EMCOR Group, Inc. (EME) Q2 2020 Earnings Report, Transcript and Summary

Good morning. My name is [Lara] [ph], and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group Second Quarter 2020 Earnings Call. [Operator Instructions] Mr. Haskel Kwestel with FTI Consulting, you may begin.

Thank you, Lara, and good morning everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the company's 2020 second quarter results which were reported this morning. I would like to turn the call over to Kevin Matz, Executive Vice President of Shared Services, who will introduce management. Kevin, please go ahead.

Thank you, Haskle, and good morning everyone. Thank you for your interest in EMCOR, and welcome to our earnings conference call for the second quarter of 2020. How time has really moved on. And as I said in our last call, I hope you and your families are well, staying safe as we move through this unprecedented time. For those of you who are accessing the call via the Internet and our Web site, welcome, and we hope you have arrived at the beginning of our slide presentation that will accompany our remarks today. Please advance to slide two. This presentation and discussion contains forward-looking statements and certain non-GAAP financial information. Page two 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 accompanied slide. Slide three shows executives who are with me to discuss the quarter and six months' result. They are Tony Guzzi, our 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 call directly via the Internet, this presentation including our slides will be archived in the Investor Relations section of our Web site under Presentations, and again, you can find this at emcorgroup.com. With that being said, let me turn the call over to Tony.

Thanks a lot, Kevin, and I will be addressing pages four through six. Let me first start by thanking our employees for their extraordinary efforts in these continued challenging times. Our performance under these conditions is outstanding. Our organization showed the grit, resiliency, discipline, and innovation that we are known for, and we stayed focus on keeping our employees safe while executing for our customers. Turning to our financial results, throughout our discussion all my financial commentary disregards the impact of the impairment charge that Mark will cover in detail. We earned an adjusted $1.44 diluted share for the second quarter. Adjusted operating income margins for the second quarter were a strong 5.47%. Operating cash flow is excellent at $276 million on a year-to-date basis. We accomplished this in an environment where we had 15.5% negative organic revenue growth for the quarter just ended. Our Mechanical Construction segment performance was exceptional with operating income growth of 24% and 8.5% operating income margins. Our Electrical Construction segment had strong operating income margins of 7.2%, despite having a 21.7% decrease in revenues as they were more significantly impacted by the mandated shutdowns than our Mechanical Construction segment was, and further, the Electrical Construction segment is more exposed to the volatility caused by oil and gas exposure in this segment. Our U.S. Building Services segment had a very strong quarter with 5.6% operating income margins, despite a 9.8% revenue decrease. We saw demand improved through the quarter, especially in our mechanical services and government services businesses. We exited the quarter in a nice, hot, steamy summer with an even more competitive cost structure. Our Industrial Services segment is also moving ahead in a very challenged market. Our customers are cutting cost, deferring work, and fighting through a really tough market for them, and as a result, for us. We will continue to maximize any opportunity available, cut cost, and look to write flexible solutions when possible. I don't anticipate this strength to improve until at least the first quarter of 2021 at the earliest. We are fortunate to be a segment leader, and have longstanding relationships with the most important customers in the downstream refining and petrochemical markets. Our U.K. segment had a strong quarter, and we expect this execution and performance to continue. They face many of the same challenges that our U.S. Building Services segment faced. However, our U.K. customer base is more institutional, manufacturing, and government-focused, and as a result, we are stable [indiscernible] employments throughout the U.K. shutdown as we were deemed essential in many cases. So, how did we continue performing in this environment, and how will we continue to perform? My comments cut across all EMCOR reporting segments. We outlined some of these actions on our first quarter call in April, and we executed well. So, number one, we focused on employee safety first, and as a result, we were able to staff job safely and with the right people. Said differently, our people had confidence that we would do the right thing. We implemented guidelines to keep operating, and when necessary to reopen. We aggressively procured the PPE, that's the Personal Protective Equipment, upfront that our employees needed to keep working, and we executed the training necessary to work safely in this environment. We communicated at all levels with a focus on safety, execution, and results. Our flat organizational structure helped our communications remain effective, and unhampered, despite COVID-related challenges. Number two, we thoroughly and quickly implemented all the different government mandates and programs with respect to COVID. Our staff did a superb job in distilling these mandates and programs into specific actions for our subsidiary operations to continue operating productively and safely, and in compliance with these varied government mandates. Number three, we aggressively cut SG&A through both the short and long-term measures. We cut executive pay 25% in the quarter, cut other salary employees pay in the quarter, furloughed staff, permanent laid-off salary staff, cut almost all travel and entertainment expenses, and reduced any additional discretionary expenses. We reduced $21 million in the quarter versus the year-ago period, and when removing incremental SG&A for businesses acquired, we cut $28 million on an organic basis. I expect about half of those cuts to be permanent. We acted fast and decisively, and it shows in our results. Further, we aggressively right-sized our craft labor workforce to match demand through layoffs and furloughs. Number four, we knew we had to comp out what would be reduced productivity, because of increased use of PPE, and the implementation of other COVID-related safety measures. We have successfully combined to this challenge, and met this challenge by working with our customers and our workforce to offer better scheduling, planning, and work practices. We believe for the most part that we are near breakeven on a productivity basis to where we would have been pre-COVID. Number five, we trained our field and sales force on IAQ, that is, Indoor Air Quality; and other building enhancements products and projects during the initial phases of COVID, so we would be ready to provide solutions for our customers to be able to return to their facilities with confidence and in an improved indoor environment. Number six, our subsidiary leaders led us well as any organization that I could imagine. I'll say that again, our subsidiary leaders led us well as any organization that I could imagine, and they executed all the above initiatives I just mentioned in an exceptional manner. With all that said, we leave the quarter with a strong RPO position of $4.6 billion, our balance sheet stripping through the quarter, despite adverse conditions, and an even more competitive cost structure than we already had. With all that said, I will turn the discussion over to Mark.

