EMCOR Group, Inc. (EME) Q2 2021 Earnings Report, Transcript and Summary

Good morning. My name is Jerome, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group Second Quarter 2021 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Mr. Haskel Kwestel with FTI Consulting. You may begin.

Thank you, Jerome, and good morning, everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the company’s 2021 second quarter results, which were reported this morning. I’d 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, Haskel, and good morning, everybody. As always, thank you for your interest in EMCOR and welcome to our earnings conference call for the second quarter of 2021. It’s amazing to me that we’re already halfway through the year in fact more so now. For those of you who are accessing the call via the Internet and our website, welcome to you as well and we hope you have arrived at the beginning of our slide presentation that will accompany our remarks today. We are on slide two. This presentation and certain -- and discussions contain forward-looking statements and may contain certain non-GAAP financial information. Page two 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 three, excuse me, are the executives who are with me to discuss the quarter and six-month results. They are Tony Guzzi, our Chairman, President and Chief Executive Officer; Mark Pompa, Executive Vice President and Chief Financial Officer; and our Executive 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 our Investor Relations section of our website under Presentation. You can always find us at emcorgroup.com. With that said, please let me turn the call over to Tony. Tony?

Yeah. Thanks, Kevin, and good morning to everybody. And upfront here, I am going to be covering pages four to six. And you take a step back, what a difference a year makes? When we reported our second quarter 2020 numbers, we were in the throes of a pandemic with no clear end in sight. Although, COVID-19 cases in some geographies are rising again. We are in a much more stable environment and have much better visibility with respect to our operations than a year ago. We remain focused on our employee safety as we continue to work in this environment. We had a very strong operating quarter, with revenues of $2.44 billion, operating income of $133 million and earnings per diluted share of $1.78. We maintained strong operating income margins of 5.5% and had revenue growth of 21% overall, with 18% organic revenue growth. It is important to remember that in second quarter 2020 we had several of our key geographic markets either shutdown or partially shutdown. This revenue growth resulted in a sizeable investment in working capital this quarter, leading to a more typical cash flow pattern for us than in the prior year, during which we were liquidating our balance sheet due to COVID-19 imposed lockdowns and customer site restrictions. Regardless of the unusual factors impacting our comparison against last year, we had a very strong quarter. Our business trends are strong. We grew our remaining performance obligations, and I’ll refer to them as RPOs for the rest of the presentation to a record $5.1 billion and had substantial growth in our Electrical and Mechanical Construction segments, as well as in our Building Services segment. This RPO growth was broad based across market sectors and geographies. For the quarter, we continued to see excellent operational execution in both our Electrical and Mechanical Construction segments. We had revenue growth in our Electrical Construction segment of 19.3% and in our Mechanical segment up 21.3%, which I believe reflects more than just resumption of normal demand from the COVID impacted results of the second quarter last year. With Mechanical Construction operating income margins of 8.3% and Electrical Construction operating income margins of 8.7%, we are executing with discipline and precision as we grow our business. We had broad based growth across our trade offerings and market sectors, and across our geographic footprint. We had especially strong growth within the commercial and that’s really across commercial with data centers and logistical infrastructure drove that, and healthcare market sectors. Our large project work and small quick term project work are both strong from a revenue and booking perspective. We continue to work very hard to bid and schedule our work amid the uncertainty around material pricing and availability. Our team is experienced with this issue and so far we have weathered this challenge. But it requires attention to detail, communication with our supply chain partners and customers, thoughtful planning, and careful contract negotiations. The supply chain pressures are likely to be with us for most of the balance of the year. Again, I sound redundant, but we are blessed with an execution-oriented culture across EMCOR. Our Electrical and Mechanical Construction teams are some of the best operators in the business. We leave the quarter with very strong RPO growth across these segments of almost 8% from the year ago period and nearly 10% from the end of 2020 and this is despite very strong revenue growth. Our U.S. Building Services segment had a very strong quarter, with revenue growth of 30.4% and operating income growth of 13.9%. Operating income margins were strong at 4.9%. RPOs additionally increased 37.8% versus the year ago period, and organically, RPOs are up 21.2%. We see accelerating demand for HVAC retrofit projects with a special emphasis on energy retrofit and IAQ or indoor air quality. We’re also performing very well in our commercial site-based business with strong bookings year-to-date and several important customer wins. We are not only executing for our current customers, but are winning new work and have a very healthy pipeline of opportunities in this business. We expect to continue to see strong demand for our mechanical services, as well as our commercial site-based business services as customers seek to improve their facilities as they emerge from the pandemic. Our Building Services team has done an exceptional job of anticipating our customers’ needs post-pandemic and we are a key partner in making these facilities more energy efficient and safer with improved air quality and movement. In our Industrial Services segment, we had a near breakeven performance on an operating income basis, despite taking a $4 million charge for a receivable from a customer who recently entered into bankruptcy protection. We had positive EBITDA and I believe we will start seeing better revenue comparisons as we move through the second half of 2021. We do expect our forward view to improve as customer inquiries and scheduling are at very robust levels for late 2021 and early 2022, crack spreads remain strong and utilization continues to improve. Our U.K. Building Services segment had another strong quarter, with operating income growth of 31.7%. We continue to execute well for our customers in the U.K. and have strong retrofit project growth and also for our full facilities management offering. Overall, a very strong quarter and we remain poised to deliver for our customers and shareholders for the remainder of 2021. We’ve had a great start to the year and I would be remiss if I didn’t thank our employees for their focus on safety first, while delivering results for our customers and shareowners in an ever changing environment. With that, I will turn the discussion over to Mark.

