EMCOR Group Inc (EME) 2016 Q2 法說會逐字稿

Good morning. My name is Angela and I will your conference operator today. At this time I would like to welcome everyone to the EMCOR Group's second-quarter 2016 earnings call. (Operator Instructions) Mr. Max Dutcher, with FTI Consulting, you may begin.

Thank you, Angela. And good morning, everyone. Welcome to the EMCOR Group's conference call. We are here today to discuss the Company's 2016 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, Max. And good morning, everyone. Welcome to EMCOR Group's earnings conference call for the second quarter of 2016. For those of you who are accessing the call via the Internet and our website, welcome to you as well. And we hope you have arrived at the beginning of our slide presentation that will accompany the remarks today. We are on slide 2.

Slide 2 depicts the executives who are with me to discuss the quarter and six months results. They are Tony Guzzi, President and Chief Operating Officer; Mark Pompa, our Executive Vice President and Chief Financial Officer; Maxine Mauricio, our Senior Vice President and General Counsel; and our Vice President of Marketing and Communications, Mava Heffler. Or call participants not accessing the conference call event today, this presentation including the slides will be archived in the Investor Relations section of our website under Presentations. You can find us at EMCOR Group.com.

Before we begin, I want to remind you that such discussion may contain certain forward-looking statements. Any such statements are based upon information available to EMCOR's management's perception as of this date, and EMCOR assumes no obligation to update any forward-looking statements.

These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance. Such risks and uncertainties include but are not limited to adverse effects of general economic conditions, changes in the political environment, changes in the specific market for EMCOR services, adverse business conditions, increased competition, mix of business and risks associated with foreign operations. Certain of the risk factors associated with EMCOR's are also discussed in the Company's 2015 Form 10-K and in other reports filed from time to time with the Securities and Exchange Commission.

Now with that said, please let me turn the call over to Tony Guzzi. Tony?

Good morning. Thanks, Kevin.

I'm going to be speaking to pages 3 and 4 of the presentations. Look, this was a record-setting second quarter for EMCOR and one of our best ever overall. And really what this quarter highlights is the strength and diversity of our underlying business, even when facing headwinds.

I'm going to be speaking to pro forma numbers which remove our transaction expenses from the Ardent transaction. We set second-quarter records for revenues, operating income, net income and earnings per share. We also had a very good cash flow quarter. We earned $0.95 per diluted share from continuing operations, excluding transaction costs, on revenues of $1.93 billion. We had revenue growth of 17% with 12.3% organic revenue growth.

Our results were powered by exceptional performance in our industrial segment, good performance in our overall construction business in segments, despite the headwind from a transportation infrastructure job and solid performance in both our Building Services and UK segments.

I'm going to now spend a little time in each one of the segments. Clearly, our industrial business segment performed exceptionally well, despite the previously discussed headwind in our shop businesses. Our 48% revenue growth and 98% operating income growth were driven by exceptional performance in our field businesses, led by demand for our specialty services and an extended turnaround season into Q2 versus the prior year.

What happened is customers needed our specialty services on critical and significant projects, and we were and are able to find the right resources, that is, skilled labor, supervision and equipment to help them solve some tough problems.

It is always hard to predict when these events happen or how long they will sustain. But what we do know is we are better positioned than anybody to help customers in these large and significant events. We can do this at EMCOR as we have not only the financial resources to fund the working capital for a surge in demand but, quite frankly, we attract the best skilled labor and supervision to complete the task.

Another underlying trend in our business or not even trend, but we expected a certain level of performance in our shop businesses through the first half of the year and the quarter, and we did a little better than that, although still below prior year. And really what happened is our repair activity in the shops was better than our expectations but, again, was below actual prior-year performance when you take OEM with repair combined.

What all this has allowed us to do in the industrial segment is perform well in what is a choppy market. The other thing we have done is we have expanded our offerings to the broader petrochemicals space and we have had some pretty good success at that. In fact, that's a lot of place where the outperformance came from.

Overall, it's great execution by this team in the most challenging of circumstances.

When you look at our construction segments combined, and that's really how we run them, but when you look at them combined, we performed well on a combined basis with 9.8% organic growth and 6.2% operating profit growth. Our mechanical segment drove this success with 18% operating profit growth and 11.2% organic revenue growth.

Our electrical segment performed well except for one job nearing completion in Northeast transportation market. Now, we were able to withstand a $10.5 million write-down on this job and still earned 5.5% operating income margins in our electrical segment.

That tells you the underlying strength of the overall segment, despite that large job loss.

The other thing that's happening in the electrical segment of our construction business is the integration of Ardent is on track and they are settling in as they focus on running the business versus selling the business. Business Building Services -- the segment rebounded in the quarter with both revenue and operating profit growth. Our mechanical services business had a very good quarter and continues to build backlog, and we are seeing especially strong demand for our retrofit and replacement businesses.

