Earnings Call Transcript
EMCOR Group, Inc. (EME)
Earnings Call Transcript - EME Q3 2023
Operator, Operator
Good morning. My name is Betsy, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group Third Quarter 2023 Earnings Call. Please note this event is being recorded. Mr. Blake Mueller with FTI Consulting, you may begin.
Blake Mueller, FTI Consulting
Thank you, Betsy, and good morning, everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the company's 2023 third quarter results, which were reported this morning. I would like to turn the call over to Kevin Matz, Executive Vice President of Shared Services, who will introduce management. Kevin, please go ahead.
Kevin Matz, Executive Vice President of Shared Services
Thank you, Blake, and good morning, everyone. And as always, thank you for your interest in EMCOR, and welcome to our earnings conference call for the third quarter of 2023. For those of you who are accessing this call via the Internet and our website, welcome as well. We hope you have arrived at the beginning of our slide presentation that will accompany our remarks today. We are on Slide 2. This presentation and discussion contains forward-looking statements and may contain certain non-GAAP financial information. Page 2 describes in detail the 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. Slide 3, excuse me, depicts the executives who are with me to discuss the quarter and nine months results. They are Tony Guzzi, Chairman, President and Chief Executive Officer; Mark Pompa, our Executive Vice President and Chief Financial Officer; Maxine Mauricio, Executive Vice President and General Counsel; and it's my pleasure to welcome Andy Backman to the call. Andy is our new Vice President, Investor Relations. Andy is an IR pro with over 20 years in the IR space. Again, welcome, Andy. It's good to have you on the team. For call participants not accessing the conference call via the Internet, this presentation, including the slides, will be archived in the Investor Relations section of our website under Presentations. You can find us at emcorgroup.com. With that said, please let me turn the call over to Tony.
Tony Guzzi, Chairman, President and CEO
Thanks, Kevin, and good morning to everybody, and thank you for joining our call. I'm going to start on Pages 4 through 6. In my remarks, I will focus on the third quarter primarily, and Mark will speak in more detail on our quarterly and year-to-date results. At the end of my remarks, I will discuss some of the key drivers of our performance. Today, we are announcing a series of record quarterly achievements: revenues, gross profit, operating income, operating income margin, diluted EPS and remaining performance obligations or RPOs. Driving this performance is strong end market demand for our services, especially in semiconductors, data centers, manufacturing, healthcare, and retrofit projects. This demand, coupled with excellent execution, has produced outstanding results, not only on a quarterly basis but also for year-to-date 2023. For the third quarter, we earned $3.61 in non-GAAP earnings per diluted share on $3.21 billion in revenues. We grew revenues 13.5% overall with 12.8% organic revenue growth. We had an adjusted operating margin of 7.4%, which is exceptional by any measure. However, I would like to remind you that margins can fluctuate quarter-to-quarter based on the mix, execution, and timing of projects, most of which worked in our favor this quarter. Our operating cash flow for the third quarter was strong at $261 million, which represents over 100% operating income conversion. On a year-to-date basis, we generated $476 million in operating cash flow, which represents a conversion of 81%. Our RPOs are at an all-time high of $8.6 billion, which represents 4.2% sequential growth from June 30, 2023, and 21.6% growth over the year-ago period. This was exceptional performance by an extraordinary team. On a segment basis, we had excellent performance in our Electrical and Mechanical Construction and U.S. Building Services segments. The operating results of our Industrial Services segment continue to improve at a modest pace. And despite difficult economic conditions, our U.K. Building Services segment is reporting operating income and operating margin which is greater than the year-ago period. The continued strength of our Electrical and Mechanical Construction segments is evidenced by quarterly revenue growth of 10.1% and 19.9%, respectively. With Mechanical Construction operating margin of 10.4% and Electrical Construction operating margin of 9.1%, the conversion from revenue to operating income by these segments has exceeded our expectations. We had excellent execution and great project mix. Across the country, we continue to complete some of the most sophisticated projects in markets such as the high-tech manufacturing sector, which includes semiconductors, the EV value chain, biotech, life sciences, pharmaceuticals, the network and communications sector, which encompasses our data center work; the manufacturing sector, which is driven by reshoring and domestic capacity expansion, as well as the healthcare sector. Our industry-leading capabilities in BIM, prefabrication, project planning, labor sourcing, and management, along with the training of that labor enable us to perform for our customers while also achieving superior financial returns. Our mechanical product offering is broad across applications such as HVAC, process, piping, plumbing, and fire protection and fire life safety. We are operating in the key geographies where such projects are in process, and our fire life safety group has the capability to move across the country. Our customers look to us to perform complex installations in the markets I just referenced. Our Electrical Construction team has deep expertise in the data center market as well as our Mechanical Construction team, which allows us to serve our customers with the right solution delivered under the most