Thank you, Tony, and good morning to everyone participating on our call today. For those accessing this presentation via the webcast we are now on slide seven. Over the next several slides, I will supplement Tony’s opening commentary on EMCOR’s second quarter performance, as well as provide a brief update on our year-to-date results through June 30th. All financial information referenced this morning is 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 revisit and expand our review of EMCOR’s second quarter performance. Consolidated revenues of $2.44 billion are up $423.6 million or 21% over quarter two 2020. Our second quarter results included $53.8 million of revenues attributable to businesses acquired pertaining to the time that such businesses were not owned by EMCOR in last year’s second quarter. Acquisition revenues positively impacted both our United States Electrical Construction and United States Building Services segments. Excluding the impact of businesses acquired, second quarter revenues increased nearly $370 million or 18.4% when compared to the second quarter of 2020, which was severely impacted by the COVID-19 pandemic, and the corresponding containment and mitigation measures mandated by certain of our customers, as well as numerous governmental authorities. Despite the less than difficult compare between quarterly periods due to the challenging environment in 2020, EMCOR’s quarter two 2021 revenues represent an all-time quarterly revenue record for the company. The specifics to each of our reportable segments are as follows. United States Electrical Construction segment revenues of $489.5 million increased $79.1 million or 19.3% from 2020 second quarter. Excluding acquisition revenues of $8.6 million, the segment’s revenues increased 17.2% quarter-over-quarter. Significant increases in revenue contribution from projects within the commercial, institutional and healthcare market sectors were the primary drivers of the period-over-period improvement. We continue to see strength in the telecommunication submarket sector, as we experience sustained customer demand for data center projects driving the growth in commercial market sector activity within the segment. United States Mechanical Construction segment revenues of $958.7 million, increased $168.2 million or 21.3% from quarter two last year. Revenue growth was primarily attributable to an increase in commercial and healthcare market sector activities. With respect to the commercial market sector, consistent with the growth experienced by our Electrical Construction segment, this segment also continues to see strong demand for data center project work, given growth in data storage and cloud computing across the country. In addition, the continued build-out of our customers’ e-commerce supply chains has resulted in an increase in the number of fire protection project opportunities for this segment within various warehousing and distribution facilities. With regard to the healthcare market sector, consistent with the trends we experienced during the first quarter of this year, we are engaged in a number of projects ranging from mechanical system retrofits to complete installations in both new and existing healthcare facilities. Second quarter revenues for EMCOR’s combined United States Construction business of $1.45 billion increased $247.3 million or 20.6%. This revenue performance represents an all-time high for our combined Construction segments. Despite this record revenue performance, we increased remaining performance obligations, which Tony briefly covered, within each of these segments as a result of strong project bookings. Tony will cover this in more detail at the completion of my prepared remarks. United States Building Services quarterly revenues of $624.4 million increased $145.5 million or 30.4%. Excluding acquisition revenues in this segment of $45.2 million, the segment’s revenues increased almost 21% organically. This performance also represents an all-time quarterly record for the segment’s revenues. Revenue gains within each of their divisions due to resumption of maintenance and project activity as compared to 2020’s COVID impacted quarter, augmented by incremental projects aimed at improving customers’ indoor air quality, as well as increased building automation and controls activity were the primary drivers of this quarter’s strong revenue performance. EMCOR’s Industrial Services segment revenues of $235.2 million decreased $5.9 million or 2.5% as the segment has yet to return to pre-pandemic revenue levels due to prolonged adverse market conditions within the oil and gas and related industries. Of those still below the prior year, this 2.5% quarter-over-quarter revenue reduction is significantly less than the more abrupt quarterly revenue declines experienced in other quarters post-quarter one of 2020. As Tony previously indicated, we are beginning to see positive signs of demand returning as we look toward -- our turnaround planning for early 2022. Let’s hope that we do not see any additional macroeconomic headwinds impacting this industry. United Kingdom Building Services revenues of $129.9 million increased $36.7 million or 39.5% from last year’s quarter. Resumption of maintenance contract activity that began during quarter one of this year strengthened in quarter two as project work that was deferred in 2020 has recommenced. Additionally, revenues of this segment benefited from $14.5 million of favorable exchange rate movement during the period. Please turn to slide eight. Selling, general and administrative expenses of $242.9 million represent 10% of revenues and reflect an increase of $37.7 million from quarter two 2020. Adjusting for incremental expenses attributable to companies acquired, inclusive of intangible asset amortization, EMCOR’s organic SG&A increase was $33.4 million. As a reminder, the prior year period benefited from substantial cost reductions resulting from actions taken in response to the COVID-19 pandemic, with significant percentage of such actions pertain to employment costs including furloughs, headcount reductions and temporary salary reductions. Additionally, 2020 second quarter included reduced levels of incentive compensation expense, as a result of the downward recalibration of our internal forecasts, driven by the uncertainty created by the pandemic. In contrast, the results for the second quarter of 2021 include a significant growth in revenues, as well as profitability forecasts, which eclipse EMCOR’s previous earnings performance records across numerous of our operating companies. These factors have necessitated headcount additions to support such growth, as well as increased levels of quarterly incentive compensation accruals. Just so that there is no misunderstanding, at this time last year, we were either reversing the previous quarter’s incentive accruals or accruing at significantly reduced rates, while at this point in 2021, based on our performance for the first six months of the year and our projections for the remainder of the year, our incentive compensation levels are tracking more linear with our current year earnings expectations. In addition to these increases in employment costs, our results for the second quarter of 2021 included a $4.1 million provision for credit losses due to the bankruptcy filing of a customer within our U.S. Industrial Services segment, which negatively impacted our quarterly consolidated SG&A margin by 20 basis points. Reported operating income for the quarter of $133.4 million, compares to an operating loss of $122.6 million in 2020 second quarter, due to the $232.8 million non-cash impairment charge recorded in the prior year. Excluding 2020’s impairment charge, operating income for the current period represents a $23.2 million or 21.1% improvement over last year’s adjusted non-GAAP second quarter operating income of $110.1 million. For the second quarter of 2021, operating margin represents 5.5% of revenues and is consistent with our adjusted non-GAAP operating margin in last year’s quarter. Consistent with our quarterly revenue performance, the operating income of each of our reportable segments other