Good morning. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group Second Quarter 2022 Earnings Call. [Operator Instructions] Note this event is being recorded. Mr. Brad Newman with FTI Consulting, you may begin.

Thank you, Andrea, and good morning, everyone. Welcome to the EMCOR Group Conference Call. We are here today to discuss the company's 2022 second 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, Brad, and good morning, everyone. As always, thanks for your interest in EMCOR, and welcome to our earnings [indiscernible] for the second quarter. For those of you who are accessing the call via the Internet and our website, welcome as well, and we hope you arrived at the beginning of our slide presentation that we'll [indiscernible] our remarks today. We [indiscernible] Slide 2. This presentation and discussion contains forward-looking statements and may contain certain non-GAAP financial information. Page 2 of our presentation 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. On Slide 3, we have the executives who are with me to discuss the quarter and 6 months results. They are Tony Guzzi, our Chairman, President and Chief Executive Officer; Mark Pompa, Executive Vice President and Chief Financial Officer; and our Vice President and General Counsel, Maxine Mauricio. For call participants not accessing the conference call via the Internet, this presentation slides will be archived in the Investor Relations section of our website under Presentations, and you can always find us at emcorgroup.com. With that out of the way, please let me turn the call over to Tony. Tony?

Yes. Thanks. Good morning to everybody, and thanks for your interest in EMCOR. My initial comments will focus on Pages 4 through 6 of the presentation. We had a strong second quarter at EMCOR with revenues of $2.7 billion and diluted earnings per share of $1.99. We delivered overall quarterly revenue growth of 11.1%, with organic revenue growth of 9.7%. We had operating income margins of 5.1% which is especially strong when considering the headwinds we faced with supply chain issues. We generated quarterly operating cash flow of $77 million and exited the quarter with very strong remaining performance obligations or RPOs of $6.5 billion, which represent nearly 27% growth from the year ago period and 15% from year-end 2021. We remain committed to our capital allocation strategy, returning a record $458 million in cash to our shareholders through June 30, 2020, in a volatile operating environment. Our team has resilience and flexibility as we continue to drive successful results for our customers and our business. Our forward momentum this quarter was driven by these key factors. We are seeing strong demand for our specialty Contracting and Construction Services across a variety of sectors where we can differentiate ourselves, which is health care, water and waste, commercial and industrial/manufacturing. We also continue to see strong forward demand for our data center and high-tech manufacturing construction services. Our Construction segments reported a combined operating income margin of 6.9% in the quarter. Our Mechanical Construction segment operating income margins were a strong 7.2% and Electrical Construction segment operating income margins rebounded to a much improved 6.2% versus first quarter performance. Performance in both segments continues to be impacted by ongoing supply chain issues related to equipment lead times and deliveries. And most of these issues that impacted our margins were from projects…

Thank you, Tony, and good morning to everyone participating in the call today. For those accessing this presentation on webcast, now on Slide 7. As Tony indicated, 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 [indiscernible]. All financial information referenced this morning is derived from our consolidated financial statements in both our earnings release announcement and Form 10-Q filed with the Securities and Exchange Commission earlier this morning. So let's revisit and expand our review of EMCOR's second quarter performance. Consolidated revenues of $2.71 billion are up $269.7 million or 11.1% over quarter 2 2021. Our second quarter results include $33.7 million of revenues attributable to businesses acquired, pertaining to [indiscernible] such businesses were not owned by EMCOR in last year's second quarter. Acquisition revenues positively impacted our United States Construction segment within the second quarter. Before reviewing the operating results of our individual segments, I would like to highlight that our $2.71 billion of quarterly revenues represents a new all-time quarterly revenue record for the company despite the [indiscernible] in the United Kingdom Building Services segment revenues which was largely due to unfavorable foreign exchange rate movements. The specifics to each of our reportable segments are as follows: United States Electrical Construction segment revenues of $564.1 million increased $72 million or 14.6% from 2021's comparable quarter. Excluding incremental acquisition revenues, this segment's revenues grew organically [indiscernible] quarter-over-quarter. Increased project activity within the commercial market sector, inclusive of the telecommunication and high-tech submarket sectors as well as growth in each of the health care, manufacturing, water and wastewater market sectors were the primary drivers of the period-over-period improvement. Partially offsetting these increases was a decline in revenues from the institutional…

