Earnings Call Transcript - EME Q1 2021

Operator, Operator

Good morning. My name is Lara, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group First Quarter 2021 Earnings Call.

Haskel Kwestel, Moderator

Thank you, Lara, and good morning, everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the company's 2021 first 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

Thanks, Haskel, and good morning, everyone. As always, thank you for your interest in EMCOR, and welcome to our earnings conference call for the first quarter of 2021. It's unbelievable that the Kentucky Derby is going to be run tomorrow or Saturday, and it's already May. For those of you who are accessing the call via the Internet on our website, welcome. And we hope you have arrived at the beginning of the slide presentation that will accompany our remarks today. We are on Slide 2. The presentation and discussion contains forward-looking statements and may contain certain non-GAAP financial information. Page two describes the details of the forward-looking statements and the non-GAAP financial disclosures. I encourage everyone to review both disclosures in conjunction with our discussion and accompanying slides. With me today are Tony Guzzi, Chairman, President, and Chief Executive Officer; Mark Pompa, our Executive Vice President, Chief Financial Officer; and Maxine Mauricio, Executive Vice President and General Counsel. Actually, Mark is not the Treasurer any longer. I'm sorry, Mark, the old title here. For call participants not accessing the conference call via the Internet, this presentation, including our slides, will be archived in the Investor Relations section of our website under Presentations. You can find us at emcor.com. With that being said, please let me turn the call over to Tony. Tony?

Tony Guzzi, Chairman, President and CEO

Yes. Thanks, Kevin. And I'm going to start my discussion on Pages 4 through 6. First, I'd like to welcome you all and highlight how different the feeling is we have in late April 2021 compared to late April 2020 when we were trying to understand how to operate during a pandemic. I don't need to recount all the areas of uncertainty and turmoil we faced last year, not only at EMCOR but in our country and across the globe. However, I want to emphasize that at EMCOR, we were able to rely on our core values of 'mission first, people always.' These values held us together and allowed us to perform at a very high level. They served as our focus point on the health and safety of our employees. At the same time, we knew we had to continue to serve our customers by providing essential services across multiple projects and service calls. Again, I want to thank all of our leaders and employees for their efforts. As demonstrated by our first quarter results, we continue to deliver strong performance by executing well for our customers while maintaining a focus on the well-being and safety of our employees. The first quarter of 2021 was outstanding by any measure. We earned $1.54 per diluted share versus $1.35 in the year-ago period on revenues of $2.3 billion, with operating income margins of 5.1%. We had strong revenue growth in our Mechanical Construction segment, up 8.4%. Our U.S. Building Services segment grew by 10.3%, and our UK Building Services segment increased by 12.8%, aided somewhat by foreign exchange effects. We were essentially flat in our Electrical Construction segment, and as expected, we had a significant decline in revenues of over 35.3% in our Industrial Services segment, impacted by industry conditions and the Texas Freeze, which in many cases pushed out our turnaround schedule into the second quarter of 2021. The work we did in connection with the freeze couldn't make up for the shortfall caused by that freeze. We also had a recordable incident rate (TRIR) of under one at 0.92, which was exceptional performance and demonstrates our focus on safety and well-being throughout the pandemic, which remains a core value of EMCOR. These results again illustrate the diversity of EMCOR's business and our ability to pivot to more resilient and stronger markets when some markets like downstream refining and petrochemical, oil, and gas are weakened due to reduced demand. Our first quarter performance demonstrates that we continue to earn strong operating income margins in our Electrical and Mechanical Construction segments. We achieved 8.8% in Electrical Construction and 7.2% in Mechanical Construction. These operating income margins show that we are earning a high conversion rate on the work we win, and we are executing well on our contracts, which are largely fixed-price contracts. I intentionally emphasize the word 'earned' when describing these operating income margins. We have demanding customers who drive a highly competitive bidding and selection process. The more complex the work, the more we compete not only on price but also on capability, requiring us to invest for productivity, through tools such as BIM (Building Information Modeling), prefabrication, and better personal protective equipment, tools, and work practices. We also invest in training and best practice sharing so that we can learn from each other to employ the best methods for our work. We must collaborate with our supply chain partners, which is crucial as the economy starts to rebound to ensure that we have the right products available at the right place and price across our geography and portfolio of projects. This is especially important for large, complex projects with accelerated timelines. Our subsidiary and segment leadership teams work hard to serve our customers every day, and they are among the most skilled teams in the industry. Our U.S. Building Services team had an exceptional quarter, earning 5% operating income margins on 10.3% revenue growth. We saw strong performance from mechanical services and both our government and commercial site-based businesses. We maintain strong demand for mechanical retrofit projects and indoor air quality (IAQ) solutions. Our site-based businesses are experiencing increased demand for small project work from total facility management customers. Our leadership from subsidiaries to business units to segments collaborates well with our customers as they return to in-office or on-site work. We are a trusted partner as they prepare and operate their facilities to ensure employee safety and peace of mind as they return to the workplace significantly. We expect this demand to accelerate in the next few months. Our UK team is performing well and has faced similar demand drivers and business contexts as our U.S. Building Services team. With 7.4% operating income margins and revenue growth of 4.5% without foreign exchange impact, we are doing well. We continue to serve our customers with complex facility service needs in the UK and perform well on our project work. Our Industrial Services segment had a tough quarter, as expected, earning positive EBITDA but slightly negative on an operating income basis. We likely could have achieved positive operating income in this segment, except for the impact of the Texas Freeze, which affected our turnaround schedule. We end the quarter with increased remaining performance obligations (RPOs) at $4.77 billion, up from $4.59 billion at year-end 2020, and up from the year-ago level of $4.42 billion. We will discuss our remaining performance obligation trends more later in my remarks. We exit the quarter with a pristine balance sheet. We are putting that balance sheet to work to grow our business and return cash to our shareholders. With my opening remarks complete, I will turn the conversation over to Mark who will discuss his favorite quarter, as he only has to comment on the quarterly performance. Mark?

