EMCOR Group, Inc. (EME) Q4 2015 Earnings Report, Transcript and Summary

Good morning. My name is Carmen and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group Fourth Quarter and Full Year 2015 Earnings Call. [Operator Instructions] I would now like to turn the call over to Max Dutcher. Sir, the floor is yours.

Thank you, Carmen and good morning everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the company’s 2015 fourth quarter and full year results, which were reported this morning. I would like to turn the call over to Kevin Matz, Executive Vice President of Shared Services, who will introduce management. Kevin, please go ahead.

Thank you, Max and good morning everyone. Welcome to EMCOR Group’s earnings conference call for the fourth quarter of 2015. For those of you who are accessing the call via the Internet and our website, welcome to you as well and we hope you have arrived at the beginning of our slide presentation that will accompany our remarks today. Please advance to Slide 2. Slide 2 has the executives who are with me to discuss the quarter and the 12-month 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 welcome to your first of many calls with us 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 find us at emcorgroup.com. Before we begin, I want to remind you that this discussion may contain certain forward-looking statements. Any such statements are based upon information available to EMCOR management’s perception as of this date and EMCOR assumes no obligation to update any such forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these 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 market for EMCOR services, adverse business conditions, increased competition, mix of business and risks associated with foreign operations. Certain other risks and factors associated with EMCOR’s business are also discussed in the company’s 2015 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 will be covering Pages 3 through 5. Well, good morning and thanks for your interest in EMCOR and welcome to our quarterly call and the 2015 year end call. I am going to mainly discuss 2015 full year results here in the front end, but I will spend some time talking about the highlights of the quarter. Mark will take us through the results of the quarter and also the year in detail. I will also cover at the end of this call our expectations for 2016. I will compare EMCOR’s performance to the pro forma numbers and Mark will provide the adjustments. 2015 has no items that warrant attention. Our fourth quarter of 2015 ended about where we expected. We earned $0.80 per diluted share from continuing operations on $1.78 billion of revenue and we had organic revenue growth of 3.1%. Operating margins expanded to 4.7% in 2015 from 4.4% in 2014. We expected and achieved organic growth in our U.S. construction operations, with very strong growth in the Mechanical Construction segment and essentially a flat fourth quarter compared to the fourth quarter of 2014 in the Electrical Construction segment. We earned a blended 7.2% operating margin in our U.S. construction operations. However, the electrical segment had an uncharacteristically weak quarter versus prior year at 4.1% and mechanical was very strong at 8.9%. We did have some issues in the quarter in some transportation and infrastructure work in our Electrical Construction segment that cost us about $8.2 million in operating income in the quarter. Those issues center on labor productivity, access and schedule delays. We will try to recoup some of these losses as the job progresses. In the Mechanical Construction segment, we had very strong underlying performance, but it was bolstered by $12.1 million claim settlement on a large institutional project in the Southeastern U.S. which we completed previously. This was one of the large projects where we had the large write-downs in 2013 and at that time we told investors that we would aggressively seek recovery and we did. Our building services had its strongest quarterly organic revenue growth in over 2 years in the fourth quarter, with expanded operating margins as compared to the year ago period by 70 basis points, as it had stronger operational performance and did not have the headwind from legal expenses that we discussed in the year ago period. Our industrial segment performed as we expected. We had a very tough compare versus the fourth quarter of 2014 for our field services business especially, where this year we had a decent fall turnaround season, but was not as strong as the exceptional fall turnaround season that we had in the fourth quarter of 2015. We have also – and we have talked about this many times faced declining backlog and opportunities in our shop business. It’s one of the most profitable things we have done, where we do. And we have talked about that and I will talk about that more as the call progresses. The UK performed as expected in the quarter as we have continued to have improved stability in the business. For the year, we have revenue growth of 4.6%, with 95% of that being organic. We had organic growth, and as a result finished the year with $6.72 billion of revenues, a record for EMCOR and had a book-to-bill of 1.03. We are pleased that we are growing again. We earned $2.72 per diluted share from continuing operations well within our updated guidance range of $2.65 to $2.75 per diluted share from continuing operations. We had record earnings per share, revenues, operating income and EBITDA in 2015. 2015 was a very good year. As we exit 2015, we expect organic growth to continue in our electrical and mechanical segments, construction segments, continuing our building service segments, continuing the United Kingdom, the UK, but we expect 2016 revenues to decline in our Industrial Services segment. Our operating income percentage was about where we expected for the year at 4.3% of revenues. We battled an underlying mix shift in our Industrial Services segment with a significant decline in our shop business and some lack of productivity in our field services business as a result of the early 2015 refinery operator strike. We generated $267 million in operating cash flow. We returned $104 million to our shareholders through stock repurchases and another $20 million in dividends. We grew backlog by almost 4% to $3.7 billion and it is at its highest level since 2008, with strong backlog growth in our Mechanical Construction and Building Services segment, a slight decline in our Electrical Construction segment and a significant decline in our Industrial Service segment. But again, we would remind everybody that it’s new heat exchanger orders is what that backlog is composed of. That backlog is down almost 50% from a year ago period. And with respect to the UK, it’s performed as expected and has become a growing and steady building services business. Our balance sheet remains liquid, strong and flexible and provides us the foundation to grow and strengthen our company. Overall, a pretty good year, with a non-residential market that continues to strengthen offset by reduction in capital spending for our industrial – oil and gas customers. And with that, I will turn the call over to Mark.

