Earnings Call: Q4 2015

Feb 25, 2016

Good morning. My name is Carmen and I will be your conference operator today. At this time, I would like welcome everyone to the EMCORE Group Fourth Quarter and Full Year 2015 Earnings Call. Ground I would now like to turn the call over to Max Detcher. Sir, the floor is yours. Thank you, Carmen, and good morning, everyone. Welcome to the EMCORE Group conference call. We are here today to discuss the company's 2015 fourth quarter and full year 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 for the fourth quarter of 2015. For 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. Please advance to Slide 2. Slide 2 has the executives who are with me to discuss the quarter and the 12 month results. They are Tony Guzzi, President and Chief Executive Officer Mark Pompa, our Executive Vice President and Chief Financial Officer, Maxine Mauricio, our Senior Vice President, General Counsel and welcome to your first of many calls with us. And our Vice President of Marketing And Communications, Made of 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 in emcorgroup.com. Before we begin, I want to remind you that this discussion may contain certain forward looking statements. Any such statements are based upon information available to EMCORE Management's perception as of this date and EMCOR assumes no obligation to update any such forward looking statement. 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 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 20 18 Form 10 K and other reports filed from time to time with the Securities And Exchange Commission. With that said, please let me turn the call over to Tony. Tony? Thanks, Kevin. And I'll be covering pages 3 through 5. Well, good morning, and thanks for your interest in EMCOR and welcome to our quarterly call. And the 2015 year end call. I am going to mainly discuss 2015 full year results here in the front end, but I will spend some time talking about the highlights of the quarter. Mark will take us through the results of the quarter and also the year in detail. I will also cover at the end of this call our expectations for 2016. I will compare EMCOR's performance to the pro form a numbers and Mark will provide the adjustments. 2015 has no items that warrant attention. Our fourth quarter 2015 ended about where we expected. We earned $0.80 per diluted share from continuing operations, on $1,780,000,000 of revenue, and we had organic revenue growth of 3.1%. Operating margins expanded to 4.7% in 2015 from 4.4% in 20 14. We expected and achieved organic growth in our U. S. Construction operations. With very strong growth in the Mechanical Construction segment, and essentially a flat 4th quarter compared to, 4th quarter 2014 in the Electrical Construction We earned a blended 7 point segment had an uncharacteristically weak quarter versus prior year at 4.1%. And mechanical was very strong at 8.9%. Did have some issues in the quarter in some transportation and infrastructure work in our Electrical Construction segment. That cost us about $8,200,000 in operating income in the quarter. Those issues center on labor productivity, access and scheduled delays. We will try to recoup some of these losses as the job progresses. In the Mechanical Construction segment, we had a we had very strong underlying performance but it was bolstered by a $12,100,000 claim settlement on a large institutional project in the Southeastern U. S, which we completed previously This was one of the large projects where we had the large write downs in 2013. And at that time, we told investors that we would aggressively seek recovery and we did. Our Building Services had its strongest quarterly organic revenue margins as compared to the year ago period by 70 basis points. It had stronger operational performance and did not have the headwind from legal expenses that we discussed in the year ago period. Versus the fourth quarter 2014 for our field services business, especially, where this year, we had a decent fall turnaround season, but was not as strong as the exceptional fall turnaround season that we had in the fourth quarter of 2014. We are also and we've talked about this many times face declining backlog and opportunities in our shop business. It's one of the most profitable things we've done. That we do. And we've talked about that, and I'll talk about that more as the call progresses. The UK performed as expected in the core as we would continue to have improved stability in the business. For the year, we have revenue growth of 4.6% with 95% of that being organic. We had organic growth, and as a result, finished the year with $6,700,000,000 in revenues, a record for EMCOR and had a book to bill operations, well within our updated guidance range of $2.65 to $2.75 diluted share from continuing operations. We had record in 2015. 2015 was a very good year. As we exit 2015, We expect organic growth to continue in our Electrical And Mechanical segments, Construction segments, continuing our Building Service segments continue in the United Kingdom, the UK, but we expect 2016 revenues to decline in our industrial services segment. Our operating income percentage was about where we expected for the year at 4.3% of revenues. We've battled an underlying mix shift in our Industrial Services segment with a significant decline in our shop business and some lack of productivity in our field services business as a result of the early 2015 refinery operator strike. We generated 2 $67,000,000 in operating cash flow. We returned $104,000,000 to our shareholders through stock repurchases and another $20,000,000 and dividends. We grew backlog by almost 4 percent to $3,700,000,000 and it is as highest level since 2008. With strong backlog growth in our Mechanical Construction And Building Services segment, a slight decline in our Electrical Construction segment, and a significant decline in our Industrial Services segment. But again, we would remind everybody that as new heat exchanger orders is what that backlog is composed of. That backlog is down almost 50% from a year ago period. And with respect to the UK, it's performed as expected and has become a growing and steady building services business. Our balance sheet remains liquid, strong and flexible. And provides us the foundation to grow and strengthen our company. Overall, a pretty good year. With a nonresidential market that continues to strengthen offset by reduction in capital spending for our industrial re oil and gas customers. And with that, I'll turn the call over to Mark. Thank you, Tony, and good morning to everyone participating on the call today. For those accessing this presentation via the webcast, we are now on Slide 6. As Tony indicated in his opening commentary, I will begin with a detailed discussion of our fourth quarter 2015 results, before moving to our full year 2015 performance, some of which Tony just outlined during his executive summary and is included in our consolidated financial statements within both our earnings release Consolidated revenues of $1,780,000,000 in quarter 4 are up $63,000,000 or 3.7 percent. All reportable segments are reporting increased revenues quarter over quarter, except our U. S. Industrial Services segment. 