Earnings Call Transcript - EME Q4 2022

Operator, Operator

Good morning. My name is Sarah, and I will be your conference operator today. I would like to welcome everyone to the EMCOR Group Fourth Quarter 2022 Earnings Call. Mr. Blake Mueller with FTI Consulting, you may begin.

Blake Mueller, FTI Consulting

Thank you, Sarah, and good morning, everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the company's 2022 fourth 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 fourth quarter and for the full year of 2022. For those of you who are accessing the call via the Internet and our website, welcome to you as well, and hopefully, you are at the beginning of a 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 has the executives who are with me to discuss the quarter and the full year results. They are Tony Guzzi, Chairman, President, and Chief Executive Officer; Mark Pompa, our Executive Vice President and Chief Financial Officer; and Executive Vice President and General Counsel, Maxine Mauricio. 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 Guzzi. Tony?

Anthony Guzzi, Chairman, President, and CEO

Good morning. Thanks, Kevin, and thank you all for your interest in EMCOR. My opening comments will cover Pages 4 through 6. I'm going to direct my comments towards our full year 2022 performance. Mark will focus his remarks on both our fourth quarter and full year 2022 performance. My only comments with respect to the fourth quarter of 2022 are that it was a record quarterly performance for revenues, operating income, net income, diluted earnings per share from continuing operations, and operating cash flow. We had an exceptional year in 2022 in a challenging environment. We earned revenues of $11.1 billion, with 11.8% revenue growth and 10.3% organic revenue growth. We executed well with a 5.1% operating income margin and generated exceptional operating cash flow of $498 million. We had strong SG&A leverage at 9.4% of sales, and all of that culminated in record earnings per diluted share of $8.10. During 2022, we faced some strong headwinds, including supply chain challenges, COVID disruptions, and material and labor inflation. We adapted both our service and project pricing and planning to adjust for inflation and the inefficiencies caused by supply chain issues. As a result, after a tough first quarter, our financial performance improved as the year progressed, demonstrating our success in mitigating such challenges. Our Mechanical Construction segment had an exceptional year with 9.5% revenue growth, all of which was organic and an operating income margin of 7.7%. This segment had excellent execution in the commercial market sector, especially in the area of high-tech manufacturing, focusing on semiconductors and data centers. This segment additionally benefited from strength in the water and wastewater sectors and the healthcare market. We enhanced our capabilities in BIM, or Building Information Modeling, and prefabrication, which allowed us to continue to deliver our services to our customers in a more productive, high-quality, and safe manner. We also continue to deliver exceptional fire-life safety projects, where we have earned our customers' confidence that we can deliver the most sophisticated technical solutions in the most demanding markets. Our portfolio of projects included semiconductor manufacturing plants, large distribution facilities, data centers, as well as those for pharma and bio-life science industries. In summary, we had an excellent year in our Mechanical Construction segment and have a solid foundation for continued success. Our Electrical Construction segment's performance strengthened through the year as expected and we finished the year more in line with our historical performance and expectations. This segment generated revenues of $2.43 billion and had very strong revenue growth of 19.9% for the year with 13.2% organic revenue growth. Operating income margin was 6.1%, and we experienced continued excellent performance in the commercial sector, including the data center and semiconductor markets. This segment additionally benefited from greater demand within the healthcare market sector, and we continue to strengthen and build out our low-voltage service offering. Our Electrical Construction business continues to be a market leader and is positioned well going into the future. Our U.S. Building Services segment had an exceptional year, driven by excellent performance across the majority of our service lines, including repair service, site-based services, building controls, and HVAC projects. This segment earned revenues of $2.72 billion and delivered a 5.3% operating income margin. Revenue growth was 12.2% with organic revenue growth of 11.6%. Our performance strengthened through the year as we had more precise pricing to offset material and fuel price increases and we became better at planning around difficult supply chain issues, driving demand for our services, our energy prices, which continue to be volatile and costly. This has created the need for enhanced energy efficiency and an uncertain supply chain, which has created the need to extend the life of our customers' mechanical equipment through repair services. Customers are also demanding more efficient, proactive, and integrated facilities management solutions that not only provide more self-performance of the most technical trades but also provide the best vendor-managed solutions for cleaning, landscaping, and other less technical trades. We have a very strong customer base with increased needs for our services, and we are delivering for our customers. Our Industrial Services segment generated revenues of $1.12 billion which represents 13.4% revenue growth, all of which was organic. We continue to experience the resumption of normal demand for our services, which began in the second half of 2021. We have seen increased demand for turnaround and shop services related to the support of our customers' downstream operations. However, demand for our services supporting our upstream customers remains challenged. Further, our renewable project activity remains muted as a result of the nonavailability of required materials to support large-scale solar installations. We expect to continue to see the segment recover more broadly to more normal operations and demand and expect demand and performance to continue to incrementally improve. Despite foreign exchange headwinds, our U.K. Building Services segment had another strong year with operating income margins up 6.3%. Our team continues to deliver for some of the most sophisticated customers in the United Kingdom. We exited the year with $7.5 billion in RPOs versus $5.6 billion at the end of 2021, representing a 33% year-over-year increase. From a market perspective, we experienced the largest growth in RPOs within the commercial market sector. This includes both traditional commercial construction projects as well as our telecommunication/data center work and our high-tech manufacturing project such as EV and battery plants, semiconductor, biotech, and life sciences. These are important areas for EMCOR. And as a result of the continued growth, we will expand our RPO and revenue disclosures beginning in 2023 to provide greater insight into these sectors. And then beyond that commercial market sector, we saw RPO growth from the majority of the remaining markets in which we operate, including the healthcare, manufacturing, institutional, and hospitality and gaming market sectors. We will discuss RPOs in more detail following Mark's commentary. Our balance sheet remains liquid and strong and will continue to support our organic growth as well as our capital investment, acquisitions, and return of cash to our shareholders through dividends and share repurchases. During 2022, we completed six acquisitions, five tuck-ins to existing subsidiaries, which bolster the capabilities of our Electrical, Mechanical, and Building Services segments. With that, I'll turn the discussion of our results over to Mark.

