Earnings Call: Q3 2017

Oct 26, 2017

Good morning. My name is Doris, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCORE Group 3rd Quarter 2017 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a Mr. Bradley Vitu with FTI Consulting, you may begin. Thank you, Doris, and good morning, everyone. Welcome to the Encore Group conference call. We are here today to discuss the company's 2017 third quarter results which were reported this morning. I would like to turn the call over to Kevin Metz, Executive Vice President of Shared Services, who will introduce management. Kevin, please go ahead. Thank you, Brad, and good morning, everyone. Welcome to EMCOR Group's earnings conference call for the third quarter of 2017. It's crazy to me how quickly this year is going by. 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 presentation that will accompany our remarks today. We are currently on Slide 2. Slide 2 are the folks that are with me to discuss the quarter 9 months results. Dayar, Tony Guzzi, our President and Chief Executive Officer Mark Pompa, Executive Vice President and Chief Financial Officer Maxine Mauricio, our Senior Vice President And General Counsel and our Vice President of Marketing And Communications, Maeva Heffler. For call participants not accessing the conference call via the Internet, This presentation, including the slides, will be archived in the Investor Relations section of our website under Presentation. You can find us at emcorgroup.com. Before we begin, I as of the state and EMCOR assumes no obligation to update any such forward looking statements. These forward looking statements involve risk and uncertainties that could cause actual results to differ materially from the forward looking statements. Accordingly, these statements are no guarantee of future performance. Such risks and uncertainties include, but are not limited to, adverse effects of general economic conditions, changes in the political environment changes in the specific markets for our services, adverse business conditions, increased competition, mix of business and risks associated with foreign operations. Certain of the risks and factors associated with EMCOR's business are also discussed in this company's 2016 Form 10 K and another report filed from time to time with the Securities And Exchange Commission. With that said, please let me turn the call over to Tony. Tony? Thanks, Kevin. Look, we had a great quarter despite significant industrial services segment headwinds, which was primarily caused by Hurricane Harvey. So I'm going to be on pages 3 to 4 to start the discussion today. We are on record quarterly earnings per share diluted share from continuing operations of $1.09 on revenues of $1,890,000,000 and operating margins of 5.6%. We set quarterly records for operating income, net income, and diluted EPS from continuing operations. We had great execution in our mechanical and electrical construction segments. We had strong execution in Building Services and the UK, and we had a real tough quarter in industrial in the industrial segment where our customers were hit hard by Hurricane Harvey. This quarter, much like our strong performance over the last 2 years, really highlights the operational strength and end market diversity of EMCOR's businesses. We focus and we respond to our customer's needs and we bring strong technical expertise and project and program execution to their business needs, and we do that very well. This continued strong performance showcases our ability to move definitely between opportunities and markets. In our Mechanical And Electrical Construction segments, we performed exceptionally. The strong performance was pretty broad based by end market and trade. We executed well in both of these segments in Commercial, Transportation And Industrial Plus Manufacturing. We had extraordinary operating income margins in our Electrical Construction segment of 10.2% and in our Mechanical Construction segment of 7.6%. Yes, we have achieved substantial cost savings in the completion of several large complex projects. But as important or more importantly, we've had outstanding overhead absorption over the past 12 months as we have grown revenues with very little fixed cost increases. Our competition is still very aggressive and our customers are as demanding as ever. If you may recall, we believe that the anywhere between 5.56.5 percent operating margins is very good mechanical construction performance. And we also believe anywhere from 6.5to7.5to7.75percentto7.3quarters operating income margins is very good electrical construction performance. As we have said many times, a trailing 4 to 8 quarter average of our operating income margins is more indicative of our overall performance. It has a tough jobs, the resolution of the tough jobs, the really good jobs, the overhead absorption, contracts converted, etcetera, etcetera, all in those numbers. We also had strong organic revenue growth in our Mechanical segment. Overall, 9.9%, about three quarters of that was organic in the 3rd quarter. Building Services had a very good quarter. Lead bikes continued strong execution in our mechanical services business and improved performance in our commercial site based business. Despite a decline in revenues, we had improved operating income margin improvement as operating income margin improved from over a long period of time. But we are very pleased that our operating income margins are at 4.6% year to date. And really, that's an objective we've been shooting to be north of 4.5%, and we want to be able to operate this segment above that. And certainly, the improved mix helps drive this improvement as some lower margin, commercial accounts move to their new rightful account holders. And they can go ahead and perform that work at very low margins. Harvey crushed our Industrial Services segment this quarter. As a result, we've had significant work changed and pushed out. We still do not have great clarity over the revised turnaround schedules for a significantly changed fall and likely changes to the spring 2018 schedule. That will likely cause a short term reduction in previously planned work as our customers bring their plants to full operational status. We did respond very well for our customers through this disrupted event. Some of our customers who are hit especially hard, especially on the petrochemical side. And right now, they're taking detailed engineering reviews underway to plan the work ahead and bring their plants fully online. We do expect to earn some significant work from these plants as they recover but to date, we