Earnings Call Transcript - EME Q3 2022

Operator, Operator

Good morning. My name is Jordan, and I'll be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group Third Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

Blake Mueller, FTI Consulting

Thank you, Jordan, and good morning, everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the company's 2022 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. As always, thank you for your interest in EMCOR, and welcome to our earnings conference call for the third quarter of 2022. For those of you, who are accessing the call via the Internet and our website, welcome as well and 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. On the next slide, they are the executives who are with me to discuss the call and nine months results. They are Tony Guzzi, Chairman, President and Chief Executive Officer; Mark Pompa, Executive Vice President and Chief Financial Officer; and our 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 as always at emcorgroup.com. With that said, please let me turn the call over to Tony. Tony?

Tony Guzzi, Chairman, President and CEO

Yes. Thanks, Kevin, and good morning, everybody. I will discuss our third quarter results in my opening comments and Mark will cover the third quarter and year-to-date results in greater detail. My opening commentary will focus on Pages 4 through 6. We delivered another strong quarter at EMCOR. Revenues grew to $2.83 billion with 12.1% overall revenue growth and 10.8% organic revenue growth, continuing the strong organic revenue growth we have earned over the last three years. I believe that this achievement, consistent strong organic revenue growth and the underlying profit growth is a testament to our positioning in certain key markets and a result of our long-term acquisition programs, capital spending, leader development programs, and customer and sector focus. Further, our gross margin gap versus prior year performance has closed to a smaller gap this year. This shows that we are narrowing the impact of the supply chain disruptions and inflation as we price, plan, and execute our project and service work. We grew operating income to $150.1 million with 5.3% operating income margins. We had strong SG&A leverage with SG&A margin at 9.3% of revenues. Our operating cash flow was exceptional at $257 million in the quarter. Our diluted earnings per share was $2.16 per share compared to a $1.85 per share for the third quarter of 2021. This is excellent overall performance, especially against the challenges of continued supply chain disruptions and inflation. These issues are still present and do present operating challenges that we have to work through. I am always amazed at the resourcefulness, flexibility, and depth of operating skills of our field leadership team as they plan and execute around an ever-changing and volatile environment and achieve excellent execution for our customers. I will now cover some highlights by segment. We continue to have very strong revenue growth in our Electrical and Mechanical Construction segments. Our Mechanical Construction segment revenues grew by 11.2% in the quarter and most of that growth in this segment was organic. Electrical Construction segment revenues grew by 19.3% with 13.1% organic revenue growth. Operating income margin of 5.6% in the Electrical Construction segment was challenged by product mix, timing, and some legacy transportation project issues. We continue to see very strong performance from our data center and high-tech manufacturing projects and are experiencing sizable growth in our commercial RPOs driven by these project awards. We expect Electrical operating income margins to rebound sequentially as we finish the year and move into 2023 as our mix improves as projects delayed by extended lead times for major equipment commence into the execution phase. Operating income margin in our Mechanical Construction segment was 8.1%, driven by exceptional execution in the commercial market sector on several semiconductor, pharma, and life science projects. Our Mechanical Construction segment also performed well with respect to our fire protection offerings, which cut across all geographies and sectors of performance. Supply chain and inflation challenges continue and will remain part of our project planning and execution through the balance of 2022 and well into 2023. Our U.S. Building Services segment had an excellent quarter with an operating income margin of 6.4% and 38.7% operating income growth, driven in part by revenues of $710.7 million which represented 13.8% revenue growth quarter-over-quarter, and that was mostly organic revenue growth. We had strong repair service, HVAC project, and energy efficiency project execution. Driving this growth is the underlying demand for our offerings. We leave this quarter with record RPOs as we continue to benefit from our customers' demand for energy efficiency upgrades in indoor air quality improvement. It was a great quarter for Building Services. Our Industrial Services segment faced a headwind of delayed turnaround projects as our customers pushed some work into the fourth quarter. The third quarter is typically a seasonally weak quarter in the Industrial Services segment. We believe we will continue to see improved performance in the fourth quarter and into the first quarter of 2023. We are also hampered in this quarter by delayed startup and awards on several solar opportunities that we are well-positioned to execute as supply chain disruptions ease. Our United Kingdom Building Services segment continues to excel with 7.1% operating income margins, favorable project mix, and excellent customer delivery. Our team continues to perform well against the backdrop of a very challenging economic environment and foreign exchange headwinds. We exit the quarter with a strong balance sheet and RPOs at a record level of $7.1 billion versus $5.4 billion a year ago and $5.6 billion at the end of 2021.