4th quarter revenues attributable to businesses acquired in 2015 were $10,600,000 and primarily impacted our U. S. Mechanical Construction Services segment. Excluding such acquisition revenues, our organic revenue growth in the quarter is 3.1%. U. S. Electrical Construction revenues increased 1.1% $357,600,000, increased project activity within commercial manufacturing and hospitality generated revenue increases, which were partially offset by a decline in quarterly transportation revenues. U. S. Mechanical Construction Fourth Quarter revenues increased $75,800,000 or 13%. Excluding acquisition revenues, this segment grew organically 11.2%. Our mechanical construction revenue growth was broad based from a sector perspective, with both the industrial and institutional market sectors project activity contributing to largest dollar revenue growth quarter over quarter. This segment is reporting a minor revenue contraction this quarter. Tony will review our backlog by market sector after the completion of my commentary during this morning's presentation. Mcore's total domestic construction business 4th quarter revenues of $1,000,000,000 increased $79,700,000 or 8.5%. U. S. Building Services quarterly revenue of $435,900,000 increased $8,300,000 or 1.9%. Revenue gains within their mechanical services, commercial site based services and energy services divisions were significant enough to overcome the headwinds associated with the loss government contracts completed in 2014 that were not renewed pursuant to rebid, as I have referenced on each of our quarterly calls during 2015. Despite reporting low single digit revenue growth in the quarter just ended, the 4th quarter represents the 3rd consecutive quarter of revenue increase for our Building Services segment, which previously had not reported any revenue growth since the third quarter of 2013. With our contract portfolio reshaping that began in 2013 behind us, our team is now developing a nice trend in revenue enhancement. United Kingdom Building Services revenue of $101,900,000 increased $11,100,000 or 12.3 percent, despite the headwind of a weakening British pound resulting in a quarter over quarter unfavorable exchange rate impact of $4,400,000. This segment continues to see revenue gains pursuant to new multi year contract awards that were not in existence during 20fourteen's fourth quarter. U. S. Industrial Services revenues of $222,200,000 declined $36,100,000 or 14% due to reductions in capital and maintenance project activity, inclusive of turnaround activities from our industrial field services operations, as well as lower revenues in 2014 fourth quarter due to a stronger than usual fall turnaround season. Additionally, as we discussed during our October 15th October 2015 conference call. The volatility in crude oil prices is resulting in both the curtailment of capital spending by most of the integrated oil companies as well as reductions in pricing of new build heat exchanger orders. We continue to see strong demand subject to seasonal patterns for our field service offerings. However, our industrial shop services backlog is down approximately 46% year over year, as a result of reduction in demand due to the aforementioned reasons. My last comment on quarterly revenues is that our 4th quarter revenues of 1,780,000,000 The Cliffs are previously established quarterly revenue record, which we achieved in last year's fourth quarter. Please turn to Slide 7. Selling, general and administrative expenses of $168,500,000 represent 9.5 percent of revenues and reflect a decrease of $3,800,000 from quarter 4 2014. As a percentage of revenues, the current year quarter declined 50 basis points from the 10% reported last year. Please note that 2014's 4th quarter SG and A was burdened by a higher level of legal costs due to the 2014 resolution during any quarter in 2015 as we were able to leverage our overhead cost structure during this period of revenue growth. Our fourth quarter is inclusive of $900,000 of incremental expenses, inclusive of intangible asset amortization related to 2015 acquisitions. Therefore, our organic decrease in SG and A expense quarter over quarter is $4,700,000 and is primarily due to reduced legal related expenses as a result of last year's unfavorable activity, as well as the benefit from recent restructuring activities. Reported operating income for the quarter was 84,100,000 represents 4.7 percent of revenues and compares to $74,500,000 4.3 percent in 2014's 4th quarter. Please note that last year's 4th quarter is inclusive of $1,500,000 is inclusive of an $1,500,000 non cash impairment charge as a result of the segments are reporting double digit percentage improvements in our quarterly operating income performance. Conversely, conversely, the remaining two segments are reporting period over period declines and I will touch on each decreased $9,000,000 or 37.8 percent over quarter 4 2014, with an operating margin of 4.1% or 260 basis points less than last year's 6.7 percent operating margin. The decrease in the segment's performance is due to approximately $8,200,000 of losses incurred on several transportation projects during the quarter due to productivity issues and delays. Additionally, This segment benefited from a number of high-tech projects within the commercial market sector that were progressing towards completion in Q4 2014 and were no longer active in the fourth quarter of 2015. 