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 2021 Earnings Call. [Operator Instructions]

Thank you, Lara, and good morning, everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the company's 2021 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.

Thanks, Haskel, and good morning, everyone. As always, thank you for your interest in EMCOR, and welcome to our earnings conference call for the first quarter of 2021. Unbelievable that the Kentucky Derby is going to be run tomorrow or Saturday, and it's already May. For those of you who are accessing the call via the Internet in our website, welcome. And we hope you have arrived at the beginning of the slide presentation that will accompany our remarks today. We are on Slide 2. The presentation and discussion contains forward-looking statements and may contain certain non-GAAP financial information. Page two describes the details of 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. With me today are Tony Guzzi, Chairman, President and Chief Executive Officer; Mark Pompa, our Executive Vice President, Chief Financial Officer and Treasurer; and Executive Vice President and General Counsel, Maxine Mauricio. Actually, Mark is not the Treasurer any longer. I'm sorry, Mark, old title here. For call participants not accessing the conference call via the Internet, this presentation, including our slides will be archived in the Investor Relations section of our website under Presentations. You can find us at emcor.com. With that being said, please let me turn the call over to Tony. Tony?

Yes. Thanks, Kevin. And I'm going to start my discussion on Pages 4 through 6. First, I'd like to welcome you all and what a different feeling we have in late April 2021 than we had in late April 2020 when we were in the throes of understanding of how to operate in a pandemic. I don't have to recount all the areas of uncertainty and turmoil we faced last year, not only at EMCOR, but our country and world writ large. However, at EMCOR, we were able to point to our values of mission first, people always. And they held us together and allowed us to perform at a very high level. These values served as our touch point to have a focus first on the health and safety of our employees. At the same time, we knew we also had to continue to serve our customers as we provided essential services across a range of projects and service calls. And again, like I always like to do, I'd like to thank all of our leaders and employees for their efforts. As demonstrated by our first quarter results, we continue to deliver strong performance by executing well for our customers while focusing on the well-being and safety of our employees. The first quarter of 2021 was an outstanding quarter by any measure. We earned $1.54 per diluted share versus $1.35 in the year-ago period on revenues of $2.3 billion with operating income margins of 5.1%. We had strong revenue growth in Mechanical Construction segment, up 8.4%. We had strong growth in our U.S. Building Services segment, up 10.3% and had strong growth in our UK Building Services segment, up 12.8%. That was aided somewhat by FX. We were essentially flat in our Electrical Construction segment. And as expected, we…

Thank you, Tony, and my voice thanks you as well. 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 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 today. So. let's expand our review of EMCOR's first quarter performance. Consolidated revenues of $2.3 billion are up a modest $4.2 million or 20 basis points over quarter one 2020. Our first quarter results include $29.1 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 declined $24.8 million or 1.1% organically. Before reviewing the operating results of our individual reportable segments, I should point out that such results reflect certain reclassifications of prior year amounts due to changes in our internal reporting structure aimed at realigning our service offerings. Most notably, we have transferred our Ardent and Rabalais subsidiaries from our United States Electrical Construction segment to our United States Industrial Services segment. With that being said, I will now review the results of each of our reportable segments, starting with our revenue performance during the quarter. With the exception of United States Industrial Services and United States Electrical Construction, all of EMCOR's reportable segments experienced first quarter revenue growth. United States Electrical Construction quarter one…

Thanks, Mark, and just for everybody's indication, on the – at year-end call, I did turn my mic on in time. I'm going to be on Page 11, remaining performance obligations by segment and market sector. So, if I had to sum it up in a lot of ways, in 2020, we had a lot of COVID disruption here in this quarter, the first quarter going to the second. We have a little bit of that left, but for the most part, first quarter 2021, the demand environment and the project bidding for construction and service projects were continuing to be active. As I mentioned earlier, total remaining performance obligations or RPOs at the end of the first quarter were just under $4.8 billion, up $351 million or 7.9% when compared to the year-ago level of $4.4 billion. And RPOs increased $181 million for the first three months of the year from the year-end level of $4.6 billion Our domestic construction segments experienced strong project growth in the quarter, with the RPOs increasing $219 million or 6.1% since the year-ago period of March 31, 2020. All but $15 million of that is organic growth. The $15 million belongs to a Chicago-based electrical contractor that really focuses on infrastructure that joined us in February. Building Services segment RPOs increased in the quarter $121 million or 22% from the year ago quarter, a portion of which was the August 2020 acquisition of a Washington D.C. full-service mechanical contractor. However, more representative of what we are now experiencing in this segment, RPOs grew $60 million or up 10% from December 31. All of that is organic growth. And to paraphrase what I said in February, this work is both the resumption of regularly scheduled mechanical systems maintenance. So, we're maintaining systems that haven't…

