EMCOR Group, Inc. (EME) Q3 2016 Earnings Report, Transcript and Summary

Good morning. My name is Derrick and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group Third 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] Thank you. Mr. Max Dutcher with FTI Consulting, you may begin.

Thank you, Derrick, and good morning, everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the Company’s 2016 third quarter results, which were reported this morning. I would like to turn the call over to Kevin Matz, Executive Vice President of Shared Services, who will introduce the management. Kevin, please go ahead.

Thank you, Max, and good morning, everyone. Welcome to EMCOR Group’s earnings conference call for the third quarter of 2016. Man, as this year gone by so quickly. For those of you who are accessing the call via the Internet on our website, welcome to you as well, and we hope you have arrived at the beginning of our slide presentation that will accompany our remarks today. We are on slide 2. Slide 2 depicts the executives who are with me to discuss the quarter and nine month results. They are Tony Guzzi, our President and CEO; Mark Pompa, Executive Vice President and Chief Financial Officer; Maxine Mauricio, our Senior Vice President and General Counsel; and Mava Heffler, our Vice President of Marketing & Communications. 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, and I guess, in two weeks we’ll have a change 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.

Yeah. Thanks Kevin, and good morning. And thanks for joining our call. I’m going to be covering pages three through five. We had a terrific quarter, a record third quarter on almost any relevant metric. We earned $0.85 per diluted share from continuing ops, earned revenues of $1.92 billion, an increase of 13.2% from the year-ago period and we generated operating income margins of 4.5% versus 4.1% in 2015’s third quarter. Each of our segments performed well in the quarter, led by a 34.2% increase in operating income in our combined construction operations with Mechanical increasing operating income of 46.5% and Electrical increasing 21.2%. We had strong broad-based performance across geographies and end markets. Our operating income margins are strong at 5.7% for our Mechanical segment and 6.7% in our Electrical segment despite a $6.9 million charge related to a Northeast transportation project in our Electrical segment. We are over 90% complete on this job, and we need to complete our work, and then we will seek our rightful entitlement due to us as we should be reimbursed, as we will seek reimbursement for the cost incurred to the project being disrupted and accelerated. We expect that this majority of this remaining work to be completed between now and early first quarter. Our Building Services segment earned 5.0% operating income margins and grew operating income by 40.8% versus the year ago period, with strong performance in our Mechanical services businesses, and improved performance in our commercial site based business. We continue to see strong demand for our mechanical retrofit project services in this segment, driven by the implementation of energy efficiency and savings programs. Industrial Services performed well with essentially a flat performance and have a strong performance in the year ago period. We have finished this significant unplanned specialty project that drove the exceptional performance in the first half of the year. Our revenues were essentially flat for the quarter in this segment, and we believe this is in line with the market. And remember, we are coming off two very strong years of revenue growth in this segment. Our customers have been active. And since the acquisition of RepconStrickland, we have effectively offered and executed work across a broader range of services. We had some business interruption from the floods affecting our Louisiana shops and services, and believe those revenues and operating profit are likely lost for the year. We are still estimating that impact but have reopened our facilities and are nearly back to full operation. The UK performed in line with our expectations and we continue to see the stability in improvement gained from our restructuring efforts. Operating cash flow were strong in the quarter at $81.1 million, and our balance sheet is liquid and strong. Our backlog increased 3.7%, which was led by an increase of 6.4% at our construction segments. Our book-to-bill was at 1.05 despite the strong revenue growth. We had good cost efficiency and control of our overhead as our SG&A rate as a percentage of revenues dropped from 9.7% in the year ago period to 9.4% in this third quarter. It was a very good quarter, and we have great year-to-date performance. 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 webcast, we’re now on slide six. I will augment Tony’s opening commentary with a detailed discussion of our third quarter 2016 results before moving to year-to-date 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 today. So let’s start with our third quarter performance. Consolidated revenues of $1.92 billion are up $224 million or 13.2% over quarter three 2015. Our third quarters included $90.8 million of revenues attributable to businesses acquired pertaining to the period of time that such businesses were not owned by EMCOR in last year’s third quarter. Acquisition revenues positively impacted our U.S. Electrical Construction, U.S. Mechanical Construction and U.S. Building Services segments. Excluding the impact of businesses acquired, third quarter revenues grew organically $133.2 million or 7.8%. U.S. Electrical Construction revenues of $458.6 million increased a $114.2 million or 33.1% from quarter three 2015. Excluding acquisitions, this segment’s revenues grew $55.5 million or 16.1% organically. Quarterly revenue growth was largely driven by increased project activity within the commercial and transportation market sectors, offset by quarter-over-quarter revenue declines within the healthcare and water market sectors. U.S. Mechanical Construction third quarter revenues of $697.7 million increased $110.2 million or 18.8%. Excluding acquisition revenues of $14.9 million, this segment grew organically 16.2%. Our Mechanical Construction segment continues to experience revenue growth across all market sectors with the commercial, water, and industrial market sectors contributing