Good morning. My name is Keith, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group First Quarter 2023 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] I'd now like to turn the conference over to your host today, Mr. Blake Mueller with FTI Consulting, please begin.

Thank you, Keith, and good morning, everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the company's 2023 first quarter results, which were reported this morning. I would like to turn the call over to Kevin Matz, Executive Vice President of Shared Services, who will introduce management. Kevin, please go ahead.

Thank you, Blake, and good morning, everyone. And as always, thank you for your interest in EMCOR, and welcome to our earnings call for the first quarter 2023, and boys it’s moving quickly. 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 certain 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, the executives who are with me to discuss the quarter results are Tony Guzzi, our Chairman, President and Chief Executive Officer; Mark Pompa, our 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 at emcorgroup.com. With that said, please let me turn the call over to Tony. Tony?

Yeah. Thanks, Kevin, and good morning, and thank you for joining our call. I will cover pages four through six in my opening comments. The momentum in the past few quarters continued in our business as we had an exceptional first quarter 2023. Our team is executing well, and I appreciate the team's focus and dedication towards driving excellent outcomes for our customers. We earned diluted earnings per share of $2.32 on revenues of $2.89 billion and operating margin up 5.4%. We had strong first quarter organic revenue growth of 10.1% versus the year ago period. We also grew remaining performance obligations or RPOs from the year ago period and from December 31, 2022, to a record $7.87 billion. During the first quarter of 2023, we executed very well across all segments, and the broad themes that drove our business in 2022 continued, including the underlying strength in the retrofit markets with a focus on energy efficiency and IAQ, or Indoor Air Quality, which also leads to emissions reduction. Growth in the network communications and data center markets, strong demand in healthcare and high-tech manufacturing, including semiconductors and all things around the EV or electric vehicle value chain and traditional manufacturing and industrial projects driven by the onshoring supply chains and domestic capacity expansion. We also continue to see an increase in demand for our downstream refinery and petrochemical services. I will discuss these trends in more detail in my later commentary. Further, we are executing well on a good mix of business as evidenced by our improved gross profit margin of 15.1%. We still face headwinds from inflation and supply chain disruption, but we continue to improve our planning and execution to mitigate such headwinds which we expect to continue through the balance of 2023. As our results demonstrate,…

Thank you, 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 augment Tony's opening commentary and review each of our reportable segment's first quarter operating performance, as well as other chief financial data derived from our consolidated financial statements included in both our earnings release announcement and Form 10-Q filed with the Securities and Exchange Commission earlier this morning. So let's expand our review of EMCOR's first quarter performance. Consolidated revenues of $2.89 billion are up $297.9 million or 11.5% over quarter one, 2022. Our first quarter results include $35.2 million of revenues attributable to businesses acquired, pertaining to the period of time that such businesses were not owned by EMCOR in last year's first quarter. Excluding the impact of acquisitions, First quarter consolidated revenues increased approximately $262.7 million or 10.1% quarter-over-quarter. Before reviewing the operating results of our individual reporting segments, I would like to highlight that our consolidated revenues of $2.89 billion established a new first quarter record and represents our second best ever quarter. With that being said, I will now cover the results of each of our reportable segments, starting with revenue. United States Electrical Construction segment quarter one revenues of $644.7 million, increased $122.7 million or 23.5% in 2022's comparable quarter. Excluding incremental acquisition contribution, this segment's revenues grew a strong 16.8% organically quarter-over-quarter. Increased project activity within the network and communications, healthcare, manufacturing and hospitality and entertainment market sectors more than offset revenue declines in transportation and traditional commercial market sector activity. We continue to experience strong demand from our data center customers as evidenced by the growth in remaining performance obligations within the network and communications market sector, and we…

