EME - NYSE

Good morning. My name is Marliese, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group's First Quarter 2024 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Andy Backman, Vice President of Investor Relations. Mr. Backman, you may begin.

Thank you, Marliese, and good morning, everyone, and welcome to EMCOR's First Quarter 2024 Earnings Conference Call. For those of you joining us by webcast, we are at the beginning of our slide presentation that will accompany our remarks today. This presentation will be archived in the Investor Relations section of our website at emcorgroup.com. With me today are Tony Guzzi, our Chairman, President and Chief Executive Officer; Jason Nalbandian, Senior Vice President and EMCOR's newly appointed Chief Financial Officer; and Maxine Mauricio, Executive Vice President, Chief Administrative Officer and General Counsel. For today's call, Tony will provide comments on our first quarter. Jason will then review our first quarter numbers before turning it back to Tony to discuss RPOs, key market drivers and how they impact our business segments, as well as reviewing our revised 2024 guidance before we open it up for Q&A. Before we begin, as a reminder, this presentation and discussion contains certain forward-looking statements and may contain certain non-GAAP financial information. Slide 2 of our presentation describes in detail these 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. And finally, as a reminder, all financial information discussed during this morning's call is included in our consolidated financial statements within both our earnings press release issued this morning and in our Form 10-Q filed with the Securities and Exchange Commission. And with that, let me turn the call over to Tony. Tony?

Good morning. Thanks, Andy, and thanks all of you for joining our call. I'm going to begin my discussion on Page 4. We had an exceptional start to the year at EMCOR. It was another quarter of records as our performance established new first quarter records for revenues, operating income, operating margin and diluted earnings per share and operating cash flow. We earned $4.17 per diluted share and grew revenues by 18.7% to $3.43 billion. Revenues increased 18.5% organically. And we were still able to grow RPOs to $9.2 billion, an increase of $1.3 billion or 16.5% versus the year-ago period. Our consolidated operating margin was a very strong 7.6%. The performance of our Electrical and Mechanical Construction segments this quarter continued to exceed our already high expectations. Our Electrical Construction segment revenues grew 18.6% with operating margin reaching a record 12%. Our Mechanical Construction segment grew revenues 32.4% with record first quarter revenues and a record first quarter operating margin of 10.6%. We executed well with strong demand across many of the market sectors we serve, including high-tech and traditional manufacturing as well as network and communications, which includes our data center work. We had outstanding performance at some of the most demanding projects for our most sophisticated customers. Central to our success is how our leadership teams effectively plan where and how we will compete and select the right sectors and geographies that allow us the best opportunity to earn the best outcome when deploying our precious resources. Then our excellence in BIM, which is really a lot more than building information modeling, it's much evolved into virtual design and construction. You'll hear me talk about VDC, that's how we talk about it at EMCOR. Which then moves into prefabrication, estimating, project planning and management, and our best-in-class labor sourcing management and training have all supported and continue to support this strong performance. Our leadership teams, from the segment, through the subsidiary level, down to our project managers and frontline supervision, are performing work productively and most importantly, safely, resulting in excellent outcomes for our customers and shareholders. Our Industrial Services segment reported its best quarter post pandemic. We continue to see improved demand for our services and completed some of our largest turnarounds in over 5 years. Our shops continue to perform well. And the electrical business within this segment is experiencing increased demand, both from traditional upstream and midstream customers as well as for certain renewable fuel projects. Within our U.S. Building Services segment, our Mechanical Services business continues to perform well with a solid high single-digit operating margins. And strong demand persists for our energy efficiency, building controls and retrofit projects. Our U.K. business continues to hold up well despite a tough economic environment. We always have challenges, and this quarter was no different. As mentioned in our last few calls, we've had a few contract losses in our U.S. site-based services business as real estate companies, in this market, continue to be aggressive and take work at or near cost. In addition, during this past month, we had a retail customer file for bankruptcy, which caused us to increase our bad debt reserves, offsetting the increased profitability otherwise experienced within our U.S. Building Services segment. Overall, we had a great quarter and are seeing continued strength in the market trends we have been discussing for the past few quarters. In addition, in April, we closed 3 acquisitions that will add to our capabilities in our Mechanical Construction segment and our U.S. Building Services segment. We spent $137 million in upfront consideration on these 3 acquisitions and are excited to integrate them into our business, and integration is well underway. We've also signed a definitive agreement to acquire another company for $38 million that will add to the electrical capabilities in our Industrial Services segment. This acquisition is expected to close on or around May 1. We ended the quarter with strong RPOs and a balance sheet that continues to support the growth of our business, both organically and through acquisition. With that being said, Jason, I will turn the call over to you.

