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

[Audio Gap] Megawatts. It's probably where we've gotten really good at doing fixed-price work. But there definitely is a shift to more AI and put a number on that. Is it growing 30% a year, Jason, it's growing 40% in the market. Does anybody really know. And so we are definitely participating in the expansion of the size of those data centers. And we're also -- our ongoing cloud business is a great business for us. We serve lots of markets. And so we used to come in and say, "Wow, we're serving 7 markets now mechanically in '16 electrical. I don't know how to do that anymore because there used to be 1 campus or 2 campuses in the state, and now that might be 5 or 6 campuses in the state. So that's irrelevant now. Venture to say we're probably servicing in some way, fire protection we're servicing everywhere in the country. Electrically, we're probably servicing 50% of the markets that matter. Mechanically, somewhere around 40%, 50%, a little less. The scope has definitely gone up. You know when you're doing a 200-megawatt data center, and I always try to ground people with 200 megawatts really means the city of Pittsburgh runs on 300 megawatts. So just a scope of 1 data center may use. We know we're doing more mechanscope, probably 1.5 to 2x if that was just a cloud data center. It's the heat, right? It needs to be cold. And electrically, that might be $1.25 billion to $1.5 billion. Jason, maybe...

I think the only thing I would add is the pace and timing of these projects, right? If you look at how fast these projects are moving today versus what they would just 3 years ago? I think that's another factor in terms of what's changed for us.

And it definitely informs our investments. So it's always important to remember who we are. Were contractors. And so by nature, we're opportunists, right? But we're strategic opportunities. So in a market, we're going to make sure we take care of our core customers, but we're also going to go to where the best margin opportunity is for us to deploy our labor over that 1- to 3-year period. That's sort of for a good contractor. Your long-term investments are building your workforce, your training, building your leadership team, investing in the right software, investing in the right prefab or at least knowing how to expand that because you got to be ready for the moment. So we are -- we got to be where we are in these fast-growing markets. We just didn't fall in it. We had to be ready for the moment. And we were ready for the moment because we invested in all those things I talked about over a long period of time. Now the way you attack the market like data centers is a couple of different ways. One is you have people that were always great at it. They built some of the first data centers in the country that the EMCOR team did. We built the AOL data center in Virginia. In 2000, '99 and 2000, we did the first Equinix jobs down there. And then we did the first big financial data centers. And that team is really what allowed us to expand into the number of markets we are today and that happens 2 ways. It happens through -- you have great electrical mechanical companies that you already own that do really health care and high-end institutional lab work, manufacturing work, and they can be trained to do data center work and their teammates do that with them. You do that through acquisition where someone might be just doing the day 2 work -- and because of our scale, training and capability, we can make them a major data center player. It's someone we acquired the very reasonable cost many years ago -- 8, 10 years ago, but we knew that was starting in that market. And then it informs your capital allocation even today. So we announced 5 electrical deals and $600 million in revenue, trailing, $100 million, give or take, of EBITDA. the 2 biggest being Schmitt and Connolly, Schmit in Central Texas, commonly outside Chicago. And there we already have a good presence in Chicago. And just for the record, both of those are now closed. We closed them early August. And what will happen there? Well, they already have a great customer base. They did a little bit of data center work, but the markets there outside of Chicago to do more, and they can team with where we have a great company there, Gibson and linepinner. -- and those 3 companies will team together to do some other work. In the case of Central Texas, One of the companies we've expanded in the data center market was our Morley-Moss company. We bought it back in 2018. It's now 10x the size it was. Great data center builders that team. They will now bring Smith, who is a very sophisticated contractor and executes well in the field. They will now -- their growth will mainly come from more exposure to the data center market. Jason, and then so you think about markets, people thought about Texas, right? -- is magic, but we think Texas is magic, too. That's why we do outside of the oil and gas business, over $1 billion of revenue in Texas without Smit. And that's -- and so we've spent a lot of time through capital allocation preparing ourselves for the moment. And that's not just data centers, that's high-tech manufacturing, it's health care, it's significant institutional work. And then we have the aftermarket business that we'll do a single line of service trade in any of those sophisticated specific long-winded answer, Jason, you got anything to add?

No, I think.

Tony, that's really helpful. And I think that's a pretty good segway. You mentioned your contractors. You go for the jobs that offer the highest returns. Let's say, in a hypothetical situation, if data centers were slow for a few quarters, do you have the ability to move the workforce around into areas like semis, health care, more institutional work and are you turning down jobs in other sectors to be able to service this data center end market?

