EMCOR Group Inc (EME) 2022 Q3 法說會逐字稿

Good morning. My name is Jordan, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group Third Quarter 2022 Earnings Call. (Operator Instructions)

Mr. Blake Mueller with FTI Consulting, you may begin.

Thank you, Jordan, and good morning, everyone. Welcome to the EMCOR Group Conference Call. We are here today to discuss the company's 2022 third quarter results which we reported this morning.

I would like to turn the call over to Kevin Matz, Executive Vice President of Shared Services, who will introduce management. Kevin, please go ahead.

Thank you, Blake, and good morning, everyone. As always, thank you for your interest in EMCOR, and welcome to our Earnings Conference Call for the Third Quarter of 2022. For those of you who are accessing the call via the Internet on our website, welcome as well, and we hope you have arrived at the beginning of our slide presentation that will accompany our remarks today. We are on Slide 2.

This presentation and discussion contains forward-looking statements and may contain certain non-GAAP financial information. Page 2 describes in detail the forward-looking statements and the non-GAAP financial information disclosures. I encourage everyone to review both disclosures in conjunction with our discussion and accompanying slides.

On the next slide, they are the executives who are with me to discuss the call and 9-months results. They are Tony Guzzi, our Chairman, President and Chief Executive Officer; Mark Pompa, Executive Vice President and Chief Financial Officer; and our Executive Vice President and General Counsel, Maxine Mauricio.

For call participants not accessing the conference call via the Internet, this presentation, including the slides, will be archived in the Investor Relations section of our website under Presentations. You can find us, as always, at emcorgroup.com.

With that said, please let me turn the call over to Tony. Tony?

Yes. Thanks, Kevin, and good morning, everybody. I will discuss our third quarter results in my opening comments, and Mark will cover the third quarter and year-to-date results in greater detail. My opening commentary will focus on Pages 4 through 6.

We delivered another strong quarter at EMCORE. Revenues grew to $2.83 billion with 12.1% overall revenue growth and 10.8% organic revenue growth, continuing the strong organic revenue growth we have earned over the last 3 years. I believe that this achievement of consistent strong organic revenue growth and the underlying profit growth is a testament to our positioning in certain key markets and a result of our long-term acquisition programs, capital spending, leader development programs and customer and sector focus.

Further, our gross margin gap versus prior year performance has closed to its smallest gap this year. This shows that we are narrowing the impact of the supply chain disruptions and inflation as we price, plan and execute our project and service work.

We grew operating income to $150.1 million with 5.3% operating income margins. We had strong SG&A leverage with SG&A margin at 9.3% of revenues. Our operating cash flow was exceptional at $257 million in the quarter. Our diluted earnings per share was $2.16 per share compared to $1.85 per share for the third quarter of 2021.

This is excellent overall performance, especially against the challenges of continued supply chain disruptions and inflation. These issues are still present, and it does present operating challenges that we have to work through. I am always amazed at the resourcefulness, flexibility and [debt] operating skills of our field leadership team as they plan and execute around an ever-changing and volatile environment and achieve excellent execution for our customers.

I will now cover some highlights by segment. We continue to have very strong revenue growth in our Electrical and Mechanical Construction segments. Our Mechanical Construction segment revenues grew at 11.2% in the quarter, and most of that growth in this segment was organic. Electrical Construction segment revenues grew at 19.3% with 13.1% organic revenue growth. Operating income margin of 5.6% in the Electrical Construction segment was challenged by product mix, timing and some legacy transportation project issues.

We continue to see very strong performance from our data center and high-tech manufacturing projects and are experiencing sizable growth in our commercial RPOs driven by these project awards. We expect Electrical operating income margins to rebound sequentially as we finish the year and move into 2023, as our mix improves, as projects delayed by extended lead times for major equipment, commence into the execution phase.

Operating income margin in our Mechanical Construction segment was 8.1%, driven by exceptional execution in the commercial market sector on several semiconductor, pharma and life science projects. Our Mechanical Construction segment also performed well with respect to our fire protection offerings, which cuts across all geographies and sectors of performance.

Supply chain and inflation challenges continued and will remain part of our project planning and execution through the balance of 2022 and well into 2023.

Our U.S. Building Services segment had an excellent quarter with an operating income margin of 6.4% and 38.7% operating income growth, driven in part by revenues of $710.7 million, which represented 13.8% revenue growth quarter-over-quarter, and that was all mostly organic revenue growth. We had strong repair service, HVAC project and energy efficiency project execution.

Driving this growth is the underlying demand for our offerings. We leave this quarter with record RPOs as we continue to benefit from our customers' demand for energy efficiency upgrades and indoor air quality improvement. It was a great quarter for Building Services.

Our Industrial Services segment faced a headwind of delayed turnaround projects as our customers pushed some work into the fourth quarter. Third quarter is typically a seasonally weak quarter in the Industrial Services segment, and we believe we will continue to see improved performance in the fourth quarter and into the first quarter of 2023. We are also hampered in this quarter by delayed start-up and awards on several solar opportunities that we are well positioned to execute as supply chain disruptions ease.

Our United Kingdom Building Services segment continues to excel with 7.1% operating income margins, favorable project mix and excellent customer delivery.

Our team continues to perform well against the backdrop of a very challenging economic environment and foreign exchange headwinds. We exit the quarter with a strong balance sheet, RPOs and remaining performance obligations at a record level of $7.1 billion versus $5.4 billion a year ago and $5.6 billion at the end of 2021.

With that, I'll turn the call over to Mark, and he'll go over the quarter in detail.

Thank you, Tony, and good morning to everyone on the call today. For those accessing this presentation via the webcast, we are now on Slide 7. Over the next several slides, I will augment Tony's opening commentary on EMCOR's third quarter performance as well as provide a brief update on our year-to-date results through September 30.