cannot place a timeline or value on that work. This delay could cause significant work to be delayed anywhere from 6 to 9 months. A lot of ways to remind us of what happened with the refinery operator strike in the spring of 2015. As that event created some real headwind for two to three quarters during and after the event. The work eventually came back with some increased scope but the reality is you cannot find the discrete work or events that you are going to execute. Also, the storm led to under absorption of overhead, as we were prepped to execute the work coupled with the lost work days from the storm. And we still paid our full time salary and hourly people despite limited opportunity to gain revenue during those time periods. I do expect our Industrial segment to earn positive operating income in the fourth quarter if workflows as currently planned. Our UK segment is finally seeing the payoff from all our hard work of restructuring the company and winning new work and moving through the startup phase on that significant new work. The PROS Brexit foreign exchange impact is largely behind us absent another significant dislocation, and we are realizing the benefits of our improved focus and execution in the UK. We can see the results the impact of a successful multiyear effort to improve our business. I want to acknowledge that success and we look forward to the continued success of our UK business. But also to invest in acquisitions and share repurchases. Our backlog has grown from a year ago period by 1.5% and stands at $3,960,000,000. We had excellent cash flow in the quarter of $135,400,000. We also had an excellent quarter where we overcame significant and I just want to emphasize that adversity in our Industrial Services segment. And with that, Mark, I'll turn it over to you. Thank you, Tony, and good morning to everyone participating on the call this morning. For those accessing this presentation via the webcast, we're now on Slide 6. Over the next several slides, I will augment Tony's opening commentary with a detailed discussion of our third quarter 2017 results, as well as a summary of our year to date results through September 30th. All financial information referenced is derived from our consolidated financial statements included in both our earnings release announcement and Form 10Q filed with the Securities And Exchange Commission earlier this morning. So let's revisit our 3rd quarter performance. Consolidated revenues of $1,890,000,000 are down 1.9% over quarter 3 2016. Our 3rd quarter results include $34,700,000 of revenues attributable to businesses acquired, pertaining to the period of time that such businesses were not owned by EMCOR in last year's third quarter. Acquisition revenues positively impacted our U. S. Mechanical Construction and U. S. Building Services segments. Excluding the impact of businesses acquired, 3rd quarter revenues declined organically $71,200,000 or 3.7%. U. S. Electrical Construction 3rd quarter revenues of $457,900,000 were essentially flat with quarter 3 2016. Quarter over quarter revenue gains within the institutional, commercial and healthcare market sectors were offset by revenue declines within the industrial and transportation market sectors due to the completion or substantial completion of large projects active in both 2016 third quarter as well as the 1st 2 quarters of 2017. U. S. Mechanical Construction Third Quarter revenues of 760,100,000 increased $68,300,000 or 9.9 percent from quarter 3 2016. Excluding acquisition revenues of $17,900,000 This segment grew organically 7.3 percent quarter over quarter. This segment's revenue growth was primarily driven by higher project activity within the healthcare, hospitality and commercial market sectors, slightly offset by reduced industrial construction project activity. EMCOR's total domestic construction business 3rd quarter revenues of one point $2,000,000,000 increased $67,600,000 or 5.9 percent with 4.3% of that growth being generated from organic activities. US Building Services revenues of $437,100,000 decreased $23,600,000 or 5.1 percent. Excluding acquisition revenues of $16,800,000, this segment's quarterly revenues decreased $40,400,000 or 8.8 percent organically. Revenue growth within their Mechanical Services division was offset by revenue declines within their commercial site based and government services divisions due to maintenance contract attrition, primarily occurring in 2016 as well as less indefinite duration and definite quantity project volumes from government related activities. US Industrial Services revenues of $145,700,000 decreased $93,400,000 or 39% due to lower field services activities quarter over quarter as a result of Hurricane Harvey's impact to our customers' facilities in the Texas, Louisiana Gulf Coast region. Due to the severity of the storm and its prolonged impact, previously scheduled maintenance turnaround work has been delayed or deferred Additionally, 2016 third quarter revenues were favorably impacted by the execution of a large specialty services capital project that was completed in 2016. United Kingdom Building Services revenues of $85,900,000 increased $12,900,000 or 17.6 percent a result of new service contract awards that commenced after July 1st this year. These new contract awards were successful in offsetting the continued weakness in United Kingdom Small project and capital project activity. Foreign exchange headwinds were minimal in the quarter over quarter comparison and did not substantially impact our current quarter results. Please turn to Slide 7. Selling, general and administrative expenses of 188,600,000 represent 10% of 3rd quarter revenues and an increase of $7,100,000 from the $181,400,000 reported in 2016 third quarter. The current year's quarter includes approximately $3,800,000 of incremental SG and A, inclusive of intangible asset amortization from those businesses acquired resulting in an organic quarter over quarter increase of approximately $3,300,000. This increase is due to unfavorable bad debt experience as well as increased medical costs. The increase in SG And A as a percentage of revenues is due to the factors just referenced as well as unabsorbed overhead costs within our Industrial Services segment due to the unfavorable impact of Hurricane Harvey and the resulting lost workdays the Texas, Louisiana Gulf Coast region. Reported operating income for the quarter of $106,500,000 represents 5.6 percent of revenues, and compares to $86,100,000 4.5 percent of revenues in 2016 third quarter. All operating segments are reporting quarter over quarter improvements in operating income other than our industrial services operations. Our U. S. Electrical Construction Services operating income of 46 point $1,000,000 increased $15,700,000 from the comparable 2016 period. Reported quarterly operating margin is 10.2% which represents a substantial improvement from 2016 third quarter. The increase in both operating income and operating margin is due to continued improved contract performance in the transportation and commercial market sectors as well as quarter over quarter improvement in institutional market sector project activities. Additionally, this segment experienced a $6,900,000 loss in last year's third quarter on a construction project located in the Northeast region which was completed in 2016. 