Thank you, Tony, and good morning, everyone. Over the next several slides, I'll review our operating performance for each of our segments as well as some of the key financial data for the first quarter of 2024 in comparison to the first quarter of 2023. I'm going to start on Slide 5, which is revenues. As Tony mentioned, consolidated revenues were $3.43 billion, an increase of $541.8 million or 18.7%. Each of our domestic reportable segments experienced year-over-year increases in revenue, and with organic growth of 18.5%, substantially all of this growth was organic. If we look at each of our segments. Revenues of U.S. Electrical Construction were $764.7 million, an increase of 18.6%. This segment continues to benefit from growth across many of the market sectors in which we participate with the most significant revenue growth in network and communications, which is predominantly our data center projects. The increased need for cloud computing, data storage and the emergence of AI have accelerated the demand for these services. Revenues in U.S. Mechanical Construction were $1.4 billion, increasing 32.4%, with revenue growth across the majority of the market sectors in which we operate. While the most significant growth occurred in the high-tech manufacturing market sector, we also saw notable increases in manufacturing, industrial, institutional and network and communications. As we've mentioned on previous calls, as a result of projects for customers engaged in the design and manufacturing of semiconductors as well as the production and development of electric vehicles and related battery technologies, this segment is experiencing strong demand for both its traditional mechanical services as well as our fire and life safety offerings. Coupled with the continued build-out of hyperscale data centers and domestic near-shoring and reshoring, these trends continue to be the driving factors behind the segment's significant organic revenue growth. Together, our domestic construction segments generated revenues of $2.2 billion, an increase of just over 27%. If we move to U.S. Building Services, revenues grew 7.7% or 6.6% organically to $781.2 million. The most significant growth in this segment was generated by our Mechanical Services division. We continue to benefit from strong demand for HVAC projects and retrofits as well as building automation and control services. In addition, we're experiencing service volume growth due in part to an expanded customer base. Looking at U.S. Industrial Services. Revenues were $354 million, increasing 7% year-over-year. With contracts of a more typical size, we executed against a more normal turnaround season and benefited from scope expansion on certain of these projects. This segment additionally benefited from increased demand for certain renewable fuel projects within the quarters. And lastly on this slide. Revenues of $104.7 million for our U.K. Building Services segment was exceptional despite a tough operating environment which has led to lower facilities maintenance and discretionary project revenues. If we turn to Slide 6, you can see operating income for the quarter was $260 million or 7.6% of revenues. This compares favorably to operating income of just under $155 million or 5.4% of revenues a year ago. A more favorable mix of work and exceptional project execution continue to be the drivers of our improved performance. Once again, if we look at each of our segments, U.S. Electrical Construction is reporting operating income of $91.6 million, which represents a 126% increase; an operating margin of 12%, which is a 570 basis point improvement. Increased gross profit and gross profit margin were the primary drivers of this performance, with the most notable increases in gross profit within network and communications, commercial, and manufacturing and industrial. Operating income for U.S. Mechanical Construction was $150.7 million, an increase of nearly 75%. And operating margin of 10.6% represents a 260 basis point improvement. This segment experienced increases in gross profit from the majority of the market sectors in which we operate with the most notable contribution being generated within the high-tech manufacturing and commercial market sectors. I should also point out that in addition to increased gross profit margin, the operating margin of each of our construction segments benefited from a reduction in SG&A margin as we leveraged our overhead cost structure during this period of growth. Together, our domestic construction segments earned operating margin of 11.1%. Operating income for U.S. Building Services was $33.5 million or 4.3% of revenues. While revenues and gross profit of this segment both exceeded that of the prior year, operating income and operating margin decreased by $4 million and 90 basis points. Unfortunately, a customer bankruptcy within our commercial site-based services division more than offset the increased profitability generated by our Mechanical Services group during the quarter. This bankruptcy negatively impacted operating income and operating margin of this segment by $11 million and 140 basis points. Moving to Industrial Services. Operating income was $18 million or 5.1% of revenues, representing an increase in operating income of 19.6% and a 60 basis point improvement in operating margin. In addition to a slight increase in gross profit margin, this segment benefited from greater overhead absorption, given the increase in quarterly revenues previously mentioned. And lastly, U.K. Building Services is reporting operating income of $5.4 million or 5.1% of revenues. Despite a reduction in quarterly revenues of this segment, operating income is in line with that of the prior year and operating margin has improved by 20 basis points, as we continue to optimize our project and service mix while seeking to more effectively leverage the overhead cost structure of this segment. Let's turn to Slide 7. We've covered most of this slide already, but I did want to briefly look at SG&A and diluted earnings per share. If we start with SG&A, as I mentioned while reviewing the operating performance of our segments, we were successful in leveraging our overhead cost structure, as evidenced by the 10 basis point reduction in SG&A margin from 9.7% to 9.6%. But I should also point out that somewhat masking our SG&A leverage is the provision we took for the customer bankruptcy within U.S. Building Services, which negatively impacted our consolidated SG&A margin by 40 basis points. And moving to EPS. Diluted earnings per share was $4.17, a nearly 80% increase compared to $2.32 in Q1 of 2023. This EPS performance, like many of our first quarter financial metrics, established a new record for EMCOR for a first quarter. And finally, if we turn to Slide 8, the strength of EMCOR's balance sheet continues to be a differentiator for us in the market, providing our customers with confidence as we bid on large-scale, complex and demanding projects. Given the size and strength of our balance sheet, including $841 million of cash on hand and $1.2 billion of capacity available to us under our revolving credit facility, coupled with our significant cash generation, we remain well positioned to fund organic growth, pursue strategic M&A and return capital to shareholders. Although not shown on this slide, operating cash flow for the quarter was $132.3 million, which represents approximately 50% of operating income. As I mentioned on last quarter's earnings call, on an annual basis, we do expect operating cash flow to be in line with a normalized historical average of between 75% to 80% of operating income or approximately equal to net income. And with that, I'll turn the call back over to Tony for a review of our RPO and market sectors.