Thank you, Tony and good morning to everyone participating on the call today. For those accessing this presentation via the webcasts, we are now on Slide 6. As Tony indicated in his opening commentary, I will begin with a detailed discussion of our fourth quarter 2015 results before moving to our full year 2015 performance, some of which Tony just outlined during his executive summary and is included in our consolidated financial statements within both our earnings release announcement and Form 10-K filed with the Securities and Exchange Commission earlier this morning. So, let’s cover the fourth quarter performance. Consolidated revenues of $1.78 billion in quarter four are up $63 million, or 3.7%. All reportable segments are reporting increased revenues quarter-over-quarter, except their U.S. Industrial Services segment. Fourth quarter revenues attributable to businesses acquired in 2015 were $10.6 million and primarily impacted our U.S. Mechanical Construction Services segment. Excluding such acquisition revenues, our organic revenue growth in the quarter is 3.1%. U.S. electrical construction revenues increased 1.1% to $357.6 million. Increased project activity within commercial, manufacturing and hospitality generated revenue increases which were partially offset by a decline in quarterly transportation revenues. U.S. Mechanical Construction fourth quarter revenues increased $75.8 million or 13%. Excluding acquisition revenues, this segment grew organically 11.2%. Our mechanical construction revenue growth was broad based from a market sector perspective, with both the industrial and institutional market sectors’ project activity contributing the largest dollar revenue growth quarter-over-quarter. This segment is reporting double digit revenue growth across six of the seven market sectors that we track and report, other than the commercial market sector, which experienced a minor revenue contraction this quarter. Tony will review our backlog by market sector after the completion of my commentary during this morning’s presentation. EMCOR’s total domestic construction business fourth quarter revenues of $1 billion increased $79.7 million, or 8.5%. U.S. building services quarterly revenue of $435.9 million, increased $8.3 million or 1.9%. Revenue gains within the mechanical services, commercial site-based services and energy services divisions were significant enough to overcome the headwinds associated with the loss of two government contracts completed in 2014 that were not renewed pursuant to re-bid, as I had referenced on each of our quarterly calls during 2015. Despite reporting low single-digit revenue growth in the quarter just ended, the fourth quarter represents the third consecutive quarter of revenue increase for our Building Services segment, which previously had not reported any revenue growth since the third quarter of 2013. With our contract portfolio reshaping that began in 2013 behind us, our team is now developing a nice trend of revenue enhancement. United Kingdom building services revenue of $101.9 million increased $11.1 million, or 12.3% despite the headwind of the weakening British pound resulting in a quarter-over-quarter unfavorable exchange rate impact of $4.4 million. This segment continues to see revenue gains pursuant to new multi-year contract awards that were not in existence during 2014’s fourth quarter. US industrial services revenues of $222.2 million declined $36.1 million or 14% due to reductions in capital and maintenance project activity, inclusive of turnaround activities from our industrial field services operations, as well as lower revenues from this segment’s shop services operations. As a reminder, this reportable segment reported over 40% revenue growth in 2014’s fourth quarter due to a stronger than usual fall turnaround season. Additionally, as we discussed during our October 2015 conference call, the volatility in crude oil prices is resulting in both the curtailment of capital spending by most of the integrated oil companies, as well as reductions in pricing of new build heat exchanger orders. We continue to see strong demand subject to seasonal patterns, for our field service offerings. However, our industrial shop services backlog is down approximately 46% year-over-year as a result of reduction in demand due to the aforementioned reasons. My last comment on quarterly revenues is that our fourth quarter revenues of $1.78 billion eclipsed our previously established quarterly revenue record which we achieved in last year’s fourth quarter. Please turn to Slide 7. Selling, general and administrative expenses of $168.5 million represent 9.5% of revenues and reflect a decrease of $3.8 million from quarter four, 2014. As a percentage of revenues, the current year quarter declined 50 basis points from the 10% reported last year. Please note that 2014’s fourth quarter SG&A was burdened by a higher level of legal costs due to the 2014 resolution of an outstanding legal matter. On a sequential basis, this quarter represents our lowest level of SG&A as a percentage of revenues during any quarter in 2015 as we were able to leverage our overhead cost structure during this period of revenue growth. Our fourth quarter is inclusive of $900,000 of incremental expenses inclusive of intangible asset amortization related to 2015 acquisitions. Therefore, our organic decrease in SG&A expense quarter-over-quarter is $4.7 million and is primarily due to reduced legal related expenses as a result of last year’s unfavorable activity, as well as the benefit from recent restructuring activities. Reported operating income for the quarter was $84.1 million, represents 4.7% of revenues and compares to $74.5 million or 4.3% in 2014’s fourth quarter. Please note that last year’s fourth quarter is inclusive of $1.5 million non-cash impairment charge as a result of the diminution in value of certain trade names of businesses previously acquired. Three of our five reportable segments are reporting double-digit percentage improvements in their quarterly operating income performance. Conversely, the remaining two segments are reporting period-over-period declines and I will touch on each segment as I walk through the remainder of Slide 7. Our U.S. Electrical Construction Services segment operating income of 14.7 million decreased $9 million, or 37.8%, over quarter four 2014, with an operating margin of 4.1% or 260 basis points less than last year’s 6.7% operating margin. The decrease in this segment’s performance is due to approximately $8.2 million of losses incurred on several transportation projects during the quarter, due to productivity issues and delays. Additionally, this segment benefited from a number of high-tech projects within the commercial market sector that were progressing towards completion in Q4 of 2014 and were no longer active in the fourth quarter of 2015. 