EMCOR Group, Inc. (EME) Earnings Call Transcript & Summary

Good afternoon, everyone. This is Dan Moll from Credit Suisse's capital markets and advisory team. And on behalf of EMCOR Group, I want to welcome all of you to EMCOR's fireside chat as part of the 2020 Credit Suisse Virtual Industrials Conference. EMCOR is one of the largest electrical and mechanical construction facility services firms in the United States. In 2019, EMCOR had revenues of approximately $9.2 billion. Their services span a broad range of diversified commercial, industrial, utility and institutional customers. EMCOR services demand comes from long-term secular drivers of things like the energy transition, energy efficiency, hyperscale data centers, e-commerce supply chains, industrial and manufacturing, technology advancements, health care facility upgrades, water and wastewater treatment, indoor air quality, a bunch of wonderful things to work on. I'm joined today by Tony Guzzi, EMCOR's Chairman, President and CEO; Mark Pompa, Executive Vice President and CFO; and Kevin Matz, Executive Vice President, Shared Services from the EMCOR team. The format will be a 30-minute fireside chat and will be all Q&A through the flow today. [Operator Instructions]

So thank you, everybody, for joining our conference today. First, I'd like to turn it over to you, Tony, for some opening comments on 2020. Coming off of a very turbulent 2020, how would you assess EMCOR's performance and how you are positioned going into 2021?

Yes. Look, as you look back at 2020, it's been quite a ride. If you just look at how we were looking at the year and just take the date of March 2, which Mark reminded me was the day that we amended our -- or signed our new credit agreement, we were feeling pretty good about the world. We'd like to say we were really smart and knew that all these things were going to happen and have a new credit agreement in place. And we say we are because we're always conservative about things like that. But the world really changed in March of 2020. In a lot of ways, we were in the best economy ever in early March 2020. We -- first quarter number showed that we had performed exceptionally well. We were on track to have another record year, and I'll come back to that theme here in a little bit. We were on track to have another record year of successive -- really performing at it at very high level. So coronavirus hit, markets were shutting down. I mean our end markets, places like Boston, parts of New York, California, owners weren't letting us into buildings. We had excess people everywhere in the field in those markets. And we had to take action quickly. We quickly cut costs. We furloughed people on the direct labor side. We took salary reductions up through, including our Board, on the senior executive and Board side. We hunkered down and a couple of things that we could always point to are true: having great balance sheet, run the business for cash and really know what leverage you can pull in the short and long term to mitigate costs and mitigate problems. So we did all those things. And then you had this other layer on top versus your standard economic disruption, which was just way beyond that, was you had at, first and foremost, to come up with a plan to keep your workforce safe, if they were going to work in the field. And so we had -- and then you had probably 40 different ways you had to respond to local government and state regulations about how you could work. And then you had all the government programs coming down from the federal government that tells you these are the things that can help or not help and this is how you interpret it to your companies in the field. So against that backdrop, you say, how did you perform? Well, go back to what I said about a record year. We are on track to have, with our current guidance, another record year at EMCOR. Our top line did shrink mainly driven by what happened in oil and gas, that was the majority of it between what was in our electrical segment, upstream and downstream. And of course, our Industrial Services segment is mechanical work, large turnaround work and other things that happen downstream. And so you put all that together, and they come -- and performed the way we did -- and they performed the way we did in the field and kept our workforce safe and productive through that is quite a testament to the leadership in -- down through our segment and subsidiary levels. And you say, how do you go into 2021? Well, we don't give 2021 guidance until we get to February. But you say, what do you know today? Well, we know we have a better cost structure than what we had going into '20, going into '21. We know that. We know we have a good backlog of work. It's up over 10 -- over 10% from year-end 2019, and it's up -- third-quarter-to-third-quarter, about the same. So we know that. We know that we have things and we're working in markets that have a lot of resiliency to them as best we can tell. Hyperscale data centers and data infrastructure, in general, something we're really good at. We're positioned in most of the important markets to do either mechanic or electrical work. We know that. What else do we know? We know that we are as well positioned as anybody to do retrofit mechanical work and indoor air quality work. And we're doing a bunch of that work. We always have done a bunch of retrofit work. Indoor air quality is now a supplement to that. And I think it will drive, longer term, a retrofit cycle because in a lot of ways, energy efficiency and indoor air quality, for the most part, are in direct collision with each other. We know also that we're in other good long-term markets, warehousing and all these things you see going on with hyperscale warehouses. We're not going to do a lot of the mechanical and electrical work on those warehouses. We get one here or there. We do a lot of sprinkler work on those warehouses. We do it exceptionally well. It's very important. It's fast track. And sprinkler work we do is a lot of prefabrication with it and design build. In fact, we just built another fabrication facility right on site of the Nucor pipe mill down in Alabama to support that sprinkler business. So we know that. We know that health care is likely to continue to be a long-term market. And that shows up in many end markets for us. So it's in manufacturing; it's in institutional; it's in commercial, if it's a data center. So we know that -- and then it's in our health care segment, if it's a hospital or associated with a hospital. So we think that's going to be a long-term segment. We also believe that the story of reshoring and adjustment of supply chain is real. We have enough anecdotes that are piling up in the southeast, southwest that we're going to benefit from that. And we're also well positioned in high-tech manufacturing. And there's really some nexus for that, right? That's -- that happens in Texas; it happens in Arizona; it happens in Utah; and it happens in Oregon, for the most part. And then of course, we have that layer of just the core good -- core mechanical and electrical business all around the country, grinding out every day with a mix of that work in the local markets. And we have seen the short duration, quick term project come back after a disastrous booking period in April, May and early June. I mean people weren't there to make decisions. So that we recovered to where we are, and then we go into next year with a lower cost structure through end of year -- end of the quarter, it was $27 million we've saved. We think we get to hold on to about 2/3 of that going into '20. Now of course, most of that's in the number, but it helps reset our cost base as volume starts to come back in the business. What are the good things? I went through some of those. What are the risks? The risk are oil and gas businesses. We don't know exactly what that recovery is going to look like. But one thing we do know is that we'll recover as travel and demand recovers. Crack spreads have stayed relatively healthy. The problem is, there's just not enough demand for the fuel, and it's mainly aviation fuel at this point.