than U.S. Industrial Services has increased by double-digit percentages. Specific quarterly operating performance by reporting segment is as follows. Operating income of our U.S. Electrical Construction Services segment of $42.7 million for the quarter ended June 30, 2021 increased by $11.1 million from the comparable 2020 period. Reported operating margin of 8.7% represents 100-basis-point improvement over last year’s second quarter due to an improvement in gross profit margin given a more favorable revenue mix and continued strong project execution. Second quarter operating income of our U.S. Mechanical Construction Services segment of $79.3 million increased $12.3 million from the comparable 2020 period. Reported operating margin of 8.3% represents a slight reduction from last year’s quarter. Our over 20% increase in quarterly revenues was the major driver of our period-over-period operating income improvement, while the slight reduction in operating margin resulted from a modest decrease in gross profit margin due to the composition of work performed during each period. Each of our Electrical and Mechanical Construction segments established new second quarter records in terms of operating income dollars. Our total U.S. Construction business is reporting $122 million of operating income and 8.4% operating margin. This performance is improved by $23.4 million and 20 basis points from last year’s second quarter. Operating income for U.S. Building Services is $30.3 million or 4.9% of revenues. This represents a $3.7 million improvement quarter-over-quarter and like most of our other reporting segments represents a new second quarter record for operating income dollars. Increased gross profit from the mechanical services and commercial-site-based services divisions due to a strong resumption in demand as compared to 2020’s challenging second quarter was the primary reason for the period-over-period increase in operating income. The 70-basis-point reduction in quarterly operating margin is due to revenue mix, which included a larger percentage of fixed price capital projects that traditionally have a lower gross profit margin profile than the segment’s call-out service work. Our U.S. Industrial Services segment operating loss of approximately $200,000 represents a decrease of $3.5 million from last year’s second quarter operating income of $3.3 million. While the segment experienced an increase in gross profit and gross profit margin during the current quarter, its results include an increase in credit losses due to the aforementioned customer bankruptcy, which negatively impacted operating income by $4.1 million and operating margin of the segment by 180 basis points. Looking ahead, we are encouraged as we are beginning to see signs of improving financial performance albeit in an environment that remains somewhat challenged. U.K. Building Services operating income of $7 million or 5.4% of revenues represents an improvement of $1.7 million with a slight reduction in operating margin over 2020 second quarter. Approximately $800,000 of this period-over-period improvement is due to positive foreign exchange movement with the remainder attributable to an increase in project activity primarily within the commercial market sector. The decrease in quarterly operating margin is a result of an increase in the ratio of selling, general and administrative expenses to revenues in the current quarter, as the prior year benefited from certain short-term cost-cutting initiatives and actually in response to the COVID-19 pandemic. We are now on slide nine. Additional financial items of significance for the quarter not addressed on my previous slides are as follows. Quarter two gross profit of $376.3 million, was higher than 2020’s comparable quarter by $61 million or 19.3%. Gross margin of 15.4% is 30 basis points lower than last year’s quarter due to shifts in revenue mix in both our U.S. Mechanical Construction and U.S. Building Services segment within the quarter. Diluted earnings per share in the second quarter of 2021 is $1.78, as compared to a loss per diluted share of $1.52 in the year ago period. On an adjusted basis after adding back the impairment loss on goodwill, identifiable intangible assets and other long-lived assets recorded last year, 2020’s non-GAAP diluted earnings per share was $1.44. When compared to our current years -- when compared to our current quarter’s performance, we’re reporting a $0.34 or 23.6% quarter-over-quarter EPS improvement. This 2021 quarterly diluted EPS of $1.78 represents a new all-time record for any quarterly period in our history, despite some of the headwinds we continue to face. This is further testimony to the operational excellence demonstrated by our subsidiary and segment teams each and every day for which I am thankful. Please turn to slide 10. With the quarterly commentary complete, I will touch on some high level highlights with respect to EMCOR’s results for the first six months of 2021. Revenues of $4.74 billion represent an increase of $427.9 million or 9.9%. Operating income of $250.4 million or 5.3% of revenues represent sizeable increases from both 2020’s reported and as adjusted non-GAAP six-month results. Year-to-date diluted earnings per share was $3.32. Although not shown on the slide, my last comment on the results for the first six-month period is with respect to our slightly negative operating cash flow as compared to 2020 strong cash flow performance during the first half of the year. With substantial organic revenue growth in this year’s second quarter, we have experienced an increase in working capital investment as both our accounts receivable and contract asset balances have elevated in concert with our project and service volumes. Further, it is important to note that our cash flow for the prior year period was favorably impacted by certain government legislation passed in light of the COVID-19 pandemic, which allowed for the deferral of the employer’s portion of social security taxes throughout the majority of 2020 and also extended the deadline for making estimated federal tax payments from the second to third quarter of last year. These measures, along with the United Kingdom’s deferral of value-added tax in the prior year favorably impacted both our second quarter and six-month operating cash flows in 2020 by almost $100 million. My expectation for full year 2021 is that we will generate operating cash flow in excess of $300 million. Please turn to slide 11. EMCOR’s balance sheet remains strong and liquid. Cash on hand is down from year end 2020 driven by cash used in financing activities of approximately $157 million, inclusive of $138 million used for the repurchase of our common stock and cash used in investing activities of approximately $71 million, most notably due to payments for acquisitions net of cash acquired totaling just shy of $56 million. Working capital levels have increased modestly as increases in accounts receivable and contract assets, resulting from our substantial organic growth during the period, were offset by the decrease in our cash balance just referenced. The increase in goodwill is predominantly a result of the three businesses acquired during the first six months of this year. Net identifiable intangible assets have increased slightly as the impact of additional intangible assets recognized in connection with the previously referenced acquisitions were largely offset by $31 million of amortization expense during the year-to-date period. Total debt exclusive of operating lease liabilities is virtually unchanged since year end 2020. As a result of our consistent outstanding borrowings and the growth in our stockholders’ equity due to our net income for the first six months of 2021, EMCOR’s debt to capitalization ratio has reduced to 11.7% from 11.9% at the end of last year. EMCOR remains in a position of strength, which allows us to continue to invest in our business, return capital to shareholders and execute against our strategic objectives both in the near- and the long-term. With my portion of this morning’s slide presentation complete, I would like to return the call to Tony. Tony?