2015’s fourth quarter U.S. Mechanical Construction Services segment operating income of $58.5 million represents a $22.1 million increase from last year’s quarter. Reported quarterly operating margin is 8.9%, which is 270 basis points higher than 2014’s fourth quarter. Consistent with the revenue performance of this segment in the quarter, we had strong operating execution across most of our projects and the broad array of market sectors in which we participate. Additionally, this segment benefited from $12.1 million of revenues as a result of the settlement of a claim on an institutional project in which we recorded significant losses in reporting periods prior to 2014. Our total U.S. construction business is reporting an increase of $13.2 million or 22% over last year’s fourth quarter with an operating margin of 7.2%, which represents an improvement of 80 basis points over 2014’s fourth quarter. Our U.S. Building Services segment operating income of $15.6 million or 3.6% of revenues, increased $3.3 million or 26.9% over 2014’s fourth quarter. The quarter-over-quarter improvement is due to additional maintenance contract volume in our commercial site-based services division as a result of new contract awards as well as a reduction in legal expenses, given the significance of such expenses in last year’s fourth quarter, which included the resolution of the legal matter previously referenced. These operating income increases were partially offset by the headwinds associated with the loss of the two government contracts in 2014 that were not renewed pursuant to re-bid. Our U.S. industrial services operating income of $11.9 million decreased $8.1 million or 40.6% compared to 2014’s fourth quarter with an operating margin of 5.3% or 240 basis points less than last year’s 7.7% operating margin. The result of last year’s fourth quarter included unusually strong seasonal turnaround activities that did not repeat in the current quarter due to our client schedules, while our shop services operations experienced both a decrease in demand and margin pressure in the current period due to the macroeconomic trends previously discussed. UK building services operating income of $3.1 million represents 3% of revenues, which is an increase of approximately $700,000 and is a 40 basis point improvement from last year’s fourth quarter. We are now on Slide 8. Consistent with our 2014 reporting, the table on Slide 8 lays out the identifiable intangible asset impairment loss impacting last year’s fourth quarter, which we excluded from EMCOR’s operating income to provide better comparability. The effect of the aforementioned adjustment amounts to 2014’s fourth quarter adjusted operating income of $76 million or 4.4% of revenues compared to 2015’s fourth quarter operating income of $84.1 million or 4.7% of revenues. Our income tax provision for the quarter is reflected at a tax rate of 38.5%, which includes discrete items that negatively impacted the rate by approximately 50 basis points this quarter. This compares favorably to the 39.5% income tax rate in last year’s fourth quarter. Tony touched on our continued strong operating cash flow performance for the annual period earlier on this call. And from a quarterly perspective, we generated $171.1 million of operating cash flow in the fourth quarter despite the increased levels of working capital required to fund our strong organic revenue growth. Please turn to Slide 9. Additional key financial data for the quarter not addressed during my highlights summary are as follows. Quarter four gross profit of $252.6 million represents 14.2% of revenues, which is improved from the comparable 2014 quarter by $4 million. The quarter-over-quarter reduction in gross margin was driven by reduced U.S. electrical construction and the U.S. industrial services margin due to revenue mix and in the case of electrical construction certain project write-downs that were recorded during the quarter. Restructuring costs during the most recent quarter were immaterial and do not require further discussion. Diluted earnings per common share from continuing operations for the fourth quarter is $0.80 compared to $0.66 per diluted share a year ago. On an adjusted basis, reflecting the add-back of a non-cash impairment loss in 2014’s fourth quarter, diluted earnings per common share from continuing operations would be $0.68 per diluted share for 2014 as compared to $0.80 per diluted share in our current quarter, an increase of $0.12, or 17.6%. We are now on Slide 10. With the fourth quarter discussion complete, I will now augment Tony’s 2015 annual commentary. Revenues of $6.72 billion are up $293.8 million, or 4.6% as compared to $6.42 billion of revenues in 2014’s annual period. 2015 acquisitions contributed $12.5 million. And when such incremental revenues are excluded, our 2015 organic revenue increase is 4.4%. All of our reportable segments are reporting revenue increases year-over-year. U.S. Electrical Construction revenues of $1.37 billion increased $55.2 million, or 4.2%. Increased project activity within the commercial, healthcare, and industrial market sectors were able to offset reduced revenues from institutional project activities. U.S. Mechanical Construction 2015 revenues of $2.3 billion increased $111.6 million, or 5.1% compared to 2014. Higher project revenues from commercial and institutional market sector activities were the most significant drivers of the year-over-year increase and we have experienced broad-based revenue growth across the majority of our mechanical construction operating companies during the year. U.S. Building Services annual revenues increased $17.9 million despite fighting through the headwind of the two government maintenance projects not renewed in 2014, which had a negative revenue impact of approximately $53 million in 2015. U.S. Industrial Services 2015 revenues of $922.1 million increased $82.1 million, or 9.8% compared to 2014. This segment’s annual revenue increase is due to capital and maintenance project activity from our industrial field services operations, inclusive of turnaround activities, despite the early 2015 negative impact of the national refinery operator strike as well as revenue contraction within the segment’s shop services operations due to the reasons mentioned during my quarterly commentary. Our UK segment 2015 revenues increased $27 million to $377.5 million despite the impact of negative exchange rate movements year-over-year of approximately $29 million. Please turn to Slide 11. Selling, general and administrative expenses of $656.6 million are up $30.1 million as compared to $626.5 million in 2014. As a percentage of revenues, SG&A is 9.8% in both annual periods. Year-to-date operating income is $287.1 million or 4.3% of revenues and represents a $2.8 million decrease over 2014’s annual performance. 