Q3 2019 Earnings Call
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Good morning, My name is lack and I will be a conference operator today at this time I would like to welcome everyone did I'm quite pleased that third quarter COVID-19 earnings call.
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After the speaker's remarks that would be a question answer session.
I would like to ask a question. During this time seem to be press Star then the number one I need telephone keypad. If you would like to withdraw your question, perhaps the times [laughter] nets, Jamie bad, but at the I consulting you may begin.
Thank you Laura and good morning, everyone welcome to the M. Core Group Conference call. We are here today, but it's got the company's 2019 third quarter results, which are reported earlier. This morning, I'd like to turn the call over to Kevin Math Executive Vice President of shared services, who will introduce management Kevin. Please go ahead.
Thank you Jamie Good morning, everyone welcome to EMCORE group's earnings conference call for the third quarter 2019.
You can't you, but I can't believe how fast the years gone by already Halloween This week.
For those of you who are accessing the called via the Internet and our website welcome and we hope you have arrived at the beginning of our slide presentation that will accompany our remarks today. Please advance to slide two.
This presentation and discussion contains certain forward looking statements.
Page two described in detail the forward looking statements in the non-GAAP financial information disclosures I encourage everyone to review both disclosures in conjunction with our discussion and accompanying slides.
Slide three depict the executives here with me to discuss the quarter in nine months results. They are Tony Ghazi, Our chairman President and Chief Executive Officer, Mark pump, our executive Vice President Chief Financial Officer, and Treasurer, and our senior Vice President and General Counsel Maxine Mauricio.
For call participants not accessing the conference call via the Internet. This presentation, including the slides will be archived in the Investor Relations section Upper web site under presentations you can find us at EMCOR group Dotcom with that said, please let me turn the call over Tony Tony Yeah, Thanks, Kevin and good morning, and I will be covering pages four through six in my opening costs.
Image.
We had another terrific quarter.
We set new company records for third quarter revenues at 2.29 billion.
Operating income at 115.8 million.
Net income attributable to EMCORE group at 81.4 million.
Diluted earnings per share from continuing operations of $1.45.
Cash flow from operations was very strong at $218.7 million.
We also had very good cost control with SGN, a at 9.6% of revenues.
We had a tough comparison this quarter versus a year ago period, and still set these new third quarter Records.
Our revenue growth was 11.8% this quarter with 8.1% of that organic revenue growth.
We have a strong base of remaining performance obligations for our Peos of 4.04 billion.
Up 65.4 million from a year ago paired add up 70.8 million from the year ended 2018.
Our ARPU always continue to be very strong despite our strong organic revenue growth in the quarter and year to date.
We continue to execute well for our customers.
Our third quarter EBITDA margins are at a strong 6.1% and we had good third quarter operating income margins of 5.1%.
Now, let me take a minute and cover some highlights from the quarter radar segments.
Mechanical and electrical construction segments continue to perform very well, we had combined operating income margins up 6.7%.
As we have discussed previously operating income margin as.
We'll move within a band of strong performance based on mix of work scope stage completion on our large complex projects, we had strong revenue growth in commercial.
Datacenters manufacturing healthcare and our short duration work.
Overall, we are executing extremely well in these segments with a focus on our estimating job selection planning pre fabrication labor management, and we're successfully closing out both large and small projects.
Our construction teams are executing well and continue to look for the right opportunities to gain productivity through extensive pre planning the application of building information modeling or Ben and the resulting prefabrication. We are also doing a very good job of workforce development in this very tight.
Labor market.
Our building services segment had an exceptional quarter, we had revenue growth of 12.3% and operating income margins of 6.6% our mix of work is very good.
Strong revenue growth in the quarter in our mechanical services and commercial site based businesses.
Our acquisition integration has been exceptional in this segment, adding geography and capability. We said last year, we had execute well and with precision and the implementation of several large complex facility management contracts. We are and is having a positive impact on our operating performance across all.
All relevant metrics.
Building services team is focused and looking to continue executing with a high level of discipline and focus our industrial services segment had a tough comparison in the quarter versus versus the year ago period and was a little behind last year in the quarter from an operating income basis, but on a year to date basis, we are seeing strength return.
To this segment with much improved performance. It is important to remember that the third quarter is always a seasonally slow quarter, unless we are helping our customers with a significant unplanned maintenance issue our augmenting their capital project work our team is not satisfied with our operating income margin.
Yes, and Theyve been rebuilding the business businesses margin base over the last six quarters through our mix of work and an emphasis on some of our more niche product offerings and hope to return to our EBITDA margins into the high single digits, we're well positioned with our customers and we have the team in place to keep executing for these customers.
At this point in time, we are executing a normal fall turnaround season.
Our UK segment continues to perform well we lost some growth from foreign exchange with the weakening of the pound Sterling. We are very strong operationally in UK and continue to win new customers, who require a strong technical part partner to Mazer complex facilities. The UK team has strong executing well.
Now and continues to win new and important customers our balance sheet remains liquid and strong with that Mark I'll turn it over to you for a detailed discussion of the quarter and our year to date performance. Thank you Tony and good morning to everyone participating on the call today for those accessing this presentation by the webcast. We're now on slide seven.
Over the next several slides as they typically do I will augment Tony is opening commentary on of course third quarter performance as well as provider summary of our year to date results through September Thirtyth, All financial information referenced is derived from our consolidated financial statements included in both our earnings release announcement and Form 10-Q filed with the Securities Exchange Commission earlier today.
So, let's revisit our third quarter performance consolidated revenues of 2.29 billion are up 240.7 million or 11.8% over quarter three 2018.
Our third quarter results include $75.6 million of revenues attributable to businesses acquired pertaining to the period of time that such businesses were not owned by EMCOR and last year's third quarter acquisition revenues positively impacted each of our United States electrical construction, United States and chemical construction in United States building services segments.
Excluding the impact of businesses acquired third quarter consolidated revenues increased a 165.2 million or 8.1%.