the largest dollar revenue growth quarter-over-quarter. This is our fourth consecutive quarter of double-digit organic revenue growth within this segment and they will continue to be successful – and they continue to be successful on growing contract backlog, which Tony will cover in his next section. EMCOR’s total domestic construction business third quarter revenues of $1.2 billion, increased $224.4 million or 24.1% with 16.2% being generated from organic revenue growth. U.S. Building Services quarterly revenues of $454.8 million increased $26.5 million or 6.2%. Excluding acquisition revenues of $17.3 million, this segment grew organically 2.2%. Revenue gains within the Mechanical and Energy services businesses were somewhat diminished by reduced revenue levels within their government services group due to maintenance contract attrition, as well as lower indefinite duration and definite quantity project volumes. Commercial site-based services quarterly revenues within our Building Service segment were essentially flat quarter-over-quarter. U.S. Industrial Services revenues of $239.1 million decreased $2.9 million or just over 1% due to reduced revenue activity within our shop services businesses due to low levels of capital spending by our customers. This reduction in capital spending is a continuation of a trend that began in late 2015 as a result of crude oil price volatility. United Kingdom Building Services revenues of $73 million decreased $24 million or 24.7% due to $13.2 million impact of the continued weakening British pound as well as a reduction of small project activity when compared to 2015’s third quarter as a our UK customers are still assessing the short and long term implications of the Brexit vote. Lastly on revenues, we achieved a new third quarter record for consolidated revenues and were essentially flat on a sequential basis with our second quarter revenue which had established a new all-time quarterly revenue record for EMCOR. Please turn to slide 7. Selling general and administrative expenses of $181.4 million represent 9.4% of revenues and an increase of $16.3 million from the $165.1 million reported in 2015’s third quarter. As a percentage of revenues, the current year quarter declined 30 basis points from the 9.7% reported last year. The third quarter includes approximately $11 million of incremental SG&A inclusive of intangible asset amortization from businesses acquired. Therefore, our quarterly organic SG&A increases approximately $5.3 million and is due to increases in employment costs as a result of higher head count and increased accruals for certain of our incentive compensation programs due to higher projected annual results than at the same period end of 2015. Despite such SG&A increases, we were able to reduce our SG&A as a percentage of revenues by effectively leveraging our overhead structure in a period of continued strong organic revenue growth. Reported operating income for the quarter of $86.1 million represents 4.5% of revenues and compares to $70 million or 4.1% in 2015’s third quarter. All reportable operating segments are reporting quarter-over-quarter improvements in operating income other than our UK operations. Our U.S. Electrical Construction services segment operating income of $30.9 million increased $5.4 million from the comparable 2015 period. Reported quarterly operating margin of 6.7%, which is 70 basis points lower than 2015’s third quarter. The reduction in quarter-over-quarter operating margin is due to an incremental write-down of $6.9 million on a transportation construction project in the Northeast, which Tony mentioned earlier and as the result of continuing productivity issues attributable to unfavorable jobsite conditions. This is the same project that negatively impacted the Electrical Construction segment’s second quarter operating performance. However, despite this continued project degradation, we have managed to sequentially improve both operating income and operating margin each quarter of the current year within our Electrical Construction segment. The impact of this project write-down on this segment’s quarterly operating margin is a 140-basis-point reduction and is muting strong operating performance from the majority of our other Electrical Construction subsidiaries. 2016’s third quarter U.S. Mechanical Construction services segment operating income of $39.4 million represents a $12.5 million increase from last year’s quarter. This represents a 46.5% improvement quarter-over-quarter as well as a 110-basis-point improvement in operating margin. Our total U.S. construction business is reporting a 6.1% operating margin for the quarter just ended as compared to 5.6% in last year’s third quarter. Operating income for U.S. Building Services increased $6.5 million to $22.6 million or 5% of revenues. Acquisitions generated $1.7 million of the period-over-period increase while this segment’s Mechanical services division contributed the majority of the remaining increase due to higher volume as well as improved project execution. Our U.S. Industrial Services segment operating income of $14.6 million increased approximately $200,000 or just under 2% compared to 2015’s third quarter with a reported operating margin of 6.1% or 20 basis points higher than last year’s 5.9% operating margin. The quarter-over-quarter improvement is attributable to increased profitability within our field services operations due to greater project activity. UK Building Services operating income of $2.6 million or 3.5% of revenues represents an $800,000 reduction period-over-period. The headwinds of a weakening British pounds and lower quarterly revenues were the reason for the 22.8% period-over-period operating income decline. The impact on consolidated operating margin of the previously mentioned project loss incurred during the quarter within our U.S. Electrical Construction services segment is a negative 30 basis points. Our third quarter 2016 cash flow provided by operations is $81.1 million and we are at approximately $128.9 million for the nine months ended. This represents a 34.9% year-over-year improvement, which is exceptional performance when you consider the working capital requirements necessitated by our strong organic revenue growth. We are now on slide 8. Additional key financial data on the slide not addressed during my highlight summary are as follows, quarter