EMCOR Group, Inc. (EME) Q1 2016 Earnings Report, Transcript and Summary

Good morning. My name is Teresa and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group First Quarter 2016 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will a question-and-answer session. [Operator Instructions] Mr. Max Dutcher with FTI Consulting, you may begin.

Thank you, Teresa, and good morning, everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the Company's 2016 first quarter results, which were reported this morning. I'd 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 first quarter of 2016. 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. You should be on slide two. Slide two has the executives that are with me to discuss the quarter’s results. They are Tony Guzzi, our President and Chief Executive Officer; Mark Pompa, Executive Vice President and CFO; Maxine Mauricio, Senior Vice President and General Counsel; and our Vice President of Marketing & Communications Mava Heffler. For call participants not accessing the conference call via the internet, this presentation including the slides will be archived in the Investor Relations section of our website under presentations. You can find this at emcorgroup.com. Before we begin, I want to remind you that this discussion may contain certain forward-looking statements. Any such statements are based upon information available to EMCOR management's perception as of this date, and EMCOR assumes no obligation to update any such forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance. Such risks and uncertainties include, but are not limited to, adverse effects of general economic conditions, changes in the political environment, changes in the specific markets for EMCOR services, adverse business 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 2015 Form 10-K and in 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 be on pages three to five now. And look, I’m going to keep my upfront comments relatively brief, as it is only a first quarter discussion and really not that much has changed in our outlook since we provided our 2016 outlook on February 25th. I’m going to speak to pro forma numbers which adjust for some of the costs of our recent acquisition of Ardent, Rabalais. Mark is going to cover those adjustments in detail. On a pro forma basis, we earned $0.57 per diluted share from continuing operations. We had excellent revenue growth of 9.9% with 90% of that being organic growth and it was really led by our mechanical segment which had 19% plus overall growth. Our revenues were $1.744 billion for the quarter. However, part of this organic growth versus the year ago period results from the impact, if you remember, the poor weather impact in the first quarter of last year in our construction operations and the impact of last year’s refinery operator strike. However, at least half of this organic growth is just solid underlying growth in the business and really what you see is when we convert our prior backlog growth in our construction operations into revenues. If you look at the segments, we had a drop in operating income margin from 3.5% to 3.2% on an overall basis when compared to year ago period. We expect our operating income margins to expand through the year and do not view this as a full year headwind. The reasons behind this drop is one, the lack of a onetime settlement in Q1 of 2015 in building services, the lower snow removal revenues in the building and the subsequent profit in building services and the impact of the previously written transportation jobs from last year that are now flowing through at no margin this year versus the year ago period. That really accounts for most of the operating drop for the Company and most of all of the operating profit drop in building services from the year ago period. Further, we had some headwinds and write-downs on a few transportation infrastructure jobs in our electrical segment. And we have started a few large jobs in both our mechanical and electrical segments that are just underway and that we are appropriately conservative on the front-end of these large jobs and our margin recognition. The industrial segment had very good year-over-year operating profit improvement and one that was driven by the lack of the strike this year and it was really driven by an increase in demand for our specialty services like our specialty welding services which had very strong demand in the quarter. We expected a decent spring turnaround season and we had and are having one. The UK had nice operating profit growth driven by the two large contracts we started up in early 2015 and we are starting to realize the positive impact of those contracts now. Despite our strong revenue growth, we had backlog growth of 2% sequentially and 3% on a year-over-year basis. We had an improved SG&A ratio at 9.6% versus a 10.2% in the year ago period and we really don’t expect that to worsen. We leaved the quarter with a strong and liquid balance sheet with plenty of strengths to support both organic and acquisition growth. Overall, a decent start to the year. We do expect our operating margins to improve and catch up with our revenue growth as the year progresses. And with that I’ll turn it over to Mark.

