EMCOR Group, Inc. (EME) Q4 2018 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 Fourth Quarter and Full Year 2018 Earnings Call. [Operator Instructions] Thank you. Ms. Jamie Baird with FTI Consulting, 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 2018 fourth quarter and full year results, which were reported this morning. I would like to turn the call over to Kevin Matz, Executive Vice President of Shared Services, who will introduce management. Kevin, please go ahead.

Thanks, Jamie and good morning everyone. Welcome to our earnings conference call for the fourth quarter and full year of 2018. For those of you who are accessing the call via the Internet and our website, welcome to you as well and we hope you have arrived at the beginning of our slide presentation that will accompany our remarks today. We are on Slide 2. This presentation and discussion contains forward-looking statements and certain non-GAAP financial information. This page describes in detail the forward-looking statements and the non-GAAP financial information disclosures. I encourage everyone to review both disclosures in conjunction with our discussion and accompanying slides. Slide 3 are the executives who are with me to discuss the quarter and full year results. They are Tony Guzzi, Chairman, President and Chief Executive Officer; Mark Pompa, our Executive Vice President and Chief Financial Officer; and our Senior Vice President and General Counsel, Maxine Mauricio. 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 With that being said, please let me turn the call over to Tony. Tony?

Thanks, Kevin and I am going to start now on Pages 4 through 6. 2018 was a great year. Our team executed with speed, discipline and precision in 2018. We served our customers adeptly on some of the most difficult and technically complex mechanical and electrical construction projects in the United States. We delivered excellent results for our customers in a recovering petrochemical refinery services market, especially in the fourth quarter. We performed well in serving some of the most sophisticated owners with mechanical retrofit and maintenance, energy savings projects, building controls upgrades and in operating facilities across a multitude of commercial, institutional and manufacturing and industrial owners. We serve these customers to their satisfaction and expectations and can bring the best technical labor and supervision to solve their needs, you have the opportunity to deliver strong financial results and we did that in 2018. We set records for revenues, operating income, net income and diluted earnings per share from continuing operations. With record 2018 revenues of $8.13 billion and operating income margins of 5% and strong cash flow of $271 million, we are not only winning work, but we are executing that work very well and converting our opportunities into strong cash flow that allows us to grow the company both organically and through acquisitions and still return cash to shareholders. We had overall growth of 5.8% with organic growth of 4.6%. We returned over $235 million of cash to shareholders through dividends and share repurchases. We successfully acquired four companies that expand our capabilities and open new geographies to us. Through these acquisitions, we expanded our mechanical services presence in the Mid-Atlantic and California, built leading positions in building controls in the New York City market and gained entrance into the important North Texas electrical construction market. These acquisitions show, despite our size and breadth, we have ample opportunity to continue to add to our portfolio through acquisitions. Despite the strong organic growth in the year, we have strong remaining performance obligations or RPOs of $3.96 billion, up 10% from the 3/31/2018 reporting period when we first started reporting RPOs versus our historical backlog reporting. I will now provide some of the highlights for our reporting segments. Our Mechanical and Electrical Construction segments continued to perform. On a combined basis, we had strong operating income margins overall at 7.2%. Our Electrical and Mechanical Construction segments both had operating income margins over 7%. We had strong execution in most regions of the United States and end-market segments. We continued to maintain excellent cost discipline. We leave the year executing with discipline and focus on a range of projects for our customers and have a lot of significant work to execute in our RPOs, which are up over 10% over the last three quarters. Our Building Services had strong operating income margins of 5%, and organic revenue growth returned to this segment. We had very strong performance in our Mechanical, Energy and Government Services businesses. We executed with skill, speed and precision across projects on energy retrofit and building controls upgrades. We have had much better commercial site-based execution and new contract implementation. Our Government Services business had a great year, and specifically, we had good conversion on our indefinite duration, indefinite quantity work or IDIQ work for our government customers. Our Industrial Services segment improved versus a very difficult end to 2017 and start to 2018 as a result of Hurricane Harvey. We had much better performance in the second half of 2018. Operating income margins were much improved in the fourth quarter at 5.2%. We need to continue this momentum into 2019, and we are seeing improved opportunities. We believe normal demand patterns have returned. Our shop performance and opportunities have improved. However, we still have not seen strong demand return for some of our specialty services. Overall, we improved in 2018 versus 2017, but this is the segment that we have the least visibility into the latter parts of 2019. Our United Kingdom segment continues its trajectory of improving bottom line performance and strong revenue growth. We are executing well for our customers with complex facilities maintenance management programs and solutions and owner direct project opportunities. We continue to grow with these customers and adding like customers to our portfolio. As stated, we exit the year with strong RPOs of $3.96 billion, which shows sequential improvement through the year, and we leave the year with a good book of business and strong demand for our services. We possess a strong and liquid balance sheet to continue to grow and strengthen our business and return cash to shareholders. And with that, the show is yours, Mark.