three gross profit of $268 million represents 13.9% of revenues, which has improved from the comparable 2015 period by $32.6 million. Gross margin was flat at 13.9% on both periods. Total restructuring costs were $539,000 as compared to $301,000 and relates to continued restructuring activities within our U.S. Mechanical Construction and U.S. Building Services segments. Diluted earnings per common share from continuing operations is $0.85 and compares to $0.66 for the quarter ended September 30, 2015 which represents a 28.8% increase. Lastly, as it has become the recent trend of achieving milestones, the results for our operations for the third quarter of 2016 set new third quarter records for consolidated revenues as previously mentioned as well as operating income and diluted earnings per common share from continuing operations. Please turn to slide 9. With the quarterly discussion out of the way, I will now quickly cover our results for the nine month period ended September 30, 2016. Revenues of $5.6 billion represent an increase of $660.7 million or 13.4% as compared to $4.94 billion in the prior year period. All reportable segments are reporting organic revenue growth year-over-year except our UK Building Services segment, which experienced a $24.5 million headwind due to the weakening of the British pound. Our year-to-date results include $179.7 million of revenues attributable to businesses acquired pertaining to the period of time that such business were not owned by EMCOR in the 2015 year-to-date period. Excluding the impact of businesses acquired, year-to-date revenues grew organically $481 million or 9.7%. Year-to-date gross profit of $765.9 million is greater than the representative 2015 period by $74 million or 10.7%. Reported gross margins are 13.7% and 14% for the nine-month period ended September 30, 2016 and 2015, respectively. The period-over-period 30 basis point reduction in gross margin is attributable to the impact of the transportation construction project that has been written down in each of the last two quarters. Additionally, we continue to have margin pressure within our Industrial Services segment as the revenue mix is a much lower percentage of shop services activities, which have historically generated the highest gross profit margins within the Company. Selling, general and administrative expenses of $530.7 million represent a 9.5% of revenues compared to $488.1 million or 9.9% of revenues in 2015. Year-to-date 2016 includes $20.9 million of incremental SG&A inclusive of intangible asset amortization pertaining to businesses acquired. In addition, the results for the nine month period ending September 30, 2016 include $3.8 million of transaction expenses in connection with our acquisition of Ardent and Rabalais. Excluding such transaction expenses, our SG&A as percentage of revenues for the year-to-date period would be 50 basis points less than the corresponding nine-month period in 2015. We have continued to maintain cost discipline despite our record revenue growth. Restructuring activity has increased from 2015 levels as we continue to refine our cost structure, to capture process improvements as well as maximize utilization of our real estate footprint. Year-to-date operating income of $234 million or 4.2% of revenues, and represent a $31 million or 15.3% increase over 2015’s nine-month performance. 2016’s operating margin is 10 basis points higher than the corresponding 2015 period. All reportable segments are reporting higher operating income year-over-year other than the U.S. Building Services, which has had essentially flat performance on a comparative basis. Despite the wind-down of difficult completion of certain transportation projects within the U.S. Electrical Construction segment, this segment’s operating income increased 4.7% period-over-period, while both U.S. Mechanical Construction services and Industrial Services operating income increased double digits. Our UK Building Services year-to-date operating income increased 6.9% and 50 basis points despite the continued foreign exchange headwinds. The impact on consolidated operating margin of the previously referenced transportation construction losses incurred during the year within our U.S. Electrical Construction services segment is a negative 40 basis points. Reported diluted earnings per common share from continuing operations is $2.33 for the nine months ended September 30, 2016, compared to $1.92 in the corresponding nine-month 2015 period. On an adjusted basis reflecting the add back of transaction costs related to the Ardent-Rabalais acquisition in April, diluted earnings per common share from continuing operations would have been $2.37 per share for 2016 and represents an improvement of 23.4% year-over-year. We are now on slide 10. EMCOR’s balance sheet continues to build upon a striking liquidity. Our September 30 cash balance has increased since year-end due to our strong nine-month operating cash flow performance, offset by funds expended for acquisitions, common stock repurchases and dividends, net of incremental borrowings from our amended credit facilities. Working capital levels have improved due to an increase in accounts receivable, due to our organic revenue growth as well as reduced levels of accounts payable on accrued expenses partially driven by a decrease in income taxes payable. Changes in our goodwill and identifiable intangible asset balances reflect the impact of acquisitions made during 2016, net of $30.7 million of year-to-date intangible asset amortization expense. Total debt of $523.3 million represents a net increase of approximately $208 million from year-end 2015 due to an increase in our term loan and funds drawn against our revolving credit facility to facilitate our closing of the Ardent-Rabalais acquisition previously mentioned. As a result of our outstanding borrowings, we currently have a debt to capitalization ratio of 24.8%. We remain happy with our balance sheet and our exceptional cash flow conversion during the first nine months of 2016. Both our operating and finance personnel continue to work together to maximize EMCOR’s liquidity through strong risk assessment and contract performance. As a result, we continue to be in a very good position to capitalize on market opportunities. With my portion of the morning concluded, I would like to return the presentation back to Tony. Tony?

