construction segment revenues of $891.5 million, increased $22.3 million or 2.6% from quarter three of 2019. The results of the segment represent record third quarter revenue performance. Excluding acquisition revenues of $61.1 million, the segment’s revenues decreased $38.8 million or 4.5% organically.

Reductions in quarter-over-quarter revenues from the manufacturing market sector, inclusive of activities within the food processing submarket sector, as well as the healthcare market sector due to project completions in the prior year are the primary reasons for this segment’s organic revenue decline. EMCOR’s total Domestic Construction business third quarter revenues of $1.4 billion, decreased by $23.5 million or 1.6%.

United States Building Services quarterly revenues of $551.5 million, increased $19.4 million or 3.7% and represents an all-time quarterly record for this segment. Excluding acquisition revenues of $20.3 million, this segment’s revenues decreased approximately $900,000 or less than 0.75%.

Reduced building control project activities due to access restrictions created by the COVID-19 pandemic were almost entirely offset by increased small project revenues, including indefinite delivery, indefinite quantity project volume from this segment’s Government Services division, as well as an increase in demand for certain services aimed at improving indoor air quality in response to the pandemic and in line with the recommendations from the CDC. Tony will comment further on our IAQ capabilities later in his presentation.

United States Industrial Services revenues of $139.7 million, decreased $94.4 million or 40.3%, as this segment continues to be impacted by the negative macroeconomic conditions and uncertainty within the markets in which it operates.

Additionally, our quarterly performance within this segment was adversely affected by work stoppages resulting from hurricane and tropical storm activity in the Gulf Coast region, where the majority of our Industrial Services operations are located.

United Kingdom Building Services segment revenues of $110.1 million, increased $12.5 million or 12.7% from last year’s quarter. Revenue gains for the quarter resulted from new maintenance contract awards, as well as strong project activity across our customer portfolio. In addition, revenues of this segment were positively impacted by $5 million, as a result of favorable foreign exchange rate movements within the quarter.

Please turn to slide eight. Selling, general and administrative expenses of $226.8 million represent 10.3% of third quarter revenues and reflect an increase of $6.7 million. The current year’s quarter includes approximately $8.9 million of incremental expenses from businesses acquired, inclusive of intangible asset amortization, resulting in an organic quarter-over-quarter decrease in selling, general and administrative expenses of approximately $2.2 million.

SG&A expenses for the third quarter of 2019 were favorably impacted by $4.5 million of insurance recovery and legal settlements within the Industrial Services segment. When excluding these recoveries from the prior year period, the adjusted organic decline in 2020’s third quarter SG&A is $6.7 million.

Quarter-over-quarter reductions in salaries and travel and entertainment expenses due to a combination of cost-cutting measures and the continuing impact of the COVID-19 pandemic were partially offset by an increase in quarterly incentive compensation expense due to EMCOR’s improved operating performance during the period and our revised upward expectations for full year 2020.

The increase in SG&A as a percentage of revenues is due to the reduction in quarterly consolidated revenues without a commensurate decrease in certain of our fixed overhead cost as we do not deem the current operating environment to be permanent. This is consistent with our assessment during this year’s second quarter.

Additionally, with quarter-over-quarter and sequential increase in total incentive compensation expense previously mentioned, our SG&A as a percentage of revenues was unfavorably impacted by approximately 50 basis points within the third quarter of 2020.

Reported operating income for the quarter of $135.9 million represented $20.1 million increase or 17.4%, as compared to operating income of $115.7 million in 2019’s third quarter. This represents an all-time quarterly operating income record for EMCOR, which is quite remarkable performance when you consider the economic backdrop.

Our third quarter operating margin of 6.2%, which favorably compares to the 5.1% of operating margin reported in last year’s third quarter. We experienced operating margin expansion within each of our reportable segments other than our U.S. Industrial Services segment, which is reporting an operating loss for the quarter and our U.K. Building Services segment, which was essentially flat period-over-period.

Specific quarterly performance by reporting segments is as follows, our U.S. Electrical Construction segment operating income of $47.1 million increased $13.4 million from the comparable 2019 period.

Reported operating margin of 9.2% represents a 310-basis-point improvement over last year’s third quarter. This improvement in both operating income dollars and operating margin is largely attributable to increased gross profit contribution from commercial market sector activities, inclusive of numerous telecommunication construction projects.

In addition, operating income and operating margin of this segment benefited from favorable project closeouts within the transportation and institutional market sectors, which positively impacted quarterly operating margin in the current year by 70 basis points.

Third quarter operating income of our U.S. Mechanical Construction services segment of $80 million represents an $18.8 million increase from last year’s quarter, while operating margin in the quarter of 9% represents a 200-basis-point improvement over 2019.