Thanks, Jason. I'm now on Slide 9. So on Slide 9, you'll see a chart that I've discussed, it's a little bit reformatted over the last 4 quarters, which highlights some of the key market sectors where we are seeing growth. In many ways, this chart, over a long period of time, and we start showing it about 4 quarters, but this idea behind this chart has really been how we allocated resource for the last 5 years or so. And now let me get into the details of this chart. We reformat a little bit, so we put things together here. And I'm going to start on the upper left-hand corner and talk about data centers and connectivity. We have that in network and communications. And our RPOs are up 9%, 51% year-over-year. And they're at a record $1.7 billion. On a year-over-year basis, they're up $575 million. A lot of this will tie to the information on the next page. I'm not going to cover it twice. We continue to see strong demand for data center, and let me sort of reflect a little bit. We've been on calls about 4 or 6 quarters ago where people were talking about was data center demand slowing? We hadn't seen that, and part of that could be our market position with really good customers that really value what we do to help deliver great projects for them. And -- but also, I think we were seeing the beginning of the AI almost 6 quarters ago. And it has become more pronounced. You can't pick up a newspaper today without seeing and talking about data center growth and the quest for more data and more computing power. They also need more energy, and I think that will play out over time to EMCOR's favor later as we continue to build out all sources of energy. But right now, let's focus on data centers. We're well positioned. I'll just give you sort of some top-level numbers on how we think about the market. It's a geographic market and it's a national market. On a geographic basis today, and if you rewound that tape to early 2019, we were only servicing maybe 3 data center markets. And that was pretty much where the markets were. We've expanded -- that was electrically. And today, we're servicing 9 data center markets, and a lot of that driven by our customers. Now we've done that through acquisition to better serve our customers. We've done that through organic growth, taking our existing operations and teaching them how to do more, but -- through a lot of peer learning. And we've done that through greenfield expansion. And so now we're able to serve more customers in a better way and deliver more projects for them to serve their ultimate customers. On the mechanical side, we were really only servicing one major market in 2019. And through acquisition and organic growth, capability building, today, we service 6. And really, a lot of it has to do with -- really, acquisition has been part of it. But really, a lot of it has to do with just strong organic growth, capability growing, peer learning and greenfield expansion. And so we have to serve our customers. We love to serve our customers. We have some of the best data center capability in the industry, so do other people, and we'll continue to build that capability and build the resources we need to perform. And this is where the virtual design and construct. This page really, other than energy efficiency, is a page that's focused on virtual design and construct and what we bring to the market. As we get to energy efficiency and sustainability, sequentially we're up 9%, 8% year-over-year. This has been a good long-term market for EMCOR. We're really good at it. Now if you just think about it broadly, energy costs are going up. Paybacks are coming down. You would expect this to continue to grow. And then you add on top of it the people looking for more sustainable solutions for their facilities. They have all committed to different goals through carbon and energy reduction. Now what drives this is equipment today is much more efficient than it was 10 or 15 years ago. And this has been going on for 20, 25 years. But what's really driving that? You can only add so much copper to the equipment to make it more efficient. So it's really also being driven by variable speed drive motors, especially in the air handlers and some of the chillers, and even in some of the rooftop units. It's being driven by better integration of digital controls, not only at product integrated controls, but also the control systems. And we're able to bring that solution. Any of -- there's still pneumatic controls out there. And the more you take those out, you bring efficiency. So the digital controls are better, the equipment is better, and our installation capability continues to be -- and our ability to analyze the building. And if you look at EMCOR today, we have 500 energy engineers and people that are LEED-certified through the business helping people come up with these solutions. Then you bring in also the continued benefit of some alternative energy solutions where people want to integrate that into that solution. And we really can offer a great solution for our end customers. And these tend to be, on with our biggest customers, multiyear program to think about how they make their facilities, offices, factories more energy efficient. And then -- and there is some government incentive that's supporting this. It started with the CARES Act, and there's been a couple of other acts that helped that do that. You get to health care, this has been a good long-term market for EMCOR. There's -- any city where we operate, people want us to be part of that solution because, again, the same things that make you great in data centers, the same things that make you set in advanced manufacturing, a hospital in today's world looks like an advanced manufacturing plant to us. With all the different systems that come to play to make that hospital functional, you need a contractor that can bring that VDC capability. That's really the birthplace of BIM and VDC for EMCOR, was the health care sector 18 years ago, 20 years ago. Now hospitals need to be more flexible. That was happening before COVID. COVID put that on exponential growth for more flexibility. The outpatient facilities are more sophisticated. And you're doing that both in a retrofit market and a new construction market. And then you have the ongoing work to make those facilities more efficient and more energy efficient. These are big energy users, and of course, they can't go down, right? They need 100% power all the time, just like the data centers. Now let's drop to the bottom of the page and talk about these things together and focus on the center, which is reshoring, near-shoring. I don't think you can separate what's going on in the chip space from reshoring, right? It was a national security issue that started to drive the CHIPS Act, which started to drive people to want to invest here, right? It wasn't like we woke up one morning and say, "Hey, we're comfortable with having 85% of our chip production somewhere else other than the United States." So that was a reshoring trend. But it goes beyond that. We saw some of that even before the CHIPS Act. It helped stabilize it and make it -- I think it's going to extend the cycle. But you also saw it in other industries. And that's why we made the investments we made in our organic businesses in the Southeast, but also built through acquisition a footprint in the Southeast because we wanted to be part of this trend. And this has been going on for 15 years at EMCOR to better serve our customers. And now you have the high-tech manufacturing and life sciences. And really what's driving high-tech manufacturing, a lot of it's chip work for us. And what do you need to do that? Well, the legislation is written that you need a great workforce that came from an apprentice program, that's highly trained, that pays good wages, that operate safely. And quite frankly, it's written to benefit the union contractor or the nonunion contractor, that wage and benefits-wise, looks an awful lot like a union contractor. And then you get to life sciences, a lot of this was coming back anyway. The disruption in the supply chains caused by COVID