Thank you, Tony. And good morning to everyone participating on the call today. For those accessing this presentation via the website, we’re now on slide six. As Tony just indicated, I will begin with the detailed discussion of our first quarter 2016 results, focusing on our performance by reportable segments before covering key financial data derived from our consolidated financial statements included in both our earnings release announcement and Form 10-Q filed with the Securities and Exchange Commission, earlier this morning. So let’s get started. Consolidated revenues of $1.74 billion are up $155.8 million or 9.8% over quarter one 2015. All reportable segments are reporting increased revenues quarter-over-quarter. First quarter 2016 revenues attributable to businesses acquired in 2015 within our U.S. mechanical services segment were $14.4 million; excluding such acquisition revenues, our organic revenue growth in the quarter was 8.9%. U.S. electrical construction revenues of $348.3 million increased $29.3 million or 9.2% from quarter one 2015. This increased revenue was due to greater project activity within the commercial, hospitality and transportation market sectors as compared to the last year’s first quarter. U.S. mechanical construction first quarter revenues increased $100.9 million or 19.7%. As referenced earlier, this segment was positively impacted by incremental revenues from businesses acquired in 2015 of $14.4 million and therefore this reportable segment’s organic revenue growth in the quarter is 16.9%. Our mechanical construction revenue growth continues to be broad-based from a market sector perspective with the industrial, institutional and hospitality market sectors contributing the largest dollar revenue growth quarter-over-quarter. Five of the seven market sectors that we track and report are generating revenue growth within this reporting segment in excess of 40%, and Tony will cover the continued backlog growth in mechanical construction as well as our consolidated backlog by market sector later on this call. EMCOR’s total domestic construction business first quarter revenues of $960.2 million increased $130.2 million or 15.7% quarter-over-quarter. U.S. building services quarterly revenues of $439.7 million were essentially flat with the first quarter of last year and were negatively impacted by the lack of snow in markets where we are contracted for removal on an event basis. This unfortunately masked strong revenue growth within the mechanical services division, which is currently executing against a substantial project backlog. U.S. industrial services revenues of $257.5 million increased $24.8 million or 10.6% due to increased field service activities period over period. As a reminder, this segment experienced significant headwinds in 2015’s first quarter due to the impact of the nationwide refinery operator strike. Additionally, as we commented through much of 2015 and extensively during our initial 2016’s earnings guidance, this segment’s shop services operations has experienced contraction in demand due to the curtailment of capital spending by most of the integrated oil companies. Despite this current headwind, our industrial services segment got off to a very good start in quarter one of this year. United Kingdom building services revenues of $87.6 million increased modestly during the first quarter, despite the headwind of weakening British pound, resulting in a quarter over quarter unfavorable exchange rate impact of 5.1 million. This segment continues to see revenue gain as it expand its customer portfolio. My last comment on quarterly revenues is that our first quarter 2016 consolidated revenues of $1.74 billion eclipsed our previously established first quarter revenue record, which we achieved in 2014's first quarter. Please turn to slide seven. Selling, general and administrative expenses of $167.4 million represent 9.6% of revenues and reflect an increase of $5.8 million from quarter one 2015. As a percentage of revenues, the current quarter declined 60 basis points from the 10.2% reported last year. The first quarter includes $1.1 million of transaction expenses in connection with the recently consummated acquisition of Ardent and Rabalais as well as 1 million of incremental expenses inclusive of intangible asset amortization related to 2015 acquisitions. Therefore, our quarterly organic increase in SG&A expenses was $3.7 million, which is primarily due to increased employment costs as a result of higher headcount period over period as well as increased legal costs due to litigation activity within the quarter. Reported operating income for the quarter of $55.6 million represents 3.2% of revenues compared to $55.3 million and 3.5% in 2015’s first quarter. Our U.S. electrical construction services segment operating income of $16.7 million is flat with the comparable 2015 period, reported quarterly operating margin is 4.8% which is 40 basis points lower than 2015's first quarter. The decrease in quarterly operating margin is due to losses on certain transportation projects recognized during the quarter. Additionally, this segment's operating margin is depressed by revenues recognized during the period for which no profit is recognized due to such projects being returned down for loss positions prior to 2016. This was impacting first quarter margins within the segment by approximately 20 basis points, and I'm confident that you'll see this segment’s operating margin improve as we progress through the year. 2016's first quarter U.S. mechanical construction services segment operating income of $23.9 million represents a $3 million increase from last year's quarter. This represents a 14.2% improvement quarter-over-quarter, primarily due to increased gross profit contributions from projects within the healthcare, hospitality and institutional market sectors. Additionally, businesses acquired in 2015 contributed $700,000 of operating income, net of intangible asset amortization expense. This segment’s operating margin of 3.9% is down 20 basis points from 2015's first quarter due to the mix of revenues and a large percentage of this quarter's activity, representing projects in the early phases of completion. Our total U.S. construction business is reporting a 4.2% operating margin for the first quarter of 2016. U.S. building services operating income of $13.9 million decreased $7.1 million from the $21 million reported in 2015's first quarter. Operating margin was 3.2% as compared to 4.8% in the prior year period. Last year's first quarter benefited from $3 million of gross profit upon the settlement of a claim. 2016's performance was hindered by a less favorable revenue mix within the segment’s chemical services division as well as the lack of snow in those geographies where we perform snow removal on an event basis. Lastly, this segment experienced an increase in their selling, general and administrative expenses due to additional headcount as well as increased bad debt and legal expenses. Our U.S. industrial services operating income of $18.9 million increased $6 million or 47% compared to 2015's first quarter with an operating margin of 7.3% or 180 basis points higher than last year's 5.5% operating margin. A spring turnaround season in the current year ago looks more typical than 2015’s strike impacted first quarter was enough to offset on an absolute dollar basis the headwinds associated with less shop services volume for the reasons provided during my revenue commentary. However, with the revenue mix more field services oriented, this segment's operating margin performance is still below what we would expect to see in what is typically a strong seasonal period. UK building services operating income of $3.3 million represents 3.8% of revenues, which is an increase of approximately $900,000 and 110 basis-point improvement over last year's first quarter. Lastly on this slide, we used $37.2 million of cash in operations as compared to $17.8 million of cash used in operations during 2015's first quarter. With the funding of our prior year incentive compensation awards occurring during our first quarter, it historically represents our weakest cash flow quarter and was further impacted by an increase in payments made for income taxes related to the prior fiscal year. Finally, due to the extremely strong revenue growth experienced during the quarter, we funded working capital requirements which will convert to cash as we progress during the year. We’re now on slide eight. Additional key financial data for the quarter not addressed during my highlight summary are as follows: Quarter one gross profit of $223.1 million represents 12.8% of revenues which has improved from the comparable quarter by $6.2 million. The quarter-over-quarter reduction in gross margin was driven by domestic construction and U.S. building services margin compression due to revenue mix and in the case of electrical construction, certain losses incurred on transportation projects that were recorded during the quarter as previously referenced. Finally, last year’s first quarter benefitted from $3 million of gross profit upon the settlement of the claim within our U.S. building services segment, which I also highlighted during my building services segment operating commentary. Diluted earnings per common share from continuing operations was $0.56 and compares to $0.52 for the quarters ending March 31, 2016 and 2015 respectfully. On an adjusted basis, reflecting the add back of transaction costs, diluted earnings per common share from continuing operations would have been $0.57 for 2016 and represents an improvement of 9.6% quarter-over-quarter. Please turn to slide nine. Tony touched upon the strength and liquidity of EMCOR’s balance sheet during his earlier remarks. Our leverage continues to reduce and is represented by our debt to capitalization ratio of 17.3%. Our cash is reduced from year end 2015, primarily due to the $37.2 million of cash used in operations previously referenced, as well as cash utilized upon common stock repurchases, property, plant and equipment additions, and our quarterly dividend payments. Working capital levels are up modestly since December 31, 2015, primarily due to a reduction in current liabilities, as a result of reduced levels of accounts payable and accrued payroll and benefits due to the funding of prior year obligations in the first quarter of this year. Identifiable intangible assets have decreased solely due to quarterly amortization expense of approximately $9.5 million. Total debt of $311.4 million is reduced from year-end 2015 due to the mandatory quarterly principal repayments under our term loan of approximately $4.4 million, offset by new capital lease additions during the period. Our quarterly changes in stockholders’ equity are detailed on page five of our Form 10-Q filed this morning with Securities and Exchange Commission and there are no unusual items to know. With our closing of the Ardent and Rabalais acquisitions subsequent to March 31st, our debt levels have increased by approximately $200 million and as a result, our debt to capitalization ratio now approximates 26%. We are happy with where our balance sheet is currently and comfortable with our leverage profile after giving effect to the most recent acquisitions. I believe we continue to be well-positioned to take advantage of all opportunities in front of us. With my portion of this morning’s presentation completed, I would like to return the presentation to Tony?