Mark Pompa, CFO

Thank you, Tony, and good morning to everyone participating on the call today. For those accessing this presentation via the webcast, we are now on Slide 7. Over the next several slides, I will provide a detailed discussion of our fourth quarter 2022 results as well as a summary update of our full year performance, some of which Tony outlined during his opening commentary. As a reminder, all financial information discussed during this morning's call is included in our consolidated financial statements within both our earnings release announcement and Form 10-K filed with the Securities and Exchange Commission earlier today. So let's begin our Q4 commentary. Consolidated revenues of $2.95 billion are up $309.6 million or 11.7% from the fourth quarter of 2021. Excluding $33.7 million of incremental 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 fourth quarter of 2022 increased approximately $276 million or 10.5% when compared to the fourth quarter of 2021. Most of our reportable segments experienced strong revenue growth during the quarter, establishing a new all-time quarterly revenue record for EMCOR, specific segment performance is as follows: United States Electrical Construction revenues of $713.6 million increased to $166.2 million or 30.4% from quarter 4 2021. Excluding incremental acquisition revenues, this segment's revenues grew a strong 24.2% organically quarter-over-quarter. Increased project activity within the commercial market sector, inclusive of data center and technology projects as well as revenue growth within the healthcare and manufacturing market sectors were the primary drivers of the quarter-over-quarter revenue increase. United States Mechanical Construction segment revenues of $1.14 billion increased $77.4 million or 7.3% from quarter 4 2021. Revenue growth during the quarter was concentrated within both the commercial and institutional market sectors. With respect to the commercial market sector, we are continuing to benefit from increased project activity from our data center customers as well as growth within the high-tech submarket sector, driven by various semiconductor construction projects. In terms of the institutional market sector, we experienced increased revenues as a result of various HVAC repair and replacement projects being performed across a number of geographies where we serve schools, universities, and other educational customers who are continuing to deploy funding that was received under the CARES Act. These substantial revenue gains were muted by revenue declines in the manufacturing, healthcare, and transportation market sectors quarter-over-quarter due to the completion or substantial completion of certain large projects which were active in the prior year period. Both our Electrical and Mechanical Construction segments established new all-time quarterly revenue records with their fourth quarter performance. Revenues of EMCOR's combined to domestic construction segments totaled $1.86 billion for the fourth quarter of 2022, an increase of $243.6 million or 15.1%, with 13% of such revenue growth being organic. Consistent with the last several quarters, we continue to be successful in winning new work to replace those projects that are being completed, as evidenced by the growth in the remaining performance obligations of these segments year-over-year. As is customary and as Tony previously commented, he will continue the RPO discussion at the conclusion of my financial commentary. United States Building Services quarterly revenues of $704.2 million increased $83.9 million or 13.5%. Quarterly revenue growth was generated across all of the segment's operating divisions with the most significant growth being generated by the Mechanical Services and commercial site-based services divisions. Within Mechanical Services, we benefited from strong demand for HVAC retrofit projects and building automation and control services with an emphasis on improving building efficiency, energy consumption, and indoor air quality. We continue to assist our customers with their decarbonization efforts and the implementation of plans or programs to combat escalating operating costs. In addition, we continue to experience growth in service repair and maintenance volumes as persisting supply chain delays have resulted in the need to extend the useful lives of in-place HVAC equipment in instances when new equipment is not readily available. With respect to the segment's commercial site-based services division, customer additions as well as scope or site expansion and increased project activity with existing customers were the drivers of the quarterly increase in revenues. EMCOR's Industrial Services segment revenues of $276.2 million decreased to $7.4 million or 2.6% with refinery utilization in excess of 90% and continued pressure on refiners to maintain or increase downstream output, we are experiencing deferrals and delays of planned maintenance work as our energy clients seek to minimize facility downtime. This has additionally led to a reduction in pull-through repair project opportunities. United Kingdom Building Services revenues of $113.3 million decreased $10.5 million. This revenue