EMCOR Group, Inc. (EME) Q1 2015 Earnings Report, Transcript and Summary

Good morning. My name is Genisha [ph] and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group First Quarter 2015 Earnings Call. [Operator Instructions] Mr. Nathan Elwell, with FTI Consulting, you may begin.

Thank you, Genisha [ph] and good morning, everyone. Welcome to the EMCOR group conference call. We are here today to discuss the company's 2015 first quarter results which were reported earlier this morning. I'd like to turn the call over to Mr. Kevin Matz, Executive Vice President of Shared Services. Who will introduce the rest of the team? Kevin, please go ahead.

Thank you, Nathan and good morning, everyone. Welcome to EMCOR group's earning conference call for the first quarter of 2015. Can't believe it's already here. 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. Slide 2 depicts the executives who are with me to discuss the quarter's results. They're Tony Guzzi, our President and Chief Executive Officer; Mark Pompa, Executive Vice President and Chief Financial Officer; Mava Heffler, Vice President of Marketing and Communications; and our Executive Vice President and General Counsel, Sheldon Cammaker. For call participants not accessing the conference call via the internet. This presentation including the slides will be archived in the Investor Relations section of our website under presentations. You can find this at emcorgroup.com. Before we begin, I want to remind you that this discussion may contain certain forward-looking statements. Such statements are based upon information available to EMCOR management's perception as of this date, and EMCOR assumes no obligation to update any such forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance. Such risks and uncertainties include, but are not limited to, adverse effects of general economic conditions, changes in the political environment, specific changes in the specific markets for EMCOR's 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 2014 Form 10-K and other reports filed from time to time with the Securities and Exchange Commission. With that said, please let me turn the call over to Tony. Tony?

Thanks, Kevin, and I'm going to talking to Pages 3 through 5. First good morning and thank you for your interest in EMCOR. The first quarter proved to be more challenging than we originally anticipated. We had two external factors beyond our control. Refinery turnaround approvals and our industrial services segment as a result of the Refinery Operator Strike and the extreme cold weather that affected our project execution and our billing services and construction segments. Weather, was a net negative for us in Q1, 2015 versus Q1, 2014. Weather was a net positive for us as a result of heavier snowfall in most regions in the country in 2014 versus 2015. 2015's first quarter was colder, but a lot less snowy than first quarter 2014. We did continue to generate backlog growth as it is up 11% year-over-year and most end markets is steadily improved as the year progresses. We generated revenues of $1.589 billion and earned $0.52 per diluted share from continuing operations in the first quarter. The reality is, we're not a big fan of excuses at EMCOR, but these quarterly impacts from these external factors are real and had significant bottom line impact in the quarter. The refining operator strike cost us at least $25 million in revenues and at least $0.06 to $0.07 in diluted EPS from continuing operation. That $0.06 to $0.07 does not account for any leverage work we gain from increased work scopes, specialized welding services and just as important our high margin shop repair work. The extreme cold weather costs us $30 million to $40 million in revenues across our construction and building services segments and at least $0.03 to $0.05 in diluted EPS from continuing operations. The reality is, if the refinery operator strike does not happen, we would be reporting a record or near record first quarter. Our Building Services and Mechanical Construction segments both had strong quarters. Our Building Services performances driven by strong demand and very good execution in our Mechanical Services business. Our Mechanical Construction segment improved operating margins and grew operation profit 9.4%. Although performance was down in our Electrical Construction segment, we expect performance to improve as the year progresses. Our SG&A percentage was higher than we like at 10.2%. We would have expected it to be 9.7% to 9.8% in the quarter but the revenue loss in the quarter identified above coupled with a lack of absorption in our industrial sector caused this to be higher. We do expect this to normalize as the year progress and fall back into the mid 9% range. Mark is going to cover this in detail in his remarks. We had a very good book-to-bill 1.06% and grew backlog by 2.8% sequentially and 11% on a year-over-year basis. Most of our end market backlog areas are up and I will cover that. We now have backlog of $3.736 billion versus $3.366 billion last year. We returned $26.1 million in cash to shareholders through repurchases and dividends. In summary, with a little less cold weather and no refinery operator strike, we would have had a very good first quarter. Our balance sheet remains liquid strong and with that, I'll turn the call over to Mark.