Thank you, Tony, and good morning to everyone participating on the call today. For those accessing this presentation via the webcast, we are now on slide seven. 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 reference 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 and expand our review of EMCOR's second quarter performance. Consolidated revenues of $2 billion are down $310.2 million or 13.3% over quarter two, 2019. Our second quarter results include $50.2 million of revenues attributable to businesses acquired pertaining to the time that such businesses were not owned by EMCOR on last year's second quarter. Acquisition revenues positively impacted both our United States Mechanical Construction and United States Building Services segments. Excluding the impact of businesses acquired, second quarter consolidated revenues decreased approximately $360.4 million or 15.5%. All of EMCOR's reportable segments experienced quarter-over-quarter revenue declines as a result of the containment and mitigation measures mandated by certain of our customers, as well as numerous governmental authorities in response to COVID-19. This resulted in facilities' closures and project delays, which impacted our ability to execute on our remaining performance obligations in many of the geographies that we serve. The specifics to each of our reportable segments are as follows. The United States Electrical Construction segment revenues of $445.9 million decreased $123.5 million, or 21.7% from 2019 second quarter. In addition to the negative impact of the COVID-19 pandemic on second quarter revenues, the unfavorable variance year-over-year is partially attributable to 2019's all-time record quarterly revenue performance. Revenue declines in most of the market sectors we serve were partially offset by quarter-over-quarter revenue growth in the institutional and hospitality market sectors. United States Mechanical Construction segment revenues of $790.4 million decreased $32.7 million or 4% from quarter two, 2019. Excluding acquisition revenues of $47.9 million, this segment's revenues decreased organically 9.8% quarter-over-quarter. Revenue declines in manufacturing and commercial market sector activities were muted by revenue gains quarter-over-quarter within the institutional transportation and healthcare market sectors. The prior-year quarter also represented an all-time quarterly revenue record for U.S. Mechanical Construction segment. Second quarter revenues from EMCOR's combined United States construction business of $1.24 billion decreased $156.2 million or 11.2%. As Tony will cover later during his presentation, our combined United States construction business has experienced growth both sequentially and year-over-year, and the remaining performance obligations through June 30. Some of this growth in RPOs has come at the expense of revenue generation during the second quarter due to COVID-19. However, we were also successful in obtaining new project opportunities during this period. United States Building Services quarterly revenues of $472.4 million decreased $51.3 million or 9.8%. Excluding acquisition revenues of $2.3 million, the segment's revenues decreased 10.2% from the record results achieved in the second quarter of 2019. Reduced project and controls activities within their Mechanical Services division, largely attributable to the impact of COVID-19 as well as large project activity in their Energy Services division were the primary drivers of the quarterly revenue decline. Additionally, as I mentioned on previous calls, we're continuing to see a reduction in IDIQ project activity within our Government Services division, due to both a smaller contract base as well as an overall reduction in government spending. EMCOR's Industrial Services segment was significantly impacted by the sharp decrease and volatility in crude oil prices resulting from geopolitical tensions between OPEC and Russia as well as the dramatic reduction in demand for refined oil products due to the containment and mitigation measures implemented in response to COVID-19. These factors have resulted in decreased demand for our services as this segment's customer base has initiated severe cost containment measures which have resulted in the deferral or cancellation of previously planned maintenance, as well as the suspension of most capital spending programs. As a result, our Industrial Services segment second quarter revenues declined $212.2 million from the $295.5 million reported in 2019 second quarter. This represents a reduction of $83.3 million or 28.2%. United Kingdom Building Services revenues of $93.1 point million decreased $19.4 million or 17.3% from last year's quarter. The period-over-period revenue reduction was primarily attributable to a decrease in project activities, resulting from COVID-19 containment and mitigation measures instituted by the U.K. government. This segment's quarterly revenues were also negatively impacted by $3.4 million of foreign exchange headwinds. Please turn to slide eight. Selling, general and administrative expenses of $205.2 million represent 10.2% of revenues and reflect a decrease of $21.1 million from quarter two, 2019. SG&A for the second quarter includes approximately $7.2 million of incremental expenses from businesses acquired, inclusive of intangible asset amortization resulting in an organic quarter-over-quarter decrease of approximately $28.3 million. The decline in organic selling, general and administrative expense is primarily due to certain cost reductions resulting from or actions taken in response to the COVID-19 pandemic. This includes the period-over-period decrease in salaries expense due to both reduce headcount as well as temporary salary reductions. Additionally, incentive compensation expenses decreased due to lower projected annual operating results relative to incentive targets when compared to the prior year. Lastly, we have experienced reductions in both medical claims as well as certain discretionary spending such as travel and entertainment costs quarter-over-quarter. The increase in SG&A as a percentage of revenues is due to the reduction in quarterly consolidated revenues without a commensurate decrease in certain of our fixed overhead costs, as we do not deem the current operating environment to be permanent. During the second quarter, we identified certain indicators and the impairment within those of our businesses that are highly dependent on the strength of the oil and gas and related industrial markets. Previously referenced volatility in crude oil prices, as well as the containment and mitigation measures implemented in response to the COVID-19 pandemic significantly impacted the demand for our services within these businesses resulting in revised near term revenue and operating margin expectations. These negative developments additionally resulted in uncertainty within the U.S. equity markets, which led to an increase in the weighted average cost of capital utilized in our appointment analysis. The combination of lower forecasted revenue and profitability along with a higher weighted average cost of capital has resulted in the recognition of a $232.8 million non-cash impairment charge during the quarter. $225.5 million of his charge pertains to a write-off of goodwill associated with our Industrial services reporting unit, while the remaining $7.3 million relates to the diminution and value of certain trade names and fixed assets within our United States Industrial Services and our United States Electrical Construction segments. As a result of the non-cash impairment charge just referenced, we're reporting an operating loss for the second quarter of 2020 of $122.6 million, which represents a decrease in absolute dollars of $242.6 million when compared to operating income of $120 million reported in the comparable 2019 period. On an adjusted basis, excluding the impact of the non-cash impairment loss, our second quarter operating income would have been $110.1 million, which represents a period-over-period decrease of $9.8 million or 8.2%. While adjusted operating income has declined, we have experienced an increase in operating margin on an adjusted basis. For the second quarter 2020, our non-GAAP operating margin was 5.5%, compared to our reported operating margin of 5.2% in the second quarter of 2019, reflecting strong operating conversion within most of our reportable segments. Considering the operating environment during the quarter, our entire team did a great job. Specific quarterly performance by reporting segment is as follows. Our U.S. Electrical Construction Services segment operating income of $32.2 million, decreased $11.6 million from the comparable 2019 period. Reported operating margin of 7.2%, represents a 50 basis point decline over last year's second quarter. The reduction in quarterly operating income and operating margin is due to the significant decrease in revenues as well as the impact of favorable project closeouts within 2019 second quarter. Second quarter operating income of our U.S. Mechanical Construction Services segment of $66.9 million, represents a $13 million increase from last year's quarter. Despite the disruption caused by the COVID-19 pandemic, this segment experienced an increase