Thanks, Tony and good morning to everyone participating on the call today. For those accessing this presentation via the webcast, we are now on Slide 7. I will begin with a detailed discussion of our fourth quarter 2018 results before moving to our full year 2018 performance, some of which Tony just outlined during his executive summary. As a reminder, all financial information discussed during today’s call is included in our consolidated financial statements within both our earnings release announcement and Form 10-K filed with the Securities and Exchange Commission earlier this morning. So let’s discuss our fourth quarter performance. Consolidated revenues of $2.23 billion in quarter four are up $216.7 million or 10.8% over 2017. Our fourth quarter results include $34.8 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 fourth quarter. Acquisition revenues positively impacted each of our United States Electrical Construction, United States Mechanical Construction and United States Building Services segments. Excluding the impact of businesses acquired, fourth quarter consolidated revenues increased $181.9 million or 9% organically. All of EMCOR’s reportable segments generated revenue growth during the fourth quarter, and our $2.23 billion of consolidated revenues represents an all-time quarterly revenue record for the company. United States Electrical Construction revenues of $534 million increased $54.6 million or 11.4% from quarter four 2017. Excluding acquisition revenues of $20.2 million, this segment’s quarterly revenues grew organically 7.2% quarter-over-quarter. Revenue gains within the commercial, manufacturing, hospitality and water market sectors were partially offset by revenue declines within the transportation, health care and institutional market sectors due to the completion or substantial completion of several large infrastructure projects during 2017 and early 2018. United States Mechanical Construction revenues of $808.5 million increased $17.7 million or 2.2% from quarter four 2017. Excluding acquisition revenues of $4.1 million, this segment’s revenues increased $13.6 million or 1.7% organically. As I mentioned during each of our last two quarterly earnings calls, our Mechanical Construction segment completed a number of large-scale projects in 2017. As a result, this segment has only achieved modest revenue growth during 2018 as we were either mobilizing or engaged in pre-project planning on a number of new projects scheduled for significant activity during 2019. This segment has however experienced the largest increase in new contract awards, as evidenced by their 23% growth in remaining performance obligations since March 31 of last year. EMCOR’s total domestic construction business fourth quarter revenues of $1.34 billion increased $72.3 million or 5.7%, with 3.8% of such growth generated from organic activities. United States Building Services revenues of $486 million increased $47.7 million or 10.9%. Excluding acquisition revenues of $10.5 million, this segment’s quarterly revenues increased $37.2 million or a strong 8.5% organically. Revenue gains within the mechanical services, energy services and commercial site-based services divisions were partially offset by a revenue decline within the Government Services division within the quarter due to maintenance contract attrition. United States Industrial Services revenues of $298.9 million increased $91.4 million or 44.1% as a result of higher field services and shop services activities. As a large percentage of our customer base continues to recover from the severe impact of 2017’s Hurricane Harvey, our Industrial Services segment experienced more normal demand and related service levels as compared to 2017’s fourth quarter. United Kingdom Building Services revenues of $101.9 million increased $5.3 million or 5.4% as we continue to add new maintenance contract awards for this segment’s growing service base. This segment’s quarterly revenues were negatively impacted by $3.3 million of foreign currency movement as the pound sterling continues to oscillate due to uncertainties surrounding the UK’s exit from the European Union. Please turn to Slide 8. Selling, general and administrative expenses of $220.9 million represent 9.9% of fourth quarter revenues and reflect an increase of $16.3 million from quarter four 2017. The current year’s quarter includes approximately $4.9 million of incremental SG&A, inclusive of intangible asset amortization from businesses acquired, resulting in an organic quarter-over-quarter increase of approximately $11.4 million. This organic increase is primarily due to higher employment costs, mainly as a result of an increase in employee headcount to support our strong organic revenue growth. Additionally, we continue to experience increases in information technology and professional fee expenses quarter-over-quarter due to numerous initiatives currently in progress. Finally, the results of 2018’s fourth quarter were further burdened by costs due to the resolution of an outstanding legal matter. Reported operating income for the quarter of $113.6 million represents 5.1% of revenues and compares to $48.1 million or 2.4% of revenues in 2017’s corresponding period. 2017’s fourth quarter included a $57.8 million non-cash impairment loss on goodwill and identifiable intangible assets. The add-back of this loss resulted in non-GAAP operating income of $105.9 million or 5.3% of revenues for 2017’s fourth quarter. When compared to our quarterly results release today, 2018’s fourth quarter operating income has improved $7.8 million but down 20 basis points in operating margin from 2017’s fourth quarter non-GAAP operating income and operating margin. Consistent with our quarterly revenue performance, our fourth quarter operating income represents a new all-time quarterly record. With that mentioned, I will now speak to each of our reporting segment’s fourth quarter operating income and operating margin results. Our U.S. Electrical Construction Services segment operating income of $33.1 million decreased $7.1 million from the comparable 2017 period. Reported quarterly operating margin was 6.2%, which is below 2017’s fourth quarter operating margin of 8.4%. This segment had strong quarterly operating income performance within the commercial, hospitality and manufacturing market sectors. However, due to the completion or substantial completion of multiple large transportation, healthcare and institutional projects in last year’s fourth quarter as well as the continued financial deterioration on an infrastructure project in the Western United States, which is now substantially complete, this segment experienced a decline in both quarterly operating income and operating margin. 