EMCOR Group, Inc. (EME) Q1 2019 Earnings Report, Transcript and Summary

Good morning. My name is Adam, and I'll be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group First Quarter 2019 Earnings Call. All lines have been place on mute to prevent any background noise. [Operator Instructions] Ms. Jamie Baird with FTI Consulting you may begin.

Thank you, Adam, and good morning, everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the Company's 2019 first quarter results, which were reported this morning. I would like to turn the call over to Kevin Matz, Executive Vice President of Shared Services, who will introduce management. Kevin, please go ahead.

Thank you, Jamie, and good morning, everyone. Welcome to EMCOR Group's earnings conference call for the first quarter of 2019. For those of you who are accessing the call via the Internet and our website, welcome to you. We hope you have arrived at the beginning of our slide presentation that will accompany our remarks today. Please advance to the second slide. This presentation and discussion contains forward-looking statements and certain non-GAAP financial information. Page 2 describes in detail the forward-looking statements and the non-GAAP financial information disclosures. I encourage everyone to review both disclosures in conjunction with our discussion and accompanying slides. Next slide depicts the executives who are with me to discuss the quarter's results. They are: Tony Guzzi, our Chairman, President and Chief Executive Officer; Mark Pompa, Executive Vice President and Chief Financial Officer; 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 of our website under Presentations. You can find this at emcorgroup.com. With that being said, please let me turn the call over to Tony. Tony?

Thanks, Kevin. And welcome to our first quarter 2019 call. I'll be covering Pages 3 to 6 in my opening comments. We had a record first quarter. We've had the opportunity to use the word record quite a few times over the last three to five years. We had revenues of $2.16 billion, operating income margins of 4.7% and diluted earnings per share from continuing operations of $1.28. We achieved 13.6% revenue growth in the quarter, with 11% organic revenue growth, which is two times to three times the growth rate of the end markets we participate in. Our results show an organization that is disciplined and focused on the task at hand while building for the future. Our remaining performance obligations or RPOs increased 15% versus a year ago period and 5% from year-end to $4.15 billion, which shows very strong bookings and RPO growth despite significant revenue growth in the quarter. Not only are we growing the business organically, we are also growing the business through acquisition, having completed four acquisitions last year, having already executed one acquisition in the first quarter of this year, and we did complete another acquisition early in the second quarter of 2019. We are very pleased with the early performance of all of these acquisitions, and we believe that with successful integration, we will grow them effectively as they open new geographies and services to bolster our existing domestic segments. In supporting that growth, we had strong SG&A control and leverage at 9.6% of sales. To our team, I say thank you, and we say thank you, for the great sustained effort in a market that is providing opportunities to excel. Our Electrical and Mechanical Construction and Services segments continue to operate well across our geographic end market sectors. Our investments in digital tools have served us well. We use these digital tools, such as BIM or building information modeling; measuring system, that's how you lay out a job; and job automation to improve quality, productivity and safety. We are one of the market leaders in design-assist capability, which is why we excel at large, complex, fast-paced projects. Additionally, the learning we can leverage across our platform, on job planning, estimating and means and method of production, are without parallel in our industry. With 6.6% operating income margins on a combined basis in the first quarter, we are converting our opportunities successfully and on a sustained basis. We have exactly the same combined segment margins versus a year ago performance, and when balanced against our two year rolling average operating income margins of 7.4%, we have clearly demonstrated sustained excellence in operations and project delivery. We have said this many times, a 12 month to 24 month rolling average on our margins is the best look at how we are doing, especially in our construction operations, not a quarter-to-quarter view. Our U.S. Building Services segment had an outstanding quarter. We are at 5.4% operating income margins, which is excellent performance in any quarter and even more stellar for a first quarter. We had success across all of Building Services divisions. The investments we have made in digital-enabled work over the last five years in technician training, routing, point-of-use technical information, customer communication, product mix and margin analysis and peer-to-peer learning are manifesting themselves in better margins, productivity and revenue growth. The Mechanical Services division of U.S. Building Services had success in projects, controls, repair service and service agreements. That would be pretty much everything they do. Our commercial site-based services team continue to excel in new contract implementation and strengthening our build operations. And our government site-based services team continue to execute well on its base contracts and winning new work and extending existing contracts. And our energy services team also executed some large, fast-paced work well. This was a stellar quarter by any measure for Building Services. Our Industrial Services segment continues to improve. We had a better spring turnaround season this year versus the year ago period and still see opportunity for both operating income growth and margin improvement. We had good growth and are starting to convert our work into better performance. Mark and team continue to win work and penetrate our core customers for new and expanded opportunities. We see good opportunities and, as of today, expect a normal fall turnaround season. We have done incrementally better, and we expect to continue that through the year. Our U.K. segment continues to develop new customer relationships, win new projects award and perform for our customers. We have come a long way in this segment over the past three years, and our expectation is that will continue. Our balance sheet is strong and positions us well to not only support strong organic growth but also complementary acquisitions and return cash to shareholders. Now Mark, it's your show.

