Earnings Call: Q2 2019

Jul 30, 2019

Good morning. My name is Adam, and I'll be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group Second Quarter 2019 Earnings Call. Call. You. 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 2019 second quarter results, which were reported earlier this morning. I would like to turn the call over to Kevin Matt, Executive Vice President of Shared Services, who will introduce management. Kevin, please go ahead. Thank you, Jamie, and good morning, everyone. Welcome to EMCOR Group's earnings conference call for the second quarter of 2019. Myware has the year gone already. For those of you who are accessing the call via the internet and our website, welcome to you as well. We hope you have arrived at the beginning of our slide presentation that will accompany our remarks today. We are on Slide 2. This presentation discussion contains forward looking statements and certain non GAAP financial information. Page 2 described in detail the forward looking statements and the non GAAP financial information disclosures. I encourage everyone to review view both disclosures in conjunction with our discussion and accompanying slides. Slide 3 depicts the executives who are with me to discuss the quarter and 6 month results. They are Tony Guzzi, Chairman, President and Chief Executive Officer Mark Pompa, our Executive Vice President, Chief Financial Officer and Treasurer and our Senior Vice President and General Counsel, Maxine Mauricio. For call participants not accessing the conference call via the internet, this presentation, including the slides, will be archived, in the Investor Relations sections of our website under presentation. You can find us at emcorgroup.com. With that said, please let me turn the call over to Tony. Tony? Thanks, Kevin, and good morning, and thanks to everyone for joining our call. On front here, I'm going to speak to pages 4 through 6. We had a great first half of twenty nineteen at EMCOR across all of our reporting segments. Our team is executing well with precision and focus. And as a result, we are delivering great results and end markets to continue to provide great opportunities for I am going in his commentary. Mark will follow me in his commentary, we'll talk about a slew of records that we set in the quarter, but suffice it to say it was a record quarter on many metrics. We had terrific performance which is 19% overall revenue growth All reporting segments had strong organic share from continuing operations, posted 5.2 percent operating income margins, had good SG and A leverage at 9.7 percent of revenues, and have strong remaining performance obligations of $4,230,000,000, which represents strong growth of 15.1% versus the year ago period. 6.5% versus year end 2018 and 1.7% versus the first quarter of 2019 despite our exceptional organic revenue growth. The companies we have acquired are contributing to EMCOR's overall success. They are opening new markets for us, new opportunities for us, and providing us with new capabilities. Our Electrical And Mechanical Construction segments continue the strong performance that we have seen for at least the last eight quarters. We have strong organic revenue growth, good acquisition integration, strong base of earnings. Our Electrical Construction segment had a great quarter, and our Mechanical Construction segment also performed well against a very difficult set of comparisons versus the year ago period. The year is progressing much stronger than we had expected, driven by excellent performance in the commercial market, data centers, and manufacturing and industrial, and steady performance in other end markets like institutional and water and waste water. We also had a nice increase on a combined basis, which shows continued excellent execution. However, we are at the front end of several large projects And as a result, like most large projects, our margin recognition is tempered until we have completed some of the work, especially the labor and gain more comfort in our original estimate. We like our current mix of work and our remaining performance obligations. We like the velocity in our short duration work, and that gives us confidence and the continued strong performance in these segments. Our team, which extends down through our subsidiary leadership, knows how to select, estimate, win and most importantly execute across a range of project types and sizes as well as end market sectors. Our Building Services segment team had another outstanding quarter. We made 5.3% operating income margins and grew operating income almost team continues to successfully integrate acquisitions into our operations. 5 quarters ago, we said we needed to execute well on several large contract wins in our commercial site based business, and we are. We have strong performance in our Mechanical Services business as we continue to see strong demand for retrofit, energy retrofit, control system upgrades, and repair service across most geographic markets. Our government business continues to operate well despite having a small reduction in revenues and our energy services manufacturing business continues to see strong demand as we execute on some complex maintenance and project opportunities. Our team in building services is focused on expanding our customer relationships, winning new business and continuing to offer our customers innovative project approaches and solutions. And you know what, it's nice to see growth return to the segment over the last few quarters. Our industrial service segment had a strong quarter as the business continues to strengthen and regain its market leading position. We are at 5.4% operating income margins and had excellent revenue growth overall of 60.6 percent led by our field services operations. We executed several large turnarounds in the quarter and we were able to showcase what makes our team excel. We performed complex work that requires the deployment of a large, highly skilled work for us on a compressed schedule under the most demanding conditions. Our shop business continues to operate well and has a good mix of work between new build cleaning and repair work. Over the past 12 months, reaching back to the third quarter of 2018, we now have a 12 month period of improved performance. Our Industrial Services team is rebuilding our margin base a piece at a time as demand patterns have stabilized after a rough period in late 2017 early 2018 with a hurricane Harvey disruption. Which caused the recalibration of planned maintenance activities. Our UK team continues to track record our success with 4.9% operating income margin. Strong implementation of contract wins, excellent performance on our facility management contracts, and strong project growth and execution. We have a good pipeline of significant new business development opportunities and we are positioned well to win our fair share of those opportunities. With all that said, we believe we have the best team in the business across all our reporting segments at Here at Corporate. We focus on the task at hand and win for our customers, employees and shareholders. And you know what, we win the right way with the values driven culture of Mission First, people always. With that summary on what was a terrific quarter, I will turn it over to Mark for a detailed financial review of our quarter end and year to date and second quarter 2019 performance. 