EMCOR Group, Inc. (EME) Q2 2019 Earnings Report, Transcript and Summary

Good morning. My name is Adam, and I'll be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group Second Quarter 2019 Earnings Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions] 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 2019 second quarter results, which were reported earlier this morning. I would like to turn the call over to Kevin Matz, Executive Vice President of Shared Services, who will introduce management. Kevin, please go ahead.

Thank you, Jamie, and good morning, everyone. Welcome to EMCOR Group's earnings conference call for the second quarter of 2019. My, where has the year gone already? For those of you who are accessing the call via the Internet and our website, welcome to you as well. 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. Page 2 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, depicts the executives who are with me to discuss the quarter and six month results. They are: Tony Guzzi, our Chairman, President and Chief Executive Officer; Mark Pompa, our Executive Vice President and Chief Financial Officer and Treasurer; 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 this at emcorgroup.com. With that being said, please let me turn the call over to Tony. Tony?

Thanks, Kevin. And good morning, and thanks to everyone for joining our call. Frankly, I'm going to speak to pages four through six. We had a great first half of 2019 at EMCOR across all of our reporting segments. Our team is executing well with precision and focus, and as a result, we are delivering great results in end markets that continue to provide great opportunities for us. I am going to focus my discussion today on our second quarter results, and Mark will cover second quarter and year-to-date performance in more detail in his commentary. Mark will follow me, and his commentary will talk about a slew of records that we set in the quarter, but suffice it to say, it was a record quarter on many metrics. We had terrific performance in the second quarter. Revenues grew to $2.32 billion, which is 19% overall revenue growth and 15.2% organic revenue growth. All reporting segments have strong organic revenue growth in the quarter. We earned $1.49 in diluted earnings per share from continuing operations, posted 5.2% operating income margins, had good SG&A leverage at 9.7% of revenues and have strong remaining performance obligations of $4.23 billion, which represents strong growth of 15.1% versus the year-ago period, 6.5% versus year-end 2018 and 1.7% versus the first quarter of 2019 despite our exceptional organic revenue growth. We are also pleased with the results of our recent acquisitions. The companies we have acquired are contributing to EMCOR's overall success. They are opening new markets for us, new opportunities for us and providing us with new capabilities. At the reporting segment level, we have performed well at all reporting segments in the quarter. Our Electrical and Mechanical Construction segments continue the strong performance that we have seen for at least the last eight quarters. We have strong organic revenue growth, good acquisition integration and solid margin conversion and operating income growth from an already strong base of earnings. Our Electrical Construction segment had a great quarter, and our Mechanical Construction segment also performed well against a very difficult set of comparisons versus the year-ago period. The year is progressing much stronger than we had expected driven by excellent performance in the commercial market, data centers and manufacturing and industrial and steady performance in other end markets like institutional and water and wastewater. We also had a nice increase in our short duration projects. Our operating income margins remain strong at 7.0% on a combined basis, which shows continued excellent execution. However, we are at the front-end of several large projects. And as a result, like most large projects, our margin recognition is tempered until we have completed some of the work, especially the labor and gained more comfort in our original estimate. We like our current mix of work in our remaining performance obligations. We like the velocity in our short duration work, and that gives us confidence in the continued strong performance in these segments. Our team, which extends down through our subsidiary leadership, knows how to select, estimate, win and most importantly, execute across a range of project types and sizes as well as end market sectors. Our Building Services segment team had another outstanding quarter. We made 5.3% operating income margins and grew operating income almost 25% on revenue growth of 13.6%. The team continues to successfully integrate acquisitions into our operations. Five quarters ago, we said we needed to execute well on several large contract wins in our commercial site-based business, and we are. We have strong performance in our mechanical services business as we continue to see strong demand for retrofit, energy retrofit, control system upgrades, and repair and service across most geographic markets. Our government business continues to operate well despite having a small reduction in revenues, and our energy services manufacturing business continues to see strong demand as we execute on some complex maintenance and project opportunities. Our team in Building Services is focused on expanding our customer relationships, winning new business and continuing to offer our customers innovative project approaches and solutions. And you know what? It's nice to see growth return to this segment over the last few quarters. Our Industrial Services segment had a strong quarter as the business continues to strengthen and regain its market-leading position. We are at 5.4% operating income margins and had excellent revenue growth overall of 60.6% led by our field services operations. We executed several large turnarounds in the quarter, and we were able to showcase what makes our team excel. We performed complex work that requires the deployment of a large, highly skilled workforce on a compressed schedule under the most demanding conditions. Our shop business continues to operate well and has a good mix of work between new build, cleaning and repair work. Over the past 12 months, reaching back to the third quarter of 2018, we now have a 12-month period of improved performance. Our Industrial Services team is rebuilding our margin base a piece at a time as demand patterns have stabilized after a rough period in late 2017 and early 2018 with the hurricane Harvey disruption, which caused the recalibration of planned maintenance activities. Our U.K. team continues its track record of success with 4.9% operating income margin, strong implementation of contract wins, excellent performance in our facility management contracts and strong project growth and execution. We have a good pipeline and significant new business development opportunities in the U.K., and we are positioned well to win our fair share of those opportunities. With all that said, we believe we have the best team in the business across all our reporting segments and here at corporate. We focus on the task at hand and win for our customers, employees and shareholders. And you know what? We win the right way with the values-driven culture of mission first, people always. With that summary of what was a terrific quarter, I will turn it over to Mark for a detailed financial review of our quarter end and year-to-date and second quarter 2019 performance. 