All financial information referenced this morning is derived from our consolidated financial statements included in both our earnings release announcement and form 10-Q filed with the Securities and Exchange Commission earlier today. So let's revisit and expand our review of EMCOR's third quarter performance.

Consolidated revenues of $2.83 billion are up $304.7 million or 12.1% over quarter 3 2021, and represent a new all-time quarterly revenue record for EMCOR. Each of our reportable segments experienced quarter-over-quarter revenue growth other than our United Kingdom Building Services segment, which was negatively impacted by unfavorable exchange rate movements during the quarter.

Excluding $32.8 million of revenues attributable to businesses acquired, pertaining to the time that such businesses were not owned by EMCOR in last year's quarter, revenues for the third quarter of 2022 increased approximately $272 million or 10.8% when compared to the third quarter of 2021.

The specifics of each reportable segment are as follows: United States Electrical Construction segment revenues is $633.4 million, increased $102.4 million or 19.3% from quarter 3 2021. Excluding incremental acquisition revenues, this segment's revenues grew a strong 13.1% organically quarter-over-quarter.

Increased project activity within the commercial market sector, inclusive of the telecommunications and technology submarket sectors, as well as revenue growth from projects supporting both sustainable energy solutions and other traditional energy sources within the manufacturing market sector were the main drivers of the period-over-period increase. In addition, this segment continues to provide electrical solutions to our health care clients, where there remains strength in demand for large capital projects.

United States Mechanical Construction revenues of $1.12 billion increased $113 million or 11.2% from quarter 3 2021. Revenue growth during the quarter was driven by increases within the commercial, institutional and water and wastewater market sectors. With respect to commercial sector revenue growth, we are benefiting from increased project activity for customers within the semiconductor industry as well as customers within the biotech, life sciences and pharmaceutical industries. These projects include both traditional mechanical construction as well as fire protection services.

In addition, within the commercial market sector, we continue to see increased demand for our fire protection services, notably from our e-commerce customers, as they expand their warehouse and distribution facilities.

From an institutional market sector perspective, revenue growth was geographically broad-based and included increased revenues from a number of schools, universities and other educational customers, including those which have received funding for HVAC repair and replacement under the CARES Act. On the other hand, our water and wastewater revenues remain concentrated within the Southern United States, where we are supporting the increasing demand for potable drinking water and the treatment of wastewater given the shift in population in that region.

Third quarter revenues from EMCOR's combined United States Construction business of $1.75 billion increased $215.4 million or 14%, with 11.9% of such growth being organic. This combined revenue performance as well as the revenue performance of each of our Electrical and Mechanical Construction segments, represent new all-time quarterly revenue records. Consistent with last quarter, the achievement of these records have been accomplished while also increasing remaining performance obligations, which also represent all-time highs for each of our construction segments.

Tony has already commented on our RPO development during the quarter, and he will be providing more detailed commentary at the conclusion of this financial section.

United States Building Services quarterly revenues of $710.7 million increased $86.1 million or 13.8%. Revenue growth was generated within the segment's mechanical services and commercial site-based services divisions. Within Mechanical Services, we continue to benefit from strong demand for HVAC retrofit projects and building automation and control services with an emphasis on improving building efficiency, energy consumption and indoor air quality. In addition, we are experiencing growth in service repair and maintenance volumes as supply chain delays have resulted in the need to extend the useful lives of existing HVAC equipment in instances when replacement equipment is not readily available.

With respect to the segment's commercial site-based services division, new customer additions as well as scope or site expansion and increased project activity with existing customers were the drivers of the quarterly increase in revenues.

EMCOR's Industrial Services segment revenues of $247.2 million increased $15 million or 6.5%. Although the quarterly growth is not as significant as that of our last 2 quarters, we were encouraged to see solid mid-single-digit revenue growth as quarter 3 represents this segment's seasonally slowest period, as Tony previously mentioned. This revenue growth was despite the headwinds created by refinery utilization well in excess of 90% during the majority of the quarter, which can often limit the opportunities to provide field services as our customers are reluctant to take down the refineries for any extended maintenance.

United Kingdom Building Services revenues of $117.7 million decreased $11.8 million. As previously mentioned, this revenue contraction was entirely due to unfavorable exchange rate movements for the British pound versus the United States dollar, which is masking revenue growth on a local currency basis. This segment continues to see strong project demand from the commercial market sector customers, inclusive of the telecommunications submarket sector.

Please turn to Slide 8. The selling, general and administrative expenses of $263.1 million represent 9.3% of revenues and compares to $243.9 million or 9.7% of revenues in the year ago period. The current year's quarter includes approximately $3.7 million of incremental expenses from businesses acquired, inclusive of intangible asset amortization, resulting in an organic quarter-over-quarter increase in SG&A of $15.5 million.

This quarter's organic growth in SG&A expenses was primarily related to increased personnel costs due to both increased headcount to support our organic revenue growth as well as higher quarterly incentive compensation expense due to improved year-over-year performance at [certain] of our operations. Additionally, we continue to experience growth in travel and entertainment expenses as our employee business travel continues to resume normalcy.

Despite the growth in SG&A dollars, we have seen a reduction in SG&A as a percentage of revenues as we successfully leverage our cost structure. As I mentioned last quarter, we continue to maintain discipline with overhead investment and will seek incremental efficiencies and economies of scale as we drive future revenue growth.

Reported operating income for the quarter of $150.1 million or 5.3% of revenues compares to operating income of $137.4 million or 5.4% of revenues in 2021's third quarter. Our $150.1 million of quarterly operating income eclipses EMCOR's all-time quarterly OI record set in 2021's fourth quarter. Our operating margin of 5.3% represents a sequential improvement from that of quarter 2, which was also sequentially higher than quarter 1.

Despite inflationary pressures and supply chain headwinds, EMCOR continues to execute at a high level, producing strong operating results and margin conversion on a revenue base which continues to grow.