in gross profit within the commercial institutional and healthcare market sectors. Operating margin of 8.5%, improved 190 basis points over the 6.6 operating margin generated in 2019, primarily due to a more favorable revenue mix than in the year ago quarter. Our total U.S. construction business is reporting $99.1 million of operating income and an 8% operating margin. This performance has improved by $1.4 million and 100 basis points of operating margin from 2019 second quarter. In addition, it represents a sequential improvement from 2020s first quarter in both absolute dollars and margin performance. Operating income for U.S. Building Services is $26.4 million or 5.6% of revenues, and although reduce by $1.6 million from last year's second quarter, represents a 30 basis point improvement in operating margin. The quarter-over-quarter reduction in operating income is due to lower gross profit contributions from their mobile mechanical services and energy services division as a result of reductions in revenues as previously mentioned. The improvement in operating margin is due to a better mix of service maintenance and repair activities within the segments, mobile mechanical services division. Our U.S. Industrial Services segment operating income of $3 million represents a decrease of $13.1 million from last year's second quarter operating income of $16 million. Operating margin of a segment for the three months ended June 30 2020 was 1.4%, compared to 5.4% for the three months ended June 30, 2019. The decrease in operating income and operating margin was primarily driven by the reduction in quarter-over-quarter revenues, which resulted from the adverse market conditions mentioned during today's call, as well as significant pricing pressure due to limited shop services opportunities. U.K. Building Services operating income of $5.4 million was essentially flat with 2019 second quarter, as foreign exchange headwinds accounted for the modest period-over-period decline. Operating margin of 5.7% represents an 80 basis point increase over last year, as a result of improved maintenance contract performance as well as the implementation of cost containment measures, which resulted in SG&A expense reductions. We are now on slide nine. Additional financial items of significance for the quarter not addressed on the previous slides are as follows. Quarter two gross profit of $315.3 million is reduced from 2019 second quarter by $31.1 million or 9%. Despite this reduction in gross profit dollars, we did experience an improvement in gross profit as a percentage of revenues with a reported gross margin of 15.7%, which is 80 basis points higher than last year's quarter. As previously mentioned on this call, we had exceptional revenue conversion within our U.S. Mechanical Construction segment, as well as margin expansion within both our U.S. and U.K. Building Services segments. We are reporting a loss per diluted share of $1.52 as compared to earnings per diluted share in last year's second quarter of $1.49. On an adjusted basis after adding back the impairment loss on goodwill, identifiable intangible assets and other long lived assets, non-GAAP diluted earnings per share is $1.44, as compared to the same report at $1.49 in last year's quarter. This represents a modest reduction of $0.05 or just over 3%. Not to be repetitive in my commentary, but in light of COVID-19 in the economic backdrop we all experienced during the last several months EMCOR has done a great job of maximizing returns were given the opportunity to deliver it services. Please turn to slide 10. With the quarter commentary complete, let's turn our attention to EMCOR's first six-month results. Revenues of $4.31 billion represent a decrease of $169.1 million or 3.8% when compared to revenues of $4.4 8 billion in the corresponding prior year period. Our second quarter revenue declines offset revenue gains posted in quarter one at each of our U.S. Mechanical Construction, U.S. Building Services, U.S. Industrial Services and U.K. Building Services segments, while our U.S. Electrical Construction Services segment has had two consecutive quarters of revenue contraction. Year-to-date gross profit of $648.3 million is lower than the 2019 six-month period by $6.8 million, or a modest 1%. Year-to-date gross margin is 15%, which favorably compares to 2019 year-to-date gross margin of 14.6%. Gross Margin improvement was largely driven by our combined U.S. construction business, as well as our U.K. Building Services segment. Selling general and administrative expenses of $432.2 million for the 2020 six-month period represent 10% of revenues compared to $432.4 million or 9.6% of revenues in 2019. While SG&A for the year-to-date period has decreased nominally from the prior year to substantial cost reduction measures implemented in the second quarter have positioned us at a lower run rate than at this time last year. We reported a loss per diluted share of $0.14 for the six months ended June 30, 2020, which compares to diluted earnings per share of $2.77 in the corresponding 2019 period. Adjusting the results for the current year to exclude the non-cash impairment loss on goodwill identifiable intangible assets and other long lived assets resulted in non-GAAP diluted earnings per share of $2.78. When comparing this as adjusted number to last year's reported amount $2.77, we are reporting a $0.01 increase. I would like to remind everyone on the call that our performance for the first six months of 2019 set records for most financial metrics with earnings per share in particular, exceeding the prior benchmark by almost 30%. Not to marginalize the sizable impairment charge taken this year, but the fact that on an adjusted basis, we were able to slightly exceed our previous year record. Despite the extraordinary market challenges presented. I believe EMCOR has done quite an exceptional job. My last comment on the slide pertains to EMCOR's income tax rate for 2020. As noted on the slide EMCOR's tax rate for the six months ended June 30, 2020 was 59.4%. Our tax rate for the remainder of 2020 will continue to be impacted by the impairment charges recorded during the second quarter, the majority of which were non-deductible for non-GAAP for tax purposes. So with that said at this time our full-year estimated tax rate is between 58% and 59%. However, this can change if any discrete tax events occur during the remainder of the year. We are now on slide 11. I spent some time during our quarter one earnings call detailing enforce liquidity profile. As a reminder, the first quarter historically -- is historically our weakest from a cash generation standpoint, due to funding a prior year earned incentive awards. In addition, 2020's first quarter was negatively impacted by our inability to monetize certain of our first quarter revenue activities, due to delays and customer billings, resulting from our previously communicated ransomware attack. However, as Tony mentioned we had record operating cash flow for the first-half of the year, and as a result of liquidity profile has improved from our already strong position. With strong operating cash flow through June, we have paid down to $200 million revolving credit borrowings outstanding as of March 31, 2020, and our cash on hand has increased to $481.4 million from the approximately $359 million on our year-end 2019 balance sheet. The improvement on operating cash flow was due to excellent working capital management by our subsidiary leadership teams, as well as the benefit with deferral of certain tax payments, due to government measures enacted in response to the COVID-19 pandemic. These measures which included the deferral of estimated U.S. federal income tax payments, the employer's portion of Social Security tax payments, and the remission of value-added tax for our U.K. subsidiary have favorably impacted second quarter and year-to-date cash flow by approximately $100 million. Please note that while we will continue to benefit from some of these deferrals throughout the remainder of 2020, our estimated U.S. federal tax payments were funded subsequent to the quarter on July 15th. Changes and additional key balance sheet positions are as follows. Working Capital levels have increased primarily due to the increase in cash just referenced. Goodwill and identifiable intangible assets have decreased since December 31, 2019 largely as a result of the impairment charges previously referenced. In addition intangible assets have decreased as a result of $29.4 million of amortization during the year-to-date period. Stockholder's equity has declined due to the operating loss recognized during the first six months of 2020. EMCOR's debt-to-capitalization ratio of 13.5% is essentially flat, when compared to our position at 2019 year-end, and is reduced from 19.9% at March 31, 2020. We have just over $1.2 billion of availability under our revolving credit line and anticipate that we will continue to generate positive operating cash flow during the last six months of calendar 2020. EMCOR's balance sheet and resulting liquidity position remains strong and we continue to preserve our flexibility and evaluate all market opportunities. With my commentary concluded, I will now turn the call back to Tony, Tony.

