Earnings Call: Q1 2021

Apr 29, 2021

Good morning. My name is Lara, and I will be your conference operator today. At this time, I would like to welcome everyone to the Amcor Group First Quarter 2021 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Mr. Hasbro Questel with FTI Consulting. You may begin. Thank you, Laura, and good morning, everyone. Welcome to The EMCOR Group Conference Call. We are here today to discuss the company's 2021 Q1 results, which were reported this morning. I would like to turn the call over to Kevin Mapp, Executive Vice President of Shared Services, who will introduce management. Kevin, please go ahead. Thanks, Haskell, and good morning, everyone. As always, thank you for your interest in EMCOR, and welcome to our earnings conference call for the Q1 of 2021. Unbelievable that the Kentucky Derby is going to be run tomorrow or Saturday, and it's already May. For those of you who are accessing the call via the Internet on our website, welcome, and we hope you have arrived at the beginning of a slide presentation that will accompany our remarks today. We are on Slide 2. The presentation discussion contains forward looking statements and may contain certain non GAAP financial information. Page 2 describes the detail of the forward looking statements in the non GAAP financial disclosures. I encourage everyone to review both disclosures in conjunction with our discussion and accompanying slides. With me today are Tony Guzzi, Chairman, President and Chief Executive Officer Mark Pompa, our Executive Vice President, Chief Financial Officer and Treasurer and Executive Vice President and General Counsel, Maxine Mauricio. Actually, Mark is not the treasurer any longer. I'm sorry, Mark. In the Investor Relations section of our website under Presentations. You can find us at emcore.com. With that being said, please let me turn the call over to Tony. Tony? Yes. Thanks, Kevin. And I'm going to start my discussion on Pages 4 through 6. First, I'd like to welcome you all and what a different feeling we have in late April 2021 than we had in late April 2020. When we were in the throes of understanding of how to operate in a pandemic. I don't have to recount all the areas of uncertainty and turmoil we faced last year, not only at EMCOR, but our country and world writ large. However, at EMCOR, we were able to point to our values of mission first people always, and they held us together and allowed us to perform at a very high level. These values served as our touch point to have a focus first on the health and safety of our employees. At the same time, we knew we also to continue to serve our customers as we provided essential services across a range of projects and service calls. And again, like I always like to do, I'd like to thank all of our leaders and employees for their efforts. As demonstrated by our Q1 results, we continue to deliver strong performance by executing well for our customers while focusing on the well-being and safety of our employees. The Q1 of 2021 was an outstanding quarter by any measure. We are at $1.54 per diluted share versus $1.35 in the year ago period on revenues of $2,300,000,000 with operating income margins of 5.1%. We had strong revenue growth in Mechanical Construction segment, up 8.4%. We had strong growth in our U. US Building Services segment of 10.3% and had strong growth in our U. K. Building Services segment of 12.8%. That was aided somewhat by FX. We were essentially flat in our Electrical Construction segment. And as expected, We had a significant decline in revenues of over 35.3% in our Industrial Services segment, which was impacted not only by industry conditions, but also the Texas freeze, which in many cases pushed out our turnaround schedule into the quarter of 2021 and the work we did in connection with the freeze could not make up for the shortfall caused by that freeze. We also had a TRIR or recordable incident rate of under 1 at 0.92, which was exceptional performance and again Shows our focus on safety and well-being throughout the pandemic, but really that's every day at EMCOR because it's one of our core values. These results again show the diversity of EMCOR's business with our ability to pivot to more resilient and stronger markets When some markets like the current downstream refining and petrochemical, oil and gas markets are weakened as a result of reduced demand. As we analyze our Q1 performance, we continue to earn strong operating income margins in our Electrical and Mechanical Construction segments. At 8.8% in our Electrical Construction segment and 7.2% in our Mechanical Construction segment, These operating income margins show that we are earning very good conversion on the work that we win, and we are executing well on our contracts, which are largely fixed price contracts. I intentionally use the word earned in describing these operating income margins. We have tough and demanding customers who drive a very competitive bidding and selection process. The more complex the work, that we compete not only on price but also on capability. We have to invest for productivity, not only through Tools like BIM or building information modeling, prefab, but also better personal protective equipment and hand tools and individual work practices. But we also invest in training and best practice sharing so that we are always learning from each other to employ the best means and method for our work. We also must work collaboratively with our supply chain partners, and that is more important than ever as the economy starts back up to make sure that we have the right products at the right place at the right price across our geography and portfolio of projects. This is especially important on large, complex projects with accelerated time schedules. Our subsidiary and segment leadership teams work hard to perform for our customers every day, and they are among the most skilled teams in our industry. Our U. S. Building Services team had an exceptional quarter, Earning 5.0 percent operating income margins on 10.3 percent revenue growth. We had strong performance from our mechanical services and both our government and commercial site based businesses. We continue to have strong demand for mechanical retrofit projects and IAQ or Indoor Air Quality Solutions. Our site based businesses continue to see increased demand for small project work from our total facility management customers. Our leadership from our subsidiaries to the business units to the segments to keep their employees safe and improve their employees' safety and peace of mind as they return to the workplace in a more significant way, and we do expect that to accelerate in the next few months. Our U. K. Team is performing well and has experienced the same demand drivers and business contacts as our U. S. Building Services team. At 7.4 percent, operating income margins And revenue growth of 4.5 percent without the impact of foreign exchange, we are doing very well. We continue to perform well in serving our customers, which have some of the most complex facility services needs in the U. K. We also continue to execute well on our project work in the U. K. We have a very good team who are laser focused on serving their customers well and have earned their customers' trust. Our Industrial Services segment had a tough quarter as expected. We are in positive EBITDA but were slightly negative on an operating income basis. We have likely made positive operating income in this segment, but for the impact of the Texas freeze, which pushed out the turnaround schedule. We leave the quarter with increased remaining performance obligation or RPOs at 4,770,000,000 up from $4,590,000,000 at year end 2020, an increase from the year ago level of 4,420,000,000 We will discuss our remaining performance obligation trends more later in my remarks. We exit the quarter with balance sheet, and we are putting that balance sheet to work to build our business and to return cash to our shareholders. With