Q4 2022 EMCOR Group Inc Earnings Call
[music].
Good morning, My name is Sarah and I will be your conference operator today at this time I would like to welcome everyone to the escort group fourth quarter 2022 earnings call.
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After the Speakers' remarks, there will be a question and answer session.
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Mr. Mike Mueller with FTR consulting you may begin.
Thank you Sarah and good morning, everyone. Welcome to the corporate conference call. We are here today to discuss the company's 2020 to fourth quarter results, which were reported this morning.
I would like to turn the call over to Kevin Matz Executive Vice President of shared services, who will introduce management.
Kevin. Please go ahead.
Thank you Blake and good morning, everyone and as always thank you for your interest in EMCORE and welcome to our earnings conference call for the fourth quarter and for the full year of 2022.
For those of you who are accessing the client or the internet and our website welcome to you as well and hopefully you are at the beginning of our slide presentation that will accompany our remarks today, we are on slide two.
This presentation and discussion contains forward looking statements and may contain certain non-GAAP financial information page two describes in detail. The forward looking statements and the non-GAAP financial information disclosures I encourage everyone to review both disclosures in conjunction with our discussion and accompanying slides.
Slide three has the executives who are with me to discuss the quarter and the full year results. They are Tony Guzzi, Chairman, President and Chief Executive Officer, Mark Pompa, Our executive Vice President and Chief Financial Officer, and Executive Vice President and General Counsel Maxine Mauricio.
For call participants not accessing the conference call via the Internet. This presentation, including the slides will be archived in the Investor Relations section of our website under presentations you can find us at Amcor group Dot Com with that said, please let me turn the call over to Tony Guzzi Tony.
Good morning, Thanks, Kevin and thank you all for your interest in EMCORE My opening comments will cover pages four through six.
I'm going to direct my comments towards our full year 2022 performance.
Mark will focus his remarks on both our fourth quarter and full year 2022 performance.
My only comments with respect to the fourth quarter of 2022 are that it was a record quarterly performance for revenues.
Operating income net income diluted earnings per share.
From continuing operations and operating cash flow.
We had an exceptional year in 2022 and a challenging environment.
We are revenues of $11 1 billion with 11, 8% revenue growth.
10, 3% organic revenue growth, we executed well with a five 1% operating income margin and.
And generated exceptional operating cash flow of $498 million, we had strong SG&A leverage at nine 4% of sales and all of that culminated in record earnings per diluted share of $1 $8 10 per share during.
During 2022, we face some strong headwinds, including supply chain challenges, COVID-19 disruptions and material and labor inflation.
We adapted both our service and project pricing and planning to adjust for inflation and the inefficiencies caused by supply chain issues.
As a result, after a tough first quarter, our financial performance improved as the year progress demonstrating our success in mitigating such challenges are.
Our mechanical construction segment had an exceptional year with nine 5% revenue growth all of which was organic and an operating income margin of seven 7%. This segment at excellent execution in the commercial market sector, especially in the area of high Tech manufacturing with a folk.
On semiconductors and data centers. This segment. Additionally benefited from strength in the water and wastewater.
Sectors, and the health care market, we enhanced our capabilities in bim or building information modeling and pre fabrication, which allowed us to continue to deliver our services to our customers in a more productive high quality and safe manner. We also continued to deliver exceptional fire life safety.
A few projects, where we have earned our customers confidence that we can deliver the most sophisticated technical solutions in the most demanding markets. Our portfolio of projects included semi conductor manufacturing plants large distribution facilities data centers as well as those for pharma and bio life Science industries.
In summary, we had an excellent year in our mechanical construction segment and have a solid foundation for continued success.
Our electrical construction segment's performance strengthen through the year as expected and we finished the year more in line with our historical performance and expectations.
This segment generated revenues of $2 $43 billion and had very strong revenue growth of 19, 9% for the year with 13, 2% organic revenue growth operating income margin was six 1% and we experienced continued excellent performance in the commercial sector.
Including the data center and semiconductor markets. This.
This segment. Additionally benefit from benefited from greater demand within the healthcare market sector, and we continue to strengthen and build out our low voltage service offering.
Our electrical construction business continues to be a market leader and is positioned well going into the future.
Our U S building services segment had an exceptional year driven by excellent performance across the majority of our service lines, including repair service site based services building controls and HVAC projects. This segment earned revenues of $2 seven 2 billion and delivered a five 3%.
Operating income margin.
Revenue growth was 12, 2% with organic revenue growth of 11, 6% our performance stress it through the year as we add more precise pricing to offset material and fuel price increases and we became better at planning around difficult supply chain issues driving demand for our services or our energy.
Prices, which continue to be volatile and costly this has created.
The need for enhanced energy efficiency, and an uncertain supply chain, which has created the need to extend the life of our customers mechanical equipment through repair services.
Customers are also demanding more efficient proactive and integrated facilities management solutions that not only provide more self performance of the most technical trades, but also provide the best vendor managed solutions for cleaning landscaping and other less technical trades, we have a very strong customer base with increase.
Needs for our services and we are delivering for our customers.
Our industrial services segment generated revenues of $1, one 2 billion, which represents 13, 4% revenue growth all of which was organic we continue to experience the resumption of normal demand for our services, which began in the second half of 2021, we are seeing increased demand for turnaround in shop services.
Related to the support of our customers' downstream operations, however demand for our services supporting our upstream customers remains challenge further our renewable project activity remains muted as a result of the non availability of required materials to support large scale solar installations.
We expect to continue to see this segment recover more broadly to a more normal or normal operations and demand and expect demand in performance to continue to incrementally improve.
Despite foreign exchange headwinds, our UK building services segment had another strong year with operating income margins up six 3%. Our team continues to deliver for some of the most sophisticated customers in the United Kingdom.
We exited the year with seven 5 billion.
And RP OS versus $5 6 billion.
At the end of 2021 <unk>.
Representing a 33% year over year increase.
From a market perspective, we experienced the largest growth in <unk> within the commercial market sector. This is this includes both traditional commercial construction projects as well as our telecommunications slash datacenter work at our high Tech manufacturing project, such as EV battery plants semiconductor biotech and.
