EMCOR Group Inc (EME) 2018 Q2 法說會逐字稿

Good morning. My name is Adam, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group Second Quarter 2018 Earnings Call. (Operator Instructions) Thank you.

Ms. Jamie Baird, with FTI Consulting, you may begin.

Thank you, Adam, and good morning, everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the company's 2018 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, Jamie, good morning, everyone. Welcome to our earnings conference call for the second quarter of 2018. For those of you who are accessing the call via the Internet and our website, welcome as well, and we hope you have arrived at the beginning of our slide presentation that will accompany our remarks today.

We are now on Slide 2. This presentation and discussion contains certain forward-looking statements and certain non-GAAP financial information. Page 2 describes in detail the forward-looking statements and the non-GAAP financial information disclosures. I encourage everyone to review both statements in conjunction with our discussion today and the accompanying slides.

Slide 3 has the executives who are with me to discuss the quarter's results. They are Tony Guzzi, our Chairman, President and CEO; Mark Pompa, 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.

For call participants not accessing the conference call via the Internet, this presentation, including the slides, will be archived in the Investor Relations section of our website under presentations. You can find this at emcorgroup.com.

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

Thanks, Kevin. Good morning, everybody, and thanks for listening. And I will initially be speaking to Pages 3 to 6 before I turn the call over to Mark. I will speak to the quarterly results, and Mark will provide a more full quarterly and year-to-date explanation of our financial results.

We had another strong quarter, highlighted by excellent performance in our Electrical and Mechanical Construction segments and strong performance in our United Kingdom and Building Services segment. We struggled, as expected, in our Industrial segment. We earned $1.21 in earnings per diluted share from continuing operations on revenues of $1.95 billion and 5.1% operating income margin. We grew operating income by 7.8% despite difficult conditions in our Industrial segment and some tough comparisons in our Mechanical Construction segment.

We had very good execution throughout our company. We continue to see strong opportunities to win work across the country and across end-market sectors. In the Mechanical and Electrical Construction segments, we executed well across our market sectors and geographies. We had excellent performance in our commercial and transportation markets sectors especially. We continue to execute well on not only large, complex projects, but also fast-paced small to midsized projects. We have had no significant disputes over the past 18 months in these segments that would negatively impact our results in a significant way.

We had strong organic growth of 6.7% in our Electrical Construction segment, driven by strong growth in the commercial sector.

Our Mechanical Construction segment had a difficult revenue compare as, in the year ago period, we were executing 2 large food processing jobs and had no comparable jobs this year. However, we have strong prospects in negotiations.

Both Construction segments grew operating income margins and dollars versus the year ago period. We had excellent productivity from our core workforce across these 2 segments and continue to deliver well for our customers. We continue to thrive in a relatively strong market because our subsidiary CEOs have recruited, and this has happened over many years, and retained excellent teams. We are finding the skilled trade labor to execute our work because we are a preferred place to work. We pay well, have great supervision, keep people safe and with our market positions, will likely have follow-on work if people perform for us.

Building Services had a strong quarter with organic revenue growth and operating income margin expansion. Overall, Building Services grew operating income 10.8% on 5.2% revenue growth. We had strong performance in our government and energy services businesses this quarter. We are implementing several large commercial site-based accounts well and have strong retrofit project bookings, which position us well as we move into the second half of 2018.

Maintenance spending is strong and we're executing well in this segment on small capital projects, repair services, add-on project work for our government and commercial site-based accounts and we are winning new maintenance contracts. At 4.9% operating income margins, we are positioned well for the second half of 2018.

Our Industrial Services business had a tough quarter and we expected it would. We usually do better in the second quarter in this segment than this quarter's performance, but the second quarter is typically our seasonally lowest-performing quarter in this segment. I believe we are almost out of the Hurricane Harvey-induced poor performance. Also our shop mix has improved, we have more work to execute and we believe it is a better mix of work. I think it is a sign we have bounced off the bottom in the shops over the last few quarters, and our mix and opportunities are better today than a year ago in both the field and in our shops in the Industrial segment. We expect this segment to perform better in the second half of 2018, with the resumption of normal demand, and we will have more opportunities to use our strong market position coupled with our excellent resources to serve our customers better.

