EME - NYSE

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, we had a great start to the year in our construction segments. This was due to the expertise and skill of our subsidiary and segment teams in estimating, winning, planning and executing complex projects across diverse market sectors, trades and geographies. Our Mechanical Construction segment continues to perform in an exceptional manner with an operating income margin of 8% and organic revenue growth of 8.7%. Driving this growth is strong penetration in high-tech manufacturing, especially in the areas of semiconductors and the EV value chain as well as continued demand for data centers. We are winning in the traditional piping trades, but also our ever-expanding fire and life safety trades. Our strong operating income margin is a result of exceptional job site planning and execution supported by excellence in BIM and prefabrication. Our Electrical Construction segment's performance continue to strengthen to historic levels to historical levels. We earned an operating income margin of 6.3% in the quarter, representing a 250 basis point improvement versus a year ago period, and we had organic revenue growth of 16.8%. We had robust performance across important sectors such as network and communications, which encompasses our data center work, health care and manufacturing and industrial. We expect our results to continue to strengthen in the segment with improved project planning and execution, supported by the increased use of BIM or Building Information Modeling and prefabrication. Our recent acquisitions in this segment are performing well and have opened new markets and opportunities for us. Our US Building Services segment had a strong first quarter. We had operating margin of 5.2% with superior performance across the segment's Mechanical Services business as evidenced by organic growth, revenue growth, up 14.1%. We successfully executed project work and through improved planning, trade and job site coordination and estimating managed to address some of the supply chain challenges that negatively impacted such work last year. We often talk about the work we do to increase our customers' energy efficiency and improve air quality, which then results in emissions reductions and supports our customers' sustainability goals. Our building services companies work through a diverse set of channels to deliver these projects and services to commercial, institutional, health care and manufacturing customers. We serve these customers directly, but also through major real estate providers, utilities and ESCOs or energy service companies. We see our ability to serve our customers through such diverse channels as a competitive advantage, and we'll continue to seek out the broadest set of customers possible. The results of our Industrial Services segment continue to improve at a steady pace. Earning and operating margin up 4.5% in the first quarter of 2023. We executed a more normal turnaround season and saw improved demand and mix for our shop services. We continue to execute work supporting our customers' increased demand for energy and operating efficiency as well as the renewable fuel expansion. The segment's performance trajectory continues to improve, and we would be even more positive about this segment's outlook if solar panel supply chain issues were not delaying our execution of electrical work supporting these solar films. Our UK team continues to execute well despite a challenging market and foreign exchange headwinds. We continue to grow our customer base and are happy with our mix of facilities management contracts and owner-direct project work. We leave the quarter with an excellent mix of work in our record RPOs of $7.87 billion. We have a strong balance sheet to support our organic growth outlook and our capital allocation model. And with that, I will turn the presentation over to Mark.

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 are executing against these contracts. Revenues of our United States Mechanical Construction segment of $1.1 billion increased approximately $86 million or 8.7% from the year ago period. Revenue growth during the quarter was predominantly derived from the high-tech and Network and Communications market sectors, increased activity within the quarter included both Mechanical Construction as well as fire protection services for customer projects, supporting the design and manufacture of semiconductors, electric vehicles and/or related battery technologies. Additionally, similar to our Electrical Construction segment, our Mechanical Construction businesses are experiencing strong demand resulting from the growth in data center development. Both our Electrical and Mechanical Construction segment established new first quarter revenue records in 2023 and consequently, our total US construction revenues of $1.72 billion, represent a first quarter record as well. This performance surpassed that of the prior year period by $208.6 million or 13.8%. United States Building Services segment revenues of $725.4 million increased $89.8 million or 14.1%, representing an all-time quarterly record for this segment. Growth was primarily experienced within the segment's Mechanical Services division, which generated incremental revenues from each of its service lines. Notably, we saw an increase in HVAC project and retrofit work, due to slightly improved equipment availability that facilitated greater project execution when compared to last year's first quarter, which was more severely impacted by the ongoing supply chain disruptions and delays. Additionally, this segment continues to experience strong demand for building automation and control solutions as our customers seek ways to improve the energy efficiency and/or indoor air quality of their facilities. With most companies focusing on their carbon footprint, we believe that this will be an area of continuing demand