2018 fourth quarter U.S. Mechanical Construction services segment operating income of $63.5 million represents $2.1 million or a 3.5% increase from last year’s quarter. Operating margin of 7.9% is slightly improved from 2017’s quarterly performance. The increase in the segment’s operating income is due to improved profitability quarter-over-quarter within the commercial, water and hospitality market sectors as well as increased short-duration project activity and corollary profit within the quarter. Our total U.S. construction business is reporting a 7.2% operating margin for the quarter just ended as compared to 8% in last year’s fourth quarter. Operating income for U.S. Building Services of $25 million represents 5.1% of revenues and is a $3.8 million improvement over last year’s fourth quarter. Operating margin improved 30 basis points due to a more favorable mix of revenues, including greater project activity. Increased profitability within each of the mechanical services, energy services and commercial site-based services divisions were marginally offset by reduced operating profits within the Government Services division for quarter four. Additionally, this segment benefited from $900,000 of incremental operating income from businesses acquired. Our U.S. Industrial Services segment operating income of $15.5 million represents 5.2% of revenues or an increase of $12.9 million from last year’s fourth quarter. The increase in quarter-over-quarter performance within this segment is due to the resumption of normal field services activities as demand for turnaround services improved over last year’s Hurricane Harvey-impacted fourth quarter. In addition, the segment benefited from increased profitability within the shop services operations due to increased demand for newbuild heat exchangers as well as repair and cleaning services. The UK Building Services operating income of $3.1 million represents 3% of revenues, which is a reduction from last year’s fourth quarter. This segment’s quarterly operating performance was negatively impacted by mobilization costs incurred on new contract awards and reduced profit contribution from project activity due to a less favorable mix in work. We are now on Slide 9. The table on Slide 9 lays out those discrete items recorded in our 2017 fourth quarter that impact period-over-period comparability. As I referenced earlier in my commentary, we recorded a $57.8 million non-cash impairment charge in last year’s fourth quarter, primarily related to a reduction in the fair value of goodwill within our Industrial Services segment as well as the diminution in value of an acquired trade name within our Building Services segment. When added back to our 2017 results, non-GAAP operating income for last year’s fourth quarter would have been $105.9 million or 5.3% of revenues as compared to $113.6 million or 5.1% of revenues in quarter four 2018. This represents a 7.3% improvement period-over-period. Tony previously referenced our year-over-year operating cash flow generation in our 2018 fourth quarter was particularly strong at $205.1 million in light of the working capital investment necessitated by our exceptionally strong organic revenue growth within the quarter of 9%. Please turn to Slide 10. Additional key financial data for the fourth quarter not addressed on the previous slides are as follows. Quarter four gross profit of $336.2 million represents 15.1% of revenues, which has improved from the comparable 2017 quarter by $25.1 million. Quarterly gross profit margin has reduced 40 basis points from 2017’s fourth quarter due to lower gross profit and lower gross profit margin within our U.S. Electrical Construction and UK Building Services segments due to mix of revenues and, specifically within the Electrical Construction segment, project losses recognized within the quarter. Restructuring expenses of $1.6 million pertained to the realignment of management resources within our corporate and U.S. Building Services operations. Diluted earnings per common share from continuing operations for the fourth quarter, is $1.38 as compared to $0.90 per diluted share a year ago. On an adjusted basis, reflecting the add-back of the non-cash impairment losses recorded in 2017’s fourth quarter as well as deducting the favorable impact of the revaluation of our U.S. net deferred tax liability position pursuant to the enactment of the Tax Cuts and Jobs Act in December 2017, our non-GAAP diluted earnings per share from continuing operations would have been $1.13. When compared to the $1.38 reported in the current quarter, our diluted earnings per share from continuing operations increased $0.25 or 22.1%. Our tax rate for the fourth quarter of 2018 is 28.9% and was negatively impacted by certain discrete items. This compares to a tax benefit in 2017’s fourth quarter due to the revaluation of our United States net deferred tax liability at the new 21% federal corporate tax rate resulting from the enactment of the Tax Cuts and Jobs Act. We are now on Slide 11. With the fourth quarter commentary out of the way, I will now augment Tony’s 2018 earlier commentary on this call. Consolidated revenues of $8.13 billion are up $443.6 million or 5.8% as compared to $7.69 billion of consolidated revenues in 2017’s annual period. Acquisitions contributed incremental revenues of $90.1 million, pertaining to the period of time that such businesses were not owned by EMCOR in 2017, and positively impacted all of our reportable segments other than our U.S. Industrial and UK Building Services segments. Excluding the impact of businesses acquired, year-to-date revenues increased organically $353.5 million or 4.6%. For full year 2018, we achieved revenue growth throughout all of our reportable segments, with all segments other than our U.S. Mechanical Construction segment achieving annual growth rates in excess of 6.5%. U.S. Electrical Construction revenues of $1.95 billion increased $124.7 million or 6.8%. Organic revenue growth was 5.7% for the Electrical Construction segment for full year 2018. This segment experienced annual revenue growth within most of the market sectors in which we operate. The segment did, however, experience a revenue decline within the transportation market sector as we executed a number of large transportation projects in 2017 that were either completed or reached substantial completion during that year. U.S. Mechanical Construction 2018 revenues of $3.20 billion increased $56.5 million or 1.9% compared to 2017. Acquisitions contributed $35.3 million in incremental revenue, resulting in modest organic revenue growth of 0.7% in 2018. This segment was coming off 2 consecutive years of significant revenue growth and, with their consistent sequential growth and remaining performance obligations throughout 2018, is placed to see further increased revenues in 2019. U.S. Building Services revenues of $1.88 billion increased $121.8 million or 6.9%. Acquisitions contributed $34.6 million of revenues, resulting in a year-over-year organic revenue increase of 5%. Strong project growth within the segment’s mechanical and energy services divisions offset minor annual revenue declines within their commercial site-based and Government Services divisions. U.S. Industrial Services 2018 revenues of $865.6 million increased $66.5 million or 8.3% compared to 2017. This segment’s annual revenue increase was due to increased field services and shop services activities as we saw resumption in maintenance turnaround activity and associated shop pull-through repair work during the third and fourth quarters of 2018. Our UK Building Services segment 2018 revenues increased $74.1 million to $414.9 million due to new maintenance contract awards within the institutional and commercial market sectors as well as annual growth in small project and capital project activities. Unlike the negative impact of foreign exchange movement in the fourth quarter, the annual impact was a favorable $15.2 million on 2018 revenues. Please turn to Slide 12. Selling, general and administrative expenses of $799.2 million represent an increase of $40.4 million as compared to $758.7 million in 2017. This increase includes $12.5 million of incremental SG&A related to businesses acquired, inclusive of intangible asset amortization. As a percentage of revenues, SG&A is 9.8% in 2018 compared to 9.9% for the 2017 annual period. The year-over-year increase in SG&A is due to an increase in employee costs as a result of growth in our indirect labor personnel, which was required to support our organic revenue growth, as well as higher expenses associated with company-wide incentive compensation plans due to our overall increased profitability. Additionally and consistent with our fourth quarter activities on a year-over-year basis, we have seen an increase in information technology and professional fee expenses due to ongoing discrete initiatives in progress. Year-to-date operating income is $403.1 million or 5% of revenues and represents a $74.2 million increase over 2017’s annual performance. Our results for both 2018 and 2017 include discrete