And Dan, the only thing I'll add just to make sure that everybody is clear on Tony's comments with regards to 2020 performance, Tony's reference point is adjusted earnings per share. So adding back the impairment charge that was taken in the second quarter.

Yes. Absolutely. Thanks, Mark.

Great. So let's start going to the queue of questions, which have started to come in a little bit. [Operator Instructions] Just want to get into a little bit of the geographic footprint that you have. So you have a wide footprint across the country. And can you comment a little bit on what you're seeing, specifically geographically you started to speak to it a little bit, across the country? And what the demand drivers are in each one of those markets that you serve, if they're unique and bespoke?

Yes. So if you go up to New England, specifically Boston Metro area, the demand drivers there are health care. And there is a large commercial project going on that we're going to be part of, which is the South Station, mechanically. And it is a fairly substantial IAQ and retrofit market in Boston right now. We don't participate electrically in Boston. Boston for us is a mechanical market. The rest of New England, our mechanical service operations are very strong, and we expect things to continue to be strong, again, driven by those trends that we've talked about. New York City is a tough market right now for us and is likely to be. People are going to come back to work, we're going to do tenants fit-out work, all that's going to happen. But New York City, on the big project side, can be episodic for us. We're coming off a pretty good 4-year run of doing a lot of transportation infrastructure work, and we need to reload some of that. And there's really nobody making any decisions on that right now, as you can well imagine. But when it happens, road, bridges, tunnels electrically and maybe some high-voltage stuff around the airports, we'll be there to do it. As you go down the coast and you look at the Mid-Atlantic, very strong health care market for us, but also it's a very significant data center market. And then, of course, all of the infrastructure, that's where we made the R&R acquisition. We expect the tenant fit-out market there to be very strong also in the retrofit market as people configure for Amazon, the support of Amazon, but it's more than Amazon. You have Microsoft with the JEDI project. You have tech going there, you have health care going there. And then of course, you have just government demand, which we expect to continue and is where the home of our government business, and we have certainly seen a pickup in the indefinite duration and definite quantity work. We have a really good team there. You go down to the south, this is where we made our BKI acquisition. We really built out a footprint in the south. The EMCOR 10 years ago had almost no southern presence in Georgia, South Carolina, North Carolina, Tennessee. We continue to build out that presence where we can position well not only the manufacturing and industrial. BKI brought more of that, but it also brought health care and data centers. And so we have a collection of very good assets to not only support the growth in that region, which is demographically growing compared to New England, but it's also -- we think that's where a lot of this industrial manufacturing base will come back to or expand from. We were doing some pharmaceutical work. We continue to do more and more of that. But we're starting to see our customers invest more and more into their facilities infrastructure, which tells us there's more to come, that this will be a base of operations across many industries, from tires to pharma to textiles to light manufacturing. You see things moving, and we see that through our millwright work that work starting to come back, machines are starting to come back, be placed, dies, things like that. Go down to Florida. We're having a lot of success building out a mechanical services footprint in Florida. We've been at it for a while. We've really picked up momentum there. We're doing a lot of water and wastewater work pretty successfully. And we're rebuilding an electrical operation there, but it's nothing that's going to move the needle here for us anytime soon. As you go over to Texas, let's bifurcate Texas. The oil and gas side of Texas, I mean it's obvious it's in a slump. That shows up mainly in our industrial segment, but there's a piece of that in our electrical segment. But other things in Texas, we're seeing a burgeoning health care market in the Houston market. We made an acquisition 18 months ago, 2 years ago that export us to build on a very successful contractor we have in the Houston market, get more in College Station and in San Antonio. And we have great capability