Good morning. My name is Betsy, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group Third Quarter 2023 Earnings Call. [Operator Instructions]. Please note this event is being recorded. Mr. Blake Mueller with FTI Consulting, you may begin.

Thank you, Betsy, and good morning, everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the company's 2023 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. And as always, thank you for your interest in EMCOR, and welcome to our earnings conference call for the third quarter of 2023. For those of you who are accessing this call via the Internet and our website, welcome as well. We hope you have arrived at the beginning of our slide presentation that will accompany our remarks today. We are on Slide 2. This presentation and discussion contains forward-looking statements and may contain certain non-GAAP financial information. Page 2 describes in detail the forward-looking statements and the non-GAAP financial information disclosures. I encourage everyone to review both disclosures in conjunction with our discussion and accompanying slides. Slide 3, excuse me, depicts the executives who are with me to discuss the quarter and 9 months results. They are Tony Guzzi, Chairman, President and Chief Executive Officer; Mark Pompa, our Executive Vice President and Chief Financial Officer; Maxine Mauricio, Executive Vice President and General Counsel; and it's my pleasure to welcome Andy Backman to the call. Andy is our new Vice President, Investor Relations. Andy is an IR pro with over 40 -- 20, not 40, 20 years in the IR space. Again, welcome, Andy. It's good to have you on the team. 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.

Thanks, Kevin, and good morning to everybody, and thank you for joining our call. I'm going to start on Pages 4 through 6. In my remarks, I will focus on the third quarter primarily, and Mark will speak in more detail on our quarterly and year-to-date results. At the end of my remarks, I will discuss some of the key drivers of our performance. Today, we are announcing a series of record quarterly achievements, revenues, gross profit, operating income, operating income margin, diluted EPS and remaining performance obligations or RPOs. Driving this performance is strong end market demand for our services, especially in semiconductors, data centers, manufacturing, health care and retrofit projects. This demand, coupled with excellent execution, has produced outstanding results, not only a quarterly basis but also for year-to-date 2023. For the third quarter, we earned $3.61 in non-GAAP earnings per diluted share on $3.21 billion in revenues. We grew revenues 13.5% overall with 12.8% organic revenue growth. We had an adjusted operating margin of 7.4%, which is exceptional by any measure. However, I would like to remind you that margins can fluctuate quarter-to-quarter based on the mix, execution and timing of projects, most of which worked in our favor this quarter. Our operating cash flow for the third quarter was strong at $261 million, which represents over 100% operating income conversion. On a year-to-date basis, we generated $476 million in operating cash flow, which represents a conversion of 81%. Our RPOs are an all-time high of $8.6 billion, which represents -- excuse me, represents 4.2% sequential growth from June 30, 2023, and 21.6% growth over the year-ago period. This was exceptional performance by an extraordinary team. On a segment basis, we had excellent performance in our Electrical and Mechanical Construction and U.S. Building Services segment. The operating…

Great. Thank you, Tony, and good morning to everyone participating on the call today. We are now on Slide 7 for those of you who are accessing this presentation via the webcast. 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 our earnings release announcement and Form 10-Q filed with the Securities and Exchange Commission earlier today. So let's revisit and expand our review of EMCOR's third quarter performance. Consolidated revenues of $3.21 billion are up $381.2 million or 13.5% over quarter 3 2022. Each of our domestic reportable segments experienced revenue growth during the third quarter. Excluding $20.4 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 2023 increased 12.8% when compared to the third quarter of 2022. Before reviewing the operating results of our individual reporting segments, I would like to reiterate what Tony highlighted earlier that our $3.21 billion of quarterly revenues represents a new all-time quarterly revenue record for the company and eclipses the previous record set during the second quarter. The specific to each of our reportable segment's third quarter revenue performance is as follows. United States Electrical Construction segment revenues of $697.4 million increased $64 million or 10.1% from quarter 3 2022. Excluding incremental acquisition revenues, this segment's revenues grew 8.1% organically quarter-over-quarter. Consistent with its second quarter performance, the segment continues to experience revenue growth across most of the market sectors that they serve. Such quarterly revenue growth was most prevalent within the network and communications,…

Thanks, Mark. And I'm going to be on -- thanks, Mark. I'm going to be on Page 12. And look, we put this page in the last time, and we really got a lot of great feedback from our investors. And I like this page because it really talks about what's driving our business from a macro level and a micro level because there's some micro drivers in here. And these opportunities on this page is really what's driving our organic growth. It's been very strong. I mean, when you think about 12.8% organic growth in the quarter, you say what's driving that? It can't just be business as usual to do that. So if you go on this page, we're going to go left to right across the top of the box and then start over again on the bottom and go left to right, and we'll draw interconnections where appropriate. Let's talk about electrification in the EV value chain. We, as a management team, have done a lot of work around energy transition and the thought process behind it. I think we -- I know I personally landed on, this is not just an energy transition. It's an energy expansion because if you really want to fund other than the bottom-right box the rest of these things, you need more energy. And -- but we're going to have to do it not with just traditional sources. We're going to have to do it with traditional sources, renewable sources. There's going to be a lot of investment. There is a lot of investment. On the transition side, some of that investment has been held up by supply chain. That's not going to break easily, right, because things like transformers, inverters. You hear a lot about the panels, but the…

[Operator Instructions]. The first question today comes from Brent Thielman with D.A. Davidson.

