EMCOR Group Inc (EME) 2016 Q3 法說會逐字稿

Good morning. My name is Derek and I will be conference operator today. At this time, I would like to welcome everyone to the EMCOR Group third quarter 2016 earnings call.

(Operator Instructions). Thank you. Mr. Max Dutcher, you may begin.

Thank you, Derek, and good morning, everyone. Welcome to the EMCOR Group's conference call. We are here today to discuss the Company's 2016 third 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 third quarter of 2016. Man, the year gone by so quickly.

For those accessing the cal via the Internet on the website, welcome to you as well and we hope you have arrived at the beginning of the slide presentation that would accompany our remarks today. We are on slide two.

Slide two depicts the executives who are with me to discuss the quarter and nine months results. They are Tony Guzzi, our President and CEO; Mark Pompa, Evecutive Vice President and Chief Financial Officer; Maxine Mauricio, our Senior Vice President and General Counsel; and Mava Heffler, our Vice President of Marketing and Communications.

For call participants not accessing the conference call via the Internet, this presentation including your slides will be archived in the Investor Relations section of our website under Presentations. You can find us at EMCORgroup.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 such forward-looking statements.

These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance. Such risks and uncertainties include but are not limited to adverse effects of general economic conditions, changes in the political environment -- and I guess in two weeks, we'll have a change 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.

With that said, please let me turn the call over to Tony. Tony?

Yes. Thanks, Kevin, and good morning and thanks for joining our call. I'm going to be covering pages three through five.

You know we had a terrific quarter. Our record third quarter on almost any relevant metric. We earned $0.85 per diluted share from continuing ops, earned revenues of $1.92 billion, an increase of 13.2% from the year-ago period and we generated operating income margins of 4.5% versus 4.1% in 2015 third quarter.

Each of our segments performed well in the quarter led by a 34.2% increase in operating income and our combined construction operations with mechanical increasing operating income of 46.5% and electrical increasing 21.2%. We had strong broad-based performance across geographies and end markets.

Our operating income margins are strong at 5.7% for our mechanical segment and 6.7% in our electrical segment, despite a $6.9 million charge related to a Northeast transportation project in our electrical segment. We are over 90% complete on this job and we need to complete our work and then we will seek our rightful entitlement due to us as we should be reimbursed as we will seek reimbursement for the cost incurred to the project being disrupted and accelerated.

We expect that this -- majority of the remaining work to be completed between now and early first quarter. Our building services segment earned 5.0% operating in income margins and grew operating income 40.8% versus the year-ago period with strong performance in our mechanical services business and improved performance in our commercial site-based business.

We continuously strong demand for our mechanical retrofit project services in the segment driven by the implementation of energy efficiency and savings programs. Industrial services performed well with essentially flat performance in our strong performance in the year-ago period. We have finished the significant unplanned specialty project that drove the exceptional performance in the first half of the year. Our revenues were essentially flat for the quarter in this segment and we believe this is in line with the market, and remember we are coming off two very strong years of revenue growth in this segment.

Our customers have been active and since the acquisition of rough construct and we have effectively offered and executed work across the broader range of services. We had some business interruption from the floods affecting our Louisiana shops and services, and believe those revenues and operating profit are likely lost for the year. We are still estimating that impact but have reopened our facilities and are nearly back to full operation.

The UK performed in line with our expectations and we continue to see the stability and improvement gained from the restructuring efforts. Operating cash flow was strong in the quarter at $81.1 million and our balance sheet is liquid and strong.

Our backlog increased 3.7% which was led by an increase of 6.4% in our construction segments. Our book to bill was at 1.05 despite the strong revenue growth. We had good cost efficiency and control of our overhead as our SG&A rate as a percentage of revenues dropped from 9.7% in the year-ago period to 9.4% in this third quarter. It was a very good quarter. And we have great year-to-date performance, and with that I will turn it 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're now on slide six. I will augment Tony's opening commentary with a detailed discussion of our third quarter 2016 results before moving to year-to-date 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 start with our third quarter performance. Consolidated revenues of $1.92 billion up $224 million or 13.2% over quarter 3, 2015. Our third quarter results included $90.8 million of revenue attributable to businesses acquired pertaining to the period of time that such businesses were not owned by EMCOR in last year's third quarter. Acquisition revenues positively impacted are US electrical construction, US mechanical construction and US building services segments. Excluding the impact of businesses acquired, third quarter revenues organically $133.2 million or 7.8%. US electrical construction revenues at $458.6 million increased a $114.2 million or 33.1% from quarter three 2015.

Excluding acquisitions this segment's revenues grew $55.5 million or 16.1% organically. Quarterly revenue growth is largely driven by increased project activity within the commercial and transportation market sectors offset by quarter-over-quarter revenue declines within the healthcare and water market sectors. US mechanical constructions third quarter revenues at $697.7 million increased a $110.2 million or 18.8%. Excluding acquisition revenues of $14.9 million, this segment grew organically 16.2%. Our mechanical construction segment continues to experience revenue growth across all market sectors, with the commercial, water, and industrial market sectors contributing the largest dollar revenue growth quarter-over-quarter.

