Earnings Call: Q1 2015

Apr 30, 2015

Good morning. My name is Janisha, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCORE Group First Quarter 1015 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Mr. Nathan Elwell with FTI Consulting. You may begin. Thank you, Janisha, and good morning, everyone. Welcome to the Encore Group conference call. We are here today to discuss the company's 2015 first quarter results, which were reported earlier this morning. Would like to turn the call over to Mr. Kevin Marks, Executive Vice President of Shared Services, who will introduce the rest of the team. Kevin, please go ahead. Thank you, Nathan, and good morning, everyone. Welcome to EMCOR Group's earnings conference call for the first quarter of 2015. Can't believe it's already here. For those of you who are accessing the call via the internet and our website, welcome, and we hope you have arrived the beginning of our slide presentation that will accompany our remarks today. Slide 2 depicts the executives who 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 Chief Financial Officer, Mabe Heffler, Vice President, Marketing And Communications, and our Executive Vice President, General Counsel, Sheldon Kamiker. For call participants not accessing the call via the internet, this presentation, including the slides, will be archived in the Investor Relations section of our website under Presentations. You can find us at emcoregroup.com. Before we begin, I want to remind you that this discussion may contain certain forward looking statements. Such statements are based upon information available to EMCOR's management as of this date and EMCOR assumes no obligation to update an 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 mix of business and risks associated with foreign operations. Certain of the risks and factors associated with EMCOR's business are also discussing the company's 2014 Form 10 K and another of course filed from time to time with the Securities And Exchange Commission. With that said, please let me turn the call back to Tony. Tony? Thanks, Kevin. And I'm going to be talking to pages 3 through 5. First, good morning and thank you for your interest in EMCOR. The first quarter proved to be more challenging than we originally anticipated. We had 2 external behind our control. Refinery turnaround deferrals in our Industrial Services segment as a result of the refinery operator strike and the extreme cold weather that affected our project execution and our Building Services And Construction segments. Weather was a net negative for us in Q1 2015 versus Q1 2014 when it was a net positive as a result 20 fifteen's first quarter was colder, but a lot less snowy than first quarter 2014. We did continue to generate backlog growth generated revenues of $1,589,000,000 and earned is we're not a big fan of excuses at EMCOR. But these quarterly impacts from these external factors are real, and had significant bottom line impact in the quarter. The refining operator strike costs us at least $25,000,000 in revenues and at least $0.06 to $0.07 in diluted EPS from continuing operation. That $0.06 to $0.07 does not account for any leverage work we gain from increased work scopes, specialized welding services, and just as important our high margin shop repair work. The extreme cold weather cost us $30,000,000 to $40,000,000 in revenues across our construction and building services segments. And at least $0.03 to $0.05 in diluted EPS from continuing operations. The reality is if the refinery operator strike does not happen, We would be reporting a record or near record first quarter. Our Building Services and Mechanical Construction segments both had strong quarters. Our Building Services performance is driven by strong demand and very good execution in our Mechanical Services business. Our Mechanical Construction segment improved operating margins and grew operating profit 9.4%. Although performance was down in our Electrical Construction segment, we expect performance to improve as the year progresses. Our SG and A percentage was higher than we like at 10.2%. We would have expected it to be 97% to 98% in the quarter, but the revenue loss in the quarter identified above, coupled with the lack of absorption in our industrial sector caused this to be higher. We do expect this to normalize as the year progressed and fall back into the mid-nine percentage range. Mark is going to cover this in detail in his remarks. We had a very good book to bill of 1.06 and grew backlog by 2.8% sequentially and 11% on a year over year basis. Most of our end market backlog areas are up and I will cover that. We now have backlog of $3,736,000,000 versus $3,366,000,000 last year. We returned $26,100,000 in cash to shareholders through repurchases and dividends. In summary, with a little less cold weather no refinery operator strike, we would have had a very good first quarter. Our balance sheet remains liquid and strong, And with that, I will 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 webcast, we are now on Slide 6. As Tony indicated in his opening commentary, I will begin with a detailed discussion of our first quarter 2015 results before moving to key financial data derived from our consolidated financial statements included in both our earnings release announcement and Form 10Q for with the Securities And Exchange Commission earlier this morning. So let's get started. Consolidated revenues of $1,590,000,000 are down 0.1% or essentially flat as compared to quarter 1, 2014. U. S. Electrical Construction revenues of $319,000,000 increased $10,900,000 or 3.5 percent from quarter 1 2014. The increased revenue was due to greater project activity within the transportation, manufacturing and healthcare market sector as compared to last year's first quarter. U. S. Mechanical Construction 1st quarter revenues declined $2,000,000 to $511,000,000 or a modest reduction of 0.4%. The quarterly reduction is due primarily to a decline in manufacturing, water and waste water and transportation construction projects. I would like to note this segment has several operating companies that are in the northeastern region, which