Mark Pompa, CFO

Thank you, Tony, and good morning to everyone 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 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 on a review of EMCOR's third quarter performance. Consolidated revenues of $2.83 billion are up $304.7 million or 12.1% over quarter three 2021 and represent a new all-time quarterly revenue record for EMCOR. Each of our reportable segments experienced quarter-over-quarter revenue growth other than our United Kingdom Building Services segment which was negatively impacted by unfavorable exchange rate movements during the quarter. Excluding $32.8 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 2022 increased approximately $272 million or 10.8% when compared to the third quarter of 2021. The specifics of each reportable segment are as follows: United States Electrical Construction segment revenues of $633.4 million increased by $102.4 million or 19.3% from quarter three 2021. Excluding incremental acquisition revenue, this segment's revenue grew a strong 13.1% organically quarter-over-quarter. Increased project activity within the commercial market sector, inclusive of the telecommunications and technology submarket sectors, as well as revenue growth from projects supporting both sustainable energy solutions and other traditional energy sources within the manufacturing market sector were the main drivers of the period-over-period increase. In addition, this segment continues to provide electrical solutions to our healthcare clients where they remain strong in demand for large capital projects. United States Mechanical Construction revenues of $1.12 billion increased by $113 million or 11.2% from quarter three 2021. Revenue growth during the quarter was driven by increases within the commercial, institutional, and water and wastewater market sectors. With respect to commercial sector revenue growth, we are benefiting from increased project activity for customers within the semiconductor industry as well as customers within the biotech, life sciences, and pharmaceutical industries. These projects include both traditional and mechanical construction, as well as fire protection services. In addition, within the commercial market sector, we continue to see an increase in demand for our fire protection services notably from our e-commerce customers as they expand their warehouse and distribution facilities. From an institutional market sector perspective, revenue growth was geographically broad-based and included increased revenues from a number of schools, universities, and other educational customers, including those which have received funding for HVAC repair and replacement under the CARES Act. On the other hand, our water and wastewater revenues remain concentrated within the Southern United States where we are supporting the increasing demand for potable drinking water and the treatment of wastewater given the shift in population in that region. Third quarter revenues from EMCOR's combined United States Construction business of $1.75 billion increased $215.4 million or 14% with 11.9% of such growth being organic. This combined revenue performance, as well as the revenue performance of each of our Electrical and Mechanical Construction segments represent new all-time quarterly revenue records. Consistent with last quarter, the achievement of these records has been accomplished while also increasing remaining performance obligations, which also represent all-time highs for each of our construction segments. United States Building Services quarterly revenues of $710.7 million increased $86.1 million or 13.8%. Revenue growth was generated within this segment's Mechanical Services and commercial site-based services divisions. Within Mechanical Services, we continue to benefit from strong demand for HVAC retrofit projects in building automation and control services with an emphasis on improving building efficiency, energy consumption, and indoor air quality. In addition, we are experiencing growth in service repair and maintenance volumes as supply chain delays have resulted in the need to extend the useful lives of existing HVAC equipment in instances when replacement equipment is not readily available. With respect to the segment's commercial site-based services division, new 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 $247.2 million increased $15 million or 6.5%. Although the quarterly growth is not as significant as that of our last two quarters, we were encouraged to see solid mid-single-digit revenue growth as quarter three represents this segment's seasonally slowest period as Tony previously mentioned. This revenue growth was despite the headwinds created by refinery utilization well in excess of 90% during the majority of the quarter, which can often limit the opportunities to provide field services as our customers are reluctant to take down the refineries for any extended maintenance. United Kingdom Building Services revenues of $117.7 million decreased by $11.8 million. As previously mentioned, this revenue contraction was entirely due to unfavorable exchange rate movements for the British pound versus the United States dollar, which masked revenue growth on a local currency basis. This segment continues to see strong project demand from the commercial market sector customers inclusive of the telecommunications submarket sector. Please turn to Slide 8. Selling, general and administrative expenses of $263.1 million represent 9.3% of revenues and compares to $243.9 million or 9.7% of revenues in the year-ago period. The current year's quarter includes approximately $3.7 million in incremental expenses from businesses acquired inclusive of intangible asset amortization, resulting in an organic quarter-over-quarter increase in SG&A of $15.5 million. This quarter's organic growth in SG&A expenses is primarily related to increased personnel costs due to both increased headcount to support our organic revenue growth as well as higher quarterly incentive compensation expense due to improved year-over-year performance at certain of our operations. Additionally, we continue to experience growth in travel and entertainment expenses as our employee business travel continues to resume normalcy. Despite the growth in SG&A dollars, we have seen a reduction in SG&A as a percentage of revenues as we successfully leverage our cost structure. As I mentioned last quarter, we continue to maintain discipline with overhead investment and will seek incremental efficiencies and economies of scale as we drive future revenue growth. Reported operating income for the quarter of $150.1 million or 5.3% of revenues compares to operating income of $137.4 million or 5.4% of revenues in 2021's third quarter. Our $150.1 million of quarterly operating income eclipses EMCOR's all-time quarterly OI record set in 2021's fourth quarter. Our operating margin of 5.3% represents a sequential improvement from that of quarter two, which was also sequentially higher than quarter one. Despite inflationary pressures and supply chain headwinds, EMCOR continues to execute at a high level, producing strong operating results and margin conversion on a revenue base, which continues to grow. Specific quarterly performance by segment is as follows: our U.S. Electrical Construction segment operating income of $35.6 million, decreased $8.7 million from the comparable 2021 period. Reported operating margin of 5.6% represents a reduction from the 8.3% in last year's quarter, the decrease in both operating income and operating margin is due to a less favorable project mix within the commercial, institutional, and transportation market sectors, coupled with certain discrete project write-downs totaling $10.5 million during the quarter, which negatively impacted the segment's operating margin by 170 basis points. These losses were due in part to