All of them cores reportable segments generated revenue growth during the third quarter other than our UK building services segment.
The United States electrical construction revenues of $554.6 million increased 68.7 million or 14.1 from 14.1% from quarter. Three 2018, excluding acquisition revenues of 43.8 million. This segment's quarterly revenues grew organically, 5.1% quarter over quarter.
Revenue gains within the commercial market sector inclusive of project activities within the telecommunications submarket sector as well as revenue growth within the manufacturing market sector were partially offset by revenue declines within the transportation hospitality and healthcare market sectors due to the completion or substantial completion of certain large projects.
During 2018 or early 2019, United States mechanical construction revenues of $869.2 million increased a 109.7 million or 14.4% from quarter. Three 2018, excluding acquisition revenues of 4.7 million. This segment's revenues increased 105 million.
Our 13.8% organically as has been the trend over the last several quarters revenue growth within this segment remains broad based across most markets sectors with revenue gains from all sectors other than hospitality contributing to the overall increase in quarter. Three revenues. This segment's revenue performance represents an all time quarterly record.
For U.S mechanical construction and eclipses the record set in quarter. Two earlier this year and of course total domestic construction business third quarter revenues of $1.42 billion increased a 178.4 million or 14.3% with 10.4% of such growth being generated from organic activities United.
It's building services quarterly revenues of $532.1 million increased 58.4 million or 12.3% excluding acquisition revenues of 27.1 million. This segment's revenues increased $31.4 million or 6.6%.
Revenue gains within the mechanical services and commercial site based services divisions were partially offset by revenue decline within the government services division due to a small their contract base as well as reduced I'd add few project activity similar to our U.S mechanical construction segment revenue performance within US building services for the quarter Robert.
Thats, an all time quarterly record for this segments.
That is states industrial services revenues of $234.2 million increased 6.8 million or 3% as a result of higher field services revenues inclusive of an increase in small capital projects such revenue gains were partially offset by a reduction in revenue from our shop services due to a lower level of heat exchanger sales than in.
2018 third quarter.
United Kingdom building services revenues of 97.6 million decreased 2.9 million as a result of $5.6 million and foreign exchange headwinds due to continued volatility in the value of the pound sterling. Despite the impact of these unfavorable exchange rate movements. This segment continues to add new facilities maintenance contracts.
As well as secure and execute projects for the expanding customer base. My last statement on third quarter revenues is to repeat what Tony referenced earlier and that our 2.29 billion of quarterly revenues as a new third quarter revenue record for EMCOR. Please turn to slide eight.
Selling general and administrative expenses of 220.1 million represents 9.6% of third quarter revenues and reflects an increase of $22.8 million from quarter. Three 2018. The current irrs quarter includes approximately $9.7 million incremental expenses inclusive of intangible asset amortization from businesses acquired.
Resulting in an organic quarter over quarter increase of approximately $13 million as I've mentioned for several quarters with the sequential achievement of new quarterly revenue Records. We are experiencing an increase in employment costs, primarily as a result of increased headcount to support the strong organic revenue growth amongst the most of our domestic reporting segments.
Reported operating income for the quarter of $115.7 million represents a 4 million increases compared to operating income of 111.8 million in 2018 third quarter similar to this quarter's revenue performance. Our operating income in absolute dollars represents a new third quarter record. However, despite the increase in operating income.
Operating margin has declined modestly from 5.5% of revenues in the third quarter of 2018% to 5.1% in the third quarter of 2019 due to margin contraction within each of our us construction segments as well as our US industrial services segment I will cover the details of each of our reportable segments operating income and operating margin per.
Formats as they continue through this slide.
Our us electrical construction segment operating income of 33.6 million decreased by approximately $800000 from the comparable 2018 period reported operating margin of 6.1% represents a 100 basis point reduction over last year's third quarter. This reduction in operating margin is due to the favorable impact in the prior year.
Period of certain large transportation constructs construction projects that had reached or approached substantial completion in 2018.
2019 third quarter U.S mechanical construction segment operating income of 61.2 million represents a 2 million or 3.3% increase from last year's third quarter operating margin of 7% decreased by 80 basis points period over period, partially as a result of a revenue mix, which includes a greater number of large projects.
And the earlier stages of completion, which typically reflect lower projected gross profit margins than projects that are approaching the later stages and completion. Additionally, 2018 third quarter operating income and operating margin were favorably impacted by the final settlement of of contract value for two projects that were completed in prior periods.
These settlements resulted in a 60 point basis favorable impact on this segment's operating margin for Q3 2018.
Our combined use construction businesses reporting a 6.7% operating margin of nine or 94.8 million of operating income, which has increased from 2018 third quarter by just over $1 million.
Operating income for you as building services of $35.1 million represent 6.6% of revenues and a 5.7 million increase over last year's third quarter operating margin improved by 40 basis points due to quarter over quarter increases in gross profit and gross profit margin within our mechanical services operation, which are executing a greater number of projects.
Service contracts going in the comparable 2018 period and are benefiting from an improved mix of work, which is providing greater margin opportunity. Both reported operating income and operating margin for this segment represent all time record quarterly performance.
Our U.S. industrial services segment operating income of 5.6 million or 2.4% of revenues represents a decrease of $2.1 million and 100 basis points of operating margin from last year's third quarter operating income and operating margin within this segment for the third quarter of 2019 were negatively impacted by an unfavorable mix of work.
Which included a greater number of small capital projects that carry relatively lower gross profit margins than typical turnaround work performed in our industrial services segment. As a reminder, the third quarter of each year tends to be one of the seasonally weakest for this segment adult in 2018, we did see an uptick in activity as our customers commenced Turner.
Around activities after the suppression of work due to the prolonged impact of Hurricane Hardy and both late 2017 in early 2018.
UK building services operating income of 4.8 million represents a slight increase over 2018 third quarter. Despite the negative impact of the decline in the pound Sterling, which reduced reported results in us dollars by approximately $300000 operating margin within this segment of 4.9% has improved by 50 basis points.
