Earnings Call Transcript - EME Q4 2024

Betsy, Conference Operator

Good morning. My name is Betsy. I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group, Inc. fourth quarter and full year 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' prepared remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star then two. I would now like to turn the call over to Andy Backman, Vice President of Investor Relations. Mr. Backman, you may begin.

Andy Backman, Vice President, Investor Relations

Thank you, Betsy, and good morning, everyone, and welcome to EMCOR's fourth quarter and full year 2024 earnings conference call. Those of you joining us by webcast, we are at the beginning of our slide presentation. 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 Maurizio, Executive Vice President, Chief Administrative Officer, and General Counsel. For today's call, Tony will provide comments on our fourth quarter and the full year 2024. Jason will then review our fourth quarter and full year numbers, before turning it back to Tony to discuss our recent acquisition of Miller Electric Company, our RPOs, as well as reviewing our 2025 guidance before we open it up for Q&A. Before we begin, as a reminder, this presentation and discussion contain certain forward-looking statements and may contain certain non-GAAP financial information. Slide two 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 financial statements. 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-K filed with the Securities and Exchange Commission. And with that, let me turn the call over to Tony.

Tony Guzzi, Chairman, President & Chief Executive Officer

Thanks, Andy. And good morning, and welcome to our fourth quarter 2024 earnings call. In my opening comments today, I will primarily highlight our performance in 2024, discuss what went well, and the challenges we faced. I will also provide some brief remarks on the quarter before turning it over to Jason, who is going to cover the quarter in detail. I'll then close by outlining our 2025 outlook and guidance. For my initial comments, I'd ask you to turn to pages four and five. For the fourth quarter of 2024, we again had record performance on nearly every relevant financial metric including diluted earnings per share of $6.32, operating income of $389 million, operating margin of 10.3%, operating cash flow of $469 million, and revenues of $3.77 billion, a 9.6% year-over-year increase. It was a great quarter finishing an exceptional year. For 2024, we are at $14.6 billion in revenues, achieving year-over-year revenue growth of 15.8%, had diluted earnings per share of $21.52, operating income of $1.3 billion, and an operating margin of 9.2%. We had operating cash flow of $1.4 billion. It was a terrific year with strong execution across our business, supported by well-timed long-term investments that position us to serve growing, diverse, and technically sophisticated end markets. Our performance culture, centered on mission first, people always, enables us to attract, develop, retain, and reward an exceptional workforce, which in turn drives our strong performance for both our customers and our shareholders. So this morning, rather than providing a segment-by-segment recap of the year, what I thought I'd do is provide an overview of what went well in 2024 and really what has gone well over the last three to five years, as well as some of the challenges we overcame to deliver an exceptional 2024. First, we operate in growing markets that offer long-term opportunities for success. However, to perform well in these markets, you must have the ability to attract, develop, and retain exceptionally skilled labor. You must exhibit excellence in project planning and development, virtual design and construction, which I'll refer to as VDC, which includes BIM or building information modeling. That then leads to prefabrication and then automation of some of our prefabrication operations. You also need to have experienced leaders down through the segment and subsidiary levels who can manage the performance of the work and earn and maintain the confidence of our customers, highlighting that we have the ability to efficiently execute projects under the most demanding conditions without compromising safety. As we have demonstrated again in 2024 and really over many years, our ability to perform well in growing markets like data centers, high-tech and traditional manufacturing, healthcare, energy retrofits, and water and wastewater projects provide us the opportunities to generate above-market growth. At EMCOR, we pivot to sectors where growth and opportunity exist, and we deploy our skilled workforce and leadership teams to tackle the most difficult projects for customers who value our capabilities, experience, and strong balance sheet. Further, we have a broad service offering and the trade depth to effectively execute that offering. Our extensive capabilities across the mechanical and electrical trades allow us to provide a more comprehensive scope and give us the desired scale for our customers. In the electrical trades, we can offer the full range of medium and low voltage solutions across geographies and markets and customers. Our mechanical capabilities span large complex mechanical and piping systems in high-tech and traditional manufacturing, industrial, oil and gas, healthcare, and water and wastewater projects that often require superior VDC and prefabrication capabilities to ensure efficient, precise, and safe execution. Our mechanical capabilities extend to FireLife Safety where we design, install, and service some of the most complex fire suppression and alarm systems. Beyond construction, our capabilities extend to the aftermarket where we have the skills and scale to meet our customers' needs with HVAC and building control service and retrofit projects, as well as electrical retrofits, low voltage work, and the fire life safety service solutions mentioned above. Finally, we invest in the long term for our people, and we are disciplined capital allocators. At our core, we are a company that succeeds because of excellence in built leadership and skilled labor united by our core values of mission first, people always. We have a comprehensive leadership development program from project managers and foremen to segment and corporate leadership. We train extensively across the skills that enable our success. We also have leading succession management as evidenced by the fact that 80% of our subsidiary segment promotions are internal and well planned. Our voluntary turnover rates at the subsidiary and segment leadership levels are near zero, as we have a pay-for-performance culture and we work collectively as a team to achieve superior results for our customers. Our capital allocation model is balanced and effective, focused on building the business first through organic investment. For example, over the past three years, we have more than doubled our capital investment in the business with CapEx now in 2024 of $75 million. We have a very successful acquisition program and we returned cash to our shareholders through dividends and share repurchases. In 2024, we completed seven acquisitions for approximately $230 million and we returned $43 million in cash through dividends to our shareholders and $500 million to our shareholders through share repurchases. The Miller acquisition, which we will discuss later in this presentation, closed on February 3, 2025, and is a great example of our capital and discipline in action. As we have said in the past, deals happen when they happen, and we are disciplined acquirers focused on building our overall business to better serve the demands of our customers through offering diverse services across markets and geographies. While 2024 was an exceptional year, we did have some challenges. These include ongoing supply chain issues, finishing some pre-COVID work that was not the greatest, and the intense competition we faced in our US and UK site-based services business. Building and maintaining our skilled workforce is always a challenge, but our field leaders are best in class in labor planning, sourcing, training, and retention. We anticipate facing some macro and other potential challenges in 2025, but as we've done in the past, we will work to protect ourselves with excessive planning and where appropriate prefabrication and automation coupled with the right contractual terms and structures. As contractors, it is in our DNA and training to adapt and improvise to achieve acceptable results. We exit 2024 with RPO growth of 14% year over year, aggregate RPOs of $10.1 billion, another record for the company. Miller added over $700 million RPOs as of our February 3 closing that is not in the $10.1 billion 2024 year-end number discussed above. Our balance sheet remains liquid and strong, even after the $865 million acquisition of Miller. With that, Jason, I'll turn the discussion over to you.