Life Sciences. These are important areas for EMCORE and as a result of the continued growth we will expand our RP O and revenue disclosures beginning in 2023 to provide greater insight into these sectors and then beyond that commercial.
Market sector, we see we saw <unk> growth from the majority of the remaining markets in which we operate including the healthcare manufacturing institutional and hospitality and gaming market sectors, we will discuss <unk> in more detail following Mark's commentary, our balance sheet remains liquid and <unk>.
And we will continue to support our organic growth as well as our capital investment acquisitions and return of cash to our shareholders through dividends and share repurchases. During 2022, we completed six acquisitions five tuck ins to existing subsidiaries, which bolster the capabilities of our electrical.
Mechanical and building services segments with that ill turn the discussion of our results over to Mark.
Thank you Tony and good morning to everyone participating on the call today.
For those accessing this presentation via the webcast. We are now on slide seven.
Over the next several slides I will provide a detailed discussion of our fourth quarter 2022 results as well as a summary update of our full year performance some of which Tony outlined during his opening commentary.
As a reminder, all financial information discussed during this morning's call is included in our consolidated financial statements within both our earnings release announcement and Form 10-K filed with the Securities and Exchange Commission earlier today, So let's begin our Q4 commentary.
Consolidated revenues of $2 95 billion or up $309 6 million or 11, 7% from the fourth quarter of 2021 <unk>.
Excluding $33 7 million of incremental revenues attributable to businesses acquired.
Turning to the time that such businesses were not owned by <unk> in last year's quarter revenues for the fourth quarter of 2022 increased approximately $276 million or 10, 5% when compared to the fourth quarter of 2021.
Most of our reportable segments experienced strong revenue growth during the quarter, establishing a new all time quarterly revenue record for EMCORE specific segment performance is as follows.
United States electrical construction revenues of $713 6 million increased $166 2 million or 34% from quarter. Four 2021, excluding incremental acquisition revenues. This segment's revenues grew a strong 24, 2% organically quarter over quarter.
Increased project activity within the commercial market sector inclusive of datacenter and technology projects as well as revenue growth within the health care and manufacturing market sectors were the primary drivers of the quarter over quarter revenue increase United States mechanical construction segment revenues of $1. One 4 billion increased 77.
$4 million or seven 3% from quarter four 2021 revenue growth during the quarter was concentrated within both the commercial and institutional market sectors with respect to the commercial market sector. We are continuing to benefit from increased project activity from our data center customers as well as growth within the high Tech sub market sector.
Driven by various semiconductor construction projects in terms of the institutional market sector. We experienced increased revenues as a result of various HVAC repair and replacement projects being performed across a number of geographies, where we serve schools universities and other educational customers, who are continuing to deploy funding.
It was received under the cares act the substantial revenue gains were muted by revenue declines in their manufacturing health care and transportation market sectors quarter over quarter due to the completion or substantial completion of certain large projects, which were active in the prior year period.
Both our electrical and mechanical construction segments established new all time quarterly revenue records with their fourth quarter performance revenues of <unk> combined domestic construction segments totaled $1 86 billion for the fourth quarter of 2022, an increase of $243 6 million or 15, 1% with.
13% of such revenue growth being organic.
Insistent with the last several quarters, we continue to be successful in winning new work to replace those projects, which are being completed as evidenced by the growth in the remaining performance obligations of these segments year over year as is customary in as Tony previously commented. He will continue the discussion at the conclusion of my financial commentary.
United States building services quarterly revenues of $704 2 million increased $83 9 million or 13, 5% quarterly revenue growth was generated across all of this segment's operating divisions with the most significant growth being generated by their mechanical services and commercial site based services divisions within mechanical services.
We benefited from strong demand for HVAC retrofit projects and building automation and control services with an emphasis on improving building efficiency energy consumption and indoor air quality, we continue to assist our customers with their de carbonization efforts and the implementation of plans or programs to combat escalating operating costs.
In addition, we continue to experience growth and service repair and maintenance volumes as persisting supply chain delays have resulted in the need to extend the useful lives of in place HVAC equipment and instances when new equipment is not readily available with respect to the segment's commercial site based services division customer additions as well as <unk>.
Our site expansion and increased project activity with existing customers, where the drivers of the quarterly increase in revenues.
And of course industrial services segment revenues of $276 2 million decreased $7 4 million or two 6% with refinery utilization in excess of 90% and continued pressure on refiners to maintain or increase downstream output. We are experiencing deferrals and delays of the planned maintenance work as well.
Energy clients seek to minimize facility downtime.
Additionally, led to a reduction in pull through repair project opportunities United Kingdom building services revenues of $113 3 million decreased $10 $5 million. This revenue contraction was entirely due to unfavorable exchange rate movements for the British pound versus the United States dollar, which is masking revenue growth on a local.
Currency basis as this segment experienced elevated project demand from its customers. Please turn to slide eight.
Selling general and administrative expenses of $277 6 million represent nine 4% of revenues and compares to $260 million or nine 8% of revenues in the year ago period.
Current year quarter includes approximately $5 1 million of incremental expenses from businesses acquired inclusive of intangible asset amortization, resulting in an organic quarter over quarter increase in SG&A of $12 $5 million. This quarter's organic growth in SGA and <unk> expenses was primarily related to personnel costs due to both.
Increased head count to support our strong organic revenue growth as well as highly quarterly incentive compensation expense due to improved year over year performance at certain of our operating companies.
The growth in SG&A dollars and consistent with our performance throughout the year, we have seen a reduction in SG&A as a percentage of revenues as we continue to successfully leverage our cost structure as I mentioned over the last several quarters. We continue to remain disciplined with overhead investment and are seeking incremental efficiencies of scale as we continue to drive revenue growth.
Reported operating income for the quarter of $177 2 million compares to operating income of $143 million in 2020 one's fourth quarter and establishes a new all time quarterly operating income record for EMCORE.
