EMCOR Group, Inc. (EME) Q1 2020 Earnings Report, Transcript and Summary

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 First Quarter 2020 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 2020 first quarter results, which were reported this morning. I would now 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. Thank you for your interest in EMCOR. As we start, let me simply and briefly say, I hope you and your families are well and staying safe as we move through this unprecedented time. For those of you who are accessing the call via our Internet and our website, welcome, and we hope you have arrived at the beginning of our slide presentation that will accompany our remarks today. We are on Slide 2. This presentation and discussion contains certain forward-looking statements and certain non-GAAP financial information. Page two describes in detail the forward-looking statements and the non-GAAP financial 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 quarter's results. They are Tony Guzzi, our Chairman, President and Chief Executive Officer; Mark Pompa, Executive Vice President and 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 Presentations. You can find us at emcorgroup.com. With that being said, please let me turn the call over to Tony. Tony?

Yes. Thanks, Kevin. And I'm going to be on Pages four through six. As we have already released preliminary results, I am not going to speak that much to the first quarter of 2020. Mark will. I will cover some of the highlights, and Mark will speak to the detailed results. And then I will end with an overview of what we are seeing in the marketplace today. Even when faced with significant obstacles, we had a record quarter. We set first quarter records for revenues, gross profit, gross margin, operating income and diluted earnings per share from continuing operation. The entire EMCOR organization has responded well to this COVID-19 crisis. I thank our leadership and all of our employees for focusing first on our employees' health and safety, and I also thank them for keeping focus on our business during these challenging times. We have a company values of mission first, people always. We train those values, we hire on those values, and we promote our team on those values. It serves us well in these challenging times. I will quickly summarize some highlights for the quarter. Our Mechanical and Electrical Construction segments had a very strong quarter, led by our work in data centers, health care and food processing. We had a particularly strong booking quarter in these segments. Our Building Services segment had the most disruption in the first quarter from COVID-19 as our owner customers started to limit access for our HVAC technicians and our commercial site-based businesses. However, we executed very well until mid-March, and our project execution was very strong, and we booked some very nice retrofit and energy savings projects. Our Industrial Services segment had a very good quarter despite a challenging end market. We had strengthened our field operations and executed several large turnarounds. Some of our work was pushed from mid-March until later in the second quarter or the results would have even been better. Our U.K. segment had a terrific quarter. We leave the quarter with a strong and liquid balance sheet, record Remaining Performance Obligations or RPOs and a business that still has opportunities to operate in this unprecedented environment. We are well positioned to continue serving our markets and our customers in an expanded way when normalized operations resume. With that, I will turn it over to Mark to discuss the quarter in more detail.