As compared to operating margin of 4.4% in the third quarter 2018, we're now in slide off.
Additional financial items of significance for the quarter not addressed in the previous slides are as follows quarter. Three gross profit of 336 million or 14.7% of revenues is improved in absolute dollars by 26.6 million. However, our gross profit margin is contracted by 40 basis points due to a reduction in gross profit margin within our.
Yes, construction operations and our US industrial services segment. The decrease in gross profit margin within our US construction segments can be attributed to a shift in revenue mix as our contract portfolio includes an increased number of projects in the earlier stages of their project lifecycle. Additionally, consistent with my operating income commentary to declining.
Profit margin within our US industrial services segment as a result of a greater number of small capital projects and a reduction in shop services revenues period over period.
Diluted earnings per common share from continuing operations is one dollar and 45 cents and compares to $1.36 cents for the quarter ended September Thirtyth 2018. This represents a nine cents or 6.6 improvement quarter over quarter, our tax rate for the third quarter is 27.9%, which is slightly higher.
Higher than the tax rate for the third.
Slightly higher than the tax rate for the third quarter 2018, due to an increase in certain nondeductible expenses year over year on year to date basis or tax rate is relatively consistent with where we work through the end of our second quarter and at the approximate midpoint of my previously communicated expected income tax rate range of 27.5% to 28.5.
5% for full year 2019.
We have continued our quarter to quarter sequential improvement in cash flow performance with cash provided by operating activities of $219.1 million during the third quarter of 2019. Despite our continued strong organic revenue growth, we experienced exceptional cash flow conversion as our operating companies continue to actively managed there.
Working capital investment we are now significantly ahead of where we work through the first nine months of last year and we expect the positive operating cash flow momentum to continue into the fourth quarter of 2019.
We are now on slide 10.
With the quarter commentary complete, let's now turn our attention to our year to date results through September Thirtyth revenues of 6.77 billion represent an increase of $869.3 million or 14.7% as compared to 5.9 billion in the prior year period.
Our year to date results include $196.7 million revenues attributable to businesses acquired pertaining to the trade upon the such businesses were not owned by EMCORE in the 2018 year to date period.
Excluding the impact of businesses acquired year to date revenues increased organically $672.6 million or a strong 11.4% significant revenue growth across each of our domestic reporting segments was augmented by revenue growth within our UK building services segment, despite an almost $20 million revenue headwind.
Due to the unfavorable foreign currency exchange rate movements year over year.
Year to date gross profit of 991.1 million is greater than the comparative 2018 period by $121.8 million or 14% with gross profit improvement in each of our reportable segments gross profit margin of 14.6% is essentially flat with 2018, while all segments other than you.
As mechanical construction generated improved gross profit margins year over year the reduction in gross profit margin within the U.S mechanical construction segment is due to the revenue composition I mentioned during my quarterly commentary selling general administrative expenses of $652.5 million represent 9.6% of revenues as compared to 578.
Point, Threemillion or 9.8% of revenues in 2018 year. Today 2019 includes $26.5 million of incremental SGN, a inclusive interchangeable asset amortization pertaining to businesses acquired as I mentioned last quarter, we continue to successfully leverage our overhead structure. During this period of continued strong.
Revenue growth.
Year to date operating income is $338 million, which represents a 48.6 million improvement over 2018 is nine month performance our year to date operating margin is 5%, which is 10 basis points higher than the comparative 2018 period in a static with our operating margin performance to the first half of 2019, we continue to perform and.
George volume of product and service work at or near record high historical margins diluted earnings per common share from continuing operations is $4 in 22 cents from the nine months ended September Thirtyth 2019, as compared to $3.52 in the corresponding 2018 period, adjusting 2018 is earning per share for the noncash.
Cash intangible asset impairment loss recorded.
In 2018, non-GAAP diluted earnings per share from continuing operations would have been $3.54 when comparing the current yields diluted earnings per share from continuing operations to 2018 is adjusted number we are reporting at 68 cents increase or 19.2% year over year EPS improvement.
We are now on slide 11.
Of course balance sheet continues to maintain its strength variations of note from December 31, 2018 are as follows our cash balance.
At 368.1 million is roughly in line with December 31, 2018, as a result of strong year to date operating cash flow, which has more than covered investing and financing activities. During the year, including approximately 80 million of cash expenditures for acquisition of acquisitions of businesses nearly $36 million.
Capital expenditures in the 36.4 million and 36.4 million of debt repayments under our credit facility during the nine month period.
Working capital levels have increased from December 30, Onest due to the growth in our accounts receivable and contract asset balances commensurate with our continued strong organic revenue growth goodwill as increased primarily as a result of the five businesses acquired to date in 2019 identifiable intangible assets have decreased due to 34.5.
One of amortization expense, partially offset by intangible assets recognized in connection with 2019 acquisitions total debt. Excluding operating lease liabilities is approximately 266 million in has reduced from December 31, 2018, due to our repayment of the outstanding balance under revolver under our.
A revolving credit facility as well as our mandatory quarterly principal repayments under our outstanding term loan. These were partially offset by the amortization of debt issuance costs. During the 2019 year to date period.
As a result of our outstanding borrowings, we have a debt to capitalization ratio of 11.9% at September Thirtyth 2019 I.
Im very happy with our strong cash flow performance during the quarter and year to date periods and as a result, we reduced our already modest leverage profile and have a balance sheet and underlying earnings base that allows us great flexibility and pursuing numerous organic and strategic opportunities with my portion of the formal slide presentation concluded I would like.
The return the call to Tony Tony Thanks, Mark and I've worked with you a long time.
Longtime 15 years, though.
As the first time I've heard you say that you're very happy so that must be really good cash flow performance.
I'm going to go I'm on page 12 valve I'm going to talk about ARPU rose by segment and market sector.
Total ARPU goes at the end of the third quarter were 4.04 billion up 65 billion or just about 2% of compared to the September 30 level of 3.97 billion.