contraction was entirely due to unfavorable exchange rate movements for the GBP versus the USD, which is masking revenue growth on a local currency basis as this segment experienced elevated project demand from its customers. Please turn to Slide 8. Selling, general and administrative expenses of $277.6 million represent 9.4% of revenues and compares to $260 million or 9.8% of revenues in the year-ago period. The current year's quarter includes approximately $5.1 million of incremental expenses from businesses acquired, inclusive of intangible asset amortization, resulting in an organic quarter-over-quarter increase in SG&A of $12.5 million. This quarter's organic growth in SG&A expenses is primarily related to personnel costs due to both increased headcount to support our strong organic revenue growth as well as higher quarterly incentive compensation expense due to improved year-over-year performance at certain of our operating companies. Despite the growth in SG&A dollars and consistent with our performance throughout the year, we have seen a reduction in SG&A as a percentage of revenues as we continue to successfully leverage our cost structure. As I mentioned over the last several quarters, we continue to remain disciplined with overhead investment and are seeking incremental efficiencies of scale as we continue to drive revenue growth. Reported operating income for the quarter of $177.2 million compares to operating income of $143 million in 2021's fourth quarter and establishes a new all-time quarterly operating income record for EMCOR. Our consolidated operating margin of 6% represents a 60 basis point improvement from 2021's fourth quarter and continues our trend of sequential quarterly operating margin improvements in 2022 after a slow start in the first quarter. Specific quarterly performance by segment is as follows: our U.S. Electrical Construction segment operating income of $58.1 million, increased $16.3 million from the comparable 2021 period, and reported operating margin of 8.1% represents an improvement from the 7.6% in last year's quarter. These increases were a result of increased gross profit and gross profit margin within the commercial, healthcare, and manufacturing market sectors, given a more favorable revenue mix. In addition, the increase in operating margin was partially attributable to a decrease in the ratio of selling, general and administrative expenses to revenues during the current year period. This improved Electrical Construction segment performance was achieved despite certain discrete project write-downs totaling $10 million during the fourth quarter of 2022, which negatively impacted the segment's operating margin by 140 basis points. As referenced last quarter, we continue to evaluate our contractual rights on these projects and are pursuing recovery where permitted. Fourth quarter operating income of United States Mechanical Construction Services segment of $105.7 million represents a $12 million increase from last year's quarter and operating margin of 9.3% represents a 50 basis point improvement from the strong 8.8% earned a year ago. From an operating income perspective, the period-over-period increase was largely a result of incremental gross profit contribution from those commercial market sector projects referenced during my revenue commentary. With respect to operating margin, improved project performance, coupled with the reduction in SG&A as a percentage of revenues were the primary drivers of the quarter-over-quarter increase. Operating income for U.S. Building Services was $37 million or 5.3% of revenues, which represents a $10.8 million or 41.2% increase period-over-period with a 110 basis point expansion in operating margin. The growth in both operating income and operating margin is due to improved fourth quarter performance within the segment's mechanical services, commercial site-based services, and government services divisions. Notably, we experienced better project execution, as well as a more favorable mix of work. This improved performance additionally reflects our continued focus on project pricing and disciplined cost management. Our U.S. Industrial Services segment operating income of $1.5 million represents a $2.5 million reduction from the $4 million of operating income reported in 2021's fourth quarter. Such decline is due to a less favorable revenue mix as we experienced limited scope growth from projects being performed by this segment's field services operations during the 2022 fourth quarter. This also resulted in a reduction in pull-through equipment repairs for our shop services operations. As I mentioned during my revenue commentary, minimization of equipment downtime has become a primary focus of this segment's customers, given the market conditions within the oil and gas industry. U.K. Building Services operating income in 2022's fourth quarter of approximately $4.5 million is down moderately and operating margin of 3.9% is essentially flat when compared to that of the prior year quarter. From an operating income perspective, the reduction in U.S. dollars is entirely due to unfavorable exchange rate movements excluding the impact of foreign exchange, this segment's