Thank you, Tony, and good morning to everyone participating on our call today. For those accessing this presentation via the webcast, we are now on Slide 7. Over the next several slides, I will augment Tony's opening commentary and review each of our reportable segment's first quarter operating performance as well as other key financial data derived from our consolidated financial statements included in both our earnings release announcement and Form 10-Q filed with the Securities and Exchange Commission earlier this morning. So let's review our first quarter performance. Consolidated revenues of $2.16 billion are up $258.3 million or 13.6% over quarter one 2018. Our first quarter results include $48.4 million of revenues attributable to businesses acquired pertaining to the period of time that such businesses were not owned by EMCOR in last year's first quarter. Acquisition revenues positively impacted both our United States Electrical Construction and United States Building Services segments. Excluding the impact of businesses acquired, first quarter consolidated revenues increased approximately $210 million or 11%. All of EMCOR's reportable segments generated revenue growth during the first quarter, and our $2.16 billion of consolidated revenues represents a first quarter revenue record for the company. United States Electrical Construction revenues of $528.1 million increased $73.3 million or 16.1% from quarter one 2018. Excluding acquisition revenues of $18.3 million, this segment's quarterly revenues grew organically 12.1% 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 power submarket sector, were partially offset by revenue declines within the health care and transportation market sectors due to the completion or substantial completion of certain large projects. United States Mechanical Construction revenues of $752.4 million increased $67.7 million or 9.9% from quarter one 2018. This segment's revenue growth was primarily attributable to an increase in revenues from commercial, manufacturing and water and wastewater projects, partially offset by a decrease in hospitality market sector activity. EMCOR's total domestic and construction business first quarter revenues of $1.28 billion increased $141 million or 12.4%, of which 10.8% of such growth was generated from organic activities. United States Building Services quarterly revenues of $512.1 million increased $57.3 million or 12.6%. Excluding acquisition revenues of $30.1 million, this segment's revenues increased $27.2 million or 6% organically. Revenue growth was experienced across all divisions within this segment other than government services due to reduced levels of IDIQ projects activity resulting from a smaller contract base. United States Industrial Services revenues of $258.6 million increased $59.4 million or a strong 29.8% as a result of higher field services and shop services activities as we executed against a more normalized spring turnaround schedule as compared to quarter one 2018, which was negatively impacted by the residual effects of 2017's Hurricane Harvey. United Kingdom Building Services revenues of $107.5 million increased $635,000 or 60 basis points quarter-over-quarter as this segment continues to grow its customer base and execute against a strong pipeline of project opportunities. Quarterly revenues were negatively impacted by $7.3 million of foreign currency movement as the pound sterling remains pressured due to the continued uncertainties surrounding the terms of the UK's exit from the European Union. Please turn to Slide 8. Selling, general and administrative expenses of $206.2 million represent 9.6% of revenues and reflect an increase of $15.1 million from quarter one 2018. SG&A for the first quarter of 2019 includes approximately $7.2 million of incremental expenses, inclusive of intangible asset amortization from businesses acquired, resulting in an organic quarter-over-quarter increase of approximately $7.9 million. This organic increase is primarily due to employment cost as a result of increased headcount to support our strong organic revenue growth as well as increased incentive compensation expense given stronger anticipated annual operating performance in the current year than reported in 2018. Additionally, we continue to absorb higher information technology costs due to certain initiatives that commenced in the prior year. Reported operating income for the quarter of $102.3 million represents 4.7% of revenues and compares the $78 million or 4.1% in 2018's first quarter. This represents a $24.3 million increase and 60 basis points of operating margin improvement period-over-period. Consistent with our quarterly revenue performance, all reportable segments have experienced increases in operating income, and our consolidated operating income and operating margin represents a company record for a first quarter. Our U.S. Electrical Construction Services segment operating income of $43 million increased $7.1 million from the comparable 2018 period. Reported operating margin of 8.1% represents a 20-basis-point improvement over last year's first quarter. The increase in the segment's operating income and operating margin is primarily due to increased gross profit from activity within the commercial market sector, inclusive of certain telecommunication projects, partially offset by a reduction in project activity within the transportation market sector