Earnings Call: Q2 2017

Jul 27, 2017

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 EMCORE Group Second Quarter 2017 Earnings Call. Call. I'll now turn the call over to Mr. Bradley Vitu with FTI Consulting. Sir, you may begin. Thank you, Adam, and good morning, everyone. Welcome to the ENCORE Group conference call. We are here today to discuss the company's 2017 2nd quarter results, which were reported this morning. I would like to turn the call over to Kevin Matt's Executive Vice President of Shared Services, who will introduce management. Second quarter of 2017, while as the year started to fly by. For those of you who are accessing the call via the internet and our website, welcome we hope you have arrived at the beginning of our slide presentation that will accompany our remarks today. You should be on Slide 2. Slide 2 has the executives who are with me to discuss the quarter and 6 months results. They are Tony Guzzi, President and Chief Executive Officer Mark Pompa, our Executive Vice President and Chief Financial Officer Maxine Mauricio, our Senior Vice President, General Counsel and our Vice President, Marketing communication, Neva 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 get us at emcorgroup.com. Before we begin, I statements are based upon information available to EMCOR Management's reception as of this date, and EMCOR assumes no obligation to update any such forward looking statements. These forward looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward looking statements. Accordingly, these statements do not guarantee our 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 increased competition, mix of business and risks associated with foreign operations. Certain other risks and factors associated with business are also discussed in the company's 2016 Form 10 K and in other reports filed from time to time with the Securities And Exchange Commission. With all that said, please let me turn the call over to Tony. Tony? Thanks, Kevin, and good morning, and welcome to EMCOR Group's second quarter 2017 conference call. Initially, I'll be covering pages 3 to 5 in my opening commentary. I am going to speak to our quarterly results. And Mark will cover in detail both the quarter and year to date results. We had a very good quarter that again really highlights the strength and diversity MMCOR Services and the end markets we serve. We are $0.95 per diluted share from continuing operations on revenues of 1,900,000,000 We had strong operating our Electrical And Mechanical Construction segments had excellent quarters. And fill the graph created by the tough comparison We knew that we had and previously discussed in our Industrial Services segment, resulting from their excellent second quarter 2016 performance. Our results, again, are bolstered by very strong operating cash flow in the quarter our folks can execute and are focused and disciplined. I now want to provide some operating detail by segment for the quarter. Our Electrical Construction segment had excellent performance with revenue growth of 6.8 percent, and that was mostly organic. And very strong operating income and operating income versus the year ago period. We had excellent execution and really benefited from an absence of badness in this segment. We have strength across our end market customers and markets. Our Electrical Construction segment continues to perform well. In a good market and can execute some of the most complex and sophisticated projects well, and we do deliver for our customers. Our Mechanical Construction segment also had excellent performance with 18.6 percent revenue growth. And again, most of that revenue growth was organic. We had strong operating income margins of 7.2%. We were aided in this segment by dispute settlement of $11,600,000 in the quarter, but our underlying operating income margins are still strong at 5.7%. We had strong execution across this segment and across most markets, and we executed well on a range of products from quick turn small projects to large complex projects. Our fire protection work and our manufacturing work is segment had a reduction in revenues of 5.4 percent, which is driven by low margin contract losses that we have previously discussed. Our operating income grew by almost 9% and our operating income margin expanded by 60 basis points which showed the impact of the more favorable mix in this segment. Our mechanical service business is performing well and continues to exit across its range of products, from service agreements, repair services, building controls and retrofit projects. In our site based business, we have won several new contracts. That should ramp up nicely in the next 12 to 18 months. And our IDIQ that is indefinite quantity, indefinite duration work in our government business grew nicely in the quarter. Our Industrial Services segment had a tough quarter and we expected that and we had foreshadowed it in our previous commentary. We knew we had a tough quarterly comparisons driven by our outstanding performance on a large impact project coupled with an elongated 2016 spring turnaround season that moved more work from first quarter 2016 to second quarter 2016 than is a normal experience for us. We also had work moved from this second quarter 2017 into second quarter of 2018, as our customers kept