operating income increased as a result of the growth in project volumes referenced during my revenue commentary. We are now on Slide 9. Additional financial items of significance for the quarter not addressed in the previous slides are as follows. Quarter 4 gross profit of $454.8 million is higher than the comparable prior year quarter by $51.8 million or 12.8%. Gross margin of 15.4% has improved over last year's quarter and represents our highest reported gross margin for any quarterly period in 2022. This increase in gross margin when compared to 2021 fourth quarter as well as the sequential improvement throughout 2022 is due to the performance of our U.S. Electrical and Mechanical Construction segments as well as our U.S. Building Services segment as referenced during my segment operating income commentary. Diluted earnings per common share in the fourth quarter of 2022 is $2.63 compared to $1.89 per diluted share for the prior year quarter. This fourth quarter EPS performance eclipses EMCOR's prior all-time quarterly record, which was established in the third quarter of 2022. Please turn to Slide 10. With my fourth quarter commentary complete, I will now augment Tony's introductory remarks on EMCOR's annual performance. Consolidated revenues of $11.1 billion represent an increase of $1.17 billion or 11.8% when compared to 2021. Our full year results include $149.7 million of incremental revenues attributable to businesses acquired pertaining to the period of time that such businesses were not owned by EMCOR in 2021. Excluding the impact of acquisitions, annual revenues increased 10.3% organically with all of our reportable segments generating double-digit or near double-digit organic revenue growth other than our United Kingdom Building Services segment due to negative foreign exchange rate movements during 2022, which have been referenced several times. As a result of our performance over the last three quarters of this year, our full year operating income of $564.9 million surpassed the $530.8 million reported in 2021. Operating margin of 5.1% for 2022 compares to 5.4% in the prior year despite the 30 basis point reduction in operating margin, 2022's performance reflects excellent operational execution given the external market headwinds encountered during the year. Full year diluted earnings per share is $8.10 and represents an increase of $1.04 or 14.7% over 2021's diluted EPS of $7.06. The combination of year-over-year net income growth with the reduction in our weighted average shares outstanding, given our share repurchase activity during 2022 has contributed to a new annual diluted EPS record for the company. We are now on Slide 11. EMCOR's balance sheet remains strong and liquid, and we are well positioned to fund organic growth, return capital to shareholders, and pursue strategic M&A investments. Fluctuations of note within our balance sheet when compared to December of 2021 are as follows: despite strong operating cash flow during the year of $498 million, our cash balance has declined from year-end 2021, as our investing and financing outflows exceeded operating cash inflows. Notably, we utilized $660.6 million for the repurchase of our common stock, have spent a net $98.7 million on acquisitions, and returned just over $27 million to our shareholders in the form of dividends. Resulting primarily from the decrease in cash, coupled with an increase in our net contract liability position, our working capital balances decreased by approximately $321 million. The impact of these items was partially offset by an increase in accounts receivable, given the revenue growth we've experienced. The $28.9 million increase in Goodwill since December of 2021 was entirely a result of the six acquisitions completed by us during calendar 2022. Net identifiable intangible assets have increased marginally period-over-period as the additional intangible assets recognized in connection with the aforementioned acquisitions were largely offset by amortization expense during the year. Total debt, exclusive of operating lease liabilities has decreased by $14.5 million, largely as a result of the $13.9 million required principal payment made on our term loan in December of 2022. Our shareholders' equity balance has reduced by just under $279 million as our shareholder return activities, including common stock repurchases and dividend payments have exceeded our net income for the year. EMCOR's debt-to-capitalization ratio has increased to 11.1% from 10.4% at year-end 2021, given the reduction in our shareholders' equity just referenced. As we stated before, our balance sheet in conjunction with the borrowing capacity available to us under our credit agreement will continue to enable us to invest in our business, return capital to shareholders, and execute against our strategic objectives as we progress through 2023 and future periods. Our commitment to shareholder return is evidenced by both our share repurchase activity to date as well as today's announcement that our Board of Directors has approved an increase in our quarterly dividend of 20%. With my portion of this morning's slide presentation completed, I would now like to return the call to Tony.