Despite the impact of the COVID-19 pandemic, this segment has experienced increased gross profit from projects within the majority of the market sectors in which it operates. In addition, a more favorable mix of work within the both -- within both the manufacturing and the commercial market sectors drove the improvement in quarterly operating margin.

Our combined U.S. Construction business is reporting a 9.1% operating margin and $127.1 million of operating income, which has increased from 2019’s third quarter by $32.3 million or 34%.

For the third quarter of 2020, operating income and operating margin for our U.S. Building Services segment was $38.2 million and 6.9%, respectively. The performance of this segment represents an all-time quarterly record in terms of both operating income and operating margin.

Operating income increased by $3.2 million over last year’s third quarter and operating margin improved by 30 basis points. These increases were primarily due to increased gross profit and gross profit margin from this segment’s commercial site-based services division.

In addition, this segment’s results for the current quarter, benefited from lower selling, general and administrative expenses, due to cost-cutting measures enacted in response to the COVID-19 pandemic.

Our U.S. Industrial Services operating loss of $9.8 million represents a decrease of $15.4 million, compared to operating income of $5.6 million in last year’s third quarter. As briefly mentioned earlier on this call, as well as during my commentary on our second quarter earnings call, this segment has been significantly impacted by adverse macroeconomic conditions within the oil and gas industry, as well as the dramatic decline in demand for refined oil products due to the travel restrictions and other containment and mitigation measures imposed in response to COVID-19.

These conditions have resulted in reduced capital spending and the implementation of various cost-cutting measures by certain of our customers, which has resulted in a decrease in demand for the services provided by this segment.

Compounding this reduced demand and as a -- and as I referenced during my revenue commentary, the Gulf Coast region has been impacted by numerous named storms during 2020’s hurricane season, which resulted in the suspension of planned maintenance activities as our customers focused on storm preparation and recovery efforts.

U.K. Building Services operating income of $5.3 million represents an approximately $600,000 increase over 2019’s third quarter due to an increase in gross profit within this segment. Operating margin of 4.8% is slightly reduced from 2019’s third quarter operating margin of 4.9%.

We are now on slide nine. Additional financial items of significance for the quarter not addressed on my previous slides are as follows, quarter three gross profit of $363.2 million or 16.5% of revenues has improved over last year’s quarter by $27.2 million and 180 basis points of gross margin.

We experienced quarter-over-quarter improvement in gross profit dollars in all reportable segments other than our Industrial Services segment due to the unfavorable market conditions previously outlined.

Diluted earnings per common share of $1.11, compares to $1.45 per diluted share in last year’s third quarter. Adjusting our record quarterly performance for the negative impact on our income tax rate resulting from the non-deductible portion of the non-cash impairment charges recorded during the second quarter of this year, non-GAAP diluted earnings per share for the quarter ended September 30, 2020, is $1.76, which favorably compares to last year’s quarter by $0.31 or 21.4%.

My last comment on this slide is a continuation of my income tax rate commentary, which as you can see on the bottom of slide nine is 54.7% for the quarter due to the non-deductibility of the majority of quarter two’s non-cash impairment charges.

With one quarter of 2020 remaining, I anticipate that our full year tax rate will be between 53% and 54%, which is a downward revision from the previous range provided on our quarter two call. As everyone on this call knows, this range can change, if we have any significant discrete tax items that occur during the fourth quarter.

Please turn to slide 10. With my quarter commentary complete, let’s now turn our attention to EMCOR’s year-to-date results through September 30th. Revenues of $6.52 billion represent a decrease of $255.1 million or 3.8% when compared to revenues of $6.77 billion in the corresponding prior year period.

Our year-to-date results include $214.1 million of revenues attributable to businesses acquired, pertaining to the period of time that such businesses were not owned by EMCOR in the 2019 year-to-date period.

Excluding the impact of businesses acquired, year-to-date revenues decreased organically 6.9%, primarily as a result of the significant revenue contraction experienced during quarter two, given the containment and mitigation measures mandated by certain of our customers, as well as numerous governmental authorities in response to COVID-19.

Year-to-date gross profit of $1 billion is higher than the 2019 nine-month period by $20.4 million or 2.1%. Year-to-date gross margin is 15.5%, which favorably compares to 2019’s year-to-date gross margin of 14.6%. The year-over-year gross margin improvement was largely driven by our combined U.S. Construction business.

Selling, general and administrative expenses of $659 million represent 10.1% of revenues, as compared to $652.5 million or 9.6% of revenues in the prior year period. Year-to-date 2020 includes $25.2 million of incremental SG&A, inclusive of intangible asset amortization pertaining to businesses acquired. Excluding such incremental costs, our SG&A has decreased on an organic basis by approximately $18.7 million year-over-year.