Jason Nalbandian, Senior Vice President & Chief Financial Officer

Thank you, Tony, and good morning, everyone. Starting on slide six, I'm going to review our operating performance for each of our segments, as well as some of the key financial data for the fourth quarter of 2024, as compared to the fourth quarter of 2023. I'll also touch on some of the highlights for our full year performance, in addition to our acquisition of Miller Electric, and the impact on our guidance for 2025. As Tony mentioned, consolidated revenues were a record $3.77 billion, an increase of $330.8 million or 9.6%, which was led by our construction segments, as we continue to execute well and demand remains strong across most of the key sectors that we serve. On an organic basis, revenues grew 7.4%. We look at each of our segments, revenues of US electrical construction were $933.2 million, an increase of just over 22%. The most significant growth in this segment was experienced in the network and communications market sector due to a number of data center projects. But beyond data centers, demand within this segment continues to be broad-based with notable revenue increases within high-tech and traditional manufacturing, transportation, and institutional. US mechanical construction generated revenues of $1.66 billion, increasing 12.8%. Similar to electrical construction, the largest growth during the quarter was seen within network and communications. In addition, this segment experienced revenue increases within a number of the other sectors in which we operate, including high-tech manufacturing and healthcare. Revenues of the mechanical segment also benefited from higher levels of service work, as we continue to grow our mechanical and fire protection maintenance base. As expected and consistent with my comments the last several quarters, partially offsetting the growth in both of our construction segments was a decrease in revenues from the commercial market sector due to either reduced demand across the commercial real estate industry or the completion of various warehousing and distribution projects. Further, within the mechanical segment, we did experience a quarterly decrease in revenues from the manufacturing and industrial sector due in part to the timing of project startups. With a robust pipeline of traditional manufacturing and food processing projects, along with a 7% year-over-year increase in manufacturing RPOs, we remain confident in the underlying demand drivers of this sector. On a combined basis, our construction segments generated revenues of $2.6 billion, an increase of 16% year over year. Looking at US Building Services, revenues were $755.6 million, representing a decrease of 5.8% due to the nonrenewal of certain facilities maintenance contracts discussed on prior calls. An $89 million reduction in revenues from our commercial and government site-based more than offset the continued strength of our mechanical services division, which grew revenues by $42.5 million. We experienced revenue growth across each of our mechanical service lines, and just as a reminder, we began to see the impact of the loss of site-based contracts in the second quarter of 2024. As such, when we look forward, we do anticipate a revenue headwind of $60 to $70 million within US building services for the first quarter of 2025. If we move to industrial services, revenues were $312.7 million, an increase of 6.9% driven by the segment's field services division inclusive of an acquisition made by us during the year. And lastly, UK Building Services delivered revenues of $107.9 million, generally in line with that of the year-ago period. Let's turn to slide seven. With operating income of $388.6 million, or 10.3% of revenues, our performance established new quarterly records for both operating income and operating margin. When compared against the fourth quarter of 2023, this represents a 34.4% nearly $100 million increase in operating income and operating margin has expanded by 190 basis points. Once again, turning to each of our segments. US Electrical Construction generated operating income of $147.9 million, which represents a 94% increase. Operating margin was an outstanding 15.8%, a 580 basis point improvement. In addition to a more favorable mix of work, this performance is a true testament to the exceptional execution by our operating companies and project teams. Operating income for US mechanical construction was $220.6 million, an increase of 18.6% year over year, and operating margin of 13.3% expanded by 70 basis points. Similar to electrical construction, a more favorable mix of work and excellent project execution were the primary drivers of this performance. From a market sector perspective, our construction segments generated greater gross profit from the majority of the sectors in which we operate, with the largest increases generally tracking the growth in revenues. Together, our construction segments reported an operating margin of 14.2%, which is a 250 basis point improvement year over year. Operating income for US Building Services was $40.9 million, a slight decline year over year, however, operating margin remained strong at 5.4%. With the loss of the previously referenced site-based contracts, the composition of this segment's revenues has shifted to a greater proportion of mechanical services, resulting in an increase in gross profit and operating margins. Moving to industrial services, operating income was $10.2 million, a decrease of $2.4 million, and operating margin was 3.3%, a reduction of 100 basis points. Despite the increase in revenues, this