Our consolidated operating margin of 6% represents a 60 basis point improvement from 2020 one's fourth quarter and continues our trend of sequential quarterly operating margin improvements in 2022 after a slow start in the first quarter.
Specific quarterly performance by segment is as follows our U S. Electrical construction segment operating income of $58 1 million increased $16 3 million from the comparable 2021 period and reported operating margin of eight 1% represents an improvement from the seven 6% in last year's quarter. These increases were a result of <unk>.
<unk> gross profit and gross profit margin within the commercial healthcare and manufacturing market sectors, given a more favorable revenue mix. In addition, the increase in operating margin was partially attributable to a decrease in the ratio of selling general and administrative expenses to revenues during the current year period. This improved electrical construction segment.
<unk> was achieved despite certain discrete project write downs totaling $10 million during the fourth quarter of 2022, which negatively impacted this segment's operating margin by 140 basis points as reference last quarter. We continue to evaluate our contractual rights on these projects and are pursuing recovery where permitted.
Fourth quarter operating income over in United States Mechanical construction services segment of $105 7 million represents a $12 million increase from last year's quarter and operating margin of nine 3% represents a 50 basis point improvement from the strong eight 8% earned a year ago from an operating income perspective the period over.
<unk> increase was largely as a largely a result of incremental gross profit contribution from those commercial market sector projects referenced during my revenue commentary with respect to operating margin improved project performance, coupled with the reduction in SG&A as a percentage of revenues were the primary drivers of the quarter over quarter increase opera.
<unk> income for U S building services with 30, it was $37 million or five 3% of revenues, which represents a $10 8 million or 41, 2% increase period over period with 110 basis point expansion in operating margin the growth in both operating income and operating margin is due to improved fourth quarter performance within this segments mechanical.
Services commercial site based services and government services divisions.
Notably, we experienced better project execution as well as a more favorable mix of work. This improved performance. Additionally reflects our continued focus on project pricing and disciplined cost management.
Our U S. Industrial services segment operating income of $1 5 million represents a $2 $5 million reduction from the $4 million of operating income reported in 2021 fourth quarter such decline is due to a less favorable revenue mix as we experienced limited scope growth from projects being performed by this segment's field services operations.
During the 2022 fourth quarter. This also resulted in a reduction in pull through equipment repairs for our shop services operations as I mentioned during my revenue commentary minimization of equipment downtime has become a primary focus of this segment's customers given the market conditions within the oil and gas industry UK building services.
Operating income in 2022% fourth quarter of approximately $4 $5 million is down moderately and operating margin of three 9% is essentially flat when compared to that of the prior year quarter from an operating income perspective, the reduction in U S. Dollars is entirely due to unfavorable exchange rate movements, excluding the impact of foreign exchange.
<unk> operating income increased as a result of the growth in project volumes referenced during my revenue commentary as their customers continue with their capital spending programs. We are now on slide nine additional.
Financial items of significance for the quarter not addressed in the previous slides are as follows quarter. Four gross profit of $454 8 million is higher than the comparable prior year quarter by $51 8 million or 12, 8% gross margin of 15, 4% has improved over last year's quarter and represents our highest reported gross.
And for any quarterly period in 2022 this increase in gross margin when compared to 2021 fourth quarter as well as the sequential improvement throughout 2022 is due to the performance of our U S electrical and mechanical construction segments as well as our U S building services segment as referenced during my segment operating income.
Diluted earnings per common share in the fourth quarter of 2022 is $2 63.
Compared to $1 89 per diluted share for the prior year quarter. This fourth quarter EPS performance eclipses <unk>. Prior all time quarterly record, which was established in the third quarter of 2022.
Please turn to slide 10.
With my fourth quarter commentary complete I will now augment Tony's introductory remarks on <unk> annual performance consolidated revenues of $11 1 billion represent an increase of 1.1 dollars 7 billion or 11, 8% when compared to 2021. Our full year results include a $149 7 million of incremental revenues attributable to <unk>.
<unk> was acquired pertaining to the period of time that such businesses were not owned by <unk> in 2021.
The impact of acquisitions annual revenues increased 10, 3% organically with all of our reportable segments generating double digit or near double digit organic revenue growth other than our United Kingdom building services segment due to negative foreign exchange rate movements during 2022, which had been referenced several times as a result of our performance.
Over the last three quarters of this year, our full year operating income of $564 9 million surpassed the $538 million reported in 2021 operating margin of five 1% for 2022 compares to five 4% in the prior year. Despite a 30 basis point reduction in operating margin 2020.
<unk> performance reflects excellent operational execution, given the external market headwinds encountered during the year full year diluted earnings per share is $8 10 and.
Ah represents an increase of $1 <unk> or 14, 7% over 2020 one's diluted EPS of $7 six.
The combination of year over year net income growth with the reduction in our weighted average shares outstanding given our share repurchase activity. During 2022 has contributed to a new annual diluted EPS record for the company. We are now on slide 11.
<unk> balance sheet remains strong and liquid and we are well positioned to fund organic growth return capital to shareholders and pursue strategic M&A investments.
<unk> of notes with of note within our balance sheet when compared to December of 2021 are as follows.
Despite strong operating cash flow during the year of $498 million, our cash balance has declined from year end 2021, as we are investing in financing outflows exceeded operating cash inflows, notably we utilized $666 million for the repurchase of our common stock.
A net $98 7 million in acquisitions and returned just over $27 million to our shareholders in the form of dividends.
<unk>, primarily from the decrease in cash coupled with an increase in our net contract liability position, our working capital balances decreased by approximately $321 million. The impact of these items were partially offset by an increase in accounts receivable given the revenue growth we've experienced the $28 $9 million increase in goodwill.
Since December of 2021 was entirely a result of the six acquisitions completed by US during calendar 2022, net identifiable intangible assets have increased marginally period over period as the additional intangible assets recognized in connection with the aforementioned acquisitions were largely offset by amortization expense during.
Dr <unk>.
<unk> exclusive of operating lease liabilities has decreased by $14 5 million largely as a result of the $13 9 million required principal payment made on our term loan in December of 2020 to our shareholders equity balance is reduced by just under $279 million as our shareholder return activity.