Reported operating income for the first nine months of 2020 is $119.2 million. Adjusting this amount to exclude the non-cash impairment loss on goodwill, identifiable intangible assets and other long-lived assets recorded in the second quarter results in non-GAAP operating income of $352 million for 2020’s nine-month period, as compared to $338 million for the corresponding 2019 year-to-date period. This adjusted non-GAAP operating income represents a $13.9 million or 4.1% improvement year-over-year.

Diluted earnings per common share for the nine months ended September 30, 2020, is $0.96. When adjusting this amount for the impact of the non-cash impairment charges previously mentioned, non-GAAP diluted earnings per share was $4.54, as compared to $4.22 in last year’s nine-month period. This represents a $0.32 or 7.6% improvement period-over-period.

We are now on slide 11. EMCOR’s liquidity profile continues to improve as we just completed another quarter of strong cash flow generation, bringing our year-to-date operating cash flow to $546.8 million.

Our operating cash flow has benefited from the effective management of working capital by our subsidiary leadership teams, coupled with the impact of certain government measures enacted in response to the COVID-19 pandemic, which allow for the deferral of the employer’s portion of social security tax payments and the remission of value-added tax for our U.K. subsidiary. On a year-to-date basis, these measures have favorably impacted operating cash flow by approximately $81 million.

With this strong operating cash flow, cash on hand has increased to $679.3 million from the approximately $359 million on our year-end 2019 balance sheet and is the primary driver of the increase in our September 30th working capital balance.

Other changes in key balance sheet positions of note are as follows, goodwill has decreased since December 31, 2019, as a result of a non-cash impairment charge recognized during the second quarter of 2020, partially offset by an increase in goodwill resulting from the businesses acquired during the year -- 2020 year-to-date period.

Largely as a result of $44.8 million of amortization expense recorded during the first nine months of this year, our identifiable intangible asset balance has decreased since December 31, 2019.

Similar to our goodwill balance, this decrease was partially offset by incremental intangible assets recognized, as a result of the acquisition of two businesses during the first nine months of this year.

Total debt has decreased by approximately $30 million since the end of 2019, reflecting our net financing activity during the year. Although, not included on this slide due to the periods presented, EMCOR has paid down approximately $273 million of borrowings under its credit facility, inclusive of borrowings executed during 2020. EMCOR’s debt to capitalization ratio has decreased to 12.3% as of September 30th.

Lastly, our stockholder’s equity has decreased since December 2019, as our share repurchase activity and dividend payments for the nine-month period of 2020 have exceeded our net income due to the impairment loss recognized in the second quarter.

Due to our strong cash flow performance in concert with our available credit, EMCOR remains in a very strong position to take advantage of any market opportunities that may be present in future periods.

With my lengthy portion of this slide presentation concluded, I would like to give the call back to Tony. Thank you.

[Tony Guzzi, Chairman, President and CEO]

Thanks, Mark. And that’s what happens when we are in the third quarter, right? Thank you. And I am going to be on page 12, remaining performance obligations by segment and market sector. Total RPOs at the end of the third quarter were a little over $4.5 billion, up $495 million or 12.3% when compared to the September 2019 level of $4 billion.

RPOs likewise increased the same amount $494 million for the first nine months of 2020, with all of this growth being organic except for approximately $86 million relating to two acquisitions in the current 12-month period.

Taken together, our Mechanical and Electrical Construction segment RPOs have increased $409 million or 12.4% since the year ago period, 7% of this growth is organic with the balance being RPOs that came with our November ‘19 acquisition of BKI, a full service mechanical contractor headquartered in the Atlanta area.

I should note here that thus far in 2020, BKI has more than doubled its RPOs total in the first nine months of this year, as they continue to win work, including projects in the data center, manufacturing and healthcare markets. The integration of BKI has gone very well due to the exceptional team they have. They really are a terrific team so we are thrilled to have them on our team.

Building Services segment RPOs increased in the quarter as this segment’s small project, repair service work also continues to regain its footing. Remember the small project work in this segment was the first to feel the effect of the pandemic, as building operations simply shutdown.

We are getting in there now as facilities open up and more and more building owners and tenants are looking for ways to increase their indoor air quality in their facilities and I will go a little deeper into IAQ on the next slide.

Project bookings are nearly flat on a year-to-date basis, which is a pretty good recovery, considering the deep drop in bookings we had in April and May.