Thanks, Mark. And I'm going to be on Page 12, remaining performance obligations by segment and market sector. Much like the last quarter, the second quarter was another strong project bookings quarter for the company. We continue to experience core demand across all our segments and many of our market sectors. Total company RPOs at the end of the second quarter was $6.4 million, [indiscernible] or [indiscernible] over June 30, 2021, total of $5.1 billion. Measuring from the end of 2021, RPO [indiscernible] $862 million thus far this year or a strong 15.4%. Additionally, second quarter project bookings were likely strong by an increase of RPOs of $508 million from this year's first quarter. Almost all of the RPO increase this quarter was organic. Growth was broad-based, with each of the 5 segments growing RPO totals from both the year ago and 2021 periods. We are positioned in active nonresidential market sectors and continue to see velocity in our business. The 1-2 punch we highlighted in our first quarter call continued this quarter, where we experienced both strong revenue growth and total RPO growth. While some RPO growth thus far could be attributable costs due to outside factors, we continue to see an active bidding environment despite current supply disruptions and inflation challenges. Together, our domestic construction segments experienced strong project growth year-over-year, RPOs increasing over $1 billion or 25% from June 2021. The Mechanical Construction segments or RPOs increased by [indiscernible] or 23% while the Electrical Construction segment saw an increase of $350 million or nearly 30%. Since September '21, our domestic [indiscernible] segment RPOs have increased over $600 million. U.S. Building Services RPO levels increased $328 million or 44% from the year ago quarter and now is over $1 billion in quality projects and service [indiscernible]. As I…

[Operator Instructions] And our first question will come from Sean Eastman of KeyBanc Capital Markets.

Hi, Tim. [indiscernible] update here. Great update. First one, kind of more of a clarification question. So you mentioned how you really like the diversity in RPOs. But of course, per the disclosures, it shows over 45% of the mix is commercial. None of the end markets we're talking about are what I would sort of think of as commercial and that piece is rapidly growing and is a lot bigger than it was in, say, 2007, 2008. So can we just get some clarity on what that piece really is?

It's growing, and I think we pointed it out in the commentary. What's driving that growth is -- you have to go back historically why it ended up there, right? Many, many years ago, it wasn't a major part of our business, and it was light manufacturing [indiscernible] enterprise data systems. Now, it's a bigger part of the business, but it's now data centers is driving the growth, high-tech manufacturing in general and more of what we were doing just build-out work, but now we're doing bigger work, life sciences, pharma and other types of that kind of manufacturing. And we still have pretty strong demand driving that growth, as we talked about in building services, there is all commercial for the most part. And that demand drives along HVAC retrofit projects, and most of those are in typical commercial. But Sean, you're pointing out something, it's growing as a bigger business. It's what's driving that commercial backlog increase, and that's why we took the time in our RPO section to talk about that. Mark?

Yes. I mean just to reamplify what Tony just said. For -- not to go for the reasons again, that Tony just mentioned, but included in our commercial RPO disclosure or all those things that Tony just highlighted as major growth areas and have been major contributors to our profitability over the last several years, we're reticent to change how we're categorizing that at a midpoint in a year, but it's something that we need to evaluate internally as we go forward to provide the analytical community, I guess, more written transparency than transparency we're already providing forward with regards to what those actually represent.

