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Edited Transcript of EME earnings conference call or presentation 27-Apr-17 2:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 EMCOR Group Inc Earnings Call

NORWALK Apr 30, 2017 (Thomson StreetEvents) -- Edited Transcript of EMCOR Group Inc earnings conference call or presentation Thursday, April 27, 2017 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony J. Guzzi

EMCOR Group, Inc. - CEO, President and Director

* Bradley Vitou

* Mark A. Pompa

EMCOR Group, Inc. - CFO and EVP

* R. Kevin Matz

EMCOR Group, Inc. - EVP of Shared Services

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Conference Call Participants

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* Adam Robert Thalhimer

Thompson, Davis & Company, Inc., Research Division - Director of Research

* Brent Edward Thielman

D.A. Davidson & Co., Research Division - VP and Senior Research Analyst

* Noelle C. Dilts

Stifel, Nicolaus & Company, Incorporated, Research Division - VP and Analyst

* Tahira Afzal

KeyBanc Capital Markets Inc., Research Division - MD, Associate Director of Equity Research, and Equity Research Analyst

* Tate H. Sullivan

Sidoti & Company, LLC - Research Analyst

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Presentation

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Operator [1]

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Good morning. My name is Polly, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group First Quarter 2017 Earnings Conference Call. (Operator Instructions)

I'll now turn the conference over to Mr. Bradley Vitou with FTI Consulting. Sir, you may begin.

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Bradley Vitou, [2]

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Thank you, Polly. Good morning, everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the company's 2017 first 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.

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R. Kevin Matz, EMCOR Group, Inc. - EVP of Shared Services [3]

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Thank you, Brad, and good morning, everyone. Welcome to EMCOR Group's Earnings Conference Call for the First Quarter of 2017. For those of you who are accessing the call via the Internet on 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. We are on Slide 2.

Slide 2 depicts the executives who are with me to discuss the quarter's results. They are Tony Guzzi, President and Chief Executive Officer; Mark Pompa, our Executive Vice President and Chief Financial Officer; Maxine Mauricio, our Senior Vice President and General Counsel; and our Vice President of Marketing and Communications, Mava Heffler.

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.

Before we begin, I want to remind you that the discussion may contain certain forward-looking statements. Such statements are based upon information available to EMCOR management's perception as of this date, and EMCOR assumes no obligation to update any such forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance. Such risks and uncertainties include, but are not limited to, adverse effects of general economic conditions, changes in the political environment, changes in 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 2016 Form 10-K and 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?

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Anthony J. Guzzi, EMCOR Group, Inc. - CEO, President and Director [4]

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Okay. Good morning. Thanks, Kevin. I'm going to be on Pages 2 to 4 as I go through these opening remarks.

Good morning, and thanks for joining us on this conference call. We're off to a good start this year. We had a very strong first quarter with revenues of $1.89 billion, earnings per diluted share from continuing operations of $0.88 per share and operating income margins of 4.4%. It was our best first quarter ever in terms of revenues, operating income and earnings per diluted share from continuing operation. It also was our eighth consecutive quarter of record revenue growth versus the year-ago periods. We had 8.4% revenue growth, nearly half of our revenue growth was organic revenue growth. Our success this quarter was driven by excellent execution in our electrical and mechanical construction segments. We had strong underlying execution across these segments and benefited from an absence of badness, to coin one of our most popular phrases here at EMCOR.

Our Electrical Construction segment grew revenues 27.2% versus the year ago period, posted 7.0% operating income margins and grew operating income by approximately 86% versus the year ago period.

Our Mechanical Construction segment grew revenues by 10.3% versus the year ago period, posted 6.0% operating income margins and grew operating income by 70%. Our quarter was driven by strong execution across all end markets, with particular strength in commercial, manufacturing, health care and transportation.

Our Building Services segment held its own in the quarter and had a good quarter despite receiving no help from the weather.

We continue to have strong underlying strength in our Mechanical Services business and are starting up several new contracts in our commercial site-based business. And we battled mild weather this segment, which is not something we'll talk about much today. It was a steady quarter. We continue to see growth in our Mechanical Services business ahead, and we are in the pilot stages of 2 nice contract wins in our commercial site-based business.