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 7. Over the next several slides, I will supplement Tony's opening commentary on EMCOR's second quarter performance as well as provide an update on our year-to-date results through June 30. 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 revisit our second quarter performance. Consolidated revenues of $2.32 billion are up $370.3 million or 19% over quarter two 2018. Our second quarter results include $72.8 million of revenues attributable to businesses acquired pertaining to the period of time that such businesses were not owned by EMCOR on last year's second quarter. Acquisition revenues positively impacted both our United States Electrical Construction and United States Building Services segments. Excluding the impact of businesses acquired, second quarter consolidated revenues increased approximately $297.5 million or a strong 15.2%. Consistent with the last several quarters, all of EMCOR's reportable segments generated revenue growth, and our $2.32 billion of consolidated revenues represents both a quarter two record as well as an all-time quarterly revenue record for EMCOR. United States Electrical Construction revenues of $569.4 million increased $89.9 million or 18.7% from quarter two 2018. Excluding acquisition revenues of $44.7 million, this segment's quarterly revenues grew organically 9.4% quarter-over-quarter. Revenue gains within the commercial market sector, inclusive of project activities within the telecommunications submarket sector as well as revenue growth within the manufacturing market sector, were partially offset by revenue declines within the transportation, health care and hospitality market sectors due to the completion or substantial completion of certain large projects during 2018. The Electrical Construction segment's quarterly revenues of $569.4 million represents an all-time quarterly high for this segment. United States Mechanical Construction revenues of $823.1 million increased $99.2 million or 13.7% from quarter two 2018. This segment's revenue growth was broad-based across all market sectors with the exception of the hospitality and institutional market sectors. This quarterly segment revenue performance represents an all-time quarterly record for our U.S. Mechanical Construction segment, consistent with previous segment. EMCOR's total domestic construction business second quarter revenues of $1.39 billion increased $189.1 million or 15.7%, of which 12% of such growth was generated from organic activities. United States Building Services quarterly revenues of $523.7 million increased $62.7 million or 13.6%. Excluding acquisition revenues of $28.1 million, this segment's revenues increased $34.5 million or 7.5%. Revenue growth was experienced across all divisions within this segment other than government services due to reduced levels of IDIQ project activity resulting from both a smaller contract base as well as overall reduced spending levels. This segment, like both of our U.S. construction segments, achieved an all-time quarterly revenue record during the second quarter of 2019. United States Industrial Services revenues of $295.4 million increased $111.5 million or almost 61%, primarily as a result of higher field services activities as this segment has seen a resumption in demand for their services, which resulted in an extended spring turnaround season. As a reminder, the first six months of 2018 were negatively impacted by the residual effects of 2017's Hurricane Harvey. United Kingdom Building Services revenues of $112.6 million increased $7 million or 6.7% quarter-over-quarter as this segment is executing against a maintenance contract base of diversified customers with strong demand for follow-on project work. This segment's quarterly revenue growth was despite the continued headwinds of a weakening pound sterling, which negatively impacted quarterly revenues by $6.6 million. Please turn to Slide 8. Selling, general and administrative expenses of $226.2 million represent 9.7% of revenues and reflect an increase of $36.3 million from quarter two 2018. SG&A for the second quarter includes approximately $9.5 million of incremental expenses, inclusive of intangible asset amortization from businesses acquired resulting in an organic quarter-over-quarter increase of approximately $26.8 million. As has been a common theme over the last several quarters, with the continued achievement of record operating performance, the organic increase in SG&A is primarily due to higher employment costs as a result of increased head count to support the strong organic revenue growth across all of our reportable segments as well as increased incentive compensation expense necessitated by our expectations for increased year-over-year profitability. In addition, we continue to absorb higher information technology costs as a result of certain initiatives, which are currently in process. Reported operating income for the quarter of $120 million represents 5.2% of revenues and compares to $99.7 million or 5.1% of revenues in 2018's second quarter. This represents a $20.3 million or 20.4% increase with a slight improvement in operating margin. All of our reportable segments have experienced increases in operating income and operating margin quarter-over-quarter other than our U.S. Mechanical Construction Services segment. Additionally, our consolidated second quarter 2019 operating income of approximately $120 million represents an all-time quarterly record for EMCOR. Our U.S. Electrical Construction services segment operating income of $43.8 million increased $7.8 million from the comparable 2018 period. Reported operating margin of 7.7% represents a 20 basis point improvement over last year's second quarter. The increase in this segment's operating income and operating margin was primarily due to increased gross profit from the commercial market sector, inclusive of certain telecommunications projects as well as the manufacturing market sector due to an increase in project activity. This increased performance was partially offset by a reduction in project activity within the transportation and health care market sectors due to the completion or substantial completion of several large projects that were active in 2018. 