running these units, as cut crack spreads are relatively strong at this time and they felt they could defer this work for a year. We continue to execute well for our customers and are positioned well in not only our turnaround work, but also in our shop services, heat exchanger cleaning and specialty services like specialty Welding. We believe we are at the bottom in demand and pricing part new build heat exchangers that we have talked about so much. The UK continues to perform steadily and this should be the last quarter. Where they had to fight through the FX headwind caused by Brexit. Our UK business added some nice customer wins in late 2016 early 2017, which went at full implementation should be nicely accretive to the segment's operating income. Our backlog grew 7.6% in the quarter, driven by our Electrical And Mechanical Construction segments. Our balance sheet is liquid and strong, enabled us to continue to invest and grow our business. And with that, turn it over to you, Mark. Thank you, Tony, and good morning to everyone participating on the call today. For those accessing this presentation via the webcast, we are now on Slide 6. Over the next five slides, I will supplement Tony's opening commentary on EMCOR's 2nd quarter performance, as well as provide a synopsis of our year to date results through June 30. All financial information referenced is derived from our consolidated financial statements included in both our earnings release announcement and Form 10Q filed with the Securities And Exchange Commission earlier this morning. So let's review our second quarter performance. Consolidated revenues of 1,900,000,000 down $37,500,000 or 1.9 percent quarter over quarter 2 2016. Revenues attributable to businesses acquired pertaining to the period of time that such businesses were not owned by EMCOR and last year's second quarter impacted the current year's quarter by $44,000,000, and positively impacted our U. S. Mechanical Construction, U. S. Building Services and our U. S. Electrical Construction segments. Excluding the impact of businesses acquired, 2nd quarter revenues declined organically $81,500,000. U. S. Electrical Construction revenues of $449,200,000 increased 28.6 revenues, this segment grew $22,100,000 or 5.2 percent organically. Revenue growth was largely driven within the commercial and healthcare market sectors, inclusive of numerous telecommunication projects, partially offset by quarter over quarter revenue declines within the hospitality and institutional market sectors, due to certain project completions that occurred in increased $116,300,000 or 18.6 percent. Excluding acquisition revenues of $21,000,000, This segment's revenues grew $95,300,000 or 15.2 percent organically quarter over quarter. This segment's revenue growth was primarily driven by higher project activity within the healthcare, commercial, industrial and hospitality market sectors. Mcore's total domestic construction business 2nd quarter revenues of $1,190,000,000 increased $144,900,000 or 13.8 percent with 11.2% being generated from organic activities. U. S. Building Services quarterly revenues of $438,300,000 decreased $24,900,000 or 5.4 percent. Excluding acquisition revenues of $16,500,000, this segment decreased organically 8.9 percent. Revenue gains within their Mechanical Services division were offset by revenue declines within their commercial site based and government services divisions, due to maintenance contract attrition primarily occurring in 2016, partially offset by increased indefinite increased indefinite duration indefinite quantity project volumes from government related activities. U. S. Industrial services revenues of $187,400,000 decreased $146,100,000 or 43.8 percent due to lower field services activities quarter over quarter as a result of an extended spring turnaround season in 2016, as well as the execution of a large specialty services capital project that favorably impacted each of the first three quarters of last year. This segment's shop services revenues within the 2nd quarter were slightly improved from the comparable 2016 quarter due to an uptick in repair work. United Kingdom Building Services revenues of $79,200,000 decreased $11,400,000 or 12.6 percent due to the $9,600,000 impact of unfavorable exchange rates for the British pound versus the US dollar, as well as reduced small project and capital project activity. Even after we have surpassed the 1 year anniversary of the Brexit vote, the resulting uncertainty in the United Kingdom continues to affect our customers' discretionary spending habits. Please turn to Slide 7. Selling, general and administrative expenses of $181,300,000 represent 9.6 percent of revenues reflect a reduction of $474,000 from quarter 2 2016. The current year's quarter includes approximately $3,900,000 of incremental SG and A, inclusive of intangible asset amortization from businesses acquired. Excluding this incremental acquisition related SG and A, as well as the $2,800,000 of transaction associated with the acquisition of Arnaud and Roblian in the second quarter of 2016, SG and A has decreased $1,600,000 on an organic basis, This decrease is primarily due to a lower incentive compensation expense and a reduced provision for doubtful accounts, both within our Industrial Services segment, partially offset by increased 4.9 percent of revenues and compares to $92,300,000 4.8 percent in 2016 second quarter. U. S. Electrical Construction Services operating income of $32,100,000 increased $9,100,000 from the comparable 2016 period. Reported operating margin is 7.1 percent, which is 160 basis points higher than 2016 second quarter. The increase in both operating income and margin is due to improved contract performance within the transportation and commercial market sectors. This segment experienced a loss of $10,500,000 on a transportation construction project during last year's second quarter due to productivity issues, and that discrete project was completed during the second half of twenty sixteen. 