2017 third quarter U. S. Mechanical Construction Services segment operating income of $57,500,000 represents an $18,600,000 increase from last year's quarter. This represents 47 represents a 47.8 percent improvement quarter over quarter due to improved operating performance across all market sectors served with projects within the institutional and water sectors contributing the largest quarter over quarter increases. Our total U. S. Construction business is reporting an 8.5% operating margin for the quarter just ended as compared to 6.1% in last year's third quarter. Operating income for U. S. Building Services increased $2,900,000 to $26,000,000 or 5.9 percent of revenues. Acquisitions generated $1,200,000 of the period over period increase. In addition, both our commercial site based services and energy services divisions and improved performance quarter over quarter. Our U. S. Industrial Services segment operating loss of $4,800,000 compares to operating income of $14,600,000 in 20 sixteen's third quarter. The weak performance in the quarter is attributable to lower turnaround activities as highlighted earlier in both Tony and my commentaries due to the impact of Hurricane Harvey. Additionally, as disclosed throughout 2016, last year's third quarter reflected the income contribution of a large field services capital project that was completed within that year. UK Building Services operating income of $3,900,000 represents 4.6 percent of revenues, which is an increase of approximately $1,300,000 and is a 110 basis point improvement over last year's third quarter. With minimal foreign exchange headwinds in the quarter, it's nice to see the success of our UK team directly and our quarterly operating results. Lastly, on this slide, and as Tony mentioned earlier, We had a strong operating cash flow quarter with cash provided by operations of $135,400,000, which compares favorably to the $81,100,000 generated in 2016 third quarter. We are now on Slide 8. Additional key financial data for the 3rd quarter not addressed on the previous slides are as follows. Quarter 3 gross profit of $295,100,000 or 15.6 percent of revenues is improved from the comparable 2016 quarter by $27,000,000 and represents a 170 basis point improvement over the 13.9% gross margin in 2016 third quarter. This quarter over quarter improvement was accomplished despite a less than favorable mix of revenues due to the reduced contribution from our industrial services operations. Diluted earnings per common share from continuing operations is $1.09 and compares to $0.85 for the quarter ended September 30, 2016. This represents a $0.24 or 28.2 percent improvement quarter over quarter. Lastly, and as Tony started today's presentation, Our third quarter results represent new records for gross profit, operating income, net income from continuing operations and diluted earnings per share from continuing operations, for any quarterly reporting period. In addition, our gross profit margin and our operating income margin set a new company record for a third quarter. We are now on Slide 9. With the quarter discussion behind us, I will now speak to our year to date results through September 30. Revenues of $5,670,000,000 represent an increase of $72,800,000 or 1.3 percent as compared to $5,600,000,000 in the prior year period. Our year to date results include $156,500,000 of revenues attributable to businesses acquired pertaining to the period of time that such businesses were not owned by EMCORE in the 2016 year to date period. Excluding the impact of businesses acquired, year to date revenues decreased organically $83,600,000 or 1.5 percent. Significant revenue growth within each of our U. S. Construction segments was muted by the year to date revenue declines within our Industrial Services and U. S. And UK Building Services segments. Year to date gross profit of $835,900,000 is greater than the representative 2016 period by $70,000,000 or 9.1%. 20 seventeen's gross margin of 14.7 percent represents a 100 basis point improvement over 2016 primarily due to improved project execution year over year within our U. S. Electrical And U. S. Mechanical Construction segments as well as a more profitable revenue mix within our US Building Services segment. 2017s gross profit and gross margin also benefited from the recovery of $18,100,000 of previously disputed contract costs within our U. S. Mechanical Construction segment during the second quarter. Selling general and administrative expenses of $552,900,000 represent 9.7 percent of revenues as compared to $530,700,000 or 9.5 percent of revenues in 2016. Year to date 2017 includes $20,000,000 of incremental SG and A inclusive and intangible asset amortization pertaining to businesses acquired. The year over year increase in SG and A as a percentage of revenues is due to unabsorbed overhead within our U. S. Industrial Services segment due to lost work days as a result of Hurricane Harvey. Additionally, increases in year over year medical costs and bad debt expense also contributed to the higher SG and A as a percentage of revenues. Year to date operating income is $282,100,000 and represents a $48,100,000 increase over 2016's year to date performance. Our year to date operating margin is 5% as compared to 4.2% in 2016s 9 month period. 