Earnings Call Transcript - EME Q1 2026

Operator, Operator

Good morning. My name is Cindy, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group First Quarter 2026 Earnings Conference Call. Operator Instructions. I will now turn the call over to Lucas Sullivan, Director, Financial Planning and Analysis. Mr. Sullivan, you may begin.

Lucas Sullivan, Director, Financial Planning & Analysis

Thank you, Cindy. Good morning, everyone, and welcome to EMCOR's First Quarter 2026 Earnings Conference Call. For those of you joining us by webcast, we are at the beginning of our slide presentation that will accompany our remarks today. This presentation will be archived in the Investor Relations section of our website at emcorgroup.com. With me today are Tony Guzzi, our Chairman, President and Chief Executive Officer; Jason Nalbandian, Senior Vice President and Chief Financial Officer; and Maxine Mauricio, Executive Vice President, Chief Administrative Officer and General Counsel. For today's call, Tony will provide comments on our first quarter 2026 and discuss our RPOs. Jason will then review the first quarter numbers, then turn it back to Tony to discuss our guidance before we open it up for Q&A. Before we begin, a quick reminder that this presentation and discussion contains certain forward-looking statements and may contain certain non-GAAP financial information. Slide 2 of our presentation describes in detail these forward-looking statements and the non-GAAP financial information disclosures. I encourage everyone to review both disclosures in conjunction with our discussion and accompanying slides. And finally, as a reminder, all financial information discussed during this morning's call is included in our consolidated financial statements within both our earnings press release issued this morning and in our Form 10-Q filed with the Securities and Exchange Commission. And with that, let me turn the call over to Tony. Tony?

Anthony Guzzi, Chairman, President & Chief Executive Officer

Yes. Thanks, Lucas, and I'm going to start my discussion on Pages 3 and 4. Good morning, and thanks for joining us today. I'm pleased to report another outstanding quarter for EMCOR. Our first quarter 2026 results demonstrate the sustained momentum we have built over many years with strong execution across our business segments, and continued growth in our core market sectors and geographies. In the first quarter, we generated revenues of $4.63 billion, representing year-over-year growth of 19.7% and organic growth of 16.8% when adjusting for incremental acquisition contribution and the sale of EMCOR U.K. Operating income reached $404 million, with 8.7% operating margin, while diluted earnings per share of $6.84 represents an increase of 30% versus the first quarter of 2025. This reflects our strategic positioning in high-growth markets and operational excellence across our construction and services platforms. These results demonstrate our customers' continued confidence in EMCOR as one of their partners of choice for complex mission-critical projects. Our Construction segment once again performed extremely well in the quarter. The Electrical Construction segment generated year-over-year revenue growth of 33.1% with a 12.1% operating margin, while the Mechanical Construction segment achieved 28.9% revenue growth with a 10.9% operating margin. This performance reflects the range of our capabilities across both trade and geographies. It also takes into account increased customer scope and our reputation as one of the premier specialty contractors for complex, fast-paced projects. Our Construction segment's growth was driven primarily by increased activity in Network and Communications, which is where our data center business rests. Institutional, manufacturing and industrial, health care and water and wastewater market sectors. Within our Mechanical Construction segment, we also benefited from increased commercial market sector revenues, driven primarily by the resumption of demand for warehousing, distribution and logistics projects. Our teams continue to leverage our prefabrication and our virtual design and construction capabilities, excellence in labor management and planning, large project coordination and execution and a disciplined focus on contract negotiation, administration and the adherence to those terms. The U.S. Building Services segment delivered solid results, led by impressive performance in our Mechanical Services division. While we still face slight revenue headwinds within our site-based business, we've begun to see the benefits of the restructuring on the cost side, which reduced overhead costs, and we have a more profitable contract portfolio mix. Our Industrial Services segment generated revenue growth of 6.4%, and that was driven by our Field Services division. Now I'm going to turn to Page 5. Our remaining performance obligation positions strengthened significantly during the quarter, providing excellent visibility for sustained growth. Our RPOs totaled $15.62 billion at the end of the quarter versus $11.75 billion in the year ago period and $13.25 billion as of December 31, 2025. This represents year-over-year growth of 32.9% and sequential growth of 17.9%. These diverse RPOs reflect continued strong demand across many market sectors, with particularly robust activity in Network & Communications or data centers, where we continue to expand our geographic footprint and scope of services to better serve our customers. We see no sign of slowing demand in this vertical, where customer investments in AI infrastructure, cloud infrastructure and overall digital transformation are driving unprecedented levels of activity. We are pleased with the quality and diversity of our work booked outside of the data center space, including the notable awards within water and wastewater as we continue to win new projects in Florida; institutional, driven by demand for upgraded live space by certain colleges and universities; and health care as our customers continue to modernize their facilities while seeking to make them more flexible and responsive. The strong operational and financial performance I've outlined demonstrate the effectiveness of our strategic initiatives and the depth of our execution capabilities. Our teams continue to deliver exceptional results for our customers while maintaining disciplined financial management and operational excellence and continued good contract negotiation and adherence to the contract terms we negotiate. With that context, I will turn it over to Jason, who will provide a detailed review of our first quarter financial results.

