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spk05: 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 MCOR Group fourth quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star then two. Mr. Blake Mueller with FPI Consulting, you may begin.
spk07: Thank you, Sarah, and good morning, everyone. Welcome to the MCOR Group conference call. We are here today to discuss the company's 2022 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.
spk01: Kevin, please go ahead. Thank you, Blake, and good morning, everyone. And as always, thank you for your interest in MCOR 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 call via the Internet and our website, welcome to you as well. And hopefully you are at the beginning of a 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 2 describes in detail the forward-looking statements in the non-GAAP financial information disclosures. I encourage everyone to review both disclosures in conjunction with their discussion and accompanying slides. Slide 3 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 mcorrgroup.com. With that said, please let me turn the call over to Tony Guzzi. Tony?
spk03: Good morning. Thanks, Kevin. And thank you all for your interest in MCOR. My opening comments will cover pages four through six. I'm going to direct my comments towards our full year 2022 performance. And 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 cashflow. We had an exceptional year in 2022 in a challenging environment. We earned revenues of $11.1 billion with 11.8% revenue growth and 10.3% organic revenue growth. We executed well with a 5.1% operating income margin and generated exceptional operating cash flow of $498 million. We had strong SG&A leverage at 9.4% of sales, and all of that culminated in record earnings per diluted share of $8.10 per share. During 2022, we faced some strong headwinds, including supply chain challenges, COVID 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 progressed demonstrating our success in mitigating such challenges. Our mechanical construction segment had an exceptional year with 9.5% revenue growth, all of which was organic, and an operating income margin of 7.7%. This segment had excellent execution in the commercial market sector, especially in the area of high-tech manufacturing, with a focus on semiconductors and data centers. This segment additionally benefited from strength in the water and wastewater sectors and the healthcare market. We enhanced our capabilities in BIM, or Building Information Modeling, and prefabrication, which allowed us to continue to deliver our services to our customers in a more productive, high quality, and safe manner. We also continue to deliver exceptional fire life safety 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 semiconductor manufacturing plants, large distribution facilities, data centers, as well as those for pharma and biolife 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 performance strengthened 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 6.1%. And we experienced continued excellent performance in the commercial sector, including the data center and semiconductor markets. This segment additionally 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 $2.72 billion and delivered a 5.3% operating income margin. Revenue growth was 12.2% with organic revenue growth of 11.6%. Our performance strengthened through the year as we had 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 are 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 increased needs for our services, and we are delivering for our customers. Our industrial services segment generated revenues of $1.12 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 have seen increased demand for turnaround and shop services related to the support of our customers' downstream operations. However, demand for our services supporting our upstream customers remains challenged. 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 more normal operations and demand and expect demand and performance to continue to incrementally improve. Despite foreign exchange headwinds, our UK building services segment had another strong year with operating income margins of 6.3%. Our team continues to deliver for some of the most sophisticated customers in the United Kingdom. We exit the year with $7.5 billion. in RPOs versus $5.6 billion at the end of 2021, representing a 33% year-over-year increase. From a market perspective, we experienced the largest growth in RPOs within the commercial market sector. This includes both traditional commercial construction projects as well as our telecommunications slash data center work and our high-tech manufacturing projects such as EV and battery plants, semiconductor, biotech, and life sciences. These are important areas for MCORP. And as a result of the continued growth, we will expand our RPO and revenue disclosures beginning in 2023 to provide greater insight into these sectors. And beyond that commercial market sector, we saw RPO 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 RPOs in more detail following Mark's commentary. Our balance sheet remains liquid and strong and 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, I'll discern the discussion of our results over to Mark.
