Earnings Call: Q2 2016

Jul 28, 2016

Good morning. My name is Angela, and I will be your conference operator today. Welcome everyone to the EMCOR Group Second Quarter 20 16 Earnings Call. After the speakers' remarks, there will be a question and answer Mr. Max Dutcher with FTI Consulting, you may begin. Thank you, Angela, and good morning, everyone. Welcome to the EMCORE Group conference call. We are here today to discuss the company 2016 second quarter results, which were reported this morning. I would like to turn the call over to Kevin Matts, Executive Vice President of shared services, who will introduce management. Kevin, please go ahead. Thank you, Max, and good morning, everyone. Welcome to EMCOR Group's earnings conference call the second quarter of 2016. For those of you who are accessing the call via the internet and our website, welcome to you as well, we hope you have arrived at the beginning of our slide presentation that will accompany our remarks today. We are on Slide 2. Slide 2 depicts the executives who are with me to discuss the quarter 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 And General Counsel and our Vice President of Marketing And Communications, Mava Heffler. For call participants not accessing the conference call via the internet, this presentation, including the slides, will be archived in the Investor Relations section of our website under presentation. You can find us at emcorgroup.com. Before we begin, I want to remind you that such discussion may contain certain forward looking statements, Any such statements are based upon information available to EMCOR's management's perception as of this date and EMCOR assumes no obligation to update any forward looking statements. These forward looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward looking statement 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 EMCOR Services, adverse business conditions, increased competition, mix of business and risks associated with foreign operations. Certain other risks and factors associated with EMCOR's business are also discussed in the company's 2015 Form 10 K and in other reports filed from time to time with the Securities And Exchange Commission Now with that said, please let me turn the call over to Tony Guzzi. Tony? Yes, good morning. Thanks, Kevin. And I'm going to be speaking to pages 3 and 4 of the presentation. Look, this was a record setting second quarter for EMCOR. And one of our best ever overall And really what this quarter highlights is the strength and diversity of our underlying business, even when facing headwinds. I'm going to be speaking to pro form a numbers, which remove our transaction expenses from the Arden transaction. We set 2nd quarter record for revenues, operating income, net income and earnings per share. We also had a very good cash flow quarter. We earned $0.95 per diluted share from continuing operations, We had revenue growth were powered by exceptional performance in our Industrial segment, good performance in our overall construction business, in segments despite the headwind from a transportation infrastructure job and solid performance in both our Building Services and UK segments. I'm going to now spend a little time in each one of the segments. Clearly, our industrial business segment performed exceptionally well despite the previously discussed headwind in our shop businesses. Our 48% revenue growth and 90% operating income growth was driven by exceptional performance in our field businesses led by demand for our specialty services What happened is customers needed our specialty services on a critical and significant projects, and we are and we were and are able to provide the right resource That is skilled labor, supervision, and equipment to help them solve some tough problems. It is always hard to predict when these events happen or how long they will sustain. But what we do know is we are better positioned than anybody to help customers But quite frankly, we attract the best skilled labor and supervision to complete the task. Another underlying trend in our business or not even trend, but we expected a certain level of performance in our shop businesses through the first half of the year in the quarter. And we did a little better than that, although still below prior year. And really what happened is our repair activity in the shops was better than our expectations. But again, was below actual prior year performance when you take OEM with repair combined. What all this has allowed us to do in the industrial segment has performed well and what is a choppy market. The other thing we've done is we've expanded our offering to the broader petrochemical space and we've had some pretty good success at that. In fact, that's a lot of place where the outperformance came from. Overall, it's great execution by this team in the most challenging of circumstances. When you look at our construction segments combined, and that's really how we run them. When you look at them combined, We performed well on a combined basis with 9.8 percent organic growth and 6.2 percent operating profit growth. Our Mechanical segment drove this success with 18% operating profit growth and 11.2 percent organic revenue Our Electrical segment performed well, except for one job nearing completion in the Northeast Transportation Mark. We were able to withstand a $10,500,000 write down on this job. And still, earn 5.5 percent operating income margins in our Electrical segment. That tells you the underlying strength of the overall segment despite that large job loss. And the other thing that's happening in the electrical segment or our construction business is the integration of art and on track and they are settling in as they focus on running the business versus selling the business. Building Services, the segment rebounded in the quarter both revenue and operating profit growth. Our Mechanical Services business had a very good quarter and continues to backlog, and we're seeing especially strong demand for our retrofit and replacement businesses. We can drive real and tangible energy savings for our customers through our retrofit and replacement businesses, and we're a leader there. Our commercial site based business has steady performance Our