20sixteen's operating margin on an adjusted basis, reflecting those items we believe impact year over year comparability is consistent at 4.2%. Our year over year improvement in operating margin is 80 basis points and is due to the improved project execution within both our U. S. Electrical And U. S. Mechanical Construction segments, as well as the year over year increases in our US Building Services segment. Reported diluted earnings per common share from continuing operations is $2.93 for the 9 months ended September 30, 2017 compared to $2.33 in the corresponding 9 month 2016 period. On an adjusted basis, reflecting the add back of transaction expenses related to the Arden Robley acquisition in April of 2016, Diluted earnings per common share from continuing operations would have been $2.37 for 2016 as compared to 20 seventeen's 2.93 dollars, which represents an improvement of 23.6 percent year over year. We are now on Slide 10 and hopefully in the home stretch. Mcore's balance sheet continues to maintain its strength, variations of note from December 31, 2016 are as follows, Our September 30th cash balance has increased slightly since year end due to our strong 9 month operating cash flow performance offset by funds expended for common stock repurchases, acquisitions, capital expenditures, and dividends. Working capital has increased due to the increase in cash just referenced as well as a moderate increase in accounts receivable slightly offset by an increase in our net billings reflect the impact of acquisitions made during the year, as well as the finalization of the purchase price allocation for prior year acquisition, net of $36,300,000 of intangible asset amortization expense in the 9 months just ended. Total debt of $413,900,000 is reduced from year end 2016 due to the mandatory quarterly principal repayment under our term loan of approximately 3,800,000 of which $11,400,000 has been paid year to date, offset by new capital lease additions during the 1st 9 months of the current year. As a result of our outstanding borrowings, we currently have a debt to capitalization ratio of 20.4% which represents a slight decrease from year end 2016. We have had excellent cash flow conversion during the 1st 9 months of this year, And as a result, our balance sheet continues to reflect our strength. We will continue to maintain our strong risk assessment discipline and remain in a great position to capitalize on market opportunities. So with my portion of the presentation finally concluded, I will now return the call to Tony. Thanks, Mark. 3rd quarter is always tough. Yes, it is. It's got to go through. Look, I'm on pages 1112 and I'm going to talk a little bit about backlog. There's not really a lot of new news in here. Total backlog at the end of the 3rd quarter is $3,960,000,000. It's up $60,000,000 or 1.5% from both September 2016 or end of third quarter of 'sixteen and from year end. Similar to last quarter, our markets can continue to give us quality bidding opportunities across most sectors. And look, the numbers show our construction segments are executing very well. We focus on the market sectors, the commercial market continues to be strong for us as the backlog at the end of the quarter is over 1,500,000,000 is up 22% from September 2016. Demand is fairly widespread and we are experiencing strength across both of our construction segments as well as our Mechanical Services business in Building Services. What we're seeing pretty much dovetails with what most industry publications say believe commercial construction will remain fairly good for the foreseeable future. Backlog in the institutional healthcare and hospitality sectors also up year over year and year to date while backlog and transportation and the industrial sectors from industrials slash manufacturing is down as we work down some large projects, mainly in food processing and transportation infrastructure. I'll talk a little bit about backlog by segment. Backlog in our domestic construction segment has remained pretty steady at around 3,000,000,000 2017. And that's even with double digit year to date revenue growth generated for the 1st 9 months. And look, 8.4% of that growth is organic. There continues to be demand for our construction services, We remain selective in our bidding pursuits. The segments are currently executing and converting at a very high level from both a profit and cash generation perspective. Building Services backlog at remain level of $700,000,000 and it's up about 6% from year end. Tankered by strength in our mechanical services business. And we do have some nice site based opportunities that I've talked about that are in the pilot stages right now. And not fully reflected in backlog. Our Industrial Services backlog stands at $57,000,000, not much has really changed. Few more inquiries, but pricing remains soft. And the UK backlog is up a bit, reflecting some new contract award wins. So I'm cautiously optimistic as I can be with regard to the non res market. I'm not a real forecaster. We'll let Kevin talk to you about that. But with the US economy approving a low interest rate environment, maybe someday tax reform, some access to capital, private construction activity should remain relatively strong hopefully into 2018. What that really means, we expect a 3% to 5% non res mark to be able to operate in 2018, 3% to 5% growth. So let's get to the exciting part. Pages 1314, right? We are raising our earnings per diluted share from continuing operations from $3.40 to $3.60 to $3.70 to 3.80. We do expect revenues to still be around $7,600,000,000. And so the reality is we continue to believe we'll have strong margin performance through year end. So what do we need to do to continue this strong trajectory really through the balance of the year and going into 2018? First, let's be clear. Fourth quarter may not from an earnings per diluted share be stronger than third quarter, but it's still going to be a pretty good quarter. And we do expect excellent execution across most of our business. So the first thing we have to do is overcome the significant headwind from Hurricane Harvey in our Industrial Services segment. We're going to have to leverage our cost structure and look for every opportunity to help our customers with their short term maintenance needs to improve their current operations and also help them as they do their detailed engineering views so that we're present for the longer term opportunities because look, this storm assaulted our customers' infrastructures in a pretty significant way. Our Building Services segment and the UK segments will continue their strong execution in the 4th quarter. Much in the same manner as their year to date results. We really do expect good performance, but in both cases, Q4 should be good But in a lot of cases, it could be a little weaker than third quarter as especially in our Building Services segment, third quarter is one of our seasonally strongest quarters. Our Electrical And Mechanical Construction segments, we do expect to continue the same pattern of success and execution in the fourth quarter. We have experienced in our year to date performance. We expect