EMCOR Group, Inc. (EME) Q2 2017 Earnings Report, Transcript and Summary

Good morning. My name is Adam and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group Second Quarter 2017 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. I will now turn the conference over toe Mr. Bradley Vitou with FTI Consulting. Sir, you may begin.

Thank you, Adam, and good morning everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the Company’s 2017 second quarter results, which 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, Brad, and good morning, everyone. Welcome to EMCOR Group’s earnings conference call for the second quarter of 2017, wow, the year has started to fly by. For those of you, who are accessing the call via the Internet and our website, welcome and we hope you have arrived at the beginning of our slide presentation that will accompany our remarks today. You should be on slide 2. Slide 2 has the executives who are with me to discuss the quarter and six months results. They are Tony Guzzi, President and Chief Executive Officer; Mark Pompa, our Executive Vice President and Chief Financial Officer; Maxine Mauricio, our Senior Vice President and General Counsel; and our Vice President, Marketing and Communications, Mava Heffler. For call participants not accessing the conference call via the Internet, this presentation, including the slides will be archived in the Investor Relations section of our website under presentations. You can 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 2016 Form 10-K and in other reports filed from time-to-time with the Securities and Exchange Commission. With all that said, please let me turn the call over to Tony. Tony?

Thank you, Kevin and good morning and welcome to EMCOR Group’s second quarter 2017 conference call. Initially, I’ll be covering pages three to five in my opening commentary. I am going to speak to our quarterly results. Then Mark will cover in detail both the quarter and year-to-date results. You know we had a very good quarter that again really highlights the strength and diversity of EMCOR services and the end markets we serve. We are $0.95 per diluted share from continuing operations, on revenues of $1.9 billion. We had strong operating income margins of 4.9%. Overall, our electrical and mechanical construction segments had excellent quarters. And fill the gap created by the tough comparison we knew that we had and previously discussed in our industrial services segment. Resulting from their excellent second quarter 2016 performance. Our results again are bolstered by very strong operating cash flow in the quarter of $108 million. Our folks can execute and are focused and disciplined. I now want to provide some operating detail by segments for the quarter. Our electrical construction segment had excellent performance with revenue growth of 6.8% and that was mostly organic. Very strong operating income margin of 7.1%, which drove a 39.6% improvement in operating income versus a year ago period. We had excellent execution and really benefit from an absence of badness in the segment. We have strength across our end market customers and markets. Our electrical construction segment continues to perform well in a good market and can execute some of the most complex and sophisticated projects well and we do deliver for our customers. Our mechanical construction segment also had actual performance with 18.6% revenue growth and again most of that revenue growth was organic. We had strong operating income margins of 7.2%. We raised in this segment by dispute settlement of $11.6 million in the quarter, but our underlying operating income margins are still strong at 5.7%. We had strong execution across this segment and across most markets and we executed well on a range of products from pivotal [ph] to small projects to large complex projects. Our fire protection work and our manufacturing work is particularly strong in this time. Our building services segment had a reduction in revenues of 5.4%, which is driven by low margin contract losses than we have previously discussed. Our operating income grew by almost 9% and our operating income margin expanded my 60 basis points, which shows the impact of the more favorable mix in this segment. Our mechanical service business is performing well and continues to etch across its range of products from service agreements, repair services, building controls and retrofit projects. In our site based business, we have won several new contracts that should ramp up nicely in the next 12 to 18 months and our IDIQ that is indefinite quantity; indefinite duration work in our government business grew nicely in the quarter. Our industrial services segment had a tough quarter and we expected that and we had foreshadowed it in our previous commentary. We knew we had a tough quarterly comparisons driven by our outstanding performance on a large impair [ph] projects coupled with an elongated 2016 spring turnaround season that moved more from first quarter 2016 to second quarter 2016 that is normal experience for us. We also had work move from this second quarter 2017 into second quarter of 2018 as our customers kept running these unit. As crack spreads are relatively strong at this time and it felt it can defer this work for a year. We continue to execute well for our customers and are positioned well in not only our turnaround work, but also in our shop services, heat exchanger cleaning and specialty services like specialty welding. We believe we are at the bottom of demand and pricing for our new build heat exchangers that we have talked about so much. The U.K. continues to perform steadily and this should be the last quarter where they had to fight through the FX headwind caused by Brexit. Our U.K. business added some nice customer wins in late 2016 and early 2017, which went at full implementation, should be nicely accretive to the segment’s operating income. Our backlog grew 7.6% in the quarter driven by our electrical and mechanical construction segments. Our balance sheet is liquid and strong, enable us to continue to invest and grow our business. And with that, I’ll turn it over to you, Mark.

