Earnings Call: Q2 2020

Aug 3, 2020

Good morning. My name is Lara, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ankur Group Second Quarter 2020 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Mr. Haskell Krestel with FTI Consulting, you may begin. Thank you, Laura, and good morning, everyone. Welcome to the EMCOR Group Conference Call. We are here today to discuss the company's 2020 second quarter results, which were reported this morning. I would like to turn the call over Kevin Mass, Executive Vice President of Shared Services, who will introduce management. Kevin, please go ahead. Thank you, Haskell. Good morning, everyone. Thank you for your interest in EMCOR, and welcome to our earnings conference call for the second quarter of 2020, how time has really moved on. And as I said in our last call, I hope you and your families are well, staying safe as we move through this unprecedented time. For those of you who are accessing the call via the Internet and our website, welcome, and we hope you have arrived at the beginning of our slide presentation that will accompany our remarks today. Please advance to Slide 2. This presentation and discussion contains forward looking statements and certain non GAAP financial information. Page 2's described in detail the forward looking statements and the non GAAP financial information disclosures. I encourage everyone review both disclosures in conjunction with our discussion and accompanying slides. Slide 3 shows the executives who are with me to discuss quarter 6 months results. They are Tony Guzzi, our Chairman, President and Chief Executive Officer Mark Pompa, our Executive Vice President and Chief Financial Officer, and our Senior Vice President and General Counsel, Maxine Mauricio. For call participants not accessing the call directly via the Internet, this presentation, including our slides, will archived in the Investor Relations section of our website under Presentation. And again, you can find us at emcoregroup.com. With that, please said, let me turn the call over to Tony. Thanks a lot, Kevin, and I'll be adjusting pages 4 through 6. Let me first start by thanking our employees for their extraordinary efforts in these continued challenging times. Our performance under these conditions is outstanding. Our organization showed the grit, resiliency, discipline and innovation that we are known for. And we stayed focused on keeping our employees safe, while executing for our customers. The impact of the impairment charge that Mark will cover in detail. Adjusted operating income margins for operating cash flow is excellent We accomplished this in an environment where we had 15.5 percent negative organic revenue growth for the quarter just ended. Our Mechanical Construction segment performance was exceptional with operating income growth of 24% and 8 0.5% operating income margins. Our Electrical Construction segment had strong operating income margins of 7.2%, despite having a 20.1.7 percent decrease in revenues as they were more significantly impacted by the mandated shutdowns that our Mechanical Construction segment was. And further, the Electrical Construction segment is more exposed to the volatility caused by our oil and gas exposure in this segment. Our U. S. Building Services segment had a very strong quarter with 5.6% operating Cannical Services And Government Services businesses. We exit the quarter in a nice, hot, steamy summer, with an even more competitive cost structure. Our Industrial Services segment is also moving ahead in a very challenged market. Our customers are cutting costs, deferring work, and fighting through a really tough market for them, and as a result for us. We will continue to maximize any opportunity available, I don't anticipate this trend to improve until at least the first quarter 2021 at the earliest. We are fortunate to be a segment leader and have longstanding relationships with the most important Our UK segment had a strong quarter, and we expect this execution and performance to continue. They faced many of the our base is more institutional, manufacturing and government focused, and as a result, we have stable field employment throughout the UK shutdown as we were deemed essential in many cases. So how did we continue performing in this environment and how will we continue to perform? My my comments cut across all EMCOR reporting segments. We outline some of these actions on our first quarter call in May April, and we executed well. So number 1, we focused on employee safety first, and as a result, we were able to staff drop safely with the right people said differently, our people had confidence that we would do the right thing. We implemented guidelines to keep operating and when necessary to reopen. We aggressively procured the PPE, that's the personal protective equipment upfront that our employees needed to keep working, and we executed the training necessary to work safely in this environment. We communicated at all levels with a focus on safety, execution and results. Our flat organizational structure helped our communications remain effective and unhampered. Despite to COVID. Our staff did a superb job in distilling these mandates and programs into specific actions, for our subsidiary operations to continue operating productively and safely and in compliance with these buried government mandates. Number 3, we aggressively cut SG and A through both the short and long term measures. We cut executive pay 25% in the quarter, cut other salary employees pay in the quarter, furloughed staff, permitting laid off salary staff, cut almost all travel and entertainment expenses and reduced any additional discretionary expenses. We reduced $21,000,000 in the quarter versus the year ago period And when removing incremental SG and A for businesses acquired, we cut $28,000,000 on an organic basis. I expect about half of those cuts to be permanent. We acted fast and decisively, and it shows in our results. Further, We aggressively right sized our craft labor workforce to match demand through layoffs and furloughs. Number 4, We knew we had to combat what would be reduced productivity because of increased use of PPE and the implementation of other COVID related safety measures. We have successfully provided this challenge and met this challenge by working with our customers and our workforce to offer better scheduling, planning and work practices. We believe for the most part that we are near breakeven on a productivity basis to where we would have been pre COVID. Number 5, we trained our field and our field and Salesforce on IAQ that is indoor air quality and other building enhancements products and projects during the initial phases of COVID, so we would be ready to provide solutions for our customers to be able to return to their facilities with confidence in an improved indoor environment. Number 6, our subsidiary leaders led as well as any organization that I could add imagined. I'll say that again. Our subsidiary leaders led as well as any organization that I could imagine and they executed strong RPO position of $4,600,000,000, a balance sheet that strengthened through the quarter despite adverse conditions, and an even more competitive cost structure than we already had. With all that said, I will turn the discussion over to Mark. Thank you, Tony. Good morning to everyone participating on the call today. For those accessing this presentation via the webcast, we are now on Slide 7. Over the next several slides, I will supplement Tony's opening commentary on EMCOR's 2nd quarter