2017 second quarter U. S. Mechanical Construction Services segment operating income of $53,100,000, represents a $15,100,000 increase from last year's quarter. This represents a 40% improvement quarter over quarter, primarily due to improved operating performance of the recovery of certain contract costs incurred in 2016 that were previously disputed. This segment's operating margin of 7.2% represents 110 basis point improvement from 2016 second quarter. Our total U. S. Construction business reporting a 7.2 percent operating margin for the quarter to send it as compared to 5.8 percent of revenues in last year's second quarter. Operating income for U. S. Building Services of $20,200,000 has improved from last year's second quarter and reported operating margin of 4.6% is up 60 basis points. The improvement in quarter over quarter operating income and operating margin is due to increased profitability within the Mechanical Services division due to repair and project activities as well as the incremental income contribution from businesses acquired. Our US Industrial Services segment operating income of $4,400,000, decreased $28,800,000 compared to 2016 second quarter with an operating margin of 2.3% is 7.60 basis points less than last year's 9.9 percent operating margin. The decrease is attributable to lower turnaround activities quarter over quarter due to 2016's extended spring turnaround season, which positively impacted last year's second quarter. Additionally, quarter 2 of the prior year was peak labor utilization levels, while executing a large field services capital project that was completed later in 2016. Lastly, this segment continues to fight headwinds within their shop services operations as demand remains muted and the pricing environment remains extremely competitive for new build heat exchanger orders. UK Building Services operating income of $3,500,000 represents 4.4 percent of revenues, is an increase of approximately $200,000 and is an 80 basis point improvement over last year's second quarter. Lastly, on this slide, we had a strong operating cash flow quarter, with cash provided by operations of $108,100,000, which compares favorably to the $85,000,000 generated in 2016 second quarter. We are now on Slide 8. Additional key financial data for the quarter not addressed on the previous slides are as follows. Quarter 2 gross profit of $274,500,000 represents 14.5 percent of revenues, which is essentially flat with the comparable 20 teen quarter on an absolute dollar basis, while representing an improvement of 30 basis points from a gross margin perspective. The quarter over quarter increase in gross margin due to the gross margin improvements in all of our reportable segments other than US Industrial Services as a result of improved project execution revenue mix within our within our Construction And U. S. Building Services segments. This improved gross profit performance was offset by the significant reduction with our U. S. Industrial Services segment due to the factors previously referenced by both myself and Tony. Restructuring costs during the most recent quarter relate to activities within our U. S. Building Services And U. S. Mechanical Construction segments as we continue to rationalize our cost structure. Diluted earnings per common share from continuing operations is $0.95 and compares to $0.92 for the quarter ended June 30, 2016. On an adjusted basis, reflecting the add back of transaction costs incurred in quarter 2 of 2016 related to last year's Arden Robley acquisition, Diluted earnings per common share from continuing operations would have been $0.95 for 2016 as compared to the $0.95 per diluted share in the current year, which represents consistent performance quarter over quarter. We are now on Slide 9. With the quarter out of the way, let's now turn our attention to the 1st 6 months. Revenues of $3,790,000,000 represent an increase of $109,300,000 or 3% as compared to $3,680,000,000 in the prior year period. Consistent with our second quarter 2017 revenue performance, robust revenue growth within our domestic construction segments is being muted by year over year revenue declines within each of our industrial services, U. S. Building And UK Building Services segments. Year to date gross profit of $540,800,000 is greater than the representative 2016 period by $43,000,000 or 8.6%. 