This is our fourth consecutive quarter of double digit organic revenue growth within this segment and they will continue to be successful -- and they continue to be successful in growing contract backlog which Tony will cover in this next section.

EMCOR's total domestic construction business third quarter revenues of $1.2 billion increased $224.4 million or 24.1% with 16.2% being generated from organic revenue growth. US building services quarterly revenues at $454.8 million increased $26.5 million or 6.2%. Excluding acquisition revenues of $17.3 million, this segment grew organically 2.2%.

Revenue gains within the mechanical and energy services businesses were somewhat diminished by reduced revenue levels within the government services group due to maintenance contract attritions, as well as lower indefinite duration, indefinite quantity project lines.

Commercial site-based services quarterly revenues within our building services segment were essentially flat quarter over quarter. US industrial services revenues at $239.1 million decreased $2.9 million or just over 1% due to reduced revenue activity within our shop services businesses due to low levels of capital spending by our customers.

This reduction in capital spending was a continuation of the trend that began in late 2015 as a result of crude oil price volatility. The United Kingdom building services revenue just $73 million decreased $24 million or 24.7% due to $13.2 million impact of the continued weakening British pound, as well as a reduction of small project activity when compared to 2015 third quarter as our UK customers are still assessing the short and long-term implications of the Brexit vote.

Lastly on revenues, we achieved a new third quarter record for consolidated revenues and we are essentially flat on a sequential basis with our second quarter revenue which had established a new all-time quarterly revenue record for EMCOR. Please turn to slide seven.

Selling, general and administrative expenses at a $181.4 mullioned represent 9.4% of revenues and an increase of $16.3 million from the $165.1 million reported in 2015's third quarter. As a percentage of revenues the current year quarter declined 30 basis points from the 9.7% reported last year. The third quarter includes approximately $11 million in incremental SG&A, inclusive in intangible asset amortization from businesses acquired.

Therefore, our quarterly organic SG&A increases approximately $5.3 million, and is due to increases in employment costs as a result of higher headcount, and increased accruals for certain of our incentive compensation programs due to higher projected annual results and at the same period ending 2015.

Despite such SG&A increases, we were able to reduce our SG&As and percentage of revenues by effectively leveraging the overhead structure, in a period of continued strong organic revenue growth.

Reported operating income for the quarter of $86.1 million represents 4.5% of revenues and compares to $70 million at 4.1% in 2015's third quarter. All reportable operating segments are recorded quarter-over-quarter improvements in operating income other than the UK operations.

Our U.S, selection of construction services segment operating income of $30.9 million increased $5.4 million from the comparable 2015 period. Reported quarterly operating margin of 6.7% which is 70 basis points lower than 2015's third quarter. The reduction in quarter-over-quarter operating margin is due to an incremental write down of $6.9 million on a transportation construction project in the Northeast, which Tony mentioned earlier. And that -- it is a result of continued productivity issues, it triggered growth to unfavorable job site conditions.

This is the same project that negatively impacted the electrical construction segment second quarter operating performance. However, despite this continued project degradation, we have managed to sequentially improve both operating income and operating margin each quarter of the current year within our electrical construction segment. The impact of this project write down on the segment's quarterly operating margin is a 140-basis point reduction, and is meeting strong operating performance from the majority of our other electrical construction subsidiaries.

2016's third quarter US mechanical construction services segment operating income of $39.4 million represents a $12.5 million increase from last year's quarter. This represents a 46.5% improvement quarter-over-quarter as well as a 110-basis point improvement in operating margin. Our total US construction business is reporting a 6.1% operating margin for the quarter just ended as compared to 5.6% in last year's third quarter.

Operating income for US building services increased $6.5 million to $22.6 million or 5% percent of revenues. Acquisitions generated $1.7 million at a period over period increase while this segment in mechanical services division contributed to the majority of the remaining increase due to higher volume as well as improved project execution.

Our US industrial services segment operating income of $14.6 million increased approximately $200,000 or just under 2% compared to 2015's third quarter with the reported operating margin of 6.1% or 20 basis points higher than last year's 5.9% operating margin. The quarter over quarter improvement is attributable to increased profitability within our field services operations, due to greater project activity.

UK building services operating income of $2.6 million or 3 .5% of revenues represent an $800,000 reduction period over period. The head winds of the weakening British pound, and lower quarterly revenues were the reasons for the 22.8% period over period operating income decline. The impact on consolidated operating margin at a previously mentioned project loss incurred during the quarter within our US electrical construction services segment is a negative 30 basis points.

Our third quarter 2016 cash flow provided by operations is $81.1 million and we are at approximately $128.9 million for the nine-month ended. This represents a 34.9 percent year-over-year improvement which is exceptional performance when you consider the working capital requirements necessitated by a strong organic revenue growth.