my opening complete, I'll now turn it over the conversation to Mark, who will discuss his favorite quarter as he only has to comment on the quarterly performance. Mark? Thank you, Tony, and my voice thanks you as well. Good morning to everyone participating on the call today. For those Accessing this presentation via the webcast, we are now on Slide 7. Over the next several slides, I will augment Tony's opening commentary and review each of our reportable segments' 1st quarter operating performance as well as other key financial data derived from our consolidated financial statements included in both our earnings release announcement and Form 10 Q filed with the Securities and Exchange Commission earlier today. So So let's expand our review of EMCOR's Q1 performance. Consolidated revenues of $2,300,000,000 are up a modest $4,200,000 or 20 basis Over Quarter 1 2020. Our first quarter results include $29,100,000 of revenues attributable to businesses acquired pertaining to the period of time that such businesses were not owned by EMCOR in last year's Q1. Acquisition revenues positively Excluding the impact of businesses acquired, 1st quarter consolidated revenues declined $24,800,000 or 1.1 percent organically. Before reviewing the operating results of our individual reportable segments, I should point out that such results reflect certain reclassifications of prior year amounts due to changes in our internal reporting structure aimed at realigning our service offerings. Most notably, we have transferred our Ardent and Roblei subsidiaries from our United States Electrical Construction segment to our United States Industrial Services segment. With that being said, I will now review the results of each of our reportable segments, starting with our revenue performance during the quarter. With the exception of United States Industrial Services and United States Electrical Construction, all of EMCOR's reportable segments experienced 1st quarter revenue growth. United States Electrical Construction Quarter 1 revenues of $456,200,000 decreased $5,600,000 or 1.2 percent from 2020's comparable quarter. Excluding acquisition revenues of $6,500,000 this segment's revenues declined 2.6% organically as revenue reductions within the manufacturing and transportation market sectors were only partially offset by increased project activities within the commercial and institutional Market Sectors. United States Mechanical Construction Revenues of $903,900,000 increased $69,800,000 or 8.4 percent from quarter 1, 2020. Revenue growth was primarily attributable to increase in commercial, healthcare and transportation market sector activities due to continued strong demand for our services, partially offset by revenue declines within the manufacturing and institutional market sectors. This substantial quarterly revenue growth was despite a reduction in short duration project volumes as a consequence of the continuing impact of the COVID-nineteen pandemic and represents a new first quarter revenue record for this segment. EMCOR's total domestic construction business 1st quarter revenues of $1,360,000,000 increased $64,200,000 or 5% and reflects a strong start to the year. United States Building Services record quarterly revenues of $581,800,000 increased $54,200,000 or 10.3 percent. Excluding acquisition revenue contribution of $22,600,000 This segment's revenues increased to $31,600,000 or 6% organically. Revenue gains within their commercial site based services division Due to an increase in event driven snow removal as well as a resumption in project volume as certain customer facilities begin to reopen for the primary drivers and quarter over quarter revenue improvement. This segment's Mobile Mechanical Services division additionally experienced stronger project and retrofit demand with an emphasis on services aimed at improving indoor air quality. United States Industrial Services Revenues of $235,400,000 decreased $128,500,000 or 35.3 percent as this segment continues to be impacted by the negative macroeconomic conditions and uncertainty within the markets in which it operates. Additionally, and as Tony mentioned, the Industrial Services segment was negatively impacted by normal weather conditions and related power outages within the Gulf Coast region, which resulted in the delay of active projects and the deferral of previously planned maintenance and turnaround activities with certain of their customers. Although we were able to assist some of our customers with emergency repairs resulting from the February storm, this unplanned work was not enough to offset the lost quarterly revenue caused by these deferrals and delays. United Kingdom Building Services segment revenues of $126,700,000 as customers began to release projects which were previously on hold due to the COVID-nineteen. This segment's results additionally benefited by 9 point that became effective on January 1, 2021. Please turn to Slide 8. Selling, general and administrative expenses of 224,100,000 Represent 9.7 percent of 1st quarter revenues and reflect a decrease of $2,900,000 from 2020. SG and A for the Q1 includes approximately $2,400,000 of incremental expenses from businesses acquired, inclusive of intangible asset amortization expense, resulting in an organic quarter over quarter decline in SG and A of $5,400,000 This organic reduction is primarily attributable to lower employment costs as a result of reduced headcount due to various cost control measures enacted during 2020, as well as a period over period decline in travel and entertainment expenses due to a combination of cost avoidance measures as well as restricted company travel protocols. These decreases were partially offset by an increase in incentive compensation expense predominantly within our United States Mechanical Construction segment due to higher projected annual operating results than what was anticipated during the same prior year period. Reported operating income for the quarter of $117,000,000 compares to $106,000,000 in 20 20's Q1 and represents an increase of $11,000,000 or 10.4%. Operating margin of 5.1 percent has expanded by 50 basis points from the prior year's 4.6% operating margin. This performance reflects a new first quarter operating income and operating margin record for EMCOR. Our United States Electrical Construction segment's Operating income of $40,300,000 is consistent with 20 20's quarter 1 performance. Reported operating margin of 8.8% represents a 10 basis point improvement over last year's Q1 as a result of a modest increase in this segment's gross profit margin. 1st quarter operating income of our U. S. Mechanical Construction segment of $65,000,000 increased nearly $20,000,000 from the comparable 2020 period, An operating margin of 7.2 percent represents 180 basis point expansion year over year. This improved performance is primarily due to greater gross profit across most of the market sectors we serve as a result of both the volume increases previously referenced and a slight improvement in revenue mix as compared to the year ago period. This segment's operating margin additionally benefited from a reduction in the ratio of selling, general and administrative expenses to revenues as a result of strong quarterly revenue growth without a commensurate increase in this segment's overhead cost structure. Consistent with the commentary during my revenue discussion, this performance has established a new first quarter record in terms of both operating income and operating margin for United States Mechanical Construction segment. Our total U. S. Construction business is reporting $105,200,000 of operating income and a 7.7 percent operating margin. This performance has improved quarter over quarter by $19,700,000 or 23.1 percent. Operating income for our U. S. Building Services segment of $29,300,000 is an 8,100,000 Our increase from last year's Q1, while operating margin of 5% represents a 100 basis point improvement. An increase in gross profit