2014’s performance included two discrete items that on a net basis favorably impacted reported operating income by $10.3 million, which we adjusted for purposes of pro forma presentation. Therefore, on an adjusted basis, the year-over-year change in operating income is an increase of $7.5 million. Our U.S. Electrical Construction Services segment operating income decreased $8.6 million over 2014 levels to $82.2 million, or 6% of revenues. The year-over-year decline in income and margin is attributable to $10.1 million of transportation construction project losses recognized in the year. Domestic mechanical construction operating income of $138.7 million or 6% of revenues increased $24.3 million and 80 basis points over 2014’s full year performance. As previously referenced, this segment benefited from $12.1 million of revenues pursuant to the settlement of the claim. Total U.S. construction operating margin of 6% increased 20 basis points year-over-year and despite some intra-period volatility represents very strong performance. U.S. Building Services 2015 operating income of $17.5 million increased $4.6 million or 7.1%, due to increased profitability within their commercial site based services and mechanical services divisions, which offset an operating income decline within the government services operations due to the absence of the contributions from the two government joint venture maintenance contracts completed in 2014 that were not renewed pursuant to rebid and have been mentioned several times during this call. Despite this headwind, our Building Services segment increased their operating margin 30 basis points year-over-year due to improved execution and the reduction in legal expenses from 2014 models. U.S. Industrial Services 2015 operating income decreased $6.7 million, or 10.6% to 56.5 million or 6.1% of revenues. As discussed during the earlier part of today’s call as well as our previous 2015 quarterly calls, this segment was negatively impacted by the nationwide refinery operator strike in early 2015 that resulted in the cancellation of certain scheduled turnarounds as well as the impact of crude oil price volatility and pricing and demand for new equipment orders within our shop services operations. EMCOR UK Building Services operating income of $11.6 million, or 3.1% of revenues, decreased 22.5% year-over-year due to the benefit realized in 2014 from a reduction in certain accrued contract costs no longer expected to be incurred of approximately $4.8 million. We are now on Slide 12. Consistent with the reconciliation discussed previously on Slide 8, this slide reflects the operating income reconciliation for the two annual periods from GAAP to pro forma adjusted earnings for those items that impacted 2014. Additive to this reconciliation from the quarterly reconciliation previously disclosed is the gain on sale of building that occurred in quarter three of 2014. Adjusted operating income in 2014, reflecting the add-back of the non-cash impairment loss and identifiable intangible assets and the deduction of the gain related to the disposition of its subsidiaries owned building and land, was $279.6 million or 4.4% of revenues as compared to $287.1 million or 4.3% of revenues in 2015, an increase of $7.5 million. The annual tax rate for 2015 is 38.1% as compared to 37.4% for the 12-month 2014 period and is in line with my rate guidance provided for 2015. For purposes of 2016 planning, I anticipate a normalized income tax rate of approximately 38%. However, as I have previously mentioned, this rate can fluctuate if any discrete tax events occur during the year. Please turn to Slide 13. Additional key financial data on this slide not addressed during the 12-month highlight summary are as follows. Year-to-date gross profile of $944.5 million is higher than 2014 by $37.2 million and is consistent on a gross margin basis at 14.1% of revenues. Total restructuring costs of approximately $800,000 are slightly reduced from 2014’s activity and relates to our U.S. Building Services segment. Diluted earnings per common share from continuing operations for the year is $2.72 compared to $2.59 per diluted share a year ago. On an adjusted basis, excluding the impact of the intangible asset impairment and deducting the gain on building sale, 2014’s year-to-date adjusted diluted earnings per share would be $2.49 as compared to 2015’s reported $2.72 per share, representing a 9.2% increase year-over-year. Lastly, on this slide and as I had previously benchmarked our fourth quarter performance, and as Tony started with in his opening commentary, I would like to point out again that the results of our operations for the year-to-date period set new company records in regards to consolidated revenues, gross profit and diluted earnings per share from continuing operations for any annual period. Please turn to Slide 14. EMCOR’s balance sheet remains sufficiently liquid as represented by cash in excess of $400 million and modest leverage as demonstrated by our debt to capitalization ratio of 17.7%. Our cash balance is up from year end 2014 due to our strong fourth quarter 2015 operating cash flow generation as well as less cash utilized in financing activities, primarily due to lower repurchases of common stock during the fourth quarter and full year comparative periods. Working capital levels have increased due to the increase in accounts receivable as a result of our organic revenue increase as well as the previously referenced cash increase. Changes in goodwill and identifiable intangible asset balances reflect the impact of acquisitions made during 2015 as well as $37.9 million of year-to-date intangible asset amortization expense. Total debt is approximately $319 million at December 31, 2015 with the year-over-year change primarily attributable to mandatory quarterly debt repayments under our term loan. The increase in our stockholders’ equity balance for the year is not equivalent to our net income for the year, as it was partially offset by common stock repurchases and dividend payments, as well as other activity which is detailed in our consolidated statement of equity included in our Form 10-K. In closing and before I am able to get a drink of water, we continue to be successful in converting our earnings into operating cash flow and have utilized this cash generation to fund organic revenue growth, fund strategic investments and return cash to stockholders. EMCOR remains well positioned to take advantage of a continued non-residential recovery, future strategic investment opportunities, as well as to continue to fund our dividend and share repurchase programs. With my portion of today’s commentary completed and my throat just about gone, I would like to return the presentation to Tony. Tony?

