Good morning. My name is Megan and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group Second 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] Mr. Blake Mueller with FTI Consulting, you may begin.

Thank you, Megan, and good morning, everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the company's 2023 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, Blake. Good morning, everyone. Thank you for your interest in EMCOR, as always, and welcome to our earnings conference call for the second quarter of 2023. For those of you who are accessing the call via the Internet and the website, please welcome as well. We are at the beginning of our slide presentation, and we are on slide two. This presentation and discussion contains forward-looking statements and may contain certain non-GAAP financial information. Page two describes in detail the forward-looking statements and the non-GAAP financial information disclosures. I encourage everyone to review both the disclosures, in conjunction with our discussion and accompanying slides. Slide three has the executives who are with me to discuss our results for the quarter and six months. With me are Tony Guzzi, Chairman, President and Chief Executive Officer; Mark Pompa, our Executive Vice President and Chief Financial Officer; and Executive Vice President and General Counsel, Maxine Mauricio. For 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 always find us at emcorgroup.com. With that said, please let me turn the call over to Tony. Tony?

Thanks, Kevin, and good morning, and thanks for joining our call. I will be speaking to the second quarter results in my opening commentary. Mark is going to cover both the second quarter and year-to-date results. I will be speaking to pages four through six in my opening comments. We had an extraordinarily strong second quarter, by any measure, at EMCOR. We had revenues of $3.05 billion, which represents 12.5% revenue growth and 11% organic revenue growth. We earned $196.7 million in operating income, and our operating income margin was a strong 6.5%. Diluted earnings per share totaled $2.95. This performance represents an all-time quarterly record for revenues, operating income, operating income margin and diluted earnings per share. We generated strong operating cash flow of $300 million in the quarter and grew our remaining performance obligations or RPO sequentially from Q1 by $413 million or 5.2%, and from the year ago period by $1.8 billion or just over 28%. Our business is performing well across nearly all segments and end markets. Our Electrical and Mechanical Construction segments continue to perform well as evidenced by the strong revenue growth of 20.2% and 12.9%, respectively. With Mechanical Construction operating income margin of 10% and Electrical Construction operating income margin of 7.5%, the conversion to operating income by these segments, especially Mechanical, are towards the high end of our expectations. Across the country, we are executing well on some of the most sophisticated projects and markets, such as high-tech manufacturing, which includes semiconductors, the electric vehicle, or EV value chain, biotech, life sciences and pharmaceuticals. The network and communications sector, which encompasses our data center work and the health care sector, are also performing well. We have industry-leading capabilities in BIM or Building Information Modeling, prefabrication, project planning, labor sourcing, management and training.…

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 seee. Over the next several slides, I will supplement Tony's opening commentary on EMCOR's second quarter performance as well as provide a brief snapshot of our year-to-date results through June 30. All financial information referenced this morning is derived from our consolidated financial statements, included in both our earnings release announcement and Form 10-Q filed with the Securities and Exchange Commission earlier this morning. So let's revisit and expand our review of EMCOR's second quarter performance. Consolidated revenues of $3.05 billion are up $338.2 million, or 12.5%, over quarter tw2022. Our second quarter results include $40.6 million of revenues attributable to businesses acquired, pertaining to the time that such businesses were not owned by EMCOR in last year's second quarter. Acquisition revenues positively impacted our United States Electrical Construction segment within the quarter. Excluding the impact of acquisitions, second quarter consolidated revenues increased approximately $297.6 million or 11% quarter-over-quarter. Before reviewing the operating results of our individual reporting segments, I would like to reiterate what Tony highlighted earlier, that our $3.05 billion of quarterly revenues represents a new all-time quarterly revenue record for the company. The specifics to each of our reportable segment's second quarter revenue performance is as follows. United States Electrical Construction segment revenues of $678.2 million increased $114 million or 20.2% from 2022's comparable quarter. Excluding incremental acquisition revenues, the segment's revenues grew a strong 13% organically period-over-period. Increased project activity within the majority of the market sectors served by this segment led to the quarterly revenue improvement. Such growth was most prevalent within the network and communications, manufacturing and industrial, health care and hospitality market sectors. Revenue of this segment…