Thank you, Tony and good morning to everyone participating on the call today. For those accessing this presentation via the webcast we are now on slide 6. Over the next five slides I will supplement Tony's opening commentary on EMCOR’s second quarter performance as well as provide a synopsis of our year-to-date results through June 30th. All financial information referenced is derived from our consolidated financial statements included in both our earnings release announcement and Form 10-Q filed with the Securities and Exchange Commission earlier this morning. So, let's review our second quarter performance. Consolidated revenues of $1.9 billion are down $37.5 million or 1.9% quarter-over-quarter to 2016. Revenue distributable to businesses acquired pertaining to the period of time that such businesses were not owned by EMCOR in last year's second quarter impacted the current year's quarter by $44 million and positively impacted our U.S. mechanical construction, U.S. building services and our U.S. electrical construction segments. Excluding the impact of businesses acquired, second quarter revenues declined organically $81.5 million. U.S. electrical construction revenues of $449.2 million, increased $28.6 million or 6.8% from quarter two 2016. Excluding acquisition revenues, this segment grew $22.1 million or 5.2% organically. Revenue growth was largely driven within the commercial and healthcare market sectors inclusive of numerous telecommunication projects, partially offset by quarter-over-quarter revenue declines within the hospitality and institutional market sectors due to certain project completions that occurred in late 2016. U. S. mechanical construction second quarter revenues are $741.8 million, increased $116.3 million or 18.6%. Excluding acquisition revenues of $21 million, this segment’s revenues grew $95.3 million or 15.2% organically quarter-over-quarter. This segment’s revenue growth was primarily driven by higher project activity within the healthcare, commercial, industrial and hospitality market sectors. EMCOR’s total domestic construction business second quarter revenues of $1.19 billion increased, $144.9 million or 13.8% with 11.2% being generated from organic activities. U.S. building services quarterly revenues of $438.3 million decreased $24.9 million or 5.4%. Excluding acquisition revenues of $16.5 million, this segment decreased organically 8.9%. Revenue gains within the mechanical services division were offset by revenue declines within their commercial site based and government services divisions due to maintenance contract attrition, primarily occurring in 2016, partially offset by increased indefinite duration, indefinite quantity project volumes from government related activities. U.S. industrial services revenues of $187.4 million decreased $146.1 million or 43.8% due to the lower field services activities quarter-over-quarter as a result of an extended spring turnaround season in 2016 as well as the execution of a large specialty services capital project that favorably impacted each of the first three quarters of last year. This segment shop services revenues within the second quarter were slightly improved from the comparable 2016 quarter due to an uptick in repair work. United Kingdom building services revenues of $79.2 million decreased $11.4 million or 12.6% due to the $9.6 million impact of unfavorable exchange rates for the British pound versus the U.S. dollar as well as, reduced small project and capital project activity. Even after we have surpassed the one year anniversary of the Brexit vote, the resulting uncertainty in the United Kingdom continues to affect our customer’s discretionary spending habits. Please turn the slide 7. Selling, general and administrative expenses of $181.3 million, represent 9.6% of revenues and reflect a reduction of 474,000 from quarter two 2016. The current year's quarter includes approximately $3.9 million of incremental SG&A inclusive of intangible asset amortization from businesses acquired. Excluding this incremental acquisition related SG&A, as well as, the $2.8 million of transaction cost associated with the acquisition of Ardent and Rabalais in the second quarter of 2016. SG&A has decreased $1.6 million on an organic basis. This decrease is primarily due to lower incentive compensation expense and a reduced provision for doubtful accounts both within our industrial services segment. Partially offset by