a strong finish to our record year and our year to date performance in 2017. We do expect excellent cash flow to continue and we will continue to look to actively support not only the organic growth in our business and the project opportunities and program opportunities we see and we have successfully exploited and we will continue to successfully exploit across our business, but we are actively pursuing acquisitions across all of our U. S. Segments. We will balance those needs against share repurchases. Confidence and cash performance in our business outlook is bolstered by yesterday's board action to increase our share repurchase authorization by another $100,000,000. Thank you. And with that, Doris, I'll take questions. Our first question is from the line of Noel Dilts with Stifel. Hi, thanks. Good morning. Good morning. So I know we spent a lot of time on you guys spent a lot of time talking about the Industrial segment on the call. But, you know, it sounds like there's a lot of uncertainty as you look out to 2018. But could you just give us, I guess, a little bit more detail on your, you know, some of the what you can see on the positive side as we get into, the first, the spring turnaround season, how you're kind of thinking about the, the, you know, what could come through in terms of upside and downside, you mentioned that there was some potential for cancellations. So can you give us some thoughts on when you might have some clarity there? And then how you're thinking about the fall turnaround season at this point? I know we're getting pretty far out there. You know, Noel, this was a fairly significant dislocation. We had lined up we thought a pretty decent, fall of 2017 turnaround season. And I think what we said is it looked a lot like what was a pretty strong fall 2016 season. So what we experienced first, right? A lot of that work starts in September. Well, clearly a lot of that work didn't happen as a result in September because most of that region was underwater. Couple that with plants deciding whether they're just going to getting fixed enough to keep operating again and most plants are up and operating again, especially on the refinery side, not so much on the petrochemical side. And now they're determining how big the scope of work will be because remember a lot of these folks lost production. Track spreads are pretty good. So they're balancing, do I do increase scope right now or I just get back online and think about doing this work sometime out into 2018 and even maybe into 2019. It really does remind us different event and it does depend on each facility is unique, but remind us a lot of the refinery operator strike. If you'll remember, we got pretty hard with the refinery operator strike. And some people didn't. And we did because it was our customers in some cases that were experiencing the strike. What we saw happen there is what happens is you lose the discrete nature of the work you were going to do. It morphs into another event. We're like we're likely to be the contractor that does that event. And that event in the short term may have a reduced scope, but in the longer term, it tends to have an enhanced scope. And we saw that. If you look at our performance in the back half of 'fifteen going into 'sixteen, even absent the large project we did, We were pretty robust through the 1st and second quarters of 2016. Now remember, that's a year later in when that manifested itself. Unfortunately, I think that could be a very similar dynamic this time and I'd ask my colleagues to kick in on that. We think it's a very similar dynamic. That the spring looked pretty good as of in August when we sat down and we do a very detailed review of the fall in the spring. We try to keep 6 months ahead at least. We had we had talk of we were going to have difficulty staffing all the projects potentially in the region, not us, but regionally. And now that's a difficulty for a different reason, right? And I think any upside that comes in early 2018 is going to be the result of what is now an unplanned event. Where people say, let's get this going now. We see an opening to do this where the plant had to come down empty. On the petrochemical side, it's very different. We have people that are undergoing very detailed engineering reviews. We have some plants that are our customers that are being that were hurt very badly and the plants aren't even running. Mark, I'll kick it over to you to give your color and Kevin, if you have any. But what we saw there, is we expect that work will be a much more planned out because we're trying to get it right, because the demand isn't as strong as it is for the as crack spreads are on the refined This is Mark. The only thing I would add to Tony's commentary and not to be duplicative is it is extremely fluid right now as you would imagine And clearly, we're available and capable to help our customer base and anybody else who is in need of our services. But I don't think our visibility is going to improve all that greatly until we actually kick over until the 1st the year. And clearly at that point, I think we're going to be in a better position to assess. What positive impact it's going to have on 2018 above and beyond what was already on the schedule for plant work. And see what else happens, right? And when you're both when you're working in a non union environment, versus a union environment and we do both is in a non union environment in this specific business you have your especially your supervisory people down through the form of level as you get ready for the season, you're guaranteeing them a certain number of hours. Right? They've foregone other opportunities. And we honor that. And so one of the things you saw in our numbers was really some pretty significant under absorption you see in our SG and A, because if you look at our SG and A real estate really, absent that is terrific absorption in our fixed overhead. And the only thing we'd be up is a little bit of incentive comp year over year and not even that because of the correction in industrial. You're really just seeing the impact of the acquisitions, which with our growth we've had over the last few years. And it's something we thought would happen. It's actually happened better than we thought it would. Added more volume without adding a lot of fixed infrastructure. That's something you can't really tease out of the numbers, but the factors there. Okay. That's actually that's really helpful. Thanks for that color. Just for my second question, I wanted to shift over to non res. I was encourage to hear you guys are expecting a, you