Our U.K. Building Services segment had another good quarter. We had operating income margins of 4.4% and expansion of 60 basis points versus the year ago period and organic revenue growth of 33.3%. I believe our team's tenure, scale and consistency, coupled with our excellence-to-service delivery, have driven success in business development over the past 2 years, and that we have good growth and that has driven improved and improving operating results.

We continue to win and expand our business and implement our new contract wins well and are delivering well on special projects that we do for our customers. We have remaining performance obligations of $3.67 billion, which shows growth since the first quarter. We have a good diverse mix of products across our segments and market sectors and continue to have strong small and large project opportunities to pursue and we believe the nonresidential market will grow this year in mid-single digits.

We continue to have a strong and liquid balance sheet that provides ample fuel to grow our business.

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

Thank you, Tony, and good morning to everyone participating on the call today. For those accessing this presentation via the webcast, we are now on Slide 7. Over the next 5 slides, I will supplement Tony's opening commentary on EMCOR's second quarter performance as well as provide a synopsis of our year-to-date results through June 30.

All financial information referenced is derived from our consolidated financial statements included in both our earnings release announcement and Form 10-Q filed with the Securities and Exchange Commission earlier this morning.

So let's revisit our second quarter performance. Consolidated revenues of $1.95 billion are up $57.9 million or 3.1% over quarter 2, 2017. Incremental revenues attributable to businesses acquired of $16.5 million pertaining to the period of time that such businesses were not owned by EMCOR in last year's second quarter, positively impacted our U.S. Mechanical Construction and our U.S. Building Services segments. Excluding the impact of businesses acquired, second quarter revenues increased $41.4 million or 2.2% organically.

U.S. Electrical Construction revenues of $479.5 million increased $30.3 million or 6.7% from quarter 2, 2017. Quarterly revenue growth was primarily driven by project activity within the institutional and commercial market sectors, which was partially offset by a revenue decline within the transportation market sector due to the completion or substantial completion of several large infrastructure projects during 2017.

U.S. Mechanical Construction revenues of $740.7 million decreased $1.1 million or 0.2%. Excluding acquisition revenues of approximately $10.4 million, this segment's revenues declined $11.5 million or 1.6% organically. Coming off of 12 consecutive quarters of revenue growth within this segment and the completion of numerous large-scale projects in 2017, this minor revenue contraction within the quarter is not concerning, especially in light of their 8.1% sequential growth and remaining unsatisfied performance obligations.

EMCOR's total domestic construction business second quarter revenues of $1.22 billion increased $29.2 million or 2.4%.

U.S. Building Services quarterly revenue of $461 million increased $22.7 million or 5.2%. Excluding acquisition revenues of $6.2 million, this segment's revenues increased organically 3.8%. Revenue gains within their mechanical services, energy services and government site-based divisions were partially offset by revenue declines within their commercial side-based division due to maintenance contract attrition, which occurred in late 2016 and in 2017. As Tony mentioned, this segment is experiencing strong project demand and they will continue to complement that demand against the robust service offerings as they progress throughout the remainder of 2018.

U.S. Industrial Services revenues of $167.2 million decreased $20.3 million or 10.8% due to lower field service activities as a result of fewer scheduled turnaround projects as compared to 2017's second quarter. As a reminder, and as Tony also mentioned, due to the seasonality of this business, the second quarter generally represents the lowest volume of field services activities for this segment. This period-over-period revenue reduction was partially offset by revenue gains within this segment's shop services operations due to increased demand.

United Kingdom Building Services revenues of $105.5 million increased $26.3 million or 33.3% inclusive of $6.4 million of favorable foreign currency movement quarter-over-quarter. This segment's increased quarterly revenues is due to the continuing operating impact of new service contract awards as well as increased small and capital project activities.

For the sake of completeness, my last statement on quarter 2 revenues is that the impact of our adoption of Accounting Standards Codification Topic 606 on January 1 of this year, which, to remind everybody, was the new revenue recognition accounting standard, as it specifically relates to our second quarter revenues and our operating results for the quarter, was immaterial.

Please turn to Slide 8. Selling, general and administrative expenses of $189.9 million represent 9.7% of revenues and reflect an increase of $8.2 million from quarter 2, 2017. The current year's quarter includes approximately $2.7 million of incremental SG&A, inclusive of intangible asset amortization from businesses acquired, resulting in an organic quarter-over-quarter increase of approximately $5.5 million.