experienced lost workdays during the quarter due to the weather factors tone previously touched upon. Additionally, this segment reported 4.2% of sequential backlog growth within the quarter which should favorably impact the next several quarters. EMCOR's total domestic construction business, 1st quarter revenues increased $8,900,000 or just over 1%. U. S. Building Services revenues of $439,500,000 decreased $8,500,000 quarter over quarter due to lost revenues attributable to snow removal activities in most geographies outside of the New England region. These revenue reductions negated gains within their Mobile Mechanical Services division attributable to both service volumes as well as small project activity. U. S. Industrial revenues increased 0.3 percent to $232,700,000 during our first quarter, despite the impact of the refinery operator strike briefed by Tony on Slide 3. This significant headwind was offset by higher revenues within Repcon Strickland, which performed more turnaround service quarter over quarter and non strike impacted sites as well as increased revenues from Umstead's shop services. United Kingdom Building Services revenues of $87,000,000 declined $2,400,000, primarily due to unfavorable exchange rate movements within the 1st quarter which is masking a favorable and general and administrative expenses of $161,600,000 represent 10.2 percent of revenues and reflect an increase of 17,700,000 from quarter 1, 2014. The majority of this increase is related to greater employment costs due to both the discrete item that favorably impacted 20 14th first quarter, as well as an increase in expenses related to compensation programs. With regard to 2014, we had a favorable medical claim favorable medical claims experience, and as a result, reported income versus expense during the prior year's first quarter. On the compensation front, there were 2 primary cost drivers: 1, the company's expectation of higher earnings in 2015 versus 2014 at both the consolidated segment reporting levels, which necessitates both higher annual and long term incentive compensation accruals and related expenses. The 2nd primary driver, increased salary and benefit costs pertains to the 3% increase in nonunion headcount and the impact of annual cost of living and merit based wage adjustments. With regard to the increase in our nonunion headcount, we had hired staff commensurate with their expected revenues ultimately did not materialize due to the impact of both the refinery operator strike as well as the productivity impact of lost work days related to localized weather. As a result, our first quarter SG and A as a percentage of revenues is somewhat distorted due to the incremental incurred costs without the corresponding revenue benefit. Operating income of $55,300,000 represents 3.5 percent of revenues and compares to $72,100,000 4 point 5 percent of revenues in 2014's first quarter. Our U. S. Electrical Construction Services segment operating income decreased $5,000,000 or 23% over quarter 1 2014. Their corresponding operating margin is down 180 basis points period over period. The decrease in operating income is due to the gross profit contributions in last year's first quarter from large project activity within the manufacturer institutional and transportation market sectors. Specifically, we had several large projects that were wrapping up in quarter 1 2014 in the power generation and public market subsectors, we had no such significant large project closeouts during the quarter just ended within this reportable segment. 20 fifteen's first quarter U. S. Mechanical Construction Services segment operating margin of 4.1% represents a $1,800,000 increase from last year's quarter. This represents a 9.4 percent improvement quarter over quarter, primarily due to increased gross profit contributions from projects within the commercial institutional and manufacturing market sectors. Our total U. S. Construction business is reporting a 4.5% operating margin, for the quarter just reported. Operating income for U. S. Building Services increased $700,000 or 3.4 percent over 20fourteen's first quarter with an operating margin of 4.8%. Strong performance within their mobile mechanical services division and the $3,000,000 favorable impact of a claim settlement offset the headwinds experienced due to lower events, snow removal revenues, which I previously referenced. Our Industrial Services segment is reporting a $10,600,000 reduction in operating income with a 460 basis point reduction in operating margin. To reiterate, this segment was severely impacted by the nationwide strike of refinery operators, resulting in deferral or potential cancellation significant turnaround activities at certain oil refineries that we service. Due to the abrupt nature of this reference work stoppage, we had increased our headcount in anticipation of executing our previously scheduled turnarounds and incurred such costs without recognizing the commensurate revenues. Additionally, our shop services operating income and margin were negatively impacted by the change in the mix of orders, which included less repair work, that may have been identified as the scheduled turnaround activities occurred. U. K. Building Services operating income of $2,400,000 represented a $1,000,000 decrease from quarter 1 2014 due to reduced gross profit from small project activity in the institutional market well as the unfavorable exchange rate effect year over year. Lastly on this slide, we used $17,800,000 of cash in operations as compared to $24,300,000 of cash used in operation during 2014's first quarter. And as most of you on the call know, quarter 1 is historically EMCOR's weakest cash flow quarter due to the funding of our prior year incentive awards. We are now on slide 8. Additional key financial data on this slide not addressed during my highlight summary are as follows: Quarter 1 gross profit of $216,900,000 represents 13.7 percent of revenues, which has improved from the comparable 2014 quarter by approximately 700,000 and 10 basis points of gross margin. Restructuring activity was negligible in the quarter and does not warrant any additional