Good morning. My name is Jordan, and I'll be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group Third Quarter 2022 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. Blake Mueller with FTI Consulting, you may begin.

Thank you, Jordan, and good morning, everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the company's 2022 third 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.

Thank you, Blake, and good morning, everyone. As always, thank you for your interest in EMCOR, and welcome to our earnings conference call for the third quarter of 2022. For those of you, who are accessing the call via the Internet and our website, welcome 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. On the next slide, they are the executives who are with me to discuss the call and nine months results. They are Tony Guzzi, 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 the Investor Relations section of our website under Presentations. You can find us as always at emcorgroup.com. With that said, please let me turn the call over to Tony. Tony?

Yes. Thanks, Kevin, and good morning, everybody. I will discuss our third quarter results in my opening comments and Mark will cover the third quarter and year-to-date results in greater detail. My opening commentary will focus on Pages 4 through 6. We delivered another strong quarter at EMCOR. Revenues grew to $2.83 billion with 12.1% overall revenue growth and 10.8% organic revenue growth, continuing the strong organic revenue growth we have earned over the last three years. I believe that this achievement, a consistent, strong organic revenue growth and the underlying profit growth is a testament to our positioning in certain key markets and a result of our long-term acquisition programs, capital spending, leader development programs, and customer and sector focus. Further, our gross margin gap versus prior year performance had closed to a smallest gap this year. This shows that we are narrowing the impact of the supply chain disruptions and inflation as we price, plan and execute our project and service work. We grew operating income to $150.1 million with 5.3% operating income margins. We had strong SG&A leverage with SG&A margin at 9.3% of revenues. Our operating cash flow was exceptional at $257 million in the quarter. Our diluted earnings per share was $2.16 per share compared to a $1.85 per share for the third quarter of 2021. This is excellent overall performance, especially against the challenges of continued supply chain disruptions and inflation. These issues are still present and it does present operating challenges that we have to work through. I am always amazed at the resourcefulness, flexibility and depth operating skills of our field leadership team as they plan and execute around an ever-changing and volatile environment and achieve excellent execution for our customers. I will now cover some highlights by segment. We continue to…

Thank you, Tony, and good morning to everyone on the call today. For those accessing this presentation via the webcast, we are now on Slide 7. Over the next several slides, I will augment Tony's opening commentary on EMCOR's third quarter performance as well as provide a brief update on our year-to-date results through September 30. All financial information referenced this morning is derived from our consolidated financial statements included in both of our earnings release announcement and Form 10-Q filed with the Securities and Exchange Commission earlier today. So let's revisit and expand a review of EMCOR's third quarter performance. Consolidated revenues of $2.83 billion are up $304.7 million or 12.1% over quarter three 2021 and represent a new all-time quarterly revenue record for EMCOR. Each of our reportable segment experienced quarter-over-quarter revenue growth other than our United Kingdom Building Services segment which was negatively impacted by unfavorable exchange rate movements during the quarter. Excluding $32.8 million of 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 third quarter of 2022 increased approximately $272 million or 10.8% when compared to the third quarter of 2021. The specifics of each reportable segment are as follows: United States Electrical Construction segment revenues of $633.4 million increased a $102.4 million or 19.3% from quarter three 2021. Excluding incremental acquisition revenue this segments revenue grew a strong 13.1% organically quarter-over-quarter. Increased project activity within the commercial markets sector, inclusive of the telecommunications and technology submarket sectors as well as revenue growth from projects supporting both sustainable energy solutions and other traditional energy sources within the manufacturing market sector were the main drivers of the period-over-period increase. In addition, this segment continues to provide electrical solutions to our healthcare…

