EMCOR Group, Inc. ($EME)

Thank you, everyone, for joining. Thanks for your patience. My name is Tim Mulrooney, I'm the research analyst here who covers EMCOR at William Blair. And I'm required to inform you that for a complete list of research disclosures or potential conflicts of interest, please visit our website at williamblair.com. This company probably requires -- I usually do a little intro for every company. This company probably requires no introduction, this is quite a full room. It seems like there's lots of interest here. The stock price is any indication of a lot of interest these days. But I was very excited. I've been following EMCOR for years. And we finally -- we started speaking with them about 2, 2.5 years ago. Finally got coverage out the door because these things take forever last year. So we've only been covering EMCOR for a year, but been following you guys from afar with a lot of interest for a long, long time and I'm very excited for you guys to be here. So we have CEO, Tony Guzzi, who's been CEO now for how many years, Tony.

Long time.

Long time is the technical term. And then Jason Nalbandian, CFO. Thank you both for being here.

Glad to be here.

Pass it over to you guys for a couple of brief intro remarks, and then we'll dive into more of a fireside chat and maybe open it up for questions for those that have.

Sure. So I'm Tony Guzzi, I'm the CEO; and Jason Nalbandian, CFO. We've both been with EMCOR, while I joined in 2004 as the President and Chief Operating Officer, did a lot of the stuff then officially became CEO in 2011. It had been a heck of a ride, Jason, CFO 2 years ago.

Yes, 2 years ago.

2 years ago. Before that, he was our Chief Accounting Officer and Controller. So we all -- we've had the privilege of working together long time. I think this first slide is sort of we're mission ready, right? Things just don't happen. I'll give you a sort of an overview of the company. We're a company of people that actually do real work. plumbers, pipefitters, electricians, millwrights, HVAC technicians and we've been that same company this whole time. We -- I'd like to tell you, we're contractors at the end of the day. And by nature and being good at what we do over a long period of time, we also happen to be opportunistic. And we still be opportunities to keep diversity of demand and I'd get ahead of some of your questions. We're not managing to any number on what percentage do we want to be data centers, what percentage do we want to be aftermarket. We're just trying to make as much money as we can every day and as many sectors as we can that makes sense, but then be able to deliver excellent results for our customers, by not outrunning what our capabilities are and the capabilities have to do, how much great field supervision and leadership we can build to be a force expander. We've grown organically exceptionally well over the last long period of time, but especially the last 6 years. And we've done that by really 2 things, right? Project size has gotten bigger and on some of the fastest-growing markets, we've added more geography through organic growth, having our companies do some of that work in those fast-growing sectors and where they were doing other things or acquisition and then growing those acquisitions. As Jason you'll hear us talk about, we're a balanced capital allocator. We tend to be pretty good acquirers. For me, that means we're a good BB+ student. No one is an A student in acquisition. It's just hard, right? And you have to do them right, and you have to have cultural alignment and great execution in the field. I think over time, we've been a compounder of success. We don't chase fads. We execute well and do what we say we're going to do for our customers. And I was telling somebody today, when you think of all these large jobs, we've never not finished a job, sometimes it's not great at the end, but we've never not finished one. We finished other people's work more than once. And I think that's a great sign of our customers' confidence. I'll get into a couple of slides here. This will be real quick at least a bit of time. So our new guidance is out there at $18.5 billion to $19.25 billion. That's up from what we started the year. And why is it up? Because we've surprised ourselves on the revenue side, we had the margins about right. We had record RPO growth. These are record level RPOs, which means for us recurring performance obligation, it's a measure of backlog, that is actually the accounting measure of backlog remaining performance obligations. This is work that's contracted in hand or the noncashable portion of our service agreements, which means if we have a 5-year service agreement they can cancel in 60 days, only 60 days worth of RPOs are in there. We're not taking guesses on what we're going to do for a customer or any of that. Our guidance has also increased to $28.25 to $29.75. We expect to do greater than 80% cash flow conversion this year, and we have about 47,000 employees, about 70% or so or a little more are in the field doing real work, turning wrenches or working farm and supervising. Look, we're mechanical, electrical, fire protection contractor and a maintenance contractor on top of that and we apply in different sectors, right? Mechanical, full range of piping from small bore piping to the biggest pipe you can imagine. Air conditioning, we'll do the service on a 20-ton rooftop as well as a 5,000 ton chiller plant, we'll replace a 20-ton roof up or well design, build, replace a chiller plant for a large hospital complex like down the street here. Fire protection for us typically means sprinkler for the majority of it. We also do alarm and detection. We do electrical work. We are mainly a medium voltage contractor, which means inside the wire outside the substation. We do substation work, and we have a small T&D business, and we have a nice size low-voltage business. Security and power generation, we're not doing EPC power generation. We're typically doing balance of plant work. We're a nonres construction company. We typically grow in our construction businesses. Jason will talk -- we can talk about -- there's a question to answer a couple 600, 700 basis points, 800 basis points above nonres in our building services where the mechanical services business is 75% of what we do. In that business, we're doing 500 -- I mean, 300 or 400 basis points. And in that business, that's the best proxy for what's going on in the other market besides high tent manufacturing and data centers. We're getting 72% of our revenue in Electrical Mechanical Construction, 21% Building Services. And again, 70% plus of that building services revenue is in Mechanical Services, which is a high single-digit ROS business. And then the balance is industrial services. Important here, we do a lot of industrial service work or construction work, up in construction services. This is the oil and gas business and a little bit of our renewable energy or intermittent energy business. And at 7% of what we do. You can see, I talked about there in the interest of time, I'll move on. And we're geographically diverse. We still have some white space we fill in. We also can do platform-enhancing acquisitions, which means build more mass in a market. We'll do everything on the acquisition side from a couple of million dollar asset deal to Miller, you saw us do last year at $865 million. We operate through 100 operating subsidiaries. We have some very large ones in [indiscernible] some smaller service companies. 450 locations in the U.S. life safety, we can cover the whole country. The bottom line is representative of some of our subsidiaries, our larger subsidiaries. With that, Jason, I'll turn it over to you.