The answer to the last question is, of course, I mean, nobody can do everything in a market. I mean you can't -- and so the critical bottleneck for us to grow come at it that way is actually supervision. We'll find the trades people, and we'll find the right ones because they'll want to work for us. But we have to train that Forman, that's superintendent, that project manager to be able to expand. By nature, EMCORE is diverse. Maybe Jason talk a little bit about our diversity of demand, and that will get to the question. But you also have to be able to reposition your work for it. I also mean you have to cut it. And so we, as a big part of EMCOR is, and maybe it's we try to keep our cost structure as variable as it can be. That's the other thing good contractors do. We lease our prefabrication facilities when we build them, we count on a 3 less payback we're doing it with an eye towards that market that we're in today, clear eyed about what it is. It maybe goes through some of the diversity demand and how things would actually shift? Yes. So I think to some extent, right, the work is the work, and we have a track record of being able to pivot from 1 sector to another, whether it was when we moved from warehousing and distribution coming out of COVID to the semiconductor space and then into the data center space. So we could do that in reverse as well. And the other thing is all the investments we've made in prefabrication and some of the construction tools we have. None of them are tied to a single market sector. So you can take those same fabrication shops today that are maybe serving data center customers and use them to serve a different sector. But to Tony's point on diversity, if you just look at EMCOR, let's just take the first half of '26. We've grown organically about 18.3%. And -- but if you strip out high-tech manufacturing, which is semiconductors, biotech and you strip out network and communications, which is data centers, we're still growing organically around 9%. So there's strength in other markets, and those are things like institutional, which is heavily weighted towards some of the colleges and universities we're working for manufacturing and industrial, which includes both the reshoring or near-shoring work we're doing as well as some of the food processing work we're doing.

And then we're starting to see a resumption in demand for warehousing and distribution. And for us, that's been commercial. But it also goes beyond that. If you look at the first half of this year, we saw some sizable growth in our Building Services business, which isn't tied to the data center market. And that's up about 5% organically. And then our oil and gas, our Industrial Services business, is up 15% organically. So I think that just speaks to our diversity and how we are able to serve all of these markets.

And if you think about data centers, I mean a lot of press out there, and I'm not a political prognosticator, I have my own opinions, which I don't necessarily need to share with you today. It's irrelevant as the CEO of EMCOR. You have to understand where we are in a job cycle. So before we get engaged, someone usually has almost always has the power to a -- we're not talking -- usually, in the EMCOR world, they may talk to us about something 5 years down the road, but we're not listening really. For us, there has to be a job there has to be how they're going to prosecute or execute that site, what our role is going to be in it. And my view and I think our constructive view is for the next 3 years, they pretty much know what they're going to build. And that won't be affected unless we really go draconian, which I don't see happening by moratoriums or anything else. And I don't think the political thing is what's going to drive this, by the way. It might be an anteceding of it. All the power we said we need to put in, in these places -- that were sold off for gas turbines through 2031. I know everybody in the room probably knows that because you track things like that in the 3 or 4 major producers. And we're talking large combined cycle things, that's what's going through power this long term or eventually nuclear, that's what powers a baseload system. That will be the obstacle if we don't do that by 2030, it won't be all this other stuff. Because when we talk to our customers and we're talking both to the people that will actually occupy the colos or the people that are building themselves, they're doing both. They can't keep up with their product developers. And for the most part, our customers aren't people like anthropic and Open AI. Our customers are who we would think they would be. And they can't -- for the people like us in this room, they can't keep up with demand which you all want and what we need to run our business, we think long term. So in the cloud business, is a pretty good business in its own right. Of course, my personal view is I always ask people and I pull out my phone, what are you willing to give up? And once we answer that question, we can have these other talks. So the power question is the real question. And when you get to there behind the meter, in front of the meter, I don't think it matters because most of the behind-the-meter solutions will be dispatchable power eventually. The behind the meter means we're funding that solution. So you don't want a data center in your neighborhood. You certainly don't want a combined cycle power plant or the modular okay, we don't want the data center, but we're going to put a modular nook at the end of the call to stack. Right merely. So I think the power will happen. It almost has to happen. But there'll be people that win and losing this. And I think the good news about who we are is we are very well positioned for where it's going to matter. And that's intentional. That's not an accident.

That's really helpful, Tony. I do want to let the audience know, if you do have a question, feel free to raise your hand. We'll get a mic over to you and you could ask. But maybe just moving along here outside of data centers. We've seen some recent announcements on the semi side, your high-tech manufacturing business. Where do you think we are in the semiconductor and the pharma build cycle -- and where do you see demand progressing in high-tech manufacturing as we go into...