Mark Pompa, CFO

Thank you, Tony, and my voice thanks you as well. Good morning to everyone participating on the call today. For those accessing this presentation via the webcast, we are now on Slide 7. Over the next several slides, I will augment Tony's opening commentary and review each of our reportable segments' first quarter operating performance, as well as other key financial data 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 expand our review of EMCOR's first-quarter performance. Consolidated revenues of $2.3 billion are up a modest $4.2 million or 20 basis points over quarter one 2020. Our first quarter results include $29.1 million of revenues attributable to businesses acquired pertaining to the period of time that such businesses were not owned by EMCOR in last year's first quarter. Acquisition revenues positively impacted each of our United States Electrical Construction, United States Mechanical Construction, and United States Building Services segments. Excluding the impact of businesses acquired, first-quarter consolidated revenues declined $24.8 million or 1.1% organically. Before reviewing the operating results of our individual reportable segments, I should point out that such results reflect certain reclassifications of prior year amounts due to changes in our internal reporting structure aimed at realigning our service offerings. Most notably, we have transferred our Ardent and Rabalais subsidiaries from our United States Electrical Construction segment to our United States Industrial Services segment. With that being said, I will now review the results of each of our reportable segments, starting with our revenue performance during the quarter. With the exception of United States Industrial Services and United States Electrical Construction, all of EMCOR's reportable segments experienced revenue growth in the first quarter. United States Electrical Construction quarter one revenues of $456.2 million decreased $5.6 million or 1.2% from 2020's comparable quarter. Excluding acquisition revenues of $6.5 million, this segment's revenues declined 2.6% organically as revenue reductions within the manufacturing and transportation market sectors were only partially offset by increased project activities within the commercial and institutional market sectors. United States Mechanical Construction revenues of $903.9 million increased $69.8 million or 8.4% from quarter one of 2020. Revenue growth was primarily attributable to an increase in commercial, healthcare, and transportation market sector activities due to continued strong demand for our services, partially offset by revenue declines within the manufacturing and institutional market sectors. This substantial quarterly revenue growth was despite a reduction in short-duration project volumes due to the ongoing impact of the COVID-19 pandemic, and it represents a new first-quarter revenue record for this segment. EMCOR's total domestic construction business first-quarter revenues of $1.36 billion increased $64.2 million or 5% and reflects a strong start to the year. United States Building Services record quarterly revenues of $581.8 million increased $54.2 million or 10.3%. Excluding acquisition revenue contribution of $22.6 million, this segment's revenues increased to $31.6 million, or 6% organically. Revenue gains within their commercial site-based services division, driven by an increase in event-driven snow removal and a resumption in project volume as certain customer facilities begin to reopen, were the primary drivers of the quarter-over-quarter revenue improvement. The segment's mobile mechanical services division additionally experienced stronger project and retrofit demand, emphasizing services aimed at improving indoor air quality. United States Industrial Services revenues of $235.4 million decreased $128.5 million or 35.3% as this segment continues to be impacted by negative macroeconomic conditions and uncertainty within the markets in which it operates. Furthermore, as Tony mentioned, the Industrial Services segment was negatively impacted by normal weather conditions and related power outages within the Gulf Coast region, which resulted in the delay of active projects and the deferral of previously planned maintenance and turnaround activities for certain customers. Although we were able to assist some of our customers with emergency repairs resulting from the February storm, this unplanned work was not enough to offset the lost quarterly revenue caused by these deferrals and delays. The United Kingdom Building Services segment revenues of $126.7 million increased $14.3 million or 12.8% due to growth in project activities across the portfolio as customers began to release projects that were previously on hold due to COVID-19. This segment's results additionally benefited by $9.5 million as a result of the strengthening of the pound sterling since the lifting of uncertainty around the United Kingdom's trade deal with the European Union that became effective on January 1, 2021. Please turn to Slide 8. Selling, general and administrative expenses of $224.1 million represent 9.7% of first quarter revenues and reflect a decrease of $2.9 million from 2020. SG&A for the first quarter includes approximately $2.4 million of incremental expenses from businesses acquired, inclusive of intangible asset amortization expense, resulting in an organic quarter-over-quarter decline in SG&A of $5.4 million. This organic reduction is primarily attributable to lower employment costs as a result of reduced headcount due to various cost-control measures enacted during 2020, as well as a decline in travel and entertainment expenses due to a combination of cost-avoidance measures and restricted company travel protocols. These decreases were partially offset by an increase in incentive compensation expense, predominantly within our United States Mechanical Construction segment, due to improved projected annual operating results compared to the same prior year period. Reported operating income for the quarter of $117 million compares to $106 million in 2020's first quarter, representing an increase of $11 million or 10.4%. The operating margin of 5.1% expanded by 50 basis points from the prior year's 4.6% operating margin. This