resulting from greater snow removal activities with customers that are contracted on a per snow event basis within this segment's commercial site based services division and an increase in gross profit from project, building controls and repair activities within the segment's Mobile Mechanical Services division were the primary drivers of the quarterly increase in operating income. In addition, This segment's operating income and operating margin benefited from a reduction in SG and A expenses as compared to the prior year due to the various cost reduction actions instituted Our U. S. Industrial Services segment operating loss of $2,400,000 represents a decline of $17,900,000 when compared to operating income of 15 $400,000 in last year's Q1. The reduction in period over period operating results is due to the previously referenced adverse market conditions, which this segment continues to face as well as the impact of February's extreme winter weather event. In addition, performance of the segment was negatively impacted by lower and labor utilization due to significant reduction in revenues. On a positive note, this segment was able to partially These negative headwinds with a nearly 21% reduction in 1st quarter selling, general and administrative expenses due to certain cost saving and savings initiatives enacted in calendar year 2020. UK Building Services operating income of $9,400,000 or 7.4 percent of revenues represents an improvement of $3,600,000 and 2.30 basis points of operating margin expansion over 20 twenty's Q1. This performance represents an all time quarterly record for operating income and operating margin as we experienced a strong resumption in project work during the quarter as the United Kingdom market approaches the hopeful conclusion of the COVID-nineteen lockdown mandates. Additionally, operating income for the quarter benefited from approximately $800,000 of favorable foreign exchange rate movement. We are now on Slide 9. Additional financial items of significance for the quarter not addressed on my previous slides are as follows. Quarter 1 gross profit of 300 $41,100,000 represents 14.8 percent of revenues, which has improved from the comparable 2020 quarter by $8,000,000 30 basis points of gross margin. Both our gross profit and gross profit margin represent new first quarter records for EMCOR, despite the significant headwinds we continue to experience within our United States Industrial Services segment. Diluted earnings per common share in the Q1 is $1.54 as compared to $1.35 per diluted share for the prior year period. This 0 point Improvement establishes a new quarter one record for the company and also ties our all time quarterly diluted earnings per share record, which we previously achieved in quarter 4 of 2019. We are now on Slide 10. As evident from Slide 10, EMCOR's liquidity profile remains strong. Cash on hand is down from year end 2020, primarily as a result of cash used in operations due to the funding of 2020's company wide incentive compensation awards as well as the funding of our United Kingdom subsidiary's VAT deferral from the prior year. Additionally, we repurchased $13,000,000 of our common stock pursuant to our share repurchase program and utilized nearly 30 $2,000,000 of cash and investing activities, including $24,000,000 to fund the 2 acquisitions that we completed during the Q1 of this year. Working capital levels have increased modestly, primarily due to a reduction in our current liabilities given a decrease in accounts payable as well as a reduction in accrued payroll and benefits due to the previously mentioned funding of prior year incentive awards. The increase in goodwill is a result of the businesses acquired our United States Electrical and United States Mechanical Construction segments. Net identifiable intangible assets have decreased as a result of of approximately $15,000,000 of intangible asset amortization expense, partially offset by the impact of additional intangible assets recognized in connection with the previously referenced 2021 acquisitions. Total debt exclusive of operating lease liabilities is virtually unchanged since year end 2020. As a result of our consistent outstanding borrowings and the growth in stockholders' equity due to our net income for the quarter, EMCOR's debt to capitalization ratio has reduced to 11.5%. Our balance sheet remains pristine and in conjunction with our available credit allows us to invest in our business, return capital to shareholders and execute against our strategic objectives as we navigate through ever changing market conditions. With my portion of the slide presentation completed, I would like to return the call to Tony. It's all yours, Tony. Thanks, Mark. And just for everybody's dedication You're in call. I did turn my mic on in time. I'm going to be on Page 11, remaining performance obligations by segment and market sector. I'd sum it up in a lot of ways. In 2020, we had a lot of COVID disruption here in this quarter, the Q1 going into the second. We have a little bit of that left, but for the most part, Q1 2021, the demand environment and the project bidding for construction and service projects We're continuing to be active. As I mentioned earlier, total remaining performance obligations or RPOs at the end of the Q1 were just under 4 $800,000,000 up $351,000,000 or 7.9 percent when compared to the year ago level of 4,400,000,000 And RPO has increased $181,000,000 for the 1st 3 months of the year from the year end level of $4,600,000,000 Our domestic construction segments experienced strong project growth in the quarter with the RPOs increasing $219,000,000 or 6.1 percent since the year ago period of March 31, 2020. All but $15,000,000 of that is organic growth. The $15,000,000 belongs to a Chicago based electrical contractor that really focuses on infrastructure that joined us in February. Building Services segment RPOs increased in the quarter 121,000,000 or 22% from the year ago quarter, a portion of which was the August 2020 acquisition of a Washington, D. C. Full service mechanical contractor. However, more representative of what we are now experiencing in this segment, RPOs grew $60,000,000 or up 10% from December 31, all of that is organic growth. And to paraphrase what I said in February, This work is both a resumption of regularly scheduled mechanical systems maintenance. So we're maintaining systems that have been running full out Small project work as a result is coming back in. And then there's a modifications and improvements around that on efficiency and indoor air quality. If you go to the right side of that page by market sector, clearly, our largest sector for RPOs continues to be commercial projects. And we're continuing to see strength, and I'll talk about this on the next page, and the resilient sectors that we've highlighted such as data center And I call it supply chains, build out for e commerce delivery and fulfillment. Those that commercial segment, which also includes The retrofit activity and newbuild is 44% of total RPOs. For the year over year and quarter over quarter comparison, commercial RPOs increased $314,000,000 $216,000,000 respectively. The rest of this sector is pretty much netted as in and outs as project activity increased a little in some sectors and decreased a little in others. That's really just the normal ebb and flow of project activity. In general, project interest is favorable in most all sectors, with the exception of hospitality that continues to be challenged. As an indication of future market activity, The March ABI came out a week or so ago. And while I think this is a soft index always, it's worked on a board survey from It's self reported numbers, but it's been the same forever. So you say, okay, if it's consistently that way, then you can start to draw trends off of it. It jumped over 50, which is expansion territory in February and was over 55 in March. And one of the analysts noted The regional scores for the most