We are now on slide eight. Additional key financial data on this slide not addressed during the highlight center as follows. Quarter three gross profit of $268 million represents 13.9% of revenues which is improved from the comparable 2015 period by $32.6 million. Gross margin was flat at 13.9% in both periods. Total restructuring costs were $539,000 as compared with $301,000 and relates to continued restructuring activities within our US mechanical construction and US building services segments.

Diluted earnings per common share from continuing operations is $0.85 and compares with $0.66 for the quarter ended September 30th 2015 which represents a 28.8% increase. Lastly, as has become a recent trend of achieving milestones, the results for our operations for the third quarter of 2016 set new third quarter records for consolidated revenues as previously mentioned, as well as operating income and diluted earnings per common share from continuing operations.

Please turn to slide nine. With deployed discussion out of the way, I will now quickly cover our results for the nine-month period ended September 30, 2016. Revenues at $5.6 billion represent an increase of $660.7 million or 13.4% as compared to $4.94 billion in the prior year period.

All reportable segments are reporting organic revenue growth year-over-year except our UK building services segment which experienced a $24.5 million headwind due to the weakening of the British pound. Our year-to-date results include a $179.7 million of revenues attributable to businesses acquired pertaining to the period of time that such businesses were not owned by EMCOR in the 2015 year-to-date period.

Excluding the impact of businesses acquired year-to-date revenues grew organically $481 million or 9.7%. Year-to-date gross profit of $765.9 million is greater than the representative 2015 period by $74 million or 10.7%. Reported gross margins are 13.7% and 14% for the nine-month periods ended September 30th 2016 and 2015 respectfully.

The period over period 30 basis point reduction in gross margin is attributable to the impact of the transportation construction project that has been written down in each of the last two quarters. Additional we continue to have margin pressure within our industrial services segment as the revenue mix is a much lower percentage of shop services activities which have historically generated the highest growth spots in margins within the company.

Selling, general and administrative expenses at $530.7 million represent 9.5% of revenues compared to $488.1 million or 9.9 percent of revenues in 2015. Year-to-date 2016 includes $20.9 of incremental SG&A, inclusive of intangible asset amortization pertaining to businesses acquired. In addition, the results for the nine-month period ending September 30, 2016 include $3.8 million of transaction expenses in connection with our acquisition of Ardent and Rabalais.

Excluding such transaction expenses, our SG&A as a percentage of revenue for the year-to-date period would be 50 basis points less than the corresponding nine-month period in 2015. We have continued to maintain cost discipline despite a record revenue growth. Restructuring activity has increased from 2015 levels as we continue to refine our cost structure to capture process improvements as well as maximize utilization of our real estate footprint.

Year-to-date operating income of $234 million or 4.2% of revenues and represent a $31 million or 15.3% increase over 2015 nine-month performance. 2016's operating margin of 10 basis points higher than the corresponding 2015 period. All reportable segments are reporting higher operating income year-over-year other than the US building services which has had essentially flat performance on a comparative basis.

Despite the wind down and difficult completion of certain transportation projects within the US electrical construction segment, this segment is operating income increased 4.7% period over period while both US mechanical construction services and industrial services operating income decreased double digits. Our UK building services year-to-date operating income increased 6.9% and 50 basis points despite the continued foreign exchange headwinds.

The impact on consolidated operating margin of the previously referenced transportation construction losses incurred during the year within our US electrical construction services segment is negative 40 basis points. Reported diluted earnings per common share for continuing operations is $2.33 for the nine-month ended September 30th 2016, compared to a $1.92 in the corresponding nine-month 2015 period. On an adjusted basis reflecting the add back of transaction costs related to the Ardent and Rabalais acquisition in April, diluted earnings per common share from continuing operations would have been $2.37 per share for 2016 and represents an improvement of 23.4% year-over-year.

You are now on slide 10. EMCOR's balance sheet continues to build upon its strength and liquidity. Our September 30th cash balances increased since year end due to our strong nine-month operating cash flow performance offset by funds expended for acquisitions, common stock repurchases and dividends, netted incremental borrowings from the amended credit facilities. Working capital levels have improved due to an increase in accounts receivable due to our organic revenue growth, as well as reduced levels of accounts payable and accrued expenses partially driven by decrease in income taxes payable.

Changes in our goodwill and identifiable and tangible asset balances reflect the impact of acquisitions made during 2016 net of $30.7 million of year-to-date in tangible asset amortization expense. Total debt of $523.3 million represents a net increase of approximately $208 million from year end 2015 due to an increase in our term loan and funds drawn against our revolving credit facility to facilitate our closing of the Ardent and Rabalais acquisition previously mentioned.

As a result of our outstanding borrowings, we currently have a debt to capitalization ratio of 24.8%. We remain happy with our balance sheet and our exceptional cash flow conversion during the first nine months of 2016. Both our operating and finance personnel continued to work together to maximize EMCOR's liquidity through strong risk assessment and contract performance. As a result, we continue to be in a very good position to capitalize on market opportunities.