Specific quarterly performance by segment is as follows. Our U.S. Electrical Construction segment operating income of $35.6 million decreased $8.7 million from the comparable 2021 period. Reported operating margin of 5.6% represents a reduction from the 8.3% in last year's quarter. The decrease in both operating income and operating margin is due to a less favorable project mix within the commercial, institutional and transportation market sectors, coupled with certain discrete project write-downs, totaling $10.5 million during the quarter, which negatively impacted the segment's operating margin by 170 basis points. These losses were due in part to supply chain disruptions as well as project completion delays and time extensions beyond our control. The majority of these projects were bid a number of years ago under different economic conditions, where the extent of the supply chain disruptions, as well as current inflationary pressures and escalating material prices, could not have been contemplated.

We continue to evaluate our contractual rights and are pursuing recovery where permitted.

Aided by the increase in segment revenues, third quarter operating income of our U.S. Mechanical Construction segment of $91 million represents a $10.2 million increase from last year's quarter, while quarterly operating margin of 8.1% has modestly improved from 8% in 2021's third quarter.

This improvement in operating margin is despite having a larger number of active projects within the manufacturing and water and wastewater sectors, where we are either acting as a construction manager or general contractor. In these cases, our percentage of self-performed labor is less than a typical EMCOR construction project, thereby resulting in a lower gross margin profile.

Operating income for U.S. Building Services is $45.6 million or 6.4% of revenues, which represents a substantial $12.7 million or $38.7 million -- sorry, 38.7% increase period-over-period with 110 basis point expansion in operating margin. Driven by the performance of our Mechanical Services division, this segment is benefiting from both favorable project execution as well as the impact of certain pricing adjustments aimed at better aligning our building rates with the increased operating costs we have experienced.

Our U.S. Industrial Services segment operating loss of $1.4 million represents a $1.6 million improvement from the $3 million loss reported in 2021's third quarter. As I referenced earlier, quarter 3 is historically our Industrial segment's seasonally weakest quarter. Additionally, the delay or deferral into future periods of certain customer turnaround projects which were anticipated to commence in September of this year resulted in a shortfall when compared to internal expectations for the quarter.

U.K. Building Services operating income of $8.4 million or 7.1% of revenues represents an increase of $1.8 million and a 200 basis point improvement in operating margin quarter-over-quarter. This improved operating income performance is despite the foreign exchange headwinds mentioned during my revenue commentary, which reduced the segment's reported operating income by $1.4 million in the quarter. This segment continues to benefit from a more favorable mix of project work when compared to the prior year.

We are now on Slide 9. Additional financial items of significance for the quarter not addressed in the previous slides are as follows. Quarter 3 gross profit of $413.2 million represents an all-time gross profit record for the company and is higher than the comparable 2021 quarter by $31.9 million or 8.4%. However, gross margin of 14.6% was lower than last year's third quarter, primarily due to the impact of project write-downs within our Electrical Construction segment, which negatively impacted our consolidated gross profit margin by 40 basis points during the quarter.

Although the quarter-over-quarter gross margin compare is unfavorable, 14.6% of gross margin is sequentially higher than our first 2 quarters of 2022 and the 50 basis point year-over-year reduction represents the smallest quarterly variance to date in the current year.

Diluted earnings per common share in the third quarter of 2022 is $2.16 and as compared to $1.85 per share for the prior year period. This third quarter EPS performance represents a new quarterly earnings per share record for EMCOR due to the combination of net income growth and a reduction in our weighted average shares outstanding given our continued share repurchase activity during the year.

Please turn to Slide 10. With my quarter commentary out of the way, let's touch on some highlights with respect to EMCOR's results for the first 9 months of 2022. Revenues of $8.13 billion represent an increase of $862.9 million or 11.9%, of which 10.3% of such revenue growth was generated from organic activities.

As a result of our exceptional performance over the last 2 quarters, our year-to-date operating income of $387.7 million approximates that of 2021, which is quite impressive given the headwinds previously discussed.

Operating margin for the year-to-date period is 4.8%, and we continue to reduce the year-over-year gap, which is now only 50 basis points. On a combined basis, our U.S. construction operations have experienced sequential quarterly improvement on operating margin throughout the year, and all of our other segments are reporting 9-month operating margins which are either equal to or greater than that of the corresponding prior year period.

Year-to-date diluted earnings per share was $5.50 and represents an increase of 6.4% from the $5.17 of EPS reported in 2021's 9-month-to-date period.

Although not shown on this slide, my last comment on our year-to-date results is with respect to our strong operating cash flow. In the 9-month period, we have generated $238.4 million of operating cash flow, which represents a substantial improvement over last year. Although we had a slow start during the first 6 months of 2022, we generated $257.2 million of operating cash during the third quarter. Despite our strong organic revenue growth to date in 2022 and the resulting requirement for working capital investment, our subsidiary management and project teams have done an excellent job of maintaining discipline in their project and service contract administration, resulting in great cash conversion.

We are now on Slide 11. EMCOR's balance sheet remains strong and we continue to be in a position to invest in our business, return capital to shareholders and pursue strategic M&A transactions. Despite the significant operating cash flow I just mentioned, our cash on hand has declined from year-end 2021 as a result of cash used in investment and financing activities during the first 9 months of 2022. Notably, we utilized $656.6 million for the repurchase of our common stock, have spent $91.1 million on acquisitions and returned $20 million to our shareholders in the form of dividends. This activity was funded by our cash on hand as well as $170 million in borrowings under our revolving credit facility.

Resulting primarily from the decrease in cash, coupled with an increase in our net contract liability position, our working capital balance has decreased by nearly $289 million from year-end 2021. These decreases were partially offset by an increase in accounts receivable given the revenue growth we continue to experience.