This organic increase is primarily due to higher employment costs as a result of increased headcount to support the organic revenue growth in our Construction and Building Services segments as well as higher incentive compensation expense necessitated by our expectations for increased year-over-year profitability.

Additionally, we have recognized higher information technology and legal expenses quarter-over-quarter due to discrete activities. Our SG&A as a percentage of revenues is down sequentially 30 basis points from quarter 1 and up marginally from 2017's second quarter.

Reported operating income for the quarter of $99.7 million represents 5.1% of revenues and compares to $92.4 million or 4.9% in 2017's second quarter.

Our U.S. Electrical Construction services segment's quarterly operating income of $36 million increased $3.9 million or 12% from the comparable 2017 quarter. Reported operating margin of 7.5%, which is 40 basis points higher than 2017's second quarter. The increase in the segment's operating income is due to increased gross profit from projects within the manufacturing, hospitality and commercial market sectors. Additionally, this segment benefited from improved overhead leverage with a reduction in their SG&A as a percentage of revenues quarter-over-quarter.

2018 second quarter U.S. Mechanical Construction services segment operating income of $57.6 million represents a $4.5 million or an 8.5% increase from last year's quarter. This quarter-over-quarter improvement is despite 2017's second quarter benefiting from $11.6 million of gross profit related to the recovery of certain contract costs incurred in 2016 that were previously disputed. Quarterly operating margin improved 60 basis points period-over-period. The increase in this segment's operating income is due to increased gross profit from manufacturing, hospitality and commercial project activity as well as the contribution from an acquired business in 2017.

Our total U.S. construction business is reporting a 7.7% combined operating margin for the quarter just ended as compared to 7.2% in last year's second quarter.

Operating income for U.S. Building Services of $22.4 million represents a $2.2 million improvement from last year's second quarter, while reported operating margin of 4.9% has increased by 30 basis points. The improvement in quarterly operating income and operating margin is due to increased profitability within their government services division due to new contract awards and their energy services division due to increased project activity. Additionally, their commercial site-based division benefited from some late-season snow removal activities that occurred within the second calendar quarter.

Our U.S. Industrial Segment operating income of $1.1 million represents 0.6% of revenues, which is a decrease of approximately $3.3 million from 2017's second quarter. This segment continued to fight through a light schedule of turnaround activities through the first half of 2018 as evidenced by their significant revenue contraction, which has impacted their profit conversion due to the more heavily weighted fixed cost structure of this segment. Additionally, the project work executed during the second quarter of the current year was more capital focused, which tends to have a lower profitability profile when compared to their traditional service activities.

The U.K. Building Services segment continues to report improving results and the quarter ended was no exception with operating income of $4.6 million, which represents 4.4% of revenues and is higher than 2017's second quarter by $1.6 million, a 60 basis points of operating margin. Continued new service contract awards along with increased small and capital project activity were the reasons for the quarterly improvement.

We are now on Slide 9. Additional key financial data for the quarter not addressed on the previous slides discussed are as follows: quarter 2 gross profit of $290.8 million represents 14.9% of revenues, which has improved from the comparable 2017 quarter by $16.3 million and 40 basis points of gross margin. This quarterly improvement is due to higher gross profit and gross margin across the majority of all of our reportable segments as a result of increased revenues and improved mix.

Restructuring cost during the most recent quarter related to continued activities within our U.S. Building Services segment and are essentially flat with 2017's quarter 2 activities.

We recognized an impairment loss of $907,000 related to the diminution in value of an acquired trade name within our Industrial Services segment. This trade name had a finite life and the resulting impairment charge accelerated this asset's future amortization expense into 2018.

Diluted earnings per common share from continuing operations is $1.21 and compares to $0.95 for the quarter ended June 30, 2017, which represents a 27.4% increase. On an adjusted basis, reflecting the add-back of the noncash identifiable intangible asset impairment loss, our non-GAAP diluted earnings per share from continuing operations would have been $1.23, which represents an increase of $0.28 or almost 30% from 2000's (sic) [2017's] second quarter reported EPS.

Our tax rate for the second quarter was 27.2% and was favorably impacted by certain discrete items. As I look forward to the remainder of 2018, we still hope for more clarity from the federal government and various state taxing authorities as they continue to analyze the federal Tax Cuts and Jobs Act. I am narrowing my range for a full year 2018 tax rate to be between 27.5% and 28%. To the extent either the federal or state taxing authorities modify the reviews or we experience unanticipated discrete tax events, this range may be modified.