With my portion of the morning concluded, I would like to return the presentation back to Tony. Tony?

Thanks, Mark. And as always when you have the kind of year we're having, it's always great to talk about it. And for those, I'm on page 11 and we'll talk a little bit about backlog by market sector.

As you can see on the chart total backlog at the end of the third quarter is $3.9 billion, up a $138 million or 3.7% from September of 2015 and up a $131 million or 3.5% from December 31. Despite this really strong revenue growth in the quarter, our book to bill was 1.05.

Project bookings remain strong in quarter three evidenced by strong total backlog and revenue growth and indicative of strong execution and project demand that we have experienced in the quarter, and again, it is a 1.05 book to bill. Now when you focus on the market sectors, we continue to see strong demand from the commercial sector as backlog increased over $100 million from September of 2015 and is also up from year end.

Our healthcare backlog kicked up for the first time in a while on the back of a couple of projects including a nice bio healthcare facility in Chicago. There are other sectors that are all very close to last year's levels. And again, with a strong demand for our services, and especially you can see that with the strong revenue we experience to continue to grow backlog.

With regard to the market, you know we are asked all the time where we think we are in the nonresidential cycle and we have talked about that. I think we have been more right than wrong. But, you know, you don't know. And I am certainly not a forecaster of markets overall. I've never pretended to be.

I do think that EMCOR is a pretty good proxy for the non-rest cycle. Given both our sector and geographic diversity. And I can say that we're busy. Yes, we're very busy right now and we continue to be busy quoting work. And, you know, we tend to be later cycle than other people, and we've shift clearly have been growing this year, especially at a faster rate within the market.

My gut, we are still in a slow, steady growth phase of the market. It may be a little choppy, it may go up and down quarter to quarter. But I still believe we are in a slow growth phase in the market as we head into 2017. I don't think it grows high single digits but I also think it doesn't go backward, at least not for the first half. It should be mid-single digits. And after that, like it always is, it gets a little foggy.

Now I'm going to move to page 12 and talk about it by segment. And there's really, we've covered all this really through our revenue discussion earlier, so really no news here. Other than to say that we continue to have strong backlog growth in the construction segments. We're up 6.3% from September 2015, the year-ago period, and we're seeing strong growth in the mechanical and that's up almost 11%.

The electrical segment is basically flat with last year. So if you take our revenue performance the market just went through, and you take our backlog performance, we have had 13% organic growth in revenues in our construction groups and segments, and we've had 19% overall. That is pretty good growth and that's well in excess of the market.

Building services is down a little over 3% from the September of 2015 and that's really not in our mechanical services businesses. It has growth characteristics that are very similar to our electrical and mechanical segments. It has to do with what goes on in our site-based businesses, where revenues could be lumpy and large contracts move out. And it's the least profitable part of what we do.

Industrial services, remember this is just shop backlog. Most of the work we do in industrial services never is in backlog because it is time and material or unit price work. This is for new build heat exchangers and that market continues to struggle and it serves the refining and petrochemical service. I'm not sure we are at a new normal. I expect the market to come back someday but it's certainly not doing that right now.

And we've offset that drag really with hustling like crazy to get the new repair work. We expect this new build dry to continue into 2017 and really, we see no quick turnaround coming there.

So as said on the second quarter call, bidding activity in our markets remain active and we are winning our share of work and we're being very selective in the work that we take because it does us no good to go backlog in revenue that doesn't turn into good profits and good cash flow.

Now I'm going to finish it here on the last couple of slides. We are going to and it's be page is 13 to 14. We are going to increase our revenue and diluted earnings per share from continuing operations guidance based on our strong year-to-date performance. We're going to increase our revenue guidance from $7.4 to $7.5 billion. We will raise our earnings diluted share from continuing ops from $2.90 to $3.10 to $3.10 to $3.20 and both of those numbers exclude the Ardent and Rabalais transaction patch.

So you might ask what drove our increase in guidance for the year? And I think there are three primary drivers, new sub-drivers -- I don't know this, but three primary drivers. First we executed very well for the most part in our mechanical and electrical sites. Sure we've had some headwinds on some Northeast transportation projects for the year. And, we will see grow right from tide them, and I went through that in my opening comments.

The jobs, when the jobs are completed, we will seek that entitlement. But we are well positioned in both good sector and geographic markets that have benefitted from the non-residential recovery.

We are now growing faster than the market and has -- to achieve strong leverage from our fixed cost structure. Our industrial service segment has performed well year-to-date. We benefitted from not only an impact project that is likely to be a non-recurring event but we were and are prepared for these events as we have the labor, technical supervision, equipment and working capital to mobilize on the efforts and have done that over the last five years. But you don't know when they are going to happen, you react, and you serve your customers.