Mark, please take a well earned drink of water. And you did all that without having to do it in between. That’s for the record. I am on Page 15. I am going to talk about backlog. As you can see on the graph, total backlog at the end of 2015 is at the highest level on the chart at $3.8 billion, up almost 4% from December of 2014 and flat with September of 2015. We had a very good booking year at EMCOR, with the book-to-bill over one. And we had both revenue and backlog growth year-over-year. And most non-residential sector growth predictions of mid single-digit growth happened. And we think that’s going to happen in ‘16 also. Worried a little bit about the back half of the year, but that’s just because we don’t have visibility. We are very well positioned in our domestic construction and building services operations and we are very well positioned in our Industrial Services segment, although I think we all know what the headwind exist there from just bottom line lower crude prices. As I mentioned earlier, if you really look at this chart and we would have put 2007 on there, this would be in second place to the end of the year 2007. And at that time, for those that have followed us for a long period of time, you may recall we had both $1 billion in commercial and gaming and hospitality. Commercial still remains our largest sector of 32% of total backlog. It has had really good growth since 2012. We continue to see stronger opportunities there. However, we are also seeing growth in water and wastewater, institutional, some hospitality and gaming and industrial projects. And these are the industrial projects beyond just our industrial segments backlog and healthcare and commercial work. Net-net, we are pretty well positioned in the market sectors we serve. And what’s always great about this chart is you see how flexible this company really is, and our ability to move between different segments and succeed in different markets. If you go to Page 16 and you look at the ebbs and flows of the market, what we discuss today, basically you are seeing strong growth in our domestic construction businesses, up $181 million or 7% from the year end 2014. And I think we – everybody knows, we are very well positioned in that non-residential market. And we have strong growth in ‘16 and we expect a solid 2016. We continue to see bidding opportunities both in our domestic construction operations and our mechanical services business, which is in building services. And those companies generally perform smaller retrofit and energy efficiency type projects. I could beat this again ad nauseam and talk about the drop in our shop backlog, it’s well documented. This is – this part of our backlog that has to do with new build heat exchangers – it’s the only thing in the backlog from our Industrial segment. And the reason for that is, everything else we do is based on unit pricing or time and material work. And I am going to cover that as we get into what our outlook is for 2016. Let’s be clear, oil companies are recalibrating and as they recalibrate they spend less money on capital. They spend less money on capital. They put less heat exchangers in. And as a result, we have less new build heat exchangers in our shops. We have new – less build heat exchangers in our shop. That’s what covers the fixed overhead in our shops, which we are now taking out and have been and that allows us to get better absorption on the repair work we do. I mean that’s really the story of what’s going on in our shop business. And we have said that for a while. We as a company and I think as a country should be very positive on the long-term outlook on the refining sector, especially on the Gulf shops. So, what you see is a seesaw, in summary; growth in non-residential, some comedown on those that have to do with the exposure to the oil and gas segment. And look, for EMCOR it’s a little bit beyond just the Industrial segment. We do construction work there too. We do a little bit of commercial work in Houston specifically for the oil companies – or a lot at times and so that all is what impacts us when oil prices go down. Now we will get to what everybody is really concerned about, what does ‘17 – what does ‘16 look like and that’s on Page 17 and 18. We are going to set 2016 earnings guidance of $2.70 to $3.00 per diluted share from continuing operations. We do expect revenues of $6.9 billion to $7 billion. We expect cash flows of at least equal to net income based on where we are today. As we have discussed and I just finished discussing, we are balancing this non-residential growth with some headwind in our oil and gas related business. We are still pretty positive on our downstream maintenance business. We are in the midst of a pretty good spring turnaround season. And as of today, we see a decent fall turnaround season. We have had decline in capital spending in the downstream and midstream markets that we serve and you can see that in our backlog drop. Just to size that for you on what it means, where you look at the Industrial segment, it’s about 8% to 10% of the revenues in that segment when it’s going well and it can be double that in the profit. So 8% to 10%, it can be 15% to 20% of the gross margin in that segment. And again, a lot of that has to do with the absorption we talked about. We expect to grow our revenues in both our Mechanical and Electrical segments. And we expect blended operating margin performance to be about where we were in 2015 or just a little bit higher. We expect building services to grow revenues and operating margins and we expect the same in the UK, with a slight margin expansion there. We do expect revenues to decline in our Industrial Services segments and margins to be essentially flat for the year as it battles through that mix shift. The markets we serve in general are a little bit uncertain right now. And that’s with some of the caution on the low end of the guidance. There are a lot of cross currents out there that are hard to quantify and estimate at this time. What I want to do in the rest of this call is take the opportunity to say, how do you get to the midpoint to the higher end of your guidance range that we put out there. Well, we expect to perform well in our Mechanical and Electrical segments and we expect to perform well in a growing non-residential market. We expect that market that we serve to grow around 5% this year. There is some uncertainty around that growth in the market in the back half of 2016. Our backlog is up to 7% and that should provide a buffer and – for these segments as we enter 2016. We are working on some large long-term infrastructure projects that as of now should have accelerating revenues in 2016 versus 2017. Like always, no different than any other year, we need the smaller, quick-turn commercial work, those projects less than $3 million or $4 million to continue to have strength in 2016 like we had in 2015. Further, we need EMCOR’s best business or one of our best business, electrical construction to return to more historic and expected levels of operating margin performance of 6.5% plus and mitigate and recover the loss of the productivity experienced on several of those large transportation infrastructure projects in Q4 2015. We expect that to happen. Building services enters the year with increased backlog for the first time in 3 years. We have strong underlying strength in our mechanical services business which will set the tone for the year. And we expect to have continued success in the execution of our project work, which had strong underlying fundamentals driven by energy efficiency work and replacement work driven by pent-up demand. Those that have followed us will always recall that we are never big discussers of pent-up demand, but we have seen strong catch-up maintenance and repair and replacement demand over the last 12 months to 18 months. Our commercial site-based and government business continue to improve and we do see a pickup in the IDIQ work over the last couple of years, from the dark, dark days of the sequester. Our Industrial segment has a headwind from the capital work and that’s been well documented. I am not going to go through that in a lot of detail right now. We said that we expect revenues to shrink 3% to 5% in that segment, but we are in the midst of a decent spring turnaround season. And it’s with our customers. I mean, our customers are spending money this spring turnaround season. And as of now, the fall season looks pretty solid. We do need strong performance from our Industrial segment’s field services operations and businesses and we will need improved performance from our specialty services businesses within those field services business to mitigate the loss for the shop work. We expect not to have as profitable 2016 as we had in 2015 in our Industrial Services segment. Summarizing the above, we expect continued growth in the non-residential construction market, where we have the best operators completing that work. We have backlog growth and we do have strength in our field services operations in the industrial segment. That’s got to make up for the drop in the new build heat exchangers in our shops. We do think we have a realistic shot to grow inside our earnings range. We will continue to be careful stewards of our cash flow and we will look to grow the business through always organic growth, which is always the best growth and acquisitions. And we are pretty good at that. We will continue to seek acquisition opportunities in all of our segments and we do see opportunities to add on our business in either geographic or service line expansion. We hope the more difficult credit markets for leveraged non-strategic acquires make acquisitions more realistic for us from a pricing standpoint, especially for some oil and gas and industrial assets. Further, we will continue to return cash to shareholders through either share buybacks or dividends and we prefer share buybacks at this time. And with that, Carmen, I will turn it over to you to open the line for questions and thank you for your interest in EMCOR.