performance, as well as provide an update on our year to date results through June 30. All financial information referenced is derived from our consolidated financial Securities And Exchange Commission earlier this morning. So let's revisit and expand our review of EMCOR's 2nd quarter performance. Consolidated revenues of $2,000,000,000 or down $310,200,000 or 13.3 percent over quarter 2 2019. Our second quarter results include $50,200,000 of revenues attributable to businesses acquired pertaining to the time that such businesses were not owned by EMCOR at last year, 2nd quarter. Acquisition revenues positively impacted both our United States Mechanical Construction And United States Building Services segments. Excluding the impact of businesses acquired, 2nd quarter consolidated revenues decreased approximately $360,400,000 or 15.5%. All of EMCOR's reportable segments experienced quarter over quarter revenue declines as a result of the containment and mitigation measures mandated by certain of our customers as well as numerous governmental authorities in response to COVID 19. This resulted in facilities closures and project delays which impacted our ability The specifics to each of our reportable segments are as follows: United States Electrical Construction segment revenues of 445,900,000 decreased $123,500,000 or 21.7 percent from 2019 second quarter. In addition to the negative impact of the COVID 19 pandemic on 2nd quarter revenues, the unfavorable variance year over year is partially attributable to 2019's all time record quarterly revenue performance. Revenue declines in most of the market sectors we serve were partially offset by quarter over quarter segment revenues of $790,400,000 decreased $32,700,000 or 4 percent from quarter 2, 2019. Excluding acquisition revenues of $47,900,000. This segment's revenues decreased organically 9.8 percent quarter over quarter. Revenue declines in manufacturing and commercial market sector activities were muted by revenue gains quarter over and healthcare market sectors. The prior year quarter also represented an all time quarterly revenue record for our U. S. Mechanical Construction segment. 2nd quarter revenues from EMCOR's combined United States construction business of $1,240,000,000 decreased $156,200,000 or 11.2 percent. As Tony will cover later during this presentation, our combined United States construction business has experienced growth, both sequentially and year over year and the remaining performance delegations through June 30. Some of this growth in RPOs has come at the expense of revenue generation during the second quarter due to COVID-nineteen. However, we were also successful in obtaining new project opportunities during this period. $4,000,000 decreased $51,300,000 or 9.8 percent. Excluding acquisition revenues of $2,300,000, the segment's revenues decreased 10.2 percent from the record results achieved in the second quarter of 2019. Reduced project and controls activities within their mobile mechanical services division largely attributable to the impact quarterly activity within our Government Services division due to both a smaller contract base as well as an overall reduction in government spending. MCORE's Industrial Services segment was significantly impacted by the sharp decrease in volatility in crude oil prices, resulting from geopolitical tensions between OPEC and Russia as well as the dramatic reduction in demand for refined oil products due to the containment and mitigation measures implemented in this segment's customer base has initiated severe cost containment measures, which have resulted in the deferral or cancellation of previously planned maintenance, as well as the suspension of most capital spending programs. As a result, our Industrial Services segment 2nd quarter revenues declined 212,200,000 the $295,500,000 reported in 2019 second quarter. This represents a reduction of $83,300,000 or 0.28 0.2%. United Kingdom Building Services revenues of $93,100,000 decreased $19,400,000 or 17.3 percent from last year quarter. The period over period revenue reduction was primarily attributable to 19 containment and mitigation measures instituted by the UK government. This segment's quarterly revenues were also negatively impacted by $3,400,000 of foreign exchange change headwinds. Please turn to Slide 8. Selling, general and administrative expenses of $205,200,000 represent 10.2 percent of revenues and reflect a decrease of $21,100,000 from quarter 2, 2019. SG and A for the 2nd quarter includes approximately $7,200,000 of incremental expenses from businesses acquired, inclusive of intangible asset amortization, resulting in an organic quarter over quarter decrease of approximately $28,300,000. The decline in organic selling, general and administrative expenses is primarily due to certain cost reductions resulting from or actions taken in response to the COVID-nineteen pandemic. This includes a period over period decrease in salaries expense due to both reduced headcount as well as temporary salary reductions. Additionally, incentive compensation expenses decreased due to lower projected annual operating results relative to incentive targets when compared to the prior year. Lastly, we have experienced reductions in both medical claims as well as certain discretionary spending, such as travel and entertainment costs quarter over quarter. Increase in SG And A as a percentage of revenues is due to the reduction in quarterly consolidated revenues without a commensurate decrease in certain of our fixed overhead costs, as we do not deem the current operating environment to be permanent. During the second quarter, we identified certain indicators of impairment within those of our businesses that are highly dependent on the strength of the oil and gas and related industrial markets. Previously referenced volatility in crude oil prices as well as the containment and mitigation measures implemented in response to the COVID-nineteen pandemic significantly impacted the demand for our services within these businesses resulting in revised near term revenue and operating margin expectations. These negative developments additionally resulted in uncertainty within the U. S. Equity markets which led to an increase in along with a higher weighted average cost of capital has resulted in the recognition of a $232,800,000 non cash impairment charge during the quarter. $225,500,000 of this charge pertains to a write off of goodwill associated with our Industrial Services reporting unit while the remaining $7,300,000 relates to the diminution and value of certain trade names and fixed assets within our United States Industrial Services in our United States Electrical Construction segments. As a result of the non cash impairment charge disreferenced, We are reporting an operating loss for the second quarter of 2020 of $122,600,000, which represents a decrease in absolute dollars, of $242,600,000 when compared to operating income of $120,000,000 reported in the comparable 2019 period. On an adjusted basis, excluding the impact of the non cash impairment loss, our 2nd quarter operating income would have been 110,100,000 which represents a period over we have experienced an increase in operating margin on an adjusted basis. For the second quarter 2020, our non GAAP operating margin was 5.5% compared to a reported segments. Considering the operating environment during the quarter, follows, our U. S. Electrical Construction Services segment operating income of $32,200,000 decreased $11,600,000 from the comparable 2019 period. Reported operating margin margin is due to the significant decrease in revenues, as well as the impact of favorable project closeouts within 2019 second quarter. 