Hey. Thanks, Mark. And I am going to be on pages 12 to 13. I am going to talk about remaining performance obligations by segment and market sector. I’ll give you a top summary here, they’re at the highest level. However, we have a strong mix. Our bookings were strong for both small and large projects with a book-to-bill of 1.12. And what I am going to do is I am going to intermix comments from what would be page 13 and we’ll talk about some of those sectors we’ve been talking about into my overall RPO commentary. We sort of had a RPO triple-play here with RPOs increasing in three comparable periods. At the year period, that’s versus 2020 for June 2021, June 2020, six-month period 2021 June versus December 2021 and sequentially from March 2021. All five of our business segments have RPO growth for each of these measurement periods. But to be fair, we’ve said this many times, this is not a quarter-to-quarter or month-to-month business. RPO movement is not something we draw sweeping inclusions from month-to-month or quarter-to-quarter. But the reality is with the kind of bookings we had and level we’re at, we feel pretty good about the forward view of our business. And I had a quarter one statement where I talked about the non-res market and I think I talked about it also as we moved through last year that we wouldn’t know what the impact of that second quarter would be until we got to the second quarter. And I think we can now say that we expect growth in the non-residential market. I would guess that growth to sort of be somewhere in the mid-single digits and we’re clearly outperforming that mid single-digit growth. As mentioned, total company RPOs at the end of the second quarter were just over $5.1 billion. They’re up $516 million or 11.2%, when compared to the year ago level of $4.6 billion. They too increased $511 million for the first six months of the year and real important to look at is the organic RPO growth, which increased $409 million or 8.9%. And again, I talked about a book-to-bill well over 1. Our domestic construction segments had RPO growth in the quarter at $301 million since June 30, 2020 and that was both in the Electrical and Mechanical Construction segments. And we’re seeing it being driven by strong overall bookings in data centers, manufacturing, industrial, water and waste water, healthcare and logistical infrastructure work. We also expect strength to continue in our small projects, short-duration work and a lot of that centers are on commercial and manufacturing is where we see that work. Building Services is 13% of total RPOs in the second quarter and increased $202 million, $114 million of that $202 million was organic. Pre-pandemic small project demand is active, it’s back is another way of saying that across the country and we also getting more value now because of the indoor air quality and air movement work that we’re doing in addition to the energy efficiency work. Our customers are executing both types of these projects as a result of an expectation of increased energy costs, a desire to reduce their carbon footprint and a strong belief that IAQ solutions will improve their employees’ productivity by improving their ease of mind and their safety. One of the things I’d point out is we are one of the key problem solvers for energy efficiency work and IAQ work, and as you demand more energy efficiency from your facility. We bring concepts from ideas and things that people think about to real projects for owners and tenants. We’re uniquely positioned to help our customers reduce their carbon footprint, achieve cost reduction goals and have better and cleaner buildings. Every time we service, repair or replace an HVAC unit or install or service a new or updated building control systems and this is exactly where Mark told you we were growing in Building Services, we are making facilities, healthcare facilities, factories and office buildings less carbon intense and more efficient. The other thing we’re seeing is the combination of these energy savings projects with more on-site generation, whether it be renewable generation like solar or combined heat and power, which takes waste heat and turns it into either HVAC or power generation. It is important to note that most of our Industrial Services segment field services work would not be in RPOs, as it is executed via time and material contracts. And in that case, we’re seeing strong demand for us to schedule for people as we go from the back half of this year into next year. What we’re seeing across the RPOs is we’re winning at a rate that we believe is much faster than the underlying non-residential market growth and that we have durability to move within these sectors and flexibility and that will continue to benefit us as we move through the remainder of 2021 and into 2022. With that, I am now going to wrap up on pages 15 and 16. As we assess our performance at the half, we are performing very well across our business. And as a result of that performance through the first half of 2021, we’re raising our earnings and revenue guidance for 2021. We will raise our revenue guidance to $9.5 million -- $905 billion in revenues, which exceeds our previous range of $9.2 billion to $9.4 billion in revenues. We will raise our earnings per diluted share guidance from $6.35 to $6.75 to a new range of $6.65 to $7.05. Previously, we had told you that we would know more at the conclusion of the second quarter and with greater visibility that we now have, we can raise our guidance. For us to achieve the middle to the top end of that guidance range, a large percentage of the following must happen. I think most of you know I like to talk about what we control and what we don’t control. We would like to focus on the things we don’t control and prepare contingency plans for those things that we don’t control. So we focus on the things we control and have contingency plans for the things we don’t control. What we control? Well, we like to think we control our cost and we’re known for keeping our cost in check, whether that be direct and indirect labor costs, material costs. We’re pretty good at this and it’s been an operating fundamental here at EMCOR for a long time. We need to continue to have success in navigating the supply chain challenge with respect to pricing and availability. I talked about that earlier in my opening commentary. It’s a challenge. I mean, I’ve listened to a bunch of calls. You listen to more calls. It’s a challenge. We’re positioned well to navigate it. We think we’ll continue navigating it well, but it is a challenge. We also need to continue to be able to find the right labor at the right time. We’ve always been very successful at that. It’s a question you all ask. I’ll answer for you now. We expect to continue to be successful at that. We will always struggle to find HVAC technicians in the summer like everybody else and our op technicians and our operating engineers, we always are looking for, because we’re growing that business pretty healthily right now. And so, those are the two areas, we always look for people. But we have great labor relations at the local level and we expect to be able to man our construction projects with the right people at the right time and the right skill mix. We are an employer of choice. We expect the booking momentum to continue, especially with respect to quick term project work, and for us, that means projects really less than $2.5 million or so. It’s very strong right now. We expect that to continue and that’s what gives us conviction to talk about the underlying strength in the market overall. I am humble enough and our team is humble enough to know that there’s a whole bunch of things we don’t control. We don’t control whether the non-residential market will continue to be strong. We expect it to be. But if it’s not, we will react and have a contingency plan to adapt to that. We don’t control what will happen in industrial services. We know what we see with respect to what people want us to do. But we’ve been doing this long enough to know that that can change. And look, we’re a little shy about being overly optimistic, as what weather has done to us in the Gulf Coast over the last three years. We don’t expect any major COVID disruptions in our business or our geographies. I do expect that there would be increased demand from our customers for us to supply vaccinated people and we are advocating that strongly in our business and for our employees. Safety is one of our key corporate values and we think keeping our employees safe is asking them to be vaccinated. We’ve had pretty good success. We need to have better success. We also don’t think the supply chain issues as of today will be more pronounced than they are, they could be. But we do expect them to last for the balance of the year, and clearly, we don’t control everything that goes on with the supply chain. As far as capital allocation, we spent nearly $57 million on acquisitions year-to-date. They were right down the pipe as far as the kind of things that we like to do. We returned $138 million year-to-date on share repurchases as Mark talked about and we also returned $14.2 million in dividends back to our shareholders. We expect to continue to be balanced capital allocators as the year progresses and we have a decent pipeline of acquisitions that we are working on. I will tell you unequivocally right now that one of the strengths of our company is our balance sheet. Our customers look to that balance sheet. That’s one of the reasons we can grow as fast as we can organically and it’s one of the reasons we’ve had so much success on a lot of the quick term work in these large data center projects and healthcare projects because people know that we will have the working capital and the ability to build the team on a very quick basis with the right labor at the right time and have the access to the capital to do that. With all that being said, I am happy to take questions. Jerome, open the line please.