segment experienced a decrease in gross profit and gross profit margin given a less favorable mix of work due in part to lower revenue contribution from our shop services division. Lastly, UK Building Services earned operating income of $4.8 million. In addition to the impact of slightly lower revenues, operating margins in the UK have declined by 50 basis points as the segment's project portfolio in last year's fourth quarter included a greater number of higher-margin opportunities. If we move to slide eight, a few quarterly highlights on this slide starting with gross profit. Driven by our Electrical and Mechanical Construction segments, as well as our US Building Services segment, gross profit margin has expanded by 210 basis points with gross profit increasing by 22.5%. Our fourth quarter SG&A increased by just under $40 million, which includes $9.5 million of incremental expenses from acquired companies. The remainder of this increase is largely due to employment costs given both greater headcount to support our organic growth as well as higher levels of incentive compensation expense across our operating companies due to their improved performance. SG&A margins for the quarter of 9.8% compare to 9.6% a year ago. The 20 basis point increase is a direct result of the expansion in gross profit margin and corresponding increase in subsidiary incentive compensation that I just referenced. Finally, on this page, diluted earnings per share was $6.32, compared to $4.47, an increase of 41.4%. If we briefly turn to slide nine, this page summarizes our performance for the full year. Tony touched on much of this already in his opening commentary, rather than walk through these results in detail, I simply want to highlight that our performance for 2024 sets new company records for virtually every metric that we track, including annual revenues, gross profit and gross profit margin, operating income, and operating margin, net income, and diluted earnings per share. Notably for 2024, we earned a full year operating margin of 9.2%. As we look ahead, we remain confident in the underlying fundamentals of our business. When Tony outlines guidance for 2025, you will see that we are once again projecting a year of strong operating margins with a range of 8.5% to 9.2%. When looking at this range though, it is important to note that we anticipate a 25 to 30 basis point impact from incremental intangible asset amortization stemming from the Miller Electric acquisition. With that being said, if we look first to the high end of this range, we are projecting an operating margin which would match the record margin we earned in 2024, despite the incremental amortization. Under this scenario, we're essentially forecasting a level of margin expansion within the underlying business. At the midpoint of our margin range, we have assumed a full year operating margin of approximately 8.9%, which when accounting for the incremental amortization is essentially in line with the 9.2% operating margin we earned in 2024. Finally, at the low end of our margin range, we've assumed a full year operating margin of 8.5%, which includes some measured assumptions due to macroeconomic and other uncertainties. When looking at margins, it's also important to remember that we are a project-based business, and our margins can and will move around from quarter to quarter based on the mix and timing of our work. Let's turn now to slide ten, which is our balance sheet. As we've previously stated, our balance sheet remains strong and liquid, and combined with our history of operating cash flow generation, provides us the flexibility we need to invest in organic growth, pursue strategic acquisitions, and return capital to our shareholders. Although not shown on this slide, operating cash flow for the fourth quarter was $470 million, and for the full year, we generated over $1.4 billion of operating cash, equivalent to nearly 105% of operating income. We remain committed to our philosophy of balanced capital allocation, and believe this is reflected both through our acquisition of Miller Electric, which Tony and I will speak to on the next slide, and our announcement today that our board of directors has approved a $500 million increase to our share repurchase program. So let's turn to slide eleven where we highlight the Miller acquisition. Based in Jacksonville, Florida, Miller Electric expands our presence in the southeast, where we previously had limited electrical operations. For full year 2024, the company generated estimated revenues of $805 million, and $80 million in adjusted EBITDA, with RPOs as of December 31st, of just over $700 million. We anticipate that Miller will contribute meaningfully to our projected revenue growth in 2025, with approximately 35% to 50% of our growth coming from Miller's contribution beginning in February of 2025. We also anticipate that the acquisition will be modestly accretive to diluted earnings per share in 2025, with further accretion in future years as backlog amortization runs off. When we reference EPS accretion, there are three factors which need to be considered. Those include the underlying operating contribution from the business, the incremental intangible asset amortization, which we estimate to be approximately $45 million in the first year, and a reduction in interest income resulting from the all-cash purchase. When you consider all three of those factors, we estimate EPS accretion in 2025 of between 10 to 15 cents. With that, I'll turn the call back to Tony. I know he wants to say a few words about the acquisition before we continue.