However, our base turnaround business was strong for the spring season and has started strong for the fall season. We also partially overcame the headwind in the declining volume in opportunities in our new build heat exchanger business by working very hard to achieve every repair dollar available to us.

If you look at building services in UK segments they're having decent solid years and they have not created any headwind for us. All these factors together have led to a terrific nine-month performance, and gives us confidence to raise our guidance and project a year that will be a record year for EMCOR on nearly every relevant metric.

So, the question that you will have is okay, Tony, how does your team, this great team we have assembled in EMCOR, how do you take it from $3.10 to $3.20 and how do you get towards the top end of that range? And, how do you do that if you're number one, you continue to have outstanding performance in our construction operations here in the fourth quarter. Two, we could see continued improvement in our building services segment led by our mechanical services business, and quite frankly a little snow would not hurt in December. Number three, a continuation of a decent fall turnaround season that we believe we are in the midst of now, and number four continued steady performance in our UK segment.

You know, then we have continued a strong liquid balance sheet. We continue to generate good cash and what are we going to do with the capital we have at EMCOR? We will continue to look for opportunities to add to our business much like we did in second quarter with the addition of a very good mechanical service business and the addition of a very good industrial electrical business.

Acquisitions that like that, we are to add to the segments that we is what we will look to continue to do. We will also look to continue to return cash to shareholders through dividends and share repurchases with more of an emphasis on share repurchase. And I'm going to take questions now and I'd be remiss if I did not thank the employees and management in EMCOR, for really a terrific start to the year, a year to nine months and a terrific quarter. Thank you all very much.

And with that, I'll turn it back over to for the start to theyear and a terrific quarter. Thank you all very much. And with that, I will turn it back over to Derek.

(Operator Instructions) Your first question from the line of John Rogers.

Hi. Good morning and --

Good morning, John.

Congratulations on the quarter. A couple of things, first of all, Tony, I guess were you on -- on the industrial services side of the business you mentioned the pickup in the fall turnaround season. But I'm more curious about what you're seeing in terms of capital spending plans all your customers there. I mean, has that market changed now with oil prices at least, you know, rebounded, maybe more stable here?

We haven't seen it yet on the capital side, John. We do have some exposure to upstream now with our acquisition Ardent and Rabalais, so we haven't seen that flow through to the upstream side which is where I think a lot of the capital was cut and some cut then downstream. And they just took a especially the integrated guys took a wholesale scalpel to their capital. So the short answer is we haven't seen it yet. We may be wouldn't be the best position to see the early signs of that. Because even in that business, we tend to -- even if we go and we put it into well, they actually will come a little later.

We are seeing strong demand from our customer set both in the spring and the fall and the spring 2017 doesn't look bad sitting here today. That will firm up, though, now, through the fourth quarter.

And then just in terms of your transportation project that you are seeking the recovery on. I assume it is, you know, at least as much as the loss report the on the project. But can you give us a sense of what the timeframe, I mean is this something that you have a chance of resolving in 2017?

John, we never try no fake those kind of recoveries into our guidance. If that happens.

Right.

Then as the year happens, we would revise our guidance because it would be an event. If we thought that that could improve our outlook. These things either settle fast or they take forever. I would put this in somewhere in the middle. It's a very difficult job that's been accelerated and has a lot of outside influences involved in the job that have made it fairly non-productive.

Okay. And I guess just last and I could, I mean I appreciate your comments about the non-residential cycle and, you know, the contact loans, tended to the growth to -- looking at but could you give us a sense of what you're seeing in proposal activity? Does that support that? Look, I means just do tune in a downturn and some of the AIA numbers and...

Again, we're later cycle so maybe we're not seeing at AI would see.

Yes.

That tends to be a best aid -- to my mind, a qualitative view of the word, not a quantitative.

Sure, sure.

We have not seen a significant drop in the activity that our folks are looking at right now. And it varies market to market, and it varies, you know, month to month. But if you take it in overall aggregate our folks have proposals and enough outlook to believe the market should grow low to mid-single digits next year.

Okay, great. Thanks a lot.

Thank you, John.

Your next question comes from the line of Noelle Dilts.

Good morning, Noelle.

Hi, good morning and congratulations on a really good quarter.

Thank you.

For my first question just first expanding around non-resi, obviously good results in the quarter, continued backlog growth. But do you think just kind of anecdotally or are you getting a sense if there's any delay in decision-making around projects here ahead of the elections? And I'm partially asking that just based on some of what we are seeing in the ABI and then some of the starts data out of Dodge.

Again, I think you look at where we are in the food chain. By the time it gets to us, people are fairly well along on the design and development of a project. The upstream folks like the architects, maybe the engineers, maybe the general contractors for more on the design build side may see that and have those macro discussions. We at EMCOR 10 have micro discussions there's a project --

Right.

That's already developed and thought about. So, we're not seeing people delay decisions based on whatever may happen in two weeks.

Yes. And then maybe could you touch on your exposure, just how you are thinking about potential federal stimulus in the infrastructure space and where and how you might see a benefit?