Yeah. Thanks, Mark, and I'm going to be on page 11, Remaining Performance Obligations, by segment and market. The robust demand for our services continued the trend we experienced in the final three quarters of 2022, into the first quarter of 2023. Total company Remaining Performance Obligations or RPOs at the end of the first quarter were almost $7.9 billion, up a little over $1.9 billion or 32% and over the March 2022 total of $5.95 billion, all but approximately $169 million of the $1.9 billion increase was organic. Additionally, first quarter project bookings were also strong with RPOs increasing $414 million or 5.5% in the first three months of 2023 from year-end 2022. With a 10.1% organic revenue growth, the continued RPO growth is a sign of strong underlying demand in our most resilient sectors. RPO growth was broad-based with each of our domestic reporting segments experiencing double-digit RPO growth in the first quarter versus the first quarter in the year ago period. Further, each of these four business segments saw RPOs increase in the first quarter from year-end 2022. Our two domestic construction segments experienced strong project growth year-over-year with combined RPOs increasing just under $1.7 billion or 36% from March 2022. The U.S. Mechanical Construction segment saw RPOs increased by $934 million or 28%. While the U.S. Electrical Construction segment saw an increase of $754 million or 58%. Much of the Construction segment's RPO increase results from continued demand for hyperscale data centers, semiconductor manufacturing and health care facilities. We are also engaged in the build-out of the Electric Vehicle or EV value chain, which includes the production and development of electric vehicles, battery plants and other manufacturing and industrial facilities driven to support this important new industry. We also are seeing increased demand from the on-shoring…

Thank you. At this time I will begin the question-and-answer session. [Operator Instructions] And today's first question comes from Brent Thielman with D.A. Davidson.

Hi. Thanks. Good morning. Congrats on a great quarter.

Good morning, Brent. Thank you.

Tony, I was just wondering if you could comment on your traditional commercial verticals just in the context of these kind of heightened concerns around credit tightening. It seems like that would be an area you may have the most exposure risk. But I'd love to hear sort of how you'd pick that apart are there high levels of retrofit and upgrades within that vertical versus new construction? Any anecdotes there would be really helpful.

I mean so that's why we did the enhanced disclosure. Then you can see the yellow bars traditional commercial. And it's the part that's up leased year-over-year, and it's essentially flat from year-end. Now part of that is a result of we're starting to burn through. That's where you really saw the impact of elongated supply lines because those projects that we do, for the most part, are meant to be quicker hitting. So if you think about EMCOR's commercial backlog, probably less than 1% of what we do today to 1.5% is what I would call new out-of-the-ground commercial or high-rise residential. At one time, that was very different. The bulk of the business that's in that traditional yellow section or even that pink section, probably that pink section has you could take that pink section and spread it across all our other sectors there, the short duration projects, but that yellow for the most part, is aftermarket. It's short duration projects. It’s not short duration. It's major retrofit. It's retrofit. It's tenant build-out. It's ad moves and changes. It's where our longer duration energy retrofit projects are. It's that kind of stuff is the fast provider of what we do in commercial now. And then as you move up, right, we talked about the maroon and the green, I mean, the reality is that's a good breakout, right, because that's where the growth is coming for us. And like we said, that growth was coming even before the enhanced legislation. I'd like the CHIPS Act and IRA, we expect that to even continue more and I talked about it maybe growth or elongation. But we're careful in that commercial sector. We've been careful in that commercial sector for a long time. We're especially careful when it's developer-led. We…

Okay. I appreciate that. Just I guess staying on the topic of the RPOs, Tony, the healthcare piece also really sticks out to me just the continued expansion there. I guess my question is, would you consider that a fairly diverse group of customers and a broader trend, or is this aligned with some specific customers that just happen to be spending?

It's both, Brent. It's both, right? $0.01 specific customers drive that backlog because they can be large projects. But if you look over a two or three year period, over time and the way we think about it is part of a broader trend. They got, quite frankly, disrupted a little bit with COVID because they weren't building new facilities in the middle of COVID. They were building emergency facilities been on new facilities or retrofitting so you can do multiuse. So some of this is pent-up demand or what should have been capital planning, but it's a long-term trend. Hospitals and big healthcare facilities and out paid facilities, they need to be cleaner. They need to have better ventilation they need to have an ability to flex from positive pressure to negative pressure in our world. They have much more complex low-voltage needs. They have much more complex general electrical needs they have to put backup power. And while they're doing all that, they have to think about their sustainability goals and how they're going to operate that facility more efficiently.

Okay. Thanks, Tony. And the last one, just, I guess, which of the two construction business groups? Are you seeing still sort of more profound challenges related to the supply disruptions in -- is it more electrical or mechanical because it looks like the electrical margin definitely snap back big from last year, but maybe a little below levels we've seen in the past. I'd just love to kind of understand that.