Our Industrial Services segment performed well and had a good spring turnaround season, and most of this turnaround work was completed in the quarter versus last year's elongated season that pushed more work into the second quarter. Revenues were flat, but the comparison to the year-ago period is a tough comparison, as we have previously discussed, as we had stellar performance through the first 3 quarters of last year on a specialty services project and had a pretty good turnaround season last spring. We executed well at 6.6% operating margins despite the lack of an impact project. We believe that we continue to gain share in the core turnaround market and have grown into a first-rate service provider to not only refineries but petrochemical plants as well. Our team continues to execute very well for our customers.

Our [U. K.] segment had a decrease in revenues as a result of foreign exchange but on a constant currency basis had some growth. We had some start-up expenses in the first quarter from some new contract wins. We expect these headwinds to diminish as we move later into the second quarter.

The U.K. Building Services business has had steady performance, and we continue to grow our customer base and our customers scope.

Our balance sheet remains liquid and strong, and our backlog stands at a very strong $3.97 billion. Our SG&A spending is well under control at 9.7% of revenues.

And with that, I'll turn the discussion over to Mark.

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Mark A. Pompa, EMCOR Group, Inc. - CFO and EVP [5]

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Thank you, Tony, and good morning to everyone participating on the call today. For those accessing this presentation via the webcast, we are now on Slide 6. Over the next 4 slides, I will augment Tony's opening commentary and cover each of our reportable segments' first quarter operating performance in a little more detail as well as other key financial data derived from the 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 get started. Consolidated revenues of $1.89 billion are up $146.8 million or 8.4% over quarter 1 2016. Incremental revenues attributable to businesses acquired of $77.7 million, pertaining to the period of time that such businesses were not owned by EMCOR in last year's first quarter, positively impacted our U.S. Electrical Construction, U.S. Building Services and our U.S. Mechanical Construction segments. Excluding such acquisition revenues, our organic revenue growth in the quarter is 4%. U.S. Electrical Construction revenues of $443 million increased $94.7 million or 27.2% from quarter 1 2016. Excluding acquisition revenues of $43.9 million, this segment's revenues grew $50.8 million or 14.6% organically. Quarterly revenue growth was primarily driven by project activity within the commercial and transportation market sectors inclusive of certain large-scale telecommunication projects, partially offset by quarter-over-quarter revenue declines within the health care and hospitality market sectors due to certain project completions that occurred in late 2016. U.S. Mechanical Construction first quarter revenues of $671.1 million increased $62.7 million or 10.3%. Excluding acquisition revenues of $16.8 million, this segment's revenues grew 7.5% organically quarter-over-quarter. Our Mechanical Construction revenue growth continues to be broad based from a market sector perspective, as was the case throughout 2016. Specifically, during the first quarter, commercial, health care, water and industrial market sector activities contributed the largest dollar revenue growth, partially offset by revenue declines from institutional project activity. EMCOR's total domestic construction business first quarter revenues of $1.11 billion increased $157.4 million or 16.5%, of which a healthy 10.1% was generated from organic activities. U.S. Building Services quarterly revenues of $440 million decreased $3.1 million or 0.7%. Excluding acquisition revenues of $17.1 million, this segment's organic revenue decrease is 4.6%. Revenue gains within the Mechanical Services division were offset by revenue declines within their commercial site-based and Government services divisions due to maintenance contract attrition, primarily occurring in 2016 as well as contract scope reductions.

Additionally, although quarter 1 2016 was relatively quiet on the snow removal front, the quarter just ended saw reduced levels of snow removal activities year-over-year due to low seasonal snowfall in geographies where we are contracted for removal on an event basis.

U.S. Industrial Services revenues of $258.6 million increased $1.1 million due to increased turnaround activities from our industrial field services operations as we executed a somewhat normal spring turnaround schedule. This differs from 2016's first quarter in which we experienced certain delays which extended our spring turnaround season into quarter 2 2016. This increase in turnaround activities for the first quarter of 2017 was partially offset by reduced revenues from large-project activity within our specialty services offerings, which were exceptionally strong in 2016 and positively impacted each of the first 3 quarters of last year.

United Kingdom Building Services revenues of $79 million decreased $8.6 million or 9.8% due to the $12.2 million impact of unfavorable exchange rates from the British pound versus the U.S. dollar. Additionally, small project and capital project activity remains muted as the impact of Brexit continues to affect our customers' spending patterns.

Lastly, our $1.89 billion of quarterly revenues surpassed their previous first quarter revenue record of $1.74 billion, which, oddly enough, was achieved in last year's first quarter.