Thank you, Tony and good morning to everyone participating on the call today. For those accessing this presentation by the webcast, we're now of Slide 6. As Tony indicated in his opening commentary, I will begin with detailed discussion of our first quarter 2015 results before moving to key financial data derived from our consolidated financial statements included in both our earnings release announcement in Form 10-Q filed with the Securities and Exchange Commission earlier this morning. So let's get started. Consolidated revenues of $1.59 billion are down point 1% or essentially flat as compared to Q1, 2014. U.S. Electrical Construction revenues of $319 million increased $10.9 million or 3.5% from Q1, 2014. The increased revenue was due to greater project activity within the transportation, manufacturing and healthcare market sectors as compared to last year's first quarter. U.S. Mechanical Construction first quarter revenues declined $2 million to $511 million or a modest reduction of 0.4%. The quarterly reduction is due primarily to a decline in manufacturing water and wastewater and transportation construction projects. I would like to note, this segment has several operating companies that are in the North Eastern region which experienced loss work days during the quarter due to the weather factors, Tony previously touched upon. Additionally, this segment reported 4.2% of sequential backlog growth within the quarter which should favourably impact the next several quarters. EMCOR's total domestic construction business first quarter revenues increased $8.9 million or just over 1%. U.S. Building Services revenues of $439.5 million decreased $8.5 million quarter-over-quarter due to loss revenues attributable to two government contracts completed in 2014 that were not renewed pursuant to rebid. As well as the impact of less events snow removal activities in most geographies outside of New England region. These revenues reductions negated gains within their mobile mechanical services division attributable to both service volumes as well as small project activity. U.S. Industrial revenues increased 0.3% to $232.7 million during our first quarter despite the impact of the refinery operator strike briefed by Tony on Slide 3. This significant headwind was offset by higher revenues within RepconStrickland which performed more turnaround services quarter-over-quarter and non-strike impacted sites as well increased revenues from Ohmstede shop services. United Kingdom Building Services of $87 million declined $2.4 million primarily due to exchange rate movements within the first quarter which is masking a favourable period of revenue growth in the local currency. Please turn to Slide 7. Selling, general and administrative expenses of $161.6 million represent 10.2% of revenues and reflect an increase of $17.7 million from Q1, 2014. The majority of this increase is related to greater employment cost due to both discrete item that favourably impacted 2014's first quarter as well as increase in expenses related to compensation programs. With regard to 2014, we had a favourable medical claims experience and as a result reported income versus expense during the prior year's first quarter. On the compensation front, there were two primary cost drivers, one, the company's expectation of higher earnings in 2015 versus 2014 about the consolidated and segment reporting levels, which necessitates both higher annual and long-term incentive compensation accruals and related expenses. The second primary driver increased salary and benefit costs pertains to the 3% increase in non-union headcount and the impact of annual cost of living and merit-based wage adjustments. With regard to the increase in our non-union headcount, we had higher staff commensurate with our expected revenues that ultimately did not materialize due to the impact of both the refinery operator strike as well as the productivity impact of loss work days related to localized weather. As the results, our first quarter SG&A as a percentage of revenues is somewhat distorted due to the incremental incurred cost without the corresponding revenue benefit. Operating income of $55.3 million represents 3.5% of revenues and compares to $72.1 million and 4.5% of revenues in 2014's first quarter. Our U.S. Electrical Construction Services segment operating income decreased $5 million or 23% over Q1, 2014. Their corresponding operating margin was down 180 basis points period over period. The decrease in operating income is due to the gross profit contributions on last year first quarter from large project activity within the manufacturing institutional and transportation market sectors. Specifically, we had several large projects that we're wrapping up in Q1, 2014 and the power generation and public market sub sectors. We had no sub significant large project close outs during the quarter just ended within this reported segment. 2015's first quarter U.S. Mechanical Construction Services segment operating margin of 4.1% represents $1.8 million increase from last year's quarter. This represents 9.4% improvement quarter-over-quarter primarily due to increase gross profit contributions from projects within the commercial institutional and manufacturing market sectors. Our total U.S. Construction businesses reporting 4.5% operating margin for the quarter just reported. Operating income for U.S. Building Services $700,000 or 3.4% over 2014's first quarter with an operating margin of 4.8%. Strong performance with their Mobile Mechanical Services division and the $3 million favourable impact of a claim settlement offset the headwinds experience due to lower event snow removal revenues, which I previously referenced. Our industrial services segment is reporting $10.6 million reduction in operating income with a 460 basis point reduction in operating margin. To reiterate, this segment was severely impacted by the nation-wide strike of refinery operators resulting in deferral potential cancelation of significant turnaround activities at certain oil refineries that we service. Due to the abrupt nature of this reference work stoppage, we had increased our headcount in anticipation of executing our previously scheduled turnarounds and incur such cost without recognizing the commensurate revenues. Additionally, our shop services operating income at margin were negatively impacted by the change in the lengths of orders, which include less repair work that may have been identified with the schedule turnaround activities occurred. UK Building Services operating income of $2.4 million represented $1 million decrease from Q1, 2014 due to reduced gross profit from small project activity in the institutional market as well as the unfavourable exchange rate effect year-over-year. Lastly, on this slide we used $17.8 million of cash in operations as compared to $24.3 million of cash used in operation during Q1, 2014 and as most of you on the call know, Q1 is historically EMCOR's weakest cash flow quarter due to the funding of the prior year incentive awards. We are now on Slide 8. Additional key financial data on this slide not addressed during my highlights summary as follows. Q1 gross profit of $216.9 million represents 13.7% of revenues which is improved from the comparable 2014 quarter by approximately $700,000 and 10 basis points of gross margin. Restructuring activity was negligible in the quarter and does not warrant any additional commentary. Diluted earnings per common share from continuing operations is $0.52 and $0.64 for the quarters ending March 31, 2015 and March 31, 2014 respectively. Please turn to Slide 9. EMCOR's balance sheet remained sufficiently liquid and represented by cash of approximately $369 million and modest leverage is demonstrated by our debt to capitalization ratio of 18.7%. Our cash is reduced from year end 2014 due to both the $17.8 million cash used in operations previously referenced as well as $37.8 million of cash used in financing activities which included $21.1 million of share repurchases during the quarter as well as $7.5 million of cash distributions to our joint venture partners pertaining to the two government contracts completed in 2014. Working capital levels have increased since the end of 2014 due to a reduction in current liabilities as a result of reduced levels of accounts payable and accrued payroll benefits due to the funding of prior year obligations. Identifiable intangible assets have decreased solely due to the quarterly amortization of expense of approximately $9.5 million and total debt is just under $330 million with the majority of the reduction due to the mandatory quarterly principal repayments of approximately $4.4 million. We are very happy with where our balance sheet is for this time of year and continue to be well positioned to take advantage of all growth opportunities that may present themselves. With my slides concluded, I would like to ask Tony to re-commandeer the microphone and thank you for your time, this morning.