We are now on Slide 10. With the quarter out of the way, let's now turn our attention to the first 6 months. Revenues of $3.85 billion represent an increase of $66.6 million or 1.8% as compared to $3.79 billion in the prior year period. Good revenue growth amongst each of our U.S. Construction, U.S. Building Services and U.K. Building Services segments is being muted by a 21% year-over-year revenue decline in our Industrial Services segment.

Year-to-date gross profit of $560 million is greater than the representative 2017 period by $19.1 million or 3.5%. 2018's gross margin of 14.5% represents a 20 basis point improvement over 2017. Consistent with my year-to-date revenue commentary, strong improvements in year-over-year gross profit and gross margin in each of our U.S. construction, U.S. Building and U.K. Building Services segments was softened by the decline within our U.S. Industrial Services segment.

Selling, general and administrative expenses of $380.9 million represent 9.9% of revenues as compared to $365.1 million or 9.6% of revenues in 2017. Our SG&A as a percentage of revenues on a year-to-date basis is down sequentially from quarter 1 by 10 basis points.

Year-to-date operating income was $177.7 million and represents a $2.9 million increase over 2017's year-to-date performance. Our year-to-date operating margin is 4.6%, which is consistent with 2017's half year performance. Despite the optics of flat year-over-year operating margin returns, our 2018 performance is quite strong given the headwinds experienced within our U.S. Industrial Services segment and the 40 basis point favorable impact to 2017's year-to-date consolidated operating margin resulting from the recovery of $18.1 million of certain contract costs previously disputed on a project completed in 2016 within our U.S. Mechanical Construction segment, which we have previously and currently highlighted in all impacted periods.

Diluted earnings per common share from continuing operations is $2.15 for the 6 months ended June 30, 2018, and compares to $1.84 in the corresponding 2017 period. On an adjusted basis, reflecting the add-back of the noncash intangible asset impairment loss, non-GAAP diluted earnings per share from continuing operations would have been $2.17 as compared to 2017's $1.84, which represents an improvement of 17.9% year-over-year.

We are now on Slide 11. EMCOR's balance sheet remains strong at June 30. Variations of note from December 31, 2017, are as follows: our cash balance is reduced from year-end 2017, primarily as a result of the continued repurchase of common stock, payments for acquisitions during the period and cash used in operations of $32.7 million during this time of revenue growth.

Despite our slow cash flow start to 2018, our expectations are still to generate operating cash flows that will approximate our estimated net income for the year.

Working capital levels have increased due to our growth in accounts receivable on contract assets related to our second quarter revenue growth.

Changes in our goodwill balance reflect the impact of businesses acquired during the year.

Identifiable intangible assets have decreased due to the impact of $21.4 million of year-to-date amortization expense and the approximately $900,000 trade name impairment, which were both somewhat offset by acquired intangible assets in connection with the acquisitions facilitated during the first 6 months of this year.

Total debt of $303.1 million is reduced from year-end 2017 due to the mandatory quarterly principal repayments under our term loan of approximately $3.8 million of which $7.6 million has been paid year-to-date. The reduction in our debt balance was partially offset by the amortization of debt issuance costs during the first 6 months of this year.

As a result of our outstanding borrowings, we currently have a debt-to-capitalization ratio of 14.9%.

We remain in a strong position to continue to execute against all of our strategic objectives, and we look forward to enhancing our company for all of our stakeholders.

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

Thanks, Mark. And I will wrap up this morning's call on Pages 12 and 13. As we move to the second half of the year, we're confident. We are going to raise our earnings per share from continuing operations and our revenue guidance for 2018. We are going to raise the bottom end of our EPS range from $4.10 to $4.40 and raise the top end of our range from $4.70 to $4.80 per diluted share from continuing operations. We are moving our revenue guidance to $7.8 billion -- around $7.8 billion.

We had excellent performance in our Electrical and Mechanical Construction segments in the first half of the year and we expect that to continue. Our Building Services segment has performed well on a year-to-date basis and we expect that to continue. And we also expect our U.K. Building Services segment to continue to perform well. With respect to our Industrial Services segment, we expect a resumption of normal demand for our services to materialize in the third and fourth quarters of 2018. And we have the market position and resources to perform. We think the hangover from Hurricane Harvey will be gone as we move to year-end.