Likewise third quarter activity was about 2% over the December 31 level up 3.96 billion.
Total ARPU shows have been quite stable.
Between four and $4.2 billion over the last five quarters, while revenues have continued to Kirk increase at very strong organic growth range. We continued to book and Bill were up book and Bill a significant level work within the year as we continue to win.
A small medium and large complex projects. So quick turn projects were booking as well as a large more complex project.
And towards bread and butter project size is still between 1 million and $5 million and these projects due to remain in our peos for an extended period and typically burn in two to three quarters for the remainder of 2019 and into 2020, we continue to see strong demand for these small to medium sized prop.
The next which to me shows the underlying strength of the market and shows broad based demand across geography and market segments. For example, our ARPU erosion. Our building services segment mechanical services business is up by $111 million or almost 26%.
Much of this mechanical services work and even some of the small project work at our electrical and mechanical centers centered around because sucks customers desire to improve the energy efficiency of their facilities and the cost effective so those facilities. The hvdc the building controls to lighting systems all of those things are things at EMCOR.
It does very well.
On the right side, a page 12, we show ARPU is by market sector. As noted the mix of work between market sectors has been relatively consistent over the past shares.
Past year with commercial our peers, making up a little over 40% of that total we believe this to serve versus market participation combined with our geographic footprint gives us a competitive advantage in our ability retained skilled labor access to end market demand across our broad range of opportunities.
As we move toward the end of the year our markets remain healthy.
And bidding activity is strong we believe this level activity will continue as we move out of 2019 and into 2020.
Im now going to be covering pages 13 or 14.
As we move to year end 2019.
We are in the midst of another record year at EMCOR.
We are still operating and what we believe is a good operating environment for us with a growing non residential market.
Our strong market for our building services product offerings at a much more stable operating environment for our industrial services segment.
We see each of these trends continuing through year end 2019 and into early 2020.
Which is the extent of the visibility that we have at any given time, that's about six months.
With our strong performance through 2019, we have raised our revenue and earnings per diluted share from continuing operations guidance twice. This will be the third time, which is a reflection of the continued strength, we see in our business.
We are moving our revenue guidance to around 9.0 billion up from 8.8 to 8.9 billion. We're raising the bottom end of our earnings per share from continuing operations from 550 to 565 and will it and we will leave the top end of the range at 575, we expect cash flow at or above net income.
With only a small gap at our range at this point in the year, what moves us from the lower end of the range to the top end of the range is a matter of project timing Closeouts and the strengthened duration of our fall turnaround schedules.
Let's talk a little bit about capital allocation.
We will continue to allocate capital in a balanced efficient at opportunistic matter much in the same manner as we have over the last five years.
Our priorities, our first to support organic growth second to acquire companies that build our business for the long term and third we will return cash to shareholders through dividends and share repurchases for.
For example that five companies we have acquired thus far in 2019 has strengthened our mechanical construction.
Electrical construction and building services segment.
We have a good pipeline of opportunities for small tuck ins to our existing subsidiaries to large standalone operations, they can bring new geography and capabilities and positively impact our long term growth and end market opportunities.
In October 4th of this year, we announced that we assign our acquisition of Bachelor and Kimball otherwise known as became.
BK I will bring about 400 million in revenues to EMCORE with a market leading position in the southeast and mechanical can truck contracting construction and services. They have the same complex project capabilities as the best EMCORE mechanical construction subsidiaries and operate with the same results as.
Our top quartile of EMCORE Mactac mechanical construction subsidiaries, we expect this acquisition to close in the next few weeks as a reminder to those who cover and invested us as we typically buy businesses with backlog, we usually have significant backlog amortization in the first two to four quarters.
Post acquisition, therefore, we will see the positive revenue EBITDA and cash impact from these acquisitions before we see the expected long term impact on our earnings per share from continuing operations. We also have made important organic growth and productivity investments and all of our bill.
Hi, This is Randy from new digital capabilities to supporting incremental this growth opportunities and our industrial services segment.
We are going to close this record year, well and we are positioned well going into 2020 with that said Laura will be happy to turn the call over to you to take questions.
Absolutely. Thank you at this time I would like to remind everyone. I'll just ask this question Wes Frye then the number one on the telephone keypad.
And that started then the number one on your telephone keypad, we'll pause for just a moment composites roster.
For some JV have you first question coming from the line of Merval gap from Stifel. Your line is now line.
Good morning, Noel Hi, good morning.
Just given some of that next leading indicators and in the Nonres market I was hoping you could just comment a little bit on.
How you're thinking about some of your key verticals and where you see some additional legs into the cycle versus those those markets, where you maybe starting to be maybe a little bit more cautious.
Yes, I mean look I think this is a big giant market that has growth in it yet.
We've said for a long time as long as we can get low single digit growth, even a small contraction.
Doesn't cause us a lot of alarm.
Because it's such a big market with so many opportunities.
Quite frankly other than some residential high rise, which were not that big a participant in.
We're not seeing significant contraction in any of the markets that we that we count on to deliver for us year after year.
We continue to see strengthened the end that commercial market. We continue to see strengthened telecommunications data infrastructure market, we continue to see strength and manufacturing, especially specialized manufacturing manufacturing, we continue to see strength and some health care markets.
Thats episodic in some ways because of large hospitals have to get one are you get to it it will in the short.
Hospitality is down for US right now because at the end of the day that also could be episodic depending on what are you building a new luxury hotel are you building a new gaming facility.
Water and wastewater continues to be a source of strength, mainly caused a where we're positioned in south Florida.
A couple of other key markets. So you know part for partner well is that short duration work continues to be very strong and.
And I think part of that is customers see the payback.
Especially as it relates to.
Not only energy efficiency, but some of the work we're doing to combine energy efficiency work to more distributed generation work you put those two together.
You can bring more energy assuredness to customers.
