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

Thomson Reuters StreetEvents

Q2 2017 EMCOR Group Inc Earnings Call

NORWALK Aug 13, 2017 (Thomson StreetEvents) -- Edited Transcript of EMCOR Group Inc earnings conference call or presentation Thursday, July 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 - Senior VP & Senior Research Analyst

* John Anthony D'Angelo

Macquarie Research - Analyst

* Noelle C. Dilts

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

* Sean D. Eastman

KeyBanc Capital Markets Inc., Research Division - Associate

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Presentation

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Operator [1]

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

I'll now turn the call 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, Adam, and good morning, everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the company's 2017 second quarter results which we 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. Good morning, everyone. Welcome to EMCOR Group's Earnings Conference Call for the Second Quarter of 2017. Wow, the year's starting to fly by.

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. You should be on Slide 2.

Slide 2 has the executives who are with me to discuss the quarter and 6 months' 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, 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 get this at emcorgroup.com.

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

These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these 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 condition, 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 in other reports filed from time to time with the Securities and Exchange Commission.

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

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

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Thanks, Kevin, and good morning, and welcome to EMCOR Group's Second Quarter 2017 Conference Call. Initially, I'll be covering Pages 3 to 5 in my opening commentary. I am going to speak to our quarterly results, and Mark will cover in detail both the quarter and year-to-date results.

We had a very good quarter that, again, really highlights the strength and diversity of EMCOR's services and the end markets we serve. We are $0.95 per diluted share from continuing operations on revenues of $1.9 billion. We had strong operating income margins of 4.9%. Overall, our Electrical and Mechanical Construction segments had excellent quarters and fill the graph created by the tough comparison we knew that we had and previously discussed in our Industrial Services segment resulting from their excellent second quarter 2016 performance. Our results again are bolstered by very strong operating cash flow in the quarter of $108 million. Our folks can execute and are focused and disciplined.

I now want to provide some operating detail by segment for the quarter. Our Electrical Construction segment had excellent performance with revenue growth of 6.8%, and that was mostly organic; and very strong operating income margin of 7.1%, which drove a 39.6% improvement in operating income versus the year-ago period. We had excellent execution and really benefited from an absence of badness in the segment. We have strength across our end-market customers and markets.

Our Electrical Construction segment continues to perform well. In a good market, it can execute some of the most complex and sophisticated projects well, and we do deliver for our customers.

Our Mechanical Construction segment also had excellent performance with 18.6% revenue growth, and again, most of that revenue growth was organic. We had strong operating income margins of 7.2%. We were aided in this segment by this dispute sum of $11.6 million in the quarter, but our underlying operating income margins are still strong at 5.7%. We had strong execution across this segment and across most markets, and we executed well on a range of products, from quick turn small projects to large complex projects. Our fire protection work and our manufacturing work is particularly strong at this time.

Our Building Services segment had a reduction in revenues of 5.4%, which is driven by slow-margin contract losses that we have previously discussed. Our operating income grew by almost 9%, and our operating income margin expanded by 60 basis points, which showed the impact of the more favorable mix in this segment.

Our Mechanical Service business is performing well and continues to axe across its range of products, from service agreements, repair and services, building controls and retrofit projects.

In our site-based business, we have won several new contracts that should ramp up nicely in the next 12 to 18 months, and our IDIQ, that is indefinite quantity, indefinite duration work in our government business, grew nicely in the quarter.

Our Industrial Services segment had a tough quarter, and we expected that, and we had foreshadowed it in our previous commentary. We knew we had a tough quarterly comparison, driven by our outstanding performance on a large impact project, coupled with an elongated 2016 spring turnaround season that moved more work from first quarter 2016 to second quarter 2016 than is a normal experience for us. We also had work moved from this second quarter in 2017 in the second quarter of 2018, as our customers kept running these units as crack spreads are relatively strong at this time and it felt they could defer this work for a year. We continue to execute well for our customers and are positioned well in not only our turnaround work but also in our shop services, heat exchanger cleaning and specialty services like specialty welding. We believe we are at the bottom in demand and pricing for our new build heat exchangers that we have talked about so much.

The U.K. continues to perform steadily, and this should be the last quarter where they had to fight through the FX headwind caused by Brexit. Our U.K. business added some nice customer wins in late 2016 and early 2017, which when in full implementation should be nicely accretive to the segment's operating income.