increased employment costs within our domestic construction segments. Reported operating income for the quarter of $92.8 million represents 4.9% of revenues and compares to $92.3 million and 4.8% in 2016 second quarter. Our U.S. electrical construction services operating income of $32.1 million increased $9.1 million from the comparable 2016 period. Reported operating margin of 7.1%, which is 160 basis points higher than 2016 second quarter. The increase in both operating income and margin is due to improved contract performance within the transportation and commercial market sectors. This segment experienced the loss of $10.5 million on a transportation and construction projects during the last year's second quarter, due to productivity issues and that discrete project was completed during the second half of 2016. 2017’s second quarter U.S. mechanical construction services segment operating income and $53.1 million, represents a $15.1 million increase from last year's quarter. This represents a 40% improvement quarter-over-quarter, primarily due to improved operating performance within the institutional market sector as well as the $11.6 million gross profit impact of the recovery of certain contract costs incurred in 2016 that were previously disputed. The segment’s operating margin of 7.2% and represents 110 basis point improvement from 2016’s second quarter. Our total U.S. construction businesses reporting a 7.2% operating margin for the quarter just ended as compared to 5.8% of revenues in last year’s second quarter. Operating income for U.S. building services of $20.2 million has improved from last year’s second quarter and reported operating margin of 4.6% is up 60 basis points. The improvement in quarter-over-quarter operating income and operating margin is due to increased profitability within their mechanical services division due to repair and project activities, as well as the incremental income contribution from businesses acquired. Our U.S. industrial services segment operating of $4.4 million decreased $28.8 million compared to 2016 second quarter with an operating margin of 2.3%, which is 760 basis points less than last year’s 9.9% operating margin. The decrease is attributable to lower turnaround activities quarter-over-quarter due to 2016’s extended spring turnaround season, which positively impacted last year’s second quarter. Additionally quarter two of the prior year was at peak labor utilization levels, while executing a large field services capital project that was completed later in 2016. Lastly, the segment continues to deploy [ph] headwinds within the shop services operations as demand remains muted and the pricing environment remains extremely competitive for new build heat exchanger orders. U.K. building services operating income of $3.5 million represents 4.4% of revenues, which is an increase of approximately $200,000 and is an 80 basis point improvement over last year's second quarter. Lastly, on this slide, we had a strong operating cash flow quarter with cash provided by operations of $108.1 million, which compares favorably to the $85 million generated in 2016’s second quarter. We are now on slide 8. Additional key financial data for the quarter not addressed in the previous slides are as follows. Quarter two gross profit of $274.5 million represents 14.5% of revenues, which is essentially flat with a comparable 2016 quarter on an absolute dollar basis. While representing an improvement of 30 basis points from a gross margin perspective. The quarter-over-quarter increase in gross margin is due to the gross margin improvements in all of our reportable segments other than U.S. industrial services as a result of improved project execution and revenue mix within our construction in U.S. building services segments. This improved gross profit performance was offset by the significant reduction with our U.S. industrial services segment due to the factors previously referenced followed by both myself and Tony. Restructuring costs during the most recent quarter relate to activities within our U.S. building services and U.S. mechanical construction segments as we continue to rationalize our cost structure. Diluted earnings for common share from continuing operations is $0.95 and compares to $0.92 for the quarter ended June 30, 2016. On an adjusted basis, reflecting the add back of transaction costs incurred in quarter two of 2016, related to last year’s