commentary. Diluted earnings per common share from continuing operations is $0.52 $0.64 for the quarter's ending March 31, 2015 2014 effectively. Please turn to slide 9. EMCOR's balance sheet remains sufficiently liquid as represented by cash of approximately 369 dollars and modest leverage as demonstrated by our debt to capitalization ratio of 18.7 percent. Our cash is reduced from year end 2014 due to both the $18,800,000 of cash used in operations previously referenced as well as $37,800,000 of cash used in financing activities, which included $21,100,000 of share repurchases during the quarter as well as $7,500,000 of cash distributions to our joint venture partners pertaining to the 2 government contracts completed in 2014. Working capital levels have increased since the end of 2014 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 year obligations. Identifiable intangible assets have decreased solely due to the quarterly amortization of expense of approximately $9,500,000 and total debt is just under $330,000,000 with the majority of the reduction due to the mandatory quarterly principal repayments of approximately 4,400,000 We are very happy with where our balance sheet is for this time that may present themselves. With my slides concluded, I would like to ask Tony to reaccommodate the microphone and thank you for your time this morning. Thanks, Mark. And I'm on page 10 and then I'll be on page 11. I want to talk a little bit about backlog and what's going on in the markets. Fitting activity wasn't continues to remain active and it translated into a book to bill of 1.06. Total backlog at the end of March is 3.7 $4,000,000,000. That's up $369,000,000 or approximately 11% from March of 2014. As I mentioned earlier, We saw backlog growth sequentially also of $102,000,000 supporting that strong book to bill. Reality, we should have had a little less sequential growth backlog because we should have burnt more revenue in the first quarter, in our backlog driven businesses, which is our mainly our domestic construction businesses. In fact though, but if you look at our $3,700,000,000 in backlog, you'd have to go all the way back to 2008 to see a comparable period. In the timeframe that we have outlined on this chart. And you can see that the gold portion, which is commercial, represents 4% of that backlog. Now if you take commercial and hospitality together in 2008 and you take that together today, you'll see that we have the same level of mix of that work. And in 2008, we were still working through the Las Vegas expansion. Commercial sector backlog is close to $1,300,000,000 and increased $185,000,000 or 17 percent from March 2014. This really now 2 to 3 year momentum in the commercial market gives us some confidence in conviction in the continued pace of the nonresidential recovery that we will see growth this year despite a tough first quarter. As I mentioned earlier, the quarter's booking activity was strong and dispersed among many market sectors from December 14 in commercial and institutional. And believe it or not, a little bit in hospitality We also saw it in industrial, which for us also includes manufacturing and water and waste water. We did burn a little backlog in healthcare And we think this is a sector that's not going to see a lot of growth, although we have some decent opportunities in front of us in specific markets. The people are still touring. Our customers are still sorting through the ramifications of the Affordable Care Act. Transportation backlog decreased a bit, but we still projects that not only are we working on, but that we also are bidding on. From a year over year perspective, our backlog growth has been fueled by increases in most mark at sectors led by substantial increases in both commercial and transportation. We're also seeing increases in industrialmanufacturing, water and wastewater, and yet that little jump in hospitality. As you can see, our backlog from perspective is anchored in the commercial sector. We do well there and it's balanced throughout the remaining sectors. A good position to be central market in 2015, and we believe that too. Looking at it by segment, mechanical and electrical construction segments both grew backlog year over year and from 14. And together, these segments comprise EMCOR Construction Services. EMCOR Construction Services backlog which represents our Mechanical And Electrical segment stands at over $2,700,000,000, an increase of $414,000,000 over March of 2014, an increase of $89,000,000 over the December 2014 level. Again, I wish we would have burnt some of that backlog in the first quarter. And got the resulting earnings from it. But you see the construction of that. You can see that the financial segment growth year over year, a mechanical up 15% and electrical up 22%. Building Services as a $747,000,000, down $32,000,000. The entirety of that is the government contracts that Mark referenced and we had referenced earlier. In our year end call. But it's up from December, which is a trend we expect to continue as the year goes on. We continue to see backlog growth in our Mechanical Services business in Building Services. In fact, the backlog there is at an all time high. And again, that lends us to believe that non res will have growth this year. And this contribution to the first quarter where they had back product growth starts to see velocity building in that business. And again, it's mainly commercial work. The drop again in building services from the 2 government page JVs. Our backlog is well balanced like we always are. We are confident in our ability to execute as a non residential market slowly improves. Now I'll be on page 1213. And it's really what everybody's been waiting for on this whole call. What do we think about the rest of the year? We're going to leave guidance unchanged at revenues of $6,600,000,000 and with the range of diluted EPS from continuing operations of 2.65 to 2.95. Here is what we expect as the year progresses. We expect revenue growth and that is supported by our strong book to bill and backlog growth. The stronger the revenue growth the likely the higher we are likely coincident with our backlog