2019 second quarter U.S. Mechanical Construction Services segment operating income of $54 million represents a $3.5 million decrease from last year's quarter. Operating margin of 6.6% is reduced by 130 basis points period-over-period as the segment's operating margin for the second quarter of 2018 represented near-record level performance due to a more favorable revenue mix than in the current year. Consistent with my commentary last quarter, this segment's operating performance was impacted by the mix of work currently in process as its project portfolio includes a greater number of large projects in the earlier stages of completion, which typically carry lower projected gross profit margins than projects that are in the later stages of execution. With the sequential growth in the segment's remaining performance obligations, which Tony will touch upon after my commentary, I anticipate this segment's results will continue to reflect strong operating performance. Our total U.S. construction business is reporting a 7% operating margin or $97.8 million of operating income, which has increased from 2018's second quarter by $4.4 million. Operating income for U.S. Building Services were $28 million, represents 5.3% of revenues and a $5.6 million improvement over last year's second quarter. Operating margin improved by 40 basis points due to quarter-over-quarter growth in project activity within the mechanical and energy services division as well as improved profitability within their commercial site-based contract portfolio. Our U.S. Industrial Services segment operating income of $16 million represents 5.4% of revenues and an increase of $14.8 million from last year's second quarter. The increase in quarter-over-quarter operating performance within this segment is due to both increased demand as well as project timing and scope pertaining to certain of our turnaround projects extended from quarter one into the second quarter of 2019. Additionally, as previously referenced on this call as well as the majority of 2017 and 2018's quarterly earnings calls, this segment was still suffering from weak demand in early 2018 due to the residual impact of hurricane Harvey. U.K. Building Services operating income of $5.5 million represents 4.9% of revenues and an increase over last year's second quarter operating income of approximately $900,000 or 50 basis points of operating margin. Consistent with my revenue commentary, this segment's improved operating income performance was despite the negative impact of the decline in the value of the pound sterling, which reduced reported results in U.S. dollars by approximately $300,000. We are now on Slide 9. Additional financial items of significance for the quarter are not addressed on the previous slides are as follows; quarter two gross profit of $346.4 million represents 14.9% of revenues, which has improved from the comparable 2018 quarter by $55.5 million and is consistent on a gross margin basis. Restructuring activity was insignificant in both quarterly periods presented. Diluted earnings per common share from continuing operations is $1.49 and compares to $1.21 for the quarter ended June 30, 2018. On an adjusted basis, reflecting the add-back of the non-cash identifiable intangible asset impairment loss recorded in 2018 second quarter of approximately $900,000, our non-GAAP diluted earnings per share from continuing operations would have been $1.23 in the year-ago period. When compared to 2019's second quarter performance, we have achieved a 21.1% increase quarter-over-quarter in diluted earnings per share. Our tax rate for the second quarter is 28.3%, which is slightly higher than our 2018 second quarter tax rate due to an increase in certain non-deductible expenses in the current period. On a year-to-date basis, our tax rate is 27.9%, which is approximately the midpoint of my previously communicated expected income tax rate range for full year 2019. Cash flow from operations for the quarter was a positive $15.2 million, which results in cash used in operating activities for the year-to-date period of approximately $42 million. With our exceptional organic revenue growth during the period, our working capital levels have increased as we continue to invest in our business. Despite our slow cash start to 2019, our expectation for the full year is to generate positive operating cash flow that will approach the net income implied by our revised earnings guidance range, which Tony will discuss later in our presentation. We are now on Slide 10. With the quarter commentary complete, let's now turn our attention to the first six month results. Revenues of $4.48 billion represents an increase of $628.7 million or 16.3% as compared to $3.85 billion in the prior year period. Double-digit revenue growth across all of our reportable segments other than our U.K. Building Services segment due to foreign currency headwinds has resulted in a new midyear revenue record for the company. Year-to-date gross profit of $655.1 million is greater than the comparative 2018 period by $95.2 million or 17%. Gross margin of 14.6% for the six months ended June 30, 2019, represents a 10 basis point improvement over gross margin for the first six months of 2018. Consistent with our revenue growth, each of our reportable segments generated higher gross profit during 2019's six month period as compared to 2018. Additionally, each of our reportable segments other than our U.S. Mechanical Construction segment are reporting improved gross margin period-over-period. Selling, general and administrative expenses of $432.4 million for the six month period represent 9.6% of revenues as compared to $380.9 million or 9.9% of revenues in 2018. We continue to be successful in leveraging our overhead structure during this period of significant revenue growth, providing additional validation of our continuing successful business model. Year-to-date operating income is $222.3 million and represents a $44.6 million increase over 2018 six month performance. Our year-to-date operating margin is 5%, which is 40 basis points higher than the comparative 2018 period. We are performing a large volume of project and service work and doing so in an efficient and profitable manner. Diluted earnings per common share from continuing operations is $2.77 for the six months ended June 30, 2019. It compares to $2.15 in the corresponding 2018 period. Adjusting 2018 earnings per share from the non-cash intangible asset impairment loss recorded in the prior year, non-GAAP diluted earnings per share from continuing operations would have been $2.17. When comparing the current year's diluted earnings per share from continuing operations to 2018's adjusted number, we are reporting a 27.6% year-over-year EPS improvement. We are now on Slide 11. EMCOR's balance sheet remains sufficiently liquid as represented by cash of approximately $213 million and modest leverage, demonstrated by our debt-to-capitalization ratio of 13.5%. Our cash balance is reduced from December 31, 2018, as a result of cash used in operations during the first six months of 2019 to fund our organic growth as well as cash expanded for businesses acquired and purchases of property, plant and equipment. Working capital levels have increased primarily due to the growth in our accounts receivable and contract asset balances related to our strong second quarter revenue growth. The increase in goodwill is due to the three businesses acquired in 2019 as well as the purchase price adjustment associated with the business acquired in the fourth quarter of 2018. Identifiable intangible assets have increased modestly as a result of the acquisition of the aforementioned businesses in 2019, offset by year-to-date amortization expense of approximately $23.2 million. Total debt, excluding operating lease liabilities, is approximately $295 million and is slightly reduced from year-end 2018 levels. We are happy with where our balance sheet is at this time given our significant organic revenue growth, and EMCOR continues to be well positioned to capitalize on available opportunities. With my prepared commentary concluded, I will return the call to Tony. Tony?