Yes. Thanks, Tony. I think this page here really highlights what Tony just discussed about our diversity, and there's a number of ways you can look at it. You can look at it by just service line or service offering, which is really represented in the pie chart on this page, or you look at it from an end market exposure perspective, which you can see in the bar charts. And either way you look at it, EMCOR's demand does remain very broad-based. I think if we quickly look at service lines and Tony touched on some of this a little bit, at a high level and just using round numbers, we're about 40% mechanical construction, about 1/3 electrical construction about 20% building services. And as Tony said, that's predominantly mechanical services and maintenance and then less than 10% Industrial Services, which again, as Tony mentioned, is really our exposure to the oil and gas sector. . If you look at the market sectors, so again, that right-hand side, those bar charts, you can really see how we're positioned across a number of markets in the broader nonresidential construction space. And it's our positioning in these markets that have really led to some of our growth over the last several years. I kind of bifurcate these sectors into 2 groups. So 1 is what I call the high-growth sector. So I think what we call network and communications, which is really data centers and then high-tech manufacturing, which is really led by semiconductor, biotech and life sciences. Outside of those sectors, we have a number of core sectors that we've been in for decades, that are really staples of EMCOR, traditional manufacturing and industrial, health care, water and wastewater and even institutional. And like I said, it's really our positioning here that's allowed us to grow the way we have. If you take just a 5-year look at the business, our revenue CAGR is just over 14%, and that's really including acquisitions, really growing 2x the broader nonresidential construction market. And I do think that's just a testament to where we've positioned ourselves and where our operating companies are located, both geographically as well as in these sectors. If you look at this next page here, supporting our growth really is our commitment to balance capital allocation. And Tony touched on this as well. But if you look over time, we have a near 50-50 split between business reinvestment. So I think M&A and CapEx as well as shareholder return. And for us, that's both through dividends and share repurchases. And we remain committed to this philosophy as we move forward. Our approach always starts with organic investment really how can we make sure that our existing or 100 operating companies can perform as best as they can and be as productive as they can, be as efficient as they can. It's making sure they have the right tools and the right resources. And you can see that in some of the investments we've made recently in prefabrication, virtual design construction tools and other digital technologies. Also in recent years, some of our organic growth has come from geographic expansion, looking at adjacent or new geographies and saying how can we position some of our best operators in those geographies to capitalize on on-demand. Besides organic growth, we do look towards M&A. We're really looking to bolster our core capabilities and our existing trades. We're looking for geographic expansion. And for us, M&A can be stand-alone strategic acquisitions or they could be smaller tuck-in deals, which really bolster existing capability. If you just look at 2025, for example, we did 10 acquisitions, 2 of those being Miller and Danforth were stand-alone businesses, while the other 8 were really tuck-ins that enhance our existing presence in some of our geographies. Acquisitions will continue to be a part of our growth strategy. I think we have a fairly robust pipeline where we sit here today. But as Tony says, deals happen when they happen. And so our guidance today is really just based on organic growth. Beyond M&A, if we have excess cash, our last priority or one of our priorities is to return capital to our shareholders. And as I mentioned, we're doing that through both dividends and share repurchases. We recently increased our dividend by 60%. It's now $0.40 per quarter. And on the share repurchase side, we've remained very active over the last several years. In the last 2 years alone, we repurchased $1.1 billion worth of our shares, and there's $593 million remaining on our current authorization on the program.