items that negatively impacted reported operating income by $900,000 and $57.8 million, respectively, which we adjusted for purposes of non-GAAP presentation. Therefore, on an adjusted basis, the year-over-year change in operating income is an increase of $17.3 million, with operating margin consistent at 5% in both annual periods. All reportable segments are reporting higher operating income and improved or flat operating margins year-over-year other than our U.S. Electrical Construction Services segment, which despite the reductions in 2018, still achieved operating margin performance in excess of 7% of revenues. Specifically for U.S. Electrical Construction segment, 2018 operating income is $139.4 million, which is $10.6 million below 2017’s operating income results. Operating margin is 7.1%, which is 110 basis points below the 8.2% generated in 2017. Improved profitability from manufacturing, hospitality and commercial market sector project activities was not enough to offset the contraction in transportation sector returns due to the completion or substantial completion of several large projects in 2017 as well as a $10 million loss recorded on an infrastructure project in the last 6 months of 2018 within the segment due to site conditions and contract scope issues. U.S. Mechanical Construction operating income of $219.4 million increased $7 million or 3.3% over 2017 levels and represent 7.3% of revenues as compared to 7.2% in 2017. The increase in operating income for 2018 was primarily due to an increase in revenues and associated gross profits within the commercial market sector as well as increased gross profit within the manufacturing market sector as a result of successful project closeouts. U.S. Building Services 2018 operating income of $93.8 million increased $12.1 million or 14.8% due to increased profitability within each of their operating divisions as a result of either improved contract performance or cost control activities. Operating margin of 5% for 2018 increased 30 basis points from 2017’s 4.7% and represents record performance for this segment since we realigned our segment reporting in 2013. U.S. Industrial Services 2018 operating income increased $9.1 million to $28.2 million or 3.3% of revenues. The year-over-year increase is attributable to higher gross profits from our field services operations due to the resumption of more normal turnaround activities after the prolonged period of inactivity resulting from the disruption caused by Hurricane Harvey. In addition, improved results within our shop services operations can be attributed to an increase in demand for newbuild heat exchangers as well as repair and cleaning services. UK Building Services operating income of $15.9 million or 3.8% of revenues increased $3 million due to an increase in gross profit from service activity within the institutional and commercial market sectors as a result of new contract awards. This segment’s operating income additionally benefited from improved small and capital project demand for full year 2018. We are now on Slide 13. Consistent with the reconciliation discussed previously on Slide 9, this page reflects the operating income reconciliation from GAAP to non-GAAP adjusted earnings for those items we believe are not reflective of our underlying operating performance. Additive to this reconciliation from the quarterly reconciliation previously discussed is the $900,000 trade name impairment we recognized during the second quarter of 2018. Adjusted non-GAAP operating income for 2018, reflecting the add-back of such identifiable intangible asset impairment, is $404 million or 5% of revenues. This compares to adjusted non-GAAP 2017 operating income of $386.7 million or 5% of revenues. Reflecting the add-back of 2017’s non-cash goodwill and identifiable intangible asset impairment, year-over-year improvement in non-GAAP operating income is an increase of $17.3 million or 4.5%. The full year tax rate for 2018 is 27.6% as compared to 28.5% for the 12-month 2017 period, which significantly benefited from the revaluation of our U.S. net deferred tax liability position necessitated by the enactment of the Tax Cuts and Jobs Act in December of 2017. With regard to 2019 planning, I anticipate our effective tax rate will be approximately 27.5% to 28.5% before discrete items. Unlike at this time last year, when we were still analyzing the far-reaching impacts of the new tax legislation, we are much better informed. However, even a full year after its enactment, there’s still ambiguity within certain state and local taxing authorities with regard to conformity to the enacted federal tax law. I will continue to be transparent if our interpretation changes at any point during 2019. However, given the potential for further refinement or clarifications regarding the Act, it may take some time before we all can say we have a full understanding of the final impact of this legislation. With that said, for purposes of developing our earnings guidance range for 2019, which Tony will speak to in a few slides, we have utilized a 28% tax rate. Please turn to Slide 14. And thankfully, it is my last slide. Actually, it’s my second to last slide. I’m getting myself excited here. Additional key financial data not addressed during the 12-month highlight summary are as follows. Year-to-date gross profit of $1.2 billion is higher than in 2017 by $58.4 million, while gross margin is 14.8% and roughly in line with last year. Total restructuring costs of approximately $2.3 million are higher than 2017’s activity as we continue to functionally realign certain management and support positions. Diluted earnings per common share from continuing operations for 2018 is $4.89 compared to $3.83 per diluted share a year ago. On an adjusted basis, excluding the impact of the identifiable and tangible asset impairment loss, 2018’s year-to-date non-GAAP diluted earnings per common share would have been $4.91 as compared to 2017’s adjusted $4.06, excluding the impact of the non-cash impairment loss on goodwill and identifiable tangible assets and the net deferred tax liability revaluation in 2017. The year-over-year improvement in adjusted non-GAAP diluted earnings per share is $0.85, which represents a 20.9% increase. Please turn to Slide 15 and this is my last slide. Our balance sheet continues to represent EMCOR’s strength with good liquidity and modest leverage. The variations of note from the end of the prior year or 2017 are as follows. Our cash balance has decreased from year-end 2017 primarily as a result of the continued repurchase of common stock pursuant to our stock repurchase program as well as funding for acquisitions, capital expenditures and dividends. Working capital levels have increased due to growth in accounts receivable and contract assets related to our strong fourth quarter organic revenue performance. Changes in our goodwill balance reflect the impact of businesses acquired. Identifiable intangible assets have decreased due to the impact of $42.4 million of amortization expense during the year and the approximately $900,000 trade name impairment loss taken in the second quarter, which I previously mentioned. Those were both somewhat offset by the acquired intangible assets in connection with the acquisitions that were completed during 2018. Total debt of $295.8 million is reduced from December 31, 2017 due to the mandatory quarterly principal repayments under our outstanding term loan, partially offset by the amortization of debt issuance costs during 2018. As a result of our outstanding borrowings, we have a debt-to-capitalization ratio of 14.5% at December 31, 2018. We closed 2018 with strong fourth quarter operating cash flow performance. We remain in a very good position to execute against our strategic objectives as we continue to move throughout 2019. Thankfully with that commentary concluded, I will now give the call back to Tony. Tony?

