Q2 2023 EMCOR Group Inc Earnings Call
This is conference number one zero.
Eight zero.
Three five.
Good morning, My Name's, Megan and I'll be your conference operator today at this time I would like to welcome everyone to the N core group.
Quarter 2023 earnings call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
If you would like to ask a question during this time.
Simply press Star then one on your telephone keypad, if he would like to withdraw your question Press Star then two.
Mr. Blake Mueller with F. T I consulting you may begin.
Thank you Megan and good morning, everyone welcome to the EMCORE Group Conference call.
We are here today to discuss the company's 2023 second 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.
Thanks, Blake good morning, everyone.
Thank you for your interest in EMCORE as always and welcome to our earnings conference call for the second quarter of 2023 for.
For those of you who are accessing the call via the Internet and the wealth and the website. Please welcome as well.
We are at the beginning of our slide presentation, and 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 our results for the quarter and six months with me 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 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 always find us at EMCORE group Dot Com with that said, please let me turn the call over to Tony Tony.
Thanks, Kevin and good morning, and thanks for joining our call.
I will be speaking to the second quarter results in my opening commentary.
Mark is going to cover both the second quarter and year to date results.
I will be speaking to pages four through six in my opening comments.
We had an extraordinarily strong second quarter by any measure at EMCORE.
We had revenues of 3.05 billion, which represents 12, 5% revenue growth.
The 11% organic revenue growth.
We earned $196 7 million and operating income.
Our operating income margin was a strong 6.5%.
Diluted earnings per share totaled $2 95.
This performance represents an all time quarterly record.
For revenues.
Operating income.
Operating income margin.
And diluted earnings per share.
We generated strong operating cash flow of $300 million in the quarter.
And grew our remaining performance obligations or RP O sequentially from Q1 by $413 million.
Or five 2%.
And from the year ago period by $1 $8 billion or just over 28%.
Our business is performing well across nearly all segments.
End markets.
Our electrical and mechanical construction segments continue to perform well as.
As evidenced by the strong.
Revenue growth of 22%.
12, 9% respectively.
With mechanical construction operating income margin of 10%.
And electrical construction operating income margin of seven 5%.
The conversion to operating income by these segments, especially mechanical or towards the high end of our expectations.
Across the country, we are executing well on some of the most sophisticated projects and markets such as high Tech manufacturing, which includes semiconductors.
The electric vehicle or EV value chain.
<unk> life Sciences and pharmaceuticals.
The networking communications sector, which encompasses our data center work and the health care sector are also performing well.
We have industry, leading capabilities in bim or building information modeling pre fabrication project planning labor sourcing management and training.
We offer a breadth of mechanical capabilities from HVAC.
Process piping plumbing, and we're also a far leading fire protection and life safety contractor.
And our customers look to us to perform complex installation in the markets I just referenced.
Our sub segment and subsidiary management teams are leading in an exceptional manner and allocating our resources in a thoughtful and pragmatic way.
While working towards outstanding outcomes for our customers, we continue to strive to optimize our project mix to produce great financial results.
Our U S building services segment continues to perform well and it has a strong mix of work across our service lines.
Revenue of this segment grew 12, 9% in the quarter with an operating income margin of 6%.
Demand continues to be strong and persist for our mechanical services with excellent execution across retrofit projects.
Building controls and maintenance and repairs.
We are working across a variety of end markets, including traditional commercial markets, but also high tech manufacturing institutional and health care customers, who remain focused on energy efficiency and indoor air quality of our IQ upgrades, we expect to have a strong repair service season, because of the heat that a blanket most.
Parts of the country as well as extended lead times for applied equipment.
This segment. This segment continues to enter into facility maintenance contracts and there is strong demand for our site based and Rob technician services with <unk>.
We're also excited about our pending acquisition of ECM ECM is a bolt on acquisition that adds capability.
<unk> will enhance our energy efficient see service offerings and will allow us to offer such services.
Programmatic way to owners looking for multi site and multi year programs welcome Tim core ECM folks soon.
Our industrial services segment continues to improve at a modest pace.
We executed a more normal spring turnaround season and demand for our niche services is robust within our shop services. We are beginning to see increased levels of capital spending in the form of greater new build heat exchanger orders.
We continue to wait for the resumption of demand for utility scale solar and are well positioned with the supply chain issues. Aside our UK business performed in a manner consistent with the available market opportunities. While we saw reduction in quarterly revenues. The team remains focused on profitability as evidenced by the consistent year over year second.
Quarter operating income margin.
Building on historical basin facility services contract EMCORE U K continues to perform various project work for its customers much of which is aimed at helping to develop and implement multiyear energy reduction programs. Overall <unk> continues to have a strong balance sheet that supports our organic growth and the capital investment needed for the.
That growth, we also have the firepower to add bolt on acquisitions.