Jason Nalbandian, Senior Vice President & Chief Financial Officer

Thank you, Tony, and good morning, everyone. Starting with Slide 6, which shows revenues. I'm going to cover the operating performance for each of our segments as well as some of the key financial data for the first quarter of 2026 as compared to the first quarter of 2025. As Tony mentioned, revenues of $4.63 billion established a quarterly record for EMCOR, increasing 19.7% or 16.8% on an organic basis when excluding acquisitions and adjusting for the sale of EMCOR U.K. Revenues of Electrical Construction were $1.45 billion, increasing just over 33%. This segment generated increased revenues from the majority of the market sectors we serve, with the most significant growth coming from Network & Communications, where revenues increased by nearly 50%, driven by strong demand for data centers. While this accounted for roughly two-thirds of the segment's growth, we did experience notable revenue increases across a number of other sectors, including hospitality and entertainment due in part to progress made on a stadium project and institutional as a result of certain public sector projects. In the quarter, our Electrical Construction segment also benefited from greater levels of short duration projects and service work. Mechanical Construction revenues of $2.03 billion are up nearly 29%. Similar to Electrical, this segment once again experienced the greatest growth from the Network & Communications market sector where revenues increased by 86%. Increased cooling requirements and advancements in liquid cooling, particularly for AI data centers continue to drive opportunities for this segment. Beyond data centers, Mechanical generated quarterly revenue growth from the majority of the other sectors in which we operate. Notably, institutional revenues doubled year-over-year; manufacturing and industrial, including food processing, was up 34%; and commercial increased by 33%, driven by warehousing, distribution and logistics projects, largely within fire protection. During the quarter, this segment also benefited from increased service revenues as we continue to expand our maintenance and inspection base, both within traditional mechanical services as well as our fire life safety offerings. On a combined basis, our construction segments generated revenues of $3.47 billion, an increase of 30.6%. I should note that this performance established new quarterly revenue records for each of these segments. Moving to Building Services. Revenues of $772.6 million grew by 4%, driven by our Mechanical Services division, which generated a 6% increase in revenues. From a service line perspective, the most significant growth was seen in repair service, service maintenance and building automation and controls. Revenues of our Industrial Services segment were $381.8 million, an increase of 6.4%. The greater contribution from our field services operations due primarily to progress made on a large solar project was partially offset by a reduction in revenues with our shop services division due to lower heat exchanger sales and related services. I'll turn to Slide 7 for operating income. We generated operating income of $403.8 million or 8.7% of revenues, both of which are records for EMCOR for a first quarter. This represents an increase in operating income of 26.7% and operating margin expansion of 50 basis points versus the prior year. When adjusting for the acquisition transaction costs, which were incurred in Q1 of 2025, operating income grew by 23.1%, and operating margin increased by 25 basis points. Once again, if we look at each of our segments, due to the growth in revenues, operating income for Electrical Construction increased by 28.2% to a quarterly record of $174.5 million. Operating margin of 12.1% compares to 12.5% a year ago. With consistent gross profit margins, this segment continues to execute well across its project portfolio with the year-over-year decrease in operating margin, primarily resulting from an increase in intangible asset amortization given the one month of incremental expense from the Miller acquisition. Mechanical Construction had operating income of $221.6 million, an 18.7% increase. From an end market standpoint, this segment generated greater gross profit across many of the sectors in which we operate with the largest increases generally tracking in line with the growth in its revenues. Operating margin of 10.9% compares to 11.9% in last year's first quarter. As we anticipated when we exited 2025, operating margin in this segment decreased due to a shift in mix that included a greater percentage of revenues from projects where we're acting as either a construction manager or a prime contractor and which inherently carry lower-than-average gross profit margins due to reduced markups on materials, equipment and subcontractor costs. In addition, we had an increase in the number of GMP or cost-plus projects, particularly in newer geographies or on projects where scope or design are still evolving. Together, our construction segments grew operating income by nearly 23% and earned a combined operating margin of 11.4%. Building Services generated operating income of $40.4 million, which represents an 11.1% increase and operating margin of 5.2% expanded by 30 basis points. This segment benefited from strong performance within its Mechanical Services division, which experienced a favorable mix, given the greater volume of higher-margin service and controls projects. Also, as Tony mentioned, while we do face some headwinds within our site-based business, the restructuring we did last year has proven to be successful, resulting in both reduced overhead costs and a more profitable contract portfolio. And lastly, operating income for Industrial Services was $12.8 million, an increase of 89.1% and operating margin of 3.3% expanded by 140 basis points. As a reminder, and contributing to the favorable year-over-year comparison, the results for this segment in last year's first quarter were negatively impacted by a $4 million increase in the allowance for credit losses which negatively impacted operating margin for Q1 of '25 by 110 basis points. Excluding this impact, the remaining increase in operating income and operating margin was primarily a result of greater gross profit and greater gross profit margin within its Field Services division. If we quickly turn to Page 8. I'll cover a few items not included on the previous slides. Gross profit of $864 million increased by 19.5% and our gross profit margin of 18.7% remained consistent with that of the prior year, which represents a record level of performance for a first quarter. SG&A was $60.1 million or 9.9% of revenues compared to $404 million or 10.4% of revenues a year ago. With the top line growth we experienced during the quarter, we are pleased with the operating leverage we attained as evidenced by the decrease in our SG&A margin. And finally, on this page, diluted earnings per share was $6.84, which represents an increase of 30% or 26.4% when excluding the transaction costs in last year's first quarter. And finally for me, let's turn to Slide 9, which covers our balance sheet. Our balance sheet, including $916 million of cash on hand and $1.25 billion of working capital remains strong and liquid and enables us to continue to fund organic growth, pursue strategic M&A and return capital to shareholders. During the quarter, we returned $105 million of cash to our shareholders through stock repurchases and our quarterly dividend. Although not shown on this page, due to an increase in accounts receivable, given our strong organic revenue growth and coupled with the payment of the prior year's incentive compensation awards, cash flows from operations in the first quarter were essentially neutral. However, for the full year, we remain confident in our ability to generate operating cash flow at least equivalent to net income or up to 80% to 85% of operating income consistent with previous years. With that, I'll turn the call back over to Tony.