In terms of other fluctuations within our balance sheet. The $26.5 million increase in goodwill since December of last year was entirely a result of the acquisitions completed by us thus far in 2022. Net identifiable intangible assets have increased by approximately $16.6 million as the additional intangible assets recognized in connection with the aforementioned acquisitions were partially offset by amortization expense during the period.

Total debt, exclusive of operating lease liabilities, has increased by nearly $170 million since December, given the borrowings under our revolving credit facility that I previously mentioned. As a result of this incremental debt, coupled with the reduction in our shareholders' equity due to our capital allocation activities, EMCOR's debt-to-capitalization ratio has increased from 10.4% at year-end 2021 to 18.9% at September 30, 2022.

We remain committed to our long-term capital allocation strategy. And with our consistent free cash flow generation, along with our liquidity, inclusive of revolving credit capacity, we continue to [remain] flexibility in our ability to execute against our strategic objectives.

With my portion of this morning's slide presentation completed, I will now give the call back to Tony. Tony?

Thanks, Mark. Well done, and I'm on Page 12, remaining performance obligations, or RPOs. And we have diverse RPOs of $7.10 billion, an all-time record. We continue to be successful in winning new work and winning matters, as the company had another strong project bookings quarter. We've experienced healthy demand throughout 2022 across our segments and many market sectors.

And while we have always described our business is not predicated on month-to-month or quarter-to-quarter, it ebbs and flows with projects and projects award, it is noticeable that our RPOs total has increased in 8 consecutive quarters, fueled overwhelmingly by organic RPO growth, and that's with strong underlying organic revenue growth.

Total company RPOs at the end of the third quarter were $7.1 billion or up $1.7 billion or 32% over the September 2021 total of $5.4 billion. From the end of last year, RPOs are up $1.5 billion or 27%. Additionally, we booked $641 million of work in the 3 months since June 30.

The complexion of our RPO portfolio has changed a bit over the last 12 months or so. In general, length is going up for projects as project scope increases. And that's because of supply chain issues would it remain elevated, and also the technical complexity and labor complexity of the kinds of projects that we're winning at the higher end of the project, the larger projects.

When you have those complex supply issues, coupled with the ability to attract and retain and deploy the right mix of skilled craft labor and the ever-present technical demand of projects, many of our customers are looking for the contractor, or us, that can be a preferred choice to complete some of these technically sophisticated projects, whether they may be hyperscale data centers, food processing plants, semiconductor fabs, hospitals, pharma plants, biolife plants, health care facilities or broad-based energy efficiency upgrades.

Together, our 2 domestic construction segments experienced strong project growth year-over-year, with RPOs increasing just under $1.5 billion or 34%. The U.S. Building Services RPOs increased $276 million from the year-ago period or 33%. That's -- and it's now at about $1.1 billion in small to midsize project work and also service work.

This quarter, we saw the increase in our Mechanical Services division and the re-award or renewal of several facilities maintenance contract in its site-based services division.

As I mentioned last quarter, these extended lead times for HVAC equipment, combined with a push for energy efficiency and improved building wellness is resulting in our customers asking us to retrofit. And when we can't retrofit on time, as Mark said, we're repairing their equipment.

The additional -- we think about the lack of equipment availability, it is driving our repair service work because equipment still needs to run. In my opinion, lead time for applied HVAC equipment will continue to be extended well into 2023.

Moving to the right side of the page, where we have our RPOs broken down by market sector. As I mentioned earlier, quarter 3 was a strong booking quarter, supported by RPO increases in all sectors against -- except water and wastewater, and we have good underlying trend in the markets where we compete, water and wastewater. They tend to be more episodic awards.

Market sectors where we're led by project awards in our broadly defined commercial sector, that includes numerous data center projects, semiconductor projects and project's customers within the biotech, life sciences and pharma industries. It's not yesterday's or 10 years ago commercial market sector.

Finishing our market sector year-over-year growth. Health care up 33%; institutional, up 24%; and short duration projects for most of the retrofit work and energy efficiency work is up 34%. Partially offsetting that was minor decreases in water and wastewater, industrial manufacturing and a decrease in transportation RPOs.

What I said last quarter still [rings true] today. I continue to like the balance and breadth from both the business segment and market perspective and a geographic perspective of our RPO portfolio as we close out 2022 and we move into 2023.

I'm going to talk about the next slide, Page 13. And I've talked about this because it is some underlying trends that are driving their business and our business, and they look like they have legs well into the future. And look, some of these awards come in bulky and episodic for the bigger work, like data centers and semiconductor fabs and some of it is more quick-hitting, like the indoor air quality mechanical services work.

But if you go to data centers and semiconductor fabs, we see good demand, and we see that continuing well into 2023. And we're positioned in all the right geographic markets with the right people. Are we in every one of them? No. But we're in enough of them to make a difference.

There's strong demand for electrical systems. If you think about data centers, bigger electrical systems, smaller mechanical systems today, still big content on both parts. Fire protection goes across everything.

If you think about semiconductor fabs for EMCOR, it flips, stronger mechanical demand, lesser electrical demand. Again, fire protection demand across it. Fire protection, we can cover the entire geography of the U.S. for these opportunities.

Industrial manufacturing. And some of this shows up in our commercial because that's where our pharma, life sciences and biotech is, we see strong opportunities. And we're really what's driving that. One is new products, new facilities, strengthening supply chains and the reshoring of manufacturing, and also still relocation from higher-cost states to lower-cost states.

Health care. This for us is outpatient health care facilities, hospitals and large physician medical office buildings. These are both upgrade opportunities as well as new construction opportunities as people seek more flexibility in their health care systems, and the pandemic taught people a lot. And also just the aging of America and the aging of these facilities are driving this demand.