Thanks, Mark. And I'm going to be on Page 12 remaining performance obligations, or RPO, by segment and market sector. Quarter two was another strong project bookings quarter across the company. Total remaining performance obligations at the end of the second quarter were $4.23 billion, up $553 million or 15% when compared to the June 30, 2018, level of $3.67 billion. Quarter two also increased $262 million over the December 31, 2018, level of $3.96 billion. The non-residential market continues to offer opportunities, and we continue to win our share of project work alongside our robust revenue growth. And in addition, as we stated throughout our call, our subsidiaries are executing at a very high level on project construction and service operations, and we see a general absence of badness across our operations. Our leaders in the field of the executive, project management and field superintendent levels are, forgive me for saying this, they're knocking it out of the park right now with regard to project selection, estimating, resource allocation, offer ratio execution, project turnover and completion. That's easily said, but let's not forget even in a good market, you need to constantly perform, and our field teams are performing, and we're building and finding the right labor resources. Domestic remaining performance obligations have increased roughly 15% or $533 million since June 30, 2018, driven mainly by our Mechanical and Electrical Construction segments. And they're up 17% and 13%, respectively, as they are awarded projects in most market segments including some large and complex industrial and commercial and data center projects. In a similar way, our mobile mechanical services business continues to grow its remaining performance obligations as demand for HVAC retrofit and maintenance projects continue as our customers seek to improve the efficiency and cost-effectiveness of our building systems and building controls. Remaining performance obligations for this group located within our Building Services segment have increased $111 million or roughly 31% from the year-ago period. As you look at the graph, the right side of the graph shows remaining performance obligations by market sector. Basically, what you're seeing in our case is improvement in the private non-residential sectors of commercial, industrial, hospitality and short duration. It's being driven by commercial and industrial and short duration projects. That's good because in the aggregate, they are up almost $578 million or almost 28%, and that's balanced against, as Mark said, a little bit of decline in transportation and health care. And we've had steady performance in water, wastewater and institutional. Taking in the aggregate, we're about breakeven from a growth perspective, I guess, measured against 2018 in those sectors. And we take a little license in defining these sectors, but we really try to level up against the Census Bureau data. With all that being said, I'm going to go to Page 13 and 14, which is what everybody on the call actually cares about the most. As we move into the back half of the year, we have healthy markets, and we continue to see bidding and project opportunities across our business. And we believe this level of activity will continue as we move through the back half of 2019 and the early part of 2020. We have had a strong first half of 2019 and are raising our earnings per diluted share from continuing operations guidance to a range of $5.50 to $5.75 versus our previous range of $5.00 to $5.50. This is over 37% increase or 7.1% when comparing midpoints of those ranges. So, in the back half, we do expect growth to slow a little bit as comparisons become more difficult for us, especially in our Industrial Services business as we had a very good second half of last year in that segment. With that as background, we now expect revenues of $8.8 billion to $8.9 billion versus previous guidance of $8.5 billion to $8.6 billion. As we move to the second half, we will continue to execute cost discipline, project controls. And we expect our cash flow to improve, as Mark said, to approach our net income level for the year as we move to near year-end. The difference between the top end of the range and the bottom of the end of the range would depend on a couple of things. One is the workflows of some of our large project work, how quickly the schedule will move, how quickly we'll be able to accelerate or accomplish planned milestones. And we have to finalize our fall turnaround schedule with our refining and petrochemical customers. What we've learned in the past few years from these customers, these downstream customers, is they've shown a willingness to move the schedule by a few weeks or months as they determine the optimal plant loading for any given time period. So let me talk about capital allocation. We will maintain our disciplined and balanced approach. We already have closed three acquisitions in 2019 and have a robust and active pipeline as well as robust organic growth opportunities as we've seen through the first half of the year. We are buying good companies, and we're buying those good companies in what we believe are good markets that will allow us to expand any one of our domestic segments from a geographic capability or serving market sector. We have a very disciplined approach. Many more people want to sell us companies than we are willing to buy, and others buy them, and that's good for them. We balance our internal and external growth efforts with returning cash to shareholders through share repurchases as well as dividends. Thanks for listening. And Adam, let's open the line to questions.