Like ECM, we hope to close soon that help us expand our capabilities in support of our customers.
With that Mark I'm going to turn it over to you.
Yes.
Thank you Tony and good morning to everyone participating on the call today for.
For those accessing this presentation via the webcast. We are now on slide seven.
Over the next several slides I will supplement Tony's opening commentary on <unk> second quarter performance as well as provide a sneak brief.
A brief snapshot of our year to date results through June 30.
All financial information referenced this morning is derived from our consolidated financial statements included in both our earnings release announcement and Form 10-Q filed with the Securities and Exchange Commission earlier. This morning, So, let's revisit and expand our review of <unk> second quarter performance consolidated revenues of $3 5 billion are up $338 2 million or 12 five.
Sent over quarter two 2022.
Our second quarter results include $40 6 million of revenues attributable to businesses acquired pertaining to the time that such businesses were not owned by <unk> in last year's second quarter acquisition revenues positively impacted our United States electrical construction segment within the quarter.
Excluding the impact of acquisitions second quarter consolidated revenues increased approximately $297 6 million or 11% quarter over quarter.
Before reviewing the operating results of our individual reporting segments I would like to reiterate what Tony highlighted earlier that our $3 5 billion of quarterly revenues represents a new all time quarterly revenue record for the company the.
The specifics for each of our reportable segments second quarter revenue performance was as follows.
State's electrical construction segment revenues of $678 2 million increased $114 million or 22% from 2022 was comparable quarter, excluding incremental acquisition revenues. This segment's revenues grew a strong 13% organically period over period increased project activity within the majority of the market set.
They are served by this segment led to the quarterly revenue improvement such growth was most prevalent within the networking communications manufacturing and industrial health care and hospitality market sectors revenue of this segment were also positively impacted by slightly improved supply chain environment with regards to equipment procurement.
Revenues of our United States mechanical construction segment of $1. One 9 billion increased $136 5 billion or 12, 9% from the year ago period.
Revenue growth during the quarter was largely driven from increased activity within the high Tech manufacturing network and communications and commercial market sectors consistent with this segment's first quarter performance, we are experiencing growth in both fire protection as well as traditional mechanical construction services. This increased demand is stemming from customer projects supporting that.
Design and manufacturer of semiconductors, as well as electric vehicles and or related battery technologies. There are additionally continues to be greater demand from our datacenter customers with these results both our electrical and mechanical construction segments established new second quarter revenue Records. Additionally, our combined U S. Construction revenue.
<unk> as well as that of our U S. Mechanical construction segment surpassed our previous all time quarterly revenue records.
United States building services segment revenues of $775 million increased $88 5 million or 12, 9% representing an all time quarterly record for this segment revenue growth was experienced across each of their divisions with the majority being generated from mechanical services contributing to this performance was increased HVAC project.
Retrofit revenues due to slightly improved equipment availability that facilitated greater project execution when compared to 2022. In addition as commented during prior quarters. This segment continues to experience strong demand for certain of its service offerings as our customers seek ways to improve the energy efficiency <unk> indoor air.
Quality of their facilities <unk> industrial services segment revenues of 290 to $2 3 million increased $7 7 million or two 7% as we continue to experience a resumption in demand for our field services and are and are starting to see increased levels of capital spending within this segments shop services.
United Kingdom building services segment revenues of $106 million represent a reduction of $8 5 million or.
Seven 4% from last year's second quarter. In addition to a minor degradation in the exchange rate between the British pound and the United States dollar.
Over a period of revenue decline as a result of the loss of certain facilities maintenance contracts due to non renewal further contributing to this decrease in revenues as a reduction in project activity as certain of this segments customers are reevaluating their capital spending programs in light of the macroeconomic headwinds within the U K.
Please turn to slide eight.
Reported operating income for the quarter was $196 7 million or six 5% of revenues and favorably compares to $137 6 million of operating income or five 1% of revenues a year ago.
Consistent with my revenue commentary and Tony's opening remarks, the current quarter's consolidated operating income and operating margin each represent new all time quarterly records for EMCORE specific operating performance by segment is as follows our U S. Electrical construction segment earned operating income of $50 7 million, an increase of $15 6 million.
From the comparable 2022 period reported operating margin of seven 5% represents an improvement from the six 2% in last year's second quarter consistent with this segment's first quarter performance, we experienced better project project execution as well as a more favorable revenue mix year over year.
Such execution, coupled with a steady improvement within the supply chain and our ability to adapt to the current operating environment resulted in a reduced level of discrete project write downs quarter over quarter.
Second quarter operating income of our U S. Mechanical construction segment of $119 8 million represents a $43 $2 million increase from last year's quarter and operating margin of 10% represents a substantial improvement from an already strong seven 2% in the second quarter of 2022.