How do we move to the top end of our range will depend on excellent performance in all of our segments. And that will manifest itself through outstanding operating income margins.

For capital allocation, we will continue to allocate our capital to growth first and return of cash to shareholders. We have a strong pipeline of small to midsized acquisitions, very similar to what we have done over the past 18 months.

To date, we have -- to date this year, we've returned about $60 million in cash to shareholders through share repurchases and another $9.4 million through dividends through the first half of 2018.

With that, I will turn it over to Adam and he can open the line to questions.

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

So Tony, first question, if I look at your top line guidance, how do I reconcile this with your commentary? Because you're saying that Industrial Services has improved. And you're generally confident about the business, yet your -- the quarterly cadence doesn't seem to improve; it seems to be more stagnant based on your guidance. And I find that a bit strange given fourth quarter is typically a very strong top line quarter for yourself.

Yes, T, I mean, look, in our business, right -- and you rightfully note many times, that we have a lot of book-to-burn work that we have to do and those jobs are between $0.5 million and $3 million. So we're going to go find that work, execute it and get it done. Also, I guess, we expect strong performance in the back half of the year in Industrial. Our experience is to be cautious when you're coming off of a couple of quarters like we've had and let's see it materialize before we get too excited about it. We're confident and we think we have the appropriate amount of reach and conservatism to say around $7.8 billion.

Got it. Okay. And Tony, if I looked and look back around 10 years or so, you started building the facility services business essentially to help mitigate the cyclicality, margins in that are supposed to be good. As we see the construction cycle eventually fade and it seems actually more resilient than I'm sure either of us thought, how do you see your margin profile progressing over the next several years?

As a company or for Building Services, specifically, T?

As a company as a whole.

Well, I mean look, in our guidance, right, is very strong margin performance in the back half of the year. And we've got the company to 5%. I'm not going to prognosticate on what a nonres downturn looks like and when it happens. I've always had the belief that our job, as a management team, is to have the next peak be better than the last peak and the next trough to be better than the last trough. We think we've built a foundation of a business to do that. Mark, I think if we do what we think we're going to do this year, that'll be the best operating income margins probably we've had since '09 and there was a lot of things going on in '09 as we moved from '08 to '09 on some work we were finishing. We've acquisitions that have a margin profile as good as what we are on a consolidated basis or better. We're moving into new geographies with new lines of service. We continue to build out a very strong fire protection business. We continue to add to our strengths around the country, either through organic growth by adding a capability in key markets around the country; and also we continue to add businesses that have a margin profile that are better than EMCOR at a consolidated level. So I can't tell you how exactly things are going to roll out over the next couple of years. We certainly don't want to give back the hard fought gains we've got on the margin side. But in a lot of ways, right now, at this point in the cycle, which we still see a pretty strong nonres cycle and industrial coming back, we still are very protective of our margins, but margin dollars matter as much or more than margin percentages at this point.

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

So my first question, I'm sure you'll be surprised by this, but is we keep hearing about labor tightness and difficulty finding the right people for the right job. You guys have been pretty vocal about your ability to -- where you've been able to find those people and fill the right positions. But just curious if there's been any change there, if you are finding certain positions more difficult to fill.

Look, Noelle, I think in general, right, you have to be a place that people want to work. And I think the labor tightness that we're seeing is mostly at the lower end for the lower-level technicians, which would be sort of someone who can do low-level electrical or low-level mechanical work. There's always tightness for HVAC technicians. That has been a consistence for me for 20 years. But our folks have gotten very creative. I mean, are the next 10% of people we have as productive as the core workforce we have for 80% of the people? Probably not, right. I mean, we've got to train them, we have our core group of people -- I would say our core group of people are more productive than they've ever been right now. We pull or fill consistently. We just had a call this morning to get ready for this call. And the people that we have that are closest to labor, whether it be union labor or nonunion labor, are still fairly optimistic about our ability to attract the kind of people that we need to get the job done. Now we're very disciplined in our bidding. We're not going to take work where we can't complete it. There were something I said in our commentary -- in the commentary -- opening commentary that I think is -- over a large -- long number of years, we recruited teams and our subsidiary CEOs have that have a lot of tenure with us and because of that tenure, they know where to find the labor, whether it be on the union or nonunion side. So was it tough? Sure, it's always tough. It's always tough to find great people that want to execute really hard work. But all that being said, we're still pretty okay with where we are in our ability to attract and retain labor.