Okay. I think that's really important. So I appreciate that. And then on the margins, also just to clarify, I think, Tony, I think you said you guys have built in a 5% operating margin for the second half. I'm kind of struggling to get to the midpoint of the guidance with that number. So maybe, I'm -- maybe I heard that wrong. And also just broadly in terms of thinking about the progression of margins, we saw this really nice sequential improvement from 1Q to 2Q. Maybe talk about that bridge and I would have thought that into the second half, there would have been a lot of opportunity to continue to improve just in terms of some of the new construction work getting to later stages, driving a tailwind even if we're assuming the supply chain remains sort of [indiscernible].

Yes. So I'm going to kick this to Mark in a minute. But broadly, I said of around and 10 or 20 basis points, your right can move that. But Sean, the -- most of our caution of saying that number is around the macro environment and supply chain. It's hard for me today to tell you that the supply chain is all fixed and it's clear selling. Lead times are terrible. OEMs are routinely missing those terrible lead times. And that has implications for us. And so for us, to sort of sit here and not caution that would be irresponsible, I think. And then secondarily, we have work that's now going to be starting that's favorable to our mix. that should be further along than it is. And we're not exactly sure. A month means a lot when you start up a large project on equipment deliveries. And most of those larger projects, we're in concert with our customers ordering that equipment. They're actually buying it ahead of time. And we will start up when that equipment is there and that could be delayed. It can start 2 weeks from now, they can start 4 weeks from now, it can start 6 weeks from now. And Mark, I think that's where our caution is.

Yes. And obviously, Tony is around 5% as it is indicated. Can mean something in the low 5% range. So clearly, as you did the math, I'm sure you came out with operating margins of 5.2% or 5.3% in the back half of the year. So clearly, no worse than they were in the second quarter and significantly higher than they were in quarter 1 and at the 6-month point on a cumulative basis. So the variable there, once again, is the revenue number. So of that $10.8 billion of guided revenues ends up creeping up. It's quite possible we get at the same point at a 5% or 5.1% margin level for the last 6 months.

Okay. Good stuff, guys. All really helpful. I'll turn it over there.

The next question comes from Adam Thalhimer of Thompson Davis.

Congrats on the strong quarter and a well-timed buyback.

Thanks, Adam.

I'm going to talk about RPOs. Are they -- because they're so strong, are they at a level where, Tony, they're starting to give you some confidence in 2023?

We don't give forward-looking guidance. But the reality is I go back to longer-term trends. And I go back to Page 13 in our presentation and talk about those sectors and most of them will be up into the right. Do I specifically know what will happen in 3 of the small project work? No, I don't. Do I know on what new awards -- No, I don't. But clearly, our average project length is somewhere 9 to 12 months. Some of these are longer term. And we'll see when they start up and then they finish. Again, we don't give forward guidance into '23.

And then can we talk a little bit more about the electrical write-downs and those specific projects? Is there any risk to those in the back half? Or does that margin hit that you took in Q1 and Q2 just slip and go away for the back half?

I mean in our business, we're always cautious to say write-downs go away. We've had a hell of a run without any significant losses. But our folks are working in unprecedented times, especially with respect to supply chain. And most of the write-downs we had in the first half of the year were on projects we took prior to the supply chain and inflation cycle. But that being said, there's a lot of moving pieces. So we actually -- I would just refer you back to the previous question on the 5 -- around 5% margin. we don't see anything or absolutely we would have taken it, right? That's how this business works. But we don't expect it, we would have taken it. And our electrical business has a good mix of work. And a lot of that margin progression to be dependent on our ability to start some of that favorable mix work will all be related to supply chain.

Adam, I'm going to just interject quickly. So Tony's point, obviously, to the extent that we've identified, the necessity to take a write-down. We've taken 100% of it in the second quarter, but we can't defer to later periods as I'm sure everyone in the call well knows. The only additional thing I'll add to Tony's commentary is that these projects are still active projects, so they create a little bit of margin headwind in that segment because we're going to be recognizing profit on the remaining revenues at a margin profile lower than what the segment traditionally [indiscernible]. That's the negative aspect of it. The fast fact is with regard to the projects that were written down, both in electric production and mechanical construction. They're all over -- they're well over 50% complete, some of them are even closer to 100% complete. So they are clearly not going to be the preponderance of revenues that are recognized in these segments as we work through the last 6 months of 2022.