made more of it come. And then you take it and then you think about all the new drugs, especially the weight loss drugs. And we're in all the right places to support that, whether it be in Indiana, whether it be in the Research Triangle Park or New Jersey, mechanically, electrically and some of our prime contracting ability on the industrial side. When you get to the EV value chain, look, I don't know whether it's going to be 10% penetration, 15% penetration or 20% penetration. We just know it's going to be more than it is today. And the infrastructure, which is what we've mainly been participating in, that's going to be built, we're going to participate in. And when you look at this bottom page, where all of our trades are participating, whether it be fire or life safety, whether it be mechanical or electrical. And that's really true for this whole page. I would say the energy efficiency for us is mainly a mechanical, mechanical services play. But the other ones, all our company, we're not in every market doing everything, but we have capability there to really play in all of this. And that's what this is, a resource allocation chart. And we think about that long and hard. And we've been thinking about this chart really for 6, 7 years now. And now I'm going to go to the next page on 10, and I'm not going to belabor the point other than to add we had pretty good growth outside of that page, right? I mean, our water and wastewater, which you can see on the right-hand side, is now $636 million. It's up 30%. And these are bigger awards. They typically become episodic. And most of our work is being performed in Florida for the reasons that you know. There was a Consent Decree about 6 years ago in Miami Dade. But also, it's just growth in population in Florida, both on the East and West Coast of Florida, and we participate in both. Institutional was actually a little bit of a surprise to us. The work now at a new record RPO and up 36% year-over-year. I guess it shouldn't have been. We have capability, and the kind of things we do in the institutional sector, whether it's K-12 schools on the energy efficiency side and remodel, or really a lot of this is being driven by state and local federal buildings, but mainly campuses and institutions that have broader campus settings in a multiyear program. And a lot of these facilities, whether it be better connectivity, where we're helping them get better WiFi across the whole campus; or it's quite simply energy efficiency programs across the campus; or building research facilities that look an awful lot like the life science labs and facilities that we talked about on the previous page. Transportation grew for us. Again, that's episodic in nature also. But this right now for us is electrical work and it's airports and traffic control systems. And then the short duration project, which mixes into a lot of the energy efficiency work and is more broadly based is up nearly 9%. That's a good sign. Now that's pretty interesting because what's happening there is we're back into a book-to-bill mode. We figure out the supply chain. Lead times are extended. We had the bubble there, in short. I actually didn't think it would continue to grow the way it's been. But that just shows you the strong underlying demand for people to get more efficient and upgrade their facilities. Some of it is as simple as they have to be competitive in a triple net lease environment. And if they don't upgrade it, they won't be. Now we have had some decrease in commercial. As Jason described, it's still a big part of what we do, still pretty profitable. Again, commercial for us has not been a new office building sector for a long time. Now we will go in and do tenant bid-out work, multiple floors for high-end clients, like some of you listening to this call. We will do that work. But -- and also, the decrease mainly was some of the logistical work we were doing for large dry good distribution centers. That would be both electrical and fire or life safety. But we have seen an increase in cold storage warehouses, which are smaller in dollar award that require actually a higher skill for us to do, both from a mechanical -- especially some of the refrigerant work on that, and fire or life safety. So you put all that together and you look at the right-hand -- left-hand side, we're up in domestic construction substantially, $1.2 billion over year. We're up in Building Services. And industrial has good bookings in its shop work. So now what does that lead you to do? You go to Page 11, which is what most of you care about. We had this robust performance. You got to look at it and say, what are you going to do? Well, we're going to increase guidance, right? And we're going to -- we're executing exceptionally well, really better than we ever have. We have really strong mix in our RPOs. We're winning the right work in the right markets. They're significant projects that are technically complex with accelerated timelines and scope expansion and more reasonable contract terms, especially in our Electrical and Mechanical Construction segments. As a result of that, our EPS guidance range is going to go from $14 to $15 per share, to $15.50 to $16.50 per share. We're also going to increase our revenue guidance from a range of $13.5 billion to $14 billion, to $14 billion to $14.5 billion. In order to achieve the end of this revised guidance range, we got to keep executing with discipline and precision, the results and strong operating margin. And what we're telling you on this call to save you asking the question, in this guidance, we plan on operating the business this year between 7% and 7.5% operating margins. We're going to continue to face challenges. We talked about one today. We're going to continue to face challenges, both in our site-based business in the U.S. and U.K. We'll work through those. We've shown we can do that. Macro factors, such as high interest rates, supply chain, energy price disruptions, global conflicts, they're all going to post challenges for us. I'd like to say that we haven't done all that in the past and been good at it, but we are. We will develop contingency plans. We have them, we develop them every day. And we execute as best as we can to overcome these challenges. We're also going to remain diligent in those that are more exposed, especially to high interest rates. And for us, that means our commercial real estate and private equity customers. We're going to continue to be balanced capital allocators and invest in organic growth as well as strategic acquisitions. We've already done more acquisitions year-to-date this year than we have in the last 2 years and -- individually in those years. And we already really like what we've done because it continues to build the business for the long term and serve our customers better. Finally -- by the way, our acquisition pipeline is robust. And you would expect that. I'm going to get into that, I'll save you the question. Why is it robust? Because people are doing better after the pandemic, right? People -- good companies aren't for sale when they're not doing well. They become for sale when they're doing well. In the markets we're serving, they're doing well. Also maybe not as well as we are, but they're doing well. And so that's when companies become for sale. And like I've always said 1,000 times over, never fall in love with a deal, and deals happen when they happen. I've done this long enough that I don't fall in love with deals. Maybe I did that 20 years ago. Finally, I want to thank all of the EMCOR leaders and teammates for their hard work and dedication to serving our customers, primarily in a safe and productive way. We put safety first as one of our core values. Personally, I'm grateful to lead such an outstanding team. We do lead our company through our EMCOR values and mission first, people always. And we're going to be continuing to be focused on executing our mission for our customers and shareholders while keeping EMCOR a great place to work for all employees. With that, Marliese, I'll turn it over to you and take any questions you may have.

