All right, let's do it. Sorry that the room's a little tight here, but I guess this is what they'd call a good problem to have, at least from the management team's standpoint. I'm Andy Whitman. I'm the senior research analyst that covers industrial services here at Baird. Really glad to be joined in this session by EMCOR. Tony Guzzi is the company's CEO, and Jason Nalbandian is the company's CFO. Andy Backman from Investor Relations is also here. And we've got the next half an hour to learn more about EMCOR. Tony, I'm going to turn the floor to you, but I think you mentioned that you might have a quick video here.
Yeah, Andy.
So why don't we, we'll give it to Andy, and we'll do the video, and then we'll have a chat.
Whiz bang.
Love it.
Guys, it gets stuff done.
Hard work people do to make the world work every day.
So all you can do, your job.
That's right.
So, Tony, why don't you talk a little bit more, put some color around the company, who you are, what you've been up to, and we'll go from there.
Yeah, I mean, EMCOR, at its simplest form, you saw it in the video. It's a company that people do real work every day. And I don't mean that as a slight on anything else, but work their hands, highly skilled craft labor. In the end, we're a company of plumbers, pipe fitters, electricians, welders, HVAC technicians, millwrights, and the people that supervise them, train them, and do the basic application engineering to make things possible, to get jobs done. If you think of a building or a data center or a semiconductor plant, EMCOR is the things you don't see a lot of times. It's all the piping and electrical systems and air conditioning systems and AV systems and all the things that you use last night in your hotel. We make that possible.
And we have about 43,000 people today, and about 27,000 of those people every day work with their hands and build things, service things, and commission work. You know, the good news about EMCOR, if you think about it today, we are exposed to some of the fastest growing markets in the country and have been for a long time. So data centers is a big part of what we do. I mean, it's not an overwhelming part of what we do, but it's been part of our growth story. We've been building data centers at EMCOR since 2001. And so we have long and deep expertise. And we had that in a couple of critical markets, right? And now we've expanded that from 2019 to three and a half times as many markets that we service those data center clients.
And that was either done through organic growth, it was done through training our people in new markets, or it was done through acquisition and then building the capability in that acquired company. If you look at reshoring, nearshoring, which semiconductors is just a piece of, right? It's bringing back high-tech industries for the most part back into the country, a lot of automation and other things. And we are positioned to help enable that trend. Again, we've been doing semiconductor work. I've been in EMCOR since 2004. Our work in semiconductors and a couple of key markets predates me. If you think about just healthcare in general, we have major hospital systems, right? We have an aging hospital fleet. We certainly saw that in 2020.
And we are one of the most significant MEP, mechanical, electrical, plumbing, and you could put fire, life, safety in there contractors and helping reimagine and redesign healthcare systems to make them more flexible, in major hospital centers. And if you think about what's going on in the energy efficiency, right? Energy is becoming more scarce and more expensive. Energy efficiency and upgrading buildings has been a theme as long as I've been in. I used to work for one of the air conditioning OEMs many years ago. And that theme has been alive for a long time. EMCOR is the people who actually get it done. We have a lot of energy engineers. We have a lot of PEs that help us design the built space and help bring energy efficiency to it.
That is an ongoing trend, but it's probably got a little more growth to it today. Why? People have their decarbonization goals, but it's also met with more expensive energy than ever in a lot of places. Then you finally get to the whole theme around skilled labor and trade labor. Look, I'm privileged to wake up every morning and work with some of the smartest people I think in the world.
Our tradespeople and the people that run our subsidiary companies, a lot of them came from either project management, project engineering, or the trades, are some of the most intuitive problem solvers I've ever been around. And so to be able to be part of something like that and to watch it grow and develop over a long period of time, I think they're having their day right now, and I couldn't be more proud to be part of our company.
Yeah, I mean, the recent results are showing it. Jason, why don't you talk a little bit about it? Last quarter revenues 15%, RPO, what other people might call backlog. Why don't you just talk about some of the trends you saw in the most recent quarter since you just reported a couple of weeks ago?
Let me start explaining the difference, how we look at RPOs versus other ones.
Sure.
Let's just start with the results, I guess, broadly first, and then we can talk a little bit about RPO as well. For us, if we just look at the quarter, our growth is really coming from our electrical and mechanical construction segments, as well as the mechanical services division within our building services segment, and that's very similar to mechanical construction, just smaller scale projects and maybe a bit more focus on service, maintenance, and repair, but if we just look at the two construction segments together, each of them had organic growth of about 21% in the quarter, and it's broad-based, right? You heard Tony talk about a lot of the trends that we're seeing, networking communications, high-tech manufacturing, but it goes beyond that.