spk02: 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 are up $309.6 million, or 11.7%, from the fourth quarter of 2021. Excluding $33.7 million of incremental revenues attributable to businesses acquired, Pertaining to the time that such businesses were not owned by MCOR and 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 MCOR. Specific segmented performance is as follows. United States electrical construction revenues of $713.6 million increased $166.2 million, or 30.4% from Q4 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 data center and technology projects, as well as revenue growth within the healthcare and manufacturing market sectors were the primary drivers of the quarter-over-quarter revenue increase. United States mechanical construction segment revenues of $1.14 billion increased 77.4 million, or 7.3%, 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 that was received under the CARES Act. These substantial revenue gains were muted by revenue declines in the manufacturing, healthcare, 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 MCORs combined to 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. Consistent 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, and as Tony previously commented, He will continue the RPO 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 the 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 decarbonization efforts and the implementation of plans or programs to combat escalating operating costs. In addition, we continue to experience growth in 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 in instances when new equipment is not readily available. With respect to the segment's commercial site-based services division, customer additions, as well as scope or site expansion, and increased project activity with existing customers were the drivers of the quarterly increase in revenues. MCOR's industrial services segment revenues of $276.2 million decreased $7.4 million, or 2.6%. 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 planned maintenance work as our energy clients seek to minimize facility downtime. This has additionally led to a reduction in pull-through repair project opportunities. United Kingdom Building Services revenues of $113.3 million decreased $10.5 million to 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 9.4% of revenues in comparison to $260 million, or 9.8% of revenues in the year-ago period. 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 quarter-over-quarter increase in SG&A of $12.5 million. This quarter's organic growth in SG&A expenses is primarily related to personnel costs due to both increased headcount to support our strong organic revenue growth, as well as higher quarterly incentive compensation expense due to improved year-over-year performance at certain of our operating companies. Despite 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 maintain discipline 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 2021's fourth quarter, and establishes a new all-time quarterly operating income record for MCOR. Our consolidated operating margin of 6% represents a 60 basis point improvement from 2021's fourth quarter and continues our trend of sequential quarterly operating margin improvements in 2022 after our 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 8.1% represents an improvement from the 7.6% in last year's quarter. These increases were a result of increased 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 performance 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 referenced last quarter, we continue to evaluate our contractual rights on these projects and are pursuing recovery where permitted. Fourth quarter operating income over United States mechanical construction services segment of 105.7 million represents a 12 million increase from last year's quarter and operating margin of 9.3% represents a 50 basis point improvement from the strong 8.8% earned a year ago. From an operating income perspective, the period over period increase was 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. Operating income for U.S. Building Services was $37 million, or 5.3% 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 segment's 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 discipline 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's 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's fourth quarter of approximately $4.5 million is down moderately. An operating margin of 3.9% 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 The segment 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 9. Additional financial items of significance for the quarter not addressed in the previous slides are as follows. Quarter 4 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% is improved over last year's quarter and represents our highest reported gross margin for any quarterly period in 2022. This increase in gross margin when compared to 2021's 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 commentary. 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 MCOR's 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 MCOR's annual performance. Consolidated revenues of $11.1 billion represent an increase of $1.17 billion, or 11.8% when compared to 2021. Our full-year results include $149.7 million of incremental revenues attributable to businesses acquired pertaining to the period of time that such businesses were not owned by MCOR in 2021. Excluding 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 have 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 $530.8 million reported in 2021. Operating margin of 5.1% for 2022 compares to 5.4% in the prior year. Despite the 30 basis point reduction in operating margin, 2022's performance reflects excellent operational execution given the external market headwinds encountered during the year. Full year diluted earnings per share is $8.10 and represents an increase of $1.04 or 14.7% over 2021's diluted EPS of $7.06. 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. MPAR's 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. Fluctuations 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 our investing and financing outflows exceeded operating cash inflows. Notably, we utilized $660.6 million for the repurchase of our common stock, have spent a net $98.7 million on acquisitions, and returned just over $27 million to our shareholders in the form of dividends, resulting primarily from the decrease in cash, coupled with an increase in our net contract liability position, our working capital balance has 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 the year. Total debt 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 2022. Our shareholders' equity balance has reduced by just under $279 million as our shareholder return activities including common stock repurchases and dividend payments, have exceeded our net income for the year. M4's debt to capitalization ratio has increased to 11.1% from 10.4% at year-end 2021, given the reduction in our shareholders' equity just referenced. As we stated before, our balance sheet, in conjunction with the borrowing 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 progress through 2023 and future periods. Our commitment to shareholder return is evidenced by both our share repurchase activity to date, as well as today's 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?