performance reflects a new first quarter operating income and operating margin record for EMCOR. Our United States Electrical Construction segment's operating income of $40.3 million is consistent with 2020's quarter one performance. Reported operating margin of 8.8% represents a 10-basis point improvement over last year's first quarter, due to a modest increase in this segment's gross profit margin. First quarter operating income for our U.S. Mechanical Construction segment of $65 million increased nearly $20 million from the comparable 2020 period, while the operating margin of 7.2% represents 180-basis point expansion year-over-year. This improved performance is primarily due to higher gross profit across most of the market sectors we serve, driven by volume increases previously referenced and a slight improvement in revenue mix compared to the year-ago period. The segment's operating margin also benefited from a reduction in the ratio of selling, general, and administrative expenses to revenues, as a result of robust quarterly revenue growth without a corresponding increase in this segment's overhead cost structure. Consistent with the commentary during my revenue discussion, this performance established a new first quarter record in terms of both operating income and operating margin for our United States Mechanical Construction segment. Our total U.S. construction business is reporting $105.2 million of operating income and a 7.7% operating margin, representing a quarter-over-quarter improvement of $19.7 million or 23.1%. Operating income for our U.S. Building Services segment of $29.3 million is an $8.1 million increase from last year's first quarter, with an operating margin of 5%, representing a 100-basis point improvement. An increase in gross profit resulting from greater snow removal activities with customers that are contracted on a per snow event basis within the segment's commercial site-based services division, in addition to higher gross profit from project building controls and repair activities in the segment's mobile mechanical services division, were the primary drivers of the quarterly increase in operating income. Moreover, the segment's operating income and margin benefited from a reduction in SG&A expenses compared to the prior year due to various cost-reduction actions instituted following the first quarter of 2020. This operating income and margin performance represent a new first quarter record for this segment. Our U.S. Industrial Services segment posted an operating loss of $2.4 million, down $17.9 million from an operating income of $15.4 million in last year's first quarter. The reduction in period-over-period operating results is due to the adverse market conditions this segment continues to face, along with the impact of February's extreme winter weather event. Fortunately, this segment managed to partially offset these negative influences with a nearly 21% reduction in first quarter selling, general and administrative expenses, resulting from certain cost-saving measures enacted in calendar year 2020. UK Building Services reported an operating income of $9.4 million or 7.4% of revenues, reflecting an improvement of $3.6 million and 230-basis points of operating margin expansion over the first quarter of 2020. This performance marks an all-time quarterly record for operating income and margin, supported by a strong resumption in project work during the quarter as the UK market approaches the hopeful conclusion of COVID-19 lockdown mandates. Additionally, operating income for the quarter benefited from approximately $800,000 of favorable foreign exchange rate movement. We are now on Slide 9. Additional significant financial items for the quarter not addressed in my previous slides are as follows. Quarter one gross profit of $341.1 million represents 14.8% of revenues, an improvement from the comparable 2020 quarter by $8 million and 30 basis points of gross margin. Both our gross profit and gross profit margin set new first quarter records for EMCOR despite the challenges experienced within our United States Industrial Services segment. Diluted earnings per common share in the first quarter is $1.54 compared to $1.35 per diluted share for the prior year period. This $0.19 or 14.1% improvement establishes a new first quarter record for the company and ties with the all-time quarterly diluted earnings per share record, achieved in quarter four of 2019. We are now on Slide 10. As evident from Slide 10, EMCOR's liquidity profile remains strong. Cash on hand is down from year-end 2020, primarily as a result of cash used in operations for funding 2020's companywide incentive compensation awards and the funding of our United Kingdom subsidiaries' VAT deferral from the previous year. Additionally, we repurchased $13 million of our common stock pursuant to our share repurchase program, and utilized nearly $32 million in cash on investing activities, including $24 million to fund two acquisitions completed during the first quarter of this year. Working capital levels have increased modestly due to a reduction in current liabilities, marked by decreases in accounts payable and reduced accrued payroll and benefits as a result of the prior year incentive award funding, and an increase in goodwill stemming from acquisitions in our United States Electrical and United States Mechanical Construction segments. Net identifiable intangible assets have decreased due to approximately $15 million of intangible asset amortization expense, partially offset by the recognition of additional intangible assets related to previously referenced 2021 acquisitions. Total debt, excluding operating lease liabilities, is virtually unchanged since year-end 2020. Our outstanding borrowings and the growth of stockholders' equity, following our net income for the quarter, have enabled EMCOR's debt-to-capitalization ratio to decrease to 11.5%. Our balance sheet remains pristine, and in conjunction with our available credit allows us to invest in our business, return capital to shareholders, and execute against our strategic objectives as we navigate ever-changing market conditions. With my portion of the slide presentation complete, I would like to return the call to Tony. It's all yours, Tony.