demanding schedules with excellent outcomes for our customers. As I have mentioned on earlier calls, our segment and subsidiary management teams are leading in an exceptional manner. They are allocating resources in a thoughtful and pragmatic way while working towards outstanding outcomes for our customers and for you, our shareholders, and that's how they produce these outstanding financial results. Our U.S. Building Services segment continues to perform well and has a strong mix of work across its service lines. The segment's revenues grew 13.7% in the third quarter with an operating margin of 7%. Demand persists for our mechanical services with excellent execution across retrofit projects, building controls, and maintenance and repairs. We are working across a variety of end markets, including traditional and high-tech manufacturing. Our institutional and commercial customers remain focused on energy efficiency and IAQ upgrades. We did experience a strong repair service season because of the heat that blanketed most parts of the country over this past summer. The Mechanical Services business is driving the robust performance of the segment on a quarterly and year-to-date basis, and the overall trends for this business remain positive. The site-based services division continues to deliver, entering into multiyear facility maintenance contracts to leverage our self-perform operating model for skilled tradespeople and operating engineers. As a result, there continue to remain areas of growth in this service line. However, these contracts take some time to ramp up. And the scope for these contracts can expand, reduce, or return to baseline over time and upon rebid. Our Industrial Services segment continues to improve at an expected pace. It is important to remember that the third quarter is typically a weak quarter for field services, contributing to the near breakeven operating income reported by this segment this quarter. We anticipate executing a fall turnaround season that is comparable to the prior year, and demand for our new services is robust. We are experiencing increased levels of capital spending, which then drives demand in our shop services division in the form of greater new build heat exchange orders. We continue to wait for the resumption of demand for utility scale solar projects, which continues to be affected by supply chain issues. And we are well positioned to perform such projects when these issues subside. Our U.K. business continues to perform in a manner consistent with the available market opportunities. Building on its normal base of facility services contracts, EMCOR U.K. continues to perform various project work for its customers. Much of that work is aimed at helping them develop and implement multiple multiyear energy reduction programs. Although we experienced a reduction in quarterly revenues within this segment, we are executing well as shown by the 8% operating margin during the quarter. Our balance sheet remains strong, supporting both our organic growth and the capital needed to invest in such growth, whether through expanding our prefabrication capabilities or investment in BIM, automation, and robotics. We also have the firepower to make bolt-on acquisitions that help us expand our capabilities in support of our customers. Great quarter. And Mark, I'll let you talk about the rest of it.
Mark Pompa, Executive Vice President and CFO
Great. Thank you, Tony, and good morning to everyone participating on the call today. We are now on Slide 7 for those of you who are accessing this presentation via the webcast. Over the next several slides, I will augment Tony's opening commentary on EMCOR's third quarter performance as well as provide a brief update on our year-to-date results through September 30. All financial information referenced this morning is derived from our consolidated financial statements included in both our earnings release announcement and Form 10-Q filed with the Securities and Exchange Commission earlier today. So let's revisit and expand our review of EMCOR's third quarter performance. Consolidated revenues of $3.21 billion are up $381.2 million or 13.5% over quarter 3 2022. Each of our domestic reportable segments experienced revenue growth during the third quarter. Excluding $20.4 million of revenues attributable to businesses acquired pertaining to the time that such businesses were not owned by EMCOR in last year's quarter, revenues for the third quarter of 2023 increased 12.8% when compared to the third quarter of 2022. Before reviewing the operating results of our individual reporting segments, I would like to reiterate what Tony highlighted earlier that our $3.21 billion of quarterly revenues represents a new all-time quarterly revenue record for the company and eclipses the previous record set during the second quarter. The specific to each of our reportable segment's third quarter revenue performance is as follows. United States Electrical Construction segment revenues of $697.4 million increased $64 million or 10.1% from quarter 3 2022. Excluding incremental acquisition revenues, this segment's revenues grew 8.1% organically quarter-over-quarter. Consistent with its second quarter performance, the segment continues to experience revenue growth across most of the market sectors that they serve. Such quarterly revenue growth was most prevalent within the network and communications, healthcare, manufacturing, and industrial and hospitality and entertainment market sectors. Revenues of our United States Mechanical Construction segment of $1.33 billion increased $221 million or a strong 19.9% from the year-ago period. This revenue growth continues to be driven by increased activity within the high-tech manufacturing, traditional manufacturing, network and communications, and commercial market sectors. Consistent with its performance during the first six months of the year, this segment is experiencing growth in both fire and life safety as well as traditional