spk03: Thanks, Mark. And I'm on page 12. remaining performance obligations by segment and market sector. The fourth quarter of 2022 saw our ninth consecutive quarter of RPO 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 RPOs by $1 billion in 2021 and in 2022. As a result, our position and our market position has strengthened even more. Total company RPOs 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, 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, and that's associated with our August acquisition of Boston-based Gaston Electric. As a side note, they have a terrific market position and dynamic leadership team that fits well with our MCOR operating style and values. The rest of that growth was all organic. Again, for 2022, Velocity in the business remains strong. with both revenue and total RPOs growing double digits from the previous year-ago period. While our continued growth of RPOs is largely due to the strength of demand for our services, a small portion of this increase can 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 RPOs increasing just over $1.5 billion, or 34%, from December 2021. The mechanical construction segments saw RPOs increase by $737 million, or 23%, while the electrical construction segments 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 service RPO levels increased 279 million, or 32% in 2022, and totals almost $1.15 billion in small to mid-sized project and service work. Like all of 2022, this quarter saw continued project awards in its mechanical services division and the award or renewal of several facilities maintenance contracts in our site-based services division. MCOR industrial services and our UK building services business, while having less RPO-type projects supporting their business, still saw their RPO totals for 2022 increase 12, and 36% respectively. I should mention that over $42 million RPO increase in the UK business came despite unfavorable exchange rates against the dollar. Moving to the right side of the page, we show RPOs broken down by market sector. Commercial RPOs 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 RPOs, 40%. Institutional RPOs, 21%. Industrial manufacturing RPOs, up 22%. And short-duration projects, which include works that are HVAC and controls retrofit work, repair service project work, and low-voltage work, up 15%. Partially offsetting the increase was a reduction in transportation and water and wastewater RPOs, which is booked in a much more episodic manner. For greater transparency, and on page 13, we're going to break out commercial RPOs into the three large subsectors that we believe make up our commercial RPOs. Going forward into 2023, we will expand our RPO 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 bar shows traditional commercial RPOs. 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 RPOs over time, 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. Going up the slide into the middle gray section, telecommunications which is network and communications infrastructure projects including data centers data fiber and cabling projects much of the growth here has been driven by hyperscale data centers projects but also the growth in our low voltage business the top like section of the bar is called high-tech projects high-tech manufacturing and R&D facilities here we capture projects in the semiconductor biotech life sciences pharmaceutical electric vehicle, and EV battery facilities. As the slide shows, we have a strong base of traditional commercial projects. More specifically, this slide shows that our recent commercial growth has been concentrated in the other two sectors, which represent 75% of our year-over-year commercial RPO growth. These are important subsectors for the company going forward. and we will expand our RPO and revenue disclosures beginning this year to provide greater insights into these important sub-sectors. So, look, in summary of the RPO section, we're busy, we're quoting work, our RPO level is high, demand for our service is high, and we continue to see an active pipeline of new projects. Given where we are, and, you know, 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 in our RPOs. We have strong inquiries. And we have demand in the market sectors where we see momentum and where 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'm going to turn to slide 14, and it's a slide we've discussed a lot over the last two years, and it's a slide I love because it talks about trends in our business that have been good long-term trends in sectors that we perform 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, and we added semiconductor fabs and other high-tech manufacturings. 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 recent legislation that's going to help it accelerate maybe a little bit. But it was a good trend. And in semiconductor fad, in our estimation and in the market's estimation, our customers, this has less to do with new demand, but it also has a lot to do with the reshoring of that manufacturing 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 in what I would say three and a half 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 reshoring of supply chains and textiles, and also things like HVAC, compressors, and all those manufacturing motors coming back to the U.S., from overseas as we learned, and it was happening even before the pandemic, but we learned in the pandemic, and it's an accelerator between that and the geopolitical uncertainty, that we did not have the resilience in our supply chain that we should have, and businesses learned that, right? They learned that you need to at least have this out of two factories or two suppliers and not just one. Healthcare has been a great long-term market for MCOR, and healthcare for us extends beyond just hospitals and to outpatient surgical centers, medical office buildings. And it's both a maintenance market for us, a retrofit market for us, and a new construction market for us. We do the new systems. We do electrical