Tony Guzzi, Chairman, President and CEO

Thanks, Mark. For everyone's reference, I'm on Page 11, discussing remaining performance obligations by segment and market sector. To summarize, in 2020, we faced significant COVID disruptions during this quarter moving into the second quarter. There is still some residual effect, but for the most part, the first quarter of 2021 has seen a more active demand environment and project bidding for construction and service projects. As I mentioned, total remaining performance obligations (RPOs) at the end of the first quarter were just under $4.8 billion, reflecting an increase of $351 million or 7.9% compared to the year-ago level of $4.4 billion. RPOs increased by $181 million in the first three months of the year from the year-end level of $4.6 billion. Our domestic construction segments experienced strong project growth in the quarter, with RPOs growing $219 million or 6.1% since the year-ago period of March 31, 2020, with nearly all of that being organic growth. The remaining $15 million is attributed to a Chicago-based electrical contractor focusing on infrastructure that joined us in February. The Building Services segment RPOs increased by $121 million, or 22% from the year-ago quarter, with a portion attributed to the August 2020 acquisition of a Washington D.C. full-service mechanical contractor. However, more representative of what we're experiencing in this segment, RPOs increased by $60 million, or up 10%, from December 31, demonstrating organic growth. This reflects the resumption of regular mechanical systems maintenance, indicating that systems we maintain are returning to full operation, leading to a resurgence in small project work. By market sector, our largest sector for RPOs remains commercial projects. We continue to see strength, especially in resilient sectors such as data centers and the e-commerce supply chain buildout. That commercial segment, which also includes the retrofit activity and new builds, makes up 44% of total RPOs. From a year-over-year perspective, commercial RPOs increased $314 million and $216 million quarter-over-quarter. In general, project interest appears favorable across most sectors, except for hospitality, which remains challenged once again. As an indicator of future market activity, the March ABI came out about a week ago. It's a soft index but has consistently shown trends, moving over 50, indicating expansion in February, and exceeding 55 in March. Regional scores were mostly in positive territory, generating an upbeat general outlook compared to the previous year. The March Dodge Momentum Index, which assesses non-residential building projects in planning, also showed strong rates in February and March, up low double digits at 11% from a year-ago period, projected right before the full pandemic impact. It is crucial to step back and recognize that the first quarter of last year was also solid, and up until the pandemic, it marked one of the best economies I've experienced in my business career. Both leading indicators confirm potential future activity and are moving in tandem, which is promising. Jumping to Pages 12 and 13, an update on the resilient sectors we previously highlighted shows strong growth in data infrastructure and supply chain. This demand is concentrated in five or six geographical areas, and we maintain 60-70% presence in those markets, both electrically and mechanically. We continue building our data center maintenance business, particularly concerning large warehouses exceeding one million square feet. We're the best in our industry, especially in fire protection. On the manufacturing front, while we see slight declines tied to food processing, we are confident in manufacturing reshoring in the southeastern U.S., possibly out of Asia and Mexico, aiming to establish redundant supply chains. We are optimistic given our significant involvement in key markets, notably semiconductors, where we excel in