And both growth in both gross profit and gross profit margin due to a more favorable revenue mix, including a higher percentage of self perform projects, where the most significant contributors to this improved operating performance. In addition, this segment benefited from a benefit from a lack of significant project write downs when compared to last year.
Well as the favorable closeout of several projects during the current year quarter.
Operating income for U S building services was $46 1 million or 6% of revenues and compares to $38 5 million or five 6% of revenues in 2022 second quarter improved operating performance within the segments Mechanical services Division as a result of both favorable project execution as well as the impact of contract price adjustments in response.
To inflation were the primary drivers of the period over period increases our U S. Industrial services segment operating income of $7 9 million or two 7% of revenues represents a slight increase in term of both dollars and margin from the comparable prior year period, we are seeing incremental demand across the segments scope of services, which has led to a.
Better mix of revenues and resulted in higher gross profit and gross profit margin.
Resulting from the reduction in revenues previously referenced UK building services operating income of $5.
$5 $9 million represents a modest decrease from Q2 of 2022, However, operating margin of five 6% remains consistent with that of the prior year, reflecting greater gross profit contribution from this segment's current portfolio of work.
We are now on slide nine.
Additional financial items of significance for the quarter not addressed in the previous slides are as follows quarter. Two gross profit of $490 $1 million is higher than the comparable 2022 quarter by $107 1 million or 28% and gross margin of 16, 1% as improved 200 basis points quarter over quarter, selling general and administrative expenses of approximately.
<unk> $293 4 million represent nine 6% of revenues and reflect an increase of $48 million from quarter. Two 2020 to SG&A for the current year's quarter includes approximately $5 1 million of incremental expenses from businesses acquired inclusive of intangible asset amortization, resulting in an organic.
SG&A increase of $42 $9 million and of course continued double digit revenue growth has necessitated investments in human capital in the form of additional personnel and training to support our back office and contract administration functions. This coupled with annual cost of living increases for existing workforce has resulted in a quarter quarter over.
Quarter increase in salaries and benefits also impacting our second quarter overhead was incremental expense pertaining to incentive compensation programs across the majority of our reportable segments. This is due to our higher operating results to date as well as a revised profitability projections for full year 2023, which have necessitated our second.
Upward revision in our annual earnings guidance, Tony will speak to our guidance range in detail later in this morning's presentation.
Diluted earnings per common share was $2.95 as compared to $1 99 in the year ago quarter, our second quarter performance establishes a new quarterly earnings per share record due to the combination of our strong net income and our share repurchase activity, which has reduced our actual and weighted average shares outstanding.
Please turn to slide 10 with.
With the quarter commentary complete I will touch on some highlights with respect to <unk> results for the first six months of 2023 revenues of $5 94 billion represent an increase of $636 1 million or 12% of which 10, 6% was generated organically operating income of $351 6 million or five.
9% of revenues represents a 48% increase from the results of the first six months of 2022 as we have experienced improved operating income and operating margin in each of our domestic reporting segments. Our year to date diluted earnings per share is $5.28, which.
<unk>, an approximate 57% increase over the $3 36.
We reported in 2020 twos corresponding six month period with substantial growth in our net income coupled with an almost 8% reduction in our weighted average shares outstanding due to our share repurchases throughout 2022, and 2023, we have been able to drive significant EPS growth on a year to date basis.
My last comment on our results for the first half of 2023 and Tony commented specifically on the quarter is that our operating cash flow of $214 9 million on a year to date basis represents a significant improvement over the cash used in operations of $18 9 million in 2022, six month period to <unk>.
Our significant organic revenue growth and the resulting demands on working capital investment our subsidiary management teams have done an excellent job of generating cash flow conversion something we have been doing consistently over a long period of time, we are now on slide 11.
<unk> balance sheet remains strong and liquid and we continue to be in position to invest in our business return capital to shareholders and pursue strategic M&A investments fluctuations when compared to December of 2022 are as follows cash on hand was just over $503 million, which represents an increase of $46 6 million.
Our exceptional operating cash flow was partially offset by cash used for financing activities of $126 4 million inclusive of just over $105 million for the repurchase of our common stock. In addition, we've utilized $48 4 million for an investment for investing activities in the form of capital expenditures and acquisitions, resulting.
Primarily from our organic growth during the period, our working capital balance has increased by nearly $152 million the $8 $3 million increase in goodwill is entirely a result of the five acquisitions completed by us thus far in 2023, while not identifiable intangible assets have decreased by $19 5 million.
As the additional intangible assets recognized in connection with such acquisitions were more than offset by $32 million of amortization expense in the first half of the year total debt has remained substantially consistent and our stockholders equity balances increased by $143 $8 million as our net income for the period exceeded our share repurchase.
<unk> and dividend payments as a result of our consistent debt balance coupled with the increase in stockholders' equity <unk> debt to capitalization ratio has reduced to 10, 4% from 11, 1% at year end 2022.