for us. Our United States Industrial Services segment generated revenues of $330.9 million, an increase of $20.1 million or 6.5% year-over-year. Despite the ongoing volatility in the broader oil and gas industry, we continue to see a steady resumption in demand for our field services offerings and as a result, we achieved a solid start to 2023. Additionally, we have experienced an increase in new build heat exchanger orders and pull-through cleaning and maintenance within this segment's shop services operations. United Kingdom Building Services segment revenues of $110.9 million represent a reduction of $20.6 million from last year's first quarter. Unfavorable exchange rate movements due to the weakening of the pound sterling negatively impacted this segment's quarter one 2023 revenues by $10.8 million. Excluding the impact of foreign exchange, EMCOR's UK revenues decreased due to the loss of certain facilities maintenance contracts not renewed pursuant to rebuild, as well as a reduction in project activity with certain customers period-over-period. Please turn to slide eight. Selling, general and administrative expenses of $281.2 million, represent 9.7% of first quarter revenues and compared to $252.6 million and 9.7% of revenues in the year ago period. SG&A for the current year's quarter includes approximately $5.2 million of incremental expenses from businesses acquired, inclusive of intangible asset amortization, resulting in an organic increase in SG&A of $23.3 million. With EMCOR's continued revenue growth, we have added personnel to support our back office and contract administration functions, resulting in increases in salaries and benefits from the corresponding 2022 period. Additionally, with the increase in both our quarter one operating income and diluted earnings per share, as well as the positive revision in our full year 2023 EPS outlook, which Tony will cover later in this morning's presentation, we have seen a resulting increase in incentive compensation expense to reflect the actual and anticipated improvement in year-over-year performance. Reported operating income for the quarter was $154.9 million or 5.4% of revenues, it favorably compares to approximately $100 million of operating income or 3.9% of revenues a year ago. Consistent with my revenue commentary, the current quarter's operating income and operating margin performance each represent new quarter one records for the company. Specific quarterly operating income performance by segment is as follows. Our US Electrical Construction segment earned operating income of $40.5 million, an increase of $20.5 million from the comparable 2022 period. Reported operating margin of 6.3% is significantly improved from last year's quarter, given a more favorable revenue mix as well as the negative impact in 2022 of supply chain disruptions, which resulted in job site sequencing challenges, as well as reductions in labor productivity and efficiency. Although we are still experiencing various degrees of supply chain difficulties, the level of impact in the current year has been less severe than that experienced in the early part of 2022. This is due to both improved equipment availability and our subsidiary management team's ability to adapt to this less than optimal operating environment. First quarter operating income of our US Mechanical Construction segment of $86.2 million represents a $27.8 million increase from last year's quarter and operating margin of 8% represents a substantial increase from the 5.9% earned a year ago. In addition to this segment's exceptional project execution, a better revenue mix when compared to the first quarter of 2022, as well as moderate improvements in both supply chain and commodity pricing environments were the primary factors driving this quarter-over-quarter improvement. Operating income for US Building Services is $37.7 million or 5.2% of revenues and compares to $24.2 million or 3.8% of revenues in 2022's first quarter. Consistent with the segment's revenue performance, these improvements were driven by the Mechanical Services division, which saw increases in both gross profit and gross margin due to better project execution, as well as the favorable impact of negotiated price adjustments, which have been enacted in response to the inflationary pressures we've experienced. Compared to the year ago period, our US Industrial Services segment operating income of $15 million or 4.5% of revenues represents an increase of $1.8 million with a slight expansion in operating margin, better pricing and mix, coupled with more normalized demand are the primary reasons for these quarter-over-quarter improvements. UK Building Services operating income of $5.4 million represents a decrease of $5.2 million, while operating margin of 4.9% is reduced from 8.1% of margin a year ago. Exacerbating the impact of reduced quarterly revenues on operating income, this segment experienced a shift in the mix and size of project work, which resulted in a decrease in gross profit margin. Additionally, contributing to the unfavorable period-over-period comparison is the impact in 2022's first quarter of a successful project closeout, which enhanced reported operating margin in the prior year period. This segment's operating income was also negatively impacted in the quarter by $500,000 resulting from unfavorable exchange rate movements. We are now on slide nine. Additional financial items of significance for the quarter not addressed on the previous slides are as follows. Gross profit of $436.1 million is higher than the comparable prior year period, by $83.5 million or 23.7% and gross margin of 15.1% is up 150 basis points quarter-over-quarter. Diluted earnings per common share was $2.32 and as compared to $1.39 in 2022’s first quarter. The increase in quarterly net income, combined with a reduction in our weighted average shares outstanding has led to a $0.93 EPS improvement