We can drive real and tangible energy savings for our customers through our retrofit and replacement businesses. And we are a leader there.

Our commercial site-based business has steady performance. Our government business did have headwinds, primarily from lower ID/IQ spending.

The UK performed well and we have a steady contributing business in the UK, which has a very strong market position, especially serving customers with mission-critical facilities.

Backlog grew from the year-ago period by 5.1% and we had a very strong book to bill, 0.98, despite record revenue quarter. Backlog is at now $3.81 billion versus the year-ago period of $3.62 billion. Cash flow was strong at $84 million, so overall a pretty darn good quarter and really sets us up well for the rest of the year.

And with that I'll turn it over to Mark.

Thank you, Tony. And good morning to everyone participating on the call. For those accessing this presentation via the webcast, we are now on slide 6.

As Tony indicated in his own commentary, I will provide a more detailed discussion of our second-quarter 2016 results before covering key financial data derived from our consolidated financial statements included in both our earnings release announcement and Form 10-Q filed with the Securities and Exchange Commission earlier today.

So let's cover our second-quarter performance in a little bit more detail. Consolidated revenues of $1.93 billion are up $280.8 million or 17% over quarter 2, 2015. All reportable segments are reporting increased revenues quarter over quarter, other than our UK Building Services segment, which experienced significant headwinds from the weekend British pound, exacerbated by the Brexit vote.

Revenues attributable to businesses acquired pertaining to the period of time that such businesses were not owned by EMCOR in last year's second quarter impacted the current year's quarter by $77.4 million and positively impacted our US electrical construction, US mechanical construction and US Building Services segments.

Excluding the impact of businesses acquired, second-quarter revenues grew organically $203.5 million or 12.3%. US electrical construction revenues of $420.6 million increased $74.4 million or 21.5% from quarter 2, 2015. Excluding acquisitions, this segment's revenues grew $26.1 million or 7.6% organically.

Revenue growth was largely driven by project activity within the commercial, transportation, industrial and hospitality market sectors, offset by quarter-over-quarter revenue declines within the healthcare, water and institutional market sectors.

US mechanical construction second-quarter revenues of $629.9 million increased 75.9 million or 13.7%. Excluding edition revenues of $14 million, this segment grew organically 11.2%. Consistent with the revenue trends within this segment during the last two quarters, revenue growth was broad-based from a market sector perspective with the industrial, water and hospitality market sectors contributing the largest dollar revenue growth quarter over quarter.

This is our third consecutive quarter of double-digit revenue growth within the mechanical construction segment as well as our fourth consecutive quarter of sequential backlog growth, which foreshadows continuing strong performance from this segment.

EMCOR's total domestic construction business second-quarter revenues of $1.1 billion increased $150.3 million or 16.7% with 9.8% being generated from organic revenue growth. US Building Services quarterly revenues of $458.8 million increased $23.2 million or 5.3%. Excluding acquisition revenues of $15.1 million, this segment grew organically 1.9%.

Revenue gains within the mechanical services and commercial site-based services divisions were somewhat diminished by reduced revenue levels in the government services group due to maintenance contract attrition as well as lower indefinite duration/indefinite quality project lines.

US Industrial Services revenues of $333.5 million increased $108.3 million or 48.1%, due to increased field services activities as we experienced an extended spring turnaround season as well as strong demand for some of our specialty services. Additionally, this segment was still experiencing significant headwinds during 2015's second quarter, due to the impact of the nationwide refinery operator strike.

This very strong second-quarter revenue performance was somewhat muted by continued soft demand for our shop services, due to a lack of capital spending by our customers, given uncertainty and volatility in crude oil prices.

United Kingdom Building Services revenues of $90.6 million decreased $1 million or 1.1%, due to the headwind of the weakening British pound, resulting in a quarter-over-quarter unfavorable exchange rate impact of $6.2 million.

Finally, it is worth noting that our consolidated second quarter of 2016 revenues of $1.93 billion surpassed our previously established revenue record for any quarterly reporting period, which we achieved in 2015's fourth quarter.

Please turn to slide 7.

Selling, general and administrative expenses of $181.8 million represent 9.4% of revenues and an increase of $20.4 million from quarter 2, 2015. As a percentage of revenues, the current-year quarter declined 40 basis points from the 9.8% reported last year. The second quarter includes $9.3 million of incremental SG&A, inclusive of intangible asset amortization from businesses acquired pertaining to the period of time that such businesses were not owned by EMCOR in last year's second quarter.

Additionally, our second quarter includes $2.8 million of transaction expenses in connection with our acquisition of Ardent and Rabalais. Therefore, our quarterly organic SG&A increases approximately $8.4 million and is primarily due to increased employment costs as a result of higher headcount and increased accruals for certain of our incentive competition programs, due to higher projected annual results than at the same period ended 2015.