20fifteen's 4th quarter U. S. Mechanical Construction Services segment operating income of $58,500,000 represents a $22,100,000 increase from last year's quarter. Reported quarterly operating margin is 8.9% is 270 basis points higher than 20fourteens 4th quarter. Consistent with the revenue performance of this segment in the quarter, We had strong operating execution across most of our projects and the broad array of market sectors in which we participate. Additionally, This segment benefited from $12,100,000 of revenues as a result of the settlement of a claim in which we recorded significant losses and reporting periods prior to 2014. Our total U. S. Construction business is reporting an increase of 13.2 $13,200,000 or 22 percent over last year's 4th quarter with an operating margin of 7.2 percent, which represents an improvement of 80 basis points over 20fourteens 4th quarter. Our U. S. Building Services segment operating income of $15,600,000 or 3.6 percent of revenues is increased $3,300,000 volume in our commercial site based services division as a result of new contract awards as well as a reduction in legal expenses Given the significance of such expenses in last year's fourth quarter, which included the resolution of the legal matter previously referenced, These operating income increases were partially offset by the headwinds associated with the loss of the 2 government contracts in 2014 that were not renewed pursuant to rebid Our U. S. Industrial Services operating income of $11,900,000 decreased $8,100,000 or 40.6 percent compared to 20fourteens 4th quarter with an operating margin of 5.3 percent or 240 basis points less than last year's 7.7% operating The result of last year's fourth quarter included unusually strong seasonal turnaround activities that did not repeat in the while our shop services operations experienced both a decrease in demand and margin pressure and the current period due to the macroeconomic trends previously discussed. UK Building Services operating income of $3,100,000 represents 3% of revenues, which is an increase of approximately $700,000 and is a 40 and is a 40 basis point improvement from last year's fourth quarter. We are now on Slide 8. Consistent with our 2014 reporting, the table on Slide 8 lays out the identifiable intangible asset impairment loss impacting last year's fourth quarter which we excluded from EMCOR's operating income to provide operating income of $76,000,000 or 4.4 percent of revenues compared to 20fifteen's 4th quarter operating income of $84,100,000 or 4.7 percent of revenues. Our income tax provision for the quarter was reflected at a tax rate of 38.5 percent, includes discrete items that negatively impacted the rate by approximately 50 basis points this quarter. This compares favorably the 39.5 percent income tax rate in last year's fourth quarter. Tony touched on our continued strong operating cash flow performance for the annual period earlier on this call, And from a quarterly perspective, we generated $171,100,000 of operating cash flow in the 4th quarter, despite the increased levels of working capital required fund our strong organic revenue growth. Please turn to Slide 9. Additional key financial data for the quarter not addressed during my highlight summary are as follows: Quarter 4 gross profit of $252,600,000 represents 14.2 percent of revenues, which is a from the comparable 2014 quarter by $4,000,000. Margin due to revenues due to revenue mix and in the case of electrical construction, certain project write downs that were recorded during the quarter. Restructuring costs during the most recent quarter were immaterial and do not require further discussion, diluted earnings per common share from continuing operations for the fourth quarter is $0.80 compared to $0.66 per diluted share a year ago. On an adjusted basis, reflecting the add back of the non cash impairment loss 2014 fourth quarter, diluted earnings per common share from continuing operations would be $0.68 per diluted share, for 2014 as compared to $0.80 per diluted share in our current quarter, an increase of $0.12 or 17.6%. We are now on Slide 10. With the 4th quarter discussion complete, I will now augment Tony's 2015 annual commentary. Revenues of $6,720,000,000 are up $293,800,000 or 4.6 percent as compared to $6,420,000,000 of revenues 20fourteen's annual period. 2015 acquisitions contributed $12,500,000 and when such incremental revenues are excluded, our 2015 organic revenue increase is 4.4%. All of our reportable segments are reporting revenue increases year over year. U. S. Electrical Construction revenues of $1,370,000,000 increased $55,200,000 or 4.2%. Increased project activity within the commercial healthcare and industrial market sectors were able to offset reduced revenues from institutional project activities. U. S. Mechanical Construction 20.15 revenues of $2,300,000,000 increased $111,600,000 or 5.1 percent compared to 2014. Higher project revenues from commercial and institutional market sector activities were the most significant drivers and we have experienced broad based revenue growth across the majority of our mechanical construction operating companies during the year. U. S. Building Services annual revenues increased $17,900,000 despite fighting through the headwind of the 2 government maintenance projects not renewed in 2014, which had a 15 revenues of $922,100,000 increased $82,100,000 or 9.8% compared to 2014. This segment's annual revenue increase is due to capital and maintenance project activity from our industrial field services operations, inclusive of turnaround activities, despite the early 2015 negative impact of the National Refinery operator strike, as well as revenue contraction within the segment's shop services operations due to the reasons mentioned during my quarterly commentary. Our UK segment 2015 revenues increased 27,000,000 $377,500,000 despite the impact of negative exchange rate movements year over year of approximately $29,000,000. Please turn to Slide 11. Selling, general and administrative expenses of $656,600,000 were up $30,100,000 as compared to $626,500,000 in 20 14. As a percentage of revenue, SG and A is 9.8 percent in both annual periods. Year to date operating income is $287,100,000 or 4.3 percent of revenues, and represents a $2,800,000 decrease over 2014's annual performance. 