If you look at all the market sectors we serve, with the exception of the commercial sector, we had growth in every one of our sectors: institutional, healthcare, traditional manufacturing, and even water and wastewater. For us, what we call RPO is really a measure of backlog. It's just tied to the accounting definition. So when we say something's in RPO, it's truly a firm contract, a signed contract. It's not an estimate of future work. It's not verbal awards. They're true hard contracts. And so for us right now, we're sitting with $9.8 billion of RPOs or some may call backlog. That's a record level for us. We're up about 9% from last quarter.
Yeah. And then, Jason, maybe talk a little bit about if you take out data centers and high-tech manufacturing, what's the underlying growth in the business without those?
Yeah, and I think that's an important point, right? Our growth is broad-based, as I said. If you just look at, so on a year-to-date basis, we've grown about 18%. But if you just look at the business without those two high-growth sectors, if you strip them out, the rest of our business is still growing at 7%, which is in excess of non-res construction, and we think supports the broad capabilities that we have.
Is that mostly that institutional business, or is it really broad-based?
It is broad, but it's truly broad-based. Yeah.
Water and wastewater.
Healthcare.
Healthcare, institutional. If you go to the aftermarket part of commercial, we see growth there, which you see in our small project, and when we track sort of the HVAC retrofit business, and that is still in the commercial market, but it's the aftermarket part of the business. You know, the other thing that's always something that I'd take a step back on, people used to think about us as a commercial office building builder, which we know how to do, but I think we've been involved with, in a significant way, only two high-rise commercial office buildings from the core and shell when it starts. We do a ton of tenant fit-out work, which is very good work, but the true core and shell work, we've done two of them since 2016.
Is that right?
That's right.
Wow. Yeah, I mean, it's funny because a lot of people are from New York, and you see EMCOR trucks all over the place.
That's right.
Tenant improvements, basically.
What's tenant improvement? Service and a little bit of transportation work is what we do in New York.
We need two buildings. That's crazy. I would not have guessed that. Okay, but the one thing, Jason, you didn't mention, you talked about the top-line trends, but last quarter you saw some really interesting margin expansion too. And it wasn't just your company. I mean, some of your competitor companies are also showing some really impressive margin expansion. Why don't you talk a little bit about what's happening there? Because you don't usually see hundreds of basis points year- over- year.
For us, the margins right now, it's a combination of things. It's hard to bifurcate any one and say, "This is what's driving margins." It's execution. We're executing better than we ever have in the field. It's productivity. It's the investments we're making in productivity. You often hear Tony talk about VDC and BIM and prefabrication. It's the mix that we have today. We're serving the right customers in the right markets. And maybe to the smallest extent, an operating environment that's led to some favorable pricing on some of our contracts.
But it looks like it's more on the electrical side, Tony, is that right, than the mechanical side?
Yeah, I think they're both doing pretty well.
They are both doing well.
As with the mechanical service business, I always think about margins and bands, and I tend to look backwards 18 months to sort of say, "What's the stability in those margins?" But on the electrical side, I just sort of like have everybody go back to first quarter of 2022, right? The electrical margins, quote, "struggled." We were like, "Yeah, okay, we're still pretty good." And the reality was that at that time, right, we ran into a lot of supply chain problems. And so we had some supervision that we were holding on to because we knew the jobs were starting. And you look at the electrical margins today, and I only point that out because this is a business where margins aren't a quarter-to-quarter game.
We didn't have our hair on fire because we had a little bit of a dip in margins in one quarter because we knew what the long-term outlook would be. And sometimes we'll run into those patches, right, where jobs will be delayed. We have to hang on to supervision, which we do, and we have to hang on to some key workforce. But that doesn't mean there's anything changed in the business. It reminds me a little bit of our RPOs as we went from first quarter to second quarter, and we had our first sequential decline in three-plus years. And I had told on calls multiple times that, "Hey, that might happen." This isn't always up into the right business. Sometimes awards come in large chunks. Sometimes they come in pieces. But the underlying trends that we see in the business are very good.
I always ask people, "Do you think the semiconductor thing is going to happen or not? Or do we really think China and Taiwan's a more stable situation now than it was five years from now?" And the answer to that's no, right? This was a geopolitical question that we were answering. And so semiconductors, we've helped build a couple of fabs on some new sites. They're going to build five there over the next 10 years. It's not going to happen on our time schedule, but it's going to happen, and we are well-positioned. Data centers. Sometimes as they build out a new pad, it takes a little while. Or even in an existing place where they're building them, they got to get power set up. They got to get a substation, and they got to have the scheduling for the substation.