<unk> was anticipating a strong 2023 after a record 2022 and our performance to date as well as revised expectations for full year 2023 are validating such expectations with my portion of this morning's slide presentation complete I will now return the call back to Tony Hey, Thanks, Thanks, Mark and I'm going to be on page 12.
And what I wanted to do before we jump into the remaining performance obligations absolute levels.
I wanted to take a step back and talk about what's been driving our exceptional organic growth in our <unk> growth over the last two years.
And what's been driving profitable organic growth for us.
And if you look at this page when I take a step back also and say if you look at these trends we're talking about on page 12, there front and center in the news every day, they're not only front and center from customers, making investments. There also the focus of government policy in some cases the strength in those sectors for the long term.
Secondarily each.
Each one of these sectors.
Require highly skilled labor.
Very skilled supervision.
Project managers and engineers that are really at the top of the industry.
And the government incentives, where they are aiding in certain cases, once that kind of workforce on those jobs.
Because it's more productive it's safer.
It's trained.
Greg you can go back to the great supervision point.
So let's talk about each of these in turn and Theres, a little bit connectivity between a couple of them.
And I'll talk about that the first one is electrification and the EV or electric vehicle value chain.
And a lot of ways, that's a whole new industry right, that's being built and plants suppliers.
Second and third tier suppliers, and we're certainly seeing that work.
In battery plants, which is the raw material and we're certainly seeing that work.
Really.
Burgeoning across the country, especially in the mid central part of the country in Midwest and also the southeast and a little bit in the southwest.
We are participating on a lot of these.
Efforts and Theres more to come I will say that the patient and timing of actual delivery has been a little slower, but we continue to see the work and broke the work and we're very bullish on the sector and it's across all of our trades. It's electrical work mechanical work and fire life safety and this is an area where our firewall.
Safety.
<unk> are in great demand, because we can provide a comprehensive solution of not only the wet side. The sprinkler, but also the fire alarm to give these folks that are starting these facilities. The assurance that we can deliver these complex systems.
We're also participating in EV charging stations, but we're doing it at scale. So what we're doing is where you are bringing in lots of megawatts to supply an EV charging station for a fleet or also a big centralized hub.
We will I'm sure across amcor, we're participating in a local installations, but we're not really participating in any significant way in national Rollouts of individual passenger car Rollouts again, we will do some of that work, but the stuff that we like to do is megawatt driven high scale.
Charging stations. We also believe the electrification also leads to an energy transition, but I think at EMCORE, We believe more and more every day, it's an energy expansion. So think about all the things on this page they all require a lot of energy there.
It's going to be a mix of all kind of energy and archive solutions to make that energy cleaner.
And this part of the <unk>.
Trends that are driving our growth at <unk> I think we're in that first couple of earnings up.
And I think the government incentives that have been put out through the various asking you've heard us talk about those will allow that momentum to continue it wasn't the advent of what was happening, but it certainly will provide bolstering to those trends continuing.
The next part is actually work that we're actively involved in today and we see that and we're still on the front end and these new sites get built out let me give you. An example, semi conductor manufacturing what you're reading the paper a lot of the semiconductor build what's happening or plan and it's going to be bolstered by the chips.
Jack.
We're participating in a number of ways, we're participating mechanically and we participate in some markets on the high purity piping and others, we do quote it.
Semi dirty side, which is far from dirty, but it's more of the HVAC and process going we do both and it depends on the capability of our.
Subsidiary in that market and what the best mix of work that we can bring to bear in that market, we're participating electrically, especially on the low voltage communication side, and we're participating with fire life safety across multiple plants across the country. When you go to the pharma biotech life Sciences R&D, Let me take the first two.
<unk> pharma and biotech.
That's actually coupled with what I'm going to talk about later on reassuring Nearshoring. So we're seeing re shoring up of pharma industry to bring resilience to the supply chain, but we're also seeing as new drugs get built by goes epic right, where people need to build the capacity to build it up.
It's in areas, where we are well positioned to do the work and it's across all of our trades, but especially mechanically and fire life safety.
The pharma area of RTP Research Triangle Park Big Farm area, Southern New Jersey, Northeastern Pennsylvania, Indiana, and Southern California are all big farm areas and it's areas, where we'll have done the work overtime.
We have the trust of the customers and we are well positioned to deliver that work for the long term.
You go to the life Sciences, R&D thats much more expansive.
R&D facilities are happening in commercial conversions, they're happening at just about every major medical center that we working and Theyre happening also as part of.
More incubator startup.
<unk> companies, where we're helping build out the facilities and then life Sciences is the same thing there.
And again go to the semi conductors part we believe that the chips Act.
We'll continue to cement those sites as long term build and it is a national security issue. So we think that has long term Delta and then when you understand the semiconductor market once you're on a site and if youre doing good work you get add I'll work on that site to build the next fab expand the fab do the process cooling work.