Tony Guzzi, Chairman, President & Chief Executive Officer

Yes. Thank you, Jason. We couldn't be more excited. We finally got into a deal with the team for Miller Electric, Henry Brown, his brother and family, and the ESOP shareholders of that company. We first started talking to each other almost six years ago to get to know each other because they're a leader in our space. They've always had an unbelievable reputation for professionalism, care for their employees, and excellent execution for their customers. They are disciplined capital allocators much like we are. It is really an acquisition that positions us to serve our customers better throughout the southeast and provides opportunity to expand and grow the business substantially. When Henry and I talked about the acquisition, it was not an acquisition based on big changes in their operation because quite frankly, they already look a lot like EMCOR. They're an IBEW leader and contractor. They run their company very much like a public company, with the care and fiduciary responsibility of what a public company does. They have training programs. They have an inclusive culture. Their values almost identically match our values of mission first, people always. You've heard me talk in the past about when EMCOR does an acquisition, we first look at their excellence in field execution. Without a question, the folks at Miller Electric and the team there are excellent in field execution and really deliver for the customers in a safe, productive manner. Then we also go back to the main office and say, do they share our values? We can say conclusively that the values of Miller Electric and EMCOR align, especially around discipline, integrity, trust, transparency, safety, and teamwork. They also embrace the community, which many of our local companies do. There's nothing we really want to change at Miller. What we want to do is take the best of Miller and bring it into EMCOR and take the best of EMCOR and bring it to Miller. We expect a long and prosperous future. We're excited that Henry and his team are going to be leading that business into the future and will report under our electrical segment to Dan Fitzgibbons, who is one of the top data center people in the country. Their mix of work brings more diversity to us. They're about 24% data centers, 23% healthcare, 15% commercial. They know how to do the hardest industrial work and also know how to work in the sports and entertainment market, which is a growing part of the Florida market. They will be based in Jacksonville, Florida, and we look to grow the Miller footprint throughout the Southeast through both organic growth and acquisitions. Henry Brown and his team will be key parts of EMCOR leadership going forward. It's as near a perfect match of how a company is run as we've seen. With that being said, I'll now move on to RPOs, which will be pages twelve and thirteen. If you look at data centers and connectivity, we continue to see strong demand for hyperscale which we include in our network and communications sector. At the end of 2024, our RPOs in the sector were a record $2.8 billion, up $1.25 billion, or 80% year over year, and 31% sequentially from the end of the third quarter. We continue to believe we're in the early innings of the overall data center expansion. We have successfully positioned ourselves in key data center geographies over the last several years. Miller even brings us more geography to serve the data center market. We expand our capabilities both through organic capability building and acquisitions. I also believe we're in the early innings of reshoring and nearshoring, and it will continue to provide us opportunities for both the high-tech manufacturing and the manufacturing industrial sectors. We expect this to strengthen more as customers invest more capital in these sectors, as well as in oil and gas projects. Long term, the equalization of trade is a plus for EMCOR. There'll be some near-term hiccups that we will work through as we always do. But long term, reshoring and nearshoring will be part of that. High-tech manufacturing, we had just over a billion dollars at the end of the quarter. That includes semiconductor, pharma, biotech, life sciences, and the electric vehicle value chain. RPOs in the sector were down sequentially year over year by 18.2% and 29.6%, respectively. Driving this is the episodic nature of these projects, especially in the semiconductor space. You go through initial phases of multiyear, multi-phase projects, and then they reload and get ready for the next phase. Also, it's defined as we complete it, especially