Okay. how we went. I think the top left people talent and developing that talent, I think our core product is actually great field leadership. And I would take our development programs, our percents of purpose, the way we run the company, our mission first people always in the operating model that has, I think that's the one part we may be superior to everybody else. . I think technology differentiation. We're never on the bleeding edge of technology, but I would say we stay on the cutting edge, and that's the BDC tools, engineering assist tools, the ability that flows out into our prefabrication/modular and the difference there is we're typically doing that for EMCOR and our companies. I've always been a believer in a strong balance sheet. It's 1 of the ways we compete. We have a fair amount of bonded work out there of about $2 billion. And think of the customers we're actually working for. They value that to a great deal. And finally, you got to hang in there. We've been doing this a long time with great success. We have become a data center builder in 2019. We became a data center builder in the early 2000s. We have become a semiconductor builder and a fab plant builder and when the CHIPS Act and TSMC and other people came, we were doing that work well back in 2005, 2007. We have long track records and because of the how we work together as a team, we can expand that track record across the country when we have the capability to do that. With Tim, I'll turn it over to you.

All right. Thanks here. Let me actually want to go back a slide. How do you go back. Looking at share repurchase year-to-date in 2026, you guys are -- I mean you did that heavy share repurchase in 2022 right before the stock price shot up a lot. I mean is it fair to say you think shares are undervalued here?

I wish we were that smart. Part of it is just balanced capital allocation. We're trying not to buy the peak, so there's some of that. But it's just a balanced way doing it. You're only early in the year. We have a good pipeline of acquisitions. We'll see how the year turns out. .

Okay. Yes. That's -- I'll give to that. I was going to ask -- maybe I'll ask about the M&A now. I mean you've got a lot of cash on the balance sheet. You've got no debt. Danforth closed. Miller's integrated. What is your appetite for M&A as we move further into 2026?

We've always had a strong appetite for M&A. But we're also very disciplined. We don't tend to just want to make deals to make deals. We have to believe it's compelling. Look, we do a lot of the tuck-in stuff, that's extraordinary value for all our shareholders. When you're doing something like a Miller or even Danforth, it's larger big footprint, you really got to make sure that the culture and the values they run their company are the same as yours. You're taking a big thing into your company organization-wise. We always start with all our acquisitions. They got to be able to execute in the field. Because really, we can't fix that reputation. And we're not going to burden ourselves somebody else's bad reputation. Our appetite is we used to say that we'd be willing to leverage up our balance sheet by 2.5x EBITDA to do a deal .

Good luck.

We're not going to -- there's not a $3 billion, $4 billion deal out there likely, but there could be a series of deals that are sort of $100 million to $500 million, give or take. And the reality of good companies, they sell in good markets. It's been my experience over a long period of time and bad companies or financially challenged companies sell in bad markets. Anybody that has a good company is not selling it into a bad market, they'll just wait. . So I expect there'll be a lot of activity, but we're very careful. We usually don't participate in the broad based. Every private equity firm can come with a staple and their main value enhancers they can put debt on a company. We don't try to compete with that nor do we want to. We're usually -- or never, I should say, going to buy a company that's on a fifth PE buyer and now they want to find a strategic chump. We're not that guy either.

Do you see that in this market?

Of course, you do -- and there's other people that are the strategic comp. And we're not going to be -- what we like to do is a Miller, great company, Danforth, great reputation. People we've talked to over a long period of time, the timing is right, either through something was going on with their succession, their ownership structure or they want to get to the next level of growth and you're thinking about the capital structure and what it will take to do that, and they said, time to look for the right partner. I think in those cases, both of them, we were the destination, and it's our job to get to a fair deal so that we can make us the destination. I think there's more than a few companies out there that, that's true for. And really, the last 3 significant sized companies we've done, Baxtor & Kimball, Danforth and Miller and you can throw Quibin there, too. they all had that criteria. We want to be with you. We got to make a fair deal. And look, I'm not looking for a market, to be honest with you. It may turn to look out like one because of how they perform when we team up. But we're not looking for them not to make a good deal for their current shareowner base because ultimately, that's not a good thing either. You want them to feel great about the deal. And when we do a deal, what's interesting about us, A lot of people have all these great acquisition lands you're going to come in there and you're going to get so excited to be part of EMCOR. I could do that to an blue in my face. Person's going to get them excited to be part of EMCOR as Henry Brown, the guy that they work for forever Miller, it's going to be Robert Beck, right? And the folks at Danforth [indiscernible] so that ownership team or that leadership team, in the case of an ESOP have to believe every bit of their fiber, this is the right thing for their organization. And then the integration becomes really successful. If Jason or I are the one settlement still to the people that we just acquired, that's a lousy deal for us. We will come in and do that later. But the first initial tranche of that, that just tells you how we think about things is that management team has to be excited about what we can do together to grow the company.