That doesn't change the underlying trend in the business. Nearshoring has been happening really since about 2018. It accelerated, then it withdrawn a little bit. And then COVID, again, go to national security issues that, "Hey, we really can't have all those places, all that key production in places where we don't necessarily get along." And so that's been happening. We see it, and it's happening in markets where we're very strong. So you take a step back, and you think about margins, you think about growth. Do you believe the underlying trends, which we do? And do you believe about our position in those underlying trends? And if you believe those things, the numbers, and if you execute, right, we are working for some of the most sophisticated, demanding customers in the world and earning these margins.
And people say, "Oh, you're getting the pricing." I think that's part of it. But again, think about who we're working for, who the end customer actually is. If they thought we weren't providing value for the dollar, they would try to bring in as much competition as they could find and help people be in our markets. So I think most of it's execution, most of it's growing our headcount slower than what our opportunities are, and we're getting more value for our labor than we were. And one of the things you see in the margins is on those bigger jobs, we're not procuring the equipment anymore. What drove that was really lead times, right?
So these giant owners in the semiconductor world, the data center world, they're procuring the major end products of things like generators, switchgear, chillers, air handlers, smart panels, VFD, large VFD motor control centers. We're fine with that. I mean, ultimately, we'd rather them do it, quite frankly, with some of these lead times where they are because they're responsible for making sure that it's on a job site for us to put in. And they've been incredibly fair because a lot of times you're building things not maybe the way we would have built them with more responsive lead times. And quite frankly, lead times on those kinds of things have really not gotten better in the last four years.
Then when somebody else is handling the procurement and the stuff isn't there.
It's on them.
It's on them. And your terms and conditions make that clear.
It's on them.
So that if you're waiting and your guys are down.
We would never sign up for their delivery of equipment. They tell us when it's going to be there, and we build a schedule around that.
Yeah. So it sounds like, I mean, the utilization, I mean, you were talking about in the lean times, you're like, "Hey, supervision's hard to find. Good ones are hard to find. Good labor's hard to find." Sometimes you just got to bridge the gap if you want to keep your people.
That's right.
Sounds like that's not the case at all today. I mean, that's a big part of it.
No, right now it's not.
Are you short people? I mean, you're always short people. I know you're always short people.
Yeah, you know.
Nobody can find a plumber. Even EMCOR sometimes.
If you're residential, yeah, residential is at the bottom of the food chain, right? EMCOR's at the top of the food chain.
I know.
Right? No, I'm serious, right? So people will gravitate up, right? I wouldn't want to be a drywall contractor right now. I wouldn't want to do big civil work right now. But where we are is a trade that people aspire to, whether it's union or non-union. And the way I think about labor is, life's about choices when you're running one of our companies or when you're us, and you think about what sectors you want to be in, and you think about what the mix is, right? The non-res market's always huge, and now it's growing fairly well. And so you've always managed a mix. No one has an unlimited supply of labor. So things you'll never hear out of my mouth. I'll never say we have unlimited demand and people are throwing work at us because I don't believe that.
I think we have to go out and earn that work every day with our technical expertise, our logistical expertise, and our ability to execute work and put the right team on the field. So you'll never hear me say that. You'll never hear me say that, "Wow, we really had a great pricing opportunity there." I assume we work with some of the smartest customers in the world, and they are paying for the value that we are delivering. I think they're finally paying what they should be for some of that value we're delivering because of the incredibly highly skilled people we have. I look at the packages we put together on these work sites to have people work the right package with 40 hours plus 10 hours of overtime with per diem, with all those things.
What you won't see from EMCOR is we're not going to go into a new market or even take on a project unless we have a pretty good idea of what it's going to take to attract labor, that we can price it into the job, and that the ultimate owner agrees what it's going to take to attract labor to that job. And so these guys are working really hard. Can you imagine doing 50-60 hours a week working as an installing electrician, a sprinkler fitter, or a pipe fitter on some of this work? So they should be doing well, and they are. And we're getting the value we should be for the labor we're delivering, the highly skilled person that works safe, productive, efficient, and knows how to get the job done the right first time.
What's the value prop if you're, I mean, most of your guys are union? What's the value?
In the construction business.
In the construction business, yeah. What's the value prop to keep those guys working for you rather than someone else?
You take a step back, and I think people have heard me, some of you in the room have heard me say this many times over 15 or 20 years, and it's more true today than ever. What's a skilled tradesperson, an electrician, what's a 30-year-old electrician or a 40-year-old electrician really care about? Well, first of all, they're worried about their family, right? And so what they think about first is, "Am I going to get paid every week?" It sounds trivial, right? Really hasn't been the history. It's always been our case, right? But smaller contractors, more financially strained contractors, that's not a certainty all the time.