Thanks, Mark. And it’s always – when you have the kind of year we’re having, it’s always great to talk about it. And for those – I’m on page 11 and we’ll talk a little bit about backlog by market sector. As you can see on the chart, total backlog at the end of the third quarter is $3.9 billion, up $138 million or 3.7% from September of 2015 and up $131 million or 3.5% from December 31. Despite this really strong revenue growth in the quarter, our book-to-bill was 1.05. Project bookings remained strong in quarter three evidenced by both strong total backlog and revenue growth and indicative of our strong execution in project demand that we have experienced in the quarter and again it’s 1.05 book-to-bill. And when you focus on the market sectors, we continue to see strong demand from the commercial sector as backlog increased over $100 million from September 2015 and is also up from yearend. Our healthcare backlog ticked up for the first time in a while on the back of a couple projects including a nice bio-healthcare facility in Chicago. There are other sectors that are all very close to last year’s levels and again with a strong demand for our services and especially you can see that with the strong revenue we experience to continue to grow backlog. With regard to the market, we’re asked all the time, where we think we are in the non-residential cycle. We’ve talked about that. I think we’ve been more right than wrong, but you know you don’t know. And I am certainly not a forecaster of markets overall. I’ve never pretended to be. I do think that EMCOR is a pretty good proxy for the non-res cycle. Given both our sector and geographic diversity, and I can say that we’re busy, we’re very busy right now and we continue to be busy [ph] quoting (0:23:13) work. And we tend to be later cycle than other people and we should clearly have been growing this year especially at a faster rate than the market. My gut, we are still in the slow and steady growth phase of the market. It may be a little choppy, it may go up and down quarter-to-quarter, but I still believe we are on a slow growth phase in the market as we head into 2017. I don’t think it grows high single digits, but I also think it doesn’t go backward, at least not for the first half. It should be mid-single digits. And after that, like it always is, it gets a little foggy. Now I’m going to move to page 12 and talk about it by segment. And there’s really – we’ve covered all this really through our revenue discussion and I think there’s really no new news here other than to say that we continue to have strong backlog growth in our construction segments. About 6.3% from September 2015 the year ago period. And we’re seeing strong growth in Mechanical and that’s up almost 11%. The Electrical segment is basically flat with last year. So if you take our revenue performance that Mark just went through and you take our backlog performance, we’ve had 13% organic growth in revenues in our construction groups and segments, and we’ve had 19% overall. That’s pretty good growth and that’s well in excess of the market. Building Services is down a little over 3% from September 2015 and that’s really not in our Mechanical services business. It has growth characteristics that are very similar to our Electrical and Mechanical segments. It has to do what goes on in our site-based businesses where revenues can be lumpy, large contracts move out, and it’s the least profitable part of what we do. Industrial Services, remember this is just shop backlog. Most of the work we do in Industrial Services is in backlog because it’s time and material or unit price work. This is for newbuild heat exchangers and that market continues to struggle and it serves as a refining and petrochemical service. I’m not sure we’re at a new normal. I expect the market to come back someday, but it’s certainly not doing that right now. And we’ve offset that drag really with hustling like crazy to get the new repair work. We expect this new build drag to continue into 2017, and really, we see no quick turnaround coming there. So as I said on the second quarter call, bidding activity in our markets remain active and we are winning our share of work. And we’re being very selective in the work that we take because it does us no good to build backlog and revenue that doesn’t turn into good profits and good cash flow. Now, I’m going to finish it here on the last couple of slides. We are going to – in pages 13 to 14. We are going to increase our revenue and diluted earnings per share from continuing operations guidance based on our strong year-to-date performance. We’re going to increase our revenue guidance from $7.4 billion to $7.5 billion, and we will raise our earnings per diluted share from continuing ops from $2.90 to $3.10 to $3.10 to $3.20 and both of those numbers exclude the Ardent-Rabalais transaction cost. So you might ask what drove our increase in guidance for the year, and I think there are three primary drivers and there are sub drivers underneath it, but three primary drivers. First, we executed very well for the most part in our Mechanical and Electrical segments. Sure, we’ve had some headwinds on some Northeast transportation projects for the year, and we will seek our rightful entitlement. I went through that in my opening comments. The jobs – when the jobs are completed, we will seek that entitlement. But we are very well positioned in both good sector and geographic markets that have benefited from the non-residential recovery. We are now growing faster than the market and have achieved strong leverage from our fixed cost structure. Our Industrial Service segment has performed well year-to-date. We’ve benefited from not only the impact project that is likely to be a non-recurring event, but we were and are prepared for these events as we have the labor, technical supervision, equipment and working capital to mobilize on these efforts and to have done that over the last five years, but you don’t know when they’re going to happen. You react and you serve your customers. However, our base turnaround business were strong for the spring season and has started strong for the fall season. We also partially overcame the headwind of the declining volume and opportunities in our newbuild heat exchanger business by working very hard to achieve every repair dollar available to us. If you look at our Building Service in UK segments, they’re having decent solid years and they have not created any headwind for us. All of these factors together have led to a terrific nine-month performance and it gives us confidence to raise our guidance and project the year that will be a record year for EMCOR on nearly every relevant metric. So the question that you’ll have is, okay, Tony, how does your team, this great team we have assembled at EMCOR, how do you take it from $3.10 to $3.20, and how do you get towards the top end of that range? And how do you do that? Number one, you continue to have outstanding performance in our construction operations here in the fourth quarter. Two, we are going to see continued improvement in our Building Service segment led by Mechanical services business. And quite frankly, a little snow would not hurt in December. Number three, our continuation of a decent fall turnaround season that we believe we are in the midst of now. And number four, continued steady performance in our UK segment. Then we have continued a strong liquid balance sheet. We continue to generate good cash. So what are we going to do with the capital we have at EMCOR? We will continue to look for opportunities to add to our business much like we did in second quarter with the addition of a very good Mechanical service business and the addition of a very good Industrial Electrical business. Acquisitions like that – that add to the segments that we have is what we will look to continue to do. We will also look to continue to return cash to shareholders through dividends and share repurchases with more of an emphasis on share repurchase. And I am going take questions now and I’d be remiss if didn’t thank the employees and management at EMCOR for really a terrific start to the year, year through nine months and a terrific quarter. Thank you all very much. And with that, I’ll turn it back over to Derrick.