Perfect. That's really helpful. And then you guys discussed seeing improvement in the refinery turnaround and maintenance markets. I'm curious if you look at the Gulf Coast, sort of, outside of that, how you're seeing demand trending for, for example, Ardent? And then if you could also comment on the shop business and just expand a little bit on what is driving the mix improvements.

Okay. So let's take them in sequence. So you want -- you're asking specifically what's happening with the turnaround market outside of the Gulf Coast or within the Gulf Coast?

More so excluding the turnaround market, what kind of -- what trends are you seeing in the Gulf Coast region just given some of the commentary that we're hearing that things are kind of picking up in the region?

That is true. We expect -- there's some mega projects planned in the Corpus Christi area over the next 5 years that we hope to be participants in with Rabalais Ardent. The maintenance market on that -- in those embedded people we have in plants, that's picked up somewhat. As you shift gears towards the more upstream market, we have steadily increased our headcount in Ardent and in Rabalais over the past 5 or 6 months. We're not seeing the conversion we'd like to see there yet but that should come. You're reading the same things I'm reading and one of the issues in West Texas right now is the ability to get the oil to market through the pipeline network. We also, in our industrial segment, have entered the midstream cycle and we're starting to see -- we've hired a really good team there and we've good people that know the market. We expect to build a decent business there doing smaller project work and things like compressor stations and gathering areas on the mechanical side. So labor's tightening, nothing like we experienced 10 years ago. We expect it to tighten more as we move into '19 and into '20. But a lot of that will be dependent on these capital projects coming up on the Southern Gulf Coast region.

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

I just hopped on, so I'm sorry if these were asked. On the electrical margins, Tony, you said there was some benefit from transportation in the first half. Do you see that business benefiting from transportation in the back half?

Well, what I meant was we're performing well. And the reason I called out transportation, if you remember a couple of years ago, that was an area of concern with investors. I just wanted to point out in my commentary that we know how to execute that work well and we're executing well. And I've -- Mark, I mean, (inaudible) I don't think there's anything abnormal in the second half.

Yes. I mean the projects that are active, Adam, are going to progress as we move throughout the year. As I had mentioned in my commentary, we actually had some large transportation projects that concluded last year. We're just kind of wrapping up what's been on the books now for the last few years and taking part in some hopefully new contract awards coming. So we'll see. But I don't see anything outsized. No.

I mean typically your electrical margins get better in the back half. I guess there's no reason to think this would be any different than that typical trend?

It all depends on -- not to interrupt Tony -- but I mean, it all depends on projects are completing and starting. So -- and it's not hard and fast that they all start at the beginning of the year and end at the end of the year. So...

In fact, we're more diverse. That's true, right?

Yes.

I mean, it's not -- one thing in general, I mean, I think if you ask any of us, would we take these margins and book them for the back half of the year and be very happy with the first half of the year margins, I think the answer to that would be yes, by and large. For the Electrical and Mechanical Construction segments. I mean, this is really good performance on a year-to-date basis; a 7.1% on a combined operating income margin. And like I said, in some ways, we want to hold onto our hard fought margin gains. But we also -- margin dollars are important. We're not going to relax our discipline we have bidding to chase them.

Okay. And there was nothing in the Q2 Mechanical margin? I mean that was [super sound].

No. That's just execution, man.

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

Tony or Mark, the RPOs, if I just look at this quarter versus what you put up in Q1, it looks like the mechanical business, you've seen a nice bump in work more than a year out, something more than 30%. Should I think of that as primarily larger projects you've picked up? Or could that include some of the smaller, more typical EMCOR contracts that got going within the year?

Yes, Brent, this is Mark. It's actually a mix of both. There's no 1 or 2 mega project in that number that's driving the increase from the end of the first quarter. But it is a nice mix of both stuff at the lower end of the scope with regards to -- or lower end of the scale with regards to contract size as well as some nice midsized projects as well.

Time to get our couple of points with Noelle's question. One of the things our folks have done an excellent job of in what's been a pretty strong market is finding the right -- we've got the right large opportunities and we're very disciplined around those. But they've also been able to find the fill-in work, the sort of $0.5 million to $3 million projects to move our core people on and we've been able to retain our workforce and the productivity gets better and better on that core workforce. We're always going to struggle with that last 10%. And we also have had great success in the water segment -- sector -- the market sector, as we got a great position in what's a pretty good market right now down in South Florida.