growth. And we expect margins improve in our construction business overall and especially in our long time and well performing electrical business. We expect margins to improve throughout the year. And SG and A, we expect to moderate Mark and I both went through the reasons why. We don't have a fixed cost issue here. You think about it, our head is up other than what we had in the industrial spike, less than 2% and our increases in salary and everything are less than 2%. Partly, the image of spend thrifts in our business. We do not know how much of the deferred turnaround work will in 2015 or how much like and not settled. We expect to have some yet unsold opportunities present themselves to us as the refineries are running at near record levels of utilization and that drives demand for our services in not only industrial services, broadly, but also our shop services, not only field, but also go shop. We are in a very fluid situation with our customers in refinery and petrochemical space right now. We are working with our strike customers, especially on a daily basis to understand how that work will be scheduled on a go forward basis. We do expect a strong fall turnaround season at this point. We expect Building Services performance to continue to improve through year end. Mechanical Services performing well and we expect that to continue. Site Based Services had a better quarter absent the snow in the first quarter and it executed terrific on the snow that we did have. We remain optimistic on our opportunities as we could perform okay in Q1 despite significant external headwinds. And I'll reiterate for the 3rd time on this call. Without these headwinds, we would have had a record or near record Q1. With respect to capital deployment, we look to fund organic growth have seen a little better acquisition environment for negotiated transaction versus prior year. And we'll continue to return cash to shareholders through dividend and buybacks. With that, we'd love to take your questions and I'll turn the call back over to Janicia. Danisha? Your first question comes from the line of Alex Rygiel of FBR. Hey, Alex. Tony, new awards has been about $1,600,000,000 almost every quarter, give or take for the last 3 years or so. It seems like you've managed possibly to that number given sort of the stagnant market but the market sounds like it's waking up a little bit. Is it time now for you possibly to press your, your team members to be a little more aggressive to build new awards a little bit quicker? Alex, that's a because our business is a business based on opportunities within a local market. And we are seeing opportunities in markets to really grow some of our companies. And part of that 2% headcount build you see is in response to not only opportunities that we have in hand, but opportunities we see in front of us. So the way I look at it with 11% backlog growth year over year and very minor headcount additions, we do have the ability to take more work. So don't want to say we're getting more aggressive because we really have driven discipline bidding in our business. It's part of our culture. But we have the ability, to expand capabilities in markets and that's what we've done. And a good example of that is what we've done in the Metro New York area really building a infrastructure and transportation infrastructure electrical contractor over the 8 years. I think in one sense, the mathematics work out to a managed number. I think with the right market in front of us, that booking rate will continue to expand. What you've seen is it's gotten better. It's just the mix has changed. The construction business is actually up nice lead 15% 22% year over year. And are there any larger projects such as Tappan Z that a timing standpoint, we could see the revenue burn sort of accelerate over the summer months here to spike your revenue? Well, I think one of the things will help our revenue. If you think of the let's just focus on the $30,000,000 to $40,000,000 delayed revenue in the construction business as a result of the weather, that should come back into the business in Q2 and early Q3 based on scheduling. I would think a lot of it would come into Q2. And we'll probably work much more productively regardless of whether we would have been able to do it in the winter because we'll be doing it in better weather now. I think backlog velocity that we had up 11% year over year, that as you know, that stuff has to move through the business now. And we're continuing to see good opportunities. And we're also seeing good momentum in our small projects work. Verde in these numbers is a pretty good story in building services. Backlog grew from year end and revenue would have grown from year end absent these 2 government contracts. And I think Mark would tell you that the government contracts because of where we were and the execution of getting it down, we really didn't get much profit contribution in first quarter last year from them. But you know, they were successful contracts because now we're distributing the cash. So and what's driving that Building Services revenue growth is really two things. It's leveraged work across our site based portfolios, both government and non government absent snow. And the other part of it is the small project work in the mechanical services business which is small project construction work, somewhat related to energy services. So that tells you the commercial market continues to rehabilitate even outside of our backlog reported numbers. If that makes any sense to you the way I laid it out. And lastly, as it relates to SG and A, SG and A has been rising a little bit over the last couple of years. But it's sort of at a level that seems like it might be at a top as a percent of revenue. Do you think that going to continue to see maybe going forward greater leverage over that sort of SG and A fixed overhead? Yes, Alex. This is Mark. I mean, obviously one of the things we talked about in connection with 2014 is that we were expecting and we try to articulate to all of you that we were going to see some creep in the percentages because the industrial portion of our revenues is much