Earnings Call Transcript - EME Q3 2025

Operator, Operator

Good morning. My name is Chris, and I will be your conference operator today. I would like to welcome everyone to the EMCOR Group Third Quarter 2025 Earnings Conference Call. At this time, I would like to turn the call over to Lucas Sullivan, Director of Financial Planning and Analysis. Mr. Sullivan, you may proceed.

Lucas Sullivan, Director of Financial Planning and Analysis

Thank you, Chris. Good morning, everyone, and welcome to EMCOR's Third Quarter 2025 Earnings Conference Call. For those of you joining us by webcast, we are at the beginning of our slide presentation that will accompany our remarks today. This presentation will be archived in the Investor Relations section of our website at emcorgroup.com. With me today are Tony Guzzi, our Chairman, President and Chief Executive Officer; Jason Nalbandian, Senior Vice President and EMCOR's Chief Financial Officer; and Maxine Mauricio, Executive Vice President, Chief Administrative Officer and General Counsel. For today's call, Tony will provide comments on our third quarter and discuss our RPOs. Jason will then review the third quarter numbers, then turn it back to Tony to discuss our guidance before we open it up for Q&A. Before we begin, a quick reminder that this presentation and discussion contains certain forward-looking statements and may contain certain non-GAAP financial information. Slide 2 of our presentation describes in detail these forward-looking statements and the non-GAAP financial information disclosures. I encourage everyone to review both disclosures in conjunction with our discussion and accompanying slides. And finally, as a reminder, all financial information discussed during this morning's call is included in our consolidated financial statements within both our earnings press release issued this morning and in our Form 10-Q filed with the Securities and Exchange Commission. And with that, let me turn the call over to Tony.

Tony Guzzi, Chairman, President and CEO

Thanks, Lucas, and welcome to the call. And I'm going to be on Pages 4 through 5 of our presentation. Good morning, and welcome to our third quarter 2025 earnings call. I'm going to cover the financial highlights for the third quarter and then provide commentary on what has gone well through the first 3 quarters of this year, which has been a lot. Jason will cover the quarterly financial results in detail. We had another strong quarter at EMCOR. We earned $6.57 in diluted earnings per share and generated revenues of $4.3 billion, which represents a 16.4% increase from the prior year period. We achieved an exceptional operating margin of 9.4% and had strong operating cash flow of $475.5 million. For the third quarter, we had a book-to-bill of 1.16, with remaining performance obligations at a record $12.6 billion, which represents an increase of $2.8 billion year-over-year and $2.5 billion from December of 2004. We continue to allocate capital with discipline. For the first 9 months of 2025, we allocated just over $430 million on share repurchases and utilized $900 million for acquisitions. Our balance sheet remains strong and liquid, providing the fuel to support our growth and capital allocation strategy. So what's driving this outstanding performance in the first 3 quarters of 2025? Our Electrical and Mechanical Construction segments continue to earn impressive operating margins and generate growth in their base of business as demonstrated by increases in both revenue and RPOs across a number of key sectors. We execute well for our customers in these segments by using VDC, BIM and prefabrication coupled with strong planning, excellent labor sourcing and management and disciplined contract negotiation and oversight. We have managed our project mix well and continue to gain the confidence of our customers across geographies and diverse market sectors. With respect to data centers, we continue to improve our capabilities to serve an increasing number of data center sites with multiple trades and across a diverse set of customers. As I have said before, we are known for having the best field leadership in the business, and they operate with focus, discipline, humility and grit. Our Mechanical Services business in our U.S. Building Services segment continues to execute well with revenue growth of nearly 6% in the quarter and 7% year-to-date and an operating margin in the high single digits. The impact of the successful restructuring in our site-based businesses is reflected in this segment's third quarter operating margin expansion. Our Industrial Services segment had some demand headwinds during the year as some large turnarounds were moved into the fourth quarter or further into 2026. And lastly, we had a successful third quarter in our U.K. Building Services segment. In September, we announced the sale of our U.K. business and believe that we will complete this transaction by year-end as we await U.K. regulatory approval. EMCOR U.K. has a very talented management team, and they will serve their new owners well, and we will miss them. Overall, we had another strong quarter and a robust performance year-to-date in 2025. Now I'm going to turn to the RPO section. As I previously mentioned, we leave the quarter with a diverse and strong set of RPOs at $12.6 billion. Due to the growth in the majority of the sectors we serve, our RPOs have increased 29% year-over-year and 25% when compared to December of 2024. On a sequential basis, RPOs have increased 6% from June to September. Long-term secular trends across key sectors continue to support this growth. Driven by robust data center demand, RPOs within network and communications totaled a record $4.3 billion at the end of September, almost double that of the year-ago period. While acquisitions have added to our data center capabilities and allow us to serve our customers in additional geographies, over 80% of our RPO growth we have seen in this space during 2025 has been organic. Healthcare RPOs totaled $1.3 billion. While the health care sector has always been core to EMCOR, the acquisition of Miller Electric has expanded our opportunities in this sector, contributing to the nearly 7% RPO growth we experienced year-over-year. Manufacturing and industrial RPOs totaled $1.1 billion. In addition to demand driven by customers' onshoring and reshoring initiatives, recent growth in this sector has also benefited from the award of certain food process projects within our Mechanical Construction segment as well as a renewable energy project within our Industrial Services segment. And led by our Mechanical Construction segment, water and wastewater RPOs increased by over $300 million during the quarter and now total $1 billion as we continue to win projects throughout Florida. Although RPOs within high-tech manufacturing have decreased from September of last year, we continue to believe in the long-term fundamentals of the sector, while acknowledging that the award of these projects can be episodic in nature or impacted by our resource allocation decisions as we seek to deploy our workforce in a manner that achieves optimal outcomes for EMCOR and our shareholders. With that, I will gladly turn the presentation over to Jason to cover our financial results in detail.