Control system upgrades, where where the leading independent building controls contractor, we continue to build out our position in a positive way today that actually drives productivity that drives efficiency and it allows the owner more control over how their buildings going to operate that would have been done in the past so.
I.
When we love a market that continues to grow double digits forever sure that saw pragmatic.
The market growing like it is right now is fine for us to deliver good results for our shareholders.
Thanks, that's helpful color.
And second I was hoping you could expand a little bit on your comments regarding labor cost increases and generally around labor availability.
As the market remains very tight for labor are you seeing some opportunity too.
Recoup some of those higher labor costs through to reprice and given that the market remains strong could you just comment a little bit on that basically cost price dynamic on the labor front, yes, I mean look.
We worry a lot more about labor productivity than we do the dollar per hour cost of labor.
If we can mix that work right. If we can drive the right productivity through our.
Ben and pre fabrication and the kinds of things we do.
Got to mitigate.
Excessive labor on a job then we can win.
The other thing is our union Workforces are tied to CBS and you could argue those CBS also set the price for the non Union labor.
And the unions by large I'm not going to say definitively and Mark. Please comment also the unions by and large.
Have been reasonable nominate all unions, but most of our local agreements have been reasonable.
We're still doing PL, ace, which would be at a reduced rate versus the overall rate in the market because they want to win the work.
We're still finding the best people and I've said this many times that well.
Skilled trades person decides where they're going to work, especially one that's going to become part of your what you would say more permanent workforce based on a number of factors and there are no particular order first as I am I going to get paid every week that sounds trivial, but more contractors go bust in good markets almost than they do in bad markets because they over extend their working capital.
Okay.
The second thing they look for his are going to keep me say.
We can definitively say, we work everyday really hard to have the best safety record in the industry. The best safety investment in the industry and divestiture safety training in the industry.
The third thing they care about does my supervision actually know what Theyre doing we've got great Foreman Superintendents project managers and local company operations people Ceos are folks know the work and finally, if I do a great job view am I going to have carry on work am I going to become part of your core team other than a few markets in this country.
We picked the labor unions don't pick the labor the comes to our jobs.
That being said if I can become part of a core EMCORE company team in a market I'm going to be able to ride out the next downturn in that local market. Our overall because I'm going to have work marked got any data that you look at this all the time or.
I think once again I think we don't.
Underestimate the significance of a destination of choice for from an employee's perspective.
Clearly we have been very successful long number of years and we have a great track record of working in harmony with our with our employment base and as a result, we both reap the benefits.
And we're blessed rate, we have our local Ceos no labor.
Technically adapt a lot of 'em came from labor they know what they know well they respected and marks a destination of choice part of being a destination of choice goes to one of our core values here at EMCOR, and it's up and down our chain of command here.
We believe a mutual respect and trust and I think that carries on to our entire workforce and I think people know that add are they cover areas, they're going to be treated well theyre going to be treated well, what we expect to get done in today that we're going to be up to date on the best installation techniques and service techniques that there are.
Thanks, very helpful I'll get back in Q.
Thank you.
Thank you. Your next question comes from the line of Brent Thielman from D.A. Davidson. Your line is now.
Hey, Thank you congratulations of quarter. Thanks.
Hey, Mark and maybe just back on the free cash flow I mean, just incredibly strong this quarter I don't know if theres any more color on whether you had a couple of business units with big contributions this quarter I guess anything else you can add there and on it was uniform I think generally the only the only segment.
Was a different contributor in quarter three than than the last two quarters would have been industrial and that's just a byproduct of of the turnaround season. So.
The majority of the workers pursuant to time and material contracts and they built in arrears. The work that was executed during the spring turnaround season wasn't monetized until quarter late quarter two in quarter three otherwise, it's just a function of of the workflow with the jobs.
We continue to to try to structure, our contractual terms for our fixed price work to the extent that we can get advanced billed and collected this clearly thats, what we tried to do.
With the significant organic revenue growth that we've been experiencing for for for many quarters now in succession. Ultimately it does does result in cash flow and.
When we were successful in monetizing a fair amount of in quarter, three and as I mentioned in my prepared commentary, we expect that quarter four will remain strong as well.
Yes.
Okay, and then Tony on on BK AI is there anything you can see quantitatively or qualitatively just around Canada grids weight rate for the last few years, and then just kind of beyond that the financial benefits, obviously that the EMCORE is there a big opportunity or bigger opportunity for them through a combination with you guys that maybe they are not realizing today.
The one question was about their base wage rates there union contractor.
Yeah. Those are set on a local basis theyre competitive upbeat guy like most EMCORE companies are like Mark said, an employer of choice. It's a destination for people. They have a terrific superintendent added privilege of meeting of a few times.
We're down there a couple of weeks ago.
They have great workforce development and so we think we're leading edge in pre fabrication and been modeling and the application or our revenue.
These guys are a little ahead of us and we'll be able to take that across the company and that's something we're looking forward to 10 to improve some of the things we're doing and we do that very well collaboratively across EMCORE.
Which we've talked about with the benefits are this is Dave.
Around a 400 million to our company with.
That'd be a top quartile, how we perform in the mechanical segment on an EBITDA and operating income margin based probably a little bit below operating income margins. Initially as we burned through some of their backlog, but that has nothing to do without operating the business is how we account for in the short term.
Yes, there is I mean, we have customers that they have they have customers. We have there's customers that would like us to do more.
These folks have the ability to travel into some markets that were not in.
We have some capability to add to that.
This product lines, we can offer some of those customers and there's places maybe we can go together that were not currently serving yeah, we're not big travelers at EMCOR typically other than fire protection as a food processing work.
And maybe a little bit of datacenter work we will.
If we to workforce development together in some of these markets it could bode well for both of us over the long term.
Terrific people great values.
Very technical.
Run by generations of Georgia Tech Engineers, we feel pretty good about this acquisition.
Okay. That's great one more quick one I guess you had a really strong fourth quarter and industrial services last year, I guess based on what you're hearing from customers and what you can see turns the normal turnaround season. I mean do you think fourq you can be as strong as last year I don't know who will be as strong as low.