Got it. Okay. And...

(inaudible) to your point of it being work more year out, that work will happen over the next 2 to 3 years. We have a good mix of work that's coming now and will be executed in the next 6 to 9 months and work that spreads out over the next 2 to 3 years.

Okay. And I guess, with these new adoption standards, I mean, I know we don't kind of have what it looked like a year ago. But is this a level of visibility, I mean, not far out that's comparable to what you saw for the business a year ago or is it even better?

Yes. There's really no difference. If you think about, and I'll let Mark dig in with sort of the layman's term of what happened between remaining unsatisfied performance obligations and backlog. So big picture, we said, look, there's an accounting standard now, we were pretty darn close to that accounting standard, why not put the stake in the ground and move from there? The only real differences are -- in our case is, we used to have our service agreements in there. We just have 1 year of the service agreements to site-based contracts we had. So we have pretty good sized book of especially mechanical service agreements in our Building Services segment and also partially in our Construction's mechanical segment and then we had the site-based contracts. Like when government wins a 3- or 5-year contract, we had 1 year of the base contract in there. Under the new standard, they said take those out to only the part that's not cancelable. Almost all these contracts have somewhere between 30-, 60- or 90-day cancellations. I think the grace is somewhere around 120 days. So that's both in government and in commercial. They almost never cancel them. We were very conservative before. So that's the part that came out. And went back in, Mark, right, was the change orders we expect to close and we only had signed documents in there before.

Yes, or if we had got a notice to proceed on a contract and actually didn't have the signatures back from the other side.

Yes. So Brent, to answer your question, our visibility is just as good now as it was a year ago. The only place that I think we've been consistent in our public commentary where we lack visibility is within our Industrial Services business, which relative to old backlog, new unsatisfied remaining performance obligations, is only related to the shop orders.

Right, it was never in any of it.

So it was never in the disclosed numbers either under the old or under the new.

So we feel good about our level of remaining performance obligations. We feel good about the mix in it and we feel good about the small project work that's happening, that drives results in revenue in the near term.

Yes, okay. And then, obviously, these transportation projects are performing well for you guys. I thought I caught, maybe you mentioned, there could be some forthcoming prospects in that area that could move into backlog. Is that something that could happen in the second half and give you some more visibility there?

I don't think there's anything imminent in transportation. I mean, and again, every one of those decisions are binary. They tend to be large jobs and you win them or lose them, and you could win them or lose them by 1% or 2%. I think that we're more bullish on what's going on in the commercial sector right now and maybe some of the industrial work that we may get on some of the design build work we do. And again, those things can push out a quarter or 2. But we have a couple projects that are further along in what we call the part 1 design stages that have a good shot at closing. When they close could be anywhere between now and the end of first quarter.

And we do have a follow-up question from Noelle Dilts with Stifel.

I just wanted to go back to the industrial -- the shop business. I think when that business was declining, you guys provided a pretty thorough explanation of why it's important even though it's small. So I was hoping you could kind of revisit that and help us -- remind us why -- and how the mechanics work there in terms of other volume starting to come back in the baseload volume there?

Yes. So look, why is the part that you see in backlog important? If you have the right mix, what that does is allows us to level-load the shop, so it allows us to get better drop-through when we do the repair work because we have a baseload, we're planning hours, we put it on top. It also continues to exercise our engineering muscle which then helps us more on the repair side. Now what we've done, and we did this in the downturn, one would say painfully because we're investing and times were tough back in '09 and '10, we built an integrated shop in one of our shops, which means it has everything from cleaning and so to repair, to new build. It has the full capability. We're going to replicate that model in one of our other shops because we found that to be a very powerful model. And we're going to replicate it in another shop over the next -- one of them should be up and running, golly what, somewhere…

October?