The other significant component of the increase in SG&A is additional bad debt expense within our US Industrial Services and US Building Services segments. Despite such SG&A increases, we were able to reduce our SG&A as a percentage of revenues by effectively leveraging our overhead structure in the period of strong organic revenue growth.

Reported operating income for the quarter of $92.3 million represents 4.8% of revenues in comparison to $77.7 million and 4.7% in 2015's second quarter.

Our US electrical construction services segment operating income of $23 million decreased $2.3 million from the comparable 2015 period. Reported quarterly operating margin is 5.5%, which is 180 basis points lower than 2015's second quarter. The decrease in both operating income and operating margin is due to a $10.5 million loss that Tony referenced that was incurred on the transportation construction project in the Northeast as a result of productivity issues attributable to unfavorable jobsite conditions.

As I'm sure most of you remember, this segment also experienced losses on certain transportation projects during the first quarter of this year.

The unfavorable activity in this quarter is unrelated to those projects addressed during quarter 1. Although we are disappointed to have had several quarters of unfavorable project performance reducing this segment's ability during both 2016 and 2015, we are encouraged by the sequential improvement in operating profit and corresponding margin, and we will seek to recover for such losses incurred.

The impact of the loss in this segment's quarterly operating margin is a negative 230 basis points and is masking strong performance from most of our other electrical construction operations, inclusive of our recent Ardent/Rabalais acquisition.

2017's second-quarter US mechanical construction and services segment operating income of $38.2 million represents a $5.8 million increase from last year's quarter. This represents an 18% improvement quarter over quarter, primarily due to increased gross profit contributions from projects within the industrial, commercial, healthcare and hospitality market sectors.

Additionally, this segment benefited from a $2 million claim settlement during the quarter, which was the primary reason for the 30-basis-point increase in operating margin. Our total US construction business is reporting a 5.8% margin for the quarter just ended, as compared to 6.4% on last year's second quarter.

Operating income for US building services increased approximately $400,000 to $18.3 million or 4% of revenues. The improvement in quarter-over-quarter operating income is due to the acquisition of the business within this segment's mechanical services division, which offset reduced operating income and operating margin contribution from the government services division.

Our US industrial services segment operating income of $33.1 million increased $15.7 million or approximately 90% compared to 2015's second quarter with an operating margin of 9.9% or 220 basis points higher than last year's 7.7% operating margin. The quarter-over-quarter improvement is attributable to higher turnaround activities, due to an extended spring turnaround season as well as increased gross profit from our specialty service offerings within our field service division.

This positive performance was able to offset the continued headwinds experienced within our shop services operations.

UK Building Services operating income of $3.3 million represents 3.6% of revenues, which is an increase of approximately $400,000 and is a 50-basis-point improvement over last year's second quarter. The impact on consolidated operating margin of the previously mentioned loss incurred during the quarter within our US electrical construction services segment is a negative 50 basis points.

Lastly, on this slide we had a strong operating cash flow quarter with cash provided by operations of $84.9 million as compared to $11.8 million on last year's second quarter.

We are now on slide 8. Additional key financial data on this slide not addressed during my highlights summary are as follows.

Quarter 2 gross profit of $274.7 million represents 14.2% of revenues, which is improved from the comparable 2015 quarter by $35.2 million. The quarter-over-quarter reduction in gross margin was driven by margin compression due to revenue mix within our US mechanical construction and US industrial services segments.

Additionally, our gross margin was negatively impacted by the loss incurred on the transportation project in US electrical construction, which was previously referenced.

Total restructuring costs were $641,000 as compared to $433,000 and were related to activities in our US mechanical construction and US building services segments.

Diluted earnings per common share from continuing operations is $0.92 and compares to $0.74 for the quarter ended June 30, 2015. On an adjusted basis, reflecting the add back of transaction costs, diluted earnings per common share from continuing operations would have been $0.95 for 2016, and represents a quarter-over-quarter improvement of 28.4%.

Lastly, as Tony previously mentioned, and I have mentioned probably about 10 minutes ago, it is worth noting again that the results of our operations for the second quarter of 2016 set new Company records for a quarter regards to consolidated revenues as well as new second-quarter records for operating income and diluted earnings per common share from continued operations. Overall, I'd say a pretty good quarter.

Please turn to slide 9. Let's turn our attention now to our results for the first six months of the year.

Revenues of $3.68 billion represent an increase of $436.6 million or 13.5% as compared to $3.24 billion in the prior-year period. All reportable segments are reporting organic revenue growth year over year except our UK building services segment, consistent with the performance in the quarter, which experienced an $11.3 million headwind due to the weakening of the British pound for the reason I, obviously, previously referenced.

Year-to-date gross profit of $497.8 million is greater than the representative 2015 period by $41.4 million or 9.1%. However, our gross margin of 13.5% is 60 basis points lower year-over-year, primarily due to the transportation construction project write-downs in both quarters of this year.