more significant now than it's ever been. Certainly with the addition of RSI in late 'thirteen, we talked a little bit about how their fixed cost structure was higher than our other segment reporting segment businesses. But clearly, the percentage of revenues in the quarter just reported, I hope it's a high watermark because Once again, as Tony said, structurally, when you look at our costs, the big one of the biggest drivers in quarter 1 was was compensation related. And the fact that we're still looking at the same targets despite the fact that we got out of the gates a little bit slower this year than we would have liked. Is driving a disproportionate amount of comp expense in the quarter relative to the actual reported performance. And we're obligated to to accrue based on the estimates, not, not true enough to actual certainly at the end of quarter 1. So we're clearly looking to be the sub-ten percent. I think Tony and I would be much happier if we were in the mid-9s. But I think getting back to some of those periods where we were in the low 9s or the high 8s, just with the composite business that we have today, which was probably unrealistic. Great. Thank you very much. Thanks, Alex. Your next question comes from the line of John Rogers D. A. Davidson. Hi. Good morning. And just following up on Alex's question, just so I'm clear, Tony, did you say that you expected 9% SG and A for the rest of the year? No. No. I said it was all into the midnights. Okay. Okay. If you ask us what the range is likely to be when you take when the year is done, 2015, depending on the revenue growth, especially in our construction business and the rebound from some of these deferrals. And some of the what we think of yet unsold opportunities that should materialize in the industrial space, we would be shooting for a number between $95,000,000 9 John. Okay. Thanks. I appreciate that. And then just in terms of the construction work that is starting to come through, Pricing on that, I mean, are you starting to see the market tighten up at all or is it just better utilization? I mean, are we going to see margin improvement, I guess? Yes, we should see we're going to see margin improvement in Electrical And Mechanical as the year progresses. Surely. We think, today, the we're doing more midsized projects work, sort of the $500,000 to $8,000,000 project and the smaller end of that the pricing has gotten better. Okay. The higher end of it, it's still not as good as it was in 20,078. But it certainly has improved from 9 in 10, John. And what we know with productivity has made that better. So we would like how we're running our construction business and we like the backlogs building and the activity is strong. That's 17% up again in year over year off of a pretty good up from $14,000,000,000 to $13,000,000,000, coupled with the growth seeing in mechanical services that I went through earlier, pretend to us that it's a good market because our guys have a lot of discipline on the kind of work they're taking. So in a small project where we're definitely seeing the uptick in the margin. Okay. And then lastly if I could I know it's a low seasonally low cash quarter, but, not significant buybacks this quarter. What's your thoughts on buyback opportunities or plans this year versus, are you seeing more acquisition opportunities? We are seeing the potential for more acquisitions on a negotiated transaction basis. We don't anticipate that we'll be big participants in the auction process. Because private equity prices are still crazy. But on a negotiated basis for things that are really close to what we do, we're starting to see some and those kinds of deals. So we would like to balance it more towards acquisition this year. If they're the right opportunities, they can add to any one of our segments. And are things that we already do. And we absolutely, we absolutely are committed to buybacks isn't likely to be as heavy as it was last year. I think it depends on the pace and timing of the recovery this year and the cash needs on organic growth. Coupled with the acquisition environment. The one thing we did accomplish in the first quarter, we said we would make sure that we bought back our overhang. That would be part of our mantra going forward. And that's what we did in the first quarter. Your next question comes from the line of Adam Dineheimer of BB And T Capital Markets. Hey, good morning, guys. Good morning, Adam. The tone of the active bidding market you cited, is that broad based geographically? There are certain markets that haven't been broad based for 20 years now, right? Collectively. But if you take the major markets, it's pretty bar based. I would say the Northeast is fairly strong, especially Boston, New York continues to be strong. The Mid Atlantic, although it was probably a little more robust in 12. It still pretty strong today. The South, especially some of the industrial work continues to be strong for us. We have some interesting opportunities in Florida on the water side. Both in South Florida, both in our pool and Kent subsidiary and pepper, water restoration and water and wastewater work. Texas is a mixed bag. Some of the institutional and healthcare work continues to be strong. Some the quick turn commercial work has turned down a little bit on the tenant fit outside. California is okay. We would like to see more large projects move through California right now. We had very good success on power generation work. We think that's going to continue, especially with our aggressive carbon reduction goals. And the tech sector is a tale of 2 worlds. The data center part of tech, which shows up wherever the segment happens for us. It's institutional. It shows up in institutional. If it's commercial, it shows up in commercial. The data center market continues to be very strong. The tech manufacturing market, which was very robust for us in 2013 2014 has definitely turned down here in 2015. Some of the big work we do for the semiconductor and other manufacturing companies has definitely slowed down out west. Okay. So I would say you could generally say broad based with the caveat on a tech. Got it. And then I'm trying