Jason Nalbandian, Senior Vice President and CFO

Thank you, Tony, and good morning, everyone. As Tony mentioned, over the next several slides, I will review the operating performance for each of our segments as well as some of the key financial data for the third quarter of 2025 as compared to the third quarter of 2024. I'll start on Slide 6, which is revenues. With growth of 16.4%, revenues of $4.3 billion set a new company record for a third quarter. Acquisitions contributed $306.6 million, with the largest incremental revenue coming from Miller Electric. On an organic basis, revenues grew by 8.1%. We experienced growth within all of our reportable segments, and demand for our services continues to be strong across most of the sectors that we serve. If we look at each of our segments, revenues of U.S. Electrical Construction were $1.29 billion, increasing 52.1% due to a combination of strong organic growth and the acquisition of Miller. Consistent with our commentary over the last several quarters, while we continue to experience greater data center demand, growth within this segment remains broad-based as increased revenues were generated from nearly all market sectors. In addition to networking and Communications, where revenues grew by nearly 70% year-over-year, Electrical Construction saw notable growth in commercial, health care, institutional, and transportation. This once again demonstrates the broad offerings of this segment. Revenues in Electrical Construction also benefited from higher levels of short duration projects and service work due in part to the capabilities we've added through the Miller acquisition. Revenues of U.S. mechanical construction were a record $1.78 billion, up 7%, almost entirely through organic growth. Due to greater demand for data center construction projects, this segment saw the largest increase from the network and communications market sector, where quarterly revenues nearly doubled year-over-year. Beyond data centers, greater revenues were generated from several other market sectors with the most notable increase within manufacturing and industrial, led by food processing construction projects. Partially offsetting the revenue growth within mechanical construction were decreases within high-tech manufacturing as we completed certain semiconductor construction projects and commercial due to less warehousing and distribution project revenue. While we are starting to see some resumption in demand from our e-commerce customers, we are just beginning to ramp up on these projects. On a combined basis, our Construction segment generated revenues of $3.1 billion, an increase of 22.2%. Looking next at U.S. Building Services, revenues of $813.9 million reflect a 2.1% increase year-over-year. This marks the second quarter of revenue growth since the loss of the site-based contracts that we've previously referenced. Similar to the second quarter, the growth in Mechanical Services exceeded the revenue decline within site-based and driven by each of its service lines, our Mechanical Services division generated revenue growth of 5.8% in the quarter, all of which was organic. Turning to our Industrial Services segment. Revenues of $286.9 million are in line with that of the year-ago period. Decreased field services revenues as a result of the completion of a large renewable fuel project were offset by an increase in shop service revenues, primarily due to greater new build heat exchanger sales. Lastly, U.K. Building Services generated revenues of $136.2 million, which represents an increase of $29.8 million or 28.1%. While favorable exchange rate movements positively impacted the segment's revenues by $4.8 million, growth was largely driven by the award of recent facilities maintenance contracts by new customers and increased project activity with existing customers. If we turn to Slide 7 for operating income, we generated a record third quarter operating income of $405.7 million and earned a very impressive 9.4% operating margin. Looking at each of our segments, U.S. Electrical Construction had operating income of $145.2 million, which represents a nearly 22% increase. As a result of the revenue growth I referenced, this segment experienced greater gross profit across the majority of the market sectors in which we operate, resulting in the increase in operating income. While down from the unprecedented 14.1% earned in last year's third quarter, the segment's operating margin of 11.3% remains strong, reflecting the overall performance and execution by our companies. In addition to incremental intangible asset amortization, which reduced operating margin by 90 basis points, operating margin in the quarter was impacted by lower profitability on certain projects in new geographies where we encountered reduced labor productivity while investing in the development of our workforce. Operating income from U.S. Mechanical Construction of $229.3 million increased by 6.7%, in line with the growth in segment revenues, while operating margin of 12.9% is