We put a new one in here, an energy transition and transportation. And if you think about it, I heard it best from one of the big utility CEOs today. It's an all-of-the-above strategy, and EMCOR can participate in an all-of-the-above strategy. It's not an either/or, energy demand is increasing.

If you think about what's happening with health care facilities, data centers, semiconductor fabs and industrial manufacturing resource, we're not going to be using less energy in America. And so we need all sources of energy to excel. And coal will phase out. And so you're going to need natural gas to supplement renewables. Nuclear, they're opening, I guess, they're fueling the first nuclear plant in Georgia. Not a big market for us. But on the periphery, we will support nuclear plants. The one in Georgia is getting built, will be the first one in a generation.

Energy transition. We do participate in the solar and wind markets in some very specific transmission and distribution opportunities, but also in the emplacement of the solar field, we should have been doing more of that work today. We do that in both the Electrical segment, and we do it in the Industrial Services segment because of the positioning of the assets and the capability.

We've learned that some of those oil and gas guys are great solar builders. They're very good at it.

And then you've got the whole value chain of automotive, from all the way back at the mine -- the lithium mines and the transportation, all the way through manufacturing and battery, all the way through to EVs and the new plants that are being built, to the distribution centers that are now putting industrial scale. So well look, is EMCORE going to be the person that's going to build the EVs' charging stations at rest stops? Probably not. We'll do it episodically or we'll do it within a local market.

We are the people that are doing it at the major distribution hubs. These are high-intensity electrical projects that are almost substation-grade installations. And then that will move all the way down through how you continue to do battery storage, which is, at best, embryonic at this stage.

So -- and then you've got underlying demand charges and what's going to have to happen with the gas system to support the renewable grid. I'm actually quite bullish on how we participate on that over a 20-year time horizon. It is not a 3-year project. This is a 20- to 30-year transition. And beyond the transition, we're going to need more energy.

And that's not to say that we're not going to continue to support the downstream refining, petrochemical and upstream market in oil and gas.

Water and wastewater, Mark touched on it. We're mainly concentrated in the Southeast and even more so in Florida.

There's a couple of things going on there. You had consent decree work that was going on with some of our customers. Now you have strong underlying demand if more people moved into those states. And the demand for freshwater, wastewater treatment is continuing to increase.

Mechanical Services, there is none better than EMCOR at Mechanical Service work. There is nobody better at putting energy efficiency project in. And we have the scale, we have the people, we have the technical know-how and we have the OEM relationships and controls, product offerings, to make it happen in a big way, not only from an efficiency upgrade standpoint but from an indoor air quality.

And finally, we're the best fire protection contractor in the United States, bar none. We're good. We can do large projects, we can do small projects, we can do service. We have the fab capability to deliver that at a cost that's competitive for our customers on the most technically sophisticated projects in the country, and all that other stuff I talked about is being built up.

Now let's go to closing on Pages 14 and 15, and what most of you care about, is we took up guidance. We believe that we will now achieve around $11 billion in annual revenue, and we're going to tighten that diluted EPS range, earnings per share guidance range, by raising the bottom end of that range to $7.60 and the top end of that diluted earnings per share range to $7.85.

We believe that we still have a growing nonresidential market because of all the things I just talked about on the previous page -- on Page 13. With respect to Industrial Services, we also believe that the oil and gas market will continue to improve, and that we will gain momentum into the renewables market as we exit the year.

We talked about the RPOs, they're at record level. We discussed the sectors on Page 12. And that should let us execute well in the fourth quarter and well into the first half of 2023 and beyond.

We believe that operating income margins will hover around, on a full year basis, 5% or a little bit above 5%. Where we end up in the range at this point of the year will depend on the following.

We do expect improvement in our Electrical Construction segment operating income margin as we move to a more favorable project mix and further progress on these projects that we're just starting in the third quarter, and we have a record of successful execution in these types of projects.

We do expect momentum to continue from Q3 into Q4 in our Mechanical Construction segment in both revenue and operating income, driven by favorable project mix and excellent execution. Our Industrial Services segment, we believe will have a more typical fourth quarter turnaround season. And our U.S. and U.K. Building Services [segment] will continue to perform well.

I think confidence is how you allocate capital, right? And at the end of the day, we have confidence in our execution and prospects. And thus, we have returned nearly $677 million in cash to shareholders through share repurchases and dividends on a year-to-date basis. We have repurchased $656.6 million in shares year-to-date, with $202.3 million of such share repurchase activity in the third quarter. We've also spent $91.1 million on acquisitions in 2022, including our recent acquisition of Boston area based Gaston Electric, and we're thrilled to have them on the team.

From our CEOs of subsidiary and segment leadership teams, to our service supervisors, foremen, superintendents and project managers, to our skilled craft labor, our team continues to perform well in a tough operating environment. And for that, I thank the entire EMCOR team. I appreciate all that team does for EMCOR and for our customers every day.

And with that, Jordan, we will now take questions.

(Operator Instructions) Our first question comes from Sean Eastman with KeyBanc Capital Markets.

Tony and team. I wanted to start on margins and just a higher-level question, sort of putting aside the noise in margins we've seen this year. How would you characterize the bridge from sort of 2011 in the high 3s to this kind of mid-5% level we've seen over the past couple of years?

How much of that is the cycle? How much of that is structural? And I realize we're not seeing slowing right now, but just in anticipation of that, I wanted to understand that move and how sustainable this level is, maybe at a lower level activity into the outer years.

Yes, Sean, I think it's always hard to separate structural versus cycle. I mean, it can't just be cycle. I mean, we've been at this for a while.

I think a lot of it goes to what we've decided to do and what we've decided not to do, right? We are operating in an environment where we are very intentional about the kind of work we've taken. We've always have been. But the team is -- have centered around a core set of values of how we run the company, and this [core] set of expectations on how we run the company and what we expect.