I almost led with that, too, because it's been 8 years since -- I think 2014 was the last time we talked about a problem project. So -- alternative.

Adam, I mean, in all fairness, right, these aren't big giant project write-downs. This is more -- like Mark said, we're getting to the end of the project. Two of them were specifically stopped and started not only through the pandemic, but because of the supply chain. That's never good for a contractor, right? As you reassemble the team and get going again. And look, what we're known for EMCOR is we will finish the work. But then what we're also known for is not reflected in these write-downs, is our ability to go win what we think will have partial entitlement. Because customer hasn't made an offer back the other way, we're putting together the case, our guys are pretty [indiscernible], and we'll see what happens. But I wouldn't term these on the same magnitude as what we had 8 years ago on a specific job. I mean, these are -- in some ways, what happens in business when you get to a period of a very choppy environment where you have either on a disruption in the job site. One of them specifically [indiscernible] carry on -- further carry on from the first quarter, we thought we had it all, but one of them specifically was workforce-related, right? And it was related to our ability to get the right workforce on and at COVID disruption, we're working more over time. We finished the job. We have a great reputation. Life goes on. And I will tie that back to the earlier point. One of the reasons that we win this big work, this complex technical work is, hey, we got the best people in the field to execute this work. And we can assemble and put on fill the best people. And also, people know that we are thoughtful in [indiscernible] our balance sheet. So the work will get done and that we understand that we manage this business through cycles. And look, I think we're -- with the RPOs we have lined up, we feel pretty good about managing through this cycle. But again, we will see, right? I mean there was a negative GDP growth print today. I don't know what that means for our business. I just feel really good about where we are on Page 12 and 13 right now, which are RPOs and markets we have to work in.

I agree. Great color.

The next question comes from Brent Thielman of D.A. Davidson.

Tony, on the data center work, it seems like it's keeping you really active. We hear some rumblings out there that things might pull back in that market vertical. I mean, any the commentary in terms of what you're seeing out there in that market would be great.

We don't see that. Could there be a short-term disruption? We don't see that. But anything we study, anything we talk to these major builders, we don't see a pullback. I think anything you're hearing around pullback is their frustration around the supply chain. I mean just for amplification on that. All these data centers, for the most part, are backed up by either natural gas generators or diesel generators. That's now up to 52 weeks. So as they try to think through how they're going to sequence these data center to come on, they have to take that in their planning. The [indiscernible] come in, these are 50-megawatt facilities. There's a substation build outside almost every one of them a substation two for one. Just to put in perspective, what 50 megawatts is, 50 megawatts of power about 1,500 to 2,000 [indiscernible]. Let us put this in perspective, what's happening here. Which gear to do that is 42 weeks right now. So [indiscernible], I think that people are feeling is, can we get the supply chain to make delivery? And then you get to the UPS system. It can take anywhere a square footage-wise, imagine a commercial 2 floors of a typical commercial office building, 60,000 square feet. That's the battery room to run that data center somewhere between 1 minute and 1.5 minutes until the generator kicks on. So these are the kind of systems that are more difficult to acquire right now. And I think that's what's causing -- and that's what caused the delay in our electrical business. So what's good news for us is those deliveries are going to start coming. We had pretty good performance without that in our mix. And then as we get through the back half of the year and into next year, that should be a favorable mix for us.

Okay. Really helpful, Tony. Appreciate that. And then the -- I mean, it sounds like on the building services side, sort of the delays in getting big equipment, maybe some seasonal factors? Or it sounds like you guys think that's going to drive a pretty -- maybe unusually stronger second half for that segment. Is that a fair characterization just maybe everything you're seeing out there?