Thanks, Mark. Well done. And I'm on Page 12, Remaining Performance Obligations or RPOs. And we have diverse RPOs of $7.10 billion an all-time record. We continue to be successful on winning new work and winning matters, as the company we had another strong project bookings quarter. We've experienced healthy demand throughout 2022 across our segments and many market sectors. And while we have always described our business as not predicated on month-to-month or quarter-to-quarter, it ebbs and flows with projects and projects award. It is noticeable that our RPOs total has increased in eight consecutive quarters fueled overwhelmingly by organic RPO growth, and that's with strong underlying organic revenue growth. Total company RPOs at the end of the third quarter were $7.1 billion or up $1.7 billion or 32% over the September 2021 total of $5.4 billion. From the end of last year, RPOs are up $1.5 billion or 27%. Additionally, we booked $641 million of work in the three months since June 30. The complexion of our RPO portfolio has changed a bit over the last 12 months or so. In general, length is going up of projects as projects scope increases and that's because of supply chain issues, which remain elevated and also the technical complexity and labor complexity of the what kinds of projects we're winning at the higher end of the project the larger projects. When you have those complex supply issues, coupled with the ability to track and retain and deploy the right mix of skilled craft labor, and the ever-present technical demand of projects, many of our customers are looking for the contractor or us that could be a preferred choice to complete some of these technically sophisticated projects where they may be hyperscale data centers, food processing plants, semiconductor fabs, hospitals, pharma…

We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Sean Eastman with KeyBanc Capital Markets. Please go ahead.

Hi, Tony and team, thanks for taking my questions.

Hi, Sean.

I wanted to start on margins and just a higher level question sort of putting aside the noise on margins we've seen this year. How would you characterize the bridge from sort of 2011 in the high-3% to this kind of mid-5% level we've seen over the past couple of years? How much of that is the cycle? How much of that is structural? And I realize we're not seeing slowing right now, but just in anticipation of that, I wanted to understand that move and how sustainable this level is, maybe at a lower level activity into the outer years.

Yes, yes, Sean. I think it's always hard to separate structural versus cycle. I mean it can't just be cycle. I mean we've been at this for a while. I think a lot of it goes to what we've decided to do and what we've decided not to do, right? We are operating in an environment where we are very intentional about the kind of work we've taken and we've always have been, but the team is -- have centered around a core set of values of how we run the company and a core set of expectations on how we run the company and what we expect. And there's a couple things that are, I'd say are structural. We have bigger subsidiaries than we had in 2011, and if they got more powerful and we get more leverage out of that and we can take more scope of the work. We've also seen a move in the market to concentrate more scope on these larger projects into folks like us. We've gotten more technically sophisticated. And so you go to a structural point, right, with the maturation of BIM, where we are still back in 2011, we were probably still leading BIM contractor, where I think have increased that lead, but also we get better at it every day. And it's not just -- it's really cool to see a 3D model, but if you don't do anything it -- with it to plan your work or plan your prefabrication plan, it doesn't mean anything. We've gotten better and better at prefabrication linked to BIM and then the execution on the job site and what that means. And so what that means is we're producing more in a factory typesetting on these more sophisticated jobs and less in the…

Yes. Sean, the only thing I would add to Tony's commentary and this is -- as a point of emphasis; we had a number of operating companies back in the 2011 period and periods prior to that that were performing at our consolidated levels or higher. The issue that we had is we had a number of businesses that clearly were performing below that which was driving margin dilution. So, I'm more in the structural camp because, as you know, we haven't divested of a lot of businesses over that period of time. But having said that, we've taken best practices and lessons learned and because our culture has continued to evolve which has always been strong but it continues to get stronger, we've been able to make significant inroads on how those other companies that previously were lagging those historical results were performing much better. We throw on the fact that that the margin dilutive businesses back in that 2011 time period, UK and to a lesser extent U.S. building services have continued to improve, it's been quite phenomenal. If we get the Industrial Services segment, more back in line or closer to our historical results, the earnings potential or margin potential of this business, continue to be quite favorable.