in the fire protection side. Certain EV value chain projects ebb and flow. We continue to believe in the long-term fundamentals of high-tech manufacturing, especially for certain semiconductor sites and in bio, life sciences, and pharma. On EVs, we're going to have more share in EVs than we have today. There are going to be hybrids, and they're all going to need battery plants and the associated value chain. We remain positive long term across these sectors. We continue to see a healthy base of RPOs within the traditional manufacturing industrial market sector. RPOs there are $863 million at the end of the quarter, up nearly 7% year over year. Energy efficiency and sustainability remain a good long-term market for us. We continue to excel with retrofit project work, especially within the mechanical services division of our US Building Services segment, where we had RPOs of over $1.1 billion. This focuses on tenant fit-outs, retrofitting outdated equipment, integrating building controls to make spaces more efficient and reduce usage and costs while increasing overall system performance. On page thirteen, you'll continue to see strong demand in healthcare. We ended the quarter with another record $1.3 billion in RPOs, up 26% from the year-ago period and 8% from the third quarter. Our water and wastewater RPOs were $683 million at the end of the quarter, up approximately 6% year over year. These projects are episodic in nature and often large in scope. These are mostly Florida projects for us. RPOs in the institutional sector, which include schools, universities, and local, state, and federal buildings, were up 18% year over year, coming in at a record $1.1 billion. Spending on research facilities, new classroom space, technology upgrades across campuses, renovation retrofits with indoor air quality and reduced energy consumption is driving demand in this sector. Transportation RPOs grew 12% year over year to $294 million, largely driven by airport construction. We also had short duration projects of $457 million, focusing on energy-efficient, smarter, cleaner, and more productive buildings. Partially offsetting our RPO increases were expected declines in commercial. At the back half of 2025 and into 2026, as return-to-office trends become more prevalent, some buildings may be retrofitted. Total company RPOs at the end of the fourth quarter were $10.1 billion, up $1.25 billion or 14.2% year over year. Miller will add another $700 million, which will be additive to that $10.1 billion. We're pleased with the RPO performance, particularly given the strong revenue growth we had through the year and in the fourth quarter. It demonstrates continued strong demand for our services, and we are pleased with our project pipeline, which remains strong and diverse. With the margins Jason talked about, we believe our RPOs are similar to what we executed over the past year and that what we're bidding on now aligns with our outlook over the last two years. In closing, 2024 was another great year for EMCOR. Our team accomplished much, and with the addition of Miller Electric on February 3rd, we've added another great team to our solid foundation for future growth. For 2025, while acknowledging challenges in the broader economic environment, we will focus on what we control, execute well, and plan for what we don't control. We will avoid overcommitting resources, continue to develop leaders and our skilled workforce, and maintain vigilance on cost, planning, pricing, contractual terms, prefabrication, and automation to keep costs under control. We'll keep SG&A costs under control, and we won't overcommit to projects or schedules. We will continue balanced capital allocation, pursue acquisitions, invest organically, and return cash to shareholders as evidenced by the expansion of our share repurchase program. Thanks to our teammates for living our values of mission first, people always, and continuing to work in a safe and productive way to deliver exceptional value to our customers. With that, I'll take questions. Betsy, over to you.

Betsy, Conference Operator

If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. First question today comes from Brent Thielman with D.A. Davidson.

Brent Thielman, Analyst, D.A. Davidson

Hey. Thanks. Good morning. Congrats on the strong year and the Miller deal. Yeah. Hey, Tony. Maybe just on Miller. I take from your comments it sounds like a really well-run business. I guess more so wondering if there are opportunities or future revenue synergies to gain when you can sort of combine it with some of your existing operations in the Southeast?