2nd quarter operating income of our U. S. Mechanical Construction Services segment of $66,900,000 represents a $13,000,000 increase from last year's quarter. Despite the disruption caused by the COVID-nineteen pandemic, this segment experienced an increase in gross profit within the commercial institutional and healthcare market sectors. Operating margin of 8.5 percent improved 190 basis points over the 6.6 percent operating margin generated in 2019 primarily due to a reporting $99,100,000 of operating income and an 8% operating margin. This performance has improved by $1,400,000 100 basis points operating margin absolute dollars and margin performance. Operating income for U. S. Building Services is $26,400,000 or 5.6 percent of revenues, and although reduced by $1,600,000 from last year's second quarter represents a 30 basis point improvement in operating margin. The quarter over quarter reduction on operating income is due to lower gross profit contributions from their mobile mechanical services and energy services division as a result reductions in revenues as previously mentioned. The improvement in operating margin is due to a better mix of service maintenance and repair activities within the segment's mobile mechanical services division. Our U. S. Industrial Services segment operating income of $3,000,000 represents a decrease of 13 point $1,000,000 from last year's 2nd quarter operating income of $16,000,000. Operating margin of this segment for the 3 months ended June 30, 2020 was 1.4%, compared in quarter over quarter revenues, which resulted from the adverse market conditions mentioned during today's call, as well as significant pricing pressure due to limited shop services opportunities. UK Building Services operating income of $5,400,000 was essentially flat with 2019 second quarter, as foreign exchange headwinds accounted for the modest period over period decline. Operating margin of 5.7 percent represents an 80 basis point increase over last year, as a result of improved maintenance contract performance as well as the implementation of cost containment measures, which resulted in SG and A expense reductions. We are now on Slide 9. Additional financial items of significance for the quarter not addressed on the previous slides are as follows. Quarter 2 gross profit of $315,300,000 is reduced from 2019 second quarter by $31,100,000 or 9 percent, Despite this reduction in gross profit dollars, we did experience an improvement in gross profit as a percentage of revenues, with the reported gross margin of 15.7%, is 80 basis points higher than last year's quarter. As previously mentioned on this call, we had exceptional revenue conversion within our U. S. Mechanical Construction segment, as well as margin expansion within both our U. S. And UK Building Services segments. We are reporting a loss per diluted share of $1.52, as compared to earnings per diluted share and last year's second quarter of $1.49. On an adjusted basis, after adding back the impairment loss on goodwill, identifiable intangible assets and other long lived assets, non GAAP diluted earnings per share is $1.44, as compared to the same reported $1.49 in last year's quarter. This represents a modest reduction of $0.05 or just over 3%. Not to be repetitive in my commentary, but in light of COVID-nineteen and the economic backdrop we all experienced during the last several months, MCORE has done a great job of maximizing returns. We're given the opportunity to deliver its services. Please turn to Slide 10. With the quarter commentary complete, let's turn our attention to EMCOR's first 6 months results. Revenues of $4,310,000,000 represent a decrease of 100 and $9,100,000 or 3.8 percent when compared to revenues of $4,480,000,000 in the corresponding prior year period. Our second quarter revenue declines offset revenue gains posted in quarter 1 at each of our U. S. Mechanical Construction, U. S. Building Services, U. S. Industrial Services And UK Building Services segments, while our U. S. Electrical Construction Services segment has had 2 consecutive quarters of revenue contraction. Year to date gross profit of 6 month period by $6,800,000 or a modest 1%. Year to date gross margin is 15%, which favorably compares to 20 nineteen's year to date gross margin of 14.6%. Gross margin improvement was largely driven by our combined U. S. Construction business, as well as our UK Building Services segment. Selling, general and administrative expenses of $432,200,000 For the 20 26 month period, represent 10 percent of revenues compared to $432,400,000 or 9.6 percent of revenues in 2019. While SG and A for the year to date period has decreased nominally from the prior year, the substantial cost reduction measures implemented in the 2nd quarter have positioned us at a months ended June 30, 2020, which compares to diluted earnings per share of $2.77 in the corresponding 2019 period. Adjusting the results for the current year to exclude the non cash impairment loss on goodwill, identifiable intangible assets and other long lived assets, results in a non GAAP diluted earnings per share of $2.78. When comparing this as adjusted number to last year's reported amount, $2.77, we are reporting a $0.01 increase. I would like to remind everyone on the call that our performance for the 1st 6 months of 2019 set records for most financial metrics with earnings per share in particular, exceeding the prior benchmark by almost 30%. Not to marginalize the sizable impairment charge taken this year, but the fact that on an adjusted basis, we were able to slightly exceed our previous year record, despite the extraordinary market challenges presented, I believe EMCOR has done quite an exceptional job. My last comment on this slide pertaining to EMCOR's income tax rate for 2020. As noted on the slide, EMCOR's tax rate for the 6 months ended June 30, 2020 was 59.4 percent. Our tax seat rate for the remainder of 2020 will continue to be impacted by the impairment charges recorded during the second quarter. The majority of which were non deductible for non for tax purposes. So with that said, at this time, our full year estimated tax rate is between 58 and 59%. However, this can change if any discrete tax events occur during the remainder of the year. We are now on Slide 11. I spent some time during our quarter 1 earnings call detailing EMCOR's liquidity profile. As a reminder, the first quarter is historically our weakest from cash generation standpoint due to quarter was negatively impacted by our inability to monetize certain of our first quarter revenue activities due to delays in customer billings resulting from our previously communicated ransomware attack. However, as Tony mentioned, we had record operating cash flow for the first half of the year, as a result, our liquidity profile has improved from our already strong position. With strong operating cash flow through June, we have paid down the $200,000,000 revolving credit borrowings outstanding as of March 31, 2020, and our cash on hand has increased to $481,400,000 the approximately $359,000,000 on our year end 2019 balance sheet. The improvement in operating cash flow is due to excellent working capital management by our subsidiary leadership teams as well as the benefit of the deferral of certain tax payments due to government measures enacted in response to the COVID-nineteen pandemic. These measures, which included the