Yes. And Sean, right now because of the mix of work and we're doing some bigger work. Where they're going to be, north of 5%. We're also worried about margin dollars, right, Mark? And we're going to drive the percentage up, Mark is a percentage guy, I'm a percentage guy and a dollar guy. We're sort of -- that's a Yin and Yan it happens in business, you go to do both. And we see pretty favorable mix. Now, one of the -- I think what's underlying your question is, if we get hit with a bad cycle, what happens? Since about 2008 when we had that recession, we've always had the mindset is our next highs have to be better than our last highs in a cycle, and our lows have to be better than the last lows. And so that's why I think when Mark says he's in the structural camp. We've done structural things to this business that we know of, and we could go through more of it, right? We talked about BIM fabricate, we talk about IT systems. We can talk about planning. We talk about how we -- how the segments have been flatten, and we can talk about all that stuff. But the key point is we're all laser-focused on having a cost structure that can compete in a tougher market. And that is something we have -- we collectively down through the subsidiary CEO level focus on every day.

All right, Thanks for that. I learned quite a bit there. And then secondly, I don't want to take anything away from the momentum we're seeing here in the business. But I wondered if we're looking here at the top-line growth and the growth in RPOs, how much you would estimate sort of the inflationary pass-through uplift is within those trends and just how we should think about your comps on these quarters going into next year to the extent inflation starts to moderate?

Yes. From your lips to God's ears, right, that inflation starts to moderate. Look, I back in the envelope, I think we think it's hard to do it because of scopes, kinds of equipment, equipment in our mix, equipment out of our mix, some of our bigger work, we don't actually purchase the underlying equipment so that's out. Labor's actually been reasonable. I think they're in it for the long game. Our collective bargaining agreements have been reasonable. They're much more focused on what goes into the benefit package. They're much more focused on actually improving the pipeline into the trades in a lot of these local unions, which is quite robust right now. I would actually say Mark 15%, 20%.

Yes, that's -- it's less than 20%. Anywhere between that 12% to 20% range is where I would settle.

Not something we haven't looked at, Sean. It's really hard to normalize period to period. But it would say, yes, 12% to 20% of that gains in revenue and in RPOs are probably inflation related.

Our next question comes from Adam Thalhimer with Thompson Davis. Please go ahead.

Hey, so I kind of wanted to start exactly where you guys left off on the RPO growth. So I'm trying to think through the $1.5 billion sequential jump in RPOs, when does that work start? And what kind of confidence does that give you in 2023 revenue growth?

Well, the works for the most part is starting now. If you think about how work gets awarded in our space, if we had some delays because of equipment and we had some delays of awards because of equipment that's part of what you saw in the third quarter. When this customer provided equipment, they delayed the award. We knew we were getting it, but they delayed the award, as we talked about. Adam, we don't comment on 2023 right now. But look, we have record RPO levels, we're in the fourth quarter, we expect a good start to 2023.

Okay. And the -- can you just kind of repeat your -- there was a comment, Q3 was a little bit down in industry -- in Industrial seasonally down. You talked about a better Q4, a better Q1. I guess, can you talk a little bit more about that kind of the next six months in Industrial?

The next six months should be okay, right? Because we're in the fourth quarter turnaround season, we're going into the first quarter turnaround season. We have no reason to believe that those -- well, we're in the one, right? So we know that most of that schedule is getting executed. And we think most of the first quarter will get executed. But we're at record frac spreads, and we have incredible external pressure on these refiners to keep operating. We don't make those decisions. We plan for them. We are well-positioned to support our customers, and we also think some of our renewable projects will start to come online as we exit the year into the first quarter of 2023.

Okay. And then, lastly, thoughts on capital allocation from here both M&A and buybacks?

I'll let Mark take that.

Yes. With regards to the buyback program, clearly, you could see in the Q what the remaining authorization is. We don't comment on our repurchase strategies as we go-forward, as you know. But we certainly have the authorization to take advantage of that if we chose to do that. With regards to the M&A pipeline and Tony is certainly going to jump in, we continue to have an active pipeline. But as other things that we've commented on this call, ultimately, we do not determine if something is actionable or not. There's obviously a lot of uncertainty as people are looking at the future for all the reasons that have been discussed previously on this call and some of the earlier questions we've had today. But this year has been relatively slow to-date. I would like to think as we move into 2023; we would like to see activity pull up.