mechanical services. Increased demand is stemming from customer projects supporting the design and manufacturing of semiconductors as well as the production and development of electric vehicles and/or related battery technologies. This, in conjunction with further data center development opportunities, as well as the domestic reshoring of critical supply chain by certain of our customers are all contributing factors to the Mechanical Construction segment, establishing a new all-time quarterly record of revenue during the third quarter. Our combined United States construction revenues of $2.03 billion increased $285 million or 16.4%, crossing the $2 billion quarterly revenue threshold for the first time and establishing a combined all-time quarterly revenue record for construction services. United States Building Services revenues of $817.7 million increased $98.3 million or 13.7%, representing a new all-time quarterly revenue record for this segment. Excluding incremental acquisition revenues, the segment's revenues grew 12.6% organically. Revenue growth was experienced across each of the three divisions with the largest contribution coming from mechanical services. Specifically, we benefited from an increase in HVAC project and retrofit revenues due to increased availability of equipment and materials when compared to 2022, which faced greater supply chain delays. There also continues to be strong demand for certain of the segment's service offerings as our customers seek ways to improve the energy efficiency and/or indoor air quality of their facilities. Lastly, both the segment's commercial and government site-based services divisions experienced incremental project revenues in the third quarter of the current year as a result of new customer additions or scope and site expansion with existing customers. EMCOR's Industrial Services segment revenues of $252.2 million increased $4.9 million or 2% quarter-over-quarter. Although not as substantial as the revenue growth of our other domestic reporting segments, we are pleased by the trend of period-over-period growth that this segment has achieved the last few years despite the sustained headwinds within the oil and gas industry. Contributing to the growth in the current quarter was a resumption of capital spending by several of our customers in the form of increased new build heat exchanger orders as well as certain renewable fuel projects. United Kingdom Building Services segment revenues of $110.7 million represents a reduction of $7 million or 5.9% from last year's third quarter. The period-over-period revenue decline is a result of the non-renewal of certain facilities maintenance contracts, which were still active in 2022 as well as the reduction in project activity as certain of this segment's customers have slowed their capital spending programs in light of the macroeconomic headwinds within the United Kingdom. Please turn to Slide 8. Reported operating income for the quarter was $235 million or 7.3% of revenues and favorably compares to $150.1 million of operating income or 5.3% of revenues a year ago. Consistent with my revenue commentary and Tony's opening remarks, the current quarter's consolidated operating income and operating margin each represent new all-time quarterly records for EMCOR. Included within our reported operating income is a small impairment charge of $2.4 million related to certain long-lived assets within our United States Mechanical Construction segment. On an adjusted basis, if such impairment charge was excluded, third quarter 2023 non-GAAP operating income would be $237.3 million or 7.4% of revenues. Specific operating performance by segment is as follows. Our U.S. Electrical Construction segment earned operating income of $63.1 million, an increase of $27.6 million from the comparable 2022 period. The reported operating margin of 9.1% represents a significant increase from the 5.6% reported in last year's third quarter. Exceptional project execution, which Tony previously commented on from each of our operating companies, coupled with a favorable revenue mix when compared to the 2022 period were the primary drivers of this performance. Such improved execution is demonstrated by a reduction of project write-downs as compared to last year's third quarter where certain discrete write-downs totaled $10.5 million and negatively impacted this segment's 2022 operating margin by 170 basis points. Besides a reduction in write-downs, this segment's operating income and operating margin for the third quarter of 2023 benefited from the successful closeout of certain projects, which positively impacted its operating margin in the quarter by 60 basis points. Third quarter operating income of our U.S. Mechanical Construction segment of $138.5 million represents a $48 million increase from last year's quarter and an operating margin of 10.4% represents 220 basis points of improvement from 2022's third quarter. Growth in both gross profit and gross profit margin due to a more favorable revenue mix, including a higher percentage of self-performed projects, were the most significant contributors to this overall improved performance. Additionally, the Mechanical segment's operating income and operating margin for the quarter benefited from the successful closeout of certain projects, which resulted in 40 basis points of incremental operating margin. Operating income for U.S. Building Services is $57.2 million or 7% of revenues and compares to $46 million or 6.4% of revenues in 2022's third quarter. Similar to the growth in the segment's revenues, the increases in operating income and operating margin were driven by the segment's Mechanical Services division. Notably, we experienced favorable project execution of HVAC projects and retrofits as well as incremental building automation and controls activity. Our U.S. Industrial Services segment incurred an operating loss of approximately $200,000, which compares favorably to an operating loss of $1.4 million