Thank you, sir. [Operator Instructions] Your first question will come from the line of Brent Thielman from D.A. Davidson. Your line is now live. You go ahead please.

Okay, great. Thank you. Good morning.

Good morning, Brent.

Hey Tony, I wanted to touch on something you mentioned in your closing remarks there, just about sort of maybe a return on the job sites back to what it once was pre-COVID in terms of processes and how things go on the job site. Do you think that helps the margins even more from here? Or how do we think about sort of financial implications of that down the road?

Yes. I think it's way too early for us to think it could help the margins. We're pretty happy where our margins are right now. But it will be interesting, the push and pull of will we be able to keep some of this enhanced scheduling. In some cases, we will. Some cases, we won't. Will we be able to work swing shifts without a lot of pay differential? I think some of our folks have started to like that because they like not being on a crowded job site, and they like being more productive. And then they can put pressure back on their – the union and others to help us do that. So, I think it's too early to tell. I think there are some hard-wired things that we'll benefit from. Our folks have got better and better at planning just the things we control. And they've gotten better and better even on the smaller jobs of using prefabrication and trying to get the work off the site. So hopefully, we can keep productivity where it is. That's our plan, and maybe we can pick up a little bit.

Okay. And then it also came up in your opening commentary, but we also obviously hear about supply chain disruptions here and there in the market. Maybe anything in particular that you're running into that you've really had to work hard through? I'd be curious about that.

Nothing has risen to the level where people are calling me to reach out to the Chief Executive Officer of a distributor, which I've done in the past, or a Chief Executive Officer of an OEM. So that means we're relatively getting through our normal mechanism what we need to stay productive on a job. I'm not sure that's true for everybody, but you think about who EMCOR is in a local market. We're known as being a very fair partner to deal with. We pay people. We pay them on time. We work with them and do a lot of preplanning, especially on the large jobs. We're innovative. We think about ways to have our suppliers help us to the point we work a lot on inventory management together. We try not to have them be surprised. And then, of course, we have big relationships. And we also tend to be pragmatic business people. Sometimes, we don't go for the last dollar on a negotiation because assurance of supply to us, when your workforce is as expensive as ours, is way more important than the extra nickel on a roll of wire or a line of – a foot of pipe.

Okay. Appreciate that. Maybe my last question, Tony, is just understanding the indoor air quality opportunity. It's obviously something that comes up with investors a lot. Is that – is it something that's meaningfully impacting the RPOs today? Or is it – I mean, obviously, still best yet to come there?

Yes, I'm going to ask Mark to help me with this. But the reality is it will probably never meaningfully affect the RPOs. What it does is it meaning affect growth in a quarter in Building Services because most of this is work – RPOs for us, for the most part, is projects that stick around through a quarter. This work tends to be in and out and tends to be smaller ticket item.

Yes. So, Brent, just to amplify Tony's commentary, this stuff is fairly quick turn. So, we're getting the award, and we're executing the work within the construct of a quarter. So, you're not going to actually see it hit the RPO number disclosed at the end of the quarter. And what's actually hitting there relative to the huge amount of RPO that EMCOR has as a consolidated enterprise is just not meaningful.