Last year, Mark, but it'll be pretty good.
Big it'll it'll look more more seasonally normal I mean, you got to remember kind of like in quarter three last year.
Though it's very difficult for us to quantify was a difficult for us to quantify a year ago. At this time that it's going to be even more difficult.
In 2019, but clearly some of the work that was deferred.
As a result of the of the storm.
Good benefit Q3 in Q4 in 2018, Theres, obviously, not that kind of impetus going into 2019, but but having said that.
We're going to be working in places that we havent been in for a little while selling until we get in there and start executing.
Against the budget, we have no idea if scope is going to be consistent with our initial thoughts on the land or expand it's all dependent on what we find when we get there so.
The good thing is we have labor on site and we're going to do our best to provide the best valued service to our customers.
As we.
Approach to everybody's shutdown as they get towards the Christmas holiday and we think about it right one of the things you're wrestle with in this business, particularly.
As you have in this business also you have a permanent workforce.
And once we start absorbing that permanent workforce in full in the fourth quarter and it doesn't take a lot of man hours to get better bottom line contribution above what we were planning and like Mark said.
The reality is our guys to a great job of flexing up a little more difficult sometimes to flex down in the off seasons, but if they come just flex up a little bit on a turnaround versus what they were planning. It can have an outsized impact and we don't know that right now and I guess, the only though the thing I would add which is one of the reasons why why margin contribution was down in quarter three as I mentioned earlier as the shops aren't.
Busy right now as they were at this time a year ago.
In order levels currently as we sit here today really haven't significantly change so.
And this from a revenue mix perspective, this to shop work as as I'm sure. He remembers the most profitable work thats executed within that segment. So.
We'll see how that develops as we go forward.
Okay, Alright, thanks, guys appreciate you're welcome. Thank you.
Thank you we have your next question coming from the line of Adam follow from Samsung. Both your line is now loan.
Adam how are good morning, guys.
Great.
So Tony I know, you're not going to give 2020 guidance, but.
From a topline standpoint.
I mean, you're modeling low single digits I mean is that.
On a roughly in line with your high level thoughts.
You're right Im not going to talk about 2020.
Look with backlog stable.
We are bringing in.
Okay, Hi, we would expect to grow the rest of the business.
Whenever nonresi is going to grow your guess is good as mine on what thats going to be right now.
We expect low single digits on non res flat to low single digits plus the addition of became.
Martin talked about the other acquisitions for the most parts as other ones have impacted to bigger ones have impacted 2019 already the smaller ones you'll lose in the rounding.
Incremental year over year, so yeah, I think thats fair to say.
And then I want to make sure I understand the electrical margins in Q3 to six.
One of his down 100 basis points year over year, you talked about some early stage projects.
Was there anything else in there that how quickly does that.
Snap back to kind of more than seven 8% range, where you've been yes. So this is mark the earlier stage projects I mentioned were specific to mechanical construction not to electrical.
What's going on with the Mark margins in electrical as a year ago at this time, where we were.
Wrapping up some large.
Transportation infrastructure projects.
In the northeast geography and.
That work is this non existant. This year clearly if you look at the margin performance of both of our domestic construction operations on a year today basis.
There there are performing ahead of where they certainly been on a five year average or an eight year average so.
As Tony as mentioned numerous times on prior calls quarter to quarter development in margins in each of these segments is difficult just because of the mix revenues and where we are on project Lifecycles.
Having said that with where the rpls for both electrical and mechanical.
And the type of work, we're executing we're happy with the mix and we're clearly happy with the execution that are operating company teams are providing.
Yes. The next net no bad jobs, no actually is quite the offs.
I mean, if you look 12 months trailing 7%.
18 month trailing in electrical 7.1% 24 months trailing in electrical 7.3% the remarkably steady when you look back.
Bob again margins will fluctuate like Mark said quarter to quarter.
We've had a remarkable.
Of the pie ex Brazil, we've had a remarkable absence of badness really over the last six quarter.
Yes, Okay understood and then.
This is almost more of a comment then a question, but you are building services business.
Tony I mean, thats amazing to see 6.6% March almost your highest margin segment.
Whereas I don't have six seven years ago, maybe more when you bought USM.
I took years to get that going to I.
I guess the question would just be like high level building services, where are we versus kind of what you wanted to bill when you bought USM.
I think I think we are real good mix of work right now.
We continue to take advantage of project opportunities across our portfolio.
We're fully integrated we said we needed to implement some large projects.
Facility project.
Management contracts and we are we're doing well, we're getting good absorption on our labor overall.
And.
We're going to go to good project flow through yeah, no from from our maintenance contract customers are doing well.
6.6% has terrific performance.
Would it have four quarters in a row mark of double digit growth I mean, one of the things we had a russell through Adam is remember we had a big decrease in revenue as we lost some government contracts as some large site based contracts that to rightsize the portfolio and as a result of that it was painful on margins during that time period. So now are not to interrupt Tony but I interrupted.
Tony So my apologies, but.
The book the book of business is extremely strong.
Thats segment and.
The the businesses that we've added over the last five plus years.
Quite exceptional and it's provided more diverse.
Service offering than we've had before and as a result of that we're clearly that some some some margin improvement opportunities, which were taking advantage of the other side of that.
Modernization is.
All everybody at EMCOR is known as being very frugal.
Where short and no frills guy.
But this team.
And led by there.
Mike Board is Theres, CEO , and Anthony say that especially their CFO . These guys are really really cost crazy I mean, they watch every nickel everybody does that at EMCOR.
But these folks really watch it and I think thats born of what they experience when they lost the contracts when they not only rightsize the portfolio. They rightsize, how they think about incremental SGN a everyday.
And they chase productivity constantly we do that everywhere.
But these folks got how to get ahead of it because of what happened in their portfolio.
Okay perfect I appreciate it thanks, guys touching that you're welcome.
