Earnings Call: Q1 2016

Apr 28, 2016

Good morning. My name is Theresa, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCORE Group First Quarter 2016 Earnings Call. All lines have been placed on mute to prevent any back After the speakers' remarks, there will be a question and answer Mr. Max Dutcher with FTI Consulting, you may begin. Thank you, Theresa, and good morning, everyone. Welcome to the EMCORE Group conference call. We are here today to discuss the company's 2016 first quarter results 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 for the first quarter of 2016. Those of you who are accessing the call via the internet and our website, welcome to you as well. And 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 that are with me to discuss the quarter's results. They are Tony Guzzi, our President and Chief Executive Officer Mark Pompa, Executive Vice President and CFO Maxine Mauricio, our Senior Vice President And General Counsel and our Vice President of Marketing And Communications, may I have 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 remind you that this discussion may contain certain forward looking statements. Any such statements are based upon information available to Import Management's perception as of this date, and of course, 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 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 of the 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 Securities And Exchange Commission. With that said, please let me turn the call over to Tony. Tony? Thanks, Kevin. And I'm going to be on pages 3 to 5 now. And look, I'm going to keep my upfront comments relatively brief as it is only a first quarter discussion. And really not that much has changed in our outlook since we provided our 2016 outlook on February 25th. I am going to speak to pro form a numbers, which adjusts for some of the costs of our recent acquisition of Art and Robillay. Mark's going to cover those adjustments in detail. On a pro form a basis, we earned $0.57 per diluted share from continuing operations. We had excellent revenue growth of 9.9% with 90% of that being organic growth and it was really led by our Mechanical segment, which had 19% plus overall growth. Our revenues were $1,744,000,000 for the quarter. However, part of this organic growth versus the year ago period results from the impact, if you remember, in the 4 weather impact in the first quarter of last year in our construction operations and the impact of last year's refinery operator strike. However, at least half of this organic growth is just solid underlying growth in the business. And it's really what you see is when we convert our prior backlog growth in our construction operations into revenues. If you look at the segments, we had a drop in operating income margin from 3.5to3.2 on an overall basis when compared to the year ago period. We expect our operating margin income margins to expand through the year and do not view this as a full year headwind. The reasons behind this drop is 1, the lack of a one time settlement in Q1 of 2015 in Building Services, the lower snow removal revenues in Building and the and profit in building services. And the impact of the previously written transportation jobs, from last year that are now flowing through at no margin this year versus the year ago period. That really accounts for most of the operating drop for the company and most of all of the operating for the profit drop in building services from the year ago period. Further, we had some headwinds and write downs on a few transportation infrastructure jobs in our Electrolux segment. And we have started a few large jobs in both our Mechanical And Electrical segments, that are just underway. And we are appropriately conservative on the front end of these large jobs in our margin recognition. The Industrial segment had very good year over year operating profit improvement and 1, it was driven by the lack of the strike this year. And it was really driven by an increase in demand for our specialty services like our specialty welding services, which had very strong demand in the quarter. We expected a decent spring turnaround season and we had in our having 1. The UK had nice operating profit growth driven by the 2 large contracts started up in early 2015, and we're starting to realize the positive impact of those contracts now. Despite our strong revenue growth, we We had an improved SG and A ratio at 9.6% versus a 10.2% in the year ago period and we really don't expect that to worsen. We lead the quarter with a strong and liquid balance sheet with plenty of strength to support both organic and acquisition growth. Overall, a decent start to the year. We do expect our 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. As Tony just indicated, I will begin with a detailed discussion of our first quarter 2016 results, focusing on our performance by reportable segment 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 this morning. So let's get started. Consolidated revenues of $1,740,000,000 are up $155,800,000 or 9.8 percent over quarter 1 2015. All reportable segments are reporting increased revenues quarter over quarter. 1st quarter 2016 revenues attributable to businesses acquired in 2015, within our U. S. Mechanical Services segment were $14,400,000. Excluding such acquisition revenues, our organic revenue growth in the quarter is 8.9%. U. S. Electrical Construction revenues of $348,300,000 increased $29,300,000 or 9.2 percent from quarter 1 2015. This increased revenue was due to greater project activity within the commercial, hospitality and transportation market sectors as compared to last year's first quarter. U. S. Mechanical Construction First quarter revenues increased to $100,900,000 or 19.7 percent. As referenced earlier, this segment was positively impacted by incremental revenues from businesses acquired in 2015 of 14,400,000 and therefore, this reportable segment's organic revenue growth in the quarter is 16.9%. Our mechanical construction revenue growth continues to be broad based From a market sector perspective, with the industrial, institutional and hospitality market sectors contributing the largest dollar revenue growth quarter over quarter. 