Thanks, Mark and I'm on Page 10 and then I'll be on Page 11. I'm going to talk a little bit about backlog and what's going on in the markets. bidding activity was and continuous to remain active and it translated into a book-to-bill of 1.06%. Total backlog at the end of March is $3.74 billion that's up $369 million or approximately 11% from March, 2014. As I mentioned earlier, we saw backlogs that was sequentially also of $102 million reporting a strong book-to-bill reality, we should have a little less sequential growth of backlog because we should have burnt more revenue in the first quarter and our backlog driven businesses which is mainly our domestic construction businesses. In fact, if you look at our $3.7 billion of backlog, you'd have to go all the way back to 2008 to see a comparable period in the timeframe that we have outlined on this chart. And you can see that the gold portion which is commercial represents 34% of that backlog. Now if you take commercial and hospitality together in 2008 and you take that together today. You will see that we have the same level of mix of that work and in 2008; we were still working through the last phases of the Las Vegas expansion. Commercial sector backlog is close to $1.3 billion, an increase of $185 million or 17% from March, 2014. This really now two year to three year momentum in the commercial market gives us some confidence in conviction and it continue to pace of the non-residential recovery that we will see growth this year, despite the tough first quarter. As I mentioned earlier, the quarter's booking activity was strong and dispersed among many market sectors from December 14 in commercial and institutional and believe it or not, a little bit in hospitality. We also saw it in industrial which for us also includes manufacturing and water and wastewater. We did burn a little backlog in healthcare and we think this is a sector that's not going to see a lot of growth although we have a some decent opportunities in front of us in specific markets. the people are still sorting; our customers are still sorting through the ramifications of the Affordable Care Act. Transportation backlog decreased a bit, but we still have some very good infrastructure projects that not only we're working on, but that we also are bidding on. From a year-over-year perspective, our backlog growth has been fuelled by increases in most market sectors. Led by substantial increases in both commercial and transportation, but we're also seeing increases in industrial/manufacturing water and wastewater and yes then we'll jump in hospitality. As you can see our backlog from a market perspective is anchored in the commercial sector, we do well there and is balanced throughout the remaining sectors. A good position to be in and many people do think, we have a growing non-residential mark in 2015 and we believe that too. Looking at it by segment, mechanical and electrical construction segments both grew backlog year-over-year and from 2014 and together these segments comprise EMCOR Construction Services. EMCOR Construction Services backlog which represents our mechanical and electrical segments stands at over $2.7 billion, an increase of $414 million over March, 2014 an increase of $89 million over the December, 2014 level. Again, I wish we would have burned some of the backlog in the first quarter and drive the resulting earnings from it. Well you see the construction of that and you can see the substantial segment growth year-over-year. Mechanical up 15% and electrical up 22%. Building services is at $747 million down $32 million, the entirety of that is the government contracts that Mark referenced and we had referenced earlier in our year end call, but it's up from December which is a trend we expect to continue as the year goes on. We continue to see backlog growth in our mechanical services business in building services. In fact the backlog there is in an all-time high and again that leading us to believe is it non-res will have growth this year and this contribution in the first quarter, when they had backlog growth start to see velocity building in that business. And again it's mainly commercial work, the drop again in building services from the two government JV's. Our backlog is well balanced and we continue to see solid bidding opportunities in front of us. The target remain disciplined like we always are. We are confident in our ability to execute as a non-residential market slowly improves. Now I'll be on Page 12 and 13. And it's really what everybody is been waiting for in this whole call, what do we think about the rest of the year. Now we're going to leave guidance unchanged. Revenues of $6.6 billion and with the range of diluted EPS from continuing operations of $2.65 to $2.95. Here's what we expect as the year progresses, we expect revenue growth and that is afforded by our strong book-to-bill and backlog growth. The stronger the revenue growth, the higher we're likely to get into our guidance range. We expect revenue momentum to build in our construction business coincident with our backlog growth and we expect margins improved in our construction business overall and especially in our long time and well performing electrical business. We expect margins to improve throughout the year and SG&A we expect to moderate and Mark and I both went through the reasons why. We don't have a fix cost issue here. You think about it, our headcount is up other than what we had in the industrial spike less than 2% and our increases in salary and everything less than 2%. Partly the image of spendthrifts [ph] in our business. We do not know, how much of the deferred turnaround work will happen in 2015 or how much it will be delayed in to 2016 at this point. Now some of this facilities are still on strike and not settled. We expect to have some unsold opportunities present themselves to us as the refineries are running at near record levels of utilization and that drives demand for our services in not only industrial services broadly, but also our shop services, not only field but also shop. We are in a very fluid situation with our customers in refinery and petrochemical space right now. We are working with our strike customers especially on a daily basis to understand how that work will be scheduled on a go forward basis. We do expect a strong fall turnaround at the season at this point. We expect building services performance to continue to improve through year end. Mechanical services performing well and we expect that to continue. Site-based services had a better quarter absent to snow in the first quarter and then executed terrific on the snow that we did have. We remain optimistic in our opportunities as we performed okay in Q1, despite significant external headwinds. And now we reiterate for the third time on this call. Without these headwinds, we would have a record or near record Q1. With respect to capital deployment, we look to fund organic growth, have seen a little better acquisition environment for negotiated transaction versus prior year and will continue return cash to shareholders through dividend and buybacks. With that, we'd love to take your questions and I'll turn the call back over to Genisha [ph]. Genisha?