comparable year-over-year as we continue to execute well across our project portfolio. Together, our Construction segments grew operating income by 12.1% and earned a combined operating margin of 12.2%. U.S. Building Services generated operating income of $59.4 million, an increase of 6.9%, and expanded operating margin by 30 basis points to 7.3%. In addition to the increase in revenue, the operating performance of the segment benefited from a reduction in SG&A margin as we are beginning to see the impact of the restructuring we recently completed within our site-based business. Moving to Industrial Services. Despite revenues which were relatively consistent year-over-year, operating income of this segment nearly doubled due in part to a more favorable mix given a greater percentage of higher-margin shop services work. Lastly, U.K. Building Services earned operating income of $7.6 million or 5.6% of revenues. The increased profitability of the U.K. business was due to greater gross profit stemming from increased revenues, a more favorable project mix, and effective cost management, which resulted from the leveraging of their overhead during a period of growth. If we move to Slide 8, I'll cover a few highlights not included on the previous slides. Gross profit of $835.3 million has increased by 13.7%, and our gross profit margin for the quarter was 19.4%. SG&A of $429.6 million increased by $58.4 million, while our SG&A margin remained consistent year-over-year at 10% of revenues. Accounting for nearly 2/3 of the increase in SG&A was $32.2 million of incremental expenses from acquired companies and $5.7 million of incremental intangible asset amortization expense. Excluding these items, SG&A grew by $20.5 million, largely due to employment costs as we continue to invest in headcount to support our organic growth, and we experienced some increased incentive compensation within certain of our segments given higher projected operating results. Lastly, on this page, diluted earnings per share was $6.57 compared to $5.80, an increase of 13.3%. If we look briefly at Slide 9, this slide summarizes our results for the first 9 months of 2025. With year-to-date revenue growth of 15.5% and operating margin expansion of 20 basis points or 30 basis points when you exclude the impact of the transaction costs incurred earlier this year, our performance for the first 3 quarters set a number of new company records. In a later slide, Tony will outline our updated earnings guidance for 2025. As I've done in the past, I mentioned that now this guidance reflects continued strength in our margins. Specifically, at the low end, we have assumed a full year operating margin, which is equal to what we have earned year-to-date, while the high end reflects what we could achieve if we produce an operating margin in the fourth quarter equivalent to the record margin we earned in Q4 of last year. Let's move to Slide 10, which is our balance sheet. With cash on hand of $655 million and working capital of $878 million, our balance sheet as of September 30 remains strong and liquid, positioning us well to continue to deliver for our customers and shareholders. Although not shown on the slide, during the quarter, we had operating cash flow of $475.5 million and have generated $778 million year-to-date. For the full year, we continue to estimate that operating cash flow will be at least equal to net income and approximately up to 80% of operating income. Given our strong operating cash flow during the quarter, we repaid the $250 million that was previously outstanding under our revolving credit facility. And before I turn the call back over to Tony, I just want to quickly look at Slide 11, which summarizes the pending divestiture of our U.K. business. As Tony mentioned and we previously announced, we have entered into an agreement to sell EMCOR U.K. for approximately $255 million. This transaction, which we anticipate will close prior to the end of the year, sharpens our focus on core end markets throughout the United States while supporting our balanced capital allocation strategy. Proceeds will be used to pursue further organic growth and strategic M&A with a focus on electrical and mechanical construction as well as mechanical services while also returning capital to our shareholders. Due to the size of the U.K. business, this transaction will not be treated as discontinued operations. As a result, we will retain the revenue and earnings that have been generated by the business through the close of the transaction. While EMCOR U.K. currently provides us with approximately $500 million of annual revenue and $0.45 of diluted EPS, the impact in the current year will be limited to the portion of 2025 that we no longer own the business. This has been reflected in the updated earnings guidance, which Tony will share with you. When providing our Q4 results, we will adjust for transaction expenses and any gain from sale as those items are excluded from our guidance. With that, I will turn the call back over to Tony.