Thanks Mark. And I am on page10, Backlog by Market Sector. As you can see from the chart, backlog at the end of the first quarter is $3.85 billion, up $116 million or a little over 3% from March of 2015 and up 2% from December 31st of 2015. As I said earlier in the call, bookings were strong in the quarter, especially given our strong revenue growth. Commercial backlog is flat from the year ago period at almost $1.3 billion. However, it did increase from December ‘15 levels by about 6% as we won a number of projects in the $6 million to $10 million range. Good work for us should turn for the most part this year and demonstrates continued demand from this sector of the non-residential market. We still think that the non-res market will grow mid-single digits in 2016 for the markets we serve. Backlog in the industrial market sector is also up in the quarter as in March we had some success in our food process design build business and we’re doing a few milk drying plants, and we’re really good at that. Food processes work for us is a very successful design build business. Our team at Shambaugh & Son leads this work. And really I think I am a little biased on this but I can unequivocally say that they are the best in the business at it. They’re technically excellent and are build -- when they build, they build with productivity and scale. We deliver our great result for our customers by providing a true turnkey food process solution. And with that, I’d ask you to flip to page 11 and I’m going to review Backlog by Segment. So what you really see here is our domestic construction segments continue to rise from March 2015 by 4.6%. And really that shows the continued strength in the non-res market. Our mechanical segment is really winning some nice work and not only food processing that I described but also in water and wastewater. Electrical has burned some work in the transportation and infrastructure segments and we have some pretty good work there and we’ve had some difficulties with some of the bigger work we’re doing, we’ve had great success on. As we sit here today, we continue to see backlog to be healthy throughout the year in our construction segment. To set expectations, we expect continued revenue and backlog strength in our mechanical and electrical segments and we also expect it in our mechanical services business. However, it is always important to note, the small movements in backlog up or down in the quarter are not worth deriving trends form, but rather the long-term trajectory, which here has been very good. Backlog in building services is up compared to both the year ago period and December 2015. Year-over-year, we saw overall growth in our mechanical services business and also our site based group on a commercial side, we've had some decrease in our government backlog. Our industrial backlog supporting the fabrication and would really -- it’s just the shop business, and we've covered this a lot, I'm not going to go into that a lot now; people have questions, they can. Basically we're not seeing a lot of increase in demand for our new build heat exchangers. And really, if you look at it from the year ago period, were down to $57 million or down almost 40%. We've done a lot of aggressive cost work in this business and we're focused on the better margin and unique applications here. We're not trying to dive down to the lowest points of the market. We still believe our shop business will be down year-over-year. However, as I mentioned earlier, we project the solid and very good year from our field groups. They're performing turnaround, they're doing maintenance work and our specialty services have really seen good demand. And again our field work is performed for the most part on a time and material, or unit price basis and therefore it's not included in backlog. So, similar to last couple of calls, we continue to win work, our backlog reflects what is occurring in the end markets. We've seen expansion in the construction market and expansion in the mechanical services market, supported by growing non-residential market, and we've had refraction in the industrial market -- industrial segment of our business which is the new heat exchangers, we've had good growth in the industrial end market, broadly. And with that, I'll turn to page 12 and 13. Now, I'm going to turn to the full year. So, we acquired Ardent, Rabalais and mechanical services contractor in the Southeast here in early Q2. With that we expect revenues to be at least $7.2 billion for 2016. We expect the acquisition to give us at least $0.05 per diluted share from continuing operations increase this year. Therefore, we're going to raise the lower end of our range on a pro forma basis from $2.70 to $2.75 per diluted share from continuing operations, and this is on a pro forma basis, which will be adding back the transaction expenses from Ardent and Rabalais which for the most part will occur in Q2. Our range on a pro forma basis is $2.75 to $3 per diluted share from continuing operations. And again, that's on a pro forma basis. How do you move up in that range really hasn't changed the whole lot from the call we had on February 25th. So, we need good organic growth, we said in our construction operations; we're having that but we need better conversion and we expect that as the year progresses. Building service segment, we needed to rebound. Now you add all the stuff together, we not only didn't have the snow removal revenues but with the unseasonably warm weather, our mechanical services mix went to more projects and less service. And for those of us followed a long time, knows the mechanical service repair work we do is one of the most profitable things we do at EMCOR. You add all that stuff together, it probably cost that segment about $0.04 a share in the quarter. The building services segment we expect to rebound especially on the mechanical services side and we also expect pretty good performance on our site-based side through the year, both government and commercial. We do need IDIQ demand to pick up through the year but it usually picks up mid to late third quarter is when we see that volume come through. We had a good spring turnaround, we’re in the middle of -- not in the middle, towards the tail end of a good spring turnaround season. We need to have a good fall turnaround season on industrial segment and we need to continue to have strong demand for our specialty services like our welding services. Sitting here today, we expect a good fall turnaround season. We also expect the demand to continue for our specialty services for a while. We still have quite a bit of work to do to close the gap because of the drop in the new build heat exchangers. That gap’s closing; the trajectory is in the right direction but it's a business where you need to pay attention to your customers and react to the demand and we're the best at it in the business. And we need the UK to continue to have decent revenue growth. They can’t focus on the exchange rate; that's our problem. We need a better conversion as it adds on work and they continue to win in the market. And they are winning in some of the most demanding applications for integrated facilities management, our restructuring work there and we're seeing it stabilized around the 3.5% level and we expect to do better as we add more project work on our customers there. We need to have solid acquisition integration, especially with Ardent and Rabalais. It’s off to a good start. These are terrific people. We've got a first class management team that are really aligned with the core values of EMCOR. And we also are excited about the opportunities for the mechanical service contract that we bought in the Southeast. Together, we couldn't be more excited with these teams have joined us and are now part of the EMCOR family but we need to continue to integrate them. And usually about six months out is when we see where they start to take advantage of the flexibility, the know-how as part of EMCOR to grow their businesses. And we still see opportunities to grow organically. We said we'd love to grow organically first. We continue to see opportunities to grow through acquisition. I think those that no how we view that, they happen when they happen; we don’t force deals and we also maintain our discipline through the acquisition process. Summarizing all that together, we had a decent quarter. Sure, we expect better drop trough and we expect to get it as the year progresses. We’re excited about the acquisitions we’ve made and we like the trajectory of the revenue growth especially in our construction segment. And really the creativity our folks in industrial segment have shown and their ability to offer and respond to customer demand with specialty services to really fill the gap from the tough hand that they have in the shops. With that, Teresa, I’ll take questions and open up the line.