deferral of estimated U. S. Federal income tax payments, the employer's portion of Social Security tax payments and the remission of value added tax for our UK subsidiary, have favorably impacted 2nd quarter and year to date cash flow by approximately 100,000,000 Please note that while we will continue to benefit from some of these deferrals throughout the remainder of 2020, our estimated U. S. Federal tax payments were funded subsequent to the quarter on July 15. Changes in additional key balance sheet positions are as follows: Working capital levels have 2019 largely as a result of the impairment charges previously referenced. In addition, intangible assets have decreased as a result of $29,400,000 of amortize during the year to date period. Stockholders' equity has declined due to the operating loss recognized during the 1st 6 months of 2020. MCcore's debt to capitalization ratio of 13.5 percent is essentially flat when compared to our position at 20 nineteen's year end. And is reduced from 19.9 percent at March 31, 2020. We have just over 1.2 $1,200,000,000 of availability under our revolving credit line and anticipate that we will continue to generate positive operating cash 2020. EMCOR's balance sheet and resulting liquidity position remains strong, and we continue to preserve our flexibility in evaluating all market opportunities. With my commentary concluded, I will now turn the call back to Tony. Tony? Sector. In short, we continue to win work and have seen our small project activity improve through the second quarter as it hit a low point in April for bookings and execution, some comparisons to consider. Total RPOs at the end of the second quarter were just about 4,600,000,000 up $365,000,000 or 8.6 percent when compared to the June 2019 level of $4,230,000,000. RPOs also increased $167,000,000 from the first quarter of 2020, reflective of the continued demand as we are seeing for market continued demand we are seeing for our services in our markets. So for the 1st 6 months of 2020, total RPOs increased $555,000,000, or 13.8 percent from December 31. With all this growth, only $11,000,000 relates to a tuck in acquisition. So almost almost all of that growth is organic. Domestic RPOs have increased $346,000,000 or 8.4 percent since the year ago period, driven mainly by our Mechanical Construction segment. We did burn through some electrical construction project as we completed complex work. However, high-tech for us means Semiconductor and the data center market. Our U. S. Building Services segment RPOs dipped a little in the quarter as this segment's project work was first impacted by COVID-nineteen, building access delays and decision making. As the economy opens up, combined with the hotter weather, we are gaining more access to facilities and seeing a resumption of our work. Additionally, both both of our Industrial Services and EMCOR UK segments increased RPO level by roughly 15%, respectively, from June 30, 2019. On the right side of the page we have on 12, we show RPOs by market sector. Of the 8 market sectors listed all had year over year RPO increases except for manufacturing and industrial. This is not to be confused our industrial segment. Currently, we're in the process of competing some major food processing projects. We continue to see demand for these large complicated projects and have a number of potential opportunities we are looking at. Commercial project RPOs comprise our largest sector, market sector at over 40% of the total, This is a 19% increase from year end spurred by data center projects. And as we have said before, we are uniquely suited for these fast paced especially in the hyperscale projects from both an electrical and mechanical perspective. Other very active markets for us are healthcare and water wastewater with these sectors being up 25% and 49%, respectively, from year end 2019. To date, we have not seen any material slowdown in bidding opportunities apart from the mandated areas. And that was New York, New Jersey Boston and parts of California and a little bit in Pennsylvania. However, these areas are now open. And as I said earlier, the industry has adapted safe the safety, safe work practices and protocols to keep projects progressing, and especially to keep workers safe. Finally, we are positioned very well to help our customers as they adjust their HVAC and building control systems to improve the IAQ and cleanliness of their buildings and other facilities. It starts with the introduction of more outside air into the space as one of the simplest ways to make a building healthier. But unfortunately, this makes the building less efficient. Tractors, know how to implement UV lights, bipolar ionization, enhanced filter, enhanced filtering and control system modifications. Most of this work will never make it into reported RPOs from a quarter to quarter basis and it is quick turn, high margin activity. Together, it will amount to a nice medium sized project with good margins. I do expect these IAQ additions to longer terms for a more robust HVAC replacement market as we seek to increase efficiency to combat the increase in IAQ. Especially the introduction of outside air. So as I said in our first quarter call, I don't know exactly how all the works specifically will roll out and how that booking will be. It's a fluid and challenging environment. There will be bumps along the way. However, the direction of future opportunities for a contractor like us we remain pointed in a positive direction. So now I'm going to close on pages 13 to 14. When we went through guidance in April, we said we had hoped that we could provide a view on the outlook for the remainder of the year during this second quarter earnings call. We have spent the last few weeks debating internally whether provide more definitive versus generic guidance for the remainder of the year. Which mostly deal with the external environment. The main caveat is we expect operating conditions to remain similar to today's operating conditions where most of the country is open for our type of work, and we are deemed in essential activity. So we decided to give guidance as to the why and what as outlined below. Subject to that main caveat, we are likely going to earn $5 to $5.50 diluted earnings per share this year on an adjusted basis adding back the impact of impairment. I think revenues will likely be 8.6000000000to8.7000000000 in this revenue guidance is second half of the activity. We have seen stabilization in the small project work and the summer heat is helping our U. S. Building Services segment. We have a strong RPO position and we see markets recovering, especially in our mechanical and electrical construction segments, and in our U. S. And UK Building Services segments. So how do you move up in this range? Largely will depend on 3 factors. The external market remains largely the same or even improves from today's operating environment. Under today's conditions, we can book and execute work, keep our workforce productive, and we believe we will continue to see the recovery in the small project work. You know, if the Industrial Services segment folks have an opportunity to help customers in an unexpected way, then we will perform, slightly better than expected. And We have no major project disruptions or any new significant customer bankruptcies. So as far as capital allocation, The dividend is safe for the foreseeable future. However, we are unlikely to make any more share repurchases in the near term. We will look to execute Sensible tuck in acquisitions where we have