Where we would benefit the most is first by increased IV IQ spending in our government's business, Mark, and that's been down right -- since when?

Yes, well, it's been down since 2015.

Right.

Yes.

Yes. And late 2015 carried into 2016.

And to some yet (multiple speakers)

Back to pre-sequester levels.

Yes, so maybe that would be a place we would see in building services and return to more normal levels of spending, pre-sequester. I think that's going to have to happen anyway. It's just not working.

The second area we can probably see it is if some of the transportation projects on the electrical side got advanced and got bid. I mean, that's really where we participate in transportation work. We also would do mechanical work around airports if that would advance. Barack was typically had been a good thing for EMCOR through the years and we participate in those projects. You know, it won't -- it think it'll have other than the IDIQ work, little than no effect on 2017.

Okay. And then just shifting over to the industrial services business. I mean looking back now over the past few quarters, you've really seemed to outperform your peers here, and I know you go back to the idea that, you know, you're it's depends on what you're seeing out of your customers, right? And as you just said to John, you've seen strong demand from your customer set.

But, do you think there is -- is there something about your customer set that you think maybe, is driving a little bit more spending? You know, maybe to touch on your petro-chem customer exposure if you're thinking your share gain there? I'm just trying to understand how you now consistently outperformed some of your peers in the turnaround space over a multiperiod basis?

Noelle, I'm always careful to talk too much about how others are doing versus how we're doing. Here's what I know about us. We have some of the best operators in the business and they are technically really good. And because we have some of the best operators we attract the best craft labor and the craft supervision that come with that.

And so when customers have major issues, and because -- since the acquisition of [Reptron-Strickland], we can really put together a great team to solve a problem. And then think they know that you know since that acquisition and really putting the whole thing together, what we had together with Homestead and Redmond, I think people also know with the financial strength of EMCOR, they know that we are going to have the resources to get those jobs done.

So when you tag -- when you put technical expertise with great leadership, together with financial strength, with a very demanding customer base and a, you know, thank goodness. underlying all that a terrific safety record, you tend to get opportunities that others mightn't see. And our guys, some of them are the pillars of the industry and we benefit from that. And so, I can't speak to what the others do; I can only speak to what we do.

Okay, thank you.

Your next question comes from the line of Tate Sullivan.

Hi, thank you. In the press releases you noted the contribution from the recent acquisition or acquisitions and I assume most of that is Ardent, even though you said there was some flood impact in Louisiana? You know, are you getting a benefit from Ardent earlier than you expected in general? And related to that, on slide six, just eyeballing it, looks like your industrial backlog increased. Is some of that Gulf Coast related work?

No, on the Gulf Coast, we did get some backlog from the electrical segment from Ardent. That would be -- some of that would be gulf coast related. I'm going to flip at the market segment -- we had three acquisitions. If you look at the past year. We made a good fire protection acquisition in the Midwest and fourth quarter of last year.

October.

Yes. Fourth quarter, right? We made a good mechanical service acquisition right before Ardent and then we made the Ardent and Rabalais acquisition. These are three really good companies that fit the kind of things we like to do. It's the right point of the cycle for us to have acquisition activity because people put couple of years behind them. And Mark, maybe you can give them a little more detail.

Yes, okay. With regards to the impact of acquisitions, we've obviously disclosed in the press release and in our commentary when you get the opportunity to go to the 10-Q you can actually see the actual contributions by segment. And as I mentioned just to reiterate electrical building services and mechanical disruption all benefitted from the acquisitions Tony just touched upon.

With regards to Ardent's contribution being quicker or more significant than anticipated, I would say to date they are in line with expectations. I don't know that they're going to perform in the fourth quarter at the levels that they have through the first months of ownership just because of this, you know, the seasonality of their business. But having said that, everybody has-been mostly in line with what we expected and the Ardent situation to a lesser extent than the acquisition that was closed in the fourth quarter last during the mechanical construction, those were backlogged serving businesses. We still need to burn through the amortization associated with those fire contracts. But we should be mostly through that by the early part of 2017.

And if you look that group of acquisitions together and you go to my last comment, there we brought fire protection, sprinkle work. We bought it industrial electric and electric and we think that Ardent's a option on the future of upstream oil and gas that we were lucky to get and not having to pay for it, for the upstream oil and gas.

And the last one was mechanical services acquisition. Took that mix of acquisitions and said is that stuff you would do in 2016 at end of the year or 2017 if they became available or end of 2017? These are the of things we like to do. And, this is the right in the cycle for that to happen. Because, you know, one of the like sort of questions you get that make no sense typically is when business goes bad. People say oh, it's a great acquisition environment. It is terrible acquisition environment because people don't sell on weak numbers and we don't buy things -- we try not to buy things that need major fix up that we've kind to manage them to grow our businesses and we like to buy good companies.

So we're at the right point in cycle for acquisitions to become available and we have enough visibility to think they -- like Mark said -- that they can meet the expectations we have for them.