know, 3% to 5% type of growth environment. You know, we obviously seen some mixed signals in terms of some of the leading indicators that we're watching, in terms of a little bit of softening on some of the key commercial verticals. Are you as you think out to next year, is there any real shift in terms of where you think that growth is coming from? Are you expecting bit of an uptick in some of the institutional building or is it really just continued strength on the on the private side? So we think in our res, we're thinking about how it impacts us, right? We don't see any big shifts. And look, we're going to book some significant work probably, but we don't know when that's going to be. And so we've always said backlog be a sawtooth pattern, especially with the strong revenue growth in our Electrical Mechanical segments. But we have pretty robust bidding opportunities yet. I think it part of it is where we are in the cycle and part of it is what our capabilities are in some markets that are particularly strong. Especially in the private side. And we're doing more fast growing work than we've done typically, we're burning a large projects faster than we typically would do through 2017. We think that will continue to 2018. So backlog book to bill not be everything reflective of what's going on in our business on the construction side over a year period. Over a year period, I think you get it in the growth rates. But we see a pretty good market going into, 2018, both for a larger opportunity, the smaller, but again, every decision is binary. We think we're well positioned for some of this work. We think the competitive dynamics are still there. We've learned recently, if we try to push the margin on the bidding opportunity a little too strong, we may lose that work. Our competition is willing to take advantage of that opportunity. And so, you know, it's more of a science than in art. And then once we get the work, which really been happening in our story, is really, really good execution. And really that execution was and I said this was underlying the business in 2016. Unfortunately, it got overshadowed by a couple of really tough jobs. Right. Okay, perfect. That's really helpful. Thanks. Our next question is from the line of Adam Salmer with Tom Thompson Davis. Can you give us an update on there were some jobs you mentioned last quarter in the Building Services groups and potential awards Can you give us an update on this? Sure. We're executing on both of them now. They could be significant opportunities. We think they will be. Could be a multi year implementation to full implementation. The only part that's in backlog, right, Mark, would be the pilot space. Yeah. So Adam, not to interrupt Tony, but, 1 of the 2 is in a pilot phase and assuming that we are successful, and they go forward with their plans, we're going to be launching across other regions of the country over the next couple of years. And the other project is just in the startup phase right now and it'll be fully ramped up as we move into 2018. The one opportunity is a total shift for that customer and how they approach a large number of facilities across multiple regions. They're thinking, you know, 10, 20 years about how this turns out. So that doesn't make any difference. You know, we wanna implement as fast as we can and that's the balance. And we're now in negotiations to make sure that we get more protection as we invest SG And A on the slower ramp. To them, it doesn't matter whether it's 3 years or 18 months for us, it matters a lot whether it's 3 years or 18 months. Great. Thanks. And then, Tony, what are you seeing in the M and A landscape right now? We've had 2 decent deals close already this year. They both augmented nice capabilities that we already have. It helped build out our fire protection business even more. And it gave us a really great mechanical services business in the Rocky Mountain region. We expect to close a similar size deal by year end, it'll be in one of the U. S. Segments. We think that'll happen. We'll see. I mean, it happens when they happen. And we have some nice opportunities we're looking at. But again, just like projects, every deal is binary. Sometimes we're successful, sometimes you're not, or sometimes it takes a multi year effort for us to do that. We're going to remain disciplined and we're going to balance that opportunity versus organic growth, which is always 1st. Then comes acquisitions and then comes share repurchases. And share repurchases happen because we feel that sometimes the best company you can buy. Well, we always the best company can buy is ours. But we can also augment and make our company better through the right acquisitions. And then lastly, the Ardent business I know they have some exposure to pipeline construction and there's been some nice movement there. With the FERC Quorum. Can you give us an update? Yes. So we expect that to impact us sometime middle of next year. We thought it would be middle of this year. All that's been pushed out about a year. And remember, we're further down the food chain. So the engineering has to happen the general pipeline contractor gets the award and then eventually we get the award. But yes, we see the same thing. And that's the that's the electrical segment? That would be in the electrical segment, yes. That's a couple I could add a couple points of growth or No, not besides the Electrical segment is right now. Our next question is from the line of Tate Sullivan with Sidoti. Can we talk about electrical contracting margins a little bit? I mean, 10.2% was amazing when you said earlier in the call that I mean, these margin levels aren't sustainable over the long term, but I mean, are you implying that you can maintain 10% here in the near term? No, I don't think I said that. I think that what I've said not in the long term, but I'm just sort of seeing what you might expect. I think what I've always said is a quarterly view on margins, good or bad, is not necessarily the best way to look at our business. And if you look back over four quarters in our electrical business today, the trailing 12 months, and it has some noise in it. This is about 7.7% and over the trailing 24 months to 6.6%. Clearly, we're trending to the higher end of that here in the near term. And could be a little bit above that. But no, 10.2% could be a good quarterly print. Maybe in some extraordinary year, we could do that. But it wouldn't be certain anything we would ever plan our business around. Right. Okay. And then, I mean, is within the Q you talked about some type telecom projects and a large