Thanks, Mark, and I'm going to be on page 12. And what I wanted to do before we jump into the remaining performance obligation's absolute levels, is I wanted to take a step back and talk about what's been driving our exceptional organic growth and our RPO growth over the last two years, and what's been driving profitable organic growth for us. And if you look at this page, I want to take a step back also and say, if you look at these trends we're talking about on Page 12, they're front and center in the news every day. They're not only front and center from customers making investments, they're also the focus of government policy, in some cases, to strengthen those sectors for the long term. Secondarily, each one of these sectors require highly skilled labor, very skilled supervision, project managers and engineers that are really at the top of the industry. And the government incentives, where they're aiding in certain cases, want that kind of workforce on those jobs because it's more productive, it's safer and it's trained. And again, going back to the great supervision point. So let's talk about each of these in turn, and there's a little bit connectivity between a couple of them, and I'll talk about that. The first one is electrification and the EV, or electric vehicle value chain. In a lot of ways, that's a whole new industry, right, that's being built in plants, suppliers -- second- and third-tier suppliers, and we're certainly seeing that work in battery plants, which is the raw material. And we're certainly seeing that work really burgeoning across the country, especially in the mid-central part of the country in Midwest and also the Southeast and a little bit in the Southwest. We are participating on…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Adam Thalhimer with Thompson, Davis. Please go ahead.

Hey, good morning. Congrats on a good quarter and thanks for all the commentary on slide 12, Tony. I guess the biggest question is, how does that all wrap up into your thoughts on the prospect for continued sequential backlog growth?

Yes. I mean, look, I've said it a thousand times. It's -- we're in a very good level of RPOs. We have opportunities in front of us. Projects, large awards come in. And because you booked it two weeks after the end of the quarter, it doesn't mean you've lost momentum in your business. Also, as you're out of site, and that site builds out like a new semiconductor site or some of these EV sites, sometimes the initial award is big. And then you get follow-on work that over a period of 18 months, which is a project less of a lot of these is every bit is big. But they -- because I know you, they tend to let it out in stages. So what I know is we have good momentum in the business. We're playing to broad themes that are driving our business and driving our sector and the economy. We have something that's very valuable, which is highly skilled technical labor that can execute the most difficult jobs and service the most -- drive service in the toughest situations. So I guess, in the 19 years I've done this, I've never thought about what sequential RPO or backlog growth looks like. I certainly have joined that we've had a book-to-bill of over 1 for I think 8 or 10 quarters in a row. I don't see maybe that's slowing down, but the flip side is if it was 0.98, I don't think that means much of anything, to be honest with you.

Great. And then I hate to ask for guidance within the guidance, but can you give us any help on how you guys see the back half playing out between Q3 and Q4?

We have. You know what? This is all project timing-related. When a turnaround starts and ends, we've never provided quarterly guidance, and I don't think we're going to start now. Are we Mark?

No, we're not.

And then lastly, fire protection. Can you give us a sense for how accretive that is to mechanical margins?

Well, it operates at better margins than the base business. Some of that has to do with the material component of those jobs. It has a higher labor component, but it's helping. It's providing a nice cap on it. But you know, it's a tough job, so we've got to execute.

Okay, I'll turn it over. Might hop back in. Thanks so much.

[Operator Instructions]

Hey, Adam. Hop back in if you want.

Sure. Go ahead.

All right.

Okay. Sorry I did want to ask about the shop business. When was the last time the shop business was strong? I can't even remember.

2018, '17, '18.

And how meaningful could that be to that segment?

It's not nonmeaningful.

And also on my list, I had solar. When you thought that might gain traction?

There's probably people better qualified than me to talk about that because of where we are in the chain to deliver those projects. There's a lot of things on the drawing board. There's a lot of land bought. There's a lot of contracts. Purchase power agreement is out there. We had a full book of business. I expected to do 10%, 12% revenue of that segment. But the reality is, there's not a lot happening there right now. Now the smaller ones are happening. So when we're on a hospital site or a campus site where we're doing the car ports, actually, one of our suppliers is doing that as part of our overall energy program for some of our bigger customers. We can get them there. When you're talking utility scale solar, and again, I think there's probably people that are better qualified to me to talk about that. We're just not seeing the activity we expected to see this year.