year-over-year. Our share repurchases in 2022 have positively impacted our first quarter 2023 diluted earnings per share by $0.25. Please turn to slide 10. EMCOR's balance sheet maintains its strength in liquidity, positioning us to fund organic growth, pursue strategic M&A opportunities and return capital to shareholders. Fluctuation of note within our balance sheet, when compared to December of 2022, are as follows. Cash on hand of just over $420 million has decreased by $36.4 million. During the quarter, we utilized $84.6 million of cash to fund our operations, deployed $25.4 million for investing activities, including capital expenditures and acquisitions and returned $23.2 million to stockholders through share repurchases and dividends. These uses of cash were partially offset by borrowings during the period of $100 million under our revolving credit facility. Resulting primarily from our organic growth during the period, our working capital balance has increased by nearly $193 million. The slight increase in goodwill was entirely a result of the two asset acquisitions completed by us during quarter one of 2023, while identifiable intangible assets have decreased marginally as the assets recognized in connection with these acquisitions, were more than offset by amortization expense during the period. Total debt has increased by just under $100 million, as a result of the additional borrowings under our revolving credit facility previously referenced. This increase in debt is the primary reason for the change in our debt-to-capitalization ratio, reflected on the bottom of slide 10. And lastly, our stockholders' equity balance has increased by just over $92 million, as our net income for the period exceeded our share repurchases and dividend payments. With my portion of this morning's slide presentation completed, I will now return the call back to Tony. Tony?

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 of manufacturing and industrial facilities as well as the expansion of capacities by some of our customers. Also across this whole EV value chain and across this reassuring and capacity expansion, we're seeing strong demand for our Fire and Life Safety services. Our U.S. Building Services RPO levels, increased $237 million or 23% from March 2022 and now stands at $1.25 billion, and a lot of that is a small to midsized project and service work. Like all of 2022, this quarter saw continued project awards in its Mechanical Services division which is focused a lot on energy efficiency, indoor air quality and general retrofit projects as well as repair service work which grows in all the channels we serve to deliver these projects. US Industrial Services grew RPO slightly year-over-year due to an increase in demand for our heat exchanger soft services and products. Moving to the right side of the page, we show RPOs broken down by market sector. As you can see, we have expanded sector segmentation to 10 market sectors. As we stated in our February call and for greater transparency into our current and future work, we split out what was previously reported as commercial RPOs into three sectors. The first of which is at the bottom is the traditional commercial projects, and that's the golden bar. And it includes work in office buildings, warehouses, retail and restaurants and other commercial buildings. Commercial sector RPOs have increased $198 million or a little over 12% on a year-over-year basis. We disaggregated these commercial sectors into other ones to include network and communication. And that is the maroon bar. And that includes work that we previously referred to as our telecommunications projects, which are data centers, data and fiber projects and network cabling projects. This sector has grown RPOs and million or 86% year-over-year. We now have a group called high-tech projects, and it's in the high-tech manufacturing sector, as shown by the green bar. And these projects and services are in the semiconductor biotech, life sciences, pharmaceutical and the EV value chain. Year-over-year, high-tech RPOs have increased $481 million or over 100%. We believe that these industries in this high-tech sector, high-tech manufacturing sectors are in for the most part in initial stages of capacity expansion and development. And that's what we -- we continue to expect to see growth, and it will be up and down a little bit as these are large projects a lot of times coming in, and that will drive growth in our RPOs. We also believe that to-date, there has been negligible impact of the government legislation that was designed to support these sectors. It just was passed, and we think that legislation will not only increase further demand, but we think it will elongate the duration of that demand. As I've said before, we continue to broaden our Fire & Life Safety services across all these sectors. That would be the gold, maroon and the green and we continue to provide projects across all sectors. Looking at other market sectors and year-over-year activity, healthcare RPOs are up 55%, institutional is up 10% and manufacturing and industrial up 35%; and short duration projects, which include much of the HVAC and repair service work, it's flat, maybe up 1%. And partially offsetting this increase was a reduction in transportation and water and wastewater RPOs. And looking at our market sector participation, it is noteworthy to see how balanced our participation is. This balance demonstrates one of the strengths we have highlighted before, which is our ability to provide electrical and mechanical construction, retrofit and repair service technical labor and solutions across diverse non-residential market sectors and US and UK geographies. We have decent work in hand and continue to bid new project opportunities across many non-residential market sectors. Our project mix is good, and we are executing well in all phases of project delivery in what is still a very