around health care, labs, service, tenant fit out. That part of Texas is starting to come back, and some of it stayed strong the whole time. We need to do more mechanical service work there, and we'll look for the right fit to do that with. As you jump over to Arizona, Arizona is a high-tech manufacturing place for us. We haven't had a lot of luck with data centers. They're one of the few places we haven't. We've had other work to do. And our guys are great health care builders there. And we have a small service operation. So Arizona looks relatively okay for us over there. California, we've participated in a lot of the pharma work that's going on, some of it to support COVID. On the manufacturing side, they have people do quick expansions. We do a lot of health care work in the San Diego area. We're doing a fair amount of tenant fit-out work and institutional work. And we'll do the odd solar farm every once in a while supporting our customers. We have a fantastic service operation across California that's growing like crazy. It's a full cell, everything from small solar work, mechanical retrofit work, controls work. And then of course, we do a lot of work in the LA area. We're on transportation, transportation infrastructure. And also, we're building out a commercial business there. California is okay. A lot of uncertainty around the virus of how you get work done, when you get it done. But long term, it should be fine. Complicated market to deal in. We've been dealing with them a long time. And then you go up to Oregon. Fantastic, high-tech manufacturing, data center market. Health care needs to come back here soon. We expect it to. Terrific electrical operation in that area. Flying through the Midwest, the Rocky Mountain region, very, very strong operations in Salt Lake City. Good demand in Salt Lake, really, a fast-growing metro area. And Denver, we're seeing signs of life again, both mechanically and electrically. And going to the Midwest, that's where -- that's the home of our fire protection assets. They're wonderful. Great operators, nationwide reach, both of them. Both subsidiaries, they do a lot of that work. Our work performed in Wisconsin is strong, #3, probably #2, maybe #1 construction-wise in the country, probably #3 service-wise, only behind -- overall behind the OEMs. And we're catching up on API quickly on the fire, life and safety. And then finally, you get back to your home, and that's a pretty good tour of the country. So overall, demand is okay. I mean decisions are being made. We have a book-to-bill for the year, close to 1, a little over 1. On an organic basis, it's close to 1. And it goes through the abrupt shocks we went through in April and May. I feel pretty good about how the company is operating and what the leadership's team is doing going into 2021.

Great. That's a good bridge to a question as we kind of get about the backlog. So this question is a little bit about kind of backlog burn and churn on that, how work -- so the -- with backlog up as much as it has year-over-year and kind of the moves that you've noticed and commented on the industrial side as we go into 2021, should revenue growth pace with backlog growth? Or will the nature of the backlog be slower burning?

I'm going to take a shot at that, and then Mark will fill in the details. First of all, our backlog tends to be a 9- to 15-month backlog, and there's some longer-term jobs there. There always is -- there's a couple right now on the wastewater side that will play out over 3 or 4 years. That's a hard thing to do. We don't give '21 guidance. And it's always important to remember, right, Mark, we're booking 60-plus percent of the work and executing it in the year. So for us to -- which we will in February. For us to feel better, we're going to have to know what backlog is at the end of the year. And then we're going to have to get a better visibility on the oil and gas market. And then I think we'll have a better sense of what's happening in that $0.5 million and below project. We feel good that we have the backlog we have, and we're very proud that we've been able to have a book-to-bill at or near 1 in this turbulent year. Mark?

Yes. Just to add to Tony's comments. Clearly, all the backlog that was on hand at the end of the third quarter, not all of them will burn down to 2021. And as Tony indicated, there's a fair amount of work that we're going to have to bid, win and execute during calendar 2021 to get back to 2020 levels. Clearly, the company will be providing earnings guidance with respect to full year 2021 in concert when we release our final earnings release for calendar 2020. But all trends are indicating more positive than negative at this point, and we're hopeful that those trends will hold as we roll over into the new calendar year.