Our backlog grew 7.6% in the quarter, driven by our Electrical and Mechanical Construction segments. Our balance sheet is liquid and strong, enabling us to continue to invest and grow our business.

And with that, I'll turn it over to you, 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 5 slides, I will supplement Tony's opening commentary and (inaudible) second quarter performance as well as provide a synopsis of our year-to-date results through June 30. All financial information referenced is derived from our consolidated financial statements included in both our earnings release announcement and Form 10-Q filed with the Securities and Exchange Commission earlier this morning.

So let's review our second quarter performance. Consolidated revenues of $1.9 billion are down $37.5 million or 1.9% quarter-over-quarter 2 2016. Revenues attributable to businesses acquired pertaining to the trade of time that such businesses were not owned by EMCOR in last year's second quarter, impacted the current year's quarter by $44 million and positively impacted our U.S. Mechanical Construction, U.S. Building Services and our U.S. Electrical Construction segments. Excluding the impact of businesses acquired, second quarter revenues declined organically at $81.5 million.

U.S. Electrical Construction revenues of $449.2 million increased $28.6 million or 6.8% from quarter 2 2016. Excluding acquisition revenues, this segment grew $22.1 million or 5.2% organically. Revenue growth was largely driven within the commercial and health care market sectors, inclusive of numerous telecommunication projects, partially offset by quarter-over-quarter revenue declines within the hospitality and institutional market sectors due to certain project completions that occurred in late 2016.

The U.S. Mechanical Construction's second quarter revenues of $741.8 million increased $116.3 million or 18.6%. Excluding acquisition revenues of $21 million, this segment's revenues grew $95.3 million or 15.2% organically quarter-over-quarter. This segment's revenue growth was primarily driven by higher project activity within the health care, commercial, industrial and hospitality market sectors.

EMCOR's total domestic construction business second quarter revenues of $1.19 billion increased $144.9 million or 13.8%, with 11.2% being generated from organic activities. U.S. Building Services quarterly revenues of $438.3 million decreased $24.9 million or 5.4%. Excluding acquisition revenues of $16.5 million, this segment decreased organically 8.9%. Revenue gains within their 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, partially offset by increased indefinite duration, indefinite quantity project volumes from government related activities.

U.S. Industrial Services revenues of $187.4 million decreased $146.1 million or 43.8% due to lower field services activities quarter-over-quarter as a result of an extended spring turnaround season in 2016 as well as the execution of the large specialty services capital project that favorably impacted each of the first 3 quarters of last year. This segment's shop services revenues within the second quarter were slightly improved from the comparable 2016 quarter due to an uptick in repair work.

United Kingdom Building Services revenues of $79.2 million decreased $11.4 million or 12.6% due to the $9.6 million impact of unfavorable exchange rates for the British pound versus the U.S. dollar as well as reduced small project and capital project activity. Even after we have surpassed the 1-year anniversary of the Brexit vote, the resulting uncertainty in the United Kingdom continues to affect our customers' discretionary spending habits.

Please turn to Slide 7. Selling, general and administrative expenses of $181.3 million represent 9.6% of revenues and reflect the reduction of $474,000 from quarter 2 2016. The current year's quarter includes approximately $3.9 million of incremental SG&A inclusive of intangible asset amortization from businesses acquired. Excluding this incremental acquisition-related SG&A as well as the $2.8 million of transaction costs associated with the acquisition of Ardent and Rabalais in the second quarter of 2016, SG&A has decreased $1.6 million on an organic basis. This decrease is primarily due to lower incentive compensation expense and a reduced provision for doubtful accounts both within our Industrial Services segment, partially offset by increased employment costs within our domestic construction segments. Reported operating income for the quarter of $92.8 million represents 4.9% of revenues and compares to $92.3 million and 4.8% in 2016's second quarter.

Our U.S. Electrical Construction Services operating income of $32.1 million increased $9.1 million from the comparable 2016 period. Reported operating margin of 7.1%, which is 160 basis points higher than 2016 second quarter. The increase in both operating income and margin is due to improved contract performance within the transportation and commercial market sectors. This segment experienced a loss of $10.5 million on the transportation construction project during last year's second quarter due to productivity issues, and that discrete project was completed during the second half of 2016.

2017 second quarter U.S. Mechanical Construction Services segment operating income at $53.1 million represents a $15.1 million increase from last year's quarter. This represents a 40% improvement quarter-over-quarter, primarily due to improved operating performance within the institutional market sector as well as the $11.6 million gross profit impact of the recovery of certain contract costs incurred in 2016 that were previously disputed. This segment's operating margin is 7.2% and represents 110 basis point improvement from 2016's second quarter. Our total U.S. Construction business is reporting a 7.2% operating margin for the quarter just ended as compared to 5.8% of revenues in last year's second quarter.