<unk>, including common stock repurchases and dividend payments have exceeded our net income for the year and of course debt to capitalization ratio was increased to 11, 1% from 10, 4% at year end 2021, given the reduction in our shareholders' equity just reference as we stated before our balance sheet in conjunction with the borrower.
Capacity available to us under our credit agreement will continue to enable us to invest in our business return capital to shareholders and execute against our strategic objectives.
As we progressed through 2023 in future periods, our commitment to shareholder return as evidenced by both our share repurchase activity to date as well as todays announcement that our board of directors has approved an increase in our quarterly dividend of 20% with my portion of this morning's slide presentation completed I would now like to return the call to Tony Tony.
Thanks, Mark and I'm on page 12.
Remaining performance obligations by segment and market sector.
The fourth quarter of 2022, so our ninth consecutive quarter of RPM growth momentum continues.
We experienced healthy project demand throughout 2022 across all our segments and most of the market sectors that we participate in.
If I look back a year the company grew <unk> by $1 billion in 2021 and in 2022.
As a result, our position and our market position is strengthened even more.
Total company <unk> at the end of 2022 were approximately $7 5 billion.
Up nearly $1 9 billion or 33% over the December 2021, total of $5 6 billion. Additionally.
Additionally, fourth quarter project bookings were likewise strong increasing $358 million in the final three months of the year.
All but approximately $160 million of which.
That's associated with the August acquisition of Boston based gas and electric.
As a side note they have a terrific market position and dynamic leadership team that fits well with our EMCORE operating style and values. The rest of that growth was all organic.
Again for 2022 velocity in the business remained strong with both revenue.
In total <unk> growing double digits from the previous year ago period, while our continued growth of <unk> is largely due to the strength of demand for our services.
Mall portion of this increase will likely be attributed to external factors such as material labor inflation as well as supply chain delays, which elongate some of our projects.
Our two domestic construction segments experienced strong construction project growth.
Year over year with ARP, increasing just over $1 5 billion or 34% from December 2021.
Mechanical construction segments, our rps increased by $737 million or 23%, while the electrical construction segment saw an increase of $789 million or a strong 64%.
Much of this increase is continued demand for hyperscale data centers industrial manufacturing facilities, and semiconductor life Sciences and healthcare facilities.
U S building services <unk> levels increased $279 million or 32% in 2022, and total is almost 1.15 billion.
And small to mid sized project and service work like all of 2022. This quarter saw continued project awards and its mechanical services Division and the award or renewal of several facilities maintenance contracts in our site based services Division.
<unk> industrial services, and our U K building services business, while having less <unk> type projects supporting their business still saw their RP O totals for 2022 increased 12 and 36% respectively.
Should mention that over $42 million <unk> increase in the U K business came despite unfavorable exchange rates against the dollar.
Moving to the right side of the page, we show <unk> broken down by market sector <unk> commercial <unk> grew 51% year over year and I'm going to come back to this in greater detail on the next slide looking at the other market sectors year over year growth healthcare Rps, 40% institutional RP O 21%.
Industrial manufacturing RPE OS up 22% and short duration projects, which include work because that's our HVAC and controls retrofit work repair and service project work and low voltage work up 15%, partially offsetting the increase was a reduction in transportation and water and wastewater ipos.
Which is booked at a much more episodic manner.
For greater transparency and on page 13, we're going to breakout commercial <unk> into the three large subsectors that we believe make up our commercial <unk> <unk>.
Boeing forward into 2023, we will expand our RPI and revenue disclosures beginning to provide greater insight into these sectors for our investors so from bottom to top the dark green section of the bars. So traditional commercial RP owes it includes a lot of work in buildings and campuses.
Warehouses mixed use facilities educational facilities and some retail we have seen growth in traditional commercial ipos overtime.
Really from a result of energy savings projects and also strong fire protection and life safety project retrofits and new builds at various logistics facilities and other facilities across the country.
Up the slide into the Middle Gray section telecommunications, which is networking communications infrastructure projects, including data centers data fiber and cabling projects much of the growth here has been driven by Hyperscale data centers.
But also the growth in our low voltage business the top line.
The bar is call it high Tech projects high Tech manufacturing and R&D facility here recapture projects in the semiconductor biotech life Sciences pharmaceutical electric vehicle and EV battery.
And EV facilities.
And EV battery facilities.
As the slide shows we have a strong base of traditional commercial projects.
More specifically the size of those that are recent commercial growth has been concentrated in the other two sectors, which represent 75% of our year over year commercial <unk> growth. These are important subsectors for the.
The company going forward, and we will expand our <unk> and revenue disclosures beginning of this year to provide greater insight into these important sub sectors. So look.
Summary of the RPI section, we're busy we're quoting work our IPO levels high demand for our services high and we continue to see an active pipeline of new projects.
Given where we are and we're going to make all the carve outs in the last section of all the economic factors. We don't control. We believe we have good visibility as we start out 2023, we have good work at our RP OS we have strong inquiries and we have demand in the market sectors, where we see momentum and.
We execute well and we have some of the best teammates and leaders on the ground and that allows us as a senior leadership team to be confident in our ability to complete the work. We currently have and what we will win in 2023 now I am going to turn to slide 14, and its a slide we've discussed a lot over the last two years.
And as the slide I love because it talks about trends in our business that have been good long term trends and sectors that we performed very well and what I'm going to do is talk about some cross cutting issues and also some specific sectors. We've been talking about data centers for a while.
Added semiconductor Fabs and other high Tech manufacturing, we are very well positioned in data centers. In fact, I would argue we can do that work mechanically electrically and fire protection as well or better than any contractor in the market and we deliver great value for our customers.
We also deliver across a whole suite of our trades in the data center market from electrical low voltage mechanical and fire protection. We do the same thing in semiconductor fabrication. We believe that's a market that was growing and we'll talk about some of the things with.