5 of the 7 market sectors that we track and report are generating revenue growth within this reporting segment in excess of 40% and Tony will cover the continued backlog growth in mechanical construction, as well as our consolidated backlog by market sector later on this call. Mcore's total domestic construction business, 1st quarter revenues of $960,200,000 increased $130,200,000 or 15.7 percent quarter over quarter. U. S. Building Services quarterly revenues of $439,700,000 were essentially flat with the first quarter of last year, and were negatively impacted by the lack of snow in markets where we are contracted for removal on an event basis. This unfortunately mass strong revenue growth within their Mechanical Services division, which is currently executing against a substantial project backlog. U. S. Industrial Services revenues of $257,500,000 increased $24,800,000 or 10.6 percent due to increased field service activities period over period. As a reminder, this segment experienced significant headwinds in 2015s first quarter due to the impact of the nationwide refinery operator strike. Additionally, as we commented through much of 2015, and extensively during our initial 2016 earnings guidance, this segment's shop services operations has experienced contraction in demand due to the curtailment of capital spending by most of the integrated oil companies. Despite its current headwind, our Industrial Services segment got off to a very good start and quarter 1 this year. United Kingdom Building Services revenues of $87,600,000 increased modestly during the first quarter, despite the headwind of the weakening British pound resulting in a quarter over quarter unfavorable exchange rate impact of 5,100,000 This segment continues to see revenue gains as it expands 16 consolidated revenues to $1,740,000,000, eclipsed our previously established 1st quarter revenue record, which we achieved in 20fourteen's first quarter. Please turn to Slide 7. Selling, general and administrative expenses of $167,400,000 represent 9.6 percent of revenues and reflect an increase of $5,800,000 from quarter 1 2015. As a percentage of revenues, the current quarter declined 60 basis points from the 10.2% reported last year. The first quarter includes $1,100,000 of transaction expenses in connection with a recently consummated acquisition of Ardent and Robloy, as well as $1,000,000 of incremental expenses, inclusive of intangible asset amortization related to 2015 acquisitions. Therefore, our quarterly organic increase as a result of higher headcount period over period as well as increased legal costs due to litigation activity within the quarter. Reported operating income for the quarter is $55,600,000, represents 3.2 percent of revenues and compares to $55,300,000 3.5 percent in 20 fifteen's first quarter. Our U. S. Electrical Construction Services segment operating income of $16,700,000 is flat with the comparable 2015 period, Reported quarterly operating margin is 4.8 percent, which is 40 basis points lower than 2015s first quarter. The decrease in quarterly operating margin is due to losses on certain transportation projects recognized during the quarter. Additionally, the segment's operating margin is depressed by revenues recognized during the period for which no profit is recognized due to such projects being written down to lost positions prior to 20 16. This is impacting 1st quarter margins within this segment by approximately 20 basis points, and I am confident that you will see this segment's operating margin improve. We progress through the year. 2016's first quarter U. S. Mechanical Construction Services segment operating income of $23,900,000 represents a $3,000,000 increase from last year's quarter. This represents a 14.2 percent improvement quarter over quarter, primarily due to increased gross profit contributions from projects within the healthcare hospitality and institutional market sectors. Additionally, businesses acquired in 2015 contributed $700,000 of operating income net of intangible asset amortization expense. This segment's operating margin of 3.9 percent is down 20 basis points from 20fifteen's first quarter due to the mix of revenues and a large percentage of this quarter's activity representing projects in the early phases of completion. Our total U. S. Construction business is reporting a 4.2 percent operating margin for the first quarter of 2016. U. S. Building Services operating income of $13,900,000 decreased $7,100,000 from the $21,000,000 reported in 20 fifteen's first quarter. Operating margin was 3.2% as compared to 4.8 percent in the prior year period. Last year's first quarter benefited from $3,000,000 of gross profit upon the settlement of a claim. 2016's performance was hindered by a less favorable revenue mix within this segment's mechanical services division, as well as the lack of snow in those geographies where we perform snow removal on an event basis. Lastly, this segment experienced an increase in their selling, general and administrative expenses, due to additional headcount as well as increased bad debt and legal expenses. Our U. S. Industrial Services operating income of $18,900,000 increased $6,000,000 or 47 percent compared to 20 fifteen's first quarter with an operating margin of 7.3 percent or 180 basis points higher than last year's five 0.5% operating margin. A spring turnaround season in the current era that looks more typical than 2015 strike impacted First Quarter was enough to offset on an absolute dollar basis the headwind associated with less shop services volume for the reasons provided during my revenue commentary. However, with the revenue mix more field services oriented, this segment's operating margin performance is still below what we would expect to see and what is typically a strong seasonal period. UK Building Services operating income of $3,300,000 represents 3.8 percent of revenues, which is an increase of approximately $900,000 and is 100 and 10 basis point improvement over during 2015's first quarter. With the funding of our prior year's incentive compensation awards occurring during our first quarter, it historically represents our weakest cash flow quarter and was further impacted by an increase in payments made for income taxes related to the prior fiscal year. Finally, due to the extremely strong revenue growth as we progress during the year. Quarter 1 gross profit of $223,100,000 represents 12.8 percent of revenues, which has improved from the comparable 2015 quarter by 6,200,000 The quarter over quarter reduction in gross margin was driven by domestic construction and U. S. Building Services margin compression due to revenue mix, and in the case of electrical construction, certain losses incurred on transportation projects that were reported during the quarter, as previously referenced. Finally, last year's first quarter benefited from $3,000,000 of gross profit upon the settlement of the claim within our U. S. Building Services segment, which I also highlighted during my Building Services segment operating income commentary. Diluted earnings per common share from continuing operations is $0.56 and compares to $0.52 for the quarters ending March 31, 2016 2015, respectively. On an adjusted basis, reflecting the add back of transaction costs, diluted earnings per common share from continuing operations would have been $0.57 for 2016, that represents an improvement of 9.6% quarter over quarter. Please turn to Slide Tony touched upon the strength and liquidity of Imports balance sheet during his early remarks. Our leverage continues to reduce and is represented by our debt to capitalization ratio of 7.17.3%. Our cash is reduced from year end 2015 primarily due to the $37,200,000 of cash used in operations previously referenced, as well as cash