Please turn to Slide 7. Selling, general and administrative expenses of $183 million represent 9.7% of revenues and reflect an increase of $15.6 million from quarter 1 2016. The current year's quarter includes approximately $12.4 million of incremental SG&A, inclusive of intangible asset amortization from businesses acquired. Excluding this incremental acquisition-related SG&A as well as the $1.1 million of transaction expenses incurred in 2016's first quarter, 2017 quarterly organic SG&A growth is approximately $4.3 million and is primarily due to increased employment cost as a result of higher headcount to support our organic revenue growth as well as higher incentive compensation expense due to anticipated improved full year operating performance, the majority of which occurred within our U.S. construction businesses. Reported operating income for the quarter of $82.8 million represents 4.4% of revenues and compares to $55.6 million or 3.2% in 2016's first quarter.

Our U.S. Electrical Construction Services segment operating income of $31 million increased $14.3 million or 85.8% from the comparable 2016 period. Reported operating margin of 7% represents a 220 basis point improvement over last year's first quarter. The increase in this segment's operating income is due to increased project activity within the commercial market subsector with a concentration in the telecommunications market subsector quarter-over-quarter. The improvement in segment operating margin is due to the lack of transportation project write-downs that impacted 2016's first quarter as well as the completion or significant completion of these specific projects, which were in a loss position during 2016 that depressed last year's operating margins due to revenues recognized for which there was no corresponding profit recognition.

2017's first quarter U.S. Mechanical Construction Services operating income of $40.4 million represents a $16.7 million increase from last year's quarter. This represents a 70% improvement quarter-over-quarter, primarily due to increased gross profit contributions from projects within the industrial, commercial and water market sectors. Additionally, this segment's quarterly operating income benefited from the recovery of certain contract costs incurred in 2016 that were previously disputed. This segment's operating margin is 6% and represents a 210 basis point improvement from 2016's first quarter. Our total U.S. construction business is reporting a 6.4% operating margin, which represents a 220 basis point improvement period-over-period. Operating income for the U.S. Building Services of $14.2 million is slightly improved from last year's first quarter while reported operating margin of 3.2% is flat between both periods. Consistent with this segment's revenue performance, the Mechanical Services division's organic growth and project and repair services volume and operating income contribution generated by acquisitions were partially offset by a reduction in income from commercial site-based services due to contract attrition and reduced snowfall removal lines.

Our U.S. Industrial Services operating income of $17 million decreased $1.8 million or 9.7% compared to 2016's first quarter, with an operating margin of 6.6% or 70 basis points less than last year's 7.3% operating margin. A seasonably normal spring turnaround season was not enough to offset the profit contribution in 2016 from a large field services capital project that was active during the first 3 quarters of last year. Additionally, the operating margin contribution from our shop services operation is reduced quarter-over-quarter due to necessary pricing declines as a result of lower market demand.

U.K. Building Services operating income of $1.7 million or 2.1% of revenues represents a $1.6 million reduction period-over-period, which is due to a decrease in both small and capital project activity as well as $200,000 of headwind from a weakened British pound. Additionally, as Tony mentioned, this segment incurred mobilization costs in connection with new contract awards, which, pursuant to contract terms, will be recovered over the life cycle of such contracts.

Lastly on this slide, we used $5.2 million of cash in operations as compared to $37.2 million of cash used in operations during 2016's first quarter. With the funding of our prior years' incentive compensation awards occurring during our first quarter, it historically represents our weakest cash flow quarter. However, our current year quarter cash flow is benefiting from a change in the due date for the first installment of federal estimated tax payments, which moved from March 15 to April 15.

We are now on Slide 8. Additional key financial data for the quarter not addressed on the previous slides are as follows: Quarter 1 gross profit of $266.3 million represents 14.1% of revenues, which is improved from the comparable 2016 quarter by $43.2 million and 130 basis points. The quarter-over-quarter improvement in gross profit is largely due to our substantial growth in quarterly revenues as well as the improved operating performance in both of our U.S. construction segments. The quarter-over-quarter increase in gross margin is due to the impact in last year's first quarter of losses on certain transportation projects as well as the effect of revenues recognized with no corresponding gross profit on projects on loss positions in the prior year. In addition, the first quarter of the current year benefited from the recovery of certain contract loss previously disputed on a project that was completed in 2016. Restructuring costs during the most recent quarter primarily represent employee severance costs in connection with the continued implementation of process improvements in both our back office and business development functional areas. Diluted earnings per common share from continuing operations is $0.88 and compares to $0.56 for the quarter ending March 31, 2016. On an adjusted basis, reflecting the add-back of transaction cost incurred in quarter 1 2016 related to the Ardent, Rabalais acquisition, diluted earnings per common share from continuing operations would have been $0.57 for 2016 as compared to the $0.88 per diluted share in the current year, which represents an increase of $0.31 or a 54.4% improvement.