Anthony Guzzi, Chairman, President, and CEO

Thanks, Mark, and I'm on Page 12, remaining performance obligations by segment and market sector. The fourth quarter of 2022 saw our ninth consecutive quarter of RPO growth. Momentum continues. We experienced healthy project demand throughout 2022 across all our segments and most of the market sectors that we participate in. If I look back a year, the company grew RPOs by $1 billion in 2021 and in 2022. As a result, our position and our market position has strengthened even more. Total company RPOs at the end of 2022 were approximately $7.5 billion, up nearly $1.9 billion or 33% over the December 2021 total of $5.6 billion. Additionally, fourth quarter project bookings were likewise strong, increasing $358 million in the final three months of the year, all but approximately $160 million of which was associated with our August acquisition of Boston-based Gas and Electric. As a side note, they have a terrific market position and dynamic leadership team that fits well with our EMCOR operating style and values. The rest of that growth was all organic. Again, for 2022, velocity in the business remained strong, with both revenue and total RPOs growing double digits from the previous year ago period. While our continued growth of RPOs is largely due to the strength of demand for our services, a small portion of this increase can likely be attributed to external factors, such as material and labor inflation as well as supply chain delays, which elongate some of our projects. Our two domestic construction segments experienced strong construction project growth year-over-year, with RPOs increasing just over $1.5 billion or 34% from December 2021. The Mechanical Construction segments saw RPOs increase by $737 million or 23%, while the Electrical Construction segment saw an increase of $789 million or a strong 64%. Much of this increase is continued demand for hyperscale data centers, industrial manufacturing facilities, and semiconductor, life sciences, and healthcare facilities. U.S. Building Service RPO levels increased $279 million or 32% in 2022 and totals almost $1.15 billion in small to midsized project and service work. Like all of 2022, this quarter saw continued project awards in its Mechanical Services division and the award or renewal of several facilities maintenance contracts in our site-based services division. EMCOR Industrial Services and our U.K. Building Services business while having less RPO-type projects supporting their business still saw their RPO totals for 2022 increase 12% and 36%, respectively. I should mention that over $42 million RPO increase in the U.K. business came despite unfavorable exchange rates against the dollar. Moving to the right side of the page, we show RPOs broken down by market sector. Commercial RPOs grew 51% year-over-year, and I'm going to come back to this in greater detail on the next slide. Looking at the other market sectors, year-over-year growth, healthcare RPOs, 40%; institutional RPO, 21%; industrial manufacturing RPOs, up 22%, and short-duration projects, which include work that our HVAC and controls retrofit work repair and service project work and low-voltage work, up 15%. Partially offsetting the increase was a reduction in transportation and water and wastewater RPOs, which is booked in a much more episodic manner. For greater transparency and on Page 13, we're going to break out commercial RPOs into the three large subsectors that we believe make up our commercial RPOs. Going forward into 2023, we will expand our RPO and revenue disclosures beginning to provide greater insight into these three sectors for our investors. So from bottom to top. The dark green section of the bar shows traditional commercial RPOs. It includes a lot of work in buildings and campuses, warehouses, mixed-use facilities, educational facilities, and some retail. We have seen growth in traditional commercial RPOs over time, really from the result of energy savings projects and also strong fire protection and life safety project retrofits and new builds at various logistics facilities and other facilities across the country. Going up the slide into the middle gray section, telecommunications, which is network and communications infrastructure projects, including data centers, data, fiber, and cabling projects. Much of the growth here has been driven by hyperscale data centers projects, but also the growth in our low-voltage business. The top right section of the bar is called high-tech projects. High-tech manufacturing and R&D facilities. Here, we capture projects in the semiconductor, biotech, life sciences, pharmaceutical, electric vehicle, and EV battery facilities. As the slide shows, we have a strong base of traditional commercial projects. More specifically, the slide shows that our recent commercial growth has been concentrated in the other two sectors, which represent 75% of our year-over-year commercial RPO growth. These are important subsectors for the company going forward, and we will expand our RPO and revenue disclosures beginning this year to provide greater insights into these important subsectors. So look, in summary of the RPO section, we're busy. We're quoting work, our RPO level is high, demand for our service is high, and we continue to see an active pipeline of new projects. Given where we are, and we're going to make all the carve-outs in the last section of all the economic factors we don't control. We believe we have good visibility as we start out 2023. We have good work in our RPOs, we have strong inquiries, and we have demand in the market sectors where we see momentum and where we execute well. And we have some of the