utilized to fund common stock repurchases property, plant and equipment additions, and our quarterly dividend payments. Working capital levels are up modestly since December 31, 2015, primarily due to a reduction in current liabilities as a result of reduced levels of accounts payable and accrued payroll and benefits due to the funding of prior expense of approximately $9,500,000. Total debt of $311,400,000 is reduced from year end 2015 due to the mandatory quarterly principal repayments under our term loan of approximately $4,400,000, offset by new capital lease additions during the period. Our quarterly changes in stockholders' equity are details on Page 5 of our Form 10 Q filed this morning with the Securities And Exchange Commission, and there are no unusual items to note. With our closing of the Ardent Robley acquisition subsequent to March 31st, Our debt levels have increased by approximately $200,000,000. And as a result, our debt to capitalization ratio now approximates 26%. We are happy with where our balance sheet is currently and comfortable with our leverage profile after giving effect in the most recent acquisitions. I believe we continue to be well positioned to take advantage of all opportunities in front of us. With my portion of this morning's presentation concluded, I would like to return the presentation to Tony. Tommy. Thanks, Mark. And I'm on page 10, backlog by market sector. As you can see from the chart, backlog at the end first quarter is $3,850,000,000, up $116,000,000 or a little over 3% from March of 2015. And up 2% from December 31, 2015. As I said earlier in the call, bookings were strong in the quarter, especially given our strong revenue growth. Commercial backlog is However, it did increase from, December 15 levels by about 6% as we won a number of projects in the $6,000,000 to $10,000,000 range. Good work for us should tone turn for the most part this year and demonstrates continued demand from this sector of the nonresidential work market. We still think that the non res market will grow mid single digits in 2016 for the markets we serve. Backlog in the industrial market sector is also up in the quarter. As in March, we had some success in our food process design build business. And we're doing a few milk drying plants. And we're really good at that. Food process work for us is a very successful design build business. Our team at Campbell And Son lead this work. And really, I think I'm a little biased on this, but I can unequivocally say that they are the best in the business at it. They are technically excellent and are the and are build when they build, they build with productivity and skill. We deliver a great result for our customers by providing a true turnkey food process solution. And with that, I'd ask you to fill up to page 11. And I'm going to do backlog by segment. So what you really see here is our domestic construction segments continue to rise from March 2015 by 4.6%. And really, that shows the continued strength in the non res market. Our Mechanical segment is really winning some nice work and not only food processing, as I described, but also in water and wastewater. Electrical has burned some work in the Transportation Infrastructure segment, and we have some pretty good work there. We've had some difficulties, but some of the bigger work we're doing, we've had great success on. And we sit here today, we continue to see backlog to be healthy throughout the year in our construction segments. To set expectations, we expect continued revenue and backlog strength in our Mechanical And Electrical segments and we also expect it in our Mechanical Services business. However, it is always important to note that small movements in backlog up or down in the quarter are not worth deriving trends from, but rather the long term trajectory which here has been very good. Backlog and Building Services is up compared both to the year ago period and December 2015. Year over year, we saw overall growth in our mechanical services business and also our site based group on the commercial side, we've had some decrease in our government backlog. Our industrial backlog supporting the fabrication and would really it's just the shop business. And we've covered this a lot. I'm not going to go into that a lot now. People have questions they can. Basically, we're not seeing a lot of increase in demand for our new build heat exchangers. And really, if you look at it from the year ago period, we're down to $57,000,000 or down almost 40%. We have done a lot of aggressive cost work in this business and we're focused on the better margin and unique applications here. We're not trying to dive down to the lowest points of the market. We still believe our shop business will be down year over year. However, as I mentioned earlier, we project a solid and very good year from our field groups. They're performing turnarounds and doing maintenance work and our specialty services have really seen good demand. And again, our field work is performed for the most part on a time and material or unit price basis and therefore is not included in backlog. So similar to the last couple calls, We continue to win work. Our backlog reflects what is occurring in the end markets. We've seen expansion in the construction market and expansion in the mechanical services market supported by a growing nonresidential market. And look, we've had retraction in the industrial market. Industrial segment of our business, which is the new heat exchangers, we've had good growth in the industrial end market broadly. And with that, I will turn to Page 1213. Now I'm going to turn to the full year. Southeast here in Q2, early Q2. With that, we expect revenues to be at least 7,200,000,000 for 2016. We expect the acquisitions to give us at least $0.05 per diluted share from continuing operations and increasing the share. Therefore, we're going to raise the lower end of our range on a pro form a basis from $2.70 to $2.75 per diluted share from continuing operations. And this is on a pro form a basis. This will be adding back the, transaction expenses from Ardent Robillay which for the most part per diluted share from continuing operations. And again, that's on a pro form a basis. How do you move up in that range? Really hasn't changed a whole lot. From the first court from the call we had on February 25th. So we need good organic growth, we said, in our construction operations, we're having that, but we need better conversion and we expect that as the year progresses. Building service segments, we needed to rebound. Now, you add all this stuff together, we not only didn't have the snow removal revenues, but with the unseasonably warm weather, Our mechanical services mix went to more projects and less service. And for those of us followed a long time, know that the mechanical service for care work we do is one of the most profitable things we do at Amcor. You add all that stuff together. It probably cost that segment about $0.04 a share in the quarter. The Building