Tony, maybe just coming back to Slide 12, when you think about -- you talked to the customers that comprise the markets that are all embedded in that slide. What do you think is the sensitivity to this interest rate environment? Because at this point, it doesn't seem like there's much.

I would agree with you. We haven't seen it in our bidding or our opportunities. I think if you're going to see it anywhere, right, you'll see it in places that have the most far-out opportunity and the most strain on balance sheets. There's probably better people than me to talk about where that will be. But really, I think we see pretty good demand across most of these. And I think that it'll important, Brent, I think part of what you're driving at is what you typically see as some of this work unfolds after the initial activity comes on a site is, in general, projects then get let in smaller amounts, right, because we're there. And we're working with them to develop the add-on work and the next scope. So I think there's great demand in there yet. I think these are really good drivers, but nothing is literally up and to the right, right? There's always a little jags along the way. We haven't seen that recently, but history would say that, that will, in fact, happen. But the underlying drivers of this over a 5-year period should continue to be pretty strong.

Yes. Okay. And the profitability of the business group is obviously a real standout, Tony. I hear you, the mix of business can have an impact in any given quarter on the margin. When you think about some of these kind of prevailing markets like data center or kind of large-scale manufacturing projects, healthcare, I mean, all of these require a certain level of technical capabilities that you guys have. Is that what you're referring to in terms of mix? And I guess why wouldn't that sustain going forward?

Yes. I think it's mix, but also contractual terms. Mark's talked about that, and I've talked about this in the past. The same project could be done, some of them may change their contractual terms because they haven't developed the scope, they think they should. So we'll maybe getting a GMP environment instead of a fixed price environment because that's going to protect us the most or we may get in an environment where the design wasn't frozen. We haven't been able to get design assist. And as a result of that, profitability can be delayed, right, Mark, because we'll -- the way the change orders get booked. So they can be a little chunky along the way. But clearly, where we do the best is when we know the work, we can do a fixed price contract, and we have more control of the schedule.

Yes. And Brent, the only thing I would add to Tony's comment with regards to mix is clearly scope of services. Tony has commented in past calls that the last couple of years, we've seen fairly sizable growth in our fire protection and life safety services. That work tends to have a better profitability profile than traditional mechanical services. Additionally, a lot of the work we're performing now, a lot of the equipment that we're installing is being procured by our customers. If more of the equipment scope comes back into our future work, the mark-up we get on equipment is certainly less than we get on our labor. So that ultimately can impact margins when you're looking at them on a comparative period. It's still very good work. Certainly welcome the opportunity to perform all scope for our customers. But certainly, it changes the project profitability characteristics from a margin perspective.

Yes, and building on that, right? We -- at the profitability levels we're at, we are much more focused on margin dollars right now than we are margin percentages and the growth they're in. And we don't control necessarily how people decide to let contracts and what that contract structure could be. The other thing along that, that I would add is, one of the changes that's happened in the market, and I don't see this changing, Brent. If you go back 10, 12 years on some of these jobs, what people would have tried to do is they would have tried to take these projects and break them up into small pieces as they can, which causes massive coordination issues on the job and that allows more contractors to bid. So there's a couple of things that have happened, right? With the rise of BIM even more ubiquitous and more complicated, coupled with the demand for prefabrication because it's the best way to get labor efficiency and reduce the need for craft labor on a job because they have plenty of work to do anyway, that it's much more difficult to do that. And so you're really looking for sophisticated contractors to be part of the team earlier, and you're working together to develop the best solution for the customer where before that we might have not got involved till 70%, 80%, 90%, a lot of times we're getting involved 40% to 60%, and we're not completing design. What we're doing is completing the design for constructability with design assist. And that makes a big difference about what kind of people we're working with and who they can work with.

Okay. Very good. I guess my last question, I mean, your optimism here is duly noted, Tony. I guess any qualitative commentary you can offer for us on the outside looking in and how to think about the business into 2024? There's a lot of interesting drivers here. You expect the company to grow. I mean, anything that you can say about 2024 at this stage being a couple of months away here?