Certainly. [Operator Instructions] Your first question comes from the line of John Rogers with D.A. Davidson.

Good morning, John.

Tony, just talking about the visibility into the second half of the year, I know it’s difficult and we are all trying to figure out what’s going on with the economy, but how much of your electrical mechanical growth or low growth is dependent on new build activity that you are waiting to see happen or is it just executing the small or refurbishment projects?

Again, if you go historically in our electrical and mechanical segments, our construction segments – and we are doing about 60% of that work is either new build or pretty significant renovation. And a lot of that’s in backlog. I mean, I think with just any momentum at all we will grow because of the backlog book. The visibility is challenging, John, always, but lot of noise going on around the economy. That’s the caution, I think, around our low end of the range. It’s visibility in the back end of the year. Anything that’s going to take us to the low end is going to be a macro event, not internally driven at this time.

Okay. And then the other question sort of bigger picture, I mean, it sounds like if I run the math right, your guidance is essentially assuming flat overall or flattish operating margins. Is there an opportunity at some point to improve those or do we really just need the top line growth to get us there?

The improvement will come from better execution than what we expect today really in our project portfolio. We are still battling that mix shift for the first part of this year, with respect to the shop versus field mix. That can be sizeable. That can be 20 or 30 basis points of headwind we entered the year with. We do expect electrical to come up, back to over 6.5%. We do expect building services to jump up, but we had exceptionally strong performance in mechanical, some of it driven by that claim settlement in the back half – in fourth quarter, but it’s 6% blended. We are operating a pretty good construction business. So, if you put it together, we expect a little bit of a tick up there, but not wholesale movement at this point based on the portfolio of work we have. I will say, in general, pricing has not come back in most markets to where it was in 2007. And so what we are doing now is we are executing. And Mark, you have something to add on that?