Tony Guzzi, Chairman, President & Chief Executive Officer

Thanks, Brent. We really only have overlap in two markets of any size, and we think of it as net additive in both. We have some overlap in Texas and in mid to southern Virginia. In both places, we think that's additive. Part of the opportunity with Miller is that we share customers, and they're going to want us to do more. Miller's customers have confidence in them, and we may not have the relationships or they may bring Miller into play as we expand to larger projects, whether that be data centers, manufacturing plants, or healthcare services. Those are the places where I think we have the most near-term synergies. Miller will serve as a platform company for us throughout the Southeast and opens a window into acquisitions in the Southeast—not large electrical contractors but small to midsize ones that will allow us to build scale and serve our customers better in more Southeastern markets.

Brent Thielman, Analyst, D.A. Davidson

And, Tony, it looks like data centers may be approaching sort of 30% of your RPOs. To what degree are you seeing the influence of new AI data centers in your bookings now? I know it hasn't really been influential to revenue yet.

Tony Guzzi, Chairman, President & Chief Executive Officer

That's a fair comment. We don't always know exactly what customers will use data centers for, but we infer it from the kind of systems and the megawatts they're specifying. For 2025, we expect most of the work to still be cloud storage data centers with a little AI. The mix has started to include some AI data centers, which require more cooling and more power. We're in the early innings of the expansion. Many planning teams have a plan and are executing. They've expanded sites across various geographies to mitigate risk and bring different labor pools to bear. The availability of power has been a key driver. We're seeing more base load power development, such as gas plants, which will enable existing and future sites to continue to develop. We have decent visibility into data center builds for the next two to three years, and I expect that visibility extends beyond that.

Brent Thielman, Analyst, D.A. Davidson

Really helpful. Tony, last one I have to ask on margins. The move in electrical margins has been phenomenal in the last few years. How do you build upon this? Are there still opportunities from execution efficiencies and utilization in the field?

Tony Guzzi, Chairman, President & Chief Executive Officer

I would be cautious to promise further margin expansion, especially the levels seen in the fourth quarter. We believe in the stability of margins based on our guidance. If you offered me to run EMCOR at 8.5% to 10% forever, I'd take it. The performance stems from several factors beyond price: excellent execution for demanding customers, innovation in means and methods, sharing best practices across projects, and strong VDC, BIM, and prefabrication capabilities. Investments in enabling software and prefabrication, combined with skilled labor management and training, have allowed us to achieve superior margins. We also maintain strong relationships with unions and operate as a destination employer. Ultimately, success requires a good market; these investments and execution excellence let us perform when the market is favorable.

Jason Nalbandian, Senior Vice President & Chief Financial Officer

The only thing I'd add on margins is to look at trailing twelve, eighteen, twenty-four month views to see where margins bounce around between quarters. That gives you a good sense of the expected quarterly variability.

Brent Thielman, Analyst, D.A. Davidson

Understood. Appreciate you taking all the questions. I'll pass it on.

Betsy, Conference Operator

Next question comes from Adam Thalhimer with Thompson Davis. Please go ahead.

Adam Thalhimer, Analyst, Thompson Davis

Morning. Congrats on the year and the Miller acquisition. Could you add on the outlook? Would you guys be willing to hold a little net debt if you found another Miller or if you really wanted to lean into the buyback?

Tony Guzzi, Chairman, President & Chief Executive Officer

On the former, yes; on the latter, not the same. We're comfortable carrying net debt between one and two times for a short period, and comfortably at 0.5 to 1.0 on a sustained basis if needed to fund the business. If we found another Miller-like company, we would lean in because of the synergies and the platform opportunity. Deals happen when they happen, and we try to keep the balance sheet flexible. Buybacks are where excess capital goes, and we're not afraid to repurchase shares, but we would not lever up to do a buyback.

Jason Nalbandian, Senior Vice President & Chief Financial Officer

Agree with Tony.

Adam Thalhimer, Analyst, Thompson Davis

Wanted to ask about the building services segment from a high level. Is that slow growth with better margins over time?

Tony Guzzi, Chairman, President & Chief Executive Officer

We have a tough comparison through the middle of the year as that large site-based contract rolls off. Growth should return, possibly in the fourth quarter, and the segment will be more weighted toward mechanical service. We don't expect to pursue large site-based real estate contracts at the same scale, and the management team will avoid chasing low-margin real estate deals. If a client values technical capability and program management, we're the right solution. We've quietly built out the mechanical service business into a leading position through organic growth and tuck-in acquisitions, and we'll continue to buy mechanical service companies focused on small projects and HVAC retrofits, as well as building controls capability.

Jason Nalbandian, Senior Vice President & Chief Financial Officer

That's part of the reason why even when revenue declines in a quarter, we're still seeing margin strength; we're focused on higher-margin work and letting lower-margin revenue lapses occur.