[Operator Instructions] At this time, we'll start with a question from Brent Thielman from DA Davidson.

Tony, I guess the manufacturing and the high-tech manufacturing verticals, how do you think about the sustainability of those areas without government incentives? And then also, how much of those verticals for you are being driven by, call them, mega jobs that might require kind of billions of investment versus sort of more selected -- that might be more selective versus kind of broader-based investment?

I don't know how to parse the second one really as far as mega jobs versus -- but we're seeing demand being pretty strong across it. My general view on some of the high-tech manufacturing areas that have been built, you think about there's probably 6 semiconductor or 7 semiconductor markets. They've been semiconductor markets. There is a rebirth in some of those markets. The only real new one is the one in outside Syracuse in Clay, New York. The other one is where the business happened, right? It was happening in Phoenix before. It was happening in Austin, Texas before. It was happening -- Columbus, Ohio was new also, I guess. But I think Intel has been thinking of expanding. Boise, Idaho was happening before. Salt Lake City was happening before. Oregon was happening before. So these for the most part, other than maybe 2 markets, have been well-established markets. Even Raleigh, North Carolina. I mean, Wolfspeed, which is one of the customers -- that was Cree one time, and Cree did semiconductors for their lighting products and decided just to focus on semiconductors. So I think a lot of it would be happening anyway. I think they realized they were too exposed to the supply chain. The supply chain had to move more to the U.S. It's pretty obvious why you can't -- if you're a Taiwan semiconductor, why you just can't be in Taiwan. It's both a diversification. It's what any responsible business would do. Intel is investing for their next generation. I mean, Intel was not cash-poor, neither is Samsung, neither is Micron. These are very good companies that know how to invest through a cycle. Now what have the government incentives done? Well, they've done a couple of things, right? I think they've helped strengthen commitment to a site. I think they've also sort of put some rules around how the work will get done and with what kind of people and what kind of trade skill, which is very high trade skill, which was probably going to happen anyway because you need the kind of people that we're privileged to have here at EMCOR and working with us to do those kind of jobs. But I think it lengthens it and it makes it less turbulent as far as how it will get built out because I think there's a fairly significant surety of supply in national security play. And then you combine that with the need for AI chips, they have a market, right? Now there's been a lot of talk when you get to that specific market, is are they stopping? Are they starting? Pauses and stops and maybe our award sizes won't be so big. But the sites we're working on today, we feel really good, are long-term sites. We have a couple more we're helping start the infrastructure on. We'll see what happens there. So that one we feel good about it. You get to the broader industrial, this was happening. It was just starting to happen pre-COVID. It's why we invested in the Southeast from 2008 to 2020 through acquisition and then organic expansion and building capability. And we have some great companies down there, right? I mean these are market leaders led by really strong teams, and we're a destination employer. But people are bringing manufacturing back to the U.S. Why now? Part of it was energy before. We were lower-cost energy. I'm not going to get into all the scenario around why we're not as lower cost as we were at one time. But we're also a more safe market. And quite frankly, the logistical challenges and the cost advantages of being in China and Southeast Asia aren't what they once were. And so -- and then with automation, when you bring it back, you can have better supply. And then you think about what happened with COVID. I said this before, I used to be a manufacturer, right? So -- and I used to do a lot of work around manufacturing in a previous life. We started with we always wanted 2 suppliers for most of our critical components, right, if you go back 25 years. And then we said, "Okay, well, maybe we don't need to do that for the critical components. We at least need our key suppliers to be doing that out of 2 factories." And then we got sloppy over the last 10 years, and we said, "Well, we can have one supplier out of one factory, and we'll be okay, and that doesn't matter whether that was in Mexico or China or Eastern Europe." That didn't turn out to be okay, right? And now we're back to building supply chain redundancy. And the natural catching point for that supply chain redundancy is the U.S., and that's mainly centered in the mid-central places like Indiana, the Southeast and Texas, quite frankly. And so we feel really bullish about that. Look, there'll be ups and downs. Maybe the awards won't be as large in the future, but we're well entrenched with some key customers and some key sites to deliver great results for them on really sophisticated projects.

Okay. Okay. Appreciate that. And then just on the Electrical business, I mean, 12% margins is exceptional. Just wondering, can you unpack that? I mean, what leads to a 12% sort of print here? Just the way to think about it -- going forward.