Yes. And John, it’s to build on Tony’s comments, when you look at our history which I am sure most people on this call have at their fingertips, on a combined basis our construction operations, back in the ‘08, ‘09, ‘10 range were kind of hovering in the mid 7s to low 7s, but we had some – we still have a lot going on in the gaming and hospitality markets. We had a lot of larger projects that were approaching completion at that time. When you look at the last 5 years or so we have kind of capped ourselves out at 6.3, 6.4 in there and as Tony said, we would certainly like to get back there. That’s once again kind of fighting the headwind of pricing. Pricing is better than it’s been. But as Tony said, it’s certainly not back to ‘07 and ‘08 levels. And we have adapted to that, because we have no choice. And I think our field level management is the best it’s ever been. And certainly, you could see that in the results. I think the only thing that’s been a little bit different with us the last few years is that we have had a few projects that have provided some unpleasant surprises, but we could bore you for all the reasons, but I wouldn’t say it’s certainly a recurring pattern at this point. But in light of the fact that pricing isn’t as robust as it has been historically, those types of things do impact the margin much more significantly than they would have say, 5, 8, 10 years ago. So, I think everybody has their mission in front of them to continue to do better. The great thing about completing a year is that we started new again for ‘16, but having said that it’s a battle everyday as you know in this industry and I think we are doing an excellent job of it.

Okay. I appreciate the color.

Thanks, John.

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

Good morning, Adam.

Hey, good morning guys. Congrats on the good Q4. On the transportation projects, I guess, first of all, do you expect any further charges this year? And then second of all I mean, what are the anticipated margins if that work ramps up?

Well, look we don’t expect any further charges or we would have taken them. And we think we got it all and it tends to be one of our better executing companies, a couple of them, where the charges happened. It’s more timing and productivity than anything else and 80% of it is not driven by us. And we will seek recovery. Just to calibrate, some of the most successful work we have ever done at EMCOR has been on transportation infrastructure work. And with our portfolio of projects we have right now, we expect that to continue to hold true. We are just ramping up some of the bigger transportation infrastructure work we have and we expect that to be successful. So, it’s a good market for us. It will continue to be a good market for us. We had a little bump here. And we will be aggressive in seeking recovery where we had the bump.

Okay, perfect. And then the $12.1 million mechanical that you recovered in Q4, is there anything else left there and how does that compare to your expectations?

It’s about where we expected. When we finished that work in…

Early ‘14.

Early ‘14, most of – the charges were all in 2013. We thought we would recover about two-thirds of what the problems were and that’s about what we did.

And then, snow removal in Q1?

It’s okay. I mean, there is a good chance you could play golf in Connecticut this weekend. So, not the strongest snow removal weather there has been, but it hasn’t been bad either.

And then just general thoughts on Houston non-res, then I will turn it over.

Houston non-res had a terrific 2015. We will do okay in 2016. We are blessed to be – have great healthcare capability in Houston, but clearly, the oil and gas customers that were doing tenant fit-out and retrofit work and building campuses – that will tail off here at the end of this year in ‘16.

Okay, thank you.

Your next question comes from the line of Tahira Afzal with KeyBanc Capital Markets.

Good morning, T.

Good morning. How are you doing?

I am doing fine. How are you?

I am doing well. Congrats. Decent quarter given all the puts and takes.

Yes, we are pleased with it.

First question is, Tony, how do I – if I look at that sort of slightly over $900 million in revenues from industrial, could you break out roughly how much came from heat exchangers, some traditional short cycle industrial work and turnaround?

The way we think of the business, T, is about 80% of that business is in the field, 20% of that business is in the shops. Half of that shop business is with the new build heat exchanger capital work. Half of that shop business, so 8% to 10%, depending on the year.

Yes. So, it seems like the turnarounds might have hurt the year more in a sense. I know that the heat exchanger business is higher margin, but it seems to be a pretty small part.

Yes, well, it’s – I like to say for every $1 we lose in our shops with absorption and everything else, we have to go make $2 somewhere else in EMCOR in revenue. All of that being said we had a pretty good fall turnaround season. We had an exceptional fall turnaround season in 2014. And we didn’t think we were going to repeat that and we have said that.

Yes. And T, this is Mark. Clearly, we never recouped the lost revenues from the first quarter that didn’t get executed pursuant to the refinery operator strike.

Got it. Okay. I mean, it seems like we are probably at the point where we – even with all the capital spending cuts and pressure on spending, maybe start seeing a secular refinery maintenance cycle come back to some extent. It seems you are assuming a good spring and fall turnaround; but it seems just given your traditional nature, you are still building it in with some measure?

Yes. We are building it in with a measure of confidence, I mean, conservatism and confidence I guess, because it is in the conservatism, right. I look at it the other way. We never had a maintenance downturn, if you look at the last 2 years, in our refinery maintenance business in the field.

Right.