Services segment, we expect to rebound, especially on the Mechanical Services side, and we also expect pretty good performance on our site based side through the year, both government and commercial. We do need IDIQ demand to pick up through the year, but it usually picks up mid to late third quarter is when we see that volume come through. We had a good spring turnaround or in the middle not in the middle towards the tail end of a good spring turnaround season. We need to have a good fall turnaround season in our Industrial segment and we need to continue We also expect the demand to continue for our specialty services for a while. We still have quite a bit of work to do to close the gap because of the drop the new build heat exchangers. That gap's closing. There's trajectories in the right direction, but it's a business where you need to pay attention to your customers and react to the demand and we're the best at it in the business. And we need the UK to continue to have decent revenue growth they can't focus on the exchange rate. That's our problem. We need a better conversion as it adds on work. And they continue to win in the market, and they are winning in some of the most demanding applications for integrated facilities management. Our restructuring work there and we're seeing it sort of stabilize around the 3.5% level. And we expect to do better as we add more project work, on our customers there. We need to have solid acquisition integration, especially with Art at Robley. It's off to a good start. These are terrific people. We bought a 1st class management team that are really aligned with the core values at EMCOR. And we also are excited about the opportunities for the mechanical service contractor we bought in the southeast. Together, we couldn't be more excited if these teams have joined us and are now part of the Evercore family. But we need to continue to integrate them. And usually about 6 months out is when we see where they start to take advantage of the flexibility they'll now have as part of Enport to grow their businesses. And we still see opportunities to grow organically, which we love to grow organically first, But we continue to see opportunities in growth through acquisition. But I think those that know how we view that, they happen when they happen. We don't force deals. And we also maintain our discipline through the acquisition process. Summarizing all that together We had a decent quarter. Sure, we expect better drop through and we expect to get it as the year progresses. We're excited about the acquisitions we've made, and we'd like trajectory of the revenue growth, especially in our construction segments. And really, the creativity are folks in the industrial segments have shown and their ability to offer and respond to customer demand with the specialty services to really fill the gap from the tough hand that they have in the shops. With that, Theresa, I'll take questions and open up the Your first question comes from the line of Alex Rygiel with FBR Capital Markets. Morning, Tony and team. How's everybody doing? Pretty good. How are you? Not too bad. So, Tony, I got to ask you the obvious right off the get go. Why not raise the high end of your guy by a nickel or a dime? Alex, I think a lot of it comes to 2 things. We have a gap to fill in building services after the first quarter. Because of the lack of repair service work and the lack of snow revenues. Coupled with, we like the what we're seeing in the industrial market right now with our guys' ability our team's ability to find new ways to serve their customers on an extended basis to make up for the shop. We'd like to see that for another quarter or quarter and a half before we declare victory there. Fair enough. Can you talk a little bit more about the 2 transportation jobs? How are they progressing? Remind us again when they're going to be done? And Yes. I'll take off on this and I'm going to ask Mark to get more specific with you. If you go, we have 2, where they should be done by the end of the year. Which really hurting us on those and we had another, 2 in the first quarter. These are all, for the most part, extended general conditions problems. I mean, that accomplishes probably 70% of what's going on here. We do expect to recoup some of that. That could be end of the year or into next year. And as you know at EMCOR, very conservative on how we think about that, because most of that's out of our hands and we'd rather, present what we see happening versus what we hope to happen. Mark? Tony, the only thing I would add and Alex, this unfortunately is not a unique situation to us or a company like us. It's just coincidental that. We had a couple of things late last year. That because of site conditions through no fault of ours has created some productivity difficulties, and we had a couple of more pop up on the radar screen earlier year. I guess the good news is it's not the same work that we were talking about in connection with Q3 and Q4 last year. But the timelines As Tony indicated, other than one project, are scheduled to be complete in calendar 2016. One of those projects actually completion date is in early 2017. But unfortunately, once, once things start to get deferred, I think you, as well as everybody on this call, knows, it becomes out of our control. So, right now, we're whole that everything is going to complete under the revised completion deadlines, but it would not be unusual for them to, to slide to the right, so to speak. Obviously, we've taken that into effect when we looked at our realized cost estimates. We didn't assume that everything was going to be great to finish on time like not on time on the extended time that they were saying. We've got more conservative. And Tony, last question, and it's a little bit more macro, but what do you think we need to kind of really jump start growth here? Well, Alex, if I could If I can have the kind of growth we had in the first quarter and have that carry through the year, I'd be really happy. So I think growth is coming in our business. I think your more macro question is, where do we see the pockets of growth long term? Where EMCOR can really grow both organically and through acquisition. I think kicking it up a level, I think what we've been able to do on the industrial side over the last eight quarters really is pretty remarkable if you look at that overall growth, mid to teens to high teens, all organic after we bought Revcon Strickland, which means we're winning in the market. The other sign of that, you take that segment specifically is here you have this really depression in the shop business on the new build side. In order way to term it. But because of our market position and because of the services we can offer, here we turned in a very good first quarter, some of that's year over year with the refinery operator strike, but a lot of it is, we were able to offer more services to customer than need those services, and we're known as the go to people to get very, very highly