I think I would say probably electrical more than mechanical, it's a more consolidated market for major end products, and it's more on the critical path. So we've had to rejigger our means and methods to work around that. Mechanically, we buy a lot of equipment, we do a lot of HVAC work. We also do a lot of district piping work supporting big process plants or where the owner bought the equipment. And so they do that in the electrical business, too, for major gear. But my experience has been when you look at things like generators and switchgears and smart panels, the delivery performance is not great yet. The mechanical has gotten a little better, at least what they say they're going to do, they do. But the electrical lead times haven't really moved much down at all. The mechanicals have started to move down a little bit. And I think, in general, the mechanical sales forces are more in tune with their factories. And I think they have better visibility to keep us up to date on what's happening than the electrical sales force.

It's really helpful. Yeah, yeah. Okay. Thanks guys.

Yeah.

Thank you. And the next question comes from Adam Thalhimer with Thompson, Davis.

Hey, good morning, guys. Great quarter.

Thanks, Adam.

On the industrial business, that was your best quarterly op income in three years. Just curious, what your visibility is like there and what the -- if you can build on the Q1 results.

Look, we think things have gotten better. We like where our shop backlog is at. We like what that portends for the future. We think we're in a more normalized operating environment, which is good. We expect to continue to operate normally. We have no reason to believe we don't have a normal fall turnaround season coming up. I think the long pull in the 10 is a new product we have, right, or a new service, which is building these alternative energy, the renewables, especially around solar, and that's clogged up everywhere. But Mark, I mean…

Yes, Adam, the only thing I would add is just don't lose sight of the fact of the seasonality of that business. So it's kind of bookends quarter one and quarter four. But having said that, we saw, as Tony mentioned a couple of times during his pre-prepared remarks, we saw us close to a normal operating environment as we've seen in a while with that customer base. And it's -- a lot of it is mix driven as well. So we're deploying the qualified label we have. And if our customers adhere to their -- to the schedules that we've been planning with them, we're optimistic that 2023 is going to at least look like a normal 12-month performance period for the Industrial Services segment.

And that's reflected in our guidance. And part of that is reflected in our guidance takeup.

Okay. What is the outlook for solar panels? I don't I have followed that closely.

There are certainly people way better qualified to talk about that than us as part of our business. But based on what we see, not good. It's still plugged up. I don't think there's going to be this big uptick this year. But again, that's sort of -- there's people who know a lot more about that to me, as someone that's followed it closely through our bidding and work, we see a lot of delayed work.

Yes. And then I guess, Blake kind of touched on this, but I just wanted to touch on your macro comment. And I guess the debate is, where do you think macro would manifest itself? Because it seems like a lot of these big projects are kind of locked and loaded and there's government support -- so maybe those big projects go, but there's risk to the short duration projects?

Yes. I think there's – it's hard to tell. I mean the short duration projects have something that's been driving them for a while. And so there's this counterbalancing view out there, right, in my mind because of energy pricing. And people who drive for more sustainable facilities. So on one hand, you sit there and say, I just won't do the project. On the other hand, you say, every day, I don't do that project, my cost structure becomes worse because energy prices continue to become uncertain and escalate. And most of our major customers have committed to sustainability goals. And you can't get there unless you do equipment replacement and modernization and all -- something as simple as fixing the compressor lines in a manufacturing facility. That requires a lot of work. It requires new equipment. If you take out something that used to be 0.68 kw per tonne, and now you're putting in something with 0.32kw per tonne on a chiller, and it has variable speed -- that's a market change in your operating cost profile. And then you're going to start thinking about, okay, I have to do that. If I don't do that in these triple net leases, which has always been the vein to the existence of energy efficiency, my building may no longer be competitive, right? So I have all these forces going on around me. And so I think that if you're heavily exposed to new build commercial, you probably have a different outlook than we have on that. I also think, if you think of some of these major projects that are going on, on those big things I talked about from reshoring, EV, value chain, semiconductors, data centers. And remember, there's a whole ecosystem around each of those. I guess most of this was happening without government support. That can only help it now, and it can only elongate it in my mind. And most of these customers are not worried about a 500 basis point expansion in interest rate costs. One, they're self-funded for the most part and the kind of value they're going to create over what they're doing. And then you layer on top of that for some of these industries, the demand with respect to national security and the onshoring of some critical industries, I think that mix drives long-term demand in a favorable way. And look, for us, we have great RPOs. We expect to continue to have great RPOs. From this high level, that could plus or minus a little bit quarter-to-quarter, but we expect our overall trends over the next couple of years to be pretty good as -- in these major sectors, but we'll see.