20 seven's gross margin of 14.3 percent represents an 80 basis point improvement over 2016 primarily due to improved project execution year over year within our Electrical Construction, Mechanical Construction And U S Building Services segment. Additionally, our U. S. Mechanical Construction segment's year to date gross profit is benefiting from the recovery of $18,100,000 of contract costs previously disputed on a project, which was completed in 2016. This item favorably impacted consolidated year to date gross margin by approximately 40 basis points. Selling, general and administrative expenses of $364,300,000 represent 9.6 percent of revenues compared to $349,200,000 or 9.5 percent of revenues in 2016. Our SG and A as a percentage of revenues on a year to date basis from quarter 1 by 10 basis points. The increase in SG and A for the 6 month period is due to $16,200,000 of incremental expenses from businesses acquired related to the period of time that such businesses were not owned by us as we continue to adjust our cost structure to enhance our efficiency and productivity. Year to date operating income is 175,600,000 and represents a $27,700,000 increase over 2016's year to date performance. Our year to date operating margin is 4.6% as compared to 4% in 2016 year to date period. 2016's operating margin on an adjusted basis, reflecting the add back of the transaction expenses, related to the acquisition of Arden and Robley in April 2016 would have been 4.1%. Therefore, our year over year improvement in operating margin is 50 basis points, and is due to improved project execution within both our U. S. Electrical And U. S. Mechanical Construction segments, as well as the year over year increase in our U. S. Building Services segment. Diluted earnings per common share from continuing operations is $1.84 for the 6 months ended June 30, 2017, compared to $1.48 in the corresponding 2016 period. On an adjusted basis, reflecting the add back of 2016 transaction expenses, Diluted earnings per common share from continuing operations would have been $1.52 for 20 16 as compared to 20 seventeen's $1.84, which ever represents an improvement of 21.1% year over year. We are now on Slide 10. MCcore's balance sheet remains strong at June 30, and variations of note from December 31, 2016 are as follows. Cash has reduced from year end 2016 due to funds expended in excess of our positive operating cash flows to date, for acquisitions, common stock repurchases, and capital expenditures. Working capital levels have decreased since the end of last year, primarily due to the reduction in cash just referenced. Changes in our goodwill and identifiable intangible asset balances reflect the impact of acquisitions net of $24,300,000 of intangible asset amortization expense. Total debt of $417,200,000 is reduced from year end 2016 due to the mandatory quarterly principal repayments under our term loan of $3,800,000 of which 7,600,000 Of our outstanding borrowings, we currently have a debt to capitalization ratio of 20.9 percent, which represents a slight decrease from year end 2016. We are happy with our balance sheet and our excellent cash flow conversion during the 1st 6 months. We have sufficient liquidity to execute against all of our strategic objectives and remain flexible to take advantage of all opportunities. With my commentary concluded, Tony? Thanks, Mark, and we look forward with the growing backlog put into work and working capital. And so I'm on page 11, and I'll be talking to page 1112 talk about backlog. In summary, our backlog continues to grow despite strong underlying revenue growth in our Electrical And Mechanical Construction segments. Total backlog at the end of the second quarter is $4,100,000,000, up $291,000,000 or 7.6% from 2016 and is also up from year end by $199,000,000 or 5.1 percent. Another quarter of strong project bookings on top of strong top line revenue. Book to bill for the quarter was a strong 1.06. We're halfway through the year now. Our markets continue to give us solid opportunities to win work across most sectors and our Electrical And Mechanical Construction segments are executing well. And really with the work we have, all our businesses are executing well with the work they have. You focus on the market sectors, we continue to win commercial projects and as evidenced by our commercial backlog logging in at almost 1,500,000,000 up $250,000,000 from the year ago period and up $163,000,000 from December 2016. Commercial backlog is up 20% year over year, which correlates with recent census, non residential spending data for the sector. And we realized that census data is, a rearview mirror look, but it also can be with the momentum in it, a future indicator, and it doesn't look that right now, the demand is slowing much at this time. Backlog in the institutional healthcare and hospitality sector is up year over year and for the 1st 6 months of 2 7s to 4 for the 1st 6 months of 2017, while backlog in the transportation and industrial sectors are down as we work down some large projects and reload, especially in the food processing and transportation infrastructure areas. Bottom line is projectivity is fairly widespread across most sectors, and we continue to see project opportunities where we can execute well for our customers. So it's supposed to page over to backlog by segment. And there's really not a lot of news here. Same story different quarter. Backlog continues to grow in our domestic construction segments. In total, our Electrical And Mechanical Construction segments backlog increased $331,000,000 to $3,200,000,000, up almost 12% despite the strong revenue growth from June 2016. It's pretty evenly split with electrical up $160,000,000 and mechanical up $171,000,000 for the year over year period. Combined over combined over a third of the backlog growth came during the first supporting the nonresidential sectors that are experiencing growth in 2017. Backlog in our Building Services segment is down $64,000,000, and it's driven by our commercial site base and government business as we continue to reshape these operations around increased profitability. Bottom line here is we are excited about some new opportunities that we are in the pilot stage of and they could be significant opportunities for us in the future. And the potential full impact of these awards are not in backlog yet in any significant and not taking these loss contracts at low or even negative margins. It certainly wasn't a performance issue. As these relationships were 8 to 14 year relationships. In the case of our government business, we had won all of the award option years. In our commercial site based business, our customer brought in new management, and they are implementing a new model, fit in our view, will ultimately cost them more money. But we are not going to execute work for them for on a go forward basis, so we bid responsibly and lost the contract. Also included in the Building Services segment is our Mobile Mechanical Services operations. Which performed mechanical maintenance, service contract and small project works. It's really all centered around HVAC and controls. It's similar to our domestic construction segments and the drivers in the mechanical services business underlying and building services is betting from the steady and improving non res market and backlog book to bill for this part of the Building Services business is over 1. Our Industrial Services backlog stands at 55,000,000 which really is the same as it's been. It's the 7th consecutive quarter it's been there. We view that the new build heat exchanger business, which is all this represents, has been in this range of $50,000,000 to $60,000,000. Not much has really changed with regard to that shop backlog. Mark did talk about repair spending being up a little bit. That would not be in backlog. And we think that the inquiries are a little more than past quarter. However, pricing remains soft. And like I said in my earlier comment, we do believe we're bouncing around the bottom in the new build heat exchanger market. Backlog in the UK is up a bit, reflecting some new contractor war wins. In all, like last quarter, backlog up in construction, in line or a little ahead of the markets, flattening the industrial shop business, It's pretty much where we thought we'd be this far, probably a little better here in early to in mid part of 2017. The bottom line on backlog, this is a good report as we are seeing good momentum in our construction segments with a book to bill over 1 and very strong revenue growth. Now I'm going to go to Page 1314 and close off our call before we get some questions. So we're going to raise guidance as we have performed very well on a year to date basis and we expect to continue to perform well for the balance of the year. We also have benefited by import diversity of services and end markets. And we have proven over time that we can execute across these diverse markets and services. We are raising our revenue guidance from the $76,000,000,000 that we had, so we expect to be around the higher end of that to $7,600,000,000. We are raising both the lower and upper end of our earnings per diluted share from continuing operations guidance. From recurring guidance of $3.20 to $3.50 per share, to our new guidance of So how do you get to the top end of the range now? That's what you always ask us. So our Electrical And Mechanical Construction segments must continue to perform well with excellent operating income margins, and we have to continue the absence of badness that we have executed to so far this year. We expect the market to continue to grow at a mid single digit pace for the balance of the year. We grew backlog in these segments despite the 10.7% organic revenue growth on a combined basis through June 30. Our Building Services segments must continue to perform well especially in our mechanical services business, and we must implement the new contract awards in the site based business to our customers' expectations. So we can grow them. We expect strength depletion, and we should have a good mix of work on a go forward basis. For industrial services, it's all about the fall turnaround season, which we expect to be comparable to 2016. And we need the opportunity and want the opportunity to get to the top end of the range to execute increased specialty services work. Reality of the specialty services work, a lot of times things have to get progressively worse on a job sometimes, or in demand has to be progressively increased. For us to get there. And there are several cases where we're looking at jobs where we may have an opportunity in Q4 and Q3. We just don't have control over that decision. In the UK segment, we should continue to perform in a steady and measured way. It has become a very stable performing segment for us. We expect our cash flow We will continue to return cash to