Tony Guzzi, Chairman, President and CEO

Thanks, Jason. We've been executing very well. As a result, we will tighten our 2025 revenue and earnings per share guidance. Specifically, we're updating our full year 2025 revenue guidance to a range of $16.7 billion to $16.8 billion from a previous range of $16.4 billion to $16.9 billion. This reflects the momentum we have seen in the business while adjusting for the anticipated sale of the U.K. segment. We are also narrowing our guidance for non-GAAP diluted earnings per share to a range of $25 to $25.75, reflecting an increase of $0.50 at the low end and $0.25 at the midpoint. In order to continue to earn strong operating margins, we will need to continue to execute with discipline and efficiency for our customers. I always remind our investors that this is not a quarter-to-quarter business with respect to operating margins and the past 4 to 8 quarters on average reflect the underlying margins in our business. There remains momentum and demand in key sectors, especially in data centers, traditional and high-tech manufacturing, health care, water and wastewater, HVAC service, building controls, and retrofit projects. Macroeconomic uncertainty always exists, especially around tariffs, trade, and now we have the government shutdown again. But we believe our guidance reflects the potential impact of such uncertainty as we view it today. We will remain disciplined capital and resource allocators. Our strong balance sheet bolsters our ability to execute a healthy pipeline of acquisitions and also robust opportunities to invest in our organic growth and return cash to shareholders through dividends and share repurchases. When we talk about resource allocation, we work to maximize our opportunities across the right sectors, customers, contracts, and geographies. Our resources, that is our supervision, our virtual design and construct or VDC capability, prefab, and as important as anything, our subsidiary and segment leadership's time, attention, and focus as they are ultimately the quarterbacks that direct this allocation. We think about that across all those sectors, customers, contracts, and geographies. Last night, we signed an agreement to acquire the John W. Danforth Company based in Buffalo, New York, with operations across Upstate New York and Ohio. Danforth is a mechanical construction company with expertise in data centers, health care, industrial, manufacturing, and commercial. They also have excellent VDC and prefab capabilities. Danforth should add about $350 million to $400 million in revenues with solid steady-state margins. However, in the first year, those margins will be reduced to backlog amortization. The transaction is expected to close in the fourth quarter, subject to customary closing conditions. They are a great team. They have a great cultural fit with us, and we have worked together successfully in the past. We do look forward to much success together, and we look forward to soon welcoming the Danforth team to our EMCOR team. And I'm going to close with what's probably the most important statement that I make at every call. I want to thank my EMCOR teammates. Thank you for your dedication to EMCOR and our customers. Thank you for living our values every day. Thank you for taking care of one another and keeping each other safe. And thank you for the outstanding results you continue to produce for our shareholders. And with that, I will take questions.

Operator, Operator

And today's first question comes from Brent Thielman with D.A. Davidson.

Brent Thielman, Analyst

Tony, to expand on your comments and concluding statement, it seems that some may be surprised by this quarter's margin profile. As you mentioned, this is a construction business, and there are impacts from mix and various factors in any given quarter. Can you elaborate on the margins you're seeing from new work? Are they looking attractive compared to what we've reported here? This is a chance to address those concerns.

Tony Guzzi, Chairman, President and CEO

This is some of the strongest overall operating margins we've had in a quarter. We knew we were going to have amortization headwind in the Electrical segment. And without the amortization headwind or the investment in new markets, reality is we're over 14% in Electrical. Mechanical margins are very strong. Building Services margins are strong. Jason, I think year-to-date, these are the best margins we've ever had on a year-to-date basis.

Jason Nalbandian, Senior Vice President and CFO

And I think the thing that I go back to, Tony, is we've said over time, right, a rolling 12- to 24-month average is where we expect our margins to be. Those margins would be somewhere between 9.1% and 9.4%. And on a consolidated basis, we delivered 9.4% in the quarter. When you look at where we were as we exited Q2, we said for the full year, our margins would be between 9% and 9.4%, and we delivered at 9.4% in the quarter. So I think we're delivering the margins that we anticipated.

Tony Guzzi, Chairman, President and CEO

Yes. The business does experience some fluctuations. However, acquiring a company as large as Miller, along with the backlog amortization we will undergo, means we cannot maintain margins at previous levels. This is not what we indicated when we provided our guidance for the year. So I find some of the margin reactions quite confusing, to be honest.

Brent Thielman, Analyst

Yes. Understood. I guess a separate question, nearly a double, if not more, in data center RPOs. I think folks understand that's a pretty good market. Maybe if you could just touch on maybe some of the other sectors and maybe what areas are surprising you in terms of relative strength or maybe even getting stronger that you'd point out outside of data centers?