[Operator Instructions] your first question comes from the line of Alex Rygiel of FBR

Tony, new awards is been is been about a $1.6 billion almost every quarter give or take for the last three years or so, it seems like you managed possibly to that number given sort of the stagnant market, but the market sounds like it's waking up a little bit. Is it time now for you possibly to press your team members to be a little bit more aggressive to build new awards a little bit quicker?

Alex, that's a balance question, our business is a business based on opportunities within a local market and we're seeing opportunities in markets to really grow some of our companies and part of that 2% headcount you see in response to not only opportunities that we have in hand, but opportunities we see in front of us. So the way I look at it, with 11% backlog growth year-over-year and very minor headcount additions. We do have the ability to take more work. So we, I don't want to say we're getting more aggressive because we really have driven discipline bidding in our business. It's part of our culture, but we have the ability to expand capabilities in markets and that's what we've done and a good example that is what we've done in the Metro New York area really building a infrastructure and transportation infrastructure electrical contract over the 8 years. So I think in one sense, the mathematics work out to a managed number. I think with the right market in front of us, that booking rate will continue to expand. But what you've seen is, it's gotten better. It's just the mix of change in construction business is actually up nicely 15% and 22% year-over-year.

And there are any larger projects such as Tappan Zee that from a timing standpoint, we could see the revenue burn sort of accelerate over the summer months here that spike your revenue?

Well, I think one of the things will help our revenue if you think the, let's just focus on the $30 million to $40 million late [ph] revenue in the construction business as a result of the weather that should come back into the business in Q2 in early Q3 based on scheduling. I would think a lot of that would come into Q2. And will probably work much productively regardless of whether we would have been able to do in the winter because we'll be doing it, in better weather now. I think the backlog velocity that we had up 11% year-over-year that as you know, that stuff has to move through the business now and we're continuing to see good opportunities and we're also seeing good momentum in our small projects work. You know buried in these numbers is a pretty good story in building services. The backlog grew from year end and revenue would have grown from year-end absent these two government contracts and Mark would tell you, the government contractor because of where we were in the execution - to get down. We really didn't get much profit contribution in first quarter last year from, but you know they were successful contracts because now we're distributing the cash. So and what's driving that building services revenue growth is really two things. It's leveraged work across our site-based portfolio both government and non-government absence of snow and the other part of it is the small project work in the mechanical services business, which is small project construction somewhat really the energy services. So that tells you, the commercial market continues to rehabilitate even outside of our backlog reported numbers. If that makes any sense to you, the way I laid it out.

