Good morning. My name is Lara, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group Fourth Quarter and Full Year 2019 Earnings Call. [Operator Instructions] Ms. Jamie Baird with FTI Consulting, you may begin.

Thank you, Lara, and good morning, everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the company's 2019 fourth quarter and full year results, which were reported earlier 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. Good morning, everyone. Welcome to our earnings call. And I hope you have arrived at the Internet site, and welcome. We hope you have arrived there, where we have our slide presentation that will accompany our remarks today. Please advance to Slide 2. The presentation and discussion contains forward-looking statements and certain non-GAAP financial information. Page 2 of the slides 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. Slide 3 depicts the executives who are with me to discuss the fourth quarter and full year 2019 results. They are Tony Guzzi, Chairman, President and Chief Executive Officer; Mark Pompa, 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 of our website under Presentation. You can find us at emcorgroup.com. With that said, please let me turn the call over to Tony.

Thanks, Kevin, and I'm going to focus my discussion on the full year results. Mark will pick up some of that, and he'll also speak to the fourth quarter of 2019 in detail. I'm going to be covering upfront here pages 4 through 6. Overall, we had a terrific 2019. We finished the year in good shape, with record financial performance on almost any relevant metric. We set records for revenue at $9.17 billion; operating income at $461 million; net income, $325 million; and earnings per share from continuing operations of $5.75. We had record bookings of $9.1 billion, had overall revenue growth of 12.8% with organic revenue growth in the year of 9.3%. We had cash flow from operations of $356 million, which exceeds our net income. We leave 2019 with flat Remaining Performance Obligations or RPOs from the year-ago period, which is quite good considering the strong organic revenue growth that we had in 2019. Our team executed extremely well and made the most of the opportunities that we had to serve our customers. We also executed well in that we matched our record annual operating income margin of 5.0%. We exit the year with a robust balance sheet and flat Remaining Performance Obligations of $4.036 billion despite that exceptional organic revenue growth. Adding to such strong organic growth in 2019 were acquisitions totaling $300 million of purchase price. I'm now going to focus my discussion on segment performance for the year. Our Mechanical and Electrical Construction segments had another great year, and we continue to execute well in these segments. On a combined basis, we grew revenues to $5.6 billion, with underlying growth of 13%, with organic growth of 9.3%. Operating income margin was a strong 7.0%. We are winning small, midsized and large projects across all…

Thank you, Tony, and good morning to everyone participating on the call today. For those accessing this presentation via the webcast, we are now on Slide 7. Over the next several slides, I will provide a detailed discussion of our fourth quarter 2019 results before moving to our full year 2019 performance, some of which Tony outlined during his opening commentary. As a reminder, all financial information discussed during today's call is included in our consolidated financial statements within both our earnings release announcement and Form 10-K filed with the Securities and Exchange Commission earlier today. So let's discuss EMCOR's fourth quarter performance. Consolidated revenues of $2.4 billion in quarter four are up $174.6 million or 7.8% over 2018. Our fourth quarter results include $93.5 million of revenues attributable to businesses acquired, pertaining to a period of time that such businesses were not owned by EMCOR in last year's fourth quarter. Acquisition revenues positively impacted each of our United States Electrical Construction, United States Mechanical Construction and United States Building Services segments. Excluding the impact of businesses acquired, fourth quarter consolidated revenues increased $81.1 million or 3.6% organically. All of EMCOR's reportable segments other than our Industrial Services segment experienced revenue growth during the fourth quarter of 2019. United States Electrical Construction revenues of $564.5 million increased $30.4 million or 5.7% from quarter four 2018. Excluding acquisition revenues of $27.7 million, this segment's quarterly revenues grew organically 0.5% versus the prior year. Revenue gains within the manufacturing, institutional, commercial and health care market sectors were substantially offset by revenue declines within the transportation, hospitality and water market sectors due to the completion or substantial completion of certain large projects during 2018 or early 2019. United States Mechanical Construction revenues of $895.6 million increased $100.9 million or 12.7% from quarter four…