due to the completion or substantial completion of several large infrastructure projects that were active in early 2018. First quarter operating income for U.S. Mechanical Construction Services segment of $41 million represents a $1.4 million increase from last year. Operating margin of 5.4% is slightly below 2018's quarterly performance due to the mix of work currently in process, including a greater number of projects in the earlier stages of completion, which typically have lower gross profit margins than projects that are in the later stages of execution. This trend is partially evidenced by the continued sequential growth in this segment's remaining performance obligations since the first quarter of 2018. Our total U.S. Construction business is reporting a 6.6% operating margin for the quarter, which is consistent with 2018's quarter one operating margin performance. Operating income for U.S. Building Services of $27.5 million represents 5.4% of revenues and a $10.4 million improvement over last year's first quarter. Operating margin improved 160 basis points due to a more favorable mix of revenues, including greater project activity as well as maintenance, contract scope expansion within their commercial site-based operations. Our U.S. Industrial Services operating income of $9.6 million represents 3.7% of revenues and an increase of $6.2 million from last year's first quarter. The increase in quarter-over-quarter performance within this segment is due to improved execution as we experienced a more normalized spring turnaround season, resulting in increased maintenance activities across our customer base. As a reminder, turnaround activities for 2018's first quarter were depressed by the residual effects of Hurricane Harvey on our customers' planned maintenance schedules. This segment's results for the current period additionally benefited from the recovery of $3.6 million pursuant to a legal settlement. U.K. Building Services operating income of $4.1 million represents 3.9% of revenues, which is an increase over last year's first quarter by approximately $370,000. Consistent with my revenue commentary, this segment's operating income performance was negatively impacted by the decline in the value of the pound sterling, which reduced reported results in U.S. dollars by approximately $300,000. We are now on Slide 9. Additional financial items of significance for the quarter not addressed on the previous slides are as follows. Quarter one gross profit of $308.8 million represents 14.3% of revenues, which is improved from the comparable 2018 quarter by $39.6 million and 10 basis points of gross margin. The increase in consolidated gross profit is a result of increases across all of our reportable segments due to both higher volume as well as good execution. Diluted earnings per common share from continuing operations is $1.28, which compares to $0.94 for the quarter ended March 31, 2018 and represents a 36.2% improvement. Our tax rate for the first quarter is 27.5%, which is slightly higher than our 2018 first quarter rate of 27% due to an increase in certain nondeductible expenses in the current period. At this point in the year, I am still comfortable with the full year estimated range for 2019 of 27.5% to 28.5% as communicated last quarter. As a reminder, our first quarter tax rate typically represents one of our lowest quarterly rates due to the tax benefits recognized upon divesting of certain share-based compensation awards. Lastly, on this slide, we utilized $57.4 million of cash from operating activities, which was a slight improvement from 2018's first quarter. As communicated on each of our first quarter earnings calls, quarter one historically represents our weakest cash flow quarter of each year due to the funding of our previous year's incentive compensation awards each February and March. Additionally, with 11% organic revenue growth during the quarter, we have seen a resulting increase in our accounts receivable and contract asset balances from the end of 2018. Please turn to Slide 10. EMCOR's balance sheet remains sufficiently liquid as represented by cash of approximately $252 million and modest leverage demonstrated by our debt-to-capitalization ratio of 14.2%. Our cash balance is reduced from year-end 2018 as a result of cash used in operations, as previously referenced, as well as cash expended for businesses acquired and purchases of property, plant and equipment. Working capital levels have decreased due primarily to the reduction in cash, as previously stated, partially offset by increased accounts receivable and contract assets. The increase in goodwill is due to the business acquired during the first quarter as well as purchase price adjustment associated with the business acquired in the fourth quarter of 2018. Intangible – identifiable intangible assets have increased as a result of the acquisition of the aforementioned business in 2019, partially offset by $11.6 million of our quarterly acquisition expense. Total debt, excluding operating lease liabilities, is approximately $299 million and represents a slight increase from year-end 2018 due to an increase in finance lease liabilities. We remain in a strong position to continue to execute against all of our strategic objectives and look forward to enhancing our company for all of our stakeholders. With my prepared commentary concluded, I will return the call to Tony. Tony?