decent visibility into and belief in the long term success of the acquisition. That's really no different than any time we've hired company. And we based on the business, the market, and the improvements we can make. Have several potential mechanical or electrical construction segment acquisitions and are in the preliminary stage of discussion on several mechanical services, a few small ones, and fire protection acquisitions that we will likely execute. Thanks for all your support during these challenging times. And with that, I'll take questions. Laura? Your first question will come from the line of Brent Thielman from D. A. Davidson. Your line is now live. Sir, go ahead please. Good morning, Brett. Hey, thank you. Hey, good morning. Congratulations on a great quarter. Tony, on the electrical business, I think I caught this at the end. It sounds like they certainly were more impacted by some of these market disruptions. Can you just walk me through? Are you expecting most of those headwinds to abate as we move into the second half of the year as we think about the outlook Yes, look, I think the core of our electrical business, which is commercial construction and institutional construction healthcare construction to continue to be fine and look like the mechanical business. In the electrical business, that's a little bit different is we have a a position in oil and gas. If you'll remember, that's where, 4 years ago we bought Art at Robillay. It's in that segment. Artant Arden had a terrific year last year, and we'll fight through those headwinds in the back half of the year. Mark, anything? Yes. And Brian, the other thing is, you know, some of the major population centers that were entirely shut down. We have significant presence on the electrical side. Some of those markets, we also have a mechanical presence, but more so, electrical focused and the inability to be able to have our people, either report to our offices for work or certainly report to any of any of our customer locations to perform any of the services was extremely difficult in the quarter, which is why you see the revenue and margin performance. Performing very well at 7.2 percent operating income margins. And we've had terrific performance, really across the country. And like Mark said, they had to fight through the head end of shutdowns, but it will have to overcome the compare, in the back half of the year in the oil and gas business. Okay. Okay. I appreciate that. And then, Tony, obviously, I understand the headwinds on the Industrial Services business. Just wondering if you're able to use some of that manpower and capacity, maybe to benefit you in other ways or in other segments sort of through this, through these tough times right now? Yes, we marginally have, look, 1st of all, the manpower we would use is the trade labor. And that's flexible anyway. We have used some of the trade labor, to help us augment, especially on the electrical side, some surge of we had on both the manufacturing and data center side, but that then normalizes. I wouldn't say it in any significant manner, no. Okay. Last one, just, Mark, the impairment of the goodwill intangibles, was that effectively all of it associated with the industrial segment or is there still some remaining on the balance sheet? No, there's roughly, just over $100,000,000 of goodwill remaining in the industrial segment post the, adjustment. Don't foresee an issue for the remainder of this year, but clearly that the business we'll have to continue to perform beyond 2021 to continue to support that record evaluation. Yes, understood. All right, guys. Thank you. Best of luck. Thanks, Brent. Thank you. Thank you, sir. Your next question will come from the line of Adam Thalhimer from Thompson Davis. Your line is now live. Go ahead please. Hey, good morning guys. I would also say congrats. Thank you. Thanks, Adam. Hey, just high level on the back half, embedded within the guidance, how do you guys see seasonality playing out year. Usually Q4 is a little stronger than Q3. Just curious. Yes, I mean, the headwind, I mean, clearly reflected in our guidance is how we see seasonality playing And as I said, we see stronger second half revenues versus first half for all reporting segments, except for industrial. Typically, industrial typically has a good 3rd quarter and even 1st quarter, 4th quarter. So we don't see that happening this year. I think, for the remaining reporting segments, as long as we sort of have the operating conditions we have now, seasonality should be about what it is. Mark, am I right? Yes. And I think, Adam, the only other variable is because we certainly experienced a fair amount of delays during quarter 2, as much as we're able to control the pacing of the projects that we're on, I'm not quite sure once we get through this revenue burst, to get caught up, what that's going to do in quarter for. So, you know, not all of our projects start on January 1st and end of December 31st, as I'm sure everybody in this call knows, But I think with the compression of, through compression of things that have to get performed between July 1st December 31 2020, You may not see a seasonality consistent with what we've experienced on a historical basis. I think I get that. So basically you're just saying Q3, Q4 model in kind of the same this year? Except for industrial. Yes, except for industrial. Okay. And then so on Industrial, so that we've seen that segment do in recent years as low as kind of $140,000,000 of revenue and slight operating loss. Is that kind of what you're anticipating here? I don't know if I've seen them do $140,000,000 of revenue. In Q3 of 'seventeen, it's a while ago. On a quarterly basis. On a quarterly basis, yes. We're taking annual. Look, I think big picture. I think we'll make money on an EBITDA basis. We've got some, you know, a goodwill and depreciation to jump over. I think profitability is going to be de minimis on an operating income basis in the back half of the year. And then what So with what's going on in oil and gas right now, Tony, what I mean, what's your thought on 2021? I have no idea right now. I mean, you know, one of the challenges we've had in that business over the last couple of years is the first quarter is always going to be better right. And quite frankly, the last 2 have been okay. And this year was shaping up to be a good year. So the question is going to be, Let's say we start seeing resumption of air travel, resumption of demand as you go from December, January, February. What does that mean for refiner, decision making is maintenance? Are they going to keep running because they're finally making money again and starting to get to a better capacity utilization, or are they going to go through scheduled maintenance? Sitting here today, I don't really have any visibility on that. On the books, first quarter 2021 looks okay. But I think, boy, we're going to have to really see December before we know that. Understood. And then just lastly, I mean, I I'm trying to rationalize this in my head. Just the ABI is kind of being as low as it has been for the past 4 months. But you guys talked about really strong bidding. And I just how do you guys look that? Well, 1st of all, we're a lagger, right? I mean, we're we would be bidding our projects probably more, congrew in with an ABI in February, March. The second thing is, I think it depends where you're where and how you're competing. I've always sort of, if the ABI is wrong, right, it's consistently right or consistently wrong, right, self reported numbers. My