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 several slides, I will supplement Tony's opening commentary on Imcore's second 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 statements included in both our earnings release announcement and Form 10Q filed with Securities And Exchange Commission earlier this morning. So let's revisit our 2nd quarter performance. Consolidated revenues of $2,320,000,000 are up 370 point $3,000,000 or 19 percent over quarter 2, 2018. Our 2nd quarter results include $72,800,000 of revenues attributable to businesses acquired pertaining to the period of time that such businesses were not owned by EMCORE and last year's second quarter. Acquisition revenues positively impacted both our United States Electrical Construction and United States Building Services segments. Excluding the impact of businesses acquired, 2nd quarter consolidated revenues increased approximately 297,500,000 or a strong 15.2%. Consistent with the last several quarters, all of EMCOR's reportable segments generated revenue growth and our $2,320,000,000 of consolidated revenues represents both a quarter 2 record, as well as an all time quarterly revenue record for EMCOR. United States Electrical Construction revenues of $569,400,000 increased $89,900,000 or 18.7 percent from quarter 2, 2018. Excluding acquisition revenues of $44,700,000, this segment's quarterly revenues grew organically 9.4% quarter over quarter. Revenue gains within the commercial market sector, inclusive of project activities within the telecommunications submarket sector, as well as revenue sectors due to the completion or substantial completion of certain large projects during 2018. The Electrical Construction segment's quarterly revenues of 5 $69,400,000, represent an all time quarterly high for this segment. United States Mechanical Construction revenues of $823,100,000 increased $99,200,000 or 13.7 percent from quarter 2, 2018. This segment's revenue growth was broad based across all market sectors with the exception with the previous segment. EMCOR's total domestic construction business 2nd quarter revenues of 1,390,000,000 increased $189,100,000 or 15.7 percent, of which 12% of such growth was generated from organic activities. United States Building Services quarterly revenues of $523,700,000 increased $62,700,000 or 13.6 percent. Excluding acquisition revenues of $28,100,000, the segment's revenues increased $34,500,000 or 7.5 percent, Revenue growth was experienced across all divisions within this segment other than government services due to reduced levels of IDIQ project activity resulting from both a smaller contract base as well as overall reduced spending levels. This segment like both of our U. S. Construction segments, achieved an all time quarterly $400,000 increased to $111,500,000 or almost 61 percent, primarily as a result of higher field services activities as this segment has seen a resumption in demand for their services, which resulted in an extended spring turnaround season. As a reminder, The 1st 6 months of 2018 were negatively impacted by the residual effects of 20 seventeen's Hurricane Harvey. United Kingdom Building Services revenues of $112,600,000 increased $7,000,000 or 6.7 percent quarter over quarter as this segment is executing against a maintenance contract base of diversified customers with strong demand for follow on project work. This segment's quarterly revenue growth was despite the continued headwinds of a weakening pound sterling, which negatively impacted quarterly revenues by $6,600,000. Please turn to Slide 8. Selling, general and administrative expenses of $226,200,000 represent 9.7 percent of revenues and reflect an increase of $36,300,000 from quarter 2, 2018. SG and A for the second quarter includes approximately $9,500,000 of incremental expenses, inclusive of intangible asset amortization from businesses acquired resulting in an organic quarter over quarter increase of approximately $26,800,000. As has been a common theme over the last several quarters, With the continued achievement of record operating performance, the organic increase in SG And A is primarily due to higher employment costs as a result of increased headcount to support the strong organic revenue growth across all of our reportable segments as well as increased incentive compensation expense necessitated by our expectations for increased year over year profitability. In addition, we continue to absorb higher information technology costs as a result of certain initiatives, which are currently in process. Reported operating income for the quarter of 120,000,000 represents 5.2 percent of revenues and compares to $99,700,000 or 5.1 percent of revenues in 2018 second quarter. This represents a $20,300,000 or 20.4 percent increase with a slight improvement in operating margin, All of our reportable segments have experienced increases in operating income and operating margin quarter over quarter other than our U. S. Mechanical Construction Services segment. Additionally, our consolidated second quarter 2019 operating income of approximately $120,000,000 represents an all time quarterly record for EMCOR. Our US Electrical Construction Services segment operating income of $43,800,000 increased $7,800,000 from the comparable 20 18 period. Reported operating margin of 7.7 percent represents a 20 basis point improvement over last year's second quarter. The increase in this segment's operating income and operating margin was primarily due to increased gross profit from the commercial market sector, inclusive of certain telecommunications projects, as well and healthcare market sectors due to the completion or substantial completion of several large projects that were active in 2018. 