Thank you, Mark, and first quarter is good, right?

Yes.

One period. I'm going to be on Page 11, which is remaining performance obligations or RPO by segment and market sector. And just a reminder, we moved to RPOs the last year in our first quarter call versus backlog reporting. We fully explained it then, and now this will be the first period we have comparability between those numbers – I mean, RPO and RPO. We had a strong bookings quarter. Total RPOs at the end of the first quarter were $4.16 billion, up $553 million or 15.3% when compared to the March 31, 2018 level of $3.6 billion. Quarter one activity also was $191 million over the December 31 level of $3.97 billion. That's pretty good considering the organic growth we had in the first quarter. The demand environment continue to be strong for our specialty construction and operating and maintenance service capability. And as we've already stated on the call, our companies are executing at a very high level in a good market, hence why we're winning more and more work. Domestic RPOs have increased roughly 16% or $561 million since March 31, 2018, driven mainly by our Mechanical Construction segment as they reload projects across most market segments, including some complex and challenging industrial and commercial projects. Similarly, our Mechanical Services business and Building Service in the U.S. Building Services segment continues to grow its RPOs as demand for HVAC retrofit and maintenance projects continue as our customers seek to improve the energy efficiency and reduce the ongoing maintenance costs of their building systems and controls. RPOs for this group have increased $137 million or just over 41% from the year-ago period. Moving to the right of the page, we show RPOs by market sector. Our growth, as I just mentioned, is being led by strength in commercial and the industrial sector projects where we have leading positions, for instance, in data center infrastructure, food processing and other manufacturing projects. Additionally, we are seeing bidding opportunities in most other market sectors. And as Mark mentioned in his earlier comments, we are in a startup phase in some large projects, especially in our Mechanical Construction segment. As we have said before, given our geographic presence and diversity of end market sectors and services, we are a pretty good proxy for the nonresidential market in the U.S. A little bit of a broken record here for Westerners over the last 2 quarters, our markets are healthy, continue to have momentum, and that activity dovetails with most industry forecasts of mid-single-digit growth for that nonres market in 2019. And we are currently outperforming the end market growth of those nonresidential markets. It's way too early for us to see into 2020. However, we don't see any storm clouds on the horizon. With that, I'll wrap up my discussions on Pages 12 to 13. With respect to full year guidance, we are pleased by our strong start in the first quarter, and we expect the strong operating environment to continue in 2019. Accordingly, we are raising our 2019 guidance range for our earnings per diluted share from continuing operations from $4.70 to $5 at the low end and at the top end of our range from $5.40 to $5.50. We now expect revenues of $8.5 billion to $8.6 billion versus prior guidance of $8.3 billion to $8.4 billion. This simple math at the midpoint is we are increasing our midpoint guidance by $0.20 of diluted EPS and our revenues by $200 million. So we're going to continue to focus on the superior operational execution. And what do I mean by that? We're going to continue estimating well, exerting strong project controls and employing excellent labor management. We know how to do that. We're going to continue developing new customers and strengthening our relationships with existing customers more across each of our geographic reporting and market segments and sectors. And we're going to methodically and successfully roll out new customer opportunities in Building Services, both here in the U.S. and in the United Kingdom. Planning for and executing more summer work in Industrial Services and continuing to rebuild our Specialty Welding Service business. And finally, maintaining cost discipline always and forever and sweating the small details in our business is something that is a hallmark of EMCOR Group. Looking ahead, we believe we have pretty solid end markets to operate in throughout 2019. We have a robust pipeline of acquisition opportunities to review and hopefully execute. We have strong organic growth to fund, and we will seek to return cash to shareholders through share buybacks and paying our dividend. And with that, Adam, I'll be happy to take questions.

[Operator Instructions] And your first question comes from the line of Tahira Afzal with KeyBanc.

Hey folks good morning and congrats to you and your team. A great quarter.

Thanks, T.

So you know my first question, what it's going to be? I mean, that low end of your guidance, what does that embed? What kind of macro scenario does it embed? Because it doesn't seem to jive with your confidence around the outlook.

T, we're here in the first quarter. We try to let almost all of the year-over-year improvement in the first quarter versus our low end. Look, I guess it's to say we book and ship or book and build a pretty good portion of our backlog as the year goes on. With all of the disruptions that could happen that we don't see right now, it's just being our typical cautious self at the low end of the range. The guidance is the guidance.

Okay. And then I guess as a follow-up. You had in your press release as well, Tony, some commentary on plans around the balance sheet and how you want to flex that. Any more thoughts and updates there? Are you seeing a good strategy on the acquisition side? Or are you still leaning a little more towards buybacks at this point?

T, we've always been known for at least over the last five or six years, balance in our capital allocation. We are seeing good acquisition opportunities. We've bought six companies if you go from the start of the second quarter this year through last year. We're pleased with what we've been able to buy, and they brought us geographic presence and capabilities, both in markets that we are in and haven't been in. We would buy across any of our domestic segments and the strength in those domestic segments. However, if the acquisitions aren't going to happen, and against that with the flexibility in our balance sheet, we'll continue to allocate capital and return cash to shareholders. We certainly have the dividend in place, and I think we've been pretty good about returning cash to shareholders over the course of the year through buybacks.