Thank you, Tony, and good morning to everyone 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 augment Tony's opening commentary and review each of our reportable segments' first quarter operating performance, as well as other chief 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 today. So, let's expand our review of EMCOR's first quarter performance. Consolidated revenues of $2.3 billion are up $141.1 million or 6.5% over quarter one 2019. Our first quarter results include $82.5 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 each of our United States Electrical Construction, United States Mechanical Construction and United States Building Services segments. Excluding the impact of businesses acquired, first quarter consolidated revenues increased approximately $58.6 million or 2.7%. All of EMCOR's reportable segments other than our United States Electrical Construction segment reported revenue growth during the first quarter of 2020. United States Electrical Construction revenues of $525.2 million decreased $2.8 million or approximately 0.5% from 2019's first quarter. Excluding acquisition revenues of $25.4 million, this segment's quarterly revenues declined 5.3% organically quarter-over-quarter. Revenue declines within the commercial, transportation, water and hospitality market sectors due to the completion of certain projects during 2019, were partially offset by increased project revenues within the manufacturing, institutional and health care market sectors. United States Mechanical Construction revenues of $834.1 million increased $81.7 million or 10.9% from quarter one 2019. Excluding acquisition revenues of $55.5 million, this segment's revenues grew organically 3.5% quarter-over-quarter. Revenue growth was primarily attributable to an increase in revenues from manufacturing, health care, transportation and institutional projects. These revenue gains were partially offset by contractions in project activity within the commercial, hospitality and water market sectors. First quarter revenues for EMCOR's total domestic construction business of $1.36 billion increased $78.9 million or 6.2%. As Tony will cover later during this presentation, our combined United States construction business has experienced growth, both sequentially and year-over-year in the Remaining Performance Obligations through March 31. United States Building Services quarterly revenues of $518.1 million, increased $6 million or just over 1%, the majority of which was attributable to organic activities. Revenue gains within the segment's mechanical services division were substantially offset by quarter-over-quarter revenue declines within each of their commercial site-based energy and government services divisions. United States Industrial Services revenues of $310 million increased $51.4 million or 19.9% as a result of higher field services activities as we executed a fairly strong spring turnaround schedule when compared to the prior year. Offsetting the quarter-over-quarter revenue growth was a decline in this segment's shop services revenues due to a reduction in new build heat exchanger sales. United Kingdom Building Services revenues of $112.4 million increased $4.8 million or 4.5% due to incremental revenues from new maintenance contracts as well as continued project and repair activity across their customer portfolio. Quarterly revenue growth was hindered by $2.2 million of foreign exchange headwinds. Please turn to Slide 8. Selling, general and administrative expenses of $227 million represent 9.9% of first quarter revenues and reflect an increase of $20.8 million from quarter one 2019. SG&A for the first quarter of 2020 includes approximately $9 million of incremental expenses from businesses acquired, inclusive of intangible asset amortization, resulting in an organic quarter-over-quarter increase of approximately $11.8 million. This organic increase is primarily due to higher employment costs as a result of increased headcount to support our pre-COVID-19 revenue growth expectations as well as incremental expense for credit losses within the quarter. This incremental expense compares unfavorably to 2019's first quarter, which included a recovery of credit losses or bad debts that have been previously written off. In addition, the first quarter of 2019 benefited from a favorable legal settlement within our Industrial Services segment, which was recorded as a reduction to selling, general and administrative expenses. The current year increases were partially offset by a reduction in incentive compensation expense year-over-year. Reported operating income for the quarter of $106 million represents 4.6% of revenues and compares to $102.3 million or 4.7% of revenues in 2019's first quarter. This performance represents a $3.7 million increase or 3.6% period-over-period. Our U.S. Electrical Construction Services segment operating income of $43.9 million increased approximately $1 million from the comparable 2019 period. Reported operating margin of 8.4% represents a 30 basis point improvement over last year's first quarter. The increase in this segment's operating income is primarily due to incremental contribution from a business acquired in 2019. The improvement in operating margin, however, is due to favorable project execution, inclusive of project closeouts within the quarter. First quarter operating income of our U.S. Mechanical Construction Services segment of $45.2 million represents a $4.2 million increase from 2019. Operating margin of 5.4% is consistent year-over-year. The increase in the segment's operating income is partially attributable to the incremental contribution from businesses acquired as well as increased gross profit from organic activities within the manufacturing market sector. Our total U.S. construction business is reporting $89.1 million of operating income and a 6.6% operating margin. This performance has improved by $5.1 million or 6.1% from 2019's first quarter. Operating income for U.S. Building Services of $20.8 million represents 4% of revenues and is a $6.6 million reduction from last year's first quarter. Operating margin decreased by 140 basis points. The quarter-over-quarter reduction in operating income is due to lower gross profit from the segment's commercial site-based services division as a result of the reduction in snow removal revenues as well as a decline in gross profit within their energy services division due to a decrease in large project activity, given the substantial completion of certain projects in 2019. Additionally, the reduction in operating margin quarter-over-quarter is due to the under absorption of certain overhead costs in those divisions that experienced revenue declines as well as an increase in the provision for credit losses within this segment as compared to 2019's first quarter, which benefited from the recovery of certain receivables, which had been previously written off. Our U.S. Industrial Services segment is reporting operating income of $12.3 million or 4% of revenues. The previously referenced quarter-over-quarter growth in field services activities resulted in an improvement in both operating income and operating margin when compared to 2019's corresponding period. U.K. Building Services operating income of $5.8 million represents 5.1% of revenues, which is an improvement of $1.6 million and 120 basis points of operating margin expansion over 2019's first quarter. Our EMCOR U.K. team continues to do an excellent job of fostering new maintenance customer relationships and executing follow-on repair and project services while maintaining a disciplined cost structure. We are now on Slide 9. Additional financial items of significance for the quarter not addressed on my previous slides are as follows: quarter one gross profit of $333.1 million represents 14.5% of revenues, which has improved from the comparable 2019 quarter by $24.3 million and 20 basis points of gross margin. The increase in consolidated gross profit is a result of increases across all our reportable segments, other than U.S. Building Services, while the gross margin improvement is due to continued excellence in project execution, primarily within our United States construction segments. Diluted earnings per common share was $1.35 as compared to $1.28 per diluted share for the quarter ended March 31, 2019. This represents a 5.5% improvement quarter-over-quarter. We are now on Slide 10. I will address EMCOR's liquidity profile directly a little later in this morning's call. But as you can see on this slide, our balance sheet continues to maintain its strength. Cash on hand is slightly down from year-end 2019 as a result of cash used in operations, primarily due to the funding of 2019's company-wide incentive compensation awards. Additionally, with respect to cash used in financing activities, we repurchased approximately $99 million of our common stock pursuant to our share repurchase program. These uses of cash were offset by incremental borrowings of $192.5 million under our amended and extended credit facility during the quarter. Working capital levels have increased due to our organic revenue growth as well as an increase in accounts receivable and a corresponding decrease in net contract liabilities related to certain delays in customer billings resulting from the RYUK ransomware attack we disclosed in connection with our 2019 year-end earnings call and Form 10-K filing. We are currently caught up with our transaction processing, however, that does not necessarily translate to quicker turnaround when it comes to payment from our customers. The increase in goodwill is due to the business acquired during the first quarter within our U.S. Building Services segment. Net identifiable intangible assets decreased as a result of $14.7 million of intangible asset amortization, partially offset by the impact of additional intangible assets recognized in connection with the previously referenced 2020 acquisition. Total debt, excluding operating lease liabilities, is approximately $505 million and represents an increase of $192.3 million from year-end 2019. As a result of our outstanding borrowings, we had a debt to capitalization ratio of 19.9% as compared to 13.2% at December 31, 2019. As I mentioned earlier, I will cover EMCOR's liquidity in greater depth later in this morning's presentation after I turn the call back to Tony. Tony?