2019 second quarter U. S. Mechanical Construction Services segment operating income of $54,000,000 represents a $3,500,000 decrease from last year's quarter. Operating margin of 6.6 percent is reduced by 130 basis points period over period as the segment's operating margin for the 2nd quarter 2018 represented near record level performance due to a more favorable revenue mix than an occurring year. Consistent with my commentary last quarter, This segment's operating performance was impacted by the mix of work currently in process as its project portfolio includes a greater number of large projects in the earlier stages of completion, which typically carry lower projected gross profit margins than projects that are in the later stages of execution. With the sequential growth in this segment's remaining performance obligations, which Tony will touch upon after my commentary, I anticipate this segment's results will continue to reflect strong operating performance. Our total U. S. Construction businesses reporting a 7% operating margin or $97,800,000 of operating income which has increased of $28,000,000 represents 5.3 percent of revenues and a $5,600,000 improvement over last year's second quarter. Operating margin improved by 40 basis points due to quarter over quarter growth and project activity within their Mechanical And Energy Services division, as well as improved profitability within their commercial site based contract portfolio. Our U. S. Industrial Services segment operating income of $16,000,000 represents 5.4 percent of revenues, and an increase of $14,800,000 from last year's second quarter. The increase in quarter over quarter operating performance within this segment is due to both increased demand as well as project timing, a scope pertaining to certain of our turnaround projects extended from quarter 1 into the second quarter of 2019. Additionally, as previously referenced on this call, as well as as the majority of 20172018 quarterly earnings calls, this segment was still suffering from weak demand in early 2018, due to the residual impact of Hurricane Harvey. UK Building Services operating income of $5,500,000 represents 4.9 percent of revenues, and an increase over last year's 2nd quarter operating income of approximately $900,000 or 50 basis points of operating margin, consistent with my revenue commentary, This segment's improved operating income performance was despite the negative impact of the decline in the value of the pound sterling, which reduced reported result U. S. Dollars by approximately $300,000. We are now on Slide quarter not addressed in the previous slides are as follows: quarter 2 gross profit of $346,400,000 represents 14.9 percent of revenues, is improved from the comparable 2018 quarter by $55,500,000 and is consistent on a gross margin basis. Restructuring activity was insignificant in both quarterly periods presented. Diluted earnings per common share from continuing operations is $1.49, and compares to $1.21 for the quarter ended June 30, 2018. On an adjusted basis, reflecting the add back of the noncash identifiable intangible asset impairment loss recorded in 2018 second quarter of approximately $900,000 Our non GAAP diluted earnings per share from continuing operations would have been $1.23 in the year ago period. When compared to 2019 second quarter performance, we have achieved a 21.1% increase quarter over quarter in diluted earnings per share. Our tax rate for the second quarter due to an increase in certain non deductible expenses in the current period. Which is approximately the midpoint of my previously communicated expected income tax rate range for full year 2019. Cash flow from operations for the quarter was a $42,000,000. With our exceptional organic revenue growth during the period, our working capital levels have increased as we continue to invest in our business, Despite our slow cash start to 2019, our expectation for the full year is to generate positive operating cash flow that will approach the net income implied by our revised earnings guidance range, which Tony will discuss later in our presentation. We are now on Slide 10. With the quarter commentary complete, let's an increase of $628,700,000 or 16.3 percent as compared to $3,850,000,000 in the prior year period. Double digit revenue growth across all of our reportable segments other than our UK Building Services segment due to foreign currency headwinds has resulted in a I'm sorry, of $655,100,000 is greater than the comparative 2018 period by $95,200,000 or 17%. Gross margin of 14.6 percent for the 6 months ended June 30, 2019, represents a 10 basis point improvement over gross margin for the 1st 6 months of 2018. Consistent with the revenue growth, each of our reportable segments generated higher gross profit during 2019 6 month period as compared to 2018. Additionally, each of our reportable segments, other than our U. S. Mechanical Construction segment, are reporting improved gross margins period over period. Selling, general and administrative expenses of $432,400,000 for the 6 month period represent 9.6 percent of revenues as compared to $380,900,000 or 9.9 percent of revenues in 2018. We continue to be successful in leveraging our overhead structure during this period of significant revenue successful business model. Year to date operating income is $222,300,000 and represents a $44,600,000 increase over 2018 6 month performance. Our year to date operating margin is 5%, which is 40 basis points higher than the comparative 2018 period, We are new operations is $2.77 for the 6 months ended June 30, 2019, and compares to $2.15 in the core funding 2018 period. Adjusting 20 eighteen's earnings per share from the noncash intangible asset impairment loss recorded in the prior year, non GAAP diluted earnings per share from continuing operations would have been $2.17 when comparing the current year's diluted earnings per share from continuing operations to 20 eighteen's adjusted number, we are reporting a 27.6% year over year EPS improvement. We are now on slide 11. EMCOR's balance sheet remains sufficiently liquid as represented by cash of approximately $213,000,000 and modest leverage, demonstrated by our debt to capitalization ratio of 13.5%. Our cash balance is reduced from December 31, 2018, as a result cash used in operations during the 1st 6 months property plant and equipment. Working capital levels have increased primarily due to the growth in our accounts receivable and contract asset balances related to our strong second quarter revenue growth. The increase in goodwill is due to the 3 businesses acquired in 2019 as well as a purchase only $23,200,000. Total debt, excluding operating lease liabilities, is approximately $295,000,000 and is slightly reduced from year