On the right side of this page, we show RPOs by market sector. Similar to a quarter ago, all eight market sectors listed had year-over-year RPO increases, except for manufacturing/industrial, where we have just completed some major projects and are looking at reloading for additional work and we feel pretty good about that as we are in the midst of developing some good prospects in the manufacturing sector as supply chains change and we also are very strong in high tech manufacturing. Many of these projects come in pieces versus all at once into our backlog.

Commercial project RPOs comprised our largest market sector at over 42% of total. This is almost a 20% increase from the year-end and it’s really spurred by two things, really high-tech and data center projects.

It bears repeating our industry has safe -- has adapted the safety and work protocols to keep projects progressing with the larger goal of keeping workers safe. Our protocols are working. The industry keeps working and bidding opportunities continue in pretty much all sectors and geographic markets.

So I am going to take the next two page and cover on pages 13 and 14. What I am going to discuss is some markets and opportunities where -- as we move forward, we believe have some resiliency for us to operate in.

And I am now going to turn to page 13. It says future effects on markets. We believe we have multiple pockets of resistance despite wider non-residential uncertainty. Let’s go to first the data centers.

This has only gotten stronger through the pandemic. It was strong already and our electrical, mechanical and fire protection demand across Mid-Atlantic, Pacific Northwest, Midwest and Southeast.

We have done a good job here and we are one of the leaders and we have also made some strategic acquisitions, especially in the last 15 months, not only in fire protection assets, but also key electrical contractors like we did in the Midwest and also in the Southeast, which is emblematic of our BKI acquisition. And of course, we build organic capability here and build off long-term success in data center markets and we are able to build these hyperscale on time, on budget and with speed.

It’s important to note here that there’s always changes in the data center market. Projects get redesigned. They get moved. They get delayed as they get redesigned. Other ones get accelerated. That was routine course of business outside of the pandemic and really had little to do with the pandemic, in our case.

On the warehouse side, we continue to build out e-commerce supply chain and we continue to see a very strong demand and not only regular warehouses, we continue to see demand across cold storage. This is especially true for our fire protection and sprinkler work.

In industrial/manufacturing, we believe we are well-positioned for electrical, mechanical opportunities and millwright opportunities, driven by the re-shoring of supply chains to the Southeast and relocation from higher cost states and sites.

We do believe also that we will have additional food processing opportunities. Anecdotally, we won at least three jobs in the last four months, which would have been headed either to Mexico or overseas, that are now being built in the Southeast.

On the healthcare side, we continue to see demand for our sys -- our work, electrical, mechanical, fire protection and then eventually service. Hospitals are looking to retrofit. They are looking to build new facilities and they are looking to have more flexibility in their existing facilities and build new facilities.

We have grown backlog here. We expect to continue to grow and look this can be episodic, things come in and out on the big projects side. But the flip side of that is we are not doing as much service work as we have typically done in hospitals, as they deal with the impacts of COVID, long-term we expect to do more retrofit work as people will think to be more flexible we will think about it.

We did a lot of work to create negative pressure environment through the pandemic in these hospitals. We expect to continue to do that. But -- and any -- and if you have a bigger casualty event, accidents, terrorist situations, if they want to be able to do positive pressure. So facilities are going to have to move between the two and that’s all about airflow and the kinds of work we do.

And then you are going to have to have enhanced electrical systems and communication wiring in those facilities and we are uniquely positioned to help with those and we have great relationships with some of the biggest hospital systems in the country and we have helped them through the pandemic, we have helped them build some of their new facilities in the past and we expect to do both in the future and I think you are starting to see the impact of that in our backlog.

On the water and wastewater side, this we think is a good long-term market for us, especially in Florida and really there they are looking for comprehensive construction services. And in water and wastewater, many times we serve as a prime contractor, bringing all trades and activities together.

Mechanical services, we believe has been a good market for us for a long, long time. We have a terrific business. Most of it rests in Building Services. Some of our service operations rest in our Mechanical Construction segment and you can see that in our 10-Q.

We see growing demand stepping from maintenance deferrals. We think there’s going to be a lot of retrofit opportunities, I want to cover both that and indoor air quality as we switch to page 14.

EMCOR has been a leader for a long time, as you look at block one, of HVAC capabilities. HVAC is a big part of our business and it can be up to a third or more of what we do in any given year. If you look at it, we do new construction, of course, we can, we can do big work.

We talked about that on some of those resilient markets on the page before, core, tenant fit-out. We are a great retrofit company. We know how to do the energy retrofit work. We know how to engineer that energy retrofit work and we know how to support and help all the ESCOs that are doing that energy retrofit work. That’s equipment replacement, energy retrofit, lighting upgrade, building control systems.