Thanks, Mark, and I'm on page 12 remaining performance obligation by segment and market sector. In short, we continue to work and have seen our small productivity improved for the second quarter, as it hit a low point in April for bookings and execution, some comparisons to consider. Total RPOs at the end of the second quarter, were just about $4.6 billion, up $365 billion or 8.6%, when compared to the June 2019 level of $4.23 billion. RPOs also increased a $160 7 million from the first quarter of 2020 reflectivity continued demand, as we are seeing for market -- continued demand we are seeing for our services and our markets. So, for the first six months of 2020, total RPOs increased $555 million or 13.8% from December 31. With all this growth, only $11 million relates to a tuck-in acquisition, so almost all that growth is organic. Domestic RPOs have increased $346 million or 8.4% just a year ago period drive mainly by our Mechanical Construction segment. We did run through some electrical construction project as we completed some complex work. However, we expect to backfill these projects, as we continue to see demand, especially in the high-tech and data market and high-tech for us means semiconductor and the datacenter market. Our U.S. Building Services segment RPOs dipped a little in the quarter as the segments project work was first impacted by COVID-19 building access delays and decision-making. As the economy opens up, combined with the hotter weather, we are getting more access to facilities and seeing the resumption of our work. Additionally, both of our Industrial services in EMCOR U.K. segments increased RPO level by roughly 15%, respectively from June 30, 2019. On the right side of the page we have on 12 we show RPOs by market sector. Of the eight market sectors listed all had year-over-year RPO increases except for manufacturing and industrial. This is not to be confused with our Industrial segment. Currently we're in the process of competing some major food processing projects. We continue to see demand for these large complicated projects, and have a number of potential opportunities we are looking at. Commercial project RPOs comprised our largest sector -- market sector that were 40% of the total. This is had 19% increase from year-end referred via our data center projects, and as we've said before, we are uniquely suited for these fast paced, especially in the hyper scale projects from both in electrical and mechanical perspective. Other very active markets for us are healthcare, water, and wastewater, with these sectors being up 25% and 49% respectively, from year-end 2019. Today, we have not seen any material slowdown in bidding opportunities, apart from the mandated areas that was New York, New Jersey, Boston and parts of California and a little bit in Pennsylvania. However, these areas are now open. As I said earlier, the industry has adapted safety -- safe work practices and protocols to keep project progressing, and especially to keep workers safe. Finally, we are positioned very well to help our customers as they adjust their HVAC in building, control systems to improve the IQ, and cleanliness of their buildings and other facilities. It starts with the introduction of more outside air into the space as one of the simplest ways to make a building healthier, but unfortunately, this makes the building less efficient. We have strong experience in IQ systems and our service companies and mechanical contractors know how to implement UV lights; bipolar ionization, enhanced filtering, and control system modifications. Most of this work will never make it into reported RPOs from a quarter-to-quarter basis and it is quick turn, high margin activity. Together, it will mount to a nice media -- medium sized project with good margins. I do expect these IQ additions to longer terms for a more robust HVAC replacement market, as we seek to increase efficiency to combat the increase in IAQ, especially the introduction of outside air. So, as I said in our first quarter call, I don't know exactly how all the works specifically we will roll out, and how that booking will be, it's a fluid and challenging environment. There will be bumps along the way. However, the direction of future opportunities for a contractor like us remains pointed in a positive direction. So now I'm going to close on pages 13 to 14. When we went through guidance in April, we said we had hoped that we could provide a view on the outlook for the remainder of the year during the second quarter earnings call. We have spent the last few weeks debating internally whether to provide more definitive versus generic guidance for the remainder of the year. We have decided to provide more specific guidance with some caveats, which mostly deal with the external environment. The main caveat is we expect operating conditions to remain similar to -- as to today's operating conditions where most of the country is opened for our type of work. And we are deemed in essential activity. So we decided to give guidance as to the why and what as outlined below. Subject to that main caveat, we're likely going to earn $5 to $5.50 diluted earnings per share this year on an adjusted basis adding back the impact of impairment. I think revenues will likely be $8.6 billion to $8.7 billion. In this revenue guidance, it is our expectation from our recent forecast, where we believe that all of our reporting segments will grow revenues in the second-half of the year versus the first-half of the year, except for our Industrial Services segment. We now understand how COVID-19 has impacted our productivity. We are seeing stabilization a small project work, and the summer heat is helping our U.S. Building Services segment, we have a strong RPO position, and we see markets recovering, especially in our mechanical, Electrical Construction segments, and in our U.S. and U.K. Building Services segments. So, how do you move up in this range largely will depend on three factors. The external marker remains largely same or even improved from today's operating environment. Under today's conditions, we can book and execute work, keep our workforce productive, and we believe we will continue to see the recovery in the small project work. You know if the Industrial Services segment folks have an opportunity to help customers in an unexpected way, then we will perform slightly better than expected, and we have no major project disruptions or any new significant customer bankruptcies. So, as far as capital allocation, the dividend is safe for the foreseeable future, however we're unlikely to make any more share repurchase in the near-term. We will look to execute accessible tuck-in acquisitions where we have decent visibility into and belief in the long-term success of the acquisition. That's really no different than any time we buy a company, and we based on the business, the market and the improvements we can make, we have several potential mechanical or Electrical Construction segment acquisitions and are in the preliminary stage of discussion on several mechanical services, a few small ones and Fire Protection acquisitions that we will likely execute. Thanks for all your support during these challenging times, and with that, I'll take questions. Lara?