Tony Guzzi, Chairman, President and CEO

Yes. I mean I think you hit on a really important question, Brent. We have a broad base of business outside of data centers that's pretty successful. A good marker, and I always think about this in our business broadly, is what goes on in the mechanical service business, which grew mid-single digits, has strong operating margins and almost has no data center exposure. I think I have this right, 7 of our 10 mechanical segments had growth and 10 of our 11 electrical market sectors had growth. We're seeing strong growth on the mechanical side in water and wastewater. We continue to see strong demand in health care in both sectors, really. The addition of Miller really bolsters our health care exposure on the electrical side in some of the fastest-growing health care markets in the country of which they're exposed to. We continue to see good opportunities in traditional manufacturing, especially for us in food processing. It's one of the few things we do on a large-scale EPC, and we do it very well out of our Shambaugh subsidiary in Fort Wayne, Indiana. We continue to see pretty good demand in traditional retrofit commercial. It's a strong market for us, especially with an eye towards energy efficiency and the restacking of buildings that continues to go on. High-tech manufacturing, that's a choice. We have very strong demand in parts of the country, and we're executing very well. In other parts of the country, it's a little lumpier or we may rededicate those resources, quite frankly, to more data center work versus slog through another semiconductor plant in parts of the country. We did very well on it. It's just a very difficult customer set and application in one particular case. When you put it all together, demand is broad-based. It's strong. We like having diverse demand. We're going to continue to pursue diverse demand. That's good news for our shareholders for the long term, and we're not giving up anything on the data center side by doing that.

Operator, Operator

Next question from Adam Thalhimer with Thompson Davis.

Adam Thalhimer, Analyst

The organic expansions you talked about that impact of the Electrical segment, Tony, can you just talk about the investments you're making, how long that headwind might persist and what the benefit?

Tony Guzzi, Chairman, President and CEO

I think typically, Adam, it's a 1- or 2-quarter headwind as we start up the job. And it's a margin investment is what it is. It's not really a capital investment upfront. It's a margin investment as we have to go through the learning curve of building a labor force. Sometimes that takes a little longer, sometimes we get it right at the beginning of a new market. Sometimes it takes us further into the job to get it right. We do that all the time. We only call that out, I think, to make investors aware that it's not a linear line when you expand from what was 3 or 4 data center markets in 2019 serving to over 16 today electrically and from 1 or 2 mechanically to over 6 today mechanically. It's not a linear straight line. We have yet to not do it successfully. It’s just more of a pointing out that this is part of how we grow the business and what we almost look at it as R&D to go into a new market.

Jason Nalbandian, Senior Vice President and CFO

Yes. I think there's a combination of things that we expect to happen as we move forward, right? We'll build that labor force, we'll get that efficiency. We'll inherently become more productive as we do the next phases of these contracts, and we'll learn some lessons here and we'll price our jobs to that market.

Tony Guzzi, Chairman, President and CEO

It's an ongoing headwind always in the numbers. This was a little more if it was a little bigger site.

Adam Thalhimer, Analyst

Okay. I noticed that you mentioned the possibility of flat margins in Q4, which I found interesting. I'm just wondering how you plan to reach the high end of the Q4 margin guidance.

Tony Guzzi, Chairman, President and CEO

I think it's just project timing. At this point, there's really nothing new. Depending on when Danforth closes, it's not going to add much, but we will have revenue coming in with low margins due to the backlog amortization headwinds. We're still working through the Miller backlog amortization. I think those are key points. Operationally, we expect to perform well in the field.

Operator, Operator

And the next question comes from Brian Brophy with Stifel.

Brian Brophy, Analyst

Just wanted to follow up on the geographic investments. I would like to understand if you could help us quantify the impact. Based on the numbers you provided, my rough calculations indicate a margin impact of around 200 to 250 basis points for the quarter. Is that an accurate assessment?

Jason Nalbandian, Senior Vice President and CFO

Yes. I think I'll give you dollars, and we can work that into margins. If we look at the jobs that drove it, it's probably about $13 million or so.

Brian Brophy, Analyst

That's helpful. I appreciate all the insights on the U.K. business. I'm curious about your perspective on the business portfolio after the transaction closes. Are there any other areas you might consider noncore? How are you currently viewing the portfolio?

Tony Guzzi, Chairman, President and CEO

We constantly assess our portfolio. We are making ongoing adjustments in our mechanical and electrical construction business, including mechanical services. Recently, we invested in several projects in a couple of geographic markets to gain scale, amounting to a $13 million investment. While this might not be seen as a typical portfolio action, it was significant this quarter. In major metro areas, we no longer wish to participate in the electrical side of the traffic market, so we are gradually winding that down across various markets. This is part of our routine operations, including opening new branch offices in the mechanical service business, sometimes through minor asset purchases. In this case, the U.K. has been phased out, and we have brought in John W. Danforth. The U.K. has been a success story for us. For those who have followed us for a long time, it’s clear we turned the operation into a very successful venture with a fantastic team. It was the right decision for our shareholders and for the team to exit at this time. Given the other opportunities we have, we wouldn’t allocate significant capital for growth there, such as expanding the U.K. platform into Europe for a facility services business. This exit was likely necessary for the continued growth of that business. Bringing in John W. Danforth is another strategic decision. They are well-known to us and hold a steady leadership position in a market where we have previously collaborated. They bring valuable capabilities in BIM, VDC, and prefabrication, which are applicable in the data center, heavy industrial, and healthcare sectors, and they effectively manage these projects.