Adam Thalhimer, Analyst, Thompson Davis

Alright. Thanks, guys. Good luck in Q1.

Betsy, Conference Operator

Next question comes from Brian Bofe with Stifel. Please go ahead.

Brian Bofe, Analyst, Stifel

Thanks. Good morning, everybody. Very nice quarter and margin performance. Wanted to ask on healthcare. That was another strong area of RPO performance in the quarter. Could you talk about what you're seeing there in terms of demand dynamics?

Tony Guzzi, Chairman, President & Chief Executive Officer

Demand in healthcare centers around new hospitals, new operating suites, podiums, and patient towers. Some projects have been accelerated due to COVID-era needs and outdated facilities. Growth is driven by demographic expansion in regions such as Florida, the Southeast, and the Southwest, and by rehab and rebuild projects in the Northeast. Hospitals are system-rich environments: extensive mechanical systems for med gases, HVAC, air purification, positive and negative pressure rooms, and specialized commissioning. Working with engineers to select and commission systems properly is critical. We also often have service operations in those markets to support long-term maintenance.

Brian Bofe, Analyst, Stifel

That's helpful. Curious if you're seeing similar green shoots in warehousing and how important that end market is for EMCOR?

Tony Guzzi, Chairman, President & Chief Executive Officer

We pivoted to data centers from warehousing even before demand fell. For us, fire and warehousing work is largely in fire life safety, and we were already positioned to serve data centers. We are seeing some green shoots in warehousing, particularly smaller-scale cold storage and reracking projects as warehouses become more automated. Those projects often require more fire protection due to denser rack configurations.

Brian Bofe, Analyst, Stifel

One other quick question: you called out tariffs as a risk. How might you be impacted and how have you managed through that in the past?

Tony Guzzi, Chairman, President & Chief Executive Officer

Think back to 2021 when prices increased quickly. We prepare by negotiating contract terms since 2021 to pass through sudden price changes where possible. Roughly, think of EMCOR's business in thirds: first, small projects and service work that is continuously repriced—tariffs have minimal impact there. Second, mid-sized projects ($1M–$10M) where we may be slightly impacted but not materially. Third, larger projects: historically we bought major end systems, but due to supply chain lead times owners now often buy the major equipment directly and send it to us, so our exposure there is limited. The remaining exposure is for materials like pipe, wire, and conduit—where we work with distributors and may lock prices or hold some inventory. We're prepared and have strategies in place.

Jason Nalbandian, Senior Vice President & Chief Financial Officer

Tony summarized it well; we spend a lot of time thinking about this and are prepared.

Brian Bofe, Analyst, Stifel

Very helpful, Tony. I will pass it on. Congrats again.

Betsy, Conference Operator

Next question comes from Alex Dwyer with KeyBanc Capital Markets. Please go ahead.

Alex Dwyer, Analyst, KeyBanc Capital Markets

Hi, guys. Good morning. Thanks for taking my questions. I wanted to ask about your data center business and if you're seeing any shifts in geographies where projects are being bid? If data center investment moves to more remote areas, it could be harder to hire a labor force. Is this something you're planning for and are there any investments you can make ahead of this to better position EMCOR?

Tony Guzzi, Chairman, President & Chief Executive Officer

Yes, yes, and yes. In 2019 we served about three data center markets electrically and roughly one to two mechanically. Today, with Miller, we're in about fifteen or sixteen electric markets. The expansion has been into secondary markets driven by the search for power and planners seeking surety of baseload power. We're seeing data centers expand into parts of Indiana, Columbus, Ohio, Oklahoma, Charleston, South Carolina, and more. How we handle it: acquisitions, organic growth, and transferring expertise. We move teams with experience in hospitals and manufacturing to help estimate and plan, then train local crews. Examples include forming Upland in Columbus by consolidating mechanical data center expertise and expanding electrically in Arizona by transferring prefabrication capabilities from Portland. These strategies help us build local capacity. Additionally, energy policy changes that provide more certain base load power, including gas plants and some nuclear, will support continued expansion in these markets.

Alex Dwyer, Analyst, KeyBanc Capital Markets

Thanks, Tony. That was helpful. My second question is on the industrial services outlook for this year and what is built into guidance from a revenue growth and margin perspective. Also, how meaningful could an oil and gas-friendly administration be over the next couple of years?