Thank you, sir. [Operator Instructions] Your first question will come from the line of Brent Thielman from D.A. Davidson. Your line is now live, sir. Go ahead, please.

Good morning, Brent.

Hey, thank you. Hey, good morning. Congratulations on a great quarter.

Thanks.

Tony, on the electrical business, I think I caught this at the end, it sounds like they certainly were more impacted by some of these market disruptions. Can you just walk me through, are you expecting most of those headwinds to abate as we move into the second-half of the year as we think about the outlook?

Yes, look I think the core of our electrical business, which is commercial construction and institutional construction, and healthcare construction to continue to be fine and look like the mechanical business. In the electrical business that's a little bit different is we have a position in oil and gas. If you'll remember that's where four years ago we bought Ardent and Rabalais, it's in that segment. Ardent had a terrific year last year, and we will fight through those headwinds in the back-half of the year. Mark, anything?

Yes, and Brent, the other thing is some of the major population centers that were entirely shutdown, we have significant presence on the electrical side. Some of those markets we also have mechanical presence, but more so electrical focus and the inability to be able to have our people either report to our offices for work, or certainly report to any of our customer's locations to perform any of the services was extremely difficult in the quarter, which is why you see the revenue and margin performance.

Yes, the base business obviously is performing very well at 7.2% operating income margins, and we've had terrific performance really across the country, and like Mark said, they had to fight through the head end of shutdowns, but it will have overcome the compare on the back-half of the year in the oil and gas business.

Okay, okay, appreciate that. And then, Tony, I obviously understand the headwinds on the Industrial Services business, just wondering if you are able to use some of that manpower and capacity maybe to benefit you in other ways or in other segments, sort of through these tough times right now?

Yes, we marginally have -- look, first of all, in manpower we would use is the trade labor, and that's flexible anyway. We have used some of the trade labor to help us augment especially on the electrical side, some surging capacity we had on both the manufacturing and datacenter side, but that then normalizes. I wouldn't say to any significant manner, no.

Okay, last one, Mark the impairment, the goodwill intangibles, was that effectively all of it associated with the Industrial segment, is there still some remaining on the balance sheet?

No, there is roughly just over $100 million of goodwill remaining in the Industrial segment post the adjustment.

Okay, thank you.

Don't foresee an issue for the remainder of this year, but clearly that the business will have to continue to perform beyond 2021 to continue to support that record evaluation.

Yes, understood. All right, guys, thank you. Best of luck.

Thanks, Brent.

Thank you.

Thank you, sir. Your next question will come from the line of Adam Thalhimer from Thompson Davis. Sir, your line is now live. Go ahead, sir.

Hey, good morning guys. I would also say congrats.

Thank you.

Thanks, Adam.

Hey, just high level on the back-half embedded within the guidance, how do you guys see seasonality playing out this year? Usually Q4 is a little stronger than Q3, just curious.

Yes, I mean the headwind, I mean clearly reflected in our guidance is how we see seasonality playing out, and as I said, we see stronger second-half revenues versus first-half for our reporting segments, except for Industrial, but typically, Industrial typically has a good third quarter and even first part of fourth quarter. So, we don't see that happening this year. I think for the remaining reporting segments, as long as we sort of have the operating conditions we have now, seasonality should be about what it is. Mark, am I right?

And I think Adam the only other variable is because we certainly experienced a fair amount of delays during quarter two, as much as we are able to control the pacing of the projects that we're on. I'm not quite sure, once we get through these revenue bursts to get caught up with that's going to do in quarter four. So, not all of our projects start on January 1 and end on December 31, as I'm sure everybody in this call knows, but I think with the compression of things that have to get performed between July 1 and December 31 of 2020, you may not see seasonality consistent with what we've experienced on a historical basis.

Okay. I think I get that. So basically, you're just saying Q3, Q4 in a model and kind of the same this year.

Except for Industrial.

Except for Industrial.

Okay. And then, so on Industrial, so that we've seen that segment do in recent years as low as kind of $140 million in revenue and slight operating loss, is that kind of what you are anticipating here?

I don't know if I've seen it do $140 million in revenue…

Hey, Q3 of '17, it's a while ago on a quarterly basis.

On a quarterly basis.

On a quarterly basis.

We have taken annual.

Look, I think big picture, I think we'll make money on an EBITDA basis. We've got some goodwill and depreciation to jump over. I think profitability is going to be de-minimis on an operating income basis in the back-half of the year.