Additionally, a change in revenue mix within our industrial services segment due to the curtailment in capital spending in most months of the integrated oil companies has resulted in significantly less shop services opportunities, which have historically generated the highest gross profit margins within that segment.

Selling, general and administrative expenses of $349.2 million represent 9.5% of revenues compared to $323 million or 10% of revenues in 2015. Our SG&A as a percentage of revenues is down sequentially from quarter 1 by 10 basis points and on an adjusted basis removing our year-to-date acquisition-related transaction expenses of $3.8 million could be 60 basis points less than the corresponding six-month 2015 period.

Restructuring activity has slightly increased from 2015 levels as we continue to adjust our cost structure as a result of streamlining certain processes to achieve both productivity and efficiency improvements.

Year-to-date operating income is $147.9 million or 4% of revenues and represents a $14.9 million increase over 2015's year-to-date performance. 2016's operating margin is reduced by 10 basis points. However, after adding back the $3.8 million of transaction costs associated with the acquisition of Ardent and Rabalais, operating margin would have been essentially flat year-over-year.

Our strong first-half operating performance within the US industrial services and US mechanical construction was muted by reduced year-to-date operating income within both our US building services and US electrical construction services segments. US building services' improved quarter 2 performance was not enough to offset their slow first-quarter of 2016 due to both the less favorable mix and a lack of snow in those geographies where we were contracted for snow removal on an event basis.

Our US electrical construction services year-to-date operating income and operating margin performance was hindered by the losses recorded on the transportation projects that I mentioned, where we had charges reported in each of the first two quarters of this year. The impact on consolidated operating margin of the previously mentioned transportation construction losses incurred during the year within our US electrical construction services segment is a -40 basis points.

Diluted earnings per common share from continuing operations is $1.48 for the six months ended June 30, 2016, compared to $1.26 in the corresponding six-month 2015 period. On an adjusted basis reflecting the addback of transaction costs, diluted earnings per common share from continuing operations would have been $1.52 per share for 2016 and represents an improvement of 20.6% year-over-year.

We are now on slide 10. Tony touched upon the strength in liquidity of EMCOR's balance sheet during his opening commentary, and it's pretty evident when you look at this page. Our cash is reduced from year-end 2015, primarily due to our year-to-date share repurchase activity and funding of dividends paid. Working capital levels have improved, due to an increase in accounts receivable, given our organic revenue growth, as well as the result of reduced levels of accounts payable and accrued expenses, partially driven by a decrease in taxes payable at the end of June as compared to the end of December.

Changes in goodwill and identifiable intangible asset balances reflect the impact of acquisitions made during 2016, net of $20 million of year-to-date intangible asset amortization expense. With regard to anticipated intangible asset amortization expense for the second half of 2016 and full-year 2017, I anticipate $20.9 million and $39.2 million, respectfully.

These amounts may change as we finalize the purchase price allocation for our 2016 acquisitions or if we are successful in adding additional businesses to our Company.

Total debt of $527.2 million represents a net increase of $212.1 million from year-end 2015, due to funds drawn against the revolving credit facility to facilitate our closing of the Ardent/Rabalais acquisition in April, which I referenced during our quarter 1 earnings call. As a result of our additional borrowings, we currently have a debt to capitalization ratio of 25.5%.

We are happy with where our balance sheet currently stands and extremely happy with our excellent cash flow conversion during a six-month period of very strong revenue growth. Our leverage profile has increased; however, we are still comfortable as we maintain significant availability under our credit facility. I believe that we remain well-positioned to take advantage of all opportunities that may present themselves in the future.

With my prepared commentary concluded, I will return the microphone to Tony. Tony?

Thanks, Mark. You deserve a drink of water after all that.

I'm on page 11 now and I'm going to backlog by market sector. Mark covered some of this when he talked about the revenue trends, and it comes pretty much on top of that. Second-quarter backlog is $3.81 billion, up $187 million or 5.2% from June 2015 and $40 million from December 31, despite strong revenue growth we've had. What you are really seeing in our backlog is that our construction segments are what is growing. And really, they comprise 75% of our total backlog anyway.

When you start to look at the market sectors, we are basically following the census data where it's year-to-date. Our backlog is growing on the private side right now and it shrunk a little bit on the institutional side, which fits right in line with the construction census data through May 2016.

And one of the things I think we look for is that our momentum in the market, and the reality is there is momentum in the market. [Dog shows] a little bit of momentum. This AVI data shows a little bit of momentum, and so does the construction data, which is more of a backward looking metric.

All of them are in line of what we've said over the last couple of years is a single-digit market grower, mid-single digit market grower for us. We certainly see that from the back half of 2016 and we think it goes into 2017. We really can't see much further than that.