part were in positive territory and the general outlook was upbeat. Now that's clearly True from a year ago period. Correspondingly, the March Dodge Momentum Index, which is an index of non residential building projects in planning, also posted a pair of strong gauge in February March. It's up low double digits at 11% from a year ago period, Pretty much right before the full impact of the pandemic. Look, I think it's important for me to just take a step back here. Q1 of last year was a good quarter. And until the pandemic came, it was probably one of the best economies that in my business career I've ever operated in. So that's the compare that a lot of these numbers are coming off of. So it's important to know that. And both of these leading indicators are indicators of potential future activity. They're moving in tandem, which is what we like to see. And we do a whole bunch of other analysis, and I'll talk about that later of what we're going to what we believe could happen to non res this year. I'm now going to jump to Page 12, and I'm going to give you a little updated commentary on these resilient sectors that we talk about. If If you look at the first two, I like to think about that as the build out of our data infrastructure and our supply chain infrastructure. That's still very strong. It's concentrated in about on the data center side, 5 or 60 graphic areas. We're in 60%, 70% of those areas now, either electrically or mechanically. We continue to build our data center maintenance business. And on the warehousing side, these are the big 1,000,000 square foot plus warehouses. For the most part, this is a life safety play for us on the fire protection side. I would argue we are the best in the business at it. Not only are we providing a great solution, we do it cost effectively and we do it time efficiently, and We got some of the best prefab capability in the industry. We're also doing targeted electrical work depending on the region of the country on these warehouses. Industrial manufacturing, it's down a little bit for us right now, but that's really driven by food process, which We have a pretty good pipeline of potential opportunities, but we're actually very bullish on manufacturing because of where we play. We do see supply chain reshoring back to the Southeast. That could be either out of Asia, most notably China or Mexico. As people look for redundant supply, I don't think we want to go people on our high margin projects want to be caught in a situation like they were at the beginning of the pandemic I do think we're in a decoupling mode versus China as far as supply to the U. S. I think the other part is we are in some good secular markets that we expect to continue, most notably semiconductors. We are very strong in some of the key markets, whether they be Arizona, which was where we're very strong mechanically. We have a terrific team in Arizona that does this work superbly. This is very difficult work and very complex. And the team we have in Arizona that executes is the best in the business. We also have electrical capability in Utah, which is Salt Lake City area, which is another one of the semiconductor hubs. And we also have electrical capability in the Pacific Northwest, most notably the Portland area, which is also subconductor hub. These are the 3 major hubs. We have capability in each and we have great relationships with both our general contractor customers and structure management customers as well as the OEMs and end users. Healthcare, we continue to see strength. We've made the right acquisitions. You look at the work we'll be doing down in the Georgia market with BKI. You look at the work we'll do in the Houston market with Cowen. You look at the work we'll do continue to do in the Midwest with a shambaugh and a combination of companies and you look at the work we'll continue to do in California. The healthcare market continues to be very strong for us. And I just gave you a couple of markets. We really do this work, broadly speaking, across the country. And we do it both in a retrofit basis, which we expect more and more mechanical and electrical retrofits, and we also see new build coming back in healthcare. Again, this is both a construction opportunity for us and a maintenance opportunity for us. I think one thing people appreciated when they were an EMCOR customer through the pandemic is we can help them make their facilities more flexible when they needed to, to handle patient surges or different kinds of health care they needed to deliver. Water and wastewater Continues to be a good market for us, especially in Florida. These projects can be lumpy in how they get delivered. We got one of the best teams in the industry down in Florida. We're very proud of them. Get to the last 2 mechanical services and indoor air quality, we're the best in the business at this. The OEMs develop solutions, but they need a company like EMCOR to be able to deliver those solutions. And we deliver these solutions as good or better, And I would say better on a consistent basis than anybody in the industry. That's both mechanical services to fix things And our air quality as their whole well building concept becomes more prevalent. And then finally, on efficiency, and we've been the best efficiency people for a long, long time. I would add another sector that sort of overlays this. We will participate in any energy transition. People ask us about that. And clearly, when you have the best pipe fitters and electricians in the business and the people that know how to supervise them, You're going to be part of that. We already are part of it on small scale solar in a more significant way out in California. And the way I think about small scale solar The way I thought about distributed generation and cogeneration, that's really what it is, 20 megawatts or less. As you get to the bigger things, we are building capability, especially in Texas right now. We'll see how that goes. I think it's going to go well, and we'll continue to build that capability. And anything that the refiners do along the line of carbon capture, it's pipe. And I'm very happy that Exxon and people like Valero are talking more about renewables, renewable diesel and carbon capture. We'll be there to help them do that. So we feel good about these resilient markets. We don't chase fads at EMCOR. We build capability and we execute and we can pivot around these markets And we've done that over a long period of time. I'm going to finish now on Page 13 and 14. As we entered 2021, Let's think about what the context of it was. Vaccinations were just starting to get rolled out. We were in a world of COVID surges in parts of the country. And as February started to come, we gave guidance, but that was our backdrop. But we continue to perform. Our folks are resilient, and they're really good at what they do. In that initial guidance we gave you about 7, 8 weeks ago, we expected to earn $6.20 to $6.70 and earnings per diluted share. And if you look at that midpoint, that would be another record year, Mark, after how many? 7? So pretty good. And we expected to do that on $9,200,000,000 to $9,400,000,000 in revenue. And so we clearly thought The revenue was going to accelerate as the year went on. And think about the tough compare we're having here in the Q1 with industrial. Up until the 3rd week of March of last year, Industrial was having a very good Q1. So We went back, we thought about it, and we said, okay, we had a better Q1 than we expected. And so with that, we're going to raise the low end of our guidance range to $6.35 That's a $0.15 movement from the $6.20 And we're going to take the top end of the range up about a $0.01 or $6.75 per diluted share. We're going to keep revenue guidance where it is, and we'll certainly know more about that when we get out of the Q2. And as we said in February 2021, we did expect 2021 to be another year of outstanding performance. Yes, but let's think about this. We have to execute