And then, so with what's going on in oil and gas right now, Tony, I mean what's your thought on 2021?

I have no idea right now. I mean one of the challenges we've had in that business over the last couple of years is the first quarter is always going to be better, right, and quite frankly, the last two have been okay. And this year was shaping up to be a good year. So, the question is going to be, let's say, we start seeing resumption of air travel, resumption of demand as you go from December, January, and February. What does that mean for refiner decision-making is maintenance. Are they going to keep running because they're finally making money again, and starting to get to better capacity utilization, or are they going to go through scheduled maintenance? Sitting here today, I don't really have any visibility on that. On the books, first quarter 2021 looks okay, but I think, boy, we're going to have to really see December before we know that.

Okay, understood. And then just lastly, I'm trying to rationalize this in my head, just the ABI kind of being as low as it has been for the past four months, but you guys talked about really strong bidding, and I just -- how do you guys look at that?

Well, first of all, we're a [laggard], [ph] right, I mean we would be bidding on projects probably more [indiscernible] with an ABI in February, March. The second thing is I think it depends where and how you're competing. I've always sort of with the ABIs wrong, right, it's consistently right or consistently wrong, it's self-reported numbers. My gut, I'm not sure how that was, if I were running my architectural firm or engineering firm in the month of April and May, I'm not sure how I reported numbers with a dispersed workforce to the -- AIA would have been at the top of my list.

Understood. All right, I'll let somebody else have that. Thanks, guys.

Thanks, Adam.

Thank you, sir. And your next question will come from the line of Noelle Dilts from Stifel. Your line is now live. Go ahead, please.

Hi, guys, good morning, and again congrats on a great performance in a tough market. So first, I just wanted to ask about how you're thinking about share gain? I've heard throughout earnings season a number of larger kind of higher quality players in the market saying that they think they may be gaining share because some of the smaller contractors may be distressed, just kind of curious how you're thinking about that phenomenon?

Yes, we never think about that. Well, it's just sort of something that has ever been on our radar screen. This is a big, big market. We are the biggest of what we do, but there is a lot of competitors out there. I never sit around and worry about who is going to succeed and who is going to fail. Contractors -- there is a wonderful thing about this business, right, when things are well, we talk about contractors overextending themselves and running into working capital problems. When things are bad, we talk about contractors taking bad work, and then failing. Here is what I've learned over a long period of time. [Indiscernible] to what you do to convey to make money on the market that's available to you to make money, grow when it's responsible to grow in that local market, shrink when you need to adjust your cost structure, and never count on your competitors making a good decision in a changing market. All that being said, I don't think there will be a lot of contractors that are sizeable that say that $15 million to $20 million contractor that will necessarily fell in this market because of the PPP loans. I think they will survive, and the question is, what does that look like a year from now?

Okay, great. That's helpful. And I guess it's sort of a related question, but I think last quarter, you kind of talked a little bit about it just being tough when you're looking at M&A opportunities, kind of trying to get a sense of where the market is going, how to think about the risk with some of the targets you might be looking at, and then also the price that was kind of being demanded at that time. Are you starting to see things come into balance, what are you just seeing in terms of pricing in the market at the moment when you are looking at some of these targets?

So, we tend to look through the cycle. We closed an acquisition today in our Building Services segment to augment and strengthen our Mechanical Services segment. It's a very good mechanicals contractor that focuses on retrofit and the interiors market. We have a pretty good service company there that we think long-term together, they'll be dynamite. Of course, we have large project capability on the mechanical side with our [indiscernible]. So this is a nice fit, and an important market with a company that we've known for a long time, and we can sort of look through the cycle and look through the market into performance, and it is performing very well. And we look at -- when we make a deal, we always try to look at a deal to say does this work for us, and does it work for the person selling the company. We don't want to be known as the people that are out there looking for a bargain, and if that acquisition exceeds our expectations, it became from superior execution, our ability to generate synergies especially on the revenue side for them to take more risks than they would have typically they have the capability that maybe they didn't want to expand their personal balance sheet to do that. I think there will be opportunities, but EMCOR in general does not look for distressed assets. We made it a few times in our past maybe we've ended up with them, but it wasn't intentional, and so, we're going to keep the tried and true thing we've done, look at the market, look at the position in the market of the person we're thinking of buying. If it's a very small acquisition, is it going to tuck into one of our larger acquisition-driven medium size acquisition to our larger subsidiaries, that's largely how we've built the fire protection business with two anchor acquisitions overtime and many, many years ago, and look to generate the right kind of synergies on the revenue side. And of course, do the cost takeout were responsible.

Thanks. That's very helpful. I guess one last question that expands a bit on what Adam was asking about. When you look out at 2021 on the non-res side of the market, you've talked about a lot of the high tech verticals and data center being really strong, and any other verticals where you're feeling kind of more confident, as you look out next year versus those where you might feel a little more cautious. And then, you spent a lot of time talking about the opportunity around indoor air quality and maybe some remodel, any way that you can help investors think about the size of that market and the opportunity?

Let's start big picture. I don't know what will happen in on non-res, and how what happened in second quarter will impact the overall numbers. You know whether it will be up or down once you correct for the second quarter. If the second quarter didn't have such an anomaly, maybe it would be down a little bit, but I don't know that, but with the second quarter being off as much, it could actually be up a little bit right on a real basis year-to-year. When I think about it, you know, what's likely to be challenged, right? I think just flat out commercial office space will be challenged except for maybe the renovation and the potential retrofit and replacement market. I don't think there will be a lot of new construction going on, although there are several projects that were involved with, I think will get built. It's funny, when I went back and looked at data, as we got rid of for the first quarter column today. We haven't been involved in a high rise commercial office building in any substantial way for four years.

Greenfield.