shareholders through both dividends and share repurchases. And Adam, with that, we'll be happy to take questions. And your first question comes from the line of Tahira Azal with KeyBanc Capital Markets. Gentlemen. This is Sean on for Tahira today. Congrats on a great quarter. First question for me is just looking at the construction segments, Given the broader market outlook mid single digits for this year, you guys are obviously tracking way ahead of that So I'm just wondering how we should be thinking about sort of a sustainable growth rate for those segments as we look out to 'eighteen And also if you could tie in maybe, how that dispute might have, helped the 15% organic growth we saw in mechanical this quarter, that would also be helpful. Well, let me, break apart the question. We've had good backlog growth in our construction segments. A lot of this work has been fast paced. Some of it will go into 2018. I think, you know, we don't give 2018 guidance at this point. Yes. Thanks, Rob. On the second point, I'm going to turn it over to Mark. The reality is Most of that just happens on the income line as far as the growth, right? Mark, but Mark will walk through the dispute resolution and the character around that. Yes, thank you, Toni. With regards to, the dispute resolution, it was a recovery of cost So as Tony indicated, it actually did go through the gross profit line and not through, not through revenue. So it did not impact the 15% quarter over quarter revenue growth. Again, clearly, both of our domestic construction segments continue to perform at a very strong level. For the most part, a lot of the work that we're currently executing, project timelines tend to be kind of in our sweet spot. Which are, on the low end anywhere from 4 to 5 months to 9 to 12 months. We continue to have some longer burn work that we've had over a long number of years. So when we sit down and get to our planning process for 2018, we'll certainly be a lot smarter and be able to that question as Tony indicated. Okay. Thanks. And then second, I just wanted to move over to Arden. We're pretty much a year in here. I just want to I was hoping you guys could discuss what they're seeing in there, particularly in their energy end markets and maybe how their contribution is shaping up versus your initial expectations? They're a little weaker than we expected initially. Really driven by the market. We expect, the rigs that have come on have basically been returning to places that have already been set up from an infrastructure standpoint. And of course, electrical equipment doesn't wear out the way mechanical equipment does. Secondarily, they continue to get very good penetration in downstream. They've been very successful there. Especially, their Corpus Christi operations, which is Robillay, is very and some of the infrastructure work down there around the energy infrastructure. But as the pipeline work materializes, we in the latter part of 'seventeen going through the latter part of 'eighteen would be at the later stages of that versus the developers that have been awarded the work where the mainline contractors that we think then we'll see the improvement. It was a long play for us. We think they're a very good management team. We're bullish on their prospects long term with the energy recovery. And your next question comes from the line of Noel Dilts with Stifel. Good morning, Noel. Hi, good morning. Congrats on a nice quarter. So my first question, just looking at your $7,600,000,000 revenue guidance. I look at consensus right now and already estimates are a little bit ahead of that. So I'm kind of just trying to better understand maybe where we as analysts are or maybe a little bit, maybe ahead of what you're thinking. So if you could give us some thoughts on what you're expecting in terms of annual growth out of the key segments? That would be helpful. Well, I mean, construction will be up. Both Electrical And Mechanical Building Services are likely to be down despite the strong underlying mechanical services growth. And like we foreshadowed over the last 14 months, we expect industrial will be down. And I think we've seen that year to date. To put all that together, Absent some specialty services work in industrial, absent faster implementation on some of these new contract awards and building services, we think we got the revenue guidance about right. Okay. And then on just kind of shifting to the high level thoughts on the non res market. Some of the concerns we're hearing or the things we're hearing are that we might see some growth shift from some of the larger Tier 1 markets like say New York into some of the medium sized cities given your strong New York presence. I wanted to know your view on that and how you're thinking about some of this growth as we head into the back half of 'seventeen and into 'eighteen. So if you think about some of the growth in New York, now in New Jersey, we do some residential high rise and we've been very successful at it on the room front. We see that continuing. We've never been big players in New York Residential High Rise, which is where you see a lot of the cranes. We are significant flares in infrastructure. And we are in, building restock retrofit. So The work that's already been done in places like Hudson Yards and some of the other