Exactly. Good color. Thanks guys.

Thank you. And the next question comes from Sean Eastman with KeyBanc.

Hi, team. Great start here. Very good start. I thought -- I mean, I thought the big takeaway from the first quarter was really the margins. I mean, I think this is a record margin performance for our first quarter. Yet you guys are saying, there's still kind of lingering supply chain challenges. Is there something unsustainable that came through in the first quarter or are we just kind of effectively not updating the outlook sort of just flowing through a better start to the year?

I don't know, Sean. I think taking our outlook up to $9.25 to $10 from $8.75 to $9.50, a pretty big move. I think the revenue velocities in the businesses, and we said that in our initial guidance, and I think further, if you extrapolate that, I think that what we're really saying in the guidance is we expect strong margins through the year. Now, we are mix dependent and projects start, they finish. But we -- there was nothing extraordinary in the first quarter, right, Mark?

Sean, the only thing I'd point out, if you recollect from quarter one last year, we did have some additional headwinds with regards to project write-downs, both in electrical and mechanical construction. The extent of write-down activity in the first quarter of 2023 was not at that same level. The other thing, which is extremely difficult to quantify relative to 2023’s quarter one, is with the fairly mild winter weather pattern we had in most of the geographies we operate, we didn't deal with the same level of job site difficulties with regards to finding weather. But like I said, that's difficult to quantify. It does not have an outsized impact on the quarter performance. And the only thing I might have done is pulled some activity forward in the year.

And I think the other thing that bolstered first quarter operating margins -- operating income margins is, this is a seasonally strong quarter for industrial. And so we have to factor in with second and third quarter mean to us there, especially if we can't deliver some of the solar work that we hope to deliver towards the back half of the year. So, -- and then I guess just general caution, right? I mean I talked about the things we don't control. And those are sizable macro forces we don't control. And so we think it's prudent to have an eye towards that. But I think we have a strong guidance out there to update us. We started the year with strong guidance. We updated that with strong guidance. And underlying that is what we believe, depending on where you are in that revenue range is pretty strong underlying operating performance.

Yes. Look, I don't want to take the wind out of the sales, great update. I guess what I was getting at is just that I have to go back to 2014 to find a year where the first quarter is not the low watermark operating margin for the year. And I feel like with that dynamic in mind, it seems like there's a lot of cushion in the guidance from a margin perspective over the balance of the year?

Yes, I mean we had a lot of -- I mean, when we start looking at this at the macro level though, right? There's a lot of puts and takes in any given quarter. And we think that with those countervailing macro forces and how they could impact the back of the year, we think that we put strong guidance out and we think we'll obviously end up somewhere in that range. And we got to execute well on the things that we can to keep those margins where they are and I went neater four or five points that we think are most important.

And coming back to the credit tightening element being so topical, maybe approaching that from a different way. How do you see that potentially impacting your M&A pipeline?

I don't think it impacts our ability to do what we think we need to execute other things we would like to execute. I think though, Sean, we know this, right, if the overall M&A environment is not favorable, less things may be for sale, right? Now, a lot of the things we buy are necessarily in that typical M&A market. most of the deals we've done over the last three years have been people selling their life's work, which is where we operate the best, right? That's where we are the most successful, and we also drive the most value, not only for the person selling the business because they have a lot of things we're looking at, but for our shareholders, and it gives us new opportunities to grow. But look, private equity is not much in the market right now between interest rates, covenants and credit tightening and the ability to place their secondary debt. They're not in the market, people that want a robust auction around the process, therefore, are trying to sell their companies right now. And so put all that together, it's no secret. I mean, you follow the same things we do. M&A volumes are down significantly. That being said, for the kinds of things we do, I don't think it -- I would say, oh, my god, it's the most robust pipeline I've ever seen. But what we have was, I think, is an acceptable pipeline of opportunities for us to pursue to continue to build on our footprint, add to our capability, and enhance the services we're offering across a number of geographies or new geographies or product lines would like to add a product services would like that.

Got it. Got it. All right. Thanks for the perspective. Many compliments to the team.

Thank you.

Thank you. And this concludes the question-and-answer session. I would like to return the call to Tony Guzzi for any closing comments.

Thank you very much all. We started well in 2023. We got a lot of work ahead of us. And I hope you all are well. Have a good summer and be safe.

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