transportation projects. Are the telecom projects what you've referred to before as mostly data centers and data centers are an element of it. We're doing some other work around that too. What's an example of another type of telecom project Well, we do some remote stations. We do some substation supporting the telecom industry and other things like that. Okay. And was a transportation project something that maybe finished this quarter and contributed to that 10% margin? It hit a couple of transportation projects hit major milestones, but they're not complete. They're not complete, but by we'll be able to release some contingency at that major milestone, but really it's the this was clearly a case of a lot of things going right a lot of small things going, right? There's really nothing outsized happening here that had part of the normal business. Okay. I'm just can you remind me what happened? My last one is, last year in fourth quarter, when you had a project loss? Are these kind of project losses? I mean, was that unique to last year when you had a lot of quick orders within the quarters for petrochemical facilities or what was different this year compared to last year? I'm sorry. This is, this is Mark. I'm going to interrupt Tony for a second. So just looking at 2016 from a complete year perspective, we did have several projects that actually had project losses that some of which were expectation related, which was impacting our Electrical segment through the 1st 3 quarters of last year. And then specifically in the fourth quarter, so those projects were long term duration projects that had been in progress pre 2016. The event that happened in the fourth quarter was a discrete project that was a quick turnaround project where all the work was executed within the confines of quarter 4 and that was the project we were successful with recovery with regards to second quarter of the current year. They were. Oh, you were. Oh, wow. Okay. Yeah. So in my prepared commentary, I did call out in our Mechanical Construction segment that we benefited from $18,000,000 of cost recovery in quarter 2 of 2017, which is impacting our year to date results. For September, obviously, that was specifically related to that project that was that road was written down in quarter 4 last year. It would be unusual for us. On that kind of project to have the kind of situation that developed for us in the fourth quarter of last year. First, the contract structure is a time and material type contract structure. It was a very unique situation around labor that we talked extensively about in our year end call last year. Okay. Thanks for that clarification. And if I may, you said you have a site based projects not in backlog. What are those or what's examples. What I said is we have 2 that I've talked about in our second quarter call that could be significant opportunities And right now, they're in their pilot stages. And the only part that is in backlog is a very small number that those are the pilot And just to remind everybody for backlog on those type of contracts for us at EMCOR, as of today, we only include 1 year of the fixed contract amount. We make no guesses on the other work and we don't take the full duration of the contract. And then when we have those contracts, If they haven't been renewed yet as we get into the final year of the contract, all we leave in those in backlog is what's remaining on the contract. Okay. Thank you. Have a good rest of the day. Our next question is from the line of Tahira Azal with KeyBanc Capital Markets. Good morning, Pete. Good morning, Tony. Congrats. Fantastic quarter, obviously. Many congrats to your team. Yeah, great team. I guess, Tony, first question, if you look at your implied guidance, it really suggests you will end the year at the upper end if the guidance is operating margins of 5% or so. What do you need to do next year? What do we need to see in the market happen next year? To really see those type of operating margins on all of those? Well, to start out, we need to continue to have a market that we can operate in, right? So if non res is growing, it gives us a market that we can operate in, then we should be okay as far as having an environment that we can operate in. The second thing is, which is actually the good news story this year that we have these margins despite the fact, which is usually our most profitable segment industrial really got crushed by what's going on here in the 3rd fourth quarter with Harvey. The next thing that has to happen is, look, P and E is we're in a tough business. Things happen and we get on projects some time through I usually say usually not through our own fault. I mean, that's proven out as we prosecute things over time, but we're not a big claims contractor. It's not something to say I wish we have. But this year, we're absolutely operating in a stellar manner. And we're operating on jobs that, our customers and the general contractor and their end contractors more worried about getting the job done. And we're all working together to get those jobs done, is lined up with a lot of our highly skilled operations, getting more work, than others maybe this year. And we really had a significant absence of madness, right. I mean, we always have something going on. But there's really been nothing significant this year with Rockwell Wood. We'd like to keep that up. So all those conditions will allow this to happen. Going into next year, we don't give guidance at this point, obviously. But, you know, margins are the biggest leverage point and obviously would love to keep these margins, but got our work cut off for us doing that. Got it. Okay, Tony. I guess before we finish, I would point out what Mark said in his commentary. Don't lose sight of the $18,000,000 settlement we had in 2nd quarter and the impact that could happen. And Tony, second point is Valero had the goal and as you know, there are big refinance that is a swing factor for you, as you said, later on, but they're pretty positive on how 2018 is shaping up, also in terms of some of the growth opportunities that have been kind of missing. In fact, it's probably the most common commentary that given in a while. Any thoughts around how much as you look at how to allocate all that cash you're building up, how thoughtful you're going to be around some of the commentary coming from customers on the downstream side? First of all, they're a great operator. And we're privileged to be able to work for them at times. Sometimes though, Let's talk about the dynamics that could happen in 2018 in the industry. Cracks spreads are likely