in last year's third quarter. As I have referenced in prior years and consistent with Tony's comment, Quarter 3 is historically our Industrial segment's weakest quarter. However, we are encouraged by the trend of quarterly improvement within this segment, and we remain ready to assist our customers as they execute their maintenance and capital spending programs. U.K. Building Services operating income of $8.9 million or 8% of revenues represents an increase of $500,000 and a 90 basis point improvement in operating margin. The performance of this segment is impressive considering the reduction in quarterly revenues previously discussed and demonstrates the strength of its portfolio of facilities maintenance contracts. We are now on Slide 9. Additional financial items of significance for the quarter not addressed on the previous slides are as follows. Quarter 3 gross profit of $545.5 million represents an all-time quarterly gross profit record for the company and is higher than the comparable 2022 quarter by $132.2 million or 32%. And gross margin of 17% has improved 240 basis points. Selling, general and administrative expenses of approximately $308.1 million represent 9.6% of revenues and reflect an increase of $45 million from Quarter 3 2022. SG&A for the current year's quarter includes approximately $4.2 million of incremental expenses from businesses acquired inclusive of intangible asset amortization, resulting in an organic SG&A increase of $40.8 million. This quarter's organic growth in SG&A was due to incremental expense pertaining to incentive compensation programs across the majority of our reportable segments. This is due to higher operating results to date when compared to the prior year as well as our revised profitability projections for the full year 2023, which have necessitated our third upward revision in our annual earnings guidance. Tony will speak to our revised guidance range in detail following the conclusion of my commentary. Besides incentive compensation, we have experienced quarter-over-quarter growth in our personnel costs due to our continued double-digit organic revenue growth, which has necessitated increased headcount to support our back office and contract administration functions coupled with annual cost of living increases for our existing workforce. We have also experienced an escalation in occupancy costs due to inflationary pressures in the real estate market. Diluted earnings per common share in the third quarter of 2023 is $3.57 as compared to $2.16 per diluted share for the prior year period. On an adjusted basis, excluding the impact of the previously mentioned long-lived asset impairment charge, non-GAAP diluted earnings per share was $3.61, which represents a $1.45 or 67.1% increase when compared to the $2.16 reported in last year's quarter. As Tony mentioned in his introductory remarks, our third quarter diluted EPS performance on either a GAAP or non-GAAP basis represents a new all-time record for EMCOR by a large margin. Please turn to Slide 10. With the quarter commentary complete, I will touch on some highlights with respect to our results for the first nine months of 2023. Revenues of $9.14 billion represent an increase of $1.02 billion or 12.5%, of which 11.3% was generated from organic activities. Operating income of $586.6 million or 6.4% of revenues represents a 51.3% increase from the results for the first nine months of 2022. We have experienced improved operating income and operating margin in each of our domestic reporting segments. Our year-to-date diluted earnings per share was $8.85, which compares to $5.50 in the corresponding 2022 period. Adjusting the current year to include the previously referenced impairment loss results in a non-GAAP diluted earnings per share of $8.88. Comparing this adjusted number to last year's reported EPS represents an improvement of 61.5% year-over-year. With substantial growth in our year-to-date net income plus the reduction in weighted average shares outstanding due to our share repurchases, EMCOR has been able to generate significant EPS growth. We are now on Slide 11. EMCOR's balance sheet maintains its strength and liquidity. We continue to be well positioned to fund organic growth, return capital to shareholders, and pursue strategic M&A opportunities. Fluctuations of note when compared to December of 2022 are as follows. Cash on hand increased by just over $67 million. Our exceptional operating cash flow was partially offset by cash used for financing activities of $276.2 million, given a repayment of $142.8 million on our term loan and just over $105 million for the repurchase of our common stock as well as cash used for investing activities of $134 million as a result of capital expenditures and acquisitions to date. Resulting primarily from our organic growth during the period, our working capital balance has increased by nearly $128 million. The $34.2 million increase in goodwill is entirely a result of the seven acquisitions completed by us thus far in 2023, while net identifiable intangible assets have increased by $6.8 million as the additional intangible assets recognized in connection with such acquisitions were partially offset by $49 million of amortization expense in the first nine months of the year. Total debt, exclusive of operating lease liabilities, has decreased by $143.2 million, almost entirely as a result of the previously mentioned $142.8 million voluntary principal payment made on our term loan. Our stockholders' equity balance has increased by $305.7 million as our net income for the nine-month period exceeded our share repurchases and dividend payments to date in 2023. EMCOR's debt to capitalization ratio has reduced to 4.4% from 11.1% at year-end 2022, given the reduction in borrowings under our credit agreement as well as the increase in stockholders' equity just referenced. With my prepared commentary for the third quarter now completed, I would now like to return the call back to Tony.