Anthony Guzzi, Chairman, President & Chief Executive Officer

Yes. Thanks, Jason, and I'm going to be on Pages 10 and 11. Given our strong start to the year and the strength of our remaining performance obligations, we are raising our full year 2026 guidance. We are increasing our revenue and diluted earnings per share guidance to a range that reflects our confidence in the sustained operational excellence that we have exhibited and strong market momentum. Such guidance reflects the demand that we are seeing and our success of winning and executing large-scale projects across many geographies and market sectors. We now expect to earn revenues between $18.5 billion and $19.25 billion and diluted earnings per share of between $28.25 and $29.75. As a reminder, EMCOR's business is characterized by project cycles and timing that can create quarterly variability. However, our guidance reflects our current expectation of continued strong operating margins throughout 2026, supported by disciplined project selection and execution. We are focused on maintaining pricing discipline while delivering exceptional value to our customers. Our sustained success is built on focused execution across a number of key priorities that differentiate EMCOR and position us for continued growth. I'm now going to highlight four of them. The first one is our training, peer learning and our productivity initiatives. We continue to leverage our training programs, our virtual design and construction capabilities, prefabrication facilities and capabilities and advanced project planning and delivery methodologies. We are committed to improving our means and methods every day, sharing knowledge across our organization and investing in workforce training, retention and expansion. Second item is contract management discipline and negotiation. We deliver exceptional results for our customers. However, we do protect our rights and interests through careful contract management and negotiation, particularly on complex fast-paced projects. Third, we're known for field leadership excellence, which one can argue is our core product. Our field leadership excellence from frontline foremen and superintendents to project managers and executives and subsidiary and segment leaders make EMCOR an employer of choice in our industry. And finally, supporting all of that is our commitment to invest with discipline and for the long term. We maintain a disciplined approach for how we grow organically and through acquisition. This, coupled with a return of cash to shareholders through dividends and share repurchases has provided the foundation for our compounding record of success over the past decade and provides balance to our approach to capital allocation. These interconnected priorities create a sustainable competitive advantage that drives superior, durable performance across many diverse geographies and market sectors. The fundamentals of our business remain strong with sustained demand across several key market sectors; we will continue to always face macroeconomic challenges. In fact, I can't remember a time when we haven't had them, such as geopolitical events, rising commodity prices, but our team has consistently demonstrated the ability to navigate complexity and continue to deliver results. Our success is a direct result of their dedication, their resilience and expertise, which results in executional excellence from our teammates across the organization. I want to thank every member of the EMCOR team for their contributions to our outstanding first quarter performance and over the long term. And for everything you do to serve our customers, keep each other safe, and drive our success every day. Thank you for your time this morning. We will now open the line for questions. And Cindy, I will turn the call over to you.

Operator, Operator

Operator Instructions. Our first question comes from Adam Thalhimer of Thompson, Davis.

Adam Thalhimer, Analyst

Congrats on the strong Q1 and the record orders. I guess I wanted to start on the book-to-bill and orders. I mean, I think at 1.5x that was a record book-to-bill for you guys. And Tony, you broadly talked about the pipeline, but I'm just curious if you can give more detail on the pipeline and what the expectation should be for orders for the rest of the year?