Yes. I mean, we like what we did so far year-to-date. We wish we have done a little more. We see continued good opportunities. We see it in our Electrical segment. We see in our Mechanical Construction segment. We see in Building Services. Industrial is more organic growth. We have the capabilities to support our customers. And even on UK, we could see an interesting acquisition or two. The bar for us is fairly high, right? We have good organic growth opportunities. We still have capabilities and geographies we'd like to fill, and we have people that want to be owned by EMCOR. We have great success in people that are trying to move their life's work to us. That's a better scenario for us. We earn well in excess of our cost of capital, and we make very fair deals with the sellers. We don't -- we're not bargain hunters, and we're not going to be the people that are going to go that squeeze the absolute last dollar out of the transaction. It's just not how it works when someone wants to be part of our team going forward. We do a lot of small acquisitions you never hear about that build a branch or allow us to take a mechanical service contractor in the West from a $40 million in 2002 to $300 million today. And so we're very intentional about that M&A dollars. Do I think there is a $1 billion deal in our offing? No, I don't. I think that we will continue to operate well with the $40 million to $300 million acquisition, and I think we have plenty of opportunities there over a multi-year period.

[Operator Instructions]. Our next question comes from Brent Thielman with D.A. Davidson. Please go ahead.

Hey Tony, in the 10-Q, you highlighted the manufacturing sector in regard to Electrical segment growth. And then within that, kind of the first bullet was transmission and distribution projects. And I was just wondering if you could clarify. Is that some of the stuff you're talking about or --?

Yes, that would be around renewables and substations that support renewables. That would be located there. And it would also be on substations supporting manufacturing clients as they build out their facilities. Yes, that's mainly what that is.

Yes. And then the EV battery plant opportunities also fall into that category and manufacturing separately?

Yes. Yes, yes.

Okay. Perfect. And then, I guess, Tony, on the -- again, on the Electrical segment, the challenges you've had to work through this year weigh a bit on the margins? Are you effectively complete with those jobs? Are you still working through them?

Most of them will be complete by the end of the year. We have one more that will be sitting out there. Obviously, at the end of every reporting period, we take our best view on that job. So we think we know where we are. This is not hundreds of millions of dollars' worth of work that need to be completed. It's probably around $50 million to $60 million of work to get completed. This is work that for the most part, was taken between 2015 and 2017, like Mark said, under very different operating assumptions. It got delayed for some design issues initially, then some pandemic issues, then some supply chain issues. And it's work that we completed in the West Coast, and we will finish those jobs. We will seek our contractual entitlement and we will move on. It's not -- like I said, this isn't hundreds of millions of dollars of backlog or hundreds of millions of dollars of work. That work will be -- other than one job, will be complete mostly this year, and maybe a couple of things will dribble into the first quarter.

Yes. Understood. And then last just the strong Building Services performance. I mean, again, this quarter. How much do you attribute to sort of these positive or favorable seasonal trends? I know that unusually warm weather, which I assume helped to some degree. And then what you attribute to what the core business is doing, right, maybe some of the secular trends around the business.

I think most of its secular trends on what the business is doing right. The size we're at now, with their profitability now, we love warm weather. We've been -- we don't --

We love warm weather, we love snow, but it doesn't move the needle for the performance of that segment.

Not like it used to, because of the size. I think what really is driving the performance is really paying -- what we didn't talk about, right? Because if things are good, you don't have to whine, right? But we didn't talk about the fuel headwind that Building Services segment had it is not zero. I mean, Mark, $3 million to $5 million?

Yes.