gut, I'm not sure how, that was if I were running my architectural firm or engineering firm, in the months of April May, I'm not sure how I reported numbers with the dispersed workforce to the, AIA would have been at the top of my list. I understood. All right. I'll let somebody else have that. Thanks guys. Thanks, Ed. Thank you, sir. And your next question will come from the line of Noelle Dilts from Stifel. Your line is now live. Please. Hi guys, good morning. And again, congrats on a great performance in the top market. So first, I just wanted to ask, you know, about how you're thinking about share gain. I've heard you know, throughout earning season, a number of larger, you know, kind of higher quality players in the market saying that they think they may be gaining share. Because some of the smaller contractors may be distressed. Just kind of curious how you're thinking about that phenomenon. Yes, we never think about that. Well, that's just sort of something that has never been on our radar screen. This is a big, big market. We are the biggest of what we do, but when there's a lot of competitors out there. I never sit around and worry about who's going to succeed and who's going to fail. Contractors is a wonderful thing about this business, right? When things are well, we talk about contractors over extending themselves and running into working capital problems. When things are bad, we talk about contractors taking bad work and then failing. Here's what I've learned over a long period of time, bid to what you do can bid to make money on the market that's available you to make money, grow when it's responsible to grow in that local market, shrink when you need to and adjust your cost structure, and never count on your competitors making a good good decision in a changing market. All that being said, I don't think there'll be a lot of contractors that are sizable. Let's say $15,000,000 to $20,000,000 contractor that will necessarily fail in this market because of the PPP loans. I think they will survive And the question is what does that look like a year from now? Okay, great. That's helpful. And I guess, you know, it's it's sort of a related question, but, you know, I think, last quarter, you kind of talked a little bit about, it it's just being tough. When you're looking at M And A opportunities, you know, kind of trying to get a sense of the market is going, how to think about the risk with some of the targets you might be looking at. And, and then also the price that was kind of being ended at that time. Are you starting to see things come into balance? You know, what are you just seeing in terms of, of pricing in the market, at the moment when you're looking at some of these targets? We tend to look through the cycle. We closed an acquisition today in our Building Services, segment that augment and strengthen our Mechanical Services segment. It's a very good, mechanicals contractor that focuses on retrofit in the interiors market. We have a pretty good service company there that we think long term together, they'll be dynamite. Of course, we have large project capability on the mechanical side. With our pool and Kent subsidiary. So this is a nice fit in an important market with a company that we've known for a long time and we can sort of look through the cycle and look through the market, into performance. And it is performing very well. And we look, when we make a deal, We always try to look at a deal to say, does this work for us and does it work for the person selling the company? We don't want to be known as the people that are out there looking for a bargain, And if that acquisition exceeds our expectations, it's became from superior execution, our ability to generate synergies, especially on the revenue side, for them to take more risk than they would have typically, they have the capability, but maybe they didn't want to expand their personal balance sheet to do that. I think there will be opportunities, but EMCORE in general does not look for distressed assets. We may have a few times in our past, maybe we've ended up with them, but it wasn't intentional. And so we're going to keep the tried and true thing we've done, look at the market, look at the position in the market of the person we're thinking of buying, If it's a very small acquisition, is it going to tuck into one of our larger acquisitions or even a medium sized acquisition to our larger subsidiaries, That's largely how we've built the fire protection business with 2 anchor acquisitions over time and many, many years ago. And look to generate the right kind of synergies on the revenue side and of course, do the cost takeout where responsible. Thanks. That's very helpful. I guess one last question that expands a bit on what Adam was asking about. When you look out at 20 21 on the non resi side of the market. You've talked about a lot of the high-tech verticals and data center being really strong any other verticals where you're feeling kind of more confident as you look out to next year versus those where you might feel, you know, a little more cautious And then you, you know, spent a lot of time talking about the opportunity around indoor air quality and maybe some remodel. Any, you know, any way that you can help investors think about the size of that, that market in that operation? Let's start big picture. I don't know what will happen in non res. And how what happened in 2nd quarter will impact the overall numbers, you know, whether it will be up or down once you correct for the 2nd quarter. Second quarter didn't have such an anomaly, maybe it would be down a little bit. But I don't know that. But with the second quarter being off as much, could actually be up a little bit, right, on a real basis, year to year. When I think about it, what's likely to be challenged, right? I think just flat out commercial office space will be challenged except for maybe the renovation and the potential retrofit and replacement market. I don't think there'll be a lot of new construction going on, although there are several projects that we're involved with. I think we'll built. It's funny when I went back and looked at, data, as we got rid of for the first quarter call today, we haven't been involved in a high rise commercial office building in any substantial way for 4 years. Greenfield. Yeah. Greenfield, yeah, Mark. Thanks. Greenfield. We're always doing retrofit work. We're always doing tenant fit out work. So I think the greenfield market will be more challenged. I think, residential high rise was already starting to become challenged. I think that'll continue to be challenged. Think anything around technology is going to do well. And that includes built office space. I don't think we're going to walk away from working it offices forever. I think it'll be a hybrid model, and that will require reconfiguration spaces. And I'm not sure people are going to be as excited about their open office plans as they have in the future, because most people want to have contingency plans to operate much like we are today in our offices. I think that, the health care market will have some strength for us potentially as you see in our backlog, because spaces are going to space is going to have to be adjusted. And there are some big projects out there that we're looking at today. I think that the, manufacturingindustrial for us potentially could get strong. It's going to look like an anomaly for a while. As our big food processes jobs move in and out, I think that will continue to be a market that will be strong for us. I'm