challenging operating environment. I have mentioned several of these robust sectors before today that drive our growth. On the next page, on page 12, you'll see highlights and more depth that explain them to you. I am not going to cover that page in detail today because I think it would be redundant with the commentary I just made explaining our RPOs and with the enhanced disclosure around commercial, I think we've met many of the things we talk about on page 12. And with that, I will now turn to page 13 and 14. We expect our success to continue in 2023 despite a market that has uncertainty in it. we are going to leave our revenue guidance intact at $12 billion to $12.5 billion in revenues, but we are going to increase our earnings per diluted share guidance from what was a range of $8.75 to $9.50 to $9.25 to $10, and earnings per diluted share is what we now expect our guidance to be. Our RPOs remain strong, and we continue to see demand in key areas like we talked about, commercial remote semiconductors, health care, data centers, bio life sciences. We also are seeing strong demand, as I said before, for our fire life safety services across most major end markets. The supply chain issues and challenges that we experienced through the last still exists with long lead times, unreliable delivery schedule for finished systems like switchgear and HVAC equipment. We also expect to continue to see inflationary pressures for labor, materials and fuel. However, as we did in most of 2022 and in the first quarter of 2023, we will continue to adapt to better planning estimating and resource allocation. So where do we end up in this guidance range will depend on several factors, some in our control and some upside of our control. And I'm going to cover first the ones that we believe that are more in our control and it's not an exhaustive list, but it is the major ones. The first thing we need to do is we need to continue to increase our use of BIM or building information modeling prefabrication enhanced planning to drive efficiency, improve safety and increase the quality and productivity of our service delivery. We can need to continue to pay attention and enhance our pricing and estimating to mitigate the impact of inflation and supply chain challenges. Third, we need to leverage our reputation as an employer of choice to staff our jobs with the right mix of skills and classifications to not only enhance our labor productivity, but also our safety and cost. Fourth, we need to train and educate our employees at all levels of the organization to work smarter and lead better. Fifth, we need to be vigilant with our commercial service customers and actively monitor their financial condition and payment status with us as they remain challenged with occupancy and now refinancing issues. And finally, we always look to gain SG&A leverage. However, we always will have areas beyond our control that could affect our performance. Number one, material sourcing and lead times continue to challenge the market and our customers. I don't think that's improving in 2023, not much anyway. Number two, higher interest rates and economic uncertainty may impact the demand for some of our customers' products and services, and then it will impact us. I expect this will move some projects in the planning stage to later periods, and those in the decision stage may be postponed, rephased or rescoped. Number three, disruption caused by uncertain energy markets and supply, especially as the conflict in Ukraine continues and it could potentially intensify. OPEC took supply out of the market and China is reopening increases demand. However, we expect to continue to generate strong operating cash flow, and we'll continue to execute our long-term and successful capital allocation strategy that balances supporting our organic growth and acquisition, while returning cash to shareholders through dividends and share repurchases. Finally, as always, I would like to continue to thank the EMCOR team because none of this would be possible without your discipline, teamwork and dedication to drive the best possible results for our customers. And as a result of serving our customers so well, we continue to produce outstanding results for our shareholders. And with that, Keith, I will take questions

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 pay attention to a lot of collections, and we pay attention to their financing. Do I think new grow commercial is a growth market right now? No. Do I think there's opportunities with well-capitalized customers? The answer is yes. Do I think the energy efficiency market has legs for a lot to go? And I like the way we service that energy efficiency market and the short duration project market. We service that through a lot of different channels. We go direct to the owner. We go to the owners what would be called their in-house general contractor or construction manager that may run all their projects like in a university or a manufacturing setting, but we're the contractor of choice and have been there for a while. We go through the large real estate providers and facilities managers. We go through that channel. We go through utilities that have programs where they help fund and direct and they have the salespeople that work with us to sell the project. And then we go through the major ESCOs where they may sell projects and now they actually have people actually have to go figure out how to get it done. And we have the sales force that knows how to sell to them and sell every one of those channels. And so we like that position. We think that market has legs. So it's a complex answer, but that's why we did the enhanced disclosure because we were thinking -- we were starting to make it harder for us to have people understand where the real growth and what that commercial sector the way we traditionally defined it was.

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.