supply chain disruptions as well as project completion delays and time extensions beyond our control. The majority of these projects were bid a number of years ago under different economic conditions where the extent of these supply chain disruptions and current inflationary pressures and escalating material prices could not have been contemplated. We continue to evaluate our contractual rights and are pursuing recovery where permitted. Aided by the increase in segment revenues, third quarter operating income of our U.S. Mechanical Construction segment of $91 million represents a $10.2 million increase from last year's quarter, while quarterly operating margin of 8.1% is modestly improved from 8% in 2021's third quarter. This improvement on operating margin is despite having a larger number of active projects within the manufacturing and water and wastewater sectors where we are either acting as a construction manager or general contractor. In these cases, our percentage of self-performed labor is less than a typical EMCOR construction project, thereby resulting in a lower gross margin profile. Operating income for U.S. Building Services is $45.6 million or 6.4% of revenues, which represents a substantial $12.7 million or 38.7% increase period-over-period with a 110 basis point expansion in operating margin. Driven by the performance of our Mechanical Services division, this segment is benefiting from both favorable project execution as well as the impact of certain pricing adjustments aimed at better aligning our billing rates with the increased operating costs we have experienced. Our U.S. Industrial Services segment operating loss of $1.4 million represents a $1.6 million improvement from the $3 million loss reported in 2021's third quarter. As I referenced earlier, quarter three is historically our Industrial segment's seasonally weakest quarter. Additionally, the delay or deferral into future periods of certain customer turnaround projects, which were anticipated to commence in September of this year, resulted in a shortfall when compared to internal expectations for the quarter. UK Building Services operating income of $8.4 million or 7.1% of revenues represents an increase of $1.8 million and a 200 basis point improvement in operating margin quarter-over-quarter. This improved operating income performance is despite the foreign exchange headwinds mentioned during my revenue commentary, which reduced the segments' reported operating income by $1.4 million in the quarter. This segment continues to benefit from a more favorable mix of project work when compared to the prior year. We are now on Slide 9. Additional financial items of significance for the quarter are not addressed in the previous slides or as follows: Quarter three gross profit of $413.2 million represents an all-time gross profit record for the company and is higher than the comparable 2021 quarter by $31.9 million or 8.4%. However, gross margin of 14.6% is lower than last year's third quarter primarily due to the impact of the project write-downs within our Electrical Construction segment, which negatively impacted our consolidated gross profit margin by 40 basis points during the quarter. Although, the quarter-over-quarter gross margin compare is unfavorable, 14.6% gross margin is sequentially higher than our first two quarters of 2022 and the 50 basis point year-over-year reduction represents the smallest quarterly variance to date in the current year. Diluted earnings per common share in the third quarter of 2022 was $2.16 as compared to $1.85 per share for the prior year period. This third quarter EPS performance represents a new quarterly earnings per share record for EMCOR due to the combination of net income growth and a reduction in our weighted average shares outstanding given our continued share repurchase activity during the year. Please turn to Slide 10. With my quarter commentary out of the way, let's touch on some highlights with respect to EMCOR's results for the first nine months of 2022. Revenues of $8.13 billion represent an increase of $862.9 million or 11.9% of which 10.3% of such revenue growth was generated from organic activities. As a result of our exceptional performance over the last two quarters, our year-to-date operating income of $387.7 million approximates that of 2021, which is quite impressive given the headwinds previously discussed. Operating margin for the year-to-date period is 4.8% and we continue to reduce the year-over-year gap, which is now only 50 basis points. On a combined basis, our U.S. Construction operations have experienced sequential quarterly improvement on operating margin throughout the year, and all of our other segments are reporting nine-month operating margins, which are either equal to or greater than that of the corresponding prior year period. Year-to-date diluted earnings per share was $5.50 and represents an increase of 6.4% from the $5.17 of EPS reported in 2021's nine-month to-date period. Although not shown on this slide, my last comment on our year-to-date results is with respect to our strong operating cash flow. In the nine-month period, we have generated $238.4 million of operating cash flow, which represents a substantial improvement over last year. Although, we had a slow start during the first six months of 2022, we generated $257.2 million of operating cash during the third quarter. Despite our strong organic revenue growth to date in 2022, and the resulting requirement for working capital investment, our subsidiary management and project teams have done an excellent job of maintaining discipline in their project and service contract administration resulting in great cash conversion. We are now on Slide 11. EMCOR's balance sheet remains strong and we continue to be in a position to invest in our business, return capital to shareholders, and pursue strategic M&A transactions. Despite the significant operating cash flow I just mentioned, our cash on hand has declined from year-end 2021 as a result of cash used in investing and financing activities during the first nine months of 2022. Notably, we utilized $656.6 million for the repurchase of our common stock, spent $91.1 million on acquisitions, and returned $20 million to our shareholders in the form of dividends. This activity was funded by our cash on hand as well as $170 million in borrowings under our revolving credit facility. Resulting primarily from a decrease in cash, coupled with an increase in our net contract liability position, our working capital balance has decreased by nearly $289 million from year-end 2021. These decreases were partially offset by an increase in accounts receivable, given the revenue growth we continue to experience. In terms of other fluctuations within our balance sheet, the $26.5 million increase in goodwill since December of last year was entirely a result of the acquisitions completed by us thus far in 2022. Net identifiable intangible assets have increased by approximately $16.6 million as the additional intangible assets recognized in connection with the aforementioned acquisitions were partially offset by amortization expense during the period. Total debt exclusive of operating lease liabilities has increased by nearly $170 million since December, given the borrowings under our revolving credit facility that I previously mentioned. As a result of this incremental debt coupled with the reduction in our shareholders' equity due to our capital allocation activities, EMCOR's debt to capitalization ratio has increased from 10.4% at year-end 2021 to 18.9% at September 30, 2022. We remain committed to our long-term capital allocation strategy and with our consistent free cash flow generation, along with our liquidity, inclusive of revolving credit capacity, we continue to remain flexible in our ability to execute against our strategic objectives.