Ardent and Rabalais acquisition, diluted earnings per common share from continuing operations would have been $0.95 for 2016 as compared to the $0.95 per diluted share in the current year, which represents consistent performance quarter-over-quarter. We are now on slide 9. With the quarter out of the way, let’s now turn our attention to the first six months. Revenues of $3.79 billion represent an increase of $109.3 million or 3% as compared to $3.68 billion in the prior year period. Consistent with our second quarter 2017 revenue performance robust revenue growth within our domestic construction segments is being muted by year-over-year revenue declines within each of our industrial services, U.S. building and U.K. building services segments. Year-to-date gross profit of $540.8 million is greater than represented at 2016 period by $43 million or 8.6%. 2007’s gross margin of 14.3% represents an 80 basis point improvement over 2016, primarily due to improved project execution year-over-year within our electrical construction, mechanical construction and U.S. building services segments. Additionally, our U.S. mechanical construction segments year-to-date gross profit is benefiting from the recovery of $18.1 million of contract costs previously dispute another project, which was completed in 2016. This item favorably impacted consolidated year-to-date gross margin by approximately 40 basis points. Selling, general and administrative expenses of $364.3 million represent 9.6% of revenues as compared to $349.2 million or 9.5% of revenues in 2016. Our SG&A as a percentage of revenues in year-to-date basis is down sequentially from quarter one by 10 basis points. The increase in SG&A for the six month period is due to $16.2 million of incremental expenses from businesses acquired related for the period of time that such businesses were not owned by us in the prior year. Restructuring activity is slightly increased from 2016 levels, as we continued to adjust our cost structure to enhance our efficiency and productivity. Year-to-date operating income is $175.6 million, represented $27.7 million increase over 2016’s year-to-date performance. Our year-to-date operating margin is 4.6% as compared to 4% in 2016’s year-to-date period. 2016’s operating margin on an adjusted basis reflecting the add back of the transaction expenses related to the acquisition of Ardent and Rabalais in April 2016 would have been 4.1%. Therefore our year-over-year improvement in operating margin is 50 basis points and is due to improved project execution within both our U.S. electrical and U.S. mechanical construction segments as well as the year-over-year increase in our U.S. building services segment. Diluted earnings per common share from continuing operations is $1.84 for the six months ended June 30, 2017 compared to $1.48 in the corresponding 2016 period. On an adjusted basis, reflecting the add-back of 2016’s transaction expenses. Diluted earnings per common share from continuing operations would have been $1.52 for 2016 as compared to 2017’s $1.84, which represents an improvement of 21.1% year-over-year. We are now on slide 10. EMCOR’s balance sheet remains strong at June 30. In variations of note from December 31, 2016 are as follows. Cash is reduced from year-end 2016 due to funds expanded in excess of a positive operating cash flows to-date for acquisitions, common stock repurchases and capital expenditures. Working capital levels have decreased since the end of last year, primarily due to the reduction in cash just referenced. Changes in our goodwill and identifiable, intangible asset balances reflect the impact of acquisitions, net of $24.3 million of intangible asset amortization expense. Total debt of $417.2 million is reduced from year-end 2016 due to the mandatory quarterly principal repayments under our term loan of $3.8 million of which $7.6 million has been repaid year-to-date offset by new capital lease additions during the first six months. As results, of our outstanding borrowings we currently have a debt-to-capitalization ratio of 20.9%, which represents a slight decrease from year-end 2016. We are happy with our balance sheet and our excellent cash flow conversion during the first six months. We have sufficient liquidity executing against all of our strategic objectives and remain flexible to take advantage of all opportunities. With my commentary concluded, I will return the call to Tony. Tony?