Anthony Guzzi, Chairman, President & Chief Executive Officer

Well, I think I'd go back to something I said in our book, right? Orders come when they come, projects come when they come. There's variability quarter-to-quarter both on bookings and when projects start, when they close, and the pace of contracts. So you know I'm not going to tell you what I see for orders for the rest of the year other than to say this. We continue to see, and I said it in my script, we continue to see no slowing of demand, especially in data centers and really across other key market sectors. I don't think we're surprised by the demand we're seeing in water and wastewater in Florida, and we're winning a little more maybe than we thought we would. I don't think we're surprised by the continued demand over multiyears in health care. We continue to see a strong manufacturing and industrial business. I mean projects can come in there a little lumpy and then they can also come in smaller task orders thereafter. I think the market has surprised us the most over the last six to nine months or two to three quarters has been the institutional market. That has shown more resiliency than we would have thought. But I think that's a result of the market positioning we have in some key markets with some universities that are spending money. I also think that we weren't surprised by the resumption in warehousing and logistics and the transportation network work that we're seeing and return in the commercial market sector of that because we could foresee that based on the customer spending patterns. I would say right now, we will continue to grow in excess of nonresidential like we have historically pretty significantly. And we will continue to win important new projects and penetrate current geographies we are and invest in new geographies, even if they may seem adjacent across the data center space. One area I'd always remind people, because I know the question is coming about high-tech manufacturing. I think that's a market of choice for us. We are well positioned in several key markets, especially in the Mountain West and in Arizona, and we're positioned there specifically across the trades of fire life safety and mechanical and some electrical. And we have the ability in other markets to serve specialty fire life safety in just about every high-tech market that exists. We look at that as a flex market. They can be very difficult customers to work for, in some cases, especially in the semiconductor market. And sometimes, we're making a mix management decision within the geographic market to maybe serve a larger data center campus that maybe go after the next semiconductor fab. But again, we feel good about demand right now. Spending patterns remain and things are pretty much unfolding for the year, much like we expected. We're not chasing margin percentages right now. We're much more focused on growing margin dollars, which is what you actually spend and invest for the long term.

Adam Thalhimer, Analyst

That doesn't set me up well for my next question, which is on margin percentages. But at a high level, that was great color. At a high level, I did want to see if I can get at the margin potential in the back half. Maybe a way to do it is, Jason, you ran through a bunch of issues that impacted you in Q1 in terms of markups and mix. Can you talk about how those issues play out as the year unfolds?

Jason Nalbandian, Senior Vice President & Chief Financial Officer

Yes. I think we said this exiting last year, and I think it still holds today. But if you look at that guidance range we provided, we do have some lower margin scenarios in there, which anticipate a changing mix. I think we believe execution is going to remain strong throughout the back half of the year, which gives us the opportunity to replicate last year's record margins at 9.4%. So I think some of these mix dynamics will remain with us throughout the rest of the year. I also believe what we've said kind of over the last several quarters and looking at kind of a rolling 12- to 24-month average, I think that holds true. Just understanding it's going to fluctuate quarter to quarter just based on that mix as you kind of saw in mechanical this quarter. But I think the fundamentals hold, and I think really no significant change from what we said at year end.

Anthony Guzzi, Chairman, President & Chief Executive Officer

Yes. I think I'm always careful about false precision. We give a range for a reason. Could we be at the top of that range a little bit? Possibly, but we don't think substantially at this point. It would take something in execution that we're not seeing right now or a booking that happened in the year that had to be done very fast at superior margins. So we have a pretty good handle on what our mix looks like. I think that's one of the things that differentiates us from some other folks. Some of these companies are becoming single-market companies. We are diverse by nature because of the geographies we serve and some of the companies we have are earning very good returns that have nothing to do with data centers. We do a little better in the data center market on margin percentage, but we should. These are fast-paced jobs that require a very strong dedication of our resources. And look, they come with risk. At the end of the day, we're always balancing contract risk versus execution versus type. Sometimes that leads us to take a contract structure that may have inherently lower gross margins, but on a risk-adjusted basis it could lead to follow-on work that comes in a fixed-price way, which then allows us the opportunity to grow margins over time. We feel good about where the margins are on a year-to-date basis. I think the year started out pretty much like we thought, which, quite frankly, was just stronger revenue than we expected. We're winning in markets right now and that feels really good.

Operator, Operator

The next question comes from Brian Brophy of Stifel.

Brian Brophy, Analyst

Yes. Nice quarter. Tony, you touched on my question at the end of your last answer about potentially shifting some of this mix away from GMP and cost-plus toward fixed-price over time. Can you help me understand: is that a deliberate decision to start with lower-risk structures in new geographies? And what is the needle mover? What needs to happen for you to move these toward more fixed-price arrangements and create greater opportunity for higher margins over time? Is it simply a matter of getting comfortable in the new geography, or is there something else?