Okay. And last question for me, Tony. I think we also – the news article is out on a potential takeover rumor. Any comments on that?

No comments, T.

Thank you, Tony.

And your next question comes from the line of Noelle Dilts with Stifel.

Good morning, Noelle.

Hi, good morning.

Good morning, how are you?

Doing well. Thank you. How are you?

Good. Good quarter, right.

Great quarter. So I was hoping you could just expand a little bit upon, generally, the labor environment and how you're thinking about that moving forward. And you touched on this, but sort of how EMCOR is approaching – kind of dealing with the tight labor environment and really thinking about costs – I'm sorry, pricing and productivity moving forward.

Yes. Look, it's good to be EMCOR in a tight labor environment. And why do I say that? One, by the nature of what we do, we tend to be at the top end of the food chain. So people want to gravitate to higher scale, and we can recruit them both in a union and nonunion environment, or in certain environments, convert people from nonunion to union, especially on the electrical side. That can be a really good thing for us. We are – have leading companies in almost every market we operate in. And if you think about what a tradesman – you heard me say this a lot. What is a skilled tradesperson care about when they choose an employer? The first part is, am I going to get paid every week? It will actually be a slam dunk in a good market just as many contractors. Or more studies have shown sometimes sell in good markets versus bad, they stretch their cash, and they can't pay their tradespeople. That's not an issue at EMCOR. The second thing, and these are in no particular order, is, are you going to keep me safe? By nature of what we do, it's dangerous work. It's high-pressure work. It's highly-skilled work. You have to be trained. And are you going to keep me safe? And are you going to train me? We win that hands down. We have industry-leading safety. We care about that every day. It's a core value of EMCOR. It's definitely embedded in our people. Always part of our core values. Mark is known to be a little tough on cost. But in all the years I've known him, and we've worked together, I've never seen him turn down a safety investment, whether it be for personal PP&E or to automate part of our shops or to put workplace hardening on larger construction sites, we're going to be there for a while. And so first one, we're going to get paid. We're going to keep you safe. Third one, am I going to be supervised by people that actually know what they're doing and are very skilled at what they do? And do I have a career path to advance if I want to be a foreman, if I want to be a superintendent? And do the people all the way through the top of the company care deeply about what I do, have deep respect for what I do and understand what I do? Well it's clearly, up through me, the people around the table with me, the people leading our segments absolutely understand what our skilled tradespeople do, and we have deep respect for them, and we're here to support them. And finally, if I do a good job for you, are you going to have more work for me? We check the block on all four of those. Now what would I not want to be in this tight labor market? I certainly wouldn't want to be at the lower end of the trade scale. I wouldn't want to be trying to fill workforce up with $10 to $12 an hour doing landscaping work. I would not want to be a second tier contractor that has a limited outlook for success at any trade. I would not want to be a painter right now and try to recruit there. So I like our position in a market like this. Quality attracts quality, and I give enormous credit to our subsidiary leadership in the field and the reputations that they have built combined with EMCOR over this many years to attract the best trade – skilled trades workers and supervision in the industry.

That's very helpful. The second question is just around the Industrial Services business. Again, could you just go a little bit deeper into how you're thinking about the outlook there for – around refinery turnaround and petrochem turnaround as you head into the back half and even early thoughts on 2020? And this is the second quarter for us that revenues, well, exceeded our forecast. Do you think – to what extent might some of that be kind of catch-up to last year versus base demand? Any thoughts on quantifying that?

It's really hard to talk about catch-up in the refining space or any process plant. Because once you miss something, it's not like you now go to the two of them. So the idea is to try to get back on normal schedule. Now one of the things that you look at is we do believe we're in a more normal market. There has been consolidation in that market, and there continues to be consolidation in that market, which we think long term favors us, but short term continues to cause disruption on size and scope of turnaround and also timing. We've had some work shift from first quarter to second quarter. We like our positions with the major refiners, and we like how we're being able to rebuild the California business, which I know you know the business. There was a change in labor law there that has been tough to navigate through. But being EMCOR, who we are and understanding how to work in a union labor environment, we think we have a pretty good solution to that, but it takes time to develop and develop the right way. That's really not been a big part of the resurgence so far. But the other thing that's different is we're learning how to operate in a world where there's less sour crude coming from Venezuela and pieces likes that – places like that and more like sweet crude. Long term, we feel good about where we are. We like our position, we like our breadth of services. I think our biggest challenge now is to be able to be flexible enough to adapt to our refining customers and at the same time rebuilding our Specialty Welding business, which has always been our flex capacity. We've hired new management there. We're excited about that new management. And we think that, that business is going to be a slow rebuild, but it won't be a forever rebuild. Mark, I mean you follow all the numbers closely in that business.