Thanks, Mark. End of year, fourth quarter, there's a lot to talk about, and it's always nice to talk about a record year. I'm going to be on page 14, and it's about Remaining Performance Obligations. In short, we continue to see opportunities in the nonresidential market as we move into 2020. Total RPOs at the end of the fourth quarter were $4.04 billion, up $73 million or just about 2% when compared to the December 2018 level of $3.97 billion. Book-to-bill measuring fourth quarter RPO total over third quarter RPO was over 1, which is fairly strong activity when measured against our fourth quarter revenue of over $2.4 billion. We said this a lot, our business is not a quarter-to-quarter business, it never has been, it never will be; and it very much depends on the flow of our projects and our maintenance operations. We have large and small construction projects. We have time and material work that's not part of RPO that drives then RPO activity. We have operations and maintenance services. We have industrial services that lead to projects overlaid on the nine RPO markets we report. One way to look at our success in 2020 is to look at the average RPOs in 2020 what we expect over 2019. Average RPOs in 2019 was $4.11 billion versus an average of $3.80 billion in 2018. And given our various segments generating 12.8% year-over-year revenue growth, it means to me we are executing large and small, faster-burning projects at a very high level, and we continue to see those opportunities ahead. Again, as we have said before, I believe a longer lens is a better gauge for our success. Domestic RPOs have increased roughly 2% or $80 million since December 2018. Our construction segment RPO activity's just a…

Thank you. [Operator Instructions] Your first question comes from the line of Brent Thielman from D.A. Davidson. Your line is now live.

Thanks. Good morning, congratulations. Great year.

Thank you.

Maybe starting on industrial services. You had a really solid spring turnaround in 2019. And I'm just curious if it's too early to call whether you think this year is going to be better, if you can grow off those big 2019 contributions you saw from the segment?

I think you said it right when you started it. It's too early to call. We're in the mid of a midst of a good spring turnaround season. We'll see how it ends up here, and we'll have a pretty good visibility that at the end of the in our first quarter call, that some of that might leak in the second quarter. Mark, what do you see?

Yes. I think, Brent, we're obviously endeavoring to do whatever we can for our customers. And we have a lot of labor mobilized. But as Tony said, it's a little early right now to call. I guess, when we get a preview of February results, we'll know a little bit more, obviously.

Okay. Okay, fair enough. And then Building Services had a lot stronger growth in 2019 than we'd expected, I guess. But should we be thinking of that still as kind of a mid- or high single-digit organic growth business in 2020, so sort of a new norm changed.

I think you're thinking about it the right way, the mid-single digits. Just like some of our construction businesses have small project capability, that can accelerate in a given time period. And of course, we brought on some significant multisite maintenance contracts in 2019. And that will be dependent on what kind of project work comes off of those contracts. So they're not quarter-to-quarter businesses, but if I look at the end of the year, and it was in the mid-single digits, I think we'd be satisfied.

Okay. And then just because it was called out in the presentation, but these large data infrastructure projects, I guess, 2-part question. Is that included in industrial or commercial RPOs? And then given the complexity of these, just kind of curious of the margin profile over the course of the project. Are they accretive? Are they in line to your construction segments?

I think the way to think about them is they would be in commercial for the most part as far as the RPO question. They burn fairly fast for significant projects. I think the margin is very much dependent on contract structure and type of work we're doing, whether we're buying the materials or not, or whether the customer is paying for acceleration. I would say net-net-net, it's really good business for EMCOR because we can deliver it. We have very strong expertise in it, and we deliver great value for our customers when we do that work.

Okay, thank you.

Thank you. We have your next question coming from the line of Adam Thalhimer from Thompson Davis. Your line is live.

Good morning, guys. Tony, I'm almost surprised that you had a good fall turnaround season, and the spring is going well. What's your high-level view of refinery right now?

High-level view, very sophisticated customers, consolidating platforms. EMCOR is pretty well positioned in it, some vendor flux, demanding as hell, and you better be able to execute in March for the right resources at the right time.

So you're gaining share?

I don't know. I think you've got to be real careful, Adam. We've talked about this in the past. I think it's how your customers line up in their turnaround seasons and how you're performing it, whether you've been able to bring additional services into those turnarounds that you have, what's the nature of the turnaround once you've got involved in it. We have some good competitors there. So I'm always hesitant to talk about share. I think in any labor-based service business, whether it be our construction business or our industrial services business, which is more time and material, we think about it more of are we capturing the opportunities we should be in serving our customers? And are we discretely capturing the best opportunities, and that opportunity to prefer I use our labor and the tight labor market? We don't focus a lot on share.

Okay. And then, can you walk us around the country; just kind of what you see in demand, bidding-wise?