to get a sense for where things stand with USM because you had a very good margin quarter there. You're getting close to revenue being flat year over year. I know there's some moving pieces with contracts rolling on and off. But I mean, when do we start seeing revenue growth again in that segment? Where can margins go and kind of what are your thoughts on that acquisition a few years on? Well, I'll tell you what what it did for is we now have a real commercial site based business. It's broad based and it's performing okay, not nearly as much as we'd like. It performed very well on the snow side in the first quarter. Just didn't have as much. We just didn't have as snow. The underlying business outside of snow actually performed better in Q1 2015 versus Q1 2014. We also are starting to book some work now in the right kinds of work. So I would say the arrow is pointed up. It's not at a 65 degree angle yet, Adam, but it's certainly better than 25 or 30. So we're starting to see all the hard work that we've done get cost structure, right, combining the businesses. We retooled the sales force. We feel pretty good at where we are. We've hired some really key people on the sales side. Some of our more senior people with their, shoulder against that from, our Mechanical Services business on sell side. We're making progress. So I could say is if you look at it as the whole business, we've made good progress If you look at just USM, we didn't make as much as we wanted. We wouldn't have fixed the whole business. We didn't have USM. It's hard to separate some of the now because we now have a national account mechanical service business we didn't have to do, which is part of the reason you're seeing the strong bookings on the mechanical service side because it's coming from customers that now believe we have the ability to serve them nationwide on the delivery of that service. So I think overall, We're not at an A. I wouldn't even say we're at a good B, but we're trending from a C plus to a B minus on that acquisition, hopefully. Okay. Good. Thank you very much. Yep. Your next question comes from the line of Steven Pfauch Stifel. Hi, good morning. Good morning, Steve. First question, I know that the majority exposure direct exposure to the oil and gas markets on the downstream side. But was any of the weakness in the Industrial drills services business due to maybe some weakness on the capital project side. And then I guess probably more relevantly Are you continuing to see kind of some, let's call it, contagion and effects in like, to like the office and commercial markets in areas like Houston? Yes, we've talked about Houston for us. The way I termed it, I think, on our year end call was this. We have a very well performing mechanical company in Houston. That's the only exposure we would have to this spillover effects from upstream in the commercial segment. They performed very well. They had a pretty good 2014. They were poised to have a great 2015. And just order of magnitude here. This isn't $0.15 a share improvement. This is $0.02 to $0.04 a share more they could have helped make us. They were positioned to have a great 2015. Now they've moved back to a good to very good twenty 15. We think that impact from the spillover effects in oil and gas for us today is less than 5%. Now as to the capital side, we're not seeing it yet. Where would we see it at EMCOR? I think we'd see it in two places. You could see in some of our construction businesses in California that service those refiners. And the reason you would see it there is in some ways, there's a marginal refiner for some of these refinery operators. And there's all kind of issues involved with operating a refinery in California. The other place you're likely to see it with us is in new build heat exchangers. Stream projects or the LNG projects, so far has been fine, but you could see it there. Now overall, with the new build heat exchanger business does for us is it loads our plants and allows us to earn better margins on the repair work. It's not one of the higher profit things we do it keeps our engineers sharp. And again, it loads our plants with more predictable load down on the Gulf Coast. Sizing that for us in the industrial segment. It's less than 10% to 12% of what we do in the industrial segment. Would be new build heat exchanger servicing midstream or any type of upstream application. Great. Thanks. And then kind of a little bit of a follow on to that. With the refinery strike that you saw on the quarter, sounds like you're expecting to get most of that back in the third quarter or the fall turnaround season. Do you think that there's going to be anything else abnormal this year with seasonality there because of the strike. I thought maybe the second quarter would be a little bit stronger. Are you expecting that? Here's what we said. And I'm sorry, we said we don't know how much of that work will come back into 2015 or 2016. We do expect a percentage to come back. Right now, which been identified as coming back is less than 25% that they've actually scheduled here today. Now is that number likely to go up? Yeah, is it likely to come in forms of other work as we try to keep these refineries operating in this environment, yes, that's the unsold opportunities we expect to happen as they operate at really high utilization. The other thing we think sitting here today based on what we know our customers have asked us to do is we expect a very strong fall turnaround season. As far as what happens in Q2, Q2 or Q3 or Q4, it's a very fluid situation. We are getting we did right size our workforce as quick as we could in response to this. And, it was a painful. I mean, here's real numbers, folks. We were up in January midteenshours year over year. Going out of the air. So our performance in Q4 was strong. Our performance coming into Q1 was very strong. As Mark intimated, the repconn Strickland part of the business did very well. And that's just they had the right mix of customers that weren't as affected by the strike. Our legacy business, which is a very good former had a very good 4th quarter and a pretty good first quarter of 2000 a record first