2014's performance included 2 discrete items, on a net basis, favorably impacted reported operating income by $10,300,000, which we adjusted for we adjusted for purposes of pro form a presentation. Therefore, on an adjusted basis, the year over year change in operating income is an increase of 7,500,000. U. S. Electrical Construction Services segment operating income decreased $8,600,000 to $82,200,000 or 6 percent of revenues. The year over year decline in income and margin is attributable to $10,100,000 of transportation construction project losses, record nice than the year. Domestic Mechanical construction operating income of $138,700,000 or 6 percent of revenues increased 24 point $3,000,000 80 basis points over 20 fourteen's full year performance. As previously referenced, this segment benefited from $12,100,000 of revenue pursuant to the settlement of the claim. Total U. S. Construction operating margin of 6% increased 20 basis points year over year and despite some intra period volatility represents very strong performance. U. S. Building Services 2015 operating income of 70,500,000 increased $4,600,000 or 7.1 percent due to increased profitability within their commercial site based services and mechanical services divisions which offset an operating income decline within the government services operations due to the absence of the contributions from the 2 government joint venture maintenance contracts completed in 2014 that were not renewed pursuant to rebid and have been mentioned several times during this call. Despite this headwind, our Building Services segment increased their operating margin 30 basis points year over year due to improved execution and the reduction in legal expenses from 2014 levels. U. S. Industrial Services 2015 operating income decreased $6,700,000 or 10.6 percent to $56,500,000 or 6.1 percent of revenues. As discussed during the earlier part of today's call, as well as our previous 2015 quarterly calls, this segment was negatively impacted by the nationwide refinery operator strike in early 2015, that resulted in the cancellation of certain scheduled turnarounds as well as the impact of crude oil price volatility on pricing and demand for new equipment orders within our shop service operations. EMCOR UK Building Services operating income of $11,600,000 or 3.1 percent of revenues decreased 22.5% year over year, due to the benefit realized in 2014 from a reduction in certain accrued contract costs no longer expected to be incurred of approximately $4,800,000. We are now on Slide 12. Consistent with the reconciliation discussed previously on Slide 8, this slide reflects the operating income reconciliation for the 2 annual period from GAAP to pro form a adjusted earnings for those items that impacted 2014. Additive to this reconciliation from the quarterly reconciliation previously disclosed is began on sale of buildings that occurred in quarter 3 2014. Adjusted operating income in 2014, reflecting the add back of the non cash the was $279,600,000 or 4.4 percent of revenues as compared to $287,100,000 or 4.3 percent of revenues 2015, an increase of $7,500,000. The annual tax rate for 2015 is 38.1 percent as compared to 37.4 percent for the 12 month 2014 period and is in line with my rate guidance provided for 2015. For purposes of 2016 planning, I anticipate a normalized income tax rate of approximately 38%. However, as I previously mentioned, this rate can fluctuate if any discrete tax events occurred during the year. Please turn to Slide 13. Additional key financial data on this slide not addressed during the 12 month highlights summary are as follows: year to date gross profit of $944,500,000 is higher than 2014 by $37,200,000 and is consistent on a gross margin basis of 14.1 percent of revenues. Total restructuring costs of approximately $800,000 or slightly reduced from 20fourteen's activity and relates to our U. S. Building Services segment. Diluted earnings per common share from continuing operations for the year was $2.72 compared to $2.59 per diluted share a year ago. On an adjusted basis, excluding the impact of the intangible asset impairment and deducting the gain on building sale, 2014's year to date adjusted diluted earnings per share, would be $2.49 as compared to 20 fifteen's reported $2.72 per share representing a 9.2% increase year over year. Lastly, on this slide, and as I had previously benchmarked our fourth quarter performance, And as Tony started within his opening commentary, I'd like to point out again that the results of our operations for the year to date period set new company records in regards to consolidated gross profit and diluted earnings per share from continuing operations for any annual period. Please turn to Slide 14. EMCOR's balance sheet remains sufficiently liquid as represented by cash in excess of $400,000,000 and modest leverage as demonstrated by our debt to capitalization ratio of 17.7%. Our cash balance is up from year end 2014 due to our strong 4th quarter 2015 operating cash flow generation as well as less cash utilized in financing activities, primarily due to lower repurchases of common stock during the fourth quarter and full year comparative periods. Working capital levels have increased due to the increase in accounts receivable as a result of our organic revenue increase as well as the previously referenced cash increase. Changes in goodwill and identifiable intangible asset balances reflect the impact of acquisitions made during 2015 as well as $37,900,000 $119,000,000 at December 31, 2015, with the year over year change primarily attributable to mandatory quarterly debt repayments under our term The increase in our stockholders' equity balance for the year is not equivalent to our net income for the year as it was partially offset by common stock repurchases and dividend payments as well as other activity, which is detailed in our consolidated statement of equity included in our Form 10 K. In closing, and before I'm able to get a drink of water, we continue to be successful in converting our earnings into operating cash flow and have utilized this cash generation to fund organic revenue growth fund strategic investments and return cash to stockholders. EMCAR remains well positioned to take advantage of a continued nonresidential recovery future strategic