developments around New York, now it's in our sweet spot to go in and do some of the work. And then some of the infrastructure work, the bridges and tunnels, we're doing very well on. And as more work becomes available around that, we will be there to participate. That's one of the beauties of EMCOR is, you know, we're not dependent on any given market. And although New York's important to us, We have the ability to shift to other markets and we have shown that, right? You see the balance between industrial last year. And now, mechanical and electrical this year. It's very similar from a geographic basis for us. Great. And then one last question on the on the downstream services side. We've seen a number of participants in this space kind of struggle with with some delays and push outs of work, which you attributed to some extent to crack spreads being up again. Can you just give us some thoughts on what in your opinion is sort of the ideal environment for refiners to start spending in a major way again and what kind of stop some of these deferrals that we've been seeing over the past couple of years? Unfortunately, we had our first, other than the strike. We had our first experience with deferrals over the last 3 years where others have been talking about. No, I think a lot of this is very customer specific. And integrated behave different than refining only companies. A lot of it has to do with going on in their fleet and the kind of crew they're taking in. I think broadly speaking, It is poised to be a healthier sector. I think from chunk of this market. Mark and I were talking about this, The reality is if you're an integrated oil company, sometimes you delay things because the refining operation is where you're actually making money now. And as oil prices come back, even though that's upstream driven, that on the integrated side has a positive impact on the refining spend. On the non integrated side, it's all about fleet management for them and crude slate management. One of the things I think that's a little different is overall, I think some of it is, it's apples and oranges for some of the companies that are reporting. They were highly dependent. Some of these companies on Mid And Upstream, and they're blaming downstream for some of their problems. And the reality is Mid And Upstream is getting better, but it's nowhere near what it was. Great. Thank you. And your next question comes from the line of Adam Thalmer with Thompson Davis. First question, just can you give us a little more color on the industrial services margin in the quarter, was that down just on lower utilization? Yes, lower label utilization. So we have a fixed cost in there. It guarantees some of your key people, especially field people, certain hours. We've been able to utilize them over the last, in 2015 2016 in the second quarter, which is unusual, by the way. The more normal practice, although this is a little worse than it can be, usually it'd be 4% or 5% margins. But with the with the push out at the last minute of these turnarounds, we ate more costs than we typically would. And we didn't get the margin to go with it. But yes, fixed cost utilization of your labor force for the people that are actually going to run the turnarounds, more senior guys. So you would expect it to go back to normal Yes, all turnaround season gets better, what we plan then we should see improved margins as we go to the back half of the year. Okay. And then along the same lines, would you if you get a strong fall turnaround season, do you think you could have growth year over year in industrial services revenue? No. Yes. Okay. So you won't get back to revenue growth in that segment until you go up against this Q2 2017 comp. Yes. Okay. And then I didn't understand you said you were bidding or you had won something in building services that could be significant? We're in the pilot stages of 3 new contracts. Our pilot We're doing very well on the pilots. We expect them to grow over the next 12 to 18 months. Implementation can look like a very slow, steady implementation. Or sometimes it really accelerates as the customer sees how much money they're really saving because we bring people to listen to what we do every day versus on the customer side a lot of times. People as part of what they do. Okay. So that's energy retrofit work done or that's government? Raw technician work and site based work for the most part. Now we do energy retrofit work on top of that, but that'll be post 12 to 18 months as we get into really know the customer. Yes, and it's additive to the base contract. Yes, it's additive. It's not part of the contract. Okay. And then lastly, Mark, are there any more dispute resolutions outstanding or did this kind of clear everything up? Well, there's always dispute resolutions outstanding relative to order of magnitude of things that we've talked about in the past. We're very thankful that this particular matter resolved itself as quickly as it did because it relates to the issue that we had in the fourth quarter with the large write down that we had. Typically, they don't resolve themselves within 6 months after something like that happening. But I don't see anything in the near term, that even is remotely close to what we just experienced over quarter 1 quarter 2 this year. On the favorable