government business did have headwinds primarily from lower IDIQ spending. The UK performed well and we have a steady contributing business in the UK, which has a very strong market position, especially serving customers with mission critical facilities. Backlog grew from the year ago period by 5.1%, and we had a very strong book to bill 0.98 despite record revenue quarter. Backlog is at now 3,810,000,000 versus the year ago period of $3,620,000,000. Cash flow was strong at $84,000,000. So overall, a pretty darn good quarter and really sets us up well depending on the call today. For those accessing this presentation via the webcast, we are now on Slide 6. As Tony indicated in his opening commentary, I will provide a more detailed discussion of our second quarter 2016 results before covering key financial data derived from our consolidated financial statements included in both our earnings release announcement and Form 10Q filed with the Securities And Exchange Commission earlier today. So let's cover our second quarter performance in a little bit more detail. Consolidated revenues of $1,930,000,000 are up $280,800,000 or 17 percent over quarter 2 2015. All reportable segments are reporting increased revenues quarter over quarter other than our UK Building Services segment, which experienced significant headwinds from the weakened British pound exasperated by the Brexit vote. 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 nearest quarter by 77,400,000 and positively impacted our U. S. Electrical Construction, U. S. Mechanical Construction And U. S. Building Services segments. Excluding the impact of businesses acquired, 2nd quarter revenues grew organically $203,500,000 or 12.3 percent. U. S. Electrical Construction revenues $120,600,000 increased $74,400,000 or 21.5 percent from quarter 2 2015. In excluding acquisitions, as segment's revenues grew $26,100,000 or 7.6 percent organically. Revenue growth was largely driven by project activity within the commercial transportation, industrial and hospitality market sectors, offset by quarter over quarter revenue declines within the healthcare, water and institutional market sectors. U. S. Mechanical Construction 2nd quarter revenues of $629,900,000 increased $75,900,000 or 13.7 percent. Excluding acquisition revenues of $14,000,000, this segment grew organically 11.2%. Consistent with the revenue trends within this segment during the last two waters, revenue growth was broad based from a market sector perspective with the industrial water and hospitality market sectors contributing to largest dollar revenue growth quarter over quarter. This is our 3rd consecutive quarter of double digit revenue growth within the Mechanical Construction segment as well as our 4th consecutive quarter of sequential backlog growth, which foreshadows continuing strong performance from this segment EMCOR's total domestic construction business 2nd quarter revenues of $1,100,000,000 increased 150,300,000 or 16.7% with 9.8% being generated from organic revenue growth. U. S. Building Services quarterly revenues of $458,800,000 increased $23,200,000 or 5.3 percent. Excluding acquisition revenues of $15,100,000, this segment grew organically 1.9%. Revenue gains within their mechanical services and commercial site based services divisions were somewhat diminished by reduced revenue levels within the Government Services group due to maintenance contract attrition as well as lower definite duration and definite quantity project volumes. U. S. Industrial Services revenues of $333,500,000 increased 100 and $300,000 or 48.1 percent due to increased field services activities as we experienced an extended spring turnaround season as well as strong demand for some of our specialty services. Additionally, this segment was still experiencing significant headwinds during 2015 second quarter, due to the impact of a nationwide refinery operator strike. This very strong second quarter revenue performance was somewhat muted by continued soft demand for shop services due to a lack of capital spending by our customers given uncertainty and volatility in crude oil prices. United Kingdom Building Services revenues of $90,600,000 decreased $1,000,000 or 1.1% due to the headwind of a weakening British pound resulting in a quarter over quarter unfavorable exchange rate impact of $6,200,000. Finally it is worth noting that our consolidated second quarter 2016 revenues of $1,930,000,000 surpassed our previously established revenue record for any quarterly reporting period, which we achieved in 2015 fourth quarter. Please turn to Slide 7 Selling, general and administrative expenses of $181,800,000 represent 9.4 percent of revenues and an increase of $20,400,000 from quarter 15. As a percentage of revenues, the current year quarter declined 40 basis points from the 9.8% reported last year. The second quarter includes $9,300,000 of incremental SG and A, inclusive of intangible asset amortization from businesses acquired pertaining to the creative time that such businesses were not owned by EMCOR and last year's second quarter. Additionally, our second quarter includes $2,800,000 of transaction expenses, in connection with our acquisition of Arnaud and Robillay. Therefore, our quarterly organic SG and A increases approximately 8,400,000 and is primarily due to increased employment costs as a result of higher headcount and increased accruals for certain of our incentive compensation programs due to higher projected annual results than at the same period end in 2015. The other significant component of the increase in SG and A is additional bad debt expense within our U. S. Industrial Services And U. S. Building Services segments. Despite such SG and A increases, we were able to reduce our SG and A as a percentage of revenues by effectively leveraging our overhead structure center revenues and compares to $77,700,000 4.7 percent in 2015 second quarter. Our U. S. Electrical Construction Services segment operating income of $23,000,000 decreased $2,300,000 from the comparable 2015 period. Reported quarterly operating margin is 5.5 percent, which is 180 basis points lower than 2015 second quarter. The decrease in both operating income and operating margin is due to a $10,500,000 loss that Tony referenced that was incurred on a transportation construction project in the Northeast As a result, the productivity issues attributable to unfavorable job site conditions. As I'm sure most of you remember, this segment also experienced losses on certain transportation projects during the first quarter of this year. The unfavorable activity in this quarter is unrelated to those projects addressed during quarter 1. Although we are disappointed to have had several quarters of unfavorable project performance reducing this segment's profitability during both 20162015 We are encouraged by the sequential improvement in operating profit and corresponding margin and we will seek to recover for such losses incurred. The impact of the loss in this segment's quarterly operating margin is a negative 230 basis points and is maxing strong performance for most of our other electrical construction inclusive of our recent Ardent Robley acquisition. 