Got it. Next question, kind of revenue contribution. You have a lot of wonderful drivers in multiple end markets and secular drivers. This one is specifically on some of the renewable growth. How much revenue are we kind of seeing from kind of wind solar specifically?

De minimis compared to the overall revenues right now. We've done some large solar projects. We've done very -- the only wind we've done has been some of the T&D work around wind out west. We haven't done wind farms per se. That tends to be a big civil game, by the way, other than some of that T&D work. On the solar side, we've done some big solar work. We don't have anything teed up right now. And we've done a small amount of on-site store where people are trying to drive somewhere between 2 to 10 megawatts on their site. We do that through our mechanical service companies for the most part, and they sub up the placement of that. They couple it in with usually an air conditioning retrofit, a control system upgrade, put the whole package together, get the utility right. Now I will say this, I expect that to increase, both the on-site stuff. And we're doing that in from all places, Indiana, right? We're also doing it in California. I do expect it to increase, and we will think hard. One of the issues with solar is when it's just the panels, a lot of that work is not done by electricians. It's done basically by nonunion millwrights or carpenters. It's not real complex to place those things. Some of the more complex systems we've done. But I think this on-site collection will be part of our future. It will get buried in the service operations. And I think that we will build the capability in other markets like Texas and other to do some solar. And the wind is for us I think a small T&D play.

Got it. Next question from the queue. You brought up IAQ, indoor air quality, highlighted obviously as a very important need in 2020. How does EMCOR size this market opportunity, the length of how long it will last, your competitive advantage? And any other needs that have risen from this year that you think will be ongoing?

Yes. So I think there's a big competitive advantage here. We were working on this stuff. They're just -- there's 4 different -- to me, there's 4 different levels of IAQ. The first one is take your existing system and see what it can do. Well, the first thing you have to think about is, how do I responsibly bring in outside air? Most of air conditioning at ASHRAE over the last 20 years have not been reducing outside air. And there's a lot of reasons for that. It makes the building inefficient and not as comfortable. Now it's about bringing in as much outside air we can responsibly and call it a wash. I don't think that's a short-term trend. You're going to have to get through a couple of seasons before people get more comfortable again about not having that fresh air come in. So that's the first level of indoor air quality. The second level is just filtration. I have a MERV 10, I want a MERV 14. Well, every time you do more filter, you drop efficiency, right? Just common sense, right? Air running into more mass. And so that would drive down efficiency. It will require more fan speed. You'll be doing things with variable speed. You'll have to upgrade that. You'll probably have to change out some of the systems long term, if you want that enhanced filtration and keep some level of energy efficiency. The third level of it is some type of how do I cure the system? And that's like a UV light game. And it's like you're either doing it on the coil or you're doing it in the mixing box. Stuff works. Of course, it uses energy to do it, and it's a retrofit opportunity. You can buy new equipment within it, but that's not mainly what people are doing, right? They're going to their existing space and upgrading the UV lights. And the final part of it is a deep -- another one is bipolar deionization -- ionization. It's basically setting electric charge across something that looks like a filter plate put in somewhere in the air path. We're at sort of the cutting-edge of that. We sold a lot of that. We were one of the first people that came through to test it with. We had tested it before COVID. We're selling a bunch of it now. And so you put all those 4 together. And then there's the last one is what are you going to do to adjust your control system to make all that work? And as the largest independent controls contractor, they can work on just about anybody's system. That will play a role. Now how big is it? It's hard to tell. I started this by saying it's a good mid-sized project for us over a couple of years, which will be about $10 million. I think it's factors above that. How many, I don't know, but it's at least 2 or 3 above that. How long does it roll out? I think this goes at least through '22. And there's a whole move now, just like we talked about lead, to start to come up with some score on wellness -- building wellness. We have some people looking at that working with some of the place, things. I think it's going to be a selling point for buildings that say, "Hey, this is what I've done to make my building better." It'll get people comfort to come back to work in office buildings, but it will also be a selling point going forward because now we're going to say, "Well, why aren't we doing some of this stuff just for basic pathogens always through other things?" And people will want -- I don't know if these lessons will last forever. Hopefully, this only happens every 100 years, and I'm gone for the next one. But for at least the next 3 to 5 years, I believe it'll be part of everybody's planning. And so when you're planning space, retrofitting space, you're going to bring all this into four. And of course, people want to know, "Hey, what did you do to make my space great for me?" A lot of ways you're taking things that were done in health care and you're bringing them into the commercial office building, things that were done in high-tech manufacturing. And you're bringing them into the commercial office building into the manufacturing plant.