And there's a couple of things that I'd say are structural. We have bigger subsidiaries than we had in 2011, and if they got more powerful, and we get more leverage out of that, and we can take more scope of the work. We've also seen a move in the market to concentrate more scope on these larger projects into folks like us.

We've gotten more technically sophisticated. And so you go to a structural point, right, with the maturation of BIM, where we are still -- back in 2011, we were probably still the leading BIM contractor, where, I think, have increased that lead, but also we get better at it every day.

And it's not just -- it's really cool to see a 3D model. But if you don't do anything with it, to plan your work or plan your prefabrication plan, it doesn't mean anything. We've gotten better and better at prefabrication linked to BIM and then the execution on the job side and what that means.

And so what that means is we're producing more in a factory-type setting on these more sophisticated jobs and less in the field. And you can really see that on large scale mechanical projects, which led the way. And our electrical contractors, especially as they build out these data centers and the work they support in health care, get better at it every day, too.

The other thing we did is we enhanced our position in markets that are more favorable for us to complete more of the value chain. So [take] fire protection. So that was a build-out strategy that's been 12, 15 years in the making. We did through acquisition, we've done it through organic growth, and we've done it through capital investment. Again, our folks are the leaders in prefabrication.

Shambaugh & Son and S.A. Comunale are the best fire protection contractors in my mind and have plenty of competition, but they're really good at what they do, and they're a preferred technical choice. And you think about that fire protection model and why we liked it so much is labor is more flexible. It's a national union for most of the union. It's a design-build product on a very specific trade. People design to a code. We then design the system underlying in it. It lends itself then well to prefabrication and it lends itself well to crews that can [tell] means and methods and apply it across multiple sites.

And you never put away that we've got great management, right, that really understand how to satisfy our customers, and at the same time, drive superior operational performance.

And you think about the Mechanical Services business, you go to more structural, right? We've done a lot in Building Services to restructure how we think about the business. And what I mean by that is, if you go into Building Services, our site-based business is a -- we have a very good business development, we have a very good execution team. We lead with self-perform, and we lead with scope that makes sense for us.

We're better at selecting our customers than we ever have been. People that demand technical excellence or demand consistent execution across many sites. And it's really with our self-perform labor, as we built that out from embryonic in 2011, maybe 50, 70 guys, to over 500 today of these operating engineers with some HVAC, some electrical skills. And that team has done a great job.

And then you get to the Mechanical Services side. We spent a lot of time understanding mix and pricing and project management and sophistication where we've actually brought as we move up the chain on these bigger energy efficiency project, the skills from our Mechanical Construction segment and some of the BIM into the mechanical services. Likewise, we've done the opposite and take some of the small project skills and put them in our Mechanical Construction segment.

And then finally, we're achieving these margins, right Mark? In the face of what would have been a less favorable mix in 2011.

Yes.

Industrial was our highest margin product for a lot of our time between 2008 and 2013, '14. And we expect those margins to improve but we have done it in the other trays, which are much bigger, and we wouldn't have expected to mix up the way we did.

Yes. Sean, the only thing I would add to Tony's commentary, and this is as a point of emphasis. We had a number of operating companies back in the 2011 period and periods prior to that, that were performing at our consolidated levels or higher. The issue that we had is we had a number of businesses that clearly were performing below that which was driving margin dilution.

So I'm more on the structural camp because, as you know, we haven't divested of a lot of businesses over that period of time. But having said that, we've taken best practices and lessons learned. And because our culture has continued to evolve, which has always been strong, but it continues to get stronger, we've been able to make significant inroads on how those other companies that previously were lagging those historical results are performing much better.

You throw in the fact that the margin-dilutive businesses back in that 2011 time period, U.K. and to a lesser extent, U.S. Building Services, have continued to improve. It's been quite phenomenal. If we get the Industrial Services segment more back in line or closer to our historical results, the earnings potential and margin potential of those businesses continue to be quite favorable.

Yes. And Sean, right now, because of the mix of work and we're doing some bigger work, where they're going to be? In the north of 5%. We're also worried about margin dollars, right, Mark? And we can drive the percentage up. Mark is a percentage guy, I'm a percentage guy and a dollar guy. We're sort of -- that's the yin and yang that happens in business. You got to do both. And we see pretty favorable mix.

Now one of the -- I think what's underlying your question is, if we get hit with a bad cycle, what happens? Since about 2008, when we had that recession. We've always had the mindset is, our next highs have to be better than our last highs in the cycle, and our lows have to be better than the last lows.

And so that's why I think when Mark says he's in the structural camp, we've done structural things to this business that we know of, and we can go through more of it, right? We talked about BIM [prefab], we talk about IT systems. We can talk about planning. We talk about how we -- how the segments have been flat. And we can talk about all that stuff.

But the key point is we're always laser-focused on having a cost structure that can compete in a tougher market. And that is something we collectively, down through the subsidiary CEO level, will focus on every day.

All right. I learned quite a bit there. And then secondly, I don't want to take anything away from the momentum we're seeing here in the business. But I wondered if we're looking here at the top line growth and the growth in RPOs, how much you would estimate sort of the inflationary pass-through uplift is within those trends. And just how we should think about your comps on these quarters going into next year to the extent inflation starts to moderate.

Yes. From your lips to God's ears, right, that inflation starts to moderate.

Look, back of the envelope, I think -- we think it's hard to do it because of scopes, kinds of equipment, equipment in our mix, equipment out of our mix. Some of our bigger work, we don't actually purchase the underlying equipment, so that's out. Labor has actually been reasonable. I think they're in it for the long game. Our collective bargaining agreements have been reasonable. They're much more focused on what goes into the benefit package, they're much more focused on actually improving the pipeline into the trades in a lot of these local unions, which is quite robust right now.

I would actually say -- Mark, 15%, 20%?

It's less than 20%, anywhere between that 12% to 20% range, that's where I would settle.