Tony Guzzi, Chairman, President and CEO
Thanks, Mark. And I'm going to be on Page 12. We put this page in the last time, and we really got a lot of great feedback from our investors. I like this page because it talks about what's driving our business from a macro level and a micro level because there are some micro drivers in here. These opportunities on this page are really what's driving our organic growth. It's been very strong. When you think about 12.8% organic growth in the quarter, you say, what's driving that? It can't just be business as usual to achieve that. If you go on this page, we're going to go left to right across the top of the box and then start over again on the bottom and go left to right, and we'll draw interconnections where appropriate. Let's talk about electrification in the EV value chain. We, as a management team, have done a lot of work around energy transition and the thought process behind it. I know I personally landed on this is not just an energy transition; it's an energy expansion because if you want to fund other than the bottom-right box the rest of these things, you need more energy. We're going to have to do it not with just traditional sources but also renewable sources. There's going to be a lot of investment. There is a lot of investment. On the transition side, some of that investment has been held up by the supply chain. That's not going to break easily, right, because things like transformers, inverters, and panels are just supply chain issues where some products have been pushed out 18 to 36 months. There's a lot of work going on around transition and being prepared for it. Where we're going to play in that is by supporting some of that transition and then also on the electric vehicle and battery plant construction; there's a lot of discussion around this. So at the highest level, this trend right now is probably impacting our current results less than any of the other trends that you see on this page. But it is a trend that will impact our results. We're also going to be a user of some of these transition vehicles, whether they be hybrids or battery powered over time. We're going to be in the construction and supply chain of those plants that will support the EV plants and battery plant construction. EMCOR has always been very careful about how we service the automotive sector, and we'll continue to be so. Right now, this is an electrical and fire life safety and protection opportunity for us, but it will expand beyond that. We expect there to be more utility grade; the way we think about it, massive numbers of charging stations at one location. We've done some of that in some of the big warehouses that have been built. But we haven't seen that proliferation yet; however, we expect it to come for a lot of the last-mile delivery. A lot of these mass charging stations make a lot of sense, and they're also supported by government incentives. If you separate the noise of what's going on today, there's going to be a slower pickup. A lot of the things we do along this are for the infrastructure that will allow things to happen at a later date. Again, it's the box of all of these that's impacting our current results the least. You go into high-tech manufacturing, life sciences, and you have to sort of drag that bottom-middle box up into it because it's also a reshoring and nearshoring issue. We are very active in the semiconductor space, and we're in many of the right markets, mainly on the mechanical side but somewhat on the electrical side in fire protection in the mechanical business, as well as just straight mechanical work. In some cases, we operate on the clean side, high-purity piping, and other places we're doing both. We're doing the so-called dirty side, but as far from dirty, it's the infrastructure to support that semiconductor plant. We also have a robust position in fire life safety and fire protection in those semiconductor plants. There’s a whole ecosystem around those semiconductor plants built to support them. In that case, we're doing some of that work, but those are significant maintenance opportunities for us versus semiconductor plants. On the pharma, biotech, life sciences, we are seeing growth in two ways. One is the reshoring, and we're seeing it also in the expansion of opportunities; weight loss drugs are causing a whole new set of plants to be built. This is especially true in some of the hubs where we're most effective, such as New Jersey, Research Triangle Park, or out in Southern California. That links to nearshoring, especially for some of the plants being built to break the dependence on China and even India for pharmaceutical compounds. Government incentives continue to support that momentum, especially on the semiconductor side, but much of that was happening. The government incentives will elongate that cycle and provide more surety to that demand. When you get to data centers and connectivity, this is something we excel at, both mechanically, electrically, and fire protection, life safety. The demand drivers are ubiquitous and AI just adds another boost to it. Returning to that first box where we discussed electrification and energy transition: A data center uses a lot of power, up to 50 to 100 megawatts; for perspective, 5,000 homes use less than 200 megawatts, and they use it intermittently. A data center is using 60 to 100 megawatts; so half of what 5,000 homes consume must be continuous, clean, and pure. So if you consider that, as well as where they're being built, we're in excellent shape, both mechanically and electrically. We do data center construction as well as anybody in the country for those specialty trades, and we're linked with the right customers. Additionally, we think about how to enhance their operation for the owner, how to get the schedule faster, and how to continue driving value through prefabrication and BIM to create a solution that is ready to build. We have a great team here. We're active in about five or six markets, and we continue to look for opportunities to support our customers, both from the GC and construction manager side but also the five major end owners that use these data centers. You get to healthcare; this market has rebounded since COVID. It has always been a good sector for us because all the elements that make those top boxes complicated exist within hospitals—medical gases, electrical systems, backup generation, power quality monitoring, and building control systems. Consider what goes into hospitals. This even extends beyond the hospitals we're trying to modernize but also to outpatient facilities that are becoming more sophisticated daily. We also see aftermarket opportunities that require the kinds of services we provide, both through our mechanical services function, our aftermarket fire life safety business, and our site-based services. To get to reshoring and nearshoring, I’ll address that from the bottom up. Automation is allowing industries beyond what we’ve discussed to be reshored. They have to; we’ve transitioned from a world where there were multiple suppliers and plants to one where there’s often a single supplier with multiple plants. This has led to a precarious supply chain; not us at EMCOR, since we procure from various sources. COVID brought this issue to a head. Many have been considering it beforehand. We’ve been investing in being able to support those customers for ten