Yes. I mean we never give 2024 guide. You know that, and you're not asking for that. Actually, you're asking what's the external environment and how that could shape the environment we compete in. Look, I think energy markets remain really uncertain. And all of the energy -- when I [indiscernible] sort of the wrong word, all the anxiety that we felt at the start of the Ukraine war, if this horrible situation in Israel becomes even more expanded and more difficult through the rest of the Middle East, it's going to have a similar or worse effect than what that Ukraine issue did on energy markets. And so that could be a real issue, right, not only for us, right, as it's consumer of energy, we buy a lot of gasoline and diesel, but in the place that could happen therein, but also sort of what it does to global supply chains and the uncertainty around shipping. I mean, all of the things that come with that, right? I also think that the other thing that could sort of dampen -- again, I don't think it dampens, right? We're sitting here with $8.6 billion of RPOs off of a $7.1 billion a year ago print, which I think even then was up 30% from the previous year. So we have good momentum in RPOs. So it is what people's conviction going to be around sort of capital investment if inflation its ugly head because of labor costs and other people have or other things. So there's some macro indicators out there. Interest rates, in my mind, aren't going down. I think that's what our team believes here. We're going to run our balance sheet very prudent. But for those that are more extended, right, there's a lot of people…

[Operator Instructions]. The next question comes from Adam Thalhimer with Thompson, Davis.

Welcome, Andy. Look forward to meeting you. Actually, Tony, can I just keep going on your PE comment? Are you seeing them show up less on M&A opportunities? Finally...

No, not with the kind of deals we do. I think they look at the size we like to do $50 million to $200 million, I think they say, hey, there's a place we can put all equity. And the earth and heavens will come together, and we'll be able to finance this at a lower rate in the next 18 months. So we don't believe that. That's clearly what they believe. So no, the answer is no. We really don't compete against them a lot. I mean, if someone really wants to go to PE, we're probably out in the first round anyway, we -- to get the great cultural fit and really understand the management team and it is a management team that's going to be there for the long term, sometimes that's not a great fit.

Okay. All right. I'm going to try to do this, going to ask a 3-part question. On RPOs, one, is there a point where you feel like you're too full? Two, are you starting to book jobs further out? And three, do you think some of the RPO growth is market share gains?

Yes. So I'll take the third one. I don't even think about market share, never have. Such a big market that 19 years, more 30 years, got 30 years, you guys ever look at market share? So you can take that one away. We don't think about it. We wouldn't know how to answer that question. Massive market, we're a small part of it. Second one, are we too full? That becomes a question of what's the project, what's the size of the project, what's the timing of that project. So here's how I think about that. Our governor has less to do with how we'll be able to fill skilled craft and technical labor. We'll find that. We've always found -- and we're a really great place to work. We've done a really good job staying ahead of the development of foreman and project managers. And then where we don't have them developed, being able to hire really good people from the outside. So if there's a slowdown in RPO, it's not because we don't think we can develop them. It's just the mix [indiscernible] right, these things come episodically. Rarely do you see a run like we've had over the last 2.5 years where RPOs just consistently grow, right? I mean, it tends to be more sought to in how RPOs grow. And the third part of the question, Mark, was?

Well, I think your question is further out. So 17% of our RPO balance is scheduled to be revenued beyond 12 months.

That's pretty consistent.

Actually might be on the low side, to be quite honest.

Data center work gets done quickly. These big jobs get done in 6 to 9 months sometimes.

Okay. And then there was a comment in the queue about small project quick turn risk, that's the biggest potential headwind, higher interest rates? Are you seeing that yet? I couldn't...

I'm sorry, Adam. I think history has shown us that when we're in a rising rate of economy with inflationary pressures, the easiest thing for people to curtail spending is small project work. To date, we haven't seen it clearly in our performance, but it's certainly we're certainly monitoring very closely.

Yes. I mean -- and there's a lot of things going on there right now that are different, right? That's where we've seen it in the past. What's different today is energy prices, and the paybacks are quicker. So how that all balances out over time, we'll see.

Okay. Lastly on industrial. Tony, you made a comment, you said something was robust, but the turnarounds were flat in Q4. So I didn't understand that.

Yes. So we have good -- I probably didn't say -- I might have said robust around our niche services. We continue to see demand for niche services like heater repair and things like that. We have good demand for our shop services, the best we've had since 2016, '17 in 6 years. So my view is robust, but robust is how I would describe the niche services.

Niche services, got it. And then are there any -- for that segment, do you see any new secular drivers? I'm thinking kind of 1, 2, 3 years out.

Well, I think one is where we're positioned, right? We're positioned on the Gulf Coast, where the refining capacity has the most advantages. I think the second secular driver will be when we can get some renewable work back in the business on the electrical side. We've proven we had network really well, electrically. We're not putting panels in that, but we're actually connecting that field to the substation to the grid. So that would be one. Another one would be upstream. We're positioned well in the Permian and Bakken specifically. And we expect both of them to have more robust opportunities here 1 to 3 years out. And then there are some interesting opportunities around also how they're helping start to think about methane management for lack of a better word and what we can do to participate in that. And we are doing some things right now to do that as they start to think about how they bring more electrification into the well instead of using diesel generators.

This concludes our 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. I guess we all won't talk together until February. So be well, have a great holiday season, and everybody be safe. And I guess, Happy Halloween, not one of my favorite holidays, but Happy Halloween.

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