to stay up a little bit. There are a lot of positives going on for them. Pretty much this fall turnaround season is like a mosh pit right now. People trying to figure out what they're going to do. Everybody lost some operating days or a lot of people did. In those plants that are really the core of their function. And the question I'd start, I've learned to acclimate myself too. Sometimes the more bullish our customers are. The more they're saying is we're really going to run these plants hard in 2018. And as a result of that, we may do less turnaround activity and less maintenance. I don't know that sitting here today, but I've known that commentary in the past, then what it does is it leads to a lag in end of 2018 2019 where the maintenance could come back. And I think they're all trying to figure that out right now. And then if you expand that to the petrochemical side, some of those plants got especially hit hard and that could turn into the unplanned work and the buffer that we need to take advantage of if the refinery maintenance work comes down in scope or gets pushed out. We're still very bullish downstream. We believe that we still have product lines and consolidation opportunities that we'd like to take advantage of to better serve our customers. We certainly don't do a lot of rotating equipment maintenance right now. We'd like to figure out how to do more of that. We don't do a lot of catalyst work right now. We'd like to figure how to do more of that. And quite frankly, we don't do a lot of work where we lead people in the plants. That tends be a little bit lower margin, but it gives you a sustained presence. Sometimes it's a little lower skill. And any opportunity to do some of that might be good to allow us to continue to build on our with our customers. And there's all kind of niche products we could grow out like refractory and everything else. So we're bullish on it. But I would say we're as bullish on the other parts of our business. The two acquisitions we've done this year are examples of things we like to do. And whether it be electrical, mechanical, fire protection, industrial, maintenance and construction just in the general market, mechanical service, maybe a new kind of technician based service. So we look at all the time, of things to add or of course downstream. Any one of those tier places we would allocate capital. And our last question is from the line of Brent Thielman with D. A. Davidson. Tony one more on Industrial. Thanks for all the commentary on the turnaround aspect. I was curious. I know you have less visibility here, but you think all this mess could open up more work for your specialty, your field services business? Yes. I just don't know when. Okay. Okay. And it seems like everything outside of industrial is pretty sheltered from some of the activity hurricane activity this quarter. Are you seeing any lift in construction or building services businesses in those regions? We think it was pretty much a wash. And I'll tell you, so if you go to the commercial side of Houston, we have a very successful mechanical contractor there, market leader. When you talk to SEO, yes, we're helping people get their HVAC systems back and up and running. We're fixing our control systems. We're we're fixed to some of their piping systems or underground systems, especially, but the counter to that is some longer term projects that we're getting ready to get underway are going through another look at the design to say, okay, how would we fair in a flooding situation like Harvey. A great example is the Texas Medical Center, what they did Tropical Store Malison, when they put basically submarine doors to closing their facility and really they fared very, very well. In this storm. So we have a lot of customers, not that it'll probably affect most of what we do other than move the mechanical rooms up a floor or 2. Has its own set of issues around when we do that. But it's going to be a lot of, I would say, hardening looks at new facilities, a significant new facilities. We're going to probably launch fourth quarter 1st quarter. They're probably going to be pushed out further as now they get the engineers back in and say, okay, If this happens again, how would we look? Okay. Okay. That's helpful. And then I know this large project activity can have a nice impact on electrical margins. Appreciate all the color there so far. I guess those areas where you're seeing the pickup in backlog, commercial, healthcare, hospitality, institutional, Can those bring the same size and scale of projects to electrical that I don't know other areas like telecom transportation can? Sure. It's very project specific. Probably one of the most successful pieces of work we've ever done for electrical was in the transportation sector. One of them may be underway right now and one of them happened about 10 years ago, 12 years ago. And of course, all the hospitality we worked in Las Vegas on the electrical side was very successful. Okay. And are you seeing that type of work come to that? On transportation, potentially, yes, on hospitality, no, not on that size, not on that size, but decent work. Sure. Maybe one more on the M and A front. Look, non res market has some good tailwinds clearly It's more growth opportunity to come. I'm sure at least some people still speculating it could be getting a little extended. Do you see a busier pipeline today? And could you tribute any of that to some folks simply saying we're going to try and sell while it's hot? Well, I think it's less than while it's hot to a more that we can actually sell. They now have 2 or 3, 4 years of successful operations. Most of them didn't experience that again until 2012, 2013 when someone got back to operating fairly well. You know, a lot of them are 4 years older or 5 years older than they were when this expansion really started. And the kinds of folks we buy that you're describing, is part of long term estate planning and most of them still want to work. And we're a logical buyer on the way out and they really care a lot about what happens to their people. And that's all the questions we have in the queue. I'd like to hand the call back over to management for any closing remarks. Thanks a lot. It was a great quarter. We look to finish the year strong. And we'll be back. We'll talk to somebody, I guess, probably out on the road a little bit. Yeah, on the road a little bit. And other than that, thank you all for your interest in EMCOR and great effort for our folks in the field. Bye. Ladies and gentlemen, this does conclude our today's conference call. You may now disconnect.