Yes. Thanks Mark. And I know you look forward to the Q1 call, when you only have to speak to Q1, but I got to say it was nice to hear you so eloquently speak to our record results for 2018. I am going to be on Page 16, which we titled remaining performance obligation or RPO by segment and market sector. Since this is our year-end call, one last time, I will outline our transition from backlog to remaining performance obligations. As we have communicated over the last several quarters, at the beginning of 2018, EMCOR adopted FASB’s new revenue recognition standard, which requires the disclosure of remaining unsatisfied performance obligations or RPOs for shorthand. Prior to the adoption of the new standard, the company had reported backlog on a quarterly basis. Backlog is not a term recognized under United States generally accepted accounting principles, so instead of reporting two figures and reconciling constantly against them, we choose to move solely to RPO. The most significant difference, again, the most significant difference between remaining performance obligations and backlog for us relates to the contract terms of the company’s service contracts. A detailed description of the difference between backlog and RPO can be found in the MD&A section within the company’s first quarter 2018 10-Q. I’d encourage you to go back and look at it, and you’ll see the difference is not that substantial with what we used to do and what we do today. Looking at the graphs, total RPOs at the end of the fourth quarter was $3.96 billion, up $360 million or 10% when compared to the March 31 level of $3.6 billion when we initially changed over to RPO reporting from backlog. Our book-to-bill, despite that strong organic revenue growth, in the fourth quarter was 1, which continues to support and show an active bidding environment and our ability to win new work even as we just completed our best revenue quarter in EMCOR’s history. Moving forward, 2019 non-residential construction activity looks similar in tone and tenor to 2018, with potential growth of between 3% and 5% as the market continues to be active for the work that we perform. Domestic RPOs have increased roughly 11% or $390 million since March 31, driven mainly by our Mechanical Construction segment as they reload project across most market sectors, including some complex and challenging commercial and industrial projects. Non-resident market activity has also supported our mechanical services operation included within our Building Services segment. This group of full service mechanical companies provides small project retrofit and energy savings project as well as preventative, scheduled and callout work for HVA systems and equipment. Moving to the right of the page, we show RPO by market sector. Our growth in 2018, as I just mentioned, is being led by strength in commercial and industrial sector projects, where we have leading positions, for instance, in data center, food processing and other manufacturing projects. As we have said in previous calls, we are a good proxy for the general market given our market sector participation and geographic footprint. We are seeing bidding opportunities in most market sectors, which except hospitality and gaming, which have not been as active over the last few years. Just for completeness sake, the top yellow section of the graph is short-duration projects, which we define as projects under $250,000 in total. So in summary, we remain well positioned in a nonresidential market that we believe still has growth. I’ve done this enough to know that you can find anything you want in leading market economic indicators. However, two indicators that I know you follow and we follow also are the ABI and the Dodge Momentum Index. Both have been in growth territory for a long time, and that should bode well for us in 2019. So let’s look to 2019 and I will be on Pages 17 to 18 to finish out the call. As we set guidance, we are cognizant that we have our strong record of performance over a long period of time but especially over the last 5 years. We expect to continue to perform like we have, with success, speed, precision, for our customers and our employees. At the lower end of our guidance range, we always have some inherent caution. We are confident in our execution capabilities, our bidding pipeline and the contracts we have secured, but we do have some caution as we have limited visibility in the back half of 2019, especially in our Industrial Services segment and in our small project work across the company. We believe we are well positioned to serve our customers and know we can perform. We have optimism about our future, but we always have caution as we look out past 6 months as our visibility diminishes, especially in our businesses more dependent on small project and time and material services. Now to the guidance, we expect revenues of at least $8.3 billion to $8.4 billion. We will set our earnings per diluted share from continuing operations at $4.70 to $5.40. We expect cash flow near net income. Supporting this guidance is our view on these markets. We expect a growing nonresidential market of 3% to 5%. We expect an improving market for downstream refining and petrochemical maintenance services and small project capital work. We expect solid demand for our Building Services, both in the United States and the United Kingdom. So the question always is how do you get to the top end of your guidance range? Well, we got to continue to execute with excellence in our Electrical and Mechanical Construction segments. We have very strong operating income margins in these segments. We need to continue that success and continue to grow successfully in what is a tight labor market. Our momentum is good in these segments over the last 24 months. And in our view, this would be the most likely – these would be the most likely segments with potential revenue upside as the year progresses. It will depend mostly on what we call our book-and-bill business earned in the year and that has the most limited visibility. We have a strong bidding pipeline today, though. We expect our Building Services segment to continue to perform very well. We need to continue executing on some large, multiyear contract implementations. We need continued strength in our mechanical services business and we need continued success with our government customers to implement their IDIQ work with success and we need strong demand for our energy services business work. Our industrial segment has the most opportunity to improve. But after the Harvey-induced disappointing performance in late 2017 and early 2018, we are still not ready to declare that we are back to normal. Why aren’t we ready to do that? Because we need to see normal, normal, as we would say, a normal spring turnaround season and a normal fall turnaround season with some work to do in the summer. Once we see that, we’ll be ready to signal the all clear. We have a very good team. But to reach the top end of our guidance, we’d like to say we need normal, normal for the full year. That means a normal spring and a normal fall. And to answer your question already, yes, we are in a normal spring right now. And we will not have that visibility for the normal fall until some time mid- to late third quarter. Our UK team continues to build on what has become a leading service provider in the UK facilities management industry. As far as cash deployment, it will be the same as it has been. First, we would love to support organic growth. And then we are going to continue to look to acquire businesses much like the 7 businesses we acquired over the last few years to strengthen our U.S. reporting segments. And of course, we’ll return cash to you, the shareholders, through share repurchases and dividends. Thank you for your interest in EMCOR. And with that, we’d love to take questions.