Yes. Just to add to Tony's commentary, I think the team has never lost their focus. Obviously, market conditions have been less than favorable to us. I think everybody has breathed a collective sigh of relief that we're starting to see more normalized site activity, and we continue to be very strong in our position with our customers, and our record – our performance record speaks for itself. So I – like Tony said, as much as we like to have the whiplash return to historical results, at least right now looking at the horizon, that doesn't appear that's what we're – the situation that's in front of us. But having said that, we're incrementally slowly building on our success certainly from late 2018, and we're confident that we're going to continue to see that as we go through the remainder of 2019 into 2020.

Thanks so much.

Thanks Noelle.

And your next question comes from the line of Adam Thalhimer with Thompson, Davis.

Good morning, Adam.

Hey, good morning, guys. Great quarter.

Thank you.

Thank you.

Hey, I'm trying to understand Q1, the revenue a little better, because you had 11% organic growth, which was not necessarily predictable from your backlog growth late last year. And then the bookings were super strong with backlog up 15, 16. So it seems like you had a lot of book and burn work maybe come in, in Q1 or just help me with the top line a little bit.

Yes. I think it's yes and yes to your question. We had good success in book and burn work. We built backlog. And I think what is a sign – and look, there's not a big plunk of backlog that came in, in Q1. Yes, there's some jobs, $30 million, $40 million. But for the most part, we're winning by converting – we're converting a lot of first downs right now. And again, go back to the question that we just had earlier. So I'm an owner. I'm a construction manager. I'm an EPC. I'm a general contractor. What am I worried about right now. The first thing you always worry about, is this contractor going to be able to finish this job financially. And do they have the technical wherewithal to actually even scope and bid it the right way. Most people don't worry about that with an import company. In fact, they don't worry about it at all. Then you get to the second point is, who's going to have the best chance to marshal the technical resources to deliver on that job. And go back to that question about how you attract technical labor. We are a very fortunate company in that we have some of the best labor relations at the local level of any company in this industry, and this is a destination of choice for skilled trades supervision and skilled trades worker. Mark?

Yes. I think the only thing that I would add to that is, clearly, weather was favorable from a productivity perspective in the quarter on the project side. Obviously, there were certainly a fair amount of inclement weather throughout the United States, but it was not in pockets of presence where we're extremely active right now. So a year ago at this time, we certainly had the counter situation until the beginning of 2018. So that certainly allowed us to execute without having to navigate exterior factors that would preclude us to getting to the job site and operate efficiently.

And yes, and I would add also, we're starting to see the investments, especially on the construction side when we think about revenue. And go back to that point I made about making sure that you can marshal the technical resource to actually complete – complex more quickly. Yes, people know we can – we have the best design-assist capability. They know we can pre-fabricate, and they know we're going to bring a ton of creativity in thinking solutions to get that job done fast, right with the right amount of labor, coupled with we have some really interesting things we do on the initial parts of a large job because of our use of some of the Trimble tools and others that I would say are market – I know we're market-leading. We're as good as anybody in the industry at that. And we can put the capital work to do that. It's tiny capital for EMCOR. But for a local contractor, this $20 million to $30 million contractor, that would be a pretty big investment they couldn't share.

And the only thing I would add, and not to jump in here again, but I think the other thing is when we're looking at the remaining performance obligation value. Just to remind everybody, the disconnect between that and historical backlog was roughly $400 million to $500 million of contract value that's no longer being reported in RPOs. And obviously, that's generating revenue, and it's generating incremental project opportunities off that base level revenue that when you're tracking that number from the beginning of 2018, it's not in there at all. So that's a little bit of a wrinkle as well with regards to reconciling to our actual top line growth.

Yes. Okay. That makes sense. As you guys are talking, I'm thinking pricing must be really good right now.

I wouldn't say that. I think that if you bifurcate the market, the smaller jobs are what they are. People are more worried about getting those done right now, gaining the energy efficiency, gaining the retrofit work and minimizing disruption. It's sort of normal market conditions versus what it is in a downturn when large contractors try to do that work and fail. The mid-market is still very competitive, and large jobs are competing against the budget in time. I mean if pricing gets out of control on a large job, it's not going to happen. Or it's going to get broken up into smaller pieces, and we're not going to be able to keep the lion's share of that job. It's all about execution, and that is where we spend our time.