The next one.
But if you go to the right upper right is data centers and connectivity.
Through various call is a lot of questions have been asked do we see the data center build slowing down we said no.
We said well maybe that's because we're late cycle.
The reality is.
You've got to figure the Big data center owners and build especially the both the <unk> and.
Sure.
<unk> big ones that build it they understood that they were going to need more capacity and so they secured the land facilities and it kept building because of really what's driving it now is not only the increased need for storage and more cloud computing, which companies like <unk> big companies like us are doing more every day, but also AI.
AI is accelerating more built out.
And it's more robust build out so when we started building data centers 20 years ago, We thought a five to 10 megawatt data center was a big data center, which by the way 10 15 megawatts Big Assembly plant actually uses in the automotive maybe 'twenty. So think about what you see there.
Now we've moved that we moved to 40, then we moved to 50 to 75 data centers Hyperscale that we're building now are somewhere between 75 to 125 megawatts of power put into perspective, right you need 5500 acres and 600000 panels to generate 200 megawatts that gives you an idea.
You need an LMA from GE, you need half of the production of one of those gas turbines.
One datacenter.
Think of the scale of these data centers and go back to the first block of why we think it's more of an energy expansion and also an energy transition at the same time and that is a long term trend, we're also going back and remodeling and adding more power.
The data centers that we built a mere five to seven years ago and that has just started so we see a strong data center market, where contractors. So two to three years.
Outlook for us, but we see a strong data center market for the foreseeable future go to the bottom left in healthcare, we've always been bullish on health care, our health care system is as complex as any of the three things above.
A major hospital every system comes to bear in an operating room Ah patient room, an ICU bed or a very sophisticated outpatient clinic.
And with the pandemic taught people, we certainly participated in helping people make their hospitals more flexible is that's got to be permanent and so youre seeing more robust patient power build than we've seen in five eight years.
And it's also coupled with more sophisticated outpatient facilities, we really didn't participate previously a lot in outpatient facilities, but with the sophistication level Thats come now we are and the outpatient we've always maintained hospitals, especially the central chiller plants.
And it will also look for more energy resilience in those places so youre seeing things like combined heat and power and other things, but it's also a great maintenance opportunity for us on the sophisticated outpatient facilities reassuring of near near shoring I'd like to say, we were really seeing this trend in the southeast and southwest with all the things we've talked about.
Above.
But really we were headed towards building that capability in the southeast because we believed in re shoring and near shoring for quite some times and the supply chains I would say got.
Scarily.
<unk> and.
One facility.
So maybe grew up a little bit manufacturer. We do we should always have two sources of supply at a minimum of two plants, we got into a world, where we're bringing all our supply out of one plant our customers.
Our our suppliers.
And the pandemic and also the tensions with China and the cost in China proved that this wasn't a feasible strategy.
So near shoring, a reassuring were happening before the pandemic. It is accelerating and if you throw the geopolitical concerns on top of it. It's a good long term trend for us, but it's a capacity not only expansions of capacity shifting its about resilience and its about automation and we're seeing that across just about any industry working and.
Finally, one of my favorite things is energy efficiency and sustainability I personally have been around that almost going on 30 year sale.
It's amazing how far we've come in HVAC equipment and controls upgrades, but also our ability to implement those solutions at the manufacturers bring.
You think about efficiency, it's 50% better today than it was a mere 10 to 15 years ago, and we're doing things with variable speed drives we're doing that with control systems, we're doing that with sensors and that sort of stuff. We've been doing for a while but now customers are also looking for water and waste reduction.
<unk> manufacturing plants are more into how they're managing their compressed air system, although waste gases.
And also facilities rationalization and footprint rationalization, that's accelerating as people do this re shoring near shoring or supply chain resilience. They're also looking for energy resilience through alternative energy solutions. It could be anything from a combined heat and power off of a gas generator that then drives their chillers to all the way through our solar.
On side of a megawatt or less to backup generation that they may only use a few days a year, but they have to be able to have it because they don't trust the grid necessarily on a go forward basis.
That has had not only had utility incentives three years it.
<unk> had state incentives and now theres going to be more federal government incentives on top of that so as you go to page 13, you start to see that's really what's underlying these long term trends. These trends that are big things is what's driving a lot of ways, our <unk> growth and if you look at our <unk> growth I'm going to talk about some high level thing.
<unk>.
And we can talk about strong demand across all of these major themes.
<unk> on page 13 at the end of the second quarter were almost $8 3 billion, that's up a little over $1 8 billion like I talked about 28% over the 22022 second quarter for a total of $6 5 billion last year.
We had good bookings in the second quarter.
We're up $827 million from the year end period, 22, and were up $413 million from the end of the first quarter.
Let me give you some big trends out of those <unk> domestic.