Although not presented on this slide, it is worth mentioning that our tax rate for the first quarter of 2017 was 33.6%, lower than expected due to a favorable discrete item. My expectations for our full year tax rate, inclusive of this favorable item, is between 37% and 37.5%.

Lastly, in addition to achieving a new first quarter revenue record, this quarter represents new first quarter records for gross profit, gross profit margin, operating income, net income from continuing operations and diluted earnings per share from continuing operations.

We are now on Slide 9. Tony also mentioned our balance sheet continues to be strong as we build upon its strength and liquidity. As you can see, our cash balance has decreased since year-end 2016 due primarily to funds expended for acquisitions that were closed in the first quarter as well as our common stock repurchase activity. Working capital levels have decreased since the end of last year, primarily due to the reduction in cash just referenced. Changes in our goodwill and identifiable intangible asset balances reflect the impact of acquisitions, including finalization of purchase price allocations, net of $12.2 million of intangible asset amortization expense. Total debt of $420.7 million is reduced from year-end 2016 due to the mandatory quarterly principal repayments under our term loan of $3.8 million, offset by new capital lease additions during the quarter. As a result of our outstanding borrowings, we currently have a debt-to-capitalization ratio of 21.5%, which represents a slight decrease from where we were at year-end 2016.

We continue to remain happy with our balance sheet as well as the underlying cash flow conversion of our current contract portfolio. As a result, we continue to be in a good position to capitalize on all opportunities.

With my brief commentary concluded, I would like to return the presentation to Tony. Tony?

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Anthony J. Guzzi, EMCOR Group, Inc. - CEO, President and Director [6]

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Thank you, Mark, and it always is brief in the first quarter, right? Look, I'm going to go on Pages 10 and 11. I'm going to talk about backlog. As you can see on the schedule, total backlog at the end of the first quarter is just under $4 billion at $3.97 billion. It's up $122 million or 3.2% from March 2016 and up from year-end by $71 million or 1.8%. The book-to-bill for the quarter was 1.04. So we had another strong quarter of project bookings on top of strong revenue growth. Our markets continue to give us bidding opportunities across most sectors, and our construction segments are executing well.

Now focusing on these market sectors, and it sounds like a bit of a broken record from 2016, our backlog is led by commercial sector projects. Commercial sector backlog stands at almost $1.4 billion, by the way, our highest level ever. We've said that a few times the last couple of years. And it grew 9.2% from the year ago quarter and increased 5.1% from December 31. Commercial backlog now stands at 35% of our total backlog. While the commercial sector is wide in terms of projects, our projects really go from anything from a new commercial building to telecommunications and data center work to large retrofit work to a simple tenant retrofit project. We execute well in all those sectors. It's now 5 consecutive quarters that we have seen an increase in health care backlog, and over $400 million, it's at a level not seen since 2010. We have recent project wins in New York, Cincinnati, Indiana and Boston. Yes, health care is in flux, and it's an uncertain market from a legislative perspective. But however, long term, it's a good market for us. These projects are technically challenging, and the demographics really say that we need to have more services. And the technology and advancements in technology will continue the need for new and updated facilities.

We have earned some backlog in our industrial and transportation sectors as we work on some food processing and infrastructure projects. And hospitality, of note, is up this quarter as we secured the mechanical systems installation for a new Northeastern casino.

EMCOR is a fairly good proxy for the nonresidential construction sector. Summarizing, we believe that nonresidential market is still positioned to grow by mid-single digits in 2017, with the private side leading the public side. Remember, this is a very big market at over $700 billion and it's only at 98% of its record 2008 high, as measured by the Census Bureau. It's quite a statement that it will take almost 9 years to reach the level that we achieved in 2008.