2017 second quarter U. S. Mechanical Construction Services segment operating income of $38,200,000, represents a $5,800,000 increase from last year's quarter. This represents an 80% improvement quarter over quarter primarily due to increased gross profit contributions from projects within the industrial, commercial, healthcare and Hospitality market sectors. Additionally, this segment benefited from a 2,000,000 Our total U. S. Construction business is reporting a 5.8% operating margin for the quarter just ended as compared to 6.4% in last year's the quarter. Operating income for U. S. Building Services increased approximately $400,000 to $18,300,000 or 4 percent of revenues. The improvement in quarter over quarter operating income is due to the acquisition of a business within the segment's mechanical services division, which offset reduced operating income and operating margin Services segment operating income of $33,100,000 increased $15,700,000 or approximately 90% compared to 2015 second quarter with an operating margin 9.9 percent or 220 basis points higher than last year's 7.7 percent operating margin. The quarter over quarter improvement is attributable to higher turnaround activities due to an extended spring turnaround season as well as increased gross profit from our specialty service offerings within our field service division. This positive performance was able to offset the continued headwinds experienced within our shop services operations. UK Building Services operating income of $3,300,000 represents a 3.6% of revenues, which is an increase of approximately 400,000 and is a 50 basis point improvement over last year's second quarter. The impact on consolidated operating margin of the previously mentioned loss incurred during quarter within our U. S. Electrical Construction Services segment is a negative 50 basis points. Lastly, on this side, slide, we had a strong operating cash flow quarter with cash provided by operations of $84,900,000 as compared to $11,800,000 in last year's second quarter. We are now on Slide 8. Additional key financial data on this slide not addressed during my highlights summary are as follows: Quarter 2 gross profit of $274,700,000 represents 14.2 percent of revenues, which has improved from the comparable 2015 quarter by 35 $200,000. The quarter over quarter reduction in gross margin was driven by margin compression due to revenue mix with our U. S. Within our US Mechanical Construction And US Industrial Services segments. Additionally, our gross margin was negatively impacted by the loss incurred on a transportation project and U. S. Electrical Construction, which was previously referenced. Total restructuring costs were $641,000 as compared to 4 $3000, and were related to activities within our U. S. Mechanical Construction And U. S. Building Services segments. Diluted earnings common share from continuing operations is $0.92 and compares to $0.74 for the quarter ended June 30, 2015. On an adjusted basis, reflecting the add back of transaction costs, diluted earnings per common share from continuing operations would have been $0.95 for 2016, and represents a quarter over quarter improvement of 28.4 percent. Lastly, as Tony previously mentioned, And I've mentioned probably about 10 minutes ago, it is worth noting again that the results of our operations for the second quarter of 2016 set new company records for a quarter in regards to consolidated revenues as well as new 2nd quarter records. Our operating income and diluted earnings per common share from continuing operations. Overall, I'd say a pretty good quarter. Please turn to Slide 9. Let's turn our attention now to our results for the 1st 6 months of the year. Revenues of $3,680,000,000 represented an increase $436,600,000 or 13.5 percent as compared to $3,240,000,000 in the prior year period. All reportable segments are reporting organic revenue growth year over year, except our UK Building Services segment, consistent with the performance in the quarter, which experienced an $11,300,000 headwind, due to the weakening of the British pound for the reason I obviously previously referenced Year to date gross profit of $497,800,000 is greater than the representative 2015 period by $41,400,000 or 9.1 percent. However, our gross margin of 13.5 percent is 60 basis points lower year over year, primarily due to the transportation construction project write downs in both quarters of this year. Additionally, a change in revenue mix within our Industrial Services segment due to the curtailment and capital spending amongst of the integrated oil companies has resulted in significantly less shop services opportunities, which have historically generated the highest gross profit margins within that segment Selling, general and administrative expenses of $349,200,000 represent 9.5 percent of revenues, compared to $323,000,000 or 10 percent of revenues in 2015. Our SG and A as a percentage of revenues is down sequentially from quarter 1 by 10 basis points. On an adjusted basis, removing our year to date acquisition related transaction expenses of $3,800,000 with the 60 basis points less than the corresponding 6 month 2015 period. Restructuring activities slightly increased from 2015 levels as we continue to adjust our cost structure as a result of streamlining certain processes to achieve both productivity and efficiency improvements. Year to date operating income is $147,900,000 or 4 percent of revenues and represents a $14,900,000 increase over 2015 year to date performance. 