[Operator Instructions] Your first question comes from the line of Noelle Dilts with Stifel. Your line is open.

Hi, guys. Congrats on another good quarter.

Hello, Noelle.

Good morning. So I was hoping you could just speak to the impact of raw material cost and inflation, I asked about this last quarter. And you talked about really making some major efforts to manage higher costs coming through. So could you just discuss where that stands today and the extent to which you’ve been able to pass higher zero costs onto your customers?

There’s three ways that this gets mitigated, yeah, and how it works, right? The first one is, our longer term projects where we lock in the price especially for major end components or major commodities where we’ve talked to distributors long before today. We’re blessed to have good relationships. And businesses work together. I mean most pricing is protected on those large projects, because we’re going to all work together through this period and we’re all going to work together after this period of inflation. So there’s a portion of our work that’s protected. The next portion of our work is, you look at our composition of our company and you think about how much gets executed in short order, which is less than a year, which marks about two-thirds of what we do? So therefore, we’re re-pricing that work all the time. We know today that we’re in that environment. So there’s two ways we’ll mitigate that. We either lock it in for that 60 days or 90 days where we buy the material or we’ll make it very clear to our customers that this is the component of what we couldn’t buy that may fluctuate and your customers understand that. Now, if we’re on a fixed price contract where they don’t accept it, then we work extra hard to lock in the price. The third component of our work is time and material. Big chunk of the building services work, the small project work may not be time and material, but it’s going to be executed in less than 60 days. It has a lot of the pricing characteristics of time and material work or it actually is time and material work and all of our industrial work which has very low material component, that’s not purchased by the customer is time and material work. Mark, do you have anything to add on that?

