These are very good companies and how to invest through a cycle. Now, what are the government incentives done? 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 a 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, our 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, it 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 two 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 lead our key suppliers to be doing that out of two factors. 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.
Brent Thielman: 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 want to think about it the variable going forward.
Tony Guzzi: 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 eight 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 hires 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 are 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 scenarios 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 be doing 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?
Jason Nalbandian: 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 zero 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.
Tony Guzzi: If you put 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, that’s pretty good. But they’re back to focusing on the input metrics.
Brent Thielman: 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?
Tony Guzzi: I don’t think it will, at least in our guidance. Jason, you agree?
Jason Nalbandian: 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 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 five 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 – we 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.
Brent Thielman: Okay, I’ll leave it there. Thanks for taking the questions.
Operator: Thank you. And now we will take a question from Adam Thalhimer from Thompson Davis. Adam, you may proceed.
Adam Thalhimer: Hey, good morning, guys. Great quarter. Congrats on that. And Jason, welcome to the call.
Jason Nalbandian: Thank you.
Adam Thalhimer: Hey, 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?
Tony Guzzi: 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’ve 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 non-union 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 drive 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 team is doing 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.
Adam Thalhimer: I guess you’ve kind of put a speed governor on the RPO growth. Is that fair?
Tony Guzzi: 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 it that we feel comfortable we can expand the company.
Adam Thalhimer: And sorry if I missed it. What was the forward look on data centers?
Tony Guzzi: 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 in – the things that will constrain it, but then we’ll fix that. We always do. People – as there’ll 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.
Adam Thalhimer: And are you seeing any – to the extent you’re seeing any weakness in non-res kind of more broadly, like commercial or I know you don’t play there much. But it sounds like that would be confined to Building Services.