2016's operating margin is reduced by 10 basis points. However, after adding back the $3,800,000 of transaction associated with the acquisition of Arden and Roble, operating margin would have been essentially flat year over year. Our strong first half operating performance within U. S. Industrial Services And U. S. Mechanical Construction was muted by reduced year to date operating income within both Services Services segments. U. S. Building Services improved quarter 2 performance was not enough to offset their slow first quarter of 2016 due to both a less favorable revenue mix and a lack of snow in those geographies where we were contracted for snow removal on an event basis. Our US Electrical Construction Services year to date operating income and operating margin performance is hindered by the losses recorded on the transportation projects that I mentioned. Where we had charges recorded in each of the 1st 2 quarters of this year. The impact on consolidated operating margin of the previously mentioned transportation construction losses incurred during the year within our U. S. Electrical And Construction Services segment is a negative 40 basis points. Diluted earnings per common share from continuing operations is $1.48 for the 6 months ended June 30, 2016, compared to $1.26 in the corresponding 6 month 2015 period. On an adjusted basis, reflecting the add back of transaction costs, diluted earnings per common share from continuing operations would have been $1.52 per share for 2016, and represents an improvement of 20.6% year over year. We are now on Slide 10. Tony touched upon the strength and liquidity of EMCOR's balance sheet during his opening commentary, and it's pretty evident when you look at this page. Our cash is reduced from year end 2015, primarily due to our year to date share repurchase activity and funding of dividends paid. Working capital levels have improved due to an increase in accounts receivable given our organic result of reduced levels of accounts payable and accrued expenses, partially driven by a decrease in taxes payable, at the end of June as compared to the end of December. Changes in goodwill and identifiable intangible asset balances reflect the impact of acquisitions made during 2016, net of 20,000,000 of year to date intangible asset amortization expense. With regard to anticipated intangible asset amortization expense for the second half of twenty sixteen and full year 2017, I anticipate $20,900,000 and $39,200,000 respectfully. These amounts may change as we finalize the purchase price allocations for our 2016 acquisitions or if we are successful in adding additional businesses to our company. Total debt of $527,200,000 represents a net increase of $212,100,000 from year end 2015 due to funds drawn against the revolving credit facility to facilitate our closing of the Ardent Robley acquisition in April, which I referenced during our quarter 1 earnings call. As a result of our additional earnings, we currently have a debt to capitalization ratio of 25.5 percent. We are happy with where our balance sheet currently stands and extremely happy with our excellent cash flow conversion during a 6 month period of very strong revenue growth. Our leverage profile has increased, however, we are still comfortable as we maintain significant availability under our credit facility. I believe we remain well positioned to take advantage of all opportunities that Thanks, Mark. We deserve a drink of water after all that. I'm on page 11 now, and we will backlog by market sector. Mark covered some of this when you talked about the revenue trends. And it comes pretty much on top of that. 2nd quarter backlog is 3 point $81,000,000,000, up $187,000,000 or 5.2 percent from June of 2015 $40,000,000 from December 31, despite strong revenue growth we've had. What you're really seeing in our backlog, is our construction segments are what's growing. And really, they comprise 75 percent of our total backlog anyway. When we start to look at the market sectors, we're basically following the census data where it's a year to date. Our backlog is growing on the private side right now, and it shrunk a little bit on the institutional side, which is right in line with construction, census data through, May of 2016. And one of the things I think we look for is that our momentum in market And the reality is there is a momentum in the market. Dog shows a little bit of momentum. This ABI data shows a little bit of momentum And so does the, construction data, which is more of a backward looking metric. All of them are in line with what we've said over the last couple of years sort of a single digit market grower, mid single digit market grower for us. We certainly see that through the back half of 2016, and we think it goes into 'seventeen. We really can't see much further than that. We do see mid single digits and really if we can grow mid single digits that gives EMCOR plenty of market operating and find the right opportunities. And with that, I'll switch to page 12 talk a little bit about the segment. There's really not a lot new here. Our construction segments are growing. Our building service is now seeing a little growth especially in the mechanical services business, but the construction is very strong, up $225,000,000 or just under 15% And that we expect that. We expect to outgrow the market when the market's a little better. And it'll come in fits and starts and there's more of a soft tooth pattern but we have good underlying momentum in the business. And when you look at the industrial services, remind you, that's just the shop backlog. It's at $59,000,000, which is basically flat from year end, down 30% from a year ago. Pricing remains tough in this new build heat exchanger market. We don't see that ending anytime soon. We think a recovery in that market at least 12 to 24 months away. But we do see good business in our repair business, which would not be in this back And of course, none of our turnaround activity or our specialty services would be on this backlog. So the next question is, okay, how's