Right. Got it. That's a good segue to the next question for outlook in the next couple of years and drivers. Within industrial, with people starting to fly and drive again and as we -- expectation comes, there's been a lot of deferred maintenance. How much can we think about with the facilities and the turnarounds and the pent-up demand? I guess the question is, could there be a super sized uncorking down at some point, '21, '22 to get that done?

Yes. So I was never an oil and gas guy until 2007, right? And then we bought Ohmstede other than we were in it in California and a couple of places. And my wife grew up around -- it's in Oklahoma. So -- and her dad was a driller. So I knew a little bit about it. And I knew how fatalistic those people view the world -- or optimistic, they're both every day. So I know that it's very cyclical, much more on the maintenance side than we thought. And as Mark pointed out, we haven't had a normal -- we had semi normal season in 2019 or '18 was the back Harvey effect, '19. And then '20 was turning up -- shaping up to be a pretty good year until the middle of March. Here's a couple of things we know, right? One is the market has consolidated. And you better be in the right places. So what are the right places? Texas, Louisiana. And unfortunately, California still needs its own refineries. No matter how much they say, they don't -- they have to have them because the mix is different. So you got Texas; Louisiana, big refining center; a little bit, Alabama. That's not going to change. And we're as well positioned or better positioned than anybody in the market. What else do I know? Well, the market is consolidated. Yes, integrated like Exxon, right? And then you have Shell deciding whether it's going to be in or out of the business. BP's mainly moved out. And then you have the big refiners, right? Valero, Marathon, P66. They are the 3 big refiners. We're well positioned with all 3 of them. They're going to run those things differently now that they have so many of them than people did when they didn't have all those. And when -- they're not going to run them like an integrator. They don't. Valero is a very different operator than some of the integrated because it's not competing with capital upstream, and they don't -- when upstream goes bad, they don't have to cut capital down here. Talk about super size, I think we have a chance as we exit 2021 and as we get into '22 and '23 to resume some normalcy and maybe even get an uptick in the refining market. Because these are important facilities, and the bigger ones are going to have to drive all this and the bigger ones are going nowhere, and that's where EMCOR makes its own. What I also think is somewhere in middle of next year, you'll start to see more and more demand for just ongoing maintenance by people like us in the refineries. Our guys instead of big turnarounds, they call them squats. We're doing more and more of those. That's not necessarily bad for us long term as long as the bigger ones come back with it. But I don't think we'll be able to have a clear read on 2021 now, and we would be happy to get it by February. But I think the balance is going to be once they get busy again, right? Crack spreads are okay. Once they get utilization up, again, are they going to run them for a while? Or are they going to take that gap as it ramps back up to start doing more maintenance? We don't know that. What we do know is our order book is filling up into 2022 and 2023, and they're paying for planners right now. That we know.

Got it. Got it. It looks like we're coming up a little bit closer towards the end of our time together in the 30 minutes. One of -- we might have time for one more. So when we start thinking about capital allocation when it comes to M&A and the balanced capital allocation of the platform, how can investors kind of think about shareholder returns, capital allocation as they think about EMCOR as part of their overall portfolio?

Yes. I think if you look at the last 5 years, and you say, I could do plus or minus 10% between return from cash to shareholders or acquisitions. I think the next 5 years looks a lot like that. We know -- we're going to return cash to shareholders, we know that, through dividends and share repurchases. We're going to have an M&A pipeline, and we think we're going to have a fairly robust one. Sitting here today, do Mark and I think we're going to go out and do $1 billion deal tomorrow morning? I don't think so. Nothing's teed up here. Perfect deals for us are somewhere between $5 million, which is like where we tack it on to of our companies, to $250 million. That's -- we're not afraid of a $0.5 billion deal. Sometimes we know too much, right? And so we watch people buy things and we scratch our heads, but that's okay. What we're not likely to do is buy 4 companies bought by a private equity firm for X times earnings and resell it to us for 2 or 3 more turns and tell us all the wonderful things they did with it. And we know that that's not true. We'd rather go golf, work on these one at a time with owners that are discerning about who they're selling their company to, that want to be part of this future with our management team. They need growth capital. And boy, we'd love to provide it.

Great. Great. Disciplined capital allocation and multiple secular drivers. So that brings up us towards the end here. I'd like to thank you, everyone, for sending the questions in. Thank you for your time. I'd like to especially thank Tony, Mark and Kevin from EMCOR for their time today to discuss some detail around the business, their markets. On behalf of Crédit Suisse, I'd like to wish everyone a safe and healthy end of 2020 and a strong game to a successful 2021. Thanks again and take care, everyone.

Thank you, Dan. Bye.

Bye, everybody.