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

Hi, gentlemen.

Good morning, Sean.

This is Sean on for Tahira today. Nice quarter, guys.

Thank you.

First one for me is clearly a blowout quarter for the Industrial Services segment. It sounded like the turnaround season was extended. You had some stuff pushed out from 1Q into 2Q. So I'd just like to get a better sense for second half visibility in that segment and just how that kind of year-over-year growth or revenue run rate's going to look in the back half. And also just kind of how sustainable that margin is you guys put up this quarter and how the delta could look around that?

Well, look, we hope our margins build from here and that won't be a linear line, right. The third quarter could be different than second quarter. We have to keep looking back. And over the last 12 months, we have about a 5% operating income margin and a mid-7s EBITDA margin in that segment. Remember that segment has a lot of amortization because it was built through acquisition.

You go to the back half of the year, we had a really strong second half of last year, especially in the early part of fourth quarter. Right now, we expect a decent turnaround season. We'll be as strong as last year's. We still have some places to fill in, but we always have places to fill in at this time moving into the fall turnaround schedule. I think demand has solidified in that sector. I think consolidation will eventually help large contractors like us in that sector. What I mean is consolidation at the refinery level. I think it allows them to, like I said in my prepared remarks, it allows them to work on optimal plant loading now. And they're getting used to that as they have bigger footprints for the most part to work in. So I say demand's okay. We're more in a more normal market, but it's very difficult for us to say second half will be better than first half. First half will be better than – second half will be better than second half last year because so much of that work is discovery work. You get into a turnaround and that turnaround can expand or you get into a turnaround and I'll say just do what you need to, button it up because we have to get that on site or like I said, it can sometimes slide a whole turnaround season as they decide to keep those units open. So we're very much at the mercy of our customers in that segment, and we react to those customers well, and we're lucky that we're able to attract and find the best labor to perform for them.

Okay. That's helpful. And I guess it's interesting to hear you guys say the bidding momentum likely to continue through the first half of 2020, particularly considering everybody's focused on some of the nonres data showing some cracks. I was just hoping for a little more color, even anecdotally, around some of these, just some of the bidding activity and the opportunities coming down the pipeline for the construction segments over the next 12 months just to try and just understand where the strength is, I guess.

Well, understand we've been in a generally slow recovery. It took us till almost 18 months ago to get back to where we were in late 2007, early 2008. For us, a 2% to 5% market still presents opportunity for us. And then as we center that and say there's some significant large opportunities, the number of contractors that can actually do that work, especially trade contractors, greatly diminishes. And so therefore, what we may see as momentum in the market, others might not see. They're more at the bottom end. The other thing that's important to remember for us is we're late cycle. So a lot of the early indicators were reacting to early indicators from 12 to 18 months ago. We still see a pretty good market and I'm careful, I said moving into 2020, not the first half of 2020, at least that's what I meant to say. So I'll clarify like Mueller did last week, right. We see momentum going into 2020. We don't see past the early part of 2020, right. So we never do. Because you got to remember a lot of our work is the short duration work, and that's an indicator for us, too. That short duration work and then the backlog in our mechanical service business continues to show momentum in some ways, they're the best indicators of where the market is right now for bidding opportunities.

Okay. That's really helpful. And just to sneak in one last one. I'm just curious what's the anticipated acquisition contribution is going to be in the second half? And then I guess more importantly, the implied organic growth in the guidance for the second half 2019?

Well, you can do the math. I mean, there's a range to that markets 3% to 5%, pretty tough compare versus the second half of last year. Clearly, we'd love this momentum to continue. But you're starting to run against pretty good competitors. And even at that rate, if you take the full year, we're clearly outperforming the market. On the second point, on the acquisition front, deals happen when they happen. We have a pretty good pipeline. We don't really count on a lot of our deals in the first six to 12 months because they have – on an EPS basis – because they have pretty heavy amortization of backlog on the EBITDA basis and cash clearly, we participated in that. We've got some nice opportunities that allows us to expand all the things we talked about geography, capability across our domestic footprint. Mark?

Yes, I think the only other thing I would add is where we sit in the calendar and what's in front of us, what's possible to happen in 2019 is probably more skewed towards the later half of the six months. So just as Tony said, adding to that, they're not going to be in the portfolio for all that long to provide a significant contribution. And with regards to revised earnings guidance, we reflected what we thought would be an appropriate level of contribution, if any, for those that we believe are going to be successful.

Yes, very minimal. You may see a little bit of revenue but not much else on the reported financials.

Got it. Thanks so much for your time, gentlemen.

You’re welcome.

Thank you.

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

Hi, guys, congrats on a great quarter.

Hi Noelle.

So first, I just wanted to expand – circle back to the question on Industrial Services margins and to see if you could expand on how you're thinking about that now over the long-term. I know there's still some opportunity for expansion there. So can you talk to me about how you're thinking about the longer term goal and what we need to see to get there?