every day. We're doing this across 4,000 projects of size of 250,000 or more. But If you added up all our projects, we're doing this now over about 12,000 projects and service events. And if you take service calls, it's multiples of that. And we have to do that against the backdrop of record operating income margins in our Electrical and Mechanical Construction segments in 2020. We do expect those increased revenues to help us mitigate some of that challenge. So when we gave you our guidance, we laid out some And what I'm going to do now is talk about what that assumption was and what the update on that assumption is now 8 weeks later with Q1 in the books. So the first assumption was our Industrial Services segment, as many of you know, primarily serve the downstream Petrochemical and Refining Markets. We didn't think it would materially improve until the Q4 and that it would gain momentum going into 2022 as demand for refined products will continue to be challenged early in 2021, especially through the end of the second quarter. Demand is picking up. So let's talk about what that view is now. We still believe as far as Performance in the segment, that's an accurate view of the market. Some trends are clearly positive now. Crack spreads are very good and high teens. The The renewable diesel market is a market we're helping our customers get ready for and serve through upgrades and adaptation of their facilities. And refinery utilization has moved into the low 80s, trending through the mid-80s. We fully expect that to be in the high 80s by early June. It's going to be driven by really aviation fuel at this point. So we had an assumption at the beginning of the year also that the nonresidential market would decline modestly. What do we think now? We think that market potentially could be flat for the year, and the second quarter trends will provide more insight as we may see Accelerating demand through the year. This market now could have either breakeven performance or modest growth in 2021. We also said that we would continue to execute well in our more resilient market sectors. 10Q include manufacturing, commercial driven by data center and logistics warehousing, water and wastewater and all the things I just mentioned on the previous page. We still think that's true and even more true today. And we do expect as the year go on that manufacturing gained strength, and we'll see it first in our backlog. We did talk about the COVID environment. We did not expect a more restrictive COVID environment than what we were operating in as we gave guidance in February. We did expect a more normal operating environment as the year progressed. We talked about that we were operating near 100% capability. We don't use the word capacity because we always look we can add tradespeople. We've learned how to work under these COVID precautions. It does require a lot more planning, and we have to be much more precise in our execution. You know what, that's sort of how we operate anyway. And it's nothing new for us to keep our employees' safety first. It's one of our core values. And quite frankly, People would not want to work for us if it was not. So what's my updated view on that? I believe that as we enter Q3 move through Q3 into Q4, more of our job sites will start to be look more normal and conditions in most of the states that we operate in because we continue to see positive trends in those states. And we will see that in the U. K. Too. I mean, we just talked to our U. K. Folks this morning. 38,000,000 out of 68,000,000 66,000,000 people in the UK this morning were operating in parts of the country that had 0 COVID cases yesterday reported. I think that might happen here as our vaccinations continue to pick up. We do expect we said we expect to continue to help our customers with IAQ energy EMCOR Group. J. Rice:] Replacement projects, optimizing their systems and helping bring their employees back to work. I would say that's going as expected. So So you say, how do we go from where we are with the low end of the range, the midpoint of the range to the top end of the range? I'd say that each one of those trends or mix of those trends get better. So maybe the non res market is better than we thought it was, especially for projects that can be completed in the year. And that's especially true as things normalize and work normalizes and people start to spend more capital. Our refining and petrochemical customers begin to gain more comfort with improved demand for refined products. And they say, look, Instead of trying to bunch all that work into 2022, we start to pull some of that work forward into 2021. That would be a logical thing to do. They do worry about manpower in when they have a bunch of work scheduled. We may be able to have some of those discussions. Momentum in IAQ and efficiency accelerates. That could happen, especially on the efficiency side as folks realize that all the investment in IAQ actually hurts efficiency and their customers will be demanding them to make their facilities more efficient. And look, we got to keep our productivity strong As we transition, we want to keep some of those gains we've made with scheduling. We want to keep the emphasis we've had on prefab even on smaller jobs as we transition. I think I sort of know we will, but we have to keep that 1st and foremost in our minds. And of course, we're not going to open the floodgates on travel. Mark talked a little bit about the organic SG and A. That's more positive than you think it is because he had a sentence in there that was pretty key. Think about the outlook we were taking on incentive compensation last year versus this year. We told you we expected to have organic reduction of around $15,000,000 $20,000,000 We're at the high end of that right now on a run rate basis. And if we have increased incentive long term, that's a good thing in our field operations because that means we're doing better. The other thing that I know you'll ask about and I'll just get in front of it now a little bit is on stimulus. The thing that will impact us this year, the government spending that will impact us this year is all related to these COVID emergency packages. We will benefit from that because of the money that went to the states and municipalities to make their budgets More flushed, allow them to complete some of their smaller capital projects and get some of their transit systems moving again. It will help them think through that and start that. We'll also benefit from some of the spending that's going to go on institutions and schools. Again, go back to this IAQ, efficiency and building wellness theme. We're seeing that already. That's what will impact 2021. If this larger infrastructure package of about 50% of the money, give or take, are stuff we could participate in or projects we could potentially participate in. That for the most part is a late 2022, early 2023, likely late 2023, early 2024 event for us. You think about everything that has to happen with a project to get it going. And I think let's all recall late 2008, early 2009, For large scale infrastructure projects, yes, there's concepts that people want to execute. People don't do detailed design on concept. And so as we learned back then, there's no such thing as a shovel ready project. There isn't here either. But one of the things that could be quicker is if we get energy efficiency dollars right and figure out how to flow that out, which in my mind would be through the utilities and their programs. The other thing you'll ask about is labor. Look, we're sort of at the top end of that food chain. That's not something that we've had issues with. I do think I'm glad I'm not a painter or a roofer or a cleaner right now because there is headwinds About hiring labor at the low end, especially with the enhanced employment benefit unemployment benefit. It requires us to also on the factory side, We're lucky to be who we are, because we can, like I said earlier, work closely