And Brent, we don't talk a lot about this. But I got to give our folks a lot of credit on this one. Back last year, four weeks before we're sitting here today, as early as March 30 of last year, we were gearing up to be able to deliver these solutions. And we had all the relationships. This was part of our arsenal of things we would deliver to a customer. But some of this was these tools, because it hurts efficiency, people weren't that excited about. I got to give a lot of credit to Mike Bordes and his team. They took advantage of the downtime with a lot of our technicians. And they took advantage with our salespeople and our service supervisors and our small project managers. And we did a ton of training from about March 25 of last year until June one when we could really go back out and offer these solutions. And you had to have all the OEM relationships in place. You had all the supply chain in place. We also had to have the front end trained so people could go and implement. And so, we were thinking about this, I'm venturing to say, long before other people to be able to deliver. And we were proactive with our customers and not reactive.

Great. Thank you, guys, for taking the question.

Thank you, sir. Your next question will come from the line of Adam Thalhimer from Thompson, Davis. Your line is now live. Go ahead please.

Hey, good morning guys. Congrats on the great start to the year.

Thank you.

Can you help us with moving Ardent into industrial? How much revenue shifts?

Mark will take that.

With regards to the quarter? Or are you looking at the full year?

Full year.

Full year 2020 or full year 2021?

Well, I need 2021. If you give me 2020, I think that will help.

I'm not going to give you 2021. So, I'll give you 2020. So, it's roughly 100...

You offered. You offered.

I want to make sure I'd be able to respond to your question.

We just want to make sure you're on your toes, Adam.

Okay.

So full year 2020, it's $143 million that's going to move out of Electrical Construction into industrial.

Perfect. Okay. And then the UK, and Mark, you mentioned there was a currency benefit there, but had a great quarter. I'm just curious how sustainable.

Look, like we always say, and probably much to ad nauseam for all of you, these aren't quarter-to-quarter businesses. But for those that have been with us a long time that we're consistently operating in the UK north of 5% now three years in a row. It might be 7% one quarter. It might be 4.9% one quarter. But if we can keep that between the goalpost of 5% to 6% on an annual basis, we're doing pretty well. And what really drove it was the project mix. And if that continues and again, this is not pricing. This is execution, and this is really, really good work.

Okay. And then the last one, the margin was really good at mechanical. You talked about some food processing jobs. Are those jobs done? Or are those going to keep burning this year?

Look, we always have some food processing work, but the large project work, the large project we were doing is pretty much through commissioning now. We have other things on the board. And the way this works is you have a lot of contingencies and really complex projects on commissioning. So, we're starting to move through some of those contingencies. But let's be clear, that's not what – the only thing that drove that performance. This was across a lot of work, a lot of projects. Mark also made a comment that unless you're really listening, you might have not picked up on. We had those – that increased revenue with very little increased cost. And so, at the end of the day, we're getting good fall-through because, again, go to the productivity point. We're probably benefiting more from productivity in our mechanical segment because of what they're doing on prefab and planning than in any part of EMCOR, especially in our – we like to call them the power companies. But what I mean by that, these are large subsidiaries. They really have got this down right now. And then Joe Burns and his team are probably as good as anybody at taking those means and methods and spreading them through the company where applicable.

Okay. I'll go ahead and turn it over. Ramp up those buybacks, guys – thank you for the time.

I'll tell you how we really feel, Adam.

Thank you. Your next question will come from the line of Noelle Dilts from Stifel. Your line is now live. Go ahead please.

Good morning Noelle. How are you?

Hi. Doing well. How are you?

Good.

So – great. So, you talked about supply chains a bit. But I was curious if you could just speak to – we've obviously seen a lot of inflation in raw material costs and steel. I understand most of your costs are made of labor, but how are you – consistent labor, but how are you thinking about or watching some of those – the raw material increases? And if there may be more of an indirect impact on your business?

Look, if not handled correctly, within a quarter or two, that could be a direct impact. We – again, go back to the supply chain discussion I had. We work really hard on large projects to try to lock in the best we can, the prices, especially on the major components, gear, chillers, air handlers, all that typically gets locked in. And we're not speculators in that. We make our price, we figure it out, and that's what we go with. We also don't run. So, when we talk about being fair, right? Typically, our guys don't run back if the price moves down to those suppliers and say, "Okay, now I need a reduction." We made our deal. And of course, now in more commodity inflationary times, they realize that. The other thing is most of our work is getting repriced, and in a sense, this smaller project work, this stuff that's less than a couple of million, all the time. What I mean by that is we're doing new work, right? So therefore, we reprice it. We were talking about this, Mark and I, as this round of commodity inflation would be, for him and I, probably about the seventh time we've seen this, eighth time together. Yes, together. We've seen it more than that, but together, we've seen it. Many years ago, I was on the other side of this, trying to ramp through price increases. We really have not been stung bad by this through time. We know the copper game. Our electrical Chief Executive Officers are as good as an estimator as good as anybody in the business as our mechanical guys. I'll make – I'll go out on a limb here. I might end up being wrong. I doubt it on this one. Steel…