mechanical retrofits. And we learned a lot during the pandemic that healthcare facilities needed to be more flexible and nimble to respond to a variety of things, right? Because in the pandemic, you needed negative pressure rooms because of the oxygen requirements. You don't want to spread room to room. And in 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'll talk about that a little bit later by some recent legislation. But again, a transition that was happening anyway. We and a lot of other people believe it's not only an energy transition, but it's also an energy expansion. And it's not only a transportation transition, but it's a transportation mix is 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 supplying and helping customers supply traditional energy sources. We also are positioned across the entire EV value chain from EV batteries to EV vehicles and the plants. I mean, these things are all just getting built now. to the charging stations and the kind of charging stations we build for the most part are industrial scale charging stations. A lot of times attached to some of those big warehousing facilities were built for last mile delivery. Water and waste 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 that require more investment to bring current facilities in some of the largest water districts up the 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. The less energy you lose, the less carbon you use, and we are definitely integrated into our customers' long-term energy efficiency drive. An example of this is where a customer will come to us and have 200 or 300 facilities and say, we need to upgrade these. We need to take the energy out. In a recent project we did, we took the equivalent of 4,400 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 positioned to help our customers have people peace of mind when they came back into the facilities. That now is an integrated solution when we do a building retrofit. 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 every day on projects from as little as $10,000 to $100 million today. And we do it well. Now, all these things are being bolstered by a couple interesting things right now, right? There's been some legislation. I'm not even going to talk about the Infrastructure Act, which we will participate in. But, you know, 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 anything that increases demand is good. But I'm going to talk about two specific places of legislation. I'm not going to go into detail other than it took some of these trends, especially around the EV transition space and the energy transition space, and it bolstered them, right? The IRA Act bolstered them. And to get the tax credits... you're going to have to use labor like ours, and that labor is well-trained, they get paid well, they're safe, and they've been through an approved apprenticeship program. On the CHICs Act, to get the credits, you're going to have to do Davis-Bacon, we believe, but I think the apprentice stuff is going to be quite obvious because these are highly skilled people that come to work. MCOR knows how to operate in that environment. And even where we are non-union and we'll supply that labor, we know how to make sure that the right apprentices will work hand in hand with our union companies to 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 the investment that's happening today. With that, I'm going to turn to page 15 and close this and talk about capital allocation. Not a lot of great new news here. We're steady and programmatic about how we think about capital. I like to look at two years to talk about we're comfortable in either world. We're comfortable in the world of 2019, where the preponderance of our capital that year went to acquisitions. And those acquisitions are bearing fruit as we support the previous page for team's 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, hey, at the end of the day, It will look something like this. Maybe 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 is 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 that we will mitigate by serving growing markets. 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. We are going to set guidance at $12 to $12.5 billion in revenue this year, and $8.75 to $9.50 in earnings per doodle and share. We talked about all this. We have the strong RPOs to execute. We have the right market positions. We continue to see strong demand for all of our services, but 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 in a world of long lead times and unreliable delivery schedules for finished systems like switchgear generators and HVAC equipment. We also expect to see continuing inflationary 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 estimating. Where we end up in this guidance range will depend on several factors, some in our control and some outside of our control. And at MCOR for a very long time, we've always tried to focus on the controllables. 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, prefabrication, and enhanced planning to drive improved efficiency, improve safety, and increase the quality of our service deliveries. 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. 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 MCOR of mission first, people always. And we need to continue to gain SG&A leverage much like we did in 2022. However, there's always things that could affect our performance that we don't control and we have to adjust to. 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 are 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 that is balanced across supporting our organic growth, enhancing our core services in 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 15 cents a share to 18 cents 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, and strong leadership of our teammates at all levels. And I want to thank each member of our MCOR team for all you do for MCOR every day. Stay safe. And with that, we will take questions.