end 2018 levels. We are happy with where our balance sheet is at this time given our significant organic revenue growth and EMCOR continues to be well positioned to capitalize on available opportunities. With my prepared commentary concluded, I will return the call to Tony. Tony? Thanks, Mark. And I'm going to be on Page 12, the remaining performance obligations or our PO by segment end market sector. Quarter 2 was another strong project bookings quarter across the company. Total remaining performance obligations at the end of the 2nd quarter were 4,230,000,000 up $553,000,000 or 15 percent when compared to the June 30, 2018 level, up 3,670,000 Quarter 2 activity also increased $262,000,000 over the December 31, 2018 level of 3,960,000,000. The nonresidential market continues to offer opportunities, and we continue to win our share of project work alongside our robust revenue growth. And in addition, as we've stated throughout our call, our subsidiaries are executing at a very high level on project construction and service operations and we see a general absence of badness across our operations. Our leaders in the field at the executive project management and field superintendent levels are, forgive me for saying this, they're knocking it out of the park right now. With regard to project selection, estimating, resource allocation, offer racial execution, project turnover and completion. That's easily said, but let's not forget, even in a good market, you need to constantly perform and our field teams are performing and we're building and finding the right labor resources. Domestic remaining performance obligations have increased roughly 15% or 533,000,000 since June 30, 2018, driven mainly by our Mechanical And Electrical Construction segments and they're up 17% 13%, respectively, as they are awarded project across most market segments, including some large and complex industrial and commercial and data center projects. In a similar vein, our Mobile Mechanical Services business continues to grow its remaining performance obligations, as demand for HVAC retrofit and maintenance projects continue as our customers seek to improve the efficiency and cost effectiveness of their building systems and building controls. Remaining performance obligations for this group located within our Building Services segment have increased $111,000,000 or roughly 31% from the year ago period. As you look at the graph, the right side of the graph shows remaining performance obligations by Marcus The, basically, what you're seeing in our case is improvement in the private nonresidential sectors of virtual, industrial hospitality and short duration. It's being driven by commercial and industrial and short duration projects. That's good because in the aggregate, they're up almost $578,000,000 or almost 28%. And that's balanced against, as Mark said, a little bit of decline in transportation and healthcare, and we've had steady performance in water, wastewater and institutional. Taking in the aggregate, we're about broke even, from a growth perspective against measured against 2018 in those sectors. And we take a little license in defining these sectors, but we really try to level up against the consensus Bureau data. With all that being said, I'm going to go to pages 1314, which is what everybody on the call actually cares about the most. As we move into the back half of the year, We have healthy markets, and we continue to see bidding and project opportunities across our business. And we believe this level of activity will continue as we move through the back half of twenty nineteen in the early part of 2020. We have had a strong first half of twenty nineteen and are raising our earnings per share per diluted share from continuing operations guidance to a range of $5.50 to $5.75 versus our previous range of $5 to $5.50. This is an over 37% increase or 7.1% when comparing midpoints of those ranges. So in the back as we had a very good second half of last year in that segment. With that as grab background, we now expect revenues of $8,800,000,000 to 8,900,000,000 versus previous guidance of $8,500,000,000 to $8,600,000,000. As we move to the second half, we will continue to execute cost discipline project controls, and we expect our cash flow to improve, as Mark said, to approach our net income level for the year as we move to near year end. The difference between the top end of the range and the bottom end of the range would depend on a couple of things. 1 is the workflows of some of our large project work. How quickly the schedule will move, how quickly we'll be able to accelerate or accomplish planned milestones, And we have to finalize our fall turnaround schedule with our Refining And Petrochemical customers. What we've learned in the past few years from these customers, these downstream customers if they've shown a willingness to move the schedule by a few weeks or months as they determined their optimal plant loading for any given time period. So let me talk about capital allocation. We will maintain our disciplined and balanced approach. We already have closed 3 acquisitions in 2019, and have a robust and active pipeline as well as robust organic growth opportunities as we've seen through the first half of the year. We are buying good companies and we're buying those good companies in what we believe are good markets that allow us to expand any one of our domestic segments from a geographic capability or serving a market sector. We have a very disciplined approach. Many more people want to sell us companies than we are willing to buy. And others buy them, and that's good for them. We balance our internal and external growth efforts with returning cash to shareholders through share repurchases as well as dividends. Thanks for listening. And Adam, let's open the line to questions. Yes, sir. And our first question comes from the line of tahira Afzal with KeyBanc Capital Markets. Hi, gentlemen. This is Sean on Virtu Tahira today. Nice quarter guys. First one for me is, clearly, blowout quarter for the Industrial Services segment. Sounded like the turnaround season was extended, you had some stuff push out from 1Q into 2Q. So I'd just like to get a better sense for second half visibility in that segment? And just how that kind of year over year growth or revenue run rate is going to look in the back half? And also just kind of how sustainable that margin is you guys put up this quarter and how the delta could look around that? Well, look, we hope our margins build from here. And that won't be a linear line. Right, third quarter could be different than 2nd quarter. We have to keep