skilled labor. Then you move to the construction side. I think we have some unique capabilities in some markets. I mean, you can take South Florida, for example, where we have unique capabilities on the water and wastewater side. And there's going to be a lot of money spent down there and we're in position to to help our customers meet the mandates that they're required to meet from the EPA. You look at the commercial market, I don't think anybody is more well positioned than we are whether it be new build or retrofit. And I think that's both electrically. And now we've added, real, real capability in Ardent Robillay. To serve the downstream industrial market and downstream petrochemical market, but also the broader industrial market. In markets that we weren't really in, which is great industrial markets of tech, electrically, Texas, Louisiana, and the mid area. And if you think about what we bought, we paid for what it does today. We bought 1 heck of an option on upstream and offshore oil and gas production. These guys are good. And when that market comes back, which invariably will, they'll be able to participate in it. And of course, mechanically, I think we go unrivaled with some of the large food process work, which you'll start seeing materialize. That team in Chamble is as good as we get. We've added to that capability, fire protection, the same thing. And then switching to building services, we feel very good about trajectory of our mechanical services business, and our site based and government business are holding their own in difficult markets. But the mechanical service business we just added to through acquisition we've always had great success in growing those companies after acquisition. JJ jumpstart growth. I agree, I mean, we have the ability, I think, with our capabilities to continue to grow strong. You're one of the more, seasonality. You understand that we see it in backlog lot of times on the construction side. And on the other side, we don't see it in backlog. So overall, good print in the first quarter I'd like to see more of that a year go on. And EMCOR could be a $7,200,000,000 company at the end of the year with better drop through. I think we'd all be happy. And your next question comes from the line of Alan Adam Thalhimer with BB And T Capital. Good morning, Adam. And Mark, what was the impact from the 2 new transportation jobs in Q1? From a margin, operating margin perspective, negatively impacted the Electrical segment, approximately 90 basis points. And on a consolidated basis and impacted at 20 basis points. Got it. Great. And then Tony, what are you seeing in the bigger metros like New York that led the non res recovery? Are those starting to peak or are you still seeing new opportunities in those kind of markets? We still see new opportunities. In New York proper. And we do quite a bit of, apartment work and things in New Jersey. The New York proper The residential high rise market has driven a lot of that. We don't do a lot of that work. It's actually become a nonunion game. I might find out hard to believe in New York but it is. I think the New York office market is still pretty strong. There's going to be a with some of these buildings they've built there'll be some tenant fit out opportunities. I think the infrastructure market is so strong. It's challenging. I mean, doing really well on some of the work and we're not doing as well on some. And Mark went through the reasons why. I think it's still pretty strong. New York's a massive market We are starting to see, and of course, LaGuardia is coming in and we're not looking to do the whole thing, but maybe we'll do some infrastructure work there. So I think New York's okay. I can go market by market with you. I think the general trend is overall, the non res market is pretty healthy. We've been sort of saying mid single digit gross. I think that's going to play out this year. I think it's really been about there when you strip off some of the large transportation projects and civil jobs and some of the power jobs over the last couple of years in industrial. So I think it's steady as it goes for now. I don't think there's a big, thrust coming there it's going to cause it to grow much above that. Could be wrong, but I think that's what we see right now. Okay. Well, that's good. And then, on the Arden acquisition, is that Is that all in the industrial segment or some of that going to hit mechanical? And then is there any seasonality to that business? It'll all be in the electrical segment. But where it anticipates is in the industrial market. And the reason we put it in the electrical segment, because of the kind of work we it does, we're very familiar with their work. The folks that run our segment know a lot about that work. We do that work today, out west, in the Rocky Mountain region and in California. Okay. Is that going to pull the margins up a little bit, Nune? I think over the long term, it could. We got some amortization we've got to work through over the next year. Okay. And just lastly, the food processing work that you mentioned, you had some of that that flowed through back in 2012. Can you compare what you're seeing today in that segment to what you have back then? It's good work just like that work. We think the difference was that work never went into backlog and it all was very rapid, and happened within 12 months. This will be more traditional over almost 2 years. And your next question comes from the line of Tahira Afzaal with KeyBanc. Good morning, Keith. Hi guys. How are you? We're good. How are you? Doing well. Thanks. The first question is, Tony, when we talked a couple of quarters ago, we were looking really for nice revenue growth for operating margins to really move beyond the mid-four percent range that they've been stuck in. Now we're seeing some sort of benefit increases and a couple of execution hiccups. What would it take to get margin sustainably higher at this point? I think the biggest thing is we can't have the drag from some of the jobs we had towards the end of last year and this year. Other than that, if you look at our book of business, it's okay. I will say this, If you look broader, with labor getting tighter, you'd expect margins to get a little better in the bidding margins. They've gotten better. But they haven't got as strong as we would have liked to have seen it maybe 5 quarters ago. So we have to out execute, and we have a pretty good record of that. Usually, when we run-in like most contractors, it's not our fault, but usually in our case, it's not our fault. We do a lot of really good planning. And, you run into some of these larger jobs, you get into the situation where there's a lot of things that play in that. From permitting to access to timing. And we don't assume 100% recovery like some people do. We assume almost none initially. Because so much of it's out of our hands. So you're seeing that's why you see spikes in our margins at times when we settle these things. But I think we'll start to see