Thanks, Mark, and I'm on Page 11, which I will cover Remaining Performance Obligations by segment and market sector. As stated earlier, we had a strong bookings quarter. Total RPOs at the end of the first quarter were $4.42 billion, up $267 million or 6.4% when compared to the March 2019 level of $4.16 billion. In fact, this RPO total is the highest quarterly total reported since we initiated RPO reporting in March 2018 and higher than any backlog level we reported prior to that. Domestic RPOs have increased $284 million or 7.1% since the year ago period, driven mainly by our Mechanical Construction segment. We did close a few strategic mechanical construction acquisitions in 2019, which helped support that growth. Book-to-bill measuring first quarter 2020 RPO activity over year-end 2019 activity was close to 1.2, which is fairly strong performance considering the strong first quarter revenues of $2.3 billion. So from the end of 2019, total RPOs increased $388 million or 9.6%. On the right side of the page, we show RPOs by market sector. $1.8 billion of this is classified as projects in the commercial sector. We view this sector broadly and beyond office and financial facilities. This sector also includes high-tech and data center projects that we continue to bid and construct. We are building these highly complex, fast-paced data center projects for the largest Internet and data storage providers. And while there are certain dense geographies for data center construction, like the Mid-Atlantic and the Pacific Northwest, where we have industry-leading expertise in our Dyna Washington, Poole and Kent North and Dyna Oregon companies, we are also seeing other areas of the country where data center construction is building up for the large providers. EMCOR companies are uniquely suited to do this work in other parts of the country as well. Two such areas are in Dallas and Iowa, where in the last 18 months or so, we have made electrical construction and service acquisitions investments to address growth in these geographic areas. Also, last November, we announced the acquisition of Batchelor & Kimball, or BKI. This terrific Atlanta-based full-service mechanical contractor is a nationwide leader in constructing large, complex construction projects, including data centers, with a strong performance record for data centers in the broader Southeast and Oklahoma. Additionally, BKI also is a leading provider of health care facilities, another market sector that saw RPO growth in the year-over-year and first three months of 2020. Before I leave here, because I know you're going to ask, I want to address a certain question. Yes, we have performed several projects across the country either to support the Corp of Engineers, municipalities or our health care provider customers. And what we're doing is expanding or retrofitting facilities to allow for the better treatment of COVID-19 patients. This work was, for the most part, being executed on a time and material basis. Therefore, it's, for the most part, not included in RPOs. In the aggregate, while this work is incredibly important to support our customers, this work has not substantially impacted our results. In summary, all I can say is that the current bidding environment is still active in most areas in the countries, and I'll speak to that in a moment. And while it is very rare the projects that we are working on get canceled, there is going to be a certain degree of uncertainty with respect to the rollout of this work in this fluid environment that we are operating in at this time. And now I'm going to go to Pages 12 and 13, and I'm going to talk about what the external environment looks like and what the internal environment that we're dealing with looks like. As I think about our business, I again rely on what has always been our operating philosophy at EMCOR. You only can control what you can control, and you have to react to the macro disruptions and problems in a disciplined and process-oriented manner. We will keep our focus on our core values of mission first, people always. We know that we create long-term sustainable value for our shareholders by focusing on our task at hand and maintaining the discipline that has served us so well in good and bad markets. And in markets like the one in which we are currently operating that have changed very abruptly, we must keep executing our mission for our customers, but we must also keep our employees safe, which is one of our core values. Fortunately, it is in our DNA to have robust contingency plans that focus not only on opportunity capture in any market, but also resiliency to react to markets and job site conditions that change for better or worse. And as contracts, markets, job sites and the overall environment changes, we are used to adjusting to changes in those conditions and know how to pivot responsibly and appropriately on very short notice. So first, let's discuss the operating environment, the external operating environment that we are operating in. In many cases, we are still operating full force as we are deemed an essential business in many states and cities. However, this changes to the plus or minus every day. Boston, New York City, New Jersey, parts of the San Francisco Bay Area and Pennsylvania, all are under work stoppage or EMCOR's project and service work are not deemed essential. However, even in those places, we are still operating at 25% to 30% of capacity as that work is deemed essential. Our small project work and technician-based businesses have been the most impacted of our United States businesses. Customers have shut much of this down, but I do not expect this shutdown will continue as a lot of this work is needed service for summer start up and required maintenance, replacement and repair work. And always keep in mind that we do not determine whether a project is stop or a service site is closed. Our owner, general contractor, construction manager and EPC contractor customers determine that, and we respond accordingly. The oil war and now the oil glut, emanating from significantly reduced demand, is ongoing and having an impact on our oil and gas customers. This affects both our more limited upstream business where the impact has been most significant to our much larger downstream business, where there has been less of an impact to date. When you talk about how we get supplies, right, to do our job, supply disruption may also happen as manufacturers and/or distributors are forced to close plants in certain states and/or countries as those plant personnel are quarantined or facilities are closed for cleaning or the government decides that facility is not essential. To date, we have not had any significant disruptions that have not allowed us to do our work where we are deemed essential. Here is what we do control in the crisis to some extent. We can control some of our costs. Unfortunately, this means we must lay off or furlough skilled tradespeople when we have no work for them. We have had a growing workforce over the last five years. And unfortunately, in many cases, the work has abruptly stopped over the last six weeks. We have reduced our hourly workforce by 20% to 25% overall, in line with those projects that are active. About 40% of our salaried workforce is either furloughed or working with reduced hours or reduced pay of up to 25% on a temporary basis. For example, as early as March 18, we announced and temporarily reduced most of the headquarters staff pay and/or hours by 25%. This includes me and all the named executive officers. Our Board of Directors have reduced their compensation by about 22%. Our segment leadership also implemented similar cost reductions for their segment staff and leadership teams. However, about 40% of our company is still working, get pre-COVID salary and hourly levels. And in those cases, we have not significantly reduced our SG&A or cost as we need to have them have the resources they need to continue to perform for our customers. We are taking measures to protect our employees. We have been very proactive with employee safety, implementing appropriate precautionary protocols and providing the necessary PPE and training. We started social distancing practices and other safety protocols in many of our locations in the first week of March. We banned all overseas travel by the third week of February and discouraged all domestic air travel by March 16. This will impact productivity in the near term, but safety and health come first. And in this crisis, we still must protect our contractual rights. We are required under contract to provide notice on jobs that are shut down, and we have also outlined for our customers how work practices have changed and possible productivity issues we may have. Our customers know we need to do this. I firmly believe that we are all working together well now. But in the end, everything will depend on the contractual language when this crisis abates, and we must protect our rights. We are communicating frequently and consistently with our field leadership about the many areas that we will have working, but have had to lead our response while navigating the myriad of government orders from the trade-off between reduced hours and furloughs, shutdown directives, essential versus nonessential businesses, and that's just to name a few. And we are proactive working with our suppliers to keep project supplies moving, but also to stay ahead of the game on providing the best personal protective equipment that we can. However, we need to balance what we control against what we do not control. And in this case, the things we do not control outweigh the areas we do control. Our Mechanical and Electrical Construction segments are operating at about 75% to 80% of capacity right now because in many markets, we are essential, and we are still working on our most significant projects. Our Building Services segment has been the most impacted by the macro factors described above and is operating at about 65% to 70% of capacity. Our Industrial Services segment had a good first quarter and has the potential to continue in the second quarter based on several large turnarounds that are currently scheduled to be executed in the latter part of the second quarter and the early part of the third quarter. The fall schedule is neither set nor firm at this time. EIS today is operating at about 75% to 80% of capacity. The U.K. business is less impacted by nature of our customer base, and it's operating at 80% to 85% of capacity. You put all that together, we think we are deploying at about 70% to 80% of our operating capacity as of today. However, as noted above, this is a fluid situation as circumstances change day-to-day, both for the positive and the negative. The next area, and I believe the most important area and is challenging in uncertain times is the condition of and how we have managed our balance sheet. Our balance sheet is solid, our liquidity is strong. Prior to the Q&A today, Mark will provide a liquidity update under our credit facilities. Times like these are why we adhere to the fundamentals of a strong balance sheet. We've always done that, and we always will. Through these business changes and cycles, it is fundamental to who we are and how we run the business. As far as capital allocation, we see no risk to the dividend currently. We do not plan any share buybacks until any more share buybacks until we return to more normal operating conditions. We did have a strong acquisition pipeline and still do, but that will wait until some normalcy returns. We have several large acquisitions, not large I'm sorry, we have several acquisitions, much like we did last year between the $40 million and $60 million purchase price range, that would either help us increase our geographic market presence. And they are attractive and they are great companies, and they will increase our end market exposure to attractive end markets like health care, data centers, infrastructure that have long-term secular growth. But again, that will wait until some more normalcy returns. Finally, we are developing a plan to bring our company back to 100% capacity. Really, that's something we know how to do. We mobilize large job sites, significant service opportunities and large, multifaceted, multi-trade customers' contracts all the time. We know how to ramp up with speed and discipline. We have terrific prospects, have strong RPOs. And even in this disrupted market, we have market sectors that are robust, such as water and wastewater, health care and within commercial, data centers. We are still bidding and booking work through this changing and evolving environment. What we know is we are well positioned as a company in very attractive long-term markets, and we know we have some of the best operators in the industry in our subsidiary companies and at our segment level. We know we have a company whose people are resilient and tough. We know that we attract great talent and the talent acquisition may accelerate in these challenging times. We know we have one of the best long-term reputations in our industry for our employees as we have a long-term record of taking care of our employees' safety and we develop them over a long-term career with us. What we do not know is what will be the pace and timing for this recovery. However, we do know that we will not be caught flat-footed in that recovery. Taking everything into consideration and the uncertainty created by this COVID-19 pandemic, we withdrew our 2020 guidance on April 21. We hope that when we come back to you with our Q2 earnings announcement, we'll have some guidepost for 2020. We should know more by then. Before we take questions, though, I'm going to ask our CFO, Mark, to cover our line of credit and our liquidity. Mark?