Operating income per U.S. Building Services of $20.2 million has improved from last year's second quarter, and reported operating margin of 4.6% is up 60 basis points. The improvement in quarter-over-quarter operating income and operating margin is due to increased profitability within the Mechanical Services division due to repair and project activities as well as the incremental income contribution from businesses acquired.

Our U.S. Industrial Services segment operating income of $4.4 million decreased $28.8 million compared to 2016 second quarter with an operating margin of 2.3%, which is 760 basis points less than last year's 9.9% operating margin. The decrease is attributable to lower turnaround activities quarter-over-quarter due to 2016's extended spring turnaround season, which positively impacted last year's second quarter. Additionally, quarter 2 of the prior year was at peak labor utilization levels while executing a large field services capital project that was completed later in 2016.

Lastly, this segment continues to fight headwinds within their shop services operations as demand remains muted and the pricing environment remains extremely competitive for new build heat exchanger orders.

U.K. Building Services operating income of $3.5 million represents 4.4% of revenues, which is an increase of approximately $200,000 and is an 80 basis point improvement over last year's second quarter. Lastly, on this slide, we had a strong operating cash flow quarter with cash provided by operations of $108.1 million, which compares favorably to the $85 million generated in 2016 second quarter.

We are now on Slide 8. Additional key financial data for the quarter not addressed in the previous slides are as follows: quarter 2 gross profit of $274.5 million represents 14.5% of revenues, which is essentially flat with the comparable 2016 quarter on an absolute dollar basis while representing an improvement of 30 basis points from a gross margin perspective. The quarter-over-quarter increase in gross margin is due to the gross margin improvements in all of our reportable segments other than U.S. Industrial Services as a result of improved project execution and revenue mix within our construction and our U.S. Building Services segments. This improved gross profit performance was offset by the significant reduction with our U.S. Industrial Services segment due to the factors previously referenced qualified by both myself and Tony.

Restructuring costs during the most recent quarter relate to activities within our U.S. Building Services and U.S. Mechanical Construction segments as we continue to rationalize our cost structure. Diluted earnings per common share from continuing operations is $0.95 and compares to $0.92 for the quarter ended June 30, 2016. On an adjusted basis, reflecting the addback of transaction costs incurred in quarter 2 of 2016, related to last year's Ardent and Rabalais acquisition, diluted earnings per common share from continuing operations would have been $0.95 for 2016 as compared to the $0.95 per diluted share in the current year, which represents consistent performance quarter-over-quarter.

We are now on Slide 9. With the quarter out of the way, let's now turn our attention to the first 6 months. Revenues of $3.79 billion represent an increase of $109.3 million or 3% as compared to $3.68 billion in the prior year period. Consistent with our second quarter 2017 revenue performance, robust revenue growth within our domestic construction segments is being muted by year-over-year revenue declines within each of our Industrial Services, U.S. Building and U.K. Building Services segments. Year-to-date gross profit of $540.8 million is greater than the representative 2016 period by $43 million or 8.6%. 2007's (sic) [2017] gross margin of 14.3% represents an 80 basis-point improvement over 2016, primarily due to improved project execution year-over-year within our Electrical Construction, Mechanical Construction and U.S. Building Services segments. Additionally, our U.S. Mechanical Construction segment's year-to-date gross profit is benefiting from the recovery of $18.1 million of contract costs previously disputed on a project, which was completed in 2016. This item favorably impacted consolidated year-to-date gross margin by approximately 40 basis points.

Selling, general and administrative expenses of $364.3 million represent 9.6% of revenues as compared to $349.2 million or 9.5% of revenues in 2016. Our SG&A as a percentage of revenues on a year-to-date basis is down sequentially from quarter 1 by 10 basis points. The increase in SG&A for the 6-month period is due to $16.2 million of incremental expenses from businesses acquired related to the period of time that such businesses were not owned by us in the prior year. Restructuring activity has slightly increased from 2016 levels as we continue to adjust our cost structure to enhance our efficiency and productivity.