Construction of Rps was up 33% versus the year ago period building services Rps was up 14, 5% versus the year ago period networking communications, which includes our Hyperscale data center work stands at $1 2 billion up 52% versus a year ago period high Tech manufacturing sector, which includes semiconductor.
<unk> pharma biotech life science at our R&D in the electric vehicle value chain are up 160% versus the year ago period, and they now total $1 2 billion health care RPI as I talked about those trends are with the hospitals and outpatient facilities that are up 50% versus the year ago period manufacturing industrial which put.
Right toward reassuring near shoring capacity transition flexibility expansion, they are up 35% versus the year ago period. So you see those trends manifesting themselves into <unk>. Our bid log continues to remain strong and we continue to see opportunities across these market sectors and other sectors.
Other sector activity, including institutional is up 13% short duration projects, which includes a lot of the HVAC retrofit project work is up 7% reality is thats hitting stasis right. We're getting used to the lead times were getting used to those extended lead times that should be more of a book and ship business in the future as we deliver the projects that we book.
Okay.
Six to 12 months ago.
Partially offsetting that is a decrease in transportation and water and wastewater ipos they tend to be more.
Episodic in their award and we have a very good position in water and wastewater and some of the markets that matter, most and you've seen those big awards come in and out of our Ipos. There, we do remain balanced in our market participation.
We're winning new work and most active activate the nonresidential sectors and why are we doing that one is the market is good but we also have a very good position and we have excellent subsidiary and field leadership and segment leadership, we have the technical expertise, we are meticulous execution and our ability to work with our customers.
To achieve unique solutions, along the entire design install retrofit repair maintain and service continuum is strengthened everyday now im going to turn to page 14, and 15, which is what most of you really care about.
We're going to raise our diluted EPS guidance from a range of 925% to $10 to a range of $10 75 to $11 25.
Our revenue guidance will remain unchanged at 12 to 12 5 billion.
As it reflected in our <unk>, we are winning work and important strategic market sectors.
We're executing such work with efficiency and precision and that's really shown by our record operating income margin.
We believe that we will gain SG&A leverage as the year progresses, and we are utilizing our bim pre fabrication labor management and supply management capabilities with <unk> delivering to delivering superior results for our customers and growth and results for our shareholders.
The supply chain remains challenging for any engineered for applied products or complex.
Assemblies, but we have learned to mitigate these disruptions.
As the year progresses, we expect some headwinds as our more traditional commercial customers will struggle with higher interest rates in some cases reduced building occupancy and potential liquidity issues.
We always know that attracting skilled trade labor and developing trade trained frontline leadership is both a challenge and an opportunity and we've always met it and.
And we believe that we will continue to be through our subsidiaries and employer of choice.
We also believe that we are well positioned to navigate these headwinds and we also have our eye on any disruption in the energy markets and that will cause us to remain vigilant in our pricing and estimating.
We're going to continue to be balanced capital allocators, there remains opportunity within our acquisition pipeline and we believe that we will continue to add capability geography, and customers that will propel growth through our acquisition program.
Much like our recent announcement of the signing.
Of ECM, we announced a few weeks ago.
With the uncertainty of the financial markets. We believe our strong balance sheet. We know we're not just believe that we know that our strong balance sheet help us win work on large sophisticated projects as our customers see our financial stress as another reason to choose EMCORE I would be remiss if I didn't thank our entire <unk>.
<unk> for their dedication and hard work and discipline.
We all appreciate all you do every day and with that I'll take questions.
I'll turn it over to you our operator.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
We're using a speaker phone please pick up your handset before pressing the keys.
Your question. Please press queue. Please press Star then two.
The first question comes from Adam Thalheimer with Thompson Davis.
Davis. Please go ahead.
Hey, good morning, Congrats on a good quarter and thanks for all the commentary on slide 12, Tony.
I guess the biggest question is how does that all wrap up into your thoughts on the prospects for continued sequential backlog growth.
Yes, I mean look.
I've said it a thousand times.
We're in a very good level of RP OS we have opportunities in front of us.
Projects large awards come in and.
Because you booked at two weeks after the end of the quarter doesn't mean, you've lost momentum in your business also as Youre out of site and that site builds out like a new semiconductor site or some of these EV sites.
Sometimes the initial award is big and then Youll get fall all work that over a period of 18 months, which is the project lots of a lot of these is every bit as big.
Because I know you they tend to let it out in stages. So what I know is we have good momentum in the business.
We're playing two broad themes that are driving.
Our business and driving our sector in the economy, we have something thats very valuable which is highly skilled technical labor that can execute the most difficult jobs.
And in service the most.
And besides service in the toughest situations.
So I guess I.
In the 19 years I've done this I've never thought about what sequential RP O or backlog growth looks like I certainly have joined that we've had book to bill of over one for I think eight or 10 quarters in a row.
I don't see maybe thats slowing down but the flip side is if it was <unk> 98, I don't think that means much of anything to be honest with you.