One of the things maybe we don’t brag about enough is a capability that we have in that aftermarket of HVAC. We are the leader there and we are the largest independent controller’s contractor on top of everything else. And really what we seek to get to is building wellness, have the most efficient building a place that’s healthy.

Now, as you move to block two, indoor air quality, let’s think about this at a high level. Really the goal over the last 20 years, and I have seen this from an OEM, I have seen it from a service perspective. I have seen it from a new construction perspective. Has been to take outside air out of the building, outside air is inefficient, right, in the summer with humidity, it causes efficiency problem. In the winter, it causes the same, for obvious reasons.

And so we have worked real hard to take outside air out. That all went by the wayside in the middle of March. Now we are opening up air dampers that haven’t been open in a long time and actually buildings are going back to 25 CFM per person and that’s cubic feet per minute, and we had got that down to 15 CFM. And we have safe and productive ways to do that like demand control ventilation.

So what are we doing now on indoor air quality? Well, a lot of it is, hey, you got to give people peace of mind and you as an owner have to do everything possible to increase the wellness and indoor air quality of your building. So, how do you do that?

You do that through enhanced filtration. We take things from merc 10 or 12 up to merc 14 or 15. You do that through UV lamp technology that gets better and better and this stuff actually works. It reduces surface decontamination and it increases airborne inactivation, right? So, things pass through the coil, pass across the air handler media and as a result you make it cleaner.

Needlepoint bipolar ionization, we are one of the leaders in the implementation of that technology. And as I talked about earlier, we spend a lot of time training on this all the way down through our technicians during the lockdown and the pandemic and we were ready to go.

This is a recent case study here. This is somewhat has 240 buildings mainly a small packaged equipment. So here you have to attack it by getting into the mixing box. And how do you do that? You do that through UV because what you are trying to do is get the surface contamination gone through UV lights.

We will do this across 240 we do this 90 sites. The goal is to demonstrate to the employees and actually have it happen and the indoor air quality gets better. This was a large multi-state corporation with lots of sites, and I’d given a number that we thought it would be like a good medium-sized project.

This is actually much better than we thought it was going to be. It’s hard to quantify exactly what it will be. But it’s something we can get in front of our customers with and help them drive productivity in their buildings by giving them a better workspace.

Now one of the things you have to think about is indoor air quality and efficiency work across purposes with each other. I personally believe we have already had a good retrofit market. That retrofit market is going to gain strength as we move through 2021 on the HVAC side.

And again, EMCOR being the largest independent air conditioning contractor, with a great retrofit capability will clearly be in a position to help our customers balance indoor air quality against efficiency.

With that, I am going to turn to the last two pages 15 and 16, and I am going to close out here. Clearly, we have done much better than we expected when we withdrew guidance in April and then when we reinstated guidance with our second quarter earnings announcement, both of which we believe were the right thing to do.

Today we are raising our guidance for earnings per share from continuing operations. We will move to $5.90 to $6.10 non-GAAP adjusted earnings per share and revenues of around $8.7 billion.

In providing this revised guidance, we have assumed the following operating environment. First, we remain an essential service in most cases; second, we continue to execute productively in this environment; third, there are no significant shutdowns like we saw in March and April and for us that means our sites, our projects, our crafts; four, we expect to have continued strong performance from our Electrical and Mechanical Construction segments, Building Services in the U.K. We still see pretty good opportunities that we are estimating in bidding and to-date, we have seen no significant project deferrals outside of oil and gas, as Mark described it.

And all-in-all, non-residential market may move downward in the fourth quarter or continue to sort of be mixed, we do expect that decline to be in the mid-single-digits as we move into 2021. This is still a big market and if you refer back to page 13, we have a lot of operating space in what we believe are resilient markets.

For Industrial Services, which is downstream, refining and petrochemical for the most part, we do expect sequential improvement as we go from Q3 to Q4, but nothing significant for the balance of the year.

And as of today, we do expect the first quarter of 2021 to be better than the fourth quarter of 2020. We have some visibility, not as much as we would typically have at this time. However, we do not expect any significant contribution from this segment for the balance of the year. Where we end up in this range now is largely a factor of job timing, completion and service demand.

As far as capital allocation, we will continue to return cash to shareholders through dividends and then we do expect to return to some level of share repurchase activity in the next few quarters. We expect to continue to be a balanced capital allocator.

What I am really excited about is we are rebuilding our pipeline of potential acquisitions and expect to start executing that pipeline in early 2021. We expect those acquisitions to be similar to the acquisitions that we executed from 2018 to 2020, which really was a terrific period for us to grow our company through acquisition. We certainly have the balance sheet to support such growth in our company and we again expect to remain balanced capital allocators.