the drop through as the year goes on to. Unfortunately, I think this year, In our construction operations, it's going to be a more third and 4th quarter phenomenon, as some of this large work starts to play out as the year progresses. Got it. Okay, Tony. And on that note, going back to those transportation projects, I mean, I assume one of them might have been one that's somewhere in the New York vicinity. And from my experience, delays from projects such as those can be, can multiply over a long time. So how confident are you and what to have you baked into estimates in terms of the recovery there. I know you said you expect margins to bounce back there, but, do you feel you've prepared a sufficient delay cushion for incremental delays? Well, I'm going to answer, obviously, we think, yes, that we put the provision there. The work that we have the largest project we're doing in New York is not one of them that are suffering this right now. It's actually turning out to be a pretty good job so far. But we think we captured it all. We took in a more negative view than what the general contractor, gave us for a time horizon, and we'll see where that ends. We don't tend to be optimistic people once we get in one of those situations. So about best to say it, we get it. We've seen the movie. Mark? Nothing more to add to that. We obviously have been very, very realistic in our assessment of how these projects are progressing. And once again, I will add, and this isn't an excuse, but having idle labor on a job, being idled through no fault of our own isn't the greatest, greatest job situation. And I think If that does not continue to replicate itself beyond the timeframes we're talking about, we should be fine with with what we have. But I think the other point and the Antonio mentioned this and I mentioned this as well in our prepared commentary, these projects will continue to, to, to burn revenue throughout the rest of the year with no profit. And that that will drag on margins. So it's not that there's going to be additional write downs, but you're going to have revenue with no profit recognized And it didn't that in its own right impacted us 20 basis points within the Electrical segment in the first quarter. So We're hopeful that the other work that's being executed, will mute the impact of that as we go forward over the next couple of quarters. But it will have a little bit of a drag. I mean, really when you put the 2 together that Mark talked about, I think you get almost 100 basis points, 110 basis points, you can understand how strong the underlying business really is. And that's I'm sure it's frustrating for you guys as well. And I guess what I'm trying to understand is what the lessons learned are. You've got some pretty big project from the transportation side as you mentioned, 'twenty? Some of the best work we've ever done at Empor has been at the Transportation segment. With the companies that are executing the work today with the same people that are doing these jobs. The lesson learned is you got to stay on top of it, which we are. It's a I also don't expect this is where these jobs will end up. Mean, we're going to get aggressive in our recovery, but you can't assume that's going to happen, when we make when we make our estimates. We were just not in the habit of doing that. But some of the best work that we've ever seen at Encore, most profitable jobs we've ever done. Award winning jobs have been in this segment with this team. So I feel pretty confident that the lesson learned is you have to be aggressive and you got to seek productivity. But I don't think in these cases that it's a lesson that we're relearning here. I mean, these folks know what they're doing, in a bid to jobs appropriately, And we expect them to finish them and we'll try to recover. But these are the same folks that brought us terrific work at great margins in the past and have been a big part of Encore. And your next question comes from the line of Nick Capolo with Thompson Research Group. Good morning. This is Steven Ramsey on for Nick. I guess on transportation thinking bigger picture, is the new long term federal highway bill impacting your transportation business And if so, how should we think about the size and timing of that impact? Again, we don't do civil work The only place we'll participate in that is in electrical infrastructure work. And again, it's been some good projects. We really won't have visibility on that. Until a year from now. But again, like I just mentioned, some of the best work we've done has been in those infrastructure works around new highways and toll roads, and we'll still be good out in the future. We'll see where the work pops up and whether we can earn an acceptable return versus who else is bidding on it. All right. And then switching to the U. S. Electrical Construction Business on the Q4 call, you were talking about that segment reaching a 6.5 ish operating margin level in fiscal year 'sixteen. Do you expect that still to happen or what needs to happen in the next 6 to 8 months this year to make that happen? We expect the margin to recover this year goes on. We'll have some of this headwind. If the margin percentages aren't there, we hope that the growth will make up for it and the margin dollars will be there and we'll make our we'll make our, what we said we would do. All right. Excellent. My last question, on the on the Q4 call as well, you talked about, how you were concerned about visibility into the second half of this year. Is that still the case or do you have some increased visibility about what that will look like? I think the non res market will continue to be strong. In mid single digits. We take that as strong now, in a 0.5% GDP environment. That's a winner. I think we have better clarity today in the Industrial because we printed a pretty good, 1st quarter in our Industrial segment. And the small project work, we think will be strong, but we got to execute it and we got to get it into backlog. So visibility is a little bit better. You would expect 3 to 4 months into the year. We'll know a whole lot more on the second quarter call than we know today. And your next question comes from the line of John Rogers with D. A. Davidson. A couple of things, I guess, maybe for Mark, the acquisition costs that you're expecting in the 2nd quarter, how much is Yes. When we had released the acquisition, we had given a range of $4,000,000 to $5,000,000, you can see that we incurred $1,000,000 in the first quarter. We're going to be probably at the lower end of that range. And now those costs will all be recognized in Q2. Okay. And in terms of the tax rate you're expecting this year, I mean, should it be in that 36% range? No, we had originally talked about with regards to, 16 guidance, approximately 38%. Obviously, with the favorable discrete item in the first quarter, that right now on an annual basis is going to drop to roughly 37.5%. Perfect. Thank you. You'll see a higher rate in Q2 and Q3 obviously because, our estimates