We do see mid-single digits, and really if we can grow mid-single digits, that gives EMCOR plenty of market to operate in and find the right opportunities.

And with that I'll switch to page 12 and talk a little bit to the segments.

There's really not a lot new here. Our construction segments are growing. Our building services are now seeing growth, especially in the mechanical services business. The construction is very strong, up $225 million or just under 15%. And we expect that; we expect to outgrow the market when the market is a little better. And it will come in fits and starts and it's more of a sawtooth pattern.

But we have good underlying momentum in the business. And when you look at the industrial services, remind you that's just the shop backlog, it's at $59 million, which is basically flat from year end, down 30% from a year ago. Our pricing remains tough in this new build heat exchanger market. We don't see that ending anytime soon.

We think a recovery in that market at least 12 to 24 months away. But we do see good business in our repair business, which would not be in this backlog. And of course, none of our turnaround activity for our specialty services would be on this backlog.

So the next question is, okay, how is bidding activity? Bidding activity is okay. It's pretty good. We are seeing -- and we are winning our share of work across multiple market segments in this single-digit market. We are seeing attractive opportunities.

The next question is, how are bidding margins? Bidding margins are okay. They have not returned to the levels they were at in 2007 and 2008. And the reality is we don't think they are likely to return to those prerecession levels anytime in the next six to 12 months.

When you think about non-res overall, somewhere in 2017, end of the year, or early 2018 we will finally get back to where we were in 2007. And you could say it took us 10 years to get back to where we were. So that's why we think there's still a little bit of growth left in this, in the mid-single-digit range.

And now for the all-important what are you going to do with the rest of the year -- we started the year pretty good here. And I'm on page 13 and 14. We are going to move our guidance based on our strong year-to-date performance and our outlook for the remainder of the year.

We now expect to achieve around $7.4 billion in revenues and we are going to move the low end of our range from $2.75 to $2.90, and the high end of the range from $3 to $3.10 per diluted share from continuing operations. And what that does, it excludes the transaction costs from the acquisition of Ardent and Rabalais.

With this guidance, we are implying a pretty good second half. And we see that as of today. And we do expect our industrial segment to continue to perform well but probably not at the really great level or superb level that it performed in the first half of the year.

So, how do you get to the high end of the range here at EMCOR? Well, we need a good fall turnaround season. And sitting here today, we expect a good fall turnaround season. We need continued strength in our specialty services to get to the top end, and we are executing very well in some difficult large projects right now. What's hard to predict is how long they go and what will be the incremental impact as you go out, especially as you get out into the end of third and fourth quarter.

We do need continued strength in our construction operations and we expect to have continued strength in our construction operations. We do think the market could slow a little bit, but we still think we have a pretty good market to operate in. And we expect continued improving performance in both our UK and building services businesses. We do expect to generate cash to net income for the year, and we expect our balance sheet to strength as the year progresses.

We have executed two very nice transactions this year. And we remain interested in adding transactions like that on any day. They had to our geographical reach and our capability in any one of our segments. We will continue to return cash to shareholders through buybacks and dividends but look for buybacks to be the primary return of capital to shareholders from us over the next 12 to 24 months.

And with that, Angela, the team is happy to take questions from anybody on the call.

(Operator Instructions) John Rogers, D.A. Davidson.

Congratulations on the great quarter. Just a couple of things -- in terms of transportation projects that you've taken the hit song both first quarter and second quarter, how much work is left to do on those projects? And as you finish them off, will that dilute margins?

The first quarter write-downs -- they will be essentially complete here in the third quarter. On the write-down this quarter, that should be finished by year end with the bulk of activity likely to take place by the end of third quarter. As far as diluting margins, Mark, they will continue to drag. But the bulk of the revenue on the first two are behind us. And the one this quarter is particularly difficult. We should move to a big chunk of completion here by the end of third quarter.

Okay. I'm just trying to back out the -- what did you say, $10 million charge on that project?

It cost us 230 basis points in the quarter.

It's $10.5 million charge in quarter 2.

And it really shows you, John, the rest of the electrical business is operating at very significant operating margins and performing very well.

Yes, okay. And then in terms of the turnaround [pivoting], Tony, you referenced some large projects that you were working on during the quarter. And I know it's a tough business to predict.

But were those just standard turnarounds? Can you give us a little more color on the type of work that it was?

Yes. It was in the broader petrochemicals space. It was not standard turnaround work. What it was was really helping people complete significant capital projects where they needed the skill and expertise of some of our welders and pipe fitters and boilermakers to finish that work in a timely manner.

Okay. But you don't see much visibility for that continuing into the second half? Is that what you are saying? Because it seems like there's a lot of market activity there.

We think some of it will continue into the second half. Understand, our specialty services -- they call us when they need very highly skilled people if the timelines are not being met. So the visibility gets tougher. So we need to really marshal significant resources in the short period of time. And so we, at best, get four- to six-week lead times on that. That's at most.