Yes, I'm going to -- I never talk about go-forward margins. We always think about it in bands and we always think about it over sort of 8 quarters, looking back. But it wasn't all that too long ago in the first quarter of 2022, not to bring up a more challenging time for us, where we had, through supply chain, a lot of jobs stalled in the Electrical sector. And we weren't earning the margins. I think we earned 6% margin or high 5s that quarter. And external folks' hairs were on fire, and we sort of knew what the drivers were. And I would say those drivers flipped this quarter, right? So the drivers of why we didn't do well, it had nothing to do with execution in the field. We -- maybe we had a little unproductive labor because we kept people and we were waiting for jobs, that didn't start up, to start up. We had some supply chain stalls that caused that. And then that caused people to delay the site conditions and the buildup. And so we did the right thing. We kept our powder dry. We kept some of our key labor, especially supervision, because we knew we were going to begin on the work. I would say the opposite happened this quarter. We had near-flawless execution in our Electrical business on a really good mix of work that led to these results. Is it always going to be this good? Probably not. But we have a really good Electrical business, led in the field by really capable people with a great segment team. Yes, Jason?

The only thing I would add there, right, is it truly is a combination of execution and mix in the quarter. There's no anomalies when we look at large project closeouts or project losses, anything to that effect really netted to near 0 in the quarter. So it truly is mix and execution. I think 12% is a record quarterly operating margin for Electrical. So I wouldn't necessarily say that, that's the new norm. I think to Tony's point, it makes sense to look at it over a 15- to 18-month period, and that's probably something we can expect to see from Electrical in the near term.

If you looked at our electrical team and our mechanical team and say, what do they actually focus on? They look at the operating margin in a given quarter as an output metric. So what are they focused on? The inputs, right? How productive is the labor on a job? How safe is that labor on a job? How much portion of the job we've been able to put through our VDC process, which is prefab, BIM modeling? How successful we've been in negotiating the contract to have constructive discussions as scope expands? They're looking at the input metrics, right? And then they're looking at the absorption they're getting on their overhead as they do this work. And that leads to great results. I mean I think they look at the end of the quarter and look down at the results, hey, that's pretty good. But they're back to focusing on the input metrics.

Okay. And Tony or Jason, I mean, just with respect to the comments on mix also in the context of the guidance, and I realize it moves around quarter-to-quarter. I guess when I think about mix for you guys, it's sort of larger, more complex sort of developments that require some level of sophistication that you bring. Why would that look any different going forward?

I don't think it will, at least in our guidance. Jason, you agree?

Yes. And I think, right, when you look at our guidance, as Tony said, margins for the year between 7% and 7.5%, right? I think the thing to remember is 7% margins will be equivalent to what we did on an annual basis in 2023, which was a record. And 7.5% margin is really our trailing 12-month average margin. And so I think what we're saying there is that mix we expect for the remainder of the year is consistent with the mix we've seen in the last 12 months.

Or -- and if you think about the input side of that, we're doing a really good job on resource allocation. And that extends -- obviously, you see it in the construction segment over the last several quarters. But quite frankly, you're also seeing it in Building Services because of what's happening in Mechanical Services and building controls, right? The mix there is very good also. And look, the industrial team also has focused the mix in a good direction, whether it's how they manage the mix within their shops, of the 5 shops we have, how they think about their field resources and how they do that versus some of the specialty services we have versus the turnaround. And then quite frankly, we're pretty excited about some of the things we have going on in our Electrical business and then how they think about mix there. When you have really precious resources like we have, and for us, that really means supervision, shop capability, VDC capability, project engineers, project managers, we think hard and long about what we're going to commit to over a long period of time and what's more attractive. And quite frankly, what's happening with us, we're winning, right? Our customers are choosing us because we deliver for them.

And now we will take a question from Adam Thalhimer from Thompson, Davis.

Great quarter. Congrats on that. And Jason, welcome to the call.

Thank you.

Tony, can you just keep going on that? Because I was actually curious how you do allocate resources. How much of it is top-down, like you're having the discussion with the customers? And how much of it is your subsidiaries?

Most of it is at the subsidiary and segment level. We -- for lack of a better word, we, at the segment and corporate level think, we put out our intent. We think about markets, we think about where is the best place for us to allocate our resources, how we're going to allocate them. But our fighting unit, quite frankly at EMCOR, is our subsidiaries, and they're good. And then within those subsidiaries, right, we think about which subsidiaries get more investment versus other subsidiaries because of the opportunities that are in front of them. And it's a very thoughtful process. We have very sophisticated business leaders at the subsidiary level, supported by great relationships whether -- with labor, whether it's union or nonunion, with superintendents and project foreman and project managers. And they look at their playing field and say, what's the best way to allocate these resources to derive the best results for our company, their people; the best results for our customers; and to build something that's sustainable in these markets based on the opportunities they see in front of them. And for us, that's usually a 6- to 24-month planning horizon at the subsidiary level and then thinking about how that builds capability. So look, what makes a great data center builder makes a good complex project builder that can do things under pressure with a fast timeline with a demanding customer. A lot of markets that look like that, but you have to build that capability. And then what we do a really good job of, and this is where our segment teams do an exceptional job of, how do you -- you don't move the people for a long period of time, but how do you peer learn? Peer learning at EMCOR is a big deal. So I talked about the expansion into other markets that we've done. It's not like we -- every place that we expanded into a data center market, we didn't have a company. It's just they weren't serving a data center market. And so the team or the electrical team said, "Okay, we do this really well. Why can't we do it here? And when we do it here, this is how we have to think about let's go way back here to estimating. So we'll work together on the estimate. And then how do we think about building the VDC capability? How do we think about prefab in that market? What does schedule start to look like?" Because we're going to make a commitment to a customer we probably have in another market to tell them now we can do that in this market. And for our guys, that's a pretty high bar to jump over, to have them trained up and ready to go. And that's how our folks think about it. That's one example that's happening every day across our company.