Thank you we have your next question coming from the line of sight is coming from Keybanc capital markets. Your line is now.
Good morning shot.
Morning morning.
Complements to the team on the quarter nice work.
First question Quint first question for me is just on the topline Tony you sound pretty pumped up overall im not picking up on any change at all and kind of that velocity of activity you're highlighting on the last call.
I just wonder as we look out into next year.
Revenues. The revenue guide has moved up pretty nicely as we move through 19 Im just wondering I.
Was there any reason why you can sort of grow in line with that not nonres backdrop next year or should we be considering this had been a tough comp as we go into next year swap me clearly with 13.7% trailing 12 month sport growth.
And 8% organic of that right. I mean, you know that is a tough comp.
Let's be clear that is a tough comp.
Hello.
We sell people most the choices people make with us our binary and I mean, our customers we get the project or we don't usually don't get a piece of a project once they've decided how they're going to awarded.
We won more than our fair share that.
And yes, 13.7% over the trailing 12 months and 10.8% organic exceptional I mean.
My hats off to definitely the team assembled with here, but we would take our hats off to the get folks in field, we're obviously winning much more than we're losing.
You know.
With a non resin market thats grow when a third I think one to three maybe next year, maybe two to four I think the way you ask your question is the right way to think about it can we grow in line with that non res market.
I think the answer to that is yes, we would expect to do that.
Now we're going to do that every quarter, nor are we can exceed that some quarters yes.
I mean, I, certainly am not signing up for 10.8% organic revenue growth next year, and you're certainly not paying us for that right now or the stock will be $140 right.
I wouldn't say this is unsustainable, but we certainly have a tough comp in the first half of next year and we know that.
I think about what we try to do as a management team on growth overall I think is a good way to look at it we think a growth like this.
We have good underlying businesses in each of our segments.
In each of those segments have good underlying businesses and there is from mechanical construction, who owns a lot of our industrial construction assets sodas electrical so any CS is a good industrial construction base too.
Building services were taken advantage of a very strong mechanical services energy efficiency market right now as well as customers desire now the come all the way back around to say the love affair with a real estate guys might be diminishing some and they're realizing you actually have to have people to get deployed technical labor at a very efficient manner and training.
And then an industrial we continue the team there is as creative as you get and developing niche product opportunities organically.
Because we think thats, a better way to do it right now.
What we try to do is get I always call more lines in the water look at growth opportunities broadly and then really concentrate to resources about quarter to do those with customers. Overall. So you think about the five acquisitions, we've made year to date and now you're going to add BK I too would.
Yes, I don't want together, we had a heck of a year acquisition wise and were teed up next year to have a heck of a year. We think now again each one of those decisions as binary too and we do really good due diligence.
And it's our operations at our staff teams do really good due diligence to make sure that we're ready to integrate day. One we do this better than we have in a long time.
So growth for us is about putting growth engines into the business both capability wise geography wise and end market sector Wise and then were contractors. Once we find out we can do something well we tried to exploit that it is many places we can to serve our customers as many cases, we can responsibly and to really drive reason.
It's across the business. So that's a long winded answer to say, yes, we ought to be able to growth in lot of resin market next year, but I'm pretty sure that modeling, 10.8% organic growth would not be a good thing to do.
Very helpful. Thanks for that and just shifting gears, a little bit over to the industrial services segment.
Margins this corner, although below our forecast I think you guys mentioned you have a path back to the mid single digit type range in that segment. Maybe you can just provide us a little more color on on bridging there.
And and speak to the mix them, we're coming out between shop and field and the types of turnarounds, whether they are more welding more hardware just trying to understand kind of the margin mix of we're coming out here.
Yes, I'm not sure about welding versus hardware I don't understand that but I do understand that.
Most of the turnaround work, we do we have electrical capability NSR electrical segment. Most of the turnaround work. We do is mechanically related and at centers on Steamfitters and Pipefitters and experienced welders I think the path back comes to two things right more repair work in the shops.
Getting our cleaning set up to full capacity in the first quarter I.
I think its capturing.
More repair work in those shops, and we do that for all the turnarounds not just ours I think it's continuing to add niche product offerings that have higher margins and we continue to do that with refractory.
Some midstream and upstream services and also some of the work we have LTL key work, we do cat Cracker work, we are back into.
California, and a good way we have we have a sort of unique way we can do that.
Because were a union contractor there.
And Mark I think the path back has been dislike it's been we've had six quarters of recovery.
And we continue to look to rebuild that based.
And has been a lot going on right you have mixed crude slates, you have or consolidation industry and we need to stay on top of all that.
I think that Shaw.
Tony is obviously spot on I think clearly.
That team down there this is working extremely hard.
To extract the best returns similar work they have in front of them.
The issue there is the workforce there is a little bit more transients over other businesses and what some of the.
Changes in schedules from our customers perspective, we do find ourselves at times with Unabsorbed labor, which we've talked about in past calls and the fact of the matter is as Weve continued to make both productivity and capital investments in that business with regards to providing.
Additional services and local markets, where we didn't have capabilities, the whitewash stand or wash stands in particular and.
But those things have to be in place well in advance of of either the spring our fall turnaround season or water for us to get throughput and that some of the weather issues. We've had in the southwest region of the country with a lot of rain, we were able to get out of the ground, but unfortunately, we were not operational to take advantage of certainly the spring term.
Around season.
We're hopeful that we're going to see better better pull through.
This fall turnaround season, as well as the spring of 2020 and.
Customers, Tony mentioned consolidation in our customers are being a little bit more disciplined in their procuring a services and a lot of our competitive landscape. There is local in nature and.
There are certain price concessions that have been made with regards to.
So some of our customers that unfortunately.
You know are being imposed on other people that are providing similar services. So it's clearly the.
The opportunities there relative to margin enhancement all have to be driven by mix of work in our productivity.
As opposed to.
Absorption.
Of labor on the market and those who control the labor dictating pricing. So we're hopeful we get back to that at some point, Tom the future about where to south area. Yes, I mean, I think if you look.