[Operator Instructions] Your next question comes from the line of Alex Rygiel with FBR Capital Markets.

So Tony, got to ask you the obvious right at getgo; why not raise the high end of your guidance by a nickel or a dime?

I think a lot of it comes to two things. We have a gap to fill in building services after the first quarter because of the lack of repair service work and lack of snow revenues, coupled with we like what we’re seeing in the industrial market right now with our guys’ ability, our team’s ability to find new ways to serve our customers on an extended basis to make up for the drop. We’d like to see that for another quarter or a quarter and a half before we declare victory there.

Can you talk a little bit more about the two transportation jobs, how are they progressing, remind us again when they’re going to be done?

I’ll take off on this and I want to ask Mark to get more specific with you. If you go -- we have two -- it should be done by the end of the year. What’s really hurting us on those and we had another two in the first quarter, these are all for the most part extended general condition problems. I mean that accomplishes probably 70% of what’s going on here. We do expect to recoup some of that but that could be end of the year or the next year. And as you know at EMCOR, very conservative of how we think about that because most of that is out of our hands and we’d rather present what we see happening versus what we hope to happen. Mark?

Yes. Tony, the only thing I would add and Alex, this unfortunately is not a unique situation for us or a company like us. If it’s coincidental that we had a couple of things late last year that because of site conditions through no fault of ours, has created some productivity difficulties and we had a couple of more pop up on the radar screen earlier this year. I guess the good news is it’s not the same work that we were talking about in connection with Q3 and Q4 last year. But the timelines as Tony indicated other than one project are scheduled to be complete in calendar 2016. One of those projects actually is completion day is in early 2017. But unfortunately once things start to get deferred, I think you as well as everyone on this call knows, it becomes out of our control. So right now, we’re hopeful that everything is going to complete under the revised completion deadlines but it will not be unusual for them to slid to the right so to speak. And obviously we’ve taken on this fact and we’ve looked at our revised cost estimates.

We didn’t assume that everything was going to be great and finish on time -- not on time, on the extended time as they were saying; we’ve got more conservative.