They don't always have as much steady work.
Right. Well, it's also, "I'm going to get paid. I did my work, and now I'm going to get paid for it." And they're not only going to pay me if I'm a union guy, you're also going to make sure you pay into the benefits fund. Again, not a non-trivial thing. The second thing they worry about, and these are no particular order, "Are you going to keep me safe?" It's dangerous things we do. And now we're doing that this year with a total recordable incident rate that's six sigma compared to the industry. It's three standard deviations away. We're going to be less than 1.0 with our biggest workforce we've ever had working more hours than we've ever had. You're going to keep me safe.
I personally, since I've led this company, have always had the belief, "You get whatever you need to keep you safe on the job. You have the right PPE. You have the right stuff to do your job from a tool standpoint. We're going to give you what you need to be successful." We're not doing a purchasing initiative on safety glasses. We're not saying, "Oh, I can get those for a dime cheaper, so yeah, go ahead and use those even though they obstruct your view." We don't do that. We keep them productive. The third thing is, "Am I working for people that actually know what they're doing? Is my frontline supervision and all the way up through to the subsidiary level, do they know how to plan a job? Do they understand the means and methods?
Are you going to have the right plan for how this building is going to be put together? Are you going to know how to coordinate with the other trades? My supervision?" I want to work on a productive job site. Not one tradesperson in the world wants to put something in, install it, and commission it, and then have to take it back out because it doesn't work. The third thing is, "If I do a good job for you, are you going to have follow-on work for me? Am I going to become part of your core team?" Who wouldn't want to work for Shambaugh & Son?
Who wouldn't want to work for Comunale? Who wouldn't want to work for one of the Dynalectric companies? Who wouldn't want to work for University Mechanical or Batchelor & Kimball or Southern Industrial or Ohmstede or Repcon? These are the best in their markets, and they are the best companies in the industry. And I say that unabashedly. And that's because of that frontline leadership at our subsidiary level.
Okay. It sounds like the company's also been investing. You talked about some of the engineering and support behind these guys, and you've been investing in virtual design construction right now.
Yeah.
I've always called it BIM, but apparently it's not BIM anymore.
We used to.
So can you just talk about how unique this is for EMCOR to have this trades labor pool with this technology and project management overlay and how much of a differentiator that might be?
I'm going to ask Jason to talk about it in terms of how we invested once I finish my part. You have to. It was BIM. What we were doing is taking 2D drawings, making them 3D, finding collisions, and then developing a prefab plan. It's so much more now, right? Because you're bringing in also the ability to site things in a building before you build it. So imagine we used to go out with string, and we used to measure out where we were going to put the anchor points to put where the conduit was going to come through or where our pipe was going to come through. That's how we used to do it. We'd find an anchor point. Now we're out there with GPS, putting those points in and marking them as the building's going up, and then we're actually putting sleeves.
It sounds like a simple thing. Massive productivity. All that's happening before any of the formwork concrete pour or anything's happening or the finish work, right? That's just an example. The other thing we're doing is we're integrated earlier on these large jobs back into the engineering firm where, in a lot of ways, we're doing the detailed design once we get down here. And you say, "What's different versus other people that can do that?" Well, there are other people that can do it, right? Other sophisticated contractors, but that's not the largest part of the contractor population. But what we're actually doing at EMCOR, what makes us unique, is we have 1,600 of those people, and we can work across the country and base load where the work goes based on who has availability in one of our subsidiary companies.
We also have the ability to outsource part of that work. We're always outsourcing about 30% of either some of our fabrication, especially on the fire side, or our design more generically. We have people that will help us do that, partners, so that we're taking some of the easier work, getting it offloaded from our folks so they can handle the more complicated parts. Because in the end, we don't want to build an infrastructure that can't withstand a little bit of a blip, right, where they're not as utilized or a downturn. So that's why we never build 100% capacity. The other thing that makes us unique is the training we do. So think about having the ability to learn this across the country, to learn this with some of the best people. And our VDC and BIM people are a mix of people.
We have people that are right out of school, that this is what they studied in community college or trade school or engineering school. And then we have people that came from the trade that actually know how it's built and what it looks like on a job site. And we blend those two together, which I think makes it fairly unique for us. That's something we've been working on for a very long time. And we actually have a centralized group that then takes the best practices and shares it, and then we have people go teach each other around the country on very detailed information. Jason, talk about how we invest in that and what's happening with capital.