That's something we haven't looked at, Sean. It's really hard to normalize. I would say yes, 12% to 20%. [Other] gains in revenue and in RPOs are probably inflation-related.

Our next question comes from Thalhimer with Thompson Davis.

So I kind of wanted to start exactly where you guys left off on the RPO growth. So I'm trying to think through the $1.5 billion sequential jump in RPOs, when does that work start? And what kind of confidence does that give you in '23 revenue growth?

Well, the work's, for the most part, is starting now. If you think about how work gets awarded in our space, -- if we had some delays because of equipment and we had some delays of awards because of equipment that's part of what you saw in the third quarter. When this customer provided equipment, they delayed the award. We knew we were getting it, but they delayed the award, as we talked about.

Adam, we don't comment on '23 right now. But look, we have record RPO levels, we're in the fourth quarter, we expect a good start to 2023.

Okay. And the -- can you just kind of repeat your there was a comment, Q3 was a little bit down in Industrial -- seasonally down. You talked about a better Q4, a better Q1. I guess, can you talk a little bit more about that kind of the next 6 months in Industrial?

The next 6 months should be okay, right? Because we're in the fourth quarter turnaround season, we're going into the first quarter turnaround season. We have no reason to believe that those -- well, we're in the one, right? So we know that most of that schedule is getting executed. And we think most of the first quarter will get executed. But we're at record [frac] spreads, and we have incredible external pressure on these refiners to keep operating.

We don't make those decisions. We plan for them. We are well positioned to support our customers, and we also think some of our renewable projects will start to come online as we exit the year into the first quarter of '23.

Okay. And then lastly, thoughts on capital allocation from here? Both M&A and buybacks.

I'll let Mark take that.

Yes. With regards to the buyback program, clearly, you could see in the Q what the remaining authorization is. We don't comment on our repurchase strategies as we go forward, as you know. But we certainly have the authorization to take advantage of that if we chose to do that.

With regards to the M&A pipeline, and Tony is certainly going to jump in, we continue to have an active pipeline. But as other things that we've commented on this call, ultimately, we do not determine if something is actionable or not. There's obviously a lot of uncertainty as people are looking at the future for all the reasons that have been discussed previously on this call and some of the earlier questions we've had today.

But this year has been relatively slow to date. I would like to think as we move into 2023, we would like to see activity pull up.

Yes. I mean, we like what we did so far year-to-date. We wish we had done a little more. We see continued good opportunities. We see it in our Electrical segment. We see in our Mechanical Construction segment. We see in Building Services. Industrial is more organic growth. We have the capabilities to support our customers. And even on U.K., we could see a niche acquisition or 2.

But the bar for us is fairly high, right? We have good organic growth opportunities. We still have capabilities and geographies we'd like to fill, and we have people that want to be owned by EMCOR. We have great success in people that are trying to move their life's work to us.

That's a better scenario for us. We earn well in excess of our cost to capital, and we make very fair deals with the sellers. We don't -- we're not bargain hunters, and we're not going to be the people that they're going to go to that squeeze the absolute last dollar out of a transaction. It's just not how it works when someone wants to be part of our team going forward.

We do a lot of small acquisitions you never hear about that build a branch or allow us to take a mechanical service contractor in the West from a $40 million in 2002 to $300 million today. And so we're very intentional about that M&A dollars.

Do I think there is a $1 billion deal in our offing? No, I don't. I think that we will continue to operate well with the to $40 million to $300 million acquisition, and I think we have plenty of opportunities there over a multiyear period.

(Operator Instructions) Our next question comes from Brent Thielman with D.A. Davidson.

Tony, in the 10-Q, you highlighted the manufacturing sector in regard to Electrical segment growth. And then within that, kind of the first bullet was transmission and distribution projects. And I was just wondering if you could clarify. Is that some of the stuff you were talking about or...

Yes, that would be around renewables and substations and support renewables. That would be located there. And it would also be on substations supporting manufacturing clients as they build out their facilities. Yes, that's mainly what that is.

Yes. And then the EV battery plant opportunities also fall into that category and manufacturing separately?

Yes.

Okay. Perfect. And then, I guess, Tony, on the -- again, on the Electrical segment, the challenges you've had to work through this year, weighed a bit on the margins? Are you effectively complete with those jobs? Are you still working through them?

Most of them will be complete by the end of the year. We have one more that will be sitting out there. Obviously, at the end of every reporting period, we take our best view on that job. So we think we know where we are.

This is not hundreds of millions of dollars worth of work that need to be completed. It's probably around $50 million to $60 million of work to get completed. This is work that, for the most part, was taken between 2015 and 2017, like Mark said, under very different operating assumptions. It got delayed for some design issues initially, then some pandemic issues, then some supply chain issues. And it's work that we completed in the West Coast, and we will finish those jobs. We will seek our contractual entitlement and we will move on.

It's not -- like I said, this isn't hundreds of millions of dollars of backlog or hundreds of millions of dollars of work. That work will be -- other than one job, will be complete mostly this year, and maybe a couple of things will dribble into the first quarter.

Yes. Understood. And then last, just the strong Building Services performance. I mean, again, this quarter. How much do you attribute to sort of these positive or favorable seasonal trends? I know that unusually warm weather, which I assume helped to some degree. And then what you attribute to what the core business is doing, right, maybe some of the secular trends around the business.

I think most of it's secular trends and what the business is doing right. The size we're at now, with their profitability now, we love warm weather. We've been -- we don't...

We love warm weather, we love snow but it doesn't move the needle for the performance of that segment.

Not like it used to, because of the size. I think what really is driving the performance is really paying -- what we didn't talk about, right? Because if things are good, you don't have to whine, right? But we didn't talk about the fuel headwind that Building Services segment had, is not 0. I mean, Mark, $3 million to $5 million?

Yes.