Tony Guzzi, Chairman, President and CEO

Thanks, Mark. Well done. I'm on Page 12 discussing the Remaining Performance Obligations or RPOs. We have diverse RPOs of $7.10 billion, marking an all-time high. We continue to successfully secure new work, as evidenced by another strong quarter in project bookings. Throughout 2022, we experienced healthy demand across our segments and various market sectors. While we have always noted that our business is not dependent on month-to-month or quarter-to-quarter results, it does fluctuate based on projects and project awards. Our RPOs have seen an increase over the last eight consecutive quarters, primarily driven by organic RPO growth alongside strong underlying organic revenue growth. By the end of the third quarter, total company RPOs stood at $7.1 billion, up by $1.7 billion or 32% compared to the September 2021 total of $5.4 billion. From the end of last year, RPOs have risen by $1.5 billion or 27%. Furthermore, we secured $641 million in work in the three months following June 30. Over the last 12 months, the composition of our RPO portfolio has shifted somewhat, with projects generally becoming longer as project scope expands. This is due to elevated supply chain issues and the increasing technical and labor complexity of the sophisticated projects we are winning, such as hyperscale data centers, food processing plants, semiconductor fabs, hospitals, pharmaceutical plants, biolife plants, healthcare facilities, or extensive energy efficiency upgrades. Our two domestic construction segments have shown strong year-over-year project growth with RPOs increasing by nearly $1.5 billion or 34%. U.S. Building Services RPOs rose by $276 million compared to the previous year, an increase of 33%, bringing the total to about $1.1 billion, largely consisting of small to mid-size project work and service contracts. This quarter, we noted growth in our Mechanical Service division and the extension or renewal of several facilities maintenance contracts in our site-based services division. As mentioned last quarter, the extended lead times for HVAC equipment, combined with a focus on energy efficiency and improved building wellness, have led customers to request retrofitting services. When retrofitting isn't feasible on time, as Mark pointed out, we are repairing their equipment. The lack of available equipment is also driving our repair service work as operational equipment remains essential. I believe that lead times for applied HVAC equipment will continue to be prolonged well into 2023. Moving to the right side of the page where we have our RPOs broken down by market sector. As I mentioned earlier, quarter three was a strong booking quarter, supported by RPO increases in all sectors against water and wastewater, and we have good underlying trends in the markets where we compete. Water and wastewater tend to be more episodic awards. Market sectors were led by project awards in our broadly defined commercial sector, including numerous data center projects, semiconductor projects, and projects from customers within the biotech life science and pharma industries. It's not yesterday's or 10 years ago commercial market sector. Finishing our market sector year-over-year growth, healthcare is up 33%, institutional is up 24%, and short duration projects for the most of the retrofit work and energy efficiency work are up 34%. Partially offsetting that were minor decreases in water and wastewater, industrial manufacturing, and a decrease in transportation RPOs. What I said last quarter still rings true today. I continue to like the balance and breadth from both the businesses segment and market perspective and a geographic perspective of our RPO portfolio as we close out 2022 and we move into 2023. I'm going to talk about the next slide on Page 13. And I've talked about this because it is some underlying trends that are driving our business and they look like they have legs well into the future. Some of these awards come in bulky and episodically for the bigger work like data centers and semiconductor fabs. Some of it is more quick-hitting like the indoor air quality mechanical services work. But you go to data centers and semiconductor fabs, we see good demand and we see that continuing well into 2023. And we're positioned in all the right geographic markets with the right people. Are we in every one of them? No, but we're in enough of them to make a difference. There's strong demand for electrical systems. When you think about data centers, there are bigger electrical systems and smaller mechanical systems today, still big content in both parts. Fire protection goes across everything. If you think about semiconductor fabs for EMCOR, it flips, stronger mechanical demand, lesser electrical demand, again, fire protection demands across it. Fire protection, we can cover the entire geography of the U.S. for these opportunities. Industrial manufacturing and some of this shows up in our commercial because that's where our pharma, life sciences, and biotech are, we see strong opportunities and really what's driving that is new products, new facilities, strengthening supply chains, and the reassuring of manufacturing and also still relocation from higher cost states to lower cost states. Healthcare, for us is outpatient healthcare facilities, hospitals, and large physician medical office buildings. These are both upgrade and new construction opportunities as people seek more flexibility in their healthcare systems and the pandemic taught people a lot. The aging of America and facilities is driving this demand. We put a new one in here and energy transition and transportation. I heard it best from one of the big utility CEOs today. He said all of the above strategy and EMCOR can participate in an all-of-the-above strategy. It's not an either/or; energy demand is increasing. If you think about what's happening with healthcare facilities, data