With recent legislation that's going to help it accelerate maybe a little bit but it was a good trend and in semi conductor fad in our estimation and the market's estimation of our customers. This has less to do with new demand, but it also has a lot to do with the re shoring of that manufacturing to.
To build the infrastructure in this country to supply our own needs. It is a good long term growth and there's six or so centers around the country that it's in and we're positioned and what I would say three five or four of them going forward industrial manufacturing. This is all the other stuff out of those high tech sectors that we have.
Broken out in commercial this is things like tire manufacturing paper manufacturing food processing and it's also the re shoring of supply chains and textiles.
Also things like HVAC.
Compressors and all of those manufacturing motors coming back to the U S from.
From overseas as we learned and it was it was happening even before the pandemic, but we learned in the pandemic and its an accelerator between that and the geopolitical uncertainty that we did not have the resilience in our supply chain that we should have and business has learned at right. They learned that you need to least have this out of two factories were two suppliers and not.
Just one health care health care has been a great long term market for EMCORE and health care for us extends beyond just hospitals to outpatient.
Outpatient surgical centers medical office buildings and is both a maintenance market for us a retrofit market for us and then new construction market for US we do the new systems, we do electrical mechanical retrofits and we learned a lot during the pandemic and that health care facilities needed to be more flexible and nimble to respond to a variety.
D of things right because in a pandemic you needed negative pressure rooms.
Cause of the oxygen requirements, you don't want to spread room to room and then a.
Other environments, you need positive pressure rooms, and we have to be able to flip between the two and we have to have space that can be flexible to do a lot of different things.
The next part is really bolstered and we can talk about that a little bit later by some recent legislation, but again a transition that was happening anyway.
And a lot of other people believe it's not only an energy transition, but it's also energy expansion and it's not only a transportation transition, but it's a transportation mix.
Going to change we are positioned across the value chain for both.
We can take part in all manners of the energy transition and also boring.
Flying and helping customer supply traditional energy sources.
Also we also are positioned across the entire EV value chain from EV EV batteries to EV vehicles and the plants, where these things are all just getting built now to the charging stations and the kind of charging stations. We built for the most part our industrial scale charging stations a lot of times attached to some of those big warehousing facilities.
We're built for last mile delivery water and wastewater water is a good market for us we really do the electrical work almost everywhere in the country that tends to be the smallest part of the work mechanically we do this lights out in Florida, which is a big and growing market for two reasons population inflow into Florida, but also consent decrees.
They require more investment to bring current facilities and some of the largest water districts up to snuff.
The last three are really cost cutting services, we provide across all sectors. We are one of the leading mechanical services providers. We do repair service. We do service agreements, we do control services, we do new control installations, and then we do mechanical retrofits.
In our mechanical services business. Most of this leads to energy reduction less energy you lose the less carbon use and we are definitely integrated into our customers' long term energy efficiency drive and an example of this is where a customer come to us and have two or 300 facilities and say we need to upgrade these we need to take the energy out in our recent project we do.
Did we took the equivalent of 4400 cars off the road and saved that customer a lot of money and they got less than a five year payback on their money, which equates to about a 13% return not bad we do that work every day and also indoor air quality is now part of the solution. If you recall back in 2020, we were well.
Well positioned to help our customers have people peace of mind when they came back into the facilities that now as an integrated solution, where we do a building retrofit where we are positioned well with the big manufacturers there to do it. We also help them think about new products in that area and it's also as Mark talked about the cares Act.
That's a big part of what's going on in educational facilities today and in fire protection and life safety.
We have great folks in the field executing this everyday on projects from as little as $10000 to $100 million today, and we do it well now all of these things are being bolstered by a couple of interesting things right now right.
There has been some legislation that might even talk about the infrastructure Act.
Which we will participate in transportation infrastructure, we pick our spots, it's not a big part of what we do but anything that uses technical labor is good for US right. Because we know we can get the technical labor.
And then anything that <unk> demand is good but I'm going to talk about two specific places of legislated I'm not going to go into detail other than it took some of these trends, especially around the EV transition space in the energy transition space and upholstered them right, the Iraq bolster them and to get the tax credits youre going to have to use labor like ours in that.
Labor as well trained they get paid well, they're safe and they've been through an approved apprenticeship program on the <unk> to get that.
Credit Youre going to Youre going to have to be do Davis Bacon, we believe but I think the apprentice stuff's going to be quite obvious because these are highly skilled people that come to work amcor knows how to operate in that environment and even where we are non union will supply that labor, we know how to make sure that the right apprentices or work hand in hand.
With our union companies they have the right people on the right job at the right time. So these acts maybe didn't create these markets, but they may accelerate some demand forward and also put a foundation on on the investment is happening today.
With that I'm going to turn to page 15, a close this and talk about capital allocation.
Not a lot of great.
Great New news here were steady and programmatic about how we think about capital I like to look at two years to talk about we're comfortable either world. We're comfortable in the world of 29, 2019, where the preponderance of our capital that year went to acquisitions and those acquisitions are bearing fruit as we support.
The previous page.
<unk> investments.
We would prefer to do that quite frankly, because we're growing the business, but we also know that we'll have years like 2022, where the best thing we can do with our capital is take the majority of that capital that we're going to allocate that year and put it in return of cash to shareholders. If you go to the 2016 to 2022 view of the world at the end of the day.
<unk>.
It will look something like this may be the little green the dark Green bar will go up a little bit if we look at the next five years, maybe the one will come down a little bit, but the point being overall as we will be balanced capital allocators. It has served us and our shareholders well over a long period of time with that I'm going to wrap this up on pages 16 and 17.
We expect to continue to have success in an uncertain market. Then we will mitigate by silver serving growing and technically advanced end markets that I, just talked about and look it's a challenging macroeconomic environment and we sound like a broken record on that because it has been for quite some time and we continue to perform through that challenging economic environment, where you're going.
Set guidance at 12% to $12 $5 billion in revenue this year and $8 75 to $9 50.
And earnings per diluted share, we talked about all of this we have a strong <unk> to execute we have the right market position. We continue to see strong demand for all of our service with fire life safety construction across all of our end markets look the supply chain issues are still bad and challenging, but we have figured out how to live.