years now. You’re seeing capacity shift across various industries from tire manufacturing to textiles returning via automation. So a wide range of industries are returning, and that is both capacity hardening and expansion. Finally, one of my favorites, because I’ve been around it for 25 years, is energy efficiency and sustainability surrounding energy efficiency. We are known for what we do in HVAC control systems and lighting retrofits. When we acquired ECM, they brought that capability, and they also have water reduction abilities. It’s as simple as how you fix faucets and use smart plumbing fixtures. That can have a significant impact. We help customers with their facilities' footprint rationalization, ensuring they can obtain the right utility rebates. We're adding in not only on massive utility-scale solar or utility-scale combined heat and power but also local decentralized generation. These are typically things that are one megawatt or less that can help reduce loads but also provide more energy security when combined with HVAC or lighting control system retrofits. There are government incentives; there are utility incentives. Our team excels at that. We’ve carved out a niche in that market, not only doing the work directly for owners but also supporting most ESCOs in bringing their solutions to life. With that, I’m going to turn to Page 13 and sort of tie that into our RPOs on this page. We have fantastic RPOs right now at $8.6 billion, right? That's a significant level; it’s up $1.5 billion from where we were last year. They were $7.1 billion; we were pretty pleased about that a year ago. Additionally, third quarter bookings were strong, with RPOs increasing almost $350 million from June, which translates to about a 4% sequential increase. Each of our five segments saw RPO growth in the third quarter compared to the year-ago period. Domestic construction services RPO, including fire protection and life safety projects, are up over $1.3 billion, in line with strong project demand we have observed all year. Building services, anchored by energy efficiency and other retrofit services, has seen its RPO increase 16% over last year's third quarter. RPOs segmented by market sector echo the organic growth trends I highlighted before. Focusing on actual activity, high-tech manufacturing, which includes semiconductors, pharma, biotech, life sciences, R&D, and the electric vehicle value chain, is up $716 million or 113% compared to the year-ago period. Network and communication, including our hyperscale data center work and our low-voltage work, stands at $1.4 billion, an increase of 40% from the third quarter of last year. We have over $1 billion in healthcare market sector RPOs as the hospital industry and medical surgical sectors continue to reshape post-pandemic, responding to demographic changes. We’ve discussed reshoring; you’ll see some of that in high-tech manufacturing, but traditional manufacturing is up 30% year-over-year. RPOs also grew in water and wastewater; we’ve discussed that before in institutional contexts, and it’s up 29%. That’s especially true for us focusing on Florida, where we have great capability in a state that struggles to meet infrastructure demands. Offsetting this increase, we’ve seen some reductions in commercial projects, mainly in warehouses. We were very active a year ago, especially with our fire protection, life safety, and electrical work, but that’s down. You would expect that to decrease now; there was a lot of build there. Cold storage is still doing well, as is the transportation market sector, both of which tend to be episodic for us. This will return at some point, but it's not what's driving our results today. We are well positioned in sectors with strong growth characteristics. To get ahead of your questions both for later in this call and when you call us afterwards to reiterate what we said here, we like our market mix, our contract mix, our margin mix, and our RPOs. Now we've got to execute. Hopefully, that stays on track, and scope doesn't expand and all that. Everything came together for us this quarter, but we do like our mix and backlog. If you go on, I'm going to Pages 14 to 16 to wrap this up. We’ve had exceptional performance this year; we had it last year as well. And we're going to see another meaningful guidance increase. This results from favorable demand in strong end markets, excellent execution, a strong project mix, and a general absence of bad outcomes. We are raising our diluted EPS guidance based on our strong third quarter and year-to-date performance from a range of $10.75 to $11.25 to a range of $12.25 to $12.65 on a non-GAAP basis. We will also revise our revenue guidance. Approximately $12.5 billion. We had a range of $12 billion to $12.5 billion; we're going to target $12.5 billion now. As reflected in our RPOs and as previously discussed, we continue to win work in important strategic market sectors. We are executing our work with efficiency, discipline, and precision as shown by our record operating margin. We are leveraging technology in BIM and prefabrication. We’re managing our labor and the supply chain effectively. We do all this with an eye toward delivering great results for our customers first and consequently delivering for you, our shareholders. As I stated earlier, it's important to remember that margins can fluctuate quarter-to-quarter based on mix, execution, and timing of projects. We evaluate our margin performance and operating margin performance in ranges, and we've discussed that over time. Our current performance has yielded operating margins at or above the high end of our historical ranges. Our team has shown resilience in dealing with supply chain issues. They still exist; lead times are challenging. We continue to build a strong bench from foremen to project managers to senior leadership. Additionally, we consistently attract notable talent from skilled labor to senior project and operations management. However, there are always factors to consider and remain prudent. We do remain concerned about financial risks to our customers from higher interest rates and macro uncertainties posed by the Ukraine war, the conflict between Hamas and Israel, volatility in the oil and gas markets—which will likely intensify from these circumstances—and dysfunction in the U.S. government, which may lead to a government shutdown or the inability to fund crucial legislation. While we do not believe the UAW strike will significantly impact us or our current projects, it may slow the release of future work within the EV value chain. Despite these challenges, we believe we will navigate them as we have in the past. Our team has always demonstrated great resilience. However, we must remain cognizant of these external factors and their potential impact on our execution and performance. We will continue to balance capital allocations. There are still opportunities within our acquisition pipeline. Given the uncertainty in financial markets, our strong balance sheet helps us secure large, sophisticated projects, as clients see our financial strength as another reason to choose EMCOR. As always, I want to thank our entire EMCOR team for their dedication and hard work. We appreciate all you do every day for our customers. With that, Betsy, I'll take questions.
Operator, Operator
The first question today comes from Brent Thielman with D.A. Davidson.