Sure. I think, generally, demand is fairly strong. I think in the Northeast, it continues to be sophisticated projects and smaller projects based on energy retrofit and building upgrade. You're up in the Northeast, you're looking at medical projects. You're looking at some power projects. You're looking at multi-site use. You're looking at hospital rebuilds separate from medical production-type facilities. There's not a whole lot of data center business in the Northeast because of the pricing power, right? I mean, I think as you move down and you get to the New York Metro area, we'll carve that out as a market specifically. EMCOR, at least for New York City proper, has never been a high-rise residential business. You go across the river, we do more of that work there. I think some of the big marquee projects are now in the tenant fit-off stage, which fits our skill set very large. There's a lot of large infrastructure work coming, there's some underway, LaGuardia Airport. We're buying a little bit there. As you go to Kennedy, we may or may not play a little larger there. But there's some infrastructure going on. But with the nature of contracting with the MTA, you need to be very careful now of what contracts you take, what contracts you don't take. You go down in the Mid-Atlantic, a very strong market across the board. It's a big data center market. It's a as you expand that definition of Mid-Atlantic, it becomes a bigger health care market, also a strong commercial market. And with what's coming on with potential Amazon headquarters in the D.C. area, it's going to be strong. And that data center market has extended beyond the Metro D.C. area down further into Virginia, and we're well positioned in all those places.…

Okay, awesome. Thanks. Congrats on the McGregor.

Thank you.

Thank you. We have your next question coming from the line of Noelle Dilts from Stifel. Your line is live.

Well, good morning. I know you talked a bit about growth expectations generally. But I was hoping you could lay out specifically how you're thinking about growth across the four divisions in your 2020 guidance, and also how you're thinking about margins.

Yes, I mean and I'll ask Mark to kick in here. It's really hard for us sitting here in the first quarter to think about it by division. Because the way we think about it, especially in the two construction segments, every decision that comes to our folks is a binary decision. Last year, we won a lot of those binary decisions that we needed to win, that we wanted I shouldn't say needed to win, that we wanted to win is a better way of saying it. And so you never know how that's going to happen or not happen. Last year, we were on the plus side. So we don't think about it that way. We try to think about it, the overall business. And then as we reforecast the year, we get more clarity. And it's now we've been doing it for a long time. We really don't drive our folks by growth. We think about conversion. And we think about using that precious resource we have of labor across each of those divisions and really not get crazy and overrun your capabilities or don't stretch to take a job that maybe doesn't have the characteristics of another one down the road. Mark, maybe you could...

Yes, the only thing I would add to Tony's commentary is, I think, clearly, when you look at the double-digit revenue growth we had across all of our reporting segments other than the U.K. in 2019, I think the logical places where I believe we could do better than the 1% to 2%, or 1% to 3% that Tony had referenced earlier would be both in our industrial and our U.S. Building Services segment. With regards to our construction operations, both electrical and mechanical, clearly, they're the largest in the EMCOR family. And project timing, as Tony just referenced, is somewhat beyond our control. We're optimistic that we're going to see growth in both of those segments. Obviously, where we made acquisitions, we'll see growth, irrespective of that, but on an organic basis. But at this point in the year, it's a little too early to call it definitively because you could certainly see substantial project movement that can certainly impact top line for 2020 but positively impact 2021. So we're just not quite there yet with visibility.

Yes. And that's how we've been doing it for years and it served us well.

Okay. Any thoughts on margins? And I should have given I was ignoring the U.K. I worry about that five platforms, so my apologies. But yes, any kind of...

No, when I go back and go to Adam's question with that on the U.S. The U.K. market for us is okay. We've got really good positions in the U.K., and they've done a great job. So, Adam, the one part, I will talk about share. The U.K. business continues to take share in the market because of stability and excellence in delivery of technical service.

Noelle, with regards to margins, I'll just chime in. When you look at our 2019 full year performance, all of our reporting segments, other than industrial, performed greater than our five-year or 10-year operating income margin performance history. So clearly, that doesn't make us satisfied. We're looking for incremental improvements, but they would be incremental improvements from where we are. And if we could sign a piece of paper today to say that we're performing at equivalent levels to the year we just finished, I not I'll speak for myself, not for my colleagues sitting with me, but I think we would be happy to sign that piece of paper.

Absolutely, Mark. I mean, we're we said this, I think, last year, either in the third quarter call or the call last year, we're much more focused on margin dollars right now, especially in our construction segments, than we are margin percentages. They should go together, but in the nature of contracts to could skew that by 20 or 30 basis points. The other thing that timing can skew it on large infrastructure projects, where we tend to be conservative as we should be as we do really complicated work over a long period of time. So, all and the food processing work has a lot of the same characteristics. So we focus on margin. At this level, at 5%, with great cash flow generation and good growth, I think what Mark's implicit in his conversation is don't turn down an opportunity to grow dollars right now. Worry about whether the margins stay the same or not.