actually a fairly significant believer in onshoring. And I think we're starting to see, that happen. We've seen it over the last couple of years. But I think it's not only going to be from, China back to the U. S. I think there will be a challenge for Mexico to attract new business. And people will build redundant supply here in the U S, versus Mexico because the Makieladero story was a tough story. We hear from some of our customers and supply lines here in the second quarter with COVID, and they found how difficult it could be operated, operate with the current government. I think that the, institutional market will be a little bit slower and I think it will pick up as buildings get reconfigured. And in the education market, again, you're going to have to think about IAQ, IAQ then drives inefficiency. And so this whole replacement market where we support, we do a little bit ourselves in a couple of states. But for the most part, we support the heck out of, the performance contractors they could in fact see an uptick in their business late 'twenty one going into 'twenty two. I think water and wastewater will continue to be a good market for us. Mainly because of, you know, we have location, location, location, lot going on down in South Florida, and we'll be part of that. I don't think, that, hospitality will be a real area of strength for anybody here anytime soon. In fact, we can argue here at EMCOR. We maybe just start blending that with our commercial sector. We just leave it out there for, comparison sake. Is that helpful? Perfect. Yes, thank you very much. Appreciate it. Thank you. Your next question will come from the line of Sean Eastman from KeyBanc Capital Markets. Your line is now live. Go ahead please. Hi, guys. Compliments with the team on a strong effort, solid quarter. I was just curious, I think one of the highlights here in the second quarter is just that RPO kicking up sequentially, considering this backdrop here. But I guess, you know, partly part of that is kind of helped by a lighter revenue quarter. And you know, you are anticipating the revenue run rate to tick up here in the back half. So I'm just kind of wondering about that second half dynamic, you know, should we expect some RPO to sort of work down in the second half, you know, how should we be thinking about that? I I look, I'll I'll I'll let Mark jump in here too. I what way I look at it is, it depends. We have several projects we're looking at that they get awarded and they're rather significant, then you won't see that. We've also seen more stability in the small project activity that is now part of our RPOs. You'll correct many years that wouldn't have been necessarily in there. I think that one of the things that will be a little bit of a headwind is we're completing 1 heck of a food process job right now. And much like we had 3 years ago, we had a little gap. We may have that again now. We got a lot of we have some very good prospects there. I think that the book and bill business underneath it is okay. Could there be an air pocket that developed because of decision making in April May tying back to this whole ABI number when architects and engineers were working remotely? Yeah, that could happen, but I don't think it's long term yet. Our working assumption at EMCOR has been for a while that things don't get really normal until first quarter of 2021. And we've been sort of configuring our business and working that way for a while. So we're sort of looking around all those pieces, Mark. Yes, Sean, the only thing I would add to Tony, our amplify from Tony's commentary is some of the revenue improvement we're looking at in the back half of the year is going to be coming, the project work that's going to come off the maintenance because of the season, the more normal seasonality and weather we're seeing in most of the geographies where we have mechanical services capabilities. And as Tony indicated, a lot of that work actually never actually goes into RPOs, just because of the quick turn nature of it. Conversely, because where we're looking at revenue declines in the back half of the year within our Industrial Services segment, other than the SHOP piece of that business, as you know, all that work is time and material, so it never actually impacts the RPO number. So I'm not necessarily convinced that you're going to see the same level of sequential growth as we move through the third quarter, but I think with all of the opportunities out there and what we're executing against, I would like to think it's going to be no worse than flat, if not as we progress through quarter 3 and quarter 4. And putting aside some of those larger projects, don't we talk about depending on the timing of when, if they're awarded in they're awarded to us when they come into the next spot. Okay, got it. Helpful. Next is just on the construction segment margins. It's interesting to see both of them hanging in pretty well here, particularly mechanical in the second quarter. Just any update on the margin trajectory in those segments? You guys mentioned mix you know, completing some projects, you know, cost control has been a big thing here in the near term. You know, any reason why these levels aren't sort of sustainable or whether the normalized margin ranges shouldn't be attainable? Even into the out year, even in that I'd go to the latter, not the former. I don't think 8a half set mechanical margins are sustainable for extended period of time. I think we've said these in the past where they jump in and out. We always say look back 12 months and that gives you a pretty straightforward quarter. It gives you a pretty good idea how we're performing. You know, we've said for a long time, anywhere from, you know, 6 to 7.5 percent mechanically is pretty good performance. I guess we ticked that up to 6.5 percent mechanically, which is, you know, pretty good as a baseline to 7 and, you know, maybe 7.5% when you're finishing jobs and are going better than expected. Electrically, we've been performing at these levels for a long time. That you know, both sectors are led by people They really know how to cut costs when they need to, not they know how to meter back in the cost. A lot of it happens upfront. Right? We don't have big write offs typically. You know, maybe we have them every 3 or 4 years. Usually, you know, most of it's not our fault. And we we do a pretty good job recovery sometimes. A third at any given time might be our fault. And so we do a good job avoiding badness. I always say margins are driven by an sense of badness and then executing on good work when you have it. So that funnel upfront is very important, and we have been very careful right now on the kind of jobs we're selecting. And, you know, at the beginning of this COVID thing, people were like getting a little desperate. We didn't participate, and we see more normal bidding resume. So Yes, long winded answer to normalized margins. These are a little high right now for mechanical, but you know, I look back to 12 months, we're doing okay. Mark? Yes, I think I see no reason that we are not going to continue to perform at our historical averages. And really, if you even look at the last 36 months, relative to, our construction operations on a combined basis, they've been fairly consistent within 50 basis points. So the work that's remaining to be performed in our remaining performance obligations as margin profiles consistent with what you've seen us earn And, we're gonna continue to, to operate, you know, under our operational excellence program and, and, and