Anthony Guzzi, Chairman, President & Chief Executive Officer

No. Look, first of all, it's not only our decision. Some customers prefer to operate on a GMP basis because they expect a fair number of change orders and want to get started. So it's not solely up to us. When it is our decision, you framed it correctly: we have to be comfortable that we know the pace of the build and the cost. To remind folks about last year, we were in a market that met three of four criteria except it was relatively new for the scale we were trying to build, and in the end we took a fixed price. We didn't get the acceleration or change orders we expected; we should have priced it differently and ended up underpricing the work. That experience didn't make us avoid fixed-price work, but it shows that when you get it wrong, you own it. Contract structure isn't just our decision; it also depends on our owners, and we typically work together. Most owners, if we have a good handle on what the project looks like and can offer a fixed price that fits their budget and removes the auditing and contract administration of a GMP agreement, are happy to move away from GMP. The other option is that if we're 50 to 60 percent into a GMP job and both sides feel comfortable that cost and scope are locked in, we'll convert it to a fixed-price contract. There are several variables here, maybe four or five or even up to six to twelve around contract administration and structure, and we always aim for the best outcome for us and the owner and the best risk-adjusted result. Jason, do you have anything to add?

Jason Nalbandian, Senior Vice President & Chief Financial Officer

Yes. I don't think anything has changed overall in terms of our appetite for fixed price work or what we see in terms of the market and our customers. I think it's very much specific geographies, specific opportunities and specific customers in the quarter, which drove the revenue mix to skew more towards GMP.

Anthony Guzzi, Chairman, President & Chief Executive Officer

Especially in mechanical, which makes sense because you're doing more of these AI data centers now. And unless we're doing prefabricated structures for those AI data centers, you can argue modular structures that have really as part of our build or somebody else's build, they do start those things up more GMP, and we would prefer they do that as they work out their designs.

Operator, Operator

The next question comes from Justin Hauke of Robert W. Baird.

Justin Hauke, Analyst

Great. I guess, so we already talked about, obviously, the first quarter and the really strong revenue trend. The RPO is up 18% quarter-over-quarter, which I think is an organic record for you. But the revenue guidance only moved up a little. You're looking for roughly 9% to 13% growth for the year, and you just did about 20% in Q1. So I'm trying to understand. I know you've got some tough comps, but what is the conservatism in that outlook that would cause the trends to decelerate to more mid-single-digit growth from what you put up at the start of the year in bookings?

Anthony Guzzi, Chairman, President & Chief Executive Officer

I think you just said it in your last sentence. We just started the year. We're in the first quarter and have three quarters ahead of us. I think we'll know a lot more about the revenue trend as we exit the second quarter and based on what we see at the end of the year. Even sitting here with these RPOs, Jason and I still think we need to book 40% of our work for the remainder of the year.

Jason Nalbandian, Senior Vice President & Chief Financial Officer

If you're taking the midpoint of our revenue guidance range, if you take into consideration what's in RPO that we believe will burn through the rest of the year and what we earned in the first quarter, we still need to book about 30% of our work.

Anthony Guzzi, Chairman, President & Chief Executive Officer

And we think we can do that, and if we can book more of that and execute it within the year, that's how the revenue guidance will creep up, and we'll have much better visibility going forward. Simply put, we feel good about the revenue trend in the business. We feel good about our RPO bookings. We feel good about the margin in those RPOs. But we're sitting here in the first quarter, in April, and we'll have a much better view of that when we talk to you again in late July.

Operator, Operator

The next question comes from Avinatan Jaroslawicz from UBS.

Avinatan Jaroslawicz, Analyst

So I just want to discuss this acceleration in organic growth that we saw here in Q1. It sounds like some of it was due to increased mix of prime contracting pass-through revenues that you called out. Just when we think of that relative to the high single-digit to low double-digit organic growth that you've discussed previously within the construction business, is that kind of upper single to low double-digit framing around your self-perform work? Or was that including the prime contracting?

Anthony Guzzi, Chairman, President & Chief Executive Officer

It was all in. I mean, I think the preponderance of what we do is self-perform. But there are two places where it's more pass-through. One is, I think we don't even call it pass-through. We don't pass anything without a markup in the construction business. It would be primarily in our water and wastewater business, where we have a great team executing very well down in Florida. And it would be in the one place we do at EMCOR on an EPC basis at scale. Yes, we do chiller plants that way. We do other things. But the one place we do it at scale is in the food processing business. It's a very good business. It's a multi-trade package. We have more of that revenue passing through right now in our manufacturing and industrial market sector and it comes at a slightly lower margin. But if you look at it on a return on capital basis, it's very, very good work. And when we look at projects, Avinatan, we look at them both ways. We look at a project like that almost the way we look at an acquisition, evaluating the cash flows on that project versus what we've invested to do it and what it allows us to do further with the customer, both from an aftermarket basis and follow-on work. We have customers where we've been on site doing large projects every three to five years; we have maintained a continuous presence at those sites, doing small fixed-price projects and maintenance projects. I don't want to say nothing is forever, but we've been there almost twenty years now. So that's a part of the business. Those are the two places where that pass-through revenue is the most significant, and that can affect margins 10 or 15 basis points in a quarter to the negative. But again, they generate really good margin dollars and a really good return on capital on those projects.