looking back. And over the last, 12 months, we have about a 5% operating income margin and a mid sevens, EBITDA margin in that segment. Remember, that segment has a lot of amortization. That it was built through acquisition. You go to the back half of the year. We had a really strong second half of last year, especially in the early part of fourth quarter. Right now, we expect a decent turnaround season will be as strong as last year's. We still have some places to fill in, but we always places to fill in at this time, moving into the fall turnaround schedule. I think demand has solidified in that sector. I think consolidation will eventually help large contractors like us in that sector. What I mean is consolidation at the refiner level I think, but it allows them to, like I said in my prepared remarks, it allows them to work on optimal plant loading now. And they're getting used to that as they have bigger footprints for the most part to work in. So I'd say demand's okay. When we're in a more normal market, but it's very difficult for us to say, second half will be better than the first half, first half will be better than second half will be better than second half last year. Because so much of that work is discovery work. You get into a turnaround and a turnaround can expand or you get into a turnaround and it'll say, just do what you need to button it up because we have to get that on-site. Or like I said, it can sometimes slide a whole turnaround season and then decide to keep those units open. So we're very much at the mercy of our customers in that segment, and we react to those customers well. And we're lucky that we're able to attract and find the best labor perform for them. Okay, that's helpful. And I guess it's interesting to hear you guys say the bidding momentum likely to continue through the first half of twenty twenty, particularly considering everybody's focused on some of the non res data showing some cracks. I was just hoping for a little more color even anecdotally around some of these, just some of the bidding activity and the opportunities coming down the pipeline for the construction segments. Over the next 12 months just to try and, just understand where the strength is, I guess. Well, understand we've been in a generally slow recovery. It took us till almost 18 months ago to get back to where we were in late 2007, early 2008. For us, a 2 to 5% market still presents opportunity for us. And then if you center that and say, There's some significant large opportunities. The number of contractors that can actually do that work, especially trade contractors greatly diminishes. And so therefore, what we may see as momentum in the market, others might not see there at more at the bottom end. The other thing that's important to remember for us is we're late cycle. So a lot of the early indicators were reacting to early indicators from 12 to 18 months ago. We still see a pretty good market. And I would care if I said moving into 2020, not the first half of twenty twenty, at least that's what I meant to say. So I'll clarify what Mueller did last week, right? We see momentum going into 2020. We don't see past the early part of 2020, right? So we never do. Because you got to remember a lot of our work is the short duration work. And that's an indicator for us too. That short duration work and in the backlog in our mechanical service business, continue to show momentum. In some ways, they're the best indicators of where the market is right now, for bidding opportunities. Okay, that's really helpful. And just to sneak in one last one, I'm just curious what the anticipated acquisition contribution is going to be in the 2nd half. And then I guess more importantly, the implied organic growth, in the guidance for the second half twenty nineteen. But you can do that math. I mean, there's a range to that mark, which 3% to 5%. Pretty tough compare versus the second half of last year. Clearly, we'd love this momentum to continue, but you're starting to run against pretty good comparison. Even at that rate, if you take the full year, we're clearly outperforming the market. On the second point, On the acquisition front, deals happen when they happen. We have a pretty good pipeline We don't really count on a lot of our deals in the 1st 6 to 12 months because they have pretty on an EPS basis. Because they have pretty heavy amortization of backlog. On an EBITDA basis and cash, clearly, we participate in that We've got some nice opportunities to allow us to expand all the things we've talked about geography capability across our domestic footprint. Mark, Yes, I think the only other thing I would add is where we sit in the calendar and what's in front of us, what's possible to happen in 2019. Is probably more skewed towards the later, later half of the six months. So just as Tony said, adding to that, they're not going to be in the portfolio for all that long provide a significant contribution. And with regards to the revised earnings guidance, we've reflected what we thought would be at appropriate level of contribution, if any, for those that we believe are going to be successful. Very minimal. You may see a little bit of revenue, but not much else on the reported financials. Got it. Thanks so much for the time, gentlemen. Yes, you're welcome. And your next question comes from the line of Noelle Dilts with Stifel. Hi guys. Congrats on a great quarter. Hi, Noel. So first, I just wanted to expand circle back to the question on industrial services margins and, just see if you could expand on how you're thinking about that now over the long term. I know there's still some opportunity for expansion there. So can you talk to me about how you're thinking about the longer term goal and what we need to see to get there? Well, we got to continue to see strengthening in our shop business. We got to successfully open this, fully open this new cleaning stand in Louisiana. It's open, but we got to get the benefit of that in the fall turnaround season. We got to continue to look for niche opportunities like we have by building a refractory business. And then we have to continue to pursue the large turnarounds because that eats the overhead. I think if you ask us and ask the team in Industrial Services, 5% is a good place to get back to, give or take. But clearly, we expect on an operating income basis to be north of 6 and on an EBITDA basis north of, high 7s, mid 8s and we got to get there first before we can increase from there. Yes. Noelle, Matt, on year to date through June, that segment is at 4 point 6% operating margin. So as Tony said, clearly in the short term, our