spk05: 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. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Noah Bills with Diesel. Please go ahead.
spk00: Hi, guys. Congrats on a good year. Thank you. Sure thing. I was hoping you could kind of walk me through how you're thinking about the margin profile in each of the divisions that's embedded within your guidance for 2023? Thanks.
spk03: Yeah, 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 isn't a, you know, pinpoint that margin by segment. It depends on mix. It depends on project timing. It depends on a lot of things. Contract structure. So we tend to think about this in buckets, right? We like to operate the mechanical business from the high sixes, seven, to the low eights. Those are all up from five years ago, 100 or so basis points, we would have told you that. The electrical business should be the high sixes to the mid eights. The building services business, they'll have a quarter 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 5% to 5.5% operating income margin. And remember, we have a lot of amortization within our industrial services, but the bottom line there is people say, where are you going to get to? I think Mark and I would say, before we can talk about where we used to be, we've got to get to 4% operating income margins on a sustained basis, and we haven't seen that for quite some time. The U.K., when they're operating north of 5.5% or so, we're pretty satisfied, and that depends a lot on mix, too. Put all that together, you get an MCOR mark somewhere between 5% and 5.5%.
spk02: Yeah, and I think, you know, I'll just add to Tony's comments. I mean, I'm sure your team has done the math. I mean, we're operating, you know, well within our 5- and 10-year averages. You know, I guess at this point, is the 10-year average even relevant? So if you look at the 5-year average, you know, places where, you know, we'd like to see some improvement, as Tony commented a couple times, is clearly... And as we've said a number of times on this call, a lot of 2022's 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 better than that. But once again, that's going to be dependent on what the customers are looking for from us. You know, we don't create demand. As good as we are, we're not that good. And, you know, ultimately, we have to have the people in place and the properties in place to facilitate providing services to those customers when they need it. So, you know, we were at, you know, 5.4% in 2021. We were slightly below that on a consolidated basis in 2022. I think, as Tony said, I think, you know, between that five and five and a half percent is realistic and 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 beat a dead horse, but our RPOs are the strongest they've ever been, but that number relative to our full year annual guidance, revenue guidance, there's 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.
spk00: Okay, great. Thank you. And just a quick one on the M&A front. I mean, I appreciated your 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. How are you thinking about just, I guess, 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.
spk03: Yeah, I 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 merits. And where we have the most success is when We're working with an owner. They may have an 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 bargain buyers. And I tend to look at things like this. We are very excited about the results of our acquisitions over the last five years. And that's a relevant time period. You do stuff way before that. Markets change. You do other stuff. In general, I think we're a good B 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 of a return, obviously, but where we can work together with management, develop the business case for the future, where we understand really in depth their 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 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 year for us acquisition-wise. We brought some good companies in. We've strengthened our electrical portfolio mainly over the last couple years. And that was just timing, right? People we've been talking to for quite a bit of time. And, you know, we have enforced deals. We never have. There's deals we walked away from that were larger because we couldn't get comfortable with their backlog. We couldn't get comfortable with their cash conversion. And in our business, 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, you know, that served us well over a long period of time. We have a fairly healthy pipeline. Deals close when they close. We look at 30 to get to 10 to get to 1, 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 that 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's sometimes things we see in due diligence that say, go fix this, and we'll talk to you in a year. And when we talk to them in a year, they're a better company, they want to sell to us, and we get to a good place. So ours is an iterative, interactive process where we try to build trust on both sides. We're not trying to make the lowest deal 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's an A on acquisitions.