Jason Nalbandian, Senior Vice President & Chief Financial Officer

And in this quarter, it was the food processing, right? We still have the water and wastewater in our backlog. I think that's what you could see as the year progresses, and this quarter was very much coming from food processing though.

Avinatan Jaroslawicz, Analyst

Okay. Got it. Makes sense. Yes, I was in part, looking at the water and wastewater growth in the quarter. And so just trying to piece it all together.

Anthony Guzzi, Chairman, President & Chief Executive Officer

I'll get ahead of one of the other questions and somebody can maybe drop out of the queue. We're not foregoing any data center work to do this work. It's either a different team that does this kind of work or a different geography. We're not foregoing any projects in the data center or high-tech world because we're doing water and wastewater or food processing. Really incremental growth at the end of the day.

Operator, Operator

The next question comes from Sangita Jain of KeyBanc Capital Markets.

Sangita Jain, Analyst

So if I can ask a follow-up on the mechanical margin discussion. Were these projects later on have incremental phases that you will then take on a fixed price? Or is the nature of these projects such that even the follow-on phases will be GMP?

Anthony Guzzi, Chairman, President & Chief Executive Officer

Well, the margin headwind in mechanical, some of it's GMP, others mix because of the food processing work; we hope to have follow-on phases fall on over a number of years. They won't be as large.

Jason Nalbandian, Senior Vice President & Chief Financial Officer

I think it's true we determine what that contracting mechanism is. They could be fixed price in the future on some of these jobs if we get more comfortable with our labor force and we get more comfortable with the design. They may stay GMP because we do have a couple of customers who just prefer GMP work. So I think it's going to be dependent on the individual jobs, and I think we'll know more as the year progresses.

Anthony Guzzi, Chairman, President & Chief Executive Officer

I think we're beating this a little too hard right now collectively on the phone. We contract lots of different ways. And sometimes, our fixed price work on something like food processing because we're serving more as a prime is a fixed-price contract. It doesn't have the same market characteristics and margin opportunity as the fixed-price contract can be on a single trade contract doing a data center or a manufacturing plant or a hospital. Other parts, we're doing GMP work on data centers because a customer can't nail down a scope or a new geography or that's their preferred way of doing the business. And they do that across their whole portfolio. I think we always think about operating in bands of margins. And as long as we're sort of within that 12- to 24-month look on bands of margins, we're performing pretty well. And then we take it a separate step further. At the part we're in a business, I think anybody that knows us, EMCOR is a return on invested capital type mentality. And if we can generate more margin dollars and balance that against the margins, we're happy. I know we're all trying to nail down this number of whatever percent for the year. A, we're not that good. That's why you have a range. And b, we have 12,000 projects going on right now, all kind of different contract structures. Is it a little bit incremental towards GMP, I look at that as a positive because maybe it takes some risk off the table where we shouldn't have been taking the risk on a fixed-price contract and allows us to penetrate a customer further. So I think we're trying to put too fine a point on something that you can't put a fine point on.

Operator, Operator

The next question comes from Tim Mulrooney of William Blair.

Timothy Mulrooney, Analyst

Jason. Just a couple of quick ones here. So I heard you say that productivity and pricing is contributing, I don't know, which said like 30% to 40% of total growth this year and you're growing, call it, 10% to 12% organically, if you exclude contribution from acquisitions. So this implies pricing is maybe adding 3 to 4 points to growth, which I'm just wanting to confirm is directionally correct. And the reason I want to is because that surprises me a little bit, like we're hearing about pricing being very strong, particularly around AI infrastructure, EMCOR are critical to the whole process, but you're not the largest cost bucket for a long shot. So it seems to me that pricing would be a lot higher than 3 to 4 points, but maybe I'm missing something.

Anthony Guzzi, Chairman, President & Chief Executive Officer

I think in general, when contractors talk about strong pricing, a lot of times, they have to execute the work. And so we're saying our expectation going into the year on pricing is we're working with really smart customers. We never assume our customers don't have alternatives. I've never assumed at any time in my career that we can just dictate pricing and that we want to be with these customers long term. I think when you look at our gross margins, and you look at our execution over a long period of time, and our ability to retain customers and at times we replace other contractors on site, but I don't remember us ever being replaced on a site. I think we get the price productivity execution just about right. I've never been the guy that's going to sit here and say there's people throwing work at us, and we just get it in buckets. And some of my peers that say that I'm not sure they have the long-term view of the market that we have. Pricing really means in contracting. Price in our business comes in a lot of different ways. If the assumptions you're making on the productivity of your labor, especially as you move further down the labor curve and there's more of a mix of people who are less familiar or more untrained, pricing also can cover what you expect on unforeseen job conditions. You don't get an adversarial relationship with customers who are going to work with you long term if there are small changes on a job. So maybe you're giving up some of that in the execution of the job to retain the customer. I think the pricing environment is good, and I think we're almost getting paid for what we're worth. But I would take probably better contract terms, better change order administration and give up some price any day as we execute these large, fast-paced jobs for what are some of the most sophisticated customers in the world.