Live in a world of long lead times and unreliable delivery schedules for finished systems like switchgear generators in HVAC equipment. We also expect to see continued inflationary profession pressures for labor as well as materials and fuel. However, as we did in 2022, we will continue to adapt through better planning pricing and.
Sitting where we ended up in this guidance range will depend on several factors.
Our control and some outside of our control and at Amcor for a very long time, we've always tried to focus on the controllable. So what do we need to do we need to keep doing what we've been doing we need to continue to increase our use of bim pre fabrication enhanced planning to drive improved efficiency improved safety and increase the quality of our.
Service delivery, we need to continue to enhance our pricing and estimating to mitigate the impact of inflation and supply chain challenges, we need to leverage our reputation as an employer of choice to staff, our jobs with the right mix of skills and classifications to enhance our labor productivity and service and project delivery.
No we need to continue to train and educate our employees at all levels of the organization to work smarter lead better and lead with the values. We have at EMCORE of mission first people always and we need to continue to gain SG&A leverage much like we did in 2022. However, there are always things that could affect our performance that we.
Don't control and we have to adjust to.
The material sourcing and lead times continue to challenge the market and our customers that is a fact of life I think I said a year ago that we thought that would be through mid 2023, I expect that trend to continue well into 2024.
Higher interest rates and economic uncertainty may impact the demand for some of our products and services.
Interest rates were up substantially we all know that I think disruption caused by uncertain energy markets and supply, especially as the conflict in Ukraine continues and potentially intensifies, we expect to generate strong operating cash flow that at least approximates our net income and to continue to execute on our long term capital allocation strategy.
<unk> that is balanced across supporting our organic growth enhancing our core services and our markets through acquisitions, while returning cash to our shareholders through dividends and share repurchases. We returned a record $688 million of cash to our shareholders in 2022 through a combination of share repurchases and dividends, we also announced.
As Mark said, a 20% increase in our quarterly dividend from 2014 from 15 cents a share to <unk> 18, a share effective with our second quarter 2023 payment and as always.
This is the reality right and this is what underpins the whole company. Our success represents the hard work diligence his strong leadership of our teammates at all levels and I want to thank each member of our EMCORE team for all you do for EMCORE every day stay safe and with that we will take questions.
Thank you.
We'll now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Are using a speakerphone please pick up your handset before pressing the key.
Joseph the question queue. Please press Star then two.
At this time, we will pause momentarily to assemble ever.
Our first question comes from Noelle Dilts with.
Stifel. Please go ahead.
Hi, guys.
Congrats on a good year.
Sure thing I was hoping you could kind of walk me through how youre thinking about the <unk>.
<unk> profile in each of the divisions, that's embedded within your guidance for 2023.
Yes, I'll take a shot at this and then Mark will jump in I think in general.
In our guidance I don't think on a consolidated level, we're planning on a big margin pop right Mark.
We don't think that's going to happen and as you know this is in a.
<unk>.
Pinpoint that margin.
By segment it depends on mix it depends on project timing it depends on a lot of things that contract structure. So we tend to think about this in buckets right.
We like to operate the mechanical business from the high 6% to 7% to the low eights.
Those are all up from five years ago, 100, or so basis points. What we would have told you that the electrical business should be the high sixes to the mid eights.
The building services business and our <unk>.
Or two they might be in the high fours and then we saw what they can do in the fourth quarter, but we tend to think about that as a five to five 5% operating income margin and remember we have a lot of amortization within our industrial services, but the bottom line there is.
People say what are you going to get to I think mark and I would say before we can talk about where we used to be we got to get them to 4% operating income margins on a sustained basis and we haven't seen that for quite some time.
When they are operating north of five five or so percent, we're pretty satisfied and that depends a lot on mix to put all that together you get an EMCORE mark somewhere between five and five 5%, yes, and I think I'll just add to Tony's comments I mean.
I'm sure. Your team has done the math I mean, we're operating well within our five and 10 year averages I guess at this point. It is the 10 year average even relevant so if you look at the five year average.
Places, where we'd like to see some improvement as Tony commented a couple of times is clearly electrical and as we've said a number of times on this call a lot of 2020 twos performance was mix related.
Putting aside some of the quarter one supply chain issues, we experienced particularly in that segment.
And the industrial services business.
Still on a five year basis is kind of there but.
We're hopeful that we're going to revert back to the 10 year or something something better than that but once again, that's going to be dependent on what the customers are looking for from us.
We don't we don't create demand.
As good as we are we're not that good and all.
Similarly, we have to be we have to have the people in place and the property is in place to facilitate providing services to those customers when they need it so.
We were at five 4% in 2021, we were slightly below that on a consolidated basis in 2022, I think as Tony said I think between that 5% five 5% is realistic indicate it could it could move in any which direction for any particular segment once again, depending on what the throughput is in the 12 months.
Once again not to.
Not to beat a dead horse, but.
Our.
Our <unk> are the strongest they've ever been but that number relative to our full year annual guidance revenue guidance Theres still a lot more work that we have to book and build.
And obviously perform.
During the year, so depending on how that shakes out could certainly impact our consolidated margins by tens of basis points in any direction.
Okay, great. Thank you and just a quick one on the M&A front I mean.
I appreciate the comments on the call Tony I think last quarter. When we spoke you talked about wanting to make sure you're really comfortable that.
The companies are properly kind of booking work and are assessing the risks associated with the current macro environment.
Are you thinking about I guess, the risk associated with M&A today and.
Do you feel like multiples are coming down to a more reasonable level to kind of reflect the current environment. Thank you.
Don't know about multiples overall, we don't really pay attention to them. We know we tend to evaluate each investment on its own merit.
And where we have the most success is when we're working with an owner they may have intermediary working with them, but they really want to be part of our team.
And we try to get to a fair deal we're not we're not bargain buyers.
And I tend to look at things like this.
We.
Our very.
Excited.
About the results of our acquisitions over the last five years and Thats a relevant time period, you do stuff way before that markets change you do other stuff in general I think we're good.