And Tony, last question and this is little bit macro. But what do you think we need to kind of jump start growth here?

Alex, if I could have the kind of growth we had in the first quarter and have that carried through the year, I’d be really happy. So, I think growth is coming in our business. I think your more macro question is where do we see the pockets of growth long-term where EMCOR can really grow, both organically and through acquisition. I think kicking it up a level, I think what we’ve been able to do on the industrial side over the last eight quarters really is pretty remarkable, if you look at that overall growth, mid teens to high teens, all organic after we bought RepconStrickland, which means we’re winning in the market. The other sign of that, if you take that segment specifically is here you have this really depression in the shop business on the build side and no other way to term it. But because of our market position and because of the services we can offer, here we turned in a very good first quarter, some of that’s year-over-year with the refinery operators but a lot of it is we are able to offer more services to customers that need those services and we’re known as the go to people to get some very, very highly skilled labor. Then you move to the construction side. I think we have some unique capabilities in some markets. And you can pick start Florida for example where we have unique capabilities on the water and wastewater side. And there is going to be a lot of money spent on there. And we’re in position to help our customers meet the mandates that they’re required to meet from the EPA. You look at the commercial market, I don’t think anybody is well-positioned than we are, whether it be new build or retrofit and that’s both logically. And now, we’ve added real capability in Ardent, Rabalais to serve the downstream industrial market and downstream petrochemical market but also the broader industrial market and markets that we weren’t really in, which is great industrial markets electrically Texas, Louisiana and the mid area. And if you think about what we bought, we paid for what it does today. We've bought one heck of an option on upstream and offshore oil and gas production. These guys are good. And when that market comes back, which is invariably will, they’ll be able to participate in it. And then, of course mechanically, I think we go unrivaled to some of the large food process work which we’ll start seeing materialize. That team at Shambaugh is good as get. We've added to that capability, fire protection the same thing. And then switching to building services, we feel very good about the trajectory of our mechanical services business and our site-based and government businesses are holding their own in difficult markets. With the mechanical service business, we just added to through acquisition, we've always had great success in growing those companies after acquisitions. Same thing to jump-start growth, I agree with you. I mean we have the ability I think with our capabilities to continue to grow strong. You’re one of the more seasoned analysts, you understand that we see backlogs a lot of times on the construction side and on the other side, we don't see it in backlog. So, overall, good trend in the first quarter. I'd like to see more of that as year go on and EMCOR could be a $7.2 billion Company at the end of the year with better drop through, I think we'd all be happy.

And your next question comes from the line of Adam Thalhimer with BB&T Capital.

Mark, what was the impact from the two new transportation jobs in Q1?

From operating margin perspective, it negatively impacted the electrical segment, approximately 90 basis points and on the consolidated basis it impacted 20 basis points.

And then Tony, what are you seeing in the bigger metros like New York that laid the non-res recovery; are those starting to peak or are you still seeing new opportunities in those markets?

We still see new opportunities in New York proper. And we do quite a bit of apartment work and things in New Jersey. The New York proper, the residential high rise market has driven a lot of that. We don't do a lot of that work. It's actually become a non-union [ph] game; my point that hard to believe in New York, but it is. I think the New York office market is still pretty strong. There is going to be -- with some of these buildings they've built, there will be some tenant set out opportunities. I think the infrastructure market is still strong. It's challenging. We're doing really well on some of the work, and we're not doing as well on some and Mark went through the reasons why. I think it's still pretty strong. New York is a massive market. We are starting -- and of course with Warriors coming in and we're not looking to do the whole thing, they may will do some infrastructure work there. So, I think New York is okay. I can go market by market with you. I think the general trend is, overall the non-res market is pretty healthy. We've been saying mid single-digit growth; I think that's going to play out this year. I think it's really been about there when you strip out some of the large transportation projects and civil jobs and some of the power jobs over the last couple of years in industrial. So, I think it's steady as it goes for now. I don't think there is a big thrust coming there that’s going to cause us to grow much above that; could be wrong but I think that's what we see right now.

And then on the Ardent acquisition, is that all in the industrial segment or some of that going to hit mechanical, and is there any seasonality to that business?

All be in the electrical segment but where it participates is in the industrial market and the reason, we put in electrical segment because of the work it does, we're very familiar with their work, the folks that run our electrical segment know a lot about that work. We do that work today out west, in the Rocky Mountain region and in California.

Okay, is that going to pull the margins up little bit any…

I think over the long-term it could. We’ve got some amortization, got to work through over the next year.

And just lastly, the food processing work that you mentioned, you had some of that did flow through back in 2012, can you compare what you're seeing today in that segment to what you had back then?

It's good work just like that work, we think. The difference was that work never went in the backlog and it all was very rapid happened within 12 months; this will be more traditional over almost two years.

And your next question comes from the line of Tahira Afzal with KeyBanc.

First question is, Tony, when we talked a couple of quarters ago, we were looking really for nice revenue growth for operating margins to really move beyond the mid 4% range that they’d been stuck in. Now we are seeing some sort of benefit increases and a couple of execution hiccups. What would it take to get margins sustainably higher at this point?