spk06: Great. Thank you very much. Our next question comes from Brent Thelman with DA Davidson.
spk05: Please go ahead.
spk08: Hey, thanks. Good morning. Congrats on a great year. Thanks, Brett. Tony, Mark, appreciate the breakout of RPOs by commercial submarkets. It's really interesting stuff. And to see the telecom and high-tech sectors more than doubling year on year, again, pretty interesting. That's obviously where you and others are talking about a lot of the growth in the commercial market, I guess, still to come. And, and Tony, I guess I've thought about data centers and semiconductor fabs. It's a little more regionally specific. So my question is, you know, these, these areas of your business around the country that are really benefiting from these sub markets. Do you have the manpower, the capacity to keep sort of supporting these pace of gains in these verticals? I mean, what are the, what are the limitations here in your business?
spk03: That'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. So you start with, what does the core labor look like in that market? And in every case, there's not enough labor in that local market. And then you go to, okay, what 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 what it takes to bring labor in. We have a pretty good idea what that wage rate looks like and that shift structure. So it's not only wage rate. It's also what is the shift structure going to look like? Am I going to work five tens? Am I going to work six tens with three days off? There's all kind of different things you think about. And then what is that local union allowed? Go back to the comment on the different acts that are supporting this. What does that local union allow as far as classifications to be able to do the work? So in a more established market where we've been doing it like Arizona, we have a pretty good idea 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 prefab a lot to travel in, we think about what peak manpower is going to be. We think about what resources we're going to have to put on the ground. But you also think about what your contracting mechanism needs to be at the start of the job. So what we may be willing to do in a more established market, on a contract side, we may not be willing to do it 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 vampire planning. So we start with the technical aspects of the process. 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 and what do we have to provide on that job? And intermixed on all that is the labor planning. And once we get a green light on the three and then contract structure, that's the fourth one. That's what you don't really know that until you've done all the other ones. Then we get a green light to say, yes, in fact, we'll do that project, but it's actually got to go through the thought process on all four of those gates.
spk08: Yeah, that's, that's, that's helpful, Tony. And I mean, as you look at the pipeline, um, of those sorts of opportunities? I mean, is it large enough that you could conceivably still double your RPOs again next year? Is there that much opportunity out there?
spk03: Yeah, I don't know about that. And, you know, the way we think about RPOs is different than a lot of other people. We're actually, I'll let Mark get into that, but we're at the accounting definition. We have a contract in hand. It's a non-cancellable portion of a service agreement. So other people might say, well, hell, we're going to be at this site for the next three years and look at all the work we're going to do. We don't do that, right? And it's approved change orders. I mean, ours is a very stringent. I don't know what that growth will be. I mean, this is pretty heady level. It's okay. There's plenty of opportunity out there. Some of it will be contracted in a way you won't see at all in RPOs. It'll 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 RPOs. There's other work that'll come out in pieces. And so it'll come out. depending on what we're doing. Mark, you want to jump in here?
spk02: Yeah, and Brian, the only thing I'll add to Tony's comments is, you know, back to the discussion of capital allocation and obviously allocating capital for growth, you know, we clearly have a close eye on these opportunities, and when we're making those investments, it's where it's giving us the ability to take some of the labor out of the field and back into the shop or into a more controlled environment where we're able to control the pace of progress a lot closer. So, you know, I wish in my long career here those opportunities existed from day one that I walked in, but it was much different market conditions then.
spk01: And technology. Yeah.
spk02: So, you know, our capabilities and, you know, our wherewithal is a lot stronger today than it certainly was then. And, you know, 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 is, you know, we're not going to, you know, enter into these arrangements with customers or potential customers if we do not believe that we do not have the ability to 100% fulfill those requirements. So, you know, 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.