side. And clearly, as Tony mentioned a number of times in his commentary, we're happy that the absence of badness that that did impact 'sixteen and to a lesser extent 'fifteen, seems to be behind us as we plowed through the remainder of this year into 2018. Yes. I mean, like Mark said, this was quicker than usual, and it was fairly unique, right? We were working directly for the principal. We'll also control the decision making and the spending authorization. That's not usually the case. Thank you. And your next question comes from the line of John Diangelo with Macquarie. Hey guys, good morning. Thank you for taking my questions. Sure. Shoot. So, I mean, it looks like in the Q, can you guys just confirm that Arden only did $6,500,000 in revenue during the quarter? No, that's John, this is Mark Pompa. That $6,500,000 is the incremental revenue because we acquired ARDA in the middle of April of 2016. So that's reflective of just 2 weeks of activity. Oh, I see. Okay. Okay. Fair enough. And then My next question is, if you look at like sort of the organic margins for the Mechanical segment, I'm actually sort of getting that the core operating margins were down versus 2Q of last year, while revenues were organic revenues were up 15%. So Can you sort of just walk through why exactly did that happen? And then backlog continues to grow in that space. Is it could backlog be getting filled with lower margin work? No, I think a lot of it's just timing. We're probably in on the front end of some work right now. Margins tend to be lower. The underlying fundamentals are very good in the business. This is not a quarterly margin business. None of them are. You sort of have to go look at a 12 month rolling average, even a 5 quarter rolling average. And anytime our mechanical business is in the high fives and low sixs is performing well. The backlog is good. There's no underlying issues in it. And your next question comes from the line of Brent Thielman with D. A. Davidson. Hey, good morning. Great quarter. Maybe sticking to that margin question. And Tony, really trying to think about the runway for construction margin here. So I looking at the backlog, you had a couple of quarters in a row where public sector moving into backlogs outpacing growth in private, clearly private still at a nice level. I guess the question is, are you seeing more cylinders in the market starting to run? Is this the sort of change that allows you to be even more about work you're going after right now? I think the selective point is correct from a different reason though. We have to pay attention to the capacity we have. We're not capacity constrained, but we want to make sure that we have the right people available to do the right jobs. And it becomes a sequencing issue, especially so that we can be able to serve some of our better customers, when they need us. So selectivity for us centers around availability are the right resources to execute the work. I think there's other parts of it that matter to us too. We think a lot about who we're working for. We think about the financial stability of the people we're working for. Have we worked with them before? Have we worked in that geography before? Do we have a labor force that can work in that geography well? We have the supervision we can bring to bear on the product project and what do the cash flows look like on the project. And when you put all that together, that's how selectivity works for us. Assuming we have the technical capability to do the work. I think right now, the market's in such a position that sometimes the best job you want, sometimes the larger work that's happening in the market, if you can't get it at the right price, sometimes it's better to bid that to a level where you'd be comfortable if you want it. And if you didn't know that there'll be capacity absorbed in that market, you'll be able to compete on the other work that will come and you're likely to be more successful, although smaller, some of the work will be more successful from a margin standpoint. Okay. And Tony, to that last point, market where it is right now, do you feel like it was there 12 months ago? Yes. Okay. Okay. And then maybe a question for Mark. On the Industrial Services side, thinking about the headwind there. Would you happen to know the large project impact on revenues in 3Q last year? Just trying to get a feel for what the base business comps are as what it was forecasting out for the second half of this year? Yes, we Brent, I respect the question. We purposely haven't disclosed that because we're sensitive to our customer and what level of information they want out in the public domain. So unfortunately, I'm not willing to share that with you at this time. Adam, is that it? Yes, sir. And now we'll turn the call back to management for closing remarks. Okay, great. Look, thank you all for your interest in EMCOR. We have a decent market right now for the majority of what we do. And we have great people executing that work every day. And our primary mission is to execute well for our customers. Do well for our shareholders. And primarily, the first mission is to keep our people safe and productive. So with that, we'll leave you go and we'll see you in October. Bye. And this concludes today's conference call. Thank you for your participation. You may now