I think the biggest thing is we can have the drag from some of the jobs we had towards the end of the last year and this year. Other than that, if you look at our book of business, it's okay. I'll say this, if you look broader with labor getting tighter, you would expect margins to get a little better in the bidding margins. They’ve got better but they haven’t got as strong as we would have liked or seen it maybe five quarters ago. So, we have to out execute. And we have a pretty good record of that. Usually when we run into like most contractors, it’s not our fault but usually in our case, it’s not our fault. We do a lot of really good planning. And you run into some of these larger jobs, you get into a situation where there is a lot of things that play in that from permitting to access, to timing and we don’t assume a 100% recovery like some people do. We assume almost none initially because so much of it’s out of our hands. So you’re seeing -- that’s why you see spikes in our margins at times when we settle these things. But I think we’ll start to see the drop through as the year goes on. Unfortunately I think this year, our construction operation is going to be a more a third and fourth quarter phenomenon as some of this large work starts to play out as the year progresses.

Got it. Okay, Tony. So on that note, going back to those transportation projects, I assume one of them might have been one that somewhere in the New York vicinity and from my experience delays from projects such as those can be multiply over longtime. So, how confident are you and what have you baked into your estimates in terms of the recovery there? I know you said you expect margins to bounce back there but do you feel you built a sufficient delay cushion for incremental delays?

I’m going to answer, obviously we think yes because we put the provision there. The work that we have -- the largest project we’re doing in New York is not one of them that are suffering this right now; it’s actually turning out to be a pretty good job so far. But, we think we captured all, we took the more negative views than what the general contractor gave us for a time horizon. And we’ll see where that ends. We don’t tend to be optimistic people once we get in one of those situations, best to say it, and we get it. We’ve seen the movie. Mark?

Nothing more to add to other than we -- obviously it’s been very realistic in our assessment of how these projects are progressing and once again, I will add and this isn’t an excuse but having idle labor on a job, being idle no fault of our own, is the greatest job situation and I think if that does not continue to replicate itself beyond the timeframes we’re talking about, we should be fine with what we have. But I think the other point, and Tony mentioned this and mentioned this as well in our commentary, these projects will continue to burn revenues throughout the rest of the year with no profit. And that will drag on margins. So, it’s not that there is going to be additional write-downs but you’re going to have revenue with no profit recognized. And it did that in its right impacted us 20 basis points within the electrical segment in the first quarter. So, we’re hopeful that the other work that’s being executed will mute be impact of that as we forward over the next couple of quarters but it will have a little bit of a drag.

I mean really when you put the two together that Mark talked about, I think you get almost 100 basis points, 110 basis points. You can understand how strong the underlying business really is.

I know. And I am sure it’s frustrating for you guys as well. I guess what I am trying to understand is what the lessons learned; you’ve got some pretty big projects on the transportation side as you mentioned, Tony.

Some of the best work we’ve ever done at EMCOR has been at the transportation segment with the companies that are executing the work today with the same people that are doing these jobs. The lesson learned is you got to stay on top of it which we are. It’s a -- I also don’t expect this is where these jobs will end up. I mean we’re going to get aggressive in our recovery but you can’t assume that’s going to happen when we make our estimates. We were just not in a habit of doing that. Some of the best work that we’ve ever seen at EMCOR, most profitable job we’ve ever done, award winning jobs had been in this segment with this team. So, I feel pretty confident that the lesson learned is you have to be aggressive and you guys see productivity, but I don’t think in these cases that it’s a lesson that we are learning here. I mean these folks know what they are doing, and they did their jobs appropriately. And we expect them to finish them and we’ll try to recover. And these are the same folks that brought us terrific work at great margins in the past and have been a big part of EMCOR.

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

Good morning. This is Stephen Ramsey on for Nick. I guess on transportation, thinking bigger picture, is the new long-term federal highway bill impacting your transportation business? And if so, how should we think about the size and timing of that impact?

Again, we don’t do civil works, the only place we’ll participate in that is in electrical infrastructure work. And again, it's been some good projects. We really won't have visibility on that until a year from now. But again, like I just mentioned, some of the best work we've done has been in those infrastructure works around new highways and toll roads and will still be good at in the future. We’ll see whether work pops up and whether we can earn an acceptable return versus who else is bidding on it.

And then switching to the U.S. electrical construction business, on the Q4 call, you were talking about that segment reaching a 6.5ish operating margin level in fiscal year ‘16. Do you expect that still to happen or what needs to happen in the next six to eight months this year to make that happen?

We expect the margins recover as year goes on, we'll have some of this headwind. If the margin percentage is not there, we hope that the growth will make up for it and the margin dollars will be there and we’ll make our -- what we said we would do.

Last question, on the Q4 call as well, you talked about how you were concerned about visibility into the second half of this year, is that still the case or do you have some increased visibility about what that will look like?

The non-res market will continue to be strong in mid single digits; we take that as strong now. In a 0.5% GDP environment that's a winner. I think we have better clarity today in the industrial because we’ve printed a pretty good first quarter in our industrial segment. And the small project work we think we'll be strong, we’ve got to execute it and we’ve got to get it in the backlog. So visibility is a little bit better as you would expect three to four months into the year; we’ll know a whole lot more on the second quarter call that we noted.

And your next question comes from the line of John Rogers with D.A. Davidson.

Couple of things, I guess maybe for Mark, the acquisition costs that you're expecting in the second quarter, how much is that?

When we had released the acquisition, we had given a range of $4 million to $5 million. We incurred $1 million in the first quarter; we're going to be probably at the lower end of that range. And now those cost will be recognized in Q2.