Okay. All right. Thanks guys.

The next question comes from Sean Eastman with KeyBanc Capital Markets. Please go ahead.

Hi, Team. Many compliments. Really fantastic update here. So I wanted to talk a little bit more about the margins, which is really the big upside toggle and the outlook for the year. Obviously, we had a really strong start on margins in the first quarter, but you guys kind of held back from flowing through that really strong start to the year. And then here we are in 2Q, kind of blowing out margin expectation, and you guys are releasing more of that kind of elevated margin and a juicier guidance update. So I just wanted to get a sense for what changed in your view? And what's kind of come through stronger to give you more confidence to just guide margins up from here versus last quarter?

Yes. So I'll take a high-level view, and then I'll turn it over to Mark. I think there's three things that we have more confidence in. One is the mix of our work going forward, and we have pretty good visibility on what we're nearing completion in and what's starting up, at least we think we do at this point in the year. The second point is the mix of trades. We have a very good mix of trades. We have strong fire life safety demand. Our electrical business is back on track with a great mix of work. In our core mechanical business, mechanical services businesses are all performing well. Coupled with, we see a pretty normal fall turnaround season. So I think that -- at a high level, that mix of things, and I'll let Mark get into more of the specifics.

Yes, Sean. I think clearly, and not to rehash history, but quarter 1, from a seasonality perspective, tends to be one of our weakest quarters in the year, despite the fact that our Industrial Services segment is executing in the earlier periods of the spring turnaround season. I think when you look back to where we were exiting last year and certainly, where we were a year ago at this time, and Tony and I both have commented on this multiple times during the call, the revenue mix was good. It certainly wasn't bad, but we certainly had some projects in the mix that were marginal contributors or they were in loss positions. So I think the term of absence of badness that we've used many times in the past is certainly, relevant or germane to the 2023 periods. And that work other than one project is all cleaned up at this point. So that's a good thing from an activity perspective. The other thing, and we talked about supply chain many times, and we're certainly not saying that it's great, but it's certainly more normalized as we sit here in late July of 2023 than it certainly was at the midpoint of last year. So we're seeing flow of equipment from the OEMs, and that's giving us the ability to make sure we're utilizing our labor in the most efficient manner possible, which is driving better margins. And then specifically, I know I mentioned this in my prepared commentary, in the mechanical -- US Mechanical Construction segment, we did have some favorable project closeout. So back to the earlier caller's point, we only control the start and stop the projects based on our customer's project time line. To the extent that we execute in the fixed price environment or arena, on a better basis, then we obviously capture that improvement. And ultimately, we recognize it where it's appropriate. We certainly had that phenomenon in the second quarter. And as we look at the book of business, as we progress to the rest of 2023, we don't see any particular problematic areas other than the fact that we have thousands of active projects out there with, certainly, a very, very large deployed workforce that we need to make sure is executing at an exceptional level as we've demonstrated over a long period of time. So kind of a long-winded answer. Ultimately, the book of business is very, very strong. We're happy with the labor complement we have on the jobs. And the operating environment is still not optimal with regards to things that are outside of our control, but we've certainly seen some stabilization, which is giving us a little bit more positive momentum as we look at the outlook for the business.

Right. Bottom line is, we called revenue about right at the beginning of the year, but our margins are 100 basis points higher than -- 125 basis points higher than we thought they were going to be.

Okay. Got it. That's helpful. And do you think that we're setting tough margin comps here in 2023? Or do you feel like in light of the mix of work in the pipeline, the complexity of projects driving RPOs and the bid pipeline, that there's some differentiation in the marketplace that perhaps we haven't seen before? And we could view this performance we're seeing here as sustainable?