bidding activity? Bidding activity is pretty it's okay. It's pretty good. We're seeing and we're winning our share of work across multiple market segments, in the single digit market. We're seeing attractive opportunities. And the next question is, how are bidding margins? Well, bidding margins are okay. They have not returned to the levels they were at in 7 or 8. And the reality is we don't think they're likely to return, to those pre recession levels anytime in the next 6 to 12 months. Now I was thinking about non res overall. So somewhere in 'seventeen end of the year early 'eighteen, we'll finally get back to where we were in 2007. You could say it took us 10 years to get back where we were. So we that's why we think there's still a little bit of growth left in this, in the mid single digit range. And now to the all important, what are you going to do with the rest of the year? We started the year pretty good here and I'm going to page on Page 1314. We are going to move our guidance up based on our strong year to date performance and our outlook for the remainder of the year. We now expect to achieve around $7,400,000,000 in revenues and we're going to move the low end of our range from $2.75 to $2.90 and the high end of the range from $3 to $3.10 per diluted share from continuing operations. And what that does is exclude the transaction cost from the acquisition of Art at Broadway. With this guidance, we're implying a pretty good second half, and we see that as of today. And we do expect our Industrial segment to continue to perform well but probably not at the really great level or superb level that have performed in the first half of the year. So how do you get to the high end of the range here, at EMCOR? Well, we need a good fall turnaround season. And when sitting here today, we expect a good fall turnaround season, We need continued strength in our specialty services to get to that top end, and we are executing very well on some difficult large project right now. What's hard to predict is how long they go and what will be the incremental impact as you go out, especially as you get out into the end of 3rd fourth quarter We do need continued strength in our construction operations, and we expect to have continued strength in our construction operation we do think the market could slow a little bit, but we still think we have a pretty good market to operate in. And we expect continued improving in performance in both our UK And Building Services business. We do expect to generate cash at least equal to net income for the year, and we expect our balance sheet to strengthen as the year progresses. We have executed 2 very nice transactions, this year. And we remain interested in adding transactions like that on any day. And they add to our geographical reach or our capability in any one of our segments. We will continue to return cash to shareholders through buybacks and dividends, but look for buybacks to be the primary return of capital to shareholders from us over the next 12 to 24 months. And with that, Angela, I'm happy to take the teams happy take questions, from anybody on the call. And your first question comes from John Rogers with D. A. Davidson. Good morning, quarter. Thank you. I guess just a couple of things. In terms of the transportation project, you've taken the hits on, both first quarter 2nd quarter. How much work is left to do on those projects? And as you finish them off, will they be, will that dilute margins? Well, the first quarter write downs they'll be essentially complete here in the 3rd quarter. On the write down this quarter, they that should be finished by year end with the bulk of the activity likely to take place by the end of third quarter. As far as diluting margins, Mark, they'll continue to drag, but the bulk of the revenue on the first two are behind us. And the second, the one this quarter particularly difficult. We should move to big chunk of completion here by the end of 3rd Okay. I'm just trying to back out that, would you say a $10,000,000 charge on that project? It cost us 230 basis points in the quarter. It's $10,500,000 charge, in quarter 2. And what it really shows you, John, the rest of the electrical business is operating at very significant operating margins are performing very well. Yes. Okay. And then in terms of the turnaround activity. Tony, you referenced some large projects that you were working on during the quarter and and I know it's a tough business to predict. But were those just standard turnarounds? Can you give us a little more color on the type that it was Yes, it was in the broader petrochemical space. It was not standard turnaround work. What it was was really helping people complete, significant capital projects where they needed the skill and expertise of some of our welders and pipe fitters boiler makers to finish that work in a timely manner. Okay. But you don't see much visibility for that continuing into the 2nd half? Is that what you're saying? Because it seems like there's a lot of market activity there. We think some of it will continue into the 2nd half to understand our specialty services, they call us in when, they need very highly skilled people or the timelines aren't being met. So the visibility gets tougher. So we need to really marshal significant resources in a short period of time. And so we at most get 4 to 6 week lead times on that. That's it most. Okay. Okay. And then I guess just lastly, Tony, I mean, I know your 3rd quarter typically seasonally dips, but your 4th quarters are often your best quarters, but you're not calling for that this year at least back into the guidance? Yes, I think the strength of our industrial first half makes it difficult for us to see typical patterns in our business right now. I would say that in our construction segment, we will follow a more typical pattern, especially in light of this $10,500,000 write down in the quarter. In our Industrial segment, because of the nature of the work we did in first half of the year. And the extended, turnaround seasons into Q2, it becomes more problematic for us to look at it that way. And we think building services will sequentially improve in UK, but very difficult because of that. And we're going to know a whole lot more in