quarter of 2014. Had a couple of very large turnarounds. Now usually we celebrate when we have large turnarounds because large turnarounds drive shop work, drive the need for specialty welding services, usually expand in scope. What happened here was we were mobilizing for those large turnarounds that started in one case and was getting scheduled to start another and it abruptly got halted in 2nd week in February. And we're hoping that would get moving while the strike didn't settle until late March early April And it was only in one of those facilities, the strike settled, and they haven't made a decision on how that work's going to be done now because it's part of their network of plants. The other plant where the large turnaround was scheduled is still on strike. There is no settlement. And just so everybody, I think most people understand this. This is pattern bargaining. So just because one operator did it doesn't mean everybody else is going to do it. And this is the refinery operators. And as they moved to Texas and Louisiana, there was less enthusiasm for the strike. And so it's a very fluid situation of how this work is going to get done. Our experience suggests us when refineries are operating at this high level of utilization that they need our services maintenance and repair services more. And sometimes, we have an opportunity to do more work for them in the fall turnaround season than we had originally anticipated. So a strong fall turnaround, not sure all what will come back as a result of the strike in 2015 2016 overall. And finally, we do expect increased demand for our services if this high utilization continues. Okay, great. Thanks. Your next question comes from the line of Tahira Afzal of KeyBanc. Hi. Good morning, folks. Good morning, Tate. Good job given all the weather nuances and all in the quarter. I know there were a lot of moving parts Thank you. I guess, first question is around some of the heat exchanger opportunities. And I know it doesn't get that much fans there, Tony, but, you know, these could be pretty interesting in terms of margin opportunities for you, you know, maybe late this year into next year. And we are seeing more LNG projects in the U. S. Going through, and progressing in construction we're seeing Petrochem projects also doing the same. So we'd love to get your thoughts on that opportunity scope and timing, versus what you've indicated in the past. We like the heat exchanger business. We like the new build heat exchanger business. We like the heat exchanger extraction business, out of refineries. We like the heat exchanger cleaning business. And we like the heat exchanger repair business in our shops. We like all facets of the heat exchanger business. I like you, T, we think the opportunities are going to continue because of LNG and Petrochem we think that we're well positioned. We would look to grow that business. We did it successfully right after we bought Olmstead with the acquisition of Redmond, which has been a terrific opportunity for us to get more exposure to the West Coast. It happen within 5 months. We look to grow that organically. The real issue for us in the heat exchanger business And what you're talking about is more specialized applications, which we tend to be very good at, is engineering resources. And we have a very good engineering resources in our Homestead business in Houston and in our shops on the repair side. We need of it. Our constraint to growth is engineering. As you know, most of these things are custom engineered. Now it's 70% sometimes custom and sometimes it's 30% custom versus something we've built before. But these are very specialized engineers. We train them well. We're always hiring them. We lose some. The one silver lining of the of the slowdown in some of the CapEx upstream is less people are competing for engineers that are, quote, broadly in oil and gas. We think that gives us an opportunity to grow our engineering force. And, you know, and finally, we're always looking for the right acquisitions, whether they're small niche acquisitions or larger ones in this space. And sometimes these companies come as part of something else and sometimes they're standalone. But in general, we like heat exchanger. The model, it looks very much like our fabrication shops on the pipe side of how you think and how you price it. The shop repair work is very similar. The way we think about repairs overall Empor and how they're priced. And so we do like the business and we're going to continue to look to grow it organically first, always. And if the right transaction came up, we would jump on it, but that's a hard thing to do. I mean, it's been a stagnant space for a long time. On the acquisition side. Got it, Tony. And Tony, if you look at, the last peak of the cycle, and I assume it was around 7, 8, for Olmstead. Where would the margins of the overall heat exchanger business be directionally today versus where there were at that point, do you think you can get them up there again just based on the activity levels you're seeing? They're down from there. They're still very healthy, but they're down Mark, maybe you add to that. I mean, I don't think they'll get back to where they were there, but we think they can improve. Yeah, you know, Teague, you may recollect shortly after we made our initial investment in this space that we were looking at operating margins that were approaching 8%. Clearly, pricing has not recovered in the current market to those levels. I like to think as we move forward, we're going to see improvement from our recently reported margins. I just think what's of the things that have changed structurally in that market sector that pricing is not going to get back to those older historical levels I'd like to be proven wrong on that front. It marks numbers on the shop side when you talked about the 20%. Got it. Okay. 2nd question, Tony, if I look back, you had, you know, you've done the right thing I assume by diversifying the business to make the troughs and peaks, less pronounced and you know, so the earnings become more consistent. But so if I look back at 'nine, because you were more concentrated, and