And lastly, as I relates to SG&A. SG&A is been rising a little bit over the last couple of years, but it's sort of at a level. It seems like it might be at a top as a percent of revenue. Do you think that, we're going to continue to see maybe going forward greater leverage over that sort of SG&A fixed overhead?

This is Mark. Obviously one of the things we talked about in connection with 2014 is that, we were expecting and we try to articulate to all of you that, we were going to see some increase in percentages because the industrial portion of our revenues is much more significant now then it's ever been certainly with the addition of our RSI in late 2013. We talked a little bit about how their fixed cost structure was higher than our other segment reporting segment business. But clearly, the percentage of revenues in the quarter just reported I hope it's a high water mark because once again as Tony said, structurally when you look at our cost, one of the biggest drivers in quarter one was really compensation-related. The fact that, we're still looking at the same targets despite the fact that, we got out of the gates a little bit slower this year than we would have liked, is driving at this proportion in a matter of comp expense in the quarter relative to the actual reported performance and we're obligated to accrue based on the estimates not try to chew it up to actual certainly at the end of quarter one. So we're clearly looking to be the sub 10%, I think Tony and I would be much happier, if we were in the mid 9's, but I think getting back to some of those periods, where we were in the low 9's to high 8's just put the composite business that we have today is probably unrealistic.

Great, thank you very much.

Your next question comes from the line of John Rogers of D.A. Davidson

Just following-up on Alex's question. Just so I'm clear, Tony did you say that you expected 9% SG&A for the rest of the year?

No, no. I said, it would fall into the mid 9's. If you ask, what the range is likely to be, when the year is done at 2015 depending on the revenue growth, especially in our construction business and the rebound from some of these deferrals and what we think of, yet unsold opportunities that should materialize in the industrial space. We would be shooting for a number between 9.5% and 9.8%. John.

Okay, thanks I appreciate that. And then just in terms of the construction work that is starting to come through, pricing on that. I mean, are you starting to see the market tighten up at all or is it just better at utilization? Are we going to see margin improvement I guess?

Yes, we should see, we're going to see margin improvement in electrical and mechanical as the year progresses, surely. We think, today that we're doing more mid-sized projects work sort of $500,000 million to $8 million project. And the smaller end of that, the pricing has gotten better.

Okay.

The higher end of it, it still not as good as it was in 2007, 2008 but it certainly has improved from 2009 and 2010, John. And what we know that productivity has made that better. So we like to how we're running our construction business and we like, have backlogs building and the activity strong, that 17% up again and commercial year-over-year off of a pretty good up from 2014 and 2013 and $1.3 billion coupled with the growth we're seeing in mechanical services as I went through earlier. Pretend to us that is a good market because our guys have a lot of discipline on the kind of work they're taking. So in a small project, we're definitely seeing the uptick in the margin.

Okay and then lastly, if could, I know it's a seasonally low cash quarter, but not significant buybacks this quarter. What's your thoughts on buyback opportunities or plan this year versus are you seeing more acquisition opportunities?

Well, we're seeing the potential for more acquisitions on a negotiated transaction basis. We don't anticipate there will be big participants in the auction process because probably equity price are still crazy, but on a negotiated basis for things that are really close to what we do, we're starting to see some opportunities in those kind of deals. So we would like to balance in more towards acquisitions this year. Until the right opportunities that can add any one of our segments and things that we already do and we absolutely are committed to buybacks, is it likely to be as heavy as it was last year. I think it depends on the pace and timing of the recovery this year and the cash leads on organic growth coupled with the acquisition environment, but one thing we did accomplish in the first quarter. We said, we would make sure that we bought back or over hang that would be part of our mantra going forward and that's what we did in the first quarter.

Okay, great. Thank you.

Your next question comes from the line of Adam Thalhimer of BB&T Capital Markets

Tony, the active bidding, market you cited is that broad based geographically?

You know, there are certain markets that haven't been broad based for 20 years now right, collectively [ph] but if you think the major markets its pretty broad based. I would say, the north east is fairly strong especially Boston, New York continues to be strong. The Mid-Atlantic although, it was probably a little more robust in 2012, it's still pretty strong today. We saw, especially some of the industrial work continues to be strong for us. We have some interesting opportunities in Florida on the water side both in South Florida, both in our Poole and Kent subsidiary and Pepper. Water restoration and water and wastewater work. Texas is a mixed bag, some of the institutional and healthcare work continues to be strong. Some of the quick-turn commercial work has turned down a little bit, not intended to fit outside. California is okay, we would like to see more large projects move through California right now, we had very good success on power generation work. We think that's going to continue especially with their aggressive carbon reduction goals and the tech factor is a tell of two worlds. The data center part of tech, which shows up wherever the segment happens for us it's institutional, shows up as institutional, if it's commercial shows up in commercial. The data center market continues to be very strong. The tech manufacturing market which was very robust for us in 2013 and 2014 has definitely turned down here in 2015. Some of the big work we do for the semiconductor and other manufacturing companies has definitely slowed down out west.