investment opportunities as well as to continue to fund our dividend and share repurchase programs. With my portion of today's commentary completed, my throat just about dawn. I would like to return the presentation to Tony. Tony? Bart, please take a well earned drink of water and you did all that without having to do it in between. For the record. I'm on page 15. I'm going to talk about backlog. As you can see on the graph, total backlog at the end of 2015 at the highest level on the chart at $3,800,000,000, up almost 4% from December of 2014. And flat with September of 2015. We had a very good booking year at EMCOR with a book to bill over 1. And we had both revenue and backlog growth year over year. And most non residential sector growth predictions of mid single digit growth happen And we think that's going to happen in 2016 also. We're at a little bit about the back half of the year, but that's just we don't have visibility. And we are very well positioned in our domestic construction and building services operations, and we're very well positioned in our Industrial Services segment Although I think we all know what the headwind exists there from just bottom line lower crude prices. As I mentioned earlier, if you really look at this chart and we would have put 2007 on there, this would be in 2nd place to the end of year 2007. And at that time, for those that have followed us for a long period of time, you may recall we had both $1,000,000,000 in commercial and gaming and hospitality. Commercial still remains our largest sector of 32% of total backlog. It has had really good growth since 2012. We continue to see strong opportunities there. However, we're also seeing growth in water and wastewater, institutional, some hospitality and gaming and industrial projects. And these are the industrial projects beyond just our industrial segments backlog. And, healthcare and commercial work. Net net, we're pretty well positioned in the market sectors we serve. And what's always great about this chart is you see how flexible this company really is and our ability to move between different segments and succeed in different markets. If you go to page 16 and look at the ebbs and flows of the market or what we discussed today. Basically, you're seeing strong growth in our domestic construction businesses, up $181,000,000 or 7 percent from the, year end 2014. And I think we everybody knows we are very well positioned in that nonresidential market. And we have shown growth in 2016, and we expect to solid 2016. We continue to see bidding opportunities both in our domestic construction operations and our Mechanical Services business, which is in Building Services. And those companies generally perform smaller retrofit and energy efficiency type projects. I could beat this again at nauseam and talk about the drop in our SHOP backlog. It's well documented This is this part of our backlog that has to do with new build heat exchangers. It's the only thing in the backlog from our industrial segment. And the reason for that is everything else we do is based on unit pricing or time and material work. And I'm going to cover that as we get into what our outlook is for 2016. Let's be clear. The oil companies are recalibrating and as they recalibrate, spend less money on capital. They spend less money on capital. They put less heat exchangers in. And as a result, we have less new build heat exchangers in our shops. We have new less build heat exchangers in our stop. That's what covers the fixed overhead in our shops, which we are now taking out. And have been, and that allows us to get better absorption on the repair work we do. I mean, that's really the story of what's going on in our shop business. And we've said that for a while. We, as a company, and I think, as a country, should be very positive on the long term outlook in the refining sector, especially on the golf side. So what you see is that we saw in summary, growth in nonresidential, some come down on those that have to do with those, exposure to the oil and gas segment. And look, for Amcor, it's a little bit beyond just the industrial segment. We do construction work there too. We do a little bit of commercial work in Houston specifically for the oil companies or a lot at times. And so that all is what impacts us when oil prices go down. Now we'll get to what everybody is really concerned about. What the 2017 what does 'sixteen look like? And that's on Page 17 2018. We're going to set 2016 and earnings guidance up $2.70 to $3 per diluted share from continuing operations. We do expect revenues of $6,900,000,000 We expect cash flows of at least equal to net income based on where we are today. As we have discussed and I just finished discussing, we're balancing this nonresidential growth with some headwind in our oil and gas related business. We're still pretty positive on our downstream maintenance business. We're in the midst of a pretty good spring turnaround season. And as of today, we see a decent fall turn season. We have had decline in capital spending in the downstream and midstream markets that we serve. And you can see that in our backlog drop. Just to size that for you on what it means when you look at the Industrial segment, it's about 8% to 10% of the revenues in that segment when it's going well. And it can be double that in the profits. So 8% to 10% it can be 15% to 20% of the gross margin in that segment. And again, a lot of that has to do the absorption we talked about. We expect to grow our revenues in both our mechanical and electrical segments. And we expect blended operating margin performance to be about where we were in 2015 or just a little bit higher. We expect Building Services to grow both revenues and operating margins, and we expect the same in the UK with slight margin expansion there. We do expect revenues to decline in our Industrial Services segments and margins to be essentially flat for the year as it battles through that mix shift. The markets we serve in general are a little bit uncertain right now. And that's with some of the caution on the low end of the guidance. There's a lot of crosscurrents out there that are hard to quantify and estimate at this time. What I want to do in the rest of this call is is take the opportunity to say, how do you get to the midpoint of the higher end of your