I'm going to hit it here, and Jason as we've done some interesting analysis that, first of all, semiconductor work -- there's about 6 geographic markets that matter. We're in 4 of them, and we're in all of them bioprotection sprinklers. It's lumpy work. And the initial fab they build on a site comes in at a big number as far as you get a contract. And then quite frankly, once you've been there, sometimes it comes in in smaller numbers. And you necessarily don't see in backlog, which you may see in revenue eventually. Where do I think we are -- and look, we can participate. We -- in 3 of those places, maybe 3.5 were very good mechanically, electrically, a couple of them and fire work prior everywhere. It's also a very difficult work. Doesn't mean you can't make good margins at -- it doesn't mean -- it is very difficult work for, for the most part, pretty difficult customers. They're all difficult at that center people are difficult to but they're good customers because they value what we do. We're going to sit out the next round of the fab, probably come back to the third 1 as we continue to build up our labor force. Pharma is a little different. I think chunk what we're doing today is tied to GLP-1s. And there, you have to be positioned in the right place. So we are. We're in New Jersey. We're in North Carolina. We're in Indiana. We're here in Southern California where they're doing sort of more of the bio research. So we're where we need to be. There were both mechanic and electric, I'd say probably in general -- like New Jersey, we have more of an electrical presence to do that work to mechanical. North Carolina, we have sort of both Southern California are probably more electrical. But all of them are really good markets for us. But again, go back to what my statement was earlier, we're contractors. We're going to look at that market. We're not going to exclude ourselves from something that matters. But over that 2-year period, we're going to try to get the mix right to maximize margin and our return to you. Jason?

Yes. I think to Tony's point, right, some of the growth we've seen recently in data centers did come at the expense of semiconductors. But if you just step back and you say the high-tech business, which is roughly 40% semi, 40% biotech and 20%, some EV battery work that we're doing. If you just look at that sector overall and you say today versus 3 years ago, we're still operating at a base that almost 1.5x what it was in 2023. And if you kind of did a 3-year CAGR from '23 to today, you'd see that we're growing there at almost 11%. So there's still a lot of opportunity. I still think to Tony's point, we're well positioned. And we -- if you've done it -- if you snap the line in '24, it's shown we were growing 30%, right, because we had a big job, right? And no, we like it. We've been working in Arizona in semiconductors.

I've been here 22 or so 1998 something like that? So that's the thing about our capabilities. We have deep capabilities in some of these markets and where we didn't, we acquired the right companies and we're able to take our folks, and they were good teammates and they brought people along. We share knowledge probably better than any company in the industry. And we share resources. I mean what we can do on the VDC side to share resources across our company. We have 1,500, 1,600 BIM people, scale matters. And the type of work you're talking about, whether it be data centers or semiconductors or pharmaceutical or health care, especially the virtual design construct VDC that then takes it to prefab. That's a real skill. And that then informs our capital spending and what we do there.

Tony, I think that's a really good transition. You just mentioned BDC, prefab. I think in the last earnings call, you mentioned that a good portion of your CapEx is going towards prefab. Maybe what's the right way to think about your prefab capacity expansion? And then how should we think about CapEx as we go into '27, '28 does this investment step down or...

No, I don't think it steps down. Because we're growing the absolute dollars don't step down. About 20%, 25% of that CapEx is just maintenance CapEx. It's leases, it's building upgrades on office space. It's specialized vehicles that we can't lease, it's things like that. The rest, the growth in that CapEx as we build out our modular and prefab capability, which we had, and then we just continue to grow it. Maybe go through the math on that, Jason.

Yes. I think if you look at -- I don't know, let's take a 5-year look, if you look let's say, our revenue CAGR is about 14%, 15% over a 5-year period. Our CapEx CAGR is nearly twice that. It's about 28% to 30%. That delta is those investments that we're making in our shops. And I think it takes 2 forms. Sometimes, it's the addition of new fabrication space, the expansion of existing shops. But the other element of it is us reinvesting in existing shops to make them more productive. How do we add more automation? How do we change out equipment to make sure that the layout is best so that we're getting the most productivity and the most efficiency. So I think we're not capital intensive. Our CapEx is like 0.6% to 0.65% of revenues. And I think that holds into '27 and '28. But the way I would think about it is any CapEx growth in excess of revenue growth, are those investments into the future.