All right. So let's end on that, can you help us – you had your best electrical margin in five quarters, your first time over 8% since Q4 2017. Just thoughts on how that trends through the year. And then on – and same question on industrial, Tony, I mean 4%. I thought you could do a little better on that revenue number.

So the answer on industrial is yes. We do expect to do better. And on electrical, we don't look at things on a quarter-to-quarter basis. On a combined basis, we're 7.4% on a rolling 24.

Yes. And then specifically through electrical on a trailing 24, operating margin performance there has been 7.8%. So clearly, we outperformed the last 24-month trend. But once again, it's solely dependent on mix and where we are in the project cycle. So mechanical, as I mentioned earlier, was a little depressed in the quarter because of a lot of new project startups. You can see that same thing happening in electrical as we move towards the year. Not all of our project start in the first quarter, and not all of them complete in the fourth quarter. So...

And look, the thing that doesn't maybe jump off the page actually is that we're particularly – that we're excited about as management team. 9.6% SG&A or percentage of sales tells us we're getting leverage. We saw this leverage a couple of years ago, moved away from it a little bit. But the growth in industrial, coupled with the growth we've had overall, 11% organic growth, we can hang onto some of that SG&A leverage. I think that's an area of outperformance versus what we would've thought in first quarter that we hope can carry at least part of it through the year.

Okay. Perfect. I’ll turn it over. Thanks guys

Thanks Adam.

And your next question comes from the line of Brent Thielman with D.A. Davidson.

Good morning, Brent.

Hey, Good morning. Great quarter.

Thank you.

Tony, just back on the industrial margins, I just wanted to get a few more thoughts from you and just in terms of what it takes to kind of drive those margins back to the ranges you've talked about before. Is it just folks in the field longer renewing contracts? What will drive that?

I think it's a three-part answer. The first thing that needs to happen is we need to continue to improve and rebuild our shops, and that's well underway. We like the direction our shops are going. We have an integrated shop in La Porte that goes all the way from cleaning, all the way through inspection, to repair and then back out. And the washstand is very much a bottleneck on the turnaround. We should be opening. We have soft opened one in Baton Rouge. It should be fully operational for the fall turnaround season. That will take Baton Rouge, and so better, more margins from the shops. Second thing is better labor productivity in the off season, which we haven't got to yet. That's where the summer work becomes important. Rebuilding our Specialty Welding business, which can – in a life cycle of business can be rebuilt relatively quickly. We're talking six to 14, 15 months, not years. We need to do that. We've got a very good management team. We hired the very experienced in the industry. And then on the turnarounds themselves, there's some dynamics that have changed. Consolidations happened in the industry. Crude mix has changed. We need to be smarter and expand with our customers. And then rebuilding California is important also. We were never huge as far as the revenue base is in pulling work out of Latin America. But when that work went to zero, it can have an impact, and we've had to reconfigure and move away from that. We're not – we talked to our management team in industrial. They aren't satisfied with these margins. We're not satisfied with them. And clearly, we want – you've got to get to 5.5% before you get to 6.5%. But we haven't lost interest over the next 18 months to move to 6% to 7% operating income margins. Mark?

Yes. I have nothing to add to what Tony said. I think, once again, we're just slowly making incremental improvements from where we were. And presuming that the market continues at some level of strength, I believe, with our team and where we're positioned, we're going to continue to execute well, and we should see some margin uplift as we move forward.

As Mark said earlier, this is as focused a team as we have anywhere at EMCOR, and this is as creative a team as we have anywhere at EMCOR.

Okay. Appreciate the color there. On mechanical, the margins there, the last couple of years, you started the year off kind of lower in 1Q, and then the business kind of drives toward that, call it, 7% to 8% each consecutive quarter thereafter. You have these big – sounds like big manufacturing jobs in early stages. Is the mix of work in mechanical really that dissimilar from what you've seen over the last couple of years?

Yes. I mean, once again, I mean it does – it clearly ebbs and flows, but I think as we're navigating the earlier parts of 2019, I would say that the work – the portfolio of work that, that segment is executing is more akin to what we saw in 2017 than in 2018. So clearly, we're anticipating that you're going to see improvement in margin performance. But once again, that's making the presumption that there aren't some additional large contract wins that come into the portfolio that we have to start up and then that could obviously have the impact of suppressing or dampening margin performance, and that would be a good product to have.

We'll take that number, but we said the 24-month rolling...

Yes, so with regards to the trailing 24-month operating margin performance for our Mechanical Construction segment, it's 7.1%, and we don't see anything in the remaining performance obligations or with execution patterns that would indicate that we will not see us performing in line with, certainly, those trends over the last two months.