BB plus student on acquisitions, the more you lean toward a competitive process, where we're buying from private equity we've done that a few times okay successfully.
It tends to not be as high a return, obviously, but where we can work together with management develop the business case for the future.
Where we understand really in depth of our capabilities, where we can build on those capabilities, where we can move them, maybe a little bit out on the project size by a lot of our peer learning we tend to get returns in the high teens and if I look at how we've done in the last five years, we've been very judicious I think about how we think about it right 19 was a great great year.
For Us acquisition wise, and we brought some good companies and we have strengthened our electrical electrical portfolio, mainly over the last couple of years.
And that was just timing right people that we've been talking to for quite a bit of time.
And.
We have enforced deals we never have.
Deals we walked away from that were larger.
Because we couldnt get comfortable with their backlog, we couldnt get comfortable with our cash conversion and in our business one.
One of the things we look at is if we can't get comfortable with the cash conversion over a period of time, there's something not right in their reported results because our view of the world is eventually it all comes out in the cash.
And so we start with that cash flow statement and move back through the due diligence.
And.
That served us well over a long period of time, we have a fairly healthy pipeline.
Deals close when they close.
We.
We look at.
30 to get to tend to get the one right our team screens the team really only engages probably.
Once we decide we're going to do something to get pretty far along we have a pretty good idea, we're going to close it. We're also not afraid to walk away as.
New information becomes available in due diligence and coupled with that there are some types of things we see in due diligence to say go fix this.
And we'll talk to you in error and when we talk to many here there are a better company they want to sell to us and we get to a good place. So ours is an iterative interactive process with where we tried to build trust on both sides. We're not trying to make the lowest still possible for us we're trying to make the best deal for us over a long term period.
And I'd say over the last five years I'd give us a good b plus a minus because I don't think anybody is in a on acquisitions.
Great. Thank you very much.
Our next question comes from Brent Thielman with D. A Davidson. Please go ahead.
Hey, Thanks, good morning, Congrats on a great year, Thanks, Brad Tony Mark I appreciate the breakout of Rps commercial Submarkets, it's really interesting stuff.
See the telecom and high tech sectors more than doubling year on year.
Pretty interesting that that.
Obviously, where you and others are talking about a lot of the growth.
Commercial market is still to come.
And Tony I guess, I'd thought about data centers and semiconductor fab, it's a little more regionally specific my question is.
These areas of your business around the country that are really benefiting from these submarkets.
Add the manpower and the capacity to keep.
Supporting these pace the gains in these verticals I mean, what are the what are the limitations here in your business.
It's actually the question we ask ourselves every time, we think about one of these jobs can we do it on a sustained basis, because if you think about and I agree it's a geographic.
Region within the U S. You have to think about it.
You start with what does the core labor looked like in that market and in every case, there's not enough labor in that local market.
And then you go to okay.
Is it going to take to attract labor and how much risk am I going to take to attract that labor. So in an established market like Arizona, we have a pretty good idea of what it takes to bring labor in we have a pretty good idea of what that wage rate looks like in that shift structure. So it's not only wage rate. It's also what are the shift structure going to look like in <unk> am I going to work six.
Turns with three days off there's all kinds of different things you think about.
And then what is that local union allowed to go back to the comment on the different acts that are supporting this what does that local union allows far as classifications to be able to do the work.
So and in a more established market, where we've been doing it like Arizona, we have a pretty good idea of what it's going to take when you go to a new market or an asset market, where we are in the market to some extent, but we may travel in and we're going to pre fab a lot to traveling.
We think about what peak manpower is going to be we think about what resources ramped to put on the ground. But you also think about what you are contracting mechanism that needs to be at the start of the job. So what we may be willing to do in our more established market on a contract side, we may not be willing to do it and in a market, where we're just establishing a presence. So there for a while we may operate more as.
A time and material until we can get a feel for what that labor force is going to look like next phases of the work we may take fixed price, because we know and our customer ultimately knows what it took us to construct a labor force.
And so that's how we think about the manpower planning so we start with the technical aspects of the progress can we do one of these then we start with what kind of risk is around that then we think about the supply chain challenges too and say what is the owner providing a what do we have to provide on that job and intermixed on all of that is the labor planning and once we get a green light on the three.
And then a contract structure that's the fourth one that's what you don't really know that until you've done all the other ones.
And then we get a green light to say, yes. In fact, we will do that project, but it's actually you got to go through the thought process on all four of those gates.
Yes.
That's helpful Tony.
As you look at the pipeline.
And those sorts of opportunities I mean is it large enough.
You could conceivably still.
Europeans again next year.
Mitch opportunity out there, yes, I don't know about that and the way we think about <unk> is different than a lot of other people were actually I'll, let market into that but we're at the accounting definition, we have a contract in hand, it's a noncancelable portion of our service agreements. So other people might say well, how we're going to be at this site for the next three years and look at all the work we're going.
We don't do that right and it's approved change orders or is it a very stringent.
I don't know what that growth will be I mean, this is a pretty heavy level. It's okay. There's plenty of opportunity out there some of it will be contracted in a way you won't see it all in <unk>. It will show up later in revenues, because it's more time and material or unit price type work and so that never fully shows up in Rps Theres. Other work that will come out in pieces and so it will come.
<unk>.
Depending on what we're doing Mark you end up with yes, Brian the only thing I'll add to Tony's comments is back to the discussion of capital allocation and obviously allocating capital for growth.
We clearly have a clue.
<unk>.
On these opportunities and where we're making those investments, that's where it's giving us the ability to.
Take some of the labor out of the field back into the shop or into a more controlled environment, where we're able to control the pace of progress a lot closer so.
I wish in my long career here those opportunities existed from day, one that I walked in but it was a much different market conditions.
Yes, so our capabilities.
And our wherewithal is a lot stronger today than it certainly was then and.
We have the balance sheet to make those investments so.
I think from a competitive perspective that certainly gives us an advantage, but at the end of the day and one of the reasons why we've been successful for a long period of time as you know we're not going to.