Yes, yes, Greenfield, yes, Mark, thanks, Greenfield. We are always doing retrofit work. We're always doing tenant fit work. So I think the Greenfield market will be more challenged. I think residential high rise was already starting to become challenged. I think that will continue to be challenged. I think anything around technology is going to do well. And that includes build office space. I don't think we're going to walk away from working in offices forever. I think it'll be a hybrid model, and that will require reconfiguration of spaces. And I'm not sure if people are going to be as excited about their open Office plans as they have in the future, because most people want to have contingency plans to operate much like we are today in our offices. I think that the healthcare market will have some stress for us potentially, as you see in our backlog, because spaces are going to be adjusted, and there're some big projects out there that we're looking at today. I think that the manufacturing/industrial for us potentially could get strong. It's going to look like an anomaly for a while, as our big food processors jobs move in and out. I think that will continue to be a market that will be strong for us. I'm actually fairly significant believer in onshore, and I think we're starting to see that happen. We've seen it over the last couple years, but I think it's not only going to be from China back to the U.S. I think there will be a challenge for Mexico to attract new business, and people build redundant supply here in the U.S. versus Mexico, because the [Maquiladora] [ph] story was a tough story. We hear from some of our customers and supply lines here in the second quarter with COVID, and they found how difficult it could be operate with the current government. I think that the institutional market will be a little bit slower than I think it will pick up as buildings get reconfigured. And in the education market, again, you're going to have to think about IAQ, IAQ then drive efficiency. And so this whole replacement market where we support, we do a little bit ourselves in a couple states, but for the most part, we support the heck out of the performance contractors. They could in fact see an uptick in their business late '21 going into '22. I think water and wastewater will continue to be a good market for us mainly because of we have location, location, location, a lot going on down in South Florida, and will be part of that. I don't think that hospitality will be a real area of strength for anybody here anytime soon. In fact, we can argue here at EMCOR we maybe just start blending out with our commercial sector. We just leave it off there for comparison sake. Is that helpful?

Perfect. Yes. Thank you very much. Appreciate it.

Thank you.

Thank you.

Your next question will come from the line of Sean Eastman from KeyBanc Capital Markets. Your line is now live. Go ahead please.

Hi, guys, compliment your team on a strong effort and solid quarter. I was just curious I think one of the highlights here in the second quarter is just that RPO picking up sequentially considering this backdrop here, but I guess part of that is kind of helped by a lighter revenue quarter, and you're anticipating the revenue run rate to pick up here in the back-half. So I'm just kind of wondering about that second-half dynamic, you know, should we expect some RPO to sort of work down in the second-half. How should we be thinking about that?

I'll let Mark jump in here too. Where I look at it is, it depends. We have several projects we're looking at that they get awarded in a rather significant, than you won't see that. We've also seen more stability in the small project activity. That is now part of our RPOs, so you'll look back many years that wouldn't have been necessarily in there.

I think one of the things that will be a little bit of a headwind is we're completing one heck of a food process job right now, and much like we had three years ago, we had a little gap. We may have that again now. We have some very good prospects there. I think that book and build business underneath it is okay.

Could there be an air pocket to develop because of decision-making in April, May tying back to this ABI number when architecture and engineers were working remotely?

Yes, that could happen, but I don't think it's long-term yet. Our working assumption with EMCOR has been for a while that things don't get really normal until first quarter of '21, and we've been sort of configuring our business and working that way for a while. So, we're sort of looking around all those pieces. Mark?

Yes. So, on the only thing I would add to Tony is -- amplified from Tony's commentary is that some of the revenue improvement we're looking at in the back-half of the year is going to be coming from the project work that's going to come off the maintenance because of the season -- the more normal seasonality and while that we are saying, and most of the geographies where we have mechanical services capabilities. And as Tony indicated, a lot of that work actually never actually goes into RPOs, just one of the quick turn nature of it. Conversely because we're looking at revenue to decline from the back-half for the year within our Industrial Services segment, other than the shop piece of that business as you know. That's all our workers time and material, so I never actually impacted the RPO number. So I'm not necessarily convinced that you're going to see the same level of sequential growth. As we move to the third quarter, but I think with all of the opportunities out there and what we are executing again. I would like to say there's going to be no worse than flat, it's not slightly either as we progress through quarter three and quarter four, and putting aside some of those larger projects when we talk about depending on the timing of one, if they are awarded and if they are awarded just when they come in to the next spot.

Okay, got it, helpful. Next is just on the Construction segment margins, it's interesting to see both of them hanging in pretty well here particularly mechanical, the second quarter, just any update on the margin trajectory in those segments, you guys mentioned mix, completing projects, cost controls and a big thing here in the near-term, any reason why these levels aren't sort of sustainable or whether they are normalized margin ranges shouldn't be attainable, even into out year, even…

I would go to latter, not the former. I don't think 8.5% mechanical margin is sustainable for extended period of time. I think, we've had these in the past where they jump in and out, we always say look back 12 months, and that gives you every three or four quarters, it gives you a pretty good idea, how we're performing. We've said for a long time anywhere from 6% to 7.5% mechanically is pretty good performance. I guess we ticked that up to 6.5% mechanically, which is pretty good as a baseline to seven. Anyhow maybe 7.5%, we are finishing jobs. These are going better than expected. Electrically, we've been performing at these levels for a long time, those sectors are led by people that really know how to cut cost when they need to, not, how to meter back in the cost, a lot of it happens upfront, right? We don't have big write-offs typically, may be we have them every three or four years. Usually, most of it's not our fault, and we do a pretty good job recovery sometimes. A third at any given time might be our fault, and so, we do a good job, avoiding badness. I always say margins are driven by and absence of that is an executing or good work when you have it. So that funnel upfront is very important and we have been very careful right now, on the kind of job we're selecting, and at the beginning of this COVID thing, people were like getting a little desperate, we then participate, and we've seen more normal fitting resume. So yes, longwinded answer to normalize margins, these are a little high right now for mechanical, but you know, I look back 12 months we are doing okay. Mark?