In that gap we see between electrical and mechanical over the last 24 months makes sense to us, just to remind everybody. Electrical tends to be more labor content on the job. We purchased a little more subcontractor work and materials on the mechanical job and get less markup there for that versus our labor.

Great. Okay. And then, Tony, as you alluded to – this is the best first quarter for Building Services margins that you ever had as far back as I can see. It seems like a lot of things went right within this segment to produce that, but kind of also within the outlook, it seems like many of those things kind of continue on here and just a lot of good momentum in general. And I guess I'm curious, the margins have been moving up for the last several quarters. Just curious if you think you're seeing a new bar for profitability in that segment.

I think you know us well enough, Brent. We like to win – we like to get close to winning or win first before we declare a victory. That's our DNA. A thousands of small things go right. But what I will say, and what I think is happening, Mike Bordes and his team have done a hell of a job. Think about what's happened over the last couple of years. We had some of those big DoD contracts and some big site-based contracts that we lost in the middle of 2016 to the middle of 2017. And they had been in declining profitability. They were both won by people that took them below our cost, and we had won one with a 13-year relationship, 14-year relationship and a couple of the big DoD jobs. We had won every award here. So it's clearly not performance-related. So we're smart bidders. So Mike and his team said, okay, we got to reconfigure. We've implemented a couple larger contracts with more self-perform, mix with them. We've honed down our vendor-managed part of the business to things that we can execute very well on. We withstood the disruption in retail in that part of the business. We continue to change the mix towards more energy services and more mechanical services, which is nothing we ever said don't mix the two. And we won some nice new contracts that allow us to leverage our own and field infrastructure and gain some productivity there. And we were looking at some stuff recently. We're starting to pick up overhead absorption on that field organization as we can serve more people. Put all that together. And then we put a lot of investment in technical infrastructure. What I mean by that is some of the data architecture or digital tools – and look, I don't talk a lot about that stuff because that would be like talking about a screwdriver and a drill or a press in a shop. It's how you do business when you're a sophisticated contractor, whether it be on the service side or the construction side. And when you have the kind of folks we have in the field that are always looking to get better and always seeking an edge in productivity, the way we do thing at EMCOR is we don't make big brand pronouncements. We execute first on a pilot, and we execute very well on that pilot, and then we bring the case together and figure out how to expand it across that entity. So the things Mike and his team have done around technician training remotely through routing, through putting the right information in the hands of that technician on the site when they need it versus having to go look for it, to do sharing of information across. I mean one of the coolest things I've seen in that business, and it's – I've been around that part of the business for 20-some years, the mechanical service part, the break-fix part, is when you saw a technician in California face-timing with a technician here on the East Coast about how to fix a pick controller, only EMCOR can pull that off outside of the OEMs, and that's one of the advantages we have. We're an independent, and we can do it across multiple platforms. And because we push really that learning down through the organization, we have the tools for people to be able to do that, and then you expand that to some of the margin and mix analysis we can do so that we can share some of the tweaks you can do about how you structure customer contracts really to help our margins but also help the customer get a better product. I mean that kind of focus has served us well, and I think you're seeing a lot of that come to fruition. Let's hope the momentum continues. Obviously, we believe it will, and that's one of the reasons we took guidance up.

Okay. I appreciate that. And one last one if I could that the growth in sort of short duration work really between both mechanical and electrical has been pretty huge. I'm curious, does that tell us something more about the cycle or something about what EMCOR is doing?

I think it's both. I think it's a cycle that continues to look for opportunities to upgrade and improve facilities. Almost all of that work is retrofit work both in our mechanical and electrical segments and also mechanical services. The second thing is go back to our point on technical resources. Our folks can marshal the right resources to get that work done, and I think Mark would tell you the same thing. The hardest work we actually do in some cases is that retrofit work because you have to do it without disrupting that law firm. You have to do it without disrupting that educational facility and especially on the higher edge side. You have to do it without disrupting that hospital and health care facility. And you surely have to do it without disrupting that manufacturing facility. And so the planning and the work and making sure that you get very skilled people – and these crew sizes for this sort of million dollar or less job are somewhere between six and 12 people at peak while at the same time you're bringing some element of subcontracting in, these are logistical and technical experts at EMCOR that make that happen every day.

Okay. Thank you for the color. I appreciate it. Congrats again.

Okay. We're done.

And there are no further questions at this time. I'll turn it back over to management.

Okay. With that, we're done. We thank you. Thanks for the great start to the year, to my EMCOR colleagues, and we'll talk to you all some time in July. Bye.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.