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

Good morning, John.

Hi. Good morning and congratulations on the quarter. Couple of things. First of all, Tony, I guess for you on the Industrial Services side of the business you mentioned the pickup in fall turnaround season. But I’m more curious about what you’re seeing in terms of capital spending plans out of the customers there. I mean is that market change now with oil prices at least rebounded maybe more stable here?

We haven’t seen it yet on the capital side, John. We do have some exposure to upstream now with our acquisition of Ardent and Rabalais. So we haven’t seen that flow through to the upstream side, which is where I think a lot of the capital was cut and some was cut in downstream as they just took – especially the integrated guys took a wholesale of scaffolds to their capital. So the short answer is, we haven’t seen it yet. We maybe wouldn’t be the best position to see the early signs of that because even in that business we tend to even if you build and putting in new wells, the Electrical will come a little later. We are seeing strong demand from our customer set – from our customer set both in the spring and the fall. And the spring 2017 doesn’t look bad sitting here today. That will firm up though now through the fourth quarter.

And then just in terms of your transportation project that you’re seeking the recovery on. I assume it’s at least as much as the losses that you reported on that project. But can you give us a sense of what the timeframe? I mean is this something that you have a chance of resolving in 2017?

John, we never try to bake those kind of recoveries into our guidance if that happens.

Right.

Then as the year happens, we would revise our guidance because it would be an event if we thought that that could improve our outlook. These things either settle fast or they take forever.

Yes.

I would put this in somewhere in the middle. It’s a very difficult job that’s been accelerated and has a lot of outside influence that’s involved in the job that have made it fairly non-productive.

Okay. And I guess just last thing if I could. I mean I appreciate your comments about the non-residential cycle and – sounds like low single-digit growth that you’re looking at. But could you give us a sense of what you’re seeing in proposal activity? Does that support that – look, I mean just we’ve seen a downturn in some of the AIA numbers?

Again, we’re later cycle, so maybe we’re not seeing what AIA would see.

Yes.

That tends to be a best day in my mind, a qualitative view of the world on quantitative.

We have not seen a significant drop in the activity that our folks are looking at right now. That varies market-to-market and it varies month-to-month. But if you take it in overall aggregate, our folks have proposals and enough outlook to believe that the market should grow low to mid-single digits next year.

Okay. Great. Thanks a lot.

Thank you, John.

Your next question comes from the line of Noelle Dilts [Stifel Nicolaus].

Good morning, Noelle.

Hi. Good morning and congratulations on a really good quarter.

Thank you.

So my first question, just first expanding around non-resi. Obviously, good results in the quarter, continued backlog growth. But do you think just kind of anecdotally, are you getting a sense that there’s any delay in decision making around projects here ahead of the elections? And I’m partially asking that just based on some of what we’re seeing in the ABI and then some of the starts data out of Dodge?

Again, I think you look at where we are in the food chain. By the time it gets to us, people work fairly well along on the design and development of our project. The upstream folks like the architects, maybe the engineers, maybe the general contractors, if they’re more on the design-build side, may see that and have those macro discussions. We at EMCOR tend to have micro discussions. It’s a project that’s already developed and thought about. So we’re not seeing people delay decisions based on whatever may happen in two weeks.

Yes. And then maybe could you touch on your exposure, just how you’re thinking about potential federal stimulus in the infrastructure space and where and how you might see benefit?

Where we would benefit the most is first by increased IDIQ spending in our government’s business, Mark, and that’s been down, right, since when?