Arizona and the Pacific Northwest. Healthcare remains strong, and our acquisitions set us up for solid opportunities. Projects in Florida's water and wastewater sectors are showing growth as these tend to be unevenly timed. The mechanical services and indoor air quality initiatives remain robust; we possess the best capability in this area, both in mechanical services to conduct repairs and in indoor air quality, as the entire well-building concept grows more prevalent. Our commitment to efficiency has always been a strength, positioning us well for energy transition opportunities. We are participating more substantially in small-scale solar in California and building our capabilities in Texas regarding carbon capture and renewables. Overall, we're positive on these resilient markets and have consistently demonstrated the ability to pivot successfully without chasing fleeting trends. Lastly, I want to focus on Pages 14 and 15. Entering 2021, we were dealing with ongoing COVID surges and just beginning vaccination rollouts. Our initial guidance expected earnings of $6.20 to $6.70 per diluted share, aiming for record earnings and revenue of $9.2 billion to $9.4 billion. As expected, demand will accelerate over the year despite challenging comps. The first-quarter performance surpassed our expectations, prompting us to raise the low end of our guidance range to $6.35, a $0.15 movement from $6.20, while slightly increasing the top end to $6.75. Our revenue guidance remains unchanged; more insights will arise post-second quarter. As indicated earlier, we projected 2021 to be another year of outstanding performance. With COVID conditions improving, we have to maintain operational efficiency daily across our 4,000 significant projects. If we sum up our guidance assumptions: for our Industrial Services segment, we anticipated performance would not improve until the fourth quarter, gaining momentum entering 2022 as demand for refined products remains pressured, particularly into the second quarter. While demand is picking up, we anticipate positive performance but remain cautious about declaring victory too soon. At the beginning of the year, we expected non-residential markets would experience modest decline; the view now suggests flat or slightly growing levels, driven by manufacturing gains. Our forecast included expectations of a more normalized operating environment as vaccination rates improved, which is materializing in many states. Our strategy of assisting customers in enhancing efficiency through IAQ and system optimization is on track. Ensuring this transition's success will hinge on maintaining high productivity standards and execution. Regarding labor, we are confident in finding skilled tradespeople and that we are a destination for talent. Finally, government spending tied to emergency COVID packages will benefit projects while the larger infrastructure proposal remains a longer-term endeavor. In summary, we maintain a disciplined approach to capital allocation, focusing on organic growth, acquisitions, share repurchases, and dividends. We are on track to meet our goals this year, having already completed three acquisitions, reflecting strong prospects in our pipeline. With that, Lara, I will take questions. Thank you for your interest in EMCOR, and we'll turn the call over to you.

Operator, Operator

Thank you, sir. Your first question will come from Brent Thielman from D.A. Davidson. Your line is now live. Please go ahead.

Brent Thielman, Analyst

Okay, great. Thank you. Good morning.

Tony Guzzi, Chairman, President and CEO

Good morning, Brent.

Brent Thielman, Analyst

Hey Tony, I wanted to touch on something you mentioned in your closing remarks, just about a possible return to the job sites resembling pre-COVID conditions in terms of processes and operations. Do you think that supports margins even more moving forward? How should we think about the financial implications of that down the road?