If you go to Page 11, backlog by segment. As we experienced throughout 2016 and now into 2017, our backlog is growing at our domestic construction segments. Combined, our Electrical and Mechanical Construction segments' backlog increased $192 million to almost $3.1 billion or up just over 7% since March 2016. Both segments saw year-over-year gains with Electrical up $117 million and Mechanical up $75 million. We continue to see bidding opportunities across most of our end markets. Backlog in our Building Service is now $57 million, and Mark went through the revenue side of that. Reality, it's based on our site-based and government business. It's pretty much flat on our mobile mechanical services business, but we do expect growth in the mechanical services business and in the site-based business as the year progresses in backlog. Our Industrial Services backlog stands at $51 million, and it's really just a continuation of the same story of the shop services business. And nothing's really changed with respect to capital spending in the refining sector, and it remains at continued lower levels. Backlog in the U.K. remains relatively flat, and we did win some contract awards that Mark and I both talked about. In all, backlog is up in construction, and it's a mile or a little ahead of markets. It's flat in shops, and again in line with what we believe the market's doing. And so far, we're pretty much where we thought we'd be in 2017.

Now I'd like you to turn to Pages 12 and 13. Recognizing our strong start to the year and also cognizant of the reality that we are only in the first quarter, we are going to adjust our guidance to reflect the start, as we believe we can now raise the lower end of our range from $3.10 to $3.20 per diluted share on continuing operations. Despite the strong revenue growth in the first quarter, we are going to leave our revenue guidance unchanged at $7.5 billion to $7.6 billion. We believe that we will continue to see strong growth in our Electrical and Mechanical Construction segments. But as we have discussed a lot over the last 3 calls, we will still have headwind in our Industrial Services segment as a result of tough 2016 comparisons, especially second and third quarters of 2017 versus that year ago periods, from the impact project covered many times as well as continued reduced demand and really reduced pricing for our shop services' new heat exchangers.

Our start is a little stronger than we expected. But as discussed, it was driven by excellent execution in our construction segments. The year is really developing as we expected. Strong growth in our -- and performance in our Electrical and Mechanical Construction segments, solid performance against tough year-over-year comps in our Industrial Services segment and steady and incrementally improving Building Services segment performance and we will have steady U.K. performance. We expect to continue to look for opportunities to deploy our capital, much in the same manner as we did in the first quarter. We made 2 nice acquisitions in the first quarter, 1 in fire protection and 1 in mechanical services, both filling geographic white spaces in EMCOR's portfolio and add some capabilities as well. We will continue to look to add capabilities and geographic reach in our Mechanical and Construction segments as well as our Building Services and Industrial Services segment. Our acquisitions will remain U.S. focused. We will continue to return cash to shareholders through dividends and buybacks.

And Polly, with that, we can take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Tahira Afzal with KeyBanc Capital Markets.

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Tahira Afzal, KeyBanc Capital Markets Inc., Research Division - MD, Associate Director of Equity Research, and Equity Research Analyst [2]

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So I guess, first question is if you're looking at the health care side and that Tony you talked about it a little more than you have in the past, do you think this could be turning potentially into a longer cycle and it could play a fairly important role going forward? Or do you think the commercial side of the business remains where we should focus on a more broad-based level?

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Anthony J. Guzzi, EMCOR Group, Inc. - CEO, President and Director [3]

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I think the commercial side on a more broad-based level. I think health care for the next 3 or 5 quarters will be important for us. We have backlog we have to execute. In fact, health care has become much more episodic than it was prior to the Affordable Care Act. As far as big jobs happen, there's not a steady bidding activity for large health care jobs like there were. But we're well positioned to take advantage of them when they are. But the commercial market and the breadth that we can serve there is probably more steady and steadily increasing market for us than the health care market.

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Tahira Afzal, KeyBanc Capital Markets Inc., Research Division - MD, Associate Director of Equity Research, and Equity Research Analyst [4]

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Got it, Tony. And then you talked about the non-res market and your ability to grow at least alongside that in the mid-single digit. If you look at what's -- how everything is shaping up over the last few months -- and I know it's too early, do you think that growth rate could be sustained into next year at this point or it's too early to say?

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Anthony J. Guzzi, EMCOR Group, Inc. - CEO, President and Director [5]

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I think it's a little early, but I see nothing right now based on the bidding activity that doesn't say to me that the market's not strong. And I will say, there's definitely, over the last 4 months, been an uptick in our customer sentiment broadly in their willingness to spend money.

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Tahira Afzal, KeyBanc Capital Markets Inc., Research Division - MD, Associate Director of Equity Research, and Equity Research Analyst [6]

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Got it. Okay. And it seems like that's showing up in leading indicators again as well, so really support what you're saying.

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Operator [7]

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And your next question comes from the line of Noelle Dilts with Stifel.