expectations as I get back at at least equal to what we are on a consolidated basis are slightly higher. And then obviously, if you look at the historical run rates, There's certainly some opportunities to improve, but it is solely dependent on mix of work. And as Tony had commented, with the less percentage of their revenues and their profit being generated from shop activities, which tend to be higher, higher profit margin contributors versus the field service work. We can't drive the demand to get that balance to a more preferable place, but ultimately, we're going to take advantage of the opportunities in front of us. Right. Okay. And then second, labor has been obviously a big conversation over the last year. Given that you are still seeing a lot of demand and strong momentum, how would you say you're thinking about just industry wide labor utilization at this point. And I'm curious if your ability to attract quality labor, if you think that's part of what driving share gains? Yes. Our ability to attract very good labor our ability to take care of that labor, to provide them opportunities if they do a good job for us, our ability to keep them safe and be led by terrific people in the field are all reasons why we attract it. I would tell you, I would not want to be at the low end of the labor pool right now. I would not want to be trying to attract painters or insulators, or landscapers or cleaners right now in any substantial way. Because any of those that are at the top of their profession are trying to migrate into the skilled trades. And this is sort of counterintuitive But in this market right now with some of these large jobs, it has become much more of a you, again, skilled trades market, because, you know, if you're a nonunion person and we're both, I mean, but if you're a nonunion person in a pretty good union market, and there's work available and the union will accept you at a pretty high level close to journeyman. You're going to go there. You get better wages, better work conditions and maybe more opportunity in the future. So Mark, I mean, I think we constantly talk to our field leadership down through the subsidiary into the superintendent levels. Because we have those great field superintendents, we're still attracting our fair share of great labor. Okay, great. That's helpful. And finally, could you just comment quickly on what you're seeing from a geographic perspective, in the U. S, is there any particular pockets of strength in activity or areas where you're seeing slowdown? Look, we're not very big in it anyway, but I'm glad we're not. I'm glad we're not a big residential high rise builder in San Francisco and I'm glad we're not a big residential high rise builder in New York City. The we do, we still see pretty good demand and it's pretty broad based from what we would have seen over the last couple of years. We see good opportunities in water and wastewater in Florida, Our Boston business, our Northeast business continues to be strong. Our Midwest business is strong, especially driven by manufacturing and fire protection and energy retrofit projects and control system upgrades. Our California business because again, the niches we participate in. Some of it was a little bit slow, but now it's regained. It's got some large project opportunities in front of it. Our service operations in California are exceptionally strong right now as we continue to drive energy retrofit work Our commercial business in Texas continues to regain strength. We're mainly in the Houston market, but with some of our acquisitions on the fire protection side, we're seeing Broadfish strength overall, especially in the data center market as it pertains to fire protection. And we got in there through acquisition. We're able to build that skill more broadly based. So there's really, you know, because in the Mid Atlantic continues to be very strong, broad based, commercial data centers, some health care. And so because we slowly rebuild through and rebuild our labor force responsibly, including on the management side. And now we're able to respond to larger project opportunities in more scope Right now, that's a trend we see because people know we can get the labor, we're pricing the work right, we're procuring the materials right, and we're executing well. And your next question comes from the line of Adam Thalhimer with Thompson Davis. Hey, Tony, can you give us some more flavor for, what's going into backlog? Which driving your backlog? Maybe the pricing within backlog I don't make a lot of comments on pricing because with pricing comes execution. You can have great pricing, but if you estimated it wrong, it turns into back pricing relatively quickly. And as you get up in project size, which is what is a you see the short day duration work increasing. That medium project side for EMCORB about $1,000,000, that's been very steady. But ultimately, what drives backlog increases is large projects, right, because we're running at such a high rate right now and our organic growth is pretty good. To demonstrably move backlog, you have to have some large projects and we'd define those as $30,000,000 plus. When you get to that level of project, And you're working against the budget a lot of times. And you're working against, can we get this project done? What's the scope going to look like? How are we going to execute That's the kind of work that's going in the backlog. And for there, what our folks have done a terrific job on is getting the scope right protecting us on the contractual terms. And sometimes it's better not to get the next increment of price. If you can get better contract terms to protect you as design or scope changes happen. And that's why you're seeing the general absence of badness. So, you know, services business or construction business is a funny thing. What really drives margin, what really makes this thing whole work is a general absence of badness. I mean, that we're performing what we said we perform. And we're not having big write downs. And that is what makes EMCOR. Yes, we've had write downs in the past, but they're nowhere near with the big EPC firm. It's important for people to always remember that about us. Other than some food process work and maybe a chiller room, we don't do EPC work. We are a specialty trade contractor. And what we do is we take a set of plans and specs, or we take a time and material job We figure out how to buy out that job, usually very successfully, and then we implement our labor and where we really make our money, is productively employing our labor to the best we can with the best mix of work that we can on