That makes sense. Last question. Could you just comment on what you're seeing in terms of the M&A pipeline opportunities in the market? Have you seen any sort of multiple compression in terms of some of the targets that you're looking at, given that we are later in the cycle?

We really have never especially the deals we've been doing over the last couple of years, we're not competing against the crazies in private equity that are going to redefine the world. We're more focused on executing in businesses that we know. And the reality is we're buying from people that are selling their life's work, and they want to still work. They want to still build their company, and they want a long-term home for their life's work. And I got a great note from a really terrific person we bought a business from, and we're coming up on year four almost. And it's been a terrific, terrific business. And we knew the gentleman for a couple years, and he knew of us. We were the home for his business. He thought we made a fair deal with him. He stayed and ran it for us for four years, and we've had some run it for 10, 15, and nothing was better than when he was able to say in that note to me. He said, "I did everything I told you that I would do. And it's important, or more importantly, you told me you did everything you told me you were going to do." And that business, on every metric, has overperformed where we thought it was going to. That's the kind of deals we're looking for at EMCOR. It doesn't say we don't get ourselves involved in processes. We were just at a small process a couple weeks ago, a relatively small company. We bid, let's say, a multiple that sort of made sense for us, but it wouldn't on the nonaggressive side. And we got good luck, you're two turns off. So we're going to keep grinding it out the way we are making fair deals. We're not known as bargain hunters. That's not who we are. We try to make a fair deal with someone who wants to be with us for the long term, where we can help grow the business together and we can continue to provide great careers for great companies.

Thanks so much.

Thank you. We have your next question coming from the line of Sean Eastman from KeyBanc Capital Markets. Your line is now live.

Morning. I'm just going to ask one since Brian Lane's waiting for us on the other line there.

He can wait.

The Industrial Services business, I'm just curious about how we should be thinking about the mix of work there, just what's looking stronger, maybe relative to 2019 between the field and shop? We did you guys did add kind of a new service line there. Just any kind of comments on business mix and margin progression in Industrial Services?

I think part of the margin progression will come from our ability to get more absorption in the second and third quarter. That's always critical. We have a certain number of people that work with us over an extended period of time. The mix will still skew to the field. That's the a bigger part of the business. But clearly, the incremental dollars we hope to drive through our shops is worth a lot more to us. And they tend to have some correlation with each other. But there's no specific mix we're looking at. But it's probably going to be similar, maybe a little more favorable to the shops, maybe a bigger part in 2019 than it is in 2020 than 2019.

Yes, Sean, the Remaining Performance Obligations in our Industrial Services segment, which is all shop-related, is up over $100 million. And at the end of 2018, it was roughly $87 million. So as long as we're successful in pushing that all through our facilities and successfully get them out the door, I would like to think that we're going to see incremental improvement there. But as Tony said once again, just from skewing the percentages of that segment's revenues, it's going to be hard for that activity to key in at the expense of the field services because it's just so much larger.

Excellent. Got it, very helpful. Learned a lot on this call today. Thanks for the time.

Thank you. And your next question will come from the line of Joe Mondillo from Sidoti & Company. Your line is live.

Hi guys, good morning.

Morning, Joe.

I was wondering if you could talk about the price/cost spread in 2019 given dynamics of wage increases, but also the leverage that you have. Did that change at all compared to past years?

No. You look at our gross margins, they're relatively consistent. The mix is relatively consistent, and I think that's where you see it. One of the things, Joe, we always pay attention to, though, is operating income margins a little more than we do gross margins because our mix of work can skew that 10, 20, 30 basis points of the size we are now. The size we used to be, they used to skew it even more. The size we are now at 10, 20, 30 basis points can skew based on mix. We focus much more on operating. Look, so far, you think about the dynamics of our there are no wage surprises in our business, right? We have three- to five-year contracts with our union. And our nonunion, we also have a pretty good idea what labor visibility is that we're bidding into a project. So then you get down to crew mix. On the union side, we have very strong definition around crew mix because we know what we bid, and we know what we can do for the contract. And if we got exceptions to that crew mix, we know that bidding the job. On the non-union side, again, we have a pretty good idea with the mix of folks we're going to use on a particular thing. So what I'm really saying is, most of our price/cost differential would pass on to the customer. Can you have a short-term dislocation on materials, which is not going on right now? Could you have that? You could, but it prices itself out within eight to 10 weeks.

All right. And relative to past years, just given sort of the economy slowing a bit, I'm just wondering, I mean, your RPOs organically seemed down a little bit. How has your project intake been trending at this point in time in the year relative to past years?