centers, semiconductor fabs, and resource manufacturing, we're not going to be using less energy in America. And so we need all sources of energy to excel; your coal will phase out. You're going to need natural gas to supplement the renewables. Nuclear, they're opening, I guess, they're fueling the first nuclear plant in Georgia. Not a big market for us but on the periphery, we will support nuclear plants. The one in Georgia is getting built, be the first one in a generation. Energy transition; we do participate in the solar and wind markets in some very specific transmission and distribution opportunities, and also in the placement of the solar fields, we should have been doing more of that work today. We do that in both the Electrical segment and we do it in the Industrial Services segment because of the positioning of the assets and the capability. We've learned that some of those oil and gas guys are great solar builders. They're very good at it. You've got the whole value chain of automotive. From all the way back at the mines, the lithium mines and the transportation, all the way through manufacturing and battery, all the way through to EVs and the new plants that are being built to the distribution centers that are now putting industrial scale. So will EMCOR be the person that's going to build the EV charging stations at rest stops? Probably not. We'll do it episodically or within a local market. We are the people who are doing it at the major distribution hubs. Those are high intensity electrical projects that are almost substation-grade installations. And then that'll move all the way down through how you continue to do battery storage, which is in its embryonic stages. You've got all underlying demand charges. What’s going to have to happen with the gas system to support the renewable grid? I'm actually quite bullish on how we participate over a 20-year time horizon. This is not a three-year project. This is a 20 to 30-year transition. Beyond the transition, we're going to need more energy. That’s not to say that we're not going to continue to support the downstream refining petrochemical and upstream market in oil and gas. Water and wastewater, as Mark touched on, we're mainly concentrated in the Southeast and even more so in Florida. A couple of things are going on there. You had consent decree work that was going on with some of our customers. Now you have strong underlying demand if more people moved into those states. The demand for fresh water and wastewater treatment is continuing to increase. Mechanical Services, there is none better than EMCOR mechanical service work. There is nobody better at putting energy efficiency projects in. We have the scale, the people, technical know-how, and the OEM relationships, and controls product offerings to make it happen in a big way, not only from an efficiency upgrade standpoint but from an indoor air quality standpoint. Finally, we're the best fire protection contractor in the United States, bar none. We're good. We can do large projects, small projects, and service. We have the fabrication capability to deliver that at a cost that's competitive for our customers on the most technically sophisticated projects in the country. All that other stuff I talked about is being built up. Now, let's go to closing on Pages 14 to 15 and what most of you care about is we took up guidance. We believe that we will now achieve around $11 billion in annual revenue and we're going to tighten that diluted EPS range, earnings per share guidance range by raising the bottom end of that range to $7.60 and the top end of that diluted earnings per share range to $7.85. We believe that we still have a growing non-residential market because of all the things I just talked about on the previous page. With respect to Industrial Service, we believe that the oil and gas market will continue to improve and that we will gain momentum into the renewables market as we exit the year. We talked about the RPOs; they're at record levels. We discussed the sectors on Page 12, and that should lead us to execute well in the fourth quarter and well into the first half of 2023 and beyond. We believe that operating income margins will hover around a full-year basis of 5% or a little bit above 5%. Where we end up in the range at this point of the year will depend on the following: we expect improvement in our Electrical Construction segment operating income margin as we move to a more favorable project mix and further progress on these projects that we just started in the third quarter, and we have a record of successful execution in these types of projects. We do expect momentum to continue from Q3 into Q4 in our Mechanical Construction segment in both revenue and operating income, driven by favorable project mix and excellent execution. Our Industrial Services segment believes will have a more typical fourth quarter turnaround season and our U.S. and UK Building Services will continue to perform well. I think confidence is how you allocate capital, right? At the end of the day, we have confidence in our execution and prospects, and thus we have returned nearly $677 million in cash to shareholders through share repurchases and dividends on a year-to-date basis. We have repurchased $656.6 million in shares year-to-date with $202.3 million of such share repurchase activity in the third quarter. We have also spent $91.1 million on acquisitions in 2022, including our recent acquisition of Boston-based Gaston Electric. We're thrilled to have them on the team. From our CEOs of subsidiary and segment leadership teams to our service supervisors and superintendents and project managers to our skilled craft labor, our team continues to perform well in a tough operating environment, and for that, I thank the entire EMCOR team. I appreciate all that that team does for EMCOR and for our customers every day. And with that, Jordan, we will now take questions.