No. Tony, you pretty much caught that. Noelle, I think just to echo Tony's point, and I think because we're such a large customer for the wholesalers that we're sourcing from, and we're consistent with where – how we're procuring our materials, we have – it's very rare that people do not honor their pricing once we get it. And we obviously strive to get price quotes as close as possible to when we're going to mobilize on work. So, we try to minimize the window of time that we would be exposed to any of that commodity inflationary pressure. But as Tony said, if we do get stung, it would be isolated instances. And it would only impact a quarter and will not prolong itself through the remainder of the year.

Okay. Okay. That's really helpful. Thank you. I guess just shifting over kind of circling back to the infrastructure bill. Clearly, both the Democratic proposal and the Republican proposal – or counterproposal are talking about really big numbers. Really, we're talking about massive increases in the market. How are you guys thinking about the industry capacity to support more work coming in, whether in terms of labor, do you think you'd be able to kind of find the right folks to ramp up relatively quickly as some of that funding comes in? Thanks.

I mean, the answer to the EMCOR-specific is on the projects that EMCOR will bid, on the projects that EMCOR will win, and that will be an increase to what we're doing today, which is we think, again, go back to what I said, even without this infrastructure bill, we expect non-res to maybe have a growth year versus what was an expected down year this year. EMCOR won't take a job unless we have the capacity to do it. And we believe we will have the capacity to grow if that infrastructure bill comes into the market. It will be a meaningful part of the industry, and it will cause the industry to grow. And we typically outgrow the industry. Second to that, will the industry be able to absorb it? I think the answer to that's yes. I think – like the industry always struggles at the low end. Somehow, we'll find a way to get through that. Where we're at, again, I always use this example. I can't worry about what all my competitors do, but I'll tell you how we think about it. We think we're a destination of choice for trade labor. And why is that? Go back to that discussion we had on safety. It's a core value. We give people the right equipment. They know that, that's fundamental to who we are. The second thing is, they know they're going to have confident supervision. You need – and that's all the way up, right? These three people I'm sitting around the table with today, including four with me, we all have deep, deep respect and have a pretty good knowledge of the challenges skilled trade labor focus on and have to do in execution of their job. It gets better as you go…

Okay. Great. And I guess last question for me is a shorter one. You mentioned that the pandemic has slowed deal flow a bit, but could you just speak to what you're kind of seeing in terms of pricing or multiple trends, given that there is now, I think, more incremental optimism around nonresi and infrastructure?

I mean, look, their multiples might drift up a half a turn or a turn, but so does ours, right, even more than that. And so, we'll still have the same disciplined process we always have. And we could show you a slide and you go, "Wow. You actually got to seal all those deals?" It starts with 200, and then it goes to 50, and then it goes to 20, and then it goes to five, and we may close three, right? But at the end of the day, I'm not looking at 200. We have folks that look at books maybe or reach out to owners or owners call us. We have a pretty good idea of the kind of companies we want to buy and who they are. We work with them over a long period of time. Where we're best is when someone's selling their life's work or their family's life's work, and they still want to be part of the solution going forward. We're not looking to make the best financial deal. What I mean by that is we're not bargained – just like I talked about how we're fair with our suppliers, we look to be fair with the people selling us their business. They're going to be our partners going forward. Secondarily, we want to make sure that we both buy into the business case and what it looks like going forward. So private – if it's a big auction run by some of the notorious banks that are going to do narrow, and narrow to them means 150 people looking at it, we're probably not going to be successful. And in fact, I'm not even sure we look at much of that anymore. A lot of times, people will hire intermediary. But their intermediaries hire to get to us and to put structure around the process. And a lot of times, we're at the top of that list. And like I said, we try to be very fair on terms and conditions, and we try to be very fair on price that works for both of us. And you think about what we've done and you say, "Wow, I didn't know you did that." We've done five deals since May of last year through a pandemic. Now none of them have been earshots. We've been pretty good, though. And we see nothing that will abate us from doing that or more, and there might be even larger ones coming in there, which means bigger contractors that we know for a very long period of time, and they have terrific reputations. And we got just sort of delayed a little bit with the pandemic.