Yes. Well, that’s been down since 2015.

Right.

Yes.

Late 2015 and carried into 2016.

[indiscernible]

[indiscernible] pre-sequester levels.

Yes. So maybe that would be a place we would see in Building Services, some return to more normal levels of spending pre-sequester. I think that’s going to have to happen anyway. It’s just not working. The second area we can probably see is that some of the transportation projects on the Electrical side got advanced and got bid. I mean that’s really where we participate in transportation work. We also would do mechanical work around airports, if that would advance. Barrack was typically had been a good thing for EMCOR through the years and we’ve participated in those projects. It won’t – I think it will have other than the IDIQ work, literally no effect on 2017.

Okay. And then just shifting over to the Industrial Services business. I mean looking back now over the past few quarters, you’ve really seem to outperform your peers here. And I know you go back to the idea of that, it depends on what you’re seeing out of your customers, right. And as you just said to John, you’re seeing strong demand from your customer set. But do you think there’s – is there something about customer set that you think maybe is driving a little bit more spending maybe to touch on your petrochem customer exposure if you’re seeing some share gain there? I’m just trying to understand how you’ve now consistently outperformed some of your peers in the turnaround space over a multi-period basis.

I’m always careful to talk too much about how others are doing versus how we’re doing. Here’s what I know about us, we have some of the best operators in the business and they’re technically really good. And because we have some of the best operators, we attract the best craft labor and the craft supervision that come with that. And so when customers have major issues and because – since the acquisition of RepconStrickland, we can really put together a great team to solve our problem. And then I think they know that – since that acquisition and really putting the whole thing together what we had together with Olmsted and Redmond, I think people also know what the financial strength of EMCOR. They know that we’re going to have the resources to get those jobs done. So when you tag, when you put technical expertise with great leadership, together with financial strength, with a very demanding customer base and a thank goodness, underlying all that a terrific safety record, you tend to get opportunities that others might not see. And our guys are, some of them are the pillars of the industry and we benefit from that. And so I can’t speak to what the others do. I can only speak to what we do.

Okay. Thank you.

Your next question comes from the line of Tate Sullivan.

Hi. Thank you. In the press release as you noted, the contribution from your recent acquisition or acquisitions, and I assume that most of that was Ardent even though you said there were some flood impact in Louisiana. I mean are you getting the benefit from Ardent earlier than you expected in general? And related to that, on slide 6, just eyeballing, it looks like your Industrial backlog increased to some of that Gulf Coast related work.

No. On the Gulf Coast, we did get some backlog in the Electrical segment from Ardent. That would be – some of that would be Gulf Coast related – I’m going to put that to Mark here in a sec. And we had three acquisitions.

Yes.

If you look at the past year, we made a good fire protection acquisition in the Midwest in fourth quarter of last year.

October.

Yes. Fourth quarter, right? We made a good Mechanical service acquisition right before Ardent and then we made the Ardent and Rabalais acquisition. These are three really good companies and fit the kind of things we like to do. It’s the right point of the cycle for us to have acquisition activity because people put a couple of years behind them. And, Mark, maybe you can give a little more detail.

Yes. Tate, with regards to the impact of acquisitions, we’ve obviously disclosed in the press release and in our commentary and when you get the opportunity, if you go to the 10-Q, you could actually see the actual contributions by segment. And as I mentioned, just to reiterate, Electrical Building Services and Mechanical Construction all benefited from the acquisition as Tony just touched upon. With regards to Ardent’s contribution being quicker or more significant than anticipated, I would say to-date they are in line with expectations. I don’t know that they’re going to perform in the fourth quarter at the levels that they have through their first months of ownership just because of the seasonality of their business. But having said that, everybody’s been mostly in line with what we expected. And in the Ardent situation to a lesser extent and the acquisition that it was close in the fourth quarter last year in Mechanical Construction, those are backlog driven businesses. So we still need to burn through the amortization associated with those acquired contracts, but we should be mostly through that by the early part of 2017.

And if you took that group of acquisitions together and you go to my last comment, there we bought fire protection, sprinkle work, we bought in Industrial Electric. In electric, we think that Ardent’s option on the future of upstream oil and gas that we were lucky to get and not having to pay for it, for the upstream oil and gas. And the last one is a Mechanical services acquisition. If you look at that mix of acquisitions and say that stuff you would do in 2016, at the end of the year or 2017 if they became available or end of 2017, these are the kind of things we like to do, and this is the right point of the cycle for that to happen because one of the like sort of questions you get that make no sense typically is when business goes bad, people say, oh, it’s a great acquisition environment. It’s a terrible acquisition environment because people don’t sell on weak numbers and we don’t buy things – we try not to buy things that need major fixed up because we depend on management to grow our businesses and we like to buy good companies. So, we’re at the right point of cycle for acquisitions to become available. We have enough visibility to think they – like Mark said that they can meet the expectations we have for them.