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Noelle C. Dilts, Stifel, Nicolaus & Company, Incorporated, Research Division - VP and Analyst [8]

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Just given the headwind that you're facing in Industrial Services in the second quarter, could you maybe go back and revisit and give us a sense of maybe how much the petrochem work and the one-off work benefited you last year, either from a revenue or profitability standpoint? And then my second question would be, just as we look at the underlying turnaround market, what do you think starts to change the behavior of the refiners? And just if you could expand upon your expectations for the back half of the year and into next year.

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Anthony J. Guzzi, EMCOR Group, Inc. - CEO, President and Director [9]

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Got it. Next year is always hard. But back half of the year, I mean, we'll be a lot smarter in July than we are today, but we're expecting a fairly busy fall turnaround season. The reality, we've been very fortunate with our customer mix. And I think with the broad array of our capabilities, we really had -- absent the strike, we really had a series of 5 straight good turnaround seasons. We believe -- I don't know if we're taking share or we're just getting enhanced scope or our capabilities, we're able to put more labor on the job and do it quickly with really skilled people. We've had pretty good success in what a lot of people saying is a tough market. We believe it is a slower-growing market. We're just doing fairly well in it. We won't be specific about the petrochemical work, but we do expect second and third quarter to be more challenging for us. We don't give quarterly guidance. But clearly, it would be very difficult for us to achieve the level of success we had in the second quarter of last year. That would be a tough thing for us to do.

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Noelle C. Dilts, Stifel, Nicolaus & Company, Incorporated, Research Division - VP and Analyst [10]

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Right. Okay. And then in your Q, you talked about certain telecom projects benefiting you in the quarter. Could you just talk about what you're seeing in telecom, how you're participating and how you're thinking about that going forward?

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Anthony J. Guzzi, EMCOR Group, Inc. - CEO, President and Director [11]

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Well, I mean, telecom work, data center work is system-rich work, and it's stuff that we do very well. Very demanding customers, tough customers, not always the most profitable customers at times. But in contract structure, they're very sophisticated. But we line up with them well, and we have customers that we can -- I won't say move across the country, but they can use our capabilities in different parts of the country. What we're seeing is a strong market, and it's a market that we're well positioned to take advantage of in the markets where we participate in it.

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Noelle C. Dilts, Stifel, Nicolaus & Company, Incorporated, Research Division - VP and Analyst [12]

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Okay. And then my last question is just on M&A. You spoke about some of your targets there. But could you talk about what you're seeing in terms of just, I guess, asset or target pricing in the market, general interest levels of selling by potential smaller private firms?

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Anthony J. Guzzi, EMCOR Group, Inc. - CEO, President and Director [13]

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I mean, we had a -- we've done 2 very, we think, are very good deals here in the first quarter. That being said, who knows? I mean, some people have expectations that are outrageous. Others understand that it takes 2 sides to actually get to a deal. Private equity, in a lot of ways, will always be uneven today, in my mind. It's crazy that they set the bar but with cheap debt. They can pay 1x or 1.5x, sometimes even 2x above what the asset is really worth. So for us to be able to compete with them in any significant way, it has to be a perfect fit like RepconStrickland was. And we were able to have a lot of synergies and we've got a first-rate team and a really good team in Industrial Services. So we'll be careful. We'll be smart about it. We won't get so enamored with anything that we'll buy it at all cost. But we do see enough opportunities. And one of the best companies that we have is the one we spent over $50 million on in the first quarter. If acquisitions aren't there, we have a great company we can buy at a multiple sometimes lower than those acquisitions in EMCOR.

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Operator [14]

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And your next question comes from the line of Tate Sullivan with Sidoti.

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Tate H. Sullivan, Sidoti & Company, LLC - Research Analyst [15]

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More on M&A. And I've seen the 2 deals in the course of the quarter. And more of a specific question on business segment. I mean, I've always associated your Building Services as more recurring and maintenance work, and it looks like one that might have been the larger acquisition is a mechanical business in the Western U.S. And why put it in Building Services? And can you just go over the difference between the 2? And...

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Anthony J. Guzzi, EMCOR Group, Inc. - CEO, President and Director [16]

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Sure. If you look at our segments broadly, the Electrical and Mechanical Construction segments, just broadly tend to do bigger projects. And 80%-plus of the time, they're working for general contractors. We do have a couple of businesses within our mechanical segment that have a large services business, but the construction businesses in those businesses dwarf the services businesses. When you get to the Building Services business, the Mechanical Services, it's the other way around. The services business we're working for the owners directly tends to be 70%, 80% of the revenue. And we're either doing project work for those owners, and there may be a general contractor involved at times. But most of the time, they're being directed by the owner to try to work the deal out with us. And a lot of times, we have an underlying base agreement -- service agreement where we're doing service work and repair service. We have a technician based in those businesses that are fairly significant and we do all the things you would expect a services business to do from GPS, 2 very efficient truck routing and everything else. So one is a little more owner and service led. One is a little more construction led and GC led.