Well take a two to three year look at this thing from this point forward.
I think consolidation actually helps people like us.
I am in March right in the short term you have us disruption.
You have local companies that are subscale try to hang on.
But as these consolidation happens and you deal with the majors.
And they have sophisticated organizations that understand it's not just about the costa labor, it's about the productivity that labor. It's about your ability to schedule. It's about the mix of your crew on that workforce on that site. It's about your ability to bring of large amounts of labor when needed like Mark said, how they flex up.
That takes a lot of working capital to do it takes a lot of training to do.
It takes a lot of safety.
Programs to do it takes equipment to have already.
We are uniquely well positioned to do all the above and we've proven that in the past so you're going through this period of customer consolidation and it's been my experience now and other parts of our business and in other businesses many years ago.
The initial phase of consolidation brings all kind of.
Decision, making.
That really isn't as rigorous as it's going to be long term.
And the more rigorous that decision, making becomes the more rigorous that decision, making centered on your ability to execute and not just price the more rigorous that decision making becomes on your ability to have the right people at the right time, the more that favors.
More significant contractors like us there's still operate with local control put all that together I think two to three years from now whatever's available in the market I expect us to be operating in a very good way against that market.
Long term.
Thanks, Dan. Thank you for the considerably more detailed responses than I expected I really appreciate it.
You're welcome shopper.
Thank you we have your next question coming from the line, it's Joe Mondello from Sidoti and company. Your line is now while.
Hi, guys. Good morning, Mccormick questions have been answered, but thanks for squeezing me and I just wanted to ask one or two questions.
Just.
I was wondering what you sort of generally look at that.
You can see sort of indications of whether it's an inflection on the upside or downside.
Downturn in the markets.
And I'm, just asking just because you see the diodes nonresidential construction starts being flat to down the architectural billings index, which is theoretically supposed to be.
The pointing to a downturn and obviously, it's not necessarily reflected in your tone in your commentary as well is actually many of the company's that we've already heard from related to the Nonres construction space.
There are more in line with what you're saying so I'm just wondering what sort of you look at is there anything macro or anything that you can point to that would be giving signs of any inflection in your business. So we look at the macro data to give us a sense are we missing something.
While we look at everything you're talking about Avi Directionally and numerous other FM I mean, it does take one numbers right I mean, Kevin we look at least five rate different sources, alright that tells you macro.
And then I get into like I said before what I've learned in our space has every decisions binary.
So macro might be flat to even down a little bit maybe people are starting to project, but then as has still big market.
And so thats as okay, where are we.
And then then what I look at is what did what do we look like.
Right I mean, we spend a lot of time.
Trying to get Paul from people that are actually at the tip of the sphere right, they're actually doing the work they're bidding the work there in front of the work.
And what do they things going on right and we have bid logs that we look at every week.
For jobs over $10 million.
We look at that velocity, we look at how we're winning we look at one of the things I watch as labor absorption and Petits specific crash, what's going on with the sprinkler fit or national Union because that's.
Across the country.
So we look at all those things.
And some of that gives us an idea what the market is going to do overall.
And then we worry a lot less about what the market's doing overall and we look at our individual places that we have strength and we say are they going to continue to have strength and I caveat. It all this the good visibility we actually have is about six months.
That lets us know that Sam Kay and looks relatively stable to up maybe for the next six to 12 months. She put all that in and then you applied judgment, which is what we get paid to do and that's how we get where we go.
Okay, Great appreciate that color just.
Sort of follow up on that especially the specifically the second part of your answer there.
On the manufacturing side of things.
I think you guys mentioned, you're continuing to see some strength there one of your peers actually reported last week sort of saying the same type thing are you surprised.
I guess, the capex projects that are coming through from the manufacturing side, because that's one thing one part of the economy, where we can certainly point to where we're seeing.
Significant slowdown so is there any caution that all within that market sounds like it's continuing this trend pretty well, but.
Are you surprised to see that strengthen that so what's taking sides.
Yes, no long term.
Yes, I mean, a sense of I don't know, how things move quarter to quarter, and why and what in the capital planning.
With all of our customers.
Multi year basis.
Here's what I think.
I think we have to make investments in your plants in facilities to make them more productive more automated and more efficient.
So you have to make a more energy efficient you've got to make them more automated and you've got to make the logistics work for you do all those things you have a manufacturing facility that can compete and win.
I think theres some exhaustion as factors that are going on now and this is just my opinion.
I think that track China trade.
In lot of waste has already had its impact and what I mean by that is it's good for EMCOR.
And that people are relocating their supply chain back to the us.
And that doesn't have to happen in a major wafer had an impact on people like US go back to the first point I have to have a manufacturing facility. This more efficient more automated and more productive.
I'm, bringing things back from China.
And we're seeing that when I do that.
Peep companies like EMCORE, our position to help us achieve that in the southeast.
The Midwest and other places so yet.
Big picture there is a manufacturer slowdown maybe in things like still and other things, but I think people are repositioning their supply chains for the long term.
Okay. Thanks, a lot guys I'll leave it at that thanks for taking my questions.
Thank you.
Thank you and the idea next question comes on line of Tate Sullivan from Maxim Group. Your line is now line.
Hi, Thank you just a quick follow up you mentioned that the robust acquisition pipeline any can you single out any target geographies at this point I think you have in the past a few if you can't comment. Thank you know you go we start to get a little too specific as we get closer to acquisitions. Okay. I would say, we continue to fill in our white space and.
Also build capability and markets were already in.
And that no capability, where we can.
Alright, thank you for that have a good risk.
Thank you Dave.
Great Hey, thanks for the great questions today.
This will be the last time, we talk.
Collectively until next year will be into 2020 will report out on.
29 team, which we say right here, it's going to be another record year.
Which you all a great ended the year and everybody be safe. Thank you all for your interest and EMCORE Goodbye.
Thank you everyone for participating this concludes today's conference you may now disconnect.
Hello.