spk03: And our risk appetite has less to do with can we do the job, but can we check all those four boxes? And capital allocation is a big deal for us. So a lot of the things we did in 18, 19, 17 acquisition-wise and even into 20 investment-wise with shops and organic investment and all those things allowed us to be in a position to serve these customers. You know, if we don't build fire fab shops in the right places with really a great team, both at Communal and Chambon, that we're not prepared to take care of these customers because you're not going to find enough labor to do that. So you have to be doing the prefabrication, like Mark said, but you also have to be able to get the work off the job because you want to make it safer and more repetitive and the quality goes way up. The second point is when you think about the investment, it goes beyond even just physical infrastructure. We've put a lot of investment into our knowledge infrastructure. We put some resources around BIM to make it more predictable, reliable, 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 series of peer groups where folks get together and and share building techniques, right? And all those things are really important to allow us to serve our customer better.
spk08: Really helpful. Just one more on the outlook for 2023. It sounds like you made some green shoots in the industrial services business in terms of better opportunities in front of them. Can you just remind me where that business needs to be in order to kind of get back to that, you know, 4% kind of margin target that you talked about?
spk03: Yeah, I don't know exactly. But I think if you could, you know, do more solar work, which is different than what was there the last time, that would certainly help. Because it's work we do very well and go back to the means and method. 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 to supply the refined product that the economy needs to run. So we are working different with those customers today, and we'll 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 of shop work at the right pricing, the more we can get of cleaning work at the right pricing, And the more work we can do in our electrical business will help lift those margins overall.
spk06: Really helpful. Thanks, guys. Our next question comes from Adam Ballheimer with Thompson Davis.
spk05: Please go ahead.
spk04: Hey, good morning, guys. Congrats on the strong fourth quarter and the outlook. Thanks, guys. BIM 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, a margin opportunity, or both?
spk03: All of the above. It's a revenue opportunity in the 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 the 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 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 going to invest in that prefab infrastructure because you don't want to be too far ahead of what the need is. That's fixed costs. And one thing we've learned is being good specialty contractors, you don't build a huge fixed cost base ever unless you 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 lists, right? We're more than happy to be a great customer of rental companies like United Rentals. Okay.
spk04: And then can you talk a little bit about your industrial group and if that could broaden out over time? 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 a hydrogen hub or some of this other stuff?
spk03: No, there's nothing at all that would prevent us. We're not wedded to anything. What we have is we've got great relationships with customers, and we can service their most advanced things. Pipe is pipe. We can do biofuels. We can do carbon capture. We can do One of the things we're most excited about is what can our electrical group do in the renewable energy space, especially around solar. We can do all that. Just so happens we didn't do as much of that as 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, foremen, superintendents. We have good millwrights, and we have terrific field electricians. 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 in. We really hadn't 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, they're used to working in austere conditions. They're used to working in demanding conditions, and they're used to being very flexible in their means and methods. 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, we'll be there. We're working on the edges of that right now in the renewable fuels and biofuels area. We certainly have the solar thing, installation down on the electric side. Now it's just getting the demand. But yeah, 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.
spk04: And then real quick, the whole Davis-Bacon issue, does that give you an advantage or can a non-union shop just pay Davis-Bacon?
spk03: It doesn't hurt. You know, this whole non-union, union, non-union thing in parts of the country where sometimes 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. And no one wakes up in the morning and says, I will never not be a non-union electrician. Non-union grows typically when the economy is not great or when the building trades aren't great. We recruited a lot of non-union electricians and pipe fitters 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 IRA, it's geared towards apprenticeship programs. There's some good non-union apprenticeship programs. It'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 at the end.
spk06: Great. Thanks, Tony. Yep. This concludes our question and answer session.
spk05: I would like to turn the conference back over to Tony Guzzi for any closing remarks.
spk03: Yeah, thank you all very much for your interest in MCOR. We're at the start of 2023. We have a pretty good outlook, and we'll be back to talk to you in April. Thank you.
spk05: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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