Tony Guzzi, Chairman, President and CEO

Yes. I think it's premature to say it could help margins further. We're quite satisfied with our margins at present. The critical factor will be asserting if we can retain some of this enhanced scheduling. In some cases, this may happen, while in others, it may not. Additionally, we may need to implement swing shifts without substantial pay differentials. We've seen that some of our employees appreciate reduced density on job sites, leading to greater productivity. This creates leverage back onto the union and others to support us in this shift. While it's too early to determine the outcome, we've invested significant efforts into planning, particularly concerning areas under our control. We've developed improved practices in project management even on smaller jobs through prefabrication and proactive site work. Our goal is to maintain current productivity rates.

Brent Thielman, Analyst

Okay. It was also mentioned in your opening commentary, we've heard about supply chain disruptions in the market. Could you share any notable challenges you've encountered that required extra efforts to address?

Tony Guzzi, Chairman, President and CEO

Nothing has risen to the level where I had to reach out to the Chief Executive Officer of a distributor or OEM, which indicates we're navigating through supply efficiently. While that may vary for others, we are known as a reliable partner locally, recognized for paying fairly and promptly. We prioritize pre-project planning, particularly on large jobs, maintaining an innovative mindset and working closely on inventory management with our suppliers. We aim for dependable partnerships rather than squeezing every dollar in negotiations because assurance of supply is more crucial than marginal savings on materials.

Brent Thielman, Analyst

I appreciate that insight. My final question pertains to indoor air quality opportunities. Is that currently influencing RPOs significantly, or is it anticipated that more impact is expected later?

Tony Guzzi, Chairman, President and CEO

Yes, I'll ask Mark to elaborate, but realistically, it may never significantly influence the RPOs. It impacts growth within the Building Services quarter since most of this work is project-based and often subsided within a quarter. Mark?

Mark Pompa, CFO

Brent, to support Tony's insight, this work is usually quick-turnaround, with awards being secured and executed within the same quarter. Therefore, it does not impact the RPO number disclosed at quarter-end. Instead, most projects incorporated into EMCOR's RPOs are longer-term contractual engagements.

Tony Guzzi, Chairman, President and CEO

And Brent, we do not stress this substantially, but I commend our team for gearing up before one year ago today, preparing to deliver these solutions. We had all the relationships required in advance; these offerings were part of our existing service array. Fortunately, we took the downtime to enhance our technician and supervisor training, so we've been well-prepared to deliver superior solutions.

Brent Thielman, Analyst

Thank you for your responses.

Operator, Operator

Thank you, sir. Your next question will be from Adam Thalhimer from Thompson, Davis. Your line is now live. Go ahead please.

Adam Thalhimer, Analyst

Hey, good morning everyone. Congrats on the excellent start to the year.

Tony Guzzi, Chairman, President and CEO

Thank you.

Adam Thalhimer, Analyst

Can you help us with moving Ardent into the Industrial segment? How much revenue is shifting?

Tony Guzzi, Chairman, President and CEO

Mark will take that.

Mark Pompa, CFO

Are you inquiring about the quarter or the full year?

Adam Thalhimer, Analyst

The full year.

Mark Pompa, CFO

For the full year of 2020, Ardent generated approximately $143 million, which will be shifted from Electrical Construction to Industrial.

Adam Thalhimer, Analyst

Perfect. Thank you. Shifting to the UK performance; Mark, you mentioned currency benefits, but can you comment on the sustainability of growth there?

Tony Guzzi, Chairman, President and CEO

As we've stated repeatedly, these businesses are not typically quarter-to-quarter. Longtime observers will recall we have consistently operated in the UK at levels north of 5% for three years running. Our aspiration is to remain steady between 5% to 6% annually. Recent results were primarily driven by project mix, reflecting execution over pricing.

Adam Thalhimer, Analyst

Got it. Lastly, regarding mechanical margin performance, was that due to completed food processing jobs, or will those continue this year?

Tony Guzzi, Chairman, President and CEO

We consistently have food processing projects, but the major work is approaching completion now. While we do have ongoing projects, it's essential to note that the recent overall performance resulted from various factors across numerous projects. Mark highlighted that we achieved that increased revenue with very little additional costs involved. Productivity enhancements in our mechanical segment substantially influenced our outcomes, particularly through prefabrication and strategic project planning employed by our subsidiaries, led by highly competent teams.

Adam Thalhimer, Analyst

Thanks for the insights.

Operator, Operator

Thank you. Your next question will come from Noelle Dilts from Stifel. Your line is now live. Go ahead please.

Noelle Dilts, Analyst

Hi. How are you?