I guess you've kind of put a speed governor on the RPO growth. Is that fair?

We don't take work we don't think we can execute. That's true. But I wouldn't -- I've heard other people say, "Hey, we're turning away work." I don't think that would be true here. I think we think about what we're going to bid. And when we bid the work or estimate the work or work in partnership with our customers to think about taking the work, we're pretty sure we can execute it. And we may not win it all the time. We don't. We don't have everything that we want to win. But I wouldn't call it a speed governor, but we very much don't try to outrun our headlights, right? We try to stay within our capability. Where do contractors don't do well is where they don't have the capability to do a job, they grow beyond the capabilities and they lack the execution resources. So the way we build capability and build capacity is someone that had been an assistant project manager or assistant project engineer, a regular foreman, now can become a general foreman, maybe help us get another superintendent out on the field which allows us to build more labor force. And then that assistant project manager now can run their own work a year, 1.5 years later with the right training. And then we can build that capability. Or if we're going to expand in another market. So maybe one of our electricals that have done a pretty -- a lot of industrial work, we take that person and say, "Okay, here's what's different between that work and data center work. Or here's what's different between that work and semiconductor work. And this is the things you need to be aware of." And they work with other EMCOR companies to understand those nuances. But I would say, yes, our governor is our capacity to build skill and -- it's not cash. It's not capital investment. It's building the human capital and acquiring the human capital and training that we feel comfortable we can expand the company.

And sorry if I missed it. What was the forward look on data centers?

I think it's pretty good. I mean, you read the same things we've done. We've done a lot of work on that. I think it's pretty good. I mean, we don't see any slowdown. And the thing that will constrain it, but then we'll fix that, we always do, people, is there will be more investment in the energy infrastructure, and then they'll keep growing. And there's nothing in the near term that suggests that's a problem, though.

And are you seeing any -- to the extent you're seeing any weakness in nonres kind of more broadly, like commercial, I know you don't play there much. But it sounds like that would be confined to Building Services.

No. That's not true. We just reallocate our resources. So we were very good at -- in the fire or life safety world, at large big box retail distribution centers. That slowed down on the dry goods side. That -- they're very capable people. We moved that capability to other places like battery plants, like semiconductor plants, through training, through a very careful, do in once, do it right, and get it right. We have a great team there, and we build that. So yes, there's slowdowns. I mean, there are certain markets -- I don't think the New York guys are running around spiking the ball in the end zone right now. They're working hard, and they're doing fine. But you wouldn't say that's a booming market. There's no Hudson Yards. There's none of that happening right now. Maybe a little slowdown in the Northeast overall, but that's been overcome by other parts of the country. I mean, nothing is always up and to the right, as you know, Adam. I mean, commercial, yes, we're not really in the light commercial business in any significant way, even in Building Services other than some of the maintenance contracts. So yes, I mean, we have our share of challenges. But luckily, we have more good than those challenges right now. Jason, do you have anything to add?

I think you covered it, Tony.

And we continue with a question from Alex Dwyer from KeyBanc.

Congrats on a great start to the year.

Thanks.

So I just wanted to ask about the productivity improvements we've seen over the past year. Like how broad-based have these improvements been in the business? Is it concentrated in a couple of end markets or projects or geographies? I just want to get a better sense for how much more room there is to run in like implementing prefab and virtual design and BIM throughout the broader company.