guidance range that we put out there? Well, we expect to perform well in our mechanical and electrical segments, and we expect to perform well in a growing nonresidential market. We expect that market that we serve to grow around 5% this year. There is some uncertainty around that growth in the market in the back half of twenty sixteen. Our backlog is up 7%. That should provide a buffer. And for these segments, as we enter 2016, We are working on some large long term infrastructure project that has now should have accelerating revenues in 2016 versus 2017. Like always, no different than any other year. We need the smaller quick turn commercial work. Those projects, less than $3,000,000 or $4,000,000 to continue to have strength in 2016 like we had best business or 1 of our best business, Electrical Construction to return to more historic and expected levels of operating margin performance of 6.5% plus and mitigate and recover the loss of the productivity experienced on several of those large transportation infrastructure projects in Q4 2015. We expect that to happen. Building services enters the year with increased backlog for the first time in 3 years. We have strong underlying strength in our Mechanical Services business, which will set the tone for the year, and we expect to have continued success in the execution of our project work which has strong underlying fundamentals driven by energy efficiency work and replacement work driven by pent up demand. Those that have followed us will always recall that we are never big discursors of Pennant demand, but we have seen strong up maintenance and repair and replacement demand over the last 12 to 18 months. Our commercial site based and government business continue to improve And we do see a pickup in the IDIQ work over the last couple of years from the dark, dark phase of the sequester. Our Industrial segment has a headwind from the capital work, and that's been well documented. I'm not going to go through that in a lot of detail right now. We said that we expect revenues to shrink 3% to 5% in that segment, but we are in the midst of a decent spring turnaround season. And it's with our customers. I mean, our customers are spending money this spring turnaround season. And as of now, the fall season looks pretty solid. We do need strong performance from our Industrial segment's field services operations and businesses and we will need improved performance from our specialty services businesses within those field services business to mitigate the loss of the shop work. We expect not to have as profitable 2016 as we had in 2015 in our Industrial Services segment. Summarizing the above, expect continued growth in the nonresidential construction market, where we have We have backlog growth and we do have strength in our field services operations in the industrial segment. That's got to make up for the drop in the new bill of heat exchangers in our shops. We do think we have a realistic shot to grow inside our earnings range. We will continue to be careful stewards of our cash flow and will look to grow the business through always organic growth, which is always the best growth and acquisitions. And we do see opportunities to add on our business in either geographic or service line expansion. We hope the more difficult credit markets leverage non strategic acquirers make acquisitions more realistic for us from a pricing standpoint, especially for some oil and gas and industrial assets. Further, we will continue to return cash to shareholders through either share buybacks or dividends and we prefer share buybacks at this time. And with that, Carmen, I'll turn it over to you to open the line for questions and thank you for your interest in Imcor. Certainly. Your first question comes from the line of John Rogers with D. A. Davidson. Tony, just talking about the visibility into the second half of the year. I know it's difficult and we're all trying to figure out what's going on with the economy, but how much of your electrical mechanical growth or low growth is dependent on new build activity that you're waiting to see happen or is it just executing the smaller maintenance for refurbishment project? Again, if you go historically in our Electrical Mechanical segments, construction segments, and we're doing about 60% of that work is either new build or pretty significant renovation. And a lot of that's in backlog. I mean, I think with just any momentum, it all will grow because of the backlog, Robert. The visibility is challenging John always. But a lot of noise going on there in the economy. That's the caution, I think, around our low end of the range. Its visibility in the back end of the year. Anything that's going to take us to the low end is going to be a macro event, not internally driven at this time. Okay. And then the other question sort of bigger picture, I mean, it sounds like if I'm running the math right, your guidance is essentially assuming flat overall or flattish operating margins. Is there opportunity at some point to improve those or do we really just need the top line growth to get there? The improvement will come from better execution than what we expect today really in our project portfolio. We're still battling that mix shift for the 1st part of this year, with respect to the shop versus field mix. Can be sizable. That can be 20 or 30 basis points of headwind we enter the year with. We do expect to let to come up back over 6.5%. We do expect Building Services to, jump up, but we had exceptionally strong performance some of it driven by that claim settlement in the back half, in fourth quarter. But it's 6% blended. We're operating in pretty good construction So if you put it together, we expect a little bit of a tick up there, but not wholesale movement at this point, based on the portfolio work we have I will say in general, pricing has not come back in most markets to where it was 2007. And so what we're doing now is we're executing. And Mark, you have some of that on it? Yes. And John, build on Tony's comments, when you look at our history, which I'm sure most people on this call have at their fingertips, on a combined basis, our construction operations back in the 'eight, 'nine, 'ten range were kind of hovering in the mid-7s to low-7s, but we had some we saw a lot going on in the gaming and