Okay, thank you.

Mark or Kevin? Mark, you have anything to add? Anything else? Lara?

Yes, thank you sir. We have last question coming from Mr. Sean Eastman from KeyBanc Capital. Your line is now live. Go ahead, please.

Hi team. Nice quarter. It's got to be a relief to comp earnings up mid-teens on that first quarter. So that's excellent. I'm just trying to think through the – kind of make sense of the earnings outlook for the balance of the year. So, after this first quarter, I mean, at the midpoint of the full year guidance, it implies lower earnings year-over-year for 2Q, 3Q, 4Q. And I'm just trying to think through where you guys are, what you guys are kind of building in there in a sense, right? Because on one hand, we have revenues that will be up high single digits. Industrial Services should be a good guy year-over-year. But then on the other hand, we're comping some pretty tough construction segment margins. So maybe you could just walk me through those moving parts. Am I thinking about that right? I'm just wondering why it makes sense for earnings to be not up over the balance of the year.

Yes, Sean. So, let's look macro level first. I've been doing this a long time, as has Mark with me. We really tried real hard to think of other than 2019, right?

2019.

And maybe there's one other time. Maybe it was coming from 2010 to 2011. And we couldn't remember where we ever even moved guidance in the first quarter.

Yes.

So, start there.

The upper end...

The upper end. Okay?

Got you. Got you.

Okay. The second thing is you're talking very slight moves in margin to portray the scenario that you're portraying. So, we're not that precise at this time of the year. We'll know a lot more at the end of the second quarter, right, Mark? But we're – we think we have good guidance right now. And I think we're still trying to work our way around Industrial Services. I mean, we gave up $17 million in the first quarter year-over-year in Industrial Services.

Almost $18 million.

Yes, and down 35% on revenues. So, we're not ready to declare victory on that comp yet. Mark, do you have anything to add?

Yes. And I think just going to the industrial point, Sean, we're hopeful that it's going to be, as you say, a good guide to 2020. But we still have three quarters of activity to get through with the customer base that if anything has demonstrated that they are reactionary to external factors more than any other customer base that we deal with. So, we would like to think, presuming that we have normal weather patterns, we don't have a hurricane season of note and anything else we could possibly think of, that you would see resumption in demand. But I think Tony has been very clear on this call today, and he certainly was very clear in the February call that we're optimistic that we'll see strengthening in performance in the fourth quarter of 2021, building strength into 2022. And any one or two decisions could easily swing that all into 2022 or conversely back into 2021. And we just don't have the visibility to that yet. So – and I think the other parts of our business are performing at or near all-time historical highs, both from a margin contribution perspective at fairly high levels of volumes. And that's baked into the guidance. But I think, once again, when we spoke externally in February, we were anticipating that we were going to see some small element of margin degradation in our Electrical and Mechanical Construction businesses. Clearly, we didn't see that in the first quarter, but unfortunately, one quarter does not make a full year. And we're going to endeavor to do whatever we can to maintain or improve those margins. But as we sit here today, it's just too early to predict that we're going to be successful on that front.

Yes. And we operate off of what we know. And I think collectively, we're fairly optimistic right now. But we've been doing this a long time, and we're in the first quarter.

Yes – now that's – fair. That's helpful perspective. I really appreciate it guys. I'm going to jump over and talk to Bradley now.

Tell him "Hi".

Take care.

Bye. I think that's it. And...

Yes, sir.

Lara, is that it?

Yes, sir. That would be our last question.

Okay. Thank you all very much. Appreciate it, and we'll be back to talk to you in July. Bye.

Thank you, sir. Thank you so much, presenters. And again, thank you, everyone, for participating. This concludes today's conference. You may now disconnect. Stay safe and have a lovely day.