that job. And so that is more important than saying, I just got great pricing on that job because that's, that can be a big misnomer. All it takes is one bad job and any pricing advantage you have has gone. Okay. So then those $30,000,000 plus jobs that you said drove backlog, you still see a good pipeline of those in the market? Yes. Okay. Moving over to Industrial, it sounds like just from answering a previous question, you'd prefer us to modeling slightly down revenue in the back half for industrial, just from a modeling perspective, not that that's the most I don't don't want to focus on it. I'd say it's plus or minus last year, flat to minus plus a little bit. Yes. And then what is the Can you remind us what's the peak revenue for that segment now? Because you did $1,070,000,000 back in 2016. You've done some acquisition since then. Mean, if we're really in a healthy market, we haven't made any acquisitions of that, that's up on that segment for a long time. We moved one of our companies from construction to Industrial. Industrial. Industrial. But all that's really doing is making up for their inability to serve California without that business. So it's sort of a wash. I thought Arden had a maybe Arden was back in 2020. Arden's not staying with you. Arden's in our Midwest Electrical Construction segment, Adam. Okay. And then lastly, I wanted to ask about the margins for the segments, just how you're thinking about this for the back half. As I try to get to your guidance, I'm thinking electrical margins kind of flattish mechanical margins up versus the 1st half and building services kind of flattish. Mark? You're not that far off, Adam. And your next question comes from the line of Zane Karimi with D. A. Davidson. Hey, good morning and solid quarter. Thanks. Thank you. Just hoping to provide any additional color on the Building Services margins. They continue to be pretty strong. And is there any mix benefit that or is that purely better terms, conditions, execution, etcetera? It's better execution, especially on our site based contract. But it's really being driven by really good mix right now, between mechanical service and some of our manufacturing energy work Mark? Yes, I think the only thing I would add to that, Zane, is that, that particular segment has gone through a pretty dramatic portfolio reshaping over the last several years. Now that we've gotten beyond some of the some of the work that either we decided not to rebid or we moved away from. You're seeing a more of contribution of the underlying business that's been there all along. So there's not much in that portfolio that's diluting the overall margin performance of that particular segment. So you're able to see if it's true performance now. Thank you. I appreciate that color there. And then kind of touching on the M and A environment commenting on earlier. Just help me get your update on it as well as any perspective on patients and what you see around the industry as a whole? Yes, I'll comment on EMCOR. Where we've had great success over our last I'd say 3 years and the last seven acquisitions all have a story. We're buying companies where people want to be bought by EMCOR. We want to make a fair deal with them. We don't want to buy them cheap. We're not buying them cheap. We're buying them at the appropriate value. We think we're buying good companies and the results back that up good companies with good capabilities in good markets to either augment us where market we're already in or to open a new market up to us. And we put a lot of thought into it. I mean, we do very, very rigorous operational due diligence legal due diligence, financial due diligence, risk due diligence insurance, which is a big deal in our business, safety due diligence, And we don't say yes to everything, not even close. We can get pretty far down the line in the initial stages before we make an offer. And just say, if we buy this, we would buy this at this because this is what the business actually can do without a lot of investment from us. Others, we say there's more upside here. And in fact, the person we're talking to, we both agree that yes. And when that happens, we were able to get to a deal. I simplify good companies, good markets, good people. Got you. And your next question comes from the line of Joe Mondillo with Sidoti and Company. Hi, good morning, everyone. Good morning. Just had a question on sort of execution. Wondering how you internally measure execution amongst all the various projects that you're involved with. And curious at this point in time right now, how sort of execution stacks up against past years at the company? I mean, I'll take a shot at it and ask my CFO to come. We measure the heck out of You start with the you start with an estimate that then goes into our work in process. And we have a rigorous work in process, methodology here at Empor. It has all the standard metrics you'd expect to see on it. But we go through rigorous work in process reviews every month all the way up through our corporate leadership team, starts at the project level, goes to subsidiary leadership, goes to segment level, makes it up the way to market his team, and of course, they manage by exception at that level. And they have great tools to analytically look at that. But we measure against what we thought we were going to do, right? I mean, we said we were going to do X, how are we doing that? Then we take a good look back at historical performance. And what should we expect, not only by company type of company, market sector, type of project type of contract. The other thing we do is we do a lot of training around that. We spend a lot of time talking to people about the right way to look at that, the right way to look at the cost to complete, the right way to at risk. Ultimately, for us to make money and for us to do as well as we are, 2 big levers have to happen. The first is don't screw up, do no harm, which means don't have any big looters in the portfolio, which right now, we don't. The second part is, get the estimate right, execute well, close out the job, and get off the job. You got to do both of those 2 things well. And I would add a third thing, which goes with that second one is we got to get labor productivity. So that means investing in BIM. Prefab, digital tools. I mean, I'll ask when people say, RG Digital, we're probably the most digital specialty trade contractor in the market. But that would have been asking us 10, 20 years ago, are you going to use the Hilton station? I mean, it's part of what we do, Mark? Yes, the only thing I would add to Tony's commentary, Joe, is with regards to the