October. The other one will be up and running somewhere by the next October. Why is that important? Well, we think it's a differentiator for us. We're known as excellence in heat exchangers. We have a couple of big product offerings in that area where we're really good. A lot of things we're really good at. We're really good at heat exchangers, the extraction, the insulation, the design, the cleaning, the repair and the manufacture. We're really good at LP Alky units. We're the market leader in both of those 2, not only on the turnaround side, but also in the rebuild side. We're really good at FCC units and cap lifts. And we're really good at specialty welding. That's a pretty robust product line. And we're building capability in refractory and we're building capability midstream on some of the same mechanical skills and applying them somewhere else. And why the shop is important is that gives us a differentiator versus other people, especially in that heat exchanger side. And I tell you, we not only have a couple of shops on the heat exchanger side, we have pipe shops also where we're really pretty good at pre-fabricating pipe for that industrial segment. So it's an integrated model. We have very good technical capability in the most important product lines and offerings there is and we really look forward to taking those excellent resources and coupling them with the market demand as things improve post RV.

And then just shifting back to the Construction business. Anything interesting that you're seeing from just a regional standpoint in terms of areas that appear to be strengthening or those that are a little bit softer?

The markets are generally strong. Commercial's strong to include data center construction. Parts of the market that are strong, I mean, it's pretty broad-based. I mean, I think there's parts of the Midwest that are still struggling but I'm not sure that, that commentary is ever going to change. But there's parts of the Midwest that are doing terrific. I think if you're -- what we've tried real hard to do, especially on the construction side is to be at scale. And if you're 1 or 2 in your regional or local market and you can bring real resources to bear and solve a technical problem and do more design assist work and fast-track some of these complicated projects and you can marshal the skilled workforce and pay that skilled workforce and have the balance sheet flexibility to do it, a lot of people ask what's the optimal number of cash, we always like to think about it as we want our customers to be able to look at that balance sheet and say, "Yes, those guys are going to make sure the job's going to get done and the workforce is going to keep working and the equipment's going to be ordered and everything's going to happen the way it's supposed to." We try real hard to do that, especially on the construction side, to be 1 or 2 in almost every market. Are we that in every market? No. But in the important markets, we're typically 1 or 2 on what we're trying to do.

Okay, great. And then last question on the M&A front. You've in the past said that target multiples are a bit expensive. Seeing any change there and how are you thinking about sort of the -- sorry, go ahead.

You have to -- we have an M&A process that we've developed over an extended period of time. And if you look at what we've done over the last 18 months and what we expect to do over at least the next 6 to 9 -- and the deals close when they close. When you're buying private family companies, sometimes they take a little longer because we want to make sure when we bring them in they're ready to go as part of our company. We're not looking to buy companies cheap. We're looking to pay a fair price for someone's life work. And we're buying people that are market leaders, they want their people to grow and prosper. They want them to be part of an organization and we have a great reputation for acquiring companies and growing them and management seems to stay with us. And that's the kind of deals we're working on right now. Where multiples are for the most part, in our minds, is sort of crazy right now. And if there's something that's sort of a $30 million or $25 million-plus EBITDA company, we've learned that there must be people a lot smarter than us in these industries to be able to pay double-digit multiples for things they know nothing about. And we just can't play at that game. We could. We certainly have the balance sheet capability to do that. I guess we've elected not to do that. And we'll continue to grind it out 3 yards in a cloud of dust. We have a great list of prospects, I mean Mark, Kevin, I mean, you guys, by all means, kick in. I think it's the best list of prospects we've seen in 5 years, 8 years. And will they all close? I hope so. May they not, no, I mean, because we do very good due diligence too. Guys, do you have anything to add to that?

No. The only thing I would add is clearly, we move at a measured pace and we have the capacity to get deals done, as we've proven in the past, but we tend not to jump if it doesn't make sense initially. And we're cautiously optimistic that as we progress into 2019 and beyond, that we're going to continue to be successful in the M&A arena and take advantage of the opportunities that are presented to us.

I think one of the things we've gotten better at is we make sure that company's ready to become part of EMCOR. We hope to before we buy it. So we spend a lot of time in due diligence with the financial organization, with the bidding organization, to make sure that we're not loading up on work that's not good or that we understand the work that they have and make sure it fits with what we're trying to do.

Okay. Anybody else? All right.

No further questions at this time, and I'll turn it back over to management.

Look, Adam, thank you. I'd like to thank everybody for being part of the call today. Thanks for all the questions. I hope everybody enjoys the remainder of their summer. We'll be back to talk to you, I guess, around Halloween. And that's a long time from now, seems like. But thank you all. And have a good summer, and be safe. Bye.

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