Jason Nalbandian, Senior Vice President & Chief Financial Officer

No, I just think when you look at the number of jobs we're executing today versus the number of jobs a year ago, and you kind of back into the growth rate in jobs or even average contract values, I think it supports what we're saying, which is that really volume demand and productivity are the core drivers of our revenue growth.

Operator, Operator

Our next question comes from Manish Somaiya of Cantor.

Manish Somaiya, Analyst

Congrats again to the team. A couple of questions. Maybe, Tony, for you first. When I think about the contracts that you're being awarded, especially the mission-critical projects, are you seeing both electrical and mechanical scopes or is that typically one or the other?

Anthony Guzzi, Chairman, President & Chief Executive Officer

I don't think we're combining electrical and mechanical scopes and bidding jobs that way. Absolutely not. We may be on some sites for both electrical and mechanical work, but we do not make decisions based on that. These are separate scopes and separate teams. If we're fortunate enough to have two EMCOR companies on a site, or even three when you include fire life safety, the job probably goes better for the owner: our teams know how to work together, they use the same VDC tools, integration improves on the drawings, and coordination on site prevents stacking. But we do not specifically bundle the two and bid them as a package; almost never. I don't want to say never, but we almost always try not to do that.

Jason Nalbandian, Senior Vice President & Chief Financial Officer

But if you look at our bookings and you say, okay, there's a significant increase in data center bookings or network communications RPOs. That's coming from both mechanical and electrical. When you look at the revenue growth within each segment, let's just, again, look at Network & Communications, round numbers, electrical is up $240 million and mechanical is up $280 million. So we're seeing that growth in both, and we're seeing the bookings from both.

Manish Somaiya, Analyst

Okay. That's super helpful. And then, Jason, on the cash flow aspect, how should we think about the cash flow use reversing over the course of the year? Is that second half weighted typically or some of that comes earlier?

Anthony Guzzi, Chairman, President & Chief Executive Officer

I think if you look at the pattern we've had over the last two years or so, we think that pattern will hold true through the remainder of the year. Q4 tends to be the strongest for us from a cash flow generation perspective. Q1 tends to be the weakest. But if you look really over '24 and '25, we expect those patterns to be about the same.

Manish Somaiya, Analyst

Okay. And then just, Tony, back to you. Maybe if you can just talk about the M&A pipeline, what you're seeing out there, what are still the missing pieces within EMCOR geographically or product-wise? And then maybe if you can also just give us a sense as to what you're seeing so far in the second quarter.

Anthony Guzzi, Chairman, President & Chief Executive Officer

I won't answer that specifically for the second quarter. We're reporting on the first quarter today. Look, our acquisition pipeline is good. Deals happen when they happen. Our primary area of interest is electrical construction. We're a medium-voltage company or line voltage company. We're not really looking to grow our high-voltage market or the T&D market; we do have a position there, but it's mainly in the Mountain West and it's a very good company, but we're not looking to become Quanta in the T&D business. We're going to continue to do low to mid-voltage acquisitions in Electrical. We still have places where we can expand geography or strengthen geography in a lot of cases now. I think what we've had great success with is either buying an acquisition of scale, which is Miller. That's a great example of that. But we also have many examples in EMCOR, which is, I think, where you create the most value is when we take an electrical contractor that was just a good industrial or health care contractor that could do really sophisticated work. We know that there's customers that want us to do data centers in that market. We were able to come in and take that group of folks and take their core business, have them continue to do that through our peer learning and then have them expand into data centers. And that comes at a much better valuation than the folks that are doing 80% of their work in data centers that everybody is frothy over and want to spend 12x or 15x earnings. We're not going to do that for one market company and a one sector company. Secondarily, we buy construction. We've tended to do that more and then take a larger platform like Batchelor & Kimball, and grow organically. And the reason that sets up is they could do that well is because the amount of prefabrication on a mechanical job, they can take more labor hours off the job, and therefore, they feel much more comfortable. And then that's sort of the fire protection story too, which is the other part of mechanical that we would grow through acquisition inorganically. And with the fire protection, we're both growing the construction capability and the aftermarket capability. The other area of interest for us is, of course, the mechanical service space. We do both. They're not large compared to the construction acquisitions, but we'll do larger acquisitions there. There, we're buying footprint. We're buying technician capability and sometimes those acquisitions are small as a couple of million dollar asset deal to open up a market or strengthen our market, whether it's a certain type of equipment, a certain kind of capability. And then we also love to continue to support our customers through building controls and automation and mechanical services acquisitions, where we're one of the more significant independent building controls, and we have a number of different brands we're dealer for, and we have good capability, and that's both on the front end of the business and the design, the development of the user interfaces and of course, the installation and the commissioning to make sure it works. Those are our primary interests as we grow through acquisition. I would also argue that we also are not immune to doing the right kind of fabrication acquisition. We haven't done a lot of that to date, but we would do that if we thought we could add value — we have ongoing work that we could take some of that capacity and then also kit up some modular work more than we're doing today. It's not something we've done heavily, but it's something we look at all the time.