Okay. And in terms of the tax rate you're expecting this year, should be in that 36% range…

No, we had originally talked about with regards to ‘16 guidance approximately 38%; obviously with the favorable discrete item in the first quarter, that rate now on an annual basis is going to drop to roughly 37.5%. So, you'll see higher rate in Q2 and Q3 obviously, because our estimate still is our estimate for the year because it’s without discrete item, when we get to the full calendar year, it will be roughly 37.5%.

And then Tony, looking at your business for the last couple of years, it seems if -- and it's varied quarter-to-quarter but you've had some better results out of the mechanical business. And I know some of this is disguised by margin versus the electrical business. Is there anything going on in terms of trends in there that makes one different than what we saw maybe in the last cycle, both ‘07, ‘08 when it seemed like the electrical business had been stronger; is it just opportunities or the types of projects?

I think it's a mix, John. We bought -- we've added to that mix through some pretty good acquisitions on the industrial side. We’ve build capability on the fire protection side. Our fire protection businesses are doing well; we're now at full strength there as far as we're buying into those markets in the life cycle and now we’re in those markets and we've grown them organically. And fire protection is one of the better things we've done. We've also I think have become very good at a couple of different things. The mechanical guys are the ones that have really benefited from this whole BIM movement and building information modeling, which then leads to better preplanning and better prefab. And really the mechanical folks have been at the center of that. And so, they've gotten more labor productivity than they had in life cycle. So, there is some process points around that and then there are some market points. We've built capability in our mechanical team because of design assist, because of some of the other work and because of the move to more industrial work, have chance to improve margins. And as a result of that we've a better mix this cycle than you had the last cycle. And put all that together, I think that's why you've seen the improvement in the mechanical. The electrical continues to be a very good business for us. We don't expect long-term margins to be where they are here in the first quarter. We had 6% in ‘15 and we'll do at least that and someone said 6.5%. There would be no reason to believe we can't get back up there. The electrical business is a little different; it gets productivity somewhat from prefab, doesn't have the same opportunities. And our electrical business, we benefited little more from the large project work that we do on the mechanical side. All those things we're talking about the infrastructure work, that's been some of that -- when we hit the higher margin periods, typically it’s when we’re doing that kind of work and once those jobs finished. So putting all that together, that’s what’s going on in the two businesses.

Okay, I appreciate the color. And are you seeing the treat from OEMs? I mean they different times talk about trying to push into specialty services side.

No.

I think what kind of mix results…

Yes. I think they had mixed results. Look, one of the happiest day for a really good service contractor is when the only other competitor on the job is an OEM, not because they are not good competitors, it’s because they’re disciplined than some lower end contractors. EMCOR is the largest mechanical service contractor I think in the country now. And maybe the combination of Johnson Controls with all of the combinations and stuff going there, we’ve lost visibility. But as an independent, we’re the biggest. I know we’re bigger than either train or carrier by a lot. And we have it two places, John, in our financial statements. You see it in the building services but in our construction mechanical segment, it’s probably 15%, 18% of that business is pure service. We’re unity at command guys, so they’re running the overall business. If it’s a construction business, they have a service arm. We leave it in that segment that’s where it belongs because we’re actually running it. But we have a very strong service business and we do all kind of great things in that service business from handheld technology to GPS, the distance -- we actually get technicians linked together when they are trying to fix something unique like a pit controller or a certain kind of chiller. We’re innovators, right? A lot of new products will come to us. Some of the new compressor technology from companies like Turbocore that was all tried by EMCOR technicians first and with our customers, drives big efficiencies. We’re probably the best implementer of energy efficiency projects in the country and we’re also the largest independent controls contractor. We have a terrific franchise in mechanical service. And I think it earns very good margins when you look at it as business, and it’s a business that we continue -- we just made that acquisition, we continue to grow both organically, which we’ve grown probably mid single digits over 15 years and through acquisitions. It’s a place we’re good at and we still have a wide space on the map

And then lastly, if I could, just on the industrial services business, when you talked about the shops services, what you were seeing there. But is this just in your mind a function of the energy market means; I mean is that what we’ll need before we can see a recovery in there? And conversely, if we don’t see a recovery, is there is a significant project for margin lift in that segment?

No. Not from where we are today.

Okay. And on the energy side of it, is that what’s required? I mean you I talked about in the past higher single digit margins there.

I think the shop business comes back when oil prices go up a little bit. They’re not going get -- they only do get back upto 80 bucks to make that happen but 60, look our guys aren’t sitting still either. So, we service other parts of the energy space whether it’d be LNG terminals, they have a lot of heat exchanger, right? We service pipelines; we service the petrochem but yes, I mean we need to really get back to where it could be margin wise. We need that business to come back. The repair business can still be there and it’s decent margin. John what that OEM business does is it allows us to load our shops and get absorptions, right. These are not big shops, but you get absorption and that allows the repair business to even be better. But again, our guys aren’t sitting still. Our cleaning operations doing very well. We’re looking to expand the specialty field services, frac spreads look like they’re going to be good for a while, refinery utilization’s high, petrochem is expanding. So, if we can’t make it in a shop, we’ve got to find a way to make it in the field. And we’ve got a really good team that thinks about this every day and we’re not rookies at it anymore either, we’ve been doing it a while too.