We just finished a series of about 60 calls with our subsidiary organizations. I would say most people look at it takes a little different than that means the one loss, and that can be skewed in short term. We look more at jobs available to bid that we really want to bid. And that is as strong as it was last year. And last year, it was very strong.

Okay. And so in terms of the guidance, which I think sort of it looks like it's calling for maybe low single-digit growth, and you saw a little bit higher growth than that last year, is that just a conservative aspect? Or is there any visibility different than there was a year ago? Could you just frame that relative to the guidance?

We give guidance the same way almost every year for 12 years, right? We start out people saying we're conservative. We try to say, this is what we think we know today. We're sitting here in the first quarter. We've got a whole year in front of us. We have to go book and finish a lot of work in a year in these numbers, and it's a project-based business. And I know people get tired of me saying, there's two things that I've learned over a long period of time. Every decision our customers make is binary in our project business, whether they're going to get the project or not. They usually don't give us pieces of it. It's not like a manufacturer that's got a piece of the market they're going to get. And absence of badness is a big thing in our business. And we start out this year coming off of a really terrific two-year, three-year run on absence of badness. We see no reason that part won't continue. But the binary decisions always make us a little hesitant because someone else is making that decision versus us.

Okay. And then looking at some industry reports, it looks like sort of, overall and this is very broad, so that's why I want to ask the question, that nonresidential construction, the construction starts declined very modestly last year then even in 2018, and they're calling for a little bit bigger declines in 2020. Could you help us understand what you're seeing, if that's similar to what your business and what you're seeing amongst your customers? Or is it a little different? Because that's just such a broad report some of the reports...

Yes, I think what you're saying is right. It's a broad report, lots in there. A lot of residential high-rise would be in there, expansive market, a lot of things that we wouldn't even participate in, for the most part. We tend to skew to the higher end of that market, and we see that really good project opportunities in front of us sitting here today in first quarter 2020.

Okay. And then, last question and sort of two part. BKI, how did that perform in the two months or, I guess, in the fourth quarter if you know what September was or October? I mean, how did that perform in the fourth quarter relative to that $400 million of revenue annually that you've put out in the press release? And then what is your expectation of D&A for 2020?

We don't break out specific subsidiary performance. $400 million is sort of what it's done over a period of time. Like any one of our companies that do large projects, they could have a small eight- to 12-week lull in action, and they pick up pretty quickly. What we do know is it's had it's disclosed in the K, we had pretty good performance coming out of the gates. This is a company that knows how to execute some of the toughest, most sophisticated work they have, and they got they would be they would skew into the top end of EMCOR's contractors immediately. The start is what we think it can do and how we think they'll execute. Mark?

Yes. Joe, the only thing I would add is just to temper Tony's commentary, clearly, with the acquisition occurring in November, we have to get through a lot of acquired backlog amortization. So top line is top line, but incremental profit contribution, at least in the initial months, is going to be somewhat diminished by that amortization expense, which is why when we went out with the press release and provided a commentary with regard to its contribution for 2020, we weren't as we weren't that bullish just because of what the drag is of that acquired backlog. And that's obviously, pursuant to the accounting regulation.

Yes. And just any time you buy a company of that size, right, it comes with that. It comes with large project work that has the same ebbs and flows of our large project work. And when we buy some of that size, we're really looking for contribution to be significant sort of eight to 15 months out from that, just being pragmatic because of the things Mark talked about and also the ebbs and flows of their own business. That's why when we look at something like that, we look at it over multiple years and not just off of one year.

Right, understandable. Could also the DNA just given the size of the acquisition, just wondering what your expectation is for 2020?

Yes. With regards to the amortization expense related to the acquired intangibles for 2020, and this is disclosed in the footnotes of the 10-K, full year intangible amortization is roughly $56.7 million. And then I suspect, from just a pure depreciation expense for the company, it's not going to look significantly different than it did for full year 2019. If anything, it will be slightly up. And if it's slightly up, you're talking single percentage points. And that is a function of us changing our capital for some of these newer businesses, we acquired capital assets.

Okay, thanks. Have a great day.

Thank you.

Thank you. That will be for your last question. Presenters, please continue.

Okay. We thank you, all, for following us in 2019. We look forward to talking to you all in 2020, and thanks for your support and interest in EMCOR. And I'll finish by saying, we are blessed to have a great team here. And I know this team that I have around the table here with us today, we are very thankful for the people in the field and that we operate great for our customers, and we do it in a safe, efficient manner. Have a great day, you all.

Thank you everyone for participating. This concludes today's conference. You may now disconnect. Have a lovely day.