Yes. I mean, $0.04, $0.05 a share of headwind coming out of fuel just in Building Services, and you probably double that across the business. Now as the year goes on, when we recouped it as our pricing caught up. We don't talk about all the planning we have to do on what we're supposed to be short-cycle projects that get pushed out and what that means for their workforce planning and how we're not absorbing. I would argue they're performing at these levels with less than optimal labor utilization on the project mix side. But offsetting that is unbelievable execution on the repair service side, which is really, really strong, which is clearly highly skilled labor and the utilization and the pricing around that, coupled with the best execution we've ever seen in our commercial site-based business. And also as we even start-up new customers, as we renew customers, and we're really -- and more importantly, we're delivering for our customers there. I mean, that's a business where you really have to work with the customer on the budgeting and year-over-year productivity and cost reductions in an inflationary environment and getting through that takes a lot of scale, and that team is executing. As well as the UK team, I would put those two together, operating in really, really difficult environments for our customers, and really delivering for them.

Our next question comes from Noelle Dilts with Stifel. Please go ahead.

Hi, thank you. Just I was hoping you could just comment a little bit on how you're thinking about the longer-term implications of higher interest rates and what that means for -- I should say higher interest rates and also just higher costs overall. I mean, obviously, your demand is exceptionally strong, you're seeing great trends. But as you look forward, how concerned are you that you could start to see slowdown in certain sectors of construction overall? Thanks.

Yes. I mean look, that's something -- this is a seasoned management team. And so we're always aware of planning for the inevitable slowdown, right? I do think if you go to the sectors I talked about on Page 13, I mean there's a real trench, right? And there may be blips along the way, but you can't get out of the way of what are really great macro trends. But people, oh, is a secular macro trends, you have to have planned and you have had to build the labor force to take advantage of those secular trends well before the secular trend happen. So there's really nothing that's happening right now that surprises us, except for maybe the speed of some of the dollars in energy transition. So we feel good about that. The second thing is, if you think about it from an underlying, what are some things that are really things we didn't have much to do with that are going to help those secular trends? There's been three or four pieces of legislation over the last couple of years that will help keep some of that demand solidified and also solidified on terms that are good for a highly skilled contractor that always pays prevailing wages. And so if you think about it, the first one was the CARES Act. Mark talked a little bit about that. That's going to drive underlying demand in the institutional market. That's the biggest part for us, schools, right, and other institutional buildings to do building upgrades. Now that was 2021. You thought it was all spent. No, it's not. Nothing almost got spent in 2021, it can't, right? You pass it, it takes a lot of plan. Then you get to 2022, Mark talked about that being some…

Great. That's very helpful. And I guess, second, just going back to your -- the discussion on the impact of inflation on RPO. Just to make sure we're thinking about this correctly. I mean, would you -- should we think of a lot of that inflation is just being passed through? So it might have a dilutive impact on margin? And obviously, we know that there have been a lot of other things that have impacted margins this year that should not -- that you should've passed though, so that will be a positive impact. But just kind of curious how to think about those spend?

I'm not sure, going forward, how dilutive the impact is of inflation, right? We have a margin. We have to make on our labor and our procurement of those materials.

Okay.

I think what your -- what has happened, right, is more of the supply chain disruption is more a problem for us than the inflation. Yes, we passed the inflation on. But we also look to seek to make our margin, right? It's not passed on without making a margin. What the real issue is the supply chain disruptions. Now part I think we believe, as a management team is we're now in a spot where things are getting delivered, right? So we waited, we waited, we waited. There was the disruption, which we foreshadowed way back in our second quarter 2021 call. We had some things priced differently. We're working through it, working through it. And now we're getting major equipment delivered. We're putting it on the site. We put that into our planning. Are we building things optimally the way we'd want to build them? Of course not. But we have figured out how to work around that. In some ways, you're almost treating the installation of some of the major subsystems, as you would on a replacement job. You're doing everything else first. I mean, because the availability of pipe and wire and more commodity-type materials has actually been pretty good, and the price has come down actually. So you put the bundle together, might it have a minor impact, Mark, to keep things tamped down.

Yes. I mean, the law of large numbers, right? For say a discussion marking something up 5%, right? And that the percentage -- the number grows, it's more of the total contract. It could be dilutive, but it's not driving the advantage.

It's not -- it's not driving it.

Yes.

Okay. Got it. Thank you.

Anybody else, no?

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

All right. Thank you all very much. Stay safe, and we won't be talking to you. So have a great Thanksgiving.

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