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Tate H. Sullivan, Sidoti & Company, LLC - Research Analyst [17]

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Okay, okay, perfect. That makes perfect sense. And then can you -- you mentioned petrochemical in addition to refineries, too. I mean, going back last cycle and getting -- and then buying Ardent, I mean, do you look -- do you benchmark where you want to be in terms of your total energy exposure?

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Anthony J. Guzzi, EMCOR Group, Inc. - CEO, President and Director [18]

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No. Again, we would never tell them not to -- just like we don't benchmark for our total construction exposure. We tend to focus on opportunities and where we can find the best opportunities to continue to sustain growth for our shareholders. Ardent is a good example. Ardent has a fairly significant, for lack of a better word, electrician and attendants business in a lot of refineries. They call them nested. But also has the ability to do work, especially the Rabalais part of that business can do a lot of different fixed price work. So we look at opportunities and look at long-term growth in those markets and try to find the right point to enter it or grow it organically.

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Operator [19]

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And your next question comes from the line of Adam Thalhimer with Thompson, Davis.

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Adam Robert Thalhimer, Thompson, Davis & Company, Inc., Research Division - Director of Research [20]

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I'm trying to understand, in the Industrial Services segment, the revenue. Can you give us a little bit more color? If I look 2 years ago back in 2015, for Q2 and Q3, you did $467 million of revenue in that segment. Is that a good kind of benchmark for how you think about Q2, Q3 this year?

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Anthony J. Guzzi, EMCOR Group, Inc. - CEO, President and Director [21]

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Well, I'll kick it over to Mark. But my view is our revenue -- our performance in Q2 and Q3 of '15 probably looks a lot more like this year than '16 did.

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Mark A. Pompa, EMCOR Group, Inc. - CFO and EVP [22]

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Yes. The only difference, Adam, as Tony mentioned earlier, we had the impact of the strike at the beginning of 2015. And unfortunately, some of that work lost its discrete nature as we rolled through the year. So that number that you're throwing out is probably a reasonable number. But we actually could be a little bit lower than that once again based on the fact that there was some spillover from the strike. That work was executed as we went throughout the remainder of 2015.

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Anthony J. Guzzi, EMCOR Group, Inc. - CEO, President and Director [23]

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And right now, we're not factoring out any specialty services work. Reality is we could get a call this afternoon and we can mobilize. We won't know that. Because it tends to be more emergency-related work sometimes.

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Adam Robert Thalhimer, Thompson, Davis & Company, Inc., Research Division - Director of Research [24]

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Okay. And then in the Building Services business, you talked about a couple of projects that are just starting up. So you're going to have revenue -- you're going to have year-over-year revenue growth in that segment from those projects that are ramping up?

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Anthony J. Guzzi, EMCOR Group, Inc. - CEO, President and Director [25]

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Probably, you wouldn't see it till late in the fourth quarter till it really ramps up. It takes a long time. The way we typically do it in the U.S. is it may end up into a large contract, but we start with pilots, so that we all set expectations about what the funding's going to be, what the execution is going to be. So I think it would be probably towards the end of the year till we would expect to get any large impact from those work we just picked up.

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Mark A. Pompa, EMCOR Group, Inc. - CFO and EVP [26]

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And Adam, this is Mark again. The other thing is with some of the maintenance contracts that we don't -- we did not carry forward into 2017, they were still burning revenue in Q2, Q3 of 2016.

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Adam Robert Thalhimer, Thompson, Davis & Company, Inc., Research Division - Director of Research [27]

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Okay. That could be. All right. I mean, in general, I guess, what I'm trying to get you to comment on is why you didn't raise the...

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Anthony J. Guzzi, EMCOR Group, Inc. - CEO, President and Director [28]

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(inaudible) 2 issues. We think we have a revenue [hole] year-over-year in the Industrial Services segment in Q2 and Q3. And we have -- although not nearly as profitable, not even in the ZIP code as profitable, we have the aforementioned projects Mark talked about. Not project, but contracts in Building Services that were significant revenue contracts that we had them for such a long period of time but then became a lot less profitable that's why you don't hear us whining about the profitability of Building Services as much as the revenue, on those losses. That's why.