Okay. Okay. That's helpful. Maybe now we'll pivot away from capital allocation and M&A, and we can go to organic growth, which I think is where there's a lot of questions. I mean, your guide -- what's your guide for this year, 12% to 13%, -- what's your guide.

Started about 9% to 10%.

Percentage increase you're saying.

Percentage increase. Round numbers 9 to 13.

9 to 13. Okay. All right. I had right, 9 to 13 round numbers for organic growth. And if I'm going to break that down in between volume and price, I'm curious about that. And the reason I'm curious about that is because one of the big questions we get from a lot of people are the constraints on growth of the business. How many people you can add as I think about that as a proxy for like your volume. But I also know that there's a lot of -- I mean, maybe you have some more price in elastic customers right now that are just more focused on getting the infrastructure built. So would be curious on how to think about -- yes, this year, but also like going forward, how do we think about that breakdown between [indiscernible] and volume.

I think this year is very much volume -- and then you see that when you look at our guidance, where our margins are relatively consistent year-over-year with what we did in '25 in terms of our guidance. And a lot of that is mix driven. And so when you say what is really driving then our growth, its volume.

So that's interesting. I would have actually guessed it was a little bit more price...

Well, the reason it may be not show up as much price. We're getting price in some markets. But it comes back to the mix. It comes back to the mix of contract structure. And we're still heavily weighted towards fixed price. But in our construction business, specifically mechanically, will be more heavily structured in even some of the electrical markets because of the designs. We're more structured towards GMP, which by its nature, has less margin upside because of a full cost disclosure. . And the reason there are certain owners that only go that way, especially on the mechanical side, coupled with -- I think the reason that's driving part of that is the AI build-out. There's a little more unknowns there on how that construction is going to play out and what changes are going to come versus the cloud, which for us is very much a fixed price market. But even there, one of the big builders still does the mechanical systems, GMP.

The other mix element we have this year, and we talked about this a little bit on our first quarter earnings call is some of our other sectors are starting to grow stronger than they have in the last several years. Water and wastewater is a great example. The food processing work we do within the manufacturing and industrial sector is another example. Both of those opportunities for us are a little bit unique in that there's more equipment content. There's a little bit more subcontract components to it. So our markups are just inherently less on some of that work. So that mix as well is driving demand, but it's diluting margins a little bit.