Yes. I think, I see no reason that we are not going to continue to perform at our historical averages and they are really, if you even look at the last 36 months relative to our construction operations on a combined basis. They've been fairly consistent within 50 basis points. So the work that's remaining to be performed in our remaining performance obligations as margin profiles consistent with what you've seen us on, and we were going to continue to operate under our operational excellence program and continue to do what's best for a customer, so…

Yes, we didn't believe that, we would have put the guidance out that we did, right, I mean, and our major question mark in the back-half of the year really centers around Industrial, and maybe to a much lesser extent, as small project work, and Mark went through why we believe that will keep going at much lesser extent than what could happen with small project only because it's the valve they can turn on and off. Not anything we are actually seeing today. Just if things are really bad like that they did in April that valve we will turn off again. And we said that in our guidance, that's one of the caveats.

Got it. I will leave it there. Thanks so much for the time. Really appreciate it.

Thank you.

Thank you so much. And for your last question, we have one from Joe Mondillo from Sidoti & Company. Your line is now live. So, go ahead please.

Hey, Joe.

Hi, good morning everyone. Sorry, I got dropped off the call for about four minutes maybe just a little just a couple minutes ago. I am not sure what happened, but I wanted to ask about sort of the COVID-related opportunity in terms of air quality and work there. I know it's probably still early, but I am wondering what your thoughts are on how big off an opportunity that could be in terms of retrofit buildings for air quality.

Yes, I would break it into two pieces, Joe. The first piece is what you are doing today to take existing systems and making more friendly for better indoor environment. I think when you add all that up at EMCOR, it will be a nice project, it will be a -- altogether, it will be a sort of $12 million to $20 million project with above average margins. These things are going to happen somewhere between $2 and $10,000 at a time, maybe $20 at the top under typical 100,000 square foot of space. That's sort of what they are. However, the longer term opportunity is okay, we need what we needed to do with the system we had. Now, how do we make sure that we have a better built space for the long-term? We do a lot of this on newer building. So, you are going to have to update the HVAC system and the control system because IAQ for the most part -- the biggest part of it is bringing in more outside air. I mean that's the first thing you could do, and it's actually one of the most effective things you can do. That works across purposes with efficiency. So, I believe that as you play this out over a two-year period, you are going to see the replacement market get stronger going from in the middle '21 and beyond. And it's already a pretty good replacement market because equipment is so much more variable and efficient today than it was even just 10 years ago. So, I think that's a second phase you will see. And then, I think of course, there will be added HVAC content and controls content in new builds. We are already seeing that, but you will see even more of that, and any of you, if you can go to a specific case, I think when you get to the healthcare space, now that we have had this issue around ICU beds, where ICUs are in general are built to operate [indiscernible] 90% of the capacity all the time. They are very expensive. So, I think as you build new hospitals and retrofit hospitals, I think you are going to be putting in the ability to flex into more ICU space. And so, how do you do that? You introduce negative pressure, right, which creates negative pressure than ICU room. You will put the more the systems into a room and they may or not be used until you need them. So that's going to be an opportunity that's going to happen. So, IAQ is a simple thing to say, it takes all kind of different flavors; existing, today, immediate, I can do things. I can put UV lights on. I can do enhanced filtering. I can do bipolar ionization. I can increase the airflow from outside. Long-term, I can do all kind of things with a system. Those things and more, but they could be actually built in into the system. In the longer term, how do I make my space as flexible as I can either in industrial setting and office setting, or in healthcare setting, so I can adjust between different kinds of uses depending on something like this potentially happening again.

Okay. And so I guess when you take this sort of the -- the knit the opportunities together, how you characterize them is your best guess that's going to be more material, more in the longer terms in the mid '21 and beyond?

Yes I think '21, it'll add on to an already good summer. I mean in '20.

Okay.

I think as you get mid '21 and beyond and things start getting incorporated designed, it will be more material. You won't necessarily see. You will just know you are doing more HVAC [count] [ph] in a building, or you'll see a more rapid replacement cycle. Things get replaced to 10 or 12 years instead of 15 to 20.

Got it. And then, I wanted to ask regarding the cost structure, was there anything - any temporary cost reductions in the second quarter that come back say starting in 3Q regardless of revenue?

Yes, about half it will. In my commentary, I said I think about half of these cost reductions will be permanent.

And did you quantify the cost reductions?

Yes, we did. We said $21 million actual versus the year-ago period, $28 million organic. So, I think if you do that, you would say we are picking up about $10 million a quarter give or take in ongoing cost reduction.

Got it, okay. And then, the RPOs that mechanical segment and then just one other question after this, but the RPOs there really strong, is that surprising just given the challenge in the second quarter just with the overall economy? And then also slowing non-rent space overall, or…

No, that was -- look, [everything] [ph] is slowing in our res space, if you have the right capability in the right market via larger contractors you can generate a positive result on your RPOs because of large projects. That is in fact what happened with our larger companies in the mechanical space. We have two or three of them that really had nice bookings in the quarter.

Okay. And then lastly from me, did I hear right that you said you do not expect any further share repurchases for the rest of the year?

I didn't say the rest of the year. I said in the near term and that probably for us means Q3 as of today.

Okay, got it. All right, thanks a lot for taking the questions.

We expect - look along those lines, if you take our long-term view of the world and we get into a more normalized operating condition, we expect to be a balanced capital allocator like we have always have been.

Thanks a lot. Have a great day.

Thank you, Joe.

Thank you so much. And that's it for your last question. I will turn the call back to the presenters for the closing remarks.

Okay. Look, as I finish today, I really want to thank our employees and then the leaders of the -- of our associates and our employees. This has been an unprecedented four or five months here. And everybody has just put their head down, gone to work, kept focus on our employee safety, kept focus on doing right things by our employees first the best that we could, and then focused on delivering results for our customers and keeping things on track. It's been a terrific effort by our leadership team and has been very, very exceptional effort for our broader employee base. I think this is going to continue for the next four or five months, and I know that our team will meet the challenge and we will respond to what we need to respond to keep the organization moving forward in a positive manner. So, I am going to thank all of them first and thank our customers and of course our investors also. And we will continue to try and do everything we can to deliver good results for you. With that, thanks.

Thank you so much. And again, thank you everyone for participating. This concludes today's conference. You may now disconnect. Stay safe and have a lovely day.