Jason Nalbandian, Senior Vice President & Chief Financial Officer

I think that's a good summary.

Operator, Operator

Our next question comes from Adam Bubes of Goldman Sachs. Unknown Analyst on behalf of Adam. This is Anuj on behalf of Adam.

Unknown Analyst, Analyst

So wanted to understand what is your prefabrication capacity today? And how much capacity do you plan to add this year? And additionally, if you can discuss the puts and takes of internalizing fabrication versus leveraging fabrication for third-party sales?

Anthony Guzzi, Chairman, President & Chief Executive Officer

Look, I think the best way to think about how we think about it is to look at our CapEx spending. We don't necessarily look at it as we're destined to add this much square footage. I think you got to take the fabrication that we do and break it into two or three pieces. One is the traditional fabrication we do just about every contract that we have, where they're doing some pipe fabrication, a little bit of fittings on the sheet metal side and they do that to support the aftermarket and the smaller projects in our market. We do a lot of that. The second fabrication is more dedicated fabrication, especially in our larger mechanical and electrical contractors. And that breaks into two pieces, too. There's especially electrically, there's almost a catalog we can do. That said, we're taking all these different parts from distributors and OEMs, put them together, so it almost kits out to the site. And then there's job specific where we're making conduit racks and different bands that we're doing specific to that job. It looks more like what we do on the mechanical side. There, we can have pretty significant pipe shops, pipe rack shops that do a variety of sizes from small bore to large bore. And then we also have sheet metal shops where we're hoping to generate off those coil lines, somewhere between 800,000 and 1.2 million pounds a year. Now again — and then there's the third part of that is part of that fabrication if we can do on job site in a tent and bring equipment in and not have to move it as much, we do that, too. So we're much more adaptable maybe than some others of fabrication. And I think that distinguishes us from other people is, for the most part, you never say everything is ever, but for the most part, EMCOR is fabricating for EMCOR and doing it as part of our job design. We do have cases where people want us to build and other people install, but that's a small minority of our fabrication versus others. And I think part of that is because we tend to have our trades focus on it. We're not a multi-craft workforce, maybe like a nonunion workforce can be in some markets. And my discussion about if we did fabrication and looked at it that way, that a fabricator would buy that we think we can bring more value to by looking at more multi-trade work.

Jason Nalbandian, Senior Vice President & Chief Financial Officer

I'd just say, if you look — Tony made the point about our CapEx over the last several years, and we've said it before, if you take even just a three-year look, our CapEx, if you look at a CAGR is growing twice what our revenue is, and that's those investments we're making in prefab. If you look at '26, I think we'll spend somewhere between $115 million and $125 million on CapEx. And I think a significant part of that will be fitting out fabrication facilities or upgrading the ones we have today.

Unknown Analyst, Analyst

That helps. And just one more follow-up. So demand remains particularly in your data center business. So what if anything, sets the ceiling on level of growth you can achieve from a capacity standpoint? Is it labor equipment procurement, et cetera?

Anthony Guzzi, Chairman, President & Chief Executive Officer

Well, it's emphatically not equipment procurement because on data centers, most of the major equipment is being bought by the owners for the owners through the GCs because they're deciding what size they want to do it. So we really have nothing to do with what's being done on the major end product equipment in data centers. In small cases, we still do, but for the most part, the owners buying the equipment. I think I've addressed where the bottleneck could be. We've been great at producing leaders. Our bottleneck is field supervision and it gets to the frontline leaders, foremen, general foremen and project managers and project executives. No one can grow without that constraint. We feel pretty good about being able to meet our growth targets we have out there, we wouldn't have taken the work. And so therefore, we feel pretty good that in this quarter, that year-over-year, it's up plus 30%, up plus 17% sequentially. We feel we can fill the teams either through increased scope or the teams that we've built to service that demand. And law of large numbers eventually tells you that your growth rate is going to slow, but the dollars stay up. And I'd say the same thing about — that's my whole margin point. We're in the search for margin dollars right now more than margin percentages. All right. Thank you all. We'll see you again at the end of July, and thanks for your interest in EMCOR. Bye.

Operator, Operator

Thank you. This concludes today's question-and-answer session. You may now disconnect.