Okay.

So I would say, you could generally say broad based with caveat on a tech.

Got it and then on, trying to get a sense for, where things stand with USM because you had a very good margin order [ph] there? You're getting close to revenue being flat year-over-year. I know there is some moving pieces with contracts going on and off, but I mean when do we start seeing revenue growth again in that segment? Reckon margins go and kind of what are your thoughts on that acquisition, a few years on?

Well, I tell you what it did for us because we now have a real commercial site business. Its broad based and it's performing okay, not nearly as much we'd like. It performed very well on the snow side in the first quarter, we just didn't have as much snow. The underlying business outside of snow actually performed better in Q1, 2015 versus Q1, 2014. We also are starting to book some work now and the right kinds of work. So I would say the arrow was pointed up, it's not a 65% degree angle yet, Adam but it's certainly better than 25% or 30%. So we're starting to see all the hard work that we've done getting the cost structure right combined with the businesses. We've retooled the sales force. We feel pretty good of where we are, we've had some really key people on the sales side and put some of our more senior people with some of our guess [indiscernible] our mechanical services business on the sales side. We're making progress, so I can say if you look at it as the whole business, we've made good progress. If you look at just USM, we didn't make as much as we wanted. We wouldn't have fixed the whole business, we have USM. It's hard to separate some of things now because we now have a national mechanical service business we didn't have to do, which is part of the reason, you're seeing the strong bookings on the mechanical service side because it's coming from customers that now believe we have the ability to serve them nationwide on the delivery of that service. So I think overall, we're not in an A, I wouldn't even say we're at good B, but we're trending from a C plus to a B minus on that acquisition, hopefully.

Okay, good. Thank you very much.

[Operator Instructions] your next question comes from the line of Steven Folse of Stifel

First question I know that the majority of direct exposure to the oil and gas market is on the downstream side, but was any of the weakness in the industrial services business due to maybe some weakness in the capital project side and I guess, probably more relevantly are you continuing to see kind of some, let's call it contagion effect in like to - like the office in commercial markets and areas like Houston.

Yes, we talked about Houston for us. The way I termed it, I think on our year-end call was this. We have a very well performing mechanical company in Houston, that's the only exposure we would have to this spill over effects from upstream in the commercial segment. They perform very well, they had a pretty good 2014. They were poised to have a great 2015 and just order of magnitude, this isn't $0.15 a share improvement. This is $0.02 to $0.04 a share more they could have help make us. They were positioned to have a great 2015, now they move back to a very good 2015. We think that impact from the spill over in oil and gas for us today is less than 5%. Now as to capital side, we're not seeing yet. Where would see at EMCOR, I think would see in two places? You could see in some of our construction businesses in California to service those refiners and the reason you would see it there is, in some ways are the marginal refiner for some of these refinery operators and is all kind of issues involved with operating a refinery in California. The other place you're likely to see it with us is in new build heat exchangers. Only, in some of the midstream projects or the LNG projects with so far has been fine, but you could see it there. Now overall, with the new build heat exchanger business does for us, is it loads our plants and it allows to earn better margins on the repair work. It's not one of the higher profit things we do, but it keeps our engineer sharp and again it loads our plans with more predictable load down on the Gulf Coast. Sizing that for us, in the industrial segment it's less than 10% to 12% of what we do in the industrial segment will be new build heat exchanger servicing midstream or any type of upstream application.

Great. Thanks and then kind of a little bit of a follow on to that, with refinery strike that you saw in the quarter. It sounds like, you're expecting to get most of that back in the third or the fall turnaround season. Do you think that there is going to be anything else abnormal this year with seasonality there because of the strike? I thought maybe the second quarter would be a little bit stronger. Are you expecting that?