Operator, Operator

We will now begin the question-and-answer session. Our first question comes from Sean Eastman with KeyBanc Capital Markets. Please go ahead.

Sean Eastman, Analyst

Hi, Tony and team, thanks for taking my questions.

Tony Guzzi, Chairman, President and CEO

Hi, Sean.

Sean Eastman, Analyst

I wanted to start on margins and just a higher-level question sort of putting aside the noise on margins we've seen this year. How would you characterize the bridge from sort of 2011 in the high-3% to this kind of mid-5% level we've seen over the past couple of years? How much of that is the cycle? How much of that is structural? I realize we're not seeing slowing right now, but just in anticipation of that, I wanted to understand that move and how sustainable this level is, maybe at a lower level activity into the outer years.

Tony Guzzi, Chairman, President and CEO

Yes, Sean. It’s always challenging to differentiate between structural factors and cycles. It can't solely be attributed to cycles since we've been experiencing this for an extended period. A significant portion relates to our strategic choices regarding the projects we engage in and those we opt not to pursue. We operate with a clear intent about the types of work we undertake, and our team is focused on a core set of values and expectations for how we manage the company. There are certain structural elements to consider. Our subsidiaries have grown larger since 2011, and their increased strength provides us with greater leverage and allows us to handle more extensive projects. Additionally, the market has shifted to consolidate larger projects with firms like ours. We've also enhanced our technical capabilities. For example, with the advancement of BIM technology, we were already a leading BIM contractor in 2011, but we've since widened that gap and continue to improve daily. Having a 3D model is impressive, but it’s key to utilize it effectively for planning work and prefabrication; otherwise, it lacks purpose. We have become increasingly proficient at connecting prefabrication with BIM and executing that on the job site. This means we are producing more in a factory-like environment for these complex projects and less on-site. This improvement is particularly evident in large mechanical projects, and our electrical contractors are also enhancing their performance daily, especially in building data centers and supporting healthcare-related work. The other thing we did was enhance our position in markets that are more favorable for us to complete more of the value chain, so like fire protection. That was a build-out strategy that's been 12, 15 years in the making. We did it through acquisition, we've done it through organic growth, and we've done it through capital investment. Again, our folks and the leaders impede fabrication. Shambaugh & Son and S.A. Comunale are the best fire protection contractors in my mind. They had plenty of competition, but they're good at what they do, and they’re the preferred technical choice. Thinking about that fire protection model and why we liked it so much is labor is more flexible, it's a national union for most of the union. It's design-build product on a very specific trade where people just design to a code. We then design the system underlying and lend it well to prefabrication which lends itself well to crews that can deal means and methods and apply it across multiple sites. You never put away the fact that they've got great management, right? They really understand how to satisfy our customers while also driving superior operational performance. Anything about the Mechanical Services that you go to more structural, right? We've done a lot in building services to restructure how we think about the business. If you go into building services, our site-based business is very good; we have very good business development, and we have a great execution team. We lead with self-perform and we lead with scope that makes sense for us. We're better at selecting our customers than we ever have been. People demand technical excellence or demand consistent execution across many sites and it's really with our self-performed labor as we build that up from embryonic 2011, maybe 50, 70 guys to over 500 today of these operating engineers with some HVAC and some electrical skilled, and that team has done a great job. You get to the Mechanical Services side; we spent a lot of time understanding mix and pricing and project management and sophistication where we actually brought as we move up the chain on these bigger energy efficiency projects that scale from our Mechanical Construction segment, and some of them have been into the Mechanical Services likewise. We’ve done the opposite and taken some of the small project skills and put them into our Mechanical Construction segment. Finally, we're achieving these margins, right, Mark, in the phase of what would have been a less favorable mix in 2011. Industrial was our highest margin product from a lot of our time between 2008 and 2013, 2014. We expect those margins to improve, but we’ve done it in the other trades which are much bigger, and we wouldn't have expected the mix up the way we did.

Mark Pompa, CFO

Yes. Sean, the only thing I would add to Tony's commentary, and this is a point of emphasis; we had a number of operating companies back in the 2011 period and periods prior to that that were performing at our consolidated levels or higher. The issue that we had was we had a number of businesses that clearly were performing below that, which was driving margin dilution. I'm more in the structural camp because, as you know, we haven't divested of a lot of businesses over that period of time. But having said that, we've taken best practices and lessons learned; our culture has continued to evolve, which has always been strong but continues to get stronger. We’ve been able to make significant inroads into how those other companies that previously were lagging those historical results were performing much better.

Tony Guzzi, Chairman, President and CEO

Right now, because of the mix of work, we’re doing some bigger work. We're going to be north of 5%. We're also worried about margin dollars, right, Mark? And we're going to drive the percentage up. Mark is a percentage guy; I'm a percentage guy and a dollar guy. That balance is essential in business; you go to do both. We see pretty favorable mix. One of the key underlying things in your question is if we get hit with a bad cycle, what happens? Since about 2008 when we had that recession, we've had the mindset that our next highs have to be better than our last highs in a cycle, and our lows have to be better than the last lows. That’s why I think when Mark says he is in the structural camp, we’ve done structural things to this business that we know of, and we could go through more of it. We talked about BIM fabricate, IT systems, planning, segment flattening, and we can talk about all that stuff. But the key point is we're laser-focused on having a cost structure that can compete in a tougher market. And that is something we have collectively down through the subsidiary CEO level focus on every day.

Sean Eastman, Analyst

All right, thanks for that. I learned quite a bit there. And then secondly, I don't want to take anything away from the momentum we're seeing here in the business. But I wondered if we're looking at the top-line growth and the growth in RPOs, how much would you estimate sort of the inflationary pass-through uplift is within those trends and just how we should think about your comps in these quarters going into next year as inflation starts to moderate?

Tony Guzzi, Chairman, President and CEO

Yes. From your lips to God's ears, right? That inflation starts to moderate. Look, back of the envelope, it’s hard to do it because of scopes, kinds of equipment, equipment in our mix, equipment out of our mix. Some of our bigger work, we don't actually purchase the underlying equipment, so that's out. Labor has actually been reasonable. I think they're in it for the long game. Our collective bargaining agreements have been reasonable. They're much more focused on what goes into the benefit package. They're much more focused on actually improving the pipeline into the trades in a lot of these local unions which is quite robust right now. I would actually say Mark 15%, 20%.

Mark Pompa, CFO

Yes, that’s less than 20%. Anywhere between that 12% to 20% range is where I would settle.

Tony Guzzi, Chairman, President and CEO

Not something we haven't looked at, Sean. It's really hard to normalize period to period. But I would say 12% to 20% of those gains in revenue and in RPOs are probably inflation-related.

Operator, Operator

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

Adam Thalhimer, Analyst

Hey, so I kind of wanted to start exactly where you guys left off on the RPO growth. So I'm trying to think through the $1.5 billion sequential jump in RPOs, when does that work start? And what kind of confidence does that give you in 2023 revenue growth?

Tony Guzzi, Chairman, President and CEO

Well, the work for the most part is starting now. If you think about how work gets awarded in our space, if we had some delays because of equipment, we had some delays of awards because of equipment that's part of what you saw in the third quarter. When this customer provided equipment, they delayed the award. We knew we were getting it, but they delayed the award, as we talked about. Adam, we don't comment on 2023 right now. We have record RPO levels; we're in the fourth quarter, and we expect a good start to 2023.