Yes. I mean, $0.04, $0.05 a share of headwind coming out of fuel just in building services, and you probably double that across the business. Now as the year goes on, when we recouped it as our pricing caught up.

We don't talk about all the planning we have to do on what we're supposed to be short-cycle projects that get pushed out and what that means for their workforce planning and how we're not absorbing. I would argue they're performing at these levels with less than optimal labor utilization on the project mix side.

But offsetting that is unbelievable execution on the repair service side, which is really, really strong, which is clearly highly skilled labor and the utilization and the pricing around that, coupled with the best execution we've ever seen in our commercial site-based business.

And also as we even start up new customers, as we renew customers, and we're really -- and more importantly, we're delivering for our customers there. I mean, that's a business where you really have to work with the customer on the budgeting and year-over-year productivity and cost reductions in an inflationary environment and getting through that takes a lot of skill, and that team is executing. As well as the U.K. team. I would put those 2 together, operating in really, really difficult environments for our customers, and really delivering for them.

Our next question comes from Noelle Dilts with Stifel.

Just I was hoping you could just comment a little bit on how you're thinking about the longer-term implications of higher interest rates and what that means for -- Well I should say higher interest rates and also just higher costs overall. I mean, obviously, your demand is exceptionally strong, you're seeing great trends. But as you look forward, how concerned are you that you could start to see slowdown in certain sectors of construction overall?

Yes. I mean look, that's something -- this is a seasoned management team. And so we're always aware of planning for the inevitable slowdown, right?

I do think if you go to the sectors I talked about on Page 13, I mean there's a real [trench], right? And there may be blips along the way, but you can't get out of the way of what are really great macro trends. But people as a secular macro trends, you have to have planned and you have had to built the labor force to take advantage of those secular trends well before the secular trends happen.

So there's really nothing that's happening right now that surprises us, except for maybe the speed of some of the dollars in energy transition. So we feel good about that.

The second thing is, if you think about it from an underlying, what are some things that are really things we didn't have much to do with that are going to help those secular trends? There's been 3 or 4 pieces of legislation over the last couple of years that will help keep some of that demand solidified and also solidified on terms that are good for a highly skilled contractor that always pays prevailing wages.

And so if you think about it, the first one was the CARES Act. Mark talked a little bit about that. That's going to drive underlying demand in the institutional market. That's the biggest part for us, schools, right? And other institutional buildings to do building upgrades. Now that was 2021. You thought it was all spent. No, it's not. Nothing almost got spent in 2021, it can't, right? You [class it], it takes a lot of plan. Then you get to 2022, Mark talked about that being some of the drivers for our small project work in the mix. Now you get to 2023, we think we'll see even more of that. Actually, I think that will be near the peak year for the execution of those projects.

Then you move to the infrastructure, probably not that big of a deal for us overall with the mix of work we do. We'll get some effect, right? We do have some transportation capability to do lighting and driver information systems. Some airport upgrades will happen that we'll be part of, and we're doing that today. And some port upgrades will happen that we'll be part of. But generally, that's a civil infrastructure build, and we're not civil contractors.

Then you move to the CHIPS Act. Look, those customers are strong and financially strong to begin with. What this does is put a base under that so that they know there's some long-term capital contribution. It also sets it up on terms that are good for contractors like us. Whether they be union or nonunion, you're going to pay prevailing wages and you're going to do that work here in the U.S., right?

Most of those sites were designed and developed and everything else before the Act, but the Act helped strengthen the implementation of those projects. And we're positioned in a lot of those markets.

The last one is the IRA. What that helps with some of these energy transition and energy efficiency. And again, we will participate in that. So yes, there's going to be speed bumps along the way.

But when you're in the businesses that we are, and really, I think that the number of people that can do what we do on some of these larger projects, there's plenty of them, there's competition. But you have to have the skill to get in the project early and do the technical planning. And then they have to believe that you have the prefab and BIM capability to do the design assist to move that project along and then you can invariably flex up and down through workforce planning and execution.

Great. That's very helpful. And I guess, second, just going back to your -- the discussion on the impact of inflation on RPO. Just to make sure we're thinking about this correctly. I mean, would you -- should we think of a lot of that inflation is just being passed through? So it might have a dilutive impact on margin?

And obviously, we know that there have been a lot of other things that have impacted margins this year that should not -- that you should be past -- so that will be a positive impact. But just kind of curious how to think about it.

I'm not sure, going forward, how dilutive the impact is of inflation, right? We have a margin. We have to make on our labor and our procurement of those materials.

I think what your -- what has happened, right, is more of the supply chain disruption is more a problem for us than the inflation. Yes, we passed the inflation on. But we also look to seek to make our margin, right? It's not passed on without making a margin.

What the real issue is, is the supply chain disruptions. Now part I think we believe, as a management team, is we're now in a spot where things are getting delivered, right? So we waited, we waited, we waited. There was the disruption, which we foreshadowed way back in our second quarter 2021 call. We had some things priced differently. We're working through it, working through it. And now we're getting major equipment delivered. We're putting it on the site. We put that into our planning.

Are we building things optimally the way we'd want to build them? Of course not. But we have figured out how to work around that. In some ways, you're almost treating the installation of some of the major subsystems, as you would on a replacement job. You're doing everything else first. I mean, because the availability of pipe and wire and more commodity-type materials has actually been pretty good, and the price has come down actually. So you put the bundle together, might it have a minor impact, Mark, to keep things tamped down?

Yes. I mean, law of numbers, right? For sake of discussion, marking something up 5% and that's the percentage -- the number grows, it's more of the total contract. It could be dilutive, but it's not.

It's not driving it.

This concludes the question-and-answer session. I would like to turn the conference back over to Tony Guzzi for any closing remarks.

All right. Thank you all very much. Stay safe, and we won't be talking to you. So have a great Thanksgiving.

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