Here's what we've said and I'm sorry, we said we don't know how much of that work will come back into 2015 or 2016. We do expect a percentage to come back, right now what's been identified as coming back is less than 25%, they've actually scheduled here today. Now, is that number likely to go up? Is it likely come in forms of other work as we try to keep these refineries operating in this environment? Yes. That's the unsold opportunities we expect to happen as they're operated really high utilization. The other thing, we think sitting here today based on what we know our customers have asked us to do, is we expect a very strong fall turnaround season. As far as what happens in Q2 or Q3 or Q4, it's a very fluid situation. We are getting, we did right-sized our workforce as quick as we could in response to this and it was, it's painful. I mean, here's real number folks. We were up in January mid-teens hours year-over-year. Go out of year [ph], so our performance in Q4 was strong, our performance coming into Q1 was very strong. As Mark intimated, the RepconStrickland part of the business did very well, not just they had the right mix of customers that weren't as affected by the strike. Our legacy business, which is a very good performer had a very good fourth quarter and a pretty good first quarter of - record first quarter of 2014 had a couple very large turnarounds, now usually we celebrate when we have large turnarounds because large turnarounds drive shop work, drive the need for specialty welding services usually expand in scope. What happened here was, we were mobilizing for those large turnarounds, started in one case and was getting scheduled to start in other and it roughly got hold in the second week in February. Now we're hoping that would get moving while the strike didn't settle until late March early April and it was only in one of those facilities that strike settled and they haven't made a decision of how that work is going to be done because that's part of the network of plants. The other plant where the large turnaround was scheduled is still on strike, there is no settlement. And just so everybody, I think most people understand this. This is pattern bargain, so just because one operator did it, doesn't mean everybody else is going to do it and this is the refinery operators. And as they move to Texas and Louisiana, there is less enthusiasm for the strike and so it's a very fluid situation, how this work is going to get done. Our experience suggest us, when refineries are operating at this higher level of utilization that they need this, our services and maintenance repair services more and sometimes we have an opportunity to do more work for them in the fall turnaround season that we had and originally anticipated. So a strong fall turnaround, not sure what will come back as result of strike in 2015 and 2016 overall and finally, we do expect increased demand for our services, if this high utilization continues.

Okay, great. Thanks.

Your next question comes from the line of Tahira Afzal of KeyBanc

Good job, given all the weather nuances and all in the quarter and I know there were lot of moving parts. I just, first question is around some of the heat exchanger opportunities. I know it doesn't get that much fanfare, Tony but these could be pretty interesting in terms of margin opportunities for you, maybe late this year into next year and we're seeing more LNG projects in the U.S. going through and progressing in construction. Do you think Petrochem projects are also doing the same, so we'd love to get your thought from that opportunity scope and timing versus what you've indicated in the past?

We like the heat exchanger business. We like the new build heat exchanger business, we like heat exchanger extraction business out of refineries, we like the heat exchanger cleaning business and we like the heat exchanger repair business, in our shops. We like all facets of the heat exchanger business like you, T. We think the opportunities are going to continue because of LNG and Petrochem. We think that we are well positioned; we would look to grow that business. We did it successfully, right after we bought Ohmstede with the acquisition of Redman which has been a terrific opportunity for us to get more exposure in the West Coast that happened within five months. We look to grow organically, the real issue for us in the heat exchanger business and what you're talking about is more specialized applications which we tend to be very good at, is engineering resources. And we have a very good engineering resources in Ohmstede business in Houston and in our shops on the repair side, we need more of it. Our constraint to growth is, engineering. As you know most of these things are customer engineer, you know it's 70% sometimes customs and sometimes it's 30% customs versus something we built before. But you know these are very specialized engineers, we train them well. We're always hiring them, we lose some. The one silver lining of the slowdown in some of the CapEx upstream is less people are competing for engineers that are "broadly in oil and gas". We think that gives us an opportunity to grow our engineering force and finally we were always looking for the right acquisitions, whether they're small niche acquisitions or larger ones in the space and sometimes these companies come as part of something else and sometimes they're standalone. But in general, we like heat exchanger, the model looks very much like our fabrications shops on the pipe side, how do you think about it and how you price it? The shop repair work is very similar, the way we think about repairs and overall at EMCOR and how they're priced. And so we do like the business and we're going to continue to look to grow it organically first always and if the right transaction came up, we would jump on it, but that's a hard thing to do. I mean, it's been a stagnant space for a long time on the acquisition side.

Got it, Tony and Tony if you look at the last peak of the cycle and I assume it was around 2007, 2008 you know for Ohmstede. Where would the margins of the overall heat exchanger business be directionally today versus where they were at that point and do you think you can get them up there again just based on the activity levels you're seeing?

They're down from there, they're still very healthy but they're down. Mark, maybe add to that I mean, well I don't think they'll get back to where they were there, but we think they can improve.

T, you may recollect surely after we've made our initial investment in this space that we were looking at operating margins that were approaching 20%. Clearly pricing has not recovered in the current market to those levels. I like to think as we move forward we're going to see improvement from our recently reported margins. I just think with some of the things that did change structurally in that market sector that pricing is not going to get back to those older historical levels, but I like to be proven wrong in that front.

And Mark's number on the shop side. If you're talking about the 20%.