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

Good morning.

Good morning. Tony, you have done a good job of answering all some of my dubbed questions on my notepad here. But I do have...

Okay, I figured that. I wanted to get ahead of you.

So I just have a couple more. So usually around this time of the year, I ask you about how things are looking on a macro level with your business peers. And it seems like there’s more resilience from the leading indicators. It seems you are seeing that too. So could we be exiting this year on really the non-res business, so let’s scrape out the industrial side, but really the rest of the business, could we be still in growth territory when we reach this point next year?

I don’t know. I will tell you this. One, we are late cycle in our construction businesses. So you would probably think that sitting here today, because we continue to see strong bidding. There is some underlying that are tied to the macro market, but those are markets within markets that probably for more sophisticated contractors, probably if all the work we’ve done and had others, outsiders help us with, if they are, in fact, true, they’re going to provide some tailwind for us for a while. But if other parts of the market go down, they’ll just be filling the gap. One is some of the data infrastructure build. You have to be a pretty sophisticated specialty contractor to do that work, and you have to be positioned in the markets where it’s happening, and we are. We are not everywhere yet that we’d like to be to do that work, but we have a path, we think, to get there to some more markets. And we put more resources behind it, and our folks are working together really, really well across the company to serve customers in multi locations but also to make sure that we can bring lessons learned to our customers. So that’s one. I think the second thing is regardless of what happens with an infrastructure build, there’s a fair amount of infrastructure work going on and that we’re looking at, and that should help sophisticated contractors also. And then there is underlying improvement in facilities between the – we have the crazy talk sometimes going on outside, people that don’t know. But people that know that the improvement in control systems, improvement in equipment and improvement in lighting can really lead, again, sophisticated contractors that can do that work to really help building owners, campus owners, plant owners to really upgrade their facilities. And then finally, I think one of the secular trends that I think will pick up more steam back half of ‘19 going into ‘21, quite frankly, again, for sophisticated contractors that are multi-trade can bring in can bring a solution and garner that real technical labor and resources and supervision is look, regardless of what you think of tariffs or how you think it’s going to play out, here’s what I think is true. It has caused a well a long overdue, I would say, is better way of saying it, a long overdue reexamination of supply chains. And as a result of that, I think work is coming back into the idea is that, that’s coming in back a little differently. There’s going to be a lot more automation, which is good for people like us. We’re going to be helping people expand, grow and reconfigure their plants. And so that creates an opportunity for folks like us. And the final secular trend is energy. The numbers around energy, for most of us that are over 50, the thought that we would be in the position we are from oil and gas production in the United States and what that means from domestic manufacturing all the way through to the jobs in those facilities bodes well. So those are 4 big things that I think that real work will come out of. When it comes out of it, how much of it we’ll win, I don’t know. But I think that’s what may actually give this non-res cycle more legs.

Got it. And that’s actually tremendously helpful and probably in line with what we are thinking, Tony. So just a quick follow-up on that. As we look at the way to redeploy your cash, it seems you might be leaning to really explore the industrial and sort of the side of the equation, which is what you’ve talked about before. Do we see potentially some more techie kind of investments in there as we move towards automation as well?

[indiscernible]: We’re opening one in Gonzales, Louisiana here in the next 2 months. It will be fully operational for the fall turnaround season. What that does is it makes that plant less dependent on newbuild heat exchangers. It expands our repair opportunities. And it’s a real value-add to our customers because they know when they give it to a company like us, like Ohmstede in the industrial space, they know it’s going to be done right. They know it’s going to be done in compliance with all the environmental laws, and they know that’s a risk that takes off of their plate because they do own it at the end anyway, just like we do when we pick it up from them. So, when we put an organic money there and then you get to the services side, as broad-based as our service offering is, there’s still other things we’d like to do. We have data center capability and services. We’d like to do more. We’d like to do more around some of the critical infrastructure in that data center. We’d like to do more with respect to just general mechanical services, and that’s an example of the acquisition that we made in the Mid-Atlantic, and we think that will be very successful. So, the deployment of capital, we’ll pull all the levers. But I would say, Mark, right now our balance sheet is about where we like it. We always need some cash, and we’ll be opportunistic across all those fronts.