Thanks, Mark, we look forward with the growing backlog put into working capital. I’m on page 11 and I’ll be talking to page 11 and 12 as I talk about backlog. In summary, our backlog continues to grow despite strong underlying revenue growth in our electrical and mechanical construction segments. Total backlog at the end of the second quarter is $4.1 billion, up $291 million or 7.6% from 2016. It is also up from year-end by $199 million or 5.1%. Another quarter of strong project bookings on top of strong top line revenue. Book-to-bill for the quarter was a strong 1.06. We're halfway through the year now. Our markets continue to give us solid opportunities to win work across most sectors and our electrical and mechanical construction segments are executing well. Really with the work we have, all our businesses are executing well with the work they have. When you focus on the market sectors, we continue to win commercial projects and that's evidenced by our commercial backlog logging in almost $1.5 billion, up $250 million from the year ago period and up $163 million from December 2016. Commercial backlog is up 20% year-over-year, which correlates with recent census nonresidential spending there for the sector. We realize the census data is a rear view mirror look, but it also can be with the momentum in it, our future indicator. It doesn't look that right now the demand is slowing much at this time. Backlog in institutional healthcare and hospitality sector is up year-over-year and for the first six months of 2017. While backlog of the transportation and industrial sectors are down as we work down some large projects in [indiscernible] especially in the food processing and transportation infrastructure areas. Bottom line that productivity is fairly widespread across most sectors and we continue to see projects opportunities where we can execute well for our customers. So, flip the page over to backlog by segments. It is really not a lot of news here. Same story, different quarter. Backlog continues to grow in our domestic construction segments. In total, our electrical and mechanical construction segments backlog increased $331 million to $3.2 billion up almost 12% despite the strong revenue growth from June 2016. It's pretty evenly split with electrical up $160 million and mechanical up $171 million for the year-over-year period. Combined over the one-thirty of the backlog growth came during the first half of 2017, supporting the non-residential sectors that are experiencing growth in 2017. Backlog in our building services segments is down $64 million is driven by our commercial site base in government business, as we continue to reshape these operations are on the increased profitability. Bottom line here is we are excited about some new opportunities that we were in the pilot stage of and it could be significant opportunities for us in the future. And the potential full impact of these awards are not in backlog yet in any significant way. Further, we showed the discipline and not taking these loss contracts at low or even negative margins. It certainly wasn’t a performance issue as these relationships were 8 year to 14 year relationships. In the case of our government business, we had won all of the award option [ph] years. In our commercial site based business, our customer brought in new management and they are implementing a new model in our view will ultimately cost them more money. But we're not going to execute work for them for practice on a go forward basis, showing bid responsibly and lost the contract. Also included in building services segments is our mechanical services operations. We performed mechanical maintenance, service contract and small project works, it’s really all centered around HVAC and controls. Similar to our domestic construction segments of the drivers and mechanical services business underlying building services is vetting from the steady and improving non-res market. And backlog book-to-bill for this part of the building service business is over one. Our industrial services backlog stands at $55 million, where it’s really the same as it’s been. It’s just seven consecutive quarters it’s been there. We view that the new build heat exchanger business, which is all this represents, has been in this range of $50 million to $60 million, not much has really changed with regard to that shop backlog. Mark did talk about repair spending being up a little bit that would not be in backlog. We think that the enquiries are a little more than past quarter. Or our pricing remains soft and like I said in my earlier comment, we do believe, we’re bouncing around the bottom into new build heat exchanger market. Backlog in the U.K. is up a bit, reflecting some new contract award wins. In all like last quarter, backlog of the construction in line or a little ahead of the markets, flat in the industrial shop business. It is pretty much where we thought would be this far, probably a little better here in early – in mid part of 2017. The bottom line of backlog, this is a good report. As we are seeing good momentum in our construction segments, with a book-to-bill over 1 and very strong revenue growth. So, now we go to page 13 and 14 and close off our call before we get some questions. So, we're going to raise guidance as we performed very well on a year-to-date basis and we expect to continue to perform well for the balance of the year. We also have benefited by EMCOR’s diversity of services and end markets and we have proven over time that we can execute across these diverse markets and services. We are raising our revenue guidance from the $7.5 billion to $7.6 billion that we had and we expect to be around the higher end of that to $7.6 billion. We are raising both the lower and upper end of our earnings per diluted share from continuing operations guidance. From recurring guidance of $3.20 to $.350 per share to our new guidance of $3.40 to $3.60 per diluted share from continuing operations. So, how you get to the top end of the range now that's what you always ask us. So, our electrical and mechanical construction segments must continue to perform well with excellent operating income margins and we have to continue the absence of badness that we've executed to so far this year. We expect the market to continue to grow at a mid single digit pace for the balance of the year. We grew backlog in these segments, despite the 10.7% organic revenue growth on a combined basis through June 30th. Our building services segments must continue to perform well especially in our mechanical services business. We must implement the new contract awards in the site based business to our customer’s expectations, so we can grow. We expect strength in our energy retrofit business and we’ve had good growth in our IDIQ work for the government. Our site based portfolio, however [ph] it should be near completion and we should have a good mix of work on a go forward basis. For industrial services, it’s all about the fall turnaround season, which we expect to be comparable to 2016. We need the opportunity and want the opportunity to get to the top end of the range to execute increased specialty services work. The reality of the specialty services work, a lot of times things have to get progressively worse on a job sometimes or demand has to be progressively increased, for us to get there and there are several cases where we're looking at jobs where we may have an opportunity in Q4 to Q3, we just don't have control over that decision. In the U.K. segment, we should continue to perform in a steady and measured way. It has become a very stable performing segment for us. We expect our cash flow to be strong this year and we will continue to look for right opportunities to support our organic growth. Also add to our company through acquisition. We will continue to return cash to shareholders through both dividends and share repurchases. And Adam with that, we’ll be happy to take questions.