you were seeing the lag benefit of all the construction cycle on the non res side. Your operating margins, touched and went slightly above 5%. Do you need all your businesses right now to work together in tandem to really deliver 5% plus operating margins over the next year or 2. Or do you think that the momentum you're seeing on the non res side will be sufficient on its own? I mean, we're getting closer when you look at where we did last year, clearly as it mixes more towards a construction improvement, especially in mechanical. We think electrical margins will get back to what they are. The way I think about the business tea is If our electrical guys can operate 6, 6a half, 7, 7a half, somewhere in there on a sustained basis, once in a while, they'll bump a little bit above that. Sometimes they'll be a little bit below that. I'm talking on an annual basis or a sort of 6 quarter lookback. Our mechanical guys can operate 5.3 to 6. If we can get building services into the mid fours, And if we can get industrial, last year, we finished it close to 8. And if we can get that a little bit above 8, we can get to 5. So they don't all have to be at optimal levels. They could be in that range and we can get there and it depends on the mix. We do think we're in an environment now I think sort of the untold story on SG And A in the first quarter is actually a positive one. I mean, we got all this stuff going on with insurance year over year and some of that had to do with, actuarial changes last year and then a whole bunch of things that go on to that, right? But the biggest thing when you look at the positive story on SG And A, we had 11% backlog build and in our fixed cost structure, which is not the unabsorbed part in industrial, we had 2% headcount built. So we think we can do a lot more work with not adding a whole lot of people. And so we expect we've said that for a while. We expect to get leverage on our SG and A and our hiring patterns, which suggests we're going to get that. We haven't added a lot to the fixed cost structure. And the second thing I think that helps with our margins is with commercial being $1,300,000,000, that's some of the better work that we do. Very rarely do we have an EMCORE a commercial job that goes sideways in a big debt way. When we have a job that goes sideways in a big way, it's usually a large institutional job sometimes an energy or power job or a water on wastewater job. And that's and once in a blue moon, it'll be a the transportation job. They tend to be very good for us. So I look at the mix right now that we have as being pretty favorable for good performance. What you're seeing right now in some of the margins is and I think Mark covered this a little bit in his comments, we had some very good power generation work finish in the first quarter of last year. We're in a different part of the cycle on some of the larger work that we have. Now it has a little bit of a different risk profile. Our guys are appropriately cautious at the beginning of a job. As they really try to figure out, are we getting the productivity we expect Are we going to be able to have the kind of pre fabrication opportunities? We thought we were going to have does the construction or project manager from the GC really know what they're doing in the flow of this job going to work. Do we not going to think we're going to have the trade stacking problems that can sometimes happen in a workshop. So we're perfectly cautious upfront. We're actually employing labor versus other people in our space that are employing people that employ labor. And so we're not at all bothered by that because we it's how we've trained our folks to think. Right. I mean, end of the day, you know, it seems to imply margins right now on the operating side based on your guidance, let's say around 4.5% or so. I guess my question is, you know, let's take out USM and snow. Let's take out refining, getting much better than whatever it ends at this year. Can you still on the commercial side see enough of a pop into next year to really see margins coming close to that 5% spot? I'd say it depends on how much SG and A leverage we get in the mix of work we have. Or would you attribute on it? Yes. And I think clearly, T, when you look back at some of those historical results, we had a lot of other noise in the system. I think, and one of the one of the things that we've done a very good job over the last 2 or 3 years is just eliminated a lot of the other earnings distractions being in the internal earnings distractions are lack thereof. So we certainly don't need to have to hit a home run or a grand slam to get to those levels. But to react to what Tony said, I think we have to be within a reasonable range. Of the midpoint of historical earnings by segment. And Tony said next is a big driver. So for whatever reason, if industrial becomes a larger percentage of the total, you're going to see a much more significant movement overall. Operating margins of the company. Conversely, if the U. K, ends up pushing through some more volume at higher levels because it's been such a drag in the past. I think it's going to make significant difference as well. I think things have we've done a good job of stabilizing things. Clearly, the discipline we've executed or demonstrated with regards to the project selection and customer selection has paid off over the long term and we're optimistic that you're going to see that in our results as we go forward and hopefully we get some sustained period of broader economic favorability that we have an experience now for a number of years. There are no further questions. Management, do you have any closing remarks? No, thank you very much. For your interest in EMCOR today. Like I said, we're not big excuse makers here, but we thought it was really important They understand how some of these external factors impacted us here in the quarter. They were unusual. We certainly look to build on very good underlying fundamentals in our business and look forward to talking to you in July with our second quarter call. Thank you very much. Thank you. That does conclude today's conference call. You may now disconnect.