Operator, Operator

The next question is from Justin Hauke with Baird.

Justin Hauke, Analyst

Great. I would like to expand on the previous question regarding capital allocation. You completed the Danforth project after a strong cash flow quarter, and you have the proceeds coming in from the U.K. However, can you provide any insights into the absence of buybacks this quarter? Does this suggest that there are other impending transactions that may be nearing completion, or is there anything else to address? Typically, your buybacks are quite consistent from quarter to quarter.

Tony Guzzi, Chairman, President and CEO

Yes, we did more in the first part of the year than usual, and most of that was done through a 10b5-1 plan. We’re not active traders of our stock. There was some dislocation in the 10b5-1 that affected the second quarter. However, we are not constrained by capital and will allocate it wisely over time. Looking at our capital usage, we are planning to add about 400,000 square feet of prefabrication space by year-end, which will enhance our modular construction abilities, mainly for our projects across various business segments. Danforth contributes to this with their modern facilities, which is a major advantage in a competitive labor market. We do not face capital constraints and view current market timing as normal. Our performance remains strong, we have good cash flow, and we intend to maintain a solid and liquid balance sheet. When you review the past six years, the next six should reflect a similar trend.

Operator, Operator

The next question comes from Avi Jaroslawicz with UBS.

Avinatan Jaroslawicz, Analyst

So I noticed that organic growth has been running around mid- to upper single digits the last few quarters. Are you thinking that should be picking up at all in the near term just based on some of the backlog growth that you're seeing? Or does this seem like a more comfortable rate for the foreseeable future?

Tony Guzzi, Chairman, President and CEO

I believe that a growth rate in the high single digits to low double digits is likely a reasonable expectation. Considering our size, the law of large numbers starts to play a role. If we say we're achieving 10% organic growth, that translates to adding between $1.5 billion and $2 billion in organic revenue over the course of a year. That's quite impressive while still maintaining our cash flow and margin profile. Jason, I think that’s a solid perspective.

Jason Nalbandian, Senior Vice President and CFO

I agree with that, Tony. If you examine the sequential growth of RPO, we are seeing a 5% to 6% increase. This suggests a positive outlook for the future. Additionally, currently around 20% of our RPO is expected to be utilized beyond a year, which is higher than the historical average of about 15%. The longer-term projects we are securing now are affecting the turnover of that RPO.

Anthony Guzzi, Chairman, President and CEO

Yes. We are experiencing strong growth in certain markets. Our data center business is expected to grow in the high teens to mid-20s for some time. Forecasts indicate that cloud storage and data centers will see growth in the high single digits to low teens. Regarding AI growth, depending on the source, we've seen indications that AI data centers will grow by over 20%. This segment is expected to become a larger part of our business, which we are intentionally developing, although we will not overlook our traditional business. Over the long term, our construction businesses have outpaced non-residential growth by 500 basis points.

Jason Nalbandian, Senior Vice President and CFO

Over a 5-year period.

Tony Guzzi, Chairman, President and CEO

Over a 5-year period. That's probably a pretty good marker. It may go a little more than that because of the data center concentration, but maybe that picks up another 100 basis points. These are long-term projections. I think high single digits organic, maybe pick a couple of more points up through acquisition is how we think about the business over a long term and how we have thought about it over a long period of time in our planning.

Avinatan Jaroslawicz, Analyst

Okay. I appreciate that perspective. And then if I could just ask a follow-up in terms of some of the cost of growth that you've been seeing, just with growth having been relatively steady just on the organic side, can you share some more color as to what made this maybe more unique than past situations? You've been growing at a pretty nice clip over the last couple of years. And similarly, have we had any periods where there have been a similar type of level of these start-up inefficiencies in the Mechanical Construction segment?

Tony Guzzi, Chairman, President and CEO

They show up, yes. The only reason we called it out this quarter is a little more than usual. This happens just about every quarter, and you can see it in our disclosures. That's where most of that rests. This was a little more, a little tougher market, a little tougher job building the labor force. Really, it's still a profitable job. I want everybody to think that we invested into a wash job. That's not what happened here. This is classic revenue recognition thing, right? The margin came down versus what we expected. Like Jason said, we probably were a little more optimistic than we needed to be as we entered that new market because, quite frankly, if you looked at the customer and what we thought we were going to be doing and the speed with which is going to happen, we'd work from other markets before, and we had a different experience, and we had a more experienced workforce.

Operator, Operator

Our next question is from Sam Kusswurm with William Blair.