Year-to-date operating income is $175.6 million and represents a $27.7 million increase over 2016's year-to-date performance. Our year-to-date operating margin is 4.6% as compared to 4% in 2016's year-to-date period. 2016's operating margin on an adjusted basis reflecting the addback of the transaction expenses related to the acquisition of Ardent and Rabalais in April 2016 would have been 4.1%. Therefore, our year-over-year improvement in operating margin is 50 basis points and is due to improved project execution within both our U.S. Electrical and U.S. Mechanical Construction segments as well as the year-over-year increase in our U.S. Building Services segment. Diluted earnings per common share from continuing operations is $1.84 for the 6 months ended June 30, 2017, compared to $1.48 in the corresponding 2016 period. On an adjusted basis, reflecting the addback of 2016's transaction expenses, diluted earnings per common share from continuing operations would have been $1.52 for 2016 as compared to 2017's $1.84, which represents an improvement of 21.1% year-over-year.

We are now on Slide 10. EMCOR's balance sheet remains strong at June 3 and variations of note from December 31, 2016, are as follows: cash is reduced from year-end 2016 due to funds expended in excess of our positive operating cash flows to date for acquisitions, common stock repurchases and capital expenditures; 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 net of $24.3 million of intangible asset amortization expense; total debt of $417.2 million is reduced from year-end 2016 due to the mandatory quarterly principal repayments under our term loan of $3.8 million, of which $7.6 million has been repaid year-to-date offset by new capital lease additions during the first 6 months. As a result of our outstanding borrowings, we currently have a debt to capitalization ratio of 20.9%, which represents a slight decrease from year-end 2016. We are happy with our balance sheet and our excellent cash flow conversion during the first 6 months. We have sufficient liquidity to execute against all of our strategic objectives and remain flexible to take advantage of all opportunities.

With my commentary concluded, I will return the call to Tony. Tony?

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

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Thanks, Mark. We look forward with the growing backlog put into work with working capital. And so on Page 11, and I'll be talking to Page 11 and 12 as I talk about backlog. In summary, our backlog continues to grow despite strong underlying revenue growth in our Electrical and Mechanical Construction segments. Total backlog at the end of the second quarter is $4.1 billion, up $291 million or 7.6% from 2016. And it's also up from year-end by $199 million or 5.1%.

Another quarter of strong project bookings on top of strong top line revenue. Book-to-bill for the quarter was a strong 1.06. We're halfway through the year now. Our markets continue to give us solid opportunities to win work across most sectors, and our Electrical and Mechanical Construction segments are executing well, and really with the work we have, all our businesses are executing well with the work they have. When you focus on the market sectors, we continue to win commercial projects and that's evidenced by our commercial backlog logging in at almost $1.5 billion, up $250 million from the year-ago period and up $163 million from December 2016. Commercial backlog is up 20% year-over-year, which correlates with recent census nonresidential spending data per sector. When we realized the census data is a rearview mirror outlook, but it also can be, with the momentum in it, a future indicator and it doesn't look that right now the demand is slowing much at this time.

Backlog in institutional, health care and hospitality sector is up year-over-year, and for the first 6 months of 2017 -- for the first 6 months of 2017, while backlog in the transportation and industrial sectors are down as we worked on some large projects and reload especially in the food processing and transportation infrastructure areas. Bottom line is productivity is fairly widespread across most sectors, and we continue to you see project opportunities where we can execute well for our customers.

So just flip the page over to backlog by segment. And there's really not a lot of news here. Same story, different quarter. Backlog continues to grow in our domestic construction segments. In total, our Electrical and Mechanical Construction segments backlog increased $331 million to $3.2 billion, up almost 12% despite the strong revenue growth from June 2016. IT's pretty evenly split with Electrical up $160 million and Mechanical up $171 million for the year-over-year period. Combined over -- if combined, over 1/3 of the backlog growth came during the first supporting the nonresidential sectors that are experiencing growth in 2017. Backlog in our Building Services segment is down $64 million and it's driven by our commercial site-based and government business as we continue to reshape these operations around increased profitability. Bottom line here is we are excited about some new opportunities that we are in the pilot stage of and they could be significant opportunities for us in the future. And the potential full impact of these awards are not in backlog yet in any significant way.

Further, we showed discipline in not taking these lost contracts at low or even negative margins. It certainly wasn't a performance issue as these relationships were 8- to 14-year relationships. In the case of our government business, we had won all of the award option years. In our commercial site-based business, our customers brought in new management and they are implementing a new model, in our view, will ultimately cost them more money. But we're not going to execute work for them for practice on a go-forward basis, so we bid responsibly and lost the contract.