Got it. Second question, Tony, if I look back you had, you've done the right thing I assume by diversifying the business to make the troughs and peaks less pronounced and so the earnings become more consistent. But therefore I look back in 2009 because you were more concentrated and you think the lag benefit of construction cycle on the non-res side, your operating margins, touched and went slightly above 5%. Do you need all your businesses right now to work together in tandem to really deliver 5% plus operating margins over the next year or two or do you think that the momentum you're seeing on the non-res side will be sufficient on its own?

I mean, we're getting closer, when you look what we did last year. Clearly, as it mixes more towards a construction improvement especially in mechanical. We think electrical margins will get back to what they are, the way I think about the business, T is, if our electrical guys can operate 6.5, 7, 7.5 somewhere near on the sustained basis. Once a while, they'll buffer little bit above that sometimes it will a bit below that. I'm talking about an annual basis or a sort of 6.25 look back. For mechanical guys can operate 5, 3 to 6. But we can get building services into the mid 4's and if we can get industrial last year, we finished at close to 8 and if we can get that a little bit above 8, we can get the 5. So they don't all have to be at optimal levels, they could be in that range and we can get there and it depends on the mix. We do think, we're in an environment now. We'll, I think sort of the untold story on SG&A in the first quarter was actually a positive one. I mean we got all the stuff going on with insurance year-over-year and some of that had to do with actuarial changes last year and is a whole bunch of things that go into that right, but the biggest thing when you look at the positive story on SG&A. We got 11% backlog build and in our fixed cost structure which is not the unobserved part industrial, we had 2% headcount built. So we think we can do a lot more work with not adding a whole lot of people and so we expect, we said that for a while, we expect to get leverage on our SG&A and our hiring patterns, which suggest we're going to get that. We haven't added a lot to the fixed cost structure and the second thing I think that helps with our margins is, with commercial being $1.3 billion that's some of the better work that we do, you know very rarely that we have at EMCOR a commercial job to go sideways in a big that way. We have a job that goes sideways in a big way, it's usually a large institutional job. Sometimes an energy or power job or a lot wastewater job and that's and once in a blue moon, it will be a transportation job, they tend to be very good for us. So I look at the mix right now that we have is being pretty favourable for good performance. What you're seeing right now in some of the margins is and I think Mark covered this a little bit in his comments. We had some very good power generation work finished in the first quarter of last year. We're in a different part of the cycle in some of the larger work that we have, now it has a little bit of a different risk profile, our guys are appropriately cautious at the beginning of a job, as they really try to figure out, are we getting the productivity we expected, are we going to be able to have the kind of prefabrication opportunities we thought, we were going to have. But as the construction of project manager from the GC really know what they're doing in the flow of this job is going to work, do we not going to think, we're going to have trade stacking problems and it can sometime happen in a large shop. So we're appropriately cautious in our front, we're actually employing labor versus other people in our space that are employing people that employee labor and so we're not at all bothered by that because it's how we've have trained our folks to think.

Thanks.

All right.

That's helpful, Tony. I mean, end of the day, you know it seems your implied margins right now in the operating side based on your guidance let's say around 4.5% or so, I guess my question is, let's take our USM and snow, let's take our refining getting much better than wherever it ends at this year. Can you still on the commercial side see enough of a pop into next year, where do you see margins coming close to that 5% mark?

I'd say it depends on how much SG&A leverage, we get in the mix of work we have. Mark, what would you attribute on it?

Yes and I think clearly, T, when you look back at some of those historical results. We had a lot of other noise in the system I think and one of the things that we've done a very good job over the last two or three years is eliminate a lot of other earnings distractions being the internal earnings distractions or lack thereof. So we certainly don't need to have to hit a home run or a grand slam to get to those levels, but to re-echo what Tony said, I think we have to be within a reasonable range of the midpoint of historical earnings by segment. And as Tony said, mix is a big driver so for whatever reason if industrial becomes a larger percentage of the total, you're going to see a much more significant move in overall operating margins of the company conversely, if the UK ends up pushing through some more volume at higher levels, you know because it's been such a drag in the past. I think it's going to make a significant difference as well. I think, we've done a good job of stabilizing thing. Clearly the discipline that we've executed or demonstrated with regards to project selection and customer selection has paid off over the long-term and we're optimistic that you're going to see that in our results, as we go forward and hopefully we get some sustained period of broader economic that favourability that we haven't experienced now for a number of years.

Got it, okay. Thanks a folks.

There are no further questions. Management, do you have any closing remarks?

Thank you very much for your interest in EMCOR today. I said, we're not big excuse makers here, but we thought it was really important to understand how some of these external factors impacted us here in the quarter, they were unusual. We certainly look to build on very good underlying fundamentals in our business and look forward to talking to you in July, with our second quarter call. Thank you very much.