Okay. Thank you. A separate topic on the transportation project again and it is amazing to consider how much you exceeded expectations and you even take out that per share impact from that one transportation project. I mean, what is the -- I mean, should I be concerned with what I think you are going to do on the Tappan bridge project for instance or road transportation projects, bad projects in general or can we just talk about effectiveness?

Well, the best projects, some of the best projects that have ever been performed at EMCOR had been the transportation segment. And once in a while you get into a confluence events that are just bad all the way around. from outside pressure to deadlines, to poor designs, to terrible general contractor management. You put that all together sometime on a job, you'll get to a bad place.

But I am bullish on transportation at EMCOR for the long-term and it's been a key pillar and foundation on electrical segment.

Thank you very much.

Your next question comes from the line Tahira Afzal.

Hey, folks, great quarter, congratulations.

Thank you, Kate.

So, Tony if I look back historically, throughout the year you guys did 5% operating margin and if I nix out these project issues you've had in terms of losses you're kind of eking up to 4.5% potentially for this year. How do you look at sort of margin expansion drivers as you go into next year?

I mean it becomes difficult when you think about the mix for us to see 5% operating margins right now. I mean just because our shop business is down so much, right, on a combined basis. If our shop business was strong, I'd think collectively as a team we would say there is a shot at that. Because that part of the business has turned from strong positive to a negative, it becomes hard for us -- and then you get into some mix issues in general, right. And, yes, I think you could correct for the projects this year and you could say that has happened.

But the reality is with the size we are now we don't have the kind of losses we have on this particular issue we are dealing with right now. But there, you know, in 3,000 projects there is always some level of thing going on. We don't execute 100%. No one does. So, I think, you know, if you add back that impact that we have, Mark, that's probably a good place because most of our businesses are firing at a pretty good level right now.

Yes, and then other than the pricing environment in the industrial services segment, in addition to the shop there still has pressure on it.

Yes, and the pricing overall, Kate -

Yes.

Yes I sat in a --

Right.

I sat in a meeting and people say where's pricing and we were with some people to see broad sections of the market last Friday. And I think the general consensus of that -- those folks and they're looking more up, you know, our customer base which is us. Margins clearly haven't recovered to where they were in 2007. And most of us don't believe that will happen because of the slow nature of the recovery in non-res.

Now the positive of that slow recovery is we don't have the kind of labor exposure we would have in the quicker recovery because people had chance to build their labor force over time versus just building it quickly.

Right.

But more than having recovered at those levels, so when UCS expand margins right now, it has a lot less to do with pricing, our customers are buying tough...

(Inaudible) and efficiency.

And has a lot to do with execution and efficiency and things we brought the jobs like GPS and the (Trimble) systems, to bin, (the binleys), the prefabrication. This led to a very close coordination with our supply case so we can be more efficient. And it's led to a lot of in better crew planning when we can. What I mean by around that is, really sitting down and figure out sections of the work that could be done with the least amount of disruption.

When you're a trades contractor, and you put labor on the job, everything's about making sure we have productive resources with that, with the tools in their hand, to work safely and get it done in the most efficient manner possible.

Right.

That's different than someone that's a general contractor or construction manager or even a broader EQC.

Got it, okay. And Tony, in your prepared commentaries, do you want to talk about healthcare after a while. Is this how think some sustainable potential improvement coming in that sector or should we regard this more as sort of one-offs right now?

I'm still in the oneoff camp.

Yes.

I think hospitals still are trying to figure out how to make money under the Affordable Care Act. And that's certainly is not going to score itself out anytime soon.

All right, okay. And last question I had Tony, you know, at there's a lot of talk about infrastructure with the -- into the elections. But there seem to be also very meaningful implications for the power segment. Do you see that as an opportunity for EMCOR to play on or you know, is it some sort of uncertainty?

No, I think it's an opportunity. I don't think it's a 2017 opportunity. I think it is an opportunity and I think, you know, I think it comes two ways. One, we do participate in solar as a specialty sub. And we've done some more in California and done it fairly well. We do participate in wind with some very specific projects in the Rocky Mountain region where we will build limited transmission and distribution lines.

Right.

And we participate probably more significant in two areas that maybe not as obvious. One is in Cogeneration. The small cogent plants. Gas generation in general we are well positioning a couple of markets to take advantage of that. Of, you know, as they left to form mechanical sub. We will not do this for PPC, I have not desire to do this for PPC. And in the third area that's not as obvious is cleanup because of our industrial footprint, not only industrial services segment but also in our mechanical segment specifically and a little bit in our building services segment, we have workers they can help decommission whether it be a coal plant or the things that go around the coal plant. We haven't seen that yet a lot but I think that's an opportunity as you go further past 2018 into 2019, into 2020.

Perfect. Thank you very much. And congrats again.

Thank you, Kate.

Your next question comes from the line of John Rogers.