best teammates and leaders on the ground and that allows us as a senior leadership team to be confident in our ability to complete the work we currently have and what we will win in 2023. Now, let's move on to Slide 14, which we've discussed frequently over the past two years. It's a slide I appreciate because it outlines positive long-term trends in sectors where we have excelled. I will address some overarching issues along with specific sectors. We've been focusing on data centers for a while, and we've also included semiconductor fabs and other high-tech manufacturing. We are well-positioned in data centers and can perform work mechanically, electrically, and in fire protection as well as or better than any contractor in the market, delivering great value for our customers. We offer a comprehensive range of services in the data center sector, including electrical, low-voltage, mechanical, and fire protection. We apply the same expertise in semiconductor fabrication. We see this market growing, especially with recent legislation likely to accelerate developments. This reflects good long-term trends, and in our assessment, much of the demand relates to reshoring manufacturing to build domestic infrastructure. There are approximately six centers across the country, and we are involved in about three and a half or four of them. Industrial manufacturing encompasses various sectors like tire and paper manufacturing, as well as food processing. It also includes the reshoring of supply chains in textiles and manufacturing elements like HVAC and compressors returning to the U.S. This shift began before the pandemic, but the pandemic highlighted the need for resilient supply chains, teaching businesses the importance of having multiple suppliers rather than relying on a single source. Healthcare has been a strong long-term market for EMCOR, extending beyond hospitals to outpatient surgical centers and medical office buildings. This market offers opportunities in maintenance, retrofitting, and new construction. The pandemic showed that healthcare facilities needed greater flexibility, such as the ability to create negative pressure rooms for oxygen management or positive pressure rooms when necessary. The subsequent transition is reinforced by recent legislation, indicating not just an energy transition but also an expansion. We are strategically positioned across the entire value chain for energy transition and to support traditional energy sources. We are also engaged throughout the EV value chain, including EV batteries, vehicles, and charging station infrastructure, primarily industrial-scale charging stations linked to large warehousing facilities for last-mile delivery. The water and wastewater sector is another area where we perform electrical work nationwide, although this represents a smaller portion of our overall work. In Florida, we excel in mechanical work, which is a growing market driven by population growth and regulatory requirements for water districts. Our services also include cost-cutting measures across all sectors, where we are a leading provider. We offer a range of mechanical services—including repair, service agreements, control services, and mechanical retrofits—contributing to energy reduction and carbon savings. An example is a recent project where our efforts resulted in the equivalent of taking 4,400 cars off the road, generating substantial savings for our customer with a payback period of under five years, equating to a 13% return. We perform this work consistently, and addressing indoor air quality is now part of our solutions. Back in 2020, we were well-positioned to assist customers in ensuring the safety of their facilities. This focus has since become a standard part of our building retrofits. We collaborate closely with major manufacturers and aid them in developing new products. Moreover, as mentioned by Mark, the CARES Act is significantly impacting educational facilities today. In Fire Protection and Life Safety, we have skilled professionals executing a variety of projects well, ranging from small jobs of $10,000 to substantial ones worth $100 million. Now, all these things are being bolstered by a couple of interesting things right now, right? There's been some legislation. I'm not even going to talk about the Infrastructure Act, which we will participate in, transportation infrastructure; we pick our spots. It's not a big part of what we do. But anything that uses technical labor is good for us, right? Because we know we can get the technical labor, and then anything that increases demand is good. But I'm going to talk about two specific places, let's say. I'm not going to go into detail other than it took some of these trends, especially around the EV transition space and the energy transition space and have bolstered them, right? The IRA Act bolstered them and to get the tax credits, you're going to have to use labor like ours, and that labor is well-trained. They get paid well. They're safe, and they've been through an approved apprenticeship program. On the CHIPS Act to get the credit, you're going to have to do Davis Bacon, we believe. But I think the apprentice stuff is going to be quite obvious because these are highly skilled people that come to work. EMCOR knows how to operate in that environment. And even where we are non-union, we will supply that labor; we know how to make sure that the right apprentices work hand in hand with our union companies. They have the right people on the right job at the right time. So these acts maybe didn't create these markets, but they may accelerate some demand forward and also put a foundation on the investment that's happening today.