Adam Thalhimer, Analyst

Okay, can you repeat your comment about the Industrial segment being a bit down in Q3 due to seasonal factors? You mentioned expectations for a better Q4 and Q1. Could you elaborate on what we can anticipate in the Industrial sector over the next six months?

Tony Guzzi, Chairman, President and CEO

The next six months should be okay, right? We're in the fourth quarter turnaround season, and we're going into the first quarter turnaround season. We have no reason to believe that those – well, we’re in one, right? So we know that most of that schedule is getting executed. We think most of the first quarter will get executed. But we're at record frac spreads, and we have incredible external pressure on these refiners to keep operating. We don't make those decisions; we plan for them. We are well-positioned to support our customers and we also think some of our renewable projects will start to come online as we exit the year into the first quarter of 2023.

Adam Thalhimer, Analyst

Okay. And then, lastly, thoughts on capital allocation from here including M&A and buybacks?

Mark Pompa, CFO

Yes. With regards to the buyback program, clearly, you could see in the Q what the remaining authorization is. We don't comment on our repurchase strategies as we go forward, as you know. But we certainly have the authorization to take advantage of that if we chose to do that. With regards to the M&A pipeline and Tony is certainly going to jump in, we continue to have an active pipeline. But as other things that we've commented on this call, ultimately, we do not determine if something is actionable or not. There’s obviously a lot of uncertainty as people are looking at the future for all the reasons discussed previously on this call, and some of the earlier questions we've had today. This year has been relatively slow-to-date. I would like to think as we move into 2023; we would like to see activity pick up.

Tony Guzzi, Chairman, President and CEO

Yes. We like what we did so far year-to-date. We wish we have done a little more. We see continued good opportunities in our Electrical segment. We see it in our Mechanical Construction segment. We see in Building Services. Industrial is more organic growth. We have the capabilities to support our customers. Even in the UK, we could see an interesting acquisition or two. The bar for us is fairly high. We have good organic growth opportunities, and we still have capabilities in geographies we want to fill, and we have people that want to be owned by EMCOR. We have great success in people trying to move their life's work to us. That's a better scenario for us. We earn well in excess of our cost of capital, and we make very fair deals with the sellers. We’re not bargain hunters, and we're not going to be people that squeeze the absolute last dollar in the transaction. It’s just not how it works when someone wants to be part of our team going forward. We do a lot of small acquisitions you never hear about that build a branch or allow us to take a mechanical service contractor in the West from $40 million in 2002 to $300 million today. We’re very intentional about that M&A dollars. Do I think there is a $1 billion deal in our offing? No, I don’t. I think we’ll continue to operate well with $40 million to $300 million acquisitions, and I think we have plenty of opportunities there over a multi-year period.

Operator, Operator

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

Brent Thielman, Analyst

Hey Tony, in the 10-Q, you mentioned growth in the Electrical segment related to the manufacturing sector. The first point you mentioned was about transmission and distribution projects. Could you clarify if that relates to some of the aspects you're discussing?

Tony Guzzi, Chairman, President and CEO

Yes, that would be around renewables and substations that support renewables. That would be located there. It would also be on substations supporting manufacturing clients as they build out their facilities. Yes, that's mainly what that is.

Brent Thielman, Analyst

Yes. And then the EV battery plant opportunities also fall into that category and manufacturing separately?

Tony Guzzi, Chairman, President and CEO

Yes. Yes, yes.

Brent Thielman, Analyst

Okay. Perfect. And then I guess, Tony, on again, on the Electrical segment, the challenges you've had to work through this year weigh a bit on the margins? Are you effectively complete with those jobs? Are you still working through them?

Tony Guzzi, Chairman, President and CEO

Most of them will be complete by the end of the year. We have one more that will be sitting out there. Obviously, at the end of every reporting period, we take our best view on that job. So we think we know where we are. This is not hundreds of millions of dollars' worth of work that needs to be completed. It's probably around $50 million to $60 million of work to get completed. This is work that for the most part was taken between 2015 and 2017, like Mark said, under very different operating assumptions. It got delayed for some design issues initially, then some pandemic issues, and then some supply chain issues. It's work that we completed on the West Coast and we will finish those jobs. We will seek our contractual entitlement and we will move on. It's not – like I said, this isn’t hundreds of millions of dollars of backlog or work. That work will be – other than one job, will be complete mostly this year, with maybe a couple of things dribbling into the first quarter.

Brent Thielman, Analyst

Yes. Understood. And then last just the strong Building Services performance. I mean, again, this quarter. How much do you attribute to seasonal trends? I know that unusually warm weather, which I assume helped to some degree. And then what you attribute to what the core business is doing, right, maybe some of the secular trends around the business.

Tony Guzzi, Chairman, President and CEO

I believe most of the long-term trends reflect what the business is doing well. At our current size and profitability, we appreciate warm weather.

Mark Pompa, CFO

We love warm weather; we love snow, but it doesn't move the needle for the performance of that segment.

Tony Guzzi, Chairman, President and CEO

Not like it used to because of the size. What really drives the performance is something we didn't discuss. When things are going well, there's no need to complain. However, we didn't mention the fuel cost challenges that the Building Services segment faced; it's not insignificant. Mark, was it around $3 million to $5 million?

Mark Pompa, CFO

Yes.