Great.
And then.
I hate to ask for guidance within the guidance, but can you give us any help on how.
You guys see the back half playing out between Q3 and Q4.
This is all project timing related.
When a turnaround starts and ends we've never provided quarterly guidance and I don't think were going to start now our remark.
No we're not.
Yes.
And then lastly fire protection.
And can you give us a sense for how accretive that is to mechanical margins well. It operates at better margins than the base business. Some of that has to do with the.
A material component of those jobs it has a higher labor component.
But it's helping.
It's.
It's providing.
A nice cap on it.
Tough jobs that we got to execute.
Okay, I'll turn it over if might hop back and thanks, so much.
Again. Thank you a question. Please press Star then one.
Okay, Adam hop back and if you want.
Sorry go ahead.
Okay.
Alright, I think Oh, okay, sorry, okay.
Yeah.
Yeah.
Sorry, I did want to ask about.
So the shop business when was the last time the shop business is strong I can't even remember 2018 17 18.
And how meaningful could that be to that segment.
It's not non meaningful.
And then.
Also my list I had solar when you thought that might gain traction.
There's probably people better qualified than me to talk about that because of where we are in the chain to deliver those projects. There's a lot of things on the drawing board and a lot of land bought theres a lot of contracts.
Purchase prior agreements out there we had a full book of business I expect it to do.
10%, 12% revenue of that segment, but the reality is.
Theres not a lot happening there right now now the smaller ones are happening. So when we're on a hospital side or a campus site, where we're doing the carports.
One of our suppliers is doing that as part of our overall.
Energy program for some of our bigger customers, we can get them, there, but when youre talking to utility scale solar and again I think there's probably people that are better qualified to talk about that.
We're just not seeing the activity we expected to see this year.
Okay, Alright, thanks, guys.
The next question comes from Sean Eastman with Keybanc capital markets. Please go ahead.
Hi, Tim many compliments really fantastic update here.
So I wanted to talk a little bit more about the margins, which is really the big upside toggle in the outlook for the year.
Yes.
Obviously, we had a really strong start.
Margins in the first quarter, but you guys kind of held back from flowing through that really strong start to the year and then here we are in <unk> kind of blowing out.
And expectation and you guys are releasing more of that kind of elevated margin in a juicy your guidance update.
Just wanted to get a sense for what changed in your view.
Got.
Whats kind of come through stronger to give you more confidence to.
Just got guide margins up from here versus versus last quarter.
I'll take a high level view, and then turn it over to Mark I think there's three things that we have more confidence and one is the mix of our work going forward and we have pretty good visibility in what we are nearing completion and what's starting up at least we think we do at this point in the year.
The second point is the mix of trades.
We have a very good mix of trades.
We have strong fire life safety demand, our electrical businesses back on track.
With a great mix of work in our core mechanical business and mechanical services businesses are all performing well coupled with we see a pretty normal fall turnaround season.
So I think that at a high level that mix of things and I'll, let market into more of the specifics.
Yes, Sean I think clearly.
Not to rehash history.
One from a seasonality perspective tends.
<unk> tends to be one of our weakest quarters in the year. Despite the fact that our industrial services segment is executing.
And the earlier earlier periods of their spring turnaround season.
When you look back to where we were exiting last year, and certainly where we were a year ago at this time.
And Tony and I, both have commented on this multiple times during this morning's call.
The revenue mix was good it certainly wasn't bad, but we certainly had some projects.
Certainly had some projects in the mix.
That were marginal contributors or they run loss positions. So I think.
The term of the absence of badness.
We've used many times in the past is certainly relevant or germane to the 2023.
Periods.
And that work.
Other than one project is all cleaned up at this point. So that's a good thing from a from an activity perspective.
The other thing and we've talked about supply chain, many times and we're certainly not saying that it's great, but it's certainly more normalized as we sit here.
In late July of 2023, and it certainly wasn't the midpoint of last year.
So we're seeing flow flow of equipment from the Oems and that's giving us the ability to make sure we're utilizing our labor in the most efficient.
Manner possible, which is driving better margins and then specifically I know I've mentioned this in my prepared commentary and the mechanical construct U S. Mechanical construction segment. We did have some favorable project closeout. So so back to the earlier caller's point.
We only control the start and stops of projects based on our customers' project timeline.
To the extent that we execute and the fixed price environment or arena on a better basis, then we obviously capture.
That improvement and ultimately we recognize that where it's appropriate we certainly had that phenomenon in the second quarter and as we look at the book of business as we as we progress through the rest of 2023.
We don't we don't see any particular problematic areas.
Other than the fact that we have.
The projects out there with certainly a very very large deployed workforce that we need to make sure.
Is executing at an exceptional level as we've demonstrated over a long period of time. So you know.
Kind of a long winded answer.
Ultimately the book of business is very very strong.