Tony Guzzi, Chairman, President & Chief Executive Officer

The real benefit of a more oil and gas-friendly administration will likely show in 2026 and beyond. For 2025, we're seeing a more traditional turnaround market. The first quarter started a bit slow due to weather impacts in Texas, which delayed some work by a week. We still expect normal turnaround seasonality with some back-half loading. We have a strong electrical business and the Ardent team covering Louisiana, Texas, and up into North Dakota and the Mid-Con area is well positioned for upstream and midstream work. If activity picks up, they'll execute on compressor stations and bringing electrical services to well sites.

Jason Nalbandian, Senior Vice President & Chief Financial Officer

Regarding guidance, there's nothing extreme built in for industrial services in 2025. Some of the growth this year included an acquisition in industrial services, so we would expect a more normal level of organic growth next year.

Alex Dwyer, Analyst, KeyBanc Capital Markets

Got it. Thank you. I'll turn it over.

Betsy, Conference Operator

The last question today comes from Adam Buck with Goldman Sachs. Please go ahead.

Adam Buck, Analyst, Goldman Sachs

Hi. Good morning. I think the midpoint of your guide assumes around 7.5% organic growth. Can you help bifurcate 2025 organic growth between your highest growth end markets—data centers and high-tech manufacturing—and how that compares to the balance of the business?

Tony Guzzi, Chairman, President & Chief Executive Officer

I'll kick it to Jason, but we don't see significant growth in manufacturing revenues until those projects move into RPOs and then revenue. We see data center growth, and in terms of broad split, it's roughly fifty-fifty between the high-growth sectors and the balance, in terms of contribution to growth assumptions.

Jason Nalbandian, Senior Vice President & Chief Financial Officer

That's fair. This year our non-residential growth outpaced other areas by 100 to 150 basis points. For next year, we expect high-growth sectors to continue to grow one to two hundred basis points in excess of non-residential trends. Across EMCOR overall that roughly translates to what Tony described.

Adam Buck, Analyst, Goldman Sachs

Appreciate the color. How are you thinking about growing employee count in 2025 and how much of the 7.5% organic growth is driven by hiring versus utilization improvements?

Tony Guzzi, Chairman, President & Chief Executive Officer

Headcount hasn't been growing as fast as revenues. Man-hours grew eight or nine percent in 2024 while headcount growth was lower. Over a multi-year period, man-hours have grown at about 60–65% of revenue growth. We expect that trend to continue by leveraging prefabrication, planning, estimating, and other productivity improvements. To attract tradespeople, key factors include: consistent weekly pay and benefits, investments in safety and equipment, strong local leadership, opportunities for permanent roles across projects, and engaging, well-planned work that builds pride. EMCOR provides those elements and Miller does as well, which helps recruitment and retention.

Jason Nalbandian, Senior Vice President & Chief Financial Officer

To add, over a ten-year period our revenue CAGR is roughly 10%, while headcount CAGR is roughly 3–3.5%, a roughly three-to-one ratio. This year headcount was up 5–5.5% while revenue was up nearly 16%, and we expect continued productivity trends to hold.

Adam Buck, Analyst, Goldman Sachs

Last one: the quarter had strong margins. Any specific drivers of the positive variance versus your expectations heading into the quarter beyond what you've discussed? Aside from intangible amortization, any other major puts and takes to keep in mind for 2025?

Jason Nalbandian, Senior Vice President & Chief Financial Officer

For the quarter, execution, particularly in the electrical segment, exceeded expectations. For 2025, outside of the estimated intangible asset amortization from Miller, there aren't any anomalies baked into guidance. We expect margins to be within the guided range and to vary quarter to quarter based on mix and timing.

Tony Guzzi, Chairman, President & Chief Executive Officer

At these margin levels, we focus on margin dollars as much as margin percentages. If we can grow margin dollars and accept small percentage trade-offs to do that, we'll take that approach.

Adam Buck, Analyst, Goldman Sachs

Great. Appreciate all the color.

Betsy, Conference Operator

This concludes our question and answer session. I would like to turn the conference back over to Mr. Guzzi for any closing remarks.

Tony Guzzi, Chairman, President & Chief Executive Officer

Look, thank you all for your interest in EMCOR. I know there's a lot more than the analysts that ask questions. Hopefully, you got most of your questions answered. We expect another good year and are excited about the future. To our team, let's work safe and productively in 2025 and do even better than we did in 2024. Andy, I'll throw it back to you to close out the call.

Andy Backman, Vice President, Investor Relations

Great. Thanks. Thanks, Tony. And thank you all for joining us today. If you should have any follow-up questions, please do not hesitate to reach out to me directly. Thank you all again, and have a great day. And Betsy, will you please close the call?

Betsy, Conference Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.