It should, coupled with repair service demand. Mike [indiscernible] team right now sleep with one eye open and equipment deliveries. Not 100% sure that all of these manufacturers are going to meet their commitments. Me, look, I'll be blunt. I was in this game 18, 20 years ago. They are all terrible at deliveries right now. They are not performing and they are communicating terribly. I am very fortunate to work with the team that stay on top of this every day and are very good and understanding the language back from those OEMs with respect to their equipment deliveries and the fulfillment of those deliveries. We got the best team in the business, interpreting those results. But all 4 of them are terrible right now.

Okay. Appreciate it, Tony. Thank you.

Next question from Noelle Dilts of Stifel.

Congrats on the quarter. So maybe in a little bit on how you're thinking about M&A with the share repurchase announcement you discussed [indiscernible] in terms of priorities, what you're seeing in the market, how you're [indiscernible] about the potential for M&A?

In general, nothing [indiscernible] in our philosophy. We've been balanced capital allocators for a while here at EMCOR. And I think in any given situation, you tell us Tony invest like crazy in organic growth when you have. And quite frankly, we have. We spent a little more on capital. Mark talked about the growth in AR. One of the big considerations we think about on a large project is what is cash flow characteristics of that project. And we know that sometimes an investment somewhere in the middle of the project. And one of the reasons we win some of those large projects. I mean, first is always technical capability, but also people look at it and said, you guys run a contract or the way you should run a contractor. And that's for the conservative balance sheet that we can figure it done. The second thing is we're very conscious with our authorities and talk about the relationship with them. We have great relationships with leading surety companies, and they appreciate how we run that and keep that balance sheet. Mark has done this for a long period of time with them to the point where the trust-based relationship we have there allows our people with confidence to go out and look at jobs and not worry about surety. And Mark, I think we have about $1.5 billion of that out there right now?

A little bit more.

And alongside Surety Credit says the conversations we have with these large projects people, whether they be in hyperscale data centers, semiconductor work, health care facilities, where they'll work with our people, our General Counsel, and they'll say -- and us and say, we get it, but can we put a corporate care around that. And that all ties back to that thoughtfulness that we have around capital allocation and a strong balance sheet. So organic growth would always come first. And then I think after that, then we have the dividend which we think is a commitment over time. And we just increased it, and we feel good about that. And then we balance the capital allocation between share repurchases and acquisitions. The reality is, we've been fairly returning cash to shareholders since 2017, '18, especially, I think $1.1 billion, $1.2 billion has now been returned to shareholders through share repurchases. I give our CFO a ton of credit for how he thinks through that with his team and how they execute it. And then we clearly were exiting the year last year with a big cash position. Now, we built that big cash position because we're one of the best cash generators in the business over time from continuing from our operations. But we also had a dislocation, right, going from '19 to '20 with the pandemic. And in this business, the revenue shrunk and we threw up a lot of -- we knew we had this onetime mark [indiscernible] of excess cash. What was either going to get put to work [indiscernible] positions were going to get put to work with buyback. And then when we saw the dislocation, I would not just say in our stock, but in the market through the first 6 months of…

Thank you.

Yes. Again, I spent a little time on that because it's always important to reiterate, which made us really good over a long period of time. We don't react to FADs and we just continue to execute. And I think that's the nature of the work we do. Anybody else, operator?

This concludes our question-and-answer session. I would like to turn the conference back over to Tony Guzzi for any closing remarks.

Yes. So I'm just going to finish the way I started. I'd like to thank all the folks that continue to support us and have listened to and supported our growth story over a long period of time. And I would really like to thank our segment and field leadership and our corporate staff. It's been -- really, great execution over a long period of time. And these last 3 years, they've been tough, right? But [indiscernible] to be big excuse makers, and we're going to continue that. And I think what's made us successful is we think through everything carefully, and we very rarely go off that track. And with that, we run by a set of values of mission first people always and our people love to execute for their customers and take care of their people, and we'll continue to do that. We'll talk to you in the third quarter. Be careful in the heat, and if you have it, you can't get your air conditioner fixed, look for your local [indiscernible] on our website. And with that, I'll let you go.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.