Yeah. So if you just step back and say, "Where do we see this showing up in our numbers?" There's obviously the impact on margins that we've talked about. There's also, I think, two other places that you can see it. One is if you just look over time and you just look at EMCOR's revenue, we've grown revenue at an annualized rate of about 10% over the last five years. But our headcount growth has only been 3, maybe 3.5% over that same period. And part of that's these investments that we're making that enable us to do more with less. In terms of the investments, we're not a capital-intensive company. If you looked at CapEx for us, it's less than 1% of revenues. It's probably 0.5% of revenues.
But if you look over the last several years, let's say moving from 2021 into 2022 and 2022 into 2023, CapEx has grown for us by 36% and then by about 60% as we continue to make the investments in BIM, VDC, and our fabrication shops.
I wanted to talk about fabrication, so thank you for that. This is increasingly, I think it seems like it's becoming more and more important to have off-site fabrication. You tell me if I'm wrong about this, but as structures have gotten bigger and more complex and then the time to market, I think especially, you guys take, there's also a margin benefit. But why don't you just talk about the importance of fabrication, what types of things you are fabricating today and what the investments are for? There's a lot here.
What the investments are for and how this is going to drive growth?
So we've been fabricating at EMCOR for 15-20 years. So the first thing you had to do is get your foreman and superintendents to buy in that this wasn't a threat to their jobs and that it was also long-term making us more competitive. And so that's a generational change that had to happen, and it's worked. And we did that by working with our local labor to get that done. So that is a precondition for success.
When you say fabrication, is this HVAC ducting that used to be done on-site and somewhere else, or what types of things?
Ducting was pretty much always done off-site.
Yeah, that's simple for the.
Let's talk about, we can break it down by trade, right? So the people that led fabrication and BIM when it started were really the mechanical contractors, especially the sophisticated mechanical contractors. Why would that be? Big piping systems. HVAC systems, you may be able to skid off-site, whether it's pumping packages or pre-cooling, fan coil, heat exchangers, you could do that. So some of that started earlier. And these were small pipe shops saying, "Hey, let's build a couple of assemblies and off." And then the mechanical guys got more and more advanced. And then fire protection was started at the same time. Sprinkler systems are all prefabricated. And sprinkler systems are unique in fire and life safety because it's pretty much a national union. And that union, that product is design-build, right?
An engineer will just write, "Comply with this fire protection code." And then we design it, we fabricate it, and we install it. Much smaller crews. They've been fabricating for a long time. Our fabrication shops on our sprinkler side, we put a fair amount of investment in, are very sophisticated now. So mechanical has been a little ahead, and now electrical has come in. Now electrical started when they prefabricated, was just making it easier for installation on individual products. Take a box, take a switchboard. But now it's actually gone to skidding that actually supports substations and data centers. And now electrical has caught up. But some of the prequalifications for success in prefabrication is we've actually taken some of our better foremen out of the field and have them develop the prefab plan with us.
One of the distinctions with EMCOR versus other contractors is we prefabricate for ourselves. We don't prefabricate for the trade. You never say never. 95% plus of our prefabrication is for us. And that is an intentional decision by us. And why do we make that decision versus others? We're not manufacturers. Even in its best case, fabrication is a job shop environment. Yeah, you'd go in there, it would feel like a shop. But remember, we're building something unique for a job. And so I've always had the bias, as has our senior leadership all the way down through subsidiaries, is we have to be tied into that job. So even when we share fabrication across the country, we treat them like a customer and are tied into the job.
Because if you're wrong on the fabrication, which we've seen when it's coming from third-party shops delivered to us, it creates havoc on a job site. A lot of times we're just taking it apart and putting it together. That's why ours are focused on our companies and we're looking for our productivity and we're not fabricating for the trade. Again, that's a choice that we made. It doesn't make other people's choice wrong. It's just a choice that we made. So one of the reasons you can grow revenues like this, now think about it, I told you we're already not supplying more of the equipment on these major jobs, so the revenues would even be higher. That's one of the reasons you see margins a little better because we actually make money on labor, right?
If you're doing the procurement.
That's our value add.
It's not really a margin.
Right. And then when you're down here and you're only growing labor at this rate versus revenues at this rate, you must be getting productivity, and that productivity is really coming through fabrication and better planning. So VDC is more than just fabrication or BIM. It also leads to better planning on how the job is going to roll out, and that's part of it. We have more sophisticated planning tools. I don't want to say we're using AI, but we've been using databases on means and methods across our company and comparing it against standard work for a long time.
Yeah. You can tell there's a lot more that we could talk about here. We're not going to because we're out of time, unfortunately. But if you could join me in thanking the EMCOR team, we appreciate it.
Thanks.