Tony, thanks, again. For everybody on the call, we are now on Slide 13. Subsequent to our fourth quarter 2019 earnings call, we amended and extended our prior credit facility, which had been entered into in August of 2016. With this refinancing transaction, we refreshed the term loan component of the credit facility, increasing the amount of our term loan to $300 million from the approximately $254 million that was outstanding as of the end of December as of the end of December 2019. Additionally, we upsized the revolving credit line from the previous $900 million of capacity to $1.3 billion of available revolving credit. Under the existing terms and conditions, if necessary, this revolving credit line could be further increased by $600 million to $1.9 billion of capacity at EMCOR's discretion. This would be subject to incremental commitments from either existing or additional lenders. As a result of this transaction, which has a maturity date of March 2, 2025, EMCOR's historically strong liquidity is even more robust. At the bottom of Slide 13, you can see the amount of our outstanding borrowings at the end of the first quarter, which includes the $300 million under our term loan, which I just mentioned, which has an annual amortization requirement of 2.5% beginning in March 2021, and a 5% per annum amortization requirement in each of the succeeding three years. Additionally, we have utilized approximately $279 million of available capacity under our revolving credit line, with $200 million in direct borrowings and approximately $79 million of letters of credit issued. This activity leaves EMCOR with approximately $1.021 billion of available credit at March 31. Such liquidity is additive to our cash on hand and the operating cash flow the company expects to generate in calendar 2020, resulting from the monetization of our accounts receivable and contracted assets during the ordinary course of business. Despite any concern we have regarding the impact of COVID-19 of the COVID-19 pandemic on the markets and customers we serve, we expect to continue our long trend of generating positive operating cash flow in 2020. On a trailing 12-month basis, our debt-to-EBITDA is less than one times through March 31, and albeit higher than at any point in time during the last three years, remains low. To reiterate, EMCOR's liquidity remains strong, and we continue to be well positioned to capitalize on all opportunities. With that, once again, I will turn the call back to Tony. Tony?