Brent Thielman, Analyst
Tony, maybe just coming back to Slide 12, when you think about—you talked to the customers that comprise the markets that are all embedded in that slide. What do you think is the sensitivity to this interest rate environment? Because at this point, it doesn't seem like there's much.
Tony Guzzi, Chairman, President and CEO
I would agree with you. We haven't seen it in our bidding or our opportunities. I think if you're going to see it anywhere, you'll see it in places that have the most far-out opportunity and the most strain on balance sheets. There are probably better people than me to discuss where that will be. But really, I think we see pretty good demand across most of these areas. I think it'll be important, Brent; part of what you're driving at is what you typically see as this work unfolds after the initial activity on a site. Generally, projects are then let in smaller amounts, and we're there working with them to develop the add-on work and the next scope. Thus, I think there's great demand still. These are really good drivers, but nothing is literally up and to the right—there's always a little jags along the way. We haven't seen that recently; however, history suggests that this will happen. But the underlying drivers over a five-year period should continue to be pretty strong.
Brent Thielman, Analyst
Yes. Okay. And the profitability of the business group is obviously a real standout, Tony. I hear you, the mix of business can have an impact in any given quarter on the margin. When you think about markets like data centers or large-scale manufacturing projects and healthcare, I mean, all of these require a certain level of technical capabilities that you guys have. Is that what you’re referring to in terms of mix? And I guess why wouldn’t that sustain going forward?
Tony Guzzi, Chairman, President and CEO
Yes. I think it's mix, but also contractual terms. Mark's talked about that, and I've mentioned it in the past. The same project could be done, but some may change their contractual terms because they haven't developed the scope as they think they should. So we might get into a GMP environment instead of a fixed price setting because that's going to protect us the most, or we may find ourselves in a situation where the design wasn't frozen, and we haven't been able to secure design assist. As a result, profitability can be delayed, right, Mark, because of the way change orders are recorded. So they can be a bit uneven over time. But clearly, where we perform best is when we understand the work, we can work under a fixed price contract, and we have more control over the schedule.
Mark Pompa, Executive Vice President and CFO
Yes. The only thing I would add to Tony’s comment regarding mix is the scope of services. Tony has previously noted that, in recent years, we’ve seen sizable growth in our fire protection and life safety services. This work tends to have a better profitability profile than traditional mechanical services. Additionally, much of the work we’re doing now involves equipment that is procured by our customers. If more of the equipment scope comes back into our future work, the mark-up we earn on equipment is certainly less than what we get on our labor. Therefore, this can ultimately impact margins when comparing them to previous periods. It’s still great work, and we welcome the opportunity to perform all scope for our customers, but the project profitability characteristics can change from a margin perspective.
Tony Guzzi, Chairman, President and CEO
Yes, and building on that, right? At the profitability levels we’re at, we are much more focused on margin dollars right now than we are margin percentages and the growth therein. We don’t necessarily control how people decide to award contracts and what that contract structure could be. Another change that has occurred in the market, and I don't see this changing, Brent, is that if you go back 10-12 years on some of these jobs, companies would try to take these projects and break them up into small pieces. This used to cause massive coordination issues on the job and allowed more contractors to bid. Recently, due to the rise of BIM and the demand for prefabrication, getting involved earlier on projects has become critical, as you need sophisticated contractors as part of the team. In the past, we might have joined a project at 70-90% completion; now, we’re often engaged at early stages—40-60%—where we’re assisting in completing the design for constructability. And that makes a significant difference regarding whom we partner with and how effectively we collaborate.
Brent Thielman, Analyst
Okay, very good. I guess my last question, I mean, your optimism here is duly noted, Tony. Any qualitative commentary you can offer for us on the outside looking in and how to think about the business into 2024? There are a lot of interesting drivers here. You expect the company to grow. Anything you can say about 2024 at this stage, being a couple of months away?
Tony Guzzi, Chairman, President and CEO
Yes. We never provide guidance for 2024; you're not asking for that, actually. You’re asking about the external environment and how it might shape what we contend with. I think energy markets remain uncertain. All the anxiety we felt at the start of the Ukraine war, if this horrible situation in Israel escalates further across the Middle East, it will have similar or worse effects on energy markets. This could pose a real issue not only for us as an energy consumer—we purchase a lot of gasoline and diesel—but also impact global supply chains and shipping. I also believe another factor that could dampen sentiment—while I don’t think it directly dampens our outlook—is the capital investment conviction if inflation re-emerges due to labor and other costs. There are some macro indicators out there. Interest rates, in my mind, are unlikely to decline. Our team believes this will be the case. We will maintain prudent management of our balance sheet. However, many others have extended debt levels, and as those debts mature, it may impact operations. Ultimately, let's refer back to our commitments and the drivers behind them. Data center clients, whether involved in builds for usage or those creating them independently, cushion their cash flow and continue generating cash without relying on financing. Semiconductor companies possess reasonable financial resources. While it may be a matter of how they commission their first fabs and what they learn at each site, this could cause delays; there always are. These customers are generally cash-rich. Similarly, healthcare is looking quite robust right now; the demand for putting hospitals in the market is significant. They can’t just build a hospital—there are certificates of need involved in some markets, especially where demographic shifts occur. Moreover, older hospitals require renovation— we are currently working at Mass General, an outstanding but outdated facility. I feel optimistic. If there's a slowdown in some of the energy efficiency projects we do for commercial clients, they will struggle because failing to become more energy efficient makes their properties harder to lease. So a lot is happening. I'm quite positive about our current condition. But I believe you could see some pressure in warehousing and retail, areas we don't serve heavily, where that will be evident, specifically amongst those with strained balance sheets, especially some private equity-owned assets loaded with debt.