Got it. Tony that is very helpful. Thank you.

Thank you.

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

Hello, good morning.

Good morning Noelle.

So, for my first question, I was just hoping you could give us a little bit more color on some of the regional trends you’re seeing in the U.S. from a non-resi construction perspective in terms of sort of first-tier cities, second-tier cities, how things are kind of trending and just generally across the country.

Yes. We might not be the best proxy in some cases because some of our, because of the kind of projects we’re doing. Northeast is still okay. I think we’re strong in parts of the Northeast yet. The D.C. market is strong for us, really, driven by data centers and some health care, the Mid-Atlantic/D. C. area. The Southeast remains strong. But our presence in the Southeast we have a very good mechanical services presence in the Southeast, but our presence in the Southeast is driven by industrial work. And that’s not petrochemical refining industrial work in the Southeast but heavy industrial, manufacturing, plant relocations, those kind of things, and aerospace now, too, water. Get down into Florida, we have a big water position, and with a consent decree, we’re poised to do well over the next couple of years. Texas, that goes to industrial for us for the most part. And we have a pretty good, growing presence in commercial, which is showing signs of life. The company in North Texas used to take part not only in the commercial market but also in the data infrastructure market there that we just bought. You get out to the Midwest our Midwest companies are sometimes not the best proxy. They’re industrial. They also one of them travels quite a bit. I would say that one of the trades that we’ve benefited from because it does travel is fire protection, and that’s a good proxy for the general market. And what that shows is, broad-based strength in a lot of markets, especially in cold storage, warehousing, data centers and manufacturing plants. As you go to the West, we have a very strong presence in California, as you know. We’re seeing still a lot of energy savings upgrade projects. We’re seeing infrastructure build-out, both on the health care side and in the transportation side. We’re seeing continued growth in multi-use as you move to Northern California, which is one of the markets we play in. And then as you go up into the Pacific Northwest, we have a terrific data center capability on the electrical side and an industrial capability on the mechanical side that has presence. So, the markets are generally okay. I mean, look, there’s ups and downs. And look, sometimes, the market’s down for us because we didn’t win the project or a couple of projects. It’s not down because the market is down. Or it’s not for us because we won 2 or 3 in a row because the alignment of scope, price and everything fell and availability fell into line. But I think generally, markets are pretty good. Mark, I mean, anything I mean, you talk to the guys all the time, too.

I mean, I think we continue to be very excited about the availability of opportunities and, clearly, the ones that we’re executing. And at this point, Tony talked about some of the difficulty in projecting beyond the midyear point. The business is the totality of our business looks exceptionally strong, and it’s executing as well as it ever has. So, all looks positive.

Okay. Fantastic. Second question just on the refinery services work that you’re doing. Tony, in the past, you’ve been really helpful in terms of kind of breaking out some of the elements that you think are have impacted turnaround and maintenance spend over the past few years. Any kind of positive developments or things you’d want to highlight in terms of how to think about the outlook and the predictability of that market?

Yes. I think everybody’s trying to figure out right now what it means when there’s not going to be Venezuelan crude coming into the country. Was that post April, I think? That’s going to be a big deal because a lot of these refiners configured their assets in 9, 8, 7, 10, pick a number, year to take advantage of lousy crude that was cheap. Now with the availability of Permian Basin crude and sweet crude, that changes the game some. And they still have to run a certain mix through those plants, so I think you’ll see more Mexican coming up and more Canadian crude and, more-crude, from North Dakota for them to make their mix up. So, part of that maintenance we’re seeing is we are [indiscernible] in these places to take advantage of this mix. But that being said, now they’re going to have to go through small capital upgrades with a different crude mix. So, I don’t know how that will all balance out. I think the other thing that’s different and could be positive for bigger providers, maybe not in the next 3 months but in the next 4 years, is there’s been more consolidation, and therefore, they’re able to run their plant networks more efficiently. And so sometimes, there’s turnarounds that you thought were small that turned into extended turnarounds. And sometimes, there are turnarounds you thought were going to be extended turn into small because of how they’re optimizing that plant network in real time. And that’s why when we get to the visibility climate, we’re not negative on the market. What we are is flexible on the market, and we have to stay that way. And I think the final thing and going back to the consolidation, I think that bodes well for people that are bringing more to their reputable companies like the companies we’re dealing with and have the balance sheet to support larger-scale turnarounds and time and material work. And then we’ve built an interesting small capital projects capability over the last couple of years that we really didn’t have 5 or 6 years ago. And I think the final thing that bodes well, look, there’s this whole thing going on with MARPOL. That’s what I call it. It’s maritime petroleum, right? They were using the lowest of the low bunker. They need to now upgrade to diesel. That means there has to be more diesel expansion. The U.S. is well positioned in diesel because of all the other factors we talked about. And so, therefore, I think folks are going to be looking to do debottlenecking projects on the diesel side, which will help someone like us that’s positioned well to not only help with the turnaround but to do small capital work.

Makes sense. Thanks so much.

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

Good morning Adam.

Hi good morning guys. Nice quarter. First question, the mechanical RPOs are growing faster than electrical. I’m just curious, is that a geographic thing?