with our supply chain partners I work real hard to mitigate the impact because they're also having difficulty ramping up. And you probably heard that on all the calls with the manufacturers. I'm sure you did. When we get to capital allocation, we had a lot of detail on that in our year end discussions. Our guidance contemplate that we will continue to be disciplined capital allocators, and we'll do that between organic growth, which we love to fund, acquisitions, share repurchases and dividends. We're on track to meeting towards meeting that goal this year. This year, we've already done 3 acquisitions. We have a very good pipeline. Those may be moving a little slower as we try to Understand the impact of pandemic on operations, but we'll get through that and we feel very good about our pipeline right now. And with that, Lara, I'll take questions. Thank you for your interest in EMCOR and we'll turn the call over to you. Thank you, sir. Your first question will come from the line of Brent Thielman from D. A. Davidson. Your line is now live, sir. Go ahead please. Great. Thank you. Good morning. Good morning, Brett. Hey, Tony, wanted to touch on something you mentioned in your closing remarks They're just about sort of maybe a return in the job sites back to what it once was Pre COVID in terms of processes and how things go on the job site. Do you think that helps the margins even more from here? Or how do we think about So the financial implications of that down the road. Yes. I think it's way too early for us to think it could help the margins. We're pretty Happy where our margins are right now. But it will be interesting, the push and pull of Yes. Will we be able to keep some of this enhanced scheduling? Some cases, we will. Some cases, we won't. Will we be able to work swing shifts without a lot of pay differential? I think some of our folks have started to like that because they like not being on a crowded job site. They like being more productive. And then they can put pressure back on their The union and others help us do that. So I think it's too early to tell. I think there are some hardwired things that we'll benefit from. Our folks have gotten better and better at planning, just the things we control. And they've gotten better and better even on the smaller jobs of using prefabrication and trying to get the work off the site. So hopefully, we can keep productivity where it is. That's our plan. And maybe we can pick up a little bit. Okay. And then also came up in your opening commentary, but We also obviously hear about supply chain disruptions here and there in the market. Maybe anything in particular that you're running into that you've really had to work hard through, It'd be Jason about that. Nothing has risen to the level where people are calling me to reach out to the CEO of a distributor, Which I've done in the past, or a CEO of an OEM. So that means we're relatively getting through our normal mechanisms, what we need to stay productive on a job. I'm not sure that's true for everybody, but you think about who EMCOR is in a local market. Yes. We're known as being a very fair partner to deal with. We pay people. We pay them on time. We We work with them and do a lot of pre planning, especially on large jobs. We're innovative. We think about ways to have our suppliers help us to the point we Work a lot on inventory management together. We try not to have them be surprised. And then of course, we have big relationships. And we also tend to be pragmatic business people. Sometimes we don't go for the last dollar on a negotiation because assurance of When your workforce is as expensive as ours, it's way more important than the extra nickel on a roll of wire or a line of a foot of pipe. Okay. Appreciate that. Maybe my last question, Tony, is just understanding the indoor air quality opportunity. It's obviously something that comes up with investors a lot. Is that something that's meaningfully impacting the RPOs today? Or is it, I mean, obviously, still best yet to come there? I'm going to ask Mark to help me with this, but the reality is it will probably never meaningfully affect the RPOs. What it does is meaningfully affect Growth in a quarter in building services because most of this is work. RPOs for us for the most part, It's projects that stick around through a quarter. This work tends to be in and out and tends to be smaller ticket items. Yes. So Brian, just to amplify Tony's commentary. This stuff is fairly quick turn. So we're getting the award and we're executing the work within the construct of a quarter. So you're not going to can actually see it hit the RPO number disclosed at the end of quarter. And what's actually hitting there relative to the huge amount Of RPO that EMCOR has as a consolidated enterprise, this is not meaningful. And Brett, we don't talk a lot about this, I got to give our folks a lot of credit on this one. Back last year, 4 weeks before we're sitting here today, as early as March 30 last year, we were gearing up to be able to deliver these solutions. We had all the relationships. This was part of our arsenal of things we would deliver to a customer. But some of this was these tools Because it hurts efficiency, people weren't that excited about. I got to give a lot of credit to Mike Bordes and his team. They took advantage of the downtime with a lot of our technicians and they took advantage with our salespeople and our service supervisors and our small project managers. And we did a ton of training from about March 25 last year until June 1 when we could really go back out and offer these solutions. And you had to have all the OEM relationships in place. You had to have all the supply chain in place. We also had to have the front end trained so people could go and implement. And so we were thinking about this, I'm venturing to say long before other people to be able to deliver and we were proactive with our customers and not reactive. Great. Thank you guys for taking the questions. Thank you, sir. Your next Question will come from the line of Adam Thalhimer from Thompson Davis. Your line is now live. Go ahead please. Hey, good morning guys. Congrats on the great start to the year. Thank you. Can you help us with moving Ardent into industrial? How much revenue shifts? Mark will take that. With regards to the quarter or are you looking at the full year? Full year. Full year 2020 or full year 2021? Well, I need 2021. If you give me 2020, I think that will help. I'm not going to give you 2021, so I'll give you 2020. So it's roughly 100%. You offered. You offered. I want to make sure I'm being responsive to your I just want to make sure you're on your toes, Adam. Okay. So full year 2020, it's 143,000,000 That's going to move out of electrical construction into industrial. Perfect. Okay. And then the UK and Mark, you mentioned there was a currency benefit there, but had a great quarter. I'm just curious how sustainable. Look, like we always say and probably Much to ad nauseam for all of you. These aren't quarter to quarter businesses. But for those that have been with us a long time that we're consistently operating in the UK north 5%, now 3 years in a row. It might be 7% 1 quarter, it might be 4.9% 1 quarter. But If we can keep that between the goalpost of 5% to 6% on an annual basis, we're doing pretty well. And what really drove it was the project mix. And if that continues and again, this is not pricing. This is execution and this is really, really good work. Okay. And then on the last one, the margin was really good at mechanical. You talked about some food processing jobs. Are those jobs done? Are those going to keep burning this year? Look, we always have some food processing work, but the large project work The large project we were doing is pretty much through commissioning now. We have other things on the boards and the way this works is, You have a lot of contingencies, you have really complex projects on commissioning. And so we're starting to