Okay, okay. And then just lastly, Tony, I know your third quarter typically seasonally tips. But your fourth quarters are often your best quarters, but you are not calling for that this year, at least backing into the guidance?

Yes, I think the strength of our industrial first half makes it difficult for us to see typical patterns in our business right now. I would say that in our construction segments we will follow more typical pattern, especially in light of this $10.5 million write-down in the quarter.

In our industrial segment, because of the nature of the work we did in the first half of the year and the extended turnaround seasons into Q2, it becomes more problematic for us to look at it that way. And we think building services will eventually improve in UK, but it's very difficult because of that. And we are going to know a lot more in October, obviously. The [fear] is almost over that; right?

Sure. Okay. Well, congratulations again. Thanks.

Noelle Dilts, Stifel.

Congratulations on a really nice quarter. So just expanding a little bit on John's line of questioning there, so you talk about seeing good fall turnaround. It kind of sounds, based on what we've heard from some others, that maybe that's a little bit more optimistic than what your peers are expecting.

So, would you say it's true that you are maybe outperforming the refinery services market as a whole? And then, what you say, it's just a function of your client exposure? Do you think there's some share gains going on? Can you just give us some thoughts there?

One thing I've learned over the last nine years of being in the refinery services and petrochemicals is I've learned to worry a lot more about what we're doing and how we are serving our customers versus what our peers are saying because they are all over the place. Here's what we know.

We know that generally we have formed the market now for about four years, especially the last three, on organic revenue growth. We also know that we are able to really marshal some critical resources at critical times with some of the best supervision and trades people in the business. And really, when we acquired RepconStrickland and you start to look at the 2014, 2015 and now 2016 results, that really brought us to critical mass of some of these skilled operators.

We also know that our broad range of capabilities allows us to serve customers in a much more holistic way. And all of that is supported by a balance sheet that can fund significant surges in working capital. We also know that expanding beyond just the refinery services market into the broader petrochemicals and industrials space has served us well in that segment and put us all together has allowed us to perform as we have.

Now, we also know is depending on having customers trust you and giving you expanded scope. And I think that, under an underlying trend, that has happened with us. We are performing some of the biggest turnarounds we've had, not only in the first half of this year but also in the second half of this year.

Okay, that's helpful. And I know this is early. How are you thinking about 2017 on the refinery and petrochemicals services side at this point? For a couple of years now we have been hearing refineries have been deferring work, and I know you guys don't necessarily think that's happening. But do you see 2017 as a growth year?

You know, initial planning would say that it's going to be an okay year, pretty good. And that can change.

But actually what we are thinking may happen -- and look, these guys make hay when they can, when they are running these refineries. Our folks that technically really know this stuff don't think these utilization rates are sustainable. And so, eventually more maintenance is going to need to be done, although we have been happy with the amount of maintenance that has been done last year and a half with our book of business.

It would seem that really with the gasoline stocks building somewhere in the fourth and first quarter and switching earlier to winter blend, you may see the opportunity here for an expanded maintenance season. But we really won't know that until we do our third-quarter call. We will have much better visibility on it then.

Now, what we are hoping that can do for us and no clear site is it will allow our shops to increase its repair volume. And that could be a good thing for us because not only drives that repair volume, because it drives better absorption of our overhead in the shops.

Right. Okay, that makes sense. Last question -- you know, it's -- I've been looking at the Association of General Contractors labor statistics and some of the general labor statistics in construction. And it does look like, in general, the industry is facing some tightness on the labor side.

Can you comment on that and if you are seeing that in any of your construction-oriented businesses?

The answer to that is yes. We are blessed to be able to attract really good flavor. How we see that is a little -- in different ways. We see people trying to get us to commit to be part of their teams much earlier, as they realize they need the right option instead of just the cheapest option. And they worry about people's ability to get resources.

We also see it in maybe contractual terms. One quarter doesn't make a trend, right, Mark? We say that all the time. But there has been some good activity on net billings in excess of cost, which for us means the work is flowing better and work is flowing more in line with the contractual terms.

You also see it in that scopes increase. What general contractors and construction managers like to do in soft market is to chop work up into as many pieces as they can get it to and still be able to manage the work, to get as much competition. As the market tightens they realize that's not only an inefficient way to run the job from their own standpoints, but they realize that does not allow us to plan manpower as effectively as we would like to. So that's the ways we see that in a tightening market.

We have been really fortunate over a long period of time. Where we are union, we tend to have a very good relationship with those unions. And they know we are always going to pay our people, keep them safe and have good supervision for them. And they are always going to get the money put into their benefits fund in the union. So we tend to have a good draw on union labor in most markets.

Where we are nonunion we have many of the same dynamics. We are a destination employer because of all those same factors.