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Adam Robert Thalhimer, Thompson, Davis & Company, Inc., Research Division - Director of Research [29]

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Okay. And then just lastly, I mean, you had -- it was great to see you guys put up great margins in the domestic construction business again. It seems like there's really no project issue that emerged. Just curious why that margin performance wouldn't continue going forward, and I assume that you expect that based on the guidance.

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Anthony J. Guzzi, EMCOR Group, Inc. - CEO, President and Director [30]

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Well, if we're going to hit our guidance, we have to have growth in margins this year because we don't expect, based on our guidance today, much growth in revenue. But the reality of the whole thing is, that's basically underlying performance absent the badness of last year. The business underlying on 98.9% of our projects or more has been exceptional over the last 18 months.

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Operator [31]

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(Operator Instructions) Your next question comes from the line of Brent Thielman with D.A. Davidson.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - VP and Senior Research Analyst [32]

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Maybe just a couple of last questions on the backlog by market sector. One, the dip in the transportation sector, do you look at that as kind of just timing of new work coming in? It just seems like it's moving in the wrong direction relative to what's being talked about out there, at least in terms of funding and support.

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Anthony J. Guzzi, EMCOR Group, Inc. - CEO, President and Director [33]

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Well, I think talked about -- and letting contracts are disconnected from each other right now, right? So again, to remind everybody what our backlog is, it's the actual signed contracts or signed change orders for 1 year of a signed service agreement or a multiyear service agreement. We don't take all 3 years and lump it into the backlog all at once. We also make no estimations on turnaround volume as all that work is timing material, which is why industrial would be so low. Transportation in general tends to be an episodic market. We booked big work. We execute that big work. We may book another one in between there. But part of it is, we have resources to execute that work. And so some of it's timing, are there resources or when they would roll off those jobs and timing of when we would win the next award. Some of it is we've been on some work and we didn't win it because the pricing or the terms weren't right. For others, it's -- some of it hasn't been let yet in the markets where we really participate significantly in transportation market. Transportation work for the most part at EMCOR -- for the most part is an electrically [gibbered] function. It's bridges, tunnels, airports, ports in general. We do a lot of work on Southern California, the ports, and subways. On the mechanical side, it's much more narrow, what we would do. On the mechanical side, it would be stations. It would be tunnel ventilation and things like that. So when we book a big transportation award at EMCOR, for the most part, it's typically an electrical job, and we have broad-based capability there. And we would also typically -- unless we're part of a design build team or a design assist team, a lot of other people will be booking that work ahead of when we would be booking that work.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - VP and Senior Research Analyst [34]

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Okay. That's helpful. Maybe just on the institutional piece of the market. Looking back 2010 to 2012, certainly a bigger piece of the pie. Is that the work just isn't there right now? Obviously, it's much smaller. Or is it just the private, commercial, the health care stuff just more attractive to you?

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Anthony J. Guzzi, EMCOR Group, Inc. - CEO, President and Director [35]

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It's a combination of both. But a lot of that institutional work you saw back in '11, '12, when it was large, was really housing on our Building Services segment. And it was very significant base operating agreements that we had for the Navy that quite frankly we won all the award years. We performed exceptionally well. When it came for rebid, we decided we couldn't do work for lower cost, so we moved on.

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Operator [36]

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And at this time, there are no further questions. Now we will return the call back to management for closing remarks.

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Anthony J. Guzzi, EMCOR Group, Inc. - CEO, President and Director [37]

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Thank you all very much. I think -- through the questions, I think we have a pretty good picture of what we're anticipating over the next couple quarters. The year is basically -- I'll just summarize this: We expect strong execution on our Electrical, Mechanical Construction segments, and we do expect revenue growth there. We're going to be a little revenue challenged here in Q2 and Q3. We're going to execute, we think, pretty well in Industrial Services. And Building Services will improve. Revenues might not be as strong because we have 2 large contracts that came out, but they were relatively low profitability. So through your questions and through our commentary, I think we have a pretty good picture of what's going to unfold here. We feel good about taking the lower end of the range up because we over-performed, I think, versus even our expectations in the first quarter. With that, we look forward to seeing you all, and thank you all for your interest in EMCOR.

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Operator [38]

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And thank you. This concludes today's conference. You may now disconnect.