Lara, with that, I will turn it over to you and take questions.

[Operator]

Thank you, sir. [Operator Instructions] Your first question will come from the line of Brent Thielman from D.A. Davidson. Your line is now live. Go ahead, please.

[Brent Thielman, D.A. Davidson]

Hey. Great. Thanks. Good morning. Congrats on a great quarter.

[Tony Guzzi, Chairman, President and CEO]

Good morning, Brent.

[Brent Thielman, D.A. Davidson]

Tony, appreciate all the color on slide 13, interesting to kind of run through all those markets. Some of these seem like pretty sort of specialized kind of highly technical areas and I am wondering as these get larger for you, if these particular areas provide larger margin opportunities to the company, of course, assuming you execute on these appropriately?

[Tony Guzzi, Chairman, President and CEO]

Yeah. I mean, with -- some of these markets you are in, you are working with a customer on budget, you are doing fee-based jobs. You are balancing speed against execution. A lot of times you are working against the budget.

Brent, our margins are pretty good right now and that’s mainly coming from productivity, not pricing. So I am always hesitant to get too excited about commenting on, well, that’s a great margin area.

Now, as you go to the smaller work, clearly, when you bring IAQ solutions and other things, but they are repair service and so a lot of time it’s time and material and a lot of times it’s small ticket items with high impact.

So sometimes they can have a little higher margin, but you are very specialized in what you are doing there. So you look back having the kind of capability we have technically allows us to perform the way we have.

[Brent Thielman, D.A. Davidson]

Okay. And Tony, is it fair to say that the $500 million odd bump in RPOs, I mean, it’s really mostly related to these markets or are there other things that are benefiting you there?

[Tony Guzzi, Chairman, President and CEO]

No. It’s mostly these markets and we don’t think, even though we are down in manufacturing, we like to look at that as a good long-term market for us too. And it’s always important, when the food process jobs come in or sometimes a high-tech job comes in, they come in in a lump.

But even the high-tech jobs can come in in pieces, as we develop the project and a lot of the manufacturing moves where people are re-shoring or building out capability, they tend to come in pieces and so they never cause a big bump in our RPOs.

[Brent Thielman, D.A. Davidson]

Okay. Great. And then on the Industrial Services business over the near term, obviously, you had tough environment. I am curious, I guess, two-part question, Tony, if the hurricanes and some of the storm activity we have been seeing has created any some near-term CapEx, repair work. And then, I guess, your thoughts into the business as we move into 2021, generally speaking?

[Tony Guzzi, Chairman, President and CEO]

Look, I will answer the one and I want Mark to kick in on some of the dynamics that happen on the cost side with the hurricanes. But, yeah, surely, I don’t think they have caused really a lot of opportunity for us in the near-term. They did cause disruption and Mark will get into that in a second.

And as we move into 2021, I mean, I think, it’s tied to the pandemic, right, and the resumption of travel. Right now what’s happening is crack spreads are actually okay. The issue is capacity utilization.

And about 7% to 9% depending on depending on this mix is ZA [ph]. ZA is now being dumped back into diesel and that’s really affecting the profitability because that incremental barrel, right, that incremental volume coming out of refinery is where they really make the margins, no matter what that product is. So utilization has to come up and then I think they will start spending money again. Mark?

[Mark Pompa, Executive Vice President and CFO]

Brent, with regards to build on what Tony just said and specific to the performance in the quarter, unfortunately, the disruption related to the storms wasn’t just as simple of us not executing work and generating revenue. We obviously had our work crews mobilized to execute against a maintenance plan that didn’t happen.

So there’s a fair amount of cost that was incurred during the quarter that clearly we did not generate any revenues or profits from. We were not unable to release that labor in multiple situations, because we were asked to keep them on standby in case that we were asked to assist in any of the assessment or recovery activities.

So specific to the question about capital opportunities as a result of storm damage, certainly the opportunity is there, but we are with most of our customers still in the assessment phase and hopefully there will be some opportunities for us, albeit it’s unfortunate at the expense of the storm damage disrupting both our customers and all the residents in that Gulf Coast region, which -- last night’s storm was the fifth named storm that hit in the 2020 hurricane season. So it’s really unfortunate. On top of everything else that’s been unfortunate in calendar 2020.

[Tony Guzzi, Chairman, President and CEO]

And we are following the same path.

[Brent Thielman, D.A. Davidson]

Yeah. Okay. I will pass it on. Thank you, guys.

[Tony Guzzi, Chairman, President and CEO]

Thank you.

[Operator]

Thank you. [Operator Instructions] Your next question will come from the line of Sean Eastman from KeyBanc Capital Markets. Your line is now line. Go ahead, please.