still is our commitment for the year because it's without that discrete item, but when we get through the full calendar year, it'll be roughly 37.5%. Okay. And then Tony, looking at your business over the last couple of years, it seems as if and it's varied quarter to quarter, but you've had some better results out of the mechanical business. And I know some of this is disguised by margins, versus the electrical business. Is there anything going on in terms of trends in there that makes one different than what we've saw maybe in the last cycle 'seventy eight when it seems like the electrical business has been stronger. Is it just opportunities or the types of projects I think it's a mix, John. We bought, we've added to that mix through some pretty good acquisitions on the industrial side. We've built capability on the fire protection side. Our fire protection businesses are going well. We're now at full strength there as far as we're buying into those markets in the last cycle now we're in those markets and we've grown them organically. And fire protection is one of the better things we've done. We've also, I think, have become very good at a couple of different things. The mechanical guys are the ones that have really benefited from this whole, BIM movement. And building, information modeling, which then leads to better pre planning and better pre fab. And really, the mechanical folks have been at the center of that. And so they've gotten more labor productivity, than they had in the last cycle. So there's some process points around that. And then there's some market points. We've built capability in our mechanical team because of design assist, because of some of the other work and because of the move to more industrial work, to have a chance to improve margins. And as a result of that, you have a better mix this cycle than you had the last cycle. And put all that together, I think that's why you've seen the improvement in the mechanical. The electrical, continues to be a very good business for us. We don't expect, long term margins to be where they are here in the first quarter. We had 6% in 2015, and we'll do at least that. And someone said 6.5%. There would be no reason to believe we can't get back up there. Okay. The electrical business is a little different. It gets productivity somewhat from prefab, doesn't have the same opportunities. And in our electrical business, we benefit a little more from the large project work than we do on the mechanical side. That all those things we were talking about the infrastructure work. That's been some of the when we hit the higher margin periods, typically it's when we're doing that kind of work. And once those jobs finish. So put all that together, that's sort of that's what's going on in the two businesses. Okay. I appreciate the color. And are you seeing a threat from OEMs? I mean, different times talk about trying to push in, especially the services side? No. I think it was kind of mixed results, but Yes. I think they've had mixed results. Look, one of the happiest day for a really good service contractor is We're the only other competitor on the jobs in OEM, not because they're not good competitors, is because they're disciplined, a little more disciplined than some lower end contractors. You know, EMCOR is the largest, mechanical service contractor, I think, in the country now. And maybe the combination of Johnson Controls with all the combinations of stuff going there, we've lost visibility. But as an independent, we're the biggest I know we're bigger than either train or carrier by a lot. And we have it two places, John, in our financial statements. You see it in building services. But in our Construction Mechanical segment, we think guys probably 15%, 18% of that business is pure service. We're Unity at command guys, right? So they're running the overall business it's a construction business, they have a service arm. We leave it in that segment. That's where it belongs, because that's who's running it. But we have a very strong service business. So we do all kind of great things in that service business from handheld technology to GPS to distance. We actually get technicians linked together when they're trying to fix something unique like pick controller or a certain kind of chiller, we're innovators, right? A lot of new products will come through us. Some of the new compressor technology from companies like Turbocort. That was all tried by EMCOR technicians first with our customers and drives big efficiencies. We're probably the best implementer of energy efficiency projects in the country, and we're also the largest independent controls contractor. We have a terrific franchise in mechanical service. And I think it, it earns very good margins when you look at it as a business. And it's a business that we continue. We just made that acquisition We'll continue to look to grow both organically, which we've grown probably mid single digits over 15 years and, through acquisition. It's a place we're good at. We still have white space on the map. Okay. And then last thing if I could, just on the Industrial Services business, I mean, you talked about the shop services and what you were seeing there. But is this just in your mind a function of the energy market Is that what we need before we're going to see a recovery in there? And conversely, if we don't see a recovery in is there a significant project or margin risk in that segment? No. Not from where we are today. Okay. And on the energy side of it, is that what Is that what's required? I mean, you talked about in the past higher single digit margins there, but the 10%? Yes, I think the shop business comes back when oil prices go up a little bit. They're not going to get back they don't need to get back up to $80 to make that happen. But 60 could not look, our guys aren't sitting still either. So we service other parts of the energy space, whether it be LNG terminals, they have a lot of heat exchangers, right? We service pipelines, we service for Petrochem, But, yeah, I mean, we need to really get back to where it could be margin wise. We need that business to come back. The repair business can still be there and it's decent margin. But John, what that OEM business does, it allows us to load our shops and get absorption, right? These aren't big shops. But you get absorption and that allows the repair business to even be better. But again, our guys aren't sitting still. Our cleaning operations doing very well We're looking to expand the specialty filled services. Prax spreads look like they're going to be good for a while. Refinery utilization is high. Petrochem is expanding. So if we can't make it in the shop, we got to find a way to make it in the field. And we got a really good team that thinks about this every day. And we're not rookies added anymore either. We've been doing it a while too. And your next question comes from the line of Noel Diltsch with Stifel. Good morning, Noel. Thanks. Good morning. How are you? Good. How are you