We were happy with what the labor complement we have on the jobs and the operating environment still is still not optimal with regards to things that are outside of our control, but we certainly have seen some stabilization, which is giving us.
A little bit more positive momentum as we look at the outlook for the business.
Right.
Bottom line is we call it revenue right about right at the beginning of the year.
But our margins are.
100 basis points higher than that.
Third 20 basis five basis points higher than we thought they were going to be.
Yeah.
Okay got it that's helpful and.
Do you think that we're setting tough margin comps here in 2020 theory or do you feel like in light of the mix of work in the pipeline the complexity of of projects driving RPM OS in the bid pipeline.
There is some differentiation in the marketplace that perhaps we haven't seen before.
And.
We can view this performance we are seeing here is sustainable.
Yes, Sean I have set a long time to go back to the way Adam asked about backlog of <unk> I think about margins the same way.
One quarter doesn't make a trend we look over.
Four or five quarters to see a trend margins.
Margins could go up or down it could be nothing more than starting up jobs mix of jobs mix of contracts.
And I said this I think last year.
After we got out of the first quarter, where we had some of the.
Tougher work that was taken pre pandemic and we didn't start up the especially the data center work, we expected to in the electrical segment.
And I said last year, when we look at underlying productivity. We look at the things we're doing to drive productivity you got to remember as a contractor we don't get to keep the productivity in a sense that a manufacturing plant does but what we do get to keep as the ideas and.
And the ideas that were driving that productivity.
So.
Quarter to quarter that can fluctuate some.
We definitely think.
As we are guiding to we believe we're going to have strong margin performance for the rest of the year.
We obviously are at all time level.
At <unk>, we like the mix of working at Rps, but hey, we've got to go out and execute we've got to have customers that hanging in there with us and we will.
Okay got it and then and then just kind of going back to your end market drivers commentary Tony I mean, we look at the IPO disclosure as kind of a leading indicator of <unk>.
Demand and I.
I wondered if you would.
Say that perhaps there is.
Later visibility in the model than we can even really observe in the ARPA disclosure just in light of.
They're being more programmatic in larger multiyear programs.
Just kind of more complex.
Infrastructure challenges driving the business that would suggest perhaps you have more of a multiyear type of visibility that.
Isn't fully captured in what we see in Rps, what would you say there what I think I said, we're always going through the page page 12, I said.
As a contractor we don't try to broaden bring big sweeping conclusions on five year outlooks, but I think what I said is I didn't know exactly how things would layer in but these.
Fix things that were driving <unk> right now that we had pretty good feeling that they were going to continue to drive our business for the next two to three years.
How that how that manifests itself as I think exact words I use like that manifest itself quarter to quarter.
I don't know, but I do know that we're well positioned to some really critical.
You would say infrastructure type.
Not the big infrastructure, but the smaller infrastructure type sectors that we feel really good about I guess, what shall we gotta go out execute everyday.
And we.
We get graded everyday by our customers, we get graded everyday and look.
The site might be great for five years, but any one of these sites. They can take a six month pause.
And we have nothing.
I think we can do about that and you saw that last year in the data center business right.
Our electrical business has a wonderful position in the datacenter market.
And just about every key geographic market that matters, we have a wonderful position.
But we also have competition every day.
But coupled with that.
We don't necessarily control when things are going to start so last year. We thought we were going to start a bunch of work in the first quarter.
And what we told everybody look it didn't start that has all kind of implications maybe for a little under absorption of our supervision why didn't start well.
It mainly didn't start because the switch gear.
Eight weeks late.
The smart panels were six weeks later the generators for five weeks later.
They are owner procured materials.
So instead of starting those jobs February one we started most of those jobs may 1st.
And we ate the supervision in the meantime, because we certainly weren't going to lose our key supervision that we plan on working for us for the next 10 years.
So.
That trend is great right and so is getting questions last first quarter.
The end of the datacenter build and we said no and.
And here, we are with one $2 billion in networking communications <unk>. So the <unk> story.
Lot of way to sort of quarter to quarter story.
Yes, I think it's notable for you to be talking to two to three years.
If you just look at the long term history of the business for you to be out kind of thing.
Robust trends out over multiple years I think in itself is notable.
Think it's.
You can't run from success that you've had where you entrenched yourself into really good positions, but again.
Our customers can make a decision not to build in a certain way.
Think will perform I don't think thats going to be an issue.
But they can delay things by year, they can delay things by six months, we see none of that today, but we could be talking very different in the first quarter of next year. It doesn't mean, it's not a longer term trend just mean, hey, they took a pause.
Got it I really appreciate all the insights and going to go see what Brian Lane has to say now alright, alright, Thank all high.
Hi, guys Bye bye.
Okay, I think thats it.
Thank you all and have a safe rest of the summer pay attention to the heat drink a lot of water and be well.
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