Yes. Thanks, Mark. And Lara, with that, we'll take questions.

So your first question will come from the line of Mr. Brent Thielman from D.A. Davidson. Sir, please proceed. Your line is now live.

All right. Good morning

Good morning, I'm doing well. Thank you. Tony, we heard from a couple of others in the contracting world about seeing more of a preference to only allow more of the established contractors that might be taking kind of safety precautions a little more seriously to come and bid. Are you seeing that at all in any of your markets?

I think the kind of customers that are attracted to us and the kind of general contractors and construction managers, one of the reasons they're picking us, amongst many reasons, is not just the precautions we would take with respect to COVID safety practices and health and welfare practices, it's how we run jobs to begin with. We have industry-leading safety. In fact, we just finished one of our best quarters ever in the first quarter. We would be in the top 1% or 2% of the industry on any safety metric. So I think that could be the case. But I think the kind of people that choose us anyway, one of the reasons they're choosing us is, one, because of our safety record and the care we have for our employees; because of our strong financial position, we tend to attract not only the best supervision and leadership in the field, we tend to attract some of the best tradespeople that there are.

Okay. I appreciate that. And then on Building Services, I'm curious, do all these delays and kind of challenges getting into the building, does that create some pent-up demand to the extent that when you can get back into these facilities, we might anticipate seeing some spikes in work?

It should. But I've never managed a company through a pandemic and what that startup will look like. So I'd venture to say, I wouldn't speculate. But in normal times, you usually don't get rewarded, you usually don't get rewarded for not doing or completing your pre-summer maintenance before it becomes 90 degrees with 95% humidity in parts of the country.

Right. Okay. And I guess my last question is on Mechanical, the big jump in RPOs, I mean even from last quarter. And I think you had BKI in that last quarter. Is there a large job or something that's an outlier? Or is it just truly reflective of some...

BKI booked work just like we thought they would. We knew we bought a market leader. We knew they had terrific positions in some key Southwest markets, not only with respect to data centers, but also with respect to health care and larger institutional work with some higher education facilities. So they were part of the story, but the story is much bigger than those. We also booked some pharma work, which really only one job had anything to do with COVID. And that is one of the treatments, and I'll just leave it at that, that maybe someone might be gearing up for. But other than that, it was we had a strong booking quarter because we're in sectors that we think have long-term secular growth.

Okay, thank you. I'll get back in queue.

Thank you. And your next question will come from the line of Noelle Dilts from Stifel. Please go ahead, your line is now live.