Thanks. Just maybe following up on that a little bit. Tony, it seems like every cycle for EMCOR non-res cycle the conventional vertical building becomes less and less a portion of your overall business. And I guess where do you see yourself positioning over the next couple of years in non-building work as a portion of EMCOR?

;

Yes. So buildings are still an important part of what we do

Yes.

It forms the foundation of the company. It did. It's still a big part of our mechanical and electrical segment. It's still a big part of our building services segment. But, John, that's right. I mean you look at we built a whole industrial segment that really has nothing to do, services segment, that has nothing to do with the building segment. All the best were construction as well as industrial construction underline especially in our mechanical NL, in our electrical with the acquisition of Ardent.

We have spent a lot of resources both through organic growth and building out capability we already had but also through acquisition to build industrial construction and manufacturing capabilities for those customers. And you can look at companies we have like ContraCosta, like the university on mechanicals, like Shamba but then you can look at how we organically added to the terrific teams in each of those places. Especially Shamba and ContraCosta. With these folks know how to do this stuff and then you match and the watch doctors.

And, so we added there. That was more organic. And then we also took that and said, okay, what are other things we can add. So, PPM, Southern industrial, Ardent -- and these are things outside of Bonson. These are things outside of the industrial services cycle. And all of them play in those markets, they play in the maintenance part of those markets. They play in the maintenance part of those markets. And so we went from a company that was primarily focused on the building sector in 2001 or 2002, to a broad-based specialty tradecontractor that can serve abroad swath of construction service needs in the United States.

And so, where do I see it going from there? Well, I think we're now at the point we have really four well defined segments and that includes the UK with its building services segment. We can continue to add responsibly, you know, our electrical and mechanical. We still have geographic that would allow us to be in the building. We have geographic opportunities industrially. We have geographic opportunities for just specific trades contractors in those segments.

Mechanical services in the building services segment, we have geographic opportunities that we're still lacking -- and we look, we look at the time. And I said this could be a good time for acquisitions for those kind of companies, like the last one we bought to become available.

We have opportunities to add to our services in the refining and petrochemical. We're still could add to our bundle of services either organically. For example, we don't do much work around catalysts. We do a little bit. We don't do much around refractory and we could do more in each of those areas. So, that's how we think about the business. We have the capital to do it, we can grow organically and through acquisition growth.

And so, what would you say not as much for the last quarter but is the balance within EMCOR now between that -- and I'm saying vertical construction or building construction versus the industrial civil side of the business at this point?

Yes, I think you could just look at the numbers and I think you could probably say we are probably still 50-55% vertical construction and 40 -- profit wise and 40 to 45 not. And the only reason we get to 50 to 55 vertical construction is we bring other things in there, like data centers, data com work and others. And that would get you to the 50-55%, otherwise, let's say it's a 50-50 now.

Great, thank you.

The next question from the line of Tate Sullivan.

Hi, thank you for taking that follow-up and more on specific -- potential market you talked about, refinery, turn around, that type work, but then on also on topic of intra-corta orders that you received in 2Q. In what are you doing -- currently what can you do, what's the opportunity say for chemical plants that are being built or expanded or already in operation in the US.

So, we do more petrochemical, we don't do a ton of work in pure chemical plants. We do petrochemical work. We do the same kind of work in petrochemical plants that we do in the other ones. Typically, you know, usually the work is smaller, or it's not as robust. But that being said, some larger turnarounds we have done has been in petrochemical plants and not refineries. Their cycles tend to be different than the refineries. They tend to be a different cycle and what I mean by that is when a refinery responds sometimes, the petrochemical historically haven't finished wrong -- we're not finding that to be necessarily true right now. Based the same services, we're doing mechanical turnaround work, now we can do electrical turnaround work. That's more maintenance focused than capital focused with the acquisition of Ardent and Rabalais. We're just in more capital capability. Yes, because of the ENI work and all the things around it. So, our guys can sell to -- if you think about what they're trying to sell in for. I got to bring highly-skilled people, I got a flexible workforce, they've got to be working on the most demanding timelines. And they've got to do it in unbelievably safe and conscious manner and have the right equipment. So there's a broad swath of those kind of customers that we can serve.

OK, thank you very much.

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

Look we had a -- we're off to a great start, obviously, it's beyond a start now, we're just finished our third quarter we're 75% of the way through the year. We are very thankful for the performance and the trust that our customers have given us to execute work for them. We're going to continue to try to do that as best we can in a safe manner and take care of our employees. We expect to, you know, obviously their guidance. We expect to do okay here on the fourth quarter. And, you know, we're hoping for a decent non-res market, you know, low, single-digit growth as we go into the next year. And, one thing I would remember about EMCOR is, you know, we got to go out and hustle every day to keep, you know, this $7.5 billion nano machine going. And we have a lot of people that do that.

And, thank you all for listening and we won't to you again together until February. So all of you have a great end to the year. Be well.

Thank you for your participation in today's conference call. You may now disconnect.