Well, we got to continue to see stripping in our shop business. We've got to successfully open this, fully open this new cleaning stand in Louisiana. It's open. We've got to get the benefit of that in the fall turnaround season. We've got to continue to look for niche opportunities like we have by building a refractory business. And then we have to continue to pursue the large turnarounds because that eats the overhead. I think if you ask us and ask the team at Industrial Services, 5% is a good place to get back to, give or take. But clearly, we expect on an operating income basis to be north of six and on an EBITDA basis north of high 7s, mid-8s, and we've got to get there first before we can increase from there.

Yes, Noelle, on year-to-date through June, that segment is at 4.6% operating margin. So as Tony said, clearly in the short-term, our expectations is they get back – get at least equal to what we are on a consolidated basis or slightly higher. And then obviously if you look at the historical run rates, there are certainly some opportunities to improve. But it is solely dependent on mix of work. And as Tony had commented, with a less percentage of their revenues and their profits being generated from shop activities, which tend to be higher profit margin contributors versus the field service work, we can drive the demand to get that balance to a more preferable place. But ultimately, we're going to take advantage of the opportunities in front of us.

Right. Okay. And then second, labor has been obviously a big conversation over the last year given that you are still seeing a lot of demand and strong momentum. How would you say you're thinking about just industry-wide labor utilization at this point? And curious if your ability to attract quality labor, if you think that's part of what's driving share gains?

Yes. Our ability to attract very good labor, our ability to take care of that labor, to provide them opportunities if they do a good job for us, our ability to keep them safe and be led by terrific people in the field are all reasons why we attract it. I would tell you, I would not want to be at the low end of the labor pool right now. I would not want to be trying to attract painters or insulators or landscapers or cleaners right now in any substantial way because any of those that are at the top of their profession are trying to migrate into the skill trades. And this is sort of counterintuitive. But in this market right now, with some of these large jobs, it has become much more of a union skill trades market because if you're a nonunion person and we're both, I mean, but if you're a nonunion person in a pretty good union market. And there's work available and the union will accept you at a pretty high level close to journeyman, you're going to go there. You get better wages, better working conditions and maybe more opportunity in the future. So I mean, I think we constantly talk to our field leadership down through the subsidiary into the superintendent levels because we have those great field superintendents, we're still attracting our fair share of great labor.

Okay. Great. That's helpful. And then finally, could you just comment quickly on what you're seeing from a geographic perspective in the U.S. if there are any particular pockets of strength in activity or areas where you're seeing slowdown?

Look, we're not very big in it anyway. But I'm glad we're not. I'm glad we're not a big residential high-rise builder in San Francisco. And I'm glad we're not a big residential high-rise builder in New York City. The things we do, we still see pretty good demand, and it's pretty broad-based from what we would have seen over the last couple of years. We see good opportunities in water and wastewater in Florida. Our Boston business, our Northeast business continues to be strong. Our Midwest business is strong, especially driven by manufacturing and fire protection and energy retrofit projects and control system upgrades. Our California business because again of the niches we participate in, some of it was a little bit slow but now it's regained. It's got some large project opportunities in front of it. Our service operations at California are exceptionally strong right now as we continue to drive energy retrofit work. Our commercial business in Texas continues to regain strength. We're mainly in the Houston market, but with some of our acquisitions on the fire protection side, we're seeing broad-based strength overall, especially in the data center market as it pertains to fire protection. And we got in there through acquisition. We're able to build that skill more broadly based. So there's really – because – and the Mid-Atlantic continues to be very strong, broad-based commercial data centers, some health care. And so because we slowly rebuilt through and rebuilt our labor force responsibly, including on the management side and now we're able to respond to larger project opportunities and more scope. Right now, that's a trend we see because people know we can get the labor. We're pricing the work right. We're procuring the materials right, and we're executing well.

Thanks so much.

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

Hey good morning guys great quarter.

Thanks Adam.

Hey, Tony, can you give us some more flavor for what's going in the backlog, what's driving your backlog, maybe the pricing within backlog?

I don't make a lot of comments on pricing because with pricing comes execution. You could have great pricing. But if you estimate it wrong, it turns into bad pricing relatively quickly. And as you get up in project size, which is – you see the short duration work increasing. That medium project side for EMCOR of about $1 million, that's been very steady. So ultimately, it will drive backlog increases as large projects, right. Because we're running at such a high rate right now, and our organic growth is pretty good, to demonstrably move backlog you have to have some large projects. So we defined those as $30 million plus. When you get to that level of project, you're working against the budget a lot of times and you're working against can we get this project done? What's the scope going to look like? How are we going to execute? That's the kind of work that's going to the backlog. And from there, what our folks have done a terrific job on is getting the scope right, protecting us on the contractual terms. And sometimes, it's better not to get the next incremental price if you can get better contract terms to protect you as designer scope changes happen. And that's why you're seeing the general absence of badness. So services business or construction business is a funny thing. What really drives margin, what really makes this whole thing work is a general absence of badness. I mean, we're performing what we said we would perform and we're not having big write-downs. And that is what makes EMCOR yes, we've had write-downs in the past, but they're nowhere near what the big EPC firms. And it's important for people to always remember that about us. Other than some food process work and maybe a chiller room, we don't do EPC work. We are a specialty trade contractor, and what we do is we take a set of plans and specs, and we take a time and material job. We figure out how to buy out that job usually very successfully and then we implement our labor. And where we really make our money is productively employing our labor to the best we can with the best mix of work that we can on that job. And so that is more important than saying I just got great pricing on that job because that can be a big misnomer. All it takes is one bad job and any pricing advantage you have is gone.