Now look, Alex, the reality is we're every day trying to figure out that impact on our ongoing margins versus more favorable contract terms. I would say most of our margin enhancement is coming from execution. I mean, any job we do, there's plenty of competition. I mean, there's other people that know how to do this work. And so I never sit there and think about -- we have very capable competitors in every business that we have. So we're earning margins because we're earning them. And it's hard to separate. I would say this in general, right? The place where you have a multiyear build, like some of these data center markets or semiconductor markets or even the manufacturing sites, where you have a multiyear build, you get better. Your people get better, they get more productive. We think of better ways to do it. And if the mix of contracts skew more for us towards fixed price versus GMP with a fee, then we do better. If we can convert more GMP to fixed price, that's good for us and the owner because we have certainty -- they have certainty of cost. And somewhere 50%, 60% along the way, we also have certainty of outcome. Or we think we do. So it's hard to separate some of that stuff. I will tell you this, though, right? The more work we can do in the shop versus in the field, the better we do. The more we can get in the planning earlier with our VDC, the virtual design construct, and implement more of those tools, the earlier we can do that, the better off we work. And so I'll just give you a broad number. And we have -- we were probably around 500 VDC people, mainly BIM operators in 2019, end of '18. Today, that number is 1,500. Now you could draw a correlation between that and our margin increase. I think that's part of it, that we're doing more. And it goes beyond prefab. A lot of times, we simplify VDC to prefab, but it goes way beyond that. It goes to -- we have a couple of people that are really good. You start to build things in 4D or parametric, right? And what you're doing is you're finding the mistakes before you go to the site. And if you can find the mistakes before you go to the site and the collisions and all the things that are going to go wrong, then you perform better, right? The most frustrating thing in the world for a foreman or a trade person or project engineer, project manager is to have installed something and then have to take it out or have someone take your work out because they didn't get it right. And our people don't like rework even if we get paid for it. That's not -- you got folks are really proud of the work. Quality also goes up, right, with VDC, whether it's field installed or whether it's shop. Because, again, if you went to a construction site today, and it's almost any site, even the smaller projects, our guys for the most part are looking at something on an iPad or a workstation. And they're looking at what they're going to build in 3 dimensions on that iPad. And they visually see what they're going to build and what it should look like versus trying to read it in 2 dimensions just off a drawing. And our technology has seeped through the organization, and we really have taken the tools. Now we just take tools to make them better. We don't self-develop any of these tools because there's good tools out there. But we've really taken leadership of that. And we have a dedicated group that does that now in our construction segment. The two work together on electrical, mechanical. It's not that different. The mechanical is probably a little more complex and advanced than the electrical folks on this because think about there's flows happening, there's systems. Where the electrical is, it's more rigidity, conduit and runs, right? But both are doing more of it. And with electrical guys think about when they do VDC is, how do I take something I'm going to do 100 times and take that work out of the field so there's less connections and the connection is easier. That's broadly speaking how they think about it. And then we're doing more skids and assemblies in both mechanical and electrical. And again, that makes it more rigorous. It makes it more stable when it gets to the field and be able to be built. So I'd say is it half of why we're doing better productivity? Sure. And then some of it is just working better because we've done these jobs multiple times. And look, EMCOR is a wonderful peer learning environment. So that's the construction side. When you get to the smaller project, Mechanical Service side, it's a little different. There, when you're doing a project a lot of times, productivity is almost secondary to making sure you don't disrupt the owner. And then it becomes a logistical game because you're usually operating in a build site, right? So they got to keep working. And so our guys have to really understand that, get the logistics right, get that in and get the building up right. So when you're doing a retrofit project, especially a midsized to medium-sized and smaller one, there, you're thinking about how do I make my customer more productive when I do it? And then how do I make sure that I've covered all my contingencies when I have to do these very complex logistical jobs in a build site? So that's a long-winded answer to what you were searching for, but...

I think the only thing I would add, you asked specifically about investments in certain markets or different sectors. And I think, right, none of these investments are targeted at a single market sector, right? The same prefabrication facility that can do a high-tech manufacturing -- support a high-tech manufacturing project can support a health care project or any other sector that we're working in. And the same thing with VDC or BIM, right? It's not targeted at any subset of our work, other than more so to our construction side than our service side.

Maybe, Jason, talk a little bit about how CapEx moved here and how do we build or build infrastructure or things like that.

In the quarter, relatively comparable year-over-year. And I think if you go to a full year of 2023, that's when you'd really see it compared to the full year of 2022. I think our CapEx was up roughly 60%, and that really was a lot of these investments that Tony has been talking about. And we'll continue to invest in prefab facilities. We'll continue to invest in BIM. We'll expand the facilities that we have where we need more capacity. And we'll find ways to add facilities in other markets where we currently don't have the same capacity we do elsewhere.

But all our investments, someone asked the question earlier about are these top-down or are they bottom-up? They're bottom-up, but there's a receptive knowledgeable ear at the top to ascertain where the best way to invest, and also to provide resources when needed, to help them invest. We haven't turned down a significant capital investment here in 5 years. I only say 5 years because I don't remember before that, because our folks bring these forward, they tend to be very well thought. And they take a -- and as a contractor, just so we understand that, too, our folks are looking for less than 4-year cash payback when they make that infrastructure investment because we do think like contractors, right? We're looking at the current market and say, "This is good for today, it'll be good for the future. But let's make sure we can earn today." And the other thing is we -- 95% I always qualify things, probably it's 100%, but 95% of our prefabrication is for us in our jobs. We don't prefabricate for the market.

That's really helpful. So if I can just ask the next one. I guess like the Industrial Services outlook commentary, it seemed a lot more positive this quarter. Large turnarounds are coming through with the larger scopes and you're getting better overhead leverage on that. And then 1Q was the best performance since the pandemic. Like would you say there's better visibility now into customer spending plans and turnarounds now? Or is it still kind of different?

I'd say yes and no, right? Yes in that we have pretty good visibility in that we understand they're going to do the work. But they could shift it from fourth quarter to first quarter or third quarter to fourth quarter. I would say that I had the privilege of seeing the kind of relationships our folks have firsthand recently at one of the biggest refining customers. And they're at the top, and they're deep. Why? Because we help that customer perform and solve problems. And ultimately, that's what that business comes down to. You have to have the best technical resources. And the good news I take away from what I've seen recently in that business is there's a little straining for manpower going on right now. And when that happens in the Gulf Coast, that's usually a good thing. It means that there's more activity going on. And when there's more activity going on, that's good for the larger contractors like us.

Thank you very much. Mr. Guzzi, we have no further questions at this time. And I will turn it back to you for some closing comments, please.

Look, we got off to a good start this year. It's been a -- we've been performing really well. I don't think you can ever discount the skill it takes of our folks in the field. You heard me talk about it earlier. And someone asked me an interesting question today. Are these decisions being made top-down at the segment level, subsidiary level? I'd say it's a team sport. But at the end of the day, we're only as good as our subsidiaries deliver on the projects that they commit to our customers. And with that, I'll thank them, and see you all in a couple of months. Bye.

Great. Thank you, Tony, and thank you, Jason, and thank you, Maxine, and to all of you for joining us today. If you should have any follow-up questions, please do not hesitate to reach out. Thank you all again, and have a great day. And Marliese, could you please close the call?