I think so much, so I just kind of wanted to ask you guys how you're thinking, if you could expand upon how you're thinking about the non-resi market longer term. In some of the conversations we've had with construction economists, they've kind of suggested that there was less overbuild in the cycle, and so they think in 2021, as things normalize, it might be pretty the spending might be pretty close to 2019 levels. I'm just curious kind of, one, how you're thinking about that? And second, how you're thinking about the opportunity around more of the renovation work, if there may be some work around airflow management and even spacing given social distancing, sort of how you're thinking about those opportunities?

Yes. I mean, look, I think that trying to draw any conclusions off of what's happening today for the non-res market would be tough. Look, I think there's some underlying fundamentals that are pretty strong on the non-res side. I think the data infrastructure, I'm not even sure we're halfway where we're going to be in the next five years. I do think some repurposing of buildings will happen, some renovations will happen. I think people will continue to upgrade their HVAC systems. And you not only get better airflow, especially with some of the new control technology, but you also get a substantial energy savings. Now one of the things that are going to happen here with the operations of building, I think, over this next five months, and I don't think COVID is going to be forever. I mean, I don't think anybody does. So if we sort of fast forward a year, I think we're in a much better place. I think one of the things that are going to happen is the demand for energy is going to go up because you're going to be bringing more outside air. And as you bring in more outside air, it's untreated, but it's certainly good to dilute the space. But then you have to treat it and then you have to control for humidity more, which then controls creates more demand on the HVAC system. I think there's also things we can do to help with employees' mindset. Even before this, we were putting in UV lights and things like that on the coils and some of the fan sections, you can go to an improved filter. And so there's things you can do that could I mean, I'm certainly not saying that's for sure, but it would be common sense that it would help with air quality. And those are all things we can do in the retrofit of buildings. Now, space gets reconfigured. A lot of people went to open office plans. What will happen in the near-term with those. They could be back to open office plans in a year. They may temporarily change those open office plans. And they'll certainly help out companies like ours to help them think about what airflow looks like and temperature management looks like in those short-term change to office plans. Now what I think is going to happen here, I do think our technicians are already starting to trickle back into buildings. We've had net hiring's up. What I mean by that is, we went down big in Building Services. We're starting to hire back some of those technicians now as buildings start to say, hey, we're going to reopen, we need to be prepared and some of this work is better off to let you come in and do now versus when the building reoccupies. I do think I don't really sense that there was a lot of overbuilding. I mean and if you think about EMCOR, yes, we do residential high rise, but it's a very small part of what we do in the overall aggregate of EMCOR. It's probably less than 1.5% to 2% of what we do. And that fluctuates. We really had one big hospitality project in the last three years, and it was a very successful one, both for the owner and us. But you look at where we are, we're still a project a company that does a lot of small projects, but we also can do some of the most complicated infrastructure work. That's both transportation infrastructure work, which is mainly a electrical job for us. But then also we on data infrastructure, I mean, we're terrific builders of these hyperscale data centers in some of the most important markets. And we really made some smart acquisitions over the last two or three years to build out that capability. So even if the non-res I've always said, if the non-res market stays flat to just down a little bit, it's really not the end of the world. There's going to be a correction here because of what's going on with COVID. I don't expect that correction to be long lived. And if it goes back to where it was in 2019 and stays there for a while, I think my three colleagues on that day would say, hey, that's good. We certainly have plenty of room to operate. And I do think, echoing the comment earlier, look, I think people go to quality in an environment like this, especially for the most complicated jobs, but also the smaller jobs that require real technical capability to make sure you're achieving what you wanted to out of that renovation.

Great, thanks so much.

Thank you. And your next question will come from the line of Adam Thalhimer from Thompson Davis. Sir, your line is now live, please proceed.

Hey, good morning guys. Good morning, Do you feel like you know enough today to put some guideposts around Q2 EPS?

No.

That's what Comfort said. I mean could that loosely hold up for you guys?

I think we gave you the building blocks, Adam. We said we're working 78% to 80% of capacity. That starts to frame the revenue side. How long that will last? We could be back up to 90% of capacity by the first of June. They're starting to put plans together in some of these major markets with the unions who, I think, in these major metropolitan areas, with the Governors, will determine whether the people come back to work. Because ultimately, it's about when the men and women on the trades feel comfortable about coming back to work. So does that happen May 15, does that happen June 1? We could go from 70% to 80%, we can go to 90% by the middle of May to early June. That could be June 15. We don't know that. We don't control that. So for me to sit here and tell you, I know that would presume that I know things that only the trade unions know and really the Governor's office knows. And that's all based on epidemiology and their models, and I can't even speculate about that. I know I also know that I expect that we'll make money in the second quarter, Mark, right?

Yes.