Also included in the Building Services segment is our mobile Mechanical Services operations, which performed mechanical maintenance, service contract and small project works. It's really all centered around HVAC and controls. And similar to our domestic construction segments and the drivers, in the Mechanical Services business underlying in Building Services is betting from the steady and improving nonres market, and backlog book to bill for this part of the Building Services business is over 1.

Our Industrial Services backlog stands at $55 million, which really is the same as it's been. It's the seventh consecutive quarter it's been there. We view that the new build heat exchanger business, which is all this represents, has been in this range of $50 million to $60 million. Not much has really changed with regard to that shop backlog. Mark did talk about repair spending being up a little bit, that would not be in backlog. And we think that the inquiries are a little more than past quarter. However, pricing remains soft, and like I said in my earlier comment, we do believe we're bouncing around the bottom in the new build heat exchanger market. Backlog in the U.K. is up a bit, reflecting some new contract awards wins. In all, like last quarter, backlog off of construction in line or a little ahead of the markets, flat in the industrial shop business, it is pretty much where we thought we'd be this far, probably a little better here in early -- in mid-part of 2017. The bottom line on backlog, this is a good report as we are seeing good momentum in our construction segments with a book-to-bill over 1 and very strong revenue growth.

So now let me go to Page 13 and 14 and close off our call before we get some questions. So we're going to raise guidance as we have performed very well on a year-to-date basis, and we expect to continue to perform well for the balance of the year. We also have benefited by EMCOR's diversity of services and end markets, and we have proven over time that we can execute across these diverse markets and services. We are raising our revenue guidance from the $7.5 billion to $7.6 billion that we had, so we expect to be around the higher end of that at $7.6 billion. We are raising both the lower and upper end of our earnings per diluted share from continuing operations guidance, from our current guidance of $3.20 to $3.50 per share to our new guidance of $3.40 to $3.60 per diluted share from continuing operations.

So how do you get to the top end of the range now? That's what you always ask us. So our Electrical and Mechanical Construction segments must continue to perform well with excellent operating income margins, and we have to continue the absence of badness that we have executed to so far this year. We expect the market to continue to grow at a mid-single-digit pace for the balance of the year. We grew backlog in these segments despite the 10.7% organic revenue growth on a combined basis through June 30.

Our Building Services segments must continue to perform well, especially in our Mechanical Services business, and we must implement the new contract awards in the site-based business to our customers' expectations, so we can grow them. We expect strength in our energy retrofit business, and we've had good growth in our IDIQ work for the government. Our site-based portfolio [Rabalais] should be near completion, and we should have a good mix of work on a go-forward basis. For Industrial Services, it's all about the fall turnaround season, which we expect to be comparable to 2016, and we need the opportunity and want the opportunity to get to the top end of the range to execute increased specialty services work. The reality of the specialty services work, a lot of times things have to get progressively worse on the jobs sometimes or demand has to be progressively increased for us to get there, and there are several cases where we're looking at jobs where we may have an opportunity in Q4 and Q3. We just don't have control over that decision. In the U.K. segment, we should continue to perform in a steady and measured way. It has become a very stable performing segment for us. We expect our cash flow to be strong this year, and we will continue to look for the right opportunities to support our organic growth and also add to our company through acquisition. We will continue to return cash to shareholders through both dividends and share repurchases.

And Adam, with that, we'll be happy to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from Tahira Afzal from KeyBanc Capital Markets.

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Sean D. Eastman, KeyBanc Capital Markets Inc., Research Division - Associate [2]

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This is Sean for Tahira today. First question for me, just looking at the construction segments, given the broader market outlook, mid-single digits for this year, you guys are obviously tracking way ahead of that. So I'm just wondering how we should be thinking about sort of sustainable growth rate for those segments as we look out to '18. And also if you could tie in maybe how that dispute might have helped the 15% organic growth we saw in Mechanical this quarter, that would also be helpful.

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

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Let me break apart the question. We've had good backlog growth in our Construction segments. A lot of this work has been -- is fast-paced, some of it will go in '18. I think you know we don't give 2018 guidance at this point. On the second point, I'm going to turn it over to Mark. The reality is, most of that just happens on the income line as far as the growth rate but Mark will walk through the dispute resolution and the characteristics around on that.