move through some of those contingencies. But let's be clear, That's not what the only thing that drove that performance. This was across a lot of work, a lot of projects. Mark also made a comment that Unless you're really listening, you might have not picked up on. We had those that increased revenue with very little increased cost. And so at the end of the day, we're getting good fall through because again, go to the productivity point. We're probably benefiting more from productivity in our Mechanical segment because of what they're doing on prefab and planning than in any part of EMCOR, especially in our We like to call them the power companies. What I mean by that is these are large subsidiaries. They really have got this down right now. And then Joe Burns and his team are probably as good as anybody at taking those means and methods and spreading them through the company where applicable. Okay. I'll go ahead and turn it over. Ramp up those buybacks, guys. Thank you, Vincent. I'll tell you really Phil Adam. Thank you. Your next question will come from the line of Noelle Dilts from Stifel. Your line is now live. Go ahead please. Good morning, Noelle. How are you? Hi, doing well. How are you? Good. Great. So you talked about supply chains a bit, But I was curious if you could just speak to we've obviously seen a lot of inflation in raw material costs and steel. I understand most of your Costs are made of labor, but how are you consists of labor, but how are you thinking about or watching some of those the raw material increases and if there may be more of an indirect impact on your business. Thanks. Look, if not handled correctly, within a quarter or 2, there could be a direct impact. We again go back to the supply chain discussion I had. We work really hard on large projects to try to lock in the best we can the prices, especially on the major components, Skier, chillers, air handlers, all that typically gets locked in. And we're not speculators in that. We make our price. We figure it out, and that's what we go with. We also don't run so when we talk about being fair, right, typically our guys don't run back if the price moves down to those suppliers and say, okay, now I need a reduction. We made our deal. And of course, now in a more commodity inflationary times, they realize that. The other thing is most of our work It's getting repriced, in one sense, is a small project work, the stuff that's less than a couple of million all the time. What I mean by that is we're doing new work, right? So therefore, we reprice Again, we were talking about this, Mark and I, as this round of commodity inflation would be for him and I probably about the 7th time we've seen Anytime together? Together. Yes, together. We've seen it more than that, but together, we've seen it. Many years ago, I was on the other side of this trying to ramp through price increases. We really have not been stung bad by this at your time. We know the copper game. Our electrical CEOs are as good as an estimator as good as anybody in the business as are mechanical guys. I'll make I'll go out on a limb here. I might end up being wrong. I doubt it on this one. Steel prices will come down because capacity will come back online. Steel guys typically can't help themselves. We will not be 3 times what we were Before this pandemic, flat coal gold as we are today, that won't be the case. And our guys also we internally Have a very good team that makes sure that our folks know the trends and commodities are coming. You say, okay, how does a company like EMCOR get that? It's not like we have a Group of economists, best I got is Kevin and someone that works for him. So I mean, these are not folks who spend their time analyzing. How we get good at it is we have great relationships with our distributor partners, and they try to keep us in front of what they're seeing on the things they're buying. And again, all the people always say, what's the benefits of scale? That information, that knowledge is a huge benefit of scale. And then finally, I'd offer, Noah, just to sort of Break out for you that how where we really are. If you take the mechanical business, 45%, 55% of a job can be materials and equipment depending on whether we buy it or the customer does of some of the big systems. And on the electrical side, that's closer to 35% to 45% of materials and the balance is labor. That's for the mechanical and electrical segments. You get to building services, little less because of the time and material nature of repair service and the labor based component of our repair projects and our service agreements and our site based business. Mechanical Service Business, give or take, is about fifty-fifty equipment to labor. And as you go to Industrial Services, It's eighty-ten, eighty-twenty, I mean. And the only thing reason it gets to 20 on materials is the work we do on the shop. And remember, most of our materials in the shop are customer provided on the big stuff. They're buying the tubes and stuff. So our exposure on materials are really in the electrical and mechanical segments, and our guys keep in front of that pretty good. And if we have a blip or exposed, it's very short. Mark, do you have anything to add to? No. Tony, you pretty much caught that. Noelle, I think just to echo Tony's point, and I think Because we're such a large customer for the wholesalers that we're sourcing from And we're consistent with how we're procuring our materials. We have it's very rare that people do not honor the pricing once We got it. And we obviously strive to get price quotes as close as possible, from where we're going to mobilize on work. So we try to minimize the window of time That we would be exposed to any of that commodity inflationary pressure. But as Tony said, if we do get stung, Yes, it would be isolated instances and it would only impact Quarter, and it will not prolong itself through the remainder of the year. Okay. Okay, that's really helpful. Thank you. I guess just shifting over kind of circling back to the infrastructure bill. Clearly, both the Democratic proposal and the Republican proposal, counter proposal are talking about really big numbers. Really, we're talking about massive increases in the market. How are you guys thinking about The industry capacity to support more work coming in, whether In terms of labor, do you think you'd be able to kind of find the right folks to ramp up relatively quickly as some of that funding comes in? Thanks. I mean, the answer to the EMCOR specific is on the projects that EMCOR will bid, on the projects that EMCOR will win, And that will be an increase to what we're doing today, which is we think again, go back to what I said, even without this infrastructure bill, We expect non res maybe have a growth year versus what wasn't expected down the year this year. EMCOR won't Unless we have the capacity to do it. And we believe we will have the capacity to grow if that infrastructure bill comes into the market. It will be a meaningful part of the industry and they'll cause the industry to grow, and we typically outgrow the industry. 