EMCOR Group, Inc. (NYSE:EME) Q1 2024 Earnings Call Transcript

EMCOR Group, Inc. (NYSE:EME) Q1 2024 Earnings Call Transcript April 25, 2024

EMCOR Group, Inc. beats earnings expectations. Reported EPS is $4.17, expectations were $2.92. EMCOR Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Marlese, 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. All lines have been placed on mute to prevent any background noise. After the speakers’ prepared remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Andy Backman, Vice President of Investor Relations. Mr. Backman, you may begin.

Andy Backman: Thank you, Marlese, 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?

Tony Guzzi: 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 of 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.

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Q&A Session

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 BDC. 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 through 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 five 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 US 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 UK 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 US 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 three acquisitions that will add to our capabilities in our Mechanical Construction segment and our US Building Services segment. We spent $137 million in upfront consideration on these three 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.

Jason Nalbandian: 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 US 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 UK 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 and 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 US 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, UK 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 US 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.

Tony Guzzi: 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 four 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 four quarters, but this idea behind this chart has really been how we allocated resource for the last five 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 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 are up $575 million. A lot of this will tie to the information on the next page, I am 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 four or six quarters ago where people were talking about why 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. But also, I think we were seeing the beginning of the AI almost six 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, it’s focused 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 three data center markets. And that was pretty much where the markets were. We’ve expanded, that was electrically and today, we’re servicing nine 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 are 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, organic growth, capability building, today, we service six. 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 are 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, 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 through the equipment to make it more efficient. It is 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 the STI [ph] 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 within 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 there is some government incentive that’s supporting this. It started with the CARES Act, and there has been a couple of other acts that helped that do that. To get to health care, this has been a good long-term market for EMCOR. 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 sent an 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 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.