doing? Good. So my first question does tie into what John was just asking about a bit, on the industrial side. I'm just curious as to your thoughts on how the fall turnaround season is shaping up and your thoughts on 2017. And if you think we're going to start few more large wholesale turnarounds? We had some pretty significant turnarounds here in the spring. We have more significant ones scheduled for the fall. When other people talk about this, and we're very careful to do this. This is dependent on who your are and where their plants are and what you want. So we see a decent fall turnaround season. It's too early to talk about spring. Those plans will start to solidify somewhere between August October and a lot of gets around manpower planning. So we think fall will be fine. We're towards the tail end of a pretty good spring turnaround season. And we should be starting up the fall sometime in early Q3. Okay. And then on the just generally on non res, very high level mean, a lot of them, the leading indicators have been a bit mixed here in the first quarter. We've, we've, heard from some experts that they think 'seventeen could slow a bit I know it's early, but do you have any preliminary thoughts on 2017 and how that might shape up? Don't really know much about 2017. We expect 16 to have good mid single digit growth. I think because of the slow pace of this recovery, I would be very prize if we have an abrupt shift unless there's a huge macro event that drives that. Okay. And then finally, Mark mentioned that on the heels of our rent, you're still in a good position to take advantage of all opportunities So could you just comment a bit on your appetite here for acquisitions repurchase in organic investments? How you're kind of about the use of capital? We were pretty aggressive on the repurchase front in the fourth quarter because we knew we were having a very good cash flow year and there wasn't an immediate acquisition that would stretch our balance sheet. So we took advantage of that. We've always committed to shareholders that we would not let dilution happen. The year ago period. We took care of most of that here in the first quarter. Share repurchase for us is really we put all that together, capital availability. We're not speculators in our stock. I guess if there was a big dislocation, maybe it would be a little more aggressive. We're not speculators in our stock. We don't even try to do that. We think about share repurchase as return cash to shareholders. And right now, we just made a really decent sized acquisition we got to integrate. But if something came along like an Arturopathy, we would take a hard look at it. We looked at this acquisition for 3 years. And the timing finally got right. We looked at the one we bought in North Carolina, the Southeast, We looked at that for two and a half years and talked. So we tend to be patient. We don't control the timing of it, but we're ready to take advantage of what we can. So I guess our first thing would be we'll generate cash this year. We'll look to pay down some debt on our revolver. As the year progresses, maybe we'll be opportunistic on share repurchase, but we'll hold some powder for acquisition. I mean, I don't think anything has really changed. Okay. And then if I could squeeze one last in, you mentioned previously at least $0.10 of accretion from Ardent previously, any refinement there given that the acquisition is now closed? I'll let Mark talk about it. We were talking into 'seventeen, I think, in the press release? Yes, sorry, into 'seventeen. Yes, exactly. This is what we see in 'sixteen right now. The reality Noel, and then I'll kick it over to Mark. You all are going to know exactly what we made because of the strongest periods or the end of 2nd quarter, 3rd quarter at the beginning of 4th. So when we do our third quarter call, you're going to have a pretty good idea of what we did this year. And then we'll have a pretty good indication of what it can do next year, but you're going to know that just by seeing what it did this year. Yes. I think, John, clearly, in the brief period of time that we've owned Art and Roblai, we haven't seen anything that would cause us to retract what we had previously communicated with regards to 2017. And, the fact that we were successful in getting it closed early in the calendar 2016. We're probably more optimistic than pessimistic about what kind of impact we all collectively could have together be it that we're all part of the same company now. What we've learned in these kind of purchases of is, these folks have been involved in a, in this case, a lengthy sale process, They run a good business while they were doing it, but they clearly haven't had been they love being contractors. They love being industrial electrical contractors. Focused downstream in other industrial markets. They've had to take a chunk of their time and be involved in the sell process. And we learned this when we did rep cross drilling and we learned we did said, about 6 months after is where we really start to see them take hold because they're up, they're back out doing things, to grow their business. With that extra time that they have now. And so our experience has been, if you go back to Revcon Strickland, we don't expect that well with Arthur Robaway, But we really saw the momentum pick up about 6 months into the acquisition as people that are really, really good at what they do. Now part of the EMCOR family where we tend to be supporters of what they want to do when we get the business plan and think through it. And we understand the business. Usually they're coming from owners, that no offense, they wouldn't know the difference between the outlet in their house and the outlet that they put in and what industrial electricians do and how they staff and how do you need to support them, what the safety programs look like, and how scale matters and the working capital. So they feel relieved to be away from a financial buyer and usually we see the benefits of that 6 to 12 months out as we start to really think about how we grow the business. So we're excited about it. Okay. That's it. Look, we think we had a pretty good first quarter. We like the revenue growth, need better conversion, top level, our construction business is converting backlog into revenue growth, thrilled to have the ardent Rob Ale people and the folks from the Southeast contractor with us now. We like what's happening with the creativeness of our industrial guys to be able to fill in that drop in demand in the shop services with other services. And our mechanical service business, expect to perform for the year and we expect our site based and government business to hold their own, maybe do a little better. So we'll fill some of that gap in building services. And we need our other businesses to convert. And, we think we have a pretty good guidance range out there and we'll see some of y'all while we're talking to investors and the rest of you, we'll talk to in July. Thank you all very