[Sean Eastman, KeyBanc Capital Markets]

Hey. Thanks for taking my questions. Compliments to the fields, really impressive, would never know there’s a pandemic going on, so nice work. I guess, firstly for me, I appreciated all the color around the pockets of resilient demand and you can certainly make a strong argument that EME can sort of outperform the broader non-res trajectory in the coming years. But we are hearing from multiple peers about a slower decision-making, deferred starts, things just slow to move across the finish line. So I just wonder how you would characterize risk of seeing an air pocket into early next year around that dynamic, whether that’s something you think we should have kind of reflected in our estimates, just given the uncertainty in the macro and around the election.

[Tony Guzzi, Chairman, President and CEO]

Sean, your specific question was on project delays and deferrals?

[Sean Eastman, KeyBanc Capital Markets]

Yeah. Just characterize the level of risk, decision-making slows down and we do see deferrals even in these end markets where there is resilient demand drivers?

[Tony Guzzi, Chairman, President and CEO]

So, as of today -- I speak about what I know, right? As of today, once we got through the oil and gas issues in March, which is a very different market and most of that works on time and material anyway, so they can turn them off relatively quickly.

As of today, we see nothing abnormal in delays, deferrals or anything else. We have not experienced. We have a different book of business probably than a couple of our peers. We are well-constituted in several, many data center markets.

We don’t look at the decision-making around one data center or two data centers with the amount of work we are doing, as anything other than routine course of business. These things shift around, they move around, the designs change, this is all about capacity planning in a region the way we think about it.

Secondarily, we work on projects over a long period of time, and as of today, all of the significant projects that we have been working on are continuing to advance. We did have one small project change, which actually worked to our benefit, because of a re-shoring issue that happened with one of our customers. We are talking to a lot of people about that right now and we are also talking to folks about healthcare opportunities.

Now, when we get to the election, the reality -- the good thing about being my age now is, I have now worked under Republican administrations as a senior business executive for a long time and I have worked under Democratic administrations. I may have my personal views about that.

But from a business standpoint, the things that we do tend to need to get done, whether the Democrats are in-charge or the Republicans are in-charge. People are going to need the kinds of things we talked about on page 13. And then, we will say, oh, we are going to get a big infrastructure bill because the Democrats are in-charge, and of course, that was the great hope when the Republicans are in-charge.

Eventually something will happen there, maybe. But at the end of the day, people are still going to build things. They are still going to build things in the markets that we are really good at. We are still going to do mechanical service on buildings. We are still going to retrofit buildings. We now have this influx of IAQ work.

We have this markets we are able to pivot to and participate more in, either by building organic capability or through acquisition, like we have done in data centers and healthcare, and then we also have businesses we can build out, whether it be low voltage, which we already are a market leader, but we would like to build that out. We continue to build on our controls footprint. And so, it’s sort of three yards and a cloud of dust here and once in a while, we take the top off the defense and do really well.

[Sean Eastman, KeyBanc Capital Markets]

That’s really helpful. I appreciate it, Tony. And it’s been a long call so I will leave it there and pass it along.

[Tony Guzzi, Chairman, President and CEO]

Thank you, Sean. Thanks for following us.

[Operator]

Thank you. [Operator Instructions] We have another question on the phone line coming from Noelle Dilts from Stifel. Your line is now live. Go ahead, please.

[Noelle Dilts, Stifel]

Hi, guys, and congratulations on a great quarter.

[Tony Guzzi, Chairman, President and CEO]

Thank you.

[Noelle Dilts, Stifel]

I was hoping you could just comment on, just given the environment, it does sound like maybe some of the smaller contractors might be facing more challenges than you are. So, one, curious how you think that might affects consolidation opportunities in the industry. And more importantly, just kind of how you are thinking about potential M&A targets, what you are seeing in terms of pricing and what would be interesting to you in the current environment?

[Tony Guzzi, Chairman, President and CEO]

Yeah. I think, Noelle, if you took our acquisitions from the last three years, lay them on a piece of paper. You see we have spent over $400 million. We brought some terrific capability and terrific teams into our company. And I think that would be look -- and I think, got it, probably, 13 acquisitions, Mark, something like that, big and small.

And I think we would look to execute the same way and our pipeline was really good going into the pandemic. We were able to complete the acquisition in D.C., because we have a lot of it done. We have other things teed up.

And where I would think that we would emphasize is really four or five areas. One is we still, despite as big as we are, think we can still play a role in building more capabilities for geography.