No. I’ll just edify what Tony said. When you look at our RPO in hand actually 84% is going to be executed in the next 12 months...

Yeah. Little more…

So it’s actually more than two-thirds. So, clearly, our supply network has been stable for a long number of years, as you would imagine. EMCOR is a sizeable and important customer for those of us who were in that chain with a valued relationship on both ends and we’re obviously working together to make this as the least painful it can be for all involved.

Yeah. I think, Mark said -- he made a really important statement there and this is the CFO making the statement. We value both sides of that supply chain. So I like other large companies that we deal with at times. We don’t take prepay discounts if we’re not prepaying somebody or early paying somebody. We treat our suppliers the way we expect to be treated. And as a result of that, they tend to treat us fair in times like this. And we also have open communication. You think about a large distributor in a market, we may be, in many cases, their most important customer electrically and mechanically on what they’re distributing. And we’re the most important customer and you treat them right when times are maybe not as good as they were last year, they remember that now, just like we do. I mean, our best customers get our best labor and I think we get the best treatment from a lot of our suppliers, because our subsidiary CEOs deal very professionally with their suppliers at all times. That is how we conduct business. It’s part of our corporate values. It’s part of our code of conduct. It’s how we treat people and it’s how we expect to be treated.

Okay. Great. That was -- that’s really helpful. Second question is a little bit more granular. But could you just expand upon the trends you’re seeing in industrial services and one of the things we’ve been watching is that with kind of a good operating environment for some of the refiners, strong crack spreads, et cetera, that they might delay some work. Just could you speak to what you’re seeing there and how you’re thinking about the outlook?

I think they may, but they’re not going to delay beyond first quarter of next year. We don’t think and that’s where we’re really seeing what we’re really calling the real inflection. Clearly, we think the comps will be better as you move through the back half of this year for a lot of reasons. But we do think that they’re rebuilding, they’re getting their planning. We know what we’re planning. Again, they’ll be better this year, next year. I don’t think they plan on deferring maintenance forever.

Okay. Thank you.

And your next question comes from Sean Eastman with KeyBanc Capital Markets. Your line is open.

Hi, gentlemen.

Good morning, Sean.

Good morning.

Good morning. Good morning. Thanks for taking my questions.

Good morning.

So, book-to-bill above 1 times two quarters in a row now. I am just curious how you would characterize the kind of velocity there since the start of the year. Has bid activity continued to build momentum through the first half? And maybe put another way, would you expect to book more work in the second half than you did in the first half?

I am always cautious to think of that especially thinking of the kind of booking we had in the first half.

Yeah.

But I think you’ve heard me say this before, Sean. Every decision of size that we’re involved with is a binary decision. What scopes to find, we don’t get -- it’s not like an OEM that gets a share of the market typically. So we won the project or we didn’t win the project. We won more than we thought we were going to win in the first half of the year and we won the right kind of work. Could that happen again in the second half of the year with more velocity? Sure it could. I don’t necessarily think overall activity is necessarily stronger than we thought it was going to be. We’re winning more of the right work and the kind of work we won than we thought in a typical year. Mark?

Yeah. Sean, the only thing I would add to Tony’s comment is that and we’re also seeing people making decisions now, right? Clearly, in the back half of 2020, there was a lot in front of us, a lot in front of our customers and most people hit the pause button for the obvious reasons. We’re seeing more conviction in decision making certainly through the first six months of 2021. I mean we’re cautiously optimistic that that trend is going to continue as we move through the rest of the year.

Yeah. I think one of the wild cards is supply chain.

Yeah.

I think there were more conviction around the supply chain right now. I think booking activity would even be stronger. I think there’s two things that are sort of holding back things right now. One on the supply chain issues, which are real and I think they center on two things. One is resumption of capacity, right? Capacity is coming back online both in the U.S. and overseas. And the second thing is availability of labor. We talk to our suppliers. They’re figuring out the first part I think now, getting the materials, and really steel mills have started coming and that’s the one I think prices should start coming down and it really hasn’t in a substantial way yet. But the real one is labor. It’s very difficult to hire labor, just come in and re-staff a lot of the plants. So, therefore, they’re not operating at the capacity they would like to operate at. And I’ll give you a real example, right? When we talk to some of our suppliers, the way you typically hire in the manufacturing environment, although we don’t really do that, but the way you typically hire in a manufacturing environment, you would typically bring people in either seasonally or for a 60-day trial period. That 60-day trial period would typically be through a temp agency and really what you’re trying to make sure is if the person show up to work, can we train them on the skills and can they pass the drug test? I mean, just to be very straight, that’s what they’re looking for. And then after 60 days people typically would get a pretty substantial raise. So they may have brought them in at $12 or $13 an hour and then raise them to $15, $18 an hour once they became full time. That whole first step isn’t happening right now. And so, as a result, you’re getting more churn in the permanent workforce, if they can find it and venture to say, I think, a big chunk of the manufacturing capacity that we draw from is probably still yet somewhere between 6% and 10% understaffed versus where they would like to be.

Okay. That’s interesting, Tony. That’s helpful as we think about the swings into the second half. And my second question is, we talk about the non-res market growth and the construction segments are clearly poised to sort of outperform that broader non-res growth. But I wanted to kind of drill down on Building Services. Considering we’ve got some seemingly pretty durable secular drivers there around energy efficiency, IAQ, et cetera, I mean, what’s the growth rate in the services piece of the business, if that makes sense?

Yeah. I mean, so you see what’s going to go on with the project bookings. I mean, they’re a little larger than they typically are, so the timing will be a little longer. So they may go into next year some of them. You’re talking 20% plus organic growth in bookings. Underlying service growth is very strong. It’s high single digits or will be and it should be through the summer. What’s restraining that segment’s growth right now is somewhat what’s going on with the government business right now and it’s nothing that we are terribly worried about, but it’s slow award, slow decision making. Pretty much, Mark and I talk about it, we can pretty much play the playbook based on when the administration is changed and now it even happens at mid-term elections, so depending on what happens with Congress. So that’s what sort of slowing things down. Good growth in commercial site, good growth in repair service, good growth in service agreements, good growth in controls, very strong growth in projects. So you are right to point out and we have a great team that anticipates those needs and did all the training they needed to do to have people ready. But you’re right to point out there are some very good secular trends that we’re benefiting from. Those trends also happen in the Mechanical Construction business, a portion of the revenues, Mark, what 15%, 20% of their revenues...

Yeah.

... is also service and small projects. Do you have anything to add to that?

No. Nothing to add.

Okay.

Okay. Thanks a lot, gents. I’ll turn it over there.

Thank you.

Great.

And your next question comes from Adam Thalhimer with Thompson Davis. Your line is open.

Hey. Good morning, guys. Congrats on a great quarter.

Good morning, Adam.

Thank you.

Can you -- I guess I wanted to ask first on the revenue guidance, because that would imply I would have to bring down the back half a little bit, within the segments where are you possibly seeing a little bit of weakness where I could bring that down?

What -- we don’t do your modeling. So we look at the first half. We’re expecting as good or better second half as the first half. But the wild card being what might happen in Industrial. So I don’t know how you’re thinking about the other parts, but that’s how we’re thinking about the world in general.

Do you see Industrial revenue being similar to the first half?

I don’t -- I think it should be better. But again we’re cautiously optimistic and with an emphasis on the word cautiously.

And then, within Building Services, was there any unusual that flowed through in Q2, I know you talked about that mix issue?

No. Nothing unusual.

No. So $624 million is kind of a decent base for the back half?

6.4, what?

No. No. I am sorry. $600 -- the quarterly revenue there was $625 million. I just didn’t know if that...

Yeah. Adam, we don’t do quarterly revenue and operating income guidance, you know that.

How are clients responding to materials prices?

I think they’re pragmatic, you’re reading it in the newspaper every day. Do they want the project done or not. We’re being straight up with them, right? We tell them what we know. They’re hearing it everywhere. So, their reacting is, I wouldn’t say, it’s shock and disappointment. The same characters, they would never want to pay for it. They don’t want to pay for anything now and the ones that work with us and the ones we’re working with. This is the time for us to be customer selective of where we are.

And then, Mark, any thoughts on back half cash flow, is it better than the first half?

Yeah. I mean, in my commentary, Adam, I specified that we’re expecting full year operating cash flow to be in excess of $300 million. So, obviously, we’re negative $6 million or $7 million through the first half. So you could force that math.

Got it. And then, Tony, you brought up the acquisition pipeline, can you give a little more color?

Yeah. Sure. I mean, we’ve closed some deals here today. We have a couple more that we expect to close here in the near-term. They’re either geographic expansions or product line expansions. And they’ve been different sizes. There are things that can be standalone and help us grow market or they’re very niche things that we attach to existing operations. The pipeline is strong. What we are learning is some companies that thought they were ready to sell, post-pandemic maybe weren’t quite ready to sell. They need six months maybe to get things ready to sell. But again, I think, I pointed out on the slide, we did about $0.5 billion of deal from 2018 till first quarter. There’s no reason for me to believe it won’t be at least that or more as we go through the next three years. As I’ve always said, deals happen when they happen. They’re episodic. I feel better about the acquisition teams we have in place now than I ever have. I feel better about the due diligence we do now than I ever have. Deals might take longer now, right? There’s other things you have to think about. You have to make sure you’re doing good cyber due diligence and the targets clearly know that. You have to make sure you’re doing good due diligence around what you really think happened to their demand in the pandemic and what’s coming back. I think again the people we’re working with to buy know that also. And then, of course, you’ve heard me whine consistently for any number of years now about multiples and private equity multiples. I am not going to do that anymore, because -- for me as a Pittsburgh Steeler fan, it’s sort of like the New England Patriots beat us, they beat us, that’s life. I am not sure they’re beating us in long-term value creation. But all you have to do to win an acquisition is pay more in some cases and that’s usually not the best acquisition for us. The best acquisition for us is some of the terrific people that have become part of our EMCOR team over the last number of years. I can go all the way back to when we bought S.A. Comunale in 2006 and Steve Comunale still proudly runs that company or Shambaugh that came with Comfort Systems and Mark Shambaugh running it and now Paul Meyers is a terrific operator with. And they take pride in what they do and they’re building that business for the long-term and the work that Rob Vincent has done in fire protection or the team that came with R&R Mechanical and how Vincent sold his life’s work to us and he is still in there every day swinging away and part of the team. And those are the best acquisitions for EMCOR. We see no shortage in the pipeline of people who really care about their business, their people and want a fair return on their life’s work, but still want to work. And so I’ll stick to what we do in the long-term value creation we have and not get crazy and try to compete with people that have a different view of the world and use leverage and slides and triangles and all that stuff to explain the business. I’ll stick to what we know how to do.

Good strategy. Thanks, Tony. Thanks, Mark.