And maybe I'll let Mark talk about that a little more. And I expect that second quarter is going to be tough for everybody. Third quarter, we should start to come back, whether this is a U or a V in our industry, I don't know. I would think there's a potential we'd be somewhere in between because we have jobs that will come back. And I think third quarter, we'll get stronger based on what we know today. And fourth quarter could even be stronger. But then there could be an outbreak again in the fourth quarter, of which I have no knowledge or experience with. I do expect things to normalize by like everybody else, by first quarter of next year. Certainly, second quarter next year should be a good comp versus second quarter this year, I would think so. But and then you got to say, okay, what's going on with productivity? For people to think that there's not going to be a productivity impact as we become accustomed to these new work rules, and wearing masks and wearing shields and sanitizing tools, all of the things we absolutely need to do to keep our workforce safe, you'd be kidding yourself. Now we will learn but we're also doing things to mitigate those. People have been fairly responsible about split shifts, disaggregating the work site, the scheduling has been better than ever in a lot of our places with our construction manager customers as they try to get density down on the jobs. But those are all things that the good news about being a contractor and having the kind of people that we have working for us is we're used to dealing with change and ambiguity. And our folks approach this just like any other problem. Mark?

Yes. The only thing I mean I'll state the obvious, Adam. I mean, this company has never provided quarterly earnings guidance, and we're obviously not going to start that in 2020. But to echo Tony's comments, as we continue to refine our internal forecasting, we don't see any interim periods that will not be profitable. I will put a caveat on that though, that to the extent that market conditions don't improve, there's clearly going to be some pressure on impairment analysis relative to those parts of our business that have high levels of goodwill and intangible assets. So putting that to the side, if you look at the underlying core operations of all of our subsidiaries, despite the headwinds that we're all collectively facing and at the reduced capacities, we're still anticipating being a profitable business for all of our interim reporting periods for 2020.

Here's what has been positive. And I think it, again, go to the position of our companies and markets, we're bidding and winning work right now. But I think one of the things everybody is going to have to think about, we're going to pop out the second quarter and say, backlog is likely to be up, right? Our RPOs are likely to be up because we don't usually get cancellations, and we sort of have a pretty good idea what's in there, obviously, of size, and we think there are projects that will go. But part of it is going to be up, and we're going to do our darn best to figure out what part of it. We didn't get revenue like we should have in the second quarter or aren't revenue like we should in the normal times. So there's going to be a little bit of a false positive there. I think the other thing you've got to sort of think about is decision making has slowed. And so for those larger projects, maybe outside of some of the faster pace work like data centers and those kind of works, I think there's going to be a lot more planning that's going to go on. And it's going to say, okay, we would have let that project maybe in June or July to start up in October, November, December, that planning might all push out, and you could be in a position where there's a little bit of gap in revenue, not overall revenue, but revenue that might have been maybe three to six months out from here.

Yes. That was one of my key questions. So in certain sectors like retail, education, office buildings, where the assumption is that there's significant disruption, is the bidding really slow there? Or is it kind of still just not that bad?

Well, again, we don't play other than on the maintenance side. And even that is not a huge part of our business on the retail side. I mean we're just not competitive in that market, except for replacement work. For the well-capitalized retailers, which for the most part is where we are, those retailers have replacement work that they had scheduled. Some of them pushed it out a month, but they're already talking to about us what that schedule will look like. Instead of April, May, what it looks like in June and then what it looks like in September or October. And that would what would be our repair contingency plans around some of that work that was supposed to be replacement. And these are people that have prospered through this pandemic. As far as education, we mainly play in the retrofit side there. And it's geared towards although we don't make a lot of guarantees, almost none. It's geared towards energy savings-type work and equipment change out and control system upgrades. We're starting to see people talk to us about starting that work early because they don't plan on bringing students back to school. As far as the commercial work, we still see decent opportunity in the retrofit side. As of today, we don't have significant commercial exposure on high-rise office building construction. There wasn't that much of it going on. We do have some on residential high-rise. But I said before, that's less than 1.5% or 2% of what we do, and that would be embedded within commercial.

Okay. And then, last one for me. When you talk about productivity impact, I mean, how do we how should we think about having to set a model? Like if you're in electrical, you're operating within a range of, call it, 6% to 8% usually. Mechanical is 5% to 7% usually. Can you still eke out? I mean can you stay in that range even with the revenue declines you're seeing?

Yes. I think as of today, yes, the answer would be because we've been at the higher end of that range. If we were in the lower end of the range, I'd be a lot less confident.

Okay. Let's just great color. Thank you guys very much

Thank you. And presenters, your next question will come from the line of Joe Mondillo from Sidoti & Company. Sir, please proceed. Your line is now live

Hi guys, good morning. Doing well. Just a question on competition. What are you seeing there? Do you think any competition is at risk in this downturn? And you may benefit from it on the other side. Just wondering what you're seeing with competition?