hospitality markets. We had a lot of a lot of larger projects that were approaching completion at that time. When you look at the last 5 years or so, we kind of capped ourselves out at 6, 3, 6, 4 in there. And as Tony said, we certainly like to get back there. That's once again kind of fighting the headwind of pricing. Pricing is better than it's been, but as Tony said, it's certainly not back to 7 and 8 levels. And, we've adapted to that because we have no choice. And I think our our field level management is the best it's ever been. And certainly, you could see that in the results. Think the only thing that's been a little bit different with us the last few years is that we've had a few projects that have provided some some unpleasant surprises, but, we could bore you for all the reasons, but I wouldn't say it's certainly a recurring pattern at point. But in light of the fact that pricing isn't as robust as it has been historically, those types of things do impact the margin much more significantly than they would have said 5, 8, 10 years ago. So I think, everybody has their mission in front of them to continue to do better. You know, the great thing about completing a year is that we started new again for 16. For having said that, it's a battle every day, as you know, in this industry, and I think we're doing an excellent job of it. Okay. I appreciate the color. Thanks, John. Your next question comes from the line of Adam Hollimer with BB And T Capital Markets. On the transportation projects, I guess, 1st of all, do you expect any further charges this year? And then second of all, I mean, what are the anticipated margins? Is that where it ramps up? Well, look, we don't expect any further charges or we would have taken them. And we think we've got it all. And it tends to be one of our better executing companies, a couple of where the charges happen. It's more timing productivity than anything else, and 80% of it is not driven by us, and we'll seek recovery. Just to calibrate some of the most success work we've ever done at EMCOR has been on transportation infrastructure work. And with our portfolio of projects we have right now, we expect that to continue to hold true. We're just ramping up some of the bigger transportation infrastructure work we have, and we expect that to be successful. So, it's a good market for us. It will continue to be a good market for us. We had a little bump here, and we will be aggressive in seeking recovery where we had the bump. Okay, perfect. And then the $12,100,000 mechanical that you recovered in Q4, is there anything else left there? And how does that compare to your expectations? It's about where we expected. When we finished that work in 20 early 2014. Early 14, most of the charges were all in 2013. We thought we would recover about 2 thirds of what the problems were, and that's about what we did. And then snow removal in Q1? It's okay. I mean, there's a good chance you could play golf in Connecticut this weekend. So not the strongest snow removal weather. It hasn't been bad either. And then just general thoughts on Houston non res, then I'll turn it over. Houston non res, had a terrific 2015. We'll do okay in 20 16, we're blessed to be have great healthcare capability in Houston. But clearly, the oil and gas customers that we're doing, tenant fit up retrofit work and building campuses. That'll tell off here at the end of this year in 2016. Okay. Thank you. Your next question comes from the line of Cara Afzal with KeyBanc Capital Good morning, Pete. Good morning. How are you doing? I'm doing fine. How are you? I am doing well. Congrats decent quarter given all the puts and takes? Yes, now we're pleased with it. So, first question is, Tony, how do I if I look at that, sort of slightly over $900,000,000 in revenues from Industrial, could you break out roughly how much came from heat exchanger, some traditional short cycle, industrial work and turnarounds? The way we think of the business, T, is about 80% of that business is in the field, is in the shops, half of that shop business is with the new build heat exchanger capital work, half of that shop business. So 8% to 10% depending on the year. Okay. So it seems like the turnarounds might have hurt the year more in a sense. I know that heat exchanger business is higher margin, but it seems to be a pretty small part. Yes. Well, it's I'd like to say for every dollar we lose All that being said, we had a pretty good fall turnaround season. We had an exceptional fall turnaround season in 2014. We didn't think we were going to repeat that and we had said that. Yes. And Jay, this is Mark. Clearly, we never recouped the lost revenues from the first quarter. That didn't get executed pursuant to the refinery operator strike. I mean, it seems like we are probably at the point where we even with all the capital spending cuts and pressure on spending, maybe start seeing a secular refinery maintenance cycle come back to some extent. It seems you're assuming a good spring and fall turnaround, but it seems just given your traditional nature, you're still building it in with some measure. Yes, we're building it in with a measure of confidence. I mean, conservatism and confidence, I guess, because it is in the conservatism, right? I think that the other way, we never had a maintenance downturn if you look at the last 2 years in our refinery maintenance business in the field. Right. We've grown. If you take all that together, up 40% in Q4 last year, up this year, high teens up the year before low 20s. I mean, we have had very strong underlying growth But for this refinery operator strike, we would have had growing earnings in industrial, despite what happened in But we lost about $30,000,000 of revenue give or take, and that's not even taking any pull through revenue. That's stuff we pretty much knew we were going to do. And we estimated then, I think, $0.06 or $0.08 a share. The reality was probably higher than that because we got no pull through work either in the shops out of those turnarounds. So we had a pretty good 2 to 3 year run-in refinery maintenance. We see no reason with the utilization rate that that's not going to continue on the maintenance side. The question is, how does drive driven miles say there's an article that is up that the refinery profitability in the Midwest is down That