[Operator Instructions] And your first question comes from the line of Tahira Afzal with KeyBanc Capital Markets.

This is Sean on for Tahira today. Congrats on a great quarter. First question for me is just you know just looking at the construction segments, given the broader market outlook mid-single digits for this year, you guys are obviously tracking way ahead of that. So, I'm just wondering how we should be thinking about sort of a sustainable growth rate for those segments as we look out to 2018. Also if you could tie in maybe how that dispute might have helped the 15% organic growth we saw in mechanical this quarter that would also be helpful.

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

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

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

They were a little weaker than we expected initially, really driven by the market. We expect the rigs that have come on are basically returning to places have already been set up from an infrastructure standpoint. Of course electrical equipment doesn't wear out the way mechanical equipment does. Secondarily, they continue to get very good penetration in downstream. They were very successful there. Especially, their Corpus Christi operations, which is Rabalais. It is very successful on some of the infrastructure work down there around the energy infrastructure. But as the pipeline work materializes, we think in the latter part of 2017 going through the latter part of 2018, would be at the later stages of that versus the developers that have been awarded the work for the mainline contractors that we think then we'll see the improvement. Here is a long play for us. We think they're very good management team and we’re bullish on the prospects of long term with the energy recovery.

Thanks a lot, Tony. Helpful guys. I’ll pass it along.

Thank you.

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

Good morning, Noelle.

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

Well, I mean construction will be up with electrical and mechanical. Building services are likely to be down despite the strong underlying mechanical services growth. Like we foreshadowed over the last 14 months, we expect industrial will be down and I think we've seen that year-to-date. Put all that together, absent some specialty services in industrial, absent faster implementation on some of these new contract awards in building services. We think we got the revenue guidance about right.

Okay. Then on just kind of shifting to the high level thoughts on the non-res market. Some of the concerns we’re hearing or the things we're hearing are that we might see some growth shift from some of the larger tier one markets like say, New York into some of the medium sized cities, given your strong New York presence. I wanted to know your view on that and how you're thinking about and some of this growth as we head into the back half of 2017 and into 2018.

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

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

Unfortunately, we had our first, other than the strike, we had our first experience with deferrals, right, over the last three [indiscernible] talk about. No, I think a lot of this is very customer specific. And you know integrated behave different than refining only companies. A lot of it has to do with what's going on in their fleet and the kind of crew they're taking in. I think broadly speaking, it is poised to be a healthier sector. I think from account to this market, Mark and I were talking about this. The reality is if you're an integrated oil company sometimes you delay things because the refining operation is where you’re actually making money now. As oil prices come back even though that’s upstream driven, that on the integrated side has a positive impact on the refining maintenance spend. On the non-integrated side, it’s all about fleet management for them and crude slate management. One of the things I think that's a little different is overall, I think some of it is, its apples and oranges for some of the companies that are reporting. They were highly dependent some of these companies are made in [ph] upstream and they're blaming downstream for some their problems. The reality is made in [ph] upstream is getting better, but it's nowhere near what it was.

Great. Thank you.

And your next question comes from the line of Adam Thalhimer with Thompson Davis.

Good morning guys. Nice quarter.

Thanks.

Hey, first quarter just can you give us a little more color around the industrial services margin in the quarter. Was that down just on lower utilization?