Yes. Joe, look, there was competition. We always have competitors, and we have some really good competitors. I think there does tend to be more of a flight to quality in a downturn for significant projects. I think competition was at risk before they started, some of them, because they overextend their balance sheet as they grow. And a smaller contractor going from being $30 million to $60 million, many times does not work out well for them. I think there will be a, like there always is in a change, and this is an abrupt change, I think some people may say, you know what, this is a good time to pack it in. I can take my working capital off the table. And maybe I can go join one of these competitors I had in the local market. These tend to be the $20 million or $30 million company where the principal is really good at what they do. They tend to run that one or two large jobs themselves. And in the past, we've had some of those folks come to work for us. And I expect that to happen again. They'll come work for us for five or eight years and run big work for us, and they're great people. I never spend a lot of time worrying about what our competitors do. Again, I always go to the things I control and more appropriately, what our subsidiary or leadership controls. And so we bid work to first of all, we make sure that we have the people and resources to execute that work. And that's where we start. Do we have the people and resources to execute that work? Do we have the experience at EMCOR or specifically in that subsidiary, in a lot of cases, to do a really good job on that work technically? Then also we balance that, again, can we make money at it? And are we working for people that we actually want to work for on that job? And that's both on the service side and the construction side. And we put all that together, and that's how we decide what are the best opportunities. And then we think about the competition. I certainly, quite frankly, wish our competitors the best in this crisis. This is a terrible crisis and pandemic, and I hope they all come through it fine.

Okay, understand. Second question was related to the electrical RPOs. What do you make out of the RPOs there declining in the last several quarters? And what your thoughts are in that specific part of the business?

Yes, I think that's like a flywheel at EMCOR that just does great, has great margins, has great cash conversion, has terrific prospects. I don't read too much into that. That's the ebb and flow of work. And I know we have a very active bid log, and we booked some really great work in the Electrical segment over the last five or six weeks.

Okay. Last question. You provided a lot of information this morning and there's a lot going on, a lot of moving pieces with the economy in general, whatnot. What are your biggest sort of challenges managing the company from the executive level in this specific time period? And what are you looking at or maybe most concerned of regarding the situation?

I think you start with, you've got to do everything you can as a leader and set the climate that you expected as a leader, and this leadership team is with me here. I would say that we believe our primary responsibility right now is to make sure that we can execute the work safely and with the well-being of our employees in mind. And then we have to be able to accomplish that work to the technical specifications that our customers expect. This pandemic would not be excuse for us not delivering a quality product to our customers. I think then all the operating practices we've had at EMCOR takeover, right? We have very strong values-oriented company. We have a culture of focusing on the most important things, whether it be operationally or financially. And based on what you see with our balance sheet, I could Mark could take you through what is, and we're not going to do that right now, a very, very detailed cash planning that goes on and cash forecasting, whether the markets are good, bad, mediocre. It's just part of our DNA. And that DNA serves us well when thing times are good, and it serves us well when times are a little tougher. And one thing I don't lie awake worrying about is I'm really sure that EMCOR will come through this fine. EMCOR will come through this stronger than our competitors. And that our people will do the right thing in the field to protect the well-being of our employees. And one of the things we have to do as a leadership team, all the way down through the subsidiary leadership, is we've got to communicate, communicate, communicate. We have to be consistent in that communication. And we have to provide people good information. The work that our legal team, our human resources teams and our safety teams and our financial teams have done through this crisis to get our operating teams the right information they need to be able to implement these myriad of things that have come out on these different relief packages, what it means for our employees, what it means for us and how we make sure that we not only comply with federal law, that we do right by our employees and our shareholders while we're doing that and our customers, but also how do we make sure that we can distill that information to things that people can understand, that goes to what is really an essential business versus a nonessential business. It goes to how do we work with our supply chain? We were out in front of this in relatively short order, thinking about PPE needs for our employees. And that goes all the way from the top down. That goes from me, all the way down through the organization worried about that. We anticipate that we're going to be wearing masks in different environments for a long time, and we acted appropriately. We have all kind of protocols around tool sanitation and job site safety. And we have a structure that allows us to communicate effectively. We have contingency plans that we develop for crises, although we didn't quite think it would be this crisis when we developed them. But our guys know how to ramp up and ramp down and focus on what's important. I think it's just the nature of who we are. We're conservative, right Mark? We took a we've been at one meeting more than one meeting when we've had a lot of people tell us the beauty of leverage. And I guess we never quite believed that, did we?

Of course, we did not.

Right. And I think that shows right now. And we'll run the business like we always do, and we'll get to the other side of this.

Okay, thanks. Well, I hope you're all safe and well and good luck with everything

Same to you. Joe, thank you.

And there are no further questions in the queue. Presenters, you may please continue.

Look, we're clearly in unprecedented times. And for anybody that's listening, I know there's a lot of EMCOR employees listening, we'll all get through this, we'll come out strong. Unfortunately, everybody is making a lot of tough decisions right now. We hope to see everybody back to work, and we'll do that the right way too; we'll have everybody's safety in mind when we do that. But let's always remember, we also got to accomplish the mission we have for our customers, and our shareholders; and we will do that, too. And we couldn't be more proud of how everybody has responded. And we'll come out of the other side of this stronger. With that, thank you all very much, and everybody, be safe.

Again, thank you everyone for participating. This concludes today's conference. You may now disconnect. Stay safe, and have a lovely day.