And I think it's always important to remember who we work for in all those cases. So we're in the water and wastewater market, it's public bid. We either got it right or we didn't, then other than capability requirement which may narrow the competitive field, we're not in there negotiating price. . In the food processing, we are, but we're going against the capital budget over a number of years. Some of these facilities, we've done all the -- [indiscernible] , we've done all their build for 5, 6 years. And so we really don't want to let them think that we're not treating them the right way and we sort of know what we have to hit based on what their capital budget is. When you get to the high tech and the semiconductor and the data center space or in the pharma space, these are really sophisticated buyers. And I sometimes chuckle when I hear some of my competitors CEOs talk about this great price leverage they have. I'm not sure that's 100% accurate because of contracting, it's very difficult to separate price. Price is maybe not as important as good contract terms. Prices maybe not important as being able to release your contingency at the end of the job. But when you release your contingency end of the job, it comes back and looks like price. The contingency was there for a reason. You thought that job was going to be fairly tough. And at the end, you did a little better. Maybe your prefab plan was better. Maybe your labor productivity was much better, but it cuts the other way too. Sometimes you're on a fixed-price job, you don't have enough contingency. We certainly saw that on a job we had last year. So it's our job to figure out the mix between contract structure with the owner, which is the more risk you take, fixed price, the more you have the margin opportunity versus what we're building versus the scope of that work versus the change order mechanisms, if we think it's going to change a lot versus our ability to get in early and help complete the design through design assist. And so the reason Jason says a volume game here for us this year is -- and also within that allows us to grow in new markets and with new customers, if we're willing to sort of do a little more GMP work this year. And I think we're at the point now where margin dollars are more important than margin percentages. And going back to the growth point, the organic growth point, I guess I've been using this example and some of you have heard it, stick with me here for a minute. Miller Electric, a hugely successful company, one of the flagship electrical companies in the country. We bought it, let's say, give or take, it was on track to do $1 billion. Took them 77 years to do that. Great contractor. Danforth, leader, upstate New York goes down to Ohio a little bit. done some of the biggest work from sort of Albany down over and even into the Northern Tero Pennsylvania. 133 years to get to $410 million. We're on a 9% to 13% organic growth. Let's just take -- give or take the midpoint on that versus last year. We're going to grow in excess of what took 10 years to do. And so every year, we're doing that, we're creating another ENR top 10 contractor. And so you get to the resources on that. Our constraint really is not skilled labor in the field. We do a pretty good job finding that where, I think, of course, everybody up and down the hall. I'm a destination employer, whatever that means. What we have to be is the destination employer or the destination for people that want careers, that we can develop the best Forman, project managers, superintendents, [indiscernible]. And I think if we can do that, which I think we have a pretty good track and we can get retention there, which we have great retention there. Then that allows us because the amount of work we're doing in the larger jobs, it allows us to expand that workforce, which allows us to take more work, which allows us to make sure we are the contractor that's going to finish the work we started and do repeat work with them versus be the contractor that also finishes that work for other people. So that supervision is what we're trying to grow because if that's supervision is as good as I know it is, they will attract the best trades people in the market, and there'll be more people that want to build a career for us versus come and do a project for us. And we'll always have both. Like a meaningless number is what's your turnover for your field labor, it's high. Everybody is as high. What we're trying to do is build that core workforce under that turnover that allows us to build that supervision, the journey and all the things we need to do to be successful for the long term.

I hear you guys talk about how the bottleneck is more on the field leadership, which is interesting because if you listen to almost all of your other competitors, the bottleneck is on the workers themselves, the electricians, plumbers, HVAC folk, welders, like it's the core trades people. Why is that not a bottleneck for you? Why do you think it's less of a bottleneck for you than others?

We don't have self-directed workforces. So you [Audio Gap] traded competitors. It's on the union side, right? Our job is to work with the union to grow that local workforce and then have the classifications we need to be able to convert nonunion to union and be able to take people from other trades and upskill to our trade, right? If it's a nonunion business, we run a little bit of one, we don't -- we're not in the labor broker business. We're not hiring somebody else to hire people for us. We're hiring people to work for us. I just think long term, like most things, right, I can have an idea how I can develop the leadership, developing that workforce under the leadership becomes a much more difficult thing if I don't have the right leadership.

And I think that leadership of that supervision is where you get your productivity, your efficiency and the margin gains also

It's also how we can share across the company is how we can take our great industrial contractor here that we had in Gary, Indiana, and get them to move the [indiscernible] to the data centers. and have the guys from Chicago train them because the leadership trust each other that they're going to execute for our core customer base. So you could say it's a chicken or an egg thing. The reason I don't talk about finding the skilled trade is as difficult because if I don't have the skilled leadership, I have people out there that are clueless on how to get productivity means and methods and everything else and keep them safe. So we are much more focused on the [indiscernible]

Got you. Okay. And just in the last minute or so here, I did want to ask about data center. I mean -- it's an important growth market for you. I'm just curious how that has changed? I know you're still entering new markets, but is the way that you are going to market, is the way that your contractors are interacting with the customer or the way that you're interacting with the customers, is that changing? Has it changed?

I think it's changed a lot in the last 5 years. The owners have always been very evolved in any hospital data center project, high-tech manufacturing, manufacturing job. The difference is the breadth that they know our people, right? These big builders and 20 or 30 people in each one of those big builders, really know the depth of our leadership at the lower level. .

The hyperscaler.

The hyperscalers, and that's different. And what they want from us is different. Now we're very careful not to overcommit or tell them, hey, we're exclusively with you because at the end of the day, who are we? We're contractors. We have to manage our opacity with the best opportunity for margin long term. and the best ability to get the job done so that we can keep doing it from other people. I mean, how do you really make money in contracting is not to lose money or disappoint your customers. So that's how you really make money in contracting in the long term. .

A perfect way to end. I hope to see you all at the Maher breakout room. Thank you, Tony and Jason.