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

So, my first question does tie into what John was asking about a bit just on the industrial side. Just curious about your thoughts on how the small turnaround season is shaping up and your thoughts on ‘17 and if you think we’re going to start to see more large wholesale turnaround?

We had some pretty significant turnarounds here in the spring; we have more significant ones scheduled for the fall. When other people talk about this, and we’re very careful at. This is dependent on who your customers are, where their plants are and what you want. So, we see a decent fall turnaround season. It’s too early to talk about spring. Those plants will start to solidify somewhere between August and October and a lot of it depends around manpower planning. So, we think this will be fine. We’re towards the tail end of a pretty good spring turnaround season. And we should be starting up the fall sometime in early Q3.

And then just generally on non-res, very high level, I mean, a lot of them, the leading indicators have been a bit mixed here in the first quarter. We’ve heard from some experts that they think ‘17 could slow a bit. I know it's early but do you have any preliminary thoughts on ‘17 and how that might shape up?

I don't really know much about ‘17. We expect ‘16 to have good mid-single digit growth. I think because of the slow pace of this recovery, I'd be very surprised if we have an abrupt shift unless there is a huge macro event that drives that.

And then finally, Mark mentioned that on the heels of Ardent, you’re still in a good position to take advantage of all opportunities. So, could you just comment a bit on your appetite here for acquisitions, repurchase, organic investments, how you are kind of thinking about the use of capital?

We are pretty aggressive on the repurchase front in the fourth quarter, because we knew we were having a very good cash flow here and there wasn't an immediate acquisition that would stretch our balance sheet. So, we took advantage of that. We've always committed to shareholders that we would not let dilution happen from the year ago period. We took care of most of that here in the first quarter. Share repurchase for us is really we put all that together, capital availability. We're not speculators in our stock. I guess there was a big dislocation, maybe we'd be a little more aggressive, but we're not speculators in our stock. We’d only try to do that. We think about share repurchases, return cash to shareholders. And right now we just made a really decent size acquisition we got to integrate. But if something came along like Ardent, Rabalais we'd take our look at it. We looked at this acquisition for three years and the timing finally got right. We looked at the when we bought North Carolina, Southeast, we looked at that for 2.5 years and talked. So, we tend to patient; we don't control the timing of them, but we're ready to take advantages of them when we can. So, I guess our first thing would be we’ll generate cash this year, we’ll look at pay downs and debt on our revolver. As year the progresses, maybe we’ll be opportunistic on share repurchase but we’ll hold some power for acquisition. I mean, I don't think, anything is really changed.

Okay. And then, if I could squeeze one last in, you mentioned previously at least $0.10 of accretion from Ardent previously, any refinements there given that the acquisition is not close?

I’ll let Mark talk about it. We were talking out into ‘17, I think in the…

Yes. 2017, yes, exactly.

This is what we see in ‘16 right now. The reality, Noelle, and I’ll kick it over to Mark, you all are going to know exactly what we made because the strongest period or the end of the second quarter, third quarter, beginning of fourth. So when we do our third quarter call, you are going to have a pretty good idea of what we did this year. And then we’ll have a pretty good indication of what it can do next year, we’re going know that just by seeing what it did this year.

And I think clearly, Noelle, for the brief period of time that we’ve owned Ardent Rabalais, we haven’t seen anything that would cause us to retract what we have previously communicated with regards to ‘17. And the fact that we were successful in getting it closed early in the calendar 2016, we’re probably more optimistic than pessimistic about what kind of impact we all collectively could have together, be it that we are part of the same company now.

What we learned in these kind of purchases is these folks have been involved in this case, a lengthy sale process, they’ve run a good business while they were doing it. But they clearly haven’t had -- they love being contractors. They love being industrial, electrical contractors, focused downstream and other industrial markets. They’ve had to take a chunk of their time and be involved in the sale processes. And we learned this when we did RepconStrickland, and we did Ohmstede. About six months after is where we really starting to see and take hold, because they are back out doing things to grow their business with that extra time they have now. And so, our experience has been, if you go back to RepconStrickland, we don’t expect that with Ardent Rabalais but we really saw the momentum pick up about six months into the acquisition, as people that are really truly good at what they do, now part of the EMCOR family where we tend to be supporters of what they want to do when we get the business plan and think through it. And we understand the business. Usually they are coming from owners that, no offense they wouldn’t know the difference between the outlet in their house and the outlet that they put in, and what industrial electricians do and how they staff and how do you need to support them and what the safety programs look like and upscale matters and the working capital. So, they feel relieved to be away from a financial buyer, and usually we see the benefits of that 6 to 12 months out as we start to really think about how we grow the business. So, we’re excited about it.

Okay, that’s it. Look, we think we had a pretty good first quarter. We like the revenue growth, need better conversion; top level, our construction business is converting backlog in the revenue growth. Thrilled to have the Ardent Rabalais people and the folks from the Southeast contract are with us now. We like what’s happening with the creativeness of our industrial guys to be able to fill in that drop in demand in the shop services with other services. And our mechanical service business, we expect to perform for the year and we expect to our site-based and government business to hold their own maybe do a little better. So, we feel some of that gap in building services and we have other businesses to convert and we think we have a pretty good guidance range out there. And we’ll see some of you out while we are talking to investors, and the rest of you we’ll talk to you in July. Thank you all very much.

Thank you ladies and gentlemen for your participation. You may now disconnect.