Okay. Thank you. Separate topic on the transportation project, again and it’s amazing to consider how much you exceeded expectations and you even take out that per share impact from that one transportation project. I mean what is the – I mean should I be concerned with what I think you’re going to do on the Tappan Zee Bridge project for instance or road transportation projects, bad projects in general or can you just talk [indiscernible]?

Well, the best projects – some of the best projects that have ever been performed at EMCOR have been in the transportation segment. And once in a while, you get into a confluence events that are just bad all the way around from outside pressure, to deadlines, to poor designs, to terrible general contractor management. You put all that together some time on a job, you get to a bad place. But I am bullish on transportation at EMCOR for the long-term and it’s been a key pillar and foundation in our Electrical segment.

Okay. Thank you very much.

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

Hi, folks. Great quarter. Congratulations.

Well, thank you, T.

So, Tony, if I look back historically, there was a year you guys did 5% operating margin. And if I mix out these projects issues you’ve had in terms of last year, you’re kind of eking up to 4.5% potentially for this year. How do you look at sort of margin expansion drivers as we go into next year?

I mean it becomes difficult when you think about the mix for us to see 5% operating margins right now. I mean just because our shop business is down so much, right, on a combined basis. If our shop business were strong, I think collectively as a team would say, yeah, there’s a shot at that. But because that part of the business has turned from a strong positive to a negative, it becomes hard for us. And then it gets us to mix issues in general, right? And, yeah, I think you’re correct for the projects this year and you could say that’s happened. But the reality of it, the size we are now, we don’t have the kind of losses we have on this particular issue where we’re dealing with right now. But in 3,000 projects, there’s always some level of thing going on there. We don’t execute 100%, and no one does. So I think if you add back that impact we have, Mark, that’s probably a pretty good place because most of our businesses are firing at a pretty good level right now.

Yeah. And then other than the pricing environment overall on the Industrial Services segment in addition to our new – the shop still has pressure on it.

Yeah. And the pricing of royalty, I said in a meeting and people say, where’s pricing? And we were with some people that see broad sections of the market last Friday. And I think the general consensus of those folks and they’re looking more up – our customer base versus us, margins clearly haven’t recovered to where they were in 2007 and most of us don’t believe that will happen because of the slow nature of the recovery in non-res. Now, the positive of that slow recovery is we don’t have the kind of labor exposure that we have in quicker recovery because people would have a chance to build their labor force over time versus just building it quickly.

Okay.

But markets haven’t recovered to those levels. So when you see us expand margins right now, it has a lot less to do with pricing. Our customers are buying tough.

You should add efficiency.

And it has lot to do with execution and efficiency in things we brought the jobs like GPS, through the Trimble systems, through BIM, then BIM leased to pre-fabrication. It’s led to a very close coordination with our supply base so we can be more efficient and it’s led to a lot of – and better pre-planning when we can. What I mean by around that is, really sitting down and figure out sections of the work that can be done with the least amount of disruption. When you’re a trade’s contractor and you put labor on the job, everything is about making sure you have productive resources with the tools in their hand to work safely and get it done in the most efficient manner possible.

Right.

That’s different than someone as a general contractor or a construction manager or even a broader EPC.

Got it. Okay. And Tony, in your prepared comments, you talked a bit about healthcare after awhile. Is this – are you seeing some sustainable potential improvement coming in that sector or should we regard this more as sort of one-offs right now?

I’m still on the one-off camp.

Yeah.

I think hospitals still are trying to figure out how to make money under the Affordable Care Act and that certainly is not going to swear itself out anytime soon.

Got it. Okay. And last question I had, Tony. There’s a lot of talk about infrastructure obviously into the election. But there seem to be also fairly meaningful implications for the power segment. Do you see that as an opportunity for EMCOR to play on, or is it some source of uncertainty?

No, I think it is an opportunity. I don’t think it’s a 2017 opportunity. I think it is an opportunity, and I think it comes two ways. One, we do participate in solar as a specialty sub, and we’ve done some work out in California and we’ve done it fairly well. We do participate and win with some very specific projects in the Rocky Mountain region where we will build limited transmission and distribution lines.

All right.

And we participate probably more significantly in two areas that may be not as obvious. One is in co-generation or co-gen plants, gas generation in general. We are well positioned in a couple of markets to take advantage of that. As an Electrical or Mechanical sub, we will not do this work EPC, I have no desire to do this work EPC. And in the third area that’s not as obvious is cleanup. Because of our Industrial footprint, not only Industrial Services segment, but also in our Mechanical segment specifically and a little bit in our Building Services segment, we have workers, they can help decommission, whether it would be a coal plant or the things that go around a coal plant. We haven’t seen that yet a lot, but I think that’s an opportunity as you go further past 2018 into 2019 into 2020.

Perfect. Thank you very much, and congrats again.

Thank you, T.

Your next question comes from the line of John Rogers.

Thanks. Just maybe following up on that a little bit. Tony, it seems like every cycle for EMCOR, non-res cycle, the conventional vertical building becomes less and less portion of your overall business. And I guess where do you see yourself positioning over the next couple of years in non-building work as a portion at EMCOR?