Samuel Kusswurm, Analyst

I guess to start, looking at your network and communications end market, it looked like revenue was flat sequentially for total U.S. construction. Just given the rapid sequential growth we've seen in the last few quarters, I think some investors may have found that surprising. Can you talk about what caused that pacing to slow? I think you just mentioned that you think we're going to market.

Jason Nalbandian, Senior Vice President and CFO

Can you repeat that question for me because we're not seeing that same data point. I just want to make sure I understand the question. You're saying revenue in Network and Communications is flat for construction?

Samuel Kusswurm, Analyst

For total U.S. construction sequentially.

Jason Nalbandian, Senior Vice President and CFO

Year-over-year was growing. Sequentially, I think it's just project timing. I think year-over-year, we're up tremendously, right? We're probably up almost 80%. I think electrical is up 70%. Mechanical is nearly double. I think it's up 90% or so. Sequentially, I wouldn't really look at this business one quarter to the next.

Tony Guzzi, Chairman, President and CEO

RPOs are up almost double.

Jason Nalbandian, Senior Vice President and CFO

In the quarter, at least 50% of our RPO growth came from network and Communications.

Tony Guzzi, Chairman, President and CEO

Yes, we're not seeing any slowing in the market. There is a lot of project timing. Our surprise indicates that we believe this is a strong area for us, and it will continue to grow.

Samuel Kusswurm, Analyst

Got it. Okay. That's helpful. Maybe just sticking with the data center theme though. Maybe you could just update us on the footprint of your mechanical business. I think last we spoke, you had been in about 5 markets today, but you were thinking of maybe taking that up to kind of the electrical business, 15 markets. How should we think about that as you think about the next year?

Tony Guzzi, Chairman, President and CEO

We plan to add 1 to 2 mechanical markets in the coming year. The distinction between mechanical and electrical is that mechanical requires a more developed workforce, and you need to carefully consider your prefabrication strategy as you enter that market. There is a higher level of investment needed in prefabrication and VDC to support the transition into the mechanical market. We anticipate expanding by at least 2 additional markets over the next year, potentially more with the acquisition of Danforth. For the electrical side, we expect to add at least 1 or 2 markets as well, possibly more. It’s also crucial to understand that once you are involved in certain sites, the build process can extend over 5 years. Frequently, multiple EMCOR companies can be present at the same site. Additionally, it's difficult to quantify the number of fire protection sites we are involved with. In our fire life safety division, we likely provide services to about 70% of data center sites across the country in various capacities.

Operator, Operator

The next question is from Sangita Jain with KeyBanc Capital Markets.

Sangita Jain, Analyst

So I appreciate the color on the RPOs in Network and Communications. Can you just elaborate if you're seeing potentially larger individual bookings in this segment or if there's any change in terms of how these contracts are coming through?

Tony Guzzi, Chairman, President and CEO

The answer is yes and yes with a caveat. Some of the contracts also will be larger, but they'll be in a contract type called GMP, where we only book a portion of that work over time because they let out the next phase, even though we know we have the whole thing, which may distinguish us from other people. Again, at EMCOR in RPOs is only contracted work. This includes places where we may have $30 million in RPOs, but we know we're going to do $100 million of work. We've been relatively consistent with that. But in general, they're getting larger, I think, is a fair comment. The project size is getting larger, and that's a combination of larger call it storage sites and larger AI sites for sure, with more content, especially mechanically.

Sangita Jain, Analyst

Are you booking projects further in advance, even for those that may not start for a few quarters?

Tony Guzzi, Chairman, President and CEO

No. We know we're probably going to get those projects. But again, which differentiates EMCOR from some other people in our sector, our space, is even though we're pretty sure we're going to get the next 5 buildings until that next data center is let, it's not in our RPOs, even though it's like an 80%, 90% probability we're going to get it.

Jason Nalbandian, Senior Vice President and CFO

Yes. If you're looking at the growth in RPOs greater than a year, it's not data centers that's driving that. It's some of the other work we do, particularly in the water and wastewater.

Sangita Jain, Analyst

Okay. That's helpful. And then is there anything in your guide '25 guide for the acquisition that you just referenced?

Tony Guzzi, Chairman, President and CEO

No, any impact they have for '25 will be immaterial, maybe a little bit on the revenue side, but we don't know exactly when we'll close. Then you have to offset that versus when the U.K. will close. We think we called it about right. If the U.K. closes later, and this one closes earlier, maybe we go towards the higher end of that guide more comfortably.

Jason Nalbandian, Senior Vice President and CFO

Yes. On the bottom line, right, if you just think EPS, just because of the backlog amortization, typically, the impact is negligible in that first, let's say, 12 months or so just because of the backlog amortization. Certainly, for the fourth quarter, the impact on EPS of the acquisition should be minimal.

Tony Guzzi, Chairman, President and CEO

De minimis.