October. Obviously, the tier is almost over then, right? Sure. Okay. Well, congratulations again. Thanks. Thank you, John. Your next question comes from Noelle Dilts with Stifel. Good morning, Noel. Thanks. Good morning. Congratulations on a really nice quarter. So just expanding a little bit on John's line of questioning there. So you talked about seeing a good fall turnaround. It kind of sounds based on what we've from some others, but maybe that's a little bit more optimistic than what your peers are expressing. So would you say, it's true that you're maybe outperforming the primary services market as a whole. And then would you say is this a function of your client exposure or do you think there's some share gain going on? Can you just give us some thoughts there? Thing I've learned, over the last 9, years of being the, refined reserve in petrochemical is I've learned to worry a lot more about what we're doing and how we're serving our customers versus what our peers are saying because they're all over the place. Here's what we know. We know that generally we have outperformed the market now for about 4 years. On organic, especially the last 3, on organic revenue growth. We also know that we're able to really marshal's critical resources at critical times with some of the best supervision and trades people in the business. And really when we acquired Repcon Strickland and you start to look at the 14, 15 and now 16 results, that really brought us a critical of some of these skilled operators. We also know that our broad range of capabilities allows us to serve customers in a whole much more holistic way. And all that supported by a balance sheet to into the broader petrochemical and industrial space has served us well in that segment. And put us all together has allowed us perform as we have. Now we also know it's depending on having customers trust you and giving you expanded scope And I think that's an underlying trend that's happened with us. We're performing some of the biggest turnarounds we've had, not only in the first half of this year, but also in the second half of the Okay. That's helpful. And I guess I know this is early. How are you thinking about 'seventeen on the refinery and petrochemical services side at this point, you know, for a couple of years now, we've been hearing, you know, refineries have been differing work. And I know you guys don't necessarily think that's but do you see 2017 as a growth year? Initial planning would say that it's going to be an okay year. Pretty good. And that can change. But actually, what we're thinking may happen and look, you know, these guys make hay when they can when they're running these refineries. Our folks that technically really know this stuff, don't think these utilization rates are sustainable. And so eventually more maintenance is going to need to be done. Although we've been happy with the amount of maintenance that's been done over the last year and a half with our book of business. Which seemed that really with the gasoline stocks building somewhere in the 4th first quarter and switching earlier to winter blend, you may see the opportunity here for an expanded maintenance season, but we really won't know that until we do our third quarter call. We'll have much better visibility on it then. Now what we're hoping that can do for us and no clear site yet is it'll allow our shops to increase its repair volume. And that could be a good thing for us, because it not only drives that repair volume because of that, it drives, better absorption of our overhead in those shops. Great. Okay. That makes sense. Last question, been looking at the association of general contractors, labor statistics and sort of some of the general labor statistics and construction. And it does look like, in general, the industry is facing some tightness on the labor side. Could you comment on that and if you're seeing that in any of your oriented businesses? The answer to that is yes. We're blessed to be able to attract really good labor how we see that as a little in different ways. We see people trying to get us to commit on, to be part of their teams much earlier as they realize they need the right option instead of just the cheapest option. And they worry about people's ability to get resources. We also see it in maybe contractual terms. And you know, 1 quarter doesn't make a trend, right, Mark? We say that all the time, but there's been some good activity on net billings and excess of cost, which for us means the work is flowing better and the work is flowing more in line with the contractual terms. You also see it in that scopes increase. What general contractors and construction managers like to do in a soft market has chopped work up into as many pieces as they can get it to and still be able to manage the work to get as much competition. As the market tightens, they realize that's not only an inefficient way to run the market from their own they run the job from their own standpoints, but they realize that does not allow us to plan manpower as effectively as we'd like to. So that's the ways we see that in a tightening market. We've been really fortunate over a long period of time where we're union. We tend to have a very good relationship with those unions and they know we're always going to pay our people, keep them safe and have good supervision for them. And they're always going to get the money put into their benefits fund in the union. So we have tend to have a good draw on union labor in most markets where we're nonunion, we have many of the same dynamics. We're a destination employer because of all those same factors. So yes, it is tightening. We think that's a good thing. Eventually, hopefully, I know the folks around this table and in our field would like to see it in bidding margins. Okay, great. Thanks a lot. Your next question comes from Nicholas Coppola with Thompson Research Group. Good morning guys. This is Steven Graves on for Nick. I was wondering if you could call out any regional characteristics in the state's strengths or weaknesses on some options here? Yes, I don't want to take a lot of time doing this because that's and what we see may be different than The Northeast continues to remain strong. New York City is, I do expect New York City