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Mark A. Pompa, EMCOR Group, Inc. - CFO and EVP [4]

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Yes, thank you, Tony. With regards to the dispute resolution, that was the recovery of costs. So as Tony indicated, it actually did go through the gross profit line and not through revenue, so did not impact the 15% quarter-over-quarter organic revenue growth. Again, clearly, both of our domestic construction segments continue to perform at a really strong level. For the most part, a lot of the work that we're currently executing, project time lines tend to be kind of in our sweet spot, which are on the low end, anywhere from 4 to 5 months to 9 to 12 months. We continue to have some longer burn work that we've had over a long number of years. So when we sit down and get to our planning process for 2018, we'll certainly be a lot smarter and be able to respond to that question, as Tony indicated.

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Sean D. Eastman, KeyBanc Capital Markets Inc., Research Division - Associate [5]

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Okay. And then, second, I just wanted to move over to Ardent, we're pretty much a year in here. I just want to -- I was hoping you guys could discuss what they're seeing in there, particularly in their energy end markets and maybe how their contribution is shaping up versus your initial expectations?

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

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They're a little weaker than we expected initially, really driven by the market. We expect -- the rates that have come on are basically they're returning to places that have already been set up from an infrastructure standpoint. And of course, electrical equipment doesn't wear out the way mechanical equipment does. Secondarily, they continue to get very good penetration in downstream. They've been very successful there. Especially their Corpus Christi operations, which is Rabalais, is very successful in some of the infrastructure work down there around the energy infrastructure. But as the pipeline work materializes, we think in the latter part of '17 going through the latter part of '18, we'd be at the later stages of that versus the developers that have been awarded the work when there's main line contractors, that we think then we'll see the improvement. Now here's a long play for us, we think they're a very good management team, and we're bullish on their prospects long term with the energy recovery.

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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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So my first question. Just looking at your $7.6 billion revenue guidance. I look at consensus right now and already estimates are a little bit ahead of that. So I'm kind of just trying to better understand maybe where we as analysts are maybe a little bit ahead of what you're thinking? So if you could give us some thoughts on kind of what you're expecting in terms of annual growth out of the key segments, that would be helpful.

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

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Well, I mean, construction will be up, both Electrical and Mechanical. Building Services are likely to be down despite the strong underlying Mechanical Services' growth. And like we foreshadowed over the last 14 months, we expect industrial will be down, and I think we've seen that year-to-date. If you put all that together, absent some specialty services work in industrial, absent faster implementation of some of these new contract awards in Building Services, we think we've got the revenue guidance about right.

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

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Okay. And then on -- just kind of shifting to the high-level thoughts on the nonres market. Some of the concerns we're hearing or the things we're hearing are that we might see some growth shift from some of the larger Tier 1 markets like, say, New York into some of the medium-sized cities. Given your strong New York presence, I wanted to know your view on that and how you're thinking about some of this growth as we head into the back half of '17 and into '18?

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

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So if you think about some of the growth in New York. Now, New Jersey, we do some residential high rise and we've been very successful at it. On the Riverfront, we see that continuing. We've never been big players in New York residential high-rise, which is where you see a lot of the cranes. We are significant players in infrastructure, and we are in building restack retrofit. So the work that's already been done in places like Hudson Yards and some of the other developments around New York, now it's in our sweet spot to go in and do some of the work. And then some of the infrastructure work, the bridges and tunnels, we're doing very well on. And as more work becomes available around that, we will be there to participate. That's one of the beauties of EMCOR is we're not dependent on any given market, and although New York's important to us, we have the ability to shift to other markets, and we have shown that, right? You see the balance between industrial last year and now mechanical and electrical this year, that's very similar on a geographic basis for us.

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

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Great. And then one last question on the downstream services side. We've seen a number of participants in this space kind of struggle with some delays and pushouts of work, which you attributed, to some extent to crack spreads being up again. Can you just give us some thoughts on what, in your opinion, sort of the ideal environment for refiners to start spending in a major way again? And what kind of stops some of these deferrals that we've been seeing over the past couple of years?

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

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Unfortunately, we had our first -- other than the strike, we had our first experience with deferrals around the last 3 years that we've been talking about. No, I think a lot of this is very customer-specific. And integrateds behave different than refining-only companies, a lot of it has to do with what's going on in their fleet and the kind of crew they're taking in. I think broadly speaking, it is poised to be a healthier sector. I think for a chunk of this market, Mark and I were talking about this, the reality is if you're an integrated oil company, sometimes you delay things because the refining operations is where you're actually making money now. And as oil prices come back, even though that's upstream-driven, that, on the integrated side, has a positive impact on the refining maintenance spend. On the nonintegrated side, it's all about fleet management for them and crude slate management. One of the things I think that's a little different is, overall, I think some of it is, it's apples and oranges for some of the companies that are reporting. They were highly dependent, some of these companies on mid and upstream and they're blaming downstream for some of their problems. And the reality is mid- and upstream is getting better but it's nowhere near where it was.