So yes, it is tightening. We think that's a good thing. Eventually, hopefully -- I know the folks around this table and in our field would like to see it in bidding margins.

Yes. Okay, great. Thanks a lot.

Nicholas Coppola, Thompson Research Group.

This is Steven Ramsey on for Nick. I was wondering if you could call out any regional characteristics in the States, strengths or weaknesses in some of the regions here.

Yes. I don't want to take a lot of time doing this because that's -- and what we see may be different than other people. Northeast continues to remain strong. New York City is -- I do expect New York City to slow somewhat, maybe not to New Jersey as much but New York City residential high-rise to slow -- not something we do a lot of, but that will have an impact on the market. Today it's okay; but I think if you pointed out a year, it's going to slow.

Boston remains particularly strong, especially in the life sciences and high-tech area.

If you swing down and you go to the Southeast, very strong for us on the industrial side. We continue to see more onshoring of manufacturing. And we continue to see more movement into those states' manufacturing facilities from other states that maybe don't have quite as favorable a business climate.

Florida will be strong for us over the next couple of years, particularly South Florida. And we specifically have great capability on the water and wastewater side.

Texas has slowed, as you would expect it to, not on the industrial side as much, downstream in maintenance. Capital projects have extended life. And of course, commercial and all the other categories have slowed in our part of Texas, which is Houston.

California continues to remain strong for us, especially Northern California. But they're going to be a lot of work happen in Southern California around infrastructure. And then you get to the Rocky Mountain region; it's a steadier market. And Chicago is fine because we have some unique capability, especially on the data side.

If you break that out, construction and maintenance, you really don't see a lot of difference. I would say, though, that on the maintenance side, the project site becomes good on the maintenance side of some of the multi-site like [ocean] people right now. It seems to us they are struggling a little bit right now. And you would expect that with everything that's going on with the consolidation in retail.

Is that a good enough view for you?

That was great. That was very helpful, thank you. And a quick second question -- on M&A, is there any particular areas you are looking to fill out or valuations edging up or in line with expectations?

Valuations are such a deal-by-deal specific thing. With the acquisition of Arden/Rabalais, we had a unique opportunity. We were able to buy a premier electrical and instrumentation contractor, an industrial one. We were able to buy at a reasonable multiple in, for them, what is a cyclical downturn. And we had a great opportunity when viewed and upstream come back to really, really do great with that great team there.

The other deal we did is more of, I would call it the private market, not owned by private equity but by an individual. And if someone is worried about the lifeblood of their company and where their folks end up, we are a premier destination. And you can take that over a long period of time. You look at [Communell]; it's an example of something we bought a long time ago. It continues to prosper with us. And the excellent operator there, Steve [Conney] operates it. You could take Shambaugh. We are in our second-generation of ownership there from the original purchase.

They are doing great and they are really driving not only fire protection but food processing and a great local contracting business.

We love those deals. And we see those coming back a little stronger right now because people have been able to put a couple good years together. And maybe they realize they won't get back to 2007. Maybe they are exceeding that. But they have something to sell on now.

Great, thank you.

Tahira Afzal, KeyBanc.

Congrats on the quarter. To my first question -- as we look at that mid-single type of growth rate you see for next year, would you elaborate on which markets you think will be growing faster, which (technical difficulty) --

Yes. T, I'll be careful with this because I am answering from a EMCOR perspective right now.

Right.

And so we may have some capabilities. We think -- let's go just segments and maybe not focus as much on -- not reporting segments but end market segments and not focus so much on geography a little bit right now. We think the data market will continue to be strong, the data center market, and we want underlying trends that say that's going to happen. And it's highly skilled work, and we do well in that.

We think commercial will be okay. We continue to see the restacking of buildings. We are not doing a ton of new construction commercial, but we are doing a lot of retrofit work in commercial, a lot.

We think manufacturing for us -- put industrial to the side. When we talk about industrial, most of that heavy industrial stuff is not in backlog of most of our revenues. But when you take manufacturing and other industrial, that's more project-driven, we think that will be good. And we think the food market for us will continue to be a good market to serve.

When you get to institutional, I think it's squishy right now. I think higher ed has some legs, with endowments being okay. I think government spending for us has been a hard thing to pin down where that's going to go.

Quite frankly, we see over the last several years really some crazy decisions being made on the government contracting side with small business and other things. They, quite frankly, drive up the cost for government when people like us can bring a much more efficient solution. But you know what? I don't have the ability to fight that.

And we also don't think -- we don't do a ton in K through 12. I don't think that's going to be a particularly strong market because some of the places where they love to build that stuff, they are under a lot of budget strain right now with the pension costs. Do you guys agree?

Enrollment is going down.

Enrollment is going down, too. Healthcare? I think it's episodic. I think if you are in the right market that someone wants to do something, they will do it. I think flat would be a good outcome in health care.