Tony Guzzi, Chairman, President and CEO

$0.04, $0.05 a share of headwind coming out of fuel just in Building Services, and you probably double that across the business. As the year goes on, when we recoup, it as our pricing caught up. We don’t talk about all the planning we have to do on what were supposed to be short-cycle projects that get pushed out and what that means for their workforce planning and how we’re not absorbing. I would argue they’re performing at these levels with less than optimal labor utilization on the project mix side. But offsetting that is unbelievable execution on the repair service side, which is really, really strong, which is clearly highly skilled labor and the utilization and the pricing around that; coupled with the best execution we've ever seen in our commercial site-based business. We even start up new customers, as we renew customers, and more importantly, we're delivering for our customers there. I mean, that's a business where you really have to work with the customer on the budgeting, year-over-year productivity, cost reductions in an inflationary environment, and getting through that takes a lot of scale, and that team is executing. As well as the UK team, I would put those two together, operating in really, really difficult environments for our customers, and really delivering for them.

Operator, Operator

Our next question comes from Noelle Dilts with Stifel. Please go ahead.

Noelle Dilts, Analyst

Hi, thank you. I was hoping you could share your thoughts on the long-term effects of higher interest rates and overall increased costs. Your demand is very strong with positive trends, but as you look ahead, how worried are you about a potential slowdown in certain construction sectors? Thanks.

Tony Guzzi, Chairman, President and CEO

Yes, this is a seasoned management team, and we are always mindful of planning for the expected slowdown. If you look at the sectors I mentioned on Page 13, there are significant trends at play. There may be minor disruptions, but the overarching macro trends are very strong. It's important to have prepared and built the workforce to capitalize on these long-term trends well in advance. Currently, there is nothing happening that surprises us, aside from perhaps the rapid investment in energy transition. Overall, we feel optimistic about our position. The second thing is, if you think about it from an underlying perspective, what are some things that we didn’t have much to do with that will help solidify those secular trends? There have been three or four pieces of legislation over the last couple of years that will help keep that demand solidified and also solidified on terms that are good for a highly skilled contractor that pays prevailing wages. The first one was the CARES Act. Mark talked a little bit about that. That's going to drive underlying demand in the institutional market. That's the biggest part for us, schools, and other institutional buildings doing building upgrades. It’s not that all that was spent in 2021; you thought it was all spent. No, it’s not. Nothing almost got spent in 2021; it can't. You pass it, it takes a lot of plan. Then you get to 2022, Mark talked about that being some of the drivers for our small project work in the mix. In 2023, we think we’ll see even more of that. I actually think that will be near the peak year for the execution of those projects. Then you move to the infrastructure, probably not that big of a deal for us overall with the mix we do. We'll get some effect. We have some transportation capability to do lighting and driver information systems, Some airport upgrades will happen that we'll be part of; and we’re doing that today. Some port upgrades will happen that we’ll be part of. Generally, that's a civil infrastructure build, and we’re not civil contractors. Then you move to the CHIPS Act. Look, the customers are strong and financially robust to begin with. What this does is put a base under that so that they know there’s some long-term capital contribution. It also sets it up on terms that are good for contractors like us. Whether they be union or non-union, you’re going to pay prevailing wages and do that work here in the U.S. Most of those sites were designed and developed and everything else before the Act, but the Act helped strengthen the implementation of those projects. And we're positioned in a lot of those markets. The last one is the IRA. What that helps with is some of these energy transition and energy efficiency. Again, we will participate in that. Yes, there’s going to be speed bumps along the way. But when you're in the businesses that we are, and really, I think that the number of people that can do what we do on some of these larger projects, there’s plenty of them; there’s competition. But you have to have the skill to get in the project early and do the technical planning, and then they have to believe that you have the prefab and BIM capability to do the design assist to move that project along so you can invariably flex up and down through workforce planning and execution.

Noelle Dilts, Analyst

Great. That's very helpful. I want to clarify your comments regarding the effect of inflation on RPO. Should we consider that much of this inflation is being passed through, potentially resulting in a dilutive effect on margin? We understand that there have been several factors influencing margins this year that should have already been accounted for, which would contribute positively. I'm interested in how to approach that expenditure.

Tony Guzzi, Chairman, President and CEO

I'm not sure how dilutive the impact of inflation is going forward. We have a margin we have to make on our labor and our procurement of those materials. What has happened is more of the supply chain disruption has been a bigger problem for us than the inflation. We passed on the inflation. But we also look to seek to make our margin. The real issue is the supply chain disruptions. Now part I think we believe, as a management team, is we're now in a spot where things are getting delivered. We waited, we waited, we waited. There was the disruption, which we foreshadowed way back in our second quarter 2021 call. We had some things priced differently. We're working through it, working through it. Now we're getting major equipment delivered. We're putting it on the site. We put that into our planning. Are we building things optimally the way we'd want to build them? Of course, not. But we've figured out how to work around that. In some ways, you're almost treating the installation of some of the major subsystems as you would on a replacement job; you're doing everything else first. The availability of pipe and wire and more commodity-type materials has actually been pretty good, and the price has come down. You put the bundle together; might it have a minor impact, Mark, to keep things tamped down?

Mark Pompa, CFO

Yes. I mean, the law of large numbers, right? For example, discussing marking something up by 5%. The percentage – the number grows. It's more of the total contract; it could be dilutive, but it's not driving the advantage.

Tony Guzzi, Chairman, President and CEO

It's not driving it.

Operator, Operator

This concludes the 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. Stay safe, and we won't be talking to you. So have a great Thanksgiving.

Operator, Operator

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