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Operator [14]

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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 [15]

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The first question, just can you give us a little more color on the Industrial Services margin in the quarter? Was that down just on lower utilization?

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Mark A. Pompa, EMCOR Group, Inc. - CFO and EVP [16]

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Yes, lower labor utilization. So we have a fixed cost in there. It guarantees, some of your key people, especially bill people certain hours. We've been able to utilize them over the last -- in '15 and '16 in the second quarter, which is unusual, by the way. The more normal practice on this is a little worse than it can be. Usually, it'd be 4% or 5% margins. But with the pushout at the last minute of this turnaround, we ate more cost than we typically would, and we get the margin to go with it. But yes, fixed cost utilization of your labor force for the people that are actually going to run the turnarounds, the more senior guys.

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Adam Robert Thalhimer, Thompson, Davis & Company, Inc., Research Division - Director of Research [17]

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So you would expect it to go back to -- back to normal...

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Mark A. Pompa, EMCOR Group, Inc. - CFO and EVP [18]

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Yes, before the turnaround season gets better is what we planned, then we should see improved margins as we go to the back half of the year.

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Adam Robert Thalhimer, Thompson, Davis & Company, Inc., Research Division - Director of Research [19]

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Okay. And then, along the same lines, would you -- if you get a strong fall turnaround season, do you think you could have growth year-over-year in Industrial Services revenue?

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Mark A. Pompa, EMCOR Group, Inc. - CFO and EVP [20]

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No.

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Adam Robert Thalhimer, Thompson, Davis & Company, Inc., Research Division - Director of Research [21]

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Okay. So you won't get back to the revenue growth in that segment until you go up against this Q2 '17 comps? (inaudible)

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

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Yes. Yes.

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Adam Robert Thalhimer, Thompson, Davis & Company, Inc., Research Division - Director of Research [23]

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Okay. And then, I didn't understand, you said you were bidding or you'd won something in Building Services that could be significant?

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Anthony J. Guzzi, EMCOR Group, Inc. - CEO, President and Director [24]

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We're in the pilot stages of 3 new contracts, they're pilots. We're doing very well on the pilots. We expect them to grow over the next 12 to 18 months. Implementation can look like a very slow steady implementation, or sometimes, it really accelerates as the customer sees how much money they're really saving because we bring -- people see what we do every day versus on the customer side a lot of times, people, it's part of what they do.

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Adam Robert Thalhimer, Thompson, Davis & Company, Inc., Research Division - Director of Research [25]

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Okay. So that's energy retrofit worked on? You're not just government (inaudible)

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Anthony J. Guzzi, EMCOR Group, Inc. - CEO, President and Director [26]

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No, it's rough technician work and site-based work, for the most part. Now we do energy retrofit work on top of that, but that'll be post 12 to 18 months as we grow in other customer.

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Mark A. Pompa, EMCOR Group, Inc. - CFO and EVP [27]

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Yes, and that's additive to the base contracts?

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

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Yes, additive, still part of the contract.

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

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Okay. And then, lastly, Mark, are there any more dispute resolutions outstanding? Or did this kind of clear everything up?

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Mark A. Pompa, EMCOR Group, Inc. - CFO and EVP [30]

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Well, there's always dispute resolutions outstanding relative to the order of magnitude, the things that we've talked about in the past. We're very thankful that this particular matter resolved itself as quickly as it did because it relates to the issue that we had in the fourth quarter with the large write-down that we had. Typically, they don't resolve themselves within 6 months after something like that happening. But I don't see anything in the near term that even he is remotely close to what we just experienced over quarter 1 or quarter 2 this year on the favorable side, and clearly, as Tony mentioned a number of times in his commentary, we're happy that the absence of badness that did impact '16 and, to a lesser extent, '15 seems to be behind us as we plow through the remainder of this year and into 2018.

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Anthony J. Guzzi, EMCOR Group, Inc. - CEO, President and Director [31]

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Yes, I mean, like Mark said, this was unusual and was fairly unique, right? We were working directly for the principal. We also control the decision-making and the spending authorization. That's not usually the case.