Operator, Operator
The next question comes from Adam Thalhimer with Thompson, Davis.
Adam Thalhimer, Analyst
Welcome, Andy. Look forward to meeting you. Actually, Tony, can I just keep going on your PE comment? Are you seeing them show up less on M&A opportunities?
Tony Guzzi, Chairman, President and CEO
No, not with the kind of deals we pursue. They can look at our target sizes of $50 million to $200 million and think there’s a place to invest all equity, believing that the stars will align for financing at lower rates in the next 18 months. So we don’t share that view. Thus the answer is no; we don't frequently compete against them. If someone seeks to pursue private equity, we're likely out in the first round, as we prioritize finding the right cultural fit and management team that values long-term commitment.
Adam Thalhimer, Analyst
Okay. I'm going to try to do this as a three-part question. On RPOs: one, is there a point where you feel like you’re too full? Two, are you starting to book jobs further out? Three, do you think some of the RPO growth is due to market share gains?
Tony Guzzi, Chairman, President and CEO
Yes. So I'll handle the third part first. I don't think about market share; we never have. The market is vast, and after 19 years in the business—over 30 years, you might ask us about market share—we wouldn't even know how to answer that. It’s a massive market, and we're a small component of it. Secondly, are we too full? That question hinges on the project scope, size, and timing. Here’s my perspective: our limits rely less on how we will fill skilled craft and technical labor. We will find that. We've historically maintained our reputation as a great place to work, and we excel at training foremen and project managers. When necessary, we hire exceptional candidates from the field. If RPOs slow down, it's not due to our labor development capabilities; it’s just that the mix varies—these things arrive episodically. It’s uncommon to have a sustained growth trend like we’ve experienced over the last 2.5 years where RPOs continuously expand. It tends to be more cyclical than we’ve observed recently. The second part you asked about relates to bookings further out: approximately 17% of our RPO balance is scheduled to produce revenue beyond 12 months.
Mark Pompa, Executive Vice President and CFO
That figure may actually be on the low side, to be honest.
Tony Guzzi, Chairman, President and CEO
Data center work typically sees completion within 6-9 months.
Adam Thalhimer, Analyst
Okay. And then there was a comment in the queue about small project quick turn risk, which is the biggest potential headwind—higher interest rates? Are you seeing that yet?
Mark Pompa, Executive Vice President and CFO
I’m sorry, Adam. I think history has demonstrated that when we’re in an environment of rising rates and inflationary pressures, the easiest thing for people to cut back on is small project work. So far, we haven’t seen that reflected in our performance, but it’s an area we’re monitoring closely.
Tony Guzzi, Chairman, President and CEO
Yes. There's a lot of factors at play right now that differ from the past. That's where we’ve typically seen this issue. What’s different today are energy prices, and paybacks are quicker. How this all balances out over time remains to be seen.
Adam Thalhimer, Analyst
Okay. Lastly on industrial: Tony, you made a comment that something was robust, but the turnarounds were flat in Q4. So I didn’t understand that.
Tony Guzzi, Chairman, President and CEO
Yes. I likely stated robust around our niche services. We continue to see demand for niche services like heater repairs and related areas. We have good demand for our shop services, the best we’ve experienced since 2016-2017. That’s how I frame it: robust, which pertains to those niche services. And regarding that segment, do you perceive any new secular drivers? I’m thinking about a one to three-year outlook. I believe one is where we’re positioned. Specifically, we are situated on the Gulf Coast, where the refining capacity has the most advantages. The second secular driver could emerge when we resume renewable work’s inclusion on the electrical side. We have demonstrated the ability to integrate that work well. We won’t be involved in putting panels in, but we will connect those projects to the grid. That will be important. Another driver is upstream; we're well-positioned in the Permian and Bakken regions, specifically, and we anticipate both areas will have more robust opportunities over the next one to three years. We’re also exploring prospects around helping to manage methane emissions, for lack of better terminology, regarding how to incorporate more electrification instead of utilizing diesel generators.
Operator, Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Tony Guzzi for any closing remarks.
Tony Guzzi, Chairman, President and CEO
All right. Thank you all very much. I suppose we won’t be speaking together until February. So have a great holiday season; stay safe. I wish everyone a Happy Halloween, though it’s not one of my favorite holidays.
Operator, Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.