Good successful electrical or mechanical contractors in markets where we are not, we would look to acquire. And usually they bring broad, what the kinds of companies we look in different geography, we look for companies that are like ours. The best of what they do. They have the ability to do a lot of different things and they can flex between markets in their local market -- end markets between their local markets.

And we have several that we are talking to and our discussion is a sort of pandemic independent. It may slow down our discussion. But -- we know who they are and they know who we are and a lot of times where someone is selling their life work to us and they tend to work for us and they tend to work for us for a long time. It’s been a recipe for great success for us. I think the electrical, mechanical contractors, you saw what we did in the Southeast and the Midwest back in 2019. We would look to do that again as far as capability and good markets.

I think the second thing is, we will always look to add mechanical service capability. Now they can take a different flavor, sometimes we buy a large company that has a bigger platform in a market. Other times we have our platform and we look to expand around that geographically to build capability.

A lot of ways that’s how we got, that is how we build our very successful California company, Mesa, over a long period of time where it’s clearly the market leader in mechanical service that was done through organic growth, that was done through opening branch offices with a great management team, having great labor management and then it was also done through selective small acquisitions.

And we look to do that in other places or we build a beachhead in a market and then expand from there. And really the aisle on that is to be able to offer a full range of services and that we can on the mechanical basis.

And then I think the final way we would look at it is, we always are looking up for good fire protection assets. We have two really great platform companies. They grow great organically and we look to adding capability where appropriate.

So they would be the places that we would look to acquire. I think for us the sort of $10 million, $50 million, $100 million even $200 million deal was a place we operate really well in. The $10 million obviously gets absorbed into a larger entity, whereas the $50 million acquisition price or so becomes a standalone entity for us in a market, and of course, the $200 million plus deal really becomes a market leader for us in an environment. So it’s all sort of all of the above.

Now how does this affect it? I think anytime you have a big dislocation, what we see is that people reevaluate where they are. And if they thought they had a five-year window, they may accelerate that forward a little bit and say, well, maybe I should start thinking about this now.

As far as pricing, if you are buying a good company, they cost what they cost. We tend not to get too far ahead of ourselves in pricing. We are certainly not competitive with private equity. I mean, they are much smarter than we are about how to run these companies. So we wouldn’t dare compete with them on that.

[Noelle Dilts, Stifel]

Okay. Thanks for that. It’s great color. I guess the second question -- again, I appreciate the detail you provided on slide 13 and 14. That’s really helpful. Is there a way that you could help us, like, look at your backlog, and say, look at that piece that’s commercial and understand how much of that work might be in those verticals that are a little bit more resilient? And I guess, I am just kind of trying to bridge how to think about those markets that you believe are a bit more insulated and the work you currently have in backlog?

[Tony Guzzi, Chairman, President and CEO]

Yeah. I mean, we don’t break it out. We have broken out to a lot of detail now. I mean, you will have a ton of detail on what we do. We are pretty protective of how much we are doing in some of those markets. Our customers appreciate that and we certainly don’t want to let our competitors know where we are that successful or not.

[Noelle Dilts, Stifel]

Okay.

[Mark Pompa, Executive Vice President and CFO]

I think that was a large market. Just to interject there, obviously, it’s in our disclosed RPO balance. Those are signed contracts. And just to build on what Tony said earlier, it’s very unusual for us once we actually sign a contract or a project that that project actually doesn’t happen, so.

[Noelle Dilts, Stifel]

Okay.

[Tony Guzzi, Chairman, President and CEO]

But like I commented, Noelle, I mean, what you are really trying to drive out I think is, what do we do in high-tech and data centers within the Commercial segment. I did comment that the growth in that segment is coming from those markets.

[Noelle Dilts, Stifel]

Okay. Great. I think that’s it for me. Thank you.

[Tony Guzzi, Chairman, President and CEO]

Thank you very much, Noelle.

[Operator]

Thank you. And as there are no further questions on the line, I would now like to turn the call over back to Mr. Tony Guzzi for closing remarks.

[Tony Guzzi, Chairman, President and CEO]

Yeah. I am going to finish and I made this comment when we were talking. I think for this leadership team around this table and for clearly our people at the segment level, we are absolutely humbled by how well our organization has responded to this crisis.

And we thank our employees and our leadership in the field for keeping focus on the task at hand and keeping our employees safe. We are going to do everything we can to keep doing that. We will get through this next phase of whatever we are in right now with this pandemic and hopefully come out here in the first quarter with solutions to this problem.

Thank you all very much, and I guess, we won’t talk to you until the New Year. Be well.

[Operator]

Thank you, sir. Thank you so much presenters. And again, thank you everyone for participating. This concludes today’s conference. You may now disconnect. Stay safe and have a lovely day.