We have grown if you take all that together, up 40% in Q4 last year, up this year, high-teens, up the year before, low 20s. I mean, we have had very strong underlying growth, but for this refinery operator strike, we would have had growing earnings in industrial, despite what happened in – but we lost about $30 million of revenue give or take. And that’s not even taking any pull-through revenue. That’s stuff we pretty much knew we were going to do. And we have estimated then I think $0.06 or $0.08 a share. The reality was probably higher than that, because we got no pull-through work either in the shops out of those turnarounds. So, we had a pretty good 2 to 3-year run in refinery maintenance. We see no reason, with the utilization rates that, that’s not going to continue on the maintenance side. The question is how does drive driven miles today, there is an article that it’s up that the refinery profitability in the Midwest is down. That will all wash itself out. It’s cyclical. I would always remind people though it depends on what your customers are doing during that time period and less than what’s actually going on in the overall market. Some people want to draw big conclusions, because one company is up, one company is down. Big picture, the market grows about 3% to 7% a year depending on the year on the maintenance side. That’s what it’s been doing. We took a lot of share here over the last couple of years. It shows the strength of the RepconStrickland acquisition and how after the first 4 or 5 months, we were again able to hit the ground running. We feel really good about that. And quite frankly, it might be an opportunity now to be okay to look for assets in that business long-term, because we are bullish on the petrochemical and the refinery business in the U.S. for as far as we can see. There will be hiccups along the way, but it’s a good business.

Right. Well, I mean the base is already growing 25% with all the petrochem that’s already under construction, so that would make sense. But Tony, last question is really on the transportation side, you saw some execution hiccups. How do we prevent these going forward? Because there are some pretty compelling large projects coming up in some of your sweet spots, regionally speaking. Any comfort around that in terms of what you have changed around the processes?

Yes. Look, the places where we had execution issues here in the third and fourth quarter are the same places that have executed some of the best projects that we have ever executed. Sometimes you get in a situation on these larger projects where schedule – we are a subcontractor. And when designs start changing and conditions start changing on the job and schedules get elongated, what really happens on some of these jobs are you have a set of general conditions you are operating in. You are paying for all that infrastructure in those general conditions on those jobs. You are going to be entitled to a chunk of that money after. It’s going to be a fight to get it, but it’s pretty clear that if the job expands 9 months and you are spending $500,000 a month to have people at the job site doing the administration and the project management and everything else that you are going to recoup that. We tend to be – some people aren’t – we tend to be very conservative in our estimate of that recovery, because we like people to see where we stand today versus the execution of those jobs. So, we don’t build big unbilled sections. We don’t build big claim portfolios. And so we may be a little different than other people as you can see with the recovery in the mechanical. I will take our execution in the transportation sector over time against anybody’s in the industry.

Fair enough. Thank you, Tony. That was helpful.

And your next question is from the line of Nick Coppola with Thompson Research Group.

Good morning, Nick.

Good morning. This is Steven Ramsey on for Nick. My first question centers around what you alluded to in pricing, how we are still off the high watermark of 2007. Is there any way to quantify that and are there any barriers to getting back to that high watermark in the next couple of years?

There is a couple of things going on there. One is just flat mix of work. When we were doing the fast turn hospitality work, where everyday you can get it open is worth millions of dollars to the operator, it means a lot to get it done in prices. And when you are able to take your whole company and dedicate it to a separate large – those large jobs and get 100% absorption on your SG&A almost, because everybody is leaning forward and out into the field focused on those projects, you tend to get better pricing. I think you have got a mix issue right now. And I think also it’s just – it’s just a tougher market. This has been a very slow recovery. And in a very slow recovery, I guess we are all learning. Non-residential construction, I think through history tends to snapback a lot quicker. With this slow recovery, it’s had a long time to absorb the work. And as a result, labor has been able to come on. Are there spot labor shortages? Sure, but nothing like you would have experienced in 2007 or 2008. So, how you get better pricing is your resources become more valuable. Your resources, which is ours is labor becomes more valuable, you are able to get an up-sell on the price. We have spots in the country where we can do that, but it’s not wholesale.

Thank you. And my second question was going to center around labor shortages which you addressed. I don’t know if you have anything else you want to add to that? Thanks.

Yes. I just think in general, when you look at labor, it’s still very competitive in the Gulf Coast for the right kinds of labor. As one of the other analysts pointed out, we are having a 25% capacity increase in our petrochemical base. That needs a lot upstream guys aren’t downstream guys – aren’t builders, they are different kinds of people. That’s not an easy migration to make for most of the skilled trades. You have very busy markets in parts of the country like Boston and New York and California right now on the trade side. But at EMCOR, we don’t – we like labor tightness and shortage. We are one of the biggest in the country. And I always go back to what I think really skilled people and supervision care about. The first thing is, are you going to work for a company that’s going to make sure you get paid every week? We are check, check on that. Are you going to work for a company where the supervision is competent? Forget about the five people around the table here today or the six people around the table here today. Is the supervision in the field competent? We get triple checks on that. Maybe the most important thing then is are you going to keep us safe? And we have – everyday we wake up and knock on wood and are very thankful that we have the focus on safety and the supervision that focuses on safety that we do. And so we can resoundingly answer yes to that. And are you going to provide me the equipment I need to be safe? And we can resoundingly say yes to that. So, we tend to attract the best trades people and supervision in the industry. So, we wish labor would even get tighter. So, thanks.

Thank you.

And there are no other questions. Gentlemen, do you have any closing remarks?

Yes. Thanks for your interest in EMCOR. We are coming off a very good 2015 and have cautious optimism as we look to 2016. Thank you.