Water for us is going to be a good market over the next couple years. And wastewater. I'm not sure that's true of a broader trend in that. We just know where we are. We're going to be doing some nice work.

Got it. Tony, if you are looking out into next year then, strategically and beyond, if you did have to make strategic acquisitions, are you going to stick with your knitting of what you said earlier on? Does industrial still, from a longer-term perspective, seem pretty favorable for you?

Yes. You know -- a couple things. We would continue to add a geographic capability under construction business. But we still don't have an electrical contractor in the Northeast, outside of New York City, for a long time now. We still don't have an electrical contractor in the Pacific Northwest outside of working. We are still not doing a ton of work in Seattle, and it is been a really good market. We have a very good one in Oregon and southern Washington.

So we would continue to look to add to that kind of capability. And also capability in sectors, like we just did with Ardent/Rabalais. Not only did it give us market opportunity down in the Gulf Coast, it gave us capability outside of California and Oregon on industrial -- and Rocky Mountain region, on industrial electrical. Okay? We would also do the same thing on the mechanical side with them.

Now, underlying EMCOR we have built one heck of an industrial construction business. We talk about industrial segment a lot because it has been a big part of what we have done with downstream refining and petrochemicals and some midstream work. But we have also built a pretty successful over a series of acquisitions, an industrial construction and maintenance business outside of that space, whether the acquisition of PMI almost 10 years ago now or nine years ago, PPM eight years ago, Southern Industrial, I think it was four or five years ago, [Bonson] -- so we have knitted together a ready good offering of industrial construction capability. And we would continue to like to add to that because you also get full-on maintenance business with that.

And we think the trends are long-term good, especially in the Southeast and the Gulf Coast and lower Midwest, for industrialization back here into America. Now, we also like the building services space because specifically we will continue to expand our mechanical services footprint. We like the deal in North Carolina, in the Southeast, that we did quite a lot. We have had great growth underlying these businesses that has been masked by some of the things going on in the site-based and government business overall in our mechanical services portfolio. And of course industrial -- we're always looking to add capability. We have some smaller businesses in there we would like to bulk up. Our team will continue to look at that. And we tend to know the properties we want to buy, and we tend to be patient until they become available and we can jar them loose.

So we see those opportunities and we will be patient and take advantage of them when they are there.

Got it. Okay, Tony. And last question -- you have had this transportation hiccups or glitches (inaudible) like here and we had a large conversation, a long conversation on this last quarter. Is it going to [spook you out] from taking other projects? Or you feel that there are lessons learned, you guys can move on and take on some of the transportation project that might be coming out?

The easy answer is probably not the right answer, to say we are not going to do this anymore. But then you've got to look at the totality of our work over 10 years and you've got to say, boy, that would be a really bad decision because we have done about $1.5 billion of this work over the last 10 years and we have made superior margins then to our standard gross margin and construction business. And so that would -- so what you have to sit back and say, okay, what caused this to happen?

I take the ones in the first quarter -- look, that stuff is going to happen. We will get recovery. They will finish. They are not nearly the size of the one we are talking here in the second quarter.

And you say what caused this? And are there things that you would know in the bidding process that would keep you from letting this happen to you? Some of this you did bid into the job, quite frankly. You thought that you had enough contingency to cover -- which are always difficult jobs. And that's one of the reasons that you can do well on them is because they are complicated, and you have a demanding owner, and people usually realize that these are complicated. And there has been great communication on the job to keep the job moving.

So you say, well, what happened here? Well, clearly, we have a lot of questions about how this job has been running, people running it. So we wouldn't look to run headfirst into a job with these folks again anytime soon, until they get their act together. And there's been some unique things on this job that won't replicate themselves and are a one-off.

But you are right. We constantly do that and we constantly question. This is the case of we're going to stay in the market. We have done very well. And I would posit to say that this team has been successful over a long period of time. I would posit to say this team will come out of this experience, and we will, as a team, much better. I'm not sure you could make us any tougher or more conservative. But I think we will come out of this experience having both with that local market team.

Got it. Thanks a lot and congrats again.

Noelle Dilts, Stifel.

Just how much transformation revenue that's going to be booked at zero margin do you have coming through in the back half?

I think it's probably going to be in the range of $40 million to $50 million.

Okay, perfect. Thanks.

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

I'd like to say it was a very good quarter and it's a very good start to the year. But it takes a lot of things to go right. And sometimes people, we collectively forget all the things that have to happen to have this kind of result. When you are doing 10,000 projects with over 32,000 people and a big chunk of them skilled trades people, there's a lot of supervision going along, a lot of bidding going on. And we are obviously doing that more successfully overall than we are not doing it successfully.

So, we get it. We are satisfied with the performance but we clearly know we have a lot of work to do in the second half of the year. And thank you for your interest in EMCOR and we wish you all a good remainder of the summer. And for our folks and anybody else, please be safe. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.