It’s a mix thing. We have a we’re doing some large manufactured food process work, helps bring it up. You could see the same thing switch in the quarter as electrical does more data center or infrastructure work. It’s purely mix, and when the projects come in.

Got it. And then so I’m trying to figure out on the industrial side, you did $513 million of industrial revenue in the back half of ‘18. So, there’s a thought that you can replicate that in the first half of ‘19 roughly, but then you just don’t know in the back half?

I think the thought is we had a pretty good fall turnaround season, still not all the way where we’d like it to be mainly because of our specialty services. And then the thought would be we think we have a pretty good spring turnaround season, and we’ll see where the dust settles. That would be normal, normal. Normal fall ‘18, normal spring ‘19, let’s then see if we get a normal fall ‘19 for a full cycle. Mark, maybe...

Yes no, the other thing is that in the back half of 2018, we actually had some emergency work as well due to a fire at a facility that needed some assistance from us. So obviously, we hope that, that type of thing doesn’t replicate itself in 2019 for all the obvious reasons.

More customers for that.

Okay, so that hit in Q4, Mark, some of that?

No, it was Q3 – Q2 and Q3.

Then go back to the…

Well, the Q4 revenue in that segment was...

Pardon me?

Well, the Q4 revenue in that segment was super strong. I just didn’t know if that was.

Well, super strong compared to Q4 ‘17. And I think if you go back and look historically, it’s still we’ve had stronger fourth quarters in the past, and certainly, conversion profit conversion isn’t where we want it to be.

It’s the kind of business because it’s time and material business and because of the dynamic we talked about with the consolidated customer base with scope, expansion and contraction. It’s one of these things where you Mark was pointing to. You take you say, well, that happened then, and it’s going to happen now. You have to sort of look at your book of business to say that’s what we think is going to happen. We’re hoping for a normal, normal. We have reason to believe it will be normal, normal. But we’re not going to declare the all clear on that until we get into the normal fall.

Okay. And then I wanted to ask about the $10 million. I think it was $10 million of electrical losses from transportation jobs. Typically, that’s the kind of thing that you guys can see flow back when you finish the job, no?

No, this is different. What I think you’re talking about is when Mark talks about we may sometimes finish the job better than we had projected along the way because of a lot of reasons. I mean, demobilization costs, off the job quicker. This is a loss on a job. It was a scope issue and a contract issue. And our mantra at EMCOR is always finish the job, get the substantial completion, finish the punch list regardless of the circumstances because that is the way you successfully keep your customers long term. That is the way you keep your reputation. And if there is a dispute to be settled, that is the way you actually prevail in the dispute.

And the only thing I would add to that is this particular project, as you know, the preponderance of our transportation work in the past has been multiyear projects. This is something that’s actually primarily burned within calendar 2018, so it’s not something that was longer-term by nature as compared to some of the other work we’ve done in that sector in the past.

It was bid, what, Mark, ‘15?

Yes. It was delayed, delayed, delayed and then accelerated.

Okay. And then just last one for me. I’m just curious how you’re thinking about Brexit. I mean, it’s not a huge segment, but I just didn’t know if you’re doing you did $16 million in the UK last year of op income. I mean, is there a risk to that number with Brexit?

Adam, I don’t think so. I mean, obviously, all the work there is domiciled in the United Kingdom proper. We do touch government as a customer on multiple contracts. But having said that, I don’t believe, whatever the terms of the exit are from the European Union that it’s going to significantly impact the opportunities we have in front of us. There’s a lot of infrastructure upgrades that have to happen there, and that’s that has to happen irrespective if the UK is in the EU or not. So, we’re not concerned.

Perfect. Thanks guys.

Thank you, Adam.

Thank you, Adam.

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

Good morning Brent.

Hi thanks. Good morning. Great quarter. Tony, in industrial, it sounds like you’re going to see a more normal or normal, normal spring season. I guess it’s too early to call kind of a normal fall season until we get a little closer. But I guess to the extent that you do see that, do you think you can get back to that sort of target range of margins in 2019 that you talked about for that business?

We sure hope so. I would add one caveat to that. We need to see, in the back half of the year, resumption of success in some of our specialty services.

Okay. And I guess if you think about the electrical RPOs, understand the moving pieces of that, it seems like the market is pretty healthy, pretty solid bidding pipeline. Do you think that reaccelerates as we work our way through 2019?

It’s job-dependent. We have very solid bidding opportunities. We have very solid bidding opportunities across our businesses right now. So, we win, they’ll accelerate. If we lose, we’ll have to fill it in with something else.

Okay. I guess last one, more to cleanup. Did the shutdown have any mentionable impact on the business here in the earlier part of the year?

It will catch up.

Yes, Brent, the only thing it impacts is our indefinite duration, indefinite quantity opportunities. And as Tony indicated, we’re pretty confident that, despite the fact that we were delayed in quarter 1, that, that work will still be get executed either before the end of the government’s fiscal year or as we move into the early part of its next fiscal year. Typically, once that work is left to us, it’s not dependent on when it’s performed, so the key thing is just getting the work orders issued. And then once that happens, then we could execute on our time line. So, we don’t see it as having a significant negative impact on our business in 2019 and having said that, if we see something like that again.

It’s confidential.

Yes, as we move forward throughout the calendar, then we reserve the right to revisit that answer.

Okay great. Thank you.

You are welcome.

And there are no further questions at this time.

Alright. Thank you all very much. We look forward to seeing some of you in 2019. Have a great day, and thank you for your interest in EMCOR.

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