to slow somewhat, maybe not New Jersey as much, but New York City. Residential high rise is low. Not something we do a lot of, but that will have an impact on the market. Today, it's okay, but I think if you play it out of here, it's going to slow Boston remains particularly strong, especially in the life sciences and high-tech area. You swing down and you go to the southeast, very strong on it for us on the industrial side. We continue see more onshoring of manufacturing. And we continue to see more movement into those states of manufacturing facilities from other states that maybe don't have quite as favorable business climate. Florida will be strong for us over the next couple of years, particularly South Florida, as we specifically have great capability on the water and wastewater side. Texas has slowed, as you would expect it to, not on the industrial side as much downstream and maintenance, capital projects have extended life. And of course, commercial and all the other categories have slowed, when our part Texas, which is Houston. California continues to remain strong for us, especially Northern California, but there's going to be a lot of work happening in Southern California around structure. And then you get to the Rocky Mountain region. It's a steady market in Chicago is fine because we have some unique capability, especially on the data side. If you break that out, construction and maintenance, you really don't see a lot of difference. I would say though that the on the maintenance side, project side becomes good, on the maintenance side of some of the multi site like ocean people right now It seems to us they're struggling a little bit right now. And you'd expect that, with everything that's going on with, the consolidation in retail. Is that a good enough for you? That's great. That's very helpful. Thank you. And a quick second question, On M and A, are there any particular areas you're looking to fill out or valuation edging up or in line with expectations and valuations are such a deal by deal specific thing. And with the acquisition of Art and Robley, we had a opportunity. We were able to buy a premier, electrical and instrument station contractor, an industrial 1. We were able to buy it at reasonable full, and for them, which is cyclical downturn. And we have a great opportunity when midstream come back to really, really do great with that great team there. The other deal we did is more of a I would call it the private private market, not owned by private equity, but by an individual. And someone that's worried about the lifeblood of their company and where their folks end up where a premier destination And you can take that over a long period of time. You look at communal as an example, something we bought a long time ago. It continues to prosper with us and the excellent operator there, Steve Commeo operates, you could take Shambaugh. We're in our 2nd generation of ownership there, from the original purchase. They're doing great and they're really driving, not only fire protection, but food process and a great local contracting business. We love those deals. And we see those coming back a little stronger right now, because people have been able to put a couple of good years together. And maybe they realize they won't get back to 2007. Maybe they're exceeding but they have something to sell on now. Great. Thank you. Your next question comes from tahira Afzal with KeyBanc. Hi, team, and congrats on the quarter. Thanks, team. Tony, first question, as you look at that mid single type of growth rate you see for next year. Would you elaborate on which markets you think will be kind of growing faster Which? Yes. See, I'll be careful with this because I'm answering from a EMCOR perspective right now. So we may have some capabilities. We think, let's go just segments and maybe not focus as much on not reporting segments, but end market segments and not focus so much on geography a little bit right now. We think data market will continue to be strong, the data center market. There's a lot of underlying trends to say that's going to happen. And it's highly skilled work and we do well in that. We think commercial will be okay. You continue to see the restocking of buildings, not a we're not doing a ton of new construction commercial, but we're doing a lot of retrofit work in commercial, a lot. We think manufacturing for us put industrial to the side. I mean, that when we talk about industrial, most of that heavy industrial stuff is not in backlog, most of our revenues. But when you take, manufacturing and other industrial, there's more project driven, we think that'll be good. And we think the food market for us, will we continue to be a good market to serve? When you get to institutional, I think it's sort of squishy, now. I think, I think higher ed has some legs, with endometas being okay. I think, government spending for us has been a hard thing to pin down where that's going to go. Quite frankly, we see over the last 7 years really some crazy decisions being made on the government contracting side with small business and other things that quite frankly drive up the cost for government when people like us bring a much more efficient solution. But you know what, I don't have the ability to fight that. And we also don't think we don't do a ton in K-twelve. I don't think that's going to be a particularly strong market, because some of the places where they love to build that stuff, they're under a lot of budget strain right now with the pension costs. You guys agree? Enrollments going down too. Healthcare? I think it's episodic. I think if you're in the right market, if someone wants to do something, they'll do it. I think flat would be a good outcome in health care. Water for us is going to be a good market over the next couple of years. And wastewater. I'm not sure that's true of a broader trend in that. We just know where we are. We're going to be doing some nice Got it. Tony, if you're looking out into next year, then strategically and beyond, You know, if you did have to make strategic acquisitions, are you going to stick with your knitting of what you said earlier on does industrials build from a longer term perspective, being pretty favorable for you? Couple of things, team. We