level of review and the rigor of the review, it's actually monthly. Right. So to the extent that there's any projects, in the portfolio that are under performing, we will recognize that fairly early in the project timeline and develop action plans to try to get ahead of it. So unlike some other people that may not take a detailed review quarterly or semiannually, we're looking at this information on a monthly basis And as Tony indicated, there's a lot of different eyes looking at it. And the great thing about having a lot of different eyes doing those reviews is everybody has a slightly perspective or bent of what they're looking for. So it's not just margin performance. It's obviously cash flow attributes. Are we cash ahead, cash behind? Obviously, we're aware of what the contractual terms are with regards to milestones and billing. On most of the large work. And, I think this the level and frequency of inquiry prevents us from from having many projects that actually result in being marginally profitable or loss projects with the number of work not the amount of work we perform in any given quarter or any given year, obviously, that's almost impossible to prevent. And I think what you're seeing in the current period results as opposed to some of the earlier periods is the fact that we haven't had any significant projects of note that are either breakeven or loss projects, which obviously, we would recognize that when we identify it as a problem, but the bigger problem once that happens is we don't have any revenue being burned through the company right now where we're not recognizing any margin. So where we've had projects in the past that were of of consequence and that had some difficulties. We then were burning revenue after that happens at no margin, which obviously dilutes the overall margins of the company. What you're seeing currently in 2019 and what you saw or almost all of 2018 is you didn't have any of that, that revenue, being burned by the company with either no margin or very low margin. So you're able to see the true performance of EMCOR at its best. The other thing I'd add to Mark, Mark, write a key statement, lots of sets of eyes. I would add one adjective to that qualified qualified and experienced. People are asking incisive questions and insightful questions. And so our field leadership very rarely fulfill from our internal resources that they're getting questions that are crazy. They're saying the app. Right question to ask and here's what we think. The other thing is, one of our core values here at EMCOR's transparency And we believe that it has to be a core value for a company that's as decentralized as we are, and it's one of the things that united together. We always have a very bad news has to travel really fast here. Good news can wait a while. Bad news has to travel fast. And we also don't overreact to bad news. We react to it in an appropriate way, and we bring all the skills that we can. And our folks know that. I mean, they know that we're going to we're in the game with them. And I would say the other thing that maybe changes us versus other people, none of us are, what I would call traditional corporate types. We're not M and A people. We are operating people from our finance team to our legal team, our safety team, our risk team, everything is focused on supporting the operations in the field. And we do acquisitions because we want to build great operations. We don't do acquisitions just to do acquisitions. We invest organically we want to get productivity. We just don't invest organically because it's a new experiment. We usually try something small and then go larger on it. So this is relentless focus on operations and productivity and the safety of our people and the transparency that I think is core to what we do, and it's how we behave, it's how we ask questions, it's how we answer questions, and it's what makes us who we are. And we take bad news and we do something with it. We don't just sit on it. So just a quick really quick follow-up to that question. At these levels of execution that you're running at, how hard is it to sort of, I guess, squeak out more margin in terms of efficiency and execution? Our segments have ranges of margins based on the mix of work they have and where they are in the project cycle. I think we're pretty good margins right now. Not going to call it peak margins because they could go up 20 or 30 basis points or go down 10 basis points. I mean, the margins we're currently earning are reflective of the mix of revenue we have. If we get an improved mix of revenue, then there's obviously the opportunity for margin improvements. All right. And then I also wanted to ask in terms of how your nonunion businesses have been performing relative to your union base compared to sort of historically, is there any changing dynamics or, in the past year or 2, is anything trended differently between the 2? No. Other than industrial, but that has nothing to do with union versus non union. That has with the recovering market. Okay. And then last question, just in terms of capacity, capacity is for the most part, based on personnel and trying to find the skilled labor and whatnot. Have you had any issues at any of your locations Obviously, this has been a sort of a theme in the industrial world, but, are you running up against capacity, at all? Okay. They always qualify adjectives. You say, have you had any issues? Well, in a bad market that has labor, we make sure we have the right mix of labor. So you always have issues as you assemble a workforce of 37 of people. Are we having trouble staffing our projects with the appropriate level of resources? I go back to our earlier comment. Because of where we are in the food chain, because of the excellence we have in project management and our field superintendents. And understand, all of EMCOR's subsidiary leadership came from the field. They were either project managers, they were filled our operating people, operations managers or they came up through the trade, they know labor and labor trust them because they keep them safe. We pay them every week. They're led by people that know what they're doing. And if they do a good job for us, They're likely to have follow on work and be part of our core team. Our folks know skilled labor. Okay, good enough. Thanks for taking my questions. Appreciate it. Thanks, John. Thank you. And there are no further questions at this time. Terrific quarter. Thanks to the people in the field. We'll talk to you all in October. Thank you. And this concludes today's conference call. Thank you for your participation. You may now disconnect.