Enter into these arrangements with customers or potential customers. If we do not believe that we do not have the ability to become a 100% to fill those requirements. So the only governor I think on the opportunity in the short term is ultimately what our risk appetite is.
And ultimately where we want to play and our risk appetite has less to do with can we do the job, but can we check all those boxes and capital allocation is a big deal for us. So a lot of the things we did in 18 19.
<unk> acquisition wise and invest in even into 'twenty investment wise with shops and.
And organic investment in all of those things.
Allowed us to be in a position to serve these customers.
Build fire fab shops in the right places with really a great team.
<unk> <unk> and <unk>, but we're not prepared to take care of these customers because youre not going to find enough labor to do that so you have to be doing the pre fabrication like Mark said, but you also have to be able to.
Get it to work off the job because you want to make it safer more repetitive.
And more.
The quality goes way up.
The second point is when you think about the investment that goes beyond even just physical infrastructure.
We've put a lot of investment into our knowledge infrastructure, we put some resources around them to make it more predictable reliable at all and it's not only a data infrastructure, but it's a people infrastructure to be able to share best practices. We also do a really good job of sharing best practices across the company through a <unk>.
Series of peer groups, where folks get together and share building techniques right and all of those things are really important to allow us to serve our customer better.
Really helpful.
Just one more on that.
On the outlook for 2023 sounds.
It sounds like.
Yes, maybe some green shoots in the industrial services business in terms of better opportunities in front of them.
Just remind me where that business needs to be in order to kind of get back to that 4% kind of margin target.
You talked about.
I don't know exactly but I think if you could.
Do more solar work.
If we were just different than what was there last time that would certainly help because it's work, we do very well and go back to the means and methods. We figured out some of the means and methods around the electrical work I think that the more call out work, we do the better but look the reality is we have customers operating at extraordinarily high levels of utilization and they almost have to now.
<unk> to supply the refined product that the economy needs to run. So we are we are working different with those customers today.
And in.
And we will adapt and we're one of the go to people to do it but mix plays a big role in that the more we can get a shop work at the right pricing. The more we can get a cleaning work at the right pricing and the more work we can do in our electrical business will help lift those margins overall.
Really helpful. Thanks, guys.
Okay.
Our next question comes from Adam.
Yes.
Thompson Davis. Please go ahead.
Hey, good morning, guys. Congrats on the strong fourth quarter and the outlook.
Hey.
Dan and Prefab can you talk a little bit about how much further you can push those.
And should we look at that as a.
Revenue opportunity for you guys and margin opportunity or both all of the above.
It's a revenue opportunity in a sense of.
It allows us to capture more of the job in some cases and even sell some modules to people, where we're not actually doing all the installation on a job. It's a margin opportunity in a sense, we make less mistakes and we have better yield.
And we get more productivity out of the people and it allows us to mix the labor a little differently on the job and how far can we can take it I mean, obviously, we're investing the resources to take it in a different direction, but it's a careful match between.
What's the Bim requirements, but then you also have to think about what your prefab plan is and then what your prefab infrastructure is and how much you are and invest in that pre fab infrastructure. Because you don't want to be too far ahead of what the need is right thats fixed cost and.
One thing we've learned is being good specialty contractors, you don't build a huge fixed cost base ever unless you would know where it's going to support you over the next two or three years. It's why we don't own thousands of scissors lifts right, we're more than happy to be a great customer of rental companies like United rentals.
Okay and then.
Can you talk a little bit about.
Your industrial group and if that could broaden out over time like I know you guys have been really focused on downstream.
Energy for a long time, but is there anything that would prevent you from working on like a hydrogen.
No theres nothing at all.
There is nothing at all that would prevent us.
And.
We're not like wedded to anything what we have is we've got great relationships.
With customers and we can service their most advanced things pipe as pipe. We can do biofuels, we can do carbon capture we can do.
One of the things, we're most excited about and what can our electrical group group doing the renewable energy space, especially around solar we can do all of that just so happens we didnt do as much of that is we wanted to last year, because we can't get product not that we can't get the product our ultimate end customer can't get the product.
We have great industrial pipe Fitters in that group Foreman superintendents, we have good mill rights and we have terrific fill an electrician.
They can do just about anything one of the things I learned and this is interesting I went out to a solar job that they were doing.
And our customer was struggling a little bit they brought us and we hadn't done really had done any one of these to scale up to that point.
The ingenuity of the people that came out of the oil and gas business.
Used to working in austere conditions that are used to working in demanding conditions and they're used to being very flexible and their means and method. The productivity. They were able to gain on that job versus people that specialize in it was quite remarkable. These are some of the most.
Intuitive problem solvers.
Across any of our businesses. So when those opportunities present will be there we're working on the edges of that right now in the renewable fuels Biofuels area, we certainly have the solar thing.
Installation dot on the electric side now is just now it's just getting the demand, but yes, we're not wedded to any one thing we're going to go where the best margin opportunities are with that workforce.
Okay, that's perfect and then real quick Dave.
David Davis Bacon issue.
Does that give you an advantage or kind of nonunion shop, just pay Davis bacon it doesn't hurt.
This whole non union.
Non union thing than parts of the country, where.
Sometimes we know we know how to operate both.
What I've learned is nobody wakes up in the morning other than maybe some of the big cities and say I will never be a union electrician no. One wakes up in the morning, and said I will never not be at Nanya electrician nonunion grows typically when the economy is not great or when the building trades our grid.
We've recruited a lot of non union electricians and Pipefitters into the Union ranks, we do it through the local union and as a result, they get into an apprentice program and if you look at the IRI, it's geared towards apprenticeship programs.
There is some good non union apprenticeship program, there's a lot more rigorous for us to set up we believe in those programs both union and non union because it comes out with a safe productive worker it Dan.
Great. Thanks, Tony.
Yes.
This concludes our question and answer session I would like to turn the conference back over to Tony Guzzi for any closing remarks.
Thank you all very much for your interest in EMCORE, where at the start of 2023, we have a pretty good outlook and.
We'll be back to talk to you in April thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.