Okay. So then those 30 million plus jobs that you said drove backlog, you still see a good pipeline of those in the market?

Yes.

Okay. Moving over to industrial, it sounds like just from answering a previous question, you'd prefer us to be modeling slightly down revenue in the back half for industrial? Just from a modeling perspective, not that that's the most...

I don't want to focus on that. I'd say it's plus or minus last year flat to minus, flat to plus a little bit, yes.

And then what is the – can you remind is what's the peak revenue for that segment now because you did $1.07 billion back in 2016, you’ve done some acquisitions since then. I mean, if we're really in a healthy market like what should we be thinking about annual revenue?

We haven't made any acquisitions on that segment for a long time. We moved one of our companies from construction to...

Industrial.

Industrial, but all that's really doing is making up for their inability to serve California without that business, and so it's sort of a wash.

I thought Ardent had a – maybe Ardent was back.

Ardent is not in that segment.

Yes, Ardent is in our U.S. Electrical Construction segment, Adam.

Okay. And then lastly, I wanted to ask about the margins for the segments, just how you're thinking about this for the back half. As I tried to get to your guidance, I'm thinking electrical margins kind of flattish, mechanical margins up versus the first half and Building Services kind of flattish.

Mark?

You're not that far off, Adam.

Okay. That's it for me. Thank you.

Okay. Thank you, Adam.

And your next question comes from the line of Zane Karimi with D.A. Davidson.

Hey, good morning and solid quarter.

Thank you.

Thank you.

Just hoping to provide any additional color on the Building Services margins, they continue to be pretty strong. And is there any mix benefit to that or is that purely better terms, conditions, execution, et cetera?

It's better execution, especially on our site-based contracts, but it's really being driven by really good mix right now between mechanical services, some of our manufacturing energy work. Mark?

Yes, I think the only thing I would add to that, Zane, is that particular segment has gone through pretty dramatic portfolio reshaping over the last several years. Now that we've gotten beyond some of the work that either we decided not to rebid or we moved away from, you're seeing a more reflective contribution of the underlying business that's been there all along. So there's not much in that portfolio that's diluting the overall margin performance of that particular segment. So you're able to see its true performance now.

Thank you. I appreciate the color there. And then kind of touching on the M&A environment comes out earlier. Just help me with your update on it as well as any perspective on expectations in what you see around the industry as a whole?

Yes. I'd comment on EMCOR. Where we've had great success over our last, I'd say, three years and in the last seven acquisitions all have a story. We're buying companies where people want to be bought by EMCOR. We want to make a fair deal with them. We don't want to buy them cheap. We're not buying them cheap. We're buying them at the appropriate value. We think we're buying good companies and the results back that up. Good companies with good capabilities in good markets to either augment us where a market we're already in or to open a new market up to us. And we put a lot of thought into it. I mean, we do very, very rigorous operational due diligence, legal due diligence, financial due diligence, risk due diligence, insurance, which is big deal in our business, safety due diligence. And we don't say yes to everything, not even close. We can get pretty far down the line in the initial stages before we make an offer and just say if we buy this, we would buy this at this because this is what the business actually can do without a lot of investment from us. Others we say, there's more upside here. And in fact, the person we're talking to, we both agree that yes. And when that happens, we were able to get to a deal. I simplify good companies, good markets, good people.

Got you. Thank you for the color there.

And your next question comes from the line of Joe Mondillo with Sidoti & Company.

Hi, good morning everyone.

Good morning.

Just had a question on sort of execution. Wondering how you internally measure execution amongst all the various projects that you're involved with. And curious at this point in time right now how sort of execution stacks up against past years at the company?

I mean, I'll take a shot at it and ask my CFO. We measure the heck out of things. You start with an estimate and then goes into our work-in-process and we have a rigorous work-in-process methodology here at EMCOR and all the standard metrics you'd expect to see on it, but we go through rigorous work-in-process reviews every month all the way up through our corporate leadership teams. Starts at project level goes up to subsidiary leadership, goes to segment level, makes it up the way to Mark and his team. And of course, they manage by exception at that level, and they have great tools to analytically look at that. But we measure against what we thought we were going to do, right. I mean, we said we were going to do X, how are we doing that? Then we take a good look back at historical performance, and what should we expect not only by company, type of company, market sector, type of project, type of contract. The other thing we do is we do a lot of training around that. We spend a lot of time talking to people about the right way to look at that, the right way to look at the cost to complete, the right way to look at risk. Ultimately, for us to make money and for us to do as well as we are, two big levers have to happen. The first is don't screw up, do no harm, which means don't have any big losers in the portfolio, which right now, we don't. The second part is get the estimate right, execute well, close off the job and get off the job. You've got to do both of those two things well. And I would add a third thing, which goes with that second one is we've got to get labor productivity. So that means investing in BIM, prefab, digital tools. I mean, I laugh when people say, are you digital? We're probably the most digital specialty trade contractor in the market. But that would have been asked the last 10, 20 years ago, are you going to use the healthy station? I mean, it's part of what we do. Mark?