Yes. So Building is so important part of what we do.

Yeah.

And it forms the foundation of the company. It did. It’s still a big part of our Mechanical and Electrical segments, still big part of our Building Service segment. But John, that’s right. I mean, you look at – we’re building a whole Industrial segment. It really has nothing to do – services segment that has nothing to do with the Building segment.

As well as for Industrial construction.

And as well as Industrial construction underlying especially in our Mechanical, and now, in our Electrical with the acquisition of Ardent. We have spent a lot of resources both through organic growth and building out capability we already had, but also through acquisition to build Industrial construction and manufacturing capabilities to support those customers. And you can look at companies we have like Contra Costa, like the University Mechanical’s, like Shambaugh, but then you can look at how we organically added to the terrific teams in each of those places especially Shambaugh and Contra Costa. I mean these folks know how to do this stuff and the UMEC’s, right, and the Wasatch’s. And – so we added there. That was more organic. And then we also took that and said okay, what are other things we can add. So PPM, Southern Industrial, Ardent. These are things outside of Bahnson. These are things outside of the Industrial Services segment. And all of them play in those markets. They play into maintenance part of those markets. And so we went from a company that was primarily focused on the Building sector in 2001 or 2002 to a broad-based especially trade contractor that can serve a broad swap of construction and service needs in the United States. And so, where do I see it going from there? Well, I think we’re now at a point, we have really four well-defined segments, and that includes the UK with its Building Services segment. We can continue to add responsibly in our Electrical and Mechanical. We still have geographic opportunities that would allow us to be in the Building. We have geographic opportunities industrially. We have geographic opportunities for just specific trade’s contractors in those segments. Mechanical services and the Building Services segment, we have geographic opportunities that we’re still lacking – and we look all the time. And I said this could be a good time for acquisitions of those kind of companies like the last three we bought that become available. We have opportunities to add to our services in the refining and petrochemical. We’re still could add to our bundle of services either organically. For example, we don’t do much work around catalyst. We do a little bit. We don’t do much work around refractory. We do a little bit. We could do more in each of those areas. So that’s how we think about the business. We’ll have the capital to do it. We can grow organically and through acquisition growth.

And so what would you say – not so much for the last quarter but is the balance within EMCOR now between that – and I’m saying vertical construction or Building construction versus the Industrial civil side of the business at this point?

Yeah. I think you can just look at the numbers and I think you could probably say, we’re probably still 50% – 55% vertical construction and 40% profit-wise and 40% – 45% not. And the only reason we get to 50% or 55% vertical construction is we bring other things in there like data centers, data com work and others, and that would get you to the 50% – 55%. Otherwise, I’d say it’s a 50-50 company now.

Okay. Great. Thank you.

Your next question comes from the line of Tate Sullivan.

Hi. Thank you for taking the follow-up, and more on specific potential market. You talked about refinery turnaround type work, but then on also on the topic of inter-quarter orders that you received in 2Q. What are you doing – currently, what can you do? What’s the opportunities for chemical plants that are being built or expanded are already in operation in the U.S.?

So, we do more petrochemical. We don’t do a ton of work in pure chemical plants. We do petrochemical work. We do the same kind of work in petrochemical plants that we do in the other ones. Typically, hugely, the work is smaller. It’s not as robust, but that being said, some of the larger turnarounds that we’ve done have been in petrochemical plants and not refineries. Their cycles tend to be different than the refineries. They tend to be a different cycle, what I mean by that is when a refinery is strong, sometimes, a petrochemical historically haven’t been strong. We’re not finding that to be necessarily true right now, but it’s the same services. We’re doing Mechanical turnaround work. Now, we can do Electrical turnaround work. It’s more maintenance-focused to capital with the acquisition of Ardent and Rabalais.

Which is in...

We have more capital capability. Yeah, because of the E&I work and all the things around it. So, our guys can sell to – think about what they’re trying to sell into. I got to bring highly skilled people. I got a flexible workforce. They’ve got to do work under the most demanding timelines and they’ve got to do it in an unbelievably safe and conscious manner and have the right equipment. So, there’s a broad swap of those kind of customers that we can serve.

Okay. Thank you very much.

Now, we will turn the call back to management for closing remarks.

Look, we had – we’re off to a great start, obviously, and it’s beyond the start now. We just finished our third quarter. We’re 75% of the way through the year. We are very thankful for the performance and the trust that our customers have given us to execute work for them. We’re going to continue to try to do that as best we can in a safe manner and take care of our employees. We expect to – obviously with our guidance, we expect to do okay here in the fourth quarter and we’re hoping for a decent non-res market, low single-digit growth as we go into the next year. And one thing I want you to remember about EMCOR is we got to go out and hustle everyday to keep this $7.5 billion now machine going and we have a lot of people to do that. And thank you all for listening and we won’t talk to you again together until February. So, all of you have a great end of the year. Be well.

Thank you for your participation in today’s conference call. You may know disconnect.