Tony Guzzi, Chairman, President and CEO

Good.

Noelle Dilts, Analyst

Well, I’m great. Thank you. You discussed supply chain challenges, but I’m curious about the recent inflation in raw materials, particularly steel. I understand that labor is consistent in your costs, but how are you monitoring or accounting for these material cost increases and their indirect impacts?

Tony Guzzi, Chairman, President and CEO

If not managed properly, this could impact us directly within a quarter or so. We endeavor to lock in prices on major components for large projects, including gear and air handlers, to minimize exposure. We aim to mitigate this by ensuring fairness in negotiations and locking in good deals. Additionally, we see ourselves as not holding large stockpiles of materials, which leaves us less vulnerable to sudden price increases. In periods of material inflation, we can manage repricing quickly on smaller project work. In the mechanical sector, we see material and equipment costs typically representing 45-55% of total projects; in electrical, closer to 35-45%; and less in the Building Services segment due to the nature of service agreements. For the Industrial Services, material costs cover 20%. Our estimation capabilities provide favorable insights into market trends.

Mark Pompa, CFO

To reiterate, during project timelines, we strive to minimize risk, securing prices close to project mobilization to avoid inflation impacts. In instances of price changes, they would be limited to the duration of that specific quarter.

Noelle Dilts, Analyst

That’s quite reassuring. Shifting gears, let’s discuss the infrastructure bill. Both political parties are proposing significant enhancements that might affect industry capacity. How are you gearing up for potential increases in labor demand as federal funding becomes available?

Tony Guzzi, Chairman, President and CEO

For EMCOR, we focus on projects we are confident we can execute, ensuring we have the capacity before taking on additional jobs. Should the infrastructure bill proceed, we anticipate positive growth in labor demand, particularly since we are a choice employer for trade labor. Our reputation for safety, fair treatment, competent supervision, and consistent pay attracts skilled workers. The industry may face challenges finding labor, but we believe that EMCOR’s established ground will position us favorably.

Noelle Dilts, Analyst

Thank you for the comprehensive response.

Tony Guzzi, Chairman, President and CEO

Certainly, one more point regarding pricing for acquisitions — we will continue applying the same discipline, independent of the current economic climate. While multiples may rise, it’s critical to remain disciplined in our approach. We have a proven track record of identifying desirable acquisitions before they come to market. Adhering to our principles, we ensure fairness in pricing for businesses while focusing on longer-term operational viability and mutual growth potential.

Operator, Operator

Thank you. Your next question will come from Sean Eastman from KeyBanc Capital. Your line is now live. Go ahead please.

Sean Eastman, Analyst

Hi team. Nice quarter. It's encouraging to see earnings growth on mid-teens over last year's first quarter.

Tony Guzzi, Chairman, President and CEO

Thank you.

Sean Eastman, Analyst

I'm attempting to gauge the outlook for earnings through the remainder of the year. Per your last guidance, the midpoint suggests lower earnings year-over-year for second, third, and fourth quarter periods. Please help me understand the inherent dynamics here, as I recognize industrial services expected to gain traction and revenues will likely rise. However, it appears that we are comping some elevated construction segment margins.

Tony Guzzi, Chairman, President and CEO

Examining for macro factors, I have never recollected adjusting guidance while exploring first-quarter outcomes. We're quite confident in the current guidance as it stands while recognizing slight margin movements. Evaluations suggest that we are attempting to see clarity in the Industrial Services segment. The first quarter resulted in a $17 million revenue loss year-over-year in Industrial Services. We're cautiously optimistic but will keep our approaches malleable as we get more data quarter-on-quarter.

Mark Pompa, CFO

Indeed, Sean. As we assess our industrial segment performance, we maintain a watchful eye, recognizing that our client base often reacts to external factors. The outlook suggests recovery and growth opportunities, but the uncertainty within this customer base remains prevalent. Overall, we anticipate incremental improvement through 2021 as the quarter unfolds.

Sean Eastman, Analyst

This makes sense. Thank you for the nuanced perspective. I'll now shift to a different topic.

Operator, Operator

Thank you, sir. This will conclude our question-and-answer session. I’d like to hand over the call back to our presenters for closing remarks.

Tony Guzzi, Chairman, President and CEO

Thank you all very much for your participation. We will reconvene in July. Take care.

Operator, Operator

Thank you, sir. We appreciate everyone for participating. This concludes today's conference. You may now disconnect. Stay safe and have a lovely day.