Operator, Operator

And the next question is from Adam Bubes with Goldman Sachs.

Adam Bubes, Analyst

I think your hours per employee has moved up steadily higher over the last few years. Can you just talk about how much more runway you have to increase utilization, both from an hour per employee basis and then in terms of just productivity?

Tony Guzzi, Chairman, President and CEO

Well, I think we're going to continue to drive productivity. Again, because of project mix and like we do with more water and wastewater coming in, that is even more different because of some of the subcontractor work we do. I think in general, at a minimum, I think we're going to continue to drive at least 3% to 5% better because we got to a pretty good place of productivity. But I think it will be higher than that. Go back to that discussion we just had about our shop investments. Our man hours are growing less than our revenues, and we expect that man hours to continue to grow 1/3 to half as much as revenues will grow. Most of our revenues, this is what's interesting. At one time, if you go back 5 or 6 years, we would have had much more equipment in those revenue numbers. Most of the data center work or high-tech manufacturing work we're doing, even some health care work, we're not really buying the major components, and most of that was driven by supply chain. The difficulties around supply chain post-COVID and extended lead times, the owners or the owners through the CM's general contracts, but mainly the owners are buying that equipment now and sending it to us for a handling fee. The revenue growth would even be more. The productivity we're getting and the ability to grow hours at 1/3 to half the rate of revenues is even more impressive if you look over the last 3 to 5 years versus if you took a 10-year view.

Jason Nalbandian, Senior Vice President and CFO

Yes. We've talked about it before, right? If you look over a 5-year period, revenue is growing basically 3x what our headcount is growing. I think Tony touched on the productivity tools and the investments in prefab. I think the other thing impacting that, too, is project sizes, right? As project sizes scale up, you inherently get more utilization, and we're benefiting.

Tony Guzzi, Chairman, President and CEO

Especially if your indirect.

Adam Bubes, Analyst

Got it. And then your data center business has grown at a really impressive high double-digit rate. The backlog would support sort of continued double-digit growth. Can you just take us under the hood and help us think about how you're able to allocate resources so efficiently and how quickly you'll be able to move labor around from here? What's sort of the sustainable rate of growth that we should be underwriting in that business?

Tony Guzzi, Chairman, President and CEO

Look, I think if you heard what I just said earlier, and I think you're probably looking at the same market forecast we are and compiling them all and trying to get a view. Cloud storage is going to go 9%, 10% is what most people think over the next 5 years. AI, depending on which ones you look at, are in excess of 20%, 25%. If you blend that out, we're doing both. There's no reason for us not to believe it's not a quarter-to-quarter business. We continue to look annually year-over-year. I don't know, mid-teens to low 20s depending on the year or the quarter. Eventually, you get into the law of large numbers there, too. But sustainably, the good news is we're penetrated with the right customer. I'll share an anecdote with all of you because I think it's really constructive. We are a large data center builder that our customers value. We just pulled together our 80 top people or so in the data center business. We actually did it at Miller, and they hosted it. It's a really impressive group of people that really know the business and know the customers. What we talked about on our side were means and methods on how to drive productivity and contract terms and the things we're seeing that can lead to better outcomes for not only EMCOR, our shareholders, but also the customer. What was different about this meeting is, and I'm not going to get into names, 3 of the top 4 actual end use, the actual end result in capital, and the other 2 wanted to come in, but the schedules wouldn't allow and they've since done conference calls on these, where the direct owners wanted to come in and make sure that we understood what they had planned and how much they wanted us to be part of those plans going forward. This is looking right through the general contractors and construction managers who are ultimately who write our checks and are very important customers for us and partners. The end user, the big hyperscalers wanted to know how important it is to share their plans with us on a proprietary basis. To be able to pull our team together like that, to be able to talk about how we get better to be able to talk very specifically around means and methods and labor productivity, couple that with our customers sharing their outlook on their capital spending, that led me obviously more positive than negative by a long shot on what data center build looks like over the next 5 years.

Operator, Operator

And at this time, we are showing no further questioners in the queue, and this does conclude today's question-and-answer session. I would now like to turn the conference back over to Tony Guzzi for any closing remarks.

Tony Guzzi, Chairman, President and CEO

Look, we'll see a couple of you, and we'll see some of the more investors as we're out and about with conferences here in November and December. But for the rest of you, this will be the premature happy Thanksgiving and have a great end of the year and happy holidays and all those things. For those of you that enjoy Halloween, enjoy Halloween tomorrow. Mostly, that should be people with little kids. After that, it's not that much fun. That's my view. But no, thank you all and to my EMCOR colleagues. Stay safe, and we look forward to seeing you all about.

Operator, Operator

Today's conference has now concluded. Thank you for attending today's presentation, and you may now disconnect your lines.