Sean, I've said a long time, I go back to the way Adam asked about backlog or RPO, I think about margins the same way. One quarter doesn't make a trend. We look over four or fivequarters to see a trend. Margins could go up or down. It could be nothing more than starting up jobs, mix of jobs, mix of contracts. And I said this, I think, last year, after we got out of the first quarter where we had some of the tougher work that was taken pre-pandemic, and we didn't start up the -- especially the data center work we expected to in the Electrical segment. And I said last year, we look at underlying productivity. We look at the things we're doing to drive productive. You got to remember, as a contractor, we don't get to keep the productivity in a sense that a manufacturing plant does. But what we do get to keep is the ideas, and the idea is that we're driving that productivity. So quarter-to-quarter, they could fluctuate some. We definitely think, as we're guiding to, we believe we're going to have strong margin performance for the rest of the year. We, obviously, are at all-time level and RPOs. We like the mix of working at RPOs. But hey, we got to go out and execute. We got to have customers that hang in there with us, and we will.

Okay. Got it. And then just kind of going back to your end market drivers commentary, Tony. I mean we look at the RPO disclosure as kind of a leading indicator of demand. And I wondered if you would say that perhaps there's greater visibility in the model, then we can even really observe in the RPO disclosure, just in light of there being more programmatic and larger multiyear programs.Just kind of more complex infrastructure challenges driving the business that would suggest perhaps you have more of a multiyear type of visibility that isn't fully captured in what we see in RPO? What would you say there?

Yes. What I think I said while I was going through that page, page 12, I said, as a contractor, we don't try to bring big sweeping conclusions on 5-year outlooks. But I think what I said is, I didn't know exactly how things would layer in, but that these six things that we were driving our RPOs right now, that we had a pretty good feeling that they were going to continue to drive our business for the next 2 to 3 years. How that manifests itself is I think exact words I used something like that, how manifests itself quarter-to-quarter. I don't know. But I do know that we're well positioned in some really critical, as you would say, infrastructure type -- not the big I infrastructure, but the small I infrastructure-type sectors that we feel really good about. But guess what, Sean, we're going to go out and execute every day. And we get graded every day by our customers. We get graded every day. And look, the site might be great for 5 years, but in any one of these sites, they could take a 6-month pause. And we have nothing that we -- there's nothing we could do about that. And you saw that last year in the data center business, right? Our electrical business has a wonderful position in the data center market. And just about every key geographic market that matters. We have a wonderful position, but we also have competition every day. But coupled with that, we don't necessarily control when things are going to start. So last year, we thought we were going to start a bunch of work in the first quarter. And what we told everybody, look, it didn't start. That has all kinds of implications, maybe for a little underabsorption of our supervision. Why didn't it start? Well, it mainly didn't start because the switchgear was eight weeks late. The smart panels were six weeks late. The generators were 5 weeks late. So they are owner procured materials. So instead of starting those jobs, February 1, we started most of those jobs May 1. And we ate the supervision in the meantime because we certainly weren't going to lose our key supervision that we plan on working for us for the next 10 years. So the trend is great, right? And so I've given questions the last first quarter is just the end of the data center build. And we said, no." And here we are with $1.2 billion in network and communications, RPOs. So the RPO is dual story, but in a lot of ways, it's not a quarter-to-quarter story.

Yes. I think it's notable for you to be talking 2 to 3 years. If you just look at the long-term history of the business for you to be out kind of seeing robust trends out over multiple years, I think, in itself is notable.

Yes. Well, I think it's -- you can't run from success that you've had where you've entrenched yourself into really good positions. But again, our customers can make a decision not to build in a certain way. I think we'll perform. I don't think that's going to be an issue, but they can delay things by a year. They can delay things by six months. We see none of that today, but we can be talking very different in the first quarter of next year. It doesn't mean it's not a long good term trend. It just means, hey, they took a pause.

Got it. I really appreciate all the insights. I'm going to go see what Brian Lane has to say now.

All right. Thank you.

Bye, guys.

Bye-bye.

Okay. I think that's it. Thank you all and have a safe rest of summer. Pay attention to the heat and drink a lot of water. Be well. Bye.

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