Yes, the only thing I would add to Tony's commentary, Joe, is with regards to the level of review and the rigor of the review, it's actually monthly. So to the extent that there's any projects in the portfolio that are underperforming, we will recognize that fairly early in the project timeline and develop action plans to try to get ahead of it. So unlike some other people that may not take a detailed review quarterly or semiannually, we're looking at this information on a monthly basis. And as Tony indicated, there's a lot of different eyes looking at it. And the great thing about having a lot of different eyes doing those reviews is everybody has a slightly different perspective of what they're looking for. So it's not just margin performance. It's obviously cash flow attributes, are we cash ahead, cash behind. Obviously, we're aware what the contractual terms are with regards to milestones and billing on most of the large work. And I think the level and frequency of inquiry prevents us from having many projects that actually result in being marginally profitable or loss projects with the number of work, the amount of work we perform in any given quarter or in any given year obviously, that's almost impossible to prevent. And I think what you're seeing in the current period results as opposed to some of the earlier periods is the fact that we haven't had any significant projects of note that are either breakeven or loss projects, which obviously we would recognize that when we identify it as a problem. But the bigger problem once that it happens is we don't have any revenue being burned through the company right now where we're not recognizing any margins. So where we've had projects in the past that were of consequence and that had some difficulties, we then were burning revenue after that happens at no margin, which obviously dilutes the overall margins of the company. What you're seeing currently in 2019 and what you saw for almost all of 2018 is you didn't have any of that revenue being burned by the company with either no margin or very low margins. So you're able to see the true performance of EMCOR at its best.

The other thing I'd add, Mark made a key statement, lots of sets of eyes. I would add one adjective to that, qualified.

Qualified.

Qualified and experienced sets of eyes. People are asking incisive questions and insightful questions. And so our field leadership very rarely feel from our internal resources that they're getting questions that are crazy. They're saying yes. Great question to ask and here's what we think. The other thing is one of our core values here at EMCOR is transparency and we believe that it has to be a core value for a company that's as decentralized as we are and it's one of the things that unites us together. We always have a very – here's the thing. Bad news has to travel really fast here. Good news can wait a while. Bad news has to travel fast and we also don't overreact to bad news. We react to it in an appropriate way and we bring all the skills that we can, and our folks know that. I mean, they know that we're going to – we're in the game with them. And I would say the other thing that maybe changes us versus other people, none of us are what I would call, traditional corporate types. We're not M&A people. We're not – we are operating people from our finance team to our legal team, our safety team, our risk team. Everything is focused on supporting the operations in the field. And we do acquisitions because we want to build great operations. We don't do acquisitions just to do acquisitions. We invest organically because we want to get productivity. We just don't invest organically because it's a new experiment. We usually try something small and then go larger on it. So this relentless focus on operations and productivity and the safety of our people and the transparency that I think is core to what we do, and it's how we behave. It's how we ask questions. It's how we answer questions, and it's what makes us who we are and we take bad news, and we do something with it. We don't just sit on it.

So just a really quick follow-up to that question, at these levels of execution that you're running at, how hard is it to sort of, I guess, squeak out more margin in terms of efficiency and execution?

Our segments have ranges of margins based on the mix of work they have and where they are in the project cycle. I think we're pretty good margins right now. I'm not going to call peak margins because they could go up 20 or 30 basis points or go down 10 basis points. I mean, the margins we're currently earning are reflective of the mix of revenue we have. If we get an improved mix of revenue then there is obviously the opportunity for margin improvements.

All right, and then I also wanted to ask in terms of how your nonunion businesses have been performing relative to your union based compared to sort of historically, is there any changing dynamics? Or in this past year or two, has anything trended differently between the two?

No. Other than industrial, but that has nothing to do with union versus nonunion. That has to do with the recovering market.

Okay. And then last question just in terms of capacity. Capacity is, for the most part, based on personnel and trying to find the skilled labor and whatnot. Have you had any issues at any of your locations? This has been a sort of a theme in the industrial world, but are you running up against capacity at all?

Look, they always qualify adjectives. You say have you had any issues while in a bad market that has labor, we would make sure we have the right mix of labor. So you always have issues if you assemble workforce of 37,000 people. Are we having trouble staffing our projects with the appropriate level of resources? I go back to our earlier comment because of where we are in the food chain, because of the excellence we have in project management and our field superintendents and understand, all of EMCOR subsidiary leadership came from the field. They were either project managers, they were field operating people, operations managers or they came up through the trade. They know labor and labor trusts them because they keep them safe, we pay them every week. They've led by people that know what they're doing. And if they do a good job for us, they are likely to have follow on work and be part of our core team. Our folks know skilled labor.

Okay. Good enough. Thanks for taking my questions. Appreciate it.

Thanks Joe.

Thank you.

And there are no further questions at this time.

With that, terrific quarter, thanks to the people in the field. We'll talk to you all in October.

Thank you.

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