Mark Pompa, CFO

Our next question comes from Brent Thielman with D.A. Davidson.

Brent Thielman, Analyst, D.A. Davidson

Congrats on a great year. Tony, Mark, I appreciate the breakout of RPOs by commercial submarkets. It's really interesting stuff and see the telecom and high-tech sectors more than doubling year-on-year. Again, pretty interesting. That's obviously where you and others are talking about a lot of the growth in the commercial market, I guess, still to come. And Tony, I guess I've thought about data centers and semiconductor fabs are a little more regionally specific. My question is these areas of your business around the country that are really benefiting from these submarkets, do you have the manpower, the capacity to keep sort of supporting this pace of gains in these verticals? I mean, what are the limitations here in your business?

Anthony Guzzi, Chairman, President, and CEO

That's actually a question we consider whenever we evaluate one of these projects. We need to determine if we can sustain it over time. It's important to analyze the local labor market because, in every case, the available workforce is insufficient. Then we assess what it takes to attract labor and the associated risks. In established areas like Arizona, we understand the requirements for bringing in labor, including wage rates and shift structures. This involves considering different shift options, such as working five tens or six tens with three days off, as well as what local unions permit in terms of job classifications. In more familiar markets, like Arizona, we have a clear grasp of what is necessary. However, in new markets, where we might be less established, we have to evaluate peak manpower needs and the resources we will deploy. We also consider the contract type we will use at the job's outset. While we may engage in standard contracts in established markets, we might opt for time and materials in emerging markets until we better understand the local labor situation. For future phases, we may switch to fixed-price contracts because we and our clients will know what it required to build the labor force. Therefore, our manpower planning begins with technical feasibility, followed by risk evaluation, and an analysis of supply chain challenges, prioritizing what the owner contributes and what we must provide. Once we gain clarity on all these aspects, including the contract structure, we can decide to proceed with the project. This decision must pass through all these considerations.

Brent Thielman, Analyst, D.A. Davidson

Yes, that's helpful, Tony. And I mean, as you look at the pipeline, of those sorts of opportunities, I mean is it large enough that you could conceivably still double your RPOs again next year? Is there any opportunity out there?

Anthony Guzzi, Chairman, President, and CEO

Yes, I'm not sure about that. Our approach to RPOs differs from many others. We operate based on the accounting definition, meaning we have a contract in place that includes a noncancelable portion of a service agreement. While others might ask how we plan to remain at a site for the next three years based on projected work, we don't take that approach. Our RPOs are based on approved change orders, which sets a strict standard. I can't predict what that growth will be; it is a significant level, but there are still plenty of opportunities available. Some of these may not fully appear in RPOs since they could be structured differently, like time and material or unit price work, showing up later in revenues. Additionally, some work will emerge in phases depending on our activities. Mark, would you like to add anything?

Mark Pompa, CFO

And Brent, the only thing I'll add to Tony's comments is back to the discussion of capital allocation and obviously allocating capital for growth. We clearly have a close eye on these opportunities, and when we're making those investments is where it's giving us the ability to take some of the labor out of the field back into the shop or into a more controlled environment where we're able to control the pace of progress a lot closer. So I wish in my long career here, those opportunities existed from day one that I walked in, but it was a much different market conditions then.

Anthony Guzzi, Chairman, President, and CEO

And technology. So our capabilities and our wherewithal is a lot stronger today than it certainly was then. And we have the balance sheet to make those investments. So I think from a competitive perspective, that certainly gives us an advantage. But at the end of the day, and one of the reasons why we've been successful for a long period of time is we're not going to enter into these arrangements with customers or potential customers if we do not believe that we have the ability to do 100% to fill those requirements. So the only governor I think on the opportunity in the short term is ultimately what our risk appetite is and ultimately where we want to play.

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.

Anthony Guzzi, Chairman, President, and CEO

Yes. Thank you all very much for your interest in EMCOR. We're at the start of 2023. We have a pretty good outlook, and we'll be back to talk to you in April. Thank you.

Operator, Operator

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