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Operator [32]

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And your next question comes from the line of John D'Angelo with Macquarie.

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John Anthony D'Angelo, Macquarie Research - Analyst [33]

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So I mean, it looks like in the Q, can you guys just confirm that Ardent only did $6.5 million in revenue during the quarter?

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Mark A. Pompa, EMCOR Group, Inc. - CFO and EVP [34]

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No, that's -- John, this is Mark Pompa. That $6.5 million is the incremental revenue because we acquired Ardent in the middle of April of 2016. So that's reflective of these 2 weeks of activity.

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John Anthony D'Angelo, Macquarie Research - Analyst [35]

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I see. Okay. Okay, fair enough. And then my next question is if you look at like sort of the organic margins for the mechanical segment, I'm actually sort of getting that the core operating margins were down versus 2Q of last year while revenues were organic revenues were 15%. So can you sort of just walk through why exactly did that happen? And then backlog continues to grow in that space. Is -- could backlog be getting sold with lower margin work?

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Anthony J. Guzzi, EMCOR Group, Inc. - CEO, President and Director [36]

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No, I think a lot of it is just timing. We're probably on the front end of some work right now. Margins tend to be lower. The underlying fundamentals are very good in the business. This is not a quarterly margin business, none of them are. You sort of have to go look at 12 month rolling out and review 5 quarter rolling average. And anytime our Mechanical business is in the high 5s and low 6s, it's performing well. The backlog is good. There's no underlying issues in it.

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Operator [37]

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(Operator Instructions) And 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 - Senior VP & Senior Research Analyst [38]

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Maybe sticking to that margin question, and Tony, really trying to think about the runway for construction margins from here. So I'm looking at the backlog, you had a couple of quarters in a row where public sector, moving into backlog is outpacing growth in private, clearly private still at the nice level. I guess the question is, are you more seeing cylinders in the market starting to run? Is this the sort of change that allows you to be even more selective about work you're going after right now?

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Anthony J. Guzzi, EMCOR Group, Inc. - CEO, President and Director [39]

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I think the selective point is correct from a different reason, though. We have to pay attention to the capacity we have. We're not capacity-constrained, but we want to make sure that we have the right people available to do the right jobs, and it becomes a sequencing issue, especially so that we could be able to serve some of our better customers when they need us. So the select of it (inaudible) maybe for us centers around availability or the right resources to execute the work. I think there's other parts of it that matter to us too. We think a lot about who we're working for. We think about the financial stability of the people we're working for, have we worked with them before, have we worked in that geography before? Do we have a labor force that can work in that geography well? We have the supervision we can bring the bear of the project and what the cash flows look like on the project? And when you put all that together, that's how selectivity works for us, assuming we have the technical capability to do the work. I think right now, the market's in such a position that sometimes the best job you won, sometime the larger work that's happening in the market, if you can't get it at the right price, sometimes it's better to bid that to a level where you'd be comfortable if you want it. And if you didn't know that there'll be capacity absorbed in that market and you'll be able to compete on the other work that will come, and you're likely to be more successful on the smaller. Some of the work that will be more successful from a margin standpoint.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [40]

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Okay. And Tony, to that last point, market where it is right now, do you feel like it was there 12 months ago?

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Anthony J. Guzzi, EMCOR Group, Inc. - CEO, President and Director [41]

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Yes.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [42]

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Got it. Okay. And then, maybe a question for Mark. On the Industrial Services side, kind of thinking about the headwind there, would you happen to know the large project impact on revenues in 3Q last year? Just trying to get a feel for what the base business comps are as we're forecasting out for the second half of this year.

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Mark A. Pompa, EMCOR Group, Inc. - CFO and EVP [43]

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Yes, we -- Brent, I respect the question. We purposely haven't disclosed that because we're sensitive, too, to our customer and what level of information they want out in the public domain. So unfortunately, I'm not willing to share that with you at this time.

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Operator [44]

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And I will turn the call back to management for closing remarks.

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Anthony J. Guzzi, EMCOR Group, Inc. - CEO, President and Director [45]

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Okay, great. Look, thank you all for your interest in EMCOR. We have a decent market right now for majority of what we do, and we have great people executing that work every day. And our primary mission is to execute well for our customers, do well for shareholders, and primarily the first mission is to keep our people safe and productive. So with that, we'll leave to go, and we'll see you in October. Goodbye.

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Operator [46]

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And this concludes today's conference call. Thank you for your participation. You may now disconnect.