2nd to that, will the industry be able to absorb it? I think the answer to that is yes. I think we're like the industry always struggles at the low end. Somehow, we'll find a way to get through that. Where we're at, again, I always use this example. I can't worry about what all my competitors do, but I'll tell you how we think about it. We think we're a destination of choice for trade labor. And why is that? Go back to that discussion we had on safety. It's a core value. We give people the right equipment. They know that that's fundamental to who we are. The second thing is they know they're going to have confidence supervision. And that's all the way up, right? These 3 people I'm sitting around the table with today, including 4 with me. We all have deep, deep respect and have a pretty good knowledge of the challenges Skilled trade labor focus have to do an execution of their job. It gets better as you go down because Now you're getting more technical and they're led by people that know how to help them do their job. It's really important. The third thing is they know they're going to get paid. That sounds simple, But you work for a smaller contractor. That may or may not happen in a given week. And the 4th thing is if they do a good job for us, Really, there's only 2 or 3 places in the country where the union says, hey, you need to take these people or you need to rotate these people up. We pick our workforce. We have rights over that, and they know that they could become part of our, quote, permanent workforce and always have a job. You put those and with EMCOR's leadership position in most markets, you put those four things together. I don't think we'll have trouble Finding that labor, but others might. And but that's no different than any other more upmarket that we're in. I will say, one One of the things that would be helpful, and I actually think it will be one of the positives, right, is the labor department is actually being run by somebody right now that really understands skilled labor training, and we'll see if he can make that successful. Okay, great. And I guess last question for me, the shorter one. You mentioned that the pandemic has slowed, deals flow a bit. But could you just speak to what you're kind of seeing in terms of pricing or multiple trends, given that there is now, I think, more incremental optimism around non resi and infrastructure. I mean, look, There might multiples might drift up at the half a turn or turn, but so is ours, right, even more than that. And so We'll still have the same disciplined process we always have. And we could show you a slide. You'd go, wow, you actually guys see all those deals. It starts with 200, and then it goes to 50 and then it goes to 20 and then it goes to 5 and we may close 3, right? But at the end of the day, I'm not looking at 200. We have folks that look at books maybe or reach out to owners or owners call us. We have a pretty good idea of the kind of companies we want to buy and who they are. We We work with them over a long period of time. Where we're best is when someone's selling their life's work or their family's life's work and they still want to be part of the solution going forward. We're not looking to make the best financial deal. What I mean by that is we're not bargain just like I talked about how we're fair with our suppliers. We look to be fair with the people selling us their business. They're going to be our partners going forward. Secondarily, we want to make sure that we both buy into the business case and what it looks like go forward. So private if it's a big auction run by some of the notorious banks that are going to do narrow and narrow to them means 150 people looking at it, We're probably not going to be successful. And in fact, I don't really make sure we look at much of that anymore. A lot of times, people will hire intermediary, but their intermediary is hired to get to us and to put structure around the process and a lot of times we're at the top of that list. And like I said, we try to be very fair on terms and conditions, and we try to be very fair on price that works for both of us. And you think about what we've done and you say, wow, didn't know you did that. We've done 5 deals since May of last year through a pandemic. No, none of them have been. I think we've been pretty good though. And we see nothing that will abate us from doing that or more and there might be even Larger ones coming in there, which means bigger contractors that we know for a very long period of time and they have terrific reputations. And We got just sort of delayed a little bit with the pandemic. Okay. Mark or Kevin? Thank you. Mark, you have any to add? Anything else? Laura? Yes. Thank you, sir. We have last question coming from Mr. Sean Minh from KeyBanc Capital. Your line is now live. Go ahead, please. Hi, team. Nice quarter. It's got to be a relief to Comp earnings up mid teens on that Q1. So that's excellent. I'm just trying to think through the kind of make sense of the earnings outlook for the balance of the year. So after this 1st quarter, I mean, at the midpoint of the full year guidance, it implies lower earnings year over year for 2Q, 3Q, 4Q. And I'm just trying to think through where you guys are What you guys are kind of building in there in a sense, right? Because on one hand, we have revenues that will be up High single digits, industrial services should be a good guy year over year. But then on the other hand, we're comping some pretty tough Construction Segment Margins. So maybe you could just walk me through those moving parts. Am I thinking about that right? I'm just wondering why it makes sense for earnings to be not up over the balance of the year. Yes, Sean. So let's look macro level first. I've been doing this a long time, as has Mark with me. We really tried real hard to think of other than 20 19. 19. Right. And maybe there's one other time. Maybe it was coming from 10 to 11. We couldn't remember. Where we ever even moved guidance in the Q1. Yes. So start there. The operator. Got you. Okay. The second thing is you're talking very slight moves in margins that portray the scenario that you're portraying. So we're not that precise at this time of the year. We'll know a lot more at the end of Q2, right, Mark? But we're we think we have good guidance right now. And I think we're still trying to work our way around Industrial Services. I mean, we gave up $15,000,000 in the Q1 year over year in industrial services. Almost 18. Yes, and down 35% on revenues. So we're not ready to declare victory on that comp yet. Mark, you have anything to add? Yes. And I think just going to the industrial point, Sean, We're hopeful that it's going to be, as you say, a good guide to 2020, but we still have 3 quarters of As you get through with the customer base that if anything is demonstrated, that they are reactionary to external factors more than any other customer base that we deal with. So you would like to think, presuming that we have normal weather patterns, we don't have a hurricane season of no And anything else we could possibly think of, that you would see resumption in demand. But I think Tony has been very clear on this call today and he certainly was very clear in the February call that we're optimistic that we'll see strengthening in performance in the Q4 of 2021, building strength into 2022. And any one or two decisions could easily swing that all into 2022 or conversely back into 2021, and we just don't have the visibility to that yet. So and I think the other parts of our business are performing atornearalltimehistoricalhighs, both from margin contribution perspective at fairly high levels of volumes. And that's baked into the guidance. But I think once again, when we spoke externally in February, we were anticipating that we were going to see Some small element of margin degradation in our electrical and mechanical construction businesses. Clearly, we didn't see In the Q1, but unfortunately, 1 quarter does not make a full year. And we're going to endeavor to do whatever we can to maintain or improve those margins. But as we sit here today, it's just too early to predict that we're going to be successful on that front. Yes. And We operate off of what we know. And I think collectively, we're fairly optimistic right now. But we've been doing this a long time and we're in the Q1. Yes. No, that's fair. That's helpful. I really appreciate it, guys. I'm going to jump over and talk to Brian Lane now. Yes, tell him hi. Take care. I think that's it. And Laura, is that it? Yes, that would be for our last question. Okay. Thank you all very much. Appreciate it. We'll be back to talk to you in July. Bye. Thank you, sir. Thank you so much, presenters. And again, thank you everyone for participating. This concludes today's conference. You may now disconnect. Stay safe and have a lovely day.