Yeah, lower label utilization, so we have a fixed cost in there, it guarantees some of your key people, especially to all people certain hours. We've been able to utilize them over the last in 2015/2016 in the second quarter, which is unusual by the way. The more normal practice obviously is a little worse than it can be. Usually, it’d 4% or 5% margins. So, with the push out at the last minute of this turnaround we ate more cost than we typically would and we didn’t get the margin to go with it. Yeah, it’s fixed of utilization of your labor force for the people that are actually going to run the turnarounds, the more senior guys.

So you would expect this to go back to –

Yeah, fall turnaround season gets better is what we plan. Then we should see improved margins as we go at the back half of the year.

Okay. And then, along that same lines, if you get a strong fall turnaround season, do you think you could have growth year-over-year in industrial services revenue now.

No.

Okay. So you won’t get back to revenue growth in that segment until you go up against this Q2 2017 comp –

Yes.

Okay. And then I didn’t understand you said you were bidding or you had won something in building services that could be significant?

We were in the pilot stages of three new contracts. They’re pilots. We’re doing very well in the pilots. We expect them to grow over the next 12 months to 18 months. Our implementation can look like a very slow and steady implementation or sometimes it really accelerates as the customer sees how much money they're really saving because we bring, people this is what we do everyday versus on the customers side a lot of times, people as part of what they do.

Okay. So, that’s energy retrofit work done, that’s governmental –

No. It’s around technician work and site based work for the most part. Now we do energy retrofit work on top of that. But that'll be post 12 months to 18 months as we get into building another customer account.

And its additive to base contracts?

Yeah, its additive, it’s all part of the contract.

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

Well, there is always dispute resolutions outstanding. Relative to order of magnitude of things that we talked about in the past. We’re very thankful that this particular matter resolved itself as quickly as it did because it relates to the issue that we had in the fourth quarter with the large write down that we had. Typically, they don't resolve themselves within six months after something like that happening. But I don't see anything in the near term that even is remotely close to what we had experienced over quarter one and quarter two this year on the favorable side. Clearly as Tony mentioned, a number of times in his commentary, we're happy that the absence of badness it did impact 2016 and to a lesser extent 2015, seems to be behind us as plough through to the remainder of this year into 2018.

Yeah, I mean like Mark said this was quite unusual and was fairly unique, right. We were working directly for the principal, who also controlled the decision making and the spending authorization, that's not usually the case.

Okay. Perfect thanks.

Thank you.

And your next question comes from the line of John D’Angelo with Macquarie. John D’Angelo: Hey guys, good morning. Thank you for taking my questions.

Sure, shoot. John D’Angelo: So, I mean, it looks like in the Q, can you just confirm that Ardent only did $6.5 million in revenue during the quarter?

John, this is Mark Pompa, that $6.5 million is the incremental revenue because we acquired Ardent in the middle of April of 2016, so that's reflective of this two weeks of activity. John D’Angelo: Okay. Fair enough. And then, my next question is if you look at like sort of the organic margins for the mechanical segment. I’m actually sort of getting that the core operating margins were down versus 2Q of last year, while organic revenues were 15%. So, can you sort of just walkthrough why exactly did that happen? Then backlog continues to grow in that space. Could backlog be getting sold with lower margin work?

No, I think a lot of is just timing. We’ll probably didn’t look front end of some of work right now. Our margins just tend to be lower. The underlying fundamentals are very good in the business. This is not a quarterly margin business, none of them are. You sort of have to go looking at 12 rolling average, even if, the five quarter rolling average. And anytime our mechanical business is in the high fives or low sixes, it’s performing well. The backlog is good, there’s no underlying issues in it. John D’Angelo: Okay. Thanks again.

Thank you.

[Operator Instructions] And your next question comes from the line of Brent Thielman with D.A. Davidson.

Good morning, Brent.

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

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

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

Yes.

Okay. And then maybe a question for Mark on the industrial services side, kind of thinking about the headwind there. Would you happen to know the large project impact on revenues in 3Q last year. Just trying to get a feel for what the base business comps are, was it forecasting out for the second half of this year?

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

Okay. Fair enough. Thanks for your time guys.

Thank you. Adam, is that it?

Yes, sir. And now I will turn the call back to management for closing remarks.

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

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