would continue to add any geographic capability on our construction business. We still don't have an contractor in the Northeast outside of New York City for a long time now. We still don't have an electrical contractor in the Pacific Northwest outside of Oregon. We're still not doing a ton of work in Seattle, and it's been a really good market. We have a very good one in Oregon and Southern Washington. So we would continue to look to add to that kind of capability. And also, capability in sectors like we just did with Art and Robloy, not only did it give us market opportunity down in the Gulf Coast, it gave us capability outside of California on, and, Oregon, on industrial, and the Rocky Mountain region, on industrial electrical. Okay. We would also do the same thing on the mechanical side with that. Now underlying EMCOR, we've built 1 heck of it in industrial construction business. So we talk about the industrial segment a lot because it's been a big important part of what we've done with downstream refining and petrochemical and some midstream work. But we've also built a pretty successful over a series of acquisitions of an industrial construction and maintenance business outside of that space, whether it be the acquisition of PMI, almost 10 years ago now or 9 years ago, PPM 8 years ago, Southern Industrial, I think almost now, 4 or 5 years ago, Boston. So we've knitted together a pretty good offering of industrial construction capability. And we would continue to like to add to that because you also get a pool on maintenance business with that. And we think the trends are long term good, especially in the southeast and the Gulf Coast, for and lower Midwest for industrialization back here in the America. Now, we also like the Building Services space, specifically, we'll continue to expand our mechanical services footprint. We liked, the deal in North Carolina in the southeast that we did quite a lot. And we've had great growth underlying this business that's been masked by some of the things going on in the site base government business overall in our Mechanical Services portfolio. And of course, Industrial, we're always looking to add capability We have some smaller businesses in there. We'd like to bulk up. Our team will continually look at that. And we tend to be, know the properties when we want to buy, and we tend to be patient until they come available, we can draw them loose. So we see those off opportunities and we'll be patient and take advantage of them when they're there. Got it. Okay, Tony. And I guess last question, You've had these transportation sort of hiccup glitches way unlike you, and we had a last conversation, a long conversation on this last quarter. Is it going to spook you out from taking other projects or you feel that bear lessons learned and you guys can move on and take on some of the transportation projects that might be coming out? The easy answer and probably not the right answer. They say, we're not going to do this anymore. Right. But then you got to look at the totality of our work over 10 years. You got to say, boy, that would be a really bad decision because we've done about $1,500,000,000 of this work over the last 10 years. And we've made superior margins than to our standard gross margin in the construction business. And So that would so would you have to sit back and say, okay, what caused this to happen? I take the ones in the first quarter. Look, that stuff's going to happen. We'll get recovery. They'll finish. They're not nearly the size of the one we're talking here in the second quarter, and they're right down there. And he said, what caused this? And are the things that you would know in the bidding process that would keep you from letting this happen to you. Some of this you did bid into the job, quite frankly. You thought that you had enough contingency to cover, which are always difficult jobs. And that's one of the reasons you can do well on is because they're complicated. And a demanding, owner and people usually realize that these are complicated and there has to be great communication on the job to keep the job moving. So you say, what happened here? Well, clearly, we'd have a lot of questions about how this job has been running the people running it. And so we wouldn't look to, run head first and to do a job with these folks again anytime soon until they get their act together. And there's been some unique things on this job that, that won't replicate themselves, and are a one off But you're right. I mean, we constantly do that and we constantly question, this is a case of we're going to stay in the market. We've done very well. And I would posit to say that this team has been very successful over a long period of time. I would posit to say this team will come out of this experience, and we will, as a team, much better. I'm not sure you could make us any tougher, more conservative, but I think we'll come out of this experience having both with that local market team. Got it. Thanks a lot and congrats again. Thank you. And you have a follow-up question from Noelle Dilts with Stifel. Thanks. Just how much transportation revenue that's going to be booked at 0 margin do you have coming through in the back half? Quarter to 50. Yes, Mark. Yes. No, I think it's probably going to be in the range of $40,000,000 to $50,000,000. Okay, perfect. Thanks. You're welcome. Now we'll turn the call back to management for closing remarks. I'd like to it was a very good quarter and it's a very good start to the year. But takes a lot of things to go right. And sometimes people, we, collectively forget, all the things that have to happen to have this kind of result. When you're doing 10,000 projects, with over 32,000 people, and a big chunk of them skilled trades people. There's a lot of supervision going along, a lot of, bidding going on. And we're obviously doing that more successfully overall that we're not doing it successfully. So we get it. We're satisfied with performance, but we clearly know we have a lot of work to do in the second half of the year. And thank you for your interest in EMCOR. And we wish you all a good remainder of the summer and for our folks and anybody else, please be safe. Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.