all will wash itself out as cyclical. I would always remind people though. It depends on what your customers are doing during that time period. And less than what's actually going on in the overall market. Some people want to draw big conclusions, because one, one folks, one company is up, one company is down, big picture, the market grows about 3% to 7% a year depending on the year on the maintenance side. That's what it's been doing. We took a lot of share here over the last couple of years. It shows the strength of the Repcon Strickland acquisition and how after the 1st 4 or 5 months, we were getting able to hit the ground running. We feel really good about that. And quite frankly, might be an opportunity now to be okay, to look for assets in that business long term, because we're bullish on the petrochemical and the refinery business in the U. S. For as far as we can see. That'll be hiccups a long way, but it's a good business. Again, that's already under construction. So that would make sense. So, Tony, last question is, really on the transportation side, you saw some execution hiccups. How do we prevent these going forward? Because there are some pretty compelling large projects coming up, in some of your sweet spots regionally speaking. Any comfort around that in terms of what you've changed around the processes? The places where we had execution issues here in the 3rd fourth quarter, are the same places that have executed some of the best projects that we've ever executed. Sometimes you get in a situation on these larger projects, where scheduled, we're a subcontractor. And when design start changing and conditions start changing on the job, schedules get elongated. What really happens on some of these jobs are you have a set of general conditions you're operating in. You're paying for all that infrastructure and those general conditions on those jobs. You're going to be entitled to a chunk of that money after. It's going to be a fight to get it, but pretty clear that if the job expends 9 months and you're spending $500,000 a month to have people at the job site, doing the administration and the project management, everything else, that you're going to recoup that. We tend to be some people aren't. We tend to be very conservative and our estimate of that recovery because we like people to see where we stand today versus the execution of those jobs. So we don't build big unbilled sections. We don't build big claim portfolios. And so we may be a little different than other people, as you can see with the recovery in the mechanical. I'll take our execution in the transportation sector over time against anybody in the industry. And your next question is from the line of Nick Capola with Thompson Research Group. Good morning. This is Steven Ramsey on for Nick. My first question centers around what you alluded to in pricing, how we're still off the high watermark of 2007? There any way to quantify that and are there any barriers to getting back to that high watermark in the next couple of years? There's a couple of things going on there. One is just flat mix of work. When we were doing the fast turn, nortality work where every day you can get it open is worth 1,000,000 of dollars to the operator. It means a lot to get it done. And prices And when you're able to take your whole company and dedicate it to a several large those large jobs and get 100% absorption on your SG and A almost, because everybody is leading forward and out into the field focused on those projects, you tend to get better pricing. I think you got a mix issue right now. And I think also it's just it's just a tougher mark This has been a very slow recovery. And in a very slow recovery, I guess, we're all learning non residential construction, I think, through history tends to snap back a lot quicker. With this slow recovery, it's had a long time to absorb the work. And as a result, labor has been able to come on. Are there spot labor shortages? Sure, but nothing like you would have experienced in 2007 or 2008. So how you get better pricing is your resources become more valuable. Your resources, which is ours as labor becomes more valuable you're able to get an upsell enterprise. We have spots in the country where we can do that, but not it's not wholesale. Thank you. And my second question was going to center around labor shortages, which you addressed. I don't know if you have anything else you want to add to that. Yes, I just think in general, when you look at labor, it's still very competitive in the Gulf Coast for the right kinds of labor. And one of the other analysts pointed out. We're having a 25% capacity increase in our petrochemical base. That's needs a lot Upstream guys aren't downstream guys aren't builders. They're different kinds of people. That's not an easy migration to make for most of the skilled trades. You have very busy markets in parts of the country like Boston and New York and California right now on the trade side. But at EMCOR, we don't we like labor tightness and shortage. We're one of the biggest in the company in the country. And I always go back to what I think really skilled people and supervision care about. The first thing is, are you going to work for a company that's going to make sure you get paid every week? We're check on that. Are you going to work for a company where the supervision is confident? Forget about the five people around the table here today or the six people around the table here today is a supervision in the field competent we get triple checks on that. Maybe the most important thing then is, are you going to keep us safe? And we have every day we wake up at knock on wood and thank and are very thankful that we have to focus on safety and the supervision that focuses on safety that we do. We can resoundingly answer yes to that. And are you going to provide me the equipment I need to be safe? And we can resoundingly say yes to that. So we tend to attract the best trades people and supervision in the industry. So we wish labor would even get tighter. So thanks. Thank you. And there are no other questions, gentlemen, do you have any closing remarks? Yes. Thanks for your interest in EMCOR. We're coming off a very good 2015 and have cautious optimism as we look to 2006. Thank you. Thank you for participating in today's conference. You may now