continue to do what's best for, for our customers. So Yeah, if we didn't believe that, we wouldn't put the guidance out that we did, right? I mean, and our major question mark in the back half of the year really centers around industrial and maybe to a much lesser extent as a small project work. And Mark went through why we believe that'll keep going. A much lesser extent on what could happen with small projects. Only cause it's the valve they can turn on and off. Not anything we're actually seeing today. Just if things got really bad like they did in April, that bell would turn off again. And we said that in our guidance, that's one of the caveats. Got it. I'll leave it there. Thanks so much for the time. Really appreciate it. Thank you so much. And for your last question. We have one from Joe Montillo from Sidoti And Company. Your line is now live. Hi. Good morning, everyone. Sorry. I got dropped off the call for about 4 minutes, maybe just a little just a couple minutes ago. Not sure what happened, but, I wanted to ask about sort of the COVID related opportunity in terms of air quality and work there. You know, I know it's probably still early, but I'm wondering what your thoughts are on how big of an opportunity that could be in terms of retrofit buildings for air quality? Yes, I would break it into two pieces, Joe. The first piece is what are you doing today, to take existing systems and making more friendly or better indoor environment. I think when you add all that up at EMCOR, it'll be a nice project. It'll be a altogether, it'll be a sort of $12,000,000 to $20,000,000 project with above average margins. These things are going to happen somewhere between $2,101,000 at a time, maybe 20 at the top end on your typical 100,000 square foot of space. That's sort of what they are. However, the longer term opportunity is, okay, we did what we needed to do with the system we had. Now how do we make sure that we have a better built space for the long term? We do a lot of this on newer buildings. So you're going to have to update the HVAC system and the control system because IAQ for the most part, the biggest part of it is bringing in more outside air that's the first thing you can do and it's actually one of the most effective things you can do. That works across purposes with efficiency. So I believe that as you play this out over a 2 year period, you're going to see the replacement market and it's already a pretty good replacement market because equipment is so much more variable and efficient today than it was even just 10 years ago. I think that's the 2nd phase you'll see. And then I think, of course, there'll be added, HVAC content and controls content in new builds. You're already seeing that, but you'll see even more of that. And then if you even go to a specific case, I think when you get to the healthcare space, now that we've had this issue around ICU beds, right, ICUs in general are built to operate damn near 90% of the capacity all the time, right? They're very expensive. So I think as you build new hospitals and retrofit hospitals, I think you're going to be putting in the ability to flex into more ICU space. So how do you do that? You introduce negative pressure, right, which creates negative pressure in an ICU room. You'll put more of the systems into a room that may or may not be used until you need them. So that's going to be an opportunity that's going to happen. So IAQ is a simple thing to say. It takes on all kinds of different flavors. Existing today, immediate, I can do things. I can put UV lights on, can do enhanced filtering, I can do bipolar ionization, I can increase the airflow from outside. Long term, I can do all kinds of things with the system, those things and more, but they can be actually built into the system. And then longer term, how do I make my space as flexible as I can, either in an industrial setting, an office setting, or a healthcare setting, so I can adjust between different kinds of uses, depending on something like this potentially happening again. Okay. And so I guess when you take the sort of net the 2 opportunities together, you know, how you characterize them. Is your best guess that going to be more material, more in the longer term, say, mid 'twenty one and beyond? Yes. I think 'twenty one it'll add on to an already good summer. Mean, in 20. I think as you get mid-twenty 1 and beyond and things start getting incorporated design, it'll be more material. You won't necessarily see it. You'll just know and more HVAC content in our building, or you'll see a more rapid replacement cycle. Things get replaced to 10 or 12 years instead of 15 to 20. Got it. And then I wanted to ask regarding the cost structure, was there anything, any temporary cost reductions in 2nd quarter that come back, say, starting in 3Q regardless of revenue? About half of it, Will. In my commentary, I said that I think about half of these cost reductions will be permanent. And did you quantify the cost reductions? Yes, we did. We said $21,000,000 actual. We versus the year ago period, $28,000,000 organic. So I think if you do that, you'd say we're picking up about $10,000,000 a quarter, give or take, an ongoing cost reduction. Got it. Okay. And then, the, the RPOs at Mechanical segment, and I, just one other question after this, but, the RPOs there really strong, is that surprising just given, the challenge in the second quarter just with the overall economy? And then also flowing, non res space overall? Or is No, that was driven. Look, even in a slowing non res place, if you have the right capability in the right market, with your larger contractors, you can generate a positive result on your RPOs because of large projects. That is in fact what happened with our larger companies in the mechanical space. We have 2 or 3 of them that really had nice bookings in the quarter. Okay. And then lastly for me, did I hear right that you said you do not expect any further share repurchases for the rest of the year? I didn't say the rest of the year. I said in the near term, and that probably for us means Q3 as of today. Got it. All right. Thanks a lot. We expect to look along those lines, if you take our long term view of the world and we get into a more normalized operating condition, We expect to Thanks a lot. Have a great day. Thank you, Joe. Thank you so much. And that's it for your last question. I will turn the call back the presenters for the closing remarks. Thank you. Well, look, as I finished today, I really want to thank our employees and then the leaders of the of our associates and our employees. This has been an unprecedented 4 or 5 months here. And everybody has just put their head down, gone to work, kept focused on their employee safety, focus on doing the right things by our employees first, the best that we could, and then focused on delivering results for our customers and keeping things on track. You know, it's been a, terrific effort by our leadership team and it's been a very, very exceptional effort for our broader employee base. I think this is going to continue for the next 4 or 5 months. And I know that our team will meet the challenge and will respond to what we need to respond to to keep the organization moving forward in a positive manner. I want to thank all of them first and I thank our customers. And of course, our investors also, and we will continue to try to do everything we can. Deliver good results Thank you everyone for participating. This concludes today's conference. You may now disconnect. Stay safe, and have a lovely day.