You’re welcome.

And your next question comes from Brent Thielman with D.A. Davidson. Your line is open.

Good morning, Brent.

Hey. Thank you. Hey, good morning. Congrats again...

Thank you.

...on another great quarter. Hey. Tony, I mean, more than 20% growth this quarter, you had some unique circumstances last year, but that’s pretty notable growth. I think one of the things that comes to mind is, all the supply chain logistical pressures that have been brought up, assuming it affects everyone in the industry. And I guess, what I am wondering is, do you think you’re gaining some share in light of that in some of these local geographies, just because you have this more sophisticated platform and so better equipped to manage that?

What I think is we’re winning more projects. I don’t ever think about share. So, yeah, I guess, we’re winning more share. But the way I think about it, are we winning more of the projects that we’re targeting? The answer to that is, yes. And I think we’re winning more of those projects for three reasons. It starts with technical excellence, right? We got the best folks and we can do it safely and we do it right and we’re going to be there to make sure that that product commissions the right way. And then, on the service side, we’re going to bring some of the best technical resources to get buildings back up and running or to get that energy efficiency done, reduce people’s carbon footprint and now bring an IAQ solution in with it, and Mike Bordes, and the team in energy services. Then I think it gets to the people on our segment level, Joe Burns and Dan Fitzgibbons, they’ve invigorated the teams. We had great teams to begin with and they’ve invigorated them to look at this market and look at that which you just said as an opportunity. We are more sophisticated. And we also, people know that we can bring the labor to bear and we can a lot of times get the best labor to bear. We have some of the best foremen and superintendents in the industry. They then interact some of the best labor in the industry. And I would now -- and just follow with what I think is often overlooked. When you’re going to do a data center project that may be a hyperscale project, that’s a 50-megawatt, a 75-megawatt project and you’re going to burn $80 million of cost in nine months or less, you better have the liquidity and balance sheet to do that. And more and more customers are looking at our balance sheet and looking at our liquidity and looking at our ability to execute the other two things. And say, yeah, these guys could make that happen and they manage this business very conservatively and they manage it appropriately for the kind of contractors that they are. And I have great faith that the EMCOR folks will bring it to bear, and I’d add another thing, our folks are working better together through their peer learning and sharing of resources and ideas across our company than any time in my 17 years here.

Hey. Tony, do you think that’s applicable to Industrial Services as well, because I know the environment is still not good, but your margins are up a little bit there, it seems like there’s…

You know.

… better growth in field services off. I wonder if that’s playing out there, too.

Bad markets prove whether you have a good team or not. We have a great team. They’ve been operate -- they’re operating near breakeven on an operating income basis, generating positive EBITDA. Mark, cash is, okay, right, tough market. I think, yes, the same applies there.

Yeah. And I guess, I tended to think of materials at least, historically, and generally, a pass-through for you guys, right or wrong, but most of the costs just lie on the people, right?

Yeah.

And so, I guess, what I am asking here, Tony, is how constraining is this rise in materials prices to margins now or potentially into the second half, because if that’s the case, I know your gross profit dollars should grow, but is it really meaningful enough to potentially weigh on margins for new jobs you add?

No. No. It might be a short-term dislocation on one project or two projects. And look, we may choose to do that. Because it’s just like we talk about how our suppliers protect us. On the right projects we would protect our customers. That’s life and we’re not going to blow up our long-term relationship because of that if we think, hey, the customer did everything right here, we need to make this right. That doesn’t typically happen on the large projects, but the smaller stuff we may do that. The second thing is what is constraining is potentially new starts? We haven’t seen that yet. We might. But I’d give you a flip side of the argument that is likely to happen I think. We talked a lot about re-shoring and on-shoring of manufacturing capacity. I think this whole supply chain issue is actually an opportunity for us long-term. The long-term meaning the next two years to five years as more people look at creating flexibility in their factories and making them less labor dependent after what they’ve experienced over the last six months and more things come onshore. The trade relations are getting better with China. The situation is not anymore improved to Mexico. One of the things I know we talk to our customers is, we got collectively in industrial American a bad habit. We always thought about our most important products being dual sourced. At least dual sourced from a facility standpoint. It might be with the same supplier, but the supplier we expected to have dual facilities. We got away from that the last 10 years and we see that coming back pretty substantially right now across the Board.

Okay. Maybe the last one and I hate to speculate too much on markets, but I don’t think I realize how fast your healthcare related business is coming back both in Electrical and Mechanical. I guess, I am just curious to your thoughts whether that’s cyclical secular catch-up from last year’s kind of softness. What are your thoughts there?

It’s cyclical secular. Does that make sense?

All of the above.

There’s good long-term secular trends but we think it’s going into a pretty good cycle right now.

Yeah. Looks sustainable. Okay. All right. Thank you very much.

Thank you. Is that it?

All right. With no further question at this time, I’ll hand the call back to the company.

Hey. Look, thank you all for listening. We did have a very good quarter. Our folks are doing a lot of the right things and I know I am thankful to be surrounded by such great teammates every day and we’re very aware of how hard the work is in the field. And I have a lot of passion on this subject about how we take care of our people. And I employ anybody that’s listening from EMCOR to everything you can to encourage vaccinations, so we can start to put this pandemic behind us. One of our core values is safety and I look at this as squarely in the middle of that core value. With that, I’ll leave you. Thank you and talk to you over the next couple of months. Bye.

Ladies and gentlemen, that concludes this conference. Thank you all for joining. You may now disconnect.