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 Fourth Quarter and Full Year 2021 Earnings Call. [Operator Instructions]. Mr. Brad Newman 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 fourth quarter and full year results, which were reported this morning. I would like to turn the call over to Kevin Matz, Executive Vice President of Shared Services, who will introduce management. Kevin, please go ahead.

Thank you, Brad, and good morning, everyone. As always, thank you for your interest in EMCOR, and welcome to our earnings conference call for the fourth quarter and full year of 2021. 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 2. This presentation and discussion contains forward-looking statements and may contain certain non-GAAP financial information. Page 2 describes in detail the forward-looking statements and the non-GAAP financial information disclosures. I encourage everyone to review both disclosures in conjunction with our discussion and accompanying slides. Slide 3 shows the executives who are with me to discuss the quarter and full year 2021 results. They are Tony Guzzi, our Chairman, President and Chief Executive Officer; Mark Pompa, Executive Vice President and Chief Financial Officer; and 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 the Investor Relations section of our website under Presentation. You can find us at emcorgroup.com. With that said, please let me turn the call over to Tony. Tony?

Yes. Good morning. Thanks, Kevin, and thank you for joining us to discuss our 2021 fourth quarter and full year results. I'm going to be covering Pages 4 to 6 in my opening comments. We will also provide our guidance for 2022. I'm going to focus my initial commentary on full year 2021. My only comments for the fourth quarter of 2021 are that it went as expected. However, the impact of COVID on productivity was more pronounced than we could have contemplated in October. We performed well, but we fought through increased workplace and supply chain disruptions because of the surge in COVID cases due to the Omicron variant. Before I discuss our results, I want to thank the entire EMCOR team for their efforts in serving our customers so well during these challenging and ever-changing times. I also want to thank our leadership team down through the subsidiary level for focusing on employee safety and wellbeing, operational excellence and rigorous contingency planning. In 2021, we had our best safety year ever, with performance that will continue to place us in the top 1% of our industry. We will continue to strive every day for 0 accidents. EMCOR had an exceptional year in 2021. We earned revenues of $9.9 billion, which represents 12.6% growth over 2020 revenues. We had operating income of $530 million and operating income margin of 5.4%. We generated operating cash flow of $319 million. Overall, it was another year where the strength of our team, our diversity of end market and demand and our execution capabilities enabled us to overcome many external challenges. COVID was omnipresent, but we worked to keep our teams safe and productive. Supply chain challenges manifested themselves in many ways from uncertain prices, extended lead times and missed deliveries from our…

Right. Thanks a lot, Tony, and good morning to everyone participating on the call today. For those accessing this presentation via the webcast, we are now on Slide 7. Over the next several slides, I will provide a detailed discussion of our fourth quarter results as well as a summary update of our full year performance, some of which Tony just outlined during his opening commentary. As a reminder, all financial information discussed during this morning's call is included in our consolidated financial statements within both our earnings release announcement and Form 10-K filed with the Securities and Exchange Commission earlier today. So let's discuss EMCOR's fourth quarter performance. Consolidated revenues of $2.64 billion are up $358.7 million or 15.7% from the fourth quarter of 2020. Excluding $63.1 million of incremental revenues attributable to businesses acquired pertaining to the time that such businesses were not owned by EMCOR in last year's quarter, revenues for the fourth quarter of 2021 increased approximately $296 million or 13% when compared to the fourth quarter of 2020. We experienced strong revenue growth from all of our reportable segments during the quarter with specific segment performance as follows. United States Electrical Construction segment revenues of $541.9 million increased $80.1 million or 17.3% from quarter 4, 2020. Excluding incremental acquisition revenues of $48.5 million, this segment's revenues grew organically 6.8% quarter-over-quarter. Increased project activity within the commercial and health care market sectors were the primary drivers of the period-over-period improvement. United States Mechanical Construction revenues of $1.06 billion increased $91.2 million or 9.4% from quarter 4, 2020. Revenue growth during the quarter was derived from the majority of the market sectors we serve, with manufacturing and health care project activity representing the most significant period-over-period increases. With respect to the manufacturing market sector and as commented…

Thank you, Mark, and take a well-deserved drink of water. I'm going to be on Page 12, remaining performance obligations by segment and market sector. The fourth quarter was another strong bookings quarter for the company. In fact, we experienced project awards strength throughout the year with the RPOs growing sequentially in each quarter of 2021. As mentioned earlier, total company RPOs at the end of the fourth quarter were $5.6 billion, up $1 billion or a 22% increase over the 2020 year-end total of $4.6 billion. Organic RPO growth was a strong 18%. This strong booking activity across the company translated to a book-to-bill ratio well over 1 despite the company generating record revenues for the quarter and for the year. Combined, our 2 domestic Construction segments experienced strong construction project growth in the year, with RPOs increasing by $800 million or 21.5%. The Mechanical Construction segment saw RPOs increase by $647 million or 24%, while the Electrical Construction segment saw an increase of $156 million or a healthy 15%. U.S. Building Services saw RPO levels increase $220 million or almost 36% from the year-end 2020. As I mentioned earlier, we continue to experience widespread demand for replacement and repair projects across a wide spectrum of energy efficiency and indoor air quality products. They're being blended together now. As the virus continues to hopefully move further behind us, it looks like more and more companies are planning for their employees to return to their offices, at least based on the bookings we're seeing. So I see this demand for small project retrofits continuing through the year. Over on the right side of the page, we show RPOs broken down by market sector. We saw RPO growth in each of these sectors listed, except to the transportation area. We saw…

[Operator Instructions] Your first question comes from the line of Sean Eastman with KeyBanc Capital Markets.

So just starting high level for me, you guys have grown EPS comfortably in the double digits every single year for the past 7 years in a row. We're going into 2022. We've got big momentum in the RPOs. Industrial Services seems to be inflecting positively. You've got a fortressed balance sheet, but the midpoint of the earnings growth outlook is 6%. So I hear the risk factors, Tony, but maybe just more specifically, how do we wrap our heads around that? Like where is the real sort of contingency built into that initial outlook?

Look, Sean, I think contingency -- and I'll ask Mark to help me here. The way I think about it is it's a macro-driven view. If we do better against those macro items, then we'll move up in the range, and I went through that. So what concerns me, I think any CEO right now, if you're not concerned about supply chain and the unpredictability in the supply chain and what that can do to your labor productivity, then you're not being careful. I think fuel costs and energy costs are a real wildcard. I thought they were wildcard going into last year. And certainly, what's happened over the last week has certainly not cleared up the energy picture any better for anybody, like we do, that operates a large fleet. We will do our damn best to pass those costs on to our customers. But remember, we're always doing that in arrears. We can't guess at a fuel price, pass it on to our customers and what largely -- where that most is impacted is a time and material business. And finally, we took a -- COVID took a whack at our productivity in the fourth quarter. And do I think that's abating? Sure, I do. Do I know it's abating for the year? I don't know. We thought -- I think we had a victory speech last July, and then we had Delta. And then we had another moment of glee, and then we had Omicron. I am not an epidemiologist, never have been. I do know a little bit about numbers. I have no idea what's going to happen. So I think if you take those potential factors into play, you can end up in a place to say, "Hey, we're going to do well, but maybe not as well as we should have." We feel really good about where our RPOs are. We really feel good about the demand in our end markets. But at the end of the day, we've got to execute in a world of uncertain labor productivity because of COVID, an uncertain material availability because of supply chain. Mark?

Yes, Sean, the only thing I would add to Tony's commentary has to do around mix of revenue. As Tony commented earlier in this morning's call about how we've moved to a more larger project away from traditional commercial work, well, obviously, when you're project planning that larger, more complex work, you have more contingencies built into your estimates. We're on the front end of a lot of that work as we enter 2022. Assuming that the project schedules adhere to what was originally anticipated, we're certainly going to have a lot better feel ultimately for the profitability of those jobs as we progress through the full year calendar. But if the supply chain does continue to rear its ugly head, those project completion time lines might slide into 2023, therefore adding more uncertainty to our estimates. So the work is there. The profitability characteristics have not changed to our detriment. Unfortunately, though, a lot of the uncertainty around the work and how it's going to progress, which is beyond our control, certainly builds in some element of conservatism.

Yes. And Mark, we're working with really rational people right now at the owner and GC and CM level. But they also don't control the supply chain issues. The only thing I'll take exception, Sean, when you asked your question, when you said we've comfortably grown EPS double digits, maybe we've been grinding and our folks have worked exceptionally hard to do that. So maybe in a virtual work-from-home environment, it's been comfortable EPS growth. But I can tell you, I couldn't be more proud of how our people have executed to put the kind of results we've had in a very challenging environment over the last 2.5 years.

Yes. Super helpful. I didn't mean to suggest it was comfortable. I just meant comfortably within the double digits, not that it was a...

I had to brag on my people here a little bit and the great work...

No, please by all means. And my second question is, obviously, the RPO growth was a big positive story for you guys throughout 2021. Do you expect that momentum in RPOs to continue this year? I'm just wondering if maybe there might have been a little bit of pull forward in new award activity just as project sponsors looked to secure that contractor capacity. Curious your thoughts there.

It's actually -- we worry about the same observation, Sean, that people want to secure capacity with really blue-chip contractors right now, which I do think there's been a flight to quality. However, if you go back to that page where I talked about those resilient markets, I think we've grown 9 of the last 12 quarters RPOs, which is not that common for us. This could be lumpy. It comes in and it comes out. One large project can move it one way or another. I do think, though, there's enough significant opportunities out there that we're involved on the front end, and we'll see when they get awarded. It could be a little lumpy. But I feel really good about the opportunities we have in the pipeline that may materialize into significant projects. And we're working as part of a team, right? The project is going to happen, it's just when. And we're 1 of 2 teams that may or may not win it. So the odds are fairly good on some of those projects. Secondarily, I think one of the things I always look at in the business is what's happening in 2 parts of the business to tell you whether momentum may be a little more broad-based. One of the things we look at is our small project work, which is very strong right now. And so it's saying people are not only spending at the top of the market, they're also spending things they need to do to maintain their facilities, gain energy efficiency and get better indoor air quality in their buildings. So we're seeing that. Secondarily, I always watch the fire protection business and the fire protection business, because it's a national business, involved in every sector of construction for us. It remains…

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

So maybe a bit too detailed, but I was wondering if you could talk about how you're thinking about sort of expected segment margin ranges embedded in your guidance in '22. When I look at 2021, your margins really held in pretty well in all of the segments, with the exception of Industrial. So I'm just really trying to get a sense of how do we think about Electrical and Mechanical margins going forward? And then with Industrial, obviously, you go back quite a few years, but we were talking about mid-single-digit levels. When can we think about that division maybe getting back toward those mid-single-digit types of -- mid-single-digit type of range.

So I'll take a shot at a macro level, and then will kick to Mark relatively quickly here. I think that we're very comfortable thinking we can operate within our 3-year averages on all of our segments with the exception of Industrial. There, we expect...

To be better.

To be better. And 3-year averages for us can have 40 to 50 basis points of flux in it, right, Mark? And it's not a quarter-to-quarter business. And like Mark said, some of it has the timing on large projects, when they end, when they start, the contingencies built in and then the acceleration of the small project portfolio. So Mark, I'll throw it to you.

Yes. Noelle, this is grounding, in fact, so to speak. So when you look at full year 2021 by segment, as I mentioned earlier, both Electrical and Mechanical Construction are operating above their 3- and 5-year averages. If you look at the back half of 2021 performance, that trend is not as consistent. So Electrical Construction's last 6 months of 2021 was actually below those averages. My anticipation, and obviously, when we did the financial modeling for purposes of 2022 planning, we're looking at -- and as Tony indicated, we're looking at margin performance consistent with really what it's been in the last 3 years. So that would put Electrical Construction around 8.25%, hopefully slightly higher. Mechanical Construction, that gets you somewhere around 7.75% to 8%. So on a blended rate, when you look at total Construction, it's just either slightly below 8% or up to 8.2%. So that's still a very good performance. When -- I think we all get jaded looking at the last few years and say, okay, that's this reality, the new reality. And as much as I think the EMCOR team would love that to be the situation, we don't control the market. And we're in a sweet spot on some things as Tony covered in depth, but that's not going to continue into perpetuity. But when you look at 2022 from a framework perspective, it doesn't look like we're going to see any softness, so to speak, with regards to demand and opportunities. When you look at our U.S. Building Services, the 2021 performance was slightly below the 3-year or 5-year average for -- once again for the reasons that we've already discussed. Clearly, supply chain difficulties have been the most impactful there. And because there's a fairly significant nonunion labor component to that segment, our ability to shift resources around is good. But if we have labor on-site and materials and equipment are not there for installation, because they're being procured by somebody other than the EMCOR subsidiary, we're still on the hook for payment for that labor, which is not obviously being very productive. So we continue to -- the project management, which is a center of excellence for EMCOR and has been for -- I don't want to say my entire history with the company, but for a long part of my history with the company. So I'd like to think that they're going to somewhere settle around that 5% range. And then as Tony indicated, Industrial, certainly, the last 3 or 4 years have been anything but steady for a lot of exterior reasons that we've discussed ad nauseam in prior calls. But their 3-year average is below 2%. I think we would be very unhappy if that's where the profitability of that segment resulted in 2022. But as we mentioned I believe in last call, as much as I like to be able to shoot back to the mid-single digits, you have to walk before you can run.

Kind of get 4% first.

Yes. So we're certainly trending in that direction. But I think, unfortunately, we've all been collectively disappointed for a lot of different reasons, some through our own fault, most through others' fault. We're not ready to declare victory quite yet in that segment. But we'll obviously have more to talk about as we progress through the year. And the U.K. has been probably the most steady of all of our businesses when you look at variability in margins period-to-period. And they're well above their 3-year average, which is just below 5%. And we'd like to think that 5% or 5.5% range is what our expectations are certainly in the near future. So probably a long answer to a short question. But we're right where we want to be. And once again, assuming project time line, certainly on the larger work progressed as planned, we certainly would think that there's going to be opportunity for improved margin performance relative to how we closed the 2021 period, specifically looking at the back half of the year. But once again, we're going to do everything that we can to control the outcome of those things. But unfortunately, a lot of that is dictated by others and outside influences.

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

Nice quarter.

Thanks, Adam.

Thanks, Adam.

Tony, what are you guys hearing -- what are you hearing from industrial customers? I'm sorry if I missed that, but just curious what they're telling you in terms of project activity this year.

Refining and petrochemical?

Yes.

Okay. Because we have more industrial customers than just EIS.

Feel free to take it wherever you want.

Well, I've covered the other ones a lot, right, in my commentary. Look...

No, no, I meant the ones in the Industrial segment, correct.

Yes. What we're seeing is what we expected for the first quarter, right? We said we're going to continue to sequentially get better. We've said that a number of times. I think we've called it about right. I think they're spending money again. We're clearly in a very good position. I said what I said for a very specific reason in my text. We kept the team together, which is a real credit to the leadership there. It's been a rough 2 years. But we kept the team together. They're executing. I think the year looks pretty good. It looks like a normal year of turnaround activity. Will they run harder and do less turnaround work in the fourth quarter because gas prices are so high? I don't know that. I think they're going to do their maintenance, to be honest with you. I think the other wildcard in that segment is we're not seeing it yet. We're seeing a small return to upstream. We see that in our Electrical business in that segment. I do expect and our people who know a lot more about this because they live it every day. We have experts in this. They expect somewhere around third and fourth quarter to see a resumption of drilling in the Permian and the Eagle Ford and a little bit North Dakota, the Bakken. That will help us. That's the part we don't have baked into anything yet. That would be upside into our business. So I think they're ready to spend money. I think they believe they are long-term winners, the Gulf Coast refining and petrochemical complex. Let's hope for no weather events here in hurricane season, and we should have a pretty good year.

Okay. Super helpful. And then -- so I'm curious, with the supply chain issues and the inflation that you started to see in the back half of 2021, what did you do differently when signing new contracts? And I guess, the question is also kind of surrounding what you think your margins are in backlog and kind of how protected you are from those issues this year?

Look, I think on the larger workforce protected as it can be. So here's what changed. And this changed for us in the first quarter of last year or maybe even the fourth quarter of '20 because we saw some of this coming. First thing we did is we don't let prices out there for more than -- depending on the kind of job, 7 to 20 days when before we would leave them out there 30 to 60 days. So the amount that we'll honor a quote, especially on a small project work, came in. So we can honor -- and when we do that, we typically are almost brought out on the job, which means we have commitments, especially on the small project work from our suppliers what we're going to pay. As you get to the larger work, there's a couple of different ways you contract it. And you either do it fixed price or you do it GMP, which looks like a fixed-price contract, but it has built-in negotiators for increases in materials and things like that. And more and more contracting has been happening that way on the larger projects because we can't guarantee what the price is going to be. And people are rational, and they know we're about as good as anybody in the business of procuring materials. But just as -- so there's all kind of things like that. And we have all kind of contingencies built in if deliveries don't happen that you wouldn't typically have seen in the past. And people are knowledgeable, and we do a really good job through our central procurement group of keeping lead times in front of people so that they can negotiate with their customers then about what lead times look on critical materials.…

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

Just one last from me. Tony, I was thinking about your prepared remarks and, in particular, some of the investments you've made in the past that seem to be sort of helping you through all of that noise in the market right now inflation, et cetera. Can you talk about -- I mean just given the state of the balance sheet and perhaps less sort of attractive M&A opportunities out there right now, some of the programs or things you're putting money toward today that might benefit you in the future? I mean anything there worth talking about that...

Yes, absolutely. We continue to build out our fire protection prefabrication capability. We have 4 strategically located facilities now. That will probably be 6 within -- we'll put 2 more in over the next probably 12 months. We continue to enhance our prefabrication in our mechanical and electrical operations. On the mechanical side, we probably have 12 significant shops; on the electrical side, 6. We'll take more square footage, and we'll be doing more things in the shops versus the field. And we'll be doing them on a larger scale to become more modular as we serve these larger projects. Also training, right? It's a soft cost, but it's not for us. We're going to ramp back up our executive training on our company values and our leadership and also our business acumen. We've been on a 2-year hiatus because of COVID. That will start again here in the second week of March and last week of March. We view those as critical to building our culture, which many people consider a softer investment. We do not. We consider it a hard investment. And we think that, more than anything, helped carry us through these last 2 years. We're going to continue to invest in BIM. We've actually put a couple of full-time resources. We put a terrific leader in charge of our BIM initiative. It's actually under one of our key segment leaders, Joe Burns, who runs mechanical, guides that, probably knows more about that than anybody in the industry. We've enhanced our relationship with Autodesk, and we will continue to push the frontier on our scale that we do. We will continue to do more mechanical service training. We're doing some very creative things around mechanical service training and training of our field technicians in general to bring…

All right. I'll hand the call back to Tony Guzzi for any closing remarks.

All right. Look, thank you all. Thanks for listening. And thanks